Reflection Paper

13Chapter 2 Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 13

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education

Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021

13

chapter 2 Charting a Company’s Long­Term Direction: Vision, Mission, Objectives, and Strategy

If you don’t know where you are going, any road will take you there. —Cheshire Cat to Alice Lewis Carroll, Alice in Wonderland

Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion. —Jack Welch, former CEO of General Electric

One secret to maintaining a thriving business is recognizing when it needs a fundamental change. —Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann

A good goal is like a strenuous exercise—it makes you stretch. —Mary Kay Ash, Founder of Mary Kay Cosmetics

I f one is even halfway convinced that crafting and executing strategy are critically important managerial tasks, then understanding exactly what is involved in developing a strategy and executing it proficiently becomes essential. What goes into charting a company’s strategic course and long-term direction? Is any analysis required? Does a company need a strategic plan? What are the various components of the strategy- making, strategy-executing process? Aside from top executives, to what extent are other senior and mid-level managers involved in crafting important parts of the company’s overall strategy? What roles and functions do nonmanagerial employees play in the process of pursuing the vision and mission, meeting or beating performance targets, and implementing and executing the strategy proficiently?

This chapter presents an overview of the managerial ins and outs of crafting and executing company strategies. The focus is on management’s direction-setting responsibilities—developing a strategic vision that sets forth where the company is headed and what its mission will be, setting performance targets, and choosing a strategy capable of producing the desired outcomes. There is coverage of why strategy making is a task for a company’s entire management team and which kinds of strategic decisions are made at which levels of management. There

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 14

is a brief discussion of the principal managerial tasks associated with implementing and executing strategy and why a company’s whole managerial team is involved in the strategy execution process. The chapter concludes with a look at the roles and responsibilities of the company’s board of directors in the strategy-making, strategy- executing process and how good corporate governance protects shareholder interests and promotes good management.

What Does the Strategy-Making, Strategy-Executing Process Entail?

Crafting and executing a company’s strategy is an ongoing process that consists of five interrelated managerial tasks:

1 . Developing a strategic vision that charts the company’s long-term direction, a mission statement that describes the purpose of the company’s business, and a set of core values to guide the pursuit of the vision and mission.

2 . Setting objectives and using them as yardsticks for measuring the company’s performance and tracking its progress in achieving the intended strategic vision and mission.

3 . Crafting a strategy to achieve the objectives and move the company along the path to accomplishing the mission and vision.

4 . Implementing and executing the chosen strategy efficiently and effectively.

5 . Monitoring developments, evaluating performance, and initiating corrective adjustments in the company’s long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, fresh managerial ideas for improving the strategy, and newly emerging market opportunities.

Figure 2.1 displays this five-task process. Let’s examine each task in some detail, thereby setting the stage for the forthcoming chapters and giving you a bird’s-eye view of the book.

Figure 2.1 The Strategy-Making, Strategy-Executing Process

Task 1 Task 2 Task 3 Task 4 Task 5

Developing a strategic

vision, mission, and core values

Setting Objectives

Crafting a strategy

to achieve the objectives,

mission, and vision

Implementing and

executing the strategy

Monitoring developments,

evaluating performance, and initiating

corrective adjustments

Revise as needed in light of the company’s actual performance, changing conditions,

new opportunities, and new ideas

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 15

Task 1: Developing a Strategic Vision, Mission Statement, and Set of Core Values

Very early in the strategy-making process, a company’s senior executives must wrestle with the issue of what directional path the company should take. Can the company’s prospects be improved by changing its product offerings, the markets in which it participates, the customers it caters to, or the business activities in which it engages? Deciding to commit the company to one path versus another pushes top-level executives to draw some carefully reasoned conclusions about whether the company’s present strategic course offers attractive opportunities for growth and profitability or whether major or minor changes of one kind or another in the company’s strategy and long-term direction are needed. Some of the most important considerations in charting a company’s future direction are shown in Table 2.1.

Table 2.1 What to Consider in Deciding on a Company’s Future Direction

External Considerations Internal Considerations • Does sticking with the company’s present strategic

course present attractive opportunities for growth and profitability?

• How well is the company faring vis-à-vis key competitors? Is the company gaining ground or losing ground, and why?

• Are the winds of change—most especially those affecting the market and competitive arena—acting to enhance or weaken the company’s prospects?

• Is the company competing in too many markets or product categories where profits are skimpy or nonexistent?

• What, if any, new customer groups and/or geographic markets should the company get in position to serve?

• Does the company have attractively strong resources and competitive capabilities to grow revenues and profits in the years ahead?

• Which emerging market opportunities should the company pursue and which ones should not be pursued?

• What resource strengths and competitive capabilities offer good potential for creating competitive advantage?

• Are there good reasons why the company should begin to deemphasize or eventually abandon any of the markets or customer groups it is currently serving?

• Is the company at risk because of specific resource weaknesses or deficient competitive capabilities or threats of technological obsolescence?

Top management’s views and conclusions about the company’s long-term direction and what product-customer- market-business mix seems optimal for the road ahead constitute a strategic vision for the company. A strategic vision delineates management’s aspirations for the company, providing a panoramic view of “where we are going” and a convincing rationale for why this makes good business sense. A strategic vision thus points an organization in a particular direction, charts a strategic path for it to follow in preparing for the future, and molds organizational identity. A forward-looking and clearly articulated strategic vision communicates management’s aspirations to stakeholders (shareholders, employees, suppliers, customers, etc.) and helps steer the energies of company personnel in a common direction. The vision of Google cofounders Larry Page and Sergey Brin “to organize the world’s information and make it universally accessible and useful” provides a good example. In serving as the company’s guiding light, it has captured the imagination of stakeholders and the public at large, served as the basis for crafting the company’s strategic actions, and aided internal efforts to mobilize and direct the company’s resources.

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

CORE CONCEPT A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic course in preparing for the future.

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Clear, forward-looking visions are distinctive and specific to a particular organization; they avoid feel- good statements like “We will become a global leader and the first choice of customers in every market we choose to serve”—which could apply to hundreds of organizations.1 Likewise, a strategic vision proclaiming management’s quest “to be the market leader” or “to be the most innovative” or “to be recognized as the best company in the industry” offers scant guidance about a company’s long-term direction or the kind of company management is striving to build.

A surprising number of vision statements found on company websites and in annual reports are vague and unrevealing, conveying nothing meaningful about the company’s future direction. Some could apply to most any company in any industry. Many read like a public relations statement, full of high-sounding words and phrases that someone came up with because it is fashionable for companies to have a vision statement.2 An example is Hilton Hotel’s vision “to fill the earth with light and the warmth of hospitality,” which simply borders on the incredulous—could anyone believe these words have any connection to Hilton Hotel’s long-term direction and management’s aspirations for the future of the company’s hotel business?

For a strategic vision statement to serve a valuable managerial purpose, it cannot be just a bunch of nice words with no specifics or forward-looking content. Rather, it must convey something definitive about the company’s long-term direction (“where we need to be headed”) and address what changes in the company’s current product-market-customer-business mix are needed to better position the company in the light of technological developments, the actions of rivals, changing buyer needs and expectations, and assorted other factors that affect the company’s long-term business prospects. Vision statements that use revealing language to paint a picture of where the company is going and needed changes in its business make-up provide valuable understanding and decision-making guidance to managers at all organizational levels in doing their part to get the company moving along the indicated strategic path. Table 2.2 provides some dos and don’ts in composing a useful, effectively- worded vision statement.

Table 2.2 Wording a Vision Statement—The Do’s and Don’ts

The Do’s The Don’ts Be graphic—Paint a clear and straight-to-the-point picture of where the company is headed and the market position(s) the company intends to stake out.

Don’t dwell on the present—a vision is not about what a company once did or does now; it’s “about the future and where we are going.”

Be forward-looking and directional—Describe the strategic course management has charted and the kinds of product-market-customer-business changes that will help prepare the company for the future.

Don’t be vague or incomplete—Never skimp on specifics that delineate where the company is headed or how the company intends to prepare for the future.

Keep it focused—Include enough specifics and details to provide managers with useful guidance in making decisions and allocating resources.

Don’t use overly broad language—Avoid all-inclusive language that gives the company license to head in most any direction, pursue most any opportunity, or enter most any business.

Have some wiggle room—Language that allows some flexibility enables the strategic course to be fine- tuned as the company’s circumstances and external environment change—significantly modifying the vision statement frequently undercuts the whole concept of establishing a long-term direction for the company.

Don’t state the vision in bland or uninspiring terms— The best vision statements are worded in a manner that motivate and inspire company personnel and shareholders about the company’s future and the merits or value of what it is trying to accomplish.

A well­conceived vision statement clearly conveys a company’s long­term direction and says something definitive about what top executives want the company’s product­market­customer­business makeup to be in three to five (or more) years.

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Be sure the journey is feasible—The path and direction should be within the realm of what the company can pursue and accomplish; over time, a company should be able to demonstrate measurable progress in achieving the vision.

Don’t be generic—A vision statement that could apply to companies in any of several industries (or to any of several rival companies in the company's industry) is incapable of giving a company its own unique identity or providing useful decision-making guidance.

Indicate why the directional path makes good business sense—The directional path should be in the long-term interests of stakeholders (especially shareholders, employees, and customers).

Don’t rely on superlatives—Visions that claim the company’s strategic course is one of being the “best” or “the most successful” or “a global leader” usually lack revealing specifics about the path the company intends to take to get there.

Make it memorable—A well-stated vision is short, easily communicated, and memorable. Ideally, it should be reducible to a few choice lines or a one-phrase “slogan.”

Don’t run on and on—A vision statement that is not concise and to the point will tend to lose its audience.

Sources: John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996), p. 72; Hugh Davidson, The Committed Enterprise (Oxford: Butterworth Heinemann, 2002, Chapter 2; and Michel Robert, Strategy Pure and Simple II (New York: McGraw- Hill, 1992), Chapters 2, 3, and 6.

Communicating the Strategic Vision How effectively top executives communicate the strategic vision to all company personnel is as important as the strategic soundness of the long-term direction they have chosen. A vision cannot provide direction for middle managers or inspire and energize employees unless everyone in the company is familiar with it and can observe top executives’ commitment to the vision. It is particularly important for executives to provide a compelling rationale for a dramatically new strategic vision and company direction. When company personnel don’t understand or accept the need for redirecting organizational efforts, they are prone to resist or be indifferent to the changes that management wants to make. Hence, explaining the basis for the new direction, addressing employee concerns head-on, calming fears, lifting spirits, and providing updates and progress reports as events unfold all become part of the task in mobilizing support for the vision and winning commitment to needed actions.

Winning the support of organization members for the vision nearly always requires putting “where we are going and why” in writing, distributing the statement organizationwide, and having executives personally explain the vision and its rationale to as many people as feasible. A strategic vision can usually be adequately stated in less than a page (often in one to two paragraphs), and managers should be able to explain it to company personnel and outsiders in five to ten minutes. Ideally, executives should present their vision for the company in a manner that reaches out and grabs people. An engaging and convincing strategic vision has enormous motivational value—for the same reason that a stone mason is more inspired by building a great cathedral for the ages than simply laying stones to create floors and walls. When managers articulate a vivid and compelling case for where the company is headed, organization members begin to say, “This is interesting and has a lot of merit. I want to be involved and do my part to help make it happen.” The more a vision evokes positive support and excitement, the greater its impact in terms of arousing a committed organizational effort and getting company personnel to move in a common direction.3 Thus, executive ability to paint a convincing and inspiring picture of a company’s journey and destination is an important element of effective strategic leadership.

Expressing the Essence of the Vision in a Slogan The task of effectively conveying the vision to company personnel is assisted when the vision of where to head is expressed in an easily remembered phrase or catchy slogan. For instance, Nike aspires to exhibit “a passion for serving athletes by developing the most innovative products and services to help them reach their full potential.” Disney’s overarching vision for its five business groups—parks and resorts, movie studios, television channels, consumer products (toys, books, and

CORE CONCEPT An effectively communicated vision is a valuable tool for managers to use in enlisting the commitment of company personnel to actions that get the company moving in the intended direction.

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licensed Disney products), and interactive media entertainment—is to “create happiness by providing the finest in entertainment for people of all ages, everywhere.” The Mayo Clinic’s vision is “to inspire hope and contribute to health and well-being by providing the best care to every patient through integrated clinical practice, education and research” while Greenpeace strives “to expose global environmental problems and to promote solutions that are essential to a green and peaceful future.” Walmart’s visionary slogan is “saving people money so they can live better”—often shortened to the tag line “Save Money. Live Better.” Creating a phrase or short slogan to illuminate an organization’s direction and purpose and then 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.

Why a Sound, Well-Communicated Strategic Vision Matters A well-thought-out, forcefully communicated strategic vision pays off in several respects: (1) it crystallizes top 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 organizational members for changes that will help move the company along the chosen strategic path; (4) it prompts lower-level managers to pursue actions and operating practices that promote achievement of the vision; and (5) it provides a rational for why the whole organization should promptly take steps to begin its journey into the future. When top executives can see evidence of progress in achieving these five benefits, the first step in organizational direction setting has been successfully completed.

Developing a Company Mission Statement The defining characteristic of a well-conceived strategic vision is what it says about the company’s future strategic course—“the direction we are headed and what market position(s) we intend to stake out.” The role of a company’s mission statement, however, is to describe the enterprise’s present business and purpose— “who we are, what we do, and why we are here.” Ideally, a company mission statement (1) identifies the company’s products/ services, (2) specifies the buyer needs that it seeks to satisfy and the customer groups or markets it serves, and (3) gives the company its own identity. The mission statements that one finds in company annual reports or posted on company websites typically are quite brief; some do a better job than others of conveying what the enterprise’s current business operations and purpose are all about.

The following mission statements provide reasonably informative specifics about “who we are, what we do, and why we are here:”

n Trader Joe’s (a specialty grocery chain): “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.

n The American Red Cross: “To prevent and alleviate human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.”

n eBay: “To provide a global trading platform where practically everyone can trade practically anything.”

n Honest Tea: “To create and promote great-tasting, healthy, organic beverages.”

n Nordstrom: “To give customers the most compelling shopping experience possible.”

n Amazon.com: “To build a place where people can come to find and discover anything they might want to buy online.”

n Warby Parker: “To offer designer eyewear at a revolutionary price, while leading the way for socially conscious businesses.”

The distinction between a strategic vision and a mission statement is fairly clear­cut: A strategic vision sets forth a company’s future direction (“where we are going”), whereas a company’s mission statement describes its present business scope and purpose (“who we are, what we do, and why we are here”).

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But some companies have used vague or imprecise wording in their mission statements, effectively obscuring the industry (or industries) in which they operate and the real substance of their business purpose. For instance, Microsoft’s mission statement—“to help people and businesses throughout the world realize their full potential”—reveals nothing about its products or business make-up and is so non-specific it could apply to thousands of companies in hundreds of industries. Avery Dennison’s mission statement is “To help make every brand more inspiring, and the world more intelligent” a lofty aspiration for a company whose product is stick-on labels. Similarly, one well-known company says its mission is “To be a company that inspires and fulfills your curiosity”; a second well-known company’s mission statement is “To refresh the world in mind, body, and spirit…To inspire moments of optimism and happiness through our brands and actions…To create value and make a difference.” But neither of these two mission statements would enable someone to correctly identify the first of these companies as Sony and the second (which markets over 500 beverage brands in more than 200 countries) as Coca-Cola. The usefulness of a mission statement that is largely a “collection of high-sounding words and phrases” and which fails to convey the essence of a company’s business activities and purpose is unclear.

Occasionally, companies say their mission is to “make a profit” or to “maximize shareholder value.” Such statements are likewise flawed. Making a profit on behalf of shareholders is more correctly an objective and a result of what a company does. Moreover, earning a profit is the obvious intent of every commercial enterprise. Such companies as BMW, Netflix, Shell Oil, Visa, Google, and McDonald’s are each striving to earn a profit for shareholders; but plainly the fundamentals of their businesses are substantially different when it comes to “who we are and what we do.” It is management’s answer to “make a profit doing what and for whom?” that reveals the substance of a company’s mission and business purpose.

Linking the Strategic Vision and Mission with Company Values Companies commonly develop a set of values to guide the actions and behavior of company personnel in conducting the company’s business and pursuing its strategic vision and mission. By values (or core values, as they are often called), we are referring to certain designated beliefs, traits, and ways of doing things— actions and behaviors that are widely viewed as “good” or “desirable” or maybe even “noble” and that are intended to guide company personnel in the course of conducting the company’s business and pursuing its vision and mission. Values relate to such things as fair treatment, honor and integrity, ethical behavior, innovativeness, teamwork, accountability, a passion for top-notch quality or superior customer service, social responsibility, and community citizenship.

Values-conscious companies normally have four to eight core values that company personnel are expected to display and that are supposed to be mirrored in how the company conducts its business. At American Express, the core values are respect for people, customer commitment (building and developing relationships that make a positive impact on the lives of our customers), integrity, teamwork (working together to fill the needs of all customers), good citizenship, a strong will to win in the marketplace and every aspect of the business, products and unsurpassed service that deliver premium value to our customers, and personal accountability for delivering on commitments. At Disney, “cast members” are expected to share the values of honesty, integrity, respect, courage, openness, diversity, and balance; these values are demonstrated through such traits and behaviors as making guests happy, caring about fellow cast members, working as a team, delivering quality, fostering creativity, paying attention to every detail, and having an emotional commitment to Disney. Rackspace, a provider of server hosting and managed cloud computing services for some 200,000 businesses in 150 countries,

To be well worded, a company mission statement must employ language specific enough to distinguish its business make­up and purpose from those of other enterprises and give the company its own identity.

CORE CONCEPT A company’s values or core values are the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company’s business and pursuing its strategic vision and mission.

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the core values are fanatical support in all we do, a commitment to greatness, full disclosure and transparency, a passion for our work, treatment of fellow Rackers like friends and family, and results first, substance over flash.4 Zappos expects its employees to practice 10 core values: deliver WOW through service; embrace and drive change; create fun and a little weirdness; be adventurous, creative, and openminded; pursue growth and learning; build open and honest relationships with communication; build a positive team and family spirit; do more with less; be passionate and determined; and be humble.5

Do companies practice what they preach when it comes to their professed values? Sometimes yes, sometimes no—it runs the gamut. At one extreme are companies whose executives are committed to grounding company operations on sound values and principled ways of doing business. Senior executives at these companies deliberately seek to ingrain the designated core values in the corporate culture—the core values thus become an integral part of the company’s DNA and what makes it tick. At such values-driven companies, executives “walk the talk” and company personnel are held accountable for displaying the stated values. At the other extreme companies tolerate, maybe even condone, unethical behavior on the part of company personnel, engage in deliberately dishonest dealings with others, have willful disregard for employee safety, and/or flagrantly disregard rules and regulations against environmental pollution. Prime examples include Volkswagen, with its deliberate efforts to falsify its compliance with vehicle emission standards and Uber, which has recently come under scrutiny for multiple allegations of misbehavior and a criminal probe of illegal operations. In-between these extremes are companies with window-dressing values; their so-called values are given lip service by top executives but have little discernible impact on either how company personnel behave or how the company operates. Such companies have values statements because they are in vogue and help make the company look good to outsiders.

At companies where the stated values are real rather than cosmetic, managers connect values to the pursuit of the strategic vision and mission in one of two ways. In companies with longstanding values that are deeply entrenched in the corporate culture, senior managers are careful to craft a vision, a mission, a strategy, and a set of operating practices that match established values, and they repeatedly emphasize how the values-based behavioral norms contribute to the company’s business success. If the company changes to a different vision or strategy, executives make a point of explaining how and why the core values continue to be relevant. Few companies with sincere commitment to established core values ever undertake strategic moves that conflict with ingrained values. In new companies or those with unspecified values, top management has to consider what values, behaviors, and business conduct should characterize the company and then draft a values statement to circulate among managers and employees for discussion and possible modification. A final values statement that incorporates the desired behaviors and traits and connects to the vision/mission is then officially adopted. Some companies combine their strategic vision, mission, and values into a single statement or document, circulate it to all organization members, and in many instances post the vision/mission and values statement on the company’s website.

Task 2: Setting Objectives

The managerial purpose of setting objectives is to convert the strategic vision and mission into specific performance targets. Objectives represent a managerial commitment to achieving particular results and outcomes. Well-stated objectives must be specific, quantifiable or measurable, challenging, and contain a deadline for achievement. As Bill Hewlett, cofounder of Hewlett-Packard, shrewdly observed, “You cannot manage what you cannot measure. And what gets measured gets done.”6 Concrete, measurable, and challenging objectives are managerially valuable for three reasons: (1) they focus organizational attention on what to accomplish and help align the actions and decisions throughout the organization, (2) they serve as yardsticks for tracking company performance, and (3) they motivate organizational members to perform at a high level and deliver the best possible results. Indeed, the experiences of countless companies and managers teach that precisely spelling out how much of what kind of performance by when and then pressing forward with actions and incentives calculated to help achieve the targeted outcomes greatly improve a company’s actual performance.

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Setting Stretch Objectives Spurs the Achievement of Exceptional Performance 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 to achieve challenging performance targets. Employing stretch objectives, especially if they entail achieving inspirational outcomes, often has the added effect of creating a more exciting work environment where it is easier to recruit and retain talented employees who relish stimulating work assignments and being part of a high-performing organization. But the most easily realized benefit of setting stretch objectives is to erect a firewall against contentment with modest gains in organizational performance. As Mitchell Leibovitz, former CEO of the auto parts and service retailer Pep Boys, once said, “If you want to have ho-hum results, have ho-hum objectives.”

How Not to Handle the Task of Setting Objectives The following three approaches to objective-setting should be scrupulously avoided:

n Setting unspecific targets like “maximize profits,” “reduce costs,” “become more efficient,” or “increase revenues.” For instance, an objective to reduce costs is technically achieved if a company’s total costs go down by $100 or if unit costs fall by a fraction of a penny—neither outcome is likely to matter. Likewise, an objective to increase revenues is realized if total revenues climb by a trivial one percent by the end of 2020. This is why setting stretch objectives and always specifying how much by when are important.

n Setting targets for the upcoming year that, if achieved, would represent only “average” performance (because the targets are slightly higher than the most recent year’s actual performance and can be reached with only minimal or modest effort). Objectives that promote or enable organizational coasting provide little or no managerial impetus for improved performance.

n Setting targets that carry no adverse consequences for organizational members if actual performance falls short of targeted performance. Organizational members understandably attach little importance to the objectives that managers announce when it has been top management practice in times past to find excuses to justify weak performance (like blaming “outside forces beyond our control”), not hold any company personnel accountable for subpar outcomes, and award bonuses and compensation increases despite failure to achieve announced objectives. Objectives—even challenging ones—are incapable of motivating company personnel to exert their best efforts to achieve stretch performance targets if they can expect to receive bonuses, pay raises, and/or promotions even if the performance targets are not reached.

All three ways of handling the task of setting objectives undercut the drive for superior performance.

What Kinds of Objectives to Set—A Balanced Scorecard Works Best Two distinct types of performance yardsticks are required: those relating to financial performance and those relating to strategic performance. Financial objectives serve the purpose of delineating the specific financial performance targets management wants the company to achieve. Strategic objectives set forth target outcomes that signal whether (1) the company’s products/services are becoming more or less appealing to buyers and (2) the company is gaining or losing ground in its efforts to compete successfully against rivals and achieve a sustainable competitive advantage.

CORE CONCEPT Financial objectives relate to the financial performance targets management have 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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Among some of the most common types of financial and strategic objectives are the following:

Financial Objectives Strategic 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

• Winning an x percent market share • Achieving lower overall costs per unit sold 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

Both Short-Term and Long-Term Objectives Are Needed 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 managerial attention on actions to deliver near-term performance improvements and satisfy shareholder expectations for progress on a variety of fronts. Longer-term targets (three to five years) prompt managers to consider what to do now to put the company in position to perform better later. The seeds for achieving long-term objectives typically must be planted well in advance of the period when the long-term targets have to be reached. For example, a company that wants to grow its revenues by 20 percent in three years cannot wait until the end of the second year to begin its revenue growth initiatives. Indeed, active managerial pursuit of long-term performance targets is critical for sustaining a company’s at attractively high levels over the long term, thus, posing a barrier to nearsighted management and undue focus on short-term results. Managers who concentrate their energies on hitting next quarter’s (or the current year’s) targets, while neglecting or postponing needed actions to achieve long-term targets, frequently fail to do the very things today that it takes to grow the business and produce good performance year after year. When trade-offs must be made between achieving long- run objectives and short-run objectives, long-run objectives should take precedence (unless the achievement of one or more short-run performance targets have unique importance).

Balanced Emphasis on Achieving Financial and Strategic Performance Targets Is Essential Achieving acceptable financial results is a must. Without adequate profitability and financial strength, a company’s ability to muster the resources needed to keep pace with rivals, invest in improved technology, and make needed capital improvements are jeopardized. Furthermore, subpar earnings and a weak balance sheet alarm shareholders and creditors, put the jobs of senior executives at risk, and begin to raise questions about the company’s ultimate survival. 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 competitive strengths are deteriorating, holding steady, or improving. Establishing and pursuing strategic objectives are important because a stronger market standing with buyers and improved competitive strength to combat rivals—especially when these result in a bigger competitive advantage—is what enables and empowers a company to improve its financial performance in upcoming periods.

CORE CONCEPT A company that pursues and achieves strategic outcomes that boost its competitiveness and strength in the marketplace vis­à­vis rivals is better able to improve its future financial performance.

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Moreover, a company’s financial performance measures are really lagging indicators that reflect the results of past decisions and organizational activities.7 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, whereas 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 competitive strength and buyer appeal for its products/services are eroding, holding steady, or improving. For instance, if a company has set aggressive strategic objectives and is achieving them—such that its competitive strength and market position are on the rise—then there’s reason to project that its future financial performance will be better than its current or past performance. If a company is losing ground to competitors and its market standing with buyers is slipping—outcomes that reflect weak strategic performance (and, very likely, failure to achieve its strategic objectives)—then its ability to maintain its present profitability is highly suspect. Hence, the degree to which a company’s managers set, pursue, and achieve stretch strategic objectives tends to be a reliable leading indicator of whether its future financial performance will improve or stall or erode.

Consequently, it is important to use a performance measurement system that strikes a balance between the pursuit and achievement of financial objectives and strategic objectives.8 Focusing only on how well a company is performing financially overlooks the fact that what ultimately enables and empowers a company to deliver better financial results from its operations is the achievement of strategic objectives that improve its ability to compete successfully against rivals and its market strength in attracting and retaining customers. Indeed, the surest path to boosting company profitability quarter after quarter and year after year is to relentlessly pursue strategic outcomes that strengthen the company’s market position with buyers and, ideally, produce a growing competitive advantage over rivals.

Objective Setting Should Extend to All Organizational Levels Objective setting should not stop with the efforts of senior management to set companywide performance targets. Company objectives need to be broken down into target outcomes for each of the organization’s separate businesses, product lines, functional departments, and work units. Company performance cannot reach full potential unless each organizational unit sets and pursues performance targets that contribute directly to the desired companywide outcomes and results. Moreover, employees within specific departments and operating units are inspired and motivated better by specific objectives relating directly to their jobs and work units than by overall companywide performance targets. Objective setting is thus a top-down process that must extend to the lowest organizational levels. And it means that each organizational unit must take care to set performance targets that support—rather than hinder— the achievement of companywide targets.

The ideal situation is a team effort in which each organizational unit strives to produce results that contribute to the achievement of the company’s performance targets and strategic vision. Such consistency signals that organizational units know their strategic role and are on board in helping the company move down the chosen strategic path and produce the desired results.

Employing a Balanced Scorecard The most widely used framework for developing a linked set of strategic and financial objectives and tracking their achievement is known as the balanced scorecard. Since its origination in the 1990s, balanced scorecard methodology has evolved from just a performance measurement tool into a full strategic planning and management system that transforms an organization’s vision, mission, objectives, and strategy into daily “marching orders” for company personnel and organization units, thereby facilitating better strategy execution as well as stronger performance measurement.9 The balanced scorecards of many companies tend to have a comprehensive set of performance targets that include financial objectives, objectives relating to customers and the market, objectives relating to product quality and worker productivity, and objectives relating to innovation, infrastructure, human capital, and culture. Surveys indicate that the balanced scorecard tool for measuring performance has been one of the top ten most used

CORE CONCEPT A 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.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 24

management tools for more than five years.10 A Bain & Co. 2017 survey of 1,268 managers found about 30 percent of companies (down from 40 percent in Bain’s 2015 survey) in the United States, Europe/Middle East/Africa, and Latin America employed a balanced scorecard approach in measuring strategic and financial performance; many employed balanced scorecards in several different parts of their organization.11 Organizations that have adopted the balanced scorecard approach include Apple, IBM, Wells Fargo Bank, Citibank, Ford Motor, Volkswagen, ExxonMobil, DuPont, Caterpillar, Pfizer, Ann Taylor Stores, General Electric, Verizon, AT&T, UPS, Duke University Hospital, Royal Canadian Mounted Police, UK Ministry of Defence, the U.S. Army Medical Command, the Federal Bureau of Investigation (FBI), and over 30 colleges and universities.12

Strategic Intent—The Relentless Pursuit of an Ambitious Long-Term Strategic Objective On occasion, companies decide to concentrate the full force of their resources and competitive actions on a long-term campaign to achieve some ambitious strategic outcome—like unseating the existing industry leader, becoming the dominant market share leader worldwide, delivering the best customer service of any company in the industry (or the world), or turning a new technology into products capable of changing the way people work and live. When a company launches aggressive initiatives over a sustained period to achieve a bold strategic outcome, it is clearly signaling strategic intent to be a winner in the marketplace, often against long odds.13

Nike’s strategic intent during the 1960s was to overtake Adidas (which connected nicely with Nike’s core purpose “to experience the emotion of competition, winning, and crushing competitors”). Also, in the 1960’s when Canon entered the market for copying equipment, its strategic intent was to “beat Xerox.” When Fox News Channel launched operations in 1996, its strategic intent was to overtake CNN, a feat it accomplished five years later—Fox News has been the most-watched cable news channel every year since 2001. Most recently, Honda achieved its long-standing strategic intent of producing an ultra-light jet when its unconventionally designed, fuel-efficient five-passenger “Civic of the Sky” mini-jet went into production in 2012—Honda first initiated the project to enter the jet aircraft market in the late 1980s.

Companies that establish exceptionally bold strategic objectives and have an unshakable—often obsessive— commitment to achieving them typically lack the immediate capabilities and market grasp to achieve their lofty target. But they rally the organization around efforts to make their strategic intents a reality. They go all out to marshal the resources and capabilities to close in on their strategic target (which is often global market leadership) as rapidly as they can. They craft potent offensive strategies calculated to throw rivals off-balance, put them on the defensive, and force them into an ongoing game of catch-up. They deliberately try to alter the market contest and tilt the rules for competing in their favor. As a consequence, capably managed, up-and- coming enterprises with strategic intents exceeding their present reach and resources are a force to be reckoned with, often proving to be more formidable competitors over time than larger cash-rich rivals that have modest strategic objectives and market ambitions.

Task 3: Crafting A Strategy

As indicated in Chapter 1, the task of stitching a strategy together entails addressing a series of hows: how to attract and please customers, how to compete against rivals, how to position the company in the marketplace vis- à-vis rivals, how best to pursue 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, and how to achieve the company’s strategic and financial objectives. Astute entrepreneurship is called for in choosing among the various strategic alternatives and in proactively searching for opportunities to do new things or to do existing things in new or better ways.14 The faster a company’s business environment is changing, the more critical it becomes for strategy makers to be good entrepreneurs in diagnosing the direction and force of the changes under way and in

CORE CONCEPT 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.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 25

responding with timely strategy adjustments. Strategy makers have to pay attention to early warnings of future change and be willing to experiment with dare-to-be-different ways to establish and solidify a market position in that future. When obstacles unexpectedly appear in a company’s path, it is up to management to adapt rapidly and innovatively. Masterful strategies come from doing things differently from competitors where it counts— out-innovating them, being more efficient, being more imaginative, adapting faster—rather than running with the herd. Good strategy making is therefore inseparable from good business entrepreneurship. One cannot exist without the other.

Crafting Strategy Involves Managers at All Organizational Levels A company’s top 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 strategic visionary and chief architect of the strategy, personally deciding what the key elements of the company’s strategy will be, although the advice of key subordinates may be sought in fashioning an overall strategy and deciding on important strategic moves. A CEO-centered approach to strategy development is characteristic of small owner- managed companies and sometimes large corporations that have been founded by the present CEO or that have CEOs with strong strategic leadership skills. Warren Buffet at Berkshire Hathaway, Mary Barra at General Motors, Reed Hastings at Netflix, Marilyn Hewson at Lockheed, Elon Musk at Tesla, Jeff Bezos at Amazon, and Mark Zuckerberg at Facebook are examples of high-profile corporate CEOs who have wielded a heavy hand in shaping their company’s strategy.

In most corporations, however, strategy is the product of more than just the CEO’s handiwork. Typically, other senior executives—business unit heads, the chief financial officer, and vice presidents for production, marketing, human resources, and other functional departments have influential strategy-making roles and help fashion the chief strategy components. Normally, the head of each individual business of a diversified corporation has lead responsibility for the business unit she or he heads. A company’s chief financial officer typically is in charge of devising and implementing an appropriate financial strategy for the whole company. In a single business corporation, the production vice president usually takes the lead in developing the company’s production strategy; the marketing vice president orchestrates sales and marketing strategy; a brand manager is in charge of the strategy for a particular brand in the company’s product lineup, and so on. Moreover, the strategy-making efforts of top executives are complemented by advice and counsel from the company’s board of directors and, normally, all major strategic decisions are submitted to the board of directors for review, discussion, perhaps modification, and official approval.

But strategy making is by no means solely a top management function, the exclusive province of owner- entrepreneurs, CEOs, high-ranking executives, and board members. The more a company’s operations cut across different products, industries, and geographical 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, distri- bution centers, and plants. On-the-scene managers who oversee specific operating units can be reliably counted upon to be intimately knowledgeable about market and competitive conditions, customer requirements and expectations, and all the problems, issues, and available strategic alternatives relating to the operating unit under their direct supervision. Managers with day-to-day familiarity of, and authority over, a specific operating unit thus have a big edge over headquarters executives in sizing up their operating unit’s situation and making wise strategic choices.

The larger and more diverse the operations of an enterprise, the more points of strategic initiative it has and the more levels of management that have a significant strategy­making role.

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Take, for example, a company like General Electric, a $120 billion global corporation with 310,000 employees, operations in about 180 countries, and businesses that include jet engines, power generation, electric transmission and distribution equipment, renewable energy, oil and gas equipment, lighting, medical imaging and diagnostics equipment, locomotives, mining and marine equipment, and financial services. While top-level headquarters executives may well be personally involved in shaping GE’s overall strategy and fashioning important strategic moves, they simply cannot know enough about the situation in every GE organizational unit across the world to decide upon every strategy detail and direct every strategic move made in GE’s worldwide organization. Rather, it takes involvement on the part of GE’s whole management team—top executives, business group heads, the heads of specific business units and product categories, and key managers in plants, sales offices, and distribution centers—to craft the thousands of strategic initiatives that end up composing the whole of GE’s strategy.

The key point here is this. While managers further down in a company’s managerial hierarchy obviously have a narrower, more specific strategy-making role than managers closer to the top, the important understanding here is that in most of today’s companies crafting strategy is a collaborative team effort in which every company manager typically has a strategy-making role—ranging from minor to major—for the area he or she heads. Hence, any notion that an organization’s strategists are at the top of the management hierarchy and that midlevel and frontline personnel merely carry out the strategic directives of top executives should be cast aside. A valuable strength of collaborative strategy making is that the team of people charged with crafting the strategy can easily include the very people who will also be charged with implementing and executing it. Giving people an influential stake in crafting the strategy they must later help implement and execute not only builds motivation and commitment but also holds them accountable for putting the strategy into place and making it work—the oft-used excuse of “It wasn’t my idea to do this” won’t fly.

A Company’s Strategy-Making Hierarchy It thus follows that a company’s overall strategy is a collection of strategic initiatives and actions devised by managers (and sometimes key employees) up and down the whole organizational hierarchy. The larger and more diverse the operations of an enterprise, the more points of strategic initiative it will have and the more managers at different organizational levels will have a relevant strategy-making role. In diversified companies, where multiple and sometimes strikingly different businesses must be managed (at General Electric, for instance), crafting a full-fledged strategy involves four distinct types of strategic actions and initiatives, each undertaken at different levels of the organization and partially or wholly crafted by managers at different organizational levels, as shown in Figure 2.2.

CORE CONCEPT In most companies, crafting and executing strategy is a collaborative team effort where every manager has a role for the area he or she heads. It is flawed thinking to view crafting and executing strategy as something only high­level executives do.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 27

Figure 2.2 A Company’s Strategy-Making Hierarchy

Orchestrated by the CEO and other senior executives

Orchestrated by the senior executives of each line of business, often with advice and input from the heads of functional area activities within each business and other key people.

Orchestrated by the heads of major functional activities within a particular business, often in collaboration with other key people.

Orchestrated by brand managers; the operating managers of plants, distribution centers, and geographic units; and the managers of strategically important activities like advertising and website operations, often in collaboration with other key people.

In the case of a single-business company, these two levels of the strategy-making pyramid merge into one level— business strategy— that is orchestrated by the company’s CEO and other top executives.

Corporate Strategy

The overall companywide game plan for managing a

set of businesses

Business Strategy (one for each business the

company has diversified into) • How to strengthen market

position and gain competitive advantage

Two-Way Influence

Two-Way Influence

Two-Way Influence

Functional Area Strategies within Each Business

• Add relevant detail to the hows of overall business strategy

• Provide a game plan for managing a particular activity in ways that support the overall business strategy

Operating Strategies within Each Business

• Add detail and completeness to business and functional strategy

• Provide a game plan for managing specific lower­echelon activities with strategic significance

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 28

n Corporate strategy concerns the overall strategy for managing a set of businesses in a diversified, multi-business enterprise. It consists of strategy initiatives to establish business positions in different industries, addresses whether to hold or divest existing businesses, strategic actions to boost the combined performance of the set of businesses the company has diversified into, and how to capture cross-business synergies and turn them into a competitive advantage. The CEO and other senior-level corporate executives have lead responsibility for devising corporate strategy. Major strategic decisions are usually reviewed and approved by the company’s board of directors. Corporate strategy and the strategy-related issues that must be confronted in diversified companies are the subjects of Chapter 8.

n Business strategy consists of the actions and approaches being employed to produce successful performance in one specific line of business. The key focus is crafting responses to changing market circumstances and initiating actions to strengthen a business’s market position and competitive capabilities, build or widen competitive advantage, and improve the business’s financial performance. Most often, corporate-level executives delegate lead responsibility for developing business-level strategy to the executive they have put in charge of the business. However, corporate-level executives may well exert strong influence over various aspects of business-level strategy, and in diversified companies it is not unusual for corporate officers to insist that business-level objectives and strategy be compatible with and supportive of corporate- level objectives and strategy themes. The executive in charge of each business unit has at least two other strategy-related roles: (1) seeing that lower-level strategies are well conceived, consistent with each other, and appropriately suited to the overall business strategy, and (2) keeping corporate-level officers (and sometimes the board of directors) informed of emerging strategic issues. Typically, corporate executives review business-level strategy, and there may be occasions when certain major strategic initiatives to be taken at the business-level are reviewed and approved by the company’s board of directors.

n Functional-area strategies concern the actions, approaches, and practices employed in managing particular functions within a business—like production, new product development, procurement, distribution, sales and marketing, customer service, and finance. A business’s production strategy, for example, represents the managerial game plan for running the manufacturing and assembly part of the business. A new product development strategy concerns the game plan for keeping a business’s product lineup fresh and in tune with what buyers are looking for. Functional strategies flesh out the details of the overall business strategy. Lead responsibility for functional strategies is normally delegated to the heads of the respective functions, with the executive in charge of the business unit having final approval. Since it is always important for functional strategies to be tightly aligned with the overall business strategy, there are times when a business unit head intervenes to adjust one or more aspects of certain functional strategies in order to enhance the power and impact of the business unit’s overall strategy.

n Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units (plants, distribution centers, geographic units) and specific operating activities with strategic significance (quality control, advertising, brand-building efforts, supply chain activities, and website sales and operations). A plant manager needs a strategy for accomplishing the plant’s objectives, carrying out the plant’s part of the company’s overall manufacturing game plan, and dealing with any strategy-related problems that exist at the plant. A company’s advertising manager needs a strategy for getting maximum audience exposure and sales impact from the ad budget. Operating strategies, while of limited scope, add further detail and completeness to functional strategies and to the overall business strategy. Lead responsibility for operating strategies is usually delegated to frontline managers, subject to the review and approval of higher-ranking managers.

Even though operating strategy is at the bottom of the strategy-making hierarchy, its importance should not be downplayed. A major plant that fails in its strategy to achieve production volume, unit cost, and quality targets can undercut the achievement of company sales and profit objectives and wreak havoc with strategic efforts to build a quality image with customers. Frontline managers are thus an important part of an organization’s strategy-making team. One cannot reliably judge the strategic importance of a given action simply by the strategy level or location within the managerial hierarchy where it is initiated.

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In single-business enterprises, the corporate and business levels of strategy making merge into one level— business strategy—because the strategy for the whole company involves only one distinct line of business. Thus, a single-business enterprise has three levels of strategy: business strategy for the entire company, functional- area strategies for each main area within the business, and operating strategies undertaken by lower-echelon managers to flesh out strategically significant aspects of the company’s business and functional-area strategies. Proprietorships, partnerships, and owner-managed enterprises may have only one or two strategy-making levels since it takes only a few key people to craft and oversee the firm’s strategy.

Uniting the Strategy-Making Effort Ideally, the pieces of a company’s strategy up and down the strategy pyramid should be cohesive and mutually reinforcing, fitting together like a jigsaw puzzle. Anything less than a unified collection of strategies weakens the overall strategy and is likely to impair company performance.15 It is top executives’ responsibility 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. Thus, as a general rule, strategy making must start at the top of the organization and proceed downward through the pyramid from the corporate level to the business level and then from the business level to the associated functional and operating levels.

Furthermore, once strategies up and down the hierarchy have been created, lower-level strategies must be scrutinized for consistency 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.

A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan 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, delineate its strategic and financial performance targets, and outline the competitive moves and operating approaches to be used in achieving the desired business results. Together, they constitute a strategic plan for coping with economic and market conditions, competing against rivals, and making progress along the chosen strategic course.16 Typically a strategic plan includes a commitment to allocate resources to carrying out the plan and contains a deadline for achieving the targeted strategic and financial performance.

In companies that do regular strategy reviews and develop explicit strategic plans, the strategic plan usually ends up as a written document that is circulated to most managers and perhaps selected employees. Near-term performance targets are the part of the strategic plan most often communicated to employees and spelled out explicitly. A number of companies summarize key elements of their strategic plans in the company’s annual report to shareholders, in their annual 10-K filing to the Securities and Exchange Commission, in postings on their website, or in statements provided to the business media; others, perhaps for reasons of competitive sensitivity, make only vague general statements about their strategic plans.17 In small privately-owned companies it is rare for strategic plans to exist in written form. Small company strategic plans tend to reside in the thinking and

CORE CONCEPT A company’s strategy is at full power only when its many pieces are united.

CORE CONCEPT A company’s strategic plan lays out its future direction, business purpose, performance targets, and strategy.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 30

directives of owners/executives; aspects of the plan are revealed in meetings and conversations with company personnel, and in the understandings and commitments among managers and key employees about where to head, what to accomplish, and how to proceed.

Task 4: Implementing and Executing the Strategy

Managing the implementation and execution of strategy is an operations-oriented make-things-happen activity aimed at performing core business activities in a strategy-supportive manner. It is easily the most demanding and time-consuming part of the strategy management process. Converting strategic plans into actions and results tests a manager’s ability to direct organizational change, motivate company personnel, build and strengthen company competencies and competitive capabilities, create and nurture a strategy-supportive work climate, and meet or beat performance targets. Initiatives to put the strategy in place and execute it proficiently must be launched and managed on many organizational fronts.

Management’s action agenda for implementing and executing the chosen strategy emerges from assessing what the company will have to do differently or better, given its particular operating practices and organizational circumstances, to execute the strategy competently and achieve the targeted financial and strategic performance. Each company manager has to think through the answer to “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 climate/culture supports good strategy execution. Depending on the amount of internal change involved, full implementation and proficient execution of company strategy (or important new pieces thereof) can take several months to several years.

In most situations, managing the strategy execution process includes the following principal aspects:

n Staffing the organization with the needed skills and expertise, consciously building and strengthening strategy-supportive competencies and competitive capabilities, and organizing the work effort.

n Allocating ample resources to those activities critical to strategic success.

n Ensuring that policies and procedures facilitate rather than impede effective execution.

n Using the best-known practices to perform core business activities and pushing for continuous improvement. Organizational units must periodically reassess how things are being done and diligently pursue ways to do them better and cheaper.

n Installing information and operating systems that enable company personnel to better perform daily operating activities and otherwise execute their part of the strategy.

n Motivating people and tying rewards and incentives directly to the achievement of performance objectives.

n Creating a company culture and work climate conducive to successful strategy execution.

n Exerting the internal leadership needed to drive implementation forward and keep improving on how the strategy is being executed. When stumbling blocks or weaknesses are encountered, management must see that they are addressed and rectified on a timely basis.

Good strategy execution requires diligent pursuit of operating excellence. It is a job for a company’s whole management team. In addition, success hinges upon the skills and cooperation of operating managers who can push for needed changes in their organization units and consistently deliver good results. Management’s handling of the strategy implementation and execution process can be considered successful if things go smoothly enough that the company meets or beats its strategic and financial performance targets and shows good progress in achieving management’s strategic vision.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 31

Task 5: Evaluating Performance and Initiating Corrective Adjustments

The fifth component of the strategy management process—monitoring new external developments, evaluating the company’s progress, and making corrective adjustments—is the trigger point for deciding whether to continue or change the company’s vision and mission, objectives, strategy, and/or strategy execution methods.18 As long as the company’s direction and strategy continues to pass the three tests of a winning strategy discussed in Chapter 1, company executives may decide to stay the course. Simply fine-tuning the strategic plan and continuing with efforts to improve strategy execution are sufficient.

But whenever a company encounters disruptive changes in its environment, questions need to be raised about the appropriateness of its direction and strategy and whether the time has arrived to retool the strategic vision, objectives, and strategy and come up with a new “going forward” strategic plan. Similarly, when a company experiences a disturbing downturn in its market position or persistent shortfalls in financial performance, its managers are obligated to ferret out the causes—do they relate to poor strategy, poor strategy execution, or both? —and take timely corrective action. A company’s direction, objectives, and strategy have to be revisited any time external or internal circumstances warrant—over time, revisions are to be expected.

Likewise, managers are obligated to assess which of the company’s operating methods and approaches to strategy execution merit continuation and which need improvement. Proficient strategy execution is always the product of much organizational learning. It is achieved unevenly—coming quickly in some areas and proving troublesome in others. Consequently, top-notch strategy execution requires a company’s management team to closely monitor each and every aspect of the strategy execution effort and proactively institute timely and effective adjustments that will move the company closer to operating excellence.

Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process

Although senior managers have lead responsibility in crafting and executing a company’s strategy, it is the duty of a company’s board of directors to exercise strong oversight and see that top management performs all five strategy-making, strategy-executing tasks in a manner that is in the best interest of shareholders and other stakeholders.19 A company’s board of directors has four important obligations to fulfill:

1. Critically appraise the company’s direction, strategy, and business approaches. Board members must ask probing questions and draw on their business acumen to make independent judgments about whether strategy proposals have been adequately analyzed and whether proposed strategic actions appear to have greater promise than alternatives. If executive management is bringing well-supported and reasoned strategy proposals to the board, there’s little reason for board members to aggressively challenge and try to pick apart everything put before them. Asking incisive questions is usually sufficient to test whether the case for management’s proposals is compelling and to exercise vigilant oversight. However, when the company has a failing strategy or is plagued with internal operating miscues, and certainly when there is a precipitous collapse in profitability, this obligation of board members takes on heightened importance. In such circumstances, board members have a duty to be proactive, expressing their concerns about the validity of the strategy and/or operating methods, initiating debate about the company’s strategic path, having one-on-one discussions with key executives and other board members, offering advice and guidance (sometimes quite forcefully), and, when circumstances require, directly intervening as a group to alter the company’s executive leadership and, ultimately, its strategy and business approaches.

CORE CONCEPT A company’s vision, objectives, strategy, and approach to strategy execution are never final. Reviewing whether and when to make revisions is an ongoing process, not an every­now­and­ then task.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 32

2. Evaluate the caliber of senior executives’ strategy-making and strategy-executing skills. The board is always responsible for determining whether the current CEO is doing a good job of strategic leadership (as a basis for awarding salary increases and bonuses and deciding on retention or removal).20 Boards must also exercise due diligence in evaluating the strategic leadership skills of other senior executives in line to succeed the CEO. When the incumbent CEO steps down or leaves for a position elsewhere, the board must elect a successor, either going with an insider or deciding that an outsider is needed to perhaps radically change the company’s strategic course.

3. Institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, and most especially those of shareholders. A basic principle of corporate governance is that the owners of a corporation delegate operating authority and managerial control to a team of executives who are then compensated for their efforts on behalf of the owners. In their role as agents of shareholders, corporate managers have an unequivocal duty to make decisions and operate the company in accord with shareholder interests (but this does not mean disregarding the interests of other stakeholders—employees, suppliers, the communities in which they operate, 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 and growing the economic value of the enterprise on behalf of shareholders; the compensation committee’s recommendations are presented to the full board for approval. But during the past 10 to 15 years, many boards of directors have done a poor job of ensuring that executive salary increases, bonuses, and stock option awards are tied tightly to performance measures that are truly in the long-term interests of shareholders. Rather, compensation packages at many companies have increasingly rewarded executives for short-term performance improvements—most notably, for achieving quarterly and annual earnings targets and boosting the stock price by specified percentages. This has had the perverse effect of causing company managers to become preoccupied with actions to improve a company’s near-term performance, often motivating them to take unprecedented and unwise business risks to boost short-term earnings by amounts sufficient to qualify for multimillion-dollar bonuses and stock option awards (that many see as obscenely large). The greater weight being placed on short-term performance improvements has worked against shareholders since, in many cases, the excessive risk-taking has proved damaging to long-term company performance: witness the huge loss of shareholder wealth that occurred at many financial institutions in 2008–2009 because of executive risk-taking in subprime loans, credit default swaps, and collateralized mortgage securities. As a consequence, the need to overhaul and reform executive compensation has become a hot topic in both public circles and corporate boardrooms.

4. Oversee the company’s financial accounting and financial reporting practices. While top executives, particularly the company’s CEO and CFO (chief financial officer), are primarily responsible for seeing that the company’s financial statements fairly and accurately report the results of the company’s operations, it is well established that a company’s board of directors is legally obligated to exercise diligent financial oversight and protect shareholders. This means closely monitoring the company’s financial practices, ensuring that generally acceptable accounting principles are properly used in preparing the company’s financial statements and that appropriate financial controls are in place to prevent fraud and misuse of funds. Virtually all boards of directors have an audit committee, always composed entirely of outside directors, that has lead responsibility for overseeing the accounting practices of the company’s financial officers and consulting with both internal and external auditors to ensure accurate financial reporting and adequate financial controls.

CORE CONCEPT The whole fabric of effective corporate governance is undermined when boards of directors shirk their responsibility to maintain ultimate control over the company’s strategic direction, the major elements of its strategy, the business approaches management is using to implement and execute the strategy, executive compensation, and the financial reporting process.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 33

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 they believe 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.21 Boards of directors that lack the backbone to challenge a strong-willed or “imperial” CEO or that rubber-stamp most anything the CEO recommends without probing inquiry and debate (perhaps because the board is stacked with the CEO’s cronies) abdicate their fiduciary duty to represent and protect shareholder interests.

Key Points

The strategy-making, strategy-executing process consists of five interrelated and integrated tasks:

1. Developing a strategic vision, mission, and set of core values that provides long-term direction, infuses the organization with a sense of purposeful action, and communicates to stakeholders management’s aspirations for the company.

2. Setting objectives and using the targeted results as yardsticks for measuring the company’s performance. Objectives need to spell out how much of what kind of performance by when. A balanced scorecard that includes both financial objectives and strategic objectives is a common and effective approach for measuring company performance. Stretch objectives spur exceptional performance and help build a firewall against complacency and mediocre performance. 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.

3. Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted. The total strategy that emerges is a collection of strategic actions and business approaches initiated partly by senior company executives, partly by the heads of major business divisions, partly by functional-area managers, and partly by operating managers on the frontlines. A single business enterprise has three levels of strategy—business strategy for the company as a whole, functional-area strategies for each main area within the business, and operating strategies undertaken by lower-echelon managers. In diversified multibusiness companies, the strategy-making task involves four distinct types or levels of strategy: corporate strategy for the company as a whole, business strategy (one for each business the company has diversified into), functional-area strategies within each business, and operating strategies. Typically, the strategy-making task is more top-down than bottom-up, with higher- level strategies serving as the guide for developing lower-level strategies.

4. Implementing and executing the chosen strategy efficiently and effectively. Managing the implementation and execution of strategy is an operations-oriented, make-things-happen activity aimed at shaping the performance of core business activities in a strategy-supportive manner. Management’s handling of the strategy execution process can be considered successful if things go smoothly enough that the company meets or beats its strategic and financial performance targets and shows good progress in achieving management’s strategic vision.

5. Monitoring developments, evaluating performance, and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas, and new opportunities. This is the trigger point for deciding whether to continue or change the company’s vision, objectives, strategy, and/or strategy execution methods.

The sum of a company’s strategic vision, mission, objectives, and strategy constitute a strategic plan.

Chapter 2 • Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy 34

Boards of directors have a duty to shareholders to play a vigilant role in overseeing management’s handling of a company’s strategy-making, strategy-executing process. A company’s board is obligated to (1) critically appraise the company’s direction, strategy, and business approaches; (2) evaluate the caliber of senior executives’ strategy-making and strategy-executing skills; (3) institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, most especially those of shareholders; and (4) oversee the company’s financial accounting and financial reporting practices.