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Chapter
Chapter Summary

Leadership and the Strategic Management Process

Chapter Two presents an overview of the managerial ins and outs of crafting and executing company strategies. Special attention is given to managements direction-setting responsibilities charting a strategic course, setting performance targets, and choosing a strategy capable of producing the desired outcomes. The chapter also examines which kinds of strategic decisions are made at what levels of management and the roles and responsibilities of the companys board of directors in the strategy-making, strategy-executing process.

Lecture Outline
I. Introduction 1. Crafting and executing a strategy are the heart and soul of managing a business enterprise. II. The Strategic Management Process 1. Crafting and executing a companys strategy is a ve-phase managerial process: a. Developing a strategic vision of where the company needs to head and what its future productconsumer-market-technology focus should be b. Setting objectives and using them as yardsticks for measuring the companys performance and progress c. Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted d. Implementing and executing the chosen strategy efciently and effectively e. Monitoring developments and initiating corrective adjustments in the companys long-term direction, objectives, strategy, or execution in light of the companys actual experience, changing conditions, new ideas, and new opportunities 2. Figure 2.1, The Strategic Management Process, displays this ve-stage process, and the need for management to evaluate the companys performance on an ongoing basis. 3. Table 2.1, Factors Shaping Decisions in the Strategic Management Process, exhibits the external and internal considerations that come into play in the strategic management process. 4. The evaluation stage of the strategic management process shown in Figure 2.1 also allows for a change in the companys vision when it becomes evident to management that the industry has changed and rendered its vision obsolete. Such occasions can be referred to as strategic inection points.
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5. The rst three stages of the strategic management process make up a strategic plan. Core Concept
A companys strategic plan lays out its future direction, performance targets, and strategy.

III. Developing a Strategic Vision: Stage 1 of the Strategy Management Process 1. Top managements views about the companys direction and future product-customer-markettechnology focus are shaped by its views of the external industry and competitive environment and the internal situation and constitute a strategic vision for the company. 2. Well conceived visions are specic to a particular organization; they avoid generic, feel-good statements like We will become a global leader and the rst choice of customers in every market we choose to serve which could apply to any of hundreds of organizations. 3. Top managements views and conclusions about the companys direction and the product-consumermarket-technology focus constitute a strategic vision. Core Concept
A strategic vision describes where we are going the course and direction management has charted and the companys future product-the route a company intends to take in developing and strengthening its future.

4. Table 2.2, Characteristics of an Effectively Worded Vision Statement, lists some characteristics of effective vision statements. For a strategic vision to function as a valuable managerial tool, it must provide understanding of what management wants its business to look like and provide managers with a reference point in making strategic decisions. 5. Table 2.3, Common Shortcomings in Company Vision Statements, provides a list of the most common shortcomings in company vision statements. 6. Concepts & Connections, 2.1, Examples of Strategic Visions How Well Do They Measure Up? provides examples of strategic visions of several prominent companies.

Concepts & Connections 2.1, Examples of Strategic Visions How Well Do They Measure Up?
Discussion Question: Are any of the Strategic Visions truly effective? Why or why not? What changes would you make to them? Answer: Table 2.3 provides most of the answers. For example, Red Hat Linus has an uninspiring vision statement. It fails to motivate personnel or to inspire shareholders. Caterpillers vision statement could apply to any number of companies. It isnt specic. Ebays vision statement is easy to communicate, but is way too broad.

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A. How a Strategic Vision differs from a Mission Statement: The chief concern of a strategic vision is with the companys future strategic course; a companys mission statement usually deals with a companys present business purpose. 1. Some companies prefer the term business purpose to mission statement, but the two phrases are essentially conceptually identical and are used interchangeably. 2. Company mission statements almost never say anything about where the company is headed, the anticipated changes in its business, or its aspirations. The mission statement of most companies say much more about the enterprises present business scope and purpose. 3. Ideally, a companys mission statement is sufciently descriptive to: Identify the companys products or services. Specify the buyer needs it seeks to satisfy. Specify the customer groups or markets it is endeavoring to serve. Specify its approach to pleasing customers. 4. Occasionally, companies state that their mission is to simply earn a prot. This is misguided Prot is more correctly an objective and a result of what a company does.

Core Concept
The distinction between a strategic vision and a mission statement is fairly clear-cut: A strategic vision portrays a companys future business scope (where we are going), whereas a companys mission typically describes its present business and purpose (who we are, what we do, and why we are here).

B. The Importance of Communicating the Strategic Vision 1. Effectively communicating the strategic vision down the line to lower-level managers and employees is as important as the strategic soundness of the journey and destination for which top management has opted. 2. Winning the support of organization members for the vision nearly always means putting where we are going and why in writing, distributing the statement organization wide, and having executives personally explain the vision and its rationales to as many people as feasible 3. An engaging and convincing strategic has enormous motivational value. C. The Benets of an Effective Strategic Vision 1. A well-conceived, effectively communicated strategic vision pays off in several respects: it crystallizes senior executives own views about the rms long-term direction; it reduces the risk of rudderless decision making by management at all levels; it is a tool for winning the support of employees to help make the vision a reality; it provides a beacon for lower-level managers in forming departmental missions; it helps an organization prepare for the future.

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IV. Setting Objectives: Stage 2 of the Strategic Management Process A. What Kinds of Objectives to Set: The Need for a Balanced Scorecard 1. Two very distinctive types of performance yardsticks are required: a. Those relating to nancial performance b. Those relating to strategic performance 2. Achieving acceptable nancial results is a must. Without adequate protability and nancial strength, a companys pursuit of its strategic vision, as well as its long-term health and ultimate survival, is jeopardized. 3. Of equal or greater importance is a companys strategic performance outcomes that indicate whether a companys market position and competitiveness are deteriorating, holding steady, or improving. 4. Illustration Capsule 2.2, Examples of Company Objectives, shows selected objectives of several prominent companies.

Concepts & Connections 2.2, Examples of Company Objectives

Discussion Question: What is the prominent purpose of an organizations stated objectives? Answer: Objectives identify an organizations performance targets. They serve to function as measures for tracking the organizations performance and progress toward achievement of desired goals.

5. The Case for a Balanced Scorecard: Improved Strategic Performance Fosters Better Financial Performance: A companys nancial performance measures are really lagging indicators that reect the results of past decisions and organizational activities. The best and most reliable leading indicators of a companys future nancial performance and business prospects are strategic outcomes that indicate whether the companys competitiveness and market position are stronger or weaker. The degree to which a companys managers set, pursue, and achieve stretch strategic objectives tends to be a reliable leading indicator of its ability to generate higher prots from business operations. 6. Short-Term and Long-Term Objectives: A companys set of nancial and strategic objectives ought to include both short-term and long-term performance targets. Short-term objectives focus attention on delivering performance improvements in the current period, while longterm targets force the organization to consider how actions currently under way will affect the company at a later date. Specically, long-term objectives stand as a barrier to a nearsighted management philosophy and an undue focus on short-term results.

Core Concept
Financial objectives relate to the nancial performance targets management has established for the organization to achieve. Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive vitality, and future business prospects.

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7. The Need for Objectives at All Organizational Levels: Objective setting should not stop with top managements establishing of companywide performance targets. Company objectives need to be broken down into performance targets for each of the organizations separate businesses, product lines, functional departments, and individual work units, employees within various functional departments, and individual work units. Objective setting is a top-down process that must extend to the lowest organizational levels. V. Crafting a Strategy: Phase 3 of the Strategy-Making, Strategy-Executing Process 1. Managements strategic approach to achieving organizational objectives, competing successfully, and building competitively important capabilities must be well-matched to the companys external and internal situation. Core Concept
Corporate strategy ensures consistency in strategic approach among businesses of a diversied, multibusiness corporation. Business strategy is primarily considered with strengthening the company market position and building competitive advantage in a single business company or a single business unit of a diversied multibusiness corporation

2. Figure 2.2 illustrates the strategy levels of a single business company with a relatively simple business structure. 3. As shown in Figure 2.2, a companys business strategy is the responsibility of the CEO and other senior executives and is primarily concerned with strengthening the companys market position and building competitive advantage. 4. Functional-area strategies concern the actions related to particular functions or processes within a business. 5. Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units. 6. The purpose of corporate strategy is to ensure consistency in strategic approach among the businesses of a diversied, multibusiness corporation. In short, winning corporate strategies build shareholder value by combining businesses to yield a 1 + 1 = 3 effect. Core Concept
In most companies, crafting and executing strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only high-level executives do.

VI. Implementing and Executing the Strategy: Phase 4 of the Strategy-Making, Strategy-Executing Process 1. Easily, the most time demanding and consuming part is managing the implementation and execution of the strategy-management process. 2. In most situations, managing the strategy-execution process includes the following principal aspects: a. Stafng the organization with the needed skills and expertise b. Allocating ample resources to activities critical to good strategy execution. c. Ensuring that policies and operating procedures facilitate rather than impede effective execution

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d. Installing information and operating systems that enable company personnel to better carry out their strategic roles e. Tying rewards and incentives directly to the achievement of performance objectives and good strategy execution f. Creating a company culture and work climate conducive to successful strategy implementation and execution

g. Exerting the internal leadership needed to drive implementation forward and keep improving strategy execution VII. Evaluating Performance and Initiating Corrective Adjustments: Phase 5 of the Strategy-Making, Strategy-Executing Process 1. The fth phase of the strategy-management process monitoring new external developments, evaluating the companys progress, and making corrective adjustments is the trigger point for deciding whether to continue or change the company vision, objectives, strategy, and/or strategy-execution methods. 2. Successful strategy execution entails vigilantly searching for ways to continuously improve and then making corrective adjustments whenever and wherever it is useful to do so. A. Leading the Strategic Management Process Core Concept
A companys vision, objectives, strategy, and approach to strategy execution are never nal; managing strategy is an ongoing process, not an every-now-and-then task

1. Leading the strategic management process calls for several actions on the part of senior executives: a. Making sure the company has a good strategic plan. b. Staying on top of what is happening. c. Putting constructive pressure on organizational units to achieve good results and operating excellence. d. Pushing corrective actions to improve both the companys strategy and how well it is being executed. e. Leading the development of stronger competitive capabilities. f. Displaying ethical integrity and leading social responsibility initiatives.

2. Making sure a company has a good strategic plan. VIII. Strategic Leadership from the Board of Directors 1. Although senior managers have lead responsibility for crafting and executing a companys strategy, it is the duty of the board of directors to exercise strong oversight and see that the ve tasks of strategic management are done in a manner that benets shareholders, in the case of investor-owned enterprises, or stakeholders, in the case of not-for-prot organizations. 2. Every corporation should have a strong, independent board of directors that: a. is well-informed about the companys performance, b. guides and judges the CEO and other top executives,

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c. has the courage to curb management actions they believe are inappropriate or unduly risky. d. certies to shareholders that the CEO is doing what the board expects, e. provides insight and advice to management, and f. is intensely involved in debating the pros and cons of key decisions and actions.

Concepts 2.3, Corporate Governance Failures at Fannie Mae and Freddie Mac
Discussion Question: What was the result of failed Corporate Governance at government sponsored mortgage giants Fannie Mae and Freddie Mac? Why did governance fail? Answer: The result of failed governance was a failure to understand the risks of the subprime mortgage strategies. Decisions were not adequately monitored. Poor governance allowed for manipulation of nancial data and the use of improper accounting procedures which overstated nancial performance. Fannie Mae executives had fraudulently inated earnings to receive bonuses linked to nancial performance. Governance failed because the politically appointed boards didnt have the knowledge to understand what was happening, and did not adequately monitor managers, particularly the CEO.

Assurance of Learning Exercises

1. Using the information in Table 2.2 and Table 2.3, critique the adequacy and merit of the following vision statements, listing effective elements and shortcomings. Rank the vision statements from best to worst once you complete your evaluation.
Company Name Wells Fargo Effective Elements Graphic Feasible Easy to communicate Directional Focused Feasible Desirable Graphic Flexible Easy to Communicate Directional Focused Flexible Desirable Shortcomings Vague Not distinctive Not forward-looking Not distinctive Vague Not forward-looking Too reliant on superlatives

Hilton Hotels Corporation

H. J. Heinz Corporation

Chevron

A suggested ranking of the vision statements from best to worst is: Chevron, Hilton Hotels Corporation, H. J. Heinz Corporation, and Wells Fargo.

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2. Go to www.dell.com/speeches and read Michael Dells recent speeches. Do Michael Dells speeches provide evidence that he is an effective leader at Dell Computer? Is there evidence he is concerned with (1) staying on top of what is happening and identifying obstacles to good strategy execution, (2) pushing the organization to achieve good results and operating excellence, and (3) displaying ethical integrity and spearheading social responsibility initiatives? Examples from Michael Dells recent speeches (2009) are provided. (1) Staying on top of what is happening and identifying obstacles to good strategy execution. Dell commented one of the most recent challenges was, What we hear from our customers right now is that they are really trying to conserve their capital, and theyre very concerned about cost and cash ow, and they are looking at, how can they use technology to drive the next wave of efciencies. I very much believe that in every challenge, in every crisis, theres an opportunity. We think about the ways of technology that are changing our industry and the way work gets done. Dell also stated, We make products that make people more efcient, so at the end of the day, our business is one of providing productivity. Our job is to make a product or a service that is fundamentally, signicantly better than the one that we sold a couple of years ago, and if its not better enough, they will just keep the old one that they have. Dell also commented on the new technologies that interested him in the next 5 10 years, I think the near-term things are around mobility, virtualization, cloud computing. I think when you get out a little further, theres a lot of work to do in the man-machine interface, in bio informatics, in combining the best of biological sciences and whats going on with semiconductors and IT. I think those all offer enormous opportunities. Regarding growth in the global arena, Dell made the following observations, For us its not is it India or China, its both, and its all of southern Asia, and its Northern Africa, and its the Middle East, and Russia. We have to be everywhere. (2) Pushing the organization to achieve good results and operating excellence. Dell provided this observation regarding the companys growth, We had this pretty amazing period where we grew 50,000%. I dont think well be able to do that again, otherwise our sales would be more than the GDP of all nations combined, or something like that, so thats not likely to happen. But, if you look at the increments of growth, in billions of dollars, they can be pretty substantial. In the mid-1990s, the company decided to enter the server business due to the potential opportunities. Dell commented on the growth in that area, So we went after that from 1995 to 2002; we built the enterprise server storage business to about $5 billion from zero. From 2002 to 2008, we built it to $12 billion, and now we are up to a 37% share in the U.S., leading share for the last eight years in servers. Dell offered the following comment regarding the protability of the company, Like I tell our chief information ofcer, I dont care about the IT budget. I care about the prot of the company. If youre managing information in our company, you are responsible for the operating income of our company, and we think of our job as, were going to make our customers more productive. Additional comments by Dell regarding the companys performance include, So for us its divide and conquer, clear accountability, responsibility. We have these four business units now which we believe is very much the right way to organize a $60 billion business. They each have a clear customer theyre focused on; they are fully integrated, so the accountability, the responsibility, the P&L is very, very clear. Its all about painting a clear vision and mission and a strategy for our teams to get excited about.

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(3) Displaying ethical integrity and spearheading social responsibility initiatives Dell commented about the companys efforts to switch from a company that did not have a green focus to a very green-focused company with a great reputation in this area, Ive often asked our teams about what happens when somebody stops using our product and how do we make that a better outcome. And what things could we be doing now that we dont know are dangerous or bad potentially that may end up being dangerous or bad with the benet of another 20 or 30 years? And so we try to think very deeply about the things we put into our product, the amount of energy our products consume. A long, long time ago, back in the early 90s, I challenged our design team to design completely recyclable computer chassis. There wasnt anybody who asked for it, there wasnt any legislation, there wasnt any reason to do it other than we worried about what would happen after we shipped all these products. And so we have been kind of a leader in materials and sustainability and reducing energy consumption, designing green data centers for our customers, measuring carbon outputs of our suppliers, being carbon neutral ourselves. And I think helping customers take better benet of the kind of tools that we provide, all sorts of things in packaging. And the objective is just to make sure that with all the wonderful things that were doing and that these tools provide, that we dont have some adverse impact on the other side. Another example provided by Dell is, Well, I believe that in our industry, we have a pretty good model for competitors forcing each other to do the right things. And Ill give you an experience from Japan. Japan had a federal model where they said, okay, youre going to do recycling and this is how much its going to cost you. Youre going to spend $41 to recycle a computer. And so we had this interesting situation in Japan where it only cost us $7, but we had to spend $41 to do it. We didnt know how to do that. So I believe in competitive models forcing the right behaviors. Certainly, theres a role for government to play if the industry isnt doing the right things itself. But I think its a lot easier if customers and competitors drive the right behavior. Its pretty hard to sit around in a legislative environment and come up with the right answer. 3. Go to www.dell.com/leadership and read the sections dedicated to its board of directors and corporate governance. Is there evidence of effective governance at Dell in regard to (1) accurate nancial reports and controls, (2) a critical appraisal of strategic action plans, (3) evaluation of the strategic leadership skills of the CEO, and (4) executive compensation? Students should recognize there is evidence the board of directors for Dell has responsibility to exercise oversight and direction over management. First, there are 12 directors, and 10 of these directors are independent. The denition of independence is: A director will be considered to be independent only if the Board afrmatively determines that the director does not have any direct or indirect material relationship with Dell that may impair, or appear to impair, the directors ability to make independent judgments. The Board has established a set of Corporate Governance Principles that are designed to reect a set of core values that provide the foundation for the Boards approach to governance. These Principles clearly outline the roles of the Board and management. A review of these roles indicates the Board has signicant responsibilities in the following areas: management planning and oversight, strategic and operational planning, major corporate actions, nancial reporting, governance, compliance and risk management, and general advice to management. The Principles distinctly outline the following: Board composition and structure which includes standards for a Board member to be declared independent; guidelines for the conduct of Board meetings; and activities related to other Board operations and practices which includes open access to management. The information in the Principles indicates the four obligations outlined in this chapter for a companys Board of Directors are most likely fullled.