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Chapter 2

Strategic Leadership: Managing the Strategy Process

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LEARNING OBJECTIVES

Explain the role of strategic leaders and what they do.

Outline how you can become a strategic leader.

Compare and contrast the roles of corporate, business, and functional managers in strategy formulation and implementation.

Describe the roles of vision, mission, and values in a firm’s strategy.

Evaluate the strategic implications of product-oriented and customer-oriented vision statements.

Justify why anchoring a firm in ethical core values is essential for long-term success.

Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence.

Describe and evaluate the two distinct modes of decision making.

Compare and contrast devil’s advocacy and dialectic inquiry as frameworks to improve strategic decision making.

The AFI Model

What is Strategic Leadership?

Successful use of power and influence.

Directing the activities of others.

Pursuing an organization’s goals.

Enabling organizational competitive advantage.

Power:

The ability to influence others to do things.

Formal authority (their position), informal authority (persuasion).

Leaders Can Positively Impact Performance

Strategic leaders impact firm performance as do leaders whose decisions lead to huge destruction of shareholder wealth and jobs.

Best: Howard Schwartz, Starbucks, Mary Barra, GM, Warren Buffett, Berkshire Hathaway, Richard Branson, Virgin, Indra Nooyi, Pepsi. Apple, Facebook, Amazon, Elon Musk, Tesla/SpaceX

Leaders Can Destroy Shareholder Value

While the effect of strategic leaders may vary, they clearly matter to firm performance.

Martin Shkreli, Turing Pharm($13.50 per tablet to $750 per tablet for life saving drug on market 62 years), Travis Kalanick, Uber, Martin Winterkorn, Volkswagen, John Stumpf, Wells Fargo, Bernie Ebbers, Worldcom, Kenneth Lay, Enron, Robert Nardelli, Home Depot, (cost cutting), Chrysler, (bk)

What Strategic Leaders Do

Exhibit 2.1

Source: Data from O. Bandiera, A. Prat, and R. Sadun (2012), “Management capital at the top: Evidence from the time use of CEOs,” London School of Economics and Harvard Business School Working Paper.

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How Do You Become a Strategic Leader?

It is a function of innate abilities and learning.

Leadership actions reflect:

Age, education, and career experiences.

Personal interpretations of situations.

Upper Echelon’s Theory:

Organizational outcomes reflect the values of the top management team.

Their unique perspectives.

Shaped by personal circumstances, values, and experiences.

Outcomes include:

Strategic choices and performance levels.

Indra Nooyi formed Performance with a Purpose based on her experiences. Thru her eyes, this was a no brainer. https://www.youtube.com/watch?v=BDTVdX-enr4

Great Companies

Great companies have things in common:

Transition from average performance to sustained competitive advantage

Stock returns 7x the general market.

Consistent patterns of leadership.

Summarized in the Level-5 Leadership Pyramid.

Best-seller book, Good to Great:

Written by Jim Collins.

Over 1,000 companies were analyzed.

A lot has happened since the book was published over a decade ago. Today only a few of the original 11 stayed all that great, including Kimberly-Clark and Walgreens. Some fell back to mediocrity; a few no longer exist in their earlier form or at all. Anyone remember Circuit City or Fannie Mae? Let’s agree that competitive advantage is hard to achieve and even harder to sustain. But his study remains valuable for its thought-provoking observations.

Strategic Leaders: The Level-5 Pyramid

Exhibit 2.2

Source: Adapted from Collins, J. (2001), Good to Great: Why Some Companies Make the Leap . . . And Others Don’t (New York: HarperCollins), 20.

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The pyramid is a conceptual framework that shows leadership progression through five distinct sequential levels. Collins found that all the companies he identified as great were led by Level-5 executives. So if you are interested in becoming an ethical and effective strategic leader, the leadership pyramid suggests the areas of growth required.

Progression of Leaders Through the Pyramid

Each level builds upon the previous one.

Prior levels must be mastered before moving on.

Each level helps individuals develop the capacity for greater success.

A Level-5 executive:

Works to help the organization succeed.

Helps others reach their full potential.

As detailed in the ChapterCase, Facebook CEO Mark Zuckerberg highly values COO Sheryl Sandberg. Here he says why: “She could go be the CEO of any company that she wanted, but I think the fact that she really wants to get her hands dirty and work, and doesn’t need to be the front person all the time, is the amazing thing about her. It’s that low-ego element, where you can help the people around you and not need to be the face of all the stuff.”17 Clearly, Sandberg appears to be a Level-5 executive: She built enduring greatness at Facebook through a combination of skill, willpower, and humility. After a highly successful decade, however, by early 2019 many critics questioned Sandberg and Zuckerberg’s leadership skills.

Strategic Leaders:The Level 5 Pyramid

	Level 4	Level 5
Perception	Rock-star CEO	Humble CEO
Ego	Is concerned with how he/she is viewed. Not overly concerned with succession plan.	Is concerned with how his/her company is viewed. Motivated to build lasting greatness and has careful succession plan.
Failure	Looks out the window to blame others.	Looks in the mirror to take responsibility.
Success	Looks in the mirror to take responsibility.	Looks out the window to credit others.
Managerial approach	Imposes a vision on others.	Facilitates discussion to draw ideas out of others.

2-‹#›

Level 5: Warren Buffet. Berkshire Hathaway

Jobs. Perception-4, Ego-4, Failure-5, Success-5, Managerial approach-4

Trump? Perception-4, Ego-4, Failure-4, Success-3, Managerial

Approaches to Leadership

More John Maxwell

Leadership is not about titles, positions or flowcharts. It is about one life influencing another.

A leader is one who knows the way, goes the way, and shows the way.

A leader is great, not because of his or her power, but because of his or her ability to empower others.

Leaders touch a heart before they ask for a hand

Everything rises and falls on Leadership

Are you a leader, a manager or a follower?

PS – there is nothing wrong with being a follower, everyone cannot lead at the same time, right?

Group Exercise

Reflect upon these Maxwell sayings and discuss what you think defines a “leader” and where are you in the process?

Are you a leader, a manager or a follower today?

Where do you want to be in 5 years?

Have you ever worked for a “bad” leader? What made them so?

Do you think Leaders are born or built?

The Strategy Process

Strategy Formulation:

The choice of strategy.

Where and how to compete.

Strategy Implementation:

Organization, coordination, integration.

How work gets done.

The execution of strategy.

The Strategy Process Across Levels

Corporate Strategy

Where to compete?

Industry, markets, and geography.

Business Strategy

How to compete?

Cost leadership, differentiation, or value innovation.

Functional Strategy

How to implement a chosen business strategy?

Different strategies will require different activities across the various functions.

Strategic Formulation and Implementation across Levels: Corporate, Business, and Functional Strategy

Exhibit 2.3

Source: Author’s creation based on Kahneman, D. (2011), Thinking, Fast and Slow (New York: Farrar, Straus and Giroux)

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Pepsi- Corporate, (where Industry, Markets, Geography) What types of products does Pepsi offer? Where is the value chain, (raw materials to retailing), What industries, (Beverage and snacks), Where to compete, (Globally)

Business Strategy with be within each SBU and what area? Snacks in Asia will be different than US.

Functional Strategy is operations, bottling, distribution, marketing, retail, customer service specific to each SBU.

Although we generally speak of the firm in an abstract form, individual employees make strategic decisions—whether at the corporate, business, or functional levels. Corporate executives at headquarters formulate corporate strategy, such as Sheryl Sandberg (Facebook), Mukesh Ambani (Reliance Industries), Rosalind Brewer (Starbucks), Mary Barra (GM), Larry Page (Alphabet), or Marillyn Hewson (Lockheed Martin). Corporate executives need to decide in which industries, markets, and geographies their companies should compete.

Corporate Strategy

Decide in which industries, markets and geographies their companies should compete.

Corporate executives:

Create synergies across SBUs.

Decide whether to enter or exit industries and markets.

Set strategic objectives.

Allocate scarce resources among SBU.

Monitor performance.

Make adjustments to the portfolio as needed.

Business Strategy

Standalone division of corporate

Profit and loss responsibility

Work with corporate to determine business strategy

Cost leadership

Differentiation

Value innovation

Functional Strategy

Within each strategic business unit:

Accounting

Finance

Human resources

Product development

Operations

Manufacturing

Marketing

Customer service

Functional managers are responsible for decisions and actions within the function.

These decisions aid in the implementation of the business-level strategy, made at the level above.

Dancing Guy and Leadership Sasquatch 2009

Leader is the lone nut until they gain the first follower…(who is another type of leader, yes?)

1. The leaders demonstrates behavior (Walks the walk)

2. The first follower encourages others to joining

3. The leader welcomes new followers

3. Early Adopters, (early majority)

4. Late Adopters

5. Laggards

Top link is Derek Sivers narration of first follower

Pic link is un-narrated.

Stopping point

Vision, Mission, Values

The first step in gaining and sustaining a competitive advantage…

Vision: What do we want to accomplish ultimately?

Mission: How do we accomplish our goals?

Values:

What commitments do we make?

What safeguards do we put in place?

How do we act both legally and ethically as we pursue our vision and mission?

This process is similar to building a house. The future owner must communicate her vision to the architect, who draws up a blueprint of the home for her review. The process is iterated a couple of times until all the homeowner’s ideas have been translated into the blueprint. Only then does the building of the house begin.

Vision

Captures an organization’s aspiration.

Spells out what the organization wants to accomplish, (“to” is a common word)

Identifies the long-term objective.

Should be forward-looking and inspiring.

An effective vision:

Is expressed as a statement.

Should be forward-looking and inspiring.

Should provide meaning for employees in pursuit of the organization’s ultimate goals.

Example: Nordstrom’s vision: “provide outstanding service every day, one customer at a time.”

Tesla’s vision is to accelerate the world’s transition to sustainable transport. The goal is to provide affordable zero-emission mass-market cars that are the best in class.

SpaceX is a spacecraft manufacturer and space transport services company, also founded by Elon Musk, whose inspirational vision is to make human life multiplanetary. To achieve this goal, SpaceX aims to make human travel to Mars not only possible but also affordable. Moreover, SpaceX also sees a role in helping establish a self-sustainable human colony on Mars.

Vision

Who is this?

“To provide outstanding service every day, one customer at a time.”

“To accelerate the world’s transition to sustainable transport.”

“To make human life multiplanetary.”

Example: Nordstrom’s vision: “provide outstanding service every day, one customer at a time.”

Tesla’s vision is to accelerate the world’s transition to sustainable transport. The goal is to provide affordable zero-emission mass-market cars that are the best in class.

Vision and Competitive Advantage

Research shows that vision statements and firm performance are related.

This relationship is strongest when:

The vision is customer oriented.

Internal stakeholders help define the vision.

Organizational structures align to the vision:

Ex: compensation.

Customer vs. Product Oriented Vision Statements

Customer-oriented vision statements:

Allow companies to adapt to changing environments.

Focus on problem solving for the customer.

Product-oriented vision statements:

Focus on improving existing products and services

Clayton Christensen shares how a customer focus let him help a fast food chain increase sales of milkshakes. The company approached Christensen after it had made several changes to its shake offering based on extensive customer feedback but sales failed to improve. Rather than asking customers what kind of milkshake they wanted, he thought of the problem in a different way. He observed customer behavior and then asked customers, “What job were you trying to do that caused you to hire that milkshake?”

Product Oriented Vision Statements

Defines a business in terms of a good or service provided.

Forces managers to take a more myopic view.

Can hinder understanding of the competitive landscape.

“To be the safest, most progressive North American railroad, relentless in the pursuit of customer and employee excellence.” -CSX Railroads

Example: U.S. Railroad companies.

They were focused on the railroad business.

They should have been focused on transportation and logistics.

Customer Oriented Vision Statements

Defines a business in terms providing solutions to customer needs.

Customer needs may change.

The means of meeting those needs may change also.

We are a global family with a proud heritage passionately committed to providing personal mobility for people around the world.-Ford Motors

Ford Motor Company.

Entered the market in the early 1900s.

He didn’t build a better horse and buggy. He offered mobility to the masses…no mention of building cars.

Ford’s focus: “to provide personal mobility for people around the world.”

Examples of Customer Oriented Vision Statements

Company	Vision Statement
Alibaba	To make it easy to do business anywhere.
Amazon	To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.
Better World Books	To harness the power of capitalism to bring literacy and opportunity to people around the world.
Facebook	To make the world more open and connected.
GE	To move, cure, build and power the world.
Google	To organize the world’s information and make it universally accessible and useful.
Nike	To bring inspiration and innovation to every athlete in the world.
SpaceX	To accelerate the world’s transition to sustainable energy.
Tesla	To be the best retailer in the hearts and minds of consumers and employees.

Walmart:

Mission

What an organization actually does.

The products and services it will provide.

The markets in which it will compete.

Defines how the vision is accomplished.

Strategy Highlight 2.1 shows how we can recast Teach for America’s mission that it will achieve its vision by enlisting, developing, and mobilizing as many as possible of our nation’s most promising future leaders to grow and strengthen the movement for educational equity and excellence.

Mission: Strategic Commitments

Credible actions that back up the vision and mission statements.

These commitments are often:

Costly.

Long-term oriented.

Difficult to reverse.

Tesla is investing billions of dollars to equip its car factory in California with cutting-edge robotics and to build the Gigafactory producing lithium-ion batteries in Nevada.

Tesla is investing billions of dollars to equip its car factory in California with cutting-edge robotics and to build the Gigafactory producing lithium-ion batteries in Nevada. These investments by Tesla are examples of strategic commitments because they are costly, long-term, and difficult to reverse. They are clearly supporting Tesla’s vision to accelerate the world’s transition to sustainable transport. Tesla hopes to translate this vision into reality by providing affordable zero-emission mass-market cars that are the best in class, which captures Tesla’s mission.

Values

Organizational core values:

Ethical standards and norms.

Govern the behavior of individuals.

Provide stability to the strategy.

Serve as guardrails to keep the company on track.

Helps employees:

Understand the company culture.

Deal with complexity.

Resolve conflict.

Consider that much of unethical behavior, while repugnant, may not be illegal. Often we read the defensive comment from a company under investigation or fighting a civil suit that “we have broken no laws.” However, any firm that fails to establish extra-legal, ethical standards will be more prone to behaviors that can threaten its very existence. A company whose culture is silent on moral lapses breeds further moral lapses. Over time such a culture could result in a preponderance of behaviors that cause the company to ruin its reputation, at the least, or slide into outright legal violations with resultant penalties and punishment, at the worst.

Vision Is Strategic Intent

Outlines a firm’s stretch goal.

Is based on a firm’s vision.

Actions based on vision will:

Build necessary resources.

Build capabilities.

Ensure continuous organizational learning.

Ensure learning from failure.

Mattel Mission, Vision and Values

Mission Statement: Our mission is to act with integrity in all that we do, positively impacting our people, our products, and our planet by playing responsibly.

Vision: Our vision is to inspire the wonder of childhood as the global leader in learning and development through play

Values:

Play Fair

Play with Passion

Play to Grow

Play Together

Mattel’s new gender-neutral doll

Video

Small group discussion

Are they living up to their vision (and their mission)?

Has this been a success?

Three Approaches to Organizational Strategy

Strategic planning:

A formal, top-down approach.

Scenario planning:

Another formal, top-down approach but adds “What ifs”.

Strategy as planned emergence:

Begins with a strategic plan, but it is less formal.

This order also reflects how these approaches were developed. The prosperous decades after World War II resulted in tremendous growth of corporations. As company executives needed a way to manage ever more complex firms more effectively, they began to use strategic planning.

Top Down Strategic Planning: Overview

Data-driven strategy process.

Top management attempts to program future success through analysis of:

Prices.

Costs.

Margins.

Market demand.

Head count.

Production runs.

Five-year plans and budgets.

Performance monitoring.

Top-down strategic planning more often rests on the assumption that we can predict the future from the past. The approach works reasonably well when the environment does not change much.

Rational, top-down process aiding in programming for future success

Information flows only one way: top-down.

Centralized strategic intelligence and decision-making

Shortcomings of the Top-Down Approach

May not adapt well to change.

Formulation is separate from implementation.

Information flows one-way.

Leaders’ future vision can be wrong.

Apple's Steve Jobs was one of the few successful tech companies using a top-down strategic-planning process. He felt that he knew best what the next big thing should be. Under his top-down, autocratic leadership, Apple did not engage in market research, because Jobs firmly believed that “people don't know what they want until you show it to them.”

However since Jobs’ death, Apple’s strategy process has become more flexible under its new CEO Tim Cook; the company is now trying to incorporate the possibilities of different future scenarios and bottom-up strategic initiatives.

Scenario Planning: Overview

Asks “what if” questions:

Top management envisions different scenarios.

Then they derive strategic responses.

Optimistic and pessimistic futures are planned.

Considerations can include:

New laws.

Demographic shifts.

Changing economic conditions.

Technological advances.

Managers envision different what-if scenarios to anticipate plausible futures. Brainstorming.

Scenario planning takes place at both the corporate and business levels of strategy.

SP places the elements in the AFI strategy framework in a continuous feedback loop, where analysis leads to formulation to implementation and back to analysis. This image conveys the dynamic and iterative method of scenario planning.

Obtain input from different levels and functions:

R&D, manufacturing, and marketing and sales.

Determine how to compete situationally.

Attach probabilities into different future states:

Highly likely vs. unlikely.

Questions to Ask in Scenario Planning

What resources and capabilities do we need to compete successfully in each future scenario?

What strategic initiatives should we put in place to respond to each respective scenario?

How can we shape our expected future environment?

Strategy executives at UPS identified a number of issues as critical to shaping its future competitive scenarios: (1) big data analytics; (2) being the target of a terrorist attack, or having a security breach or IT system disruption; (3) large swings in energy prices, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; (4) fluctuations in exchange rates or interest rates; and (5) climate change.

Black Swan Events

The high impact of a highly improbable event.

Accounting Scandals: Enron

Real Estate Bubble: 2008 financial crisis

Pandemics: Covid-19

In the past, most people assumed that all swans were white. When they first encountered swans that were black, they were surprised.

Wars, disasters world events.

Strategy as Planned Emergence

Top-Down and Bottom-Up:

Bottom-up strategic initiatives emerge.

Evaluated and coordinated by management.

Less formal and less stylized.

Relies on data, plus:

Personal experience.

Deep domain expertise.

Front line employee insights.

Example: many changes have occurred in the online retail industry:

Some companies have flourished: Amazon and eBay.

Others have been forced to adjust: Best Buy, Home Depot

Others are now out of business: Circuit City and Radio Shack.

Realized Strategy Is a Combination of Top-Down Intended Strategy and Bottom-Up Emergent Strategy

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Intended strategy: The outcome of a rational and structured top-down strategic plan

Emergent strategy: Any unplanned strategic initiative , it bubbles up from the bottom of the organization and can influence and shape a firm’s overall strategy

Realized strategy: Combination of intended and emergent strategy

Strategic Initiatives

An activity a firm pursues to explore and develop:

New products and processes.

New markets.

New ventures.

Can bubble up from deep within a firm through:

Autonomous actions.

Serendipity.

Resource-allocation process (RAP).

For example, the new delivery-by-drone project at Amazon.com was conceived of and invented by a low-level engineer. Even relatively junior employees can come up with strategic initiatives that can make major contributions if the strategy process is sufficiently open and flexible.

Autonomous Actions, Serendipity, Resource Allocation

Autonomous Actions:

Strategic initiatives undertaken by employees.

A response to unexpected situations.

Serendipity:

Random events, surprises, coincidences.

Has an effect on strategic initiatives.

Resource Allocation Process (RAP):

How a firm allocates resources based on policy.

Helps shape realized strategy.

Functional manager at Starbucks was much closer to the customers and was able to introduce a new product.

Serendipity: Products that occur due to one persons belief and luckily succeeded…

Post it notes was a mistake. Trying to make a strong adhesive and out came a weak one. Replacement for bookmarks in choir.

Velcro was discovered by a scientist taking his dog for a hike and discovering the burrs attached to its fur.

Viagra was a side effect of a heart medicine.

Superglue was came about trying to create a clear plastic gunsight when the materials fused together.

Scotchgard discovered when a scientist working with air conditioning solution spilled coffee on her shoes.

RAP is focusing resources on a certain belief and seeing what happens,

Strategic Decision Making

Can be limited due to our cognitive limitations:

Choosing “good enough” options vs. optimal solutions.

Human decision making is filled with cognitive limitations and biases.

Artificial intelligence can augment the information at our fingertips.

Managers can become better at decision making using theories and frameworks that help make sense of uncertain information.

Satisficing?

Two Decision Making Modes

System 1:

Brain’s default mode.

Gut reaction.

Familiar, efficient, automatic.

Requires little energy.

System 2:

Logical, analytical, deliberate.

Requires more energy.

Slower.

Brilliantly named System 1 and System 2

Two Distinct Modes of Decision Making

System 1	System 2
Fast	Slow
Unconscious	Conscious
Automatic	Effortful
Everyday, Snap Decisions	Complex, Analytical Decisions
Error Prone, Higher Likelihood of Biases	Reliable, Lower Likelihood of Biases

Cognitive Biases

Bias:	Description:
Illusion of Control	Our tendency to overestimate our ability to control events.
Escalating Commitment	Continuing to support a project when it is showing signs that it may not succeed.
Confirmation Bias	Searching for information to support existing beliefs.
Reason by Analogy	The tendency to use simple analogies to make sense out of complex problems.
Representativeness	Drawing conclusions based on small samples or anecdotes.
Groupthink	When opinions coalesce around a leader without individuals critically evaluating and challenging that leader’s opinions and assumptions.

President Trump with Covid

Gambling, Bidding wars, Staying in a miserable job

Steve Schmidt would ask numerous people for feedback until he found someone who agreed with his choice.

Trying to explain something complex by relating it to something known. Convincing a friend of a movie…”its like this and that”.

Small samples skew reality. If I were to ask this class a question, does that reflect the national view?

Going along to get along…Hitler, Trump, Big Banks

How to Improve Decision Making

DA: The path forward is challenged with alternative viewpoints…Highlights what can go wrong…Criticisms are offered.

DI: Alternatives are explored…Compromises are discussed.

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