Lesson 1-LEADERSHIP, STRATEGY, and Competitive advantage.pdf

Lesson 1 L E A D E R S H I P, S T R A T E G Y, A N D C O M P E T I T I V E A DVA N TA G E LEARNING OBJECTIVES You should be able to: 1-1 Explain what is meant by “competitive advantage” 1-2 Discuss the strategic role of managers at differ...

Lesson 1 L E A D E R S H I P, S T R A T E G Y, A N D C O M P E T I T I V E A DVA N TA G E LEARNING OBJECTIVES You should be able to: 1-1 Explain what is meant by “competitive advantage” 1-2 Discuss the strategic role of managers at different levels within an organization 1-3 Identify the primary steps in a strategic planning process 1-4 Discuss the common pitfalls of planning, and how those pitfalls can be avoided 1-5 Outline the cognitive biases that might lead to poor strategic decisions, and explain how these biases can be overcome 1-6 Discuss the role strategic leaders play in the strategy-making process W H Y D O S O M E O R G A N I Z AT I O N S SUCCEED WHILE OTHERS FAIL? WA L - M A RT ’ S C O M P E T I T I V E A DVA N TA G E  W H Y D O S O M E O R G A N I Z AT I O N S SUCCEED WHILE OTHERS FAIL? Strategy is a set of related actions that managers take to increase their company’s performance. Task of most effectively managing a company’s Strategic Leadership strategy-making process Strategy Formulation Task of determining and selecting strategies Strategy Implementation Task of putting strategies into action to improve a company’s efficiency and effectiveness Competitive Advantage Results when a company’s strategies lead to superior performance compared to competitors S T R A T E G I C L E A D E R S H I P, C O M P E T I T I V E A DVA N TAG E , A N D S U P E R I O R P E R F O R M A N C E To increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits.  M A X I M I Z I N G S H A R E H O L D E R VA L U E I S T H E U LT I M AT E G O A L O F P RO F I T- M A K I N G C O M PA N I E S F O R T WO R E A S O N S : First, shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. Risk capital is capital that cannot be recovered if a company fails and goes bankrupt. Second, shareholders are the legal owners of a corporation, and their shares therefore represent a claim on the profits generated by a company. Shareholder value means the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: (a) capital appreciation in the value of a company’s shares and (b) dividend payments. SUPERIOR PERFORMANCE Profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs. Profit growth is the increase in net profit over time. Together, profitability and profit growth are the principal drivers of shareholder value C O M P E T I T I V E A DVA N TA G E A N D A C O M PA N Y ’ S B U S I N E S S M O D E L Competitive Advantage is the A company has a sustained A Business Model is the achieved advantage over competitive advantage when conception of how strategies rivals when a company’s its strategies enable it to should work together as a profitability is greater than maintain above-average whole to enable the company the average profitability of profitability for a number of to achieve competitive firms in its industry. years. advantage.  C O M PA N Y ’ S B U S I N E S S M O D E L Management’s model of how strategy will allow the company to gain competitive advantage and achieve superior profitability A business model encompasses how the company will: Select its customers. Deliver goods and services Define and differentiate to the market. its product offerings. Organize activities within Create value for its the company. customers. Configure its resources. Acquire and keep Achieve and sustain a high customers. level of profitability. Produce goods or services. Grow the business over Lower costs time.  I N D U S T RY DIFFERENCES IN PERFORMANCE A Company’s Profitability and Profit Growth are determined by two main factors:  Its relative success in its industry  The overall performance of its industry relative to other industries R E T U R N O N I N V E S T E D C A P I TA L IN SELECTED INDUSTRIES, 2002 -2011 Figure 1.3 shows the average profitability, measured by ROIC, among companies in several different industries between 2002 and 2011. The computer software industry had a favorable competitive environment: demand for software was high and competition was generally not based on price. Just the opposite was the case in the air transport industry, which was extremely price competitive P E R F O R M A N C E I N N O N P RO F I T ENTERPRISES By definition, nonprofit enterprises such as government agencies, universities, and charities are not in “business” to make profits. Are not in business to make a profit Should use their resources efficiently and effectively Set performance goals unique to the organization 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.  S T R AT E G I C M A N AG E R S 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 General 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 W H AT I S S T R AT E G I C M A N AG E M E N T ? Strategic management is a set of managerial decisions and actions that help determine the long-term performance of an organization. Originally called business policy, strategic management has advanced substantially with the concentrated efforts of researchers and practitioners. Today, we recognize both a science and an art to the application of strategic management techniques. L E V E L S O F S T R AT E G I C M A N AG E M E N T T H E S T R A T E G Y- M A K I N G P R O C E S S Select the corporate vision, mission, and values and the major corporate goals and objectives. Analyze the external competitive environment to identify opportunities and threats. Analyze the organization’s internal environment to identify its strengths and weaknesses. Select strategies that: Build on the organization’s strengths and correct its weaknesses – in order to take advantage of external opportunities and counter external threats Are consistent with organization’s vision, mission, and values and major goals and objectives Are congruent and constitute a viable business model Implement the strategies.  MAIN COMP ONE NT S OF THE S T R A T E G Y- MA K I NG P RO C E S S   C R A F T I N G T H E O R G A N I Z AT I O N ’ S M I S S I O N S TAT E M E N T 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 THE MISSION The mission is a statement of a company’s raison d’etre, its reason for existence today. What is it that the company does? What is the company’s business? 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)? A company’s mission is best approached from a customer- oriented business definition. 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. Microsoft's corporate vision is “to help This vision statement shows that the company people and businesses throughout the world presents its business and computing products as tools that people and business organizations can use for realize their full potential.” their development. VA L U E S 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 company’s mission ❖ Organizational culture The set of values, norms, and standards that control how employees work to achieve an organization’s mission and goals Often seen as an important source of competitive advantage In high-performance organizations, values respect the interests of key stakeholders. 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. 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 Focus on long-run performance and competitiveness.  E X T E R N A L A N A LY S I S Purpose is to identify the strategic opportunities and threats in the organization’s operating environment that will affect how it pursues its mission. 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 Government   I N T E R N A L A N A LY S I S Purpose is to pinpoint the strengths and weaknesses of the organization. Strengths lead to superior performance and weaknesses to inferior performance. Internal analysis includes an assessment of: Quantity and quality of a company’s resources and capabilities Ways of building unique skills and company-specific or distinctive competencies Building & sustaining a competitive advantage requires a company to achieve superior: Efficiency Innovations Quality Responsiveness to customers   S E L E C T I N G S T R AT E G I E S : S WO T A N A LY S I S A N D B U S I N E S S M O D E L SWOT analyses help to identify strategies that align a company’s resources and capabilities to its environment – in order to create and sustain a competitive advantage. Functional strategies should be consistent with and support the company’s 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 When taken together, the various strategies pursued by a company must lead to a viable business model.   S T R AT E G Y I M P L E M E N TAT I O N After choosing a set of congruent strategies to The feedback loop indicates thatstrategic achieve competitive advantage, managers must put those strategies into action: planning is ongoing-it never ends. Implementation and execution of the strategic Managers must monitor strategy execution: plans To determine if strategic goals and objectives Design of the best organization structure are being achieved Consistency of strategy with company culture To evaluate to what extent competitive Control systems to measure and monitor advantage is being created and sustained progress Managers must monitor and reevaluate for the Governance systems for legal and ethical next round of strategy formulation and compliance implementation Consistency with maximizing profit and profit growth  P L A N N E D, D E L I B E R AT E , E M E R G E N T A N D R E A L I Z E D S T R AT E G I E S Several scholars have criticized the formal planning model for three main reasons: the unpredictability of the real world, the role that lower-level managers can play in the strategic management process, and the fact that many successful strategies are often the result of serendipity, not rational strategizing. I N T E N D E D A N D E M E R G E N T S T R AT E G I E S Intended or Planned Emergent Strategies Realized Strategies Strategies Strategies an Unplanned responses to The product of organization plans to put unforeseen whatever intended into action circumstances strategies are actually put Typically the result of a Serendipitous discoveries into action and of any formal planning process and events may emerge emergent strategies that Unrealized strategies are that can open up new evolve the result of unplanned opportunities unprecedented changes Must assess whether the and unplanned events emergent strategy fits after the formal planning the company’s needs and is completed capabilities  Business history is replete with examples of accidental events that help to push companies in new and profitable directions. Serendipity—stumbling across good things unexpectedly SERENDIPITY A N D S T R AT E G Y Serendipitous discoveries and events can open all sorts of profitable avenues for a company. But some companies have missed profitable opportunities because serendipitous discoveries or events were inconsistent with their prior (planned) conception of what their strategy should be. In one of the classic examples of such myopia, a century ago, the telegraph company Western Union turned down an opportunity to purchase the rights to an invention made by Alexander Graham Bell. The invention was the telephone, a technology that subsequently made the telegraph obsolete. S T R AT E G I C P L A N N I N G I N P R AC T I C E Recent studies suggest that formal planning does have a positive impact on company performance – and should include the current and future competitive environments. Recognizes that the future is inherently Scenario Planning unpredictable Develops strategies for possible future scenarios Involves the functional managers Avoids the ivory tower approach Decentralized Planning Perceives procedural justice in the decision making Avoids the strategic fit model, which focuses too much on the current state Strategic Intent Sets ambitious vision and goals that stretch a company and then finds ways to build to attain those goals  S T R AT E G I C D E C I S I O N M A K I N G 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: Systematic errors in human decision making that arise from the way people process information. Rules of thumb or heuristics resulting in systematic errors Prior hypothesis bias Escalating commitment Reasoning by analogy Representativeness Illusion of control Availability of 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  Devil’s Advocacy - A technique in which one member of a decision making team identifies all the considerations that might make a proposal unacceptable. The Dialectic Inquiry- The generation of a plan (a thesis) and a counterplan (an antithesis) that reflect plausible but conflicting courses of action. TECHNIQUES FOR Outside view- Identification of past I M P RO V I N G successful or failed strategic initiatives to determine whether those initiatives will DECISION MAKING work for project at hand.  S T R AT E G I C L E A D E R S H I P Good leaders of the strategy-making process have a number of key attributes: (1) vision, eloquence, and consistency; (2) articulation of a business model; (3) commitment; (4) being well informed; (5) willingness to delegate and empower; (6) astute use of power; and (7) emotional intelligence THINK ABOUT THESE… Discuss how smaller firms can sustain a competitive advantage over their rivals. Some firms publicize their corporate mission statements by including them in annual reports, on company letterheads, and in corporate advertising. What, if anything, does this practice say about the ability of these mission statements to be sources of sustained competitive advantage for a firm?