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Chapter 2

Chapter 2. Leading Strategically Through Effective Vision and Mission. Key points in Chapter 2 . The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy). Managerial Discretion and Decision Biases. Discretion – latitude for action or decision making

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Chapter 2

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  1. Chapter 2

    Leading Strategically Through Effective Vision and Mission
  2. Key points in Chapter 2 The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy)
  3. Managerial Discretion and Decision Biases Discretion – latitude for action or decision making Hubris – excessive pride, leading to a feeling of invincibility Heuristics – rules of thumb used in decision making
  4. Decision-Making Biases Reliance on previously formed beliefs Focus on limited objectives Exposure to limited decision alternatives Illusion of control Reliance on a limited set of heuristics
  5. Hubris Excessive pride that leads to a feeling of invincibility Magnifies the effects of decision-making biases
  6. Implications for IBP Be sure you don’t fall prey to decision making biases Be sure you understand the effects of hubris Play the role of Devil’s Advocate Question decisions constructively
  7. Strategic Vision vs. Mission A strategic vision concerns “wherewe are going” or ”what do we want to be.” Markets to be pursued Future product/ market/customer/ technology focus Kind of company management is trying to create The mission statement focuses on its “who we are and what we do” Current product and service offerings Customer needs being served Technologicaland businesscapabilities
  8. Mission Statements Boundaries of the currentbusiness Fundamental purpose that sets it apart from other firms of its type Conveys Who we are, What we do, and Why we are here
  9. Objectives Turns mission into performance outcomes Organizations produce what is measured Long and Short term
  10. Control Systems Financial Controls focus on short-term financial outcomes produce risk-averse managerial decisions Strategic Controls focus on the content of strategic actions encourage decisions that incorporate moderate and acceptable levels of risk
  11. Leading versus Lagging Indicators Current financial results are “lagging indicators” reflecting results of past decisions and actions—good profitability now does not translate into stronger capability for delivering better financial results later However, meeting or beating strategic performance targets signals growing competitiveness & strength in the marketplace, thus developing the capability for better financial performance in the years ahead Good strategic performance is thus a “leading indicator” of a company’s capability to deliver improved future financial performance
  12. Controls in Balanced Scorecard Framework

  13. Chapter 4

    Exploring the External Environment: Macro and Industry Dynamics
  14. “Computers in the future may weigh no more than 1.5 tons”
  15. “Computers in the future may weigh no more than 1.5 tons” Popular Science Magazine, forecasting the relentless march of Science - 1949
  16. In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000
  17. “I think there is a world market for maybe five computers” Thomas Watson, Chairman of IBM, 1943
  18. “But what….is it good for?” Engineer at IBM, commenting on the microchip, 1968
  19. “The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible” Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service
  20. FedEx now delivers well over 7.5 million packages a day – 2.7 billion a year
  21. “We don’t like their music and guitar music is on the way out” Decca Records Company in rejecting the Beatles, 1962
  22. “ Who the hell wants to hear actors talk” H. M. Warner, 1927
  23. “There is no reason why anyone would want a computer in their home” Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977
  24. “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.” Internal Memo, Western Union, 1876
  25. “Everything that can be invented has been invented” Charles H. Duell, Commissioner of the U.S. Patents Office, 1899
  26. “640K of RAM ought to be enough for anybody” Bill Gates, 1981
  27. Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ, Oct 1, 2003
  28. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002
  29. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002 September 2003, “The Big Three” became GM, Ford, and Toyota
  30. “Nothing important happened today” Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England
  31. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett Skate to where the puck is going, not to where the puck has been. Wayne Gretsky
  32. Components of External Analysis Scanning – Identifying early signals Monitoring – Following signals or change identifies in scanning to identify patterns Forecasting – Projections of what might happen Assessing – Determining the timing and significance of forecasted change
  33. General or Macro Environment Demographic Economic Political Sociocultural Technological Environmental
  34. 1) Demographic Segment Characteristics of the population e.g., age, race, gender, sexual orientation and social classes Ethnic structure Income distribution Geographic distribution
  35. 2) Economic Segment General health/wellbeing of the local, regional, national or global economy. e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs
  36. 3) Political/Legal Segments Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.
  37. 4) SocioculturalSegment Attitudes of society towards work, careers, products, services and consumer activism. e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.
  38. 5) Technological Segment Changes in technology that affect the workplace, and the products and services consumers expect e.g., Information technologies, entertainment technologies, product technologies.
  39. 6) Environmental Environmental and ecological issues (on supple and waste side), including pressure from NGOs and activists.
  40. General Environment Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance Cast a wide net and to identify the emerging trends Then determine which factors are relevant, and how these changes will have an effect upon the firm.
  41. ROIC Across Industries 1995-2004
  42. Porter’s Five Forces Competitive Rivalry Power of Buyers Power of Suppliers Potential Entrants Substitute Products Each of these forces affect costs/prices, therefore, profitability
  43. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Suppliers of Key Inputs Buyers Potential New Entrants
  44. Porter’s 5-forces is all about margins { Price What factors increase/decrease margins within an industry, thus affecting profitability. Profits Costs
  45. When industry structural variables are weak…... Prices can be kept high { Profits can soar Costs can be kept low
  46. When industry structural variables are strong Prices will be pushed down { Profits shrink Costs will rise
  47. Suppose you had to start a new business and start generating revenues… … today … in a week … in 2 months … in 1 year What kind of businesses might you start?
  48. Potential New Entrants Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. Firms can create “barriers to enter” Barriers of entry are desirable for entrenched firms
  49. Barriers to Entry Economies of scale Product differentiation & loyalty Capital & resource requirement Switching costs Distribution Cost disadvantage independent of size Regulatory policies Access to technology & know-how Learning, costs, experience curves Threat of retaliation
  50. Suppliers Who are you key suppliers? Suppliers are a strong competitive force when: Only a few suppliers exist and is more concentrated than industry to which it is selling Few substitutes available to the industry firm Industry not important buyers to supplier group Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality It is costly for buyers to switch suppliers Forward integration by suppliers is a credible threat Suppliers can supply at a lower cost
  51. Buyers Who are your key buyers? - who provides our revenues? Can they force: lower prices, higher quality and service – affect the terms and conditions of the exchange? When do you, as a consumer, have power? Two issues Price sensitivity Can you actually bargain
  52. Buyers What affect buyers’ power? Volume/Frequency of purchase When buyers represent a large portion of sellers revenues When buyers can easily switch to another product When the product the buyers are buying is undifferentiated When buyers can self-source or backwards integration Criticality Buyers’ knowledge Buyers’ profitability
  53. Substitutes Product/service which fulfills similar need Price cap 3 Questions Are they available? Can we switch? Price-performance relationship?
  54. Substitutes and Business Definition How we define our business defines our substitutes and our rivals Carbonated Soft Drink Soft Drinks Beverages Many Substitutes Few Substitutes Few Rivals Many Rivals
  55. Rivalry and Profitability Industry profitability is a collective good. Collective good is served by coordination Are there industries were pricing is coordinated? Incentive to violate
  56. Rivalry – What drives it? Numerous or equally balanced competitors Slow growth, excess capacity High fixed costs High storage costs High obsolescence costs Lack of differentiation Low switching costs Perceptions of high payoff from competitive actions High exit barriers
  57. Industries and Segments What is a segment? Different segments….. posses different combinations of 5-forces therefore: reward different strategies possess different levels of profitability
  58. Segments in the Automotive Industry Economy Luxury Which segment is more attractive? Why?
  59. Segments in the Automotive Industry Economy Luxury More Rivalry More Substitutes More Entrants More Buyer Power
  60. Porter’s..in conclusion Attractiveness of industry/segment current industry adjacent segments industries you might consider entering Which forces possess the greatest influence? Can we influence them?
  61. Static model & Hypercompetition If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.
  62. Analysis of Direct Competitors Key Terms Strategic Group–set of firms emphasizing similar strategic dimensions to use a similar strategy Strategic Dimensions–areas that firms in a strategic group treat similarly
  63. Implications from Strategic Group Dynamics Intra-strategic group rivalry is more intense than inter-strategic group rivalry Membership in a strategic group partially defines the essential characteristics of firms' strategies The more similar strategies are seen across strategic groups, the greater the level of expected rivalry The strengths of industries' five forces differ across strategic groups
  64. Price National Jewelry Retailers Quality
  65. Price National Jewelry Retailers Cartier Quality
  66. Price National Jewelry Retailers Cartier Tiffany Quality
  67. Price National Jewelry Retailers Cartier Tiffany Jerrods Quality
  68. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Quality
  69. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Quality
  70. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay Quality
  71. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart Quality
  72. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart K-Mart Quality
  73. Price National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart K-Mart Quality
  74. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Burdines Dillards Jerrods Marks & Morgan Sears JCP Zales Kay Target Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  75. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Burdines Dillards Jerrods Marks & Morgan Sears JCP Zales Kay Target Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  76. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Strategic Groups identify Burdines Dillards Closest Rivals Jerrods Marks & Morgan Sears JCP Zales Kay Target Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  77. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Strategic Groups identify Burdines Dillards Mobility Barriers Jerrods Marks & Morgan Sears JCP Zales Kay Target Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  78. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Strategic Groups identify Burdines Dillards Jerrods Marks & Morgan Sears JCP Zales Kay Untapped Niches Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  79. Price National Jewelry Retailers Cartier Tiffany Nordstroms Sachs Strategic Groups identify Burdines Dillards Jerrods Marks & Morgan Sears JCP Zales Kay Untapped Niches Target Pawn Shop Chain-by-the-Foot Carts WalMart Kmart Breadth of Product Line
  80. Other Dimensions for Strategic Group Maps Vertical integration Geographic scope R&D Expenditures Customer Service Number of outlets Reputation Can even be categorical (e.g., Mexican, Italian, pizza, subs, chicken)
  81. Competitor Analysis Components
  82. Identification of Key Success Factors? KSFs areproduct attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability opportunities for competitive advantage
  83. What factors determine winners and losers in football? What about baseball? Golf? Airlines?
  84. Example: KSFs for Beer Industry Utilization of brewing capacity -- to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand
  85. Identifying Key Success Factors (KSFs) - vary by segment Automotive Industry
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