Strategic Management
What is Strategy?
A company’s strategy consists of the set of competitive moves and business approaches that management is employing to run the company
Strategy is management’s “game plan” to
Attract and please customers
Stake out a market position
Conduct operations
Compete successfully
Achieve organizational objectives
What is a Business Model?
A company’s business model addresses “How do we make money in this business?” Is the strategy that management is pursuing capable of delivering good bottom-
line results?
Do the revenue-cost-profit economics of the company’s strategy make good make good business sense?business sense? Look at the revenue streams the
strategy is expected to produce
Look at the associated cost structure and potential profit margins
Do the resulting earnings streams and ROI indicate the strategy makes sense and that the company has a viable business model?
Strategy
Business
Model
Strategy vs. Business Model :What is the Difference?
Strategy -- Deals with a company’s competitive initiatives and business approaches
Business Model -- Concerns whether the revenues and costs flowing from the strategy demonstrate that the business can be amply profitable and viable
Redhat Linux’s Business ModelUse volunteer programmers to create the software; make source code open and available to all users
Use volunteer programmers to create the software; make source code open and available to all users
Give Linux operating system away free of charge to those who download it (charge a small fee to users who want a copy on CD)
Give Linux operating system away free of charge to those who download it (charge a small fee to users who want a copy on CD)
Make money by employing a cadre of technical support personnel who provide technical support to users for a fee
Make money by employing a cadre of technical support personnel who provide technical support to users for a fee
Microsoft’s Business ModelEmploy a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users
Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users
Sell resulting operating system and software packages to PC makers and users at relatively attractive prices and achieve large unit sales
Sell resulting operating system and software packages to PC makers and users at relatively attractive prices and achieve large unit sales
Most costs arise in developing the software; variable costs are small—once breakeven volume is reached, revenues from additional sales are almost pure profit.
Most costs arise in developing the software; variable costs are small—once breakeven volume is reached, revenues from additional sales are almost pure profit.
Provide technical support to users at no costProvide technical support to users at no cost
What is the Difference between Operational Effectiveness(OE) and Strategic Positioning?
Operational Effectiveness is performing performing similar activitiessimilar activities better than rivals Affects the relative cost position and levels of
differentiation Japanese activities addressed OE(imitate
rather than innovate) Deals with issues such as eliminating waste,
employing advanced technology, motivating employees.
Operational Effectiveness - The Productivity Frontier The sum of all existing best practices at a given time The frontier of OE can be individual activities or group
activities(order processing, manufacturing, purchasing linked by IT).
Move a company towards the frontier(improving OE) by capital investment, org. development, systems design, management.
Move the frontier as a result of research - laptop computers, personal organizers, email, TQM, benchmarkeing.
Problem with competing on the basis of OE Advantages are easy to copy-there are no secrets As everyone gets closer to the frontier, it becomes
harder to maintain a lead Moving the frontier raises the bar for everyone but
gives nobody an advantage Competitive convergence - everyone gets to the
same place. The airlines have the same technology, the same costs
and have no real way to get ahead
Strategic Positioning is about deliberately choosing a different set of activitieschoosing a different set of activities than rivals that delivers a unique mix of values, resulting in a competitive advantage that can’t be easily copied.
Airlines
Full Service AirlinesFull Service Airlines Any point A to any point B First Class, Business Class,
Coach, promotional Seat Assignments in
advance Baggage handling and
transfer Hub and Spoke system to
promote connecting flights Coordinate schedules Meals Drinks
Southwest AirlinesSouthwest Airlines Mid sized cities and
secondary airports Frequent reliabile
departures Very low ticket prices Quick turnarouds Standardized aircraft no seat assignments no meals
Furniture Retailing
Typical Furniture Stores Areas displaying samples books of fabric, colors etc. Different types of woods Sales people assisting customers
with choices. Decorating services Third party manufacturing Delivery in 6-8 weeks Maximum customization and
service at a high cost
Ikea Clear in store displays No sales people low cost ready to assemble Ikea designed products Customer picks up product
in boxes from warehouse, brings it home and assembles
In store child care Extended hours
Operational Effectiveness vs. Strategy (Summary) Operational
Effectiveness
Performing similar activities better than rivals
Efficiency
Practices that allow firm to better utilize inputs
Strategic Positioning Performing different
activities than rivals or
Performing similar activities in different ways
Operational Effectiveness vs Strategic Positioning (Summary) Competition based on operational
effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition.
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value
The Five Tasksof Strategic Management
Craft aStrategy
to AchieveObjectives
SetObjectives
Develop aStrategic
Visionand
Mission
Implementand
ExecuteStrategy
Improve/Change
Revise asNeeded
Revise asNeeded
Improve/Change
Recycleas Needed
Task 1 Task 2 Task 3 Task 4 Task 5
Monitor,Evaluate,and Take
CorrectiveAction
Missions vs. Strategic Visions
A mission statement focuses on current business activities -- “who we are and what we do” Current product and
service offerings Customer needs being
served Technological and
business capabilities
A strategic vision concerns a firm’s future business path -- “where we are going” Markets to be pursued Future technology-product-
customer focus Kind of company that
management is trying to create
Defines current business activities, highlighting boundaries of current business Present products and services Types of customers served
Conveys Who we are, What we do, and Why we are here
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 is profit is an objective or intended outcome!
Characteristics ofa Mission StatementCharacteristics ofa Mission Statement
Key Elements ofa Mission Statement Three factors to consider
Customer needs –What is being satisfied
Customer groups –Who is being satisfied
Technologies/resources/business approaches used and activities performed –How customer needs are satisfied
Trader Joe’sMission Statement
To give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed
buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth,
friendliness, fun, individual pride, and company spirit.
(a unique grocery store chain)
Strategic Vision
A picture in your mind’s eye of what the company will look like in the future.
Examples of Strategic Visions
Red Hat LinuxTo extend our position as the most trusted Linux and open
source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management
platform, and associated support and services.
Wells FargoWe want to satisfy all of our customers’ financial needs,
help them success financially, be the premier providerof financial services in every one of our markets, and
be known as one of America’s great companies.
Examples of Strategic Visions
WyethOur vision is to lead the way to a healthier world. By
carrying out this vision at every level of our organization,we will be recognized by our employees, customers, and shareholders as the best pharmaceutical company in the
world, resulting in value for all. We will achieve this by: Leading the world in innovation by linking pharmaceutical,
biotech, and vaccines technologies Making quality, integrity, and excellence hallmarks
of the way we do business Attracting, developing, and motivating the best people Continually growing improving our business
Setting Objectives
Converts strategic vision and mission into specific performance targets
Creates yardsticks to track performance
Pushes firm to be inventive and focused on results
Helps prevent complacency and coasting
Second Task of Strategic Management
Characteristics of a Goal
Specific Measurable Time Constrained Achievable
Outcomes focusedon improving financial performance
Outcomes focused on improving long-term competitive business position
Financial Objectives Strategic Objectives
$
Types of Objectives RequiredTypes of Objectives Required
X % increase in annual revenuesX % increase annually in after-tax profitsX % increase annually in earnings per shareAnnual dividend increases of X %Profit margins of X %X % return on capital employed (ROCE) Increased shareholder valueStrong bond and credit ratingsSufficient internal cash flows to fund 100% of new
capital investmentStable earnings during periods of recession
Examples: FinancialObjectivesExamples: FinancialObjectives
Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or
quality or customer service Deriving X % of revenues from sale of new products
introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening company’s brand name appeal Having stronger national or global sales and distribution
capabilities than rivals Consistently getting new or improved products to market
ahead of rivals
Examples: StrategicObjectivesExamples: StrategicObjectives
Strategic Performance Fosters Better Financial Performance
A company’s achievement of satisfactory financial performance, by itself, is not enough
Financial performance measures are “lagging indicators” reflecting results of past decisions and actions
Of equal or greater importance is a company’s performance on measures of its strategic well-being —its competitiveness and market position
Strategic performance measures are “leading indicators” of a company’s future financial performance and business prospects
Achievement of strategic performance targets Signals growing competitiveness Signals growing strength in the marketplace
Which type of goal is more important –Strategic or Financial?
Balanced Scorecard Approach – Strategic and Financial Objectives
Balanced scorecard approach for measuringcompany performance requires both – Financial objectives Strategic objectives
Emphasis on financial performance may assumepriority over strategic performance when company’s Financial performance is dismal and Survival is threatened
Otherwise, management is advised to put more emphasis on achieving strategic objectives
The surest path to sustained future profitabilityyear after year is to relentlessly pursue strategic outcomes
that strengthen a company’s business position andgive it a growing competitive advantage over rivals!
1. First, establish 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
Objectives Are Neededat All Levels
Importance ofTop-Down Objectives Guide objective-setting and strategy-making at lower
levels
Ensures financial and strategic performance targets for all business units, divisions, and departments are directly connected to achieving company-wide objectives
Integration of objectives has two advantages
Helps produce cohesion among objectives andstrategies of different parts of organization
Helps unify internal efforts to move acompany along the chosen strategic path
Concept of Strategic Intent
A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive
actions and energies on achieving that objective!
Characteristics of Strategic Intent Indicates firm’s intent to
stake out a particular position over the long-term
Involves establishing a BHAG - ”big, hairy, audacious goal”
Signals relentless commitment to winning
Crafting a Strategy
Strategy involves determining whether to Concentrate on a single business or several
businesses (diversification) Cater to a broad range of customers or focus on
a particular niche Develop a wide or narrow product line Pursue a competitive advantage based on
Low cost or Product superiority or Unique organizational capabilities
Third Task of Strategic Management
Types of Strategy
Grand Strategy Growth, Consolidation, Divest
Generic Strategy Low Cost Differentiation
International Strategy Domestic - Make it here/sell it here Export – Make it here/sell it there Multicountry- Make it there/sell it there Global – Make it anywhere/sell it anywhere
Diversification Related Unrelated
Figure 1-2: A Company’s Strategy is Partly Planned Planned andand Partly Reactive Reactive
New initiatives plus ongoing strategy features continued from prior periods
Adaptive reactions to
changing circumstances
Abandoned strategy
features
Actual Company Strategy
Company Experiences, Know-how, Resource
Strengths and Weaknesses,
and Competitive Capabilities
Planned Strategy
Reactive Strategy
Crafting Strategy is anExercise in Entrepreneurship
Strategy-making is a market-driven and customer-driven activity that involves Keen eye for spotting emerging market
opportunities Keen observation of customer needs Innovation and creativity Prudent risk-taking Strong sense of how to grow and strengthen
business
What is a Strategic Plan?Where firm is headed -- Strategic vision and business mission
Action approaches to achieve targeted results -- A comprehensive strategy
Short and long term performance targets -- Strategic and financial objectives
What Does Strategy Implementation and Execution Include? Building a capable organization Allocating resources to strategy-critical activities Establishing strategy-supportive policies Motivating people to pursue the target objectives Tying rewards to achievement of results Creating a strategy-supportive corporate culture Installing needed information, communication, and operating
systems Instituting best practices and programs for continuous
improvement Exerting the leadership necessary to drive the process forward
and keep improving
Monitoring, Evaluating, and Taking Corrective Actions as Needed
The tasks of crafting, implementing, and executing a strategy are not a one-time exercise
Customer needs and competitiveconditions 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 the need for corrective actions and adjustments
Fifth Task of Strategic Management
Levels of Strategy-Making in a Single-Business Company
Business Strategy
Two-Way Influence
Two-Way Influence
Functional Strategies
Operating Strategies
Executive-Level Managers
OperatingManagers
Functional Managers
Figure 2.2: Corporate Strategy fora Diversified Company
CorporateStrategy
Approach tocapital allocation
Narrow or broad-based diversification
Scope ofgeographicoperations
Moves to add newnew businesses
Moves to build positionsin new industries
Efforts to capturecross-businessstrategic fits
Moves to divestweak business units
Is diversificationrelated, unrelatedor a mix?
Objectives Are Needed at All Levels
Objective-setting process is top-down, not bottom-up!
1. First, establish organization-wide objectives and performance targets
2. Next, set business and product line objectives
3. Then, establish functional and departmental objectives
4. Individual objectives are established last
Strategic Management Principle
Objective-setting needs to be more of a
top-down than a bottom-up process in
order to guide lower-level managers and
organizational units toward outcomes
that support the achievement of overall
business and company objectives.
Goal Alignment
Functional Strategies
Game plan for a strategically-relevant function, activity, or business process
Details how key activities will be managed
Provide support for business strategy
Specify how functional objectives are to be achieved
Operating Strategies
Concern narrower strategies for managing grassroots activities and strategically-relevant operating units
Add detail to business and functional strategies
Example: Operating Strategy
Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach. Warehouse manager took following approaches:
Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item
Staffing strategy of maintaining workforce capability to ship any order within 24 hours
Improving Delivery & Order-Filling
To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions:
Recruitment manager develops selection process designed to weed out all but best-qualified candidates
Information systems manager devises way to use technology to boost productivity of office workers
Compensation manager devises improved incentive compensation plan
Purchasing manager obtains new efficiency-increasing tools and equipment
Boosting Worker Productivity
Example: Operating Strategy
Uniting the Company’s Strategy-Making Effort
A company’s strategy is a collection of
strategies and initiatives being acted on by managers at various organizational levels
Separate levels of strategy must be unified into a cohesive, company-wide action plan
Pieces of strategy should fit together like the pieces of a puzzle
Figure 2.4: Networking of Missions,Objectives, and Strategies
Level 1Corporate-LevelManagers
Level 2Business-LevelManagers
Level 3Functional Managers
Level 4Plant Managers,Lower-LevelSupervisors
CorporateLevel
Objectives
Corporate-wideStrategic
Vision
CorporateLevel
Strategy
BusinessLevel
Objectives
BusinessLevel Strategic
Vision
BusinessLevel
Strategies
FunctionalObjectives
Functional Missions
FunctionalStrategies
OperatingObjectives
OperatingMissions
OperatingStrategies
Two-Way Influence Two-Way Influence Two-Way Influence
Two-Way Influence Two-Way Influence Two-Way Influence
Two-Way Influence Two-Way Influence Two-Way Influence