The Managerial Process of Crafting and Executing Strategy McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The Managerial Process of

Crafting and Executing Strategy

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

“If you don’t know

where you are going,

any road will take you

there.”

The Koran

Fig. 2.1: The Strategy-Making, Strategy-Executing Process

Developing a Strategic Vision

• Involves thinking strategically about

– Future direction of company

– Changes in company’s product/market/customer technology to improve

• Current market position

• Future prospects

Phase 1 of the Strategy-Making ProcessPhase 1 of the Strategy-Making Process

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.

Strategic Vision vs. Mission

• A strategic vision concerns a firm’s future business path - “wherewe are going” – Markets to be pursued– Future product/market/

customer/technology focus– Kind of company

management is trying to create

• The mission statement of a firm focuses on its present business purpose - “who we are and what we do”– Current product and

service offerings– Customer needs being

served– Technological

and businesscapabilities

Characteristics of a Mission Statement

• Identifies the boundaries of the current business and highlights

• Conveys– Who we are,– What we do, and– Why we are here

A well-conceived mission statement distinguishes a company’s business makeup from that of other profit-seeking enterprises in language specific

enough to give the company its own identify!

Examples: Vision Slogans

Levi Strauss & Company“We will clothe the world by marketing the most appealing and widely worn casual clothing in the world.”

Nike“To bring innovation and inspiration

to every athlete in the world.

Mayo Clinic“The best care to every patient every day.”

Examples: Vision Slogans

Scotland Yard“To make London the safest major city in the world.”

Greenpeace“To halt environmental abuse and

promote environmental solutions.”

Charles Schwab“To provide customers with the most useful and

ethical financial services in the world.”

Setting Objectives

• Purpose of setting objectives– Converts vision into specific performance targets

– Creates yardsticks to track performance

• Well-stated objectives are– S Specific

– M Measurable

– A Attainable

– R Realistic

– T Time-bound

Phase 2 of the Strategy-Making ProcessPhase 2 of the Strategy-Making Process

Types of Objectives Required

Outcomes focusedon improving financial

performance

Outcomes focused on improving competitive vitality and future business position

Financial Objectives Strategic Objectives

$

• Place more emphasis on delivering an exceptional customer experience

• Add approximately 350 netnew McDonald’s restaurants

• Reduce general and administrativespending as a percent of total revenues

• Achievements– Systemwide sales and revenue growth of 3-5%– Annual operating income growth of 6-7%– Annual returns on incremental invested capital in high teens

McDonald’s Financialand Strategic Objectives

• Increase sales to 4.2 million cars and trucks by 2008 (up from 3 million in 2003)

• Cut purchasing costs 20% and halve the number of suppliers

• Have zero net debt

• Maintain a return on invested capital of 20%

• Maintain a 10% or better operating margin

Nissan’s Financial Objectives

• Achieve 4-6% sales growth, 7-10% growth in operating income, EPS in the range of $2.35 to $2.45, and operating free cash flow of $900 million to $1 billion in fiscal 2006

• Pay dividends equal to 45-50% of earnings

• Increase focus on company’s 15 power brands and give top resource priority to those brands with number one and two market positions

• Continue to introduce new and improved food products

• Add to the Heinz portfolio of brands by acquiringcompanies with brands that complement existing brands

• Increase sales in Russia, Indonesia, China, and Indiaby 50% in fiscal year 2006 to roughly 6% of total sales

• By end of fiscal 2008, derive approximately 50% of sales and profits from North America, 30% from Europe, and 20% from all other markers

H. J. Heinz Company’s Financial and Strategic Objectives

Your Opinion

Which matters most to a company’s future financial performance—setting and pursuing financial performance targets or setting and pursuing strategic performance targets?

What arguments support your answer?

Objectives Are Needed at All Levels

The process is more top-down than bottom up

1. First, establish organization-wide objectives and performance targets

2. Next, set business andproduct line objectives

3. Then, establish functionaland departmental objectives

4. Individual objectives are established last

Crafting a Strategy

• Strategy-making involves entrepreneurship – Actively searching for opportunities to do new things

or– Actively searching for opportunities to do

existing things in new or better ways

• Strategizing involves– Developing timely responses to happenings

in the external environment and

– Steering company activities in new directions dictated by shifting market conditions

Phase 3 of the Strategy-Making ProcessPhase 3 of the Strategy-Making Process

What Does Good Strategy Making Entail?

Masterful strategies come partly (maybe mostly) by doing things differentlyfrom competitors where it counts – Out-innovating them– Being more efficient– Being more imaginative– Adapting faster

Rather than running with the herd!

Levels of Strategy-Makingin a Diversified Company

Corporate Strategy

Business Strategies

Functional Strategies

Operating Strategies

Two-Way Influence

Two-Way Influence

Two-Way Influence

Corporate-Level Managers

Business-Level Managers

Functional Managers

OperatingManagers

Implementing and Executing Strategy

• Operations-oriented activity aimed atperforming core business activities in astrategy-supportive manner

• Tougher and more time-consumingthan crafting strategy

• Key tasks include

– Improving efficiency of strategy being executed

– Showing measurable progress in achieving targeted results

Phase 4 of the Strategy-Making ProcessPhase 4 of the Strategy-Making Process

• Exercise strong oversight to ensure five tasks of strategic management are executed to benefit– Shareholders or– Stakeholders

• Make sure executive actions are not only proper but also aligned with interests of stakeholders

Corporate Governance:Strategic Role of a Board of Directors

Evaluating a Company’s

External Environment

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

“Analysis is the critical

starting point of

strategic thinking.”

Kenichi Ohmae

• Diagnosing a company’s situation has two facets– Assessing the company’s external or

macro-environment• Industry and competitive conditions

• Forces acting to reshape this environment

– Assessing the company’s internal ormicro-environment• Market position and competitiveness

• Competencies, capabilities, resource strengthsand weaknesses, and competitiveness

Understanding the Factors that Determine a Company’s Situation

Fig. 3.2: The Components of a Company’s Macro-environment

Key Questions Regarding theIndustry and Competitive Environment

What are the industry’s dominant economic traits?

How strong are competitive forces?

What forces are driving change in the industry?

What market positions do rivals occupy? What moves will they make next?

What are the key factors for competitive success?

How attractive is the industry from a profit perspective?

Fortune 500

• Market size and growth rate• Number of rivals• Scope of competitive rivalry• Buyer needs and requirements• Degree of product differentiation• Product innovation• Supply/demand conditions• Pace of technological change• Vertical integration• Economies of scale• Learning and experience curve effects

Question 1: What are the Industry’sDominant Economic Traits?

Question 2: What Kinds of CompetitiveForces Are Industry Members Facing?

• Objectives are to identify

– Main sources of competitive forces

– Strength of these forces

• Key analytical tool

– Five Forces Modelof Competition

Fig. 3.3: The Five Forces Model of Competition

Analyzing the Five Competitive Forces: How to Do It

Step 1: Identify the specific competitivepressures associated with each ofthe five forces

Step 2: Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak?

Step 3: Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits

• Seriousness of threat depends on

– Size of pool of entry candidatesand available resources

– Barriers to entry

– Reaction of existing firms

Competitive PressuresAssociated With Potential Entry

Competitive Pressures from Substitute Products

Substitutes matter when customers are attracted to the products of firms in other industries

Concept

Sugar vs. artificial sweeteners Eyeglasses and contact lens

vs. laser surgery Newspapers vs. TV vs. Internet

Examples

• Sellers are forging strategic partnershipswith select suppliers to– Reduce inventory and logistics costs

– Speed availability of next-generationcomponents

– Enhance quality of parts being supplied

– Squeeze out cost savings for both parties

• Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships

Competitive Pressures: Collaboration Between Sellers and

Suppliers

• Whether seller-buyer relationships represent aweak or strong competitive force depends on

– Whether buyers have sufficient bargainingleverage to influence terms of sale in their favor

– Extent and competitive importance ofseller-buyer strategic partnershipsin the industry

Competitive Pressures From Buyersand Seller-Buyer Collaboration

• Partnerships are an increasingly important competitive element in business-to-business relationships

• Collaboration may result inmutual benefits regarding– Just-in-time deliveries– Order processing– Electronic invoice payments– Data sharing

• Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships

Competitive Pressures: Collaboration

Between Sellers and Buyers

• Competitive environment is unattractive fromthe standpoint of earning good profits when

– Rivalry is vigorous

– Entry barriers are lowand entry is likely

– Competition from substitutes is strong

– Suppliers and customers haveconsiderable bargaining power

Strategic Implications ofthe Five Competitive Forces

• Competitive environment is ideal froma profit-making standpoint when

– Rivalry is moderate

– Entry barriers are highand no firm is likely to enter

– Good substitutesdo not exist

– Suppliers and customers arein a weak bargaining position

Strategic Implications ofthe Five Competitive Forces

• Objective is to craft a strategy to

– Insulate firm fromcompetitive pressures

– Initiate actions to producesustainable competitive advantage

– Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines thebusiness model for the industry

Coping With theFive Competitive Forces

Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?

• Industries change because forcesare driving industry participantsto alter their actions

• Driving forces are themajor underlying causesof changing industry andcompetitive conditions

• Where do driving forces originate?– Outer ring of macroenvironment– Inner ring of macroenvironment

STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years

– Usually no more than 3 - 4 factorsqualify as real drivers of change

STEP 2: Assess impact– Are the driving forces acting to cause market demand

for product to increase or decrease?– Are the driving forces acting to make competition

more or less intense?– Will the driving forces lead to higher or lower industry

profitability? STEP 3: Determine what strategy changes are needed

to prepare for impacts of driving forces

Analyzing Driving Forces: Three Key Steps

Question 4: What Market PositionsDo Rivals Occupy?

• One technique to revealdifferent competitive positionsof industry rivals isstrategic group mapping

• A strategic group is acluster of firms in an industrywith similar competitiveapproaches and market positions

STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3: Assign firms that fall in about the same strategy space to same strategic group

STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Procedure for Constructing a Strategic Group Map

Example: Strategic Group Map of Selected Retail Chains

• A firm’s best strategic moves are affected by– Current strategies of competitors– Future actions of competitors

• Profiling key rivals involves gatheringcompetitive intelligence about– Current strategies– Most recent actions and public announcements– Resource strengths and weaknesses– Efforts being made to improve their situation– Thinking and leadership styles of top executives

Question 5: What Strategic Moves AreRivals Likely to Make Next?

• KSFs are those competitive factors most affecting every industry member’s ability to prosper

• KSFs concern– Specific strategy elements– Product attributes– Resources– Competencies– Competitive capabilities

that a company needs to be competitively successful• KSFs are attributes that spell the difference between

– Profit and loss– Competitive success or failure

Question 6: What Are the KeyFactors for Competitive Success?

• Full utilization of brewing capacity –to keep manufacturing costs low

• Strong network of wholesale distributors –to gain access to retail outlets

• Clever advertising –to induce beer drinkers tobuy a particular brand

Example: KSFs for Beer Industry

Example: KSFs for Apparel Manufacturing Industry

• Appealing designs andcolor combinations –

to create buyer appeal

• Low-cost manufacturingefficiency – to keep selling

prices competitive

• Involves assessing whether the industryand competitive environment is attractiveor unattractive for earning good profits

• Under certain circumstances, a firm uniquelywell-situated in an otherwise unattractive industry can still earn unusually good profits– Attractiveness is relative, not absolute– Conclusions about attractiveness have

to be drawn from the perspective of a particular company

Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?