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Chapter 2

Chapter 2. Leading Strategically Through Effective Vision and Mission. Key points in Chapter 2. The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy). Managerial Discretion and Decision Biases. Discretion – latitude for action or decision making

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Chapter 2

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  1. Chapter 2 Leading Strategically Through Effective Vision and Mission

  2. Key points in Chapter 2 The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy)

  3. Managerial Discretion and Decision Biases • Discretion – latitude for action or decision making • Hubris – excessive pride, leading to a feeling of invincibility • Heuristics – rules of thumb used in decision making

  4. Decision-Making Biases • Reliance on previously formed beliefs • Focus on limited objectives • Exposure to limited decision alternatives • Illusion of control • Reliance on a limited set of heuristics

  5. Hubris • Excessive pride that leads to a feeling of invincibility • Magnifies the effects of decision-making biases

  6. Implications for IBP • Be sure you don’t fall prey to decision making biases • Be sure you understand the effects of hubris • Play the role of Devil’s Advocate • Question decisions constructively

  7. Strategic Vision vs. Mission • A strategic vision concerns “wherewe are going” or ”what do we want to be.” • Markets to be pursued • Future product/ market/customer/ technology focus • Kind of company management is trying to create • The mission statement focuses on its “who we are and what we do” • Current product and service offerings • Customer needs being served • Technologicaland businesscapabilities

  8. Mission Statements • Boundaries of the currentbusiness • Fundamental purpose that sets it apart from other firms of its type • Conveys • Who we are, • What we do, and • Why we are here

  9. Objectives • Turns mission into performance outcomes • Organizations produce what is measured • Long and Short term

  10. Control Systems • Financial Controls • focus on short-term financial outcomes • produce risk-averse managerial decisions • Strategic Controls • focus on the content of strategic actions • encourage decisions that incorporate moderate and acceptable levels of risk

  11. Leading versus Lagging Indicators • Current financial results are “lagging indicators” reflecting results of past decisions and actions—good profitability now does not translate into stronger capability for delivering better financial results later • However, meeting or beating strategic performance targets signals growing competitiveness & strength in the marketplace, thus developing the capability for better financial performance in the years ahead • Good strategic performance is thus a “leading indicator” of a company’s capability to deliver improved future financial performance

  12. Controls in Balanced Scorecard Framework

  13. Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

  14. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett • Skate to where the puck is going, not to where the puck has been. Wayne Gretsky

  15. Components of External Analysis • Scanning – Identifying early signals • Monitoring – Following signals or change identifies in scanning to identify patterns • Forecasting – Projections of what might happen • Assessing – Determining the timing and significance of forecasted change

  16. General or Macro Environment • Demographic • Economic • Political • Sociocultural • Technological • Environmental

  17. 1) Demographic Segment • Characteristics of the population • e.g., age, race, gender, sexual orientation and social classes • Ethnic structure • Income distribution • Geographic distribution

  18. 2) Economic Segment • General health/wellbeing of the local, regional, national or global economy. • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

  19. 3) Political/Legal Segments • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

  20. 4) SocioculturalSegment • Attitudes of society towards work, careers, products, services and consumer activism. • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

  21. 5) Technological Segment • Changes in technology that affect the workplace, and the products and services consumers expect • e.g., Information technologies, entertainment technologies, product technologies.

  22. 6) Environmental • Environmental and ecological issues (on supple and waste side), including pressure from NGOs and activists.

  23. General Environment • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance • Cast a wide net and to identify the emerging trends • Then determine which factors are relevant, and how these changes will have an effect upon the firm.

  24. ROIC Across Industries 1995-2004

  25. Porter’s Five Forces • Competitive Rivalry • Power of Buyers • Power of Suppliers • Potential Entrants • Substitute Products Each of these forces affect costs/prices, therefore, profitability

  26. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Suppliers of Key Inputs Buyers Potential New Entrants

  27. Porter’s 5-forces is all about margins { Price What factors increase/decrease margins within an industry, thus affecting profitability. Profits Costs

  28. When industry structural variables are weak…... Prices can be kept high { Profits can soar Costs can be kept low

  29. When industry structural variables are strong Prices will be pushed down { Profits shrink Costs will rise

  30. Potential New Entrants • Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. • Firms can create “barriers to enter” • Barriers of entry are desirable for entrenched firms

  31. Barriers to Entry • Economies of scale • Product differentiation & loyalty • Capital & resource requirement • Switching costs • Distribution • Cost disadvantage independent of size • Regulatory policies • Access to technology & know-how • Learning, costs, experience curves • Threat of retaliation

  32. Suppliers • Who are you key suppliers? • Suppliers are a strong competitive force when: • Only a few suppliers exist and is more concentrated than industry to which it is selling • Few substitutes available to the industry firm • Industry not important buyers to supplier group • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality • It is costly for buyers to switch suppliers • Forward integration by suppliers is a credible threat • Suppliers can supply at a lower cost

  33. Buyers • Who are your key buyers? - who provides our revenues? • Can they force: • lower prices, higher quality and service – affect the terms and conditions of the exchange? • When do you, as a consumer, have power? • Two issues • Price sensitivity • Can you actually bargain

  34. Buyers • What affect buyers’ power? • Volume/Frequency of purchase • When buyers represent a large portion of sellers revenues • When buyers can easily switch to another product • When the product the buyers are buying is undifferentiated • When buyers can self-source or backwards integration • Criticality • Buyers’ knowledge • Buyers’ profitability

  35. Substitutes • Product/service which fulfills similar need • Price cap • 3 Questions • Are they available? • Can we switch? • Price-performance relationship?

  36. Substitutes and Business Definition • How we define our business defines our substitutes and our rivals Carbonated Soft Drink Soft Drinks Beverages Many Substitutes Few Substitutes Few Rivals Many Rivals

  37. Rivalry and Profitability • Industry profitability is a collective good. • Collective good is served by coordination • Are there industries were pricing is coordinated? • Incentive to violate

  38. Rivalry – What drives it? • Numerous or equally balanced competitors • Slow growth, excess capacity • High fixed costs • High storage costs • High obsolescence costs • Lack of differentiation • Low switching costs • Perceptions of high payoff from competitive actions • High exit barriers

  39. Industries and Segments • What is a segment? • Different segments….. • posses different combinations of 5-forces • therefore: • reward different strategies • possess different levels of profitability

  40. Segments in the Automotive Industry Economy Luxury Which segment is more attractive? Why?

  41. Segments in the Automotive Industry Economy Luxury More Rivalry More Substitutes More Entrants More Buyer Power

  42. Porter’s..in conclusion • Attractiveness of industry/segment • current industry • adjacent segments • industries you might consider entering • Which forces possess the greatest influence? • Can we influence them?

  43. Static model & Hypercompetition • If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.

  44. Analysis of Direct Competitors • Key Terms • Strategic Group–set of firms emphasizing similar strategic dimensions to use a similar strategy • Strategic Dimensions–areas that firms in a strategic group treat similarly

  45. Implications from Strategic Group Dynamics • Intra-strategic group rivalry is more intense than inter-strategic group rivalry • Membership in a strategic group partially defines the essential characteristics of firms' strategies • The more similar strategies are seen across strategic groups, the greater the level of expected rivalry • The strengths of industries' five forces differ across strategic groups

  46. Competitor Analysis Components

  47. Identification of Key Success Factors? • KSFs areproduct attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability • opportunities for competitive advantage

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