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CHAPTER 1STRATEGIC LEADERSHIP: MANAGING THE STRATEGY-

MAKING PROCESS FOR COMPETITIVE ADVANTAGE

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LEARNING OBJECTIVES Explain what is meant by competitive advantage Discuss the strategic role of managers at

different levels within the organization Identify the primary steps in a strategic planning

process Discuss the common pitfalls of planning and how

those pitfalls can be avoided

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LEARNING OBJECTIVES Outline the cognitive biases that might lead to

poor strategic decisions, and explain how these biases can be overcome

Discuss the role strategy leaders play in the strategy-making process

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STRATEGY Set of related actions that managers take to

increase their company’s performance Strategic leadership: Creating competitive

advantage through effective management of the strategy-making process

Strategy formulation: Selecting strategies based on analysis of an organization’s external and internal environment

Strategy implementation: Putting strategies into action

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FIGURE 1.2 - DETERMINANTS OF SHAREHOLDER VALUE

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SUPERIOR PERFORMANCE Risk capital: Equity capital for which there is no

guarantee that stockholders will: Recoup their investment Earn a decent return

Shareholder value: Returns that shareholders earn from purchasing shares in a company

Sources Capital appreciation in the value of a company’s sharesDividend payments

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SUPERIOR PERFORMANCE Profitability: Return a company makes on the

capital invested in the enterprise Return on invested capital (ROIC) - Net profit over the

capital invested in a firm Result of how efficiently the capital is used to satisfy

customer needs Profit growth: Increase in net profit over time,

achieved by: Selling products in rapidly growing markets Gaining market share from rivals

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SUPERIOR PERFORMANCE Selling more to existing customers Expanding overseas or diversifying into new businesses

To boost profitability and profit growth, managers must:

Use strategies to give their company a competitive advantage over rivals

Deliver high profitability and sustainable profit growth

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COMPETITIVE ADVANTAGE Occurs when a company’s profitability is greater

than the average profitability of firms in its industry

Sustained competitive advantage: A company’s strategies enable it to maintain above-average profitability for a number of years

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BUSINESS MODEL Conception of how strategies should work

together as a whole to enable the company to achieve competitive advantage

Deals with how a company: Selects, acquires, and keeps its customers Defines and differentiates its product offerings Creates value for its customers Produces goods or services and delivers to the market Lowers costs and organizes its resources and activities Achieves and sustains high profitability and growth

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FIGURE 1.3 - RETURN ON INVESTED CAPITAL (ROIC) IN SELECTED INDUSTRIES, 2002-2011

Source: Value Line Investment Survey.

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STRATEGIC MANAGEMENT

• Bear responsibility for a company’s overall performance or for one of its major self-contained subunits or divisions

General managers

• Responsible for supervising a particular function, task, activity, or operation

Functional managers

• Competes in several different businesses and has a separate self-contained division to manage each

Multidivisional company

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FIGURE 1.4 - LEVELS OF STRATEGIC MANAGEMENT

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CORPORATE-LEVEL MANAGERS Oversee the development of strategies for the entire

organization Provide a link between people concerned with the

firm’s strategic development and the shareholders Ensure that business strategies pursued by the

company are consistent with maximizing profitability and profit growth

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BUSINESS-LEVEL MANAGERS Heads of business units Business unit: Self-contained division that provides a

product or service for a particular market Translate statements of intents into concrete

strategies for individual businesses Are concerned with strategies specific to a

particular business

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FUNCTIONAL- LEVEL MANAGERS Responsible for specific business functions Develop functional strategies to fulfill the

strategic objectives set by business- and corporate-level general managers

Provide information that helps formulate realistic and attainable strategies

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STEPS IN A FORMAL STRATEGIC PLANNING PROCESS Select the corporate mission and goals Analyze the organization’s external competitive

environment and internal operating environment Select strategies that: Build on the organization’s strengths and correct it’s

weaknesses Are consistent with the organization’s mission and goals Are congruent and constitute a viable business model

Implement the strategies

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MAIN COMPONENTS OF THE STRATEGIC PLANNING PROCESS

Exi

stin

g B

usin

ess

Mod

el

Mission, Vision,

Values, and Goals

External Analysis:

Opportunities and Threats

SWOT Strategic Choice

Strategies: Functional, Business,

Global, and Corporate-

Level

Governance and Ethics

Designing Organization

Structure

Designing Organization

Culture

Designing Organization

ControlsInternal

Analysis: Strengths and Weaknesses

Strategic Formulation Strategic Implementation

Feedback

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COMPONENTS OF A MISSION STATEMENT

• Purpose of the company, or a statement of what the company strives to do

Mission

• Articulation of a company’s desired achievements or future state

Vision

• Statement of how employees should conduct themselves and their business to help achieve the company mission

Values

• Goal - Precise and measurable desired future state that a company attempts to realize

Establishing major goals

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FIGURE 1.6 - DEFINING THE BUSINESS

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EXTERNAL AND INTERNAL ANALYSIS External analysis - Identifies strategic

opportunities and threats that will affect how an organization pursues its mission

Involves examination of the:Industry environment in which the company operatesCountry or national environmentMacroenvironment

Internal analysis - Focuses on reviewing the resources, capabilities, and competencies of a company

Goal - Identify the company’s strengths and weaknesses

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SWOT ANALYSIS Comparison of strengths, weaknesses,

opportunities, and threats Purpose - Identify the strategies to: Exploit external opportunities Build on and protect company strengths Eradicate weaknesses and counter threats

Goal - Affirm a company-specific business model To align, fit, or match a company’s resources and

capabilities to the demands of its environment

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SWOT STRATEGIES Functional-level strategies - Directed at

improving the effectiveness of operations within a company

Business-level strategies - Encompass the business’s overall competitive theme

How it positions itself in the marketplace to gain a competitive advantage

Different position strategies that can be used in different industry settings

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SWOT STRATEGIES Global strategies - Address how to expand

operations outside the home country Since competitive advantage is determined at a global

level Corporate-level strategies - Determine: The businesses a company should be in to maximize

profitability and profit growth How to gain a competitive edge

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STRATEGY IMPLEMENTATION AND FEEDBACK LOOP Strategy implementation Taking action at the functional, business, and corporate

levels to execute a strategic plan Designing the best organization structure, culture, and

control systems to put a chosen strategy into action Feedback loop - Provide information to the

corporate level on the: Strategic goals that are being achieved Degree of competitive advantage being created and

sustained

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CRITICISMS OF FORMAL PLANNING MODELS Unforeseen circumstances can adversely affect

strategic plans Excessive importance is attached to the role of

top management While ignoring lower-level managers

Many successful strategies are a result of serendipity rather than strategic planning

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FIGURE 1.7 - EMERGENT AND DELIBERATE STRATEGIES

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FIGURE 1.8 - SCENARIO PLANNING

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SCENARIO PLANNING Formulating plans that are based on “what-if”

scenarios about the future Encourages managers to: Think outside the box and be more flexible Anticipate probable scenarios

Ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation

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COGNITIVE BIASES AND STRATEGIC DECISION MAKING

• Systematic errors in human decision making• Arise from the way people process information

Cognitive biases

• Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong

Prior hypothesis bias

• Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing

Escalating commitment

• Use of simple analogies to make sense out of a complex problem

Reasoning analogy

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COGNITIVE BIASES AND STRATEGIC DECISION MAKING

• Tendency to generalize from a small sample or a single vivid anecdote• Violates the statistical law of large numbers

Representativeness

• Tendency to overestimates one’s ability to control events• General or top managers are more prone to this

Illusion of control

• Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it

Availability error

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TECHNIQUES FOR IMPROVING DECISION MAKING

• A member of a decision-making team identifies all the considerations that might make a proposal unacceptable• Possible perils of recommended courses of action are

brought into light

Devil’s advocacy

• Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action• Promotes strategic thinking

Dialectic inquiry

• Identification of past successful or failed strategic initiatives to determine if they will work for the current project

Outside view

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CHARACTERISTICS OF GOOD STRATEGIC LEADERS Vision, eloquence, and consistency Articulation of a business model Commitment Being well informed Willingness to delegate and empower Astute use of power Emotional intelligence Self-awareness, self-regulation, and motivation Empathy and social skills