Published on April 13, 2008
The Managerial Process of Crafting and Executing Strategy : The Managerial Process of Crafting and Executing Strategy Chapter Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region “If you don’t know where you are going, any road will take you there.”: “If you don’t know where you are going, any road will take you there.” The Koran “Management’s job is not to see the company as it is . . . but as it can become.” John W. Teets Chapter Roadmap: Chapter Roadmap What Does the Process of Crafting and Executing Strategy Entail? Developing a Strategic Vision: Phase 1 of the Strategy-Making, Strategy-Executing Process Setting Objectives: Phase 2 of the Strategy-Making, Strategy-Executing Process Crafting a Strategy: Phase 3 of the Strategy-Making, Strategy-Executing Process Implementing and Executing the Strategy: Phase 4 of the Strategy-Making, Strategy-Executing Process Initiating Corrective Adjustments: Phase 5 of the Strategy-Making, Strategy-Executing Process Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process Fig. 2.1: The Strategy-Making, Strategy-Executing Process: Fig. 2.1: The Strategy-Making, Strategy-Executing Process Developing a Strategic Vision: Developing a Strategic Vision Involves thinking strategically about Future direction of company Changes in company’s product-market- customer-technology to improve Current market position Future prospects Phase 1 of the Strategy-Making Process A strategic vision is a road map showing the route a company intends to take in developing and strengthening its business. It paints a picture of a company’s destination and provides a rationale for going there. Key Elements of aStrategic Vision: Delineates management’s aspirations for the business – Charts a strategic path for the future “Where are we going?” Steers energies of employees in a common direction Molds organizational identity Is distinctive and specific to a particular organization Avoids use of generic language Triggers strong emotions Is challenging, uncomfortable, nail biting Key Elements of a Strategic Vision Exelon’sStrategic Vision: Exelon’s Strategic Vision One Company, One Vision. Exelon strives to build exceptional value - by becoming the best and most consistently profitable electricity and gas company in the United States. To succeed, we must . . . Live up to our commitments . . . Perform at world-class levels . . . Invest in our consolidating industry . . . Examples of Strategic Visions: Examples of Strategic Visions Red Hat Linux To extend our position as the most trusted Linux and open source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management platform, and associated support and services. Wells Fargo We want to satisfy all of our customers’ financial needs, help them success financially, be the premier provider of financial services in every one of our markets, and be known as one of America’s great companies. Examples of Strategic Visions: Examples of Strategic Visions Wyeth Our vision is to lead the way to a healthier world. By carrying out this vision at every level of our organization, we will be recognized by our employees, customers, and shareholders as the best pharmaceutical company in the world, resulting in value for all. We will achieve this by: Leading the world in innovation by linking pharmaceutical, biotech, and vaccines technologies Making quality, integrity, and excellence hallmarks of the way we do business Attracting, developing, and motivating the best people Continually growing improving our business Examples of Strategic Visions: Examples of Strategic Visions Dental Products Division of 3M Corporation Become THE supplier of choice to the global dental professional markets, providing world-class quality and innovative products. [All employees of the division wear badges bearing these words, and whenever a new product or business procedure is being considered, management asks “Is this representative of THE leading dental company?”] Nike To bring innovation inspiration to every athlete in the world. Examples of Strategic Visions: Examples of Strategic Visions Intel Our vision: Getting to a billion connected computers worldwide, millions of servers, and trillions of dollars of e-commerce. Intel’s core mission is being the building block supplier to the Internet economy and spurring efforts to make the Internet more useful. Being connected is now at the center of people’s computing experience. We are helping to expand the capabilities of the PC platform and the Internet . . . We have seen only the early stages of deployment of digital technologies. Examples of Strategic Visions: Examples of Strategic Visions Heinz Our vision, quite simply, is to be the world’s premier food company, offering nutritious, superior tasting foods to people everywhere. Being the premier food company does not mean being the biggest but it does mean being the best in terms of consumer value, customer service, employee talent, and consistent and predictable growth. General Electric We will become number one or number two in every market we serve, and revolutionize this company to have the speed and agility of a small enterprise. Strategic Vision vs. Mission: The mission statement of most companies focuses on current business activities - “who we are and what we do” Current product and service offerings Customer needs being served Technological and business capabilities A strategic vision concerns a firm’s future business path - “where we are going” Markets to be pursued Future technology-product-customer focus Kind of company management is trying to create Strategic Vision vs. Mission Characteristics ofa Mission Statement: Defines current business activities, highlighting boundaries of current business Present products and services Types of customers served Conveys Who we are, What we do, and Why we are here A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?” Making is profit is an objective or intended outcome! Characteristics of a Mission Statement Key Elements ofa Mission Statement: Key Elements of a Mission Statement Three factors to consider Customer needs – What is being satisfied Customer groups – Who is being satisfied Technologies/resources/business approaches used and activities performed – How customer needs are satisfied Trader Joe’sMission Statement: Trader Joe’s Mission Statement 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. (a unique grocery store chain) Linking the Vision With Company Values: A statement of values is often provided to guide the company’s pursuit of its vision Values – Beliefs, business principles, and ways of doing things that are incorporated into Company’s operations Behavior of workforce Values statements Contain between four and eight values Are ideally tightly connected to and reinforce company’s vision, strategy, and operating practices Linking the Vision With Company Values Example: Company Values: Example: Company Values Home Depot Example: Company Values: Du Pont Safety Ethics Environmental stewardship Respect for people Example: Company Values Communicating theStrategic Vision: An exciting, inspirational vision Contains memorable language Clearly maps company’s future direction Challenges and motivates workforce Provokes emotion and enthusiasm Winning support for the vision involves Putting “where we are going and why” in writing Distributing the statement organization-wide Having executives explain the vision to the workforce Communicating the Strategic Vision Examples: Vision Slogans: Examples: Vision Slogans Levi Strauss & Company “We will clothe the world by marketing the most appealing and widely worn casual clothing in the world.” Microsoft Corporation “Empower people through great software—any time, any place, and on any device.” Mayo Clinic “The best care to every patient every day.” Examples: Vision Slogans: Examples: Vision Slogans Scotland Yard “To make London the safest major city in the world.” Greenpeace “To halt environmental abuse and promote environmental solutions.” Charles Schwab “To provide customers with the most useful and ethical financial services in the world.” Overcoming Resistance toa New Strategic Vision: Overcoming Resistance to a New Strategic Vision Mobilizing support for a new vision entails Reiterating basis for the new direction Addressing employee concerns head-on Calming fears Lifting spirits Providing updates and progress reports as events unfold Strategic Inflection Points: Strategic Inflection Points There are times when companies come to a major fork in the road. Perhaps because market conditions are changing rapidly in ways that threaten or endanger the company’s business prospects Perhaps because the strategy simply runs out of stream Perhaps because the actions of competitors block the success of the company’s present strategic course and strategy Critical decisions have to be made about where do we go from here A major new directional path may have to be taken A major new strategy may be needed Intel’s “StrategicInflection Points”: Intel’s “Strategic Inflection Points” Prior to mid-1980s Focus on memory chips Starting in mid-1980s Abandon memory chip business (due to lower-cost Japanese companies taking over the market) and Become preeminent supplier of microprocessors to PC industry Make PC central appliance in workplace and home Be undisputed leader in driving PC technology forward 1998 Shift focus from PC technology to becoming the preeminent building block supplier to the Internet economy Payoffs of aClear Strategic Vision: Crystallizes an organization’s long-term direction Reduces risk of rudderless decision-making Assists in gaining support of organizational members for changes to make the vision a reality Helps keep strategy-related actions of managers on common path Helps an organization prepare for the future Payoffs of a Clear Strategic Vision Setting Objectives: Setting Objectives Purpose of setting objectives Converts vision into specific performance targets Creates yardsticks to track performance Pushes firm to be inventive, intentional, and focused in its actions Setting challenging, achievable objectives guards against Complacency Internal confusion Status quo performance Phase 2 of the Strategy-Making Process Characteristics of Objectives: Characteristics of Objectives Represent commitment to achieve specific performance targets Spell-out how much of what kind of performance by when Well-stated objectives are Quantifiable Measurable Contain a deadline for achievement Establishing objectives converts the vision into concrete performance outcomes! Types of Objectives Required: Outcomes focused on improving financial performance Outcomes focused on improving long-term competitive business position Financial Objectives Strategic Objectives Types of Objectives Required Examples: FinancialObjectives: X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Annual dividend increases of X % Profit margins of X % X % return on capital employed (ROCE) Increased shareholder value Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investment Stable earnings during periods of recession Examples: Financial Objectives Examples: StrategicObjectives: Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service Deriving X % of revenues from sale of new products introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening company’s brand name appeal Having stronger national or global sales and distribution capabilities than rivals Consistently getting new or improved products to market ahead of rivals Examples: Strategic Objectives Unilver’s Strategic and Financial Objectives : Unilver’s Strategic and Financial Objectives Grow annual revenues by 5-6% annually Increase operating profit margins from 11% to 16% within 5 years Trim company’s 1200 food, household, and personal care products down to 400 core brands Focus sales and marketing efforts on those brands with potential to become respected, market-leading global brands Streamline company’s supply chain The Kroger Company’s Strategic and Financial Objectives : The Kroger Company’s Strategic and Financial Objectives Reduce our operating and administrative cost by $500 million by year-end 2003 Leverage our $51 billion size to achieve greater economies of scale Reinvest in our core business to increase sales and market share Grow earnings per share by 10-12% in 2002-2003 and by 13-15% annually starting in 2004. Seagate Technology’s Strategic Objectives : Seagate Technology’s Strategic Objectives Solidify the company’s No. 1 position in the overall market for hard-disk drives Get more Seagate drives into popular consumer electronics products (i.e. video recorders) Take share away from Western Digital in providing disk drives for Microsoft’s Xbox Capture a 10% share of the market for 2.5-inch hard drives for notebook computers by 2004 Heinz’s Financial andStrategic Objectives : Heinz’s Financial and Strategic Objectives Achieve earnings per share in the range of $2.15-$2.25 in 2004 Increase operating cash flow by 45% to $750 million Reduce net debt by $1.3 billion in 2003 and further strengthen the company balance sheet in 2004 Continue to introduce new and improved food products Remove the clutter in the company product offerings by reducing the number of SKUs Increase spending on trade promotion and advertising by $200 million to strengthen the recognition and market shares of the company’s core brands Divest non-core underperforming product lines DuPont’s Financial andStrategic Objectives: DuPont’s Financial and Strategic Objectives To achieve annual revenue growth of 5 to 6% and annual earnings-per-share growth averaging 10% Grow per-share profits faster than revenues by Increasing productivity, Selling enough new products each year that average prices and average margins rise, and Using surplus cash to buy back shares Sell the company’s low-margin textiles and interiors division (with sales of $6.6 billion and operating profits of only $114 million) 3M Corporation’s Financialand Strategic Objectives: 3M Corporation’s Financial and Strategic Objectives To achieve annual growth in earnings per share of 10% or better, on average A return on stockholders’ equity of 20-25% A return on capital employed of 27% or better Have at least 30% of sales come from products introduced in the past four years Strategic Performance Fosters Better Financial Performance: Strategic Performance Fosters Better Financial Performance A company’s achievement of satisfactory financial performance, by itself, is not enough Financial performance measures are “lagging indicators” reflecting results of past decisions and actions Of equal or greater importance is a company’s performance on measures of its strategic well-being — its competitiveness and market position Strategic performance measures are “leading indicators” of a company’s future financial performance and business prospects Achievement of strategic performance targets Signals growing competitiveness Signals growing strength in the marketplace Balanced Scorecard Approach – Strategic and Financial Objectives: Balanced Scorecard Approach – Strategic and Financial Objectives Balanced scorecard approach for measuring company performance requires both – Financial objectives Strategic objectives Emphasis on financial performance may assume priority over strategic performance when company’s Financial performance is dismal and Survival is threatened Otherwise, management is advised to put more emphasis on achieving strategic objectives The surest path to sustained future profitability year after year is to relentlessly pursue strategic outcomes that strengthen a company’s business position and give it a growing competitive advantage over rivals! Short-Term vs.Long-Term Objectives: Short-Term vs. Long-Term Objectives Short-term objectives Targets to be achieved soon Milestones or stair steps for reaching long-range performance Long-term objectives Targets to be achieved within 3 to 5 years Prompt actions now that will permit reaching targeted long-range performance later Concept of Strategic Intent: A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective! Concept of Strategic Intent Characteristics ofStrategic Intent: Characteristics of Strategic Intent Indicates firm’s intent to making quantam gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds Involves establishing a grandiose performance target that is out of proportion to its immediate capabilities and market position but then devoting the company’s full resources and energies to achieving the target over time Signals relentless commitment to achieving a particular market position and competitive standing Objectives Are Neededat All Levels: 1. First, establish organization-wide objectives and performance targets 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. Individual objectives are established last Objectives Are Needed at All Levels Importance ofTop-Down Objectives: Importance of Top-Down Objectives Guide objective-setting and strategy-making at lower levels Ensures financial and strategic performance targets for all business units, divisions, and departments are directly connected to achieving company-wide objectives Integration of objectives has two advantages Helps produce cohesion among objectives and strategies of different parts of organization Helps unify internal efforts to move a company along the chosen strategic path Crafting a Strategy: Crafting a Strategy Strategy-making involves entrepreneurship – searching for opportunities To do new things or To do existing things in new or better ways Strategizing involves Picking up on happenings in the external environment and Steering company activities in new directions dictated by shifting market conditions Phase 3 of the Strategy-Making Process Activities Involved inCrafting a Strategy: Activities Involved in Crafting a Strategy Studying market trends and actions of competitors Listening to customers, anticipating their changing needs Scrutinizing business possibilities based on new technology Building firm’s market position via acquisitions or new products Pursuing ways to strengthen firm’s competitive capabilities Who Participates in Craftinga Company’s Strategy?: Who Participates in Crafting a Company’s Strategy? Chief executive officer - CEO Senior corporate executives Chief financial officer - CFO Managers of business divisions and major product lines Key VPs for production, marketing, human resources, and other functional departments Every company manager has a strategy-making, strategy-executing role – ranging from minor to major – for the area he or she heads! Strategizing: An Individual or Team Responsibility?: Strategizing: An Individual or Team Responsibility? Teams are increasingly used because Finding market- and customer-driven solutions is necessary Complex strategic issues cut across functional areas and departmental units Ideas of people with different backgrounds and experiences strengthen strategizing effort Groups charged with crafting the strategy often include the people charged with implementing it Fig. 2.2: A Company’s Strategy-Making Hierarchy: Fig. 2.2: A Company’s Strategy-Making Hierarchy Levels of Strategy-Makingin a Diversified Company: Levels of Strategy-Making in a Diversified Company Corporate Strategy Business Strategies Functional Strategies Operating Strategies Two-Way Influence Two-Way Influence Two-Way Influence Levels of Strategy-Making ina Single-Business Company: Levels of Strategy-Making in a Single-Business Company Business Strategy Two-Way Influence Functional Strategies Operating Strategies Business-Level Managers Operating Managers Functional Managers Two-Way Influence Tasks of Corporate Strategy: Tasks of Corporate Strategy Moves to achieve diversification Actions to boost performance of individual businesses Capturing valuable cross-business synergies to provide 1 + 1 = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses Tasks of Business Strategy: Initiating approaches to produce successful performance in a specific business Crafting competitive moves to build sustainable competitive advantage Developing competitively valuable competencies and capabilities Uniting strategic activities of functional areas Gaining approval of business strategies by corporate-level officers and directors Tasks of Business Strategy Tasks of Functional Strategies: Game plan for a strategically-relevant function, activity, or business process Detail how key activities will be managed Provide support for business strategy Specify how functional objectives are to be achieved Tasks of Functional Strategies Tasks of Operating Strategies: Tasks of Operating Strategies Concern narrower strategies for managing grassroots activities and strategically-relevant operating units Add detail to business and functional strategies Delegation of responsibility to frontline managers Uniting the Company’sStrategy-Making Effort: Uniting the Company’s Strategy-Making Effort A firm’s strategy is really a collection of initiatives undertaken by managers at all levels in the organizational hierarchy All the various strategic initiatives must be unified into a cohesive, company-wide action plan Pieces of strategy should fit together like the pieces of a puzzle What Is a Strategic Plan?: Its strategic vision and business mission Its strategy Its strategic and financial objectives What Is a Strategic Plan? A Company’s Strategic Plan Consists of Implementing and Executing Strategy: Action-oriented, operations-driven activity aimed at shaping performance of core business activities in a strategy-supportive manner Tougher and more time-consuming than crafting strategy Key tasks include Improving efficiency of the strategy being executed Showing measurable progress in achieving targeted results Phase 4 of the Strategy-Making Process Implementing and Executing Strategy What Does Strategy Implementation Involve?: Building a capable organization Allocating resources to strategy-critical activities Establishing strategy-supportive policies Instituting best practices and programs for continuous improvement Installing information, communication, and operating systems Motivating people to pursue the target objectives Tying rewards to achievement of results Creating a strategy-supportive corporate culture Exerting the leadership necessary to drive the process forward and keep improving What Does Strategy Implementation Involve? Characteristics of Good Strategy Execution: Characteristics of Good Strategy Execution Involves creating strong “fits” between strategy and Organizational capabilities Reward structure Internal operating systems Organization’s work climate and culture The stronger the “fits” the Better the execution Higher a company’s odds of achieving its performance targets Evaluating Performance andMaking Corrective Adjustments: Tasks of crafting and implementing the strategy are not a one-time exercise Customer needs and competitive conditions change New opportunities appear; technology advances; any number of other outside developments occur One or more aspects of executing the strategy may not be going well New managers with different ideas take over Organizational learning occurs All these trigger the need for corrective actions and adjustments on an as-needed basis Phase 4 of the Strategy-Making Process Evaluating Performance and Making Corrective Adjustments Monitoring, Evaluating, and Adjusting as Needed: Monitoring, Evaluating, and Adjusting as Needed Taking actions to adjust to the march of events tends to result in one or more of the following Altering long-term direction and/or redefining the mission/vision Raising, lowering, or changing performance objectives Modifying the strategy Improving strategy execution Corporate Governance: Strategic Role of a Board of Directors: Corporate Governance: Strategic Role of a Board of Directors Exercise strong oversight to ensure the five tasks of strategic management are executed to benefit Shareholders or Stakeholders Make sure executive actions are not only proper but also aligned with interests of stakeholders Obligations of aBoard of Directors: Obligations of a Board of Directors Be inquiring critics and overseers Evaluate caliber of senior executives’ strategy-making and strategy-executing skills Institute a compensation plan for top executives rewarding them for results that serve interests of Stakeholders and Shareholders Have courage to intervene when things are not going well or to rein in a CEO who steps “out of bounds” Good CorporateGovernance Matters: Good Corporate Governance Matters The whole fabric of effective corporate governance is undermined when boards of directors shirk their responsibility to maintain ultimate control over Company’s strategic direction, Major elements of its strategy, and Business approaches management is using to implement and execute the strategy Board members are obligated to rein in a CEO who oversteps the bounds of sound business principles and ethical behavior A rubber stamp board abdicates its responsibility to shareholders Boards of directors have a very important oversight role in the strategy-making, strategy-executing process!