The Managerial
Process of
Crafting and
Executing Strategy
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“If you don’t know where
you are going, any road
will take you there.”
The Koran
Fig. 2.1: The Strategy-Making, Strategy-Executing Process
Developing a Strategic Vision
Phase 1 of the Strategy-Making Process
• Involves thinking strategically about
– Future direction of company
– Changes in company’s product/market/customer
technology to improve
• Current market position
• Futurevision
prospects
A strategic
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.
Strategic Vision vs. Mission
• A strategic vision concerns
a firm’s future business
path - “where
we are going”
– Markets to be pursued
– Future product/market/
customer/technology focus
– Kind of company
management is
trying to create
• The mission statement of a
firm focuses on its present
business purpose - “who we
are and what we do”
– Current product and
service offerings
– Customer needs being
served
– Technological
and business
capabilities
Characteristics of a Mission
Statement
• Identifies the boundaries of the current
business and highlights
• Conveys
– Who we are,
– What we do, and
– Why we are here
A well-conceived mission statement distinguishes a company’s business
makeup from that of other profit-seeking enterprises in language specific
enough to give the company its own identify!
Examples: Vision Slogans
Levi Strauss & Company
“We will clothe the world by marketing the most appealing and
widely worn casual clothing in the world.”
Nike
“To bring innovation and inspiration
to every athlete in the world.
Mayo Clinic
“The best care to every patient every day.”
Examples: Vision Slogans
Scotland Yard
“To make London the safest major city in the world.”
Greenpeace
“To halt environmental abuse and
promote environmental solutions.”
Charles Schwab
“To provide customers with the most useful and
ethical financial services in the world.”
Setting Objectives
Phase 2 of the Strategy-Making Process
• Purpose of setting objectives
– Converts vision into specific performance targets
– Creates yardsticks to track performance
• Well-stated objectives are
– S Specific
– M Measurable
– A Attainable
– R Realistic
– T Time-bound
Types of Objectives Required
Financial Objectives
Strategic Objectives
Outcomes focused
on improving financial
performance
Outcomes focused on
improving competitive vitality
and future business position
$
McDonald’s Financial
and Strategic Objectives
• Place more emphasis on delivering an
exceptional customer experience
• Add approximately 350 net
new McDonald’s restaurants
• Reduce general and administrative
spending as a percent of total revenues
• Achievements
– Systemwide sales and revenue growth of 3-5%
– Annual operating income growth of 6-7%
– Annual returns on incremental invested capital in high teens
Nissan’s Financial Objectives
• Increase sales to 4.2 million cars and trucks by
2008 (up from 3 million in 2003)
• Cut purchasing costs 20% and halve the number
of suppliers
• Have zero net debt
• Maintain a return on invested capital of 20%
• Maintain a 10% or better operating margin
H. J. Heinz Company’s Financial
and Strategic Objectives
• Achieve 4-6% sales growth, 7-10% growth in operating income, EPS in the range of
$2.35 to $2.45, and operating free cash flow of $900 million to $1 billion in fiscal
2006
• Pay dividends equal to 45-50% of earnings
• Increase focus on company’s 15 power brands and give top resource priority to
those brands with number one and two market positions
• Continue to introduce new and improved food products
• Add to the Heinz portfolio of brands by acquiring
companies with brands that complement existing brands
• Increase sales in Russia, Indonesia, China, and India
by 50% in fiscal year 2006 to roughly 6% of total sales
• By end of fiscal 2008, derive approximately 50% of sales and profits from North
America, 30% from Europe, and 20% from all other markers
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?
Objectives Are Needed at All Levels
The process is more top-down than bottom up
1. First, establish organization-wide objectives and
performance targets
2. Next, set business and
product line objectives
3. Then, establish functional
and departmental objectives
4. Individual objectives are established last
Crafting a Strategy
Phase 3 of the Strategy-Making Process
• Strategy-making involves entrepreneurship
– Actively searching for opportunities to do new things
or
– Actively searching for opportunities to do
existing things in new or better ways
• Strategizing involves
– Developing timely responses to happenings
in the external environment
and
– Steering company activities in new directions
dictated by shifting market conditions
What Does Good Strategy Making Entail?
Masterful strategies come partly (maybe
mostly) by doing things differently
from competitors where it counts
–
–
–
–
Out-innovating them
Being more efficient
Being more imaginative
Adapting faster
Rather than running with the herd!
Levels of Strategy-Making
in 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
Implementing and Executing Strategy
Phase 4 of the Strategy-Making Process
• Operations-oriented activity aimed at
performing core business activities in a
strategy-supportive manner
• Tougher and more time-consuming
than crafting strategy
• Key tasks include
– Improving efficiency of strategy being executed
– Showing measurable progress in achieving targeted
results
Corporate Governance:
Strategic Role of a Board of Directors
• Exercise strong oversight to ensure five tasks
of strategic management are executed to
benefit
– Shareholders or
– Stakeholders
• Make sure executive actions are not only
proper but also aligned with interests of
stakeholders
Evaluating a
Company’s
External
Environment
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“Analysis is the critical
starting point of
strategic thinking.”
Kenichi Ohmae
Understanding the Factors that
Determine a Company’s Situation
• Diagnosing a company’s situation has two facets
– Assessing the company’s external or
macro-environment
• Industry and competitive conditions
• Forces acting to reshape this environment
– Assessing the company’s internal or
micro-environment
• Market position and competitiveness
• Competencies, capabilities, resource strengths
and weaknesses, and competitiveness
Fig. 3.2: The Components of a Company’s Macroenvironment
Key Questions Regarding the
Industry and Competitive Environment
What are the
industry’s
dominant
economic traits?
How strong are
competitive
forces?
What market
positions do rivals
occupy? What
moves will they
make next?
What forces are
driving change in
the industry?
What are the key
factors for
competitive
success?
How attractive is
the industry
from a profit
perspective?
Fortune 500
Question 1: What are the Industry’s
Dominant Economic Traits?
•
•
•
•
•
•
•
•
•
•
•
Market size and growth rate
Number of rivals
Scope of competitive rivalry
Buyer needs and requirements
Degree of product differentiation
Product innovation
Supply/demand conditions
Pace of technological change
Vertical integration
Economies of scale
Learning and experience curve effects
Question 2: What Kinds of Competitive
Forces Are Industry Members Facing?
• Objectives are to identify
– Main sources of competitive forces
– Strength of these forces
• Key analytical tool
– Five Forces Model
of Competition
Fig. 3.3: The Five Forces Model of Competition
Analyzing the Five Competitive
Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
Step 2: Evaluate the strength of each
competitive force -- fierce, strong,
moderate to normal, or weak?
Step 3: Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits
Competitive Pressures
Associated With Potential Entry
• Seriousness of threat depends on
– Size of pool of entry candidates
and available resources
– Barriers to entry
– Reaction of existing firms
Competitive Pressures from
Substitute Products
Concept
Substitutes matter when customers are attracted
to the products of firms in other industries
Examples
 Sugar vs. artificial sweeteners
 Eyeglasses and contact lens
vs. laser surgery
 Newspapers vs. TV vs. Internet
Competitive Pressures: Collaboration
Between Sellers and Suppliers
• Sellers are forging strategic partnerships
with select suppliers to
– Reduce inventory and logistics costs
– Speed availability of next-generation
components
– Enhance quality of parts being supplied
– Squeeze out cost savings for both parties
• Competitive advantage potential may accrue to sellers
doing the best job of managing supply-chain
relationships
Competitive Pressures From Buyers
and Seller-Buyer Collaboration
• Whether seller-buyer relationships represent a
weak or strong competitive force depends on
– Whether buyers have sufficient bargaining
leverage to influence terms of sale in their favor
– Extent and competitive importance of
seller-buyer strategic partnerships
in the industry
Competitive Pressures: Collaboration
Between Sellers and Buyers
• Partnerships are an increasingly important competitive
element in business-to-business relationships
• Collaboration may result in
mutual benefits regarding
–
–
–
–
Just-in-time deliveries
Order processing
Electronic invoice payments
Data sharing
• Competitive advantage potential may accrue to sellers
doing the best job of managing seller-buyer
partnerships
Strategic Implications of
the Five Competitive Forces
• Competitive environment is unattractive from
the standpoint of earning good profits when
– Rivalry is vigorous
– Entry barriers are low
and entry is likely
– Competition from
substitutes is strong
– Suppliers and customers have
considerable bargaining power
Strategic Implications of
the Five Competitive Forces
• Competitive environment is ideal from
a profit-making standpoint when
– Rivalry is moderate
– Entry barriers are high
and no firm is likely to enter
– Good substitutes
do not exist
– Suppliers and customers are
in a weak bargaining position
Coping With the
Five Competitive Forces
• Objective is to craft a strategy to
– Insulate firm from
competitive pressures
– Initiate actions to produce
sustainable competitive advantage
– Allow firm to be the industry’s “mover and shaker”
with the “most powerful” strategy that defines the
business model for the industry
Question 3: What Factors Are Driving Industry
Change and What Impacts Will They Have?
• Industries change because forces
are driving industry participants
to alter their actions
• Driving forces are the
major underlying causes
of changing industry and
competitive conditions
• Where do driving forces originate?
– Outer ring of macroenvironment
– Inner ring of macroenvironment
Analyzing Driving Forces:
Three Key Steps
STEP 1: Identify forces likely to exert greatest influence
over next 1 - 3 years
– Usually no more than 3 - 4 factors
qualify as real drivers of change
STEP 2: Assess impact
– Are the driving forces acting to cause market demand
for product to increase or decrease?
– Are the driving forces acting to make competition more
or less intense?
– Will the driving forces lead to higher or lower industry
profitability?
STEP 3: Determine what strategy changes are needed
to prepare for impacts of driving forces
Question 4: What Market Positions
Do Rivals Occupy?
• One technique to reveal
different competitive positions
of industry rivals is
strategic group mapping
• A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
Procedure for Constructing
a Strategic Group Map
STEP 1: Identify competitive characteristics that differentiate
firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these
differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space to
same strategic group
STEP 4: Draw circles around each group, making circles
proportional to size of group’s respective share of
total industry sales
Example: Strategic Group Map of Selected Retail Chains
Question 5: What Strategic Moves Are
Rivals Likely to Make Next?
• A firm’s best strategic moves are affected by
– Current strategies of competitors
– Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about
–
–
–
–
–
Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
Efforts being made to improve their situation
Thinking and leadership styles of top executives
Question 6: What Are the Key
Factors for Competitive Success?
• KSFs are those competitive factors most affecting every
industry member’s ability to prosper
• KSFs concern
–
–
–
–
–
Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
that a company needs to be competitively successful
• KSFs are attributes that spell the difference between
– Profit and loss
– Competitive success or failure
Example: KSFs for Beer Industry
• Full 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
Example: KSFs for Apparel
Manufacturing Industry
• Appealing designs and
color combinations –
to create buyer appeal
• Low-cost manufacturing
efficiency – to keep selling
prices competitive
Question 7: Does the Outlook for the Industry
Present an Attractive Opportunity?
• Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits
• Under certain circumstances, a firm uniquely
well-situated in an otherwise unattractive
industry can still earn unusually good profits
– Attractiveness is relative, not absolute
– Conclusions about attractiveness have
to be drawn from the perspective of a
particular company