Chapter One

Strategic
Leadership:
Managing the
Strategy-
Making
Process for
Competitive
Advantage
Copyright Houghton Mifflin Company. All rights reserved. 1 | 2
Chapter Outline:
+
Strategic Leadership, Competitive
Advantage, Superior Performance
+
Strategic Managers
+
Strategy-Making Process
+
Strategy as an Emergent Process
+
Strategic Planning in Practice
+
Strategic Decision Making
+
Strategic Leadership
Copyright Houghton Mifflin Company. All rights reserved. 1 | 3
Why do some organizations succeed
while others fail?
+
Strategic Leadership

Task of most effectively managing a

companys strategy-making process
+
Strategy Formulation
Task of determining and selecting strategies
+
Strategy Implementation
Task of putting strategies into action to improve a
companys efficiency and effectiveness
Competitive Advantage results when a
companys strategies lead to superior
performance compared to competitors
Strategy is a set of related actions that managers take to
increase their companys performance.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 4
Superior Performance and
Sustainable Competitive Advantage
+
Superior Performance
One companys profitability relative to that of other companies in
the same or similar business or industry
Maximizing shareholder value is the ultimate goal of profit making
companies

ROIC (Profitability) = Return On Invested Capital

Net profit Net income after tax

Capital invested
Equity + Debt to creditors
+
Competitive Advantage
When a companys profitability is greater than the average of all
other companies in the same industry & competing for the same
customers
=
ROIC
=
Sustained Competitive Advantage
When a companys strategies enable it to maintain above
average profitability for a number of years
Copyright Houghton Mifflin Company. All rights reserved. 1 | 5
Determinants of
Shareholder Value
To increase shareholder value, managers must
pursue strategies that increase the profitability of
the company and grow the profits.
Figure 1.2
Copyright Houghton Mifflin Company. All rights reserved. 1 | 6
A business model encompasses how the company will:
Companys Business Model
Managements model of how strategy will allow
the company to gain competitive advantage
and achieve superior profitability

Select its customers

Define and differentiate its

product offerings

Create value for its

customers

Acquire and keep

customers

Produce goods or services

Lower costs

Deliver those goods and

services to the market

Organize activities within

the company

Configure its resources

Achieve and sustain a high

level of profitability

Grow the business over

time
Copyright Houghton Mifflin Company. All rights reserved. 1 | 7
Differences in Industry
and Company Performance
A Companys Profitability and Profit
Growth are determined by two main
factors:
OThe overall performance
of its industry relative
to other industries
OIts relative success in its
industry as compared to the
competitors
Copyright Houghton Mifflin Company. All rights reserved. 1 | 8
Return on Invested Capital
in Selected Industries, 20022006
Data Source: Value Line Investment Survey
Figure 1.3
Copyright Houghton Mifflin Company. All rights reserved. 1 | 9
Performance in Nonprofit Enterprises
Nonprofit entities such as government
agencies, universities, and charities:

Are not in business to make a profit

BUTstill need to use their resources efficiently

and effectively

Must meet goals

Set strategies to achieve goals and compete

with other nonprofits for scarce resources
A successful strategy gives potential
donors a compelling message as to
why they should contribute.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 10
Strategic Managers
+
Corporate-Level Managers

Oversee the development of strategies for the

whole organization

The CEO is the principle general manager who

consults with other senior executives
+
Business-Level Managers

Responsible for overall company, business unit, or

divisional performance
+
Functional-Managers

Responsible for supervising a particular task or

operation (e.g. marketing, operations, accounting,
human resources)
Copyright Houghton Mifflin Company. All rights reserved. 1 | 11
Levels of Strategic Management
Figure 1.4
Copyright Houghton Mifflin Company. All rights reserved. 1 | 12
The Five Steps of the
Strategy Making Process
C Select the corporate mission and the major
corporate goals.
C Analyze the external competitive environment to
identify opportunities and threats.
C Analyze the organizations internal environment to
identify its strengths and weaknesses.
C Select strategies that:

Build on the organizations strengths and correct its

weaknesses in order to take advantage of external
opportunities and counter external threats
Are consistent with organizations mission and major goals
Are congruent and constitute a viable business model
C Implement the
strat
strategies.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 13
Crafting the Organizations Mission
Statement
Provides a framework or context within
which strategies are formulated, including:
+
Mission
The reason for existence what an organization does
+
Vision
A statement of some desired future state
+
Values
A statement of key values that an organization is
committed to
+
Major Goals
The measurable desired future state that an organization
attempts to realize
Copyright Houghton Mifflin Company. All rights reserved. 1 | 14
The Mission
+
What is it that the company does?

Who is being satisfied (what

customer groups)?

What is being satisfied

(what customer needs)?

How customer needs are being satisfied (by

what skills, knowledge, or distinctive competencies)?
The mission is a statement of a companys
reason for existence today.
A companys mission is best approached from
a customer-oriented business definition.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 15
Abells Framework
for Defining the Business
Figure 1.6
Source: D. F. Abell, Defining the Business: The Starting Point of
Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 16
The vision of Ford is to become the worlds
leading consumer company for automotive
products and services.
The Vision
What would the company like to achieve?
A good vision is meant to stretch a company by
articulating an ambitious but attainable future state.
Nokia is the worlds largest manufacturer of
mobile phones and operates with a simple but
powerful vision: If it can go mobile, it will!
Copyright Houghton Mifflin Company. All rights reserved. 1 | 17
Values
In high-performance organizations, values
respect the interests of key stakeholders.
The values of a company should state:
+
How managers and employees should conduct
themselves
+
How they should do business
+
What kind of organization they need to build to
help achieve the companys mission
+
Organizational culture
The set of values, norms, and standards that control how
employees work to achieve an organizations mission and goals
Often seen as an important source of competitive advantage
Copyright Houghton Mifflin Company. All rights reserved. 1 | 18
Values at Nucor

Management is obligated to manage Nucor in such a

way that employees will have the opportunity to earn
according to their productivity.

Employees should be able to feel confident that if

they do their jobs properly, they will have a job
tomorrow.

Employees have the right to be treated fairly and

must believe that they will be.

Employees must have an avenue of appeal when they

believe they are being treated unfairly.
At Nucor, values emphasizing pay for performance, job
security, and fair treatment for employees help to create an
atmosphere that leads to high employee productivity.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 19
Key characteristics of well-constructed goals:
1. Precise and measurable to provide a
yardstick or standard to judge performance
2. Address crucial issues with a limited
number of key goals that help to maintain focus
3. Challenging but realistic to provide
employees with incentive for improving
4. Specify a time period to motivate and
inject a sense of urgency into goal attainment
Major Goals
A goal is a precise and measurable desired
future state that a company must realize
if it is to attain its vision or mission.
Focus on long-run performance and
competitiveness.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 20
External Analysis requires an assessment of:
+
Industry environment in which company operates

Competitive structure of industry

Competitive position of the company

Competitiveness and position of major rivals
+
The country or national environments
in which company competes
+
The wider socioeconomic or macroenvironment that
may affect the company and its industry
Social
Governmental
Purpose is to identify the strategic opportunities and
threats in the organizations operating environment
that will affect how it pursues its mission.

Legal

International

Technological

Macroeconomic
External Analysis
Copyright Houghton Mifflin Company. All rights reserved. 1 | 21
Internal analysis includes an assessment of:
+
Quantity and quality of a companys
resources and capabilities
+
Ways of building unique
skills and company-specific
or distinctive competencies
Purpose is to pinpoint the strengths and weaknesses
of the organization. Strengths lead to superior
performance and weaknesses to inferior performance.
Internal Analysis
Building & sustaining a competitive advantage
requires a company to achieve superior:

Efficiency

Quality

Innovations

Responsiveness to customers
Copyright Houghton Mifflin Company. All rights reserved. 1 | 22
+
SWOT analyses help to identify strategies that align a
companys resources and capabilities to its environment
in order to create and sustain a competitive advantage.
+
Functional strategies should be consistent with and
support the companys business level and global
strategies.

Functional-level strategy directed at operational effectiveness

Business-level strategy businesses overall competitive themes
Global strategy expand, grow and prosper at a global level
Corporate-level strategy to maximize profitability and profit growth
Selecting Strategies: SWOT
Analysis and Business Model
When taken together, the various strategies
pursued by a company must lead to a
viable business model.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 23
Strategy Implementation
+
After choosing a set of congruent strategies to
achieve competitive advantage, managers
must put those strategies into action:

Implementation and execution of the strategic plans

Design of the best organization structure

Consistency of strategy with company culture

Control systems to measure and monitor progress

Governance systems for legal and ethical

compliance

Consistency with maximizing profit and profit

growth
Copyright Houghton Mifflin Company. All rights reserved. 1 | 24
The Feedback Loop
+
Managers must monitor strategy execution:

To determine if strategic goals and objectives are

being achieved

To evaluate to what extent competitive advantage is

being created and sustained
+
Managers must monitor and reevaluate for
the next round of strategy formulation and
implementation
Strategic planning is ongoing.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 25
Emergent and Deliberate Strategies
Source: Adapted from H. Mintzberg and
A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985.
Figure 1.7
Copyright Houghton Mifflin Company. All rights reserved. 1 | 26
Intended and Emergent Strategies
+
Intended or Planned Strategies

Strategies an organization plans to put into action

Typically the result of a formal planning process

Unrealized strategies are the result of unprecedented changes
and unplanned events after the formal planning is completed
+
Emergent Strategies
Unplanned responses to unforeseen circumstances
Serendipitous discoveries and events may emerge that can open
up new unplanned opportunities
Must assess whether the emergent strategy fits the companys
needs and capabilities
+
Realized Strategies
The product of whatever intended strategies are actually put into
action and of any emergent strategies that evolve
Copyright Houghton Mifflin Company. All rights reserved. 1 | 27
Strategic Planning in Practice
+
Scenario Planning

Recognizes that the future is inherently unpredictable

Develops strategies for possible future scenarios
+
Decentralized Planning
Involves the functional managers
Avoids the ivory tower approach

Perceives procedural justice in the decision making

+
Strategic Intent
Avoids the strategic fit model, which focuses too much on the
current state
Sets ambitious vision and goals that stretch a company and
then finds ways to build to attain those goals
Studies suggest that formal planning has a positive
impact on company performance and should include the
current and future competitive environments.
Copyright Houghton Mifflin Company. All rights reserved. 1 | 28
Strategic Decision Making
In spite of systematic planning, companies may adopt poor
strategies if groupthink or individual cognitive biases are
allowed to intrude into the decision-making process.
+
Cognitive biases: Rules of thumb or heuristics
resulting in systematic errors
Prior hypothesis bias
Escalating commitment
Reasoning by analogy
Representativeness
Illusion of control
Availability error
+
Groupthink: Decisionmakers embark on a course of
action without questioning the underlying assumptions
Group coalesces around a person or policy
Decisions based on an emotional rather than an objective assessment
of the correct course of action
Copyright Houghton Mifflin Company. All rights reserved. 1 | 29
Strategic Leadership
+
Vision, eloquence, and consistency
+
Articulation of the business model
+
Commitment
+
Being well informed
+
Willingness to delegate and empower
+
The astute use of power
+
Emotional intelligence: self-awareness, self-
regulation, motivation, empathy, social skills
Good leaders of the strategy-making process
have a number of key attributes: