Strategic Mngt IMT-56

Strategic Management – Amit Saxena 1

Strategic Planning

- Amit Saxena

What is Strategy Is knowing the business you propose to

carry out (Xenophon) Defines what a business is in or is to be

and the kind of company it is or is to be (Andrews)

Is a rule for making decisions (Ansoff) The way in which a corporation

endeavors to differentiate itself positively from its competition (Ohmae)

Ideas and actions to conceive and secure the future (Macmillan & Tampoe)



Strategic ManagementDefinition: Strategic management consists of the analysis,

decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

Key attributes of strategic management Plan of Actions Directs the organization toward overall goals and

objectives. Includes multiple stakeholders in decision making Helps to Overcome Uncertainties Needs to incorporate short-term and long-term

perspectives Recognizes trade-offs between efficiency and

effectiveness Assurance for a Better Tomorrow Provides a Platform for Balanced Development of the

Organization


Strategic Management Strategic Decision

A decision may be identified as strategic if is Rare : The Decisions are that one of the Many Consequential : The outcome of the decision

requires Management Support and Commitment. The resulting actions require high investment in time and emotion

Directive : These actions help the organization to meet it’s Goals and Objectives

The action helps the organization to develop specific Core Competencies which will help the organization to place itself favorably over the competition


Organization’s Env Context

Internal•Structure•Culture•Resources

Societal Environme

nt

Task Environme

nt

Economic Forces

Technological Forces

Socio Cultural

Loliticallegal

Communities

Suppliers

Competitors

Trade Association

s

Shareholders

Customers

Creditors

Government

Employees


Porter’s Five Forces Model of Industry Competition

Threat ofnew entrants

Bargaining power of buyers

Bargaining power of suppliers

Threat ofSubstitute products

and services


Porters Generic Value Chain

Inbound Logistics

OperationsOut-

bound Logistics

Marketing &

Sales

Service

FIRM INFRASTRUCTURE

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

PROCUREMENT

MARGIN

MARG

IN


Strategic Management

Strategic management is the study of why some firms outperform others How to compete in order to create

competitive advantages in the marketplace

How to create competitive advantages in the market place

Unique and valuable Difficult for competitors to copy or substitute


What is Strategic ManagementOther Definitions The process by which an organization determines its

long-run direction and performance by ensuring that careful formulation, effective & efficient implementation, and continuous evaluation of strategy and performance takes place.

Strategic Management integrates various organizational functions and processes (that are typically strategic in nature) into a cohesive, broader strategy. The boundaries between these various functions and processes are conceptual only, and it is through their interaction and interdependence that each is able to contribute to organizational improvements.

Strategic Management, therefore, is the process that links the various other functions and strategic processes together in a dynamic and interactive manner - responsive to the organization's changing environment.


Strategic Management – The Need In today's highly competitive business

environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper.

The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track.


Objectives of Firm Profits Sustained Growth and Evolution Product

Quality Range Innovation

Market Leadership Customer base Customer loyalty Customer satisfaction Customer service

Market Share Brand Image Values Contribution towards Society


Stretegic Planning Process

Mission and Objectives

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation and Control


Strategic Management - Concerns Future – The Long term dynamics and

concern Growth – Direction, extent, pace and

timing of growth Environment Portfolios of Business Strategy Integration Creating Core Competencies / Competitive

advantages Corporate Strategy


Why Strategic Planning It helps to define:

Purpose and Mission of a Firm Corporate Objectives Choice of Business(s) How to achieve these Objectives

Strategic Planning helps a Firm to Chart a route map Provide a framework for systematic handling of corporate

decisions Take decisions about the future Provide direction How growth could be achieved Ensures best utilization of firms resources among product-

market opportunities Ensure that the firm remains a prepared organization Hedges the firm against uncertainty arising from

environment turbulence Helps the firm to understand trends in advance and provides

benefit of lead time for taking crucial decisions and actions


Strategic Management Participants Senior Executives and business managers in

public sector organizations They need to seek out opportunities for new ways of

working that will help the organization to realize the agenda for change in the public sector

They also need to be aware of the implications of realignment if the strategic direction is changed

Senior Management responsible for reviewing and redefining the requirements for delivery of core services, and for acquiring the means to deliver them

Staff responsible for developing and reviewing the business strategy in their organizations

They need to appreciate the wider business context partners and other stakeholders affected by the strategy.


Hierarchical Levels of Strategy Strategy can be formulated on

three different levels: Corporate level Business unit level Functional or departmental level


Corporate Level Strategies Corporate level strategy fundamentally is concerned with

the selection of businesses in which the company should compete and with the development and coordination of that portfolio of businesses.

Corporate level strategy is concerned with Reach – defining the issues that are corporate

responsibilities Competitive Contact – defining where in the corporation the

competition is to be localized Managing Activities and Business Interrelationships Management Practices – how business units are governed

i.e. Centralization vs. Decentralization Corporations are responsible for creating value through

their businesses. They do so by managing their portfolio of businesses, ensuring that the businesses are successful over the long-term, developing business units, and sometimes ensuring that each business is compatible with others in the portfolio.


Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm.

At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced.

At the business level, the strategy formulation phase deals with:

Positioning the business against rivals Anticipating changes in demand and technologies and adjusting

the strategy to accommodate them Influencing the nature of competition through strategic actions

such as vertical integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces.


Functional Level Strategy

The Functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.

Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based.

Once the higher-level strategy is developed, the functional units translate it into discrete action-plans that each department or division must accomplish for the strategy to succeed.


Competitive Advantage When a firm sustains profits that exceed the average for its

industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

Cost advantage Differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.


A Model of Competitive Advantage

To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors.

Superior value is created through lower costs or superior benefits to the consumer (differentiation).

Resources

Distinctive Competencies

Capabilities

Cost Advantage or Differentiation Advantage

Value Creation


Competitive Advantage Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. Some examples of such resources

Patents and trademarks Proprietary know-how Installed customer base Reputation of the firm Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.


Competitive Advantage Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.

Value Creation The firm creates value by performing a series of activities that Porter

identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream Capabilities operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.

To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).


Organization Analysis Tools for Organization Analysis

SWOT - Analysis SAP - Strategic Advantage profile ETOP - Environment Threat & Opportunity profile OCP - Organisational Capability profile.

Faculties for Analysis Finance Marketing Operations Personnel General Management

Derek F.Abell : Defined Business along three dimensions Customer groups ‘who is being satisfied’ Customer functions ‘what is being satisfied’ Alternative technologies ‘how the need is being satisfied’

Helps in : Defining Business Choice of objectives Strategic Alternatives Functional policy implementation Formulate Organisational Structure


Competitive advantage factors & sources of Competitive advantage In Marketing

Marketing standing Market share Innovation in marketing Customer satisfaction level Customer service level New product leadership Price leadership Channel strength Marketing communications strength Advertising effectiveness Strength of personal selling/ sales force productivity Market research capability Marketing organisation Marketing costs Product-mix & product lines Product-wise position in

Profitability Product quality Stage of the product in the life cycle Product design Product’s sophistication/ technological strength Differentiation Positioning Brand power Quality of the marketing capability in toto


Competitive advantage factors & sources of Competitive advantage

In Finance Assets Liquidity Leverage Gearing Cash flow Cost of capital Profitability Costs Quality of financial management Knowledge and dynamism in tax planning



In Manufacturing / Operations Size or capability of production Locational advantage Production facilities Capacity utilisation Raw materials- their cost, quality and delivery Maintenance Cost of production Break-even position Productivity Inventory management Value engineering capability Experience curve benefit Flexibility Automation



In Research and Development Nature, depth and quality of R&D capability Resource allocation to R&D Quality, expertise and experience of R&D

personnel Speed of R&D Engineering capability for pursuing R&D

suggestions Record of patents generated Comparisons of R&D investment vs new

products launched



In Human Resources Quality, knowledge, expertise and

experience of personnel Morale and motivation of personnel Personnel turnover Labour costs Industrial relations



In Corporate Factors and Overall Resources

Company size Corporate image Quality of management in general The CEO Board of Directors: dummies or policy

makers? Corporate performance record Innovation record Quality of strategic planning Organisational culture Organisational structure Use of information technology - extent of use

and degree of sophistication.


SWOT Analysis A scan of the internal and external

environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection


SWOT Analysis Framework

Environmental Scan/ \

Internal Analysis External Analysis/ \ / \

Strengths Weaknesses Opportunities Threats|

SWOT Matrix


SWOT Analysis Strengths

A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include

Patents Strong brand names Good reputation among customers Cost advantages from proprietary know-how Exclusive access to high grade natural resources Favorable access to distribution networks

Weaknesses The absence of certain strengths may be viewed as a weakness. For example,

each of the following may be considered weaknesses Lack of patent protection A weak brand name Poor reputation among customers High cost structure Lack of access to the best natural resources Lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment increased trade barriers


SWOT Analysis Opportunities

The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include

An unfulfilled customer need Arrival of new technologies Loosening of regulations Removal of international trade barriers

Threats Changes in the external environmental also may

present threats to the firm. Some examples of such threats include

Shifts in consumer tastes away from the firm's products Emergence of substitute products New regulations Increased trade barriers


SWOT / TOWS Matrix

S-O strategies pursue opportunities that are a good fit to the companies strengths.

W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths

to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's

weaknesses from making it highly susceptible to external threats

Strengths Weakness

Opportunities

S-O Strategy W-O Strategy

Threats S-T Strategy W-T Strategy


Strategic Alternatives for a Firm “Strategic alternatives revolve around the

question of whether to continue or change business the enterprise is currently in or improve the efficiency and effectiveness with which the firm achieves its corporate objectives in its chosen business sector.”

Glueck’s Grand strategies Stability Expansion Retrenchment Combination


Grand Strategies Stability Strategy : Incremental improvement of functional

performance Special service to a customer like packaging. Copier company gives better after sales service Steel company modernises its plant for efficiency and

productivity. Expansion Strategy: Substantially broadens its scope in

order to improve its performance Chocolate company - old aged added to children and teenagers. Printing press changes from letter press printing to desktop

publishing etc. Retrenchment Strategy: Substantially reduce its scope in

order to improve its performance Pharmaceutical firm pulls out retail selling to institutional

selling. Hospital focuses on speciality treatment.

Combination Strategy: A combination of Stability, Expansion & Retrenchment either at the same time in different businesses or at different times in the same businesses with a view of improving its performance.


Other Strategies Modernisation Strategies Diversification & Integration Strategies Vertical integration

Backward - moving towards raw materials Forward - moving nearer the customer

Horizontal integration : takeover of a competitor or moving to a new geographical region - merger/ acquisition

Concentric diversification: Marketing tech. related : rubber into raincoat/ shoes, gloves etc. Technology : leasing firm offices hire purchase. Market related - sewing machine to kitchen ware (Singer).

Mergers Takeovers Joint Ventures. Turnaround Divestment Liquidation strategies Combination strategies


Horizontal Integration The acquisition of additional business activities at the

same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses.

Some examples of horizontal integration include: The Standard Oil Company's acquisition of 40 refineries. An automobile manufacturer's acquisition of a sport utility

vehicle manufacturer. A media company's ownership of radio, television,

newspapers, books, and magazines. HP – COMPAQ Merger (25 Billion US$) Microsoft Acquiring Lookout


Horizontal Integration Advantages of Horizontal Integration

The following are some benefits sought by firms that horizontally integrate:

Economies of scale - achieved by selling more of the same product, for example, by geographic expansion.

Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies."

Increased market power (over suppliers and downstream channel members)

Reduction in the cost of international trade by operating factories in foreign markets

Disadvantages of Horizontal Integration Horizontal integration by acquisition of a competitor will increase a

firm's market share. However, if the industry concentration increases significantly then anti-trust issues may arise.

Aside from legal issues, another concern is whether the anticipated economic gains will materialize. Before expanding the scope of the firm through horizontal integration, management should be sure that the imagined benefits are real.

Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously. There must be an explicit horizontal strategy in place. Such strategies generally do not arise from the bottom-up, but rather, must be formulated by corporate management


Vertical Integration The degree to which a firm owns its upstream suppliers

and its downstream buyers is referred to as Vertical Integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy.

Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration

Two issues that should be considered when deciding whether to vertically integrate is cost and control.

The cost aspect depends on the cost of market transactions between firms versus the cost of administering the same activities internally within a single firm.

The second issue is the impact of asset control, which can impact barriers to entry and which can assure cooperation of key value-adding players.


Vertical Integration-Advantages Reduce transportation costs if common

ownership results in closer geographic proximity. Improve supply chain coordination. Provide more opportunities to differentiate by

means of increased control over inputs. Capture upstream or downstream profit margins. Increase entry barriers to potential competitors,

for example, if the firm can gain sole access to a scarce resource.

Gain access to downstream distribution channels that otherwise would be inaccessible.

Facilitate investment in highly specialized assets in which upstream or downstream players may be reluctant to invest.

Lead to expansion of core competencies.


Vertical Integration-Disadvantages Capacity balancing issues. For example, the

firm may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions.

Potentially higher costs due to low efficiencies resulting from lack of supplier competition.

Decreased flexibility due to previous upstream or downstream investments. (Note however, that flexibility to coordinate vertically-related activities may increase.)

Decreased ability to increase product variety if significant in-house development is required.

Developing new core competencies may compromise existing competencies.

Increased bureaucratic costs.


BCG Matrix

Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors


BCG Matrix Cash Cow - a business unit that has a large market share

in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.

Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.

Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.


Business Vision and Company Mission While a business must continually adapt to its

competitive environment, there are certain core ideals that remain relatively steady and provide guidance in the process of strategic decision-making. These unchanging ideals form the business vision and are expressed in the company mission statement.

Essentials of a Mission / Vision It should be feasible It should be precise It should be clear It should be motivating It should indicate major components of strategy. It should indicate how objectives are to be accomplished.

The mission statement communicates the firm's core ideology and visionary goals, generally consisting of the following three components:

Core values to which the firm is committed Core purpose of the firm Visionary goals the firm will pursue to fulfill its mission


Mission Core Values

The core values are a few values (no more than five or so) that are central to the firm. Core values reflect the deeply held values of the organization and are independent of the current industry environment and management fads

excellent customer service pioneering technology creativity integrity social responsibility

Core Purpose The core purpose is the reason that the firm exists.

This core purpose is expressed in a carefully formulated mission statement. Like the core values, the core purpose is relatively unchanging and for many firms endures for decades or even centuries.

This purpose sets the firm apart from other firms in its industry and sets the direction in which the firm will proceed


Vision The visionary goals are the lofty objectives that the firm's

management decides to pursue. This vision describes some milestone that the firm will reach in the future and may require a decade or more to acheive. In contrast to the core ideology that the firm discovers, visionary goals are selected.

These visionary goals are longer term and more challenging than strategic or tactical goals. There may be only a 50% chance of realizing the vision, but the firm must believe that it can do so.

Most Visionary Goals fall into one of the following Target - quantitative or qualitative goals such as a sales

target or Ford's goal to "democratize the automobile." Common enemy - centered on overtaking a specific firm such

as the 1950's goal of Philip-Morris to displace RJR. Role model - to become like another firm in a different

industry or market. For example, a cycling accessories firm might strive to become "the Nike of the cycling industry."

Internal transformation - especially appropriate for very large corporations. For example, GE set the goal of becoming number one or number two in every market it serves.


Objectives Role of Objectives

They help an organisation peruse its mission & purpose They provide the basis for strategic decisions making They provide standards for performance appraisal

Characteristics of Objectives Understandable Concrete & Specific Related to a time frame. Measurable and controllable Challenging Correlate to each other Set within constraints

Objectives cover areas like: ROI Shareholder return and value Capital & net profit Increase in sales volume Reduction in costs Improve customer services Output, sales turnover, investment Industrial relations, welfare & development Community service, rural development, family & employee welfare.


Vision, Mission, Goals and Objectives Vision

Expression of growth ambition of a firm

Future visualised What a firm wants to become -

long term Dream crystallised Grand design of the firm’s future Common aspiration Represents thrust of a firm Inspires the employees

Mission Explains the firm’s existence &

role in society Firm’s values & beliefs

What it stands for Qualities it will cherish What it will give & expect from

society It is abstract It is not time bound It is unique & personal to a firm

Objectives Specific short-and medium term

quantities targets eg. achieve 40% growth,

Increase productivity by 7% Goals

Qualitative intentions eg. Improve product

development capabilities etc.


Credo of Johnson and Johnson

We believe our first responsibility is to the doctors, nurses and patients,to mothers and fathers and all others who use our products and services.

In meeting their needs everything we do must be of high quality.We must constantly strive to reduce our costs

in order to maintain reasonable prices.Customers' orders must be serviced promptly and accurately.

Our suppliers and distributors must have an opportunityto make a fair profit.

We are responsible to our employees,the men and women who work with us throughout the world.

Everyone must be considered as an individual.We must respect their dignity and recognize their merit.

They must have a sense of security in their jobs.Compensation must be fair and adequate,

and working conditions clean, orderly and safe.We must be mindful of ways to help our employees fulfill

their family responsibilities.Employees must feel free to make suggestions and complaints.There must be equal opportunity for employment, development

and advancement for those qualified.We must provide competent management,and their actions must be just and ethical.

We are responsible to the communities in which we live and workand to the world community as well.

We must be good citizens – support good works and charitiesand bear our fair share of taxes.

We must encourage civic improvements and better health and education.We must maintain in good order

the property we are privileged to use,protecting the environment and natural resources. Our final responsibility is to our stockholders.

Business must make a sound profit.We must experiment with new ideas.

Research must be carried on, innovative programs developedand mistakes paid for.

New equipment must be purchased, new facilities providedand new products launched.

Reserves must be created to provide for adverse times.When we operate according to these principles,

the stockholders should realize a fair return.


Management (led by CEO)

Role of Corporate Governance

Corporate governance Relationship among

The shareholders The management (led by the

Chief Executive Officer) The board of directorsManagement

(led by CEO)• Issue is

• How corporation s can succeed (or fail) in aligning managerial motives with

the interests of the shareholders The interests of the board of

directors

Shareholders

Board of Directors


Separation of Owners (Shareholders) and Management

Shareholders (investors) Limited liability Participate in the profits of

the enterprise Limited involvement in the

company’s affairsManagement (led by CEO)

Shareholders

• Management• Run the company

• Does not personally have to provide the funds


Separation of Owners (Shareholders) and Management

Board of directors Elected by shareholders Fiduciary obligation to

protect shareholder interests

Management (led by CEO)

Shareholders

Board of Directors


Agency Theory: Two Problems

Goals of principals and agents may conflict Difficulty or expensive for the principal to

verify what the agent is actually doing Hard for board of directors to confirm that

managers are actually acting in shareholders interests

Managers may opportunistically pursue their own interests

Principal and agent may have different attitudes and preferences toward risk


Governance Mechanisms: Aligning the Interests of Owners and Managers

Two primary means of monitoring behavior of managers Committed and involved board of directors

Active, critical participants in setting strategies Evaluate managers against high performance standards Take control of succession process Director independence

Shareholder activism Right to sell stock Right to vote the proxy Right to sue for damages if directors or managers fail to

meet their obligations Right to information from the company Residual rights following company’s liquidation


Governance Mechanisms: Aligning the Interests of Owners and Managers

Managerial incentives (contract-based outcomes) Reward and compensation agreements (from

TIAA-CREF) Align rewards of all employees (including rank and file as

well as executives) to the long-term performance of the corporation

Allow creation of executive wealth that is reasonable in view of the creation of shareholder wealth

Measurable and predictable outcomes that are directly linked to the company’s performance

Market oriented Easy to understand by investors and employees Fully disclosed to investing public and approved by

shareholders


External Governance Control Mechanisms

Market for corporate control Auditors Banks and analysts Regulatory bodies (Sarbanes-Oxley Act in

2002)

Media and public activists


Major Provisions of Sarbanes-Oxley Act Auditors

Barred from certain types of nonaudit work Not allowed to destroy records for five years Lead partners auditing a firm should be changed at

least every five years CEOs and CFOs

Must fully reveal off-balance sheet finances Vouch for the accuracy of information revealed

Executives Must promptly reveal the sale of shares in firms they

manage Are not allowed to sell shares when other employees

cannot


The process of providing the direction and inspiration necessary to create and implement a vision, mission, and strategies to achieve and sustain organizational objectives

The purpose of strategic leadership is to effectively implement and guide the process of strategic management

Strategic Leadership


Strategic Leadership Strategic leadership involves:Strategic leadership involves:

The ability to anticipate, envision, maintain The ability to anticipate, envision, maintain flexibility and empower others to create flexibility and empower others to create strategic changestrategic change

Multi-functional work that involves working Multi-functional work that involves working through othersthrough others

Consideration of the entire enterprise rather Consideration of the entire enterprise rather than just a sub-unitthan just a sub-unit

A managerial frame of referenceA managerial frame of reference


SuccessfulSuccessfulStrategic ActionsStrategic Actions

Strategic Leadership and the Strategic Management Process

Effective StrategicEffective StrategicLeadershipLeadership

Strategic IntentStrategic Intent Strategic MissionStrategic Mission

shapes the formulation ofshapes the formulation of

andandinfluenceinfluence


Strategic Leadership and the Strategic Management Process

StrategicStrategicCompetitivenessCompetitiveness

Above-Average ReturnsAbove-Average Returns

FormulationFormulationof Strategiesof Strategies

ImplementationImplementationof Strategiesof Strategies

SuccessfulSuccessfulStrategic ActionsStrategic Actions

yieldsyields


Exercise of Effective Strategic Leadership

EstablishingEstablishingbalancedbalancedorganizationalorganizationalcontrolscontrols

EmphasizingEmphasizingethicalethicalpracticepractice

DevelopingDevelopinghumanhumancapitalcapital

Exploiting andExploiting andmaintainingmaintainingcorecorecompetenciescompetencies

SustainingSustainingan effectivean effectiveorganizationalorganizationalcultureculture

DeterminingDeterminingstrategicstrategicdirectiondirection

Effective StrategicEffective StrategicLeadershipLeadership


Emphasizing Ethical Practices Ethical practices increase the effectiveness Ethical practices increase the effectiveness

of strategy implementation processesof strategy implementation processes Ethical companies encourage and enable Ethical companies encourage and enable

people at all organizational levels to people at all organizational levels to exercise ethical judgmentexercise ethical judgment

To properly influence employee judgment To properly influence employee judgment and behavior, ethical practices must shape and behavior, ethical practices must shape the firm’s decision-making process and be the firm’s decision-making process and be an integral part of an organization’s culturean integral part of an organization’s culture

Leaders set the tone for creating an Leaders set the tone for creating an environment of mutual respect, honesty and environment of mutual respect, honesty and ethical practices among employeesethical practices among employees


Developing Human Capital

Human capital refers to the knowledge Human capital refers to the knowledge and skills of the firm’s entire workforceand skills of the firm’s entire workforce

Employees are viewed as a capital Employees are viewed as a capital resource that requires investmentresource that requires investment

No strategy can be effective unless the No strategy can be effective unless the firm is able to develop and retain good firm is able to develop and retain good people to carry it outpeople to carry it out

The effective development and The effective development and management of the firm’s human management of the firm’s human capital may be the primary capital may be the primary determinant of a firm’s ability to determinant of a firm’s ability to formulate and implement strategies formulate and implement strategies successfullysuccessfully


Sustaining an Effective Organizational Culture

An organizational culture consists of a An organizational culture consists of a complex set of ideologies, symbols, and complex set of ideologies, symbols, and core values that is shared throughout the core values that is shared throughout the firm and influences the way it conducts firm and influences the way it conducts businessbusiness

Shaping the firm’s culture is a central task Shaping the firm’s culture is a central task of effective strategic leadershipof effective strategic leadership

An appropriate organizational culture An appropriate organizational culture encourages the development of an encourages the development of an entrepreneurial orientation among entrepreneurial orientation among employees and an ability to change the employees and an ability to change the culture as necessaryculture as necessary

Reengineering can facilitate this processReengineering can facilitate this process


Establishing Balanced Organizational Controls

Organizational controls provide the Organizational controls provide the parameters within which strategies are to be parameters within which strategies are to be implemented and corrective actions takenimplemented and corrective actions taken

Financial controls are often emphasized in Financial controls are often emphasized in large corporations and focus on short-term large corporations and focus on short-term financial outcomesfinancial outcomes

Strategic control focuses on the content of Strategic control focuses on the content of strategic actions, rather than their outcomesstrategic actions, rather than their outcomes

Successful strategic leaders balance strategic Successful strategic leaders balance strategic control and financial control (they do not control and financial control (they do not eliminate financial control) with the intent of eliminate financial control) with the intent of achieving more positive long-term returnsachieving more positive long-term returns


Strategic and Financial Controls in a Balanced Scorecard Framework

PerspectivesPerspectives CriteriaCriteria

FinancialFinancial • Cash flowCash flow• Return on equityReturn on equity• Return on assetsReturn on assets

CustomerCustomer • Assessment of ability to Assessment of ability to anticipate customers needsanticipate customers needs

• Effectiveness of customer Effectiveness of customer service practicesservice practices

• Percentage of repeat businessPercentage of repeat business• Quality of communications with Quality of communications with

customerscustomers


Strategic and Financial Controls in a Balanced Scorecard Framework

PerspectivesPerspectives CriteriaCriteria

Internal Internal Business Business ProcessProcess

• Asset utilization improvementsAsset utilization improvements• Improvements in employee Improvements in employee

moralemorale• Changes in turnover ratesChanges in turnover rates

Learning and Learning and GrowthGrowth

• Improvements in innovation Improvements in innovation abilityability

• Number of new products Number of new products compared to competitorscompared to competitors

• Increases in employees’ skillsIncreases in employees’ skills

Generic Strategies and Industry Forces

Cost Differentiation FocusEntry Barriers

Ability to Cut Prices deters potential entrants

Customer Loyalty can discourage potential entrants

Focusing Develops core competencies that can act as Entry Barrier

Buyers Power

Ability to offer lower prices to powerful buyers

Large Buyers have less power to negotiate because of few close alternatives

Large buyers have less power to negotiate because of few alternatives

Supplier Power

Better Insulated from powerful suppliers

Better able to pass on Supplier price increases to Customers

Supplier have power because of low Volume, but differentiation focused firms have better ability to pass on supplier price increase

Threat of Substitutes

Can use low price to defend against substitutes

Customer become attached to differentiating attributes, reducing threat of substitutes

Specialized products & core competency protect against substitutes

Rivalry Better able to compete on price

Brand Loyalty to keep Customer from Rivals

Rivals cannot meet differentiation focused Customer needs


Date post:	28-Apr-2015
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Strategic Mngt IMT-56

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