Business Strategy

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Strategic direction-setting

Strategic direction-settingLearning objectives

1. Outline and explain strategic direction-setting in the business strategy process and the importance of establishing strategic objectives for a firm

2. Outline and discuss the role of a firm’s vision and mission

3. Understand the nature, scope and attributes of strategic objectives

4. Identify and define stakeholders of a firm and their role in setting strategic objectives

5. Understand how business ethics and stakeholder expectations determine a firm’s strategic objectives

6. Understand how to develop a set of strategic objectives for a firm using a stakeholder analysis table

7. Articulate the link between strategic objectives and evaluation of a firm’s strategic performance.

Strategic direction-settingOutline

• Introduction• Organisational vision and mission

• Vision • Mission

• Strategic objectives• What are strategic objectives?• Scope of strategic objectives• Attributes of strategic objectives

• Major determinants of strategic objectives• Business ethics

• Four broad levels of ethical stance• Corporate code of ethics statement

• Stakeholder expectations• The bottom line on strategic objectives • Conclusion• Strategic direction-setting: Summary• Summary of strategic objectives identified using stakeholder analysis• Postscript: Some strategic performance reporting systems.

References

• Hanson et al., (2014) Chapter 1 (especially pp. 17-22), Chapter 10 (especially p. 312) ; and Chapter 12 (especially pp. 374-375).

• Article 6: Mitchell, R.K., Agle, B.R. & Wood, D.J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, Vol. 2, No. 4: 853-886.

• Article 7: Uren, D. (2003). The power of profit. AFR BOSS Magazine, August: 66-69.

• Article 1(e): Viljoen and Dann (2003) Chapter 8 (especially pp. 208-211).

Readings in bold black are important.

Analyse the environment

Identify opportunities and threats

Identify the organisation’s current vision, mission, and

strategic objectives

Reassess the organisation’s vision, mission and strategic

objectives

Formulate strategies to achieve strategic

objectives

Implement strategies

Evaluate results

Analyse the organisation’s

resources

Identify strengths and weaknesses

A business strategy process: Rational or formal model


Strategic choice Strategic analysis Strategic implementation

Strategic evaluation2.

9.8.7.6.

3.

1.

4. 5.

(Source: Robbins, S. P., Bergman, R., Stagg, I. and Coulter, M. 2009. Management, 5th edition, Pearson Education, Australia: 276; and Robbins, S. P., Bergman, R., and Stagg, I. 1997. Prentice Hall, Australia: 248 )

Introduction

Strategic direction-setting is about:

• Determining vision and mission• Setting strategic objectives.

Aimed at communicating organisational purpose to stakeholders and proving a basis for evaluation of a firm’s strategic

performance.

Organisational vision and missionVision

“…a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve…”

(Hanson et al., 2014: 18)


Examples of vision statements

• ‘Our purpose is to create long term value through the discovery, development and conversion of natural resources and provision of innovative customer and market-based solutions.’ (BHP)

• ‘Our vision is to be the world’s best quick service restaurant.’ (McDonald’s)

Copyright © 2014 Cengage Learning Pty LimitedHanson et al., 2014: 18


Questions

Does the firm clearly articulate a vision?

Does the firm “live” the vision?

If so, what do you conclude?

If not, what do you conclude?

Organisational vision and missionMission

Mission statement

‘… specifies the business … in which the firm intends to compete and the [stakeholders] it intends to serve…’ (Hanson et al., 2014: 18-19; modified to replace the word ”customers” with “stakeholders” as shown in brackets)

• Tends to be more specific than a vision statement• Widely adopted in 1990’s and 2000’s• Often criticised as too bland and broad• Often very difficult and complex to write a mission statement that

works.


Purposes of mission statements

• Develop commitment to the organisation

• Direct search for new projects

• Highlight an organisation's point of differentiation

• Establish organisational climate

• Attract prospective employees, customers and other stakeholders.

Pearson Education Australia 2000


Elements of a mission statement

• The vision statement is often included as part of the mission statement

• Stakeholder promises: who are the stakeholders and what the firm will endeavour to do for them

• Ethical standards that guide firm and employee behaviour

• Public image: how the firm wishes to be perceived in public

• How the firm differs or stands out in the market.

Strategic distinctivenessHow the organisation

differentiates itselffrom others of its type

Stakeholder promisesthe commitment of the

organisation to allinterested parties

Values and beliefsGuidelines on how

things are to be donein the organisation

Public imageHow the organisationwishes to be seen by external constituents

THE MISSIONSTATEMENT

Fundamental purposethe business of the

organisation -its reason forexistence

Standards and behavioursthe major policies an proceduresused to implement the strategy

and reinforce the values and beliefs

Organisational vision and mission Elements of a mission statement



Example of a mission statement

• ‘Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants.’ (McDonald’s)



Questions

Does the firm clearly articulate a mission?

Does the firm “live” the mission?

Does the mission statement identify the firm’s stakeholders?

Who are they?

If so, what do you conclude?

If not, what do you conclude?

Strategic objectivesWhat are strategic objectives?

‘… specify exactly what (a firm ) hopes to achieve in the future…’ (Viljoen, J. and Dann, S. (2003). Strategic Management, 4th edition,

Longman, Pearson Education, Australia: 201)

• Strategic objectives embrace the entire firm

• Strategic objectives link a firm to its environment

• Strategic objectives therefore flow from strategic analyses: both internal and external

• Strategic objectives change over time.

Strategic objectives are the focus of the CEO and top management.

Strategic objectives Scope of strategic objectives

Strategic objectives may be:

• Financial• Non-financial

Examples of financial strategic objectives:

• Growth in dividends• Eps• Profits• Sales

Strategic objectivesScope of strategic objectives

Examples of areas for non-financial strategic objectives:

• Employee relations, development and safety• Customer service and satisfaction levels• Fair treatment and payment of suppliers• Ethical standards of behaviour in communities• Environmental responsibility.

Strategic objectives Attributes of strategic objectives

• Specific

• Measureable

• Achievable

• Realistic

• Timeframe


Major determinants of strategic objectives

Two major determinants of a firm’s strategic objectives are:

• Business ethics

• Stakeholder expectations.

These two determinants of strategic objectives are closely related. Why?

Because business ethics focuses upon a firm’s attitudes and responsibilities towards its stakeholders.

Major determinants of strategic objectives

Defining stakeholders

We use Freeman’s (1984) classic definition of stakeholders:

“any group or individual who can affect or is affected by the achievement of the firm’s objectives”

(Freeman, R.E. 1984. Strategic management: A stakeholder approach. Pitman, Marshfield, USA, p. 25).

Note the linkage in this definition between stakeholders and strategic objectives. Why is this linkage important?

Because strategic objectives are developed to address the demands of a firm’s stakeholders. The rest of this topic examines this linkage.

Major determinants of strategic objectives Four stakeholder groups


Major determinants of strategic objectives Another view of stakeholder groups

( Johnson, G., Scholes, K. and Whittington, R. (2008). Exploring Corporate

Strategy: Text and Cases, 8th edition, Prentice-Hall, Pearson Education, UK: 154).

Business ethics(Hanson et al., 2014: 312)

Strategic objective-setting is heavily influenced by a firm’s ethical stance towards its stakeholders.

• Ethical stance: standards of behaviour and moral judgement practised by a firm

• Ethical stance shaped by:

• Society’s expectations (legal, social, moral) about business behaviour

• Individuals’ ethical views/practices within a firm, ESPECIALLY those of top management and CEO.

Business ethics Four broad levels of ethical stance

Ethical responsibility to

Other commitments Comment

Short-term shareholder interests

Legal minimum to all other stakeholders

Fewer large firms appear to be in this category

Longer-term shareholder interests

May need to heed certain stakeholder interests; all others, legal minimum

Many large firms appear to be in this category

Multiple stakeholders Recognise multiple stakeholder interests beyond legal minimum

More and more large firms moving into this category

Many stakeholders (society)

Commitments to many major stakeholders

Some foundations andcharitable trusts fit this category.

(Please note this diagram is based on a diagram in the earlier edition of Johnson, G., Scholes, K. and Whittington, R. 2005. Exploring Corporate

Strategy, 7th edition: 189-191)

Business ethics

Corporate code of ethics or conduct statement(Hanson et al., 2014: 374-375)

Some large firms codify their ethical stance in a corporate code of ethics or conduct statement:

• The statement often identifies key stakeholders

• Highlights ethical behaviour within a firm towards key stakeholders

• Signals expectations of behaviour to all managers and employees

• Signals expectations to new employees and other stakeholders

• Provides a standard against which all corporate actions can be measured.

Business ethics

Example of a corporate code of ethics or conduct statementEndeavour Energy

Business ethics

In sum

A firm’s mission statement and corporate code of ethics or conduct statement should answer the questions:

• Who are the firm’s stakeholders (including whether there is only one or are multiple stakeholders)

• The firm’s view about the ethical stance and responsibilities it has towards these stakeholders.

Stakeholder expectations

Problem

• Stakeholders are not passive • They have demands on the firm and expectations that the firm will satisfy those demands• Those expectations or demands are often in conflict!

How does a CEO:

• Determine these expectations or demands of stakeholders?• Prioritise those often conflicting expectations or demands?• Determine how those expectations or demands should be met?

The Mitchell, Agle and Wood (1997) stakeholder theory model provides a way to address these vital questions.


The Mitchell, Agle and Wood model (1997: 874)


The stakeholder salience model (Mitchell, Agle and Wood, 1997) is based on three criteria of power, legitimacy and

urgency.

• Stakeholders fall into one of three typologies:

• Satisfy one criterion: low salience: discretionary, dormant

or potential stakeholders

• Satisfy two criteria: moderate salience: dominant

stakeholders

• Satisfy three criteria: high salience: definitive stakeholders.



Stakeholder salience analysis therefore enables CEOs to:

• Identify those stakeholders and their demands that must be satisfied

• Rank those demands in order of priority.


THE NEXT STEP

CEOs then develops STRATEGIC OBJECTIVES to address those prioritised stakeholder demands.

In other words, strategic objectives are developed to address the demands of a firm’s stakeholders.

This linkage between stakeholder salience and strategic objective-setting is vitally important to CEOs but is often not properly

understood or well addressed in the literature.


The bottom line on strategic objectives

Probably the single most dominant strategic objective for commercial organisations (especially public

companies) is profit growth:

• It is expressed in many ways eg. growth in revenues (surrogate for profit); growth in $ profits; improving returns on shareholder funds; growth in eps (earnings per share); growth in ROI

• The problem of short-term versus long-term profit growth objectives.

The bottom line on strategic objectives

Why is profit growth often (usually?) the dominant strategic objective?

• Shareholders are usually the definitive stakeholders

• The Ball and Brown research (Uren, D. (2003). The power of profit. AFR BOSS Magazine, August: 66-69).

• Other reasons?

A reminder: How best to grow profitably?

The right approach to achieve profitable growth?

• Focus on developing strategies that strengthen core competencies and hence SCA

• Focus on developing strategies that deliver the SCA to customers and markets that most value the SCA.

Examples: Maytag, David Jones.

Maytag: financial impacts of moving from SCA

SCA: design, manufacture, supply and service of world-leading reliable, durable commercial washing machines and dryers.

1985 1994

Sales $US 684mill $US 3.4bill

ROS 8-12%* 1%**

Profit $US 55-82mill $US 34mill

* during 1970s to 1980s

** average of less than 1% between 1989 and 1995

(Porter, M. 1996. What is strategy? Harvard Business Review, November-December: 76)

Conclusion

Strategic direction-setting involves:

• Determining mission and vision• Setting strategic objectives.

The next step in the business strategy process is to identify, choose and implement strategies that will achieve the strategic objectives of the organisation.

Example of strategic objectives identified using a stakeholder analysis table

Source: Woolworths strategic case study by Lynda O’Hanlon, Mitch Soree and Seyed Zoheir Mirkarimi, Newcastle Business School, MBA program, trimester 3, 2010.

Postscript Some strategic performance reporting systems

A peek at the last stage of the business strategy journey.

Strategic evaluation: where the CEO’s success in achieving strategic objectives is measured.

Analyse the environment

Identify opportunities and threats

Identify the organisation’s current vision, mission, and

strategic objectives

Reassess the organisation’s vision, mission and strategic

objectives

Formulate business strategies Implement

strategiesEvaluate results

Analyse the organisation’s

resources

Identify strengths and weaknesses

PostscriptSome strategic performance reporting systems


Strategic choice Strategic analysis Strategic implementation

Strategic evaluation2.

9.8.7.6.

3.

1.

4. 5.

Source: Hanson et al., 2014: 4; Viljoen and Dann, 2003: 42 and 59; Robbins et al., 1997: 248

• Cash flow


The balanced scorecard(Hanson et al., 2014: 377-379)



Triple bottom line reporting(Viljoen and Dann, 2003: 208-211)

Focuses on evaluating strategic performance in three areas:

• The environmental bottom line - the organisation’s achievement of environmental objectives

• The social justice bottom line - the organisation’s achievement of community and relevant social objectives

• Financial or economic bottom line – the organisation’s achievement of financial and related objectives.

Documents

Business Strategy