Strategic Management Lecture 02

7/28/2019 Strategic Management Lecture 02

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The Process

II


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5 Tasks

1. Developing a vision 2. Setting objectives

3. Crafting a strategy 4. Implementing the

strategy 5. Evaluating the

performance


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1. VISION

Vision is the long termdirection of a company

- what do we plan to do?- where are we heading ?


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Mission

The mission relates to the present setof activities,

- what we do

- why we do

Elements underneath are,- what is our business?

- who is our customer?- where is our customer?- what is our value to our

customer?


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Mission: why

Creates an emotionalbonding within the

organization.

An organization with a sense

of mission can capture theemotional support of itspeople.


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Why

A well-conceived and wordedmission statement

- Provides a direction and apurpose- Eliminates risk of decisions

in vacuum

- Provides employees a senseof purpose

- Steers organization into thefuture


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Elements to Connect

Customer - Who Products - What Market - Where

Philosophy - Beliefs, Values,Aspirations,Ethical Priorities

Self-Concept - Distinctive

Competence Public Image - Responsiveness tosociety,community

Employees - Concern, employeesare valuable assets

Growth, Survival - Commitment togrowth & financialsoundness


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Vision Statements:

SamplesEastman Kodak To be the worlds best in

chemical and electronicimaging

Compaq Computer To be the leading supplier of

PC servers in all customer segments


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Shared Vision

The purpose of visionstatement is creation of

emotional bonding between themembers of the organization.

Sharing is done throughcommunication.


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2. OBJECTIVES

Objectives convert a visioninto measurable outcomes of

performance. What gets measured gets

done.

They are quantitative andhave deadlines.

Must also be specific and notwords, e.g. 10% increase insales, not increase sales.


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Types

Two broad classification;

1. Financial : Short term

- Rising stock pricesHigher returns on

invested capital


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Types

2. Non-Financial : Long term

- Mainly competitor focused,e.g. unseating a competitor

considered to be industrysbest in a particular product.


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Comparison

Financial Growth in revenue Higher ROI Rising stock prices Stable earning during recession

Non-Financial

Bigger market share Higher product quality More attractive product line than rivals Wider geographic coverage than rivals


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Short term vs Long term

There can be clash;e.g. retaining vs distributingthe profit.what do you do?

Financial objectives aretempting and can beimposing in difficult times. If

this is pursued too often thelong-term effectiveness of acompany may be in danger.


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3. STRATEGY

Strategy is the desired marketposition.

Entrepreneurial elements in theprocess to attain the strategicposition include

risk-taking, business creativity,and an eye for spottingopportunities.

Managerial elements includeability to respond toenvironmental changes..


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Elements of Strategy

How to grow the business

How to satisfy the customers

How to outcompete rivals

How to respond to changingmarket conditions


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Strategy Hierarchy

Each functional channels or unitwithin an organization will allhave own goals and tasks

feeding into the organizationstrategy, ie the role of HROperationsMarketing

Financefeeding into the strategy.

Q. Identify tasks as above intobecoming the worlds favouriteairline.


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4. IMPLEMENTATION

Implementation is a leader drivenactivity,

Implementation requiresattention to details such as

- the budget to steer resources into critical areas

- framing policies to supportstrategy- creating conducive company

culture and work climate tomotivate people

- install support systems- institute programs and

practices of continuousimprovement


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Culture

Collection of values and norms that are shared by people and

groupsin an organizationthat control the way they interact

with each other andwith stakeholders outside the

organization.


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Values

Beliefs and ideas about whatkinds of goals

members of an organizationsshould pursue

and about the appropriate kinds

or standards of behaviour

organizational

members should use to achievethese goals.


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Norms

Guidelines or expectations thatprescribe appropriate kinds of

behaviour by employees in particular

situations and

control the behaviour of organizational

members towards one another.


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5. EVALUATION

Evaluation goes beyond financialmeasures as strategy is a long

journey requiring attention to bothperformance and sustenance.

Financial measures tell the story of past events, an adequate story for industrial age companies for whichinvestments in long-termcapabilities and customer relationships were not critical for

success.


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Evaluation Perspectives


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Strategy FormulationStrategy Formulation is the development of long run plans

for the effective management of environmental

opportunities and threats, in the light of corporatestrengths and weaknesses.It includes defining thecorporate mission,specifying achievable objectives,developing strategies and setting policy guide lines

Mission:

A strategic plan starts with a clearly defined businessmission.

Mintzberg defines a mission as follows:

A mission describes the organisations basic functionin society, in terms of the products and services it

produces for its Customer.

A clear business mission should have each of thefollowing elements:


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Taking each element of the above diagram in turn, whatshould a good mission contain?

(1) A Purpose Why does the business exist? Is it to create wealth for

shareholders? Does it exist to satisfy the needs of allstakeholders (including employees, and society atlarge?)

(2) A Strategy and Strategic Scope A mission statement provides the commercial logic for

the business and so defines two things: - The products or services it offers (and therefore its

competitive position)- The competences through which it tries to succeed

and its method of competing A business strategic scope defines the boundaries of its operations. These are set by management.

For example, these boundaries may be set in terms of geography, market, business method, product etc. Thedecisions management make about strategic scopedefine the nature of the business.


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(3) Policies and Standards of Behaviour A mission needs to be translated into everyday

actions. For example, if the business missionincludes delivering outstanding customer service, then policies and standards should becreated and monitored that test delivery.

These might include monitoring the speed withwhich telephone calls are answered in the salescall centre, the number of complaints received

from customers, or the extent of positive customer feedback via questionnaires.

(4) Values and Culture The values of a business are the basic, often un-

stated, beliefs of the people who work in the

business. These would include: Business principles (e.g. social policy,commitments to customers)

Loyalty and commitment (e.g. are employeesinspired to sacrifice their personal goals for thegood of the business as a whole? And does thebusiness demonstrate a high level of commitmentand loyalty to its staff?)

Guidance on expected behaviour a strongsense of mission helps create a work environmentwhere there is a common purpose


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The following are some examples of missionstatements from real enterprises.

3M"To solve unsolved problems innovatively"

Wal-Mart"To give ordinary folk the chance to buy the samething as rich people."

Walt Disney"To make people happy."

IBM

Operating a safe and secure government.

At Microsoft, we work to help people and businesses

throughout the world realize their full potential. This isour mission. Everything we do reflects this missionand the values that make it possible

Microsoft


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ObjectiveIn this step the firms mission and vision is converted into

tangible actions (objectives) and later into results

(goals) to be achieved. Objectives are broad categories.They are non-measurable, non-dated, continuous, andongoing. With objectives the company moves frommotive to action. Objectives are the general areas inwhich your effort is directed to drive your mission

statement. CHARACTERISTIC Hierarchization The objectives must be displayed on

hierarchical scales, showing which of thesehave priority. It would also be interesting to clarifyhow the priorities were established.

Numbers must appear Always when possible the objectives must bequantifiable, facilitating the follow-up of the results obtained throughout time.

Realistic The objectives must emerge from an analysisof the environmental opportunities andthreats and from the strengths and weaknesses, as wellas the companys resources and not from the thoughts and wishes of its differentexecutives and employees.


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Consistent A company can be looking for several

objectives and important challenges all atonce;however, they must be consistent. Clear The objectives must be clear, in other

words, simple to understand, understood by allprofessionals involved in the process andrecorded in a written form.

Communicated The purpose and the content of the objectives must be communicated to allpeopleinvolved, direct or indirectly, in reaching them.

Separated into functional objectives The corporate objectives of the company must beseparated into specific objectivesfor each functional area of the company(marketing, human resources, finance, andproduction, among others).

Motivators The objectives must favor a situationof motivation to facilitate the development andimplementation of strategies by the employees, inview of their fulfillment.


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The following are examples of financialobjectives:

Growth in revenues

Growth in earnings Wider profit margins Bigger cash flows Higher returns on invested capital Attractive economic value added (EVA) performance Attractive and sustainable increases in market value

added (MVA) A more diversified revenue base

The following are examples of strategic marketobjectives:

A bigger market shareQuicker design-to-market times than rivalsHigher product quality than rivalsLower costs relative to key competitorsBroader or more attractive product line than rivals

A stronger reputation with customers than rivals

Superior customer serviceRecognition as a leader in technology and/or product

innovationWider geographic coverage than rivalsHigher levels of customer satisfaction than rivals


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Internal Operational Objectives

Internal operational objectives focus on business process that have an impact on creating customer valueand satisfaction. Internal objectives focus onmaintaining the firms core competencies.Management objectives focus on running a major functional activity or process within a business, suchas, research and development, production, marketing,

customer service, distribution, finance, humanresources, and other strategy critical activities.

Operational objectives focus on how a companymanages frontline organizational units with a business(plants, sales districts, distribution centers) and how to

perform strategically significant operating tasks(materials purchasing, inventory control, maintenance,shipping, advertising campaigns)


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Strategy"Strategy is the direction and scope of an organisation

over the long-term: which achieves advantage for theorganisation through its configuration of resourceswithin a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations".

In other words, strategy is about: Where is the business trying to get to in the long-term

(direction) * Which markets should a business compete in and

what kind of activities are involved in such markets?(markets; scope)

* How can the business perform better than the

competition in those markets? (advantage)? * What resources (skills, assets, finance, relationships,

technical competence, facilities) are required in order to be able to compete? (resources)?

* What external, environmental factors affect the

businesses' ability to compete? (environment)? * What are the values and expectations of those who

have power in and around the business? (stakeholders )


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Strategy at Different Levels of a Business

Strategies exist at several levels in any organisation -ranging from the overall business (or group of

businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily

influenced by investors in the business and acts toguide strategic decision-making throughout the business. Corporate strategy is often stated explicitly ina "mission statement".

Business Unit Strategy - is concerned more with howa business competes successfully in a particular market. It concerns strategic decisions about choice of

products, meeting needs of customers, gainingadvantage over competitors, exploiting or creating newopportunities etc.

Operational Strategy - is concerned with how each

part of the business is organised to deliver thecorporate and business-unit level strategic direction.Operational strategy therefore focuses on issues of resources, processes, people etc.


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In practice, a thorough strategic management process has

three main components, shown in the figure below:


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Strategic Analysis

This is all about the analysing the strength of businesses' positionand understanding the important external factors that mayinfluence that position. The process of Strategic Analysis can

be assisted by a number of tools, including:

PEST Analysis - a technique for understanding the"environment" in which a business operates

Scenario Planning - a technique that builds various plausible views of possible futures for a business

Five Forces Analysis - a technique for identifying the forceswhich affect the level of competition in an industry

Market Segmentation - a technique which seeks to identifysimilarities and differences between groups of customers or users

Directional Policy Matrix - a technique which summarisesthe competitive strength of a businesses operations inspecific markets

Competitor Analysis - a wide range of techniques andanalysis that seeks to summarise a businesses' overallcompetitive position

Critical Success Factor Analysis - a technique to identifythose areas in which a business must outperform thecompetition in order to succeed

SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a

businesses "internal" position and "external" environmentalinfluences.


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Strategic Choice This process involves understanding the nature of

stakeholder expectations , identifying strategic options,and then evaluating and selecting strategic options.

Strategy Implementation Often the hardest part. When a strategy has been analysed

and selected, the task is then to translate it intoorganisational action.

PolicyBusiness Policy defines the scope or spheres withinwhich decisions can be taken by the subordinates inan organization. It permits the lower levelmanagement to deal with the problems and issues

without consulting top level management everytime for decisions. Business policies are theguidelines developed by an organization to governits actions. They define the limits within whichdecisions must be made. Business policy also dealswith acquisition of resources with whichorganizational goals can be achieved. Business

policy is the study of the roles and responsibilitiesof top level management, the significant issuesaffecting organizational success and the decisionsaffecting organization in long-run.


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Features of Business PolicyAn effective business policy must have following features

Specific- Policy should be specific/definite. If it isuncertain, then the implementation will becomedifficult.Clear- Policy must be unambiguous. It should avoid useof jargons and connotations. There should be nomisunderstandings in following the policy.Reliable/Uniform- Policy must be uniform enough sothat it can be efficiently followed by the subordinates.Appropriate- Policy should be appropriate to the

present organizational goal.Simple- A policy should be simple and easily

understood by all in the organization.Inclusive/Comprehensive- In order to have a widescope, a policy must be comprehensive.Flexible- Policy should be flexible inoperation/application. This does not imply that a policyshould be altered always, but it should be wide in scope

so as to ensure that the line managers use them inrepetitive/routine scenarios.Stable- Policy should be stable else it will lead toindecisiveness and uncertainty in minds of those wholook into it for guidance.


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Strategy ImplementationIt is the process by which strategies and policies are put in

action through the development of programs budgetsand procedures

Programs Plan of action aimed at accomplishing a clear objective, with details on what work is to be done, bywhom,when, and what means or resources will be

used.Budgets A budget is a statement of companys programs in

terms of dollar Procedures Procedures are a system of sequential steps or

techniques that describe in detail how a particular task

or job is to be done.Follwoing are the main steps in implementing a strategy:

Developing an organization having potential of carrying out strategy successfully.

Disbursement of abundant resources to strategy-

essential activities. Creating strategy-encouraging policies. Employing best policies and programs for

constant improvement. Linking reward structure to accomplishment of

results. Making use of strategic leadership.


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Evaluation and ControlEvaluation and control is the process in which corporate

activities and performance results are monitored sothat actual performance can be compared withdesired performance.

The process of Strategy Evaluation consists of followingsteps-

01.Fixing benchmark of performance

While fixing the benchmark, strategists encounter questions such as - what benchmarks to set, how toset them and how to express them. In order todetermine the benchmark performance to be set, it isessential to discover the special requirements for

performing the main task. The performanceindicator that best identify and express the specialrequirements might then be determined to be usedfor evaluation. The organization can use bothquantitative and qualitative criteria for comprehensive assessment of performance.Quantitative criteria includes determination of net

profit, ROI, earning per share, cost of production,rate of employee turnover etc. Among theQualitative factors are subjective evaluation of factors such as - skills and competencies, risk taking

potential, flexibility etc.


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02Measurement of performance

The standard performance is a bench mark withwhich the actual performance is to becompared. The reporting and communicationsystem help in measuring the performance. If appropriate means are available for measuring

the performance and if the standards are set inthe right manner, strategy evaluation becomeseasier. But various factors such as managerscontribution are difficult to measure.Similarly divisional performance is

sometimes difficult to measure as comparedto individual performance. Thus, variableobjectives must be created against whichmeasurement of performance can be done.The measurement must be done at right time

else evaluation will not meet its purpose. For measuring the performance, financialstatements like - balance sheet, profit and lossaccount must be prepared on an annual basis .


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03Analyzing Variance

While measuring the actual performance andcomparing it with standard performance theremay be variances which must be analyzed.

The strategists must mention the degree of tolerance limits between which the variance between actual and standard performancemay be accepted. The positive deviationindicates a better performance but it is quite

unusual exceeding the target always. Thenegative deviation is an issue of concern

because it indicates a shortfall in performance. Thus in this case the strategistsmust discover the causes of deviation andmust take corrective action to overcome it.


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04.Taking Corrective Action Once the deviation in performance is identified,

it is essential to plan for a corrective action. If the performance is consistently less than thedesired performance, the strategists must

carry a detailed analysis of the factorsresponsible for such performance. If thestrategists discover that the organizational

potential does not match with the performance requirements, then the standardsmust be lowered. Another rare and drasticcorrective action is reformulating the strategywhich requires going back to the process of strategic management, reframing of plans

according to new resource allocation trendand consequent means going to the beginning point of strategic management process.

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Strategic Management Lecture 02