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09-Hill 8e Basic Ch01

09-Hill 8e Basic Ch01

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Chapter One

Strategic Leadership: Managing the g g StrategyMaking Process for Competitive Advantage

Chapter Outline:
Strategic Leadership, Competitive Advantage, Superior Performance Strategic Managers gy g Strategy-Making Process Strategy as an Emergent Process Strategic Planning in Practice Strategic Decision Making Strategic Leadership

Copyright © Houghton Mifflin Company. All rights reserved.

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Why do some organizations succeed while others fail?
Strategy is a set of related actions that managers take to increase their company’s performance. Strategic Leadership
• Task of most effectively managing a co pa y s st ategy a g p ocess company’s strategy-making process

Superior Performance and Sustainable Competitive Advantage
Superior Performance
• One company’s profitability relative to that of other companies in the same or similar business or industry • Maximizing shareholder value is the ultimate goal of profit making companies

ROIC (Profitability) = Return On Invested Capital • ROIC

Strategy Formulation
• Task of determining and selecting strategies

= Capital invested =

Net profit

Net income after tax Equity + Debt to creditors

Strategy Implementation
• Task of putting strategies into action to improve a company’s efficiency and effectiveness

Competitive Advantage
• When a company’s profitability is greater than the average of all other companies in the same industry & competing for the same customers

Competitive Advantage results when a company’s strategies lead to superior performance compared to competitors
Copyright © Houghton Mifflin Company. All rights reserved. 1|3

Sustained Competitive Advantage
When a company’s strategies enable it to maintain above average profitability for a number of years
Copyright © Houghton Mifflin Company. All rights reserved. 1|4

Determinants of Shareholder Value
Figure 1.2

Company’s Business Model
Management’s model of how strategy will allow the company to gain competitive advantage and achieve superior profitability
A business model encompasses how the company will: • Select its customers • Deliver those goods and services to the market • Define and differentiate its product offerings • Organize activities within the company • Create value for its customers • Configure its resources • Acquire and keep • Achieve and sustain a high customers level of profitability • Produce goods or services • Grow the business over • Lower costs time
1|5 Copyright © Houghton Mifflin Company. All rights reserved. 1|6

To increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits.
Copyright © Houghton Mifflin Company. All rights reserved.

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business unit. 3 Analyze the organization’s internal environment to identify its strengths and weaknesses weaknesses. 1 | 12 2 . 2002–2006 Figure 1. Copyright © Houghton Mifflin Company. 1 | 11 Copyright © Houghton Mifflin Company. All rights reserved. All rights reserved. strat Copyright © Houghton Mifflin Company.g.3 Data Source: Value Line Investment Survey Copyright © Houghton Mifflin Company. 2 Analyze the external competitive environment to identify opportunities and threats. universities. All rights reserved. or divisional performance Functional-Managers • Responsible for supervising a particular task or operation (e. Select strategies that: • • • Build on the organization’s strengths and correct its weaknesses – in order to take advantage of external opportunities and counter external threats Are consistent with organization’s mission and major goals Are congruent and constitute a viable business model Implement the strategies. operations. Levels of Strategic Management Figure 1. marketing. 1|8 Performance in Nonprofit Enterprises Nonprofit entities such as government agencies.Differences in Industry and Company Performance A Company’s Profitability and Profit Growth are determined by two main factors: The Th overall performance ll f of its industry relative to other industries Its relative success in its industry as compared to the competitors Copyright © Houghton Mifflin Company. All rights reserved.4 The Five Steps of the Strategy Making Process 1 Select the corporate mission and the major corporate goals. 1|7 Return on Invested Capital in Selected Industries. human resources) 1|9 Copyright © Houghton Mifflin Company. All rights reserved. All rights reserved. accounting. and charities: • Are not in business to make a profit • BUT…still need to use their resources efficiently and effectively y y • Must meet goals • Set strategies to achieve goals and compete with other nonprofits for scarce resources Strategic Managers Corporate-Level Managers • Oversee the development of strategies for the whole organization • The CEO is the principle general manager who consults with other senior executives Business-Level Managers B i L lM • Responsible for overall company. 1 | 10 A successful strategy gives potential donors a compelling message as to why they should contribute.

Abell.6 The Vision What would the company like to achieve? A good vision is meant to stretch a company by articulating an ambitious but attainable future state. or distinctive competencies)? Vision – A statement of some desired future state Values – A statement of key values that an organization is committed to Major Goals – The measurable desired future state that an organization attempts to realize Copyright © Houghton Mifflin Company. Copyright © Houghton Mifflin Company. they will have a job tomorrow. job security. The vision of Ford is “to become the world’s leading consumer company for automotive products and services. Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs. Prentice Hall. 1 | 16 Values The values of a company should state: How managers and employees should conduct themselves How they should do business What kind of organization they need to build to help achieve the company’s mission Organizational culture • • The set of values. 1 | 15 Nokia is the world’s largest manufacturer of mobile phones and operates with a simple but powerful vision: “If it can go mobile. and fair treatment for employees help to create an atmosphere that leads to high employee productivity. values respect the interests of key stakeholders. and standards that control how employees work to achieve an organization’s mission and goals Often seen as an important source of competitive advantage Values at Nucor “Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.” p y “Employees should be able to feel confident that if they do their jobs properly. 1980). Copyright © Houghton Mifflin Company. 1 | 13 A company’s mission is best approached from a customer-oriented business definition. All rights reserved. All rights reserved. including: Mission – The reason for existence – what an organization does The Mission The mission is a statement of a company’s reason for existence today. 3 .” Source: D. 1 | 18 In high-performance organizations. values emphasizing pay for performance.” “Employees must have an avenue of appeal when they believe they are being treated unfairly. All rights reserved. F. norms. All rights reserved. Copyright © Houghton Mifflin Company.” At Nucor. All rights reserved.” “Employees have the right to be treated fairly and must believe that they will be. it will!” Copyright © Houghton Mifflin Company.1 Crafting the Organization’s Mission Statement Provides a framework or context within which strategies are formulated. 1 | 17 Copyright © Houghton Mifflin Company. p. 7. 1 | 14 Abell’s Framework for Defining the Business Figure 1. What is it that the company does? • Who is being satisfied (what customer groups)? • What is being satisfied (what customer needs)? • How customer needs are being satisfied (by what skills. All rights reserved. knowledge.

Strengths lead to superior performance and weaknesses to inferior performance. 3. Selecting Strategies: SWOT Analysis and Business Model SWOT analyses help to identify strategies that align a company’s resources and capabilities to its environment – in order to create and sustain a competitive advantage. All rights reserved. Copyright © Houghton Mifflin Company. 1 2. All rights reserved. 1 | 24 4 . 1 | 22 Copyright © Houghton Mifflin Company. All rights reserved. All rights reserved. All rights reserved. Copyright © Houghton Mifflin Company. Internal Analysis Purpose is to pinpoint the strengths and weaknesses of the organization. • Functional-level strategy – directed at operational effectiveness • Business-level strategy – businesses’ overall competitive themes • Global strategy – expand. Copyright © Houghton Mifflin Company. 1 | 23 Copyright © Houghton Mifflin Company. All rights reserved. grow and prosper at a global level • Corporate-level strategy – to maximize profitability and profit growth Internal analysis includes an assessment of: Quantity and quality of a company s resources and company’s capabilities Ways of building unique skills and company-specific or distinctive competencies Building & sustaining a competitive advantage requires a company to achieve superior: • Efficiency • Quality • Innovations • Responsiveness to customers 1 | 21 When taken together. Key characteristics of well-constructed goals: 1. managers must put those strategies into action: • • • • • Implementation and execution of the strategic plans Design of the best organization structure Consistency of strategy with company culture Control systems to measure and monitor progress Governance systems for legal and ethical compliance • Consistency with maximizing profit and profit growth ⑥The Feedback Loop Managers must monitor strategy execution: • To determine if strategic goals and objectives are being achieved • To evaluate to what extent competitive advantage is g being created and sustained Managers must monitor and reevaluate for the next round of strategy formulation and implementation Strategic planning is ongoing. 1 | 19 2 External Analysis Purpose is to identify the strategic opportunities and threats in the organization’s operating environment that will affect how it pursues its mission. the various strategies pursued by a company must lead to a viable business model. Strategy Implementation After choosing a set of congruent strategies to achieve competitive advantage. Precise and measurable – to provide a yardstick or standard to judge performance Address crucial issues – with a limited number of key goals that help to maintain focus Challenging but realistic – to provide employees with incentive for improving Specify a time period – to motivate and inject a sense of urgency into goal attainment Focus on long-run performance and competitiveness.Major Goals A goal is a precise and measurable desired future state that a company must realize if it is to attain its vision or mission. Functional strategies should be consistent with and pp p y g support the company’s business level and global strategies. External Analysis requires an assessment of: Industry environment in which company operates • Competitive structure of industry • Competitive position of the company • Competitiveness and position of major rivals The country or national environments in which company competes The wider socioeconomic or macroenvironment that may affect the company and its industry • Social • Governmental • Legal • International • Technological • Macroeconomic 1 | 20 Copyright © Houghton Mifflin Company. 4.

and consistency Articulation of the business model Commitment Being well informed Willingness to delegate and empower The astute use of power Emotional intelligence: self-awareness. social skills Copyright © Houghton Mifflin Company. 1 | 28 Strategic Leadership Good leaders of the strategy-making process have a number of key attributes: Vision. 30. motivation. 1 | 26 Strategic Planning in Practice Studies suggest that formal planning has a positive impact on company performance – and should include the current and future competitive environments. Mintzberg and A. Vol. 2. Strategic Decision Making In spite of systematic planning. June 1985. McGugh. empathy. Scenario Planning • Recognizes that the future is inherently unpredictable • Develops strategies for possible future scenarios Cognitive biases: Rules of thumb or heuristics resulting in systematic errors • • • • • • Prior hypothesis bias Escalating commitment Reasoning by analogy Representativeness Illusion of control Availability error Decentralized Planning • Involves the functional managers • Avoids the ivory tower approach • Perceives procedural justice in the decision making Strategic Intent • Avoids the strategic fit model.7 Intended and Emergent Strategies Intended or Planned Strategies • Strategies an organization plans to put into action • Typically the result of a formal planning process • Unrealized strategies are the result of unprecedented changes and unplanned events after the formal planning is completed Emergent Strategies • Unplanned responses to unforeseen circumstances • Serendipitous discoveries and events may emerge that can open up new unplanned opportunities • Must assess whether the emergent strategy fits the company’s needs and capabilities Realized Strategies Source: Adapted from H. All rights reserved. Administrative Science Quarterly. 1 | 29 5 . 1 | 27 Groupthink: Decisionmakers embark on a course of action without questioning the underlying assumptions • Group coalesces around a person or policy • Decisions based on an emotional rather than an objective assessment of the correct course of action Copyright © Houghton Mifflin Company. All rights reserved. 1 | 25 • The product of whatever intended strategies are actually put into action and of any emergent strategies that evolve Copyright © Houghton Mifflin Company. companies may adopt poor strategies if groupthink or individual cognitive biases are allowed to intrude into the decision-making process. All rights reserved.Emergent and Deliberate Strategies Figure 1. selfregulation. No. which focuses too much on the current state • Sets ambitious vision and goals that stretch a company and then finds ways to build to attain those goals Copyright © Houghton Mifflin Company. All rights reserved. eloquence. Copyright © Houghton Mifflin Company. All rights reserved.

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