MSI 101 - Strategy Module.pdf

MSI-101 Strategic Management 1. What is strategy and why is it important 2. Charting a Company’s Direction: Its Vision, Mission, Objectives, and Strategy 3. Evaluating a Company’s External Environment 4. Evaluating a Company’s Resources, Capabilities, and Co...

MSI-101 Strategic Management 1. What is strategy and why is it important 2. Charting a Company’s Direction: Its Vision, Mission, Objectives, and Strategy 3. Evaluating a Company’s External Environment 4. Evaluating a Company’s Resources, Capabilities, and Competitiveness 5. The Five Generic Competitive Strategies  CHAPTER 1 What Is Strategy and Why Is It Important? Copyright © McGraw-Hill Education. Permission required for reproduction or display.  Learning Objectives This chapter will help you understand: 1. What we mean by a company’s strategy and why it needs to differ from competitors' strategies. 2. The concept of a sustainable competitive advantage. 3. The five most basic strategic approaches for setting a company apart from its rivals. 4. That a company’s strategy tends to evolve. 5. What constitutes a viable business model. 6. The three tests of a winning strategy.  What Do We Mean By Strategy ? A company’s strategy is the coordinated set of actions that its managers take in order to outperform the company’s competitors and achieve superior profitability. All Businesses Face Three Central Questions 1. What is our present situation? Industry conditions and competitive pressures, market standing, competitive strengths and weaknesses, and future prospects in light of changes taking place in the business environment 2. What should the company’s future direction be and what performance targets should we set? What buyer needs to try to satisfy Which growth opportunities to emphasize? Where to head and what outcomes to strive to achieve? 3. What’s our plan for running the company and achieving good results? Challenges managers to craft a series of competitive moves and business approaches—henceforth called a strategy—for heading the firm in the intended direction, staking out a market position, attracting customers, and achieving the targeted outcomes  Strategy Is about Making Choices Strategy is all about choosing How: How to position the firm in the marketplace How to attract customers How to compete against rivals How to achieve the firm’s performance targets How to capitalize on opportunities to grow the business How to respond to changing economic and market conditions Strategy Is about Competing Differently Strategy as a choice: Is deciding to compete differently from rivals— pressuring rivals by doing what they do not do or, even better, doing what they cannot do. Guides the company in what it must do and also in knowing what it must not do. Is successful when its actions, business approaches, and competitive moves appeal to buyers in ways that: Set it apart from its rivals by either providing products with higher perceived values or efficiently producing at lower costs. Stake out a market position that is not crowded with strong competitors. FIGURE 1.1 Identifying a Firm’s Strategy–What to Look for Illustration Capsule 1.1 Apple Inc.: Exemplifying a Successful Strategy Key elements of Apple’s successful strategy are: Designing and developing its own operating systems, hardware, application software and services. Continuously investing in R&D and frequently introducing products. Strategically locating its stores and staffing them with knowledgeable personnel. Maintaining a quality brand image, supported by premium pricing. Committing to corporate social responsibility and sustainability through supplier relations. Cultivating a diverse workforce rooted in transparency.  Strategy and the Quest for Competitive Advantage Competitive advantage: Requires meeting customer needs either more effectively (with products or services that customers value more highly) or more efficiently (by providing products or services at a lower cost to customers.) Sustainable competitive advantage requires: Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors. Developing expertise and long-term competitive capabilities that cannot be readily overcome. Putting the constant quest for sustainable competitive advantage at center stage in crafting your strategy.  Basic Strategic Approaches (1 of 2) Strategies for Building Competitive Advantage Low-Cost Focused Provider Differentiation Focused Low- Broad Differentiation Cost Best-Cost Provider  Basic Strategic Approaches (2 of 2) Low-cost provider strategy—achieving a cost-based advantage over rivals Broad differentiation strategy—differentiating the firm’s product or service from rivals in ways that appeal to a broad spectrum of buyers A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) by having lower costs to serve niche members at a lower price Focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) by offering buyers customized attributes that meet their specialized needs and tastes better than rivals’ products Best-cost provider strategy—giving customers more perceived value for their money by satisfying their expectations on key quality features, performance, and/or service attributes that match or exceed their price expectations  Why a Company’s Strategy Evolves over Time Managers modify strategy in response to: Changing market conditions. Advancing technology. Fresh moves of competitors. Shifting buyer needs. Emerging market opportunities. New ideas for improving the strategy. FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments A Company’s Strategy Is Partly Proactive and Partly Reactive Realized (current) strategy is a blend of: Proactive (deliberate) strategy elements that include planned initiatives to improve the company’s financial performance and secure a competitive edge. Reactive (emergent) strategy elements developed on the fly in response to unanticipated developments and fresh market conditions. Abandoned and superseded strategy elements that no longer fit with the company’s ongoing strategy. A Company’s Strategy and Its Business Model How the firm will make money: By providing customers with value The firm’s customer value proposition By generating revenues sufficient to cover costs and produce attractive profits The firm’s profit formula It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy. The Relationship Between a Company’s Strategy and Its Business Model REALIZED BUSINESS STRATEGY MODEL Competitive Initiatives Value Proposition Business Approaches Profit Formula  Business Model Elements: The Customer Value Proposition The customer value proposition is: Satisfying buyer wants and needs at a price customers will consider a good value. The greater the value provided (V) and the lower the price (P), the more attractive the value proposition is to customers  Business Model Elements: The Profit Formula The profit formula: Creates a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition. V – the value provided to customers P – the price charged to customers C – the firm’s costs The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be a moneymaker. FIGURE 1.3 The Business Model and the Value-Price-Cost Framework  Is The Company’s Strategy A Winner? EXHIBITS GOOD FIT WITH THREE SITUATION TESTS OF A RESULTS IN COMPETITIVE WINNING ADVANTAGE STRATEGY PROMOTES SUPERIOR PERFORMANCE © McGraw-Hill Education.  What Makes a Strategy a Winner? A winning strategy must pass three tests: The fit test Does it exhibit good fit with the external and internal aspects of the firm’s dynamic situation? The competitive advantage test Is it likely to result in a sustainable competitive advantage? The performance test Is it producing superior performance, as indicated by the firm’s profitability, financial and competitive strengths, and market standing? Illustration Capsule 1.2 FM Radio: Contrasting Business Models Who listens to the radio anymore? How sustainable are the business models of three FM Radios over the long term? Given the changes in user listening habits, which competitor’s present strategy best passes the three tests of a winning strategy? What internal and external factors will create particular difficulties for each competitor in changing its strategy or business model? Why Crafting and Executing Strategy Are Important Tasks Strategy provides: A prescription for doing business. A road map to competitive advantage. A game plan for pleasing customers. A formula for attaining long-term standout marketplace performance. Good Strategy + Good Strategy Execution = Good Management Applying What You Learned in This Chapter Google’s browser-based Chrome operating system and its online applications suite are challenging Microsoft’s long-term dominance of the office productivity application marketplace sectors. What should be Microsoft’s near-term response to this competitive challenge? How will Microsoft’s long-term response to this competitor’s actions affect its business model? Which competitor’s strategy will likely be the eventual winner in the marketplace? Why?  The Road Ahead Strategy is about asking the right questions. What must managers do, and do well, to make a firm successful in the marketplace? Strategy requires getting the right answers Good strategic thinking and good management of the strategy-making, strategy-executing process are important. First-rate capabilities and skills in crafting and executing strategy are essential to managing successfully. Welcome and best wishes for your success!  MSI-101 Strategic Management 1. What is strategy and why is it important 2. Charting a Company’s Direction: Its Vision, Mission, Objectives, and Strategy 3. Evaluating a Company’s External Environment 4. Evaluating a Company’s Resources, Capabilities, and Competitiveness 5. The Five Generic Competitive Strategies  CHAPTER 2 Charting a Company’s Direction: Its Vision, Mission, Objectives, and Strategy Copyright © McGraw-Hill Education. Permission required for reproduction or display. ©alice-photo/Shutterstock.com  Learning Objectives This chapter will help you understand: 1. Why it is critical for managers to have a clear strategic vision of where the company needs to head, and why. 2. The importance of setting both strategic and financial objectives. 3. Why the strategic initiatives taken at various organizational levels must be tightly coordinated. 4. What a company must do to achieve operating excellence and to execute its strategy proficiently. 5. The role and responsibility of a company’s board of directors in overseeing the strategic management process. What Does the Strategy-Making, Strategy- Executing Process Entail? 1. Developing a strategic vision, a mission statement, and a set of core values 2. Setting objectives for measuring the firm's performance and tracking its progress 3. Crafting a strategy to move the firm along its strategic course and achieve its objectives 4. Executing the chosen strategy efficiently and effectively 5. Monitoring developments, evaluating performance, and initiating corrective adjustments FIGURE 2.1 The Strategy-Making, Strategy-Executing Process STAGE 1: Developing a Strategic Vision, Mission Statement, and Set of Core Values Developing a strategic vision Delineates management’s aspirations for the firm to its stakeholders Provides direction: “where we are going” Sets out the compelling rationale (strategic soundness) for the firm’s direction Uses distinctive and specific language to set the firm apart from its rivals TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts (1 of 2) The Dos The Don’ts Be graphic. Don’t be vague or incomplete. Paint a clear picture of where the Never skimp on specifics about where the company is headed and the market company is headed or how the company position(s) the company is striving to stake intends to prepare for the future. out. Be forward-looking and directional. Don’t dwell on the present. Describe the strategic course that will help A vision is not about what a firm once did or the company prepare for the future. does now; it’s about “where we are going.” Keep it focused. Don’t use overly broad language. Focus on providing managers with All-inclusive language that gives the guidance in making decisions and company license to pursue any opportunity allocating resources. must be avoided. Have some wiggle room. Don’t state the vision in bland or Language that allows some flexibility uninspiring terms. allows the directional course to be The best vision statements have the power adjusted as market, customer, and to motivate company personnel and inspire technology circumstances change. shareholder confidence about the company’s future. TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts (2 of 2) The Dos The Don’ts Be sure the journey is feasible. Don’t be generic. The path and direction should be within the A vision statement that could apply to realm of what the company can accomplish; companies in any of several industries (or over time, a company should be able to to any of several companies in the same demonstrate measurable progress in industry) is not specific enough to provide achieving the vision. any guidance. Indicate why the directional path makes Don’t rely on superlatives. good business sense. Visions that claim the company’s strategic The directional path should be in the long- course is one of being the “best” or “most term interests of stakeholders, especially successful” usually lack specifics about shareowners, employees, and suppliers. the path the company is taking to get there. Make it memorable. Don’t run on and on. To give the organization a sense of direction A vision statement that is not short and to and purpose, the vision needs to be easily the point will tend to lose its audience. communicated. Ideally, it should be reducible to a few choice lines or a memorable “slogan.” Examples of Strategic Visions—How Well Do They Measure Up? (1 of 2) Vision Statement Effective Elements Shortcomings Whole Foods Market is a dynamic leader in the Forward- looking Too long quality food business. We are a mission-driven company that aims to set the standards of Graphic Not memorable excellence for food retailers. We are building a business in which high standards permeate all Focused aspects of our company. Quality is a state of mind at Whole Foods Market. Makes good business sense Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer. Our success in fulfilling our vision is measured by customer satisfaction, team member happiness and excellence, return on capital investment, improvement in the state of the environment and local and larger community support. Our ability to instill a clear sense of interdependence among our various stakeholders (the people who are interested and benefit from the success of our company) is contingent upon our efforts to communicate more often, more openly, and more compassionately. Better communication equals better understanding and more trust. Examples of Strategic Visions—How Well Do They Measure Up? (2 of 2) Vision Statement Effective Elements Shortcomings Keurig Focused Not graphic Become the world’s leading Flexible Lacks specifics personal beverage systems Makes good Not forward-looking company. business sense Nike Forward-looking Vague and lacks detail NIKE, Inc. fosters a culture of Flexible Not focused invention. We create products, Generic services and experiences for today’s athlete* while solving Not necessarily feasible problems for the next generation. *If you have a body, you are an athlete.  Strategic Vision Examples—How Well Do They Measure Up? For which of these three businesses is it the most difficult to create a vision statement? How does the scope of a business affect the language of its vision statement? Considering the acquisition of Whole Foods by Amazon, how would you reword the Whole Foods mission statement to reduce it to less than 100 words? (Currently = 154 words)  Communicating the Strategic Vision Why communicate the vision? Fosters employee commitment to the firm’s chosen strategic direction Ensures understanding of its importance Motivates,informs, and inspires internal and external stakeholders Demonstrates top management support for the firm’s future strategic direction and competitive efforts  Putting the Strategic Vision in Place What needs to be done: Put the vision in writing and distribute it. Hold meetings to personally explain the vision and its rationale. Create a memorable slogan or phrase that effectively expresses the essence of the vision. Emphasize the positive payoffs for making the vision happen.  Why a Sound, Well-Communicated Strategic Vision Matters It crystallizes senior executives’ own views about the firm’s long-term direction. It reduces the risk of rudderless decision making. It is a tool for winning the support of organization members to help make the vision a reality. It provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the firm’s overall strategy. It helps an organization prepare for the future.  Developing a Company Mission Statement A well-conceived company mission statement: Uses specific language to give the firm its own unique identity Describes the firm’s current business and purpose— “who we are, what we do, and why we are here” Focuses on describing the firm’s business, not on “making a profit”—earning a profit is an objective, not a mission  An “Ideal” Mission Statement Identifies the company’s product or services Specifies the buyer needs it seeks to satisfy Identifies the customer groups or markets it is endeavoring to serve Gives the company its own identity that sets the company firm apart from its rivals Clarifies the firm’s purpose and business makeup to stakeholders Linking the Vision and Mission with Core Values Core values: Are the beliefs, traits, and behavioral norms that employees are expected to display in conducting the firm’s business and in pursuing its strategic vision and mission. Become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported by top management. Match the firm’s vision, mission, and strategy, contributing to the firm’s business success.  TOMS Shoes: A Mission with a Company TOMS’s mission statement With every product you purchase, TOMS will help a person in need. One for One.® TOM’s core values Our mission is ingrained in our one-to-one business model. Lead with the story: our mission and purpose are the same. Communicate to ensure that customers know they are doing more than just buying a product. Extend and adapt the one–for-one model to other product categories to support other causes. Protect the success of the model when acquiring stakeholders. Stage 2: Setting Objectives The purposes of setting objectives: To convert the vision and mission into specific, measurable, challenging yet achievable, deadline performance targets To focus efforts and align actions throughout the organization To serve as yardsticks for tracking a firm’s performance and progress To provide motivation and inspire employees to greater levels of effort  Converting the Vision and Mission into Specific Performance Targets Specific Characteristics Quantifiable of Well-Stated (Measurable) Challenging Objectives (Motivating) Deadline for Achievement  Setting Stretch Objectives Setting stretch objectives promotes better overall performance because stretch targets because they: Push a firm to be more inventive. Increase the urgency for improving financial performance and competitive position. Cause the firm to be more intentional and focused in its actions. Create an exciting work environment and attract the best people. Help prevent internal inertia and contentment with modest gains in performance.  What Kinds of Objectives To Set Financial Objectives Strategic Objectives Communicate top Are the firm's goals management’s goals for related to market financial performance. standing and competitive position. Are focused internally on the firm’s operations Are focused externally and activities. on competition vis-à-vis the firm’s rivals. © McGraw-Hill Education.  The Need for Short-Term and Long-Term Objectives Short-Term Objectives: Focus attention on quarterly and annual performance improvements to satisfy near-term shareholder expectations. Long-Term Objectives: Force consideration of what to do now to achieve optimal long-term performance. Help pose a barrier to overemphasizing achieving just short-term results and postponing/delaying actions needed to achieve long-term performance targets.  Examples of Common Financial Objectives An x percent increase in annual revenues Annual increases in after-tax profits of x percent Annual increases in earnings per share of x percent Annual dividend increases of x percent Profit margins of x percent An x percent return on capital employed (ROCE) or return on shareholders’ equity investment (ROE) Increased shareholder value—in the form of an upward-trending stock price Bond and credit ratings of x Internal cash flows of x dollars to fund new capital investment  Examples of Common Strategic Objectives Winning an x percent market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service Deriving x percent of revenues from the sale of new products introduced within the past five years Having broader or deeper technological capabilities than rivals Having a wider product line than rivals Having a better-known or more powerful brand name than rivals Having stronger national or global sales and distribution capabilities than rivals Consistently getting new or improved products to market ahead of rivals  The Need for a Balanced Approach to Objective Setting A balanced scorecard strives to place: Balanced emphasis on achieving both financial and strategic objectives by tracking measures of both financial performance and the competitiveness of its market position. The four dimensions of a Balanced Scorecard: Financial objectives Strategic objectives that signal greater competitive strength (and thus greater capability to achieve higher levels of financial performance) Internal process objectives relating to productivity and quality Organizational objectives concerning human capital, culture, infrastructure, and innovation Good Strategic Performance Is the Key to Better Financial Performance Good financial performance is not enough. Current financial results are lagging indicators and do not assure the development of competitive capabilities for delivering better financial results in the future. Setting and achieving stretch strategic objectives signal improvements in a firm’s competitiveness and strength in the marketplace. Ongoing good strategic performance is a leading indicator of a firm’s increasing capability to deliver improved future financial performance. Setting Objectives for Every Organizational Level Breaks down overall performance targets into targets for each of the organization’s separate units Fosters setting lower-level performance targets or outcomes that support achievement of firm- wide strategic and financial objectives Extends the top-down objective-setting process to all organizational levels Stage 3: Crafting a Strategy Strategy making: Addresses a series of strategic hows. Requires choosing among strategic alternatives. Promotes actions to do things differently from competitors rather than running with the herd. Is a collaborative team effort that involves managers in various positions at all organizational levels. Strategy-Making Involves Managers at All Organizational Levels. Chief executive officer (CEO) Has ultimate responsibility for leading the strategy-making process as the strategic visionary and chief architect of strategy. Senior executives Fashion the major strategy components involving their areas of responsibility. Managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise) Utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy. FIGURE 2.2 A Company’s Strategy-Making Hierarchy  A Firm’s Strategy-Making Hierarchy (1 of 2) Corporate strategy Multibusiness strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses Business strategy How to strengthen market position and gain competitive advantage Actions to build competitive capabilities of single businesses Monitoring and aligning lower-level strategies  A Firm’s Strategy-Making Hierarchy (2 of 2) Functional area strategies Add relevant detail to the “hows” of business strategy. Provide a game plan for managing a particular activity in ways that support the business strategy. Operational strategies Add detail and completeness to business and functional strategies. Provide a game plan for managing specific operating activities with strategic significance. NOTE: These four strategies all impact each other. UNITING THE STRATEGY-MAKING HIERARCHY Components of a company’s strategy Corporate Level up and down the strategy hierarchy should be cohesive Business Level and mutually reinforcing. Functional Level Operational Level A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan Its strategic vision, business mission, and ELEMENTS OF A core values FIRM’S STRATEGIC Its strategic and PLAN financial objectives Its chosen strategy Stage 4: Executing the Strategy Converting strategic plans into actions requires: Directing organizational action Motivating people Building and strengthening the firm’s competencies and competitive capabilities Creating and nurturing a strategy-supportive work climate Meeting or beating performance targets Managing the Strategy Execution Process (1 of 2) Creating a strategy-supporting structure Staffing the firm with the needed skills and expertise Developing and strengthening strategy- supporting resources and capabilities Allocating ample resources to the activities critical to strategic success Ensuring that policies and procedures facilitate effective strategy execution Organizing work effort to achieve best practices Managing the Strategy Execution Process (2 of 2) Installing information and operating systems that enable company personnel to perform essential activities Motivating people by tying rewards and incentives to the achievement of performance objectives Creating a company culture conducive to successful strategy execution Exerting the internal leadership needed to propel implementation forward Stage 5: Evaluating Performance and Initiating Corrective Adjustments Evaluating performance Deciding whether the enterprise is passing the three tests of a winning strategy—good fit, competitive advantage, strong performance Initiating corrective adjustment Deciding whether to continue or change the firm’s vision and mission, objectives, strategy, and strategy execution methods Applying lessons based on organizational learning.  Achieving Effective Corporate Governance A strong, independent board of directors: Is well informed about the firm’s performance. Guides and judges the CEO and other executives. Can curb management actions the board believes are inappropriate or unduly risky. Can certify to shareholders that the CEO is doing what the board expects. Provides insight and advice to top management. Is intensely involved in debating the pros and cons of key strategic decisions and actions.