Chapter 1

1. GARETH R. JONES /CHARLES W. L. HILL Theory of Strategic Management Chapter 1 Strategic Leadership: Managing the Strategy Making Process for Competitive Advantage

2. The Concept of ‘Strategy’ • The word ‘Strategy’ was initially introduced and defined in the ancient military dictionaries • It comes from the Greek word ‘strategos’, strictly meaning a general in command of an army; it is formed from ‘stratos’, meaning army and ‘ag’, meaning to lead • Used first time in business literature by William Newman (1951)

3. The Concept of ‘Strategy’ Generic • a plan of attack for winning • a plan for beating the opposition Organisational • a plan for achieving organisational goals • a plan for securing a competitive advantage in a given market

4. Purpose of Strategy • To set the future direction for the organisation • To state how it is to create value to customers • To identify what product/s and in which markets the firm will invest its resources • To describe how it is to perform better than competition

5. OVERVIEW • A strategy is a set of related actions that managers take to increase their company’s performance. • Strategic leadership is how to most effectively manage a company’s strategy-making process to create competitive advantage.

6. OVERVIEW • Strategy formulation is the task of selecting strategies. • Strategy implementationis the task of putting strategies into action. Supporting products Improving efficiency and effectiveness of operations Designing Delivering Designing a company’s organization structure Control systems Culture

7. Competitive Advantage • To increase shareholder value, managers must pursue strategies that increase the profitability of the company and ensure that profits grow. • To do this, a company must be able to outperform its rival. In other words, it must have a competitive advantage. • A company has competitive advantage over its rivals when its profitability is greaterthan the average profitability and profit growth of other companies competing for the same set of customer.

8. SUPERIOR PERFORMANCE • Risk capital is capital that cannot be recovered if a company fails and goes bankrupt. • Shareholder value is the return that a shareholder earns from purchasing shares in a company.

9. The sum of money invested in the business Net income after taxes SUPERIOR PERFORMANCE • Profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs. • The profitgrowth of a company can be measured by the increase in net profit over time. • Together, profitability and profit growth are the principal drivers of shareholder value.

10. Company’s Business Model The conception of how strategies should work together as a whole to enable the company to achieve competitive advantage A business model encompasses how the company will: • Select its customers • Define and differentiate its product offerings • Create value for its customers • Acquire and keep customers • Produce goods or services • Deliver those goods and services to the market • Organize activities within the company • Configure its resources • Achieve and sustain a high level of profitability • Grow the business over time

11. LEVELS OF STRATEGIC MANAGEMENT

12. LEVELS OF STRATEGIC MANAGEMENT • Corporate-Level Managers • Oversee development of strategies for whole organization • CEO is principle general manager who consults with other senior executives • Business-Level Managers • Responsible for business unit that provides product/service to particular market • Functional-Managers • Supervise particular function/operation (e.g. marketing, operations, accounting, human resources)

13. STRATEGY PLANNING PROCESS Select the corporate mission and major corporate goals. Analyze the organization’s external competitive environment to identify opportunities and threats. Analyze the organization’s internal operating environment to identify the organization’s strengths and weaknesses. Select strategies that build on the organization’s strengths and corrects its weaknesses in order to take advantage of external opportunities and counter external threats. Implement the strategies.

14. STRATEGY PLANNING PROCESS 1. The Mission Statement • Amission statementdescribes what a company does. • A mission statement focuses on today and what an organization does to achieve it. It drives the company • The vision of a company articulates what the company would like to achieve. • A vision focuses on tomorrow and what an organization wants to ultimately become. It gives the company direction • The values of a company state how managers and employees should conduct themselves and business to help achieve company mission.

15. STRATEGY PLANNING PROCESS Company: Amazon Mission: We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience. Vision: To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online. Company: Uber Mission: Uber’s mission is to bring transportation — for everyone, everywhere. Vision: Smarter transportation with fewer cars and greater access. Transportation that’s safer, cheaper, and more reliable; transportation that creates more job opportunities and higher incomes for drivers. Company: Google Mission:  To organize the world’s information and make it universally accessible and useful. Vision: To provide access to the world’s information in one click.

16. STRATEGY PLANNING PROCESS Company: Ikea Mission: Offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Vision: To create a better everyday life for the many people. Company: AirBnB Mission: Belong anywhere. Vision: Tapping into the universal human yearning to belong—the desire to feel welcomed, respected, and appreciated for who you are, no matter where you might be. Company: Facebook Mission: To give people the power to build community and bring the world closer together. Vision: People use Facebook to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them.

17. STRATEGY PLANNING PROCESS The Mission Statement

18. External Analysis Purpose is to identify the strategic opportunities and threats in the organization’s operating environment that will affect how it pursues its mission. External Analysis requires an assessment of: • Industry environment in which company operates • Competitive structure of industry • Competitive position of the company • Competitiveness and position of major rivals • The country or national environments in which company competes • The wider socioeconomic or macroenvironment that may affect the company and its industry • Social • Government • Legal • International • Technological

19. Building & sustaining a competitive advantage requires a company to achieve superior: • Efficiency • Quality • Innovations • Responsiveness to customers Internal Analysis Purpose is to pinpoint the strengths and weaknessesof the organization. Strengths lead to superior performance and weaknesses to inferior performance. Internal analysis includes an assessment of: • Quantity and quality of a company’s resources and capabilities • Ways of building unique skills and company-specific or distinctive competencies

20. STRATEGY PLANNING PROCESS 4. SWOT Analysis and the Business Model • The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis. • The goal of a SWOT analysis: • Create, affirm, or fine-tune a company-specific business model. • Design a business model that will best align, fit, and match a company’s resources and capabilities to the demands of the environment in which it operates.

21. STRATEGY PLANNING PROCESS 5. Strategy Implementation • Strategy implementation involves taking action at the functional, business, and corporate levels to execute a strategic plan. • Putting quality improvement programs into place • Changing the way a product is designed • Positioning the product differently in the marketplace • Offering different versions of the product to different consumers

22. STRATEGY DECISION MAKING Cognitive Biases and Strategic Decision Making • The rationality of decision-making is bound by one’s cognitive capabilities. • When managers make decisions, they tend to fall back on certain rules of thumb. • Sometimes these rules lead to severe errors, called cognitive biases. • Prior hypothesis bias refers to making decisions based on a belief, even when evidence proves that the belief is incorrect.

23. Cognitive Biasis and Strategic Decision Making • Escalating commitment occurs when decision makers, having committed significant resources to a project, commit even more despite feedback that tells them the project is failing. • The use of simple analogies to make sense out of a complex problem is reasoning analogy, which may flawed by invalid reasoning. • Generalizing from a small sample or a single vivid anecdote is representativeness. • The illusion of controlis the tendency to overestimates one’s ability to control events.

24. Techniques for Improving Decision Making • Devil’s advocacy requires the generation of a plan, as well as a critical analysis of that plan. • Dialectic inquiry requires the generation of a plan and a counter-plan that reflects plausible but conflicting courses of action. • Strategic managers listen to a debate between advocates of the plan and counter-plan and then decide which will lead to higher performance. • This approach may reveal problems with definitions, recommended courses of action, and assumptions of both plans.

25. Characteristics of Good Strategic Leaders 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 • Vision, Eloquence, and Consistency • A strong leader gives an organization a sense of direction. • Articulation of a Business Model • Knowing how the various strategies that the company pursues fit together.

26. Characteristics of Good Strategic Leaders • Commitment • A strong leader demonstrates his or her commitment to a vision and business model with action and words. • Being Well Informed • Effective leaders develop a network of formal and informal sources who to keep them well informed about what is going on within their company.

27. Characteristics of Good Strategic Leaders • Willingness to Delegate and Empower • Avoids being overloaded with responsibilities. • Understands that delegation is a good motivational tool. • The Astute Use of Power • Power comes from control over resources that are important to the organization: budgets, capital, positions, information, and knowledge. • Politically astute managers use these resources to critically place allies who can help them attain their strategic objectives. (continued)

28. Characteristics of Good Strategic Leaders • Emotional Intelligence • Self-awareness—the ability to understand one’s own moods, emotions, and drives as well as their effect on others • Self-regulation—the ability to control or redirect disruptive impulses or moods, that is, to think before acting • Motivation—a passion for work that goes beyond money or status and a propensity to pursue goals with energy and persistence • Empathy—the ability to understand the feelings and viewpoints of subordinates and taking those into account when making decisions • Social skills—friendliness with a purpose.