GBA 490 Chapter 2
Which is more important to a company's future financial performance—the achievement of strategic objectives or the achievement of financial objectives? Why?
A good financial performance, by itself, is not enough. Of equal or greater importance is a company's strategic performance—outcomes that indicate whether a company's market position and competitiveness are deteriorating, holding steady, or improving. A stronger market standing and greater competitive vitality—especially when accompanied by competitive advantage—is what enables a company to improve its financial performance.
Define and briefly explain what is meant by each of the following terms. a) strategic vision b) stretch objectives c) strategic objective d) balanced scorecard e) strategic intent
Strategic vision: A strategic vision delineates management's aspirations for the business, providing a panoramic view of "where we are going" and a convincing rationale for why this makes good business sense for the company.Stretch objectives: Stretch objectives set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results.Strategic objective: Strategic objectives are goals concerning a company's marketing standing and competitive position.Balanced Scorecard: It is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing.Strategic intent: A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective.
What are the duties of a company's board of directors in the strategy-making, strategy-executing process?
A company's board of directors has four important obligations to fulfill:1. Oversee the company's financial accounting and financial reporting practices.2. Critically appraise the company's direction, strategy, and business approaches.3. Evaluate the caliber of senior executives' strategic leadership skills.4. Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests.
What is the role and responsibility of a company's CEO in the strategy-making, strategy-executing process?
A company's senior executives obviously have lead strategy-making roles and responsibilities. The chief executive officer (CEO), as captain of the ship, carries the mantles of chief direction setter, chief objective setter, chief strategy maker, and chief strategy implementer for the total enterprise. Ultimate responsibility for leading the strategy-making, strategy-executing process rests with the CEO. And the CEO is always fully accountable for the results the strategy produces, whether good or bad. In some enterprises, the CEO or owner functions as chief architect of the strategy, personally deciding what the key elements of the company's strategy will be, although he or she may seek the advice of key subordinates and board members. A CEO-centered approach to strategy development is characteristic of small owner-managed companies and some large corporations that were founded by the present CEO or that have a CEO with strong strategic leadership skills.
Isabelle is in the process of setting financial and strategic objectives for her marketing company. She realizes she needs to add short-term and longer-term performance targets. Is it important to include short-term and long-term objectives at this stage? Which one is more important? Explain.
A company's set of financial and strategic objectives should include both near-term and longer term performance targets. Short-term (quarterly or annual) objectives focus attention on delivering performance improvements in the current period and satisfy shareholder expectations for near-term progress. Longer-term targets (three to five years off) force managers to consider what to do now to put the company in position to perform better later. Long-term objectives are critical for achieving optimal long-term performance and stand as a barrier to a nearsighted management philosophy and an undue focus on short-term results. When trade-offs have to be made between achieving long-term objectives and achieving short-term objectives, long-term objectives should take precedence (unless the achievement of one or more short-term performance targets has unique importance).
A well-conceived strategic vision helps prepare a company for the future. True or false? Explain and justify your answer.
A well-conceived strategic vision is distinctive and specific to a particular organization; it avoids generic, feel-good statements like "We will become a global leader and the first choice of customers in every market we serve." The real purpose of a vision statement is to serve as a management tool for giving the organization a sense of direction. A well-thought-out, forcefully communicated strategic vision pays off in several respects: (1) It crystallizes senior executives' own views about the firm's long-term direction; (2) it reduces the risk of rudderless decision making; (3) it is a tool for winning the support of organization members to help make the vision a reality; (4) it provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the company's overall strategy; and (5) it helps an organization prepare for the future. When top executives are able to demonstrate significant progress in achieving these five benefits, the first step in organizational direction setting has been successfully completed.
Ali is a business unit head of a soap manufacturing company. Explain the strategy he could use to strengthen his market position and build a competitive advantage over his rivals. Differentiate between his strategy and a corporate strategy.
Business strategy is concerned with strengthening the market position, building competitive advantage, and improving the performance of a single line of business unit. Business strategy is primarily the responsibility of business unit heads, although corporate-level executives may well exert strong influence.Corporate strategy concerns how to improve the combined performance of the set of businesses the company has diversified into by capturing cross-business synergies and turning them into competitive advantage. It addresses the questions of what businesses to hold or divest, which new markets to enter, and how to best enter new markets (by acquisition, creation of a strategic alliance, or through internal development, for example). It is orchestrated by the CEO and other senior executives and establishes an overall strategy for managing a set of businesses in a diversified, multi-business company.
Identify and explain three actions that top executives can take to help instill a spirit of high achievement into the corporate culture and mobilize organizational energy behind the drive for good strategy execution and operating excellence.
Each company manager has to think through the answer to the question "What needs to be done in my area to execute my piece of the strategic plan, and what actions should I take to get the process under way?" How much internal change is needed depends on how much of the strategy is new, how far internal practices and competencies deviate from what the strategy requires, and how well the present work culture supports good strategy execution. In most situations, managing the strategy execution process includes the following principal aspects:• Creating a strategy-supporting structure.• Staffing the organization to obtain 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 the work effort along the lines of best practice.• Installing information and operating systems that enable company personnel to perform essential activities.• Motivating people and tying rewards directly to the achievement of performance objectives.• Creating a company culture conducive to successful strategy execution.• Exerting the internal leadership needed to propel implementation forward.
Why does an organization need both financial and strategic objectives?
Financial objectives communicate management's goals for financial performance. Strategic objectives are goals concerning a company's marketing standing and competitive position. The importance of setting and attaining financial objectives is obvious. Without adequate profitability and financial strength, a company's long-term health and ultimate survival are jeopardized. Furthermore, subpar earnings and a weak balance sheet alarm shareholders and creditors and put the jobs of senior executives at risk. However, good financial performance, by itself, is not enough. Of equal or greater importance is a company's strategic performance—outcomes that indicate whether a company's market position and competitiveness are deteriorating, holding steady, or improving. A stronger market standing and greater competitive vitality— especially when accompanied by competitive advantage—is what enables a company to improve its financial performance.
Explain the difference between financial objectives and strategic objectives. Give examples of each.
Financial objectives relate to the financial performance targets management has established for the organization to achieve. For example, 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. Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects. For example, winning an x percent market share; achieving lower overall costs than rivals; overtaking key competitors on product performance, quality, or customer service.
What is the managerial value of a good strategic vision?
For a strategic vision to function as a valuable management tool, it must convey what top executives want the business to look like and provide managers at all organizational levels with a reference point in making strategic decisions and preparing the company for the future. It must say something definitive about how the company's leaders intend to position the company beyond where it is today
Explain why a company's strategy is really a collection of strategies.
Ideally, the pieces of a company's strategy up and down the strategy hierarchy should be cohesive and mutually reinforcing, fitting together like a jigsaw puzzle. It is the responsibility of top executives to achieve this unity by clearly communicating the company's vision, objectives, and major strategy components to down-the-line managers and key personnel. Midlevel and frontline managers cannot craft unified strategic moves without first understanding the company's long-term direction and knowing the major components of the corporate and/or business strategies that their strategy-making efforts are supposed to support and enhance. Anything less than a unified collection of strategies weakens the overall strategy and is likely to impair company performance. Thus, as a general rule, strategy making must start at the top of the organization and then proceed downward from the corporate level to the business level and then from the business level to the associated functional and operating levels. Once strategies up and down the hierarchy have been created, lower-level strategies must be scrutinized for consistency with and support of higher-level strategies. Any strategy conflicts must be addressed and resolved, either by modifying the lower-level strategies with conflicting elements or by adapting the higher-level strategy to accommodate what may be more appealing strategy ideas and initiatives bubbling up from below.
What is the strategy-making hierarchy for a diversified company? How does it differ from the strategy-making hierarchy for a single business company?
In diversified companies multiple and sometimes strikingly different businesses have to be managed, and crafting a full-fledged strategy involves four distinct types of strategic actions and initiatives, namely, corporate strategy, business strategy, functional-area strategy, and operating strategy. Each of these involves different facets of the company's overall strategy and calls for the participation of different types of managers. In single-business companies, the uppermost level of the strategy-making hierarchy is the business strategy, so a single-business company has three levels of strategy: business strategy, functional-area strategies, and operating strategies.
List and briefly discuss at least three obligations of a company's board of directors in corporate governance and the strategy-making, strategy-executing process.
In their role as agents of shareholders, top executives have a clear and unequivocal duty to make decisions and operate the company in accord with shareholder interests. (This does not mean disregarding the interests of other stakeholders—employees, suppliers, the communities in which the company operates, and society at large.) Most boards of directors have a compensation committee, composed entirely of directors from outside the company, to develop a salary and incentive compensation plan that rewards senior executives for boosting the company's long-term performance on behalf of shareholders. Every corporation should have a strong independent board of directors that (1) is well informed about the company's performance, (2) guides and judges the CEO and other top executives, (3) has the courage to curb management actions the board believes are inappropriate or unduly risky, (4) certifies to shareholders that the CEO is doing what the board expects, (5) provides insight and advice to management, and (6) is intensely involved in debating the pros and cons of key decisions and actions. Boards of directors that lack the backbone to challenge a strong-willed or "imperial" CEO or that rubber-stamp almost anything the CEO recommends without probing inquiry and debate abdicate their fiduciary duty to represent and protect shareholder interests.
Identify and explain four actions that top executives can take that are key elements in directing organizational action and building capabilities behind the drive for good strategy execution to meet or beat performance targets.
Management's action agenda for executing the chosen strategy emerges from assessing what the company will have to do to achieve the targeted financial and strategic performance. In most situations, managing the strategy execution process includes the following principal aspects:• Creating a strategy-supporting structure.• Staffing the organization to obtain 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 the work effort along the lines of best practice.• Installing information and operating systems that enable company personnel to perform essential activities.• Motivating people and tying rewards directly to the achievement of performance objectives.• Creating a company culture conducive to successful strategy execution.• Exerting the internal leadership needed to propel implementation forward.
What is meant by the term "stretch objectives"? Is it important that companies establish stretch objectives? Why or why not
Stretch objectives set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results. The experiences of countless companies teach that one of the best ways to promote outstanding company performance is for managers to deliberately set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results. Challenging company personnel to go all out and deliver "stretch" gains in performance pushes an enterprise to be more inventive, to exhibit more urgency in improving both its financial performance and its business position, and to be more intentional and focused in its actions. Stretch objectives spur exceptional performance and help build a firewall against contentment with modest gains in organizational performance.
What is the meaning of the term "balanced scorecard"? What are the merits of using a balanced scorecard in judging a company's performance?
The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. It provides a company's employees with clear guidelines about how their jobs are linked to the overall objectives of the organization, so they can contribute most productively and collaboratively to the achievement of these goals.
What is the difference between a mission statement and a strategic vision?
The defining characteristic of a strategic vision is what it says about the company's future strategic course—"the direction we are headed and the shape of our business in the future." It is aspirational. In contrast, a mission statement describes the enterprise's present business and purpose—"who we are, what we do, and why we are here." It is purely descriptive. Ideally, a company mission statement (1) identifies the company's products and/or services, (2) specifies the buyer needs that the company seeks to satisfy and the customer groups or markets that it serves, and (3) gives the company its own identity.
What are the five integrated tasks of the strategy-making, strategy-executing process, and what does each one involve?
The process of crafting and executing a company's strategy is an ongoing, continuous process consisting of five interrelated stages:1. Developing a strategic vision that charts the company's long-term direction, a mission statement that describes the company's purpose, and a set of core values to guide the pursuit of the vision and mission.2. Setting objectives for measuring the company's performance and tracking its progress in moving in the intended long-term direction.3. Crafting a strategy for advancing the company along the path management has charted and achieving its performance objectives.4. Executing the chosen strategy efficiently and effectively.5. Monitoring developments, evaluating performance, and initiating corrective adjustments in the company's vision and mission statement, objectives, strategy, or approach to strategy execution in light of actual experience, changing conditions, new ideas, and new opportunities.
Alonzo, the CEO of ActiveMinds, a business consulting service, decides to express the essence of his organization's vision with the help of a slogan. How does this help him?
The task of effectively conveying the vision to company personnel is assisted when management can capture the vision of where to head in a catchy or easily remembered slogan. A number of organizations have summed up their vision in a brief phrase. Creating a short slogan to illuminate an organization's direction and purpose and using it repeatedly as a reminder of "where we are headed and why" helps rally organization members to hurdle whatever obstacles lie in the company's path and maintain their focus.
Explain why an organization needs a strategic vision. What purpose does a strategic vision serve?
Top management's views and conclusions about the company's long-term direction and what product-market-customer business mix seems optimal for the road ahead constitute a strategic vision for the company. A strategic vision delineates management's aspirations for the business, providing a panoramic view of "where we are going" and a convincing rationale for why this makes good business sense for the company. A strategic vision thus points an organization in a particular direction, charts a strategic path for it to follow, builds commitment to the future course of action, and molds organizational identity. A clearly articulated strategic vision communicates management's aspirations to stakeholders (customers, employees, stockholders, suppliers, etc.) and helps steer the energies of company personnel in a common direction.
The achievement of financial objectives tends to be a lagging indicator of a company's performance, while the achievement of strategic objectives tends to be a leading indicator of a company's future financial performance. True or false? Support and explain your answer.
True. A company's financial performance measures are really lagging indicators that reflect the results of past decisions and organizational activities. But a company's past or current financial performance is not a reliable indicator of its future prospects—poor financial performers often turn things around and do better, while good financial performers can fall upon hard times. The best and most reliable leading indicators of a company's future financial performance and business prospects are strategic outcomes that indicate whether the company's competitiveness and market position are stronger or weaker. The accomplishment of strategic objectives signals that the company is well positioned to sustain or improve its performance.
An organization's strategic plan consists of the actions which management plans to take in the near future. True or false? Explain and justify your answer.
True. Developing a strategic vision and mission, setting objectives, and crafting a strategy are basic direction-setting tasks. They map out where a company is headed, its purpose, the targeted strategic and financial outcomes, the basic business model, and the competitive moves and internal action approaches to be used in achieving the desired business results. Together, these elements constitute a strategic plan for coping with industry conditions, outcompeting rivals, meeting objectives, and making progress toward aspirational goals. Typically, a strategic plan includes a commitment to allocate resources to the plan and specifies a time period for achieving goals (usually three to five years).
The task of crafting a company's strategy is typically a job for the company's whole management team, not just a small group of senior executives. True or false? Explain and support your answer.
True. The more a company's operations cut across different products, industries, and geographic areas, the more that headquarters executives have little option but to delegate considerable strategy-making authority to down-the-line managers in charge of particular subsidiaries, divisions, product lines, geographic sales offices, distribution centers, and plants. On-the-scene managers who oversee specific operating units can be reliably counted on to have more detailed command of the strategic issues and choices for the particular operating unit under their supervision—knowing the prevailing market and competitive conditions, customer requirements and expectations, and all the other relevant aspects affecting the several strategic options available. Managers with day-to-day familiarity of, and authority over, a specific operating unit thus have a big edge over headquarters executives in making wise strategic choices for their operating unit. The result is that, in most of today's companies, crafting and executing strategy is a collaborative team effort in which every company manager plays a strategy-making role—ranging from minor to major—for the area he or she heads.
Identify the key characteristics of a well-stated organizational objective.
Well-stated objectives must be specific, quantifiable or measurable, and challenging and must contain a deadline for achievement. Concrete, measurable objectives are managerially valuable for three reasons: (1) They focus organizational attention and align actions throughout the organization, (2) they serve as yardsticks for tracking a company's performance and progress, and (3) they motivate employees to expend greater effort and perform at a high level.
Discuss the meaning of each of the following levels of strategy and indicate what level of management tends to take the lead responsibility for crafting the strategy at each of the four levels. a. corporate strategy b. business strategy c. functional-area strategy d. operating strategy
a Corporate strategy is orchestrated by the CEO and other senior executives and establishes an overall strategy for managing a set of businesses in a diversified, multibusiness company.b. Business strategy is concerned with strengthening the market position, building competitive advantage, and improving the performance of a single line of business unit.c. Functional-area strategies concern the approaches employed in managing particular functions within a business—like research and development (R&D), production, procurement of inputs, sales and marketing, distribution, customer service, and finance.d. Operating strategies concern the relatively narrow approaches for managing key operating units (e.g., plants, distribution centers, purchasing centers) and specific operating activities with strategic significance (e.g., quality control, materials purchasing, brand management, Internet sales).