Chapter 1 - Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage

Representativeness

A bias rooted in the tendency to generalize from a small sample or even a single, vivid anecdote.

Availability error

A bias that arises from our predisposition to estimate the probability of an outcome based on how easy the outcome is to imagine.

Illusion of control

A cognitive bias rooted in the tendency to overestimate one's ability to control events.

Prior hypothesis bias

A cognitive bias that occurs when decision makers who have strong prior beliefs tend to make decisions on the basis of these beliefs, even when presented with evidence that their beliefs are wrong.

Escalating commitment

A cognitive bias that occurs when decision makers, having already committed significant resources to a project, commit even more resources after receiving feedback that the project is failing.

Multidivisional company

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

Sustained competitive advantage

A company's strategies enable it to maintain above-average profitability for a number of years.

Components of a Mission statement

A mission statement has four main components: a statement of the organization's reason for existence—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 to which the organization is committed; and a statement of major goals. Mission • Purpose of the company, or a statement of what the company strives to do. o What is our business? What will it be? What should it be? o To answer the question, "What is our business?' a company should define its business in terms of three dimensions: who is being satisfied (what customer groups), what is being satisfied (what customer needs), and how customers' needs are being satisfied (by what skills, knowledge, or distinctive competencies). - Customer Oriented Product-oriented focuses on the characteristics of the products sold and the markets served, not on the customer needs the products satisfy. • This obscures the company's true mission Vision • Articulation of a company's desired achievements or future state. Values • Statement of how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help achieve the company mission. • Insofar as they help to drive and shape behavior within a company, values are commonly seen as the bedrock of a company's organizational culture: the set of values, norms, and standards that control how employees work to achieve an organization's mission and goals. Establishing major goals • Goal - Precise and measurable desired future state that a company attempts to realize.

Business unit

A self-contained division that provides a product or service for a particular market.

Strategy

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

Values

A statement of how employees should conduct themselves and their business to help achieve the company mission.

Devil's advocacy

A technique in which one member of a decision-making team identifies all the considerations that might make a proposal.

Defining the Business

Business Definition • Who is being satisfied? o Customer groups • What is being satisfied? o Customer needs • How are customer needs being satisfied? o Distinctive competencies

Cognitive Biases and Strategic Decision Making - 1

Cognitive biases • Systematic errors in human decision making. o Arise from the way people process information Prior hypothesis bias • Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong. Escalating commitment • Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing. Reasoning analogy • Use of simple analogies to make sense out of a complex problem.

Strategic leadership

Creating competitive advantage through effective management of the strategy-making process.

Techniques for Improving Decision Making

Devil's advocacy • A member of a decision-making team identifies all the considerations that might make a proposal unacceptable. o Possible perils of recommended courses of action are brought into light. Dialectic inquiry • Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action. o Promotes strategic thinking. Outside view • Identification of past successful or failed strategic initiatives to determine if they will work for the current project.

Risk capital

Equity capital invested with no guarantee that stockholders will recoup their cash or earn a decent return.

Scenario planning

Formulating plans that are based upon "what-if" scenarios about the future.

Outside view

Identification of past successful or failed strategic initiatives to determine whether those initiatives will work for project at hand.

Scenario Planning

Identify different possible futures • Formulate plans to deal with those futures. • Invest in one plan but... • Hedge your bets by preparing for other scenarios. • Switch strategy if tracking of signposts shows alternative scenarios becoming more likely.

Astute use of power

In a now-classic article on leadership, Edward Wrapp noted that effective leaders tend to be very astute in their use of power. • Strategic leaders must often play the power game with skill and attempt to build consensus for their ideas rather than use their authority to force ideas through; they must act as members of a coalition or its democratic leaders rather than as dictators. Jeffery Pfeffer articulated a similar vision of the politically astute manager who gets things done in organizations through the intelligent use of power. • In Pfeffer's view, Power comes from control over resources that are important to the organization: budgets, capital, positions, information, and knowledge. Politically astute managers use these resources to acquire another critical resource: critically placed allies who can help them obtain their strategic objectives. Pfeffer stresses that one does not need to be a CEO to assemble power in an organization. Sometimes a junior functional managers can build a surprisingly effective power base and use it to influence organizational outcomes.

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 logistics.

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 - 1

Maximizing shareholder value is the ultimate goal of profit-making companies, for two reasons: • 1) Shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. • 2) Shareholders are the legal owners of a corporation, and their shares therefore represent a claim on the profits generated by a company; thus, managers have an obligation to invest those profits in ways that maximize shareholder value. • Risk capital - Equity capital for which there is no guarantee that stockholders will: o recoup their investment. o earn a decent return. • 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.

Emergent and Deliberate Strategies

Planned strategy • Deliberate strategy o Realized strategy • Unpredicted change in planned strategy o Unrealized strategy Serendipity, Autonomous action by lower-level managers, and/or Unplanned shift by top-level managers • Emergent strategy o Realized strategy

Superior performance - 3

Profit growth - The increase in net profit over time, achieved by: • selling products in rapidly growing markets. • gaining market share from rivals. • selling more to existing customers. • expanding overseas or diversifying into new businesses. To boost profitability and profit growth, managers must: • use strategies to give their company a competitive advantage over rivals. • deliver high profitability and sustainable profit growth.

Superior performance - 2

Profitability - The return a company makes on the capital invested in the enterprise. • Return on invested capital (ROIC) - Net profit over the capital invested in a firm. o Net profit = Net income after tax o Capital = the sum of money invested in the company; stockholders' equity plus debt owed to creditors • Result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs.

Feedback loop

Provides information to the corporate level on the: • strategic goals that are being achieved. • degree of competitive advantage being created and sustained. • This information and knowledge is returned to the corporate level through feedback loops, and becomes the input for the next round of strategy formulation and implementation. • Top managers can then decide whether to reaffirm the existing business model and the existing strategies and goals, or suggest changes for the future. o For example, if a strategic goal proves too optimistic, a more conservative goal is set. o Or, feedback may reveal that the business model is not working, so managers may seek ways to change it.

Cognitive Biases and Strategic Decision Making - 2

Representativeness • Tendency to generalize from a small sample or a single vivid anecdote. o Violates the statistical law of large numbers. Illusion of control • Tendency to overestimates one's ability to control events. o General or top managers are more prone to this. Availability error • Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it.

Shareholder value

Returns that shareholders earn from purchasing shares in a company.

Strategy formulation

Selecting strategies based on analysis of an organization's external and internal environment.

Strategy

Set of related actions that managers take to increase their company's performance. • Strategic leadership - Creating competitive advantage through effective management of the strategy-making process. • Strategy-making process - The process by which managers select and then implement a set of strategies that aim to achieve a competitive advantage. o Strategy formulation - Selecting strategies based on analysis of an organization's external and internal environment. o Strategy implementation - Putting strategies into action.

Main Components of the Strategic Planning Process

Strategy Formulation • Existing Business Model • Mission, Vision, Values, and Goals • External Analysis: Opportunities and Threats; SWOT Strategic Choice; and Internal Analysis: Strengths and Weaknesses • Functional-Level Strategies • Business-Level Strategies • Global Strategies • Corporate-Level Strategies Strategy Implementation • Governance and Ethics • Designing Organizational Structure, Designing Organizational Culture, and Designing Organizational Controls

Cognitive biases

Systematic errors in decision making that arise from the way people process information.

Competitive advantage

The achieved advantage over rivals when a company's profitability is greater than the average profitability of firms in its industry.

Vision

The articulation of a company's desired achievements or future state.

SWOT analysis

The comparison of strengths, weaknesses, opportunities, and threats.

Business model

The conception of how strategies should work together as a whole to enable the company to achieve competitive advantage.

Dialectic inquiry

The generation of a plan (a thesis) and a counterplan (an antithesis) that reflect plausible but conflicting courses of action.

Profit growth

The increase in net profit over time.

Criticisms of Formal Planning Models

The planning model suggests that a company's strategies are the result of a plan, that the strategic planning process is rational and highly structured, and that top management orchestrates the process. Several scholars have criticized the formal planning model for three main reasons: • 1) The unpredictability of the real world - Unforeseen circumstances can adversely affect strategic plans. • 2) The role that lower-level managers can play in the strategic management process - Excessive importance is attached to the role of top management, while ignoring lower-level managers. • 3) The fact that many successful strategies are often the result of serendipity, not rational strategizing or strategic planning.

Mission

The purpose of the company, or a statement of what the company strives to do.

Profitability

The return a company makes on the capital invested in the enterprise.

Reasoning by analogy

Use of simple analogies to make sense out of complex problems.

Major Goals

Well-constructed goals have four main characteristics: • They are precise and measurable. • They address crucial issues. • They are challenging but realistic. • They specify a time period in which the goals should be achieved, when that is appropriate.

Strategy implementation

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.

Steps in a formal strategic planning process

• 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 organization's strengths and weaknesses. • 4) Select strategies that: o build on the organization's strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats. o are consistent with the organization's mission and major goals of the organization. o are congruent and constitute a viable business model. • 5) Implement the strategies

Articulation of a business model

• A business model is the manager's conception of how the various strategies that the company pursues fit together into a congruent whole.

SWOT analysis

• Comparison of strengths, weaknesses, opportunities, and threats. • Purpose - Identify the strategies to: o exploit external opportunities. o counter threats o build on and protect company strengths. o eradicate weaknesses. • Goals - Create, affirm, and fine-tune a company-specific business model that will best align, fit, or match a company's resources and capabilities to the demands of its environment in which it operates.

BUSINESS MODEL

• Conception of how the set of strategies their company pursues work together as a congruent whole, enabling the company gains a competitive advantage and achieve superior profitability and profit growth. Deals with how a company: • selects, acquires, and keeps its customers. • defines and differentiates its product offerings. • creates value for its customers. • produces goods or services and delivers to the market. • Increase productivity and lowers costs and organizes its resources and activities. • achieves and sustains high profitability and growth.

Being well informed

• Effective strategic leaders develop a network of formal and informal sources who keep them well informed about what is going on within the company.

Determinants of Shareholder Value

• Effectiveness of strategies • Profitability (ROIC) • Profit growth • Shareholder value

External and internal analysis

• External analysis identifies strategic opportunities and threats in the organization's operating environment that will affect how an organization pursues its mission. o Involves examination of the: Industry environment in which the company operates. • Requires an assessment of the competitive structure of the company's industry, including the competitive position of the company and its major rivals. • It also requires analysis of the nature, stage, dynamics, and history of the industry. Country or national environment. • Assessing the impact of globalization on competition within an industry The wider socioeconomic or macroenvironment. • Consists of examining macroeconomic, social, governmental, legal, international, and technological factors that may affect the company and its industry • Internal analysis focuses on reviewing the resources, capabilities, and competencies of a company in order to identify the company's strengths and weaknesses.

Scenario planning

• Formulating plans that are based on "what-if" scenarios about the future. • Encourages managers to: o think outside the box, to anticipate what they might need to do in different situations. o It reminds managers that the world is complex and unpredictable, and to place a premium on flexibility rather than on inflexible plans based on assumptions about the future (which may or may not be correct). o As a result of scenario planning, organizations might pursue one dominant strategy related to the scenario that is judged to be most likely, but they make investments that will pay off if other scenarios come to the fore (anticipate probable scenarios). • Decentralized planning with Ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation. o Can result in strategic plans formulated in a vacuum by top managers who may be disconnected from current operating realities. o Can lead to tensions between corporate business-, and functional-level managers. o Much of the best planning can and should be done by business and functional managers who are closest to the facts; in other words, planning should be decentralized. o Corporate level planners should be facilitators who help business and functional managers do the planning by setting the broad strategic goals of the organization and providing the resources necessary to identify the strategies required to attain those goals.

SWOT strategies

• Functional-level strategies - Directed at improving the effectiveness of operations within a company, such as manufacturing, marketing, materials management, product development, and customer service. • Business-level strategies - 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. • Global strategies - address how to expand operations outside the home country in order to grow and prosper in a world where competitive advantage is determined at a global level. • Corporate-level strategies answer the primary questions: What business or businesses should we be in to maximize long-run profitability and profit growth of the organization, and how should we enter and increase our presence to gain a competitive advantage?

Strategic management

• General managers - Bear responsibility for a company's overall performance or for one of its major self-contained subunits or divisions o Have profit-and-loss responsibilities for a product, a business, or the company as a whole. • Functional managers - Responsible for supervising a particular function; that is, a task, an activity, or an operation such as accounting, marketing, research and development (R&D), information technology, or logistics. • Multidivisional company - Competes in several different businesses and has a separate self-contained division to manage each.

Levels of Strategic Management

• Head Office - Corporate Level o CEO, Board of Directors, Corporate staff (General managers) • Divisions A, B, and C - Business Level o Divisional managers and staff • Business functions of Divisions A, B, and C - Functional Level o Functional managers • Market A, B, and C

Business-level managers

• Heads of business units o Business unit is a self-contained division (with its own functions—for example, finance, purchasing, production, and marketing departments) that provides a product or service for a particular market. • Translate statements of intents into concrete strategies for individual businesses. • Are concerned with strategies specific to a particular business.

Willingness to delegate and empower

• High-performance leaders are skilled at delegation • They recognize that unless they learn how to delegate effectively, they can quickly become overloaded with responsibilities. • They also recognize that empowering subordinates to make decisions is a good motivational tool and often results in decisions being made by those who must implement them. • At the same time, astute leaders recognize they need to maintain control over certain key decisions (company's vision and business model).

Competitive advantage

• Occurs when a company's profitability is greater than the average profitability of firms in its industry or other companies competing for the same set of customers. The higher the profitability and profit growth relative to rivals, the greater its competitive advantage will be. • Sustained competitive advantage - A company's strategies that enable it to maintain above-average profitability for a number of years.

Corporate-level managers

• Oversee the development of strategies for the entire 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. • Provide a link between people concerned with the firm's strategic development and the shareholders. • Ensure that business strategies pursued by the company are consistent with maximizing profitability and profit growth.

Functional- level managers

• Responsible for specific business functions or operations (human resources, purchasing, product development, logistics, production, customer service, and so on) found within a company or one of its divisions • Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers. • Provide information that helps formulate realistic and attainable strategies.

Emotional intelligence

• Self-awareness - the ability to understand one's own moods, emotions, and drives, as well as their effect on others • Self-regulation - the ability to control or redirect disruptive impulses or moods; that is, to think before acting • Motivation - a passion for work that goes beyond money or status and a propensity to pursue goals with energy and persistence. • Empathy - the ability to understand the feelings and viewpoints of subordinates and to take those into account when making decisions • Social skills - friendliness with a purpose.

Commitment

• Strong leaders demonstrate their commitment to their visions and business models by actions and words, and they often lead by example.

Vision, eloquence, and consistency

• Strong leaders have a clear, compelling vision of where the organization should go • Eloquently communicate this vision to others within the organization in terms that energize people • Consistently articulate their vision until it becomes part of the organization's culture

Strategy implementation

• Taking actions at the functional, business, and corporate levels to execute a strategic plan. o For example, putting quality improvement program into place, changing the way a product is designed, positioning the product differently in the marketplace, segmenting the marketing and offering different versions of the product to different consumer groups, implementing price increases or decreases, expanding through mergers and acquisitions, or downsizing the company by closing down or selling off parts of the company. • Designing the best organization structure, culture, and control systems to put a chosen strategy into action. o In addition, senior managers need to put a governance system in place to make sure that everyone within the organization acts in a manner that is not only consistent with maximizing profitability and profit growth, but also legal and ethical.

Characteristics of Good Strategic Leaders

• Vision, eloquence, and consistency • Articulation of a business model • Commitment • Being well informed • Willingness to delegate and empower • Astute use of power • Emotional intelligence o Self-awareness, self-regulation, and motivation o Empathy and social skills