Strategic Management

Chapter # 2…..Part 2

Strategy Formulation, Execution, and Governance

 Stage 3: Crafting a Strategy
• Strategy Formulation Involves Managers at All Organizational
Levels
• The CEOs, high-ranking executives, and board members are chief
architects of the company’s strategy
• Leaving strategy making to the Top Management is a mistake !
• In companies that span across different industries, products and
geographical areas, HQs usually don’t know much about the PESTEL
conditions affect the companies’ strategic options
• So, top management at HQs should delegate considerable strategy-
making authority to down-the-line managers
Stage 3: Crafting a Strategy
 Stage 3: Crafting a Strategy
• A Company’s Strategy-Making Hierarchy
• In a diversified, multi-business company rafting a full-fledged
strategy involves 4 distinct types of strategic actions and initiatives,
each undertaken at different levels of the organization and crafted by
managers at different organizational levels
• The 4 strategic actions and initiatives are:
• Corporate strategy
• Business strategy
• Functional-area strategy
• Operating strategy
 Stage 3: Crafting a Strategy
• A Company’s
Strategy-Making
Hierarchy
 Stage 3: Crafting a Strategy
• Corporate Strategy
• Architects: CEO and other senior executives
• They establish the overall companywide game plan or road map for
a managing a set of businesses
• Corporate strategy addresses the questions like:
• what businesses to hold or divest
• which new markets to enter
• how to best enter new markets
• To diversify or consolidate
• Pursue horizontal or vertical integration
 Stage 3: Crafting a Strategy
• Business Strategy
• Architects: Corporate-level executives & the key business-unit heads
• Focuses on how to strengthen market position and build competitive
advantage for the business unit
• In single-business companies, the corporate and business levels of the
strategy-making hierarchy merge into a single level—business strategy
• 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
 Stage 3: Crafting a Strategy
• Functional Strategy
• Functions of a business: Research and development (R&D),
production, procurement of inputs, sales and marketing, distribution,
customer service, and finance
• Architects: Heads of the functional areas but general manager of the
business has final approval-giving authority
• Concern the actions related to particular functions or processes within
a business
• A company’s product development strategy, for example, represents
the managerial game plan for creating new products that are in tune
with what buyers are looking for
 Stage 3: Crafting a Strategy
• Operating Strategy
• Architects: Frontline managers, subject to the review and approval of
higher-ranking managers

• Concern the relatively narrow strategic initiatives and approaches for

managing key operating units (plants, distribution centers, geographic
units) and specific operating activities (e.g., quality control, materials
purchas- ing, brand management, Internet sales)
 Stage 3: Crafting a Strategy
• Uniting the Strategy-Making Hierarchy
• It is the responsibility of top executives to achieve this unity by clearly
communicating the company’s vision, mission, objectives, and major
strategy components to down-the-line managers and key personnel
• General rule: strategy making must start at the top of the organization,
then proceed downward from the corporate level to the business level,
and then from the business level to the associated functional and
operating levels
• Once strategies up and down the hierarchy have been created, lower-
level strategies must be scrutinized for consistency with and support of
higher-level strategies.
A Strategic Vision + Mission + Objectives + Strategy =
A Strategic Plan

• 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.
• In small, privately owned companies it is rare for strategic plans
to exist in written form.
Stage 4: Implementing and Executing the Chosen
Strategy
• Managing the strategy execution process includes:
• Creating a strategy-supporting structure.
• Staffing the organization to obtain needed skills and expertise.
• Developing and strengthening strategy-supporting resources and
capabilities.
• Allocating ample resources to the activities critical to strategic success.
• Ensuring that policies and procedures facilitate effective strategy
execution.
• Organizing the work effort along the lines of best practice.
Stage 4: Implementing and Executing the Chosen
Strategy
• Managing the strategy execution process includes:
• Installing information and operating systems that enable company
personnel to perform essential activities.
• Motivating people and tying rewards directly to the achievement of
performance objectives.
• Creating a company culture conducive to successful strategy execution.
• Exerting the internal leadership needed to propel implementation
forward.
Stage 5: Evaluating Performance and Initiating
Corrective Adjustments
• Stage # 5: Decide whether to continue or change the company’s vision,
objectives, strategy, and/or strategy execution methods
• If everything is going smooth…. Stay on the course… Just fine tune the
strategic plan and strategy execution
• But whenever a company encounters disruptive changes in its environment,
questions need to be raised about the appropriateness of its direction and
strategy
• It is not unusual for a company to find that one or more aspects of its
strategy implementation and execution are not going as well as intended
• Successful strategy execution entails vigilantly searching for ways to improve
and then making corrective adjustments whenever and wherever it is useful
to do so
 Corporate Governance
• Corporate Governance: Board of directors’ four important corporate
governance obligations
1. Oversee the company’s financial accounting and financial reporting practices
• Board members have a fiduciary duty to protect shareholders by exercising
oversight of the company’s financial practices
• Corporate boards ensure that GAAP are properly used in preparing the
company’s financial statements and determine whether proper financial
controls are in place to prevent fraud and misuse of funds
• BoD monitor the financial reporting activities by appointing an audit
committee… composed of outside directors or outside + inside directors
• BoD consults the audit committee to ensure that financial reports are
accurate and adequate financial controls are in place
 Corporate Governance
• Corporate Governance: Board of directors’ four important corporate
governance obligations

2. Diligently critique and oversee the company’s direction, strategy, and

business approaches

• Directors must set aside time to guide management in choosing a

strategic direction and to make independent judgments about the
validity and wisdom of management’s proposed strategic actions
 Corporate Governance
• Corporate Governance: Board of directors’ four important corporate
governance obligations
3. Evaluate the caliber of senior executives’ strategy formulation and
strategy execution skills
• The board is always responsible for determining whether the current
CEO
is doing a good job of strategic leadership and whether senior
management is actively creating a pool of potential successors to the
CEO and other top executives.
• Outside directors go into the field to personally evaluate how well the
strategy is being executed
 Corporate Governance
• Corporate Governance: Board of directors’ four important corporate
governance obligations
4. Institute a compensation plan for top executives that rewards them
for actions and results that serve shareholder interests
• 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 company’s long-term performance and growing the
economic value of the enterprise on behalf of shareholders
• The compensation committee’s recommendations are presented to
the full board for approval.