CHAPTER 2

1. CHAPTER 2 THE THREE STRATEGY- MAKING TASKS Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast

2. “Quote” “Management’s job is not to see the company as it is….but as it can become.” John W. Teets “A strategy is a commitment to undertake one set of actions rather than another.” Sharon M. Oster • The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill

3. Chapter Outline • Developing a Strategic Vision / Mission • Establishing Financial and Strategic Objectives • Crafting a Strategy • Factors Shaping a Company's Strategy • Linking Strategy With Ethics • Approaches to Performing the Strategy-Making Task

4. Our future direction will be . . . Developing a Vision or Mission First Direction-Setting Task • Indicates the long-term course management has charted for the organization -- • Business activities to be pursued • Future market position • Future customer focus • Kind of company to become

5. Why Have a Mission orStrategic Vision? • Power of a well-conceived strategic vision • Guides managerial decision-making • Arouses employee buy-in and commitment • Prepares a company for the future

6. x Characteristics of a Strategic Vision • Charts a company’s future strategic course • Defines the business makeup in 5 to 10 years • Company specific, not generic • Provides a company with its own special identity and path to follow • The vision is not to make a profit • The real mission/vision is “what will we do to make a profit?” • Requires the exercise of management foresight

7. Elements of a Strategic Vision Defines present andfuture business make-up of company Charts a long-term path to follow Communicated in an inspiringandexcitingmanner

8. Example: Strategic Vision . . . . . . we want Delta to be the WORLDWIDE AIRLINE OF CHOICE. DELTA AIRLINES

9. Example: Strategic Vision WORLDWIDE,because we are and intend to remain an innovative, aggressive, ethical, and successful competitor that offers access to the world at the highest standards of customer service. We will continue to look for opportunities to extend our reach through new routes and creative global alliances. DELTA AIRLINES

10. Example: Strategic Vision AIRLINE,because we intend to stay in the business we know best -- air transportation and related services. We won’t stray from our roots. We believe in the long-term prospects for profitable growth in the airline industry, and we will continue to focus time, attention, and investment on enhancing our place in that business environment. DELTA AIRLINES

11. Example: Strategic Vision OF CHOICE,because we value the loyalty of our customers, employees, and investors. For passengers and shippers, we will continue to provide the best service and value. For our personnel, we will continue to offer an ever more challenging, rewarding, and result-oriented workplace that recognizes and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return. DELTA AIRLINES

12. Defining a Company’s Business • A good business definition incorporates three factors • Customer needs-- WHATis being satisfied • Customer groups-- WHO is being satisfied • Technologies used and functions performed--HOW customer needs are satisfied

13. Business Mission: Russell Corp. • Russell Corporation is a vertically integrated international designer, manufacturer, and marketer of athletic uniforms, . . . , and a comprehensive line of lightweight, yarn-dyed woven fabrics. • The Company’s manufacturing operations include the entire process of converting raw fibers into finished apparel and fabrics. • Products are marketed to sporting goods dealers, department and specialty stores, mass merchandisers, . . . , and other apparel manufacturers.

14. Business Mission:McDonald’s Serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value to a broad base of fast-food customers worldwide. McDonald’s serves approximately 30 million customers daily at 20,000-plus restaurants in over 90 countries.

15. Broad - Narrow Mission Statements? • Narrow enough to specify real arenaof interest • Serve as • Boundary for what to do and not do • Beacon of where top management intends to take firm • Diversified companies employ broader business definitions

16. Broad Definition Beverages Children’s products Furniture Global mail delivery Travel & tourism Narrow Definition Soft drinks Toys Wrought iron lawn furniture Overnight package delivery Ship cruises in the Caribbean Definitions: Broad - Narrow Scope

17. Mission Statementof a Diversified Firm TIMES MIRROR CORPORATION Times Mirror is a media and information company principally engaged in newspaper publishing; book, magazine and other publishing; and cable and broadcast television.

18. Mission Statements forFunctional Departments • Spotlights department’s • Contributionto firm’s mission/vision/objectives • Roleand scope of activities • Direction which department needs to pursue

19. Mission Statements ofFunctional Departments HUMAN RESOURCES To contribute to organizational success by developing effective leaders, creating high performance teams, and maximizing the potential of individuals. CORPORATE SECURITY To provide services for the protection of corporate personnel and assets through preventive measures and investigations.

20. Decision Time: What Will the Vision Be? • Entrepreneurial challenge -- • Creatively preparing a company for the future • Astute strategists focus on • Shifting customer needs • New technologies • Attractive foreign markets • Growing or shrinking opportunities

21. Intel’s “Strategic Inflection Points” • Pre - mid 1980s • Business focus was memory chips • Post - mid 1980s • Abandon memory chip business • Adopt new strategic vision • Become preeminent supplier of microprocessors to PC industry • Make PC central appliance in workplace and home • Be undisputed leader in driving PC technology forward

22. Communicating the Vision • An exciting, inspirational vision • Inspires, challenges, and motivates workforce • Arouses strong sense of organizational purpose and induces employee buy-in • Brings workforce together and galvanizes people to live the business

23. Managerial Value: Strategic Vision and Mission • Crystallizes long-term direction • Reduces riskof rudderless decision-making • Conveysorganizational purpose and identity • Keeps direction-related actions of lower-level managers on common path • Helps organization prepare for the future

24. Establishing Objectives Second Direction-Setting Task • Represent commitment to achieve specific performance targetsby a certain time • Must be stated in quantifiable terms and contain a deadline for achievement • Spell-out how muchof whatkind of performance by when

25. Purpose of Objectives • Substitutes results-oriented decision-making for aimlessness over what to accomplish • Provides benchmarks for judging organizational performance

26. Strategic Management Principle Companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies whose managers exhibit good intentions, try hard, and hope for the best!

27. Outcomes that improve a firm’s financial performance Outcomes that strengthen a firm’s competitiveness and long-term market position Types of Objectives Required Financial Objectives Strategic Objectives $

28. Strategic Management Principle Every company needs both strategic and financial objectives!

29. Examples: Financial Objectives • Achieve revenue growth of 10% per year • Increase earnings by 15% annually • Increase dividends per share by 5% per year • Increase net profit margins from 2% to 4% • Attractive EVA performance • Stronger bond and credit ratings • A rising stock price (outperform the S&P 500) • Attractive increases in MVA • Recognition as a “blue chip” company • A more diversified revenue base

30. Examples: Strategic Objectives • A bigger market share • Quicker design-to-market times than rivals • Higher product quality than rivals • Lower costs relative to key competitors • Broader product line than rivals • A stronger reputation with customers than rivals • Better customer service than rivals • Recognition as a leader in technology • Wider geographic coverage than rivals • More innovative products than rivals

31. Corporate Objectives: McDonald’s To achieve 100 percent total customer satisfaction . . . everyday . . . in every restaurant . . . for every customer.

32. Corporate Objectives: 3M Corporation 30 percent of the company’s annual sales must come from products fewer than four years old.

33. Corporate Objectives: Anheuser-Busch • To make all our companies leaders in their industries in quality while exceeding customer expectations. • To achieve a 50% share of the U.S. beer market. • To establish and maintain a dominant leadership position in the international beer market. • To provide all our employees with challenging and rewarding work, . . . , and opportunities for personal development, advancement, and competitive compensation. • To provide our shareholders with superior returns by achieving double-digit annual earnings per share growth, . . .

34. Corporate Objectives: McCormick & Co. • To achieve a 20 percent return on equity. • To achieve a net sales growth rate of 10 percent per year. • To maintain an average earnings per share growth rate of 15 percent per year. • To maintain total debt-to-total capital at 40 percent or less. • To pay out 25% to 35% of net income in dividends.

35. Strategic or Financial Objectives --Which Take Precedence? • Pressures for better short-term financial performance become pronounced when • Firm is struggling financially • Resource commitments for new strategic initiatives may hurt bottom-line for several years • Proposed strategic moves are risky • A firm that consistently passes up opportunities to strengthen its long-term competitive position • Risks diluting its competitiveness • Risks losing momentum in its markets • Can hurt its ability to fend off rivals’ challenges

36. Strategic Management Principle Building a stronger long-term competitive position benefits shareholders more lastingly than improving short-term profitability!

37. The Concept of Strategic Intent A company exhibits STRATEGIC INTENTwhen it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!

38. The Concept of Strategic Intent • Indicates firm’s intent to stake out a particular position over the long-term • Serves as a rallying cry for employees to do their very best • Signals deep-seated commitment to winning

39. Short-Range andLong-Range Objectives • Short-Range objectives • Targets to be achieved soon • Serve as stair stepsfor reaching long-range performance • Long-Range objectives • Targets to be achieved within 3 to 5 years • Prompt actions now that will permit reaching targeted long-range performance later

40. Objectives Are Needed at All Levels Process istop-down, not bottom-up! 1. First, establish organization-wide objectives 2. Next, set business and product lineobjectives 3. Then, establish functionaland departmental objectives 4. individual objectives come last

41. Strategic Management Principle Objective-setting needs to be more of a top-down than a bottom-up process in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives.

42. Crafting a Strategy Third Direction-Setting Task • An organization’s strategy deals with • How to make management’s strategic vision a reality • The game plan for • Moving the company into an attractive business position • Building a sustainable competitive advantage

43. Strategizing Is HOW To . . . • Achieve performance targets • Out-compete rivals • Achieve sustainable competitive advantage • Strengthen firm’s long-term competitive position • Make the strategic vision a reality Our game plan for running the company will be . . .

44. Characteristics of Strategy-Making • Action-Oriented • Evolves Over Time • A Never-ending, Ongoing Task

45. Two-Way Influence Two-Way Influence Two-Way Influence Fig. 2-1(a): Levels of Strategy-Making:A Diversified Company Corporate-Level Managers Corporate Strategy Business-Level Managers Business Strategies Functional Managers Functional Strategies Operating Managers Operating Strategies

46. Two-Way Influence Two-Way Influence Levels of Strategy-Making:A Single-Business Company Executive-Level Managers Business Strategy Functional Managers Functional Strategies Operating Managers Operating Strategies

47. Corporate Strategy fora Diversified Company Kind of Diversification How Much Diversification Responses to Changing Conditions Corporate Strategy Efforts to Build Competitive Advantage Via Diversification Approach to Capital Allocation Moves to Divest Weak Units Moves to Strengthen Positions and Profits in Present Businesses Moves to Add New Businesses

48. Tasks of Corporate Strategy • Moves to achieve diversification • Actions to boost performance of individual businesses • Capturing synergy among business units 2 + 2 = 5 effects! • Establishing investment priorities and steering corporate resources into the most attractive business units

49. Strategy Components ofa Single-Business Company Responses to Changing Conditions Strategic Alliances and Collaborative Partnerships Basic Competitive Approach Business Strategy Moves to Secure Competitive Advantage Manufacturing Strategy Marketing Strategy R & D Strategy Geographic coverage; approach to vertical integration Human Resources Strategy Finance Strategy

50. What Business Strategy Involves • Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations, etc. • Crafting competitive moves leading to sustainable competitive advantage • Building competitively valuable competencies and capabilities • Uniting strategic initiatives of functional areas • Addressing strategic issues facing the company