Ch. 1 Managing Strategy Making Process for Competitive Advantage

Decentralized Planning

"ivory tower" approach can be a mistake

Goals

. A goal is a precise and measurable desired future state that a company attempts to realize. In this context, the purpose of goals is to specify with precision what must be done if the company is to attain its mission or vision

Well constructed goals have these characteristics:

1) Precise & Measurable 2) Address crucial issues 3) Challenging but realistic 4) specify time period in which should be acheived Also provide a way for performance of managers to be evaluated.

Profitability & Profit Growth caused by two main factors

1) Relative Success in industry 2) Overall performance of industry in comparison to other industries

External Analysis

2nd component to strategic management process. Three interrelated environments should be examined when undertaking an external analysis: the industry environment in which the company operates, the country or national environment, and the wider socioeconomic or macroenvironment

Internal Analysis

3rd Component. focuses on review- ing the resources, capabilities, and competencies of a company. The goal is to identify the strengths and weaknesses of the company.

Business Model

A business model is managers' conception of how the set of strategies their company pursues should work together as a congruent whole, enabling the company to gain a competitive advantage and achieve superior profitability and profit growth. In essence, a business model is a kind of mental model, or gestalt, of how the various strategies and capital investments a com- pany makes should fit together to generate above-average profitability and profit growth.

Competitive Advantage

A company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers. The higher its profitability relative to rivals, the greater its competitive advantage will be

Mission Statement's 4 Main components

A mission statement has four main components: a statement of the raison d'être of a company or organization—its reason for existence—which is normally referred to as the mission; a statement of some desired future state, usually referred to as the vision; a statement of the key values that the organization is committed to; and a statement of major goals.

Strategic Leadership

A strategy is a set of related actions that managers take to increase their company's performance.

Strategy

A strategy is a set of related actions that managers take to increase their company's performance.

Functional Level Managers

Functional-level managers are responsible for the specific business functions or operations (human resources, purchasing, product development, customer service, etc.) that constitute a company or one of its divisions. Thus, a functional manager's sphere of responsibi ity is generally confined to one organizational activity, whereas general managers oversee the operation of an entire company or division.

Competitive Advantage

If a company's strategies lead to superior performance

Functional Managers

Managers responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistic

General Managers

Managers who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions.

Superior Performance

Maximizing shareholder value is the ultimate goal of profit-making companies, for two reasons. 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 corpora- tion, and their shares therefore represent a claim on the profits generated by a company.

Characteristics of good leaders

Several authors have identified a few key character- istics of good strategic leaders that do lead to high performance: (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.4

Criticisms against rational strategies

Several scholars have criticized the formal planning model for three main reasons: the unpredictability of the real world, the role that lower-level man- agers can play in the strategic management process, and the fact that many successful strategies are often the result of serendipity, not rational strategizing.

Superior performance in non profits

Still have to have standards/goals & strategies. Still competing for scarce resources like other businesses.

Availability Error

The availability error arises from our predisposition to estimate the probability of an outcome based on how easy the outcome is to imagine. For example, more people seem to fear a plane crash than a car accident, and yet statistically one is far more likely to be killed in a car on the way to the airport than in a plane crash. Plane crash is more vivid in imaginations than car crash.

SWOT Analysis

The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis.16 The central purpose is to identify the strategies to exploit external opportunities, counter threats, build on and protect company strengths, and eradicate weaknesses.

Corporate Level Managers

The corporate level of management consists of the chief executive officer (CEO), other senior executives, and corporate staff. In consultation with other senior executives, the role of corporate-level managers is to oversee the development of strategies for the whole organization. This role includes defining the goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the entire organization. Corporate-level managers also provide a link between the people who oversee the strategic development of a firm and those who own it (the shareholders). Corporate-level managers, and particularly the CEO, can be viewed as the agents of shareholders.3 It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing profitability and profit growth. If they are not, then the CEO is likely to be called to account by the shareholders.

Model of Strategic Planning Process

The formal strategic planning process has five main steps: 1. Select the corporate mission and major corporate goals 2. Analyze the organization's external competitive environment to identify opportunities and threats. 3. Analyze the organization's internal operating environment to identify the organiza- tion's strengths and weaknesses. 4. 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. These strategies should be consistent with the mission and major goals of the organization. They should be congruent and constitute a viable business model. 5. Implement the strategies.

Values

The values of a company state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission. Insofar as they help drive and shape behavior within a company, values are commonly seen as the bedrock of a company's organizational cul- ture: the set of values, norms, and standards that control how employees work to achieve an organization's mission and goals e.g Nucor Steel

Vision

The vision of a company defines a desired future state; it articulates, often in bold terms, what the company would like to achieve.

Profitable Growth

What shareholders want to see, and what managers must try to deliver through strategic leadership, is profitable growth: that is, high profitability and sustainable profit growth. This is not easy, but some of the most successful enterprises of our era have achieved it—companies such as Apple, Google, and Wal-Mart.

Multidivisional company

a company that competes in several different businesses and has created a separate self-contained division to manage each.

Techniques for improving decision making

devil's advocacy a technique in which one member of a decisionmaking team identifies all the considerations that might make a proposal unacceptable. dialectic inquiry The generation of a plan (a thesis) and a counterplan (an antithesis) that reflect plausible but conflicting courses of action. outside view identification of past successful or failed strategic initiatives to determine whether those initiatives will work for project at hand.

Risk Capital

equity capital for which there is no guarantee that stockholders will ever recoup their investment or earn a decent return.

Scenario Planning

involves formulating plans that are based upon "what-if" scenarios about the future. In the typical scenario-planning exercise, some scenarios are optimistic and some are pessimistic. Teams of managers are asked to develop specific strategies to cope with each scenario. A set of indicators is chosen as signposts to track trends and identify the probability that any particular scenario is coming to pass. The idea is to allow managers to understand the dynamic and complex nature of their environment, to think through problems in a strategic fash- ion, and to generate a range of strategic options that might be pursued under different circumstances.2

Reasoning by analogy

involves the use of simple analogies to make sense out of complex problems. The problem with this heuristic is that the analogy may not be valid

Representativeness

is rooted in the tendency to generalize from a small sample or even a single vivid anecdote. This bias violates the statistical law of large numbers, which says that it is inappropriate to generalize from a small sample, let alone from a single case.

Strategy Implementation

is the task of putting strategies into action, which includes designing, delivering, and supporting products; improving the efficiency and effectiveness of operations; and designing a company's organizational structure, control systems, and culture.

Escalating commitment

occurs when deci- sion makers, having already committed significant resources to a project, commit even more resources even if they receive feedback that the project is failing.37 This may be an irrational response; a more logical response would be to abandon the project and move on (that is, to cut your losses and exit), rather than escalate commitment. Feelings of personal responsibility for a project seemingly induce decision makers to stick with a project despite evidence that it is failing

Illusion of Control

or the tendency to overestimate one's ability to control events. General or top managers seem to be particularly prone to this bias: having risen to the top of an organization, they tend to be overconfident about their ability to succeed. According to Richard Roll, such overconfidence leads to what he has termed the hubris hypothesis of takeovers.3

Profit Growth

profit growth of a company can be measured by the increase in net profit over time A company can grow its profits if it sells products in markets that are growing rapidly, gains market share from rivals, increases the amount it sells to existing customers, expands overseas, or diversifies profitably into new lines of business Together, profitability and profit growth are the principal drivers of shareholder value

Prior hypothesis bias

refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make decisions on the basis of these beliefs, even when presented with evidence that their beliefs are incor- rect. Moreover, they tend to seek and use information that is consistent with their prior beliefs while ignoring information that contradicts these beliefs.

Profitability

the return a company makes on investing in enterprise. The return on invested capital (ROIC) that a company earns is defined as its net profit over the capital invested in the firm (profit/capital invested). By net profit, we mean net income after tax. By capital, we mean the sum of money invested in the company: that is, stockholders' equity plus debt owed to creditors. So defined, 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

Shareholder Value

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

Sustained Competitive Advantage

when its strategies enable it to maintain above-average profitability for a number of years.

Various alternative strategies

• Functional-level strategies, directed at improving the effectiveness of operations within a company, such as manufacturing, marketing, materials management, product devel- opment, and customer service. We review functional-level strategies in Chapter 4. • Business-level strategies, which encompass the business's overall competitive theme, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings—for example, cost leadership, differentiation, focusing on a particular niche or segment of the industry, or some combination of these. We review business-level strategies in Chapters 5, 6, and 7. • Global strategies, which address how to expand operations outside the home country to grow and prosper in a world where competitive advantage is determined at a global level. We review global strategies in Chapter 8. • Corporate-level strategies, which answer the primary questions: What business or businesses should we be in to maximize the long-run profitability and profit growth of the organization, and how should we enter and increase our presence in these businesses to gain a competitive advantage? We review corporate-level strategies in Chapters 9 and 10.

A business model encompasses how a company will:

• 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 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.