management strategy, planning and implementation
CHAPTER 2 Strategy Formulation, Execution, and Governance
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LEARNING OBJECTIVES
Understand why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.
Explain the importance of setting both strategic and financial objectives.
Explain why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.
Recognize what a company must do to achieve operating excellence and to execute its strategy proficiently.
Identify the role and responsibility of a company’s board of directors in overseeing the strategic management process.
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What Does the Strategy-Making, Strategy-Executing Process Entail?
Develop a strategic vision.
Set objectives.
Craft a strategy.
Implement and execute the chosen strategy.
Evaluate and analyze the external environment and the firm’s internal situation and performance.
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FIGURE 2.1 The Strategy Formulation, Strategy Execution Process
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TABLE 2.1 Factors Shaping Decisions in the Strategy Formulation, Strategy Execution Process
| External Considerations | Internal Considerations |
| Does the current strategic course present attractive opportunities for growth and profitability? | Does the company have an appealing customer value proposition? |
| What kind of competitive forces are industry members facing and are they acting to enhance or weaken the company’s prospects for growth and profitability? | What are the company’s competitively important resources and capabilities and are they potent enough to produce a sustainable competitive advantage? |
| What factors are driving industry change and what impact on the company’s prospects will they have? | Does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats? |
| How are industry rivals positioned and what strategic moves are they likely to make next? | Are the company’s costs competitive with those of key rivals? |
| What are the key factors of future competitive success and does the industry offer good prospects for attractive profits for companies possessing those capabilities? | Is the company competitively stronger or weaker than key rivals? |
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Strategic Inflection Point and Strategic Plan
A strategic inflection point occurs when significant changes in an industry require that management must evaluate the risks of changing the company’s future direction rather than staying on its established course.
A strategic plan maps out where a company is headed, establishes strategic and financial targets, and outlines the competitive moves and approaches to be used in achieving the desired business results.
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Stage 1: Developing a Strategic Vision, a Mission, and Core Values
Strategic Vision
Top management’s view of “where we are going”
Firm’s direction and its future product-market-customer-technology focus to stakeholders
Distinctive and specific to a particular organization
Avoids use of generic, innocuous, and uninspiring language that could apply to most any firm
Definitively states how the company’s leaders intend to position the firm beyond where it is today
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CORE CONCEPT: Strategic Vision
A strategic vision describes “where we are going”—the course and direction management has charted and the company’s future product-customer-market-technology focus.
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TABLE 2.2 Characteristics of Effectively Worded Vision Statements
| TYPE | DESCRIPTION |
| Graphic | Paints a picture of the kind of company that management is trying to create and the market position(s) the company is striving to stake out. |
| Directional | Is forward looking; describes the strategic course that management has charted and the kinds of product-market-customer-technology changes that will help the company prepare for the future. |
| Focused | Is specific enough to provide managers with guidance in making decisions and allocating resources. |
| Flexible | Is not so focused that it makes it difficult for management to adjust to changing circumstances in markets, customer preferences, or technology. |
| Feasible | Is within the realm of what the company can reasonably expect to achieve. |
| Desirable | Indicates why the directional path makes good business sense. |
| Easy to communicate | Is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple, memorable “slogan” |
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TABLE 2.3 Common Shortcomings in Company Vision Statements
| Shortcoming | Description |
| Vague or incomplete | Short on specifics about where the company is headed or what the company is doing to prepare for the future. |
| Not forward looking | Doesn’t indicate whether or how management intends to alter the company’s current product-market-customer-technology focus. |
| Too broad | So all-inclusive that the company could head in most any direction, pursue most any opportunity, or enter most any business. |
| Bland or uninspiring | Lacks the power to motivate company personnel or inspire shareholder confidence about the company’s direction. |
| Not distinctive | Provides no unique firm identity; could apply to firms in any of several industries (including rivals operating in the same market arena). |
| Too reliant on superlatives | Doesn’t say anything specific about the company’s strategic course beyond the pursuit of such distinctions as being a recognized leader, a global or worldwide leader, or the first choice of customers. |
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The Importance of Communicating the Strategic Vision
An engaging, inspirational vision
Provides direction and energizes employees
Makes the organization’s case for “where we are going and why”
Evokes positive support and excitement
Enlists the commitment of company personnel to engage in actions that move the company in its intended direction
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Expressing the Essence of the Vision in a Slogan
Disney
To "create happiness by providing the finest in entertainment for people of all ages, everywhere"
The Mayo Clinic
The best care to every patient every day
Greenpeace
To halt environmental abuse and promote environmental solutions
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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 by management at all levels.
It is a tool for winning the support of employees to help make the vision a reality.
It provides a beacon for lower-level managers in forming departmental missions.
It helps an organization prepare for the future.
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Strategic Vision versus Mission Statement
A strategic vision concerns a firm’s future strategic course— “where we are headed and our future focus.”
Markets to be pursued
Future product, market, customer and technology focus
A firm’s mission statement focuses on its present business scope and purpose— “who we are, what we do, and why we are here.”
Current product and service offerings
Customer needs being served
Company identity
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Developing a Company Mission Statement
Ideally, a company mission statement is sufficiently descriptive to:
Identify the company’s products or services.
Specify the buyer needs it seeks to satisfy.
Specify the customer groups or markets it is endeavoring to serve.
Specify its approach to pleasing customers.
Give the company its own identity.
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CORE CONCEPT: Mission Statement
A well-conceived mission statement conveys a company’s purpose in language specific enough to give the company its own identity.
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Example of a Mission Statement
The mission of Trader Joe’s is to give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.
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Strategic Mission, Vision and Profit
Occasionally, companies state that their mission is to simply earn a profit.
Profit is more correctly an objective and a result of what a firm does.
Profit is the obvious intent of every commercial enterprise.
Profit is not “who we are and what we do.”
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Linking the Strategic Vision and Mission with Company Values
Values
Provide guidance for desired actions and behaviors of employees as they conduct the company’s business
Fair treatment
Honor and integrity
Ethical behavior
Innovativeness
Teamwork
A passion for excellence
Social responsibility
Community citizenship
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CORE CONCEPT: Values
A company’s values are the beliefs, traits, and behavioral norms that its personnel are expected to display in conducting the company’s business and pursuing its strategic vision and mission.
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Stage 2: Setting Objectives (1 of 3)
Managerial Purpose in Setting Objectives
To convert the strategic vision into specific performance targets
To create yardsticks to track progress and measure performance
Managerially Valuable Objectives
Are well-stated (clearly worded)
Are challenging, yet achievable such that they stretch the organization to perform at its full potential
Are quantifiable (measurable)
Contain a specific deadline for achievement
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The Imperative of Setting Stretch Objectives
To promote outstanding performance, managers must set its performance targets high enough to stretch an organization to perform at its full potential.
A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective.
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CORE CONCEPTS: Objectives, Stretch Objectives and Strategic Intent
Objectives are an organization’s performance targets—the results management wants to achieve.
Stretch objectives set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results.
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.
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Stage 2: Setting Objectives (2 of 3)
What Kinds of Objectives to Set
Financial objectives
Communicate management’s targets for financial performance
Are lagging indicators reflecting results of past decisions and organizational activities
Relate to revenue growth, profitability, and return on investment
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Stage 2: Setting Objectives (3 of 3)
What Kinds of Objectives to Set (continued)
Strategic objectives
Are related to a firm’s marketing standing and competitive vitality
Are leading indicators of a firm’s future financial performance and business prospects
If achieved, indicate that a firm’s future financial performance will be better than its current or past performance
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CORE CONCEPTS: Financial Objectives, and Strategic Objectives
Objectives are an organization’s performance targets—results management wants to achieve.
Financial objectives relate to the financial performance targets management has established for the organization to achieve.
Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive vitality, and future business prospects.
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CORE CONCEPT: Balanced Scorecard
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.
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The Balanced Scorecard Approach to Performance Measurement
Financial Objectives
An x percent increase in annual revenues
Annual increases in earnings per share of x percent
An x percent return on capital employed (ROCE) or shareholder investment (ROE)
Bond and credit ratings of x
Internal cash flows of x to fund new capital investment
Strategic Objectives
Win an x percent market share
Achieve customer satisfaction rates of x percent
Achieve a customer retention rate of x percent
Acquire x number of new customers
Introduce x number of new products in the next three years
Reduce product development times to x months
Increase the percentage of sales coming from new products to x percent
Improve information systems capabilities to give frontline managers defect information in x minutes
Improve teamwork by increasing the number of projects involving more than one business unit to x
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Examples of Financial Objectives
Examples:
An x percent increase in annual revenues
Annual increases in earnings per share of x percent
An x percent return on capital employed (ROCE) or shareholder investment (ROE)
Bond and credit ratings of x
Internal cash flows of x to fund new capital investment
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Examples of Strategic Objectives
Examples:
Win an x percent market share
Achieve customer satisfaction rates of x percent
Achieve a customer retention rate of x percent
Acquire x number of new customers
Introduce x number of new products in the next three years
Reduce product development times to x months
Increase sales coming from new products to x percent
Improve information systems capabilities to give frontline managers defect information in x minutes
Improve teamwork by increasing the number of projects involving more than one business unit to x
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Short-Term and Long-Term Objectives
Short-term Objectives
Are targets to be achieved soon
Represent milestones or stair steps for reaching long-range performance
Long-term Objectives
Are targets to be achieved within 3 to 5 years
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The Need for Objectives at All Organizational Levels
Objectives are needed at all levels.
To set business-level objectives
To set establish functional-area objectives
To set operating-level objectives
Long-term objectives take precedence over short-term objectives.
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Stage 3: Crafting a Strategy
Crafting a strategy means asking:
How to attract and please customers?
How to compete against rivals?
How to position the firm in the marketplace and capitalize on attractive opportunities to grow the business?
How best to respond to changing economic and market conditions?
How to manage each functional piece of the business?
How to achieve the firm’s performance targets?
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Strategy Formulation Involves Managers at All Organizational Levels
In most firms, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels.
Crafting strategy is rarely something only high-level executives do.
A company’s overall strategy is a collection of strategic initiatives and actions devised by managers up and down the whole organizational hierarchy.
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A Company’s Strategy-Making Hierarchy
A firm’s strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy.
Crafting strategy is a collaborative effort.
Involves managers from various levels of the organization
Should be cohesive and mutually reinforcing, fitting together like a jigsaw puzzle
Requires choosing among the various strategic alternatives
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CORE CONCEPTS: Corporate Strategy and Business Strategy
Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company.
Business strategy is primarily concerned with strengthening the company’s market position and building competitive advantage in a single business company or a single business unit of a diversified multibusiness corporation.
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FIGURE 2.2 A Company’s Strategy-Making Hierarchy
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The Strategy-Making Hierarchy
| STRATEGY | DESCRIPTION |
| Corporate strategy | Is orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company. Addresses the questions of how to capture cross-business synergies, 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. |
| Business strategy | Is primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company. |
| Functional-area strategies | Are concerned with actions related to particular functions or processes within a business (marketing strategy, production strategy, finance strategy, customer service strategy, product development strategy, and human resources strategy). |
| Operating strategies | Are relatively narrow strategic initiatives and approaches for managing key operating units (plants, distribution centers, geographic units) and specific operating activities such as materials purchasing or Internet sales. |
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Stage 4: Implementing and Executing the Chosen Strategy (1 of 2)
Managing the strategy execution process involves:
Staffing the organization to provide needed skills and expertise
Allocating ample resources to activities critical to good strategy execution
Ensuring that policies and procedures facilitate rather than impede effective execution
Installing information and operating systems that enable personnel to perform essential activities
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Stage 4: Implementing and Executing the Chosen Strategy (2 of 2)
Managing the strategy execution process involves:
Pushing for continuous improvement in how value chain activities are performed
Tying rewards and incentives directly to the achievement of performance objectives
Creating a company culture and work climate conducive to successful strategy execution
Exerting the internal leadership needed to propel implementation forward
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Stage 5: Evaluating Performance and Initiating Corrective Adjustments
Deciding if there is a need for change:
Monitoring for disruptive developments
Evaluating the firm’s recent performance
Making corrective adjustments to strategy
Strategy executionan ongoing and uneven process of organizational learning
A firm’s vision, objectives, strategy, and approach to strategy execution are never final.
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Corporate Governance: The Board of Directors
The Role of the Board of Directors in the Strategy-Formulation, Strategy-Execution Process:
Oversee the firm’s financial accounting and reporting practices.
Diligently critique and oversee the company’s direction, strategy, and business approaches.
Evaluate the caliber of senior executives’ strategy-making and strategy-executing skills.
Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests.
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Strong Boards Lead to Good Corporate Governance
A Strong, Independent Board of Directors
Is well informed about the company’s performance
Guides and judges the CEO and other top executives
Has the courage to curb management actions it believes are inappropriate or unduly risky
Certifies to shareholders that the CEO is doing what the board expects
Provides insight and advice to management
Is intensely involved in debating the pros and cons of key decisions and actions
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Appendices
Long descriptions of images
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Appendix 1: Figure 2.1 The Strategy Formulation, Strategy Execution Process
A five-stage process model illustrates external and internal factors shaping strategic and operating decisions.
Stage 1: developing a strategic vision, mission, and values.
Stage 2: setting objectives.
Stage 3: crafting a strategy to achieve the objectives and move the company along the intended path.
Stage 4: executing the strategy.
Stage 5: evaluating and analyzing the external environment and the company's internal situation to identify corrective adjustments.
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Appendix 2: Figure 2.2 A Company’s Strategy-Making Hierarchy
An illustration denotes a company's strategy-making hierarchy.
A corporate strategy is the overall companywide game plan for managing a set of businesses. Corporate strategies are orchestrated by the CEO and other executives.
A business strategy determines how to strengthen market position and gain competitive advantage, and actions to build competitive capabilities. Business strategies are orchestrated by the CEO, senior executives, and with advice and input from key people.
Functional area strategies add relevant detail to the hows of overall business strategy and provide a game plan for managing a particular activity to support the overall business strategy. Functional area strategies are orchestrated by the heads of major functional activities and by key people.
Operating strategies add detail and completeness to business and functional strategy and provide a game plan for managing specific lower-echelon activities with strategic significance. Operating strategies are orchestrated by brand managers, operating managers, managers of strategically important activities like advertising and website operations, and additional key people. All four of these strategies have a two-way influence on each other.
In the case of a single-business company (corporate and business strategies), the strategy-making pyramid merge into one level, business strategy, that is orchestrated by the company’s chief executive officer and other top executives.
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