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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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Strategy: Core Concepts and Analytical Approaches


Arthur A. Thompson, The University of Alabama

4th Edition, 2016-2017

An e-book published by McGraw-Hill Education, Burr Ridge, IL

CHAPTER 2

Charting a Companys LongTerm Direction: Vision, Mission,


Objectives, and Strategy
If you dont know where you are going, any road will take you there.
Cheshire Cat to Alice
Lewis Carroll, Alice in Wonderland
One secret to maintaining a thriving business is recognizing when it needs a fundamental change.
Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann
If we can know where we are and something about how we got there, we might see where we are trending
and if the outcomes which lie naturally in our course are unacceptable, to make timely change.
Abraham Lincoln
A good goal is like a strenuous exerciseit makes you stretch.
Mary Kay Ash, Founder of Mary Kay Cosmetics

f one is even halfway convinced that crafting and executing strategy are critically important managerial
tasks, then understanding exactly what is involved in developing a strategy and executing it proficiently
becomes essential? Is any analysis required? What goes into charting a companys strategic course and longterm direction? Does a company need a strategic plan? What are the various components of the strategy-making,
strategy-executing process and to what extent are company personnelaside from senior management
involved in the process?
This chapter presents an overview of the managerial ins and outs of crafting and executing company strategies.
Special attention is paid to managements direction-setting responsibilitiescharting a strategic course, setting
performance targets, and choosing a strategy capable of producing the desired outcomes. Also, there is coverage
of why strategy making is a task for a companys entire management team and which kinds of strategic decisions
are made at which levels of management. The chapter concludes with a look at the roles and responsibilities of
the companys board of directors in the strategy-making, strategy-executing process and how good corporate
governance protects shareholder interests and promotes good management.

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Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

What Does the Strategy-Making, Strategy-Executing


Process Entail?
Crafting and executing a companys strategy is an ongoing process that consists of five interrelated managerial
tasks:
1. Developing a strategic vision that charts the companys long-term direction, a mission statement that
describes the purpose of the companys business, and a set of core values to guide the pursuit of the
vision and mission.
2. Setting objectives and using them as yardsticks for measuring the companys performance and the
progress it is making in achieving the intended strategic vision and mission.
3. Crafting a strategy to achieve the objectives and move the company along the strategic course
management has charted.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Monitoring developments, evaluating performance, and initiating corrective adjustments in the
companys long-term direction, objectives, strategy, or execution in light of actual experience, changing
conditions, fresh managerial ideas for improving the strategy, and newly emerging market opportunities.
Figure 2.1 displays this five-task process. Lets examine each task in some detail, thereby setting the stage for the
forthcoming chapters and giving you a birds-eye view of the book.

Figure 2.1 The Strategy-Making, Strategy-Executing Process


Task 1

Task 2

Developing
a strategic
vision,
mission, and
core values

Setting
Objectives

Task 3

Task 4

Crafting a
strategy
to achieve the
objectives and
the company
vision

Implementing
and
executing
the strategy

Task 5
Monitoring
developments,
evaluating
performance,
and initiating
corrective
adjustments

Revise as needed in light of the companys


actual performance, changing conditions,
new opportunities, and new ideas

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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Task 1: Developing a Strategic Vision, Mission Statement,


and Set of Core Values
Very early in the strategy-making process, a companys senior managers must wrestle with the issue of what
directional path the company should take. Can the companys prospects be improved by changing its product
offerings and/or the markets in which it participates and/or the customers it caters to and/or the business activities
in which it engages? Deciding to commit the company to one path versus another pushes managers to draw
some carefully reasoned conclusions about whether the companys present strategic course offers attractive
opportunities for growth and profitability or whether major or minor changes of one kind or another in the
companys strategy and long-term direction are needed. Table 2.1 singles out the big factors to consider in
charting a companys future direction.

Table 2.1

Factors to Consider in Deciding on a Companys Future Direction


External Considerations

Does sticking with the companys present strategic


course present attractive opportunities for growth
and profitability?

Internal Considerations
How well is the company faring vis--vis key
competitors? Is the company gaining ground or
losing ground, and why?

Are the winds of changemost especially those in


Does the company have sufficient business and
the companys market and competitive arenaacting
competitive strength to achieve attractive gains in
to enhance or weaken the companys prospects?
revenues and profits in the years ahead?
What, if any, new customer groups and/or
geographic markets should the company get in
position to serve?

What organizational and resource strengths can the


company leverage and which resource weaknesses
need to be corrected?

Which emerging market opportunities should the


company pursue and which ones should not be
pursued?

Is the company competing in too many markets


or product categories where profits are skimpy or
nonexistent?

Should the company begin to deemphasize or


eventually abandon any of the markets or customer
groups it is currently serving?

Is the company at risk because of growing


technological obsolescence or deficient skills and
capabilities?

Top managements views and conclusions about the companys long-term direction and what product-customermarket-business mix seems optimal for the road ahead constitute a strategic vision for the company. A strategic
vision delineates managements aspirations for the
company, providing a panoramic view of where we are
CORE CONCEPT
going and a convincing rationale for why this makes good
A strategic vision describes the route a company
business sense. A strategic vision thus points an organization
intends to take in developing and strengthening
in a particular direction, charts a strategic path for it to
its business. It lays out the companys strategic
follow in preparing for the future, and molds organizational
course in preparing for the future.
identity. A clearly articulated strategic vision communicates
managements aspirations to stakeholders (shareholders,
employees, suppliers, customers, etc.) and helps steer the energies of company personnel in a common direction.
The vision of Google cofounders Larry Page and Sergey Brin to organize the worlds information and make it
universally accessible and useful has been successful as the companys guiding light because its obvious
relevance has captured the imagination of stakeholders and the public at large, served as the basis for crafting the
companys strategic actions, and aided internal efforts to mobilize and direct the companys resources.
Well-conceived visions are distinctive and specific to a particular organization. They avoid feel-good statements
like We will become a global leader and the first choice of customers in every market we choose to serve
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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which could apply to hundreds of organizations.1 Likewise, a strategic vision proclaiming managements quest
to be the market leader or to be the most innovative or to be recognized as the best company in the industry
offer scant guidance about a companys long-term direction or the kind of company management is striving to
build. Hilton Hotels vision to fill the earth with light
A well-conceived vision statement clearly conveys
and the warmth of hospitality borders on the
a companys long-term direction and says something
incredulouscould anyone believe this is real? A vision
definitive about what top executives want the
statement is just a bunch of words unless it paints a
companys product-market-customer-business
picture of where we are headed, unless it says
makeup to be in three to five (or more) years.
something definitive about how the companys leaders
intend to position the company beyond where it is today,
and unless there is genuine top management commitment to pursue this strategic course. Table 2.2 provides some
dos and donts in composing a useful vision statement.

Table 2.2

Wording a Vision StatementThe Dos and Donts


The Dos

The Donts

Be graphicPaint a clear and straight-to-the-point


picture of where the company is headed and the
market position(s) the company is striving to stake out.

Dont be vague or incompleteNever skimp on


specifics that delineate where the company is headed
or how the company intends to prepare for the future.

Be forward-looking and directionalDescribe the


strategic course that management has charted and
the kinds of product-market-customer-technology
changes that will help the company prepare for the
future.

Dont dwell on the presenta vision is not about


what a company once did or does now; its about
where we are going.

Keep it focusedBe specific enough to provide


managers with guidance in making decisions and
allocating resources.

Dont use overly broad languageAll-inclusive


language that gives the company license to head in
most any direction, pursue most any opportunity, or
enter most any business must be avoided.

Have some wiggle roomLanguage that allows


some flexibility is good. The directional course may
have to be adjusted as market-customer-technology
circumstances change, and coming up with a new
vision statement every one-to-three years signals
rudderless management.

Dont state the vision in bland or uninspiring


termsThe best vision statements are short, easily
communicated, and memorable, with the power to
motivate company personnel and inspire shareholder
confidence about the companys future.

Be sure the journey is feasibleThe path and


direction should be within the realm of what the
company can pursue and accomplish; over time, a
company should be able to demonstrate measurable
progress in achieving the vision.

Dont be genericA vision statement that could apply


to companies in any of several industries (or to any of
several companies in the same industry) is incapable of
giving a company its own unique identity.

Indicate why the directional path makes good


business senseThe directional path should be in
the long-term interests of stakeholders (especially
shareowners, employees, and customers).

Dont rely on superlativesVisions that claim the


companys strategic course is one of being the best
or the most successful or a recognized leader or
the global leader usually lack revealing specifics
about the path the company is taking to get there.

Make it memorableTo give the organization a


sense of direction and purpose, the vision needs to be
short, easily communicated, and memorable. Ideally,
it should be reducible to a few choice lines or a onephrase slogan.

Dont run on and onA vision statement that is not


short and to the point will tend to lose its audience

Sources: John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996), p. 72; Hugh Davidson, The Committed
Enterprise (Oxford: Butterworth Heinemann, 2002, Chapter 2; and Michel Robert, Strategy Pure and Simple II (New York: McGrawHill, 1992), Chapters 2, 3, and 6.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Communicating the Strategic Vision


Effectively communicating the strategic vision to lower-level managers and employees is as important as the
strategic soundness of the long-term direction top management has chosen. A vision cannot provide direction
for middle managers or inspire and energize employees unless everyone in the company is familiar with it
and can observe senior managements commitment to the vision. It is particularly important for executives to
provide a compelling rationale for a dramatically new strategic vision and company direction. When company
personnel dont understand or accept the need for redirecting organizational efforts, they are prone to resist or
be indifferent to the changes management wants to make. Hence, explaining the basis for the new direction,
addressing employee concerns head-on, calming fears, lifting spirits, and providing updates and progress reports
as events unfold all become part of the task in mobilizing support for the vision and winning commitment to
needed actions.
Winning the support of organization members for the vision nearly always requires putting where we are going
and why in writing, distributing the statement organization wide, and having executives personally explain the
vision and its rationale to as many people as feasible. A
strategic vision can usually be adequately stated in less
CORE CONCEPT
than a page (most usually in one to two paragraphs), and
An effectively communicated vision is a valuable
managers should be able to explain it to company personnel
management tool for enlisting the commitment
and outsiders in five to ten minutes. Ideally, executives
of company personnel to actions that get the
should present their vision for the company in a manner that
company moving in the intended direction.
reaches out and grabs people. An engaging and convincing
strategic vision has enormous motivational valuefor the
same reason that a stone mason is more inspired by building a great cathedral for the ages than simply laying
stones to create floors and walls. When managers articulate a vivid and compelling case for where the company
is headed, organization members begin to say, This is interesting and has a lot of merit. I want to be involved
and do my part to help make it happen. The more a vision evokes positive support and excitement, the greater
its impact in terms of arousing a committed organizational effort and getting company personnel to move in a
common direction.2 Thus, executive ability to paint a convincing and inspiring picture of a companys journey
and destination is an important element of effective strategic leadership.

Expressing the Essence of the Vision in a Slogan The task of effectively conveying the vision to
company personnel is assisted when the vision of where to head is exprssed in an easily remembered phrase
or cathy slogan. For instance, Nike aspires to exhibit a passion for serving athletes by developing the most
innovative products and services to help them reach their full potential. Disneys overarching vision for its five
business groupsparks and resorts, movie studios, television channels, consumer products (toys, books, and
licensed Disney products), and interactive media entertainmentis to create happiness by providing the finest
in entertainment for people of all ages, everywhere. The Mayo Clinics vision is to inspire hope and contribute
to health and well-being by providing the best care to every patient through integrated clinical practice, education
and research while Greenpeace strives to expose global environmental problems and to promote solutions that
are essential to a green and peaceful future. Walmarts visionary slogan is saving people money so they can
live betteroften shortened to the tag line Save Money. Live Better. Creating a phrase or short slogan to
illuminate an organizations direction and purpose and then using it repeatedly as a reminder of where we are
headed and why helps rally organization members to hurdle whatever obstacles lie in the companys path and
maintain their focus.
Why a Sound, Well-Communicated Strategic Vision Matters A well-thought-out, forcefully
communicated strategic vision pays off in several respects: (1) it crystallizes senior executives own views about
the firms long-term direction; (2) it reduces the risk of rudderless decision making; (3) it is a tool for winning
the support of organizational members for changes that will help move the company along the chosen strategic
path; (4) it provides a beacon for lower-level managers in making decisions and operating their assigned pieces
of the business; and (5) it helps an organization prepare for the future. When top executives can see evidence of
progress in achieving these five benefits, the first step in organizational direction setting has been successfully
completed.
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Developing a Company Mission Statement


The defining characteristic of a well-conceived strategic vision is what it says about the companys future
strategic coursethe direction we are headed and what market position(s) we intend to stake out. The role of
a companys mission statement, however, is to describe the
The distinction between a strategic vision and a
enterprises present business and purposewho we are,
mission statement is fairly clear-cut: A strategic
what we do, and why we are here. Ideally, a company
vision sets forth a companys future direction
mission statement (1) identifies the companys products/
(where we are going), whereas a companys
services, (2) specifies the buyer needs that it seeks to satisfy
mission statement describes its present
and the customer groups or markets it serves, and (3) gives
business scope and purpose (who we are,
the company its own identity. The mission statements that
what we do, and why we are here).
one finds in company annual reports or posted on company
websites typically are quite brief; some do a better job than
others of conveying what the enterprises current business operations and purpose are all about.
The following mission statements provide reasonably informative specifics about who we are, what we do, and
why we are here:
n Trader Joes (a specialty grocery chain): The mission of Trader Joes is 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.
n The American Red Cross: To prevent and alleviate human suffering in the face of emergencies by
mobilizing the power of volunteers and the generosity of donors.
n eBay: To provide a global trading platform where practically everyone can trade practically anything.
n Harley-Davidson: We fulfill dreams through the experience of motorcycling, by providing to
motorcyclists and to the general public an expanding line of motorcycles and branded products and
services in selected market segments.
n Amazon.com: To build a place where people can come to find and discover anything they might want
to buy online.
But some companies have used vague or imprecise wording in their mission statements, effectively obscuring
the industry (or industries) in which they operate and the real substance of their business purpose. For instance,
Microsofts mission statementto help people and
businesses throughout the world realize their full
To be well worded, a company mission statement
potentialreveals nothing about its products or business
must employ language specific enough to
make-up and is so non-specific it could apply to thousands
distinguish its business make-up and purpose
of companies in hundreds of industries. Similarly, Cocafrom those of other enterprises and give the
Cola, which markets nearly 400 beverage brands in more
company its own identity.
than 200 countries, says that its mission is To refresh the
worldTo inspire moments of optimism and happiness
To create value and make a difference. The usefulness of a say-nothing mission statement that fails to convey
the essence of a companys business activities and purpose is unclear.
Occasionally, companies couch their mission in terms of making a profit. This, too, is flawed. Profit is more
correctly an objective and a result of what a company does. Moreover, earning a profit is the obvious intent
of every commercial enterprise. Such companies as BMW, Netflix, Shell Oil, Procter & Gamble, Apple, and
McDonalds are each striving to earn a profit for shareholders; but plainly the fundamentals of their businesses
are substantially different when it comes to who we are and what we do. It is managements answer to make
a profit doing what and for whom? that reveals the substance of a companys mission and business purpose.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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Linking the Strategic Vision and Mission with Company Values


Many companies have developed a set of values to guide the actions and behavior of company personnel in
conducting the companys business and pursuing its strategic vision and mission. By values (or core values, as
they are often called), we are talking about certain designated
CORE CONCEPT
beliefs, traits, and ways of doing thingsactions and
behaviors that are widely viewed as good or desirable
A companys values or core values are the
or maybe even noble. Values relate to such things as fair
beliefs, traits, and behavioral norms that company
treatment, honor and integrity, ethical behavior,
personnel are expected to display in conducting
innovativeness, teamwork, accountability, a passion for
the companys business and pursuing its strategic
top-notch quality or superior customer service, social
vision and mission.
responsibility, and community citizenship.
Values-conscious companies normally have four to eight core values that company personnel are expected to
display and that are supposed to be mirrored in how the company conducts its business. At American Express,
the core values are respect for people, customer commitment, integrity, teamwork, good citizenship, a will to
win, and personal accountability. At Rackspace, a provider of server hosting and managed cloud computing
services for over 200,000 businesses in some 110 countries, the core values are fanatical support in all we
do, a commitment to greatness, full disclosure and transparency, a passion for our work, treatment of fellow
Rackers like friends and family, and results first, substance over flash. Toyota preaches respect for, and the
development of, its employees, teamwork, getting quality right the first time, learning, continuous improvement,
and embracing change in its pursuit of low-cost, top-notch manufacturing excellence in motor vehicles.3
Do companies practice what they preach when it comes to their professed values? Sometimes yes, sometimes
noit runs the gamut. Quite a large number of companies have executives who are committed to grounding
company operations on sound values and principled ways of doing business. Executives at these companies
deliberately seek to infuse the company with the desired character, identity, and behavioral norms by ingraining
the designated core values in the corporate culturethe core values thus become an integral part of the companys
DNA and what makes it tick. At such values-driven companies, executives walk the talk and company personnel
are held accountable for displaying the stated values. At the other extreme are companies with window-dressing
values; the professed values are given lip service by top executives but have little discernible impact on either
how company personnel behave or how the company operates. Such companies have values statements because
they are in vogue and are seen as making the company look good. And there are some companies (with or
without window-dressing values) that in actuality have bad or unsavory valuessuch companies tolerate,
maybe even condone, unethical behavior on the part of company personnel, engage in deliberately dishonest
dealings with others, have willful disregard for employee safety, and/or flagrantly disregard rules and regulations
against environmental pollution.
At companies where the stated values are real rather than cosmetic, managers connect values to the pursuit of the
strategic vision and mission in one of two ways. In companies with longstanding values that are deeply entrenched
in the corporate culture, senior managers are careful to craft a vision, a mission, a strategy, and a set of operating
practices that match established values, and they repeatedly emphasize how the values-based behavioral norms
contribute to the companys business success. If the company changes to a different vision or strategy, executives
make a point of explaining how and why the core values continue to be relevant. Few companies with sincere
commitment to established core values ever undertake strategic moves that conflict with ingrained values. In
new companies or those with unspecified values, top management has to consider what values, behaviors, and
business conduct should characterize the company and draft a values statement that is circulated among managers
and employees for discussion and possible modification. A final values statement that incorporates the desired
behaviors and traits and that connects to the vision/mission is then officially adopted. Some companies combine
their strategic vision, mission, and values into a single statement or document, circulate it to all organization
members, and in many instances post the vision/mission and values statement on the companys website.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Task 2: Setting Objectives


The managerial purpose of setting objectives is to convert the strategic vision and mission into specific
performance targets. Objectives represent a managerial commitment to achieving particular results and outcomes.
Well-stated objectives must be specific, quantifiable or measurable, challenging, and contain a deadline for
achievement. As Bill Hewlett, cofounder of Hewlett-Packard,
shrewdly observed, You cannot manage what you cannot
CORE CONCEPT
measure. . . . And what gets measured gets done.4 Concrete,
Objectives are an organizations performance
measurable, and challenging objectives are managerially
targetsthe results and outcomes management
valuable for three reasons: (1) they focus organizational
wants to achieve. They function as yardsticks for
attention on what to accomplish, (2) they serve as yardsticks
measuring how well the organization is doing.
for tracking company performance, and (3) they motivate
organizational members to perform at a high level and deliver
the best possible results. Indeed, the experiences of countless companies and managers teach that precisely spelling
out how much of what kind of performance by when and then pressing forward with actions and incentives calculated
to help achieve the targeted outcomes greatly improve a companys actual performance.

The Imperative of Setting Challenging or Stretch Objectives The experiences of countless


companies and managers teach that one of the best ways to promote outstanding company performance is for
managers to deliberately set performance targets high
Theres no better way to avoid ho-hum results
enough to stretch an organization to perform at its full
than by setting stretch objectives and motivating
potential and deliver the best possible results. Challenging
company personnel to go all out and deliver stretch gains
organization members to perform at full potential
in performance pushes an enterprise to be more inventive,
and deliver the best possible results.
to exhibit more urgency in improving both its financial
performance and its business position, and to be more intentional and focused in its actions. Stretch objectives
spur exceptional performance and help build a firewall against contentment with modest gains in organizational
performance. As Mitchell Leibovitz, former CEO of the auto parts and service retailer Pep Boys, once said, If
you want to have ho-hum results, have ho-hum objectives.
How Not to Handle the Task of Setting Objectives The following three approaches to objectivesetting should be scrupulously avoided:
n Setting unspecific targets like maximize profits, reduce costs, become more efficient, or increase
revenues. For instance, an objective to reduce costs is technically achieved if a companys total costs
go down by $100 or if unit costs fall by a fraction of a pennyneither outcome is likely to matter.
Likewise, an objective to increase revenues is realized if total revenues climb by a trivial 1 percent by
2020. This is why specifying how much by when is necessary for an objective to be managerially useful.
n Setting targets for the upcoming year that, if achieved, would represent only average performance
(because the targets are slightly higher than the most recent years actual performance and can be
reached with only minimal or modest effort). Objectives that promote or enable organizational coasting
provide little or no managerial impetus for improved performance.
n Setting targets that carry no adverse consequences for organizational members if actual performance
falls short of targeted performance. Organizational members understandably attach little importance
to the objectives managers announce when it has been top management practice in times past to find
excuses to justify weak performance (like blaming outside forces beyond our control), not hold any
company personnel accountable for subpar outcomes, and award bonuses and compensation increases
despite failure to achieve announced objectives. Objectiveseven challenging onesare incapable of
motivating company personnel to exert their best efforts to achieve stretch performance targets if they can
expect to receive bonuses and increased compensation even if the performance targets are not reached.
All three ways of handling the task of setting objectives undercut the drive for good performance.
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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What Kinds of Objectives to SetThe Need for a Balanced Scorecard


Two distinct types of performance yardsticks are required: those relating to financial performance and those
relating to strategic performance. Achieving acceptable financial results is a must. Without adequate profitability
and financial strength, a companys pursuit of its strategic
vision, as well as its long-term health and ultimate survival,
CORE CONCEPT
are jeopardized. Furthermore, subpar earnings and a weak
Financial objectives relate to the financial perfor
balance sheet alarm shareholders and creditors and put
mance targets management has established for
the jobs of senior executives at risk. But good financial
the organization to achieve. Strategic objectives
performance, by itself, is not enough. Of equal or greater
relate to target outcomes that indicate a company
importance is a companys strategic performanceout
is strengthening its market standing, competitive
comes that indicate whether a companys market position
vitality, and future business prospects.
and competitiveness are deteriorating, holding steady, or
improving. Establishing and pursuing strategic objectives are
important because a stronger market standing and greater competitive vitalityespecially when accompanied by
competitive advantageis what enables and empowers a company to improve its financial performance.
Common financial and strategic objectives include the following:
Financial Objectives

Strategic Objectives

An x percent increase in annual revenues

Winning an x percent market share

Annual increases in after-tax profits of x


percent

Achieving lower overall costs than rivals

Annual increases in earnings per share of x


percent

Overtaking key competitors on product


performance or quality or customer service

Profit margins of x percent

Deriving x percent of revenues from the sale of


new products introduced within the past five
years

Increased shareholder valuein the form of an


upward-trending stock price

Having a better-known or more powerful brand


name than rivals

Bond and credit ratings of x

Having stronger national or global sales and


distribution capabilities than rivals

Annual dividend increases of x percent

An x percent return on capital employed (ROCE) Having broader or deeper technological


capabilities than rivals
or return on shareholders equity investment
(ROE)
Having a wider product line than rivals

Internal cash flows of x dollars to fund new


capital investment

Consistently getting new or improved products


to market ahead of rivals

Both Short-Term and Long-Term Objectives Are Needed A companys set of financial and strategic
objectives ought to include both near-term and longer-term performance targets. Having quarterly and annual
objectives prompts managers to take actions that will deliver immediate performance improvements and satisfy
shareholder expectations for near-term progress on a variety of fronts. Having objectives that are to be reached
in three to five years forces managers to consider what to do now to put the company in position to perform
better later. For example, a company that wants to grow its revenues by 20 percent in three years cannot wait
until the end of the second year to begin its revenue growth initiatives. Moreover, it is generally in investors best
interest for companies to be managed in a manner that produces sustained long-term performance. Managers
who concentrate their energies on hitting next quarters (or the current years) targets and then on some day in
the future worry about achieving long-term targets, frequently fail to do the very things today that it takes to
grow the business and produce good performance year after year after year. The seeds for achieving long-term
objectives typically must be planted in the near term rather than in the months before the long-term targets have
to be reached. When trade-offs must be made between achieving long-run objectives and their short-run siblings,
long-run objectives should take precedence (unless the achievement of one or more short-run performance
targets have unique importance).
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

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The Case for a Balanced Scorecard: Improved Strategic Performance Fosters Better
Financial Performance A companys financial performance measures are really lagging indicators that
reflect the results of past decisions and organizational activities.5 But a companys past or current financial
performance is not a reliable indicator of its future prospectspoor financial performers often turn things around
and do better, whereas good financial performers can fall upon hard times. The best and most reliable leading
indicators of a companys future financial performance and business prospects are strategic outcomes that
indicate whether the companys competitiveness and market
position are stronger or weaker. For instance, if a company
CORE CONCEPT
has set aggressive strategic objectives and is achieving
A company that pursues and achieves strategic
themsuch that its competitive strength and market
outcomes that boost its competitiveness and
position are on the risethen theres reason to expect that
strength in the marketplace is better able to
its future financial performance will be better than its current
improve its future financial performance.
or past performance. If a company is losing ground to
competitors and its market position is slippingoutcomes
that reflect weak strategic performance (and, very likely, failure to achieve its strategic objectives)then its
ability to maintain its present profitability is highly suspect. Hence, the degree to which a companys managers
set, pursue, and achieve stretch strategic objectives tends to be a reliable leading indicator of whether its future
financial performance will improve or stall.
Consequently, it is important to use a performance measurement system that strikes a balance between financial
objectives and strategic objectives.6 Focusing only on how well a company is performing financially overlooks
the fact that what ultimately enables a company to deliver better financial results from its operations is the
achievement of strategic objectives that improve its competitiveness and market strength. Indeed, the surest path
to boosting company profitability quarter after quarter and year after year is to relentlessly pursue strategic
outcomes that strengthen the companys market position and, ideally, produce a growing competitive advantage
over rivals.
The most widely used framework for developing a linked set of strategic and financial objectives and tracking
their achievement is known as the balanced scorecard. Since its origination in the 1990s, balanced scorecard
methodology has evolved from just a performance
measurement tool into a full strategic planning and
CORE CONCEPT
management system that transforms an organizations
A balanced scorecard is a widely used method for
vision, mission, objectives, and strategy into daily
combining the use of both strategic and financial
marching orders for company personnel and organization
objectives, tracking their achievement, and giving
units, thereby facilitating better strategy execution as well
7
management a more complete and balanced view
as stronger performance measurement. About half of the
of how well an organization is performing.
large companies in the United States, Europe, and Asia
employ a balanced scorecard approach to measuring their
performance; a 2013 survey by Bain & Company of 12,300 companies worldwide found that balanced scorecard
methodology was one of the top five management tools.8 Users have included IBM, Wells Fargo, Ford Motor,
ExxonMobil, DuPont, Caterpillar, General Electric, Verizon, UPS, Duke University Hospital, Royal Canadian
Mounted Police, UK Ministry of Defense, the U.S. Army Medical Command, and over 30 colleges and
universities.9

Strategic IntentThe Relentless Pursuit of an Ambitious Long-Term Strategic Objective


On occasion, companies decide to concentrate the full force of their resources and competitive actions on a longterm campaign to achieve some ambitious strategic
CORE CONCEPT
outcomelike unseating the existing industry leader,
becoming the dominant market share leader worldwide,
A company exhibits strategic intent when it
delivering the best customer service of any company in the
relentlessly pursues an ambitious strategic
industry (or the world), or turning a new technology into
objective, concentrating the full force of its
products capable of changing the way people work and live.
resources and competitive actions on achieving
When a company launches aggressive initiatives over a
that objective.
sustained period to achieve a bold strategic outcome, it is
clearly signaling strategic intent to be a winner in the marketplace, often against long odds.10
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Nikes strategic intent during the 1960s was to overtake Adidas (which connected nicely with Nikes core
purpose to experience the emotion of competition, winning, and crushing competitors). Also, in the 1960s
when Canon entered the market for copying equipment, its strategic intent was to beat Xerox. When Fox
News Channel launched operations in 1996, its strategic intent was to overtake CNN, a feat it accomplished 5
years laterFox News has been the number 1 cable news channel every year since 2001. Most recently, Honda
achieved its long-standing strategic intent of producing an ultra-light jet when its unconventionally designed,
fuel-efficient five-passenger Civic of the Sky mini-jet went into production in 2012Honda first initiated the
project to enter the jet aircraft market in the late 1980s.
Companies that establish exceptionally bold strategic objectives and have an unshakableoften obsessive
commitment to achieving them typically lack the immediate capabilities and market grasp to achieve their lofty
target. But they rally the organization around efforts to make their strategic intents a reality. They go all out
to marshal the resources and capabilities to close in on their strategic target (which is often global market
leadership) as rapidly as they can. They craft potent offensive strategies calculated to throw rivals off-balance,
put them on the defensive, and force them into an ongoing game of catch-up. They deliberately try to alter the
market contest and tilt the rules for competing in their favor. As a consequence, capably managed, up-andcoming enterprises with strategic intents exceeding their present reach and resources are a force to be reckoned
with, often proving to be more formidable competitors over time than larger cash-rich rivals that have modest
strategic objectives and market ambitions.

Objective Setting Should Extend to All Organizational Levels Objective setting should not stop with
top managements establishing companywide performance targets. Company objectives need to be broken down
into performance targets for each of the organizations separate businesses, product lines, functional departments,
and individual work units. Company performance cant reach full potential unless each organizational unit sets
and pursues performance targets that contribute directly to the desired companywide outcomes and results.
Objective setting is thus a top-down process that must extend to the lowest organizational levels. And it means
that each organizational unit must take care to set performance targets that supportrather than conflict with or
undercutthe achievement of companywide targets.
The ideal situation is a team effort in which each organizational unit strives to produce results that contribute
to the achievement of the companys performance targets and strategic vision. Such consistency signals that
organizational units know their strategic role and are on board in helping the company move down the chosen
strategic path and produce the desired results.

Task 3: Crafting A Strategy


As indicated in Chapter 1, the task of stitching a strategy together entails addressing a series of hows: how to
attract and please customers, how to compete against rivals, how to position the company in the marketplace and
capitalize on attractive opportunities to grow the business, how best to respond to changing economic and market
conditions, how to manage each functional piece of the business, and how to achieve the companys strategic and
financial objectives. Astute entrepreneurship is called for in choosing among the various strategic alternatives
and in proactively searching for opportunities to do new things or to do existing things in new or better ways.11
The faster a companys business environment is changing, the more critical it becomes for strategy makers to
be good entrepreneurs in diagnosing the direction and force of the changes under way and in responding with
timely strategy adjustments. Strategy makers have to pay attention to early warnings of future change and be
willing to experiment with dare-to-be-different ways to establish a market position in that future. When obstacles
unexpectedly appear in a companys path, it is up to management to adapt rapidly and innovatively. Masterful
strategies come from doing things differently from competitors where it countsout-innovating them, being more
efficient, being more imaginative, adapting fasterrather than running with the herd. Good strategy making is
therefore inseparable from good business entrepreneurship. One cannot exist without the other.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

23

Crafting Strategy Involves Managers at All Organizational Levels


A companys senior executives obviously have lead strategy-making roles and responsibilities. The chief
executive officer (CEO), as captain of the ship, carries the mantles of chief direction setter, chief objective setter,
chief strategy maker, and chief strategy implementer for the total enterprise. Ultimate responsibility for leading
the strategy-making, strategy-executing process rests with the CEO. And the CEO is always fully accountable
for the results the strategy produces, whether good or bad. In some enterprises, the CEO or owner functions as
strategic visionary and chief architect of the strategy, personally deciding what the key elements of the companys
strategy will be, although the advice of key subordinates may be sought in fashioning an overall strategy and
deciding on important strategic moves. A CEO-centered approach to strategy development is characteristic of
small owner-managed companies and sometimes large corporations that have been founded by the present CEO
or that have CEOs with strong strategic leadership skills. Steve Jobs at Apple, Reed Hastings at Netflix, Christine
Whitmanfirst at eBay and now at Hewlett-Packard, Warren Buffet at Berkshire Hathaway, and Howard Schultz
at Starbucks are examples of high-profile corporate CEOs who have had a very big strategy-making role.
In most corporations, however, strategy is the product of more than just the CEOs handiwork. Typically,
other senior executivesbusiness unit heads, the chief financial officer, and vice presidents for production,
marketing, human resources, and other functional departments have influential strategy-making roles and help
fashion the chief strategy components. Normally, a companys chief financial officer is in charge of devising and
implementing an appropriate financial strategy; the production vice president takes the lead in developing the
companys production strategy; the marketing vice president orchestrates sales and marketing strategy; a brand
manager is in charge of the strategy for a particular brand in the companys product lineup, and so on. Moreover,
the strategy-making efforts of top managers are complemented by advice and counsel from the companys
board of directors and, normally, all major strategic decisions are submitted to the board of directors for review,
discussion, perhaps modification, and official approval.
But strategy making is by no means solely a top management function, the exclusive province of ownerentrepreneurs, CEOs, high-ranking executives, and board members. The more a companys operations cut across
different products, industries, and geographical areas, the more that headquarters executives have little option
but to delegate considerable strategy-making authority to down-the-line managers in charge of particular
subsidiaries, divisions, product lines, geographic sales offices, distribution centers, and plants. On-the-scene
managers who oversee specific operating units can be reliably counted upon to be intimately knowledgeable
about market and competitive conditions, customer requirements and expectations, and all the problems, issues,
and available strategic alternatives relating to the operating unit under their direct supervision. Managers with
day-to-day familiarity of, and authority over, a specific operating unit thus have a big edge over headquarters
executives in sizing up their operating units situation and making wise strategic choices.
Take, for example, a company like General Electric, a $150 billion global corporation with over 300,000
employees, operations in more than 100 countries, and businesses that include jet engines, power generation,
electric transmission and distribution equipment, oil and
The larger and more diverse the operations of an
gas equipment, lighting, medical imaging and diagnostics
equipment, locomotives, security devices, water
enterprise, the more points of strategic initiative it
treatment systems, and financial services. While top-level
has and the more levels of management that have
headquarters executives may well be personally involved
a significant strategy-making role.
in shaping GEs overall strategy and fashioning important
strategic moves, it doesnt follow that a few senior executives in GEs headquarters have either the expertise or
a sufficiently detailed understanding of all the relevant factors to wisely craft all the strategic initiatives taken
for hundreds of subsidiaries and thousands of products. They simply cannot know enough about the situation
in every GE organizational unit to decide upon every strategy detail and direct every strategic move made in
GEs worldwide organization. Rather, it takes involvement on the part of GEs whole management teamtop
executives, business group heads, the heads of specific business units and product categories, and key managers
in plants, sales offices, and distribution centersto craft the thousands of strategic initiatives that end up
composing the whole of GEs strategy.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

24

The key point here is this. While managers further down in a companys managerial hierarchy obviously have a
narrower, more specific strategy-making role than managers closer to the top, the important understanding here
is that in most of todays companies crafting strategy is a
collaborative team effort in which every company manager
CORE CONCEPT
typically has a strategy-making roleranging from minor
In most companies, crafting and executing strategy
to majorfor the area he or she heads. Hence, any notion
is a collaborative team effort where every manager
that an organizations strategists are at the top of the
has a role for the area he or she heads. It is flawed
management hierarchy and that midlevel and frontline
thinking to view crafting and executing strategy as
personnel merely carry out the strategic directives of senior
something only high-level managers do.
managers should be cast aside. A valuable strength of
collaborative strategy making is that the team of people
charged with crafting the strategy can easily include the very people who will also be charged with implementing
and executing it. Giving people an influential stake in crafting the strategy they must later help implement and
execute not only builds motivation and commitment but also holds them accountable for putting the strategy into
place and making it workthe oft-used excuse of It wasnt my idea to do this wont fly.

A Companys Strategy-Making Hierarchy


It thus follows that a companys overall strategy is a collection of strategic initiatives and actions devised by
managers (and sometimes key employees) up and down the whole organizational hierarchy. The larger and more
diverse the operations of an enterprise, the more points of strategic initiative it will have and the more managers
at different organizational levels will have a relevant strategy-making role. In diversified companies, where
multiple and sometimes strikingly different businesses must be managed (at General Electric, for instance),
crafting a full-fledged strategy involves four distinct types of strategic actions and initiatives, each undertaken at
different levels of the organization and partially or wholly crafted by managers at different organizational levels,
as shown in Figure 2.2.
n Corporate strategy concerns strategy initiatives to establish business positions in different industries,
whether to hold or divest existing businesses, strategic actions to boost the combined performance of
the set of businesses the company has diversified into, and how to capture cross-business synergies
and turn them into a competitive advantage. The CEO and other senior-level corporate executives have
lead responsibility for devising corporate strategy. Major strategic decisions are usually reviewed and
approved by the companys board of directors. We will look deeper into the strategy-making process at
diversified companies in Chapter 8.
n Business strategy consists of the actions and approaches crafted to produce successful performance in
one specific line of business. The key focus is crafting responses to changing market circumstances
and initiating actions to strengthen a businesss market position and competitiveness, build or widen
competitive advantage, and improve the businesss financial performance. Most often, corporate-level
executives delegate lead responsibility for developing business-level strategy to the manager they have
put in charge of the business. However, corporate-level executives may well exert strong influence over
various aspects of business-level strategy, and in diversified companies it is not unusual for corporate
officers to insist that business-level objectives and strategy conform to corporate-level objectives
and strategy themes. The business head has at least two other strategy-related roles: (1) seeing that
lower-level strategies are well conceived, consistent, and adequately matched to the overall business
strategy, and (2) keeping corporate-level officers (and sometimes the board of directors) informed of
emerging strategic issues. Typically, corporate executives review business-level strategy, and there may
be occasions when certain major strategic initiatives to be taken at the business-level are reviewed and
approved by the companys board of directors.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Figure 2.2 A Companys Strategy-Making Hierarchy


Orchestrated by
the CEO and other
senior executives

Corporate
Strategy
The overall companywide
game plan for managing a
set of businesses

Two-Way Influence
Orchestrated
by the general
managers of each
of the companys
different lines of
business, often
with advice and
input from the
heads of functional
area activities
within each
business and other
key people.

Orchestrated by
the heads of major
functional activities
within a particular
business, often in
collaboration with
other key people.

Business Strategy

(one for each business the


company has diversified into)

How to strengthen market


position and gain competitive
advantage

In the case of a
single-business
company, these
two levels of
the strategymaking pyramid
merge into one
levelbusiness
strategy that is
orchestrated by
the companys
CEO and other
top executives.

Two-Way Influence

Functional Area Strategies


within Each Business
Add relevant detail to the hows of overall
business strategy
Provide a game plan for managing a
particular activity in ways that support the
overall business strategy

Two-Way Influence

Orchestrated by
brand managers;
the operating
managers of
plants, distribution
centers, and
geographic units;
and the managers
of strategically
important activities
like advertising
and website
operations, often in
collaboration with
other key people.

Operating Strategies
within Each Business
Add detail and completeness to business
and functional strategy
Provide a game plan for managing
specific lower-echelon activities with
strategic significance

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

n Functional-area strategies concern the actions, approaches, and practices to be employed in managing
particular functions within a businesslike production, new product development, sales and marketing,
customer service, and finance. A businesss production strategy, for example, represents the managerial
game plan for running the manufacturing and assembly part of the business. A functional strategy for
new product development strategy, on the other hand, represents the managerial game plan for keeping
a businesss product lineup fresh and in tune with what buyers are looking for. Functional strategies
flesh out the details of the overall business strategy. Lead responsibility for functional strategies within
a business is normally delegated to the heads of the respective functions, with the general manager of
the business having final approval. Since it is critically important for the different functional strategies
to be strongly supportive and in harmony with the overall business strategy, there are times when the
general business manager exerts strong influence on the content of functional strategies.
n Operating strategies concern the relatively narrow strategic initiatives and approaches for managing
key operating units (plants, distribution centers, geographic units) and specific operating activities
with strategic significance (quality control, advertising campaigns, the management of specific brands,
supply chainrelated activities, and website sales and operations). A plant manager needs a strategy for
accomplishing the plants objectives, carrying out the plants part of the companys overall manufacturing
game plan, and dealing with any strategy-related problems that exist at the plant. A companys advertising
manager needs a strategy for getting maximum audience exposure and sales impact from the ad budget.
Operating strategies, while of limited scope, add further detail and completeness to functional strategies
and to the overall business strategy. Lead responsibility for operating strategies is usually delegated to
frontline managers, subject to the review and approval of higher-ranking managers.
Even though operating strategy is at the bottom of the strategy-making hierarchy, its importance should
not be downplayed. A major plant that fails in its strategy to achieve production volume, unit cost, and
quality targets can undercut the achievement of company sales and profit objectives and wreak havoc
with strategic efforts to build a quality image with customers. Frontline managers are thus an important
part of an organizations strategy-making team. One cannot reliably judge the strategic importance of a
given action simply by the strategy level or location within the managerial hierarchy where it is initiated.
In single-business enterprises, the corporate and business levels of strategy making merge into one level
business strategybecause the strategy for the whole company involves only one distinct line of business. Thus,
a single-business enterprise has three levels of strategy: business strategy for the entire company, functionalarea strategies for each main area within the business, and operating strategies undertaken by lower-echelon
managers to flesh out strategically significant aspects for the companys business and functional-area strategies.
Proprietorships, partnerships, and owner-managed enterprises may have only one or two strategy-making levels
since it takes only a few key people to craft and oversee the firms strategy.

Uniting the Strategy-Making Effort


Ideally, the pieces of a companys strategy up and down the strategy pyramid should be cohesive and mutually
reinforcing, fitting together like a jigsaw puzzle. Anything less than a unified collection of strategies weakens
the overall strategy and is likely to impair company
performance.12 It is top executives responsibility to
CORE CONCEPT
achieve this unity by clearly communicating the companys
A companys strategy is at full power only when
vision, objectives, and major strategy components to
its many pieces are united.
down-the-line managers and key personnel. Midlevel and
frontline managers cannot craft unified strategic moves
without first understanding the companys long-term direction and knowing the major components of the
corporate and/or business strategies that their strategy-making efforts are supposed to support and enhance.
Thus, as a general rule, strategy making must start at the top of the organization and proceed downward through
the pyramid from the corporate level to the business level and then from the business level to the associated
functional and operating levels.
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Furthermore, once strategies up and down the hierarchy have been created, lower-level strategies must be
scrutinized for consistency and support of higher-level strategies. Any strategy conflicts must be addressed and
resolved, either by modifying the lower-level strategies with conflicting elements or by adapting the higher-level
strategy to accommodate what may be more appealing strategy ideas and initiatives bubbling up from below.

A Strategic Vision + Mission + Objectives + Strategy =


A Strategic Plan
Developing a strategic vision and mission, setting objectives, and crafting a strategy are basic directionsetting tasks. They map out where a company is headed, delineate its strategic and financial performance
targets, and outline the competitive moves and operating
approaches to be used in achieving the desired business
CORE CONCEPT
results. Together, they constitute a strategic plan for
A companys strategic plan lays out its future
coping with economic and market conditions, competing
direction, business purpose, performance
against rivals, and making progress along the chosen
targets, and strategy.
strategic course.13 Typically a strategic plan includes a
commitment to allocate resources to carrying out the plan
and contains a deadline for achieving the targeted strategic and financial performance.
In companies that do regular strategy reviews and develop explicit strategic plans, the strategic plan usually
ends up as a written document that is circulated to most managers and perhaps selected employees. Near-term
performance targets are the part of the strategic plan most often communicated to managers and employees and
spelled out explicitly. A number of companies summarize key elements of their strategic plans in the companys
annual report to shareholders, in postings on their website, or in statements provided to the business media;
others, perhaps for reasons of competitive sensitivity, make only vague general statements about their strategic
plans.14 In small privately owned companies, it is rare for strategic plans to exist in written form. Small company
strategic plans tend to reside in the thinking and directives of owners/executives; aspects of the plan are revealed
in meetings and conversations with company personnel, and in the understandings and commitments among
managers and key employees about where to head, what to accomplish, and how to proceed.

Task 4: Implementing and Executing the Strategy


Managing the implementation and execution of strategy is an operations-oriented make-things-happen activity
aimed at performing core business activities in a strategy-supportive manner. It is easily the most demanding
and time-consuming part of the strategy management process. Converting strategic plans into actions and
results tests a managers ability to direct organizational change, motivate company personnel, build and
strengthen company competencies and competitive capabilities, create and nurture a strategy-supportive work
climate, and meet or beat performance targets. Initiatives to put the strategy in place and execute it proficiently
must be launched and managed on many organizational fronts.
Managements action agenda for implementing and executing the chosen strategy emerges from assessing what
the company will have to do differently or better, given its particular operating practices and organizational
circumstances, to execute the strategy competently and achieve the targeted financial and strategic performance.
Each company manager has to think through the answer to What needs to be done in my area to execute my
piece of the strategic plan, and what actions should I take to get the process under way? How much internal
change is needed depends on how much of the strategy is new, how far internal practices and competencies
deviate from what the strategy requires, and how well the present work climate/culture supports good strategy
execution. Depending on the amount of internal change involved, full implementation and proficient execution
of company strategy (or important new pieces thereof) can take several months to several years.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

In most situations, managing the strategy execution process includes the following principal aspects:
n Staffing the organization with the needed skills and expertise, consciously building and strengthening
strategy-supportive competencies and competitive capabilities, and organizing the work effort.
n Allocating ample resources to those activities critical to strategic success.
n Ensuring that policies and procedures facilitate rather than impede effective execution.
n Using the best-known practices to perform core business activities and pushing for continuous
improvement. Organizational units must periodically reassess how things are being done and diligently
pursue ways to do them better and cheaper.
n Installing information and operating systems that enable company personnel to better carry out their
strategic roles day in and day out.
n Motivating people and tying rewards and incentives directly to the achievement of performance
objectives.
n Creating a company culture and work climate conducive to successful strategy execution.
n Exerting the internal leadership needed to drive implementation forward and keep improving on how
the strategy is being executed. When stumbling blocks or weaknesses are encountered, management
must see that they are addressed and rectified on a timely basis.
Good strategy execution requires diligent pursuit of operating excellence. It is a job for a companys whole
management team. In addition, success hinges upon the skills and cooperation of operating managers who can
push needed changes in their organization units and consistently deliver good results. Managements handling of
the strategy implementation and execution process can be considered successful if things go smoothly enough
that the company meets or beats its strategic and financial performance targets and shows good progress in
achieving managements strategic vision.

Task 5: Evaluating Performance and Initiating Corrective


Adjustments
The fifth component of the strategy management processmonitoring new external developments, evaluating
the companys progress, and making corrective adjustmentsis the trigger point for deciding whether to continue
or change the companys vision and mission, objectives, strategy, and/or strategy execution methods.15 As long
as the companys direction and strategy seem well matched
to industry and competitive conditions and performance
CORE CONCEPT
targets are being met, company executives may decide to
A companys vision, objectives, strategy, and
stay the course. Simply fine-tuning the strategic plan and
approach to strategy execution are never final.
striving to improve strategy execution are sufficient
Reviewing whether and when to make revisions
is an ongoing process, not an every-now-andBut whenever a company encounters disruptive changes
then task.
in its environment, questions need to be raised about the
appropriateness of its direction and strategy. For, instance,
following the Great Recession of 20072009, companies across the world were suddenly confronted with sharply
different economic and market outlooks, prompting many to retool their strategic vision, objectives, and strategy
and come up with a new going forward strategic plan. Similarly, when a company experiences a downturn in
its market position or persistent shortfalls in performance, its managers are obligated to ferret out the causesdo
they relate to poor strategy, poor strategy execution, or both?and take timely corrective action. A companys
direction, objectives, and strategy have to be revisited any time external or internal conditions warrantover
time, revisions are to be expected.
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

Likewise, managers are obligated to assess which of the companys operating methods and approaches to
strategy execution merit continuation and which need improvement. Proficient strategy execution is always the
product of much organizational learning. It is achieved unevenlycoming quickly in some areas and proving
troublesome in others. Consequently, top-notch strategy execution requires a companys management team to
scrutinize the entire strategy execution effort and proactively institute timely and effective adjustments that will
move the company closer to operating excellence.

Corporate Governance: The Role of the Board of Directors


in the Strategy-Making, Strategy-Executing Process
Although senior managers have lead responsibility in crafting and executing a companys strategy, it is the duty
of the board of directors to exercise strong oversight and see that top management performs all five strategymaking, strategy-executing tasks in a manner that is in the best interests of shareholders and other stakeholders.16
A companys board of directors has four important obligations to fulfill:
1. Critically appraise the companys direction, strategy, and business approaches. Board members must
ask probing questions and draw on their business acumen to make independent judgments about whether
strategy proposals have been adequately analyzed and whether proposed strategic actions appear to have
greater promise than alternatives. If executive management is bringing well-supported and reasoned
strategy proposals to the board, theres little reason for board members to aggressively challenge and try
to pick apart everything put before them. Asking incisive questions is usually sufficient to test whether
the case for managements proposals is compelling and to exercise vigilant oversight. However, when
the company has a failing strategy or is plagued with internal operating miscues, and certainly when
there is a precipitous collapse in profitability, board members have a duty to be proactive, expressing
their concerns about the validity of the strategy and/or operating methods, initiating debate about the
companys strategic path, having one-on-one discussions with key executives and other board members,
and perhaps directly intervening as a group to alter the companys executive leadership and, ultimately,
its strategy and business approaches.
2. Evaluate the caliber of senior executives strategy-making and strategy-executing skills. The board is
always responsible for determining whether the current CEO is doing a good job of strategic leadership
(as a basis for awarding salary increases and bonuses and deciding on retention or removal).17 Boards
must also exercise due diligence in evaluating the strategic leadership skills of other senior executives
in line to succeed the CEO. When the incumbent CEO steps down or leaves for a position elsewhere,
the board must elect a successor, either going with an insider or deciding that an outsider is needed to
perhaps radically change the companys strategic course.
3. Institute a compensation plan for top executives that rewards them for actions and results that serve
stakeholder interests, and most especially those of shareholders. A basic principle of corporate
governance is that the owners of a corporation delegate operating authority and managerial control to a
team of executives who are then compensated for their efforts on behalf of the owners. In their role as
agents of shareholders, corporate managers have an unequivocal duty to make decisions and operate
the company in accord with shareholder interests (but this does not mean disregarding the interests of
other stakeholdersemployees, suppliers, the communities in which they operate, and society at large).
Most boards of directors have a compensation committee, composed entirely of directors from outside
the company, to develop a salary and incentive compensation plan that rewards senior executives for
boosting the companys long-term performance and growing the economic value of the enterprise on
behalf of shareholders; the compensation committees recommendations are presented to the full board
for approval. But during the past 10 to 15 years, many boards of directors have done a poor job of
ensuring that executive salary increases, bonuses, and stock option awards are tied tightly to performance
measures that are truly in the long-term interests of shareholders. Rather, compensation packages at many
companies have increasingly rewarded executives for short-term performance improvementsmost
notably, for achieving quarterly and annual earnings targets and boosting the stock price by specified
Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

percentages. This has had the perverse effect of causing company managers to become preoccupied with
actions to improve a companys near-term performance, often motivating them to take unprecedented
and unwise business risks to boost short-term earnings by amounts sufficient to qualify for multimilliondollar bonuses and stock option awards (that many see as obscenely large). The greater weight being
placed on short-term performance improvements has worked against shareholders since, in many
cases, the excessive risk-taking has proved damaging to long-term company performance: Witness the
huge loss of shareholder wealth that occurred at many financial institutions in 20082009 because of
executive risk-taking in subprime loans, credit default swaps, and collateralized mortgage securities. As
a consequence, the need to overhaul and reform executive compensation has become a hot topic in both
public circles and corporate boardrooms.
4. Oversee the companys financial accounting and financial reporting practices. While top executives,
particularly the companys CEO and CFO (chief financial officer), are primarily responsible for seeing
that the companys financial statements fairly and accurately report the results of the companys
operations, it is well established that board members have a fiduciary duty to protect shareholders by
exercising oversight of the companys financial practices, ensuring that generally acceptable accounting
principles are properly used in preparing the companys financial statements and that appropriate
financial controls are in place to prevent fraud and misuse of funds. Virtually all boards of directors
have an audit committee, always composed entirely of outside directors, that has lead responsibility for
overseeing the companys financial officers and consulting with both internal and external auditors to
ensure accurate financial reporting and adequate financial controls.
Every corporation should have a strong independent board of directors that (1) is well informed about the
companys performance, (2) guides and judges the CEO and
other top executives, (3) has the courage to curb management
CORE CONCEPT
actions they believe are inappropriate or unduly risky, (4)
The whole fabric of effective corporate
certifies to shareholders that the CEO is doing what the
governance is undermined when boards of
board expects, (5) provides insight and advice to
directors shirk their responsibility to maintain
management, and (6) is intensely involved in debating the
ultimate control over the companys strategic
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pros and cons of key decisions and actions. Boards of
direction, the major elements of its strategy, the
directors that lack the backbone to challenge a strong-willed
business approaches management is using to
or imperial CEO or that rubber-stamp most anything the
implement and execute the strategy, executive
CEO recommends without probing inquiry and debate
compensation, and the financial reporting
(perhaps because the board is stacked with the CEOs
process.
cronies) abdicate their duty to represent and protect
shareholder interest.

Key Points
The strategy-making, strategy-executing process consists of five interrelated and integrated tasks:
1. Developing a strategic vision, mission, and set of core values that provides long-term direction, infuses
the organization with a sense of purposeful action, and communicates to stakeholders managements
aspirations for the company.
2. Setting objectives and using the targeted results as yardsticks for measuring the companys performance.
Objectives need to spell out how much of what kind of performance by when. A balanced scorecard
that includes both financial objectives and strategic objectives is a common and effective approach for
measuring company performance. Stretch objectives spur exceptional performance and help build a
firewall against complacency and mediocre performance. A company exhibits strategic intent when it
relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and
competitive actions on achieving that objective.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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Chapter 2 Charting a Companys Long-Term Direction: Vision, Mission, Objectives, and Strategy

3. Crafting a strategy to achieve the objectives and move the company along the strategic course that
management has charted. The total strategy that emerges is a collection of strategic actions and business
approaches initiated partly by senior company executives, partly by the heads of major business
divisions, partly by functional-area managers, and partly by operating managers on the frontlines. A
single business enterprise has three levels of strategybusiness strategy for the company as a whole,
functional-area strategies for each main area within the business, and operating strategies undertaken by
lower-echelon managers. In diversified multibusiness companies, the strategy-making task involves four
distinct types or levels of strategy: corporate strategy for the company as a whole, business strategy (one
for each business the company has diversified into), functional-area strategies within each business, and
operating strategies. Typically, the strategy-making task is more top-down than bottom-up, with higherlevel strategies serving as the guide for developing lower-level strategies.
4. Implementing and executing the chosen strategy efficiently and effectively. Managing the implementation
and execution of strategy is an operations-oriented, make-things-happen activity aimed at shaping the
performance of core business activities in a strategy-supportive manner. Managements handling of the
strategy execution process can be considered successful if things go smoothly enough that the company
meets or beats its strategic and financial performance targets and shows good progress in achieving
managements strategic vision.
5. Monitoring developments, evaluating performance, and initiating corrective adjustments in vision,
long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions,
new ideas, and new opportunities. This is the trigger point for deciding whether to continue or change
the companys vision, objectives, strategy, and/or strategy execution methods.
The sum of a companys strategic vision, mission, objectives, and strategy constitute a strategic plan.
Boards of directors have a duty to shareholders to play a vigilant role in overseeing managements handling of a
companys strategy-making, strategy-executing process. A companys board is obligated to (1) critically appraise
the companys direction, strategy, and business approaches; (2) evaluate the caliber of senior executives strategymaking and strategy-executing skills; (3) institute a compensation plan for top executives that rewards them for
actions and results that serve stakeholder interests, most especially those of shareholders; and (4) oversee the
companys financial accounting and financial reporting practices.

Copyright 2016 by Arthur A. Thompson. All rights reserved. Not for distribution.

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