Establishing Company Direction - Lecture 2

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Lecture: 2

Establishing Company Direction - An overview

Three Elements of a Strategic Vision Coming up with a mission statement which defines what business the company is presently in. It also portrays “who we are, what we to, and where we are now”. b. Using mission statement as a basis for deciding on a long-term course. c. Communicating the vision in clear & exciting terms. a.

The mission is not to make a profit One of the roles of mission statement is to give organization its own special identity, business emphasis and path for development. It must set a company apart from other similarly situated companies. Profit cannot differentiate one company from another.

Incorporating elements in Mission Statement: • •

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Customer needs (what is being satisfied) Customer groups (who is being satisfied) Company’s activities, technologies, and competences (how the company goes about creating value to customers and satisfying their needs)

Braod or Narrow definition of business definition Broad Definition Furniture business Telecommunication business Beverage business Travel & tourism business

Narrow Definition Wrought iron furniture business Mobile telephone business Soft drink business Cruise ship business

Mission Statements for Functional Departments There can be separate mission statements for the departments like Marketing Finance, Human Resources, R & D etc. For the mission of the HRD is to contribute to organization by developing effective leaders, creating high-Performance team and maximizing the potential of individuals.

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Establishing obectives: The second direction setting task Objectives represent a managerial commitment to achieving specific predominance targets within a specific time frame. • Every Company needs both strategic objectives and financial objectives. •

Financial objectives  Growth in revenue  Growth in earnings.  Higher Dividends.  Higher profit earnings  Higher return on invested capital.  Attractive Economic value added(EVA) performance  Strong bond and credit ratings.  Bigger cash flows  A rising stock price than rivals.  Attractive and sustainable increases in market value added (MVA)  Recognition as blue chip company  A more diversified revenue base  Stable earnings during periods of recession.

Strategic objectives  A bigger market  Quicker design to market times than rivals  Higher product quality than rivals  Lower costs relative to key competitors  Broader or more attractive product line than rivals  A strong reputation with customers than rivals  Superior customer service  Recognition as a leader in technology and/or product innovation  Wider geographic coverage than rivals  Higher levels of customer satisfaction than rivals.

Strategic Intent Concept: A company exhibit strategic intent when it relentlessly pursue a very ambitious startegic objective and concentrates competitive actions and energies to achieve the objective. Vitually startegic intent can be thought as a “Big Hairy Audacious Goal” or BHAG that usually takes a long time to achieve, may be as long as 20-30 years. Ex: • •

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A small company want to dominate the niche. An up-and-coming enterprise may try to overtake market leaders. Technologically advanced company may discover a whole new array of products.

(Ex: Komatsu an Earth Moving Equipment Company (See the Text Book, page: 45)

Crafting a Strategy- the third task of Strategic Management An organization’s strategy consists of the combined action that managements has taken and intends to take in achieving strategic and financial objectives and pursuing the organization’s missions.

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THE STRATEGY MAKING PYRAMID:

Responsibility of corporate level managers

Corporate Strategy Two way influence Business Strategies

Responsibility of business level manager

Two way influence Functional Strategies (R&D, Manufacturing, Marketing, finance HRM etc.)

Responsibility of heads of major functional division

Two way influence Responsibility of plant manager, regional manager

Operating Strategies (Regions and districts plants departments within functional areas)

In diversified enterprises, strategy is initiated at four distinct organization levels: 1.

Corporate strategy

: Strategy for the company and all of its business as a whole.

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Business strategy

: Strategy for the each business the company has diversified into.

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Functional Strategy

: Strategy for each specific functional unit within a business structure. Each business usually has a production strategy, a marketing strategy, finance strategy and so on.

4. Operating strategy

: Strategies for basic operating unit like plants, sales districts regions and departments within functional areas.

In single business enterprise, there are only three levels of strategy: -Business strategy : Responsibility of executive level managers -Functional strategy : Responsibility of heads of major functional activities within a business. -Operating strategy : Responsibility of plant managers, geographic unit managers, supervisors.

Corporate strategy: Corporate strategy is the overall managerial game plan for a diversified company. It concerns how a diversified company intends to establish business positions in different industries and the actions and approaches employed to improve the performance of the group of businesses the company has

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diversified into. Crafting corporate strategy for a diversified company involves four kinds of initiatives: 1. Making the memo to establish positions in different business and achieve diversification 2. Initiating actions to boost the combined performance of the business the firm has diversified. 3. Pursuing ways to capture the synergy among related business unit and turn in into competitive advantage. 4. Establishing investment priorities and steering corporate resourses into the most attractive business units.

Business strategy: The term business strategy refers to the managerial game plan for a single business. It is mirrored in the pattern of approaches and moves crafted by management to produce successful performance in one specific line of business. The central thrust of business strategy is how to build and strengthen the company’s long – term competitive position in the market place. Towards the end, business strategy is concerned principally with: 1. Forming responses to changes under way in the industry, the economy at large, the regulatory and political area and other relevant areas. 2. Crafting competitively moves and market approaches that can lead to sustainable competitive advantage. 3. Building competitively valuable competencies and capabilities. 4. Uniting the strategic initiatives of functional departments. 5. Addressing specific strategic issue facing the company’s business. It is clear that business strategy encompasses whatever moves and new approaches manager deem prudent in light of market forces, economic trends and developments, buyers’ need and demographics, new legislation and regulatory requirements and other such broad external factors. A good strategy is well matched to the external situation. A business strategy is powerful if it produces a sizable and sustainable competitive advantage. It is weak if it results in competitive disadvantages. A business strategy that yields sustainable competitive advantage has three facts: Deciding what product / service attributes offer the best chance to win a competitive edge 2. Developing skills, expertise and competitive capabilities that set the company apart from rivals. 3. Trying to insulate the business as much as possible from the effects of competition. 1.

Functional strategy: The term functional strategy refers to the managerial game plan for running the major functional activity or process within a business like R & D, Production, Marketing, Customer Service, Distribution, Finance, Human resources and so on. A business needs as many functional strategy as it has critical activities.

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The primary role of functional strategy is to support the company’s overall business strategy and competitive approach. Well executed functional strategies give the enterprise competitively valuable competencies, capabilities and resource strengths. Compatible, collaborative, mutually reinforcing strategies are essential for the overall business strategy to have maximum impact. Operating strategy: Operating strategy concerns how to manage front line organizational units within its’ business (plants, sales districts, distribution centers) and how to perform strategically significant operating tasks (materials, purchasing, shipping, inventory control, maintenance, advertising campaigns). Lead responsibility for operating strategies is usually delegated to front line managers subject to review and approval by higher ranking mangers. Frontline managers are part of an organization’s strategy making term because many operating units have strategy critical performance targets and need to have strategic action plans in place to achieve them. A regional manger needs a strategy customized to the region’s particular situation and objectives.

Uniting the strategy-making effort. A Company’s strategy is at full power only when all parts are united. To achieve this unity, the strategizing process as to proceed more from the top down than from the bottom up. Direction and guidance have to flow from the corporate level to the business level and from the business level to the functional and operating levels. Lower level managers cannot do good strategy making without understanding the company long term direction and higher level strategies.

Factors shaping a companys’ strategy Factors external to the company: • Economic, societal, political, regulatory & community • Competitive conditions and overall industry attractiveness • The company’s market opportunities and external threats Factors Internal to the comapny

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Company resource strengths, competencies and competitive capabilities. Personal ambitions, business philosophies and ethical principles of key executives. Shared values and company culture

Considering the above factors next steps: • Conclusions concerning how internal and external factors stack up: their implications for startegy • Identification and evaluations of strategy alternatives • Crafting strategy that fits the overall situation.

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Test of a Winning Strategy 

The Goodness of Fit Test: A good strategy is well matched to the company’ situation – both internal and external factors, its own capabilities and aspirations. Unless a strategy exhibits tight fit with factors shaping the strategy, it is less likey to be succesful.

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The competitive Advantage Test: A good strategy leads to sustainable competitive advantage. The bigger the competitive edge that a strategy helps builds, the more powerful and effective it is.

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The performance Test: A good strategy boosts company performance. Two kinds of performance improvements are the most telling; gains in profitability and gains in the company’s long-term business strengths and competitive position.

Questions: • Sketch the ‘Strategy Making Pyramid’ ? Describe the test of a “Winning Strategy”? • Describe the Corporate & Business strategy. What are the factors that shape the companys’strategy?