Learning MBA Master Degree

TEACHER: Hello, Student. In this Module, I will give you a more in-depth look at the first of the three strategy-making tasks: developing a strategic vision and business mission.

STUDENT: Hi, Teacher. May I know the names of the other two tasks now?

TEACHER: Yes, they are:

* Setting performance objectives, and
* Developing a strategy to produce the desired results.


We will describe these two tasks in the following two Modules.

We will also examine the kinds of strategic decisions made at each management level, the major determinants of a company's strategy, and four frequently used managerial approaches to forming a strategic plan.

DEVELOPING A STRATEGIC VISION AND MISSION
The First Strategy-Making Task

A strategic vision provides a big picture perspective of "who we are, what we do, and where we are headed."

Management's views about what activities the organization intends to pursue and the long-term direction it signals for the future constitute a strategic vision.

A well-conceived strategic vision is a prerequisite to effective strategic leadership. A manager cannot be a good leader or strategy-maker without a sound concept of the business.

STUDENT: I guess we are talking specifically about top managers here, right?

TEACHER: Certainly. The top manager and/or the top management team must have a clear vision of what the company will do, what it will not do, and what kind of long-term competitive position to develop.

STUDENT: Sorry to interrupt again, but I become confused when I read the terms "strategic vision" and "business mission or mission statement". Are they exactly the same?

TEACHER: Many textbooks and companies use these terms interchangeably.

If we look closer a the meaning of the words, we may conclude that "Missions" tend to be more concerned with the present ("what is our business') while a "Vision" refers to the bigger issue of long-term direction (where are we headed, what new objectives will we have, what will our business be in 5 to 10 years, what kind of company are we trying to become, and what type of market position do we expect to hold?)

A basic condition of an effective strategic vision and company mission statement it that it must be high1y personalized. Statements applicable to any company or to any industry have no real value. A good strategic vision/mission statement sets an organization apart from others in its industry and gives it its own special identity, approach to the business, and path for development.

STUDENT: It must be a difficult task to develop personalized visions for companies that are exactly in the same business.

TEACHER: In many cases being in the same industry does not mean two companies are very similar. We can think of "banking" as an industry, but within this industry there are many different categories: small local banks, large global banks, banks specializing in catering to large commercial customers, others geared towards a mass market of individuals or small companies, commercial banks, investment banks, savings and loan associations, etc. STUDENT: I see your point. Hewlett Packard and Dell are both in the computer business, but Hip's business range is much wider than Dell’s.
TEACHER: Exactly. To expand the list of examples, General Electric is not on the same long-term strategic course as Whirlpool Corp., even though both are leaders in the major home appliance business; while Whirlpool's business is concentrated in appliances, GE has major business positions in aircraft engines, defense electronics, engineering plastics, electric power generation equipment, factory automation, locomotives, lighting, medical diagnostics imaging, and TV broadcasting (it owns NBC). STUDENT: But one thing I an sure all companies have in common is that they are interested in being profitable.
TEACHER: Sometimes companies define their mission in terms of making a profit. This is a mistake. Profit is actually an objective and a result of what the company does. Stating that a company is set to make a profit is a truism; making a profit is the basic and common objective of all commercial enterprises.

The desire to make a profit says nothing about the business environment in which profits are to be pursued. Missions based on making a profit are incapable of distinguishing one type of enterprise from another. The business and long-term direction of McDonald’s are plainly different from the business and long-term direction of Ford; but there is no doubt that both want to be profitable.

STUDENT: I see. In other words, for a mission statement to be informative it has to spell out how the company will make a profit.

TEACHER: Exactly. We must know management's answer to "make a profit doing what and for whom?".

There are three different concepts involved in forming a well-conceived strategic vision and expressing it in a company mission statement:

* Understanding what business a company is really in.
* Communicating the vision and mission clearly, and

Deciding when to modify the company's strategic course and change its business mission.

UNDERSTANDING AND DEFINING THE BUSINESS

It may appear a an easy task at first sight, but actually deciding what business an organization is in, is neither obvious nor easy. Is IBM in the computer business (a product-oriented definition) or the information and data processing business (a customer service or customer needs type of definition) or the advanced electronics business (a technology-based definition? Is Coca-Cola in the soft-drink business (in which case its strategic vision can be trained narrow1y on the actions of Pepsi, 7UP, Dr Pepper, Canada Dry, and Schweppes? Or is it in the beverage industry (in which case management must think strategically about positioning Coca-Cola products in a market that includes fruit juices, alcoholic drinks, milk, bottled water, coffee, and tea?

STUDENT: This reminds me of the famous anecdote about the railroads in the USA. It is said that many railroad companies failed because they insisted in defining themselves as being in the railroad business instead of as being in the transportation business. They became victims of the expansion of road and air transportation; if they had defined themselves as being in the transportation business rather that exclusively in the railroad business they could have diversified into these types of transportation.

TEACHER: Good example. Going back to Coca-Cola, defining the type of business they are in is not a trivial question. Many young adults get their morning caffeine dose by drinking cola instead of coffee. With a beverage industry perspective as opposed to a soft-drink industry perspective, Coca-Cola’s management is more likely to perceive a long-term growth opportunity in winning youthful coffee drinkers over to its colas.

Arriving at a good business definition usually requires taking three factors into account:

1. Customer needs, or what need or desire is being satisfied.

2. Customer groups, or who’s needs or desires are being satisfied.

3. The technologies used and functions performed -how customers' needs or desires are satisfied.

Defining a business in terms of what to satisfy, who to satisfy, and how the organization will go about producing the satisfaction makes a complete definition.

STUDENT: I can see that it takes all three. Certainly, just knowing what products or services a firm provides is not enough, because products or services are not important to customers if they do not need or want them.

TEACHER: Exactly. The capacity to deliver a product or service becomes a business when it satisfies a need or want. Without the need or want there is no business.

Customer groups are relevant because they indicate the market to be served, the geographic domain to be covered and the types of buyers the firm is targeting.

Technology and functions performed are important because they indicate how the company will satisfy the customers' needs.

STUDENT: I feel there is something missing here. What about the specific part of a possible array of related products or services the company will be active in?

TEACHER: Good observation. A firm's business can be specialized, concentrated in just one stage of an industry's total production-distribution chain, or partially or fully integrated, spanning all parts of the industry chain. Wal-Mart, Home Depot, and Toys-R-Us, are essentially one-stage firms. Their operations focus on the retail end of the consumer goods business; they don't manufacture the items they sell. Most airlines are one-stage enterprises; they made the decision to limit its business mission to moving travelers from one location to another via commercial jet aircraft.

On the other hand, we can mention a major global oil company such as Exxon as examples of full "vertical" integration. They drill wells, pump oil, transport crude oil in their own ships and pipelines to their own refineries, and sell gasoline and other refined products through their own networks of branded distributors and service station outlets.

STUDENT: Your said "vertical" integration. Is there a "horizontal" integration?

TEACHER: Yes, and GE is a good example here. Horizontally integrated firms are active in completely different business; let me just remind you that GE manufactures aircraft engines and owns NBC, a TV broadcasting network. Certainly these two types of businesses are not related.

STUDENT: It is apparent that the business of a retailer like Sears or Wal-Mart is much narrower and quite different than that of a fully integrated enterprise like Exxon.

TEACHER: It is certainly so because of the disparity in functions performed and technology employed. Between these two extremes, firms can be partially integrated, participating only in selected stages of the industry. Goodyear, for instance, both manufactures tires and operates a chain of company-owned retail tire stores, but it has not integrated backward into rubber plantations and other tire-making components. General Motors, the world's most integrated manufacturer of cars and trucks, makes between 60 and 70 percent of the parts and components used in assembling GM vehicles. But GM is moving to outsource a greater fraction of its parts and systems components, and it relies totally on a network of independent, franchised dealers to handle sales and service functions.

STUDENT: Thanks to your explanation I now realize that one way of distinguishing between firms in the same industry, is by looking at which functions they perform and how far their scope of operation extend across all the business activities involved in getting products to end-users. In other words, determine the extension of the vertical integration of each firm.

TEACHER: Exactly. And before you ask me for it, I will mention a few examples.

One good example of a business definition that incorporates all three components -needs served, target market, and functions performed- is Polaroid's business definition during the early 1970s: "perfecting and marketing instant photography to satisfy the needs of more affluent U.S. and West European families for affection, friendship, fond memories, and humor."

McDonald's mission is focused on "serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value" to a broad base of fast-food customers worldwide (McDonald's serves approximately 25 million customers daily at some,13,000 restaurants in over 65 countries). The concepts that McDonald's uses to define its business are a limited menu, good-tasting fast-food products of consistent quality, value pricing, exceptional customer care, convenient locations, and global market coverage.

Trying to identify needs served, target market, and functions performed in a single sentence is a strong challenge, and many firms' mission statements fail to communicate all three concepts clearly.

COMMUNICATING THE STRATEGIC VISION

How to describe the strategic vision, state it in the form of a mission statement, and communicate it down the line to lower-level managers and employees is almost as important as the strategic soundness of the organization's business concept and long-term direction.

A vision and mission in words that inspire and challenge he1p build committed effort from employees and serve as powerful motivational tools. Having an exciting mission or cause brings the workforce together, galvanizes people to act, stimulates extra effort, and causes people to feel part of the business instead of just coming to work.

WHEN TO CHANGE THE MISSION

A very simple explanation of why missions have to change sometimes is this one: "Times change, conditions change." Managers must continually reassess their company's position and prospects, and be alert to the moment when it's time to steer a new course and adjust the mission. The key strategic question here is "What new directions should we be moving in now to get ready for the changes we see coming in our business?"

Repositioning or even reinventing an enterprise in light of emerging developments and changes on the horizon lessens the chances of getting trapped in a stagnant or declining core business or letting attractive new growth opportunities slip away because of inaction. Good entrepreneurs have a sharp eye for shifting customer wants and needs, emerging technological capabilities, changing international trade conditions, and other important signs of growing or shrinking business opportunity.

STUDENT: I can think of one example myself: cable TV companies and telephone companies are in a strategic race to install fiber optics technology and position themselves to market a whole new array of services such as pay-per-view TV, home shopping, and internet access.

TEACHER: We can conclude that a company's mission has a finite life, one subject to change whenever top management feels that the present mission is no longer adequate. But we should add that sometimes a strategy must be altered quickly (maybe only temporarily) to adapt to unforeseen circumstances. Just let me show you a change announced by McDonald’s in November 2002: "Fast-food giant McDonald's Corp. said it would close about 175 restaurants worldwide and slash up to 600 jobs, forecasting a shortfall in 2002 earnings as it struggles to turn around its U.S. performance and trim worldwide costs. McDonald's, besieged by lackluster U.S. sales and poor service in its U.S. stores, has returned to price discounting in its largest market, sparking increased competition amid large fast-food rivals Burger King Corp. and Wendy's International Inc."

STUDENT: It appears that they did not effectively implement the "clean, friendly restaurants" strategy in the US, and had to resort to "price discounting" instead of offering "good value" –which implies a premium price justified by the quality of the food and the service.

TEACHER: I totally agree. Well, see you in next Module.