WHO DECIDES WHAT TO DO?

MODULE TWO: MODELLING THE STRATEGIC MANAGEMENT PROCESS

2.1 The Strategic Process Model

2.2 Strategy and the Evolution of the Company

The roles undertaken by decision makers are to some extent dependent on the stage of the
company’s evolution, which can be classified in three stages:

Small or Single-product company with little formal structure controlled by the

Entrepreneurial owner-manager.
Integrated Single product-line company with vertically integrated manufacturing
and specialized functional organization. The owner-manager still
retains control over strategic decisions, but most operating decisions
are delegated through policy.
Diversified Multi-product company with formalized managerial systems which are
evaluated by objective criteria, such as return on investment. Product
and market decisions are delegated to the heads of SBUs.

In smaller companies the individual owner plays a dominant role in determining strategy,
but in the larger, diversified company it may be difficult to identify strategists.

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2.3 Strategy Makers (Strategists)
Strategists with different characteristics are required for companies at different stages.
This leads to problems in ensuring that the right type of person is in charge.
It is often difficult to identify the ultimate strategic planner in companies which have
developed beyond the stage of owner/manager control. While managers tend to feel that
they understand their own function, there is relatively little systematic information
available on how managers actually spend their time. Managers prefer verbal sources and
that they avoid documented information; their approach is impressionistic rather than
detailed. Some general managers are naturally reflective while others tend to be doers.
The roles which managers play in strategic planning process depend on many factors
unique to the individual company. For example, in companies with a rigid hierarchical
structure the process may be concentrated on one person, such as the managing director.
Strategic planning can be regarded as a multidimensional role which is undertaken by
many individuals working at different levels.

Corporate level Typically the Board of Directors and the CEO

strategists
SBU strategists Comprise executives, planning departments and consultants.

The process model also provides insights into the complexity of the management function
in terms of the roles which managers are required to adopt at different times; because of
the fluid nature of everyday events the manager is likely to flit from one role to another
without giving the matter conscious thought. The four ‘eggs’ on the right-hand side of the
process model serve to identify several roles as follows.
1. Strategist, Entrepreneur, and Goal Setter. Even in large companies these functions
are not the sole domain of the chief executive, and some aspects are typically
devolved to managers. While managers are to some extent constrained by existing
plans and commitments, they have a role to play in making decisions about potential
investments, reacting to changing circumstances, identifying new courses of action
and so on.
2. Analyzer and Competitor. The manager needs to be constantly aware of changes in
the economic environment, the efficiency of the company, and its competitive
position. The process of information collection and analysis is time consuming, and it
is necessary for managers to filter out what is unimportant and focus on factors which
are likely to impact significantly on the firm. Managers are typically keenly aware
that time spent on analyzing is at the expense of more immediate concerns and this
role tends to be given a low priority because of its lack of immediate payoff.
3. Strategy Decision Maker. It is rare that major strategy decisions are taken without
wide managerial consultation. Options must be identified, and different points of
view brought to bear in order to assess the costs and benefits associated with each. At

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 times the manager will be involved in higher level strategy assessment, and at others
will be making devolved strategy type decisions.
4. Implementer and Controller. Once decisions have been taken the manager has a
major role to play in making them happen. This involves allocating resources and is
typically thought of as being the major role a manager has to perform, but in fact it is
only one of several, and it may not consume most time. As well as allocating
resources, the manager has to monitor how effectively resources are being utilized,
and this means that systems must be set up which adequately measure performance.
5. Communicator. As new information becomes available and competitive conditions
change the manager has to ensure that everyone is kept aware of changes in direction
as far as possible.

There might be some conflict between the roles.

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 MODULE THREE: COMPANY OBJECTIVES
3.1 Setting Objectives
It is often difficult for managers to answer the fundamental question ‘What are we trying to
achieve?’ Managers may well ask whether it really does help matters to have some overall
objective for the company, given that it is difficult enough to survive from day to day and
to meet long term targets. However, all organizations need to have some understanding of
what they are trying to achieve; otherwise, their actions may as well be random. In fact, the
confusion between plans and objectives pervades many areas of activity. At the level of the
company, some managers become so involved in the planning process that they overlook
what it is meant to achieve; there is a danger that managers confuse the means by which
ends are to be achieved with the ends themselves.
Since strategy is partly concerned with confrontation with competitors, it is not advisable
for company objectives to be explicit. So, balance between informing managers about
objectives and ensuring that competitors cannot pre-empt strategic moves is essential. The
mission statement can be an important dimension of the company objective because it
captures the attitudes and expectations of employees and provides a general focus for its
activities with which people can identify.
Whether the mission statement is a powerful, visionary focus for company activity, or
whether it is no more than a meaningless compromise depends on the individual
circumstances.
3.2 From Vision to Mission to Objectives
One of the primary roles of the CEO is to develop a long-term view of what the company
is about and the markets within which it should be operating. This is the vision which is
not expressed in detailed terms and is perhaps no more than a broad thrust within which
the company will be directed.
The vision is the long-term and high-level view of what the company is about, what
markets it should be in and where it should be going. To translate this vision into a tangible
set of directions which can be used by employees, there are a number of steps:
➢ Develop the mission statement.
➢ Disaggregate the mission.
➢ Derive objectives.
The mission statement needs to have several characteristics including the following.
➢ Serve as a definition of the business the organization is in.
➢ Be clearly understood by employees.
➢ Provide a focus for activities.
3.2.1 Defining the Business of the Organization
It is not always obvious what the business definition is. For example of service provider,
the executive board of a football club may run the club under the impression that they are

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 in the sport business; but if they realized that the club was really in the entertainment
business they would take a wider range of issues into account
For example of product market, Take the case of a soft drinks company
Few questions reveal differences in business definition
1. Does the company control all stages of production or does it purchase
o This question relates to the productive scope of the company
o The scope of the company also impacts on the skill set
2. Does the company control distribution and marketing channels?
o This question relates to the market positioning of the product
3. Does the company compete in the soft drinks or beverage market?
o This question relates to the breadth and focus of the business definition
4. Is the drink a stand-alone or is it also intended as a mixer?
o This question relates to the target markets.

3.2.2 Deriving the Mission Statement

Once the business definition has been arrived at it is possible to derive a statement of how
the company intends to operate within that business area. The statement may be related to
factors such as the following.
The quality of the company’s products;
The degree of differentiation;
The geographical area which it intends to serve;
The segment of consumers which it targets.
Sometimes mission statement is a description of what company is rather than providing
any new direction to employees. For example, the company may have been producing
own brand drinks to supermarkets since it began business, so the introduction of a
mission statement has virtually no impact on employees.
Sometimes mission is a statement of where senior management wishes the organization
to be at some point in the future. For example, a company might aspire to be the market
leader in terms of market share, and therefore the mission statement is based not only on
what business the company is in, but where it would like to be positioned within the
relevant market
3.2.3 Disaggregating the Mission
The mission statement for the company as a whole can be quite general, but it needs to be
modified and applied to individual parts of the organization to ensure, as far as possible,
that the focus of functional departments is aligned with the vision of the senior managers.
3.2.4 Setting Objectives
While the mission statement is stated in qualitative (aggregate) terms, objectives should
be clear and accompanied by performance targets. These introduce the concept of
accountability into the company. Once the general vision of the company has been

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 established, and the mission identified, it is necessary to determine what has to be
achieved for the mission to be successful.
In the absence of identifiable targets, the mission can have little operational significance
and will probably be acknowledged but largely ignored by managers at all levels. It is
also essential to ensure that objectives are consistent.
3.3 The Gap Concept
The gap concept is concerned with the difference between expected and desired future
states. What is expected to happen in the future if the business status quo is maintained and
what is expected when we take a specific course of action? There are two steps in
identifying a performance gap:
➢ Decide what the desired future state is at a specified time in the future (new
products, market shares, profitability, etc)
➢ Analyze the state the company is likely to be in at that time if no changes to
strategy are made.
The salient issue here is comparison of expected future states, and not comparison of the
current state with the desired future state. Once Performance Gaps have been identified,
there are three basic questions to address:
➢ Does the gap arise because of external or internal factors, i.e., is it the environment
or is it us?
➢ Which strategy alternative will close the gap?
➢ Does the company have the corporate ability to close the gap?
Gap analyses facilitate planning, decision making and resource deployment. The future
desired state must include objectives that match corporate ability, both quantifiable and
non-quantifiable. Broadly speaking, there are two reasons for the emergence of gaps:
Those within the control of the company.
➢ Internal gap constraints arise when the current allocation of resources is not
consistent with achieving the future desired state.
➢ Another internal gap factor arises when the resources available to the company
are insufficient in quantity or quality to achieve the desired objective.
Those factors outside
➢ The fact that gaps are due to external causes does not necessarily mean that the
company can do nothing about them, but those instances where they cannot be
fully counteracted need to be recognized.

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3.4 Credible Objectives
Setting objectives is partly dependent on past decisions and on the state of the company at
the moment, as well as on perceived market opportunities. The setting of realistic
objectives is a dynamic process which is constantly under review. For objectives to be
credible they must also be consistent.
3.5 Quantifiable and Non-Quantifiable Objectives
Company objectives can be expressed in terms of a single variable or in terms of a number
of components or characteristics. Some of these components are not readily measurable,
and hence it is reasonable to ask whether there are any guidelines which managers can use
in attempting to determine the relative importance of such intangible factors. Companies
can take an indirect approach to derive the relative value of unquantifiable objectives.
➢ The first step is to decide on a unit of account which is both measurable and
important to managers. An obvious contender is return on investment (ROI), since
at the end of the day the company must have a positive ROI to stay in business.
➢ Second, attempts can be made to determine how change in the non-quantifiable
objective is related to changes in ROI.
Non-quantifiable objectives can sometimes be translated into quantitative terms.
3.6 Aggregate Objectives
The corporate objectives that are part of the mission statement are aggregate objectives,
i.e., they apply to the overall company performance, market size, target markets, financial
structure etc. Objectives, such as ‘being in the transportation businesses, ‘innovative
design’, ‘maintain target ROI’ are aggregate objectives. It is difficult to visualize a single
objective which applies to a range of products and SBUs that is why aggregate objectives
are sometimes indistinguishable from mission statements.
3.7 Disaggregated Objectives
Disaggregated objectives are a translation into SBU level objectives such as ‘producing top
level trucks’, ‘maintain market share’, ‘cut costs’ etc. Converting corporate or aggregate

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 objectives to disaggregated realistic, consistent, and achievable, and make sense to
managers objective raises many difficulties.
3.8 The Principal/Agent Problem
There is no guarantee that the manager will place the company’s objectives high in his/ her
personal set of priorities. The root cause of the principal-agent problem is asymmetric
information: the agent always has more information than the principal. The problem may
really be with the contract between agent and principle and incentive system.
For example, a CEO may have a remuneration package including a bonus for growth in
current profits; to ensure that current profits continue to grow the CEO may reduce
expenditure on R&D, which has the effect of increasing current profit. However, this goes
at the expense of long-term competitiveness, and thus against the main objective of
increasing shareholder’s wealth.
3.9 Means and Ends
The distinction between means and ends is the difference between what is to be achieved
ought to be differentiated from how it is to be achieved.
As an alternative to specifying aggregate and disaggregated objectives, the process of
achieving a corporate objective could be set out as a series of means to achieve the desired
end as follows:
END
o Achieve 15 per cent ROI
MARKETING MEANS
o Achieve 23 per cent market share
o Improve quality
o Achieve more effective quality control
PRODUCTION MEANS
o Reduce unit cost by 4 per cent
o Stabilize labor force
o Improve sports facilities
Some managers might argue that the distinction between means and ends is merely
semantic issue and has no operational significance.
3.10 Behavioral versus Economic and Financial Objectives
There are two approaches to objectives stems economic approach (rational resource
allocation) or behavioral approach (efficient communication systems).
‘Economists’ in corporations believe that objectives should be expressed in economic or
financial terms, otherwise they cannot be related to market conditions and performance and
therefore proper feedback will be lacking. ‘Behaviorists’ argue that good communications
and labor conditions are the factors that put companies in a competitive position.
There is no right or wrong approach to setting objectives. The two approaches are
complementary, but it is impossible to say which comes first. The achievement of financial

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 objectives makes it possible to create the behavioral environment which makes it possible
to aspire to higher financial objectives which, etc.
3.11 Economic Objectives
The economist will always ask what is being maximized? If profit is made, is it the
maximum profit? We may be doing things right, but are we doing the right thing?
Activities, which are inconsistent with maximizing wealth, are deemed illogical. The
downside of the approach is that one cannot quantify everything that needs to be taken into
account.
3.12 Financial Objectives
The application of financial concepts makes it possible to quantify the profit maximization
objective.
3.12.1 Discounting and Present Value
It is the technique for converting streams of future positive and negative net cash flows
into current terms. By using the rate r of interest and the time period n, it is possible to
express a dollar in what is known as ‘present value’ terms.

3.12.2 Net Present Value

When an investment is undertaken, the cash flow pattern is usually negative at the
beginning, when the expenditures are made and positive thereafter when the investment
generates income, −A1 , A2 , A3 , . . . , An
The net present value (NPV) is found by summing the discounted streams of future
expenditure and income over the life of a project: where r = cost of capital to the
company

If the NPV is positive, the investment yields a value over its life, and is worth
considering.
3.12.3 Capitalized Value
The capitalized value of a stream of income is found by dividing the annual income by
the interest rate.

3.12.4 Choice of Interest Rate: The Cost of Capital

When carrying out NPV calculations it is necessary to select a rate of interest to use for
discounting. This interest rate is the cost to the company of raising money on the open
market, and this is usually termed the cost of capital. The cost of debt cannot be

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 determined on a historical basis; it is the cost of new debt which determines the true
present value of future cash flow streams.
The theory known as capital asset pricing provides a perspective on the appropriate
method of calculating and allowing for risk. The objective of this theory is to explain
what determines the value of a company’s shares by taking into account different forms
of risk, and it is an important part of modern finance theory. The value of the common
stock of a company can be interpreted as the capitalized value of the future expected
stream of income from the stock.
While there are many problems associated with measuring the appropriate cost of capital
for the company, it is important that the issues of the cost of debt, the risk-free rate and
the equity risk premium are taken into account.
3.12.5 Return on Investment
The profit maximization objective can be expressed as maximizing the rate of return on
investment
In practical terms this involves taking into account: a stream of investments over time,
changes in interest rates, liquidity and cash flow requirements, tax incidence, the
portfolio of assets, dividend payments, and many other considerations. Because of the
difficulty of reducing these complex calculations, managers tend to use measures which
can be calculated relatively easily

The main drawback associated with using ROI as a company objective is that the figures
for both asset values and income are historical. It therefore may not capture the income
earning potential of the company produced by recent investment. Furthermore, the figure
used for the value of assets is typically arbitrary, being the result of accounting
depreciation procedures. On the other hand, it is often contended that despite the
deficiencies of ROI, it still contains sufficient useful information for determining
company objectives.
Despite the difficulties associated with ROI it should not be dismissed as irrelevant to
decision making. While it may provide a misleading view of the rate of return on a single
investment, the average ROI for a company as a whole, which is comprised of returns
derived from many assets of various vintages, may be sufficiently accurate to monitor a
company’s performance.
3.12.6 Shareholder Wealth
This definition originates from the proposition that the primary objective of a company is
to maximize the wealth of the shareholders.

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 Shareholder wealth analysis is based on a detailed analysis of the revenue generating
potential of the various parts of the business, and hence may often bear little relation to
the market valuation.
There are several stages in estimating shareholder wealth:
Stage 1: Decide on the Planning Period
o The planning period is that period during which meaningful projections can be
made and is typically around five years in real life.
Stage 2: Determine the Cost of Capital
o The process of determining the cost of capital is described in section 3.12.4.
Stage 3: Decide on the Residual Cash Flow
o This is the constant net cash flow predicted after the end of the planning
period.
Stage 4: Determine the Cash Flows during the Planning Period
o This depends on investment and marketing strategies.
Stage 5: Calculate Net Present Value of Cash Flows during the Planning Period
o The process is explained in section 3.12.2.
Stage 6: Calculate the Present Capitalized Value of the Residual Cash Flow
o The process for calculating the capitalized value is explained in section 3.12.3
Stage 7: Add the Net Present Value, Capitalized Residual Value, Marketable Securities
minus Debt

3.13 Social Objectives

Corporate Social Responsibility (CSR) is another body of thought which takes the view
that companies should have objectives which are much broader in scope than simply
maximizing profits. Companies should seek minimisation of pollution and creating
employment for disadvantaged. CSR proponents (e.g Hayek) argue that unintended
consequences of human action may harm both company and society.
Classical economists such as Friedman argue that any goal other than profit maximisation
leads to misallocation of resources. The arguments against incorporating social objectives
into company objectives:
➢ The lack of efficiency criteria
➢ The self-interest of the shareholders
The underlying issue here is what is referred to by economists as ‘efficiency versus
equity’. The efficiency issue is concerned with maximizing the output of goods and
services. The equity issue is how the output should be distributed among members of
society.

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3.14 Stakeholders
Stakeholders are a variety of individuals and groups have an interest in the organization
and some influence on the way it is managed. Stakeholder extends well beyond the
shareholders, or owners of the company, to include managers, employees, customers,
suppliers, creditors, the local community and the government.
3.14.1 Stakeholder Interest and Influence
The main characteristic of this classification is that the interests of the different
stakeholders are completely different, and this raises the possibility of conflicts of interest.

Stakeholder Interest Stakeholder influence

Shareholders Shareholders can be regarded as the most Shareholders usually exert little influence on
important because they provide the capital for major company decisions or run from day to
the company day.
Shareholders direct resources to those Large companies have many shareholders, and
operations which provide the highest financial they are geographically isolated, coming
returns. together, if at all, only for the annual general
Shareholders control the supply of capital, meeting where power with CEOs
and if their interests are not met in the form of In smaller companies, family owned or has a
a rate of return which is comparable to other few partners, the shareholders have a direct
investment opportunities then the company influence on company operations and play
will most likely cease to exist. dual role of shareholders and managers, and
this negates the principal-agent problem.
Managers Managers are charged with the responsibility Influence of managers increases with the size
of determining the direction, scope and of the company and the influence of
effectiveness of the business. they are shareholders diminishes.
responsible for the allocation of resources and Aligning management incentive with
deployment of capital. shareholders interest is important but difficult
Aligning can be done by stock options or non-
executive board members
Employees The success of the company depends on the It is not so much the direct influence of
productive effort of employees. employees on company decision making,
which is important, but the extent to which
they are able and willing to collaborate in the
changes which strategic decision making
involves.
Employees can influence the company in
different ways like strikes and trade unions.
Suppliers Priority depends on the number of suppliers The important considerations are the number
which the company uses and availability of of suppliers and the availability of substitutes
substitutes.
It may be that a long-term relationship has
been developed with certain suppliers which
provide security of supplies, flexibility and so

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 on. But it has to be recognized that there are
costs as well as benefits in such a relationship
Customers Customers are crucial to the success of the The number of customers or customer groups
company, but as a stakeholder in companies, largely determines customer influence. On the
they are less important. other hand, if there are few substitutes for the
company’s products this power will be greatly
diminished.
Creditors Creditors have no other interest in the Companies build relationships with sources of
company than that their debts will be credit, such as banks, so that they can rely on a
serviced. fast and fairly sympathetic reaction to credit
requirements.
In principle, the influence the bank has is to
decide whether to provide a loan, and it does
this in competition with other banks.
The fact that the company is highly geared
may constrain its activities, but it is difficult to
see how the creditor can exert direct influence
on the company unless it has put the creditors’
funds at risk.
Local Companies depend on their local community The influence of the local community is in the
communities for employees, services, land, planning form of a series of constraints.
permission and so on; the local community If the company pollutes the locality, it will
depends on the company for employment and probably have difficulty obtaining permission
the creation of wealth. There is no doubt that for expansion.
the local community has a valid stakeholder
interest, and this needs to be taken into
account in company decision making.
Governments In a market economy the role of the Apart from regulation, the government can
government is to set the rules of the game and influence companies by its own role as a
monitor that they are being adhered to. purchaser and its policies on subsidies and
trade.

3.14.2 Mapping Stakeholders

Stakeholder influence and priority can have a significant
impact on how an organization operates and on its potential
for change. The influence of the individual stakeholders
needs to be identified and prioritized. Then we map out the
perceived influences. An organizational change which is
not accompanied with some form of stakeholder mapping
may well run into constraints which could have been
identified well in advance.

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3.15 Ethical Considerations
Moral behavior is difficult to define for companies and for managers. The manager may
find it counter-productive to take a stand for the sake of principle when that principle is
based on a series of dubious premises. Not only is it virtually impossible to incorporate
ethical issues into company objectives, but surveys report that practicing managers have
little idea of what ethical behavior should be. Many felt that performing well and being
loyal to the company constituted behaving ethically, while less than one third of employees
believed that their companies respected employees who blew the whistle on unethical
practices.
Managers should attempt to be clear about the distinction between means and ends. A
related issue is whether a particular means justifies a particular end. Moral issues are never
simple to resolve. It is argued that companies which attempt to meet social rather than
profit related objectives may do more harm than good, and in that sense their well-meaning
attempts could be regarded as immoral.
Some companies impose a code of ethics on their employees, such as never accepting
bribes. This is somewhat difficult to enforce in countries where bribery is socially
acceptable and is not seen as immoral behavior.

3.16 SMART Objectives

SMART stands for Specific, Measurable, Achievable, Relevant and Time-bound.
A useful acronym that captures many of the dimensions of objectives discussed above is
SMART which stands for Specific, Measurable, Achievable, Relevant and Time-bound.
Some versions use ‘Realistic’ instead of ‘Relevant’, but there is not much difference
between ‘Achievable’ and ‘Realistic’, while ‘Relevant’ has a particular strategic
implication.
Specific objectives are unambiguous and convey what outcome, action or behavior is
required.
Measurable is the ability to evaluate achievement using numbers, rates, frequencies or
percentages.
Achievable objectives are those which employees believe can be reached.
Relevant objectives are linked to the organization’s strategy and achievement of the
objective is seen to move the business towards its goals. The more clearly aligned with the
wider success of the organization, the more motivated people are likely to be in achieving
the objectives. On the other hand, targets which are not aligned (or the alignment is not
clarified) are unlikely to be taken seriously.
Time-bound: the progress towards the objectives can be measured against an agreed time
frame, not only for the ultimate deadline but for stages along the way.

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