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Chapter 2- Strategic leadership: Managing the Strategy Process 2.1. Vision, Mission, and Values 

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Strategic management process: method used by strategic leaders to formulate and implement a strategy, which lays the foundation for a sustainable competitive advantage  First step in the process is to define a firm’s vision, mission and values Strategic leadership: executive’s use of power and influence to direct the activities of others when pursuing an organization’s goals Vision: a statement about what an organization ultimately wants to achieve -> the company’s aspiration  Motivates employees while leaving room for individual and team contribution; responds to desire of people to find meaning in their work, beyond financial success  Leads to higher organizational performance; visionary companies often outperform their competitors in the long run.  Should be forward-looking and inspiring  Customer-orientated vision: focus on employees to think about how best to solve a problem for a customer -> allows companies to adapt to changing environments  Product-orientated vision: focus employees on improving existing products and services without consideration of underlying customer problems -> often constrain the ability to adapt to changing environments  Moving from product-orientated to customer-orientated vision: in some cases vision statements and product performance are associated. A positive relationship is most likely to exist under… o …customer orientated vision statements o …internal stakeholders that are invested in defining the vision o …organizational structures such as compensation systems that align with the firm’s vision statement Mission: description of what an organization actually does- the products and services it plans to provide and the markets in which it will compete  Visions and missions have to be backed up with strategic commitments, which are actions to achieve the mission that are costly, long-term orientated and difficult to reverse Values: A core values statement provides principles to guide an organization while it works on achieving its vision and fulfilling its mission, for internal conduct and external interactions.  Often includes explicit and ethical considerations  Provides a touchstone for employees to understand the company culture  Offers principles to deal with complexity and resolve conflict  “Moral compass”

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2.2 Strategic Leadership 

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Strategic leadership: executive’s successful use of power and influence to direct the activities of others when pursuing an organization’s goals.  Most managers prefer oral communication and face-to-face meetings, as they are able to pick up nonverbal cues. Upper-echelons theory: a conceptual framework that views organizational outcomesstrategic choices and performance levels- as reflections of the values of the members of the top management team.  Executives interpret situations through the lens of their perspective, shaped by personal circumstances, values and experiences.  Their leadership actions reflect age, education and experiences.  Strong leadership is the result of both innate abilities and learning Level-5 leadership pyramid: Jim Collins found consistent patterns of leadership among top companies. Each level builds upon the previous one.

Strategic formulation: part of the strategic management process that concerns the choice of strategy in terms of where and how to compete. Strategy implementation: part of the process that concerns the organization, coordination, and integration of how work gets done, or strategy execution  The two can be broken down in three areas…  …Corporate strategy: concerns questions relating to where to compete in terms of industry, markets and geography  … Business strategy: concerns questions about how to compete -> either cost leadership, differentiation or value innovation  … Functional strategy: concerns questions of how to implement a chosen business strategy Corporate executives formulate corporate strategy and are responsible for setting overarching strategic objectives and allocating scarce resources among different business divisions, monitoring performance, and making adjustments as needed.  Goal to increase overall corporate value so that it is higher than the sum of the individual business unit 2

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Strategic business unit (SBU): standalone division of a larger conglomerate with its own profit-and-loss responsibility  Within each SBU there are various business functions, such as accounting, finance, human resources, product development, operations, manufacturing, marketing, customer service.  Each functional manager is responsible for the decisions and actions within a single functional area.

2.3 The Strategic Management Process 

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Managers rely on three approaches when strategizing for competitive advantage  Strategic planning  Scenario planning Top-down strategies  Strategy as planned emergence Top-down strategic planning: rational, data driven process through which executives attempt to program future success. All strategic intelligence and decision-making responsibilities are concentrated in the office of the CEO.  Analysis: of internal and external data and apply it to all quantifiable areas, e.g. prices.  Formulation: reconfirm or adjust the company’s vision, mission and values to formulate corporate-, business- and functional strategies.  Implementation: Appropriate organizational structures and controls, as well as governance mechanisms aid in effective implementation.

Scenario planning: strategic planning in which top management envisions different scenarios to anticipate plausible futures in order to derive strategic responses.  Takes place at both the corporate and business levels of strategy and addresses optimistic and pessimistic futures  In analysis stage, managers identify possible future scenarios.  In formulation stage, the teams develop different plans to possible future scenarios. (What resources are needed, what initiatives are needed and how can we shape the future environment).  In the implement stage, managers execute the dominant strategic plan, which is the option that most closely matches the current reality. 3

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If the feedback is negative, managers consider whether to modify the plan or to activate an alternative plan

Strategy as planned emergence: due to the lack of flexibility in the top-down approaches, and the criticism of illusion of control, which is a tendency by people to overestimate their ability to control events, this strategy is based on an inspiring vision and not on hard data alone.  Focused on all types of information, also soft sources  E.g. Henry Mintzberg proposes this approach  Process begins with a top-down plan based on analysis of external and internal environment  Then managers design an intended strategy, the outcome of a rational and structured top-down strategic plan  Realized strategy: combination of intended and emergent strategy  Emergent strategy: any unplanned strategic initiative coming up from the bottom of an organization  Strategic initiative: any activity a firm pursues to explore and develop new products and processes, new markets or new ventures (can be the result of either bottom-up or top-down processes) o Can come up through… o … Autonomous actions: strategic initiatives undertaken by lower level employees on their own volition and often in response to unexpected situations. They are much closer to final products and customers than managers. Management has to decide which initiatives to support and which to shut down. o …Serendipity: describes random events, pleasant surprises, and accidental happenstances that can have a profound impact on the firm’s initiatives o …Resource-allocation process (RAP): determines the way it allocates its resources and can be critical in shaping its realized strategy. Emergent strategies can be a result from a firm’s resource allocation process.

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 Planned emergence: strategy process in which organizational structure and systems allow bottom-up initiatives to emerge and be evaluated and coordinated by top managers

2.4. Implications for the Strategist    

The firm needs an inspiring vision and mission backed up by ethical values The strategic leader must put an effective strategic management process in place The effectiveness of the chosen strategy process is contingent upon the rate of change in the internal and external environment of the firm. All employees should be involved in setting the vision and mission to create more meaningful work; every employee plays a strategic role.

Mini case 2: Teach for America: How to inspire future leaders       

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TFA is a nonprofit organization that recruits college graduates and professionals to teach for two years in economically disadvantaged communities in the US They describe themselves as the head of the movement of leaders who work to ensure that youth growing up in poverty get an excellent education Founder Wendy Kopp was convinced that people generally search for a meaning in their lives by making a positive contribution to society Aims to turn on its head the social perception of teaching from an unattractive job into a high-prestige professional opportunity. Mission: to eliminate educational inequality by enlisting the nation’s most promising future leaders in the effort. TFA corps members are paid as regular first year teacher. Today one third applied as graduate students or professionals. 50% of the teachers are of color. Making TFA highly selective changed the social perception of teaching in unprivileged areas. It is now an honor and great resume builder to be chosen for the TFA. 95% of school principals working with TFA members say that these teachers make a positive difference.

Chapter 3- External Analysis: Industry Structure, Competitive Forces and Strategic Groups 5

3.1. The PESTEL framework  

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Framework to scan, monitor and evaluate changes and trends in the firm’s macroenvironment Managers tend to have little influence on the firm’s general environment (e.g. interest rates), but have some influence over the firm’s task environment (e.g. composition of their strategic groups). PESTEL: Political, Economic, Sociocultural, Technological, Ecological, Legal Political Factors: result from the processes and actions of government bodies that can influence the decisions and behavior of the firm  Managers try to influence and shape this realm, by lobbying, public relations, contributions, litigation, etc.  Closely connected to legal factors, as political pressure often results in changes in legislation Economic Factors: are mostly macroeconomic factors that affect the whole economy  Growth rates: measure of change in the amount of goods and services produced by a nation’s economy. During booms businesses expand, while in recessions businesses look for low-cost solutions. Boom periods can also lead to speculative asset bubbles.  Levels of unemployment: affected by the growth rate. In boom periods, there is low unemployment, whereas in recession times, the unemployment rises.  Interest rates: the amount that creditors are paid for the use of their money and the amount that debtors pay for that use, adjusted for inflation. When credit is cheap, interest rates are low and there is economic growth.  Price stability (Inflation/Deflation): the lack of change in price levels of goods and services, which rarely occurs. Rising prices, inflation, occurs when there is too much money in the economy. Deflation threatens the economy, because it distorts expectations about the future and nobody invests.  Currency exchange rates: determine how many dollars one must pay for a unit of foreign currency.  Economic factors are ever-present and rarely static. Managers must appreciate the power of these factors to assess their effects on firm performance. Sociocultural factors: capture a society’s cultures, norms and values. They also differ across groups, so managers have to monitor such trends and consider implications for the firm.  Demographic trends are also sociocultural factors. They are population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion and socioeconomic class.  Can present opportunities, but can also pose threats Technological factors: capture the application of knowledge to create new processes and products, e.g. biotechnology or nanotechnology.  Relentless and high speed Ecological factors: involve broad environment issues such as the natural environment, global warming, and sustainable economic growth. 6

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 Organizations are in an interdependent relationship with the natural environment  Managers need to find responsible and sustainable ways to influence the continued existence of human societies and the organizations we create  The can also provide business opportunities Legal factors: include the official outcomes of political processes as manifested in laws, mandates, regulations and court decisions.  Often coexist with or result from political will, pressure and legal sanctions  Governments can often wield positive legal and political mechanisms to achieve desired changes in consumer behavior.

3.2. Industry Structure and Firm Strategy: The Five Forces Model 

Industry: group of incumbent companies facing more or less the same set of suppliers and buyers  Industry analysis: provides a more rigorous basis to identify an industry’s profit potential, the level of profitability for the average firm and the implications for one firm’s strategic position within an industry.  Strategic position: relates to its ability to create value for customers (V) while containing the cost to do so (C). The highest competitive advantage can be achieved by maximizing the difference between the value and the costs (V-C).  Porter’s five forces: a framework that identifies five forces that determine the profit potential of an industry and shape a firm’s competitive strategy.  Competition has to be viewed more broadly than simply as the firm’s closest competitors, but rather should also encompass other forces like buyers, suppliers, potential entrants and substitutes  Profit potential is not only determined by industry-specific factors, but a function of the five forces o Treat of entry o Power of suppliers o Power of buyers o Threat of substitutes o Rivalry among existing firms  The stronger the forces, the lower the industry’s profit potential  The threat of entry: describes the risk that potential competitors will enter the industry  Incumbent firms may lower prices to make entry appear less attractive to new entrants  Threat may force incumbent firms to spend more money to satisfy their existing customers, which reduces an industry’s profit potential.  Entry barriers: are obstacles that determine how easily a firm can enter an industry. Examples are … o … Economies of scale: are cost advantages that accrue to firms with larger output, because they can spread fixed costs over more units, which decreases the per unit price. 7

o … Network effects: the value of a product or service increases with the number of users. o … Customer switching costs: costs incurred by moving from one supplier to the other; one time sunk costs. o … Capital requirements: describe the “price of the entry ticket” or how much capital is required to entry the industry. The treat of entry is high when the requirements are low. Capital is a resource that can be relatively easy acquired in the face of attractive returns. o … Advantages independent of size: incumbent firms often possess cost and quality advantages, based on brand loyalty, proprietary technology, and preferential access to raw material and distribution channels, favorable geographic locations and cumulative learning and experience effects, emotional connection with the firm, patents and trade secrets. o … Government policy: government policies restrict or prevent new entrants o … Credible threat of retaliation: firms must anticipate how incumbent firms will react, e.g. with a price war. Incumbent firms often have deeper pockets and can therefore stand a price competition for a longer time. The threat of entry is high when new entrants expect that incumbents will not or cannot retaliate.  The power of suppliers: captures pressures that industry supplier can exert on an industry’s profit potential. Powerful suppliers can raise the cost of production by demanding higher prices for their inputs or reducing the quality and they can threat the firms by capturing part of the economic value created. Power is high when…  …suppliers industry is more concentrated than the one they supply to  … suppliers do not depend heavily on the industry for their revenues  …incumbent firms face high switching costs between suppliers  … suppliers offer differentiated products  … there are no substitutes for the supplier’s products  … suppliers can credibly threaten to forward-integrate into the industry  industry structures are not static, but can change over time  The power of buyers: pressure customers can put on the producer’s margins in the industry by demanding a lower price or higher product quality. Strong buyers reduce the profit potential. Power is high when…  … there are few buyers that purchase large quantities  … the industry sells standardized or undifferentiated products  … buyers face low or no switching costs  … buyers can credibly threaten to backwardly integrate into the industry  … buyers are price sensitive, e.g. when o The purchase represents a significant part of his budget o Buyers earn low profits o The quality cost of the buyer’s product is not affected much by the quality cost of their inputs  Relative strengths are context-dependent 8

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The treat of substitutes: products available from outside the industry will come close to meeting the needs of current customers. High threat reduces profit potential by limiting the price the industry can charge. The threat is high when…  … the substitute offers an attractive price-performance trade-off  … the buyer’s switching costs are low  Rivalry among existing competitors: intensity with which companies within the same industry jockey for market share and profitability. Companies can use price and non-price competition to create more value in terms of design, quality, promotion, supports, etc. Determined by...  … Competitive structure: element and features common in all industries, such as number and size of competitors, firm’s degree of pricing power, type of product, height of entry barriers. Companies can be fragmented (many small firms and low profitability) or consolidated (few or one firm, highly profitable). o Perfect competition: fragmented, many small firms, low profitability, consumers only decide based on price, no ability to generate profits o Monopolistic competition: many firms with differentiated products, some obstacles to entry, some ability to raise prices. o Oligopoly: few large firms, differentiated products, high entry barriers, some degree of pricing power, companies are interdependent o Monopoly: one large firm with a unique product, high entry barriers, high profits. Sometimes government grants monopolistic position. There are natural monopolies (government thinks the market would not supply these products without them) and near monopolies (accrued power through patents or technology)  … Industry growth: in periods of high growth, demand rises and price competition decreases. Rivalry becomes fierce, during slow or negative growth, because rivals can only gain at the expense of others. Destructive price competition can lead to limited choices, lower quality and higher prices in the long-run if few large firms survive.  … Strategic commitments: firm actions that are costly, long-term orientated ...