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
– latitude for action or
decision making
 Hubris – excessive pride, leading
to a feeling of invincibility
 Heuristics – rules of thumb used in
decision making
 Discretion
Decision-Making Biases
 Reliance
 Focus
on previously formed beliefs
on limited objectives
 Exposure
 Illusion
to limited decision alternatives
of control
 Reliance
on a limited set of heuristics
Hubris

Excessive pride that leads to a feeling
of invincibility

Magnifies the effects of decisionmaking biases
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
Strategic Vision vs. Mission
 A strategic vision
concerns “where
we 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
Technological
and business
capabilities
Mission Statements
 Boundaries of the current business
 Fundamental purpose that sets it apart from
other firms of its type
 Conveys



Who we are,
What we do, and
Why we are here
Objectives
 Turns mission into performance outcomes
 Organizations produce what is measured
 Long and Short term
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
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
Controls in Balanced Scorecard Framework
Chapter 4
Exploring the External Environment:
Macro and Industry Dynamics
“Computers in the future may weigh no more
than 1.5 tons”
“Computers in the future may weigh no more
than 1.5 tons”
— Popular Science Magazine, forecasting the
relentless march of Science - 1949
In 1968, a 100 megabyte hard
drive weighed 4,500 pounds
cost more than $130,000
“I think there is a world market for maybe five
computers”
— Thomas Watson, Chairman of IBM, 1943
“But what….is it good for?”
— Engineer at IBM, commenting on the
microchip, 1968
“The idea is interesting and well-formed, but in
order to earn better than a “C” the idea must
be feasible”
— Yale University Professor in response to
Fred W. Smith’s paper proposing an
overnight delivery service
FedEx now delivers well over 7.5 million
packages a day – 2.7 billion a year
“We don’t like their music and guitar music is on
the way out”
— Decca Records Company in rejecting the
Beatles, 1962
“ Who the hell wants to hear actors talk”
H. M. Warner, 1927
“There is no reason why anyone would want a
computer in their home”
Ken Olson, president, chairman, and founder of
Digital Equipment Corporation, 1977
“This ‘telephone” has too many shortcoming to
be seriously considered a means of
communication. The device is inherently of no
value to us.”
Internal Memo, Western Union, 1876
“Everything that can be invented has been
invented”
Charles H. Duell, Commissioner of the U.S.
Patents Office,
1899
“640K of RAM ought to be enough for anybody”
Bill Gates, 1981
Subway opens a
new store every 3
hours
Starbucks every
11 hours
Quiznos every 16
hours
WSJ, Oct 1, 2003
“I see no scenario whatsoever where Toyota
will pass us in share”
Chrysler CEO, January 2002
“I see no scenario whatsoever where Toyota
will pass us in share”
Chrysler CEO, January 2002
September 2003, “The Big Three” became GM,
Ford, and Toyota
“Nothing important happened today”
Journal entry made by King George III, July 4,
1776, the day the United States declared
independence from England
 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
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
General or Macro Environment
1)
2)
3)
4)
5)
6)
Demographic
Economic
Political
Sociocultural
Technological
Environmental
1) Demographic Segment
 Characteristics of the population

e.g., age, race, gender, sexual orientation and
social classes
 Ethnic structure
 Income distribution
 Geographic distribution
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
3) Political/Legal Segments
 Tax laws, minimum wages, environmental
laws, labor laws, consumer protection,
product liability, etc.
4) Sociocultural Segment
 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.
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.
6) Environmental
 Environmental and ecological issues (on
supple and waste side), including pressure
from NGOs and activists.
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.
ROIC Across Industries
1995-2004
25
20
15
10
5
0
-5
Bevrgs
Cigs
Pharm
Steel
Computers
Airlines
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
Substitute
Products
(of firms in
other industries)
Suppliers of
Key Inputs
Rivalry
Among
Competing
Sellers
Potential
New
Entrants
Buyers
Porter’s 5-forces is all about margins
Price
What factors
increase/decrease margins
within an industry, thus
affecting profitability.
Profits
Costs
{
When industry structural variables are weak…...
Prices can be kept high
Profits can soar
Costs can be kept low
{
When industry structural variables are strong
Prices will be pushed down
Profits shrink
Costs will rise
{
 Suppose you had to start a new business and
start generating revenues…
… today
… in a week
… in 2 months
… in 1 year
What kind of businesses might you start?
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
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
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
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
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
Substitutes

Product/service which fulfills similar need
Price cap
3 Questions





Are they available?
Can we switch?
Price-performance relationship?
Substitutes and Business Definition
 How we define our business defines our
substitutes and our rivals
Carbonated Soft Drink
Many Substitutes
Few Rivals
Soft Drinks
Beverages
Few Substitutes
Many Rivals
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
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
Industries and Segments
 What is a segment?
 Different segments…..
•
•
posses different combinations of 5-forces
therefore:


reward different strategies
possess different levels of profitability
Segments in the Automotive
Industry
Economy
Luxury
Which segment is more attractive? Why?
Segments in the Automotive
Industry
Economy
More Rivalry
More Substitutes
More Entrants
More Buyer Power
Luxury
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?
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.
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
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
Price
National Jewelry Retailers
Quality
Price
National Jewelry Retailers
Cartier
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Zales
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Zales
Kay
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Zales
Kay
WalMart
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Zales
Kay
WalMart
K-Mart
Quality
Price
National Jewelry Retailers
Cartier
Tiffany
Jerrods
Marks & Morgan
Zales
Kay
WalMart
K-Mart
Quality
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Pawn Shop
Chain-by-the-Foot Carts
Burdines
Dillards
Sears
JCP
Target
WalMart
Kmart
Breadth of Product Line
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Pawn Shop
Chain-by-the-Foot Carts
Burdines
Dillards
Sears
JCP
Target
WalMart
Kmart
Breadth of Product Line
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Pawn Shop
Chain-by-the-Foot Carts
Strategic Groups identify
Burdines
Dillards
Closest Rivals
Sears
JCP
Target
WalMart
Kmart
Breadth of Product Line
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Pawn Shop
Chain-by-the-Foot Carts
Strategic Groups identify
Burdines
Dillards
Mobility Barriers
Sears
JCP
Target
WalMart
Kmart
Breadth of Product Line
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Strategic Groups identify
Burdines
Dillards
Sears
JCP
Untapped Niches
Pawn Shop
Chain-by-the-Foot Carts
WalMart
Kmart
Breadth of Product Line
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Strategic Groups identify
Burdines
Dillards
Sears
JCP
Untapped Niches
Target
Pawn Shop
Chain-by-the-Foot Carts
WalMart
Kmart
Breadth of Product Line
Other Dimensions for Strategic
Group Maps







Vertical integration
Geographic scope
R&D Expenditures
Customer Service
Number of outlets
Reputation
Can even be categorical (e.g., Mexican,
Italian, pizza, subs, chicken)
Competitor Analysis Components
Identification of Key Success Factors?
 KSFs are product attributes, competencies,
competitive capabilities, and market
achievements with the greatest direct bearing
on profitability
 opportunities for competitive advantage
 What factors determine winners and losers in
football?
 What about baseball?
 Golf?
 Airlines?
Example: KSFs for Beer Industry
 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 to buy
a particular brand
Identifying Key Success Factors
(KSFs) - vary by segment
Automotive Industry