IPPTChap002

Copyright © 2014 by The McGraw-Hill Education All rights reserved.

19e Global EditionTHOMPSON | PETERAF | GAMBLE | STRICKLAND

CHAPTER 2CHAPTER 2

CHARTING A COMPANY’S DIRECTION: ITS CHARTING A COMPANY’S DIRECTION: ITS VISION, MISSION, OBJECTIVES, AND VISION, MISSION, OBJECTIVES, AND STRATEGYSTRATEGY

CHARTING A COMPANY’S DIRECTION: ITS CHARTING A COMPANY’S DIRECTION: ITS VISION, MISSION, OBJECTIVES, AND VISION, MISSION, OBJECTIVES, AND STRATEGYSTRATEGY

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1. Grasp why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.

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

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

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

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

WHAT DOES THE STRATEGY-MAKING, WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL?STRATEGY-EXECUTING PROCESS ENTAIL?

1.1. Developing a strategic vision, a mission statement, Developing a strategic vision, a mission statement, and a set of core values.and a set of core values.

2.2. Setting objectives for measuring the firm's Setting objectives for measuring the firm's performance and tracking its progress.performance and tracking its progress.

3.3. Crafting a strategy to move the firm along its Crafting a strategy to move the firm along its strategic course and to achieve its objectives.strategic course and to achieve its objectives.

4.4. Executing the chosen strategy efficiently and Executing the chosen strategy efficiently and effectively.effectively.

5.5. Monitoring developments, evaluating performance, Monitoring developments, evaluating performance, and initiating corrective adjustments.and initiating corrective adjustments.

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FIGURE 2.1 The Strategy-Making, Strategy-Executing Process

Strategic Plan

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STRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLE

♦ A company’s strategic plan lays out its future A company’s strategic plan lays out its future direction, performance targets, and strategy.direction, performance targets, and strategy.

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TASK 1: DEVELOPING A STRATEGIC VISION, TASK 1: DEVELOPING A STRATEGIC VISION, A MISSION STATEMENT, AND A SET OF A MISSION STATEMENT, AND A SET OF CORE VALUESCORE VALUES

Developing a Strategic Vision:Developing a Strategic Vision:● Delineates management’s future aspirations Delineates management’s future aspirations

for the firm to its stakeholders.for the firm to its stakeholders.

● Provides direction—“where we are going.”Provides direction—“where we are going.”

● Sets out the compelling rationale Sets out the compelling rationale (strategic soundness) for the firm’s direction.(strategic soundness) for the firm’s direction.

● Uses Uses distinctivedistinctive and and specificspecific language to set language to set the firm apart from its rivals.the firm apart from its rivals.

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CORE CONCEPTCORE CONCEPTCORE CONCEPTCORE CONCEPT

♦ A A strategic vision strategic vision describes management’s describes management’s aspirations for the future and delineates the aspirations for the future and delineates the company’s strategic course and long-term company’s strategic course and long-term direction.direction.

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TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts

The DosThe Dos The Don’tsThe Don’ts

Be graphic Don’t be vague or incomplete

Be forward-looking and directional Don’t dwell on the present

Keep it focused Don’t use overly broad language

Have some wiggle room Don’t state the vision in bland or uninspiring terms

Be sure the journey is feasible Don’t be generic

Indicate why the directional path makes good business sense

Don’t rely on superlatives only

Make it memorable Don’t run on and on

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Vision Statement for Coca-ColaVision Statement for Coca-Cola

Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.• People: Be a great place to work where people are inspired to be the best they can be.• Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and

satisfy people’s desires and needs.• Partners: Nurture a winning network of customers and suppliers; together we create

mutual, enduring value.• Planet: Be a responsible citizen that makes a difference by helping build and support

sustainable communities.• Profit: Maximize long-term return to shareowners while being mindful of our overall

responsibilities.• Productivity: Be a highly effective, lean and fast-moving organization.

Effective ElementsEffective Elements ShortcomingsShortcomings

• Graphic• Focused

• Makes good business sense• Flexible

• Long• Not forward-looking

ILLUSTRATION CAPSULE 2.1ILLUSTRATION CAPSULE 2.1

Examples of Strategic VisionsExamples of Strategic Visions——How Well Do They Measure How Well Do They Measure Up?Up?

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Vision Statement for Proctor & GambleVision Statement for Proctor & Gamble

We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.


• Forward-looking• Flexible• Feasible• Makes good business sense

• Not graphic• Not focused• Not memorable

ILLUSTRATION CAPSULE 2.1 (cont’d)ILLUSTRATION CAPSULE 2.1 (cont’d)


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Vision Statement for HeinzVision Statement for Heinz

We define a compelling, sustainable future and create the path to achieve it.


• Forward-looking• Flexible

• Not graphic• Not focused• Confusing• Not memorable• Not necessarily feasible

ILLUSTRATION CAPSULE 2.1 (cont’d)ILLUSTRATION CAPSULE 2.1 (cont’d)


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♦ For which of these businesses is it the most For which of these businesses is it the most difficult to create a vision statement?difficult to create a vision statement?

♦ How does the scope of a business affect the How does the scope of a business affect the language of its vision statement?language of its vision statement?

♦ How would you reword the Coca-Cola mission How would you reword the Coca-Cola mission statement to reduce it to less than 100 words? statement to reduce it to less than 100 words? (Coca-Cola currently = 121 words)(Coca-Cola currently = 121 words)

ILLUSTRATION CAPSULE 2.1 ILLUSTRATION CAPSULE 2.1


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COMMUNICATING COMMUNICATING THE STRATEGIC VISIONTHE STRATEGIC VISION

Why Communicate the Vision:Why Communicate the Vision:● Fosters employee commitment to the firm’s chosen Fosters employee commitment to the firm’s chosen

strategic direction. strategic direction.

● Ensures understanding of its importance.Ensures understanding of its importance.

● Motivates, informs, and inspires internal and external Motivates, informs, and inspires internal and external stakeholders.stakeholders.

● Demonstrates top management support for the firm’s Demonstrates top management support for the firm’s future strategic direction and competitive efforts.future strategic direction and competitive efforts.

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♦ An effectively communicated vision is a An effectively communicated vision is a valuable management tool for enlisting the valuable management tool for enlisting the commitment of company personnel to engage commitment of company personnel to engage in actions that move the company forward in in actions that move the company forward in the intended direction.the intended direction.

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PUTTING THE STRATEGIC VISION PUTTING THE STRATEGIC VISION IN PLACEIN PLACE

Put the vision in writing and distribute it.Put the vision in writing and distribute it. Hold meetings to personally explain the vision Hold meetings to personally explain the vision

and its rationale.and its rationale. Create a memorable slogan that captures the Create a memorable slogan that captures the

essence of the vision.essence of the vision. Emphasize the positive payoffs for making the Emphasize the positive payoffs for making the

vision happen.vision happen.

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WHY A SOUND, WELL-COMMUNICATED WHY A SOUND, WELL-COMMUNICATED STRATEGIC VISION MATTERSSTRATEGIC VISION MATTERS

It crystallizes senior executives’ own views about It crystallizes senior executives’ own views about the firm’s long-term direction.the firm’s long-term direction.

It reduces the risk of rudderless decision making.It reduces the risk of rudderless decision making.

It is a tool for winning the support of organization It is a tool for winning the support of organization members to help make the vision a realitymembers to help make the vision a reality

It provides a beacon for lower-level managers in It provides a beacon for lower-level managers in setting departmental objectives and crafting setting departmental objectives and crafting departmental strategies that are in sync with the departmental strategies that are in sync with the firm’s overall strategy.firm’s overall strategy.

It helps an organization prepare for the future.It helps an organization prepare for the future.

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DEVELOPING A COMPANY DEVELOPING A COMPANY MISSION STATEMENTMISSION STATEMENT

The Mission Statement:The Mission Statement:● Uses specific language to give the firm its own unique Uses specific language to give the firm its own unique

identity.identity.

● Describes the firm’s current business and purposeDescribes the firm’s current business and purpose—“who we are, what we do, and why we are here.”—“who we are, what we do, and why we are here.”

● Should focus on describing the firm’s business, Should focus on describing the firm’s business, not not on “making a profit”on “making a profit”—earning a profit is an objective —earning a profit is an objective not a mission. not a mission.

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♦ The distinction between a strategic vision The distinction between a strategic vision and a mission statement is fairly clear-cut: and a mission statement is fairly clear-cut: ● A strategic vision A strategic vision portrays a firm’s aspirations portrays a firm’s aspirations

for its future (“where we are going”)for its future (“where we are going”)

● A firm’s A firm’s missionmission describes its purpose and its describes its purpose and its present business (“who we are, what we do, present business (“who we are, what we do, and why we are here”).and why we are here”).

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THE IDEAL MISSION STATEMENTTHE IDEAL MISSION STATEMENT

Identifies the firm’s product or services.Identifies the firm’s product or services. Specifies the buyer needs it seeks to satisfy.Specifies the buyer needs it seeks to satisfy. Identifies the customer groups or markets it is Identifies the customer groups or markets it is

endeavoring to serve.endeavoring to serve. Specifies its approach to pleasing customers.Specifies its approach to pleasing customers. Sets the firm apart from its rivals.Sets the firm apart from its rivals. Clarifies the firm’s business to stakeholders.Clarifies the firm’s business to stakeholders.

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LINKING THE VISION AND MISSION LINKING THE VISION AND MISSION WITH CORE VALUESWITH CORE VALUES

Core ValuesCore Values● Are the beliefs, traits, and behavioral norms that Are the beliefs, traits, and behavioral norms that

employees are expected to display in conducting the employees are expected to display in conducting the firm’s business and in pursuing its strategic vision firm’s business and in pursuing its strategic vision and mission.and mission.

● Become an integral part of the firm’s culture and what Become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported makes it tick when strongly espoused and supported by top management.by top management.

● Matched with the firm’s vision, mission, and strategy Matched with the firm’s vision, mission, and strategy contribute to the firm’s business success.contribute to the firm’s business success.

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♦ A firm’s A firm’s core valuescore values are the beliefs, traits, and are the beliefs, traits, and behavioral norms that the firm’s personnel are behavioral norms that the firm’s personnel are expected to display in conducting the firm’s expected to display in conducting the firm’s business and pursuing its strategic vision and business and pursuing its strategic vision and mission.mission.

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WOWWOW Philosophy: 10 Core Values Philosophy: 10 Core Values♦ Deliver WOW through Service

♦ Embrace and Drive Change

♦ Create Fun and a Little Weirdness

♦ Be Adventurous, Creative, and Open Minded

♦ Pursue Growth and Learning

♦ Build Open and Honest Relationships With Communication

♦ Build a Positive Team and Family Spirit

♦ Do More with Less

♦ Be Passionate and Determined

♦ Be Humble.


Core Values for ZapposCore Values for Zappos

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Core Values for AmazonCore Values for Amazon♦ Customer

ObsessionWe start with the customer and work backward.

♦ Innovation If you don’t listen to your customers you will fail. But if you only listen to your customers you will also fail.

♦ Bias for Action

We live in a time of unheralded revolution and instrumental opportunity–provided we make every minute count.

♦ Ownership Ownership matters when you’re building a great company. Owners think long – term, please passionately for their projects and ideas, and are empowered to respectfully challenge decisions.

♦ High-Hiring Bar

When making a hiring decision we ask ourselves: “Will I admire this person? Will I learn from this person? Is this person a superstar?”

♦ Frugality We spend money on the things that really matter and believe that frugality breeds resourcefulness, self-sufficiency and intention.


Core Values for AmazonCore Values for Amazon

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♦ How do the core values of Zappos reflect How do the core values of Zappos reflect the value it places on its human capital?the value it places on its human capital?

♦ What effects do core values have What effects do core values have on the hiring practices of firms?on the hiring practices of firms?

♦ Where and by how much do Amazon’s core Where and by how much do Amazon’s core values overlap the core values of Zappos?values overlap the core values of Zappos?

♦ Why did Amazon acquire Zappos in 2009?Why did Amazon acquire Zappos in 2009?


Comparing Core ValuesComparing Core Values

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TASK 2: SETTING OBJECTIVESTASK 2: SETTING OBJECTIVES

The Purposes of Setting Objectives:The Purposes of Setting Objectives:● To convert the vision and mission into specific, To convert the vision and mission into specific,

measurable, timely performance targets.measurable, timely performance targets.

● To focus efforts and align actions throughout To focus efforts and align actions throughout the organization.the organization.

● To serve as yardsticks for tracking a firm’s To serve as yardsticks for tracking a firm’s performance and progress.performance and progress.

● To provide motivation and inspire To provide motivation and inspire employees to greater levels of effort.employees to greater levels of effort.

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♦ ObjectivesObjectives are an organization’s performance are an organization’s performance targets—the specific results management targets—the specific results management wants to achieve.wants to achieve.

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♦ A company exhibits A company exhibits strategic intentstrategic intent when it when it relentlessly pursues an ambitious strategic relentlessly pursues an ambitious strategic objective, concentrating the full force of its objective, concentrating the full force of its resources and competitive actions on achieving resources and competitive actions on achieving that objective.that objective.

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CHARACTERISTICS OF CHARACTERISTICS OF STRATEGIC INTENTSTRATEGIC INTENT

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

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

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

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THE IMPERATIVE OF SETTING THE IMPERATIVE OF SETTING STRETCH OBJECTIVESSTRETCH OBJECTIVES

Setting stretch objectives promotes better Setting stretch objectives promotes better overall performance because stretch targets:overall performance because stretch targets:● Push a firm to be more inventive.Push a firm to be more inventive.

● Increase the urgency for improving financial Increase the urgency for improving financial performance and competitive position.performance and competitive position.

● Cause the firm to be more intentional and Cause the firm to be more intentional and focused in its actions.focused in its actions.

● Act to prevent internal inertia and contentment with Act to prevent internal inertia and contentment with modest to average gains in performance.modest to average gains in performance.

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♦ Financial ObjectivesFinancial Objectives● Communicate top Communicate top

management’s goals for management’s goals for financial performance.financial performance.

● Are focused internally Are focused internally on the firm’s operations on the firm’s operations and activities.and activities.

♦ Strategic ObjectivesStrategic Objectives● Are the firm's goals Are the firm's goals

related to marketing related to marketing standing and standing and competitive position.competitive position.

● Are focused externally Are focused externally on competition vis-à-on competition vis-à-vis the firm’s rivals. vis the firm’s rivals.

WHAT KINDS OF OBJECTIVES WHAT KINDS OF OBJECTIVES TO SETTO SET

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THE NEED FOR SHORT-TERM AND THE NEED FOR SHORT-TERM AND LONG-TERM OBJECTIVESLONG-TERM OBJECTIVES

Short-Term Objectives:Short-Term Objectives:● Focus attention on quarterly and annual performance Focus attention on quarterly and annual performance

improvements to satisfy near-term shareholder improvements to satisfy near-term shareholder expectations.expectations.

Long-Term Objectives:Long-Term Objectives:● Force consideration of what to do now to achieve Force consideration of what to do now to achieve

optimal long-term performance.optimal long-term performance.

● Stand as a barrier to an undue focus on short-term Stand as a barrier to an undue focus on short-term results.results.

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CORE CONCEPTSCORE CONCEPTSCORE CONCEPTSCORE CONCEPTS

♦ Financial objectivesFinancial objectives relate to the financial relate to the financial performance targets management has performance targets management has established for the organization to achieve.established for the organization to achieve.

♦ Strategic objectivesStrategic objectives relate to target outcomes relate to target outcomes that indicate a company is strengthening its that indicate a company is strengthening its market standing, competitive position, and market standing, competitive position, and future business prospects.future business prospects.

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SETTING FINANCIAL SETTING FINANCIAL OBJECTIVESOBJECTIVES

Examples of Financial ObjectivesExamples of Financial Objectives♦ An x percent increase in annual revenues

♦ Annual increases in after-tax profits of x percent

♦ Annual increases in earnings per share of x percent

♦ Annual dividend increases of x percent

♦ Profit margins of x percent

♦ An x percent return on capital employed (ROCE) or return on shareholders’ equity investment (ROE)

♦ Increased shareholder value—in the form of an upward-trending stock price

♦ Bond and credit ratings of x

♦ Internal cash flows of x dollars to fund new capital investment

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SETTING STRATEGIC SETTING STRATEGIC OBJECTIVESOBJECTIVES

Examples of Strategic ObjectivesExamples of Strategic Objectives♦ Winning an x percent market share

♦ Achieving lower overall costs than rivals

♦ Overtaking key competitors on product performance or quality or customer service

♦ Deriving x percent of revenues from the sale of new products introduced within the next five years

♦ Having broader or deeper technological capabilities than rivals

♦ Having a wider product line than rivals

♦ Having a better-known or more powerful brand name than rivals

♦ Having stronger national or global sales and distribution capabilities than rivals

♦ Consistently getting new or improved products and services to market ahead of rivals

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THE NEED FOR A BALANCED THE NEED FOR A BALANCED APPROACH TO OBJECTIVE SETTINGAPPROACH TO OBJECTIVE SETTING

A balanced scorecard measures A balanced scorecard measures a firm’s optimal performance by:a firm’s optimal performance by:

Placing a balanced emphasis on achieving Placing a balanced emphasis on achieving both financial and strategic objectives.both financial and strategic objectives.

Tracking both measures of financial performance Tracking both measures of financial performance and measures of whether a firm is strengthening and measures of whether a firm is strengthening its competitiveness and market position.its competitiveness and market position.

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GOOD STRATEGIC PERFORMANCE IS THE KEY GOOD STRATEGIC PERFORMANCE IS THE KEY TO BETTER FINANCIAL PERFORMANCETO BETTER FINANCIAL PERFORMANCE

Good financial performance is not enough: Good financial performance is not enough: ● Current financial results are Current financial results are lagging indicatorslagging indicators of past of past

decisions and actions which does not translate into a decisions and actions which does not translate into a stronger competitive capability for delivering better stronger competitive capability for delivering better financial results in the future.financial results in the future.

● Setting and achieving Setting and achieving stretch strategic objectivesstretch strategic objectives signals a firm’s growth in both competitiveness and signals a firm’s growth in both competitiveness and strength in the marketplace.strength in the marketplace.

● Good strategic performance is a Good strategic performance is a leading indicatorleading indicator of a of a firm’s increasing capability to deliver improved future firm’s increasing capability to deliver improved future financial performance.financial performance.

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♦ The The Balanced ScorecardBalanced Scorecard is a widely used is a widely used method for combining the use of both strategic method for combining the use of both strategic and financial objectives, tracking their and financial objectives, tracking their achievement, and giving management a more achievement, and giving management a more complete and balanced view of how well an complete and balanced view of how well an organization is performing.organization is performing.

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SETTING OBJECTIVES FOR EVERY SETTING OBJECTIVES FOR EVERY ORGANIZATIONAL LEVELORGANIZATIONAL LEVEL

Breaks down performance targets for each Breaks down performance targets for each of the organization’s separate units.of the organization’s separate units.

Fosters setting performance targets that Fosters setting performance targets that support achievement of firm-wide strategic support achievement of firm-wide strategic and financial objectives.and financial objectives.

Extends the top-down objective-setting Extends the top-down objective-setting process to all organizational levels.process to all organizational levels.

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♦ Which company included no strategic Which company included no strategic objectives in its listing of objectives?objectives in its listing of objectives?

♦ Which company has the shortest-term focus Which company has the shortest-term focus based on it objectives? Which has the longest-based on it objectives? Which has the longest-term focus?term focus?

♦ Which company’s listing of objectives appears Which company’s listing of objectives appears to best fit the balanced scorecard concept?to best fit the balanced scorecard concept?


Examples of Company ObjectivesExamples of Company Objectives

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TASK 3: CRAFTING A STRATEGYTASK 3: CRAFTING A STRATEGY

Strategy Making:Strategy Making:● Addresses a series of strategic Addresses a series of strategic how’show’s..

● Requires choosing among strategic alternatives.Requires choosing among strategic alternatives.

● Promotes actions to do things differently from Promotes actions to do things differently from competitors rather than running with the herd.competitors rather than running with the herd.

● Is a Is a collaborative team effort collaborative team effort that involves managers that involves managers in various positions at all organizational levels.in various positions at all organizational levels.

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STRATEGY MAKING INVOLVES MANAGERSSTRATEGY MAKING INVOLVES MANAGERSAT ALL ORGANIZATIONAL LEVELSAT ALL ORGANIZATIONAL LEVELS

Chief Executive Officer (CEO)Chief Executive Officer (CEO)

● Has ultimate responsibility for leading the strategy-making Has ultimate responsibility for leading the strategy-making process as strategic visionary and as chief architect of strategy.process as strategic visionary and as chief architect of strategy.

Senior ExecutivesSenior Executives

● Fashion the major strategy components involving their areas of Fashion the major strategy components involving their areas of responsibility.responsibility.

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

● Utilize on-the-scene familiarity with their business units to Utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy.orchestrate their specific pieces of the strategy.

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♦ In most companies, crafting and executing In most companies, crafting and executing strategy is a strategy is a collaborative teamcollaborative team effort in which effort in which every manager has a role for the area he or every manager has a role for the area he or she heads; it is rarely something that only high-she heads; it is rarely something that only high-level managers do.level managers do.

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WHY IS STRATEGY-MAKING OFTEN WHY IS STRATEGY-MAKING OFTEN A COLLABORATIVE PROCESS?A COLLABORATIVE PROCESS?

The many complex strategic issues involved and The many complex strategic issues involved and multiple areas of expertise required can make the multiple areas of expertise required can make the strategy-making task too large for one person or a small strategy-making task too large for one person or a small executive group.executive group.

When operations involve different products, industries When operations involve different products, industries and geographic areas, strategy-making authority must and geographic areas, strategy-making authority must be delegated to functional and operating unit managers be delegated to functional and operating unit managers such that such that all managers have a strategy-making role—all managers have a strategy-making role—ranging from major to minor—for the area they head!ranging from major to minor—for the area they head!

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A FIRM’S STRATEGY-MAKING HIERARCHYA FIRM’S STRATEGY-MAKING HIERARCHY

CorporateCorporateStrategyStrategy

Multibusiness Strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses

Business Business StrategyStrategy

• How to strengthen market position and gain competitive advantage• Actions to build competitive capabilities of single businesses• Monitoring and aligning lower-level strategies

Functional Area Functional Area StrategiesStrategies

• Add relevant detail to the how’s of the business strategy• Provide a game plan for managing a particular activity in ways that

support the business strategy

Operating Operating StrategiesStrategies

• Add detail and completeness to business and functional strategies • Provide a game plan for managing specific operating activities with

strategic significance

Two-Way Influence

Two-Way Influence

Two-Way Influence

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FIGURE 2.2A Company’s Strategy-Making Hierarchy

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CORE CONCEPTSCORE CONCEPTSCORE CONCEPTSCORE CONCEPTS

♦ Corporate strategy Corporate strategy is strategy at the is strategy at the multi-multi-business levelbusiness level, concerning how to improve , concerning how to improve company performance or gain competitive company performance or gain competitive advantage by managing a set of businesses advantage by managing a set of businesses simultaneously.simultaneously.

♦ Business strategyBusiness strategy is strategy at the single- is strategy at the single-business level, concerning how to improve the business level, concerning how to improve the performance or gain a competitive advantage performance or gain a competitive advantage in a particular line of business.in a particular line of business.

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UNITING THE STRATEGY-MAKING UNITING THE STRATEGY-MAKING HIERARCHYHIERARCHY

Business-levelBusiness-level

Corporate-levelCorporate-level

Functional-levelFunctional-level

Operational-Operational-levellevel

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♦ A company’s strategy is at full power only when A company’s strategy is at full power only when its many pieces are united. its many pieces are united. Anything less than Anything less than a unified collection of strategies weakens the a unified collection of strategies weakens the overall strategy and is likely to impair company overall strategy and is likely to impair company performance.performance.

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A STRATEGIC VISION + OBJECTIVES + A STRATEGIC VISION + OBJECTIVES + STRATEGY = A STRATEGIC PLANSTRATEGY = A STRATEGIC PLAN

Its strategic vision, business Its strategic vision, business mission, and core valuesmission, and core values

Its strategic and financial Its strategic and financial objectivesobjectives

Its chosen strategyIts chosen strategy

Elements of a Firm’s Strategic Plan

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TASK 4: EXECUTING THE STRATEGYTASK 4: EXECUTING THE STRATEGY

Converting strategic plans into actions requires:Converting strategic plans into actions requires:● Directing organizational action.Directing organizational action.

● Motivating people.Motivating people.

● Building and strengthening the firm’s competencies Building and strengthening the firm’s competencies and competitive capabilities.and competitive capabilities.

● Creating and nurturing a strategy-supportive work Creating and nurturing a strategy-supportive work climate.climate.

● Meeting or beating performance targets.Meeting or beating performance targets.

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MANAGING THE STRATEGY EXECUTION MANAGING THE STRATEGY EXECUTION PROCESSPROCESS

Staffing the firm with the needed skills and expertise.Staffing the firm with the needed skills and expertise.

Building and strengthening strategy-supporting Building and strengthening strategy-supporting resources and competitive capabilities.resources and competitive capabilities.

Organizing work effort along the lines of best practice.Organizing work effort along the lines of best practice.

Allocating ample resources to the activities critical to Allocating ample resources to the activities critical to strategic success.strategic success.

Ensuring that policies and procedures facilitate rather Ensuring that policies and procedures facilitate rather than impede effective strategy execution.than impede effective strategy execution.

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MANAGING THE STRATEGY EXECUTION MANAGING THE STRATEGY EXECUTION PROCESS (CONT’D)PROCESS (CONT’D)

Installing information and operating systems that enable Installing information and operating systems that enable effective and efficient performance.effective and efficient performance.

Motivating people and tying rewards and incentives Motivating people and tying rewards and incentives directly to the achievement of performance objectives.directly to the achievement of performance objectives.

Creating an internal culture and work climate conducive Creating an internal culture and work climate conducive to successful strategy execution.to successful strategy execution.

Exerting the internal leadership needed to propel Exerting the internal leadership needed to propel implementation forward.implementation forward.

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TASK 5: EVALUATING PERFORMANCE TASK 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE AND INITIATING CORRECTIVE AJUSTMENTSAJUSTMENTS

Evaluating Performance:Evaluating Performance:● Deciding whether the enterprise is passing the three Deciding whether the enterprise is passing the three

tests of a winning strategy—good fit, competitive tests of a winning strategy—good fit, competitive advantage, strong performance.advantage, strong performance.

Initiating Corrective Adjustments:Initiating Corrective Adjustments:● Deciding whether to continue or change the firm’s Deciding whether to continue or change the firm’s

vision and mission, objectives, strategy, and/or vision and mission, objectives, strategy, and/or strategy execution methods.strategy execution methods.

● Based on organizational learning.Based on organizational learning.

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♦ A company’s vision and mission, as well as its A company’s vision and mission, as well as its objectives, strategy, and approach to strategy objectives, strategy, and approach to strategy execution are never final; managing strategy is execution are never final; managing strategy is an ongoing process.an ongoing process.

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THE ROLE OF THE BOARD OF DIRECTORS THE ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCEIN CORPORATE GOVERNANCE

Obligations of the Board of Directors:Obligations of the Board of Directors:● Critically appraise the firm’s direction, strategy, and Critically appraise the firm’s direction, strategy, and

business approaches.business approaches.

● Evaluate the caliber of senior executives’ strategic Evaluate the caliber of senior executives’ strategic leadership skills.leadership skills.

● Institute a compensation plan that rewards top Institute a compensation plan that rewards top executives for actions and results that serve executives for actions and results that serve stakeholder interests—especially shareholders.stakeholder interests—especially shareholders.

● Oversee the firm’s financial accounting and reporting Oversee the firm’s financial accounting and reporting practices compliance with the Sarbanes-Oxley Act.practices compliance with the Sarbanes-Oxley Act.

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ACHIEVING EFFECTIVE ACHIEVING EFFECTIVE CORPORATE GOVERNANCECORPORATE GOVERNANCE

A strong, independent board of directors:A strong, independent board of directors:● Is well informed about the firm’s performance.Is well informed about the firm’s performance.

● Guides and judges the CEO and other executives.Guides and judges the CEO and other executives.

● Can curb management actions the board believes are Can curb management actions the board believes are inappropriate or unduly risky.inappropriate or unduly risky.

● Can certify to shareholders that the CEO is doing Can certify to shareholders that the CEO is doing what the board expects.what the board expects.

● Provides insight and advice to top management.Provides insight and advice to top management.

● Is actively involved in debating the pros and cons of Is actively involved in debating the pros and cons of key strategic decisions and actions.key strategic decisions and actions.

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♦ Effective corporate governance requires the Effective corporate governance requires the board of directors to oversee the company’s board of directors to oversee the company’s strategic direction, evaluate its senior strategic direction, evaluate its senior executives, handle executive compensation, executives, handle executive compensation, and oversee financial reporting practices.and oversee financial reporting practices.

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♦ Why were the audit and compensation Why were the audit and compensation committees at Fannie Mae’s ineffective?committees at Fannie Mae’s ineffective?

♦ Was the conduct of the committees legal? Was the conduct of the committees legal? Was it ethical?Was it ethical?

♦ What did linking executive compensation to What did linking executive compensation to financial objectives do to promote misconduct financial objectives do to promote misconduct in both organizations?in both organizations?

♦ Could setting “stretch” objectives have Could setting “stretch” objectives have discouraged misconduct by top management? discouraged misconduct by top management?


Corporate Governance Failures Corporate Governance Failures at Fannie Mae and Freddie Macat Fannie Mae and Freddie Mac

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Documents

IPPTChap002