CHAPTER 2 The Strategic Management Process McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Part 1 Strategy Analysis . LO 2-1 Explain the role of vision, mission, and values in the strategic management process. LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals. LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications. LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. LO 2-5 Explain why anchoring a firm in ethical values is essential for longterm success. LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. 2-3 Chapter Case 2 Teach For America: Inspiring Future Leaders • TFA Mission: Eliminate educational inequality Started by an undergraduate student, Wendy Kopp Inspiring mission Provide a meaningful service option for bright young people • Make teaching to the neediest high prestige Over 45,000 applicants for 4,500 jobs TFA Video Teach For America – Inspiring Others • What are the key issues in the opening case? • How was TFA able to successfully recruit? Established an inspiring mission Appealing to the target demographic Clear communication of the goals of the organization The program is highly selective • Would TFA have succeeded as a for-profit firm? Vision, Mission, and Values • What are visionary organizations? Begin with the end in mind Similar to designing & building a home Vision – what to ultimately accomplish? Mission – what is the firm about? Values – how to accomplish goals? Frank Lloyd Wright EXHIBIT 2.1 Teach For America: Vision, Mission, and Values • Vision • One day, all children in this nation will have the opportunity to attain an excellent education. • Mission • Eliminate educational inequality by enlisting our nation’s most promising future leaders in the effort. • Values • Relentless pursuit of results. • Sense of possibility. • Disciplined thought. • Respect and humility. • Integrity. Vision, Mission, and Values • What is forming strategic intent? Staking out a desired leadership position in the long term that far exceeds a company's current situation Often used in Japanese corporate settings Canon will "beat Xerox" Effective use of stretch goals Competitive advantage for tomorrow STRATEGY HIGHLIGHT 2.1 Winning Through Strategic Intent: The “Pocketable” Radio • Small Japanese Company after WWII, founded by Masura Ibuka Invented an electric rice cooker Wanted to license the transistor from Bell Labs in U.S. Japanese Government & Bell Labs both said NO Persisted with request – Finally,1953 got transistor. “Beat Bell Labs” to pocket-sized radio 1957 – Launched world’s FIRST pocket radio 1958 – Changed company name to…. 1–9 LO 2-1 Explain the role of vision, mission, and values in the strategic management process. LO 2-2 Describe and evaluate the role of strategic intent in achieving longterm goals. LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications. LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. LO 2-5 Explain why anchoring a firm in ethical values is essential for longterm success. LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. Vision, Mission, and Values • Customer-Oriented Missions • Define the firm in terms of solutions for customers Disney: "Make People Happy" Enhanced strategic flexibility NOT the same as listening to customers • Product-Oriented Missions • Define the firm in terms of products or services U.S. Railroads: "Safest… North American railroad” Missed the opportunity to move into delivery before UPS & Federal Express Defining the Business: The Starting Point of Strategy • Example: Fall of the Railroads “They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.” Theodore Levitt “Market Myopia” Mission Statements and Competitive Advantage • Do mission statements help gain and sustain competitive advantage? Results are inconclusive Need strategic commitments to succeed (e.g., Boeing Dreamliner) • Positive associations – Visionary firms, like Merck • Negative associations – Better World Books • No associations – Intel LO 2-1 Explain the role of vision, mission, and values in the strategic management process. LO 2-2 Describe and evaluate the role of strategic intent in achieving longterm goals. LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications. LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success. LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. Living the Values • Ethical standards and norms that govern behavior. • McKesson (health care) – ICARE Shared principles a framework for daily interactions • Dark side of values Bernard Madoff Ponzi scheme estimated at $65 billion in fraud Enron One of the largest bankruptcies in U.S. history Over 50,000 jobs lost (Enron and Arthur Andersen) LO 2-1 Explain the role of vision, mission, and values in the strategic management process. LO 2-2 Describe and evaluate the role of strategic intent in achieving longterm goals. LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications. LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. LO 2-5 Explain why anchoring a firm in ethical values is essential for long term success. LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. The The Evolution Evolution of of Strategic Strategic Management Management DOMINANT THEME MAIN ISSUES CONCEPTS & TECHNIQUES IMPLEMENTATION 1950s 1960s Early-mid Late1970s 1970s early 1980s Late 1980s Late 1990s early 1990s early 2000s Budgetary planning & control Corporate planning Corporate strategy Quest for competitive advantage Financial control Planning growth Diversifica- Positioning ion Competitive advantage Budgeting project appraisal Forecasting & investment planning Portfolio planning. Synergy market share Resource analysis. Case competences Emphasis on financial management Rise of corporate planning departments & formal planning DiversifiIndustry/market cation. selectivity. Quest for Active asset global management market share Analysis of industry & competition Analysis of industry & competition Strategic innovation The “New Economy” Innovation & knowledge Dynamic sources of advantage Knowledge management cooperation Restructuring Virtual orgaBPR. nization. Refocusing Alliances Outsourcing Quest for critical mass 17 Strategy as Strategic Planning • Top-down rational planning Define mission, vision, and goal (strategic intent) External analysis of opportunities and threats Internal analysis of strengths and weaknesses Create strategic fit through SWOT Formulate appropriate strategy Implement chosen strategy Monitor performance and modify if necessary assess environmental factors Identify current mission and strategic goals Strategy formulation Strategy implementation Conduct competitive analysis: •strengths •weakness •opportunity •threats Develop specific strategies: •corporate •business •functional carry out strategic plans maintain strategic control assess organisational factors 619 Fundamental Question of the Choice of Goals: Planning for what Purpose(s)? • Profitability (net profits) • Efficiency (low costs) • Market Share • Growth (e.g., increase in total assets, sales, etc) • Shareholder Wealth (dividends plus stock price appreciation) • Utilization of Resources (e.g., ROE, ROI) • Reputation • Contribution to Stakeholders (e.g., employees, society) • Survival (avoid bankruptcy) 20 Strategy as Scenario Planning • Scenario planning Envision different "what-if" plans Generates a dominant plan Must implement the most probable option Keeps other scenarios in the event of changes… "Arab Spring" impact on the oil industry? Good example of the AFI framework Scenario planning at Shell EXHIBIT 2.2 Scenario Planning in the AFI Strategy Framework STRATEGY HIGHLIGHT 2.2 Shell’s Future Scenarios • Petroleum industry use of scenario planning Shell made right move in the 1960s Again in the 1980s Communism might fall in Soviet Union Now projecting 20% energy from renewables by 2025 1–23 Strategy as Planned Emergence • Strategic Initiative Google 50% of the firm's new products come from the "20% rule" (one day a week on own ideas) Enron Wind investment by GE • Mintzberg Planned Emergence • Strategy can come from top or bottom: Some intended strategies drop off in the process Allows for new emerging ideas to become realized Resource allocation process Serendipity can have dramatic effects Strategic Initiatives and Serendipity • Japan Railways Constructing a bullet train through the mountains north of Tokyo, which required many tunnels Persistent flooding Complex engineering plans to drain the water Maintenance worker suggested that the fresh water off the mountains should not be drained, but rather should be bottled 1,000 vending machines on 1,000 railroad platforms in and around Tokyo, and home delivery of water, juices, and coffee followed. The employee’s proposal had turned this “bottom-up” strategy into a multi-million dollar business. EXHIBIT 2.3 Mintzberg’s Planning Framework Strategy Strategy Making Making :: Design Design or or Process? Process? Strategy as Design Strategy as Process Planning and rational choice Many decision makers responding to multitude of external and internal forces INTENDED STRATEGY EMERGENT STRATEGY REALIZED STRATEGY Mintzberg’s Mintzberg’sCritique Critiqueof ofFormal FormalStrategic StrategicPlanning: Planning: •The fallacy of prediction – the future •The fallacy of prediction – the futureisisunknown unknown •The fallacy of detachment -impossible •The fallacy of detachment -- impossibleto todivorce divorceformulation formulationfrom from implementation implementation •The •Thefallacy fallacyof offormalization formalization--inhibits --inhibitsflexibility, flexibility,spontaneity, spontaneity, intuition intuitionand andlearning. learning. 27 STRATEGY HIGHLIGHT 2.3 “It’s Not What We Do!” • Starbucks Autonomous action of mid-level manager Tenacity and persistence of a store manager in Southern California Risk of failure Possible career-limiting action Organization must be willing to accept new ideas Frappuccino was born! Contributing 20% of the $11billion in revenues for Starbucks in 2010. 1–28 An An optimal optimal decision decision isis possible possible All All relevant relevant information information isis available available All All relevant relevant information information isis understandable understandable All All alternatives alternatives are are known known Managers Managers as as decision decision makers makers Assumptions Assumptions of of the the Rational Rational Model Model Rational Rational decision decision making making All All possible possible outcomes outcomes known known 9 BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E © McGraw-Hill Australia 2001 29 Time Time constraints constraints Limited Limited ability ability to to understand understand all all factors factors Inadequate Inadequate base base of of information information Limited Limited memory memory of of decision-makers decision-makers Managers Managers as as decision decision makers makers Satisficing Satisficing ‘Satisficing’ ‘Satisficing’ decision decision making making Poor Poor perception perception of of factors factors to to be be considered considered in in decision decision process process 10 BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E © McGraw-Hill Australia 2001 30 31 32 33 Take-Away Concepts LO 2-1 Explain the role of vision, mission, and values in the strategic management process. A vision captures an organization’s aspirations. An effective vision inspires members of the organization. A mission statement describes what an organization actually does and why it does it. Values define the ethical standards and norms that should govern the behavior of individuals within the firm. Success is created twice: first analyzing a mental model and second formulating and implementing a strategy to make a vision a reality. LO 2-2 Describe and evaluate the role of strategic intent in achieving longterm goals. Strategic intent finds its expression in stretch goals that exceed the firms’ existing resources and capabilities by a large margin. Effective use of strategic intent creates at all levels of the organization an obsession with winning that can help companies ascend to global leadership. Take-Away Concepts LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications. Customer-oriented missions define businesses providing solutions to customer needs. Product-oriented missions define a business in terms of a good or service provided. Customer-oriented missions provide managers with more strategic flexibility than product-oriented missions. LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. Mission statements can help a firm achieve superior performance, but mission statements by themselves do not directly affect firm performance. To be effective, mission statements need to be backed up by hard-toreverse/irreversible commitments. Take-Away Concepts LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success. Ethical core values enable employees to make day-to-day decisions that are guided by correct principles. Values are guardrails to keep a company on track for competitive advantage. LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. Top-down strategic (long-range) planning works reasonably well when the environment does not change much. In scenario planning, managers envision different what-if scenarios and prepare contingency plans that can be called upon when necessary. Strategic initiatives can be the result of top-down planning by executives or can emerge through a bottom-up process from deep within the organization. A firm’s realized strategy is generally a combination of its top-down intended strategy and bottom-up emergent strategy, resulting in planned emergence.