Essentials of Strategic Management 3e

CHARTING A COMPANYSDIRECTION: VISION AND MISSION, OBJECTIVES, AND STRATEGYCopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin2chapter1LO1Grasp why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.LO2Understand the importance of setting both strategic and financial objectives.LO3Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.LO4Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently.LO5Become aware of the role and responsibility of a companys board of directors in overseeing the strategic management process.2-#What Does the Strategy-Making,Strategy-Executing Process Entail?Developing a strategic visionSetting objectivesCrafting a strategyImplementing and executing the chosen strategyMonitoring developments, evaluating performance, and initiating corrective adjustments2-#

FIGURE 2.1The Strategy-Making, Strategy-Executing Process

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TABLE 2.1Factors Shaping Decisions in the Strategy-Making, Strategy-Executing ProcessExternal ConsiderationsInternal ConsiderationsDoes sticking with the companys present strategic course present attractive opportunities for growth and profitability?Does the company have an appealing customer value proposition?What kind of competitive forces are industry members facing and are they acting to enhance or weaken the companys prospects for growth and profitability?What are the companys competitively important resources and capabilities and are they potent enough to produce a sustainable competitiveadvantage?What factors are driving industry change and what impact on the companys prospects will they have?Does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats?How are industry rivals positioned and what strategic moves are they likely to make next?Are the companys prices and costs competitive with those of key rivals?What are the key factors of future competitive success and does the industry offer good prospects for attractive profits for companiespossessing those capabilities?Is the company competitively stronger or weaker than key rivals?2-#Factors Shaping Strategic DecisionsExternal ConsiderationsWhat are the industrys economic characteristics?How strong are the competitive forces at play?What forces are driving change in the industry?What market positions do rivals occupy and what moves are they likely to make next?What are the key factors for future competitive success?What are the companys external opportunities?2-#Factors Shaping Strategic DecisionsInternal ConsiderationsHow well is the present strategy working?What are the companys competitively valuable resources, capabilities, and internal weaknesses?Are the companys prices and costs competitive?Is the company competitively stronger or weaker than key rivals?2-#Stage 1: Developing a Strategic Vision,a Mission, and Core ValuesStrategic VisionIs top managements views about the firms direction and future product-market-customer-technology focusProvides a panoramic view of where we are goingIs distinctive and specific to a particular organizationAvoids use of innocuous uninspiring language that could apply to most any firmDefinitively states how the companys leaders intend to position the firm beyond where it is today2-#Characteristics of Effectively Worded Vision StatementsGraphicPaints a picture of the kind of firm that management is trying to createDirectionalIs forward looking to changeFocusedIs specific enough to provide guidance in decision making

FlexibleIs not so focused that it makes it difficult to adjustFeasibleIs within the realm of what is possibleDesirableIndicates why the directional path makes senseEasy to CommunicateCan be explained in simple terms2-#

TABLE 2.2Characteristics of Effectively Worded Vision StatementsGraphicPaints a picture of the kind of company that management is trying to create and the market position(s) the company is striving to stake out.DirectionalIs forward looking; describes 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.FocusedIs specific enough to provide managers with guidance in making decisions and allocating resources.FlexibleIs not so focused that it makes it difficult for management to adjust to changing circumstances in markets, customer preferences, or technology.FeasibleIs within the realm of what the company can reasonably expect to achieve.DesirableIndicates why the directional path makes good business sense.Easy to communicateIs explainable in 5 to 10 minutes and, ideally, can be reduced to a simple, memorable slogan2-#

TABLE 2.3Common Shortcomings in Company Vision StatementsVague or incompleteShort on specifics about where the company is headed or what thecompany is doing to prepare for the future.Not forward lookingDoesnt indicate whether or how management intends to alter the companys current product-market-customer-technology focus.Too broadSo all-inclusive that the company could head in most any direction, pursue most any opportunity, or enter most any business.Bland or uninspiringLacks the power to motivate company personnel or inspire shareholderconfidence about the companys direction.Not distinctiveProvides no unique company identity; could apply to firms in any of several industries (including rivals operating in the same market arena).Too reliant on superlativesDoesnt say anything specific about the companys strategiccourse beyond the pursuit of such distinctions as being a recognized leader, a global or worldwide leader, or the first choice of customers.2-#Concepts and Connections 2.1Examples of Strategic VisionsHow Well Do They Measure Up?

2-#Concepts and Connections 2.1Examples of Strategic VisionsHow Well Do They Measure Up?

2-#Examples of Vision StatementsTo extend our position as the most trusted Linux and open source providerthrough a complete range of enterprise software, a powerful Internet platform, and associated support and services.Red Hat

Provide a global trading platformwhere practically anyone can tradepractically anything.

To be the global leader in customer value.

2-#Strategic Inflection PointsA change in vision is required when it becomes evident to management that the industry has changed in a significant way that renders the companys current vision obsolete. Core Concept 2-#The Importance of Communicating the Strategic VisionAn engaging, inspirational visionChallenges and motivates the workforceArticulates a compelling case for where we are going and whyEvokes positive support and excitementArouses a committed organizationaleffort to move in a common direction2-#16Expressing the Essence of the Vision in a SloganNikeTo bring innovation and inspiration to every athlete in the worldThe Mayo ClinicThe best care to every patient every dayGreenpeaceTo halt environmental abuse and promote environmental solutions.2-#Why a Sound, Well-Communicated Strategic Vision MattersIt crystallizes senior executives own views about the firms long-term direction.It reduces the risk of rudderless decision making by management at all levels.It is a tool for winning the support of employees to help make the vision a reality.It provides a beacon for lower-level managers in forming departmental missions.It helps an organization prepare for the future.2-#Strategic Vision versus Mission StatementA strategic vision concerns a firms future business pathwhere we are going Markets to be pursuedFuture product/ market/customer/technology focusThe mission statement of a firm focuses on its present business purposewho we are and what we doCurrent product and service offeringsCustomer needs being served2-#Developing a Company Mission StatementIdeally, a company mission statement is sufficiently descriptive to:Identify the companys products or services.Specify the buyer needs it seeks to satisfy.Specify the customer groups or markets it is endeavoring to serve.Specify its approach to pleasing customers.Give the company its own identity.2-#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.Example of a Mission Statement

2-#Examples of Mission Statements

To help people and businesses throughout the world realize their full potential.To organize the worlds information and make it universally accessibleand useful.

2-#Strategic Mission, Vision, and ProfitFirms sometimes state that their mission is to simply earn a profit.Profit is the obvious intent of every commercial enterprise.Profit is not who we are and what we do.Profit is more correctly an objective and a result of what a firm does.2-#Linking the Strategic Vision and Mission with Company ValuesCORE CONCEPTA firms values are the beliefs, traits,and behavioral norms that the firms personnel are expected to display in conducting the firms business and pursuing its strategic vision and mission.2-#CONCEPTS & CONNECTIONS 2.2ZAPPOS MISSION AND CORE VALUESDeliver Wow through ServiceEmbrace and Drive ChangeCreate Fun and a Little WeirdnessBe Adventurous, Creative, and Open MindedPursue Growth and LearningBuild Open and Honest Relationships withCommunicationBuild a Positive Team and Family SpiritDo More with LessBe Passionate and DeterminedBe Humble2-#Stage 2: Setting ObjectivesWhy set objectives?To convert the strategic vision into specific performance targetsTo create yardsticks to track progress and measure performanceObjectives should:Be well-stated (clearly worded)Be challenging, yet achievable in order to stretch the organization to perform at its full potentialBe quantifiable (measurable)Contain a specific deadline for achievement2-#Objectives are an organizations performance targetsthe results management wants to achieve. Core Concept 2-#Stage 2: Setting Objectives (contd)What Kinds of Objectives to SetFinancial objectivesCommunicate managements targets for financial performanceAre lagging indicators that reflect the results of past decisions and organizational activitiesRelate to revenue growth, profitability, and return on investment2-#Stage 2: Setting Objectives (contd)What Kinds of Objectives to SetStrategic objectivesAre related to a firms marketing standing and competitive vitalityAre leading indicators of a firms future financial performance and business prospects.If achieved, indicate that a firms future financial performance will be better than its current or past performance.2-#The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. Core Concept 2-#

TABLE 2.4The Balanced Scorecard Approach to Performance MeasurementFinancial ObjectivesStrategic ObjectivesAn x percent increase in annual revenuesAnnual increases in earnings per share of x percentAn x percent return on capital employed (ROCE) or shareholder investment (ROE)Bond and credit ratings of xInternal cash flows of x to fund new capital investmentWinning an x percent market shareAchieving customer satisfaction rates of x percentAchieving a customer retention rate of x percentAcquire x number of new customersIntroduction of x number of new products in the next three yearsReduce product development times to x monthsIncrease percentage of sales coming from new products to x percentImprove information systems capabilities to give frontline managers defect information in x minutesImprove teamwork by increasing the number of projects involving more than one business unit to x2-#Examples of Financial ObjectivesX% increase in annual revenuesX% increase annually in after-tax profitsProfit margins of X%X% return on capital employed (ROCE)Sufficient internal cash flows to fund 100% of new capital investment2-#32Examples of Strategic ObjectivesWinning an X% market shareAchieving a customer retention rate of X%Acquire X number of new customersReduce product defects to X%Introduction of X number of new products in the next three yearsIncrease employee training to X hours/yearReduce turnover to X% per year 2-#33Examples of Company ObjectivesGeneral Motors Reduce the percentage of automobiles using internal combustion engines through the development of hybrids, range-extended electric vehicles, and hydrogen fuel cell electric engines.Reduce automotive structural costs to benchmark levels of 23% of revenue by 2012 from 34% in 2005.Reduce annual U.S. labor costs by an additional $5 billion by 2011.

2-#Examples of Company ObjectivesThe Home DepotBe the number one destination for professional contractors.Improve in-stock positions so customers can find and buy exactly what they need.Deliver differentiated customer service and the know-how that our customers have come to expect.Repurchase $22.5 billion of outstanding shares during 2008.Open 55 new stores with 5 store relocations in 2008.

2-#Short-Term and Long-Term ObjectivesShort-Term ObjectivesTargets to be achieved soonMilestones or stair steps for reaching long-range performanceLong-Term ObjectivesTargets to be achieved within 3 to 5 years2-#The Need for Objectives at All Organizational LevelsObjectives Are Needed at All LevelsSet business-level objectivesEstablish functional-area objectivesSet operating-level objectives lastLong-term objectives take precedence over short-term objectives2-#Stage 3: Crafting a StrategyCrafting a strategy means asking:How to attract and please customersHow to compete against rivalsHow to position the firm in the marketplace and capitalize on attractive opportunities to grow the businessHow best to respond to changing economic and market conditionsHow to manage each functional piece of the businessHow to achieve the firms performance targets2-#

A Firms Strategy-Making HierarchyA firms strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy Crafting strategy is a collaborative effort that:Involves managers from various levels of the organizationIs rarely something only high-level executives engage inRequires choosing among the various strategic alternatives2-#In most firms, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only high-level executives do. Concept to Action 2-#Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multibusiness firm.Business strategy is primarily concerned with strengthening the firms market position and building competitive advantage in a single business company or a single business unit of a diversified multibusiness corporation. Concept to Action 2-#

FIGURE 2.2A Companys Strategy-Making Hierarchy2-#Corporate Strategy versus Business StrategyCorporate strategy is orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company.Business strategy is primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company.2-#The Strategy-Making HierarchyCorporate strategyIs orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company. Addresses the questions of how to capture cross-business synergies, what businesses to hold or divest, which new markets to enter, and how to best enter new marketsby acquisition, creation of a strategic alliance, or through internal development.Business strategyIs primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company.Functional-area strategiesAre concerned with the strategies specifically related to particular functions or processes within a business (marketing strategy, production strategy, finance strategy, customer service strategy, product development strategy, and human resources strategy).Operating strategiesAre relatively narrow strategic initiatives and approaches of limited scope for managing key operating units (plants, distribution centers, geographic units) and specific operating activities such as materials purchasing or Internet sales.2-#Stage 4: Implementing and Executing the Chosen StrategyManaging the strategy execution process involves:Staffing the organization to provide needed skills and expertise.Allocating ample resources to activities critical to good strategy execution.Ensuring that policies and procedures facilitate rather than impede effective execution.Installing information and operating systems that enable personnel to perform essential activities.2-#Stage 4: Implementing and Executing the Chosen Strategy (cond)Managing the strategy execution process involves:Pushing for continuous improvement in how value chain activities are performed.Tying rewards and incentives directly to the achievement of performance objectives.Creating a company culture and work climate conducive to successful strategy execution.Exerting the internal leadership needed to propel implementation forward.2-#Stage 5: Evaluating Performance and Initiating Corrective AdjustmentsTriggering change as needed:Monitoring new external developmentsEvaluating the firms progressMaking corrective adjustmentsManaging strategy is an ongoing process, not an every-now-and-then taskA firms vision, objectives, strategy, and approach to strategy execution are never final2-#Corporate Governance: The Role of the Board Of DirectorsThe Role of the Board Of Directors in the Strategy-Making, Strategy-Executing Process:Oversee the firms financial accounting and reporting practices.Diligently critique and oversee the companys direction, strategy, and business approaches.Evaluate the caliber of senior executives strategy-making and strategy-executing skills.Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests.2-#Strong Boards Lead to Good Corporate GovernanceA Strong, Independent Board of Directors:Is well informed about the companys performanceGuides and judges the CEO and other top executivesHas the courage to curb management actions it believes are inappropriate or unduly riskyCertifies to shareholders that the CEO is doing what the board expectsProvides insight and advice to managementIs intensely involved in debating the pros and cons of key decisions and actions2-#Leading the Strategic Management ProcessThe Strategic Management Process calls for six managerial actions:Making sure the company has a good strategic planStay on top of what is happening (MBWA)Putting constructive pressure on organizational units to achieve good results2-#Leading the Strategic Management Process (contd)The Strategic Management Process calls for six managerial actions:Pushing corrective actions to improve both the firms strategy and how well it is being executedLeading the development of better competitive capabilitiesDisplaying ethical integrity and leading social responsibility initiatives2-#Making Sure a Firm Has a Good Strategic PlanResponsibility of CEOEffectively communicate the vision, objectives, and major strategy componentsExercise due diligence in reviewing lower-level strategies for consistency with higher-level strategies2-#Staying on Top of How Well Things Are GoingStay connected to the field by managing by walking around (MBWA)Insist that top managers spend time in the trenches to exchange information and ideas through face-to-face contact with employeesPrevent overly abstract thinking and getting disconnected with reality of whats happening2-#Pushing for Good Results and Operating ExcellenceFosters a resultsoriented, high-performance cultureTreat employees with dignity and respectEncourage employees to use initiative and creativity in performing their workSet stretch objectives and clearly communicate expectationsFocus attention on continuous improvementReward high performanceCelebrate successes2-#Initiating Corrective Actions to Improve Strategy and ExecutionThe leadership challenge of making corrective adjustments is twofold: Deciding when adjustments are neededDeciding what adjustments to makeLeaders responsibility is to step forward and push corrective actions2-#Leading Social ResponsibilityThe strength of management commitment determines whether a company will implement and execute a full-fledged strategy of social responsibility that:That protects the environment Actively participates in community affairs Supports charitable causesSupports workforce diversity and the overall well-being of employees

2-#Displaying Ethical IntegrityThe CEO and other senior executives must set an excellent example in their own ethical behavior.Top management must declare unequivocal support of the companys ethical code. Top management must be prepared to act swiftly and decisively in punishing ethical misconduct.2-#Leading the Development of Better Competitive CapabilitiesLead efforts to strengthen existing competitive capabilitiesAnticipate changes in customer-market requirements Proactively build new competencies and capabilities that hold promise for building an enduring competitive edge 2-#