Chapter 2: Leading the Process of Crafting and Executing Strategy

1. Chapter 2: Leading the Process of Crafting and Executing Strategy Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. “If you don’t know whereyou are going, any roadwill take you there.” Cheshire Cat to Alice Lewis Carroll, Alice in Wonderland

3. “If you articulate a visionthat makes people passionate, there are so many amazing things you can do.” Dr. Sophie Vandebroek Xerox Corporation

4. Figure 2.1: The Strategy-Making, Strategy-Executing Process 2-4

5. Developing a Strategic Vision Phase 1 • Involves thinking strategically about • Future direction of company • Changes in company’s product/market/customer technology to improve • Current market position • Future prospects 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.

6. Table 2.1: Factors to Consider in Deciding on a Company’s Future Direction 2-6

7. Key Elements of a Strategic Vision • Delineates management’s aspirations for the business • Provides a panoramic view of “where we are going” • Charts a strategic path • Is distinctive and specific to a particular organization • Avoids use of generic language thatis dull and boring and that couldapply to most any company • Captures the emotions ofemployees and steers themin a common direction • Is challenging and a bit beyond a company’s immediate reach

8. Role of a Strategic Vision • A well-conceived, well-communicated vision functions as a valuable managerial tool to • Give the organization a sense of direction, mold organizational identity, and create a committed enterprise • Illuminate the company’s directional path • Provide managers with a reference point to • Make strategic decisions • Translate the vision into hard-edgedobjectives and strategies • Prepare the company for the future A strategic vision exists only as words and has noorganizational impact unless and until itwins the commitmentof company personnel and energizes them to act in ways thatmove the company along the intended strategic path!

9. Table 2.2: Characteristics of an Effectively Worded Vision Statement 2-9

10. Table 2.3: Common Shortcomings in Company Vision Statements 2-10

11. Example of Strategic Vision Red Hat To extend our position as the most trusted Linux and open source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management platform, and associated support and services. 2-11

12. Example of Strategic Vision UBS • We are determined to be the best global financial services company. • We focus on wealth and asset management, and on investment banking and securities businesses. • We continually earn recognition and trust from clients, shareholders, and staff through our ability to anticipate, learn and shape our future. • We share a common ambition to succeed by delivering quality in what we do. • Our purpose is to help our clients make financial decisions with confidence. • We use our resources to develop effective solutions and services for our clients. • We foster a distinctive, meritocratic culture of ambition, performance and learning as this attracts, retains and develops the best talent for our company. • By growing both our client and our talent franchises, we add sustainable value for our shareholders. 2-12

13. Examples of Strategic Visions Caterpillar Be the global leader in customer value. eBay Provide a global tradingplatform where practically anyonecan trade practically anything. 2-13

14. Strategic Vision vs. Mission • A strategic vision concerns a firm’s futurebusiness path - “wherewe are going” • Markets to be pursued • Future product/market/customer/technology focus • Kind of company management is trying to create • A company’s mission statement typically focuses on its present business purpose - “who we are and what we do” • Current product and service offerings • Customer needs and customer groups being served • Geographic coverage 2-14

15. Characteristics of a Mission Statement • Identifies boundaries of a company’s currentbusiness and says something about • Present products and services • Types of customers served • Geographic coverage • Conveys • Who we are, • What we do, and • Why we are here A good mission statement describes a company’s business makeup and purpose in language specific enough to give the company itsown identity and distinguish it from other enterprises in the same or other industries!

16. Key Elements of aMission Statement • A complete mission statement should cover three things: • Customer needs being met – What is being satisfied • Customer groups or markets being served – Who is being satisfied • What the organization does (in terms of business approaches, technologies used, and activities performed) to satisfy the targeted needs of the targeted customer groups – How customer needs are satisfied A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?”Making a profit is an objective or intended outcome!

17. Values Linking the Visionwith Company Values • Companies often develop a statement of values to guide a company’s pursuit of its vision and strategy and paint the white lines for how a company’s business is to be conducted • Company values statements typically contain four to eight beliefs, traits, and behaviors relating to such things as • Fair treatment, integrity, ethical behavior, innovation, teamwork, product quality, customer satisfaction,social responsibility, community citizenship • But values statements remain a bunch of nice words untilespoused beliefs, traits, and behaviors are • Incorporated into company’s operations and work practices • Used as benchmarks for job appraisal, promotions, and rewards If company personnel are not held accountablefor displaying company values in doing their jobs, then thecompany values statement is a bunch of empty words!

18. Example: American Express’Company Values Customer commitment Quality andIntegrity Respectfor people Teamwork 2-18

19. Example: Toyota’s Company Values Respect for and development of employees Teamwork Getting quality right the first time Learning Continuous improvement Embracing change in pursuit of low-cost, top-notch manufacturing excellence in motor vehicles 2-19

20. Example: DuPont’s Company Values Safety Ethics Respectfor people Environmental stewardship 2-20

21. Example: Abbott Laboratories’ Company Values Pioneering Achieving Caring Enduring 2-21

22. Example: Yahoo’s Core Values Excellence – Committed to winning with integrity. Innovation – Thrive on creativity an ingenuity. Customer Fixation – Respect our customers above all else. Teamwork – Treat one another with respect and communicate openly. Community – Share an infectious sense of mission to make an impact on society. Fun – Believe humor is essential to success. What Yahoo Doesn’t Value – Singles out 54 things it does not value – losing, bureaucracy, “good enough,” arrogance, status quo, formality, quick fixes … 2-22

23. Communicating the Strategic Vision • Winning support for the vision involves • Putting “where we are going and why” in writing • Distributing the statement organization-wide • Having executives explain vision to employees • An engaging, inspirational vision • Challenges and motivates workforce • Articulates a compelling casefor where company is headed • Evokes positive support and excitement • Arouses a committed organizationaleffort to move in a common direction

24. Capturing the Vision in a Slogan FedEx “Satisfying worldwide demand for fast,time-definite, reliable distribution.” Home Depot “Helping people improve theplaces where they live and work.”

25. Capturing the Vision in a Slogan Scotland Yard “To make London the safestmajor city in the world.” Charles Schwab “To provide customers withthe most useful and ethical financialservices in the world.”

26. Recognizing Strategic Inflection Points • Sometimes an order-of-magnitude change occurs in a company’s environment that • Dramatically alters its future prospects • Mandates radical revision of its strategic course • Critical decisions have to be made about where to go from here • A major new directional path may have to be taken • A major new strategy may be needed • Responding quickly to unfolding changes in the marketplace lessons a company’s chances of • Becoming trapped in a stagnant business or • Letting attractive new growth opportunities slip away

27. Intel’s “Strategic Inflection Points” • Prior to mid-1980s • Focus on memory chips • Starting in mid-1980s • Abandon memory chip business (due to lower-cost Japanese companies taking over the market) and • Become preeminent supplier of microprocessors to PC industry • Be undisputed leader in drivingPC technology forward • 1998 • Shift focus from PC technology to becoming the preeminent building block supplier to Internet economy

28. Overcoming Resistance toa New Strategic Vision • Mobilizing supportfor a new vision entails • Reiterating basis for the new direction • Addressing employee concerns head-on • Calming fears • Lifting spirits • Providing updates and progressreports as events unfold

29. Setting Objectives Phase 2 • Purpose of setting objectives • Converts vision into specific performance targets • Creates yardsticks to track performance • Well-stated objectives are • Quantifiable • Measurable • Contain a deadline for achievement • Spell-out how much of what kindof performance by when

30. Importance of SettingStretch Objectives • Objectives should be set at levels thatstretchan organization to • Perform at its full potential,delivering the best possible results • Push firm to be more inventive • Exhibit more urgency to improve its business position • Be intentional and focused in its actions There’s no better way to avoid ho-hum results thanby setting stretchobjectives and using compensation incentives to motivate organization members to achieve the stretch performance targets!

31. Types of Objectives Required $ Financial Objectives Strategic Objectives Outcomes focusedon improving financial performance Outcomes focused on improving competitive strength and market standing 2-31

32. Examples: Financial Objectives • Annual revenue growth of X% • X % increase in after-tax profits annual • Earnings per share growth of X% annually • Annual dividend increases of X% • Profit margins of X% • X% return on capital employed (ROCE) • Annual stock price increases that average X% over time • Strong bond and credit ratings • Sufficient internal cash flows to fund 100% of new capital investment • Stable earnings during periods of recession

33. Examples: Strategic Objectives • Winning an X% market share within 3 years • Achieving lower overall costs than rivals • Overtaking key competitors on product performance or quality or customer service within 2 years • Deriving X% of revenues from sale of new products introduced in past 5 years • Being the recognized industry leader in product innovation and/or technological know-how • Having a wider product line than rivals • Consistently getting new or improved products to market ahead of rivals • Having stronger national or global sales and distribution capabilities than rivals

34. A Balanced Scorecard Approach –Setting Strategic and Financial Objectives • A balanced scorecardfor measuringcompany performance is optimal; it entails • Setting financial and strategic objectives • Placing balanced emphasis on achieving both types of objectives (However, if a company’s financial performance is dismal or if its very survival is in doubt because of poor financial results, then stressing the achievement of the financial objectives and temporarily de-emphasizing the strategic objectives may have merit) • Just tracking financial performance overlooks the importance of measuring whether a company is strengthening its competitiveness and market position The surest path to sustained future profitability year after year is to relentlessly pursue strategic outcomes that strengthen a company’s business position and give it a growing competitive advantage over rivals!

35. General Motors’ Objectives • Reduce the percentage of automobiles using conventional internal combustion engines (ICE) through the development of hybrid ICEs, plug-in hybrid ICEs, range-extended electric vehicles, and hydrogen fuel cell electric engines • Reduce automotive structural costs to benchmark levels of 23 percent of revenue by 2012 from 34 percent in 2005 • Reduce annual U.S. labor costs by an additional $5 billion by 2011

36. The Home Depot’s Objectives • Be the number one destination for professional contractors, whose business accounted for roughly 30 percent of 2006 sales • Improve in-stock positions so customers can find and buy exactly what they need • Deliver differentiated customer service and the know-how that our customers have come to expect from The Home Depot • Repurchase $22.5 billion of outstanding shares during 2008 • Open 55 new store locations with 5 store relocations in 2008

37. The Objectives at Yum! Brands (KFC, Pizza Hut, Taco Bell) • Open 100 KFC restaurants in Vietnam by 2010 • Expand Taco Bell restaurant concept to Dubai, India, Spain and Japan during 2008 and 2009 • Increase number of international restaurant locations from 12,000 in 2007 to 15,000 in 2012 • Increase operating profit from international operations from $480 million in 2007 to $770 million in 2012 • Expand Pizza Hut’s menu to include pasta and chicken dishes • Decrease the number of company owned restaurant units in U.S. from 20% of units in 2007 to less than 10% of units by 2010 • Increase the number of Taco Bell units in the U.S. by 2%–3% annually between 2008 and 2010

38. Avon’s Objectives • Increase our beauty sales and market share • Strengthen our brand image • Enhance the representative experience • Realize annualized cost savings of $430 million through improvements in marketing processes, sales model and organizational activities • Achieve annualized cost savings of $200 million through a strategic sourcing initiative

39. For Discussion: 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?

40. Both Short-Term and Long-Term Objectives Are Needed • Short-term objectives • Targets to be achieved soon • Milestones or stair steps for reaching long-range performance targets • Long-term objectives • Targets to be achieved within3 to 5 years • Calls for actions now that willpermit reaching targetedlong-range performance later

41. Objectives Are Needed at All Levels The objective-setting process is more top-down than bottom up 1. First, set organization-wideobjectives and performance targets 2. Next, set business andproduct line objectives 3. Then, establish functionaland departmental objectives 4.Individual objectives are established last

42. Importance of Top-Down Objectives • Provides guidelines for objective-setting and strategy-making in lower-level organizational units • Helps ensure that performance targets set by business units, divisions, and departments are directly connected to achieving company-wide objectives • Top-down objective-settinghastwo advantages • Leads to cohesive and compatibleobjectivesand strategies up and down the organization • Helps unify internal efforts to movecompany along the chosen strategic path

43. Figure 2.2: A Company’s Strategy-Making Hierarchy 2-43

44. Corporate Strategy • Moves to diversify into different industries • Actions to boost the combined performance of the company’s different businesses • Actions to capture cross-business synergies • Establishing investment priorities and steering corporate resources into the most attractive businesses Orchestrated by headquarters executives and involves

45. Business Strategy Concerns the actions and approaches crafted to produce successful performance in one specific line of business. Is usually the responsibility of the manager in charge of the business and involves • Crafting competitive moves to build sustainable competitive advantage • Seeing that lower-level strategies withinthe business are well-matched to the overall business strategy • Gaining approval of business-level strategic moves by corporate-level officers and directors

46. Functional Strategies • Crafting functional strategic initiatives that will support the overall business strategy • Adding function-related strategic details to the overall business strategy Concerns the game planfor a function, activity, or process within a business; is usually orchestrated by the functional head and involves

47. Operating Strategies • Are generally crafted by frontline managers (subject to review and approval by higher-ranking managers) • Concern the relatively narrow strategic initiatives and approachesfor managing key operating units (geographic regions, distribution centers, plants) and strategically-relevant operating activities (advertising, supply chain activities, Internet sales) • Add further detail and completeness to functional and business strategies

48. Levels of Strategy-Makingin a Diversified Company Corporate-Level Managers Corporate Strategy Two-Way Influence Business-Level Managers Business Strategies Two-Way Influence Functional Managers Functional Strategies Two-Way Influence Operating Managers Operating Strategies 2-48

49. Levels of Strategy-Making ina Single-Business Company Business-Level Managers Business Strategy Two-Way Influence Functional Managers Functional Strategies Two-Way Influence Operating Managers Operating Strategies 2-49

50. What Is a Strategic Plan? Itsstrategic visionand business mission ACompany’s Strategic Plan Consists of Itsstrategicandfinancial objectives Itsstrategy 2-50