Unformatted text preview: BA-405: Exam 1 (Chapters 1-3)
Chapter 1: Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage
Overview: A strategy: is a set of related actions that managers take to increase their company’s performance.
o For most, if not all, companies, achieving superior performance relative to rivals is the ultimate challenge; if a
company’s strategies result in superior performance, it is said to have a competitive advantage. Strategic leadership: is about how to most effectively manage a company’s strategy-making process to create competitive
advantage. The strategy making process is the process by which managers select and then implement a set of strategies that
aim to achieve a competitive advantage. Strategy Formulation: is the task of selecting strategies Strategy implementation: is the task of putting strategies into action, which includes designing, delivering and supporting
products; improving the efficiency and effectiveness of operations; and designing a company’s organizational structure,
control systems, and culture.
Strategic Leadership, Competitive Advantage, and Superior Performance: Strategic leadership is concerned with managing the strategy-making process to increase the performance of a company,
thereby increasing the value of the enterprise to its owners, its shareholders.
Superior Performance: Maximizing shareholder value is the ultimate goal of profit-making companies, for 2 reasons. 1) Shareholders provide a
company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. 2)
shareholders are the legal owners of a corporation, and their shares therefore represent a claim on the profits generated by a
company. Thus, mangers must have an obligation to invest those profits in ways that maximize shareholder value- best way
to do this in the long-run is to focus on customers and employees; by satisfying customer needs and making sure that
employees are fairly treated, and work productively, typically translates into better financial performance and superior longrun returns for shareholders. Risk Capital: is the capital that cannot be recovered if a company fails and goes bankrupt. Equity capital invested with no
guarantee that stockholders will recoup their cash or earn a decent return. Shareholder value: the returns that shareholders earn from purchasing shares in a company. These returns come from 2
sources; 1) capital appreciation in the value of a company’s shares and 2) dividend payments. Profitability: the return a company makes on the capital invested in the enterprise.
o The Return on Invested Capital (ROIC): is the net profit over the capital invested in the firm (profit/capital
invested). Profit = Net income after tax. Capital= the sum of money invested in the company.
o Profitability: is the result of how efficiently and effectively managers use the capital at their disposal to produce
goods and services that satisfy customer needs.
o Lululemon ROIC was 31% above its competitors, meaning its strategies resulted in the very efficient and effective
use of its capital. Profit growth: can be measured by the increase in net profit over time. A company can grow its profits if it sells products in
rapidly growing markets, gains market share from rivals, increases sales to existing customers, expands overseas, or
diversifies profitability into new lines of business.
o Together, Profitability and profit growth are the principal drivers of shareholder value – to both boost
profitability and grow profits over time, managers must formulate and implement strategies that give the company a
competitive advantage over rivals. GOAL: PROFITABLE GROWTH – HIGH PROFITABLILITY AND
SUSTAINABLE PROFIT GROWTH – WHAT INVESTORS/ SHAREHOLDERS WANT!
Competitive Advantage and a Company’s Business Model: Competitive Advantage: the archived advantage over rivals when a company’s profitability is greater than the average
profitability of firms in its industry. The higher the profitability and profit growth relative to its rivals, the greater it’s
competitive advantage will be. Sustained competitive advantage: when its strategies enable it to maintain above average profitability and growth profit for
a number of years. (this is accomplished through combining unique strategies that fir together to give a company competitive
advantage). Business model: the conception of how strategies should work together as a whole to enable the company to achieve
competitive advantage and achieve superior profitability and profit growth. Ex: Walmart: based on the idea that costs can be
lowered by replacing full-service retail format for with a self-service format and a wider selection of products sold in largefootprint store that contains minimal fixtures and fittings.
Industry Differences in Performance: Technological change might be revolutionizing competition; others may be characterized by stable technology. In some
industries, high profitability among incumbent companies might induce new companies to enter the industry. And these new
entrants might subsequently depress prices and profits in the industry. In other industries, new entry might be difficult, and
periods of high profitability might persist for considerable time. Profitability and profit growth of a company are determined by two main factors: its relative success in its industry and
the overall performance of its industry relative to other industries.
Performance in Nonprofit Enterprises: Nonprofit enterprises, such as government agencies, universities, and charities are not in “business” to make profits.
Nevertheless, they are expected to use their resources efficiently and operate effectively, and their managers set goals to
measure performance. They also need to understand that nonprofits compete with each other for scarce resources, just as businesses do. For
example: charities compete for scarce donations, and their managers must plan and develop strategies that lead to high
performance and demonstrate a track record of meeting performance goals.
Strategic Managers: Lululemon’s success was largely based on how well the company’s managers performed their strategic roles. General Managers (business level managers): managers who bear responsibility for the overall performance of the
company or for one of its major, self-contained subunits or divisions. Functional Managers: managers responsible for supervising a particular function; that is a task, an activity, or an operation
such as accounting, marketing, research and development, information technology, or logistics. The overriding concern of general managers is the success of the whole company or the divisions under their direction; they
are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and
capital they have at their disposal. Multidivisional company: a company that competes in several different businesses and has created a separate, selfcontained division to manage each. There are 3 main levels of management: corporate, business, and functional. General Managers are found at the first 2 of
these levels, but their strategic roles differ depending on their sphere of responsibility.
Corporate level Managers: Corporate level managers: consist of the chief executive officer (CEO), other senior executives, and corporate staff. These
individuals occupy the apex of decision making within the organization. The CEO is the principal general manager. In
consultation with other senior executives, the role of corporate-level managers is to oversee the development of strategies for
the whole organization. The role includes defining the goals of the organization, determining what businesses it should be in, allocating resources
among different businesses, formulating and implementing strategies that span individual businesses, and providing
leadership for the entire organization. Corporate level managers also provide a link between the people who oversee the strategic development of a firm and those
who own it (the shareholders). Corporate-level managers, particularly the CEO, can be viewed as the agents o shareholders. It
is their responsibility to ensure that the corporate and business strategies that the company peruses are consistent with
superior profitability and profit growth.
Business-Level Managers: A business unit: is a self-contained division (with its own functions – for example, finance, purchasing, production, and
marketing departments) that provides a product or service for a particular market. The principal general manager at the business level, or the business level manager, is the head of the division. The strategic role of these managers is to translate the general statements of direction and intent form the corporate level into
concrete strategies for individual business; whereas corporate-level general managers are concerned with strategies that span
individual businesses, business-level general managers are concerned with the strategies that are specific to a particular
Functional Level Managers: Functional level-managers are responsible for the specific business functions or operations (HR, Purchasing, product
development, logistics, production, customer service, and so on) found within a company or one of its divisions. Functional level manager’s sphere of responsibility is generally confined to one organizational activity, whereas general
managers oversee the operation of an entire company or division. Although they are not responsible for the overall performance of the organization, functional level managers have a major
strategic role: to develop functional strategies in their areas that help fulfill the strategic objectives set by the business- and
corporate-level general managers. A model of the Strategic Planning Process: The formal strategic planning process has 5 main steps:
1) Select the corporate mission and major corporate goals
2) Analyze the organizations external competitive environment to identify opportunities and threats.
3) Analyze the organizations internal operating environment to identify the organizations strengths and weaknesses.
4) Select strategies to build the organization’s strengths and correct its weaknesses in order to take advantage of external
opportunities and counter external threats. Should be consistent with the mission and major goals of the organization and
constitute a viable business model.
5) Implement the strategies. Mission Statement: The first component of the strategic management process is crafting the organizations mission statement -> it has 4 main
components: 1) a statement of the organizations main reason for existence (mission), 2) a statement of some desired future
state (vision), 3) statement of the key values of the organization, and 4) statement of major goals. The mission: the purpose of the company, or a statement of what the company strives to do. Ex: google mission statement: is
to organize the world’s information and make it universally accessible and useful. Business Definition: who is being satisfied? (customer groups), What is being satisfied? (customer needs), How are
customer needs being satisfied? (distinctive competencies).
o This approach stresses the need for a customer-oriented rather than product-oriented business approach. Vision: the articulation of a company’s desired achievements or future state; what the company would like to achieve. Values: a statement of how employees should conduct themselves and their business to help achieve company mission
(bedrock of company’s organizational culture).
Major Goals: A goal: is a precise, measurable, desired future state that a company attempts to realize. 4 characteristics of well-constructed goals: 1) they are precise and measurable, 2) they address critical issues, 3) they are
challenging but realistic, 4) they specify a time period in which goals should be achieved, when that is appropriate. Well-constructed goals also provide a means by which the performance of managers can be evaluated. To guard against short-run decision making, managers need to ensure that they adopt goals whose attainment will increase the
long-run performance and competitiveness of their enterprise. Long-term goals are related to such issues as product
development, customer satisfaction, and efficiency, and they emphasize specific objectives or targets concerning such details
as employee and capital productivity, product quality, innovation, customer satisfaction, and customer service.
External Analysis: The purpose of the external analysis is to identify strategic opportunities and threats within the organizations operating
environment that will affect how it pursues its mission. 3 interrelated environments should be examined when undertaking an external analysis: the industry environment in which
the company operates, the country or national environment, and the wider socioeconomic or Macroenvironment. 1) Analyzing the industry environment requires an assessment of the competitive structure of the company’s industry,
including the competitive position of the company and its major rivals. Globalization and how it affects the industry- outsourcing. 2) Analyzing the macroenvironment consists of examining macroeconomic, social, governmental, legal, international, and
technological factors that may affect the company and its industry.
Internal Analysis: Internal Analysis focuses on reviewing the resources, capabilities, and competencies of a company in order to identify its
strengths and weakness.
SWOT Analysis and the Business Model: SWOT Analysis: the comparison of strengths, weaknesses, opportunities, and threats. The central purpose is to identify the
strategies to exploit external opportunities, counter threats, build on and protect company strengths, and eradicate weakness. The goal of a SWOT analysis is to create, affirm, or fine-tune a company-specific business model that will best align, fit, or
match a company’s resources and capabilities to the demands of the environment in which it operates. 4 main strategies: Functional level strategies, business level strategies, global strategies, and corporate level strategies.] In essence, SWOT is a methodology for choosing between competing business models and for fine-tuning the business model
that managers choose.
Strategy Implementation: Strategy implementation involves taking actions at the functional, business, and corporate levels to execute a strategic plan. Implementation can include, for example, putting quality improvement programs into place, changing the way a product is
designed, positioning the product differently in the marketplace, segmenting the marketing and offering different versions of
the product to different consumer groups, implementing price increases or decreases, expanding through mergers and
acquisitions, or downsizing the company by closing down or selling off parts of the company. Strategy implementation also entails designing the best organizational structure and the best culture and control systems to
put a chosen strategy into action – ensure everything is legal and ethical.
The Feedback Loop: indicates that strategic planning is ongoing, and it never ends. After given feedback, this information and knowledge is returned to the corporate level through feedback loops and becomes
the input for the next round of strategy formulation and implementation. Top managers can then decide whether to reaffirm
the existing business model and the existing strategies and goals or suggest changes for the future.
Strategy as an Emergent Process: The planning model suggests that a company’s strategies are the result of a plan, that the strategic planning process is rational
and highly structured, and that top management orchestrates the process. Critics of the formal planning model complain for 3 main reasons: 1) the unpredictability of the real world, 2) the role that
lower-level managers can play in the strategic management process, and 3) the fact that many successful strategies are often a
result of serendipity and not rational strategizing. Autonomous Action: Strategy Making by Lower -Level Managers Top managers usually rise to preeminence by successfully executing the established strategy of the firm. Therefore, they may
have an emotional commitment to the status quo and are often unable to see things from a different perspective. In this sense,
they can be a conservative force that promotes inertia. Lower-level managers are less likely to have the same commitment to
the status quo and have more to gain from promoting new technologies and strategies. They may be the first ones to
recognize new strategic opportunities and lobby for strategic change.
Serendipity and Strategy: Many successful strategies are not the result of well-thought-out plans, but of serendipity- stumbling across good outcomes
unexpectedly. Ex: 3M and the creation of Scotchgarde form fluorocarbon. Serendipitous discoveries and events can open all sorts of profitable avenues for a company. But some companies have
missed profitable opportunities because serendipitous discoveries or events were inconsistent with their prior (planned)
conception of their strategy.
Intended and Emergent Strategies: (Henry Mintzberg) A company’s realized strategy is the product of whatever
planned strategies are actually put into action (the company’s
deliberate strategies) and any unplanned, or emergent,
strategies. In Mintzberg’s view, many planned strategies are not
implemented because of unpredicted changes in the
environment (they are unrealized). Emergent strategies: are the unplanned responses to
unforeseen circumstances; they are not a product of formal, topdown planning mechanisms. They are often successful and may
be more appropriate than intended strategies. The critical point demonstrated by the Honda example is that
successful strategies can often emerge within an organization
without prior planning, and in response to unforeseen
circumstances. In practice: the strategies of most organizations are likely a combination of the INTENDED and the EMERGENT. Evaluation involves comparing each emergent strategy with the organization’s goals, external environmental opportunities
and threats, and internal strengths and weaknesses. The objective is to assess whether the emergent strategy fits the
company’s needs and capabilities.
Scenario Planning: Strategic planning may fail over longer time periods because the future is entirely unpredictable. Scenario planning: involves formulating plans that are based upon “what-if” scenarios about the future. In the typical
exercise, some scenarios are optimistic, and some are pessimistic. The idea is to allow managers to understand the dynamic and complex nature of their environment, to think through problems
in a strategic fashion, and to generate a range of strategic options that might be pursued under different circumstances.
Decentralized Planning: Ivory-tower approach: basically, leaving the strategic planning to top-level managers who have no idea of the operations of
the company. Correcting the ivory tower approach to planning requires recognizing that successful strategic planning encompasses
managers at all levels of the corporation. Much of the best planning can and should be done by business and functional
managers who are closest to the facts; in other words, planning should be decentralized. Corporate-level planners should be
facilitators who help business and functional managers do the planning by setting the broad strategic goals of the organization
and providing the resources necessary to identify the strategies required to attain those goals.
Cognitive Biases and Strategic Decision Making: Cognitive Biases: systematic errors in decision making that arise from the way people process information. Prior Hypothesis Bias: cognitive bias that occurs when decision makers who have strong prior beliefs t...
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