Strategy Decision Making 2 Flashcards
What is Strategy?
What is Strategy?
Strategy is the creation of a unique and valuable position, involving a different set of activities
Important points for Strategy
Important points for Strategy
It is about the managers’ theories about how to gain and sustain competitive advantage
It is about being different from your rivals
It is about creating value while keeping costs under control
The Strategic Management Process
The Strategic Management Process
The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns.
Company Mission
Company Mission
the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product, market, and technology terms
Company Vision
Company Vision
a company’s purpose or reason for existing
Company Values
Company Values
What a company believes, its business practices around how teammates treat one another, and how the company treats its customers.
Mission Statement
Mission Statement
a statement of the organization’s purpose - what it wants to accomplish in the larger environment
Product Oriented Mission
Product Oriented Mission
defines a business in terms of a good or service provided rather than in terms of the customer need to be met
Customer Oriented Mission
Customer Oriented Mission
defines a business in terms of providing solutions to customer needs
Organizational Culture
Organizational Culture
the set of values, norms, and standards that control how employees work to achieve an organization’s mission and goals
Business Level Strategy
Business Level Strategy
the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
Quest for gaining and sustaining competitive advantages in a discrete and identifiable product market (How to compete?)
Scenario Planning
Scenario Planning
Strategy-planning activity in which top management envisions different what-if scenarios to anticipate plausible futures in order to derive strategic responses.
Corporate Level Strategy
Corporate Level Strategy
A plan that indicates in which industries and national markets an organization intends to compete.
Quest for selecting and managing the scope and the overall direction of the firm (Where to compete to get competitive advantage?)
Decentralized Planning
Decentralized Planning
An approach where top executives or planning experts work with managers in major divisions or departments to develop their own goals and plans.
Strategic Intent
Strategic Intent
a stretch goal that pervades the organization with a sense of winning, which it aims to achieve by building the necessary resources and capabilities through continuous learning
External Analysis
External Analysis
Examining the organization’s operating environment to identify strategic opportunities and threats.
Why Look at the External Environment?
Why Look at the External Environment?
Threats
Opportunities
Macro-environment
Industry
Political PESTEL
Political PESTEL
the impact of government including taxes, tariffs, trade agreements, and labor regulations
Economic PESTEL
Economic PESTEL
growth rates, interest rates, levels of employment, price stability (inflation and deflation), and currency exchange rates.
Social PESTEL
Social PESTEL
population size, age, ethnic mix, and social movements
Technological PESTEL
Technological PESTEL
impact of the internet, smart devices, and automation on business and society
Legal PESTEL
Legal PESTEL
requirements related to labor and consumer protection, equality, and product safety
Ecological PESTEL
Ecological PESTEL
broad environmental issues such as the natural environment, global warming, and sustainable economic growth
How do firms try to influence the environment?
How do firms try to influence the environment?
Marketing and Lobbying
lobbying
ying
Engaging in activities aimed at influencing public officials, especially legislators, and the policies they enact.
Porter’s 5 Force
orter’s 5 Forces
*Rivalry among competitors;
*Threat of new entrants;
*Threat of substitute products;
*Bargaining power of buyers;
*Bargaining power of suppliers;
Understanding the forces that shape industry competition is the starting point for developing strategy (boundaries often blurry)
Industry Life Cycle
Industry Life Cycle
the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry
What are the five sequential stages of a company’s life cycle?
What are the five sequential stages of a company’s life cycle?
Embryonic
Growth
Shakeout
Mature
Decline
stage 1
Stage 1: Embryonic
The industry is just beginning to develop
Development is slow
Buyers are unfamiliar with a product
High prices
Stage 2: Growth
Stage 2: Growth
Demand takes off
Many new customers
First-time demand
Prices fall with development and higher volume
Entry barriers are relatively low
Relatively low competition
Stage 3: Shakeout
Stage 3: Shakeout
The rate of growth slows
Demand approaches saturation levels
Few potential first-time buyers
Rivalries become intense
Excess capacity may exist
Means of competition: Efficiency
Stage 4: Mature
Stage 4: Mature
The market is saturated
Demand is limited to replacement demand
Growth is low or zero
Barriers increase
The threat of new entries decrease
Competition drives prices down
Stage 5: Decline
Stage 5: Decline
Falling demand = Excess capacity
Growth becomes negative due to
Technology substitution
Demographics
International competition
How to outperform your rivals?
How to outperform your rivals?
by establishing a preservable difference:
delivering greater value to customers … or
create comparable value at lower costs
Strategic Positioning
Strategic Positioning
performing different activities from rivals or performing similar activities in different ways (operational effectiveness similar activities better than rivals)
What does a sustainable strategic position require?
What does a sustainable strategic position require?
requires trade-offs (different positions, with their tailored activities, require different product configurations, skills, equipment, and systems …)
Improving operational effectiveness?
Improving operational effectiveness?
Improving operational effectiveness is a necessary part of management, but it is not a strategy
What is internal analysis?
What is internal analysis?
Analyzing the firm’s current and future performance and sustainability strategies
Value Chain Analysis
Generic building blocks of competitive advantage
Firm resources
Market-based View
Market-based View
Look at the industry structure then decide on a way of acting and then analyze the performance
Resource-based View
Resource-based View
a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles as an organization
3 Generic Business Strategies
3 Generic Business Strategies
cost leadership, differentiation, and focus
Cost Leadership Approach
Cost Leadership Approach
To outperform competitors by doing everything it can to produce goods or services at the lowest possible cost
Differentiation Approach
Differentiation Approach
The differentiated product can satisfy a customer’s need in a way that competitors cannot
Focus Approach
Focus Approach
Directed toward serving the needs of a limited customer group or segment (e.g. geographic region, customer segment, type of customer)
Building Blocks of Competitive Advantage
efficiency, innovation, quality, responsiveness to customers
Stuck in the Middle Hypothesis
A firm “stuck in the middle” […] “will compete at a disadvantage because the cost leader, differentiators, or focuser will be better positioned to compete in any segment […] Such a firm will be much less profitable than rivals achieving one of the generic strategies”
Which is better between hybrid and pure strategies?
Which is better between hybrid and pure strategies?
Purer strategy positions are associated with above-average operating returns across three out of four major industry sectors
Data and analysis did not identify a single industry in which hybrid strategies outperformed pure strategies
How to sustain the rent-generating potential of a resource?
How to sustain the rent-generating potential of a resource?
Inimitability: physical uniqueness, path-dependent accumulation, causal ambiguity, and social complexity
Non-substitutability: can another/different resource provide the same benefits?
What are a firm’s resources and capabilities?
A firm’s resources and capabilities include all of the financial, physical, human, and organizational assets used by a firm to develop, manufacture, and deliver products or services to its customers
How does a company compete with others based on resources?
How does a company compete with others based on resources?
Resource-based reasoning—a company will outperform its rivals if it has the best and most appropriate stocks of resources
Competitive advantage arises from the ownership and deployment of a valuable resource that enables the company to perform activities better or more cheaply than competitors
What are tangible resources?
What are tangible resources?
Physical assets such as equipment, buildings, land, furniture, owned raw materials, the size and geographic scope of the work force, and financial assets.
What are intangible resources?
What are intangible resources?
assets that are much more difficult for competitors to account for or imitate and are typically embedded in unique routines & practices that have evolved & accumulated over time (brand names and reputations)
VRIO
VRIO Framework
A theoretical framework that explains and predicts firm-level competitive advantage.
What are core competencies?
What are core competencies?
a unique skill and/or knowledge an organization possesses that gives it an edge over competitors
What resources and capabilities are necessary to successfully pursue the everyday low-price strategy?
Locations
Procurement
Inbound & Outbound Logistics
HR Practices and Operations
Marketing
The Value Chain
The Value Chain
The set of activities through which a product or service is created and designed to deliver value to customers
The BCG Matrix
The BCG Matrix
a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market
Related Diversification
Related Diversification
a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity
Unrelated Diversification
Unrelated Diversification
a growth strategy whereby a new business lacks any common elements with the present business
Ambidexterity
the challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities
What are challenges faced by businesses upon integration?
What are challenges faced by businesses upon integration?
Operational challenges
Not-invented-here syndrome
Status differences
Awareness from top managers
Identity clashes
Organizational Design
Configuring the formal elements/dimensions of organizations (including structures, processes, people, …) to achieve specific goals in specific environments (including external competitors and internal culture and politics)
What is a strategic organizational design composed of?
What is a strategic organizational design composed of?
Strategy
Structure
People
Processes
What makes Organization Design strategic?
What makes Organization Design strategic?
Organization design is one of the few levers for change available to most managers
What does Organizational Design entail?
What does Organizational Design entail?
Design is about how to combine elements/dimensions to achieve goals
Design involves trade-offs
Design involves intervention and innovation: creating new possibilities, not just analyzing or selecting among predefined options
What does Organizational Design entail?
What does Organizational Design entail?
Design is about how to combine elements/dimensions to achieve goals
Design involves trade-offs
Design involves intervention and innovation: creating new possibilities, not just analyzing or selecting among predefined options
Strategic Direction and Organization Design Divisions
How they are interlinked
Strategic Leadership
focuses on executives and their ability to anticipate, envision, maintain flexibility, think strategically, and work with others to initiate changes that will create a positive future for an organization
Why is Strategy important?
To position or set direction within the environment
Position vs. Trajectory
To focus effort within the organization
To define the organization, to give meaning to the organization’s activities
To provide consistency (but not too much)
What are the 3 stages of people in a company who drive strategy?
What are the 3 stages of people in a company who drive strategy?
Formulation (higher ups)
Implementation (middle man.)
Execution (employees)
Who comprises the formulation stage?
TMT (CEO, CFO, CMO,…)
Board of Directors
Shareholders
Chief Executive Officer (CEO)
Chief Executive Officer (CEO)
Corporate officer who has overall responsibility for managing the business and delegates responsibilities to other corporate officers.
US vs. Europe CEOs difference
US vs. Europe CEOs difference
US: CEO is often the Chairman of the board of directors
Europe: The Chairman is not an executive officer
Chief Operating Officer (COO)
Chief Operating Officer (COO)
the position responsible for overseeing the company’s operations and manages day-to-day activities and reports them to the CEO
What characteristics distinguish CEOs from other employees?
Leadership abilities
Intellectual
Motivational
Personal
Interpersonal
What characteristics do CEOs in SMEs and Large Firms have in common?
CEO candidates in both SMEs & large firms have above-average general ability and execution skills. However, factor patterns are not identical across firm sizes.
What are the four factors that explain the variation in CEO abilities?
General Ability
Execution Ability vs. Personal Skill
Charismatic vs. Analytical
Strategic vs. Managerial Focus
What characteristics do CEO, CFO, and COO candidates show?
CEO: Candidates have more extreme scores on general ability, execution, charisma, and strategic focus.
CFO: Diametrically opposite to CEO scores (lower general ability, more interpersonal, analytical and managerial/detail focused).
COO: Factors fall between CEO & CFO, except that COO shows a high managerial/detail-oriented focus
Top Management Team (TMT)
Top Management Team (TMT)
relatively small group of most influential executives at the apex of an organization → responsible for strategic decision-making
TMT Composition and Structure
Demographic characteristics
Size
Homogeneity vs. Heterogeneity
Interdependence of Roles
TMT Behavior and Processes
Distribution of Power
Group-dynamic processes
Interpersonal Conflicts
Leadership of TMTs
Functional TMT members
senior executives in the TMT responsible for one or more functional areas in their organizations
Examples of functional TMT members
Examples of functional TMT members
Chief Marketing Officer
Chief Commercial Officer
Chief Operating Officer
Chief Technology Officer
Chief Strategy Officer
How is power distributed amongst the TMT members?
Differences in compensation between the CEO and other TMT members
Differences in size and importance of areas of responsibility
Differences in the possibility to access/connect with the CEO
Differences in the importance and potential for the future of responsibilities, committee memberships, and tasks
Differences in the external presentation of functions/resorts
Board of Directors Purpose
Board of Directors Purpose
Internal Orientation: Monitoring and Advising
External Orientation: Resource provider
BoD acts as a watchdog
Provides insights and expertise
Ensures alignment in goals of the firm’s strategy
Connects organization with other external sources by leveraging resources and connections
Monitoring (principle agent theory)
Information asymmetry
Opportunism
Divergence of Interest
How does the Board of Directors monitor and control the TMT?
Ensures effective governance by dismissing executives and hold management accountable for their actions
Resource provider role of Board of Directors
Social capital → goal: reducing environmental uncertainty and dependency
Diverse and well connected Board is better
Principle Agent Theory
Principle Agent Theory
Analyses of how policy makers (principals) can control actors who work for them (agents) but have far more information
Management vs. Leadership
management: planning, organizing, leading, controlling
leadership: agenda setting, aligning, inspiring, monitoring
Pragmatic Leaders
Focus on realistic objectives
Sensitivity for the limits of strategic change
Focus on implementation and short-term results
Open to internal criticisms and suggestions
Visionary Leaders
Strategic architect with visionary ideas reaching far beyond existing activities
Long-term focus on “big issues”
Highly creative
People-oriented motivator
The Hazards of High CEO Status
The likelihood of experiencing a fall from grace increased proportionately with the number of awards won during the time at the helm.
Why do leaders fail?
Structural / Economic Reasons: lack of innovative product offerings or personal behavior reasons
Choosing the wrong people: choosing only based off of cognitive ability and not also taking into account personality
Operative goals
specific long-term and short-term goals that guide managers and employees as they perform the work of the organization - serve as a benchmark to assess employee performance
5 Essential CEO Skills
5 Essential CEO Skills
Leadership
Intellectual
Motivational
Personal
Interpersonal
Upper Echelons Theory
a framework that helps us understand the link between strategic leadership, strategy, and firm performance
How does the upper echelons perspective provide insight into a firm’s strategic operations?
characteristics (e.g., cognitive base and values) of a firm’s top-level managers play a key role in explaining and/or predicting strategic decisions and organizational performance.
Executives interpret situations through a lens of their unique perspectives, shaped by personal circumstances, values, and experiences
Based on the concept of bounded rationality: Limitations managers face when making decisions, time constraints
What does an organization’s structure define?
What does an organization’s structure define?
How tasks are allocated
Areas of responsibility and authority
Reporting relationships
Formal coordinating mechanisms and interaction patterns between organizational members
Vertical Hierarchy
who reports to whom, chain of command
Number of levels in the hierarchy
The span of control of managers and supervisors
Three Components of Organizational Structure
Complexity
Formalization
Centralization
COMPLEXITY
Complexity
the extent of differentiation within an organization
Centralization
Centralization
Degree to which decision-making authority is restricted to higher levels of management in an organization.
Formalization
Formalization
how standardized an organization’s jobs are and the extent to which employee behavior is guided by rules and procedures
Vertical Differentiation
Vertical Differentiation
(the number of levels in management hierarchy)
Span of control = avg. # employees/manager
Horizontal Differentiation
Horizontal Differentiation
the formal division of the organization into subunits
Span of Control
Span of Control
the number of subordinates who report directly to a manager
When is a wider span of control possible?
When is a wider span of control possible?
with other coordinating methods
when employees perform similar tasks
when tasks are routine
Spatial dispersion
the extent to which units are dispersed geographically
flat Hierarchy
lat Hierarchy
An organisational hierarchy with few layers
Tall Hierarchy
A classic bureaucratic structure in which authority and communication flow from the top down; involves close supervision of subordinates all along the chain of command
High Formalization
High Formalization
Clear job descriptions
Many organizational rules
Procedures covering work processes
Low Formalization
Non-programmed employee behaviors
Great discretion in one’s work (what is to be done, when is it to be done, and how it should be done)
Centralized Structure
Rely on one individual to make decisions and provide direction for the company
Assign decision-making responsibility to higher level managers; greater demands on the mental and physical capabilities of CEOs and managers
Low Decentralization (High Centralization)
Eliminates the additional responsibility not desired by people performing routine jobs
Permits crucial decisions to be made by individuals who have the “big picture”
High Decentralization (Low Centralization)
Can eliminate levels of management, making a leaner organization
Promotes greater opportunities for decisions to be made by people closest to the problem
Decentralized Structure
Decentralized Structure
Give more authority to lower-level employees; bottom-up
Sense of empowerment
Decisions are often faster, and employees believe that decentralized companies provide greater levels of procedural fairness to employees
What does complexity mean to managers?
Greater attention must be paid to dealing with problems of communication, coordination, and control, and the maintenance of the organization itself
Greater difficulties in managing organizational change
What are the Results of Increasing Firm Size
Requires additional managerial capacity to facilitate control, communication, and management of conflict
Managers must balance the benefits of large size (e.g., production and financial economies) with the diseconomies of managing a larger, more complex organization
What happens to vertical differentiation when increasing firm size?
Increasing firm size likely enhances vertical differentiation (more layers of management).
What happens to horizontal differentiation when increasing firm size?
Larger firms may have more division of labor (horizontal differentiation) but at a declining rate and higher functional differentiation.
What happens to formalization when increasing firm size?
Larger firms may resort to more formalization (as a substitute for more direct surveillance).
Functional Design
Specialized labor is divided into departments
Most useful when an organization has few products or goals
Enables decision-making on a centralized, hierarchical basis
Divisional Design
Organizational divisions and semiautonomous units
Decentralizes decisions to the lowest level
Difficulties arise when priorities are determined at higher organizational levels
When is functional design unsuitable
Organization grows
Organization diversifies
Poor departmental coordination allows the top-heavy decision-making
Geographical Design
Customer location as the basis for structural grouping
Each region of the country/ world may have distinct tastes and preferences
Each unit includes all functions required to produce and market products/services in that region
Matrix Structure
an organization combines functional and divisional chains of command in a grid so that there are two command structures-vertical and horizontal
Disadvantages due to the dual authority system
What must be done for a matrix structure to be applied?
Share resources across the organization
Two or more critical outputs are required: products and technical knowledge
The environment is complex and uncertain
What is organizational culture
The shared social knowledge within an organization regarding the rules, norms, and values that shape the attitudes and behaviors of its employees
Strong Organizational Culture
Clear vision
Consistent values
Dedication to aligned goals
Work becomes intrinsically rewarding (e.g. involvement of employees in the decision-making process)
Increased employee loyalty
Weak Organizational Culture
No coherent values
Stiff bureaucracy
Less motivated employees - not willing to go the extra mile
High level of control and monitoring of the employees
Little socialization
