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Course Number: BA 469, Fall 2008

College/University: Oregon State

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CHAPTER 1 The Strategic Management Process SYNOPSIS OF CHAPTER This is an introductory chapter. Its purpose is to define critical concepts and introduce the main components of the strategic management process. The chapter serves to establish the context within which subsequent chapters fit. This chapter begins with a discussion of the concept of strategy. The strategies an organization pursues have a major...

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1 The CHAPTER Strategic Management Process SYNOPSIS OF CHAPTER This is an introductory chapter. Its purpose is to define critical concepts and introduce the main components of the strategic management process. The chapter serves to establish the context within which subsequent chapters fit. This chapter begins with a discussion of the concept of strategy. The strategies an organization pursues have a major impact upon its performance relative to its peers. The firm's top managers have direct responsibility for choosing strategies that will lead to superior performance and provide competitive advantage. Next, the chapter equates superior performance with profitability, for profit-seeking enterprises. Sustained competitive advantage occurs when a firm is able to maintain above-average profitability over an extended period of time. Strategic management is just as crucial to nonprofits as it is to profit-seeking businesses. A discussion of the roles of strategic managers and the function of strategic leadership in an organization follows. It examines the roles and responsibilities of strategic managers at three main levels within an organization: the corporate, business, and functional level. It also points out the attributes of sound strategic leadership. The chapter gives an overview of the formal strategic management process. The process consists of two phases. The first phase, formulation, includes the establishment of corporate mission, values, and goals; analysis of the external environment; analysis of the internal environment; and selection of an appropriate functional-, business-, or corporate-level strategy. The second phase, implementation, consists of the actions taken to carry out the chosen strategy. The traditional concept of the strategic planning process is one that is rational and deterministic, and orchestrated by senior managers. However, strategies may also emerge through other mechanisms. Next, the chapter presents a discussion of strategic planning in practice. Formal planning helps companies make better strategic decisions, and the use of decision aids can help managers make better forecasts. However, formal strategic planning systems do not always produce the desired results. The final section of the chapter stresses the importance of effective decision making by the firm's top managers in achieving superior performance. TEACHING OBJECTIVES 10. 20. 30. 40. 50. 60. 70. Introduce students to the concept of strategy. Specify the relationships between superior performance, profitability, competitive advantage and sustainable competitive advantage. Identify the roles and responsibilities of strategic managers at different levels within the organization. Outline the main components of the strategic management process covered in subsequent chapters and show how they fit together. Contrast the rational, deterministic view of strategy with alternate views, which describe strategy as an emergent process. Explain why formal strategic planning may not always lead to success, and 0identify ways of avoiding some of the common pitfalls associated with strategic planning. Identify the attributes associated with superior strategic leadership. Copyright Houghton Mifflin Company. All rights reserved. 2 80. Chapter 1: The Strategic Management Process Describe some of the barriers to effective strategic decision making and the techniques for improving decision making. 0OPENING CASE: DELL COMPUTER The Opening Case tells the story of Dell Computer, from its earliest days as a start-up in Michael Dell's college dorm room, to an extremely successful giant corporation, with estimated sales of over $30 billion in 2002. Dell has the highest profitability in its industry, has maintained that leadership for several years, and even stayed profitable during the recent downturn in high technology industries. Dell's phenomenal success is directly attributable to its direct-sales business model, which allows the firm to cut costs and lower prices by eliminating the middlemen: wholesalers and retailers. Dell's model also allows buyers to customize their computers quickly and easily, thus providing a high value-added product for a lower price than traditional PC makers. Another important aspect of Dell's business model is a just-in-time supply chain, with purchases made in great quantities, allowing the firm to further reduce inventory, obsolescence, and cost of raw materials. Teaching Note: This Opening Case provides an excellent opportunity to discuss many of the concepts that will be introduced in Chapter 1. For example, Dell developed a business model that was unique and revolutionary at the time. The model allowed the firm to add value for customers while keeping costs low, improving both effectiveness and efficiency. Because the model was unique and led to improved effectiveness and efficiency, the firm achieved a sustained competitive advantage. The business model was developed by Michael Dell, and thus provides an example of effective strategic leadership and vision. This case may be used to point out to students that every firm, no matter how successful, is vulnerable to competitive attack. Although Dell dominates its industry today, so too did IBM dominate at one time, as did Apple, Osborne, and Atari. To highlight Dell's current advantages, one avenue of discussion would involve asking students to describe conditions under which Dell might lose its competitive advantage. LECTURE OUTLINE I0. Overview A0. Why do some organizations succeed and others fail? An answer can be found in the subject matter of this course. This course is about strategic management and the advantages that accrue to organizations that think strategically. B0. A strategy is a course of action that managers take in the effort to attain superior performance. C0. Understanding the roots of success and failure is not an empty academic exercise. Through such understanding comes a better appreciation for the strategies that must be pursued to increase the probability of success and reduce the probability of failure. Superior Performance and Competitive Advantage A0. For businesses, superior performance is demonstrated through above-average profitability, as compared to other firms in the same industry. Profitability is typically measured using after-tax return on invested capital. Show Transparency 1 Figure 1.1: Return on Invested Capital in Selected Industries, 1997-2001 B0. The strategies that an organization's managers pursue have a major impact on its performance relative to its peers. C0. When a firm's profitability is greater than the average profitability for all firms in its industry, it has a competitive advantage over its rivals. The greater the profitability, the greater is its competitive advantage. A sustained competitive advantage occurs when a firm maintains above-average profitability for a number of years. D0. 0A business model describes managers' beliefs about how a firm's strategies will lead to competitive advantage and superior profitability. An appropriate business model is one component of a successful strategy. E0. Another component of a successful strategy is a favorable competitive or industry environment.0000 II0. Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process F0. 3 Strategic management is relevant to many different kinds of organizations, from large multibusiness organizations to small one-person enterprises and from publicly held profit-seeking corporations to nonprofit organizations. III0. Strategic Managers and Strategic Leadership0 A0. General managers are responsible for the overall performance of the organization or for one of its major self-contained divisions. B0. Functional managers are responsible for specific business functions, such as human resources, purchasing, production, sales, customer service, and accounts. C0. The three main levels of management are the corporate level, the business level, and the functional level. General managers are found at the first two of these levels but their strategic roles differ, depending on their sphere of responsibility. Functional managers too have a strategic role, though of a different kind. Show Transparency 2 Figure 1.2: Levels of Strategic Management D0. The corporate level consists of the CEO, board of directors, and corporate staff. The CEO's role is to define the mission and goals of the firm, determine what businesses the firm should be in, allocate resources to the different business areas of the firm, and formulate and implement strategies that span individual businesses. E0. The business level consists of the heads of the individual business units (divisions) and their support staff. Business unit (divisional) CEOs' role is to translate general statements of intent at the corporate level into concrete strategies for individual businesses. F0. The functional level consists of the managers of specific business operations. They develop functional strategies that help fulfill the business- and corporate-level strategic goals. They provide most of the information that makes it possible for business and corporate-level general managers to formulate strategies. They are closer to the customer than the typical general manager, and therefore functional managers may generate important strategic ideas. They are responsible for the implementation of corporate- and business-level decisions. IV0. Strategic Planning A0. The formal strategic management planning process can be broken down into a number of components. Each component forms a section of this course. Thus it is important to understand how the different components fit together. B0. Together, the components form a cycle, from strategy formulation to implementation. After implementation, the results that are obtained must be monitored, and the results become an input to the formulation process on the next cycle. Thus the strategic process is continuous. Show Transparency 3 Figure 1.3: Main Components of the Strategic Planning Process C0. The components are organized into two phases. The first phase is strategy formulation, which includes selection of the corporate mission, values, and goals; analysis of the external and internal environments; and the selection of appropriate strategies. D0. The second phase is strategy implementation, which includes corporate governance and ethics issues, as well as the actions that managers take to translate the formulated strategy into reality. 0STRATEGY IN ACTION 1.1: STRATEGIC PLANNING AT MICROSOFT At first glance, formal strategic planning may seem to be incompatible with the unpredictable changes and the free-wheeling cultures of high-technology firms. But Microsoft, a dominant high-tech organization, has had a formal planning process in place since 1994, when CEO Bill Gates hired Bob Herbold to head the operations staff. Herbold's planning system looked at strategies for extending and maintaining the company's established products, such as MS Windows, as well as strategies for speeding, developing, and easing adoption of its newer Copyright Houghton Mifflin Company. All rights reserved. 4 Chapter 1: The Strategic Management Process products, such as MSN and X-Box. The plan looks at goal and financial information from each of Microsoft's divisions for three years into the future, and is updated annually. The planning process includes functional and top managers. The resulting strategic plans are used to determine resource allocation within the firm, as well as for strategic control and monitoring. Microsoft managers realize the need for flexibility as industry conditions change, but the formal plan provides a foundation for action that enables, rather than hinders, creativity and flexibility. Teaching Note: This insert provides an example of how a large, diversified firm, with many products in many different stages of development, competing in a rapidly changing environment, has a powerful need for formal strategic planning. In fact, such firms' need for formal planning is perhaps greater than smaller, less diversified firms or firms in industries that change slowly. One common, yet false, assumption made by students is that complexity or unpredictability can eliminate or reduce the need for planning. Through the example of this case, you can demonstrate that the opposite is true--that complex firms in difficult environments have a critical need for a consistent planning process, which allows comparison across divisions and across time. E0. Corporate Mission, Values and Goals 10. A corporate mission or vision is a formal statement of what the company is trying to achieve over a medium- to long-term time frame. The mission states why an organization exists and what it should be doing. Abell used a customer-oriented definition when he claimed that a mission statement should describe the customer, their needs, and the method the firm will use to satisfy those needs. Show Transparency 4 Figure 1.4: Abell's Framework for Defining the Business The values of a company state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission. Values are the foundation of a company's organizational culture. Values include respect for the organization's diverse stakeholders. 30. A goal is a desired future state or an objective to be achieved. Corporate goals are a more specific statement of the ideas articulated in the corporate mission. Well-constructed goals are precise and measurable, address crucial issues, are challenging but realistic, and have a specified time horizon for completion. 40. A major goal of business is to provide high returns to shareholders, either through dividends or through an appreciation in the value of the shares. High profitability will enable the firm to pay high dividends as well as create an appreciation in share value. Thus, high profitability provides the best return to shareholders. However, managers must be aware that the profitability should be sustainable, and they should not sacrifice long-term profits for short-run profits. F0. External analysis identifies strategic opportunities and threats that exist in three components of the external environment: the specific industry environment within which the organization is based, the country or national environment and the macroenvironment. G0. Internal analysis identifies the strengths and weaknesses of the organization. This involves identifying the quantity and quality of an organization's resources. H0. Together, the external and internal analyses result in a SWOT analysis, delineating a firm's strengths, weaknesses, opportunities, and threats. The SWOT analysis is then used to create a business model to achieve competitive advantage, by 0identifying strategies that align, fit, or match a company's resources to the demands of the environment. This model is called a fit model. I0.Strategic choice involves generating a series of strategic alternatives, based on the firm's mission, values, goals, and SWOT analysis, and then choosing those strategies that achieve the best fit. Organizations identify the best strategies at the functional, business, global, and corporate levels. 10. Functional-level strategy is directed at improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources. 20. The business-level strategy of a company encompasses the overall competitive theme that a company chooses to stress, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings. 20. Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process 30. 5 More and more, to achieve a competitive advantage and maximize performance, a company has to expand its operations outside the home country. Global strategy addresses how to expand operations outside the home country. 40. Corporate-level strategy must answer this question: What businesses should we be in to maximize the long-run profitability of the organization? The answer may involve vertical integration, diversification, strategic alliances, acquisition, new ventures, or some combination thereof. J0.Strategy implementation consists of a consideration of corporate governance and business ethics, as well as actions that should be taken, for companies that compete in a single industry and companies that compete in more than one industry or country. V0. 0Strategy as an Emergent Process A0. The formal planning process implies that all strategic decision making is rational, structured, and led by top management. However, some criticisms of the formal planning process include the charge that the real world is often too unpredictable, that lower-level employees often play an important role in the formulation process, and that successful strategies are often the result of good luck rather than rational planning. B0. We live in an uncertain world, in which even thoughtful strategic plans may be rendered useless by rapid environmental changes. Therefore organizations must be able to respond quickly to changing circumstances. According to critics, such a flexible approach to strategy making is not possible within the framework of the traditional strategic planning process, with its implicit assumption that an organization's strategies need to be reviewed only during the annual strategic planning exercise. 0STRATEGY IN ACTION 1.2: A STRATEGIC SHIFT AT MICROSOFT Microsoft is the dominant software company in the world. Nevertheless, Microsoft was caught off guard by the rapid rise of the Internet and the invention of the Java computer programming language. This led to the sudden emergence of companies such as Netscape and Sun Microsystems as potential competitors. Microsoft initially ignored these two developments, but later decided to respond. The firm's goal was still to be the dominant software maker; however, its strategy to achieve this goal shifted to a reliance on industry standards, which made its products able to work in many different hardware and software environments. In addition, Microsoft decided to give away its own Web browser and Web server software for free; decided to incorporate "browser functions" in future software; and developed new versions of the software package Word that would enable users to convert their documents into HTML format that could be transmitted over the Web. The software giant surprised observers by announcing an alliance with rival America Online (AOL), the world's largest on-line service, and Microsoft also cut a deal with Intel. Teaching Note: The key point here is that strategy is not only a rational and deterministic planning process. Instead, strategy is constantly shaped by unforeseen events in an unpredictable environment. Ask students to consider the risks and benefits of following the strategic advice of just a few managers, in light of the material about biases in strategic decision making. Another discussion starter would be to ask students if they know of other actions that Microsoft took to increase the chances of success of this fairly risky shift in strategy. For example, at the same time as the case, Microsoft was entering into contractual relationships with PC makers to ensure that its products were bundled with every new PC purchased. (Some of these actions were found to be illegal; most were unethical; and they provide one of the bases for the antitrust lawsuits that were filed against Microsoft.) 0STRATEGY IN ACTION 1.3: THE GENESIS OF AUTONOMOUS ACTION AT 3M Serendipity, or luck, often plays a part in the development of successful strategies. 3M is renowned for its ability to capitalize on that luck, using events that seem to be random or accidental to inspire new products and strategies. The development of the waterproofing Scotch Guard products happened as the result of an accident in a lab experiment. In another example, an employee developed a product, terminal emulation software, purposefully for his own personal use, but was unaware at the time that the market demand for that product would be extraordinarily high. However, firms have to be prepared for happy accidents and recognize their potential contribution. In one sad example, Western Union turned down the opportunity to purchase Bell's patent on the Copyright Houghton Mifflin Company. All rights reserved. 6 Chapter 1: The Strategic Management Process telephone, believing that their extremely successful telegraph business would continue to dominate the communications industry. Teaching Note: An interesting discussion could be generated from this case by asking students to consider what kind of organization culture, policies, structure, leadership, and so on would be necessary to encourage employees' creativity and autonomy, as opposed to the closed mindset displayed by Western Union. Tolerance of failure is perhaps the most important characteristic in encouraging creativity, because a firm that punishes failed experiments will find that employees are unwilling to experiment. Yet failure is abhorred and punished severely in most organizations. You can point out to students that 3M gives its R&D employees funds, space, and time to pursue experiments of personal interest, with the requirement that any promising developments be reported and pursued further. Post-It notes is another 3M product that grew from a failed experiment, when an experiment produced a very weak glue rather than the powerful glue that was intended. Classroom discussion can also be enlivened and humor introduced if you describe, or ask students to describe, other innovations that were not pursued, to disastrous results. For example, when a Harvard M.B.A. student wrote a paper proposing a profitmaking delivery service, he hoped his professor would help him find venture financing, but instead, received a D on the assignment. The professor believed that no firm would ever be able to deliver packages more efficiently or cheaply than the government-subsidized U.S. Postal Service. The student went on to become the founder of Federal Express. C0. Mintzberg believed that strategies can emerge from deep within an organization, and therefore, he defined strategy as a pattern in a stream of decisions or actions. The pattern is a product of whatever aspects of an organization's intended (planned) strategy are actually realized and of its emergent (unplanned) strategy. Strategies that are intended may be deliberately implemented, or realized. They may also be abandoned, or unrealized. Unintended strategies may spring from anywhere in the organization, or "emerge," and are thus called emergent strategies. Show Transparency 5 Figure 1.5: Emergent and Deliberate Strategies D0. Nevertheless, top management still has to evaluate the worth of emergent strategies and determine whether each one fits the organization's needs and capabilities. This involves analyzing the organization's external environment and internal operations. Moreover, an organization's capability to produce emergent strategies is a function of the kind of culture fostered by its structure and control systems. E0. Thus the different components of the strategic management process are just as important from the perspective of emergent strategies as they are from the perspective of intended strategies. The formulation of intended strategies is a top-down process, whereas the formulation of emergent strategies is a bottom-up process. F0. In practice, the strategies of many firms are a mix of the intended and the emergent. The trick for managers is to recognize the process of emergence and to intervene selectively, killing off bad emergent strategies but nurturing good ones (strategic management process for intended and emergent strategies). VI0. Strategic Planning in Practice A0. Research indicates that formal planning does help companies make better strategic decisions. B0. However, one mistake made by planners is to focus on the present, which is known, and neglect to study the future, which is more unpredictable but also more essential for strategic decisions. Studying the future means making accurate estimates of future conditions. The text highlights the use of scenario planning, which was developed at Royal Dutch/Shell and is a helpful forecasting technique. 0STRATEGY IN ACTION 1.4: SCENARIO PLANNING AT DUKE ENERGY Duke Energy is one of the nation's largest energy generators and marketers, and has been suffering increasingly intense competition as that industry becomes more uncertain and complex. Demand for energy is strongly dependent upon the economic cycle, which itself is highly unpredictable. In addition, energy generation capacity must be planned at least five years in advance, is very costly to develop, and can sit idle for some time if forecasts Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process 7 are inaccurate. To cope with this uncertainty, Duke managers developed three possible future industry scenarios. In the first, demand slips; in the second, energy trading becomes dominated by Internet firms, rather than traditional marketers such as Duke; and in the third, demand grows, as does competition. For each scenario, managers identified about 20 signals that would indicate the scenario was developing in reality. Monitoring these signals pointed to the likelihood of the third scenario dominating the industry trends, and managers immediately began to make decisions that would maximize performance under that scenario, such as increasing capacity. Duke executives also realized that they could take some relatively simple and inexpensive actions that would enable them to hedge their bets, in case another scenario developed instead. Teaching Note: Scenario planning can be a very useful technique but it depends upon having the information and ability to identify relevant signals, interpret trends, and so on. One way to help students understand scenario planning is to have a short classroom activity devoted to developing scenarios for some future time in the students' lives, such as determining what they will be doing in five years' time. Ask students to help develop two scenarios of their future, while you write their ideas down. They should identify relevant variables, which might include such items as the unemployment rate, their satisfaction or lack of satisfaction with their first professional job after graduation, and so on. For example, one scenario might be "Still Working at My First Job," another might be "Returning to Graduate School," whereas another might be "Switching Career Fields." Help students think about what data they need to evaluate, what the relevant signposts might be, and what differing actions they might take in response to the scenario planning results. Yet another interesting concept is the extent to which the students could hedge their bets, taking actions that will help to achieve success no matter what the scenario. For example, savings could be used to support them while they take a short career break under one scenario, while they could be used to pay for graduate school in another scenario. Another serious mistake that is often associated with the use of formal planning is ignoring the potential contributions of any employees that are not part of the top management team. This error is known as ivory-tower planning. This approach can result in strategic plans that are formulated by planning executives who have little understanding or appreciation of operating realities and are not the ones who must implement the plans. This separation between thinking and doing causes more harm than good. 10. Correcting the ivory-tower approach to planning involves recognizing that, to succeed, planning must embrace all levels of the corporation. Most of the planning can and should be done by functional managers. They are the ones closest to the facts. The role of corporate-level planners should be that of facilitators who help functional managers do the planning. 20. It is not enough just to involve lower-level managers in the strategic planning process. They also need to perceive that the decision-making process is just. Procedural justice is the extent to which the dynamics of a decision-making process are judged to be fair. Three criteria have been found to influence the extent to which strategic decisions are seen as just: engagement, explanation, and clarity of expectations. D0. Another serious error was pointed out by Hamel and Prahalad, who that assert adopting the fit model to strategy formulation leads to a mindset in which management focuses too much upon the existing resources of a company and current environmental opportunities--and not enough on building new resources and capabilities to create and exploit future opportunities. When companies0 have bold ambitions that outstrip their existing resources and capabilities and want to achieve global leadership, then they build the resources and capabilities that would enable them to attain this goal. The top management of these companies created an obsession with winning at all levels of the organization and then sustained that obsession over the long term. Hamel and Prahalad refer to this obsession as strategic intent. VII0. Strategic Leadership and Decision Making A0. One of the key strategic roles of any manager, whether general or functional, is to provide strategic leadership for subordinates. Strategic leadership refers to the ability to articulate a strategic vision for the company and to motivate others to buy into that vision. Strong leaders meet six criteria. 10. Strong leaders have a vision of where the organization should go, are eloquent enough to communicate this vision to others within the organization in terms that energize people, and consistently articulate their vision until it becomes part of the culture of the organization. 20. Strong leaders demonstrate their commitment to their vision by actions and words, and they often lead by example. C0. Copyright Houghton Mifflin Company. All rights reserved. 8 Chapter 1: The Strategic Management Process Strong leaders are well informed, developing a network of formal and informal sources of information that keep them well apprised of what is going on within their company. They develop "backchannel" ways of finding out what is going on within the organization so that they do not have to rely on formal information channels. 40. Strong leaders are skilled delegators. They recognize that, unless they delegate, they can quickly become overloaded with responsibilities. Besides, they recognize that empowering subordinates to make decisions is an effective motivational tool. Empowerment also makes sense when it results in shifting decisions to those who must implement them. 50. Strong leaders are politically astute. They play the power game with skill, preferring to build consensus for their ideas rather than use their authority to force ideas through. They act as members or leaders of a coalition rather than as dictators. Recognizing the uncertain nature of their forecasts, they commit to a vision rather than to specific projects or deadlines. They also realize that a big change may be more easily implemented in small, piecemeal steps. 60. Strong leaders exhibit emotional intelligence, which includes self-awareness, self-regulation, motivation, empathy, and social skills. Leaders who exhibit a high degree of emotional intelligence tend to be more effective. B0. The best-designed strategic planning systems will fail to produce the desired results if strategic decision makers fail to use the information at their disposal effectively. Our rationality as decision makers is bounded by our own cognitive capabilities. Experimental evidence shows that all humans suffer from innate flaws in their reasoning ability, which are called cognitive biases. We tend to fall back on certain rules of thumb, or heuristics, when making decisions, and sometimes they lead to severe and systematic errors in the decision-making process. However, to the extent that managers are aware of their own cognitive biases, they can attempt to compensate for the resulting weaknesses through some decision-making improvement techniques. 10. The prior hypothesis bias refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make decisions on the basis of these beliefs, even when presented with evidence that their beliefs are wrong. 20. Escalating commitment occurs when, having already committed significant resources to a project, decision makers commit even more resources if they receive feedback that the project is failing. This may be an irrational response; a more logical response may be to abandon the project and move on, rather than escalate commitment. 30. Reasoning by analogy involves the use of simple analogies to make sense out of complex problems. However, because they oversimplify a complex problem, such analogies can be misleading. 40. Representativeness refers to the tendency on the part of many decision makers to generalize from a small sample or even a single vivid anecdote. Generalizing from small samples violates the statistical law of large numbers, which tells us that it is inappropriate to generalize from a small sample, to say nothing of a single case. 50. The illusion of control is the tendency on the part of decision makers to overestimate their ability to control events. Top-level managers seem to be particularly prone to this bias. Having risen to the top of an organization, they tend to be overconfident about their ability to succeed. C0. Another cause of poor strategic decision making appears to be a phenomenon referred to as groupthink. Groupthink occurs when a group of decision makers decides on a course of action without questioning underlying assumptions. Typically, a group coalesces around commitment to a person or policy. Information that could be used to question the policy is ignored or filtered out, while the group develops after-the-fact rationalizations for its decision. Thus commitment is based on an emotional rather than an objective assessment of what is the correct course of action. D0. The existence of cognitive biases and groupthink raises the problem of how to bring critical information to bear on the decision mechanism to ensure that strategic decisions made by the firm are realistic. Two techniques that have been proposed to guard against this problem are devil's advocacy and dialectic inquiry. 10. Devil's advocacy involves the generation of a plan and a critical analysis of it. A member of the group should act as the devil's advocate, bringing out all the reasons why the proposal should not be adopted. Thus decision makers can be made aware of the possible perils of recommended courses of action. 30. Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process 20. 9 Dialectic inquiry involves the generation of a plan and a counterplan reflecting plausible but conflicting courses of action. A debate between advocates of the plan and those of the counterplan should be considered by senior strategic managers. The debate is intended to reveal problems with definitions, recommended courses of action, and assumptions. As a consequence, corporate decision makers and planners can form a new, more encompassing final plan (a synthesis). Show Transparency 6 Figure 1.6: Processes for Improving Decision Making 0ANSWERS TO DISCUSSION QUESTIONS 10. What do we mean by strategy? The straightforward answer is the definition presented in the text: "an action a company takes to attain superior performance." You can also point out to students that strategy involves both thinking and doing. However, a full answer to this question involves a consideration of Mintzberg's definition of strategy as a pattern in a stream of decisions or actions. From this perspective, strategy is more than what a company intends to do; it is also what it actually does. That is to say, a company's strategy is the product of (a) that part of its intended strategy that is actually realized and (b) its emergent strategy. 20. What do you think are the sources of sustained superior profitability? In the plainest terms, sustained superior profitability results when a company is able to increase profits, either by increasing revenues or decreasing expenses or both, and when that ability is difficult or impossible for competitors to imitate. With that in mind, it becomes clear that sustained superior profitability is most likely to occur when the advantages are intangible, such as management insight, disciplined cost cutting by employees, or a culture that nourishes creativity. Intangible resources are much more difficult to imitate than tangible ones, and thus provide a sustainable advantage. However, students should see that no firm can sustain an advantage forever. The advantage itself will tend to weaken over time and competitors will learn to imitate that advantage or develop other advantages of their own that will counteract the power of the original advantage. 30. What are the strengths of formal strategic planning? What are its weaknesses? A formal strategic planning process results in a systematic review of all the external and internal factors that might have a bearing on the ability of the company to meet its strategic objectives. Formally identifying strengths, weaknesses, opportunities, and threats is a good way of alerting strategic managers to what needs to be done if the firm is to fulfill its strategic mission. However, like any rational process, strategic planning is limited by the fallibility of human decision makers. In particular, strategic managers may fall victim to the phenomenon of groupthink and to their own cognitive biases. Thus supposedly rational decisions can turn out to be anything but rational. This hazard can be minimized, however, if the organization uses decision-making techniques such as devil's advocacy or dialectic inquiry. In addition, in a complex and uncertain world characterized by rapid change, strategic plans can become outdated as soon as they are made. In such circumstances, the company's plan can become a policy straitjacket, committing it to a course of action that is no longer appropriate. Change is something that cannot be insured against. Consequently, flexible, open-ended plans are perhaps the best way of giving the company room to maneuver in response to change. Moreover, consistent vision and strategic intent are probably more important than detailed strategic plans. The strategies that a company adopts might need to change with the times, but the vision can be more enduring. 40. Discuss the accuracy of this statement: Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events. Formal strategic planning systems are not at their best in situations with rapid and unpredictable change. Formal systems are time-consuming, and may not be able to provide answers quickly enough when time is Copyright Houghton Mifflin Company. All rights reserved. 10 Chapter 1: The Strategic Management Process very short. Also, formal systems depend upon detailed estimates and forecasts, which are very difficult to do well when conditions are chaotic. Nevertheless, formal systems may still be useful in some ways, even in these challenging environments. For example, formal systems are often associated with detailed and directive plans, but they may also be used to prepare flexible, open-ended plans that are more appropriate for rapidly changing environments. Also, the activities of formal planning--gathering data, preparing forecasts, generating and considering multiple alternatives, and so on--are themselves good preparation for making strategic choices, and thus could be useful in any type of environment. 50. Evaluate President George W. Bush against the leadership characteristics discussed in the text. On the basis of this comparison, do you think that President Bush is a good strategic leader? Answering this question calls for students to rate President Bush according to the six main characteristics of good strategic leaders discussed in the text. There is no right answer to this question. Students' political biases will undoubtedly color the answers they give. It is the exercise itself that is important. Only with the passage of time will a more objective judgment of Bush's leadership skills be possible. For now, however, have a go at answering this question with your students; it will prove instructive. 0SMALL-GROUP EXERCISE: DESIGNING A PLANNING SYSTEM This exercise asks students to break up into groups of three to five people and to develop a strategic planning process for a fast-growing computer software company. The students are asked to act as senior managers for this company. Their board of directors asked for a process that would indicate how decisions are made and resources are allocated. The students face the following constraints in writing the plan: It should involve as many key employees in the process as possible; it should help to build a sense of shared vision and of how to continue to grow rapidly; it should help to generate three to five key strategies for the company; and it should drive the formulation of a detailed course of action that will be linked to the company's annual operations budget. Teaching Note: This is an excellent exercise to get students involved. In addition, since Chapter 1 is taught within the first week of the quarter, it is an excellent exercise to break the ice and to make the students feel comfortable with one another and with the instructor. Be sure to emphasize to students that they are not developing strategies, rather, they are designing the process by which the strategies will be determined. This is an interactive exercise, and students should be asked to present their findings to the rest of the class. The students should think carefully about who should be included in this process and to outline the strengths and weaknesses of their proposed approach. Given that several groups present, each group will then be asked to justify the advantages of their approach relative to that of other groups. If time permits, an open discussion involving all groups at the end of the class can be used to come up with some kind of synthesis. From this classroom discussion, students should emerge with two important conclusions. First, that there is no single "best" way to plan. Different companies and different situations require different processes. Second, that every approach to planning involves some trade-offs. The key to choosing an appropriate process is understanding the trade-offs and choosing the process that is best for the firm's specific needs. 0ARTICLE FILE 1 This exercise asks students to find an example of a company that has recently changed its strategy. They should determine whether this change was the outcome of a formal planning process or whether it was an emergent response to unforeseen events occurring in the company's environment. Teaching Note: Students will come away from this task with an appreciation for the ways in which formal planning and emergent strategies interact and influence each other. For example, a firm without any formal planning may be reacting to events as they occur, but this is unlikely to occur in ways that achieve a focused strategy. On the other hand, firms that engage in some formal planning are better prepared to react to unforeseen events with a coherent and realistic strategy. However, if formal planning is carried to an extreme and adherence to plans is strictly enforced, emergent responses may be discouraged and inflexibility may present problems. Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process 11 0STRATEGIC MANAGEMENT PROJECT: MODULE 1 Each chapter contains a Strategic Management Project section, which asks students to collect and analyze information about a specific firm, in ways that are relevant to the topics covered in that chapter. Students are asked to select one company that they can use throughout the chapters, and therefore, appropriate selection is essential. Spending extra time early in the semester to help students make good choices can eliminate many problems later. There are two approaches that students can use to select a company for study. Instruct your students as to which one to follow. The first approach is to pick a well-known company that has a lot of information written about it. For example, large publicly held companies such as Microsoft, General Motors, and Southwest Airlines are routinely covered in the business and financial press. By using the library, students should be able to track down a great deal of information about such companies. To encourage the students in exploring a variety of information resources, some professors schedule a classroom visit by the business librarian, whereas others prefer a tour of the library itself to acquaint students with their offerings. Many libraries now have electronic data search facilities such as ABI/Inform, the Wall Street Journal Index, the F&S Index, and Nexis. These enable students to identify any article that has been written in the business press about the company of their choice within the last few years. If you do not have electronic data search facilities at your institution, we suggest that students ask the librarian about data sources. A number of nonelectronic data sources are available. For example, F&S Predicasts publishes an annual list of articles relating to major companies that appeared in the national and international business press. Students will also want to collect full financial information on the company that they pick. Again, this can be accessed from electronic databases such as Compact Disclosure. Alternatively, your library might have the annual financial reports, 10-K filings, or proxy statements pertaining to the companies selected by the students. The range and quality of business information appearing on the Internet is improving, and students will find it worthwhile to investigate reputable online resources. A second approach is to select a smaller company in your city or town to study. Although small companies are not routinely covered in the national business press, they may be covered in the local press. More important, this approach can work if the management of the company will agree to talk to students at length about the strategy and structure of the company. If you or your students happen to know somebody in such a company or if you or they have worked there, this approach can be very worthwhile. However, we do not recommend this approach unless students can get a substantial amount of guaranteed access to the company. Some companies may be too small or too limited in scope to provide satisfactory results, because students need to pick a company for which information about corporate and international strategy is available. Whichever approach your students use, you should point out to students that some sources are biased, and that they should think carefully about the source of the information as they interpret it. For example, company founders may be overly optimistic about their firm's performance. Corporate web sites should be treated as advertisements, because few will report any negative information. Crackpots, of the "I hate Microsoft" type are especially prevalent on the Internet, and their information should be scrutinized carefully. Some respected publications have biases towards liberal or conservative reporting--consider the difference between the New York Times and the Wall Street Journal. Other publications tend to present a more balanced view. In order to reduce biases in their data, students should consult several different sources. Once students have chosen a company for this project, they should obtain information about its history, its mission and major goals, its internal strengths and weaknesses, and the opportunities and threats that it faces in its environment. They should also obtain information about the firm's CEO. The information they obtain in this first chapter is of an introductory nature. They will perform a full-blown SWOT analysis in later chapters. For this chapter, the purpose of this assignment is to acquaint themselves with several data sources, and to develop an understanding of the firm that can be used as a foundation for further exploration in future assignments. 0EXPLORING THE WEB: VISITING 3M Students are asked to visit 3M's corporate web site, investigate its history to discover the evolution of its strategy over time, and to answer the following question: "To what degree do you think that this evolution was the result of detailed long-term strategic planning, and to what degree was it the result of unplanned actions taken in response to unpredictable circumstances?" In the General Task, students are asked to repeat the process for a company of their choosing. Copyright Houghton Mifflin Company. All rights reserved. 12 Chapter 1: The Strategic Management Process Teaching Note: This exercise is designed as a homework assignment. It can be done individually or with a partner. It is very useful for the following reasons. Students will realize that the Web is an excellent resource for research on companies and therefore can be used to prepare case discussions and to write papers. Second, the concepts of intended versus emergent strategies as taught in Chapter 1 will be reiterated as the students analyze how 3M's (or another company's) strategy developed over time. Third, it is a good way to help students prepare for the second chapter, on external analysis. To use this exercise in the classroom, ask a few students randomly at the beginning of the second lecture to present their findings briefly. In the General Task, students will again see that planned and emergent strategies are related, that they build upon each other, and that most companies use both to some extent. (See the Teaching Note for the Article File 1, above.) 0CLOSING CASE: THE EVOLUTION OF STRATEGY AT YAHOO In 1993, Stanford University graduate students Jerry Yang and David Filo compiled a list of their favorite web sites and posted it to the Internet, inadvertently creating a site that provided a much-needed index to the World Wide Web for the early users of the new technology. Within a year, over 100,000 users accessed the system daily, and Yang and Filo put their studies on hold to develop their concept into a business. Their business model was to charge companies an advertising fee for placing messages on the index pages, which were free to the users. Obtaining venture capital from a Silicon Valley investment firm was conditional upon hiring an experienced manager to run the firm. 45-year-old Andrew Koogle, considered an "old man" by the young entrepreneurs, took on the role of CEO. By 1996, the firm had 800,000 users daily. The business model evolved away from pure advertising, to creating a web portal for bringing together buyers and sellers, with Yahoo taking a percentage of each transaction. In order to attract more users, the firm began offering customers an easy way to personalize web sites and also added unique features and content. Yahoo also built brand awareness through advertising its services, and helped firms develop their web presence. The results were spectacular--Yahoo had 55 million registered users by 2000, and 80 million by 2001. However in the first nine months of 2001, Yahoo saw sales decline by 34 percent and experienced a loss for the first time in years. The slump was due to the slowdown in the economy, which caused advertising expenditures to fall. Also, many of Yahoo's commercial clients were dot-com companies, which were particularly hard hit in early 2001. Koogle resigned in 2001, and was replaced by veteran manager Terry Semel. Semel's goals included: attracting more traditional companies as clients, instead of relying on Internet-based firms; reducing the firm's dependence on advertising revenue by charging users for premium services; and increasing the services, and fees, to commercial clients. Teaching Note: This case illustrates a number of concepts from the chapter, including the serendipitous nature of many successful strategic ideas, the evolution of strategy over time, and the impact of environmental and internal forces on strategic decision making. 0Answers to Case Discussion Questions 10. To what extent was the evolution of strategy at Yahoo planned? To what extent was it an emergent response to unforeseen events? Students should be able to find examples of both planned and emergent strategies in this case. For example, there has been a deliberate and intense search over the course of several years by Yahoo managers to find a way to increase revenues. This is a difficult issue for Internet portals, which users believe should provide services with little or no charge. Therefore, someone other than the user must pay for the service. When one strategy for increasing revenues was successful, the firm increased its efforts in that area. When the firm became over-reliant upon revenues from one set of businesses, there was a deliberate search for alternate customers. On the other hand, emergent strategies were also important. The founders did not anticipate the explosive growth in the Internet, driven by the falling prices and increased ease of use of personal computer hardware Copyright Houghton Mifflin Company. All rights reserved. Chapter 1: The Strategic Management Process 13 and software. The high-tech slump and the failure of many Internet businesses were also unanticipated and caused the firm to scramble for an adequate response. 20. Could Yahoo have done a better job of anticipating the slowdown in advertising revenue that occurred in 20002001 and positioning itself for that slowdown? How? What might it have done differently from a strategic planning perspective? Although Yahoo was certainly not alone in being taken by surprise, it could have done a better job of anticipating the high-tech slowdown. Specifically, even in the absence of any evidence that pointed directly to a slowdown, the firm should have looked carefully at its business model for areas of vulnerability. Early identification of potential weaknesses would allow more time for planning and preparation of strategies to offset those weaknesses. Yahoo's model, charging advertisers in order to provide free services to consumers, was very vulnerable to slowdown in advertising expenditures. Additionally, most of the firm's advertisers were concentrated in the high-tech industry, which increased Yahoo's vulnerability. Scenario planning is one tool the firm could have used to identify vulnerabilities. 30. Does Yahoo have a source of potential long-term competitive advantage? Where does this come from? Students' answers to this question will fall into two categories. If students see the firm as having a potential for long-term competitive advantage, they will probably focus on the long-term experience that Yahoo managers have in this fledgling industry and the brand name recognition that Yahoo possesses. Yahoo also has a relatively loyal and very large customer base. However, on the downside, Yahoo's recent problems and strategic missteps have somewhat eroded its reputation. In this developing industry, longevity is not much of an advantage, and may in fact be a disadvantage. Yahoo's customers could quickly and easily switch to another web portal if they decided that the firm is no longer meeting their needs. Yahoo's fundamental problem, that users don't want to pay for web portal services, remains unchanged, and it's unlikely the firm will have a long-term competitive advantage until they find a way to effectively address that concern. 40. What does Koogle's resignation in May 2001 tell you about the role of a CEO in a public company? Most CEOs are collaborators, developing their firm's strategies in tandem with many lower-level managers. And most CEOs delegate strategy implementation to lower-level managers as well. However, the CEO is the single person most closely associated with the firm's performance in the minds of company shareholders. This can work in the CEO's favor, as when they garner all the praise when performance climbs. It can also work against them, when they receive all the blame for performance declines. Koogle was not solely responsible for Yahoo's problems; and in fact, in the answer to Question 1 above, the role of serendipity is described. However, shareholders, employees, and customers tend to lose confidence in a firm's leadership when performance is poor, even when environmental factors are largely to blame. When a CEO recognizes that they no longer have their stakeholders' confidence, their effectiveness is diminished. Koogle apparently realized that it would be best for both the firm and himself if he removed himself from the situation. Copyright Houghton Mifflin Company. All rights reserved.