Strategic Management

What is Strategy?

A company’s strategy consists of the set of competitive moves and business approaches that management is employing to run the company

Strategy is management’s “game plan” to

Attract and please customers

Stake out a market position

Conduct operations

Compete successfully

Achieve organizational objectives

What is a Business Model?

A company’s business model addresses “How do we make money in this business?” Is the strategy that management is pursuing capable of delivering good bottom-

line results?

Do the revenue-cost-profit economics of the company’s strategy make good make good business sense?business sense? Look at the revenue streams the

strategy is expected to produce

Look at the associated cost structure and potential profit margins

Do the resulting earnings streams and ROI indicate the strategy makes sense and that the company has a viable business model?

Strategy

Business

Model

Strategy vs. Business Model :What is the Difference?

Strategy -- Deals with a company’s competitive initiatives and business approaches

Business Model -- Concerns whether the revenues and costs flowing from the strategy demonstrate that the business can be amply profitable and viable

Redhat Linux’s Business ModelUse volunteer programmers to create the software; make source code open and available to all users

Use volunteer programmers to create the software; make source code open and available to all users

Give Linux operating system away free of charge to those who download it (charge a small fee to users who want a copy on CD)

Give Linux operating system away free of charge to those who download it (charge a small fee to users who want a copy on CD)

Make money by employing a cadre of technical support personnel who provide technical support to users for a fee

Make money by employing a cadre of technical support personnel who provide technical support to users for a fee

Microsoft’s Business ModelEmploy a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users

Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users

Sell resulting operating system and software packages to PC makers and users at relatively attractive prices and achieve large unit sales

Sell resulting operating system and software packages to PC makers and users at relatively attractive prices and achieve large unit sales

Most costs arise in developing the software; variable costs are small—once breakeven volume is reached, revenues from additional sales are almost pure profit.

Most costs arise in developing the software; variable costs are small—once breakeven volume is reached, revenues from additional sales are almost pure profit.

Provide technical support to users at no costProvide technical support to users at no cost

What is the Difference between Operational Effectiveness(OE) and Strategic Positioning?

Operational Effectiveness is performing performing similar activitiessimilar activities better than rivals Affects the relative cost position and levels of

differentiation Japanese activities addressed OE(imitate

rather than innovate) Deals with issues such as eliminating waste,

employing advanced technology, motivating employees.

Operational Effectiveness - The Productivity Frontier The sum of all existing best practices at a given time The frontier of OE can be individual activities or group

activities(order processing, manufacturing, purchasing linked by IT).

Move a company towards the frontier(improving OE) by capital investment, org. development, systems design, management.

Move the frontier as a result of research - laptop computers, personal organizers, email, TQM, benchmarkeing.

Problem with competing on the basis of OE Advantages are easy to copy-there are no secrets As everyone gets closer to the frontier, it becomes

harder to maintain a lead Moving the frontier raises the bar for everyone but

gives nobody an advantage Competitive convergence - everyone gets to the

same place. The airlines have the same technology, the same costs

and have no real way to get ahead

Strategic Positioning is about deliberately choosing a different set of activitieschoosing a different set of activities than rivals that delivers a unique mix of values, resulting in a competitive advantage that can’t be easily copied.

Airlines

Full Service AirlinesFull Service Airlines Any point A to any point B First Class, Business Class,

Coach, promotional Seat Assignments in

advance Baggage handling and

transfer Hub and Spoke system to

promote connecting flights Coordinate schedules Meals Drinks

Southwest AirlinesSouthwest Airlines Mid sized cities and

secondary airports Frequent reliabile

departures Very low ticket prices Quick turnarouds Standardized aircraft no seat assignments no meals

Furniture Retailing

Typical Furniture Stores Areas displaying samples books of fabric, colors etc. Different types of woods Sales people assisting customers

with choices. Decorating services Third party manufacturing Delivery in 6-8 weeks Maximum customization and

service at a high cost

Ikea Clear in store displays No sales people low cost ready to assemble Ikea designed products Customer picks up product

in boxes from warehouse, brings it home and assembles

In store child care Extended hours

Operational Effectiveness vs. Strategy (Summary) Operational

Effectiveness

Performing similar activities better than rivals

Efficiency

Practices that allow firm to better utilize inputs

Strategic Positioning Performing different

activities than rivals or

Performing similar activities in different ways

Operational Effectiveness vs Strategic Positioning (Summary) Competition based on operational

effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition.

Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value

The Five Tasksof Strategic Management

Craft aStrategy

to AchieveObjectives

SetObjectives

Develop aStrategic

Visionand

Mission

Implementand

ExecuteStrategy

Improve/Change

Revise asNeeded

Revise asNeeded

Improve/Change

Recycleas Needed

Task 1 Task 2 Task 3 Task 4 Task 5

Monitor,Evaluate,and Take

CorrectiveAction

Missions vs. Strategic Visions

A mission statement focuses on current business activities -- “who we are and what we do” Current product and

service offerings Customer needs being

served Technological and

business capabilities

A strategic vision concerns a firm’s future business path -- “where we are going” Markets to be pursued Future technology-product-

customer focus Kind of company that

management is trying to create

Defines current business activities, highlighting boundaries of current business Present products and services Types of customers served

Conveys Who we are, What we do, and Why we are here

A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?”

Making is profit is an objective or intended outcome!

Characteristics ofa Mission StatementCharacteristics ofa Mission Statement

Key Elements ofa Mission Statement Three factors to consider

Customer needs –What is being satisfied

Customer groups –Who is being satisfied

Technologies/resources/business approaches used and activities performed –How customer needs are satisfied

Trader Joe’sMission Statement

To give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed

buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth,

friendliness, fun, individual pride, and company spirit.

(a unique grocery store chain)

Strategic Vision

A picture in your mind’s eye of what the company will look like in the future.

Examples of Strategic Visions

Red Hat LinuxTo extend our position as the most trusted Linux and open

source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management

platform, and associated support and services.

Wells FargoWe want to satisfy all of our customers’ financial needs,

help them success financially, be the premier providerof financial services in every one of our markets, and

be known as one of America’s great companies.

Examples of Strategic Visions

WyethOur vision is to lead the way to a healthier world. By

carrying out this vision at every level of our organization,we will be recognized by our employees, customers, and shareholders as the best pharmaceutical company in the

world, resulting in value for all. We will achieve this by: Leading the world in innovation by linking pharmaceutical,

biotech, and vaccines technologies Making quality, integrity, and excellence hallmarks

of the way we do business Attracting, developing, and motivating the best people Continually growing improving our business

Setting Objectives

Converts strategic vision and mission into specific performance targets

Creates yardsticks to track performance

Pushes firm to be inventive and focused on results

Helps prevent complacency and coasting

Second Task of Strategic Management

Characteristics of a Goal

Specific Measurable Time Constrained Achievable

Outcomes focusedon improving financial performance

Outcomes focused on improving long-term competitive business position

Financial Objectives Strategic Objectives

$

Types of Objectives RequiredTypes of Objectives Required

X % increase in annual revenuesX % increase annually in after-tax profitsX % increase annually in earnings per shareAnnual dividend increases of X %Profit margins of X %X % return on capital employed (ROCE) Increased shareholder valueStrong bond and credit ratingsSufficient internal cash flows to fund 100% of new

capital investmentStable earnings during periods of recession

Examples: FinancialObjectivesExamples: FinancialObjectives

Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or

quality or customer service Deriving X % of revenues from sale of new products

introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening company’s brand name appeal Having stronger national or global sales and distribution

capabilities than rivals Consistently getting new or improved products to market

ahead of rivals

Examples: StrategicObjectivesExamples: StrategicObjectives

Strategic Performance Fosters Better Financial Performance

A company’s achievement of satisfactory financial performance, by itself, is not enough

Financial performance measures are “lagging indicators” reflecting results of past decisions and actions

Of equal or greater importance is a company’s performance on measures of its strategic well-being —its competitiveness and market position

Strategic performance measures are “leading indicators” of a company’s future financial performance and business prospects

Achievement of strategic performance targets Signals growing competitiveness Signals growing strength in the marketplace

Which type of goal is more important –Strategic or Financial?

Balanced Scorecard Approach – Strategic and Financial Objectives

Balanced scorecard approach for measuringcompany performance requires both – Financial objectives Strategic objectives

Emphasis on financial performance may assumepriority over strategic performance when company’s Financial performance is dismal and Survival is threatened

Otherwise, management is advised to put more emphasis on achieving strategic objectives

The surest path to sustained future profitabilityyear after year is to relentlessly pursue strategic outcomes

that strengthen a company’s business position andgive it a growing competitive advantage over rivals!

1. First, establish organization-wide objectives and performance targets

2. Next, set business andproduct line objectives

3. Then, establish functionaland departmental objectives

4. Individual objectives are established last

Objectives Are Neededat All Levels

Importance ofTop-Down Objectives Guide objective-setting and strategy-making at lower

levels

Ensures financial and strategic performance targets for all business units, divisions, and departments are directly connected to achieving company-wide objectives

Integration of objectives has two advantages

Helps produce cohesion among objectives andstrategies of different parts of organization

Helps unify internal efforts to move acompany along the chosen strategic path

Concept of Strategic Intent

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive

actions and energies on achieving that objective!

Characteristics of Strategic Intent Indicates firm’s intent to

stake out a particular position over the long-term

Involves establishing a BHAG - ”big, hairy, audacious goal”

Signals relentless commitment to winning

Crafting a Strategy

Strategy involves determining whether to Concentrate on a single business or several

businesses (diversification) Cater to a broad range of customers or focus on

a particular niche Develop a wide or narrow product line Pursue a competitive advantage based on

Low cost or Product superiority or Unique organizational capabilities

Third Task of Strategic Management

Types of Strategy

Grand Strategy Growth, Consolidation, Divest

Generic Strategy Low Cost Differentiation

International Strategy Domestic - Make it here/sell it here Export – Make it here/sell it there Multicountry- Make it there/sell it there Global – Make it anywhere/sell it anywhere

Diversification Related Unrelated

Figure 1-2: A Company’s Strategy is Partly Planned Planned andand Partly Reactive Reactive

New initiatives plus ongoing strategy features continued from prior periods

Adaptive reactions to

changing circumstances

Abandoned strategy

features

Actual Company Strategy

Company Experiences, Know-how, Resource

Strengths and Weaknesses,

and Competitive Capabilities

Planned Strategy

Reactive Strategy

Crafting Strategy is anExercise in Entrepreneurship

Strategy-making is a market-driven and customer-driven activity that involves Keen eye for spotting emerging market

opportunities Keen observation of customer needs Innovation and creativity Prudent risk-taking Strong sense of how to grow and strengthen

business

What is a Strategic Plan?Where firm is headed -- Strategic vision and business mission

Action approaches to achieve targeted results -- A comprehensive strategy

Short and long term performance targets -- Strategic and financial objectives

What Does Strategy Implementation and Execution Include? Building a capable organization Allocating resources to strategy-critical activities Establishing strategy-supportive policies Motivating people to pursue the target objectives Tying rewards to achievement of results Creating a strategy-supportive corporate culture Installing needed information, communication, and operating

systems Instituting best practices and programs for continuous

improvement Exerting the leadership necessary to drive the process forward

and keep improving

Monitoring, Evaluating, and Taking Corrective Actions as Needed

The tasks of crafting, implementing, and executing a strategy are not a one-time exercise

Customer needs and competitiveconditions change

New opportunities appear; technology advances; any number of other outside developments occur

One or more aspects of executing thestrategy may not be going well

New managers with different ideas take over

Organizational learning occurs

All these trigger the need for corrective actions and adjustments

Fifth Task of Strategic Management

Levels of Strategy-Making in a Single-Business Company

Business Strategy

Two-Way Influence

Two-Way Influence

Functional Strategies

Operating Strategies

Executive-Level Managers

OperatingManagers

Functional Managers

Figure 2.2: Corporate Strategy fora Diversified Company

CorporateStrategy

Approach tocapital allocation

Narrow or broad-based diversification

Scope ofgeographicoperations

Moves to add newnew businesses

Moves to build positionsin new industries

Efforts to capturecross-businessstrategic fits

Moves to divestweak business units

Is diversificationrelated, unrelatedor a mix?

Objectives Are Needed at All Levels

Objective-setting process is top-down, not bottom-up!

1. First, establish organization-wide objectives and performance targets

2. Next, set business and product line objectives

3. Then, establish functional and departmental objectives

4. Individual objectives are established last

Strategic Management Principle

Objective-setting needs to be more of a

top-down than a bottom-up process in

order to guide lower-level managers and

organizational units toward outcomes

that support the achievement of overall

business and company objectives.

Goal Alignment

Functional Strategies

Game plan for a strategically-relevant function, activity, or business process

Details how key activities will be managed

Provide support for business strategy

Specify how functional objectives are to be achieved

Operating Strategies

Concern narrower strategies for managing grassroots activities and strategically-relevant operating units

Add detail to business and functional strategies

Example: Operating Strategy

Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach. Warehouse manager took following approaches:

Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item

Staffing strategy of maintaining workforce capability to ship any order within 24 hours

Improving Delivery & Order-Filling

To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions:

Recruitment manager develops selection process designed to weed out all but best-qualified candidates

Information systems manager devises way to use technology to boost productivity of office workers

Compensation manager devises improved incentive compensation plan

Purchasing manager obtains new efficiency-increasing tools and equipment

Boosting Worker Productivity

Example: Operating Strategy

Uniting the Company’s Strategy-Making Effort

A company’s strategy is a collection of

strategies and initiatives being acted on by managers at various organizational levels

Separate levels of strategy must be unified into a cohesive, company-wide action plan

Pieces of strategy should fit together like the pieces of a puzzle

Figure 2.4: Networking of Missions,Objectives, and Strategies

Level 1Corporate-LevelManagers

Level 2Business-LevelManagers

Level 3Functional Managers

Level 4Plant Managers,Lower-LevelSupervisors

CorporateLevel

Objectives

Corporate-wideStrategic

Vision

CorporateLevel

Strategy

BusinessLevel

Objectives

BusinessLevel Strategic

Vision

BusinessLevel

Strategies

FunctionalObjectives

Functional Missions

FunctionalStrategies

OperatingObjectives

OperatingMissions

OperatingStrategies

Two-Way Influence Two-Way Influence Two-Way Influence

Two-Way Influence Two-Way Influence Two-Way Influence

Two-Way Influence Two-Way Influence Two-Way Influence