Week 1 Flashcards
Strategy
Set of goal-directed actions a firm takes to gain and maintain superior performance compared to competitors. This superior performance is attained by competing for new resources.
3 Elements of a good strategy
- A diagnosis of the competitive challenge; achieved through an analysis of the company’s external and internal environments;
- A guiding policy that addresses the competitive challenge; attained through strategy formulation, which leads to the formation of the firm’s corporate, business, and functional strategies;
- A set of coherent actions to implement the company’s guiding policy; achieved through strategy implementation.
2 things a firm needs to do to gain a competitive advantage
- Provide goods or services that consumers value higher than those of its competitors;
- Provide goods or services similar to the competitors’, but for a lower price.
Strategic positioning
Finding a unique position within an industry in which the firm can provide value to customers while containing its costs.
Problems with trying to do what your competitors are doing just a little better
Can lead to cut-throat competition and low profit potential.
Consider what would happen if all firms chose to be cost leaders. If this was the case; no single firm could gain a competitive advantage.
Additionally, since companies would have no money to reinvest into their products, there would be little value creation for customers.
Problems with trying to do what your competitors are doing just a little better
This can lead to cut-through competition and low-profit potential. Consider what would happen if all firms chose to be cost leaders.
If this was the case; no single firm could gain a competitive advantage. Additionally, since companies would have no money to reinvest into their products, there would be little value creation for customers.
What is NOT Strategy
- Strategy is not grandiose statements. These statements are often not backed up by strategic actions, provide little managerial guidance, and can therefore lead to goal conflict and confusion;
- Strategy is not a failure to face a competitive challenge. If a firm does not define a competitive challenge, employees cannot work towards addressing it;
- Strategy is not Operational effectiveness, competitive benchmarking, or other tactical tools. These are part of a firm’s functional and global initiatives to support its competitive strategy but are insufficient to gain a competitive advantage individually.
Vision
A statement defining what an organization ultimately wants to accomplish and its aspirations.
- Briefly identifies the organization’s primary long-term objectives.
- Employees in visionary companies feel part of something bigger and gain a sense of purpose.
- Visionary companies often outperform their competitors in the long run.
Customer oriented vision statements
Define a business in terms of offering solutions to customer needs. Therefore, employees are focused on how to best solve a problem for customers. Hence, companies are allowed and able to adapt to changing environments.
Product oriented vision statements
Define a business in terms of a good or service provided. Therefore, employees are focused on improving existing products and services without considering the underlying customer problems to be solved and therefore constrain the company’s adaptability to changing environments.
Additionally, managers operating with a product-oriented vision are often forced to take a more myopic, or short sighted, view on the Competitive landscape.
Under what circumstances is there a positive relationship between Vision Statement and Firm Performance
- The visions are customer-oriented;
- Internal stakeholders are invested in defining the vision;
- Organisational structures such as compensation systems align with the firm’s vision statement.
Strategic commitments
When the enterprise undertakes credible actions, which are costly, long-term Oriented, and difficult to reverse.
The core values statement
Statement of principles that guides an organization as it works to achieve its vision and fulfill its mission.
This statement is important since it gives insight into company culture and offers principles that employees can use to handle complexity and conflicts.
The organisational core values
Ethical standards and norms that govern the behavior of employees in a firm.
2 important functions of strong ethical values:
- They underlay the vision statement and give stability to the strategy. It, therefore, lays the groundwork for long-term success;
- They serve as guardrails to keep the company on track when the company is pursuing its vision and mission to achieve competitive advantage.
AFI framework
- Analyse internal and external environments;
- Formulate a suitable business and corporate strategy;
- Implement this strategy through culture, structure, and controls.
Strategic leadership
The use of power by executives to influence and direct the actions of others when pursuing a company’s goals.
The upper-echelons theory
Conceptual framework that sees organizational outcomes (strategic choices and performance levels) as reflections of the top management team’s values.
The theory explains that strategic leaders interpret situations through the lens of their unique perspectives based on personal circumstances, values and experiences.
Hence, their leadership actions reflect their age, education, and career experiences. This means good strategic leaders have both a natural talent, as well as learned skills.
The level 5 leadership pyramid
Conceptual framework that shows how leadership progresses through 5 stages. According to research, great companies have level-5 executives as leaders. The pyramid also shows what skills a leader needs to develop to move to the next stage.
The 5 levels of the pyramid
- Level 1 is a highly capable individual who makes productive contributions through motivation, talent, knowledge, and skills.
- However, to move to level 2, the individual has to become a contributing team player, working effectively with others to achieve common goals.
- Level 3 is when the team player turns into an effective manager who is able to organize resources to accomplish firm goals.
- To attain level 4, the professional has learned to do the right things, meaning the manager understands what choices need to be taken in any situation to pursue the firm strategy.
- Lastly, at level 5, the strategic leader builds enduring greatness by combining willpower and humility. A level 5 leader works to help the organization succeed and helps others reach their full potential.
Strategy Process
The strategy process can be broken down into two parts:
- Strategy formulation is about the choice of strategy in terms of where and how the firm will compete.
- Strategy implementation focuses on how work gets done, or the execution of the strategy.
The 3 separate areas in which Strategy formulation and implementation can be split into
- Corporate strategy looks at where to compete in terms of industries, markets, and geography;
- Business strategy tackles the question of how to compete. The three generic business strategies are cost leadership, differentiation, or value innovation;
- Functional strategy is concerned with the implementation of the chosen business strategies. Different corporate and business strategies will need different activities across the various functions.
Strategic Business Units (SBU)
These are the standalone divisions of large conglomerates, which are each responsible for their own profitability.
Each business unit also has its own business functions, like accounting, human resources, or operations.
Functional Managers
Responsible for the decisions and actions within that functional area, and should help the firm implement the business-level strategy.
Three approaches managers can take when strategizing for competitive advantage:
- Strategic planning (formal, top-down approach);
- Scenario planning (formal, top-down approach);
- Strategy as planned emergence (less formal).
Top-down strategic planning
Strategy in which decision-making responsibilities belong to top management who use rational and data-driven processes.
The three steps of a strategic planning approach are analysis, formulation and implementation.
Advantages of Top-down Strategic planning
- Top managers can either reconfirm or adjust the firm vision, mission and values and then formulate corporate, business, and functional strategies.
- Top-down strategic planning is based on the assumption that one can predict the future from the past, which works well if the environment does not change much.
Disadvantage of Top-down strategic planning
Separates the formulation and integration of strategy. Information only flows one way; from the top down. Additionally, unforeseen events can destroy the careful plans that were drafted.
Furthermore, strategic leaders’ visions can be wrong for the company and still imposed in the strategy.
Scenario planning
Consists of planning for the future with several contingency plans.
The approach asks “what-if” questions regarding the future. Scenario planning starts with top-down approach. However, the top management envisions multiple plausible future scenarios and the strategic response that must be carried out in each of the scenarios.
The goal is to create multiple effective strategies which offer the firm more flexibility in planning. Strategic planning occurs at both the corporate-level and business-level of strategy.
Different stages in Scenario Planning
- Analysis stage
- Formulation stage
- Implementation stage
Analysis stage
Managers brainstorm possible future scenarios, and use input from different functional areas and future functional states. It is especially important to consider negative scenarios in this stage.
Managers also need to consider black swan events. These are events that are highly improbable and unexpected, but have a significant impact.
Formulation stage
Management develops different strategies to address specific scenarios.
Managers develop contingency plans and build a portfolio of future options, into which they integrate additional information over time.
The most viable options are developed into detailed strategic plans.
Implementation stage
Managers execute the dominant strategic plan or the plan that is most in line with the current reality.
If performance is good, this gives feedback to management that the dominant strategic plan is working. Otherwise, managers can modify the plan as they see fit.
Strategy as planned emergence
Involves both top-down and bottom-up aspects. This approach was developed from criticisms of the previous two approaches. Critics of top-down and scenario planning suggest that strategic planning is not equivalent to strategic thinking.
Scenario analysis is blamed for being too strict and confining when firms need more flexibility to respond quickly.
Managers in the previous two approaches can also have an illusion of control, which means they overestimate their ability to control events.
Critics of the two approaches say that not only hard data, but also soft data, like the personal experience of employees, should be used in strategy formulation.
Strategy process of Strategy as planned emergence
Starts with a top-down strategic plan based on a structured analysis of the external and internal environment, which is called the intended strategy.
This analysis completes the first stage of the AFI framework. However, several parts of the intended strategy will likely be dropped due to unpredictable circumstances, which is called the unrealised strategy.
At the same time, an emergent strategy may arise, which are the unplanned strategic initiatives from deep within the organisation. The combination of the intended strategy and the emergent strategy is called the realised strategy.
Another important feature of this approach is strategic initiatives. These are any activities a firm pursues to explore and create new products, processes, markets, or ventures. They can come from anywhere, as a response to both internal and external sources. Hence, they can occur both bottom-up and top-down.
The three mechanisms that can cause strategic initiatives
- Autonomous actions;
- Serendipity;
- Resource-allocation process (RAP).
Autonomous actions
Strategic initiatives undertaken by low-level employees in response to unexpected situations. Often times, low-level employees receive much more direct customer feedback, so they can take actions that could influence the firm strategy.
To be successful, these emergent strategies need to be within the firm vision and mission and need support from top management. They also need help from mid-level management. These mid-level employees that support ideas from low-level employees are known as internal champions.
Serendipity
Random events or pleasant surprises that can have a large impact on a firm’s strategic initiatives.
Managers can create an environment where serendipity flourishes by providing time and resources for employees to pursue other interests.
Resource allocation process
Determines how a firm allocates resources and can be vital in shaping realised strategy.
A firm can; for example, choose to let mid-level managers allocate resources to products that they believe are the most beneficial for their profits.
Black Swan Events
Event that is highly unexpected and has a large impact.
These events have two features in common that are relevant to strategic management:
- They show that the actions of management can impact the economic well-being of a significant number of people globally;
- Stakeholders should be considered important since they can affect or be affected by a company’s actions.
Stakeholder strategy
Approach to managing various stakeholders, with the aim of gaining and sustaining competitive advantage. It allows firms to examine how their stakeholders interact to create and trade value.
Ways in which effective stakeholder management can benefit firm performance:
- Satisfied stakeholders are more cooperative; this is beneficial because of additional information they reveal can further increase the firm’s value creation or lower its costs;
- If trust increases, the costs for the firms’ business transactions is reduced;
- Managing the web of stakeholders can increase organizational flexibility and adaptability;
- The likelihood of certain negative impacts can be reduced, creating more stable returns;
- Firms can build strong reputations in the market, which can benefit their business.
Stakeholder impact analysis
This is a five-step process where, in every step, the firm should consider three stakeholder attributes.
This decision tool can help the firm to prioritize and meet the needs of different stakeholders, creating a competitive advantage and enabling it to be a good corporate citizen.
- The first is power. Stakeholders hold power over the firm when it can get the firm to do something it would normally not do.
- Second is legitimate claims. A stakeholder has legitimate claim if their claim is legally valid or otherwise appropriate.
- The last attribute is an urgent claim. This is a stakeholder claim that requires immediate attention and action.
Stakeholder Impact Analysis
5 Steps:
- Identifying the stakeholders
- Stakeholder interests
- Opportunities and threats
- Social responsibilities
- Addressing stakeholder concerns
Corporate social responsibility framework
This framework states that society gives shareholders the ability to create firms and firms, therefore, owe society something, The ‘repayment’ to society can happen in four different areas, namely economic, legal, ethical, and philanthropic.
Economic responsibility
The firm first has to ensure that creditors are paid, investors get their return, suppliers are paid, and consumers can afford their products.
Governments also have to be paid taxes, and they expect firms to manage natural resources properly.
Legal responsibility
As laws are society’s codified ethics, a firm that follows the law likely performs more ‘right’ actions than ‘wrong’ actions.
Laws also help firms with the rules of the game for example by giving firms property rights. Laws can have large impacts on businesses.
Ethical responsibility
Legal requirements are often only the bare minimum when it comes to ethical behaviour. Sometimes laws also lag behind newer technologies such as data privacy.
Because of this, firms have to make sure they meet the expectations, values, and norms of their stakeholders.
Philanthropic responsibility of firms also called corporate citizenship
It is expected that firms voluntarily give back to society, for example by reinvesting profits into education or health programmes.
One thing to note is that while the legal and economic responsibilities are required by shareholders and society, philanthropic and ethical responsibilities are not - they are just expectations that stakeholders have towards firms.
