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chapter 2 Charting a Company’s Direction

Its Vision, Mission,

Objectives, and Strategy

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Chapter 2 presents an overview of the managerial tasks associated with developing and executing company strategies. Special attention is given to the importance of a clear vision for the company and the strategic and financial objectives that will guide the way. The importance of setting objectives at all levels of the organization is explored, along with the role of operating excellence in the successful execution of strategy. The chapter wraps up with an exploration of the role of the company’s board of directors in overseeing the strategic management process.

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Learning Objectives

After reading this chapter, you should be able to:

Understand why it is critical for managers to have a clear strategic vision of where the company needs to head.

Explain the importance of setting both strategic and financial objectives.

Explain why the strategic initiatives taken at various organizational levels must be tightly coordinated.

Recognize what a company must do to execute its strategy proficiently.

Comprehend the role and responsibility of a company’s board of directors in overseeing the strategic management process.

This chapter presents the concepts and analytical tools for zeroing in on a single-business company’s external environment.

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

Developing a strategic vision, a mission statement, and a set of core values.

Setting objectives for measuring the firm's performance and tracking its progress.

Crafting a strategy to move the firm along its strategic course and achieve its objectives.

Executing the chosen strategy efficiently and effectively.

Monitoring developments, evaluating performance, and initiating corrective adjustments.

Crafting and executing a company’s strategy is an ongoing process that consists of five interrelated stages.

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FIGURE 2.1 The Strategy-Making, Strategy-Executing Process

Access the text alternative for slide images.

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

Figure 2.1 displays this five-stage process, which we examine next in some detail. The first three stages of the strategic management process involve making a strategic plan. A strategic plan maps out where a company is headed, establishes strategic and financial targets, and outlines the competitive moves and approaches to be used in achieving the desired business results.

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TABLE 2.1 Factors Shaping Decisions in the Strategy-Making, Strategy-Execution Process

External Considerations. Does sticking with the company’s present strategic course present attractive opportunities for growth and profitability? What kind of competitive forces are industry members facing, and are they acting to enhance or weaken the company’s prospects for growth and profitability? What factors are driving industry change, and what impact on the company’s prospects will they have? How are industry rivals positioned, and what strategic moves are they likely to make next? What are the key factors of future competitive success, and does the industry offer good prospects for attractive profits for companies possessing those capabilities?

Internal Considerations. Does the company have an appealing customer value proposition? What are the company’s competitively important resources and capabilities, and are they potent enough to produce a sustainable competitive advantage? Does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats? Are the company’s costs competitive with those of key rivals? Is the company competitively stronger or weaker than key rivals?

Table 2.1 provides some dos and don’ts in composing an effectively worded vision statement.

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

Developing a strategic vision:

Delineates management’s aspirations for the firm to its stakeholders.

Provides direction: “where we are going.”

Sets out the compelling rationale (strategic soundness) for the firm’s direction.

Uses distinctive and specific language to set the firm apart from its rivals.

A strategic vision describes top management’s aspirations for the company’s future and the course and direction charted to achieve them. A clearly articulated strategic vision communicates management’s aspirations to stakeholders (customers, employees, stockholders, suppliers, etc.) and helps steer the energies of company personnel in a common direction.

Well-conceived visions are distinctive and specific to a particular organization. As a valuable management tool, it must convey what top executives want the business to look like and provide managers at all organizational levels, with a reference point in making strategic decisions and preparing the company for the future

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TABLE 2.2 Wording a Vision Statement—the Dos and Don’ts 1

The Dos	The Don’ts
Be graphic. Paint a clear picture of where the company is headed and the market position(s) the company is striving to stake out.	Don’t be vague or incomplete. Never skimp on specifics about where the company is headed or how the company intends to prepare for the future.
Be forward-looking and directional. Describe the strategic course that will help the company prepare for the future.	Don’t dwell on the present. A vision is not about what a firm once did or does now; it’s about “where we are going.”
Keep it focused. Focus on providing managers with guidance in making decisions and allocating resources.	Don’t use overly broad language. All-inclusive language that gives the company license to pursue any opportunity must be avoided.
Have some wiggle room. Language that allows some flexibility allows the directional course to be adjusted as market, customer, and technology circumstances change.	Don’t state the vision in bland or uninspiring terms. The best vision statements have the power to motivate company personnel and inspire shareholder confidence about the company’s future.

Table 2.1 provides some dos and don’ts in composing an effectively worded vision statement.

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TABLE 2.2 Wording a Vision Statement—the Dos and Don’ts 2

The Dos	The Don’ts
Be sure the journey is feasible. The path and direction should be within the realm of what the company can 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 companies in the same industry) is not specific enough to provide any guidance.
Indicate why the directional path makes good business sense. The directional path should be in the long-term interests of stakeholders, especially shareowners, employees, and suppliers.	Don’t rely on superlatives. Visions that claim the company’s strategic course is one of being the “best” or “most successful” usually lack specifics about the path the company is taking to get there.
Make it memorable. To give the organization a sense of direction and purpose, the vision needs to be easily communicated. Ideally, it should be reducible to a few choice lines or a memorable “slogan.”	Don’t run on and on. A vision statement that is not short and to the point will tend to lose its audience.

Table 2.1 provides some dos and don’ts in composing an effectively worded vision statement.

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Examples of Strategic Visions—How Well Do They Measure Up? 1

Vision Statement	Effective Elements	Shortcomings
Whole Foods Market Whole Foods Market is a dynamic leader in the quality food business. We are a mission-driven company that aims to set the standards of excellence for food retailers. We are building a business in which high standards permeate all aspects of our company. Quality is a state of mind at Whole Foods Market. Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer. Our success in fulfilling our vision is measured by customer satisfaction, team member happiness and excellence, return on capital investment, improvement in the state of the environment and local and larger community support. Our ability to instill a clear sense of interdependence among our various stakeholders (the people who are interested and benefit from the success of our company) is contingent upon our efforts to communicate more often, more openly, and more compassionately. Better communication equals better understanding and more trust.	Forward-looking. Graphic. Focused. Makes good business sense.	Long. Not memorable.

Illustration Capsule 2.1 provides a critique of the strategic visions of several prominent companies.

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Examples of Strategic Visions—How Well Do They Measure Up? 2

Vision Statement	Effective Elements	Shortcomings
Keurig Dr. Pepper A leading producer and distributor of hot and cold beverages to satisfy every consumer need, anytime and anywhere.	Easy to communicate. Focused.	Not distinctive. Not forward-looking.
Nike NIKE, Inc. fosters a culture of invention. We create products, services and experiences for today’s athlete* while solving problems for the next generation. *If you have a body, you are an athlete.	Forward-looking. Flexible.	Vague and lacks detail. Not focused.

Illustration Capsule 2.1 provides a critique of the strategic visions of several prominent companies.

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Strategic Vision Examples—How Well Do They Measure Up?

For which of these three businesses is it the most difficult to create a vision statement?

How does the scope of a business affect the language of its vision statement?

Considering the acquisition of Whole Foods by Amazon, how would you reword the Whole Foods mission statement to reduce it to less than 100 words? (Currently = 150+ words.)

Student discussion responses will vary for the first question. For the second question, the instructor can begin with an explanation of factors that define the scope of a business. For the third question, the class can be divided into groups to develop a revised mission statement for Whole Foods.

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Communicating the Strategic Vision

Why communicate the vision?

Fosters employee commitment to the firm’s chosen strategic direction.

Ensures understanding of its importance.

Motivates, informs, and inspires internal and external stakeholders.

Demonstrates top management support for the firm’s future strategic direction and competitive efforts.

An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company forward in the intended direction.

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Putting the Strategic Vision in Place

What needs to be done:

Put the vision in writing and distribute it.

Hold meetings to personally explain the vision and its rationale.

Create a memorable slogan or phrase that effectively expresses the essence of the vision.

Emphasize the positive payoffs for making the vision happen.

A strategic vision describes “where we are going”—the course and direction management has charted and the company’s future product customer-market technology focus.

A strategic vision has little value unless it’s effectively communicated down the line to lower-level managers and employees. An effectively communicated vision enlists the commitment of personnel to engage in actions that move the company forward in the intended direction.

The task of effectively conveying the vision is assisted when management can capture the vision in a catchy or easily remembered slogan.

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Why a Sound, Well-Communicated Strategic Vision Matters

It crystallizes senior executives’ own views about the firm’s long-term direction.

It reduces the risk of rudderless decision making.

It is a tool for winning the support of organization members to help make the vision a reality.

It provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the firm’s overall strategy.

It helps an organization prepare for the future.

A well thought-out, forcefully communicated strategic vision pays off in several respects. When management can demonstrate significant progress in achieving these five benefits, it can count its efforts to create an effective vision for the company as successful.

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Developing a Company Mission Statement

A well-conceived company mission statement:

Uses specific language to give the firm its own unique identity.

Describes the firm’s current business and purpose—“who we are, what we do, and why we are here.”

Focuses on describing the firm’s business, not on “making a profit”—earning a profit is an objective, not a mission.

The distinction between a strategic vision and a mission statement is fairly clear-cut. A strategic vision portrays a firm’s aspirations for its future (“where we are going”). A firm’s mission describes the scope and purpose of its present business (“who we are, what we do, and why we are here”).

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An “Ideal” Mission Statement

Identifies the company’s product or services.

Specifies the buyer needs it seeks to satisfy.

Identifies the customer groups or markets it is endeavoring to serve.

Gives the company its own identity that sets the company firm apart from its rivals.

Clarifies the firm’s purpose and business makeup to stakeholders.

A company mission statement ideally (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.

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Linking the Vision and Mission with Core Values

Core values:

Are the beliefs, traits, and behavioral norms that employees are expected to display in conducting the firm’s business and in pursuing its strategic vision and mission.

Become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported by top management.

Match the firm’s vision, mission, and strategy, contributing to the firm’s business success.

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

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TOMS Shoes: A Mission with a Company

TOMS’s mission statement:

With every product you purchase, TOMS will help a person in need, One for One®.

TOM’s core values:

Our mission is ingrained in our one-to-one business model.

Lead with the story: our mission and purpose are the same.

Communicate to ensure that customers know they are doing more than just buying a product.

Extend and adapt the one–for-one model to other product categories to support other causes.

Protect the success of the model when acquiring stakeholders.

TOMS’s mission is ingrained in their business model to avoid relying on donors to fund giving to the poor by creating a business that would fund the giving itself. With the one-for-one model, TOMS built the cost of giving away a pair of shoes into the price of each pair they sold, enabling the company to make a profit while still giving away shoes to the needy.

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Stage 2: Setting Objectives

The purposes of setting objectives:

To convert the vision and mission into specific, measurable, challenging yet achievable, deadline performance targets.

To focus efforts and align actions throughout the organization.

To serve as yardsticks for tracking a firm’s performance and progress.

To provide motivation and inspire employees to greater levels of effort.

Concrete, measurable objectives are managerially valuable for three reasons: (1) They focus efforts and align actions throughout the organization, (2) they serve as yardsticks for tracking a company’s performance and progress, and (3) they motivate employees to expend greater effort and perform at a high level.

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Converting the Vision and Mission into Specific Performance Targets

Characteristics of Well-Stated Objectives:

Specific

Quantifiable (Measurable)

Challenging (Motivating)

Deadline for Achievement

Well-stated objectives are specific, quantifiable or measurable and contain a deadline for achievement.

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Setting Stretch Objectives

Setting stretch objectives promotes better overall performance because stretch targets because they:

Push a firm to be more inventive.

Increase the urgency for improving financial performance and competitive position.

Cause the firm to be more intentional and focused in its actions.

Create an exciting work environment and attract the best people.

Help prevent internal inertia and contentment with modest gains in performance.

Stretch objectives set performance targets high enough to stretch an organization to reach its full potential and deliver the best possible results.

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Cautions About Stretch Goals

Realistic stretch goals:

Definitely reachable, with a strong and coordinated effort on the part of company personnel.

Overly ambitious stretch goals:

Are usually beyond the organization's capabilities to reach, regardless of the level of effort.

Involve radical expectations and often go unachieved, and run the risk of killing motivation, eroding employee confidence, and damaging both worker and company performance.

Can work as envisioned if:

The company has ample resources and capabilities.

Its recent performance is strong.

There is a difference, however, between stretch goals that are clearly reachable, with enough effort, and those that are well beyond the organization's current capabilities, regardless of the level of effort. Extreme stretch goals, involving radical expectations, usually fail, killing motivation, eroding employee confidence, and damaging both worker and company performance.

Extreme stretch goals can work as envisioned under circumstances where the company is a strong competitor with plentiful resources.

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What Kinds of Objectives To Set

Financial Objectives:

Communicate top management’s goals for financial performance.

Are focused internally on the firm’s operations and activities.

Strategic Objectives:

Are the firm's goals related to market standing and competitive position.

Are focused externally on competition vis-à-vis the firm’s rivals.

Financial objectives relate to the financial performance targets management has established for the organization to achieve.

Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects.

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The Need for Short-Term and Long-Term Objectives

Short-Term Objectives:

Focus attention on quarterly and annual performance improvements to satisfy near-term shareholder expectations.

Long-Term Objectives:

Force consideration of what to do now to achieve optimal long-term performance.

Help pose a barrier to overemphasizing achieving just short-term results and postponing/delaying actions needed to achieve long-term performance targets.

When trade-offs must be made between achieving long-term objectives and achieving short-term objectives, long-term objectives should take precedence (unless the achievement of one or more short-term performance targets has unique importance).

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Examples of Common Financial 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 capital investment.

Examples of commonly used strategic objectives are listed in this slide

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Examples of Common Strategic Objectives

Winning an x percent market share.

Achieving lower overall costs 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.

Getting new or improved products to market ahead of rivals.

Examples of commonly used strategic objectives are listed in this slide

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The Need for a Balanced Approach to Objective Setting

A balanced scorecard approach:

Strives to place a balanced emphasis on achieving both financial and strategic objectives by tracking measures of both financial performance and the competitiveness of its market position.

The four dimensions of a balanced scorecard:

Financial objectives.

Customer: objectives relating to customers and the market.

Internal process objectives relating to improving productivity and quality.

Organizational objectives concerning human capital, culture, infrastructure, and innovation.

The Balanced Scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. Despite its popularity, the balanced scorecard is not without limitations. Importantly, it may not capture some of the most important priorities of a particular organization, such as resource acquisition or partnering with other organizations. Further, its value, as with most strategy tools, depends on implementation and follow-through as much as on substance.

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Good Strategic Performance Is the Key to Better Financial Performance

Good financial performance is not enough.

Current financial results are lagging indicators and do not assure the development of competitive capabilities for delivering better financial results in the future.

Setting and achieving stretch strategic objectives signal improvements in a firm’s competitiveness and strength in the marketplace.

Ongoing good strategic performance is a leading indicator of a firm’s increasing capability to deliver improved future financial performance.

The best and most reliable leading indicators of a company’s future financial performance and business prospects are strategic outcomes that indicate whether the company’s competitiveness and market position are stronger or weaker. The accomplishment of strategic objectives signals that the company is well-positioned to sustain or improve its performance.

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Setting Objectives for Every Organizational Level

Breaks down overall performance targets into targets for each of the organization’s separate units.

Fosters setting lower-level performance targets or outcomes that support achievement of firm-wide strategic and financial objectives.

Extends the top-down objective-setting process to all organizational levels.

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.

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Examples of Company Objectives

Jet Blue, Lululemon Athletica, Inc., General Mills.

Which company included the most specific strategic objectives in its listing of objectives?

Which company has the shortest-term focus based on its objectives? Which has the longest-term focus?

Which company’s listing of objectives appears to best fit the balanced scorecard concept?

For the first question, emphasizing the necessity for specificity in the wording of objectives is essential to evaluating successful strategic performance: who did what, how much got done, and how long did it take?.

Deciding how far into the future to set the goal for achieving an objective is critical to coordinating all levels of a strategic effort.

Student responses will vary for the third question. Not all strategy can be planned deliberately; there is frequently a need for a more adaptive approach.

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Stage 3: Crafting a Strategy

Strategy making:

Addresses a series of strategic hows.

Requires choosing among strategic alternatives.

Promotes actions to do things differently from competitors rather than running with the herd.

Is a collaborative team effort that involves managers in various positions at all organizational levels.

Strategy is the result of piecing together critical ‘how’ statements such as how to attract and please customers, how to compete against key rivals, how to position the company in the marketplace, and many more. Speed and entrepreneurship are key elements in growing in fast-paced markets. Therefore, strategy formulation should involve managers at all organizational levels and relies on innovative thinking.

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Strategy-Making Involves Managers at All Organizational Levels

Chief executive officer (CEO):

Has ultimate responsibility for leading the strategy-making process as the strategic visionary and chief architect of strategy.

Senior executives:

Fashion the major strategy components involving their areas of responsibility.

Managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise):

Utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy.

In most companies, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only high-level executives do.

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FIGURE 2.2 A Company’s Strategy-Making Hierarchy

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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. Figure 2.2, A Company’s Strategy Making Hierarchy, illustrates this concept.

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A Firm’s Strategy-Making Hierarchy 1

Corporate strategy:

Multibusiness strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses.

Business strategy:

How to strengthen market position and gain competitive advantage.

Actions to build competitive capabilities of single businesses.

Monitoring and aligning lower-level strategies.

Corporate strategy is strategy at the multibusiness level, concerning how to improve company performance or gain competitive advantage by managing a set of businesses simultaneously.

Business strategy is strategy at the single-business level, concerning how to improve the performance or gain a competitive advantage in a particular line of business.

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A Firm’s Strategy-Making Hierarchy 2

Functional area strategies:

Add relevant detail to the “hows” of business strategy.

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

Operational strategies:

Add detail and completeness to business and functional strategies.

Provide a game plan for managing specific operating activities with strategic significance.

NOTE: These four strategies all impact each other.

Functional-area strategies concern the actions related to particular functions or processes within a business.

Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units.

A firm's strategy is at full power only when the many pieces of its strategy are united. Anything less than a unified collection of strategies weakens the overall strategy and is likely to impair company performance.

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Uniting the Strategy-making Hierarchy

Functional Level 

 Operational Level 

 Corporate Level 

 Business Level

Components of a company’s strategy up and down the strategy hierarchy should be cohesive and mutually reinforcing.

Ideally, the pieces and layers of a company’s strategy should fit together like a jigsaw puzzle. Anything less than a unified collection of strategies weakens company performance. Achieving unity in strategy making is partly a function of communicating the company’s basic strategy theme effectively across the whole organization and establishing clear strategic principles and guidelines for lower-level strategy making.

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A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan

ELEMENTS OF A FIRM’S STRATEGIC PLAN.

Its strategic vision, business mission, and core values.

Its strategic and financial objectives.

Its chosen strategy.

A company’s strategic plan lays out its direction, business model, and performance targets, for some period of time. A company’s vision, mission, objectives, strategy, and approach to strategy execution are never final; reviewing whether and when to make revisions is an ongoing process.

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Stage 4: Executing the Strategy

Converting strategic plans into actions requires:

Directing organizational action.

Motivating people.

Building and strengthening the firm’s competencies and competitive capabilities.

Creating and nurturing a strategy-supportive work climate.

Meeting or beating performance targets.

Managing the implementation of a strategy 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 action, motivate people, build and strengthen competitive capabilities, create and nurture a strategy supportive work climate, and meet or beat performance targets.

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Managing the Strategy Execution Process 1

Creating a strategy-supporting structure.

Staffing the firm with the needed skills and expertise.

Developing and strengthening strategy-supporting resources and capabilities.

Allocating ample resources to the activities critical to strategic success.

Ensuring that policies and procedures facilitate effective strategy execution.

Organizing work effort to achieve best practices.

Managing the strategy execution process requires constant and consistent attention to its principal aspects. Good strategy execution requires diligent pursuit of operating excellence, and it is a job for a company’s whole management team.

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Managing the Strategy Execution Process 2

Installing information and operating systems that enable company personnel to perform essential activities.

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

Creating a company culture conducive to successful strategy execution.

Exerting the internal leadership needed to propel implementation forward.

Good strategy execution requires diligent pursuit of operating excellence, and it is a job for a company’s whole management team.

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Stage 5: Evaluating Performance and Initiating Corrective Adjustments

Evaluating performance:

Deciding whether the enterprise is passing the three tests of a winning strategy—good fit, competitive advantage, strong performance.

Initiating corrective adjustment:

Deciding whether to continue or change the firm’s vision and mission, objectives, strategy, and strategy execution methods.

Applying lessons based on organizational learning.

The fifth phase 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.

As long as the company’s strategy continues to pass the three tests of a winning strategy, simply fine-tuning the strategic plan and continuing with efforts to improve strategy execution are sufficient.

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The Role of the Board of Directors in Corporate Governance

Obligations of the board of directors:

Oversee the firm’s financial accounting and reporting practices compliance with GAAP principles.

Critically appraise the firm’s direction, strategy, and business approaches.

Evaluate the caliber of senior executives’ strategic leadership skills.

Institute a compensation plan that rewards top executives for actions and results that serve stakeholder interests—especially shareholders.

Although senior managers have lead responsibility for crafting and executing a company’s strategy, it is the duty of the board of directors to exercise strong oversight and see that the five tasks of strategic management are performed in a manner that benefits shareholders, in the case of investor-owned enterprises, or stakeholders, in the case of not-for-profit organizations.

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Achieving Effective Corporate Governance

A strong, independent board of directors:

Is well informed about the firm’s performance.

Guides and judges the CEO and other executives.

Can curb management actions the board believes are inappropriate or unduly risky.

Can certify to shareholders that the CEO is doing what the board expects.

Provides insight and advice to top management.

Is intensely involved in debating the pros and cons of key strategic decisions and actions.

Effective corporate governance requires the board of directors to oversee the company’s strategic direction, evaluate its senior executives, handle executive compensation, and oversee financial reporting practices.

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Corporate Governance Failures at Volkswagen

Why does the VW advisory board refuse to accept responsibility for the continuing series of management scandals that have plagued the firm for the past two decades?

How has the government-mandated two-tier governance structure promoted misconduct in the organization?

What must be changed at VW to restore stakeholder confidence in the firm?

The primary cause is the absence of a strong group of independent directors. Based upon German corporate law, governance is provided by a Management Board and a Supervisory Board, with employees making up 50% of the Supervisory Board. This should have allowed for at least 50% of the Supervisory Board to be fully independent. While staying within the ‘letter of the law,’ they sidestepped the ‘spirit of the law’ by cycling recent former senior executives through the Supervisory Board Chairmanship position and other board positions. This had the effect of removing truly independent oversight.

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End of Main Content

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Figure 2.1 The Strategy-Making, Strategy-Executing Process, Text Alternative

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Stages 1, 2 and 3.

Are considered strategy making.

Stage 4.

Is where strategy execution occurs.

Stage 5.

Is where strategy-related adjustments are made.

Entails revising/adjusting stages 1 through 4 as needed in light of the firm's actual performance, changing conditions, new opportunities, and new ideas.

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Second level

Third level

Fourth level

Fifth level

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Figure 2.2 A Company’s Strategy-Making Hierarchy, Text Alternative

Each level of strategies influence those above and below it.

Corporate strategy (for the business as a whole) is orchestrated by the C E O and other senior executives. This concerns how to gain advantage from managing a set of business.

Business strategy (one for each business the company has diversified into) is orchestrated by the senior executives of each line of business, often with advice from the heads of functional areas within the business and other key people. This strategy concerns how to gain and sustain a competitive advantage for a single line of business.

Functional area strategies (within each business) are orchestrated by the heads of the major functional activities within a particular business, often in collaboration with other key people. These strategies concern how to manage a particular activity within a business in ways that support the business strategy.

Operating strategies (within each functional area) are orchestrated by brand managers, plant managers, and the heads of other strategically important activities, such as distribution, purchasing, and website operations, often with input from other key people. These strategies concern how to manage activities of strategic significance within each functional area, adding detail and completeness.

In a single-business company, corporate and business merge into one level. This is orchestrated by the company’s C E O and other top executives.

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