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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Process of Crafting and Executing Strategy Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

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Str. Mgmt Ch 2

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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 2: Leading the Process of Crafting and

Executing Strategy

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

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Chapter Learning Objectives

1. Grasp why it is critical for company managers to think long and hard about where a company needs to head and why.

2. Understand the importance of setting both strategic and financial objectives.

3. Recognize that the task of crafting a company strategy draws on the entrepreneurial talents of managers at all organizational levels.

4. Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.

5. Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently.

6. Understand why the strategic management process is ongoing, not an every-now-and-then task.

7. Learn what leadership skills management must exhibit to drive strategy execution forward.

8. Become aware of the role and responsibility of a company’s board of directors in overseeing the strategic management process.

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Chapter Roadmap

What Does the Strategy-Making, Strategy-Executing process Entail?

Phase 1: Developing a Strategic Vision Phase 2: Setting Objectives Phase 3: Crafting a Strategy Phase 4: Implementing and Executing the Strategy Phase 5: Evaluating Performance and Initiating

Corrective Adjustments Leading the Strategic Management Process Corporate Governance: The Role of the Board of

Directors in the Strategy-Making, Strategy-Executing Process

Figure 2.1: The Strategy-Making, Strategy-Executing Process

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Developing a Strategic Vision

Involves thinking strategically about

Future direction of company

Changes in company’s product/market/customer technology to improve

Current market position

Future prospects

Phase 1

A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic

course in preparing for the future.

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Key Elements of a Strategic Vision

Delineates management’s aspirations for the business

Provides a panoramic view of “where we are going” Charts a strategic path Is distinctive and specific to

a particular organization Avoids use of generic language that

is dull and boring and that couldapply to most any company

Captures the emotions ofemployees and steers themin a common direction

Is challenging and a bit beyond a company’s immediate reach

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Role of a Strategic Vision

A well-conceived, well-communicated vision functions as a valuable managerial tool to Give the organization a sense of direction, mold

organizational identity, and create a committed enterprise

Illuminate the company’s directional path Provide managers with a reference point to

Make strategic decisions Translate the vision into hard-edged

objectives and strategies Prepare the company for the future

A strategic vision exists only as words and has noorganizational impact unless and until it wins the commitmentof company personnel and energizes them to act in ways that

move the company along the intended strategic path!

Table 2.2: Characteristics of an Effectively Worded Vision Statement

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Table 2.3: Common Shortcomings in Company Vision Statements

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Strategic Vision vs. Mission

A strategic vision concerns a firm’s future business path - “wherewe are going” Markets to be pursued

Future product/market/customer/technology focus

Kind of company management is trying to create

A company’s mission statement typically focuses on its present business purpose - “who we are and what we do” Current product and

service offerings

Customer needs and customer groups being served

Geographic coverage

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Characteristics of a Mission Statement

Identifies boundaries of a company’s current business and says something about Present products and services Types of customers served Geographic coverage

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

A good mission statement describes a company’s business

makeup and purpose in language specific enough to give

the company its own identity and distinguish it from

other enterprises in the same or other industries!

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Key Elements of aMission Statement

A complete mission statement should cover three things: Customer needs being met –

What is being satisfied Customer groups or markets being served –

Who is being satisfied What the organization does (in terms of business

approaches, technologies used, and activities performed) to satisfy the targeted needs of the targeted customer groups – How customer needs are satisfied

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 a profit is an objective or intended outcome!

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Companies often develop a statement of values to guide a company’s pursuit of its vision and strategy and paint the white lines for how a company’s business is to be conducted

Company values statements typically contain four to eight beliefs, traits, and behaviors relating to such things as Fair treatment, integrity, ethical behavior,

innovation, teamwork, product quality, customer satisfaction,social responsibility, community citizenship

But values statements remain a bunch of nice words until espoused beliefs, traits, and behaviors are

Incorporated into company’s operations and work practices

Used as benchmarks for job appraisal, promotions, and rewards

Values

Linking the Visionwith Company Values

If company personnel are not held accountablefor displaying company values in doing their jobs, then the

company values statement is a bunch of empty words!

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Winning support for the vision involves Putting “where we are going and why” in writing

Distributing the statement organization-wide

Having executives explain vision to employees

An engaging, inspirational vision Challenges and motivates workforce

Articulates a compelling casefor where company is headed

Evokes positive support and excitement

Arouses a committed organizationaleffort to move in a common direction

Communicating the Strategic Vision

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Recognizing Strategic Inflection Points

Sometimes an order-of-magnitude change occurs in a company’s environment thatDramatically alters its future prospects

Mandates radical revision of its strategic course

Critical decisions have to be made about where to go from hereA major new directional path may have to be taken

A major new strategy may be needed

Responding quickly to unfolding changes in the marketplace lessons a company’s chances ofBecoming trapped in a stagnant business or

Letting attractive new growth opportunities slip away

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Mobilizing support for a new vision entails

Reiterating basis for the new direction

Addressing employee concerns head-on

Calming fears

Lifting spirits

Providing updates and progressreports as events unfold

Overcoming Resistance toa New Strategic Vision

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Crystallizes an organization’s long-term direction

Reduces risk of rudderless decision-making

Creates a committed enterprise where organizational members enthusiastically pursue efforts to make the vision a reality

Provides a beacon to keep strategy-related actions of all managers on common path

Helps an organization prepare for the future

Payoffs of a Clear Strategic Vision

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Setting Objectives

Purpose of setting objectives

Converts vision into specific performance targets

Creates yardsticks to track performance

Well-stated objectives are

Quantifiable

Measurable

Contain a deadline for achievement

Spell-out how much of what kindof performance by when

Phase 2

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Importance of SettingStretch Objectives

Objectives should be set at levels that stretch an organization toPerform at its full potential,

delivering the best possible resultsPush firm to be more inventiveExhibit more urgency to improve its business

positionBe intentional and focused in its actions

There’s no better way to avoid ho-hum results thanby setting stretch objectives and using compensation

incentives to motivate organization members to achieve the stretch performance targets!

Types of Objectives Required

Financial Objectives Strategic Objectives

Outcomes focused

on improving financial

performance

Outcomes focused on improving competitive strength and market

standing

$

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Examples: Financial Objectives

Annual revenue growth of X% X % increase in after-tax profits annual Earnings per share growth of X% annually Annual dividend increases of X% Profit margins of X% X% return on capital employed (ROCE) Annual stock price increases that average X% over

time Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new

capital investment Stable earnings during periods of recession

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Winning an X% market share within 3 years Achieving lower overall costs than rivals Overtaking key competitors on product performance

or quality or customer service within 2 years Deriving X% of revenues from sale of new products

introduced in past 5 years Being the recognized industry leader in product

innovation and/or technological know-how Having a wider product line than rivals Consistently getting new or improved products to

market ahead of rivals Having stronger national or global sales and

distribution capabilities than rivals

Examples: Strategic Objectives

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Achieving good financial performance is not enough Current financial results are “lagging indicators” reflecting

results of past decisions and actions — good profitability now does not translate into stronger capability for delivering even better financial results later

However, setting well-chosen strategic objectives and achieving them signals Growing competitiveness Growing strength in the marketplace

A company that is growing competitively stronger is developing the capability for better financial performance in the years ahead Good strategic performance is thus a “leading indicator” of a

company’s capability to deliver improved future financial performance

Good Strategic Performance Is the Key to Better Financial Performance

Unless a company sets and achieves stretch strategic objectives

it is not developing the competitive muscle to deliver even

better financial results in the years ahead!

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A balanced scorecard for measuringcompany performance is optimal; it entails

Setting financial and strategic objectives Placing balanced emphasis on achieving

both types of objectives(However, if a company’s financial performance is dismal or if its very survival is in doubt because of poor financial results, then stressing the achievement of the financial objectives and temporarily de-emphasizing the strategic objectives may have merit)

Just tracking financial performance overlooks the importance of measuring whether a company is strengthening its competitiveness and market position

A Balanced Scorecard Approach –Setting Strategic and Financial Objectives

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

strengthen a company’s business position and give it a growing competitive advantage over rivals!

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Both Short-Term and Long-Term Objectives Are Needed

Short-term objectives

Targets to be achieved soon

Milestones or stair steps for reaching long-range performance targets

Long-term objectives

Targets to be achieved within3 to 5 years

Calls for actions now that willpermit reaching targetedlong-range performance later

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Concept of Strategic Intent

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its

resources and competitive actions on achieving that objective!

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Characteristics of Strategic Intent

Indicates firm’s intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds

Involves establishing a grandiose performance target out of proportion to immediate capabilities and market position but then devoting the firm’s full resources and energies to achieving the target over time

Entails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position

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Objectives Are Needed at All Levels

1. First, set 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

The objective-setting process is more top-down than bottom up

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Crafting a Strategy

Strategy-making involves astute entrepreneurship Actively searching for opportunities

to do new things or

Actively searching for opportunities to do existing things in new or better ways

Strategizing involves Developing timely responses to happenings

in the external environment and

Steering company activities in new directions dictated by shifting market conditions

Phase 3

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Crafting a Good Strategy Requires Good Business Entrepreneurship

Developing a winning strategy involves

Diagnosing the direction and force of the market changes underway and making timely strategic adjustments

Spotting new or better waysto satisfy customer needs

Figuring out how to outwit and outmaneuver competitors

Pursuing ways to strengthen the firm’s competitive capabilities

Proactively trying to out-innovate rivals

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The Role of Astute Entrepreneurship in Crafting a Company’s Strategy

Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts

Innovating more creatively Being more efficient Being more imaginative Adapting faster

Rather than running with the herd!

Good strategy-making is therefore inseparable from good entrepreneurship—one cannot

exist without the other!

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The Hows That Define a Firm's Strategy

How to grow the business

How to please customers

How to outcompete rivals

How to respond to changing market conditions

How to manage each functionalpiece of the business (R&D, production, marketing, HR, finance, and so on)

How to achieve targeted levels of performance

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Who Is Involved in Strategy Making?

CEO (chief executive officer) Has ultimate responsibility for leading

the strategy-making process

Functions as strategic visionary andchief architect of strategy

Senior executives Typically have influential roles in fashioning those strategy

components involving their areas of responsibility

Managers of subsidiaries, divisions, geographic regions, plants, and other important operating units (and, often, key employees with specialized expertise)

Some pieces of the strategy are best orchestrated by on-the-scene company personnel with detailed familiarity of the piece of the business they are in charge of running

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Why Is Strategy-Making Nearly Always a Collaborative Process?

The job is often way too big for one person or a small executive group—many strategic issues are complex or cut across multiple areas of expertise

The more a company’s operations cut across different products, industries and geographic areas, the more that headquarters executives must delegate strategy-making authority to down-the-line managers in charge of particular functions and operating units

In today’s companies every manager typically has a strategy-making role—ranging from

major to minor—for the area he or she heads!

Figure 2.2: A Company’s Strategy-Making Hierarchy

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Uniting the Company’sStrategy-Making Effort

A firm’s strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy

Pieces of strategy should fittogether like the pieces of a puzzle

Key approaches used to unifyall strategic initiatives into acohesive, company-wide action plan Effectively communicate company’s vision,

objectives, and major strategies to all personnel Diligently review lower-level strategies for

consistency and support of higher-level strategies—revise as needed

What Is a Strategic Plan?

Its strategic vision and business mission

Its strategy

Its strategic andfinancial objectives

A

Company’s

Strategic Plan

Consists of

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Implementing and Executing Strategy

Operations-oriented activity aimed atperforming core business activities in astrategy-supportive manner

Tougher and more time-consumingthan crafting strategy

Key tasks include Improving the efficiency with which

the strategy is being executed

Showing measurable progress in achieving both operating excellence and targeted results

Phase 4

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Building a capable organization Allocating resources to strategy-critical activities Establishing strategy-supportive policies Instituting best practices and programs

for continuous improvement Installing information, communication,

and operating systems Motivating people to pursue the target objectives Tying rewards to achievement of results Creating a strategy-supportive corporate culture Exerting the leadership necessary to drive the

process forward and keep improving

What Does Implementing and Executing the Strategy Involve?

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Crafting and implementing a strategy is not a one-time exerciseCustomer needs and competitive conditions 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 a need for corrective actions and adjustments on an as-needed basis

Evaluating Performance andMaking Corrective Adjustments

Phase 5

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Taking actions to adjust to the march of events tends to result in one or more of the following

Altering long-term direction and/orredefining the mission/vision

Raising, lowering, or changingperformance objectives

Modifying the strategy

Improving strategy execution

Monitoring, Evaluating, and Adjusting as Needed

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Leading the StrategicManagement Process

Diverse leadership challenges include Exerting take-charge leadership Being a spark plug for change and action Ramrodding things through Achieving results

Leading the strategic managementprocess can involve various stylesand approaches Being a hard-nosed authoritarian Being a perceptive listener Being a compromising decision maker Delegating authority to people closest to the action Being a coach Assuming a highly visible role in guiding the process Making brief ceremonial appearances

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1. Stay on top of what’s happening

2. Make sure company has agood strategic plan

3. Put constructive pressure oncompany to achieve good results

4. Push corrective actions to improve overall strategic performance

5. Lead development of stronger corecompetencies and competitive capabilities

6. Display ethical integrity and lead social responsibility initiatives

Things a Chief Strategy Implementer Must Do to Be Successful

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Develop a broad network of formaland informal sources of information

Talk with many people at all levels

Be an avid practitioner of MBWA

Observe situation firsthand

Monitor operating results regularly

Get feedback from customers

Watch competitive reactions of rivals

Role #1: Stay on Topof What’s Happening

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Role #2: Make Sure CompanyHas a Good Strategic Plan

Two key responsibilities of CEO and top-level executives

Effectively communicate company’s vision, objectives, and major strategy components to down-the-line managers and key personnel

Exercise due diligence in reviewing lower-level strategies for consistency and support of higher-level strategies

Effective leadership minimizespotential for conflict betweendifferent levels in the strategy hierarchy

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Successful leaders spend time Mobilizing organizational energy behind

Good strategy execution and

Operating excellence

Nurturing a results-oriented work climate

Promoting enabling cultural driversStrong sense of involvement on part of company

personnel

Emphasis on individual initiative and creativity

Respect for contributions of individuals and groups

Pride in doing things right

Role #3: Put Constructive Pressure on Company to Achieve Good Results

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Role #4: Push Corrective Actions to Improve Strategy-Making and Strategy-Execution

Requires deciding When adjustments are needed

What adjustments to make

Involves Adjusting long-term direction, objectives, and

strategy on an as-needed basis in response to unfolding events and changing circumstances

Promoting fresh initiatives to bring internal activities and behavior into better alignment with strategy

Making changes to pick up the pace when results fall short of performance targets

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Top management intervention isrequired to establish better or new Resource strengths and competencies

Competitive capabilities

Senior managers mustlead the effort because Competencies reside in combined

efforts of different work groups and departments, thus requiring cross-functional collaboration

Stronger competencies and capabilitiescan lead to a competitive edge over rivals

Role #5: Promote Stronger CoreCompetencies and Capabilities

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Role #6: Display Ethics Leadership and Lead Social Responsibility Initiatives

Set an excellent example in

Displaying ethical behaviors

Demonstrating character andpersonal integrity in actions and decisions

Declare unequivocal support for high ethical standards and expect all employees to conduct themselves in an ethical fashion

Encourage compliance and establish toughconsequences for unethical behavior

Our ethicscode is . . .

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Exercise strong oversight to ensure five tasks of strategic management are executed to benefit

Shareholders or

Stakeholders

Make sure executive actions are not only proper but also aligned with interests of stakeholders

Corporate Governance:Strategic Role of a Board of Directors

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Obligations of a Board of Directors

Be inquiring critics and overseers Evaluate caliber of senior executives’

strategy-making and strategy-executing skills

Institute a compensation plan fortop executives rewarding them forresults that serve interests of Stakeholders andShareholders

Oversee a company’sfinancial accountingand reporting practices

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Key Responsibilities of Board Members

Be well informed about a company’s performance Guide and judge CEO and other top executives Exhibit courage to curb inappropriate or unduly

risky management actions Confirm that CEO is doing what

board expects Provide insight and advice to management Be intensely involved in debating pros and cons

of key actions and decisions

Board members have a very important oversight role in

the strategy-making, strategy-executing process!