Because learning changes everything.

CHAPTER 2
Strategy Formulation,
Execution, and
Governance

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 LEARNING OBJECTIVES

1. Understand why it is critical for a firm’s managers to have a

clear strategic vision of where a firm needs to head and why.
2. Explain the importance of setting both strategic and financial
objectives.
3. Explain why the strategic initiatives taken at various
organizational levels must be tightly coordinated to achieve
companywide performance targets.
4. Recognize what a firm must do to achieve operating excellence
and to execute its strategy proficiently.
5. Identify the role and responsibility of a firm’s board of directors
in overseeing the strategic management process.

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 The Strategy Formulation, Strategy Execution Process

1. Develop a strategic vision.

2. Set objectives.
3. Craft a strategy.
4. Implement and execute the chosen strategy.
5. Evaluate and analyze the external environment
and the firm’s internal situation and performance.

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 FIGURE 2.1 The Strategy Formulation, Strategy Execution Process

Access the text alternative for slide images.

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 TABLE 2.1 Factors Shaping Decisions in the Strategy Formulation,
Strategy Execution Process

External Considerations Internal Considerations

Does sticking with the company’s present Does the company have an appealing customer
strategic course present attractive opportunities value proposition?
for growth and profitability?
What kind of competitive forces are industry What are the company’s competitively
members facing and are they acting to enhance important resources and capabilities, and are
or weaken the company’s prospects for growth they potent enough to produce a sustainable
and profitability? competitive advantage?
What factors are driving industry change, and Does the company have sufficient business and
what impact on the company’s prospects will competitive strength to seize market
they have? opportunities and nullify external threats?
How are industry rivals positioned, and what Are the company’s costs competitive with those
strategic moves are they likely to make next? of key rivals?

What are the key factors of future competitive Is the company competitively stronger or
success, and does the industry offer good weaker than key rivals?
prospects for attractive profits for companies
possessing those capabilities?

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 Strategic Inflection Point and Strategic Plan

A strategic inflection point occurs when significant changes in an

industry require that management must evaluate the risks of
changing the company’s future direction rather than staying on its
established course.
A strategic plan maps out where a company is headed, establishes
strategic and financial targets, and outlines the competitive moves
and approaches to be used in achieving the desired business
results.

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 Stage 1: Developing a Strategic Vision, a Mission,
and Core Values
A Strategic Vision:
• Is top management’s view of “where we are going.”
• Defines the firm’s direction and its future product-market-customer-
technology focus to stakeholders.
• Is distinctive and specific to a particular organization.
• Avoids use of generic, innocuous, and uninspiring language that
could apply to most any firm.
• Definitively states how the company’s leaders intend to position
the firm beyond where it is today.

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 CORE CONCEPT: Strategic Vision

A strategic vision describes “where we are going”—the course and

direction management has charted and the company’s future
product-customer-market-technology focus.

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 TABLE 2.2 Characteristics of Effectively Worded Vision Statements

TYPE DESCRIPTION
Graphic Paints a picture of the kind of company that management is trying to create and
the market position(s) the company is striving to stake out.
Directional Is forward looking; describes the strategic course that management has charted
and the kinds of product-market-customer-technology changes that will help the
company prepare for the future.
Focused Is specific enough to provide managers with guidance in making decisions and
allocating resources.
Flexible Is not so focused that it makes it difficult for management to adjust to changing
circumstances in markets, customer preferences, or technology.
Feasible Is within the realm of what the company can reasonably expect to achieve.

Desirable Indicates why the directional path makes good business sense.
Easy to Is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple,
communicate memorable “slogan”

Source: Based partly on John P. Kotter, Learning Change (Harvard Business School Press, 1996)

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 TABLE 2.3 Common Shortcomings in Company Vision Statements

SHORTCOMING DESCRIPTION
Vague or Short on specifics about where the company is headed or what the
incomplete company is doing to prepare for the future.
Not forward Doesn’t indicate whether or how management intends to alter the company’s
looking current product-market-customer-technology focus.
Too broad So all-inclusive that the company could head in most any direction, pursue
most any opportunity, or enter most any business.
Bland or Lacks the power to motivate company personnel or inspire shareholder
uninspiring confidence about the company’s direction.
Not distinctive Provides no unique firm identity; could apply to firms in any of several
industries (including rivals operating in the same market arena).
Too reliant on Doesn’t say anything specific about the company’s strategic
superlatives course beyond the pursuit of such distinctions as being a recognized leader, a
global or worldwide leader, or the first choice of customers.

Source: Based on information in Hugh Davidson, The Committed Enterprise (Oxford: Butterworth Heinemann, 2002), chap. 2; and Michel Robert, Strategy Pure and Simple II (New York: McGraw-Hill,
1998), chaps. 2, 3, and 6.

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 Concepts and Connections 1.1
Examples of Strategic Visions—How Well Do They Measure Up?
Effective Short-
Company Vision Statement Elements comings
Whole Whole Foods Market is a dynamic leader in the quality food business. We are a • Forward-looking • Long
mission-driven company that aims to set the standards of excellence for food retailers. • Graphic • Not
Foods We are building a business in which high standards permeate all aspects of our • Focused memorable
company. Quality is a state of mind at Whole Foods Market. • Desirable
Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision
reaches far beyond just being a food retailer. Our success in fulfilling our vision is
measured by customer satisfaction, team member happiness and excellence, return on
capital investment, improvement in the state of the environment and local and larger
community support.
Our ability to instill a clear sense of interdependence among our various stakeholders
(the people who are interested and benefit from the success of our company) is
contingent upon our efforts to communicate more often, more openly, and more
compassionately. Better communication equals better understanding and more trust.
Dr. Pepper A leading producer and distributor of hot and cold beverages to satisfy every consumer • Focused • Not graphic
need, anytime and anywhere. • Desirable • Not distinctive
• Easy to
communicate
Caterpillar Our vision is a world in which all people’s basic needs—such as shelter, clean water, • Graphic • Too broad
sanitation, food and reliable power—are fulfilled in an environmentally sustainable • Desirable • Too reliant on
way and a company that improves the quality of the environment and the communities superlatives
where we live and work. • Not distinctive
Nike NIKE, Inc., fosters a culture of invention. We create products, services and experiences • Forward-looking • Vague
for today’s athlete* while solving problems for the next generation. • Flexible • Not focused
• Too reliant on
superlatives

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 The Importance of Communicating the Strategic Vision

An engaging, inspirational vision.

• Provides direction and energizes
employees.
• Makes the organization’s case for “where
we are going and why.”
• Evokes positive support and excitement.
• Enlists the commitment of company
personnel to engage in actions that move
the company in its intended direction.

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 Expressing the Essence of the Vision in a Slogan

Disney
• To "create happiness by providing the finest
in entertainment for people of all ages,
everywhere."
The Mayo Clinic
• The best care to every patient every day.
Greenpeace
• To halt environmental abuse and promote
environmental solutions.

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Why a Sound, Well-Communicated Strategic Vision Matters

It crystallizes senior executives’ own views about

the firm’s long-term direction.
It reduces the risk of rudderless decision making
by management at all levels.
It is a tool for winning the support of employees
to help make the vision a reality.
It provides a beacon for lower-level managers in
forming departmental missions.
It helps an organization prepare for the future.

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 Strategic Vision versus Mission Statement

A strategic vision concerns a A firm’s mission statement

firm’s future strategic course— focuses on its present business
“where we are headed and our scope and purpose—
future focus.” “who we are, what we do, and
• Markets to be pursued. why we are here.”
• Future product, market, • Current product and service
customer and technology focus. offerings.
• Customer needs being served.
• Company identity.

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 Developing a Company Mission Statement

Ideally, a company mission statement is sufficiently descriptive to:

• Identify the company’s products or services.
• Specify the buyer needs it seeks to satisfy.
• Specify the customer groups or markets it is endeavoring to serve.
• Specify its approach to pleasing customers.
• Give the company its own identity.

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 CORE CONCEPT: Mission Statement

A well-conceived mission statement conveys a

company’s purpose in language specific enough to give
the company its own identity.

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 Example of a Mission Statement

The mission of St. Jude Children’s Research Hospital: “To advance

cures, and means of prevention, for pediatric catastrophic diseases
through research and treatment. Consistent with the vision of our
founder Danny Thomas, no child is denied treatment based on
race, religion or a family’s ability to pay.”

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 Strategic Mission, Vision, and Profit

Occasionally, companies state that their mission is to simply

earn a profit.
Profit is more correctly an objective and a result of what a
firm does.
Profit is the obvious intent of every commercial enterprise.
Profit is not “who we are and what we do.”

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 CORE CONCEPT: Values

A company’s values are the beliefs, traits, and behavioral norms

that its personnel are expected to display in conducting the
company’s business and pursuing its strategic vision and mission.

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 Linking the Strategic Vision and Mission
with Company Values

Values • Fair treatment

• Provide guidance for desired • Honor and integrity
actions and behaviors of • Ethical behavior
employees as they conduct • Innovativeness
the company’s business • Teamwork
• A passion for excellence
• Social responsibility
• Community citizenship

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Stage 2: Setting Objectives
Managerial Purpose in Setting Objectives.
• To convert the strategic vision into specific performance targets.
• To create yardsticks to track progress and measure performance.
Managerially Valuable Objectives.
• Are well-stated (clearly worded).
• Are challenging, yet achievable such that they stretch the organization
to perform at its full potential.
• Are quantifiable (measurable).
• Contain a specific deadline for achievement.

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The Imperative of Setting Stretch Objectives
To promote outstanding performance, managers must set its
performance targets high enough to stretch an organization
to perform at its full potential.
A company exhibits strategic intent when it relentlessly
pursues an ambitious strategic objective.

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 CORE CONCEPT: Objectives, Stretch Objectives,
and Strategic Intent
Objectives are an organization’s performance targets—the results
management wants to achieve.
Stretch objectives set performance targets high enough to stretch
an organization to perform at its full potential and deliver the best
possible results.
Strategic intent is embodied in the organization’s relentless pursuit
of an ambitious strategic objective, concentrating the full force of
its resources and competitive actions on achieving that objective.

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Stage 2: Setting Financial Objectives
What Kinds of Financial Objectives to Set:
• Financial objectives.
• Communicate management’s targets for financial performance.
• Are lagging indicators reflecting results of past decisions and organizational
activities.
• Relate to revenue growth, profitability, and return on investment.

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Stage 2: Setting Strategic Objectives
What Kinds of Strategic Objectives to Set:
• Strategic objectives.
• Are related to a firm’s marketing standing and competitive vitality.
• Are leading indicators of a firm’s future financial performance and business
prospects.
• If achieved, indicate that a firm’s future financial performance will be
better than its current or past performance.

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 CORE CONCEPT: Financial Objectives and
Strategic Objectives
Objectives are an organization’s performance targets—results
management wants to achieve.
Financial objectives relate to the financial performance targets
management has established for the organization to achieve.
Strategic objectives relate to target outcomes that indicate a
company is strengthening its market standing, competitive vitality,
and future business prospects.

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 CORE CONCEPT: The Balanced Scorecard

The balanced scorecard is a widely used method for combining

the use of both strategic and financial objectives, tracking their
achievement, and giving management a more complete and
balanced view of how well an organization is performing.

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 Table 2.4 The Balanced Scorecard Approach
to Performance Measurement
Financial Objectives. Strategic Objectives.
• An x percent increase in annual • Win an x percent market share.
revenues. • Achieve customer satisfaction rates of x percent.
• Annual increases in earnings • Achieve a customer retention rate of x percent.
per share of x percent.
• Acquire x number of new customers.
• An x percent return on capital
• Introduce x number of new products in the next
employed (ROCE) or
three years.
shareholder investment (ROE).
• Reduce product development times to x months.
• Bond and credit ratings of x.
• Increase the percentage of sales coming from
• Internal cash flows of x to fund
new products to x percent.
new capital investment.
• Improve information systems capabilities to give
managers defect information in x minutes.
• Improve teamwork by increasing the number of
projects involving more than one business unit to
x.

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 Short-Term and Long-Term Objectives
Short-term Objectives Long-term Objectives
• Are targets to be • Are targets to be achieved
achieved soon. within 3 to 5 years.
• Represent milestones or
stair steps for reaching
long-range performance.

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The Need for Objectives at All Organizational Levels
Objectives are needed at all levels.
• To set business-level objectives.
• To set establish functional-area objectives.
• To set operating-level objectives.
Long-term objectives take precedence over
short-term objectives.

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Stage 3: Crafting a Strategy
Crafting a strategy means asking:
• How to attract and please customers?
• How to compete against rivals?
• How to position the firm in the marketplace and capitalize on attractive
opportunities to grow the business?
• How best to respond to changing economic and market conditions?
• How to manage each functional piece of the business?
• How to achieve the firm’s performance targets?

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 Strategy Formulation Involves Managers at
All Organizational Levels
In most firms, crafting strategy is a collaborative team effort that
includes managers in various positions and at various
organizational levels.
Crafting strategy is rarely something only high-level executives do.
A firm’s overall strategy is a collection of strategic initiatives and
actions devised by managers up and down the whole
organizational hierarchy.

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A Company’s Strategy-Making Hierarchy
A firm’s strategy is a collection of initiatives undertaken by
managers at all levels in the organizational hierarchy.

Crafting strategy is a collaborative effort.

• Involves managers from various levels of the organization.
• Should be cohesive and mutually reinforcing, fitting together like a jigsaw
puzzle.
• Requires choosing among the various strategic alternatives.

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 CORE CONCEPT: Corporate Strategy and Business Strategy

Corporate strategy establishes an overall game plan for

managing a set of businesses in a diversified, multibusiness
company.
Business strategy is primarily concerned with strengthening
the company’s market position and building competitive
advantage in a single business company or a single business
unit of a diversified multibusiness corporation.

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 Figure 2.2 A Company’s Strategy-Making Hierarchy

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 The Strategy-Making Hierarchy
STRATEGY DESCRIPTION
Corporate Is orchestrated by the CEO and other senior executives and establishes an
strategy overall game plan for managing a set of businesses in a diversified,
multibusiness company.
Addresses the questions of how to capture cross-business synergies,
what businesses to hold or divest, which new markets to enter, and how
to best enter new markets—by acquisition, creation of a strategic
alliance, or through internal development.
Business Is primarily concerned with building competitive advantage in a single
strategy business unit of a diversified company or strengthening the market
position of a nondiversified single business company.
Functional- Are concerned with actions related to particular functions or processes
area within a business (marketing strategy, production strategy, finance
strategies strategy, customer service strategy, product development strategy, and
human resources strategy).
Operating Are relatively narrow strategic initiatives and approaches for managing
strategies key operating units (plants, distribution centers, geographic units) and
specific operating activities such as materials purchasing or Internet sales.

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 Stage 4: Implementing and Executing the Chosen Strategy
Managing the strategy execution process involves:
• Exerting the internal leadership • Installing information and
needed to propel implementation operating systems that enable
forward personnel to perform essential
activities
• Creating a company culture and
work climate conducive to • Ensuring that policies and
successful strategy execution procedures facilitate rather than
impede effective execution
• Tying rewards and incentives
directly to the achievement of • Allocating ample resources to
performance objectives activities critical to good strategy
execution
• Pushing for continuous
improvement in how value chain • Staffing the organization to provide
activities are performed needed skills and expertise

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 Stage 5: Evaluating Performance and Initiating
Corrective Adjustments

Deciding if there is a need for change:

• Monitoring for disruptive developments.
• Evaluating the firm’s recent performance.
• Making corrective adjustments to strategy.
Strategy execution is an ongoing and uneven process
of organizational learning.
• A firm’s vision, objectives, strategy, and approach to
strategy execution are never final.

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Corporate Governance: The Board of Directors
The Role of the Board of Directors in the Strategy-Formulation,
Strategy-Execution Process:
• Oversee the firm’s financial accounting and reporting practices.
• Diligently critique and oversee the company’s direction, strategy,
and business approaches.
• Evaluate the caliber of senior executives’ strategy-making and
strategy-executing skills.
• Institute a compensation plan for top executives that rewards them
for actions and results that serve shareholder interests.

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Strong Boards Lead to Good Corporate Governance
A Strong, Independent Board of Directors
• Is well informed about the company’s performance.
• Guides and judges the CEO and other top executives.
• Has the courage to curb management actions it believes are
inappropriate or unduly risky.
• Certifies to shareholders that the CEO is doing what the board expects.
• Provides insight and advice to management.
• Is intensely involved in debating the pros and cons of key decisions and
actions.

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