Foundations in Strategic Management, 2e

Foundations in Strategic Management, 2e.

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Learning Objectives

Understand the:

• The leadership responsibilities of executive managers

• The responsibilities of boards of directors

• The importance of organizational culture in the management of organizations

• The characteristics of resources and capabilities that create a foundation for competitive advantage

• The usefulness of the Value Chain in understanding sources of competitive advantage

• The process of establishing strategic direction


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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis


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Four Primary Responsibilities of Leaders

Four Primary Responsibilities of Leaders

• Design organizational purpose, vision and core values

• Develop policies, strategies and structure

• Create an environment for organizational learning

• Serve as a steward for the organization

• Design organizational purpose, vision and core values

• Develop policies, strategies and structure

• Create an environment for organizational learning

• Serve as a steward for the organization


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Corporate GovernanceCorporate Governance

ShareholdersShareholders

Board ofDirectors

Board ofDirectors

Chief ExecutiveOfficer (CEO)

TopManage-MentTeam

TopManage-MentTeam

VP-LegalVP-Financial VP-MarketingVP-Human Res.


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Agency TheoryAgency Theory• Agents--managers with a fiduciary duty to act in the best

interests of owners

• Agency problem--managers maximize their own self-interests at the expense of owners

– High salaries of CEOs

– Short-term risk vs. long-term benefits

– Empire building for status

– CEO duality

• Agents--managers with a fiduciary duty to act in the best interests of owners

• Agency problem--managers maximize their own self-interests at the expense of owners

– High salaries of CEOs

– Short-term risk vs. long-term benefits

– Empire building for status

– CEO duality


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Governance Trends

Independents

1973 1998

Insiders vs. 10-15 total members 6-8 insiders

11 avg. total members 2 avg. insiders

Independent. nominating committee

2%

74%

Compensation

4% provided stock 78% provided all or part in stock

CEO performance evaluation.

None

72% have formal process 89% of those have annual review

Corporate governance review committee

None

58% have formal governance review committee


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Boards of Directors of High Performing Companies

Boards of Directors of High Performing Companies

• Active in governance processes

• Include BOTH insiders and outsiders

• Interlocking directorates

• Active in governance processes

• Include BOTH insiders and outsiders

• Interlocking directorates


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Employees and Culture

• Employees and the way they are managed can be important sources of competitive advantage.

• An organization’s culture, the system of shared values that guides employee beliefs and behavior, is another important component of the internal environment.


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Resources Leading to Sustainable Competitive

Advantage

Resources Leading to Sustainable Competitive

AdvantageOrganizationalResources and

Capabilities

Financial

Physical

Human

Organizational

VALUABLE?

UNIQUE?

CompetitiveAdvantage

DIFFICULT OR COSTLY

TO IMITATE?

SustainableCompetitiveAdvantage

APPLIEDTO MULTIPLEBUSINESSES?

Core Competencyor Capability


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The Value ChainThe Value Chain

Primary Activities

•Inbound Logistics

•Operations

•Outbound Logistics

•Marketing and Sales

•Service

Activities that Support the Primary Activities

•Administration

•Technology Development

•Human Resource Development

•Procurement

Primary Activities

•Inbound Logistics

•Operations

•Outbound Logistics

•Marketing and Sales

•Service

Activities that Support the Primary Activities

•Administration

•Technology Development

•Human Resource Development

•Procurement


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Use of Finance in Strategic Management

Use of Finance in Strategic Management

• Identify Strengths and Weaknesses

• Diagnose Problems

– Declining Profitability

– Insufficient Liquidity

– Leverage Too High or Too Low

– Internal Mismanagement

• Determine Ability to Finance Future Plans

– Ability to Borrow

– Stock vs. Debt

• Identify Strengths and Weaknesses

• Diagnose Problems

– Declining Profitability

– Insufficient Liquidity

– Leverage Too High or Too Low

– Internal Mismanagement

• Determine Ability to Finance Future Plans

– Ability to Borrow

– Stock vs. Debt


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Some Commonly Used Ratios Some Commonly Used Ratios• Profitability

– Gross Profit Margin

– Net Profit Margin

– ROA

– ROE

• Liquidity

– Current

– Quick

• Leverage

– Debt to Equity

– Total Debt to Total Assets (Asset Ratio)

• Activity

– Asset Turnover Average Collection Period

– Accounts Receivable Turnover Inventory Turnover

• Profitability

– Gross Profit Margin

– Net Profit Margin

– ROA

– ROE

• Liquidity

– Current

– Quick

• Leverage

– Debt to Equity

– Total Debt to Total Assets (Asset Ratio)

• Activity

– Asset Turnover Average Collection Period

– Accounts Receivable Turnover Inventory Turnover


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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis


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John W. Teets, CEOGreyhound Corp.John W. Teets, CEOGreyhound Corp.

“Management’s job is not to see the

company as it is... but as it can become.”

“Management’s job is not to see the

company as it is... but as it can become.”


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Strategic DirectionStrategic Direction

• DirectionDirection is defined by mission, business definition, vision and is defined by mission, business definition, vision and enterprise strategyenterprise strategy

• MissionMission: Organizational purpose, what it does, and why it exists. : Organizational purpose, what it does, and why it exists.

• Business definitionBusiness definition: Part of mission, defines products, markets, : Part of mission, defines products, markets, functions served, and resource conversion processes. functions served, and resource conversion processes.

• VisionVision: What the organization wants to be in the future. : What the organization wants to be in the future.

• Enterprise StrategyEnterprise Strategy--Link between mission, vision, and values. What --Link between mission, vision, and values. What should the organization be? down but they still exist, even if by defaultshould the organization be? down but they still exist, even if by default

• DirectionDirection is defined by mission, business definition, vision and is defined by mission, business definition, vision and enterprise strategyenterprise strategy

• MissionMission: Organizational purpose, what it does, and why it exists. : Organizational purpose, what it does, and why it exists.

• Business definitionBusiness definition: Part of mission, defines products, markets, : Part of mission, defines products, markets, functions served, and resource conversion processes. functions served, and resource conversion processes.

• VisionVision: What the organization wants to be in the future. : What the organization wants to be in the future.

• Enterprise StrategyEnterprise Strategy--Link between mission, vision, and values. What --Link between mission, vision, and values. What should the organization be? down but they still exist, even if by defaultshould the organization be? down but they still exist, even if by default


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Business DefinitionBusiness Definition• What is our product or service?

• Who are our customers? (markets and distribution channels)

• What do we do for them or provide for them? (functions served by our products or services)

• How do we produce the service or do it? (What are our resource conversion processes, technologies)

• What is our product or service?

• Who are our customers? (markets and distribution channels)

• What do we do for them or provide for them? (functions served by our products or services)

• How do we produce the service or do it? (What are our resource conversion processes, technologies)


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Business Definition for Toys ‘R’ Us

Business Definition for Toys ‘R’ Us

• Markets - Children, grandparents, parents

• Functions served (by the stores) - Availability, selection, low prices, easy access

• Resource conversion processes - Buying, inventorying, distributing, limited service, promotion and advertising

• Products/services - Toys and games, clothing and furniture for children

• Markets - Children, grandparents, parents

• Functions served (by the stores) - Availability, selection, low prices, easy access

• Resource conversion processes - Buying, inventorying, distributing, limited service, promotion and advertising

• Products/services - Toys and games, clothing and furniture for children


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Mission and Vision of MateriaLink

Mission - MateriaLink provides an electronic marketplace that allows buyers in Engine Procurement, and Construction (EPC) companies worldwide to source, procure and dispose of surplus and new materials in the most efficient manner possible.

Vision - MateriaLink is the premier electronic marketplace for project surplus, new and EPC industry information. We will be the preferred provider for all EPC and new materials transactions. We are committed to continuing to provide a site functionality that will enhance profitability and cut costs for our users.