Learning MBA Master Degree

TEACHER: Hello, Student. I am glad to begin teaching the Strategic Management course today, and to have you as my student.

This course is about developing, implementing, and executing company strategies; a job that belongs to managers, of course.

STUDENT: Teacher, everyone talks about "strategy", but my feeling is that many people do not know exactly what it is. Can you give me a clear definition?

TEACHER: Yes, but let me confine the definition to business strategy: "Business Strategy is the array of competitive moves and business approaches management uses to produce the best possible results".

Strategy is management's "game plan" for strengthening the organization's position, pleasing customers, and achieving performance targets.

Obviously in business as in life there are many possible paths to follow and choices must be made. The strategy managers decide on indicates that they have chosen an objective, a route, and a manner to conduct business.

STUDENT: I assume that a comprehensive strategy should cover every major function and department of a company. Am I correct?

TEACHER: Yes, of course. Each major function has a role in the company strategy. The challenge is to coordinate business decisions and competitive actions taken across the company so that they are consistent with the overall strategy. Again, developing and executing strategy are basic management functions.

STUDENT: What you are saying is that management must successfully define the company's long-term objectives, develop and implement effective strategic actions and business plans, and execute the strategy so that it produces the expected results.

TEACHER: Right. Indeed, good strategy definition and good strategy execution are the key competencies of good management.

STUDENT: I see that you are stressing both "defining" and "executing" as vital management competencies.

TEACHER: No doubt about it. Some managers design good strategies but fail to implement them well. Others design poor strategies but execute them competently.

Managers must combine good strategy-making with good strategy execution in order to lead a company successfully.

STUDENT: I am inclined to believe that all we need to make a company successful is hiring a management team able to develop and implement a good strategy, right?

TEACHER: Student, you are too clever a person to believe this. I know that you are perfectly aware that good strategy combined with good strategy execution doesn't guarantee that a company will avoid periods of weak performance.

It may take time to show good results. And any business can be confronted with adverse and unforeseen conditions.

But it is management's job to adjust to unexpected1y tough conditions by devising strategic defenses and novel business approaches adjusted to adverse conditions.

STUDENT: I am glad that you think I’m clever. I do, too. To prove it, let me summarize what you have said: "The essence of good strategy-making and executing is to build a competitive position strong enough and an organization capable enough to succeed despite unforeseeable events, strong competition, and internal problems".
TEACHER: Correct. Now let’s go on to describe...
THE FIVE TASKS OF STRATEGIC MANAGEMENT

The strategy-making, strategy-implementing process consists of five interrelated managerial tasks:

1. Deciding what business the company will be in and forming a strategic vision of where the organization needs to be headed -giving the organization a sense of purpose, providing long-term direction, and establishing a clear mission to be accomplished.
2. Converting the strategic vision and mission into measurable objectives and performance targets.
3. Developing a strategy to achieve the desired results.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Evaluating performance, making corrective adjustments in execution, and adjusting long-term strategy according to experience, changing conditions, new ideas, and new opportunities.


DEVELOPING A STRATEGIC VISION AND BUSINESS MISSION

The basic questions senior managers need to ask and find answers to are:

* What is our vision for the company?
* What are we trying to do and to become?

Finding intelligent answers to these questions forces managers to think about what the company's business character is and should be and to develop a clear picture of where the company needs to be headed over the next 5 to 10 years.

Management's answer to "who we are, what we do, and where we're headed" shows the way for the organization to take and establishes the foundations of a strong organizational identity.

What a company intends to do and to become is commonly called the company's mission.

A mission statement defines a company's business and provides a clear view of what the company is trying to do for its customers.

But managers also have to think strategically about where they are trying to take the company. They must have a concept of the company's future organization and long-term direction.

Management's view of the kind of company it is trying to create and its objective in terms of a specific business positions represent a strategic vision for the company.

By developing and communicating a business mission and strategic vision, management provides its employees with a sense of purpose and an understanding of the company's future direction.

STUDENT: I guess you have a few real life examples of company mission and vision statements to show me, do you?

TEACHER: Of course. Here they are:



* Avis Rent-a-Car: "Our business is renting cars. Our mission is total customer satisfaction".
* Eastman Kodak: "To be the world’s best in chemical and electronic imaging".
* Compaq Computer: "To be the leading supplier of PCs and PC servers in all customer segments".
* The Saturn Division of General Motors: "To market vehicles developed and manufactured in the United States that are world leaders in quality, cost, and customer satisfaction through the integration of people, technology and business systems and to transfer knowledge, technology and experience throughout General Motors".
* Otis Elevator: "Our mission is to provide any customer a means of moving people and things up, down and sideways over short distances with higher reliability than any similar enterprise in the world".

STUDENT: I must say that these statements convey a clear meaning in a very condensed way.

TEACHER: Yes, and this is a must for these type of statements to be effective.

SETTING OBJECTIVES

The purpose of setting objectives is to evolve statements of business mission and company direction into specific performance targets.

Objective-setting implies challenge; the performance targets must require considerable effort.

The challenge of achieving the desired performance forces an organization to be more inventive, to experiment a sense of urgency in improving both its financial performance and its business position.

STUDENT: This is true, but I have also experienced the demoralizing effects of objectives that are perceived by employees as impossible to achieve.

TEACHER: Right. It is very difficult to judge in advance whether objectives are challenging but achievable or are impossible to achieve. It is important that management, after having set challenging but realistic objectives, convinces employees that these objectives are achievable.

The objectives managers establish should ideally include both short-range and long-range performance targets. Short-range objectives describe the immediate improvements and results management expects.

Long-range objectives motivate employees to consider what to do now to position the company to perform well over the longer term.

STUDENT: In real life, short-term and long-term objectives sometimes are in collusion. I think that ideally when tradeoffs have to be made between achieving long-run objectives and achieving short-run objectives, long-run objectives should take precedence.

TEACHER: True. Rarely does a company prosper from repeated management actions that sacrifice better long-run performance for better short-tern performance. However, due to the way top managers are compensated and judged, often the short-run takes precedence.

Every unit in a company needs concrete, measurable performance targets. When company-wide objectives are broken down into specific targets for each organizational unit and lower-level managers are held accountable for achieving them, a results-oriented climate builds throughout the enterprise.

From a company-wide perspective there must be financial objectives and strategic objectives. Financial objectives are important for obvious reasons. Strategic objectives are needed to bring about efforts to strengthen a company's overall business and competitive position.

Financial objectives typically relate to such measures as earnings growth, return on investment, borrowing power, cash flow, and shareholder returns.

Strategic objectives are about the company’s competitiveness and long-term business position in its markets: growing faster than the industry average, constantly improving product quality, customer service and market share, being the lower cost producer, etc.

STUDENT: A few examples of well-known companies are called for, aren’t they?

TEACHER: Glad to oblige. Here the are:



* Exxon: "To provide shareholders a secure investment with a superior return".
* General Electric: "To become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in".
* Apple Computer: "To offer the best possible personal computing technology and to put that technology in the hands of as many people as possible".
* Ford Motor Company: To satisfy our customers by providing quality cars and trucks, developing new products, reducing the time it takes to bring new vehicles to market, improving the efficiency of all our plants and processes, and building on our teamwork with employees, unions, dealers, and suppliers".


DEVISING A STRATEGY

Objectives are the "ends," and strategy is the "means" of achieving them. Strategy is the array of actions managers employ to achieve strategic and financial performance targets.

The task of crafting a strategy starts with a solid diagnosis of the company's internal and external situation. A misdiagnosis of the situation involves the risk of pursuing ill-conceived strategic actions.

A company's strategy is normally a mix of:

1. Deliberate and purposeful actions, and
2. Reactions to unanticipated developments and fresh competitive pressures.


Strategy is more than what managers have carefully plotted out in advance. New situations always emerge, such as important technological developments, rivals' actions, etc.

Company strategies in practice end up being a mix of planned actions and unplanned strategy responses.

Strategy and the outside world

The challenge is for company managers to keep their strategies closely matched to such outside drivers as changing buyer preferences, the latest actions of rivals, market opportunities and threats, and newly appearing business conditions.

The faster a company's business environment is changing, the more critical it becomes for its managers to be good entrepreneurs in diagnosing shifting conditions and instituting strategic adjustments.

STUDENT: What you mean, in short, is that managers must be good entrepreneurs.

TEACHER: Exactly. Managers with poor entrepreneurial skills are usually risk-averse and do not develop a new strategic course while the current strategy produces acceptable results. They tend to dismiss new outside developments as unimportant or else waste valuable time before taking actions.

Why Company Strategies Evolve

Making frequent adjustments of a company's strategy in different departments and functional areas is quite normal.

Sometimes fundamental changes in strategy are needed for, i.e. when a competitor makes an important move, or when technological breakthroughs occur.

For the reasons stated an organization's strategy forms over a period of time.

Current strategy is typically a mix of historical approaches and new actions. Except for crisis situations (where many strategic moves are usually made quickly to produce a substantially new strategy almost overnight) and new company start-ups (where strategy exists most1y in the form of plans and intended actions), it is common for key elements of a company's strategy to emerge in bits and pieces as the business develops.

STUDENT: What you said about crisis situations reminds me of 1993 when Lou Gerstner took over as top boss of money loosing IBM; he had to quickly develop a radically different strategy to turn around the company.

TEACHER: Good example. It also shows how strategy is usually devised by the top people in a company. When Palmistrano took over as IBM CEO from Gerstner in 2002, the first thing he did was implementing a new strategy exemplified by the acquisition of the consulting arm of PricewaterhouseCoopers (PwC) for $3.5 billion in cash and shares. Gerstner did never make a large acquisition during his tenure. Plamistrano stated that IBM would make a ca. $3 billion acquisition every year.

Rarely is a company's strategy so perfect and durable that it can remain unchanged for a very long time. Even the best business plans must be adapted to changing market conditions, new customer needs and preferences, the actions of rival firms, etc.

STUDENT: It is apparent that strategy-making is a dynamic process. Management must reevaluate strategy regularly, refining and modifying it as needed.

TEACHER: Good observation. However, when strategy changes so often and so deeply that the game plan is revised every few months, managers are almost certainly guilty of poor strategic analysis. Important changes in strategy are needed occasionally, especially in crisis situations, but they cannot be made too often without creating undue organizational confusion and disrupting performance.

Good strategies normally have a life of several years, requiring only minor adjustments to keep them in tune with changes in the environment.

The components of a Company’s Strategy

The basic concerns of a company’s strategy are:

* How to grow the business
* How to satisfy customers
* How to effectively compete with rivals
* How to adapt to changing market conditions
* How to manage the different functional areas of the business
* How to achieve strategic and financial objectives.


In the business world, companies have a large degree of freedom on what strategy they decide to adopt.

They can diversify in different degree, into related or unrelated industries, via acquisition, joint venture, strategic alliances, or internal start-up.

Even when a company elects to concentrate on a single business, there is usually enough strategy-making latitude to differentiate a firm from its close competitors. Companies in the same business can pursue low-cost leadership and position themselves as the lowest cost but high quality suppliers; others stress various combinations of product/service attributes that justify a premium price as perceived by customers, and still others elect to concentrate on the special needs and preferences of narrow buyer segments

Many elements of a firm’s strategy are visible to outside observers, and therefore most of a company's strategy can be deduced from its actions and public pronouncements. Yet, there's an unrevealed portion of strategy outsiders can only speculate about -the actions and moves company managers are considering. Managers often, for good reason, choose not to reveal certain elements of their strategy until the time is right.

STUDENT: Will you give me an example of a real world company’s strategy?

TEACHER: Yes. No company is more "real world" that McDonald’s.

These are the following core elements of this company’s strategy as stated in the mid 90’s and implemented since then:

Growth Strategy

* Add 700 to 900 restaurants annually, some company-owned and some franchised, with about two-thirds outside the USA.
* Promote more frequent customer visits via de addition of breakfast and dinner menu items, low-price specials and Extra Value Meals.

Franchising Strategy

* Be highly selective in granting franchising, extend them only to highly motivated entrepreneurs willing to be active on-premise owners.


Store Location and Construction Strategy

* Locate restaurants only on sites that offer convenience to customers and afford long-term sales growth potential.
* Reduce site costs and building costs by using standardized, cost-efficient store designs and consolidating purchases of equipment and materials via a global sourcing system.
* Utilize store and site designs that are attractive and pleasing and where feasible provide drive-thru service and play areas for children.


Product Line Strategy

* Offer a limited menu.
* Expand product offering into new categories of fast food (chicken, Mexican, pizza and so on) and include more items for health-conscious customers.
* Do extensive testing to ensure consistent high quality before implementing new menu items system-wide.

Store Operations

* Establish stringent product standards, strictly enforce restaurant operating procedures (especially as concerns food preparation, store cleanliness and friendly, courteous counter service) and build close working relationships with suppliers to assure that food is safe and of the highest quality.
* Develop new equipment and production systems that improve the ability to serve hotter, better-tasting food, faster and with greater accuracy.


Sales Promotion, Marketing and Merchandising

* Enhance the McDonald’s image of quality, service, cleanliness, and value globally via heavy media advertising and in-store merchandise promotions funded with fees tied to a percent of sales revenues at each restaurant.
* Continue to use value pricing and Extra Value Meals to build customer traffic.
* Use Ronald McDonald to create greater brand awareness among children and Mc prefix to reinforce the connection of menu items and McDonald’s.


Social Responsibility

* Operate in a socially responsible manner by supporting education programs for student employees and by providing nutritional information on McDonald’s products to customers.


STUDENT: There is little doubt that the "McStrategy" worked!

TEACHER: Yes. A sound, well implemented strategy. Let’s examine the different aspects of the "total strategy process".

Strategy and Strategic Plans

Developing a strategic vision and mission, establishing objectives, and deciding on a strategy are basic direction-setting tasks. They map out where the organization is headed, its short-range and long-range performance targets, and the competitive moves and internal action approaches to be used in achieving the targeted results. Together, they constitute a strategic plan.

STRATEGY IMPLEMENTATION AND EXECUTION

The strategy-implementing function consists of defining what it will take to make the strategy work and to reach the targeted performance on schedule

STUDENT: I guess the required skill here is being good at figuring out what must be done to put the strategy in place, execute it proficiently, and produce good results.

TEACHER: Right. The job of implementing strategy is primarily a hands-on administrative task that includes the following principal aspects:

Building an organization capable of carrying out the strategy successfully.

• Developing budgets that steer resources into those internal activities critical to strategic success.

• Establishing strategy-supportive policies.

• Motivating people in ways that induce them to pursue the target objectives energetically and, if need be, modifying their duties and job behavior to better fit the requirements of successful strategy execution.

• Tying the reward structure to the achievement of targeted results.

• Creating a company culture and work climate conductive to successful strategy implementation.

• Installing internal support systems that enable company personnel to carry out their strategic roles effectively day in and day out.

• Instituting best practices and programs for continuous improvement.

• Exerting the internal leadership needed to drive implementation forward and to keep improving on how the strategy is being executed.

EVALUATING PERFORMANCE, REVIEWING NEW DEVELOPMENTS, AND INITIATING CORRECTIVE ADJUSTMENTS

None of the previous tasks are one-time exercises. New circumstances call for corrective adjustments. Long-term direction may need to be altered, the business redefined, and management's vision of the organization's future course narrowed or broadened. Performance targets may need raising or lowering in light of past experience and future prospects. Strategy may need to be modified because of shifts in long-term direction, because new objectives have been set, or because of changing conditions in the environment.

The search for ever better strategy execution is also continuous. Sometimes an aspect of implementation does not go as well as intended and changes have to be made. Progress is typically uneven -faster in some areas and slower in others. Some tasks get done easily; others prove to be difficult. Implementation has to be thought of as a process, not an event. It occurs through the pooling effect of many managerial decisions and many incremental actions on the part of work groups and individuals across the organization. Budget revisions, policy changes, reorganization, personnel changes, reengineered activities and work processes, culture-changing actions, and revised compensation practices are typical actions managers take to make a strategy work better.

WHY STRATEGIC MANAGEMENT IS AN ONGOING PROCESS

Because each one of the tasks of strategic management requires constant evaluation and a decision whether to continue or change, a manager cannot afford distractions. Nothing about the strategic management process is final; all prior actions are subject to modification as conditions in the surrounding environment change and ideas for improvement emerge. Strategic management is a process filled with motion

CHARACTERISTICS OF THE PROCESS

Although developing a mission, setting objectives, forming a strategy, implementing and executing the strategic plan, and evaluating performance portray what strategic management involves, actually performing these five tasks is not so cleanly divided into separate, neatly sequenced compartments. There is much interplay among the five tasks.

THE ROLE AND TASKS OF STRATEGIC PLANNERS

If senior and middle managers have the lead roles in strategy-making and strategy implementing in their areas of responsibility, what should strategic planers do? Is there a legitimate place in big companies for a strategic planning department staffed with specialists in planning and strategic analysis?

The answer is yes. But the planning departments role and tasks should consist chiefly of helping to gather and organize information that strategy-makers need, establishing and administering an annual strategy review cycle whereby managers reconsider and refine their strategic plans, and coordinating the process of reviewing and approving the strategic plans developed for all the various parts of the company.

THE STRATEGIC ROLE OF THE BOARD OF DIRECTORS

Since lead responsibility for crafting and implementing strategy falls to key managers, the chief strategic role of an organization's board of directors is to see that the overall task of managing strategy is adequately done. Boards of directors normally review important strategic moves and officially approve the strategic plans submitted by senior management-a procedure that makes the board ultimately responsible for the strategic actions taken. But directors rarely can or should play a direct role in formulating Strategy. The immediate task of directors is to ensure that all proposals have been adequately analyzed and considered and that the proposed strategic actions are superior to available alternatives