Professional Documents
Culture Documents
Management Process
LO1.
LOz.
LO3.
LO4.
Become alvare of what a company must do to achieve operating exce[lence and to execute its strategy proficientty.
LO5.
execution
LO6.
to drive stratesv
fo rwa rd.
LO7.
Chapter
Crafting and executing strategy are the heart and soul of managing a business
enterprise. But exactly what is involved in developing a strategy and executing it proficiently? 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? In this chapter we
present an overview of the ins and outs of crafting and executing company
strategies. Special attention will be given to management's direction-setting
responsibilities-charting a strategic course, setting performance targets, and
choosing a strategy capable of producing the desired outcomes. We will also
explain why strategy making is a task for a company's entire management
team and discuss which kinds of strategic decisions tend to be made at which
levels of management. The chapter concludes with a look at strategic leadership by a company's board of directors and how good corporate Bovernance
protects shareholder interests and promotes good management.
2.
and focus.
5. Eoaluating
Figure 2.1 displays this five-stage process. The model illustrates the need for
management to evaluate a number of external and internal factors in deciding
IGURtr
2.
Part
One:
Table 2.1
EXTERNAL CONSIDERATIONS
NTERNAL CONSIDERATIONS
Chapter
The model shown in Figure 2.1 also illustrates the need for management
to evaluate the company's performance on an ongo.ing basis. Any indication
that the company is failing to achieve its objectives calls for corrective adjustments in one of the first four stages of the process. It's quite possible that the
company's implementation efforts have fallen short and that new taclics must
be devised to fully exploit the potential of the company's strategy. If management determines that the company's execution efforts are sufficient, it should
challenge the assumptions underlying the company's business strategy and
alter the strategy to better fit competitive conditions and the company's internal capabilities. If the company's strategic approach to competition is rated as
sound, then perhaps management set overly ambitious targets for the companv's performance.
The evaluation stage of the strategic management process shown in
Figure 2.1 also allows for a change in the company's vision, but this should
oniy be necessary when it becomes evident to management that the industry
has changed in a significant way that renders its vision obsolete. Such occasions can be referred to as strategic inflection points. When a company reaches
a strategic iflection point, management has some tough decisions to make
about the company's direction, because abandoning an established course caries considerable risk. However, responding to r-rnfolding changes in the marketplace in timely fashion lessens a company's chances of becoming trapped
in a stagnant or declining business or letting attractive new growth opportunities slip away.
The first three stages of the strategic management A company's sfuategc plan lays out its future
process make up a strategic pian. A shategic plan maPS direction, performance targets, and strategy.
out where a company is headed, establishes strategic
and financial targets, and outlines the competitive moves and approaches to
be used in achieving the desired business results.l
r of the
Top management's views about the company's direction and fufure productcustomer-market-technology focus are shaped by its views of the external
u,
iurt
Part
One:
instance, Henry Ford's vision of a car in every garage had power because it
captured the imagination of others, aided internal efforts to mobilize the Ford
Motor Company's resources, and served as a reference point for lauging the
merits of the companv's strategic actions.
Table 2.2
Craphic-Paints a picture of
Directional-ls forward looking; describes the strategic course tht nranalement has
charted and the kincls oi product-ma rke[-customer-tech nology changes that will help the
(ompdny prepare for lhe future.
Focused-ls specific enouglr to provide nranagers with guidance in making decisions and
allocating resou rces.
ls
,,r,hat
Desirable--lnd icates why the directional path makes good busrness sense.
Source: Based partfy on John P. Kolet, Lpdcling (-hrge (tioston: Harvard uusiness S.hool I'ress, '1996),
72.
Chapter
l9
Some could apply to most any company in anv industry. Manv read like a
public relations statement-lofty w,ords that someone came up with because
it is fashionable for companies to hav-e an official vision statement.s Table 2.3
provides a list of the most common shortcomings in companr vision statements. Like any tool, vision statements can be used properly or improperlyi
either clearLy conveying a company's strategic course or not. Concepts &
Connections 2.1 provicles a critique of the strategic visions of several prominent companies.
The mission statements of most companies say much The distinction between a strategc vision and a
morc about thc cntcrprisc's present business scope and mtssion statement is fairly clear-cut: A strategic
purpose-"rvho we are, n hat we do, and why we are vsion portrays a company's future business
here." Very felv mission statements are forwarcl look- scope ("where we are going") whereas a
ing in conient or emphasis. Consicler, for example, the comPany's mission typically describes its
purpose ("who we are,
mission statement of rrader Joe's (a specialt.v grocery T:-T lltli::sJald
cnarn)i
The mission of Trader Joe's is to give our customers the best food and ber.erage
valucs that thcy can find anylvhcrc and to pror.rde them with the information
required for informed buyrng decrsions. We providc thcsc r,r'ith a dcdication to
the highest quality clf customer satisfaction tlelivered lvith a sense of r+'armth,
friendliness, fun, individual pride, ancl company spirit.
, Hugh Davidson, The Commtted Enterprse (Oxford: Butterworth Heinemann, zooz), pp. zo
and s.
Table 2.3
incomplete Short on specifics about lvhere the company is headed or what the
company is doing to prepare for the future.
Vague or
Not forward looking-Doesn't indicate rvhether rr how ntanagernent inLends to alter the
cLlmpan,v's current product-market-customt:r-technology focus
Too broad-So .rll-irrclLrsive that the conrl:rany coulcl heacl in most any direction, pursuc
'rrr).1 ,rrr) uf-l,urlit) {rr ert-r 1r\l lrv llu.ie..
Bland or uninspiring-Lacks the por'ver to motivatc company pcrsonncl or inspirc share
holcler conficience alouL the conrDnv's cJirecLion,
Part
One:
WEtt
VISION STATEMENT
EfFECTIVE ETEMTNTS
.
.
.
.
.
servrceS.
Directional
snonrcomrlcs
Bland or
un Insprfl ng
Focused
Feasble
Desrable
Easy to
communicate
UBS
Caterpillar
Be the slobal leader in customer varue.
.
.
.
Focused
Feasible
Desirable
.
.
Not forwardlooking
Bland or
un Insprfl nE
.
.
.
Drectonal
Vague or
Desirable
Easy to
communicate
incomplete
Could apply
to many
companres In
many industrics
eBay
Provide a global trading platform where practically anyone can trade prctically anything.
Craphic
Flcxible
Easy to
Communicate
Too broad
Note that Trader Joe's mission statement does a good job of conveying "who
we are, what we do, and why we are here," but it provides no sense of "where
we are headed." (Some companies use the term business purpose instead of
mission statement i describing themselves; in acfual practice, there seems to
Chapter
mission
.
.
.
.
ldentif!
it
seeks
to satisfy.
it
is endeaaoring to serue.
Occasionally, companies state that their mission is to simply eam a profit. This
is misguided. Profit is more correctly an objectioe and a result of what a com-
pany does.
An example of a well-stated mission statement with ample specifics about
what the organization does is that of the Occupational Safety and Health
Administration (OSHA): "to assure the safety and health of America's workers by setting and enforcing standards; providing training, outreach, and
education; establishing partnerships; and encouraging continual improvement in workplace safety and health." Google's mission statement, while
short, still captures the essence of what the company is about: "to organize
the world's information and make it universally accessible and useful." An
example of a not-so-revealing mission statement is that of Microsoft. "To
help people and businesses throughout the world realize their full potential" says nothing about its products or business makeup and could apply
to many companies in many differeni industries. A mission statement that
provides scant indication of "who we are and what we do" has no apparent
value.
99
Pat.l
One:
Tr,vo r.erv
frnancial
estab-
Strate
that
business
prospects.
future
Robert S. Kaplan and Davld P Norton, The Strotegy Focused Organization (Boston: Harvard
Business School Press,2ool), p. 3.
Chapter
highly suspect.
2OO9.
,Information posted on the Web ste of Balanced Scorecard Institute, accessed May 27,2oo9.
Part
Ore:
General Motors
Reduce the percentage of automobiles using conventional
internal combustion engines (lCE) through the develop-
Avon
Be the number one destination for professionaL contractors, whose business accounted for roughly 30 percent
,f
Chaptcr
96
Table 2.4
TINANCIAT OBIECTIVES
An x perccnt Incrcase
tn.innual revenLtes
Annual increases in
.
.
.
ofx
Internal cash floivs of
x to fund ne$, capjtal
nvestmenI
STRATECtC OBIECTTVES
..lr.r percett
market share
Achieving customer
satisfact on rates of
x percent
Achieving a customer
retention rate of
x percent
Acquire x rrunrber of
Winning
Increase Percentcrge
new'cLts[omeTS
Introduction of x
numbcr of ncw
proclucts in the next
three yea rs
Reduce product
ness unrt to x
dcvclopmcnt timcs
to x nronths
Part
One:
FIGURE 2.2
stretegy-Making Hiererchy
br
Two-way Influence
Orchestrated by brand
managers; the operating
Two-Way Inf,uence
managers of ptants,
Chapter
98
Part
One:
.
.
.
.
.
.
.
.
Chapter
to achieve good
4.
5.
6.
things that the CEO and other topJevel executives should do in leading the
development of a good shategic plan. One is to efectioely communicate the
cofttpany's oision, objectirtes, and major strtery components to down-the-Iine
managers and key personnel. The greater the numbers of company personnel who know, understand, and buy into the company's long-term direction
and overall strateg, the smaller the risk that organization units will go off in
conflicting strategic directions. The second is to exercise due diligence in retiewitrg lower-Ieael strategies 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
higherJevel strategy to accommodate what may be more appealing strategy
ideas and initiatives bubbling from below. Anything less than a unified colIection of strategies weakens the ooerall strategy and is likely to impair company
performance.
GOING
One of the
best ways for executives to stay on top of the strategy execution process is
by making regular visits to the field and talking with many different people at many different levels-a technique often labeled managing by ualking around (MBWA). Walmart executives have had a long-standing practice
Part
One:
and
talking with store managers and employees. Sam Walton, Walmart's founder,
insisted, "The key is to get out into the store and listen to what the associates have to say." fack Welch, the highly effective CEO of General Electric
(GE) from 1980 to 2001, not only spent several days each month personally
visiting GE operations and talking with major customers, but also arranged
his schedule so that he could spend time exchanging information and ideas
with GE managers from all over the world who were attending classes at the
company's leadership development center near GE's headquarters. feff Bezos,
Amazon.com's CEO, is noted for his frequent facilities visits and his insistence
that other Amazon managers spend time in the trenches with their people to
prevent overly abstract thinking and getting discorurected from the reality of
what's happening.lo
Most managers practice MBWA, attaching great importance to gathering
information from people at diffeent organizational levels about how well
various aspects of the strategy execution process are going. They believe facilities visits and face-to-face contacts give them a good feel for what progress is
being made, what problems are being encountered, and whether additional
resources or different approaches may be needed. Just as important, MBWA
provides opportunities to give encouragement, lift spirits, shift attention frorn
old to new priorities, and create excitement-all of which help mobilize organizational efforts behind strategy execution.
.
.
.
.
.
Settin| stretch objectiaes and clearly communicating an expectation that company personnel are to gioe their best in achieuing performance targets.
Focusing attention on continuous improaement.
Llsing
r ezo ar d
the
effort.rr
Fred Vogelstein, "Winning the Amazon Way,' Foftune, May 26,2oo3, p.64.
leffrey Pfeffer, "Producing Sustainable Competitve Advantage through the Effective Management
of People," Academy of Manogement Executve 9, no. r (February 1995),
pp. 55-69.
'"
"
Chapter
I,FADING THE DEVELOPMENT OF' tsETTER COMPETITIVI CAPABILITI ES A company that proactively tries to strengthen its competitive
capabilities not only adds power to its strategy and to its potential for winning competitive advantage but also enhances its chances for achieving good
strategy execution and operating excellence. Senior management usually has
to lend the strengthening effort because competencies and competitive capabilities are spawned by the combined efforts of different work groups, departments, and strategic allies. The tasks of developing human skills, knowledge
bases, and intellectual assets and then integrating them to forge competitively
advantageous competencies and capabilities is an exercise best orchestrated
by senior managers who appreciate their significance and who have the clout
to enforce the necessary cooperation among individuals, groups, departments,
and extemal allies. Aside from leading efforts to strengthen existing competitive capabilities, effecve strateBy leadership also entails trying to anticipate
changes in customer-market requirements and proactively build neu competencies and capabilities that hold promise for building an enduring competitive edge over rivals. Senior managers are i the best position to see the
need and potential of such new capabilities and then to play a lead role in the
capability-building process.
Part
One:
First and foremost, the CEO and othcr senior executives must set an excellent example in their own ethical behavior, demonstrating character and
personal integrity in their actions and decisions. The behavior of senior
executives is always watched carefully, sending a clear message to company personnel regarding what the "real" standards of Personai conduct
arc.
Second, top managemcnt must declare unequivocal support of the company's ethical code and take an uncomPromising stand on expecting all
companv pcrsonnel to adhere to the company's ethical prncipies.
1.. ()aersee the companq's finnncial accounting and financial reporting practices.
White top management, particularly the company's CEO and CFO (chief
financial officer), is primarily responsible for seeing that the company's
financial statements accuratelv report the results of the companY's
Chapter
operations, board members have a fiduciary duty to protect shareholders by exercising oversight of the company's financial practices. In addition, corporate boards must ensure that generally acceptable accounting
principles (CAAP) 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. Virtually all boards
of directors monitor the financial reporting activities by appointing an
audit committee, always composed entirely of outside directors (irtside
directors hold management positions in the company and either directly
or indirectly report to the CEO). The members of the audit committee
have lead responsibility for overseeing the decisions of the company's
financial officers and consulting with both internal and external auditors to ensure that financial reports are accurate and adequate financial
controls are in place. Faulty oversight of corporate accounting and financial reporting practices by audit committees and corporate boards during the early 2000s resulted in the federal investigation of more than 20
major corporations between 2000 and 2002. The investigations of such
well-known companies as AOL Time Warner, Clobal Crossing, Enron,
Qwest Communications, and WorldCom found that upper management
had employed fraudulent or unsound accounting practices to artificially
inflate revenues, overstate assets, and reduce expenses. The scandals
resulted ir the conviction of a number of corporate executives and the
passage of the Sarbanes-Oxley Act of 2002, which tightened financial
reporting standards and created additional compliance requirements for
public boards.
2.
Be inquiring critics and ooersee the company's direction, stratery, and business
npproaches. Even though board members have a legal obligation to war-
rant the accuracy of the company's financial reports, 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. Many boards have for.rnd that meeting
agendas become consumed by compliance matters and little time is left
to discuss matters of strategic importance. The board of directors and
management at Philips Electronics hold annual two- to three-day retreats
devoted exclusivelv to evaluating the company's long-term direction and
various strategic proposals. The company's exit from the semiconductor
business in 200 and its increased focus on medical technology and home
health care resulted frorn rnanagement-board discussions during such
retreats.ls
3.
'rAs discussed n Jay W. Lorsch and Robert C. Clark, "Leading from the Boardroom," Horvord 8us'
ness Review 86, no. 4 (April zoo8), pp. ro5-rrr.
'4lbd.. o. 110.
Executive compensation in the financiat services industry during the mid-2ooos ranks high among examples
of failed corporate governance. Corporate governance at
the gove rnment-sponso red mortgage giants Fannie Mae
and Freddie Mac was particularly weak. The politically
appointed boards at both enterprises faiLed to understand the risks of the subprime loan strategres berng
Commission investigators
oI
GSE
$6.3
illio n.
Both organizations were placed into a conservatorship under the direction of the U.S. governrnent in
September 2oo8 and were provided bailout funds of
nearly $60 billion by April zoog- In lMay zoo9, Fannie Mae
had requested another $r9 bitlion of the $4oo blllon
cornmitted by the U.S. government to cover the operating losses of the two government-sponsored mortgage
firms. As of iune zoo9, the U.S. government has spent
more than $2.5 trilLion to bail out flnancial institutions
damaged by the subprime mortgage market and other
risky loans and had made commitments totaling $rz.z
trillion to provide long-term stabiIity to the financial services in d ustry.
Sources: "Adding Up the Governments TotaL Bailo!t Tab,"
Net York Timcs Onlnc, Febtuav 4, 2oo9; Eic Dasn,
"Fannie Mae to Rstate ResuLts by $6.3 biLlion because of
Accounting," Ncw York Timcs Orllne, wwo.nytlmes.com,
December 7, 2006; Anys 5hn, "Fann e fl4ae lets Executrve
Salaties," Woshingtolr Pos, Fbruary 9, 2006, p. D4; and
Scott Decarlo, Eri. Weiss, .4ark Jlckling, and james R Crist e,
Fannie Moe ancl Fredclie ll,ac: Scondol in U.S. Housing
(Nova Publlshers, ?oo6j, pp ?66-286
Chapter
4.
Institute a conpensation
rate governance is that the owners of a corporation delegate operating authority and managerial control to top management in return for
compensation. In their role as an agent of shareholders, top executives
have a clear and unequivocal duty to make decisions and operate the
company in accord with shareholder interests (but this does not mean
disregarding the interests of other stakeholders, particularly those of
empkryees, with whom they also have an agency relationship). Most
boards of directors have a compensation committee, composed entirely
of outside directors, to develop salary and incentive compensation plans
that make it in the self-interest of executives to oPerate ihe business in
a manner that benefits the owners. It is also incumbent on the board
of directors to prevent managcmcnt from gaining executive perks and
privileges that simply line the financial pockets of executives. Concepts
& Connections 2.3 discusses how weak governance at Fannie Mae and
Freddie Mac allowed opportunistic senior managers to secure excessive,
if not obscene, compensation, while making decisions that imperiled the
futures of the companies they managed.
Every corporation should have a strong, independent board of directors that
(1) is well-informed about the company's performance, (2) guides and judges
the CEO and other top executives, (3) has the courage to curb management
actions they believe are inappropriate or unduly risky, (4) certifies to shareholders that the CEO is doing what the board expects, (5) provides insight and
advice to management, and (6) is intensely involved in debating the pros and
cons of key decisions and actions.l Boards of directors that lack the backbone
to challenge a strong-willed or "imperial" CEO or that rubberstamp most
anything the CEO recommends without probing inquiry and debate abandon
their duty to represent and protect shareholder interests.
'5
As discussed in Stephen P Kaufman, "Evaluating the CEO," Harvord Business Revew 86, no- 70
a discussion of what it takes for the corporate governance system to function properly, see
David A. Nadter, "Buildng Better Boards," Horuard Business Review 82, no. 5 (May 2oo4), pp.
1o2-1o5; Cyntha A. Montgomery and Rhonda Kaufman, "The Board's Missing Link," Harvord Business Review 8r, no. 3 (March zoo3), pp. 86-513; and John Carver, "What Contnues to Be Wrong
with Corporate Governance and How to Fix lt," lvey Business Journol 68, no. 1 (September/October
zoo3), pp. r-5. See atso Gordon Donaldson, 'A New Too[ for Boards: The Strategic Audr," Horvard
Busness Review 7J, no. 4 0uly-August
Kev Points
The strategic management process consists of five interrelated and integrated stages:
Dneloping a strategic ztision of where the company needs to head and what its future
product-customer-maket-technology focus should be. This managerial step prr>
vdes long-term directicn, infuses the organization with a sense of purpcsefr-rl acon,
and communicates to stakeholders management's aspiratioru for the company.
Setting objectiaes and using the targeted results as yardsticks for measuring the
company's performance. Objectives need to spell out ftoar much of what kind of
performance br when. Abalanced scorecard approach for measuring company performance entails setting bothJinancial objectioes and strategic objectixes.
Crafting a strategy to achime the objectiaes and move the company along the strategic
course that management has charted. The total strategy that emerges is really 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 fontlines. A
single business enteprise has three levels of strategy-business strategy for the
company as a whole, functional-aea 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. Typica-lly, the strategymaking task is more top-down than bottom-up, with higher-level strategies
serving as the guide for developing lowerJevel strategies.
Implementing and executing the chosen strategy effciently and {fectiaely. Managing the implementation and execution of strategy is an operatioru-oriented,
make-things-happen activity aimed at shaping the performance of core business
activities in a strategy supportive mrnnet Management's handling of the strategy implementation process can be consideed successful if things go smoothly
enough that the company meets or beats its strategic and financial performance
targets and shows good progress in achieving management's strategic vision.
5.
The sum of a company's strategic vision, obiectives, and strategy constitutes a strategic
plan.
J.
5.
6.
LO
1 1.
Using the information in Tables 2.2 and 2.3, critique the adequacy and merit of the
following vision statements, listing effective elements and shortcomings. Rank
the vision statements from best to worst once you complete your evaluation.
EFFECTIVE
ETEMENTS
VISION STATEMENT
wells targo
\ /c \\,ant to satisf,v
them
-.uc r
.
.
.
.
.
H.
l. Heinz Company
SHORTCOMINGS
Assurance
of Learning
Exercises
LO5
LO7
Meet with your co-managers and prepare a strategic vision statement for your
comPany. It should be at least one sentence long and no longer than a brief
para$aph. Whm you are finished check to see if your vision statement meets
the conditions for an effectively worded strategic vision set forth in Table 2.2 and
avoids the shortcomjngs set forth in Table 2.3. If not, then revise it accordingly.
What would be a good slogan that captures the essence of your strategic vision
and that could be used to help communicate the vision to company personnel,
shaeholders, and other stakeholders?
LOl
What are your company's financial objectives? What are your company's strate-
LOz
gic obiectives?
J.
LO3