Module 2 - Strategy formulation

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Module 2Strategy Formulation

•Definition of Strategy Formulation•Developing Strategic Vision & Mission for a Company•Business Policies, Objectives, Goals.•Balance Score card.•Strategic Intent- hierchy•Merging Strategic Vision, Objectives ,strategy to Strategic Plan.

What is Strategy Formation?

• The stage of strategic management that involves the planning and decision making that lead to the establishment of the organization’s goals and of a specific strategic plan.

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Realized StrategyStrategy Formation Activities

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Realized StrategyStrategy Formation Roles

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Top vs. middle vs. bottom roles

How much empowerment of middle and lower levels is beneficial for the organization?

Line vs. staff rolesWhich of this two groups should be responsible for the strategy formation process?

Internal vs. external roles

Should the strategy formation activities be carried out by members of the organization or should they be outsourced?

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How Are Vision & Mission Statements Used to Set the Strategic Direction?

Mission Statement• Definition of Mission

“A purpose or reason for being.”

• The Mission answers the BIG questions:– What is our business?– Why do we exist?

• The Mission statement defines the purpose or broader goal for being in existence.

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What is a mission statement?

A mission statement describes….• Who we serve• Why - Our reason for being• What we Strive to Achieve

Examples: Mission and Vision Statements

Otis Elevator

Our mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher

reliability than any similar enterprise in the world.

Our business is renting cars. Our mission is total customer satisfaction.

Avis Rent-a-Car

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What is a mission statement?A mission statement articulates…

• Our values• Our Purpose• Our Direction Now and in The future

Why do we need a mission statement?

“Unless the mission is explicitly expressed, clearly understood, and supported by every member of the organization, the enterprise is at the mercy of events” (p. 371).

Peter Drucker

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Why do we need a mission statement?

A mission statement guides the decisions we make about what we do and how we accomplish it.

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Characteristics of a Mission Statement

• Defines current business activities• Highlights boundaries of current business • Conveys

– Who we are,– What we do, and – Where we are now

• Company specific, not generic —so as to give a company its own identity

A company’s mission is not to make a profit !The real mission is always—“What will we do to make a

profit?”

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Example: Mission Statement

Apple Computer, Inc., ignited the personal computer revolution in the 1970s with the Apple II, and reinvented the personal computer in the 1980s with the Macintosh.

Apple is now committed to its original mission--to bring the best personal computing products and

support to students, educators, designers, scientists, engineers, business persons and consumers in over

140 countries around the world.

Apple Computer

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Importance of Mission

MissionResource Allocation

Identifying the Purpose

Organizational Culture

Focal point for work structure

Benefits from a strong mission

Better Assessment & Control

Better Financial Result

Mission Elements

CustomersMarkets

Employees

PublicImage

Self-Concept Philosophy

SurvivalGrowthProfit

ProductsServices

Technology

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What an organization should look like once its has successfully implemented its strategies and achieved its full potential. Vision Statement –

What do we want to become?McDonald’sOur vision is to be the world’s best quick service restaurant.DisneyTo be the happiest place on earth

WHAT IS A VISION ?

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Vision Statement• A few important facts . . .

– You have to have one• Companies with vision statements are

8 times more effective• Tells you where you want to go

– You have to share it• Tell EVERYONE

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Developing a Strategic Vision

• Involves thinking strategically about– Firm’s future business plans– Where to “go”

• Tasks include– Creating a roadmap of the future– Deciding future business position to stake

out– Providing long-term direction– Giving firm a strong identity

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Examples: Mission and Vision Statements

Empower people

through great software

anytime, anyplace, and

on any device.

Microsoft Corporation

Characteristics of a Strategic Vision

• Charts a company’s future strategic course

• Defines the business makeup for 5 years (or more)

• Specifies future technology-product-customer focus

• Indicates capabilities to be developed

• Requires managers to exercise foresight

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Vision

Module 2 Lakshman K21

The Kingfisher Airlines family will consistently deliver a safe, value-based and enjoyable travel experience to all our guests

Examples: Mission and Vision Statements

Our vision: Getting to a billion connected computers

worldwide, millions of servers, and trillions of dollars

of e-commerce. Intel’s core mission is being the

building block supplier to the Internet economy and

spurring efforts to make the Internet more useful.

Being connected is now at the center of people’s

computing experience. We are helping to expand the

capabilities of the PC platform and the Internet.

Intel

Entrepreneurial Challenges inForming a Strategic Vision

• How to creatively prepare a company for the future

• How to keep the company responsive to – Evolving customer needs– Competitive pressures– New technologies– New market opportunities– Growing or shrinking

opportunities

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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

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Examples: Mission and Vision Statements

The mission of the American Red Cross

is to improve the quality of human life; to

enhance self-reliance and concern for

others; and to help people avoid,

prepare for, and cope with emergencies.

American Red Cross

Defining a Company’s Business

• A good business definition incorporates three factors– Customer needs -- What is being satisfied– Customer groups -- Who is being satisfied– Technologies and competencies employed

-- How value is delivered to customers to satisfy their needs

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Your Mission—Vision Statement

Should include the best of both

Communicating the Vision—Mission

• An exciting, inspirational vision– Challenges and motivates workforce– Arouses strong sense of organizational purpose– Induces employee buy-in– Galvanizes people to live the business

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Managerial Value of a Well-Conceived Strategic Vision and Mission

• Crystallizes long-term direction• Reduces risk of rudderless decision-making• Conveys organizational

purpose and identity• Keeps direction-related actions of lower-level

managers on common path• Helps organization prepare for the future

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What is the difference between a ‘policy’ and a ‘strategy’?

POLICY

A policy is a document written to structure and outline the strategy to those that it affects and to those who must implement it.

STRATEGY

A strategy is devised at the relevant level of management and is a long-term plan of change and improvement for an organisation.

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Definition of Business Policy

• Business policy may be defined as “specific guides to managerial action and decision in the implementation of strategy”.

• “A policy is a statement or a commonly accepted understanding of decision making criteria or formula prepared or evolved to achieve economy in operation by making relevant decision”—Earnest.

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Features of Business Policy• An effective business policy must have following features-• Specific- Policy should be specific/definite. If it is uncertain,

then the implementation will become difficult. • Clear- Policy must be unambiguous. It should avoid use of

jargons and connotations. There should be no misunderstandings in following the policy.

• Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates.

• Appropriate- Policy should be appropriate to the present organizational goal.

• Simple- A policy should be simple and easily understood by all in the organization.

• Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios.

• Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance.

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Difference between Policy and Strategy• The term “policy” should not be considered as synonymous

to the term “strategy”. The difference between policy and strategy can be summarized as follows-

• Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While strategy is concerned with those organizational decisions which have not been dealt/faced before in same form.

• Policy formulation is responsibility of top level management. While strategy formulation is basically done by middle level management.

• Policy deals with routine/daily activities essential for effective and efficient running of an organization. While strategy deals with strategic decisions.

• Policy is concerned with both thought and actions. While strategy is concerned mostly with action.

• A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as prescribed by a policy. 33

Classification of Business Policies

• Top management Policies.• Middle management Policies• Lower level management Policies• Marketing and sales policies.• Production Policies.• Financial Policies.• Personnel Policies.

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Objectives

• Objectives are formulated to accomplish Organisation Mission.

• Objectives can be defined as “ The long term results that an organization seeks to achieve in pursuing its basic mission”.

• Objectives of Tesco Company• Offering customers the best value for money and the

most competitive prices • Meeting the needs of customers by constantly seeking,

and acting on, their opinions regarding innovation, product quality, choice, store facilities and service

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Importance of Objectives

• Objectives indicates the purpose and aims of organisation.

• Objectives provide directions for the functioning of an organisation.

• It helps to adjust itself to the existing environment.

• Helps in attaining employees coordination and therefore reduce conflicts.

• Helps in control and assessment of organisation performance.

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OBJECTIVES-

Employee Focus: Make the organization a Great Place to work .

Community Focus: Be a responsible corporate citizen .

Supplier Focus: Treat Suppliers as partners .

Shareholders Focus: Demonstrate superior results .

Customer Focus: Improve Customer Satisfaction.

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Features of Good Objectives.

• Objectives should be understandable.

• Objectives should be related to the time frame.

• Objectives should be specific• Objective should be realistic.• Measurability.• Flexibility.

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Goals• Definition of Goals “An objective or desired

outcome; the end-point you want to reach.”

• Goals should be SMART– Specific– Measurable– Achievable– Realistic– Timebound

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What is a Balanced Scorecard?

The Balanced Scorecard is a strategic planning and management system used to align business activities to the vision and strategy of the organization by monitoring performance against strategic goals.

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What Is a Balanced Scorecard?

A Measurement System?

A Management System?

A Management Philosophy?

Balanced Scorecard Concept

• Was first published in 1992 by Kaplan and Norton, a book followed in 1996.

• Traditional performance measurement that only focus on external accounting data are obsolete.

• The approach is to provide 'balance' to the financial perspective.

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The Balanced Scorecard What is it?

• Balances financial and non-financial measures• Balances short and long-term measures• Balances performance drivers (leading indicators)

with outcome measures (lagging indicators)• Should contain just enough data to give a complete

picture of organizational performance… and no more.• Leads to strategic focus and organizational

alignment.

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Why Use a Balanced Scorecard?

• Improve organizational performance by measuring what matters

• Increase focus on strategy and results • Align organization strategy with workers on a day-to-

day basis • Focus on the drivers key to future performance• Improve communication of the organization’s Vision

and Strategy • Prioritize Projects / Initiatives

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4 Original Business Perspectives

Adapted from The Balanced Scorecard by Kaplan & Norton

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The Balanced Scorecard model suggests that we view the organization from 4 perspectives.

Then Develop metrics, collect data and analyze it relative to each of these perspectives

Balanced Scorecard Measurements

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How do customer see us? Feedback

What we must Excel at?

Can we continue to improve and create value?

How well do we look at our stakeholders?

Internal Process

Learning and Development

Financial

4 Business Perspectives Questions• Financial

– What must we do to create sustainable economic value?• Internal Business Process

– To satisfy our stakeholders, what must be our levels of productivity, efficiency, and quality?

• Learning and Growth– How does our employee performance management system,

including feedback to employees, support high performance? • Customer

– What do our customers require from us and how are we doing according to those requirements?

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Key Implementation Success Factors

• Obtaining executive sponsorship and commitment • Involving a broad base of leaders, managers and

employees in scorecard development • Choose the right Scorecard Champion• Beginning interactive (two-way) communication first • Viewing the scorecard as a long-term journey rather

than a short-term project • Getting outside help if needed

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Oracle Balance score card

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Benefits of Balanced Scorecard Benefit

• Helps align key performance measures with strategy at all levels of an organization

• The methodology facilitates communication and understanding of business goals and strategies at all levels of an organization

• Strategic initiatives that follow "best practices" methodologies that cascade through the entire organization

• Transforms an organization’s mission statement and strategic plan from a passive document into the "marching orders" for the organization on a daily basis.

• It enables executives to truly execute their strategies by identifying what should be done and measured.

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To date, some form of a Balanced Scorecard is used by nearly 60% of Fortune 500 companies

Financial?

• Revenue growth rates• Cost reduction• Asset utilisation• Project profitability

To succeed financially, how should we appear to our shareholders?

Growth Maturity Harvesting

Financial objectives tend to be influenced by the organization's position on the life-cycle curve.

What should our balance sheet look like?

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Customer?

What do

our customers

value most?

MarketShare

CustomerRetention

CustomerProfitability

CustomerSatisfaction

CustomerAcquisition

• Product / ServiceAttributes

• Customer Relationship• Image and Reputation

Organisational sub-units may have internal clients.

To achieve our vision, how should we appear to our customers?

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Internal BusinessProcesses?

• Improve quality• Reduce cycle times• Maximise production• Maximise throughput• Reduce cost per process• Reduce cost per transaction

CUSTOMER

NEED

SATISFIED

SERVICE THE CUSTOMER

CUSTOMER

NEED

IDENTIFIED

CREATE THE PRODUCT/ SERVICE OFFERING

BUILD THE PRODUCTS/ SERVICES

DELIVER THE PRODUCTS/ SERVICES

IDENTIFY THE MARKET

Innovation Process Operations Process

Customer Service

corecompetencies

To satisfy our shareholders and customers, what business processes must we excel at?

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Learning andInnovation?

• Employee capabilities• Information system capabilities• Motivation• Empowerment• Alignment

Internal

&

External

R&DHighlight gaps in employeeskills and information systems.

To achieve our vision, how will we sustain our ability to change and

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The Four Perspectives Apply to Mission Driven As Well As Profit Driven Organizations

• What must we do to satisfy our financial contributors?

• What are our fiscal obligations?

• Who is our customer?• What do our customers expect

from us?

• What internal processes must we excel at to satisfy our fiscal obligations, our customers and the requirements of our mission?

• How must our people learn and develop skills to respond to these and future challenges?

Profit DrivenProfit Driven Mission DrivenMission Driven

• What must we do to satisfy our shareholders?

• What do our customers expect from us?

• What internal processes must we excel at to satisfy our shareholder and customer?

• How must our people learn and develop skills to respond to these and future challenges?

Financial Perspective

Customer Perspective

Internal Perspective

Learning & Growth Perspective

Answering these questions is the first step to develop a Balanced Scorecard

Why are Companies Adopting a Balanced Scorecard?

• Change

Formulate and communicate a new strategy for a more competitive environment

•Growth

Increase revenues, not just cut costs and enhance productivity

• Implement

From the 10 to the 10,000. Every employee implements the new growth strategy in their day-to-day operations

The Revenue Growth Strategy

“Improve stability by broadening the sources of revenue from current customers”

The Productivity Strategy

“Improve operating efficiency by shifting customers to more cost-effective channels of distribution”

Improve Returns

Improve Operating Efficiency

Broaden Revenue Mix

Increase Customer Confidence in Our Financial Advice

IncreaseCustomer Satisfaction Through Superior Execution

IncreaseEmployee Productivity

Access to Strategic Information

Develop Strategic Skills

Align Personal Goals

FinancialPerspective

CustomerPerspective

InternalPerspective

Learning Perspective

Cross-Sell the Product Line

Shift to Appropriate Channel

Provide Rapid Response

Develop New Products Minimize

Problems

Understand Customer Segments

Why Do We Need a Balanced Scorecard? To Implement Business Strategy!

“Less than 10% of strategies effectively formulated are effectively executed”

Fortune

“Business Strategy is now the single most important issue… and will remain so for the next five years”Business Week

Our Research Has Identified Four Barriers to Strategic Implementation

Today’s Management Systems Were Designed to Meet The Needs of Stable Industrial Organizations That We’re Changing Incrementally

You Can’t Manage Strategy With a System Designed for Tactics

Only 5% of the work force understands the strategy

60% of organizations don’t link budgets to strategy

Only 25% of managers have incentives linked to strategy

85% of executive teams spend less than one hour per month

discussing strategy

9 of 10 companies fail to execute

strategy

The People Barrier

The Vision Barrier

The Management Barrier

The Resource Barrier

Balanced Scorecard “Early Adaptors” Have Executed Their Strategies Reliably and Rapidly

(USM&R)2003

#6 in profitability

2005

2006

2007

#1 in profitability

#1 in profitability

#1 in profitability

Mobil

2003

Property & Casualty

Retail Bank2003 Profits = $x

200420052006

Profits = $8xProfits = $13xProfits = $19x

Brown & Root Engineering (Rockwater)

2003Losing money 2006

#1 in growth and

profitability

Profit Stock

$275M loss

Stock Price = $59

2004200520062007

$15M$60M$80M$98M

$74$114$146$205

Scorecard Potential Pitfalls & Criticisms

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Scorecard Potential Pitfalls & Criticisms

• Lack of a well Defined Strategy – The balanced scorecard relies on a well defined strategy and

understanding of linkages between strategic objections and metrics. Without this foundation the implementation could fail.

• Too much focus on the lagging measures– Focusing on only the lagging measures may cause a lack of priority or

opportunity for the leading measures.• Use of Generic Metrics

– Don’t just copy metrics from another firm. Identify the measures that apply to your strategy and competitive position .

• Self-serving managers– Managers whose goal is to achieve a desired result in order to obtain a

bonus or other self reward.

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Balanced Scorecard Links Vision & Strategy to Personal Objectives

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VISIONWhat we want to be

STRATEGYOur game plan

STRATEGIC OUTCOMES

SatisfiedSHAREHOLDERS

Delighted CUSTOMERS

Efficient and EffectivePROCESSES

Motivated & PreparedWORKFORCE

PERSONAL OBJECTIVESWhat I need to do

BALANCED SCORECARDTranslate, Focus and Align

TRANSFORMATION OBJECTIVESWhat we must improve

Strategic Intent

• Strategic intent is a high-level statement of the means by which your organization will achieve its vision. It is a statement of design for creating a desirable future (stated in present terms). Putting it simple, a strategic intent is your company's vision of what it wants to achieve in the long term.

• Strategic Intent has a hierarchy- vision, Mission and goals and objectives.

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Strategic Intents

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Vision

Winning competitive battles through deciding how to leverage resources, capabilities, and core

competencies.

Mission

An application of strategic intent in terms of products to be offered and markets to be served.

Attributes of Strategic Intent• Sense of Direction: Strategic Intent implies a

particular view about long term market or competitive position that an organisation hope to build in future.

• Sense of Discovery: Strategic Intent is differential as each organisation differs from others. It Implies a competitively unique point view about the future.

• Sense of Destiny: strategic Intent has an emotional edge to it. It is an end result that employees perceive as inherently worthwhile

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SOME SAMPLE STRATEGIC INTENTS

FORD Motor CompanyOur Vision: to become the world's leading

company for automotive products and services.

Our Mission: we are a global, diverse family with a proud heritage, passionately committed to providing outstanding products and services.

Our Values: We do the right thing for our people, our environment and our society, but above all for our customers.

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SOME SAMPLE STRATEGIC INTENTS

TOYOTA MOTOR Corporation Slogan: Toyota will continue to innovate

relentlessly to ensure further growth.Mission: Toyota seeks to create a more

prosperous society through automotive manufacturing.

Vision: Toyota aims to achieve long-term, stable growth in harmony with the environment, the global economy, the local communities it serves, and its stakeholders.

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Merging the Strategic Vision, Objective and Strategy into a Strategic Plan

• The Vision is the primary statement. Based on Vision statement, the Mission statement is formed.

• The Objectives of the Company helps to prepare Strategic plan in various areas like marketing, finance, production.

• Hence the genesis is Vision and Objectives of the Company helps to draw the Strategic Plan in different are as of the Organization & Business.

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Merging the Strategic Vision, Objective and Strategy into a Strategic Plan

• The strategic plan projects a prescriptive model based on predictive environment which is a road map for execution.

• Strategic plan is translated into the operations planning.

• Any deviation required is to be directed by strategic plan which takes care of the corporate objective and factors commanding the change.

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