Strategy
Set of related actions that managers take to increase their company's performance
Strategic Leadership
Creating competitive advantage through effective management of the strategy-making process
Strategy Formulation
Selecting strategies based on analysis of an organization's external and internal environment
Strategy implementation
Putting strategies into action
Risk Capital
Equity capital for which there is no guarantee that stockholder will:
recoup their investment
Earn a decent return
Determinants of Shareholder Value
Profitabilty
Effectiveness of strategies
Profit Growth
Shareholder Value
Shareholder value
Returns that shareholders earn from purchasing shares in a company: Sources:
Capital appreciation in the value of a company's shares
Dividend payments
Profitability
Return a company makes on the capital invested in the enterprise
Return on invested capital (ROIC)
Net profit over the capital invested in a firm
Profitability is the result of :
Result of how efficiently the capital is used to satisfy customer needs
Profit growth
Increase in net profit over time
Profit Growth is achieved by:
1.Selling products in rapidly growing markets
2.Gaining market share from rivals
3.Selling more to existing customers
4.Expanding overseas
5. diversifying into new businesses
To boost profitability and profit growth, managers must:
1.Use strategies to give their company a competitive advantage over rivals
2.Deliver high profitability and sustainable profit growth
Competitive advantage
Occurs when a company's profitability is greater than the average profitability and profit growth of firms in its industry
Sustained competitive advantage
A company's strategies enable it to maintain above-average profitability for a number of years
Strategic management Involves:
1. General Managers
2. Functional Manager
3. Multidivisional Company
General Managers
Bear responsibility for a company's overall performance or for one of its major self-contained subunits or divisions
Functional Managers
Responsible for supervising a particular function, task, activity, or operation
Multidivisional company
Competes in several different businesses and has a separate self-contained division to manage each
Corporate-level managers
1. Oversee the development of strategies for the entire organization
2. Provide a link between people concerned with the firm's strategic development and the shareholders
3. Ensure that business strategies pursued by the company are consistent with maximi
Business-level managers
1.Heads of business units
2. Translate statements of intents into concrete strategies for individual businesses
3. Are concerned with strategies specific to a particular business
Business unit
Self-contained division that provides a product or service for a particular market
Functional- level managers
1. Responsible for specific business functions
2. Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers
3. Provide information that helps formulate realistic and attainable strategies
Steps in a formal strategic planning process
1. Select the corporate mission and goals
2. Analyze the organization's external competitive environment and internal operating environment
3. Select strategies that:
Build on the organization's strengths and correct it's weaknesses
4. Are consistent with
Mission
Purpose of the company, or a statement of what the company strives to do
Vision
Articulation of a company's desired achievements or future state
Values
Statement of how employees should conduct themselves and their business to help achieve the company mission
Establishing major goals
Goal - Precise and measurable desired future state that a company attempts to realize
Components of a Mission statement:
Mission
Vision
Values
Establishing major goals
SWOT analysis
Comparison of strengths, weaknesses, opportunities, and threats
Purpose of SWOT
Identify the strategies to:
1. Exploit external opportunities
2. Build on and protect company strengths
3. Eradicate weaknesses and counter threats
Goal of SWOT
Affirm a company-specific business model:
To align, fit, or match a company's resources and capabilities to the demands of its environment
Functional-level strategies
Directed at improving the effectiveness of operations within a company
Business-level strategies
Encompass the business's overall competitive theme:
1. How it positions itself in the marketplace to gain a competitive advantage
2. Different position strategies that can be used in different industry settings
Global strategies
Address how to expand operations outside the home country-
Since competitive advantage is determined at a global level
Corporate-level strategies
Determine:
1. The businesses a company should be in to maximize profitability and profit growth
2. How to gain a competitive edge
Strategy implementation
1. Taking action at the functional, business, and corporate levels to execute a strategic plan
2. Designing the best organization structure, culture, and control systems to put a chosen strategy into action
Feedback loop
Provide information to the corporate level on the:
1. Strategic goals that are being achieved
2. Degree of competitive advantage being created and sustained
Unforeseen circumstances can adversely affect strategic plans
True
Many successful strategies are a result of serendipity rather than strategic planning
True
Scenario planning Involves:
1. Formulating plans that are based on "what-if" scenarios about the future
2. Encourages managers to:
Think outside the box and be more flexible
3. Anticipate probable scenarios
4. Ivory tower planning
Ivory Tower Planning
Recognizes that successful strategic planning encompasses managers at all levels of the corporation
Types of Bias in Strategic decision making:
Cognitive Bias
Prior Hypothesis Bias
Escalating Commitment
Representativeness
Illusion of control
Availability Error
Reasoning by analogy
Reasoning Analogy
Use of simple analogies to make sense out of a complex problem
Representativeness
Tendency to generalize from a small sample or a single vivid anecdote
Violates the statistical law of large numbers
Illusion of Control
Tendency to overestimates one's ability to control events
General or top managers are more prone to this
Availability Error
Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it
Cognitive Biases
Systematic errors in human decision making
Arise from the way people process information
Prior Hypothesis Bias
Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong
Escalating Commitment
Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing
Techniques for Improving Decision Making
1. Devil's Advocacy
2. Dialectic Inquiry
3.Outside View
Devil's Advocacy
A member of a decision-making team identifies all the considerations that might make a proposal unacceptable-
Possible perils of recommended courses of action are brought into light
Dialectic inquiry
Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action-
Promotes strategic thinking
Outside View
Identification of past successful or failed strategic initiatives to determine if they will work for the current project
Characteristics of Good Strategic Leaders
1. Vision, eloquence, and consistency
2. Articulation of a business model
Commitment
3. Being well informed
4. Willingness to delegate and empower
5. Astute use of power
6. Emotional intelligence
7. Self-awareness, self-regulation, and motivation
8. Empat
Firm Obtain competitive Advantage by :
Formulating and implementing strategies that enable their company to outperform rivals.