CHAPTER 2

Charting a
Company’s
Direction
Its Vision, Mission,
Objectives, and
Strategy

Learning Objectives
THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 Why it is critical for company managers to have a clear strategic vision of where a
company needs to head and why.

LO 2 The importance of setting both strategic and financial objectives.

LO 3 Why the strategic initiatives taken at various organizational levels must be tightly
coordinated to achieve companywide performance targets.

LO 4 What a company must do to achieve operating excellence and to execute its strategy
proficiently.

LO 5 The role and responsibility of a company’s board of directors in overseeing the strategic
management process.
Vision without action is merely a dream. . . .Vision with A good goal is like a strenuous exercise—it makes you
action can change the world. stretch.

Joel A. Barker – Consultant and Author Mary Kay Ash – Founder of Mary Kay Cosmetics

To succeed in your mission, you must have single-

minded devotion to your goal.

Abdul Kalam – Former President of India

If crafting and executing strategy are critically impor- Special attention is given to management’s
tant managerial tasks, then it is essential to know direction-setting responsibilities—charting a strate-
exactly what is involved in developing a strategy and gic course, setting performance targets, and choos-
executing it proficiently. Is any analysis required? What ing a strategy capable of producing the desired
goes into charting a company’s strategic course and outcomes. We also explain why strategy making is a
long-term direction? Does a company need a stra- task for a company’s entire management team and
tegic plan? What are the various components of the discuss which kinds of strategic decisions tend to
strategy-making, strategy-executing process and to be made at which levels of management. The chap-
what extent are company personnel—aside from ter concludes with a look at the roles and responsi-
senior management—involved in the process? bilities of a company’s board of directors and how
This chapter presents an overview of the ins and good corporate governance protects shareholder
outs of crafting and executing company strategies. interests and promotes good management.

WHAT DOES THE STRATEGY-MAKING,

STRATEGY-EXECUTING PROCESS ENTAIL?
The process of crafting and executing a company’s strategy is an ongoing, continuous
process consisting of five interrelated stages:
1. Developing a strategic vision that charts the company’s long-term direction, a
mission statement that describes the company’s purpose, and a set of core values
to guide the pursuit of the vision and mission.
2. Setting objectives for measuring the company’s performance and tracking its
progress in moving in the intended long-term direction.
3. Crafting a strategy for advancing the company along the path management has
charted and achieving its performance objectives.
4. Executing the chosen strategy efficiently and effectively.
 20 PART 1 Concepts and Techniques for Crafting and Executing Strategy

FIGURE 2.1 The Strategy-Making, Strategy-Executing Process

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Monitoring
Crafting a developments,
Developing
strategy evaluating
a strategic
Setting to achieve the Executing
vision, performance,
objectives objectives and the strategy
mission, and and initiating
the company corrective
core values
vision adjustments

Revise as needed in light of the company’s actual

performance, changing conditions, new opportunities,
and new ideas

5. Monitoring developments, evaluating performance, and initiating corrective

adjustments in the company’s vision and mission statement, objectives, strategy,
or approach to strategy execution in light of actual experience, changing condi-
tions, new ideas, and new opportunities.
Figure 2.1 displays this five-stage process, which we examine next in some
A company’s strategic plan detail. The first three stages of the strategic management process involve making a
lays out its future direction, strategic plan. A strategic plan maps out where a company is headed, establishes
performance targets, and strategic and financial targets, and outlines the competitive moves and approaches
strategy. to be used in achieving the desired business results.1

STAGE 1: DEVELOPING A STRATEGIC VISION,

MISSION STATEMENT, AND SET OF CORE VALUES
Very early in the strategy-making process, a company’s senior managers must wrestle
LO 1 with the issue of what directional path the company should take. Can the company’s
Why it is critical for prospects be improved by changing its product offerings, or the markets in which it
company managers to participates, or the customers it aims to serve? Deciding to commit the company to
have a clear strategic one path versus another pushes managers to draw some carefully reasoned conclusions
vision of where a about whether the company’s present strategic course offers attractive opportunities
company needs to
head and why.
for growth and profitability or whether changes of one kind or another in the com-
pany’s strategy and long-term direction are needed.
 CHAPTER 2 Charting a Company’s Direction 21

Developing a Strategic Vision

Top management’s views and conclusions about the company’s long-term direction and
what product-market-customer business mix seems optimal for the road ahead constitute
a strategic vision for the company. A strategic vision delineates management’s aspi-
rations for the business, providing a panoramic view of “where we are going” and CORE CONCEPT
a convincing rationale for why this makes good business sense for the company. A A strategic vision describes
strategic vision thus points an organization in a particular direction, charts a strategic “where we are going”—
path for it to follow, builds commitment to the future course of action, and molds orga- management’s aspirations
nizational identity. A clearly articulated strategic vision communicates management’s for the company and
aspirations to stakeholders (customers, employees, stockholders, suppliers, etc.) and the course and direction
helps steer the energies of company personnel in a common direction. For instance, charted to achieve them.
Henry Ford’s vision of a car in every garage had power because it captured the imagi-
nation of others, aided internal efforts to mobilize the Ford Motor Company’s resources,
and served as a reference point for gauging the merits of the company’s strategic actions.
Well-conceived visions are distinctive and specific to a particular organization;
they avoid generic, feel-good statements like “We will become a global leader and the
first choice of customers in every market we serve.”2 Likewise, a strategic vision pro-
claiming management’s quest “to be the market leader” or “to be the most innovative”
or “to be recognized as the best company in the industry” offers scant guidance about
a company’s direction or the kind of company that management is striving to build.
A surprising number of the vision statements found on company websites and
in annual reports are vague and unrevealing, saying very little about the company’s
future direction. Some could apply to almost any company in any industry. Many
read like a public relations statement—high-sounding words that someone came up
with because it is fashionable for companies to have an official vision statement.3 But
the real purpose of a vision statement is to serve as a management tool for giving the
organization a sense of direction.
An effectively
For a strategic vision to function as a valuable management tool, it must convey
communicated vision is
what top executives want the business to look like and provide managers at all orga-
a valuable management
nizational levels with a reference point in making strategic decisions and preparing
tool for enlisting the
the company for the future. It must say something definitive about how the company’s commitment of company
leaders intend to position the company beyond where it is today. Table 2.1 provides personnel to actions that
some dos and don’ts in composing an effectively worded vision statement. Illustration move the company in the
Capsule 2.1 provides a critique of the strategic visions of several prominent companies. intended direction.

Communicating the Strategic Vision

A strategic vision has little value to the organization unless it’s effectively communi-
cated down the line to lower-level managers and employees. A vision cannot provide
direction for middle managers or inspire and energize employees unless everyone in
the company is familiar with it and can observe management’s commitment to the
vision. It is particularly important for executives to provide a compelling rationale for
a dramatically new strategic vision and company direction. When company personnel
don’t understand or accept the need for redirecting organizational efforts, they are
prone to resist change. Hence, explaining the basis for the new direction, addressing
employee concerns head-on, calming fears, lifting spirits, and providing updates and
progress reports as events unfold all become part of the task in mobilizing support for
the vision and winning commitment to needed actions.
Winning the support of organization members for the vision nearly always
means putting “where we are going and why” in writing, distributing the statement
22 PART 1 Concepts and Techniques for Crafting and Executing Strategy

TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts

The Dos The Don’ts

Be graphic. Paint a clear picture of where the company Don’t be vague or incomplete. Never skimp on
is headed and the market position(s) the company is specifics about where the company is headed or how the
striving to stake out. company intends to prepare for the future.

Be forward-looking and directional. Describe the Don’t dwell on the present. A vision is not about what a
strategic course that will help the company prepare for company once did or does now; it’s about “where we are
the future. going.”

Keep it focused. Focus on providing managers with Don’t use overly broad language. Avoid all-inclusive
guidance in making decisions and allocating resources. language that gives the company license to pursue any
opportunity.

Have some wiggle room. Language that allows some Don’t state the vision in bland or uninspiring terms.
flexibility allows the directional course to be adjusted as The best vision statements have the power to motivate
market, customer, and technology circumstances change. company personnel and inspire shareholder confidence
about the company’s future.

Be sure the journey is feasible. The path and direction Don’t be generic. A vision statement that could apply
should be within the realm of what the company can to companies in any of several industries (or to any of
accomplish; over time, a company should be able to several companies in the same industry) is not specific
demonstrate measurable progress in achieving the vision. enough to provide any guidance.

Indicate why the directional path makes good Don’t rely on superlatives. Visions that claim the
business sense. The directional path should be in company’s strategic course is the “best” or “most
the long-term interests of stakeholders (especially successful” usually lack specifics about the path the
shareholders, employees, and suppliers). company is taking to get there.

Make it memorable. To give the organization a sense Don’t run on and on. A vision statement that is not short
of direction and purpose, the vision needs to be easily and to the point will tend to lose its audience.
communicated. Ideally, it should be reducible to a few
choice lines or a memorable slogan.

Sources: John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996); Hugh Davidson, The Committed Enterprise
(Oxford: Butterworth Heinemann, 2002); and Michel Robert, Strategy Pure and Simple II (New York: McGraw-Hill, 1992).

organizationwide, and having top executives personally explain the vision and its ratio-
nale to as many people as feasible. Ideally, executives should present their vision for the
company in a manner that reaches out and grabs people. An engaging and convincing
strategic vision has enormous motivational value—for the same reason that a stonema-
son is more inspired by the opportunity to build a great cathedral for the ages than a
house. Thus, executive ability to paint a convincing and inspiring picture of a company’s
journey to a future destination is an important element of effective strategic leadership.

Expressing the Essence of the Vision in a Slogan The task of effec-

tively conveying the vision to company personnel is assisted when management can
capture the vision of where to head in a catchy or easily remembered slogan. A number
of organizations have summed up their vision in a brief phrase. Nike’s slogan is “to bring
ILLUSTRATION Examples of Strategic Visions—
CAPSULE 2.1 How Well Do They Measure Up?

Vision Statement Effective Elements Shortcomings

Coca-Cola • Graphic • Long

Our vision serves as the framework for our Roadmap and • Focused • Not forward-looking
guides every aspect of our business by describing what we • Flexible
need to accomplish in order to continue achieving sustainable,
quality growth. • Makes good
• People: Be a great place to work where people are inspired business sense
to be the best they can be.
• Portfolio: Bring to the world a portfolio of quality beverage
brands that anticipate and satisfy people’s desires and
needs.
• Partners: Nurture a winning network of customers and
suppliers; together we create mutual, enduring value.
• Planet: Be a responsible citizen that makes a difference by
helping build and support sustainable communities.
• Profit: Maximize long-term return to shareowners while being
mindful of our overall responsibilities.
• Productivity: Be a highly effective, lean, and fast-moving
organization.

Procter & Gamble • Forward-looking • Not graphic

We will provide branded products and services of superior • Flexible • Not focused
quality and value that improve the lives of the world’s • Feasible • Not memorable
consumers, now and for generations to come. As a result,
consumers will reward us with leadership sales, profit and • Makes good
value creation, allowing our people, our shareholders and the business sense
communities in which we live and work to prosper.

Heinz • Forward-looking • Not graphic

We define a compelling, sustainable future and create the path • Flexible • Not focused
to achieve it.
• Confusing
• Not memorable
• Not necessarily feasible

Note: Developed with Jenna P. Pfeffer.

Source: Company documents and websites (accessed February 12, 2012).

innovation and inspiration to every athlete in the world.” The Mayo Clinic’s vision is to
provide “the best care to every patient every day,” while Greenpeace’s aspires “to halt
environmental abuse and promote environmental solutions.” Even Scotland Yard has a
catchy vision, which is “to make London the safest major city in the world.” Creating a
short slogan to illuminate an organization’s direction and purpose and using it repeat-
edly as a reminder of “where we are headed and why” helps rally organization members
to hurdle whatever obstacles lie in the company’s path and maintain their focus.

23
 24 PART 1 Concepts and Techniques for Crafting and Executing Strategy

Why a Sound, Well-Communicated Strategic Vision Matters

A well-thought-out, forcefully communicated strategic vision pays off in several
respects: (1) It crystallizes senior executives’ own views about the firm’s long-term
direction; (2) it reduces the risk of rudderless decision making; (3) it is a tool for
winning the support of organization members to help make the vision a reality; (4)
it provides a beacon for lower-level managers in setting departmental objectives and
crafting departmental strategies that are in sync with the company’s overall strategy;
and (5) it helps an organization prepare for the future. When top executives are able
The distinction between
to demonstrate significant progress in achieving these five benefits, the first step in
a strategic vision and a
organizational direction setting has been successfully completed.
mission statement is fairly
clear-cut: A strategic
vision portrays a company’s
aspirations for its future Developing a Company Mission Statement
(“where we are going”), The defining characteristic of a strategic vision is what it says about the company’s
whereas a company’s future strategic course—“the direction we are headed and the shape of our busi-
mission describes the ness in the future.” It is aspirational. In contrast, a mission statement describes the
scope and purpose of its enterprise’s present business and purpose—“who we are, what we do, and why we
present business (“who we are here.” It is purely descriptive. Ideally, a company mission statement (1) identi-
are, what we do, and why fies the company’s products and/or services, (2) specifies the buyer needs that the
we are here”). company seeks to satisfy and the customer groups or markets that it serves, and (3)
gives the company its own identity. The mission statements that one finds in com-
pany annual reports or posted on company websites are typically quite brief; some do
a better job than others of conveying what the enterprise is all about.
Consider, for example, the mission statement of Trader Joe’s (a specialty grocery
chain):
The mission of Trader Joe’s is to give our customers the best food and beverage values that
they can find anywhere and to provide them with the information required for informed buying
decisions. We provide these with a dedication to the highest quality of customer satisfaction
delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.

Note that Trader Joe’s mission statement does a good job of conveying “who we are,
what we do, and why we are here” but it provides no sense of “where we are headed.”
An example of a well-stated mission statement with ample specifics about what
the organization does is that of the Occupational Safety and Health Administration
(OSHA): “to assure the safety and health of America’s workers by setting and enforcing
standards; providing training, outreach, and education; establishing partnerships; and
encouraging continual improvement in workplace safety and health.” YouTube’s mis-
sion statement, while short, still captures the essence of what the company is about: “to
provide fast and easy video access and the ability to share videos frequently.” An exam-
ple of a not-so-revealing mission statement is that of Microsoft. “To help people and
businesses throughout the world realize their full potential” says nothing about its
To be well worded, products or business makeup and could apply to many companies in many different
a company mission industries. A person unfamiliar with Microsoft could not discern from its mission
statement must employ statement that it is a globally known provider of PC software and a leading maker of
language specific enough video game consoles (the popular Xbox 360). Coca-Cola, which markets nearly 400
to distinguish its business beverage brands in over 200 countries, also has an uninformative mission statement:
makeup and purpose from “to refresh the world; to inspire moments of optimism and happiness; to create value
those of other enterprises
and make a difference.” The usefulness of a mission statement that cannot convey
and give the company its
the essence of a company’s business activities and purpose is unclear.
own identity.
Occasionally, companies couch their mission in terms of making a profit. This,
too, is flawed. Profit is more correctly an objective and a result of what a company
 CHAPTER 2 Charting a Company’s Direction 25

does. Moreover, earning a profit is the obvious intent of every commercial enterprise.
Such companies as Volkswagen, Wegmans, Edward Jones, The Boston Consulting
Group, DreamWorks Animation, and Intuit are each striving to earn a profit for share-
holders; but plainly the fundamentals of their businesses are substantially different when
it comes to “who we are and what we do.” It is management’s answer to “make a profit
doing what and for whom?” that reveals the substance of a company’s true mission and
business purpose.

Linking the Vision and Mission

with Company Values
Many companies have developed a set of values to guide the actions and behavior of
company personnel in conducting the company’s business and pursuing its strategic
vision and mission. By values (or core values, as they are often called), we mean
certain designated beliefs, traits, and behavioral norms that management has deter- CORE CONCEPT
mined should guide the pursuit of its vision and mission. Values relate to such things A company’s values are the
as fair treatment, honor and integrity, ethical behavior, innovativeness, teamwork, a beliefs, traits, and behavioral
passion for top-notch quality or superior customer service, social responsibility, and norms that company
community citizenship. personnel are expected to
Most companies have articulated four to eight core values that company person- display in conducting the
nel are expected to display and that are supposed to be mirrored in how the com- company’s business and
pany conducts its business. At Kodak, the core values are respect for the dignity of pursuing its strategic vision
the individual, uncompromising integrity, unquestioned trust, constant credibility, and mission.
continual improvement and personal renewal, and open celebration of individual
and team achievements. At Foster Wheeler, a global engineering and construction firm,
the five core values are integrity, accountability, high performance, valuing people, and
teamwork. In its quest to be the world’s leading home-improvement retailer, Home
Depot embraces eight values—entrepreneurial spirit, excellent customer service, giv-
ing back to the community, respect for all people, doing the right thing, taking care of
people, building strong relationships, and creating shareholder value.
Do companies practice what they preach when it comes to their professed values?
Sometimes no, sometimes yes—it runs the gamut. At one extreme are companies with
window-dressing values; the values are given lip service by top executives but have
little discernible impact on either how company personnel behave or how the company
operates. Such companies have value statements because they are in vogue and make
the company look good. At the other extreme are companies whose executives are
committed to grounding company operations on sound values and principled ways of
doing business. Executives at these companies deliberately seek to ingrain the desig-
nated core values into the corporate culture—the core values thus become an integral
part of the company’s DNA and what makes the company tick. At such values-driven
companies, executives “walk the talk” and company personnel are held accountable
for embodying the stated values in their behavior.
At companies where the stated values are real rather than cosmetic, managers con-
nect values to the pursuit of the strategic vision and mission in one of two ways. In
companies with values that are deeply entrenched in the corporate culture, senior man-
agers are careful to craft a vision, mission, strategy, and set of operating practices that
match established values; moreover, they repeatedly emphasize how the value-based
behavioral norms contribute to the company’s business success. If the company changes
to a different vision or strategy, executives take care to explain how and why the core
values continue to be relevant. Few companies with sincere commitment to established
core values ever undertake strategic moves that conflict with ingrained values. In new
ILLUSTRATION Patagonia, Inc.:
CAPSULE 2.2 A Values-Driven Company

PATAGONIA’S MISSION STATEMENT

Build the best product, cause no unnecessary harm, use
business to inspire and implement solutions to the envi-
ronmental crisis.

PATAGONIA’S CORE VALUES

Quality: Pursuit of ever-greater quality in everything we
do.
Integrity: Relationships built on integrity and respect.
Environmentalism: Serve as a catalyst for personal and
corporate action.
Not Bound by Convention: Our success—and much of
the fun—lies in developing innovative ways to do things. integrity and respect. In addition to keeping faith with
Patagonia, Inc., is an American outdoor clothing and gear those who make its products, Patagonia relentlessly pur-
company that clearly “walks the talk” with respect to its sues integrity in sourcing production inputs. Central to
mission and values. While its mission is relatively vague its environmental mission and core values, it targets for
about the types of products Patagonia offers, it clearly use sustainable and recyclable materials, ethically pro-
states the foundational “how” and “why” of the company. cured. Demonstrating leadership in environmentalism,
The four core values individually reinforce the mission Patagonia established foundations to support ecologi-
in distinct ways, charting a defined path for employees cal causes, even defying convention by giving 1 percent
to follow. At the same time, each value is reliant on the of profits to conservation causes. These are but a few
others for maximum effect. The values’ combined impact examples of the ways in which Patagonia’s core values
on internal operations and public perception has made fortify each other and support the mission.
Patagonia a strong leader in the outdoor gear world. For Patagonia, quality would not be possible without
While many companies espouse the pursuit of quality integrity, unflinching environmentalism, and the compa-
as part of their strategy, at Patagonia quality must come ny’s unconventional approach. Since its founding in 1973
through honorable practices or not at all. Routinely, the by rock climber Yvon Chouinard, Patagonia has remained
company opts for more expensive materials and labor to remarkably consistent to the spirit of these values. This
maintain internal consistency with the mission. Patagonia has endeared the company to legions of loyal customers
learned early on that it could not make good products in while leading other businesses in protecting the environ-
bad factories, so it holds its manufacturers accountable ment. More than an apparel and gear company, Patagonia
through a variety of auditing partnerships and alliances. inspires everyone it touches to do their best for the planet
In this way, the company maintains relationships built on and each other, in line with its mission and core values.

Note: Developed with Nicholas J. Ziemba.

Sources: Patagonia, Inc., “Corporate Social Responsibility,” The Footprint Chronicles, 2007, and “Becoming a Responsible Company,”
www.patagonia.com/us/patagonia.go?assetid=2329 (accessed February 28, 2014).

companies, top management has to consider what values and business conduct should
characterize the company and then draft a value statement that is circulated among man-
agers and employees for discussion and possible modification. A final value statement
that incorporates the desired behaviors and that connects to the vision and mission is
then officially adopted. Some companies combine their vision, mission, and values into
a single statement or document, circulate it to all organization members, and in many
instances post the vision, mission, and value statement on the company’s website. Illus-
tration Capsule 2.2 describes how core values underlie the company’s mission at Pata-
gonia, Inc., a widely known and quite successful outdoor clothing and gear company.
26
 CHAPTER 2 Charting a Company’s Direction 27

STAGE 2: SETTING OBJECTIVES

The managerial purpose of setting objectives is to convert the vision and mission
into specific performance targets. Objectives reflect management’s aspirations for LO 2
company performance in light of the industry’s prevailing economic and competi- The importance
tive conditions and the company’s internal capabilities. Well-stated objectives must of setting both
be specific, quantifiable or measurable, and challenging and must contain a deadline strategic and financial
for achievement. As Bill Hewlett, cofounder of Hewlett-Packard, shrewdly observed, objectives.
“You cannot manage what you cannot measure. . . . And what gets measured gets
done.”4 Concrete, measurable objectives are managerially valuable for three rea- CORE CONCEPT
sons: (1) They focus organizational attention and align actions throughout the orga- Objectives are an
nization, (2) they serve as yardsticks for tracking a company’s performance and organization’s performance
progress, and (3) they motivate employees to expend greater effort and perform at targets—the specific results
a high level. management wants to
achieve.

The Imperative of Setting Stretch Objectives

The experiences of countless companies teach that one of the best ways to promote
outstanding company performance is for managers to deliberately set performance
targets high enough to stretch an organization to perform at its full potential and CORE CONCEPT
deliver the best possible results. Challenging company personnel to go all out and
deliver “stretch” gains in performance pushes an enterprise to be more inventive, to Stretch objectives set
exhibit more urgency in improving both its financial performance and its business performance targets high
position, and to be more intentional and focused in its actions. Stretch objectives enough to stretch an
spur exceptional performance and help build a firewall against contentment with organization to perform at
modest gains in organizational performance. its full potential and deliver
Manning Selvage & Lee (MS&L), a U.S. public relations firm, used ambitious the best possible results.
stretch objectives to triple its revenues in three years. A company exhibits strategic
intent when it relentlessly pursues an ambitious strategic objective, concentrating the
full force of its resources and competitive actions on achieving that objective. MS&L’s
strategic intent was to become one of the leading global PR firms, which it achieved
CORE CONCEPT
with the help of its stretch objectives. Honda’s long-standing strategic intent of pro-
ducing an ultra-light jet was finally realized in 2012 when the five-passenger plane A company exhibits
dubbed the “Honda Civic of the sky” went into production. Google has the strate- strategic intent when
gic intent of developing drones for the delivery of online orders through Amazon it relentlessly pursues
and has been making good progress toward meeting that stretch goal. an ambitious strategic
objective, concentrating the
full force of its resources
What Kinds of Objectives to Set and competitive actions on
Two distinct types of performance targets are required: those relating to finan- achieving that objective.
cial performance and those relating to strategic performance. Financial objectives
communicate management’s goals for financial performance. Strategic objectives are
goals concerning a company’s marketing standing and competitive position. A compa-
ny’s set of financial and strategic objectives should include both near-term and longer-
term performance targets. Short-term (quarterly or annual) objectives focus attention
on delivering performance improvements in the current period and satisfy shareholder
expectations for near-term progress. Longer-term targets (three to five years off) force
managers to consider what to do now to put the company in position to perform better
later. Long-term objectives are critical for achieving optimal long-term performance
 28 PART 1 Concepts and Techniques for Crafting and Executing Strategy

and stand as a barrier to a nearsighted management philosophy and an undue focus

CORE CONCEPT on short-term results. When trade-offs have to be made between achieving long-
Financial objectives term objectives and achieving short-term objectives, long-term objectives should
relate to the financial take precedence (unless the achievement of one or more short-term performance
performance targets targets has unique importance). Examples of commonly used financial and strate-
management has gic objectives are listed in Table 2.2.
established for the
organization to achieve.
Strategic objectives The Need for a Balanced Approach
relate to target outcomes to Objective Setting
that indicate a company is
The importance of setting and attaining financial objectives is obvious. Without
strengthening its market
standing, competitive
adequate profitability and financial strength, a company’s long-term health and
position, and future ultimate survival are jeopardized. Furthermore, subpar earnings and a weak bal-
business prospects. ance sheet alarm shareholders and creditors and put the jobs of senior executives
at risk. However, good financial performance, by itself, is not enough. Of equal
or greater importance is a company’s strategic performance—outcomes that indicate
whether a company’s market position and competitiveness are deteriorating, holding
steady, or improving. A stronger market standing and greater competitive vitality—
especially when accompanied by competitive advantage—is what enables a company
to improve its financial performance.
Moreover, a company’s financial performance measures are really lagging indi-
cators that reflect the results of past decisions and organizational activities.5 But a
company’s past or current financial performance is not a reliable indicator of its future
prospects—poor financial performers often turn things around and do better, while
good financial performers can fall upon hard times. The best and most reliable lead-
ing indicators of a company’s future financial performance and business prospects are
strategic outcomes that indicate whether the company’s competitiveness and market
position are stronger or weaker. The accomplishment of strategic objectives signals that
the company is well positioned to sustain or improve its performance. For instance, if a

TABLE 2.2 Common Financial and Strategic Objectives

Financial Objectives Strategic Objectives

• An x percent increase in annual revenues • Winning an x percent market share

• Annual increases in after-tax profits of x percent • Achieving lower overall costs than rivals
• Annual increases in earnings per share of x • Overtaking key competitors on product performance,
percent quality, or customer service
• Annual dividend increases of x percent • Deriving x percent of revenues from the sale of new
• Profit margins of x percent products introduced within the past five years
• An x percent return on capital employed • Having broader or deeper technological capabilities than rivals
(ROCE) or return on shareholders’ equity (ROE) • Having a wider product line than rivals
investment • Having a better-known or more powerful brand name than
• Increased shareholder value in the form of an rivals
upward-trending stock price • Having stronger national or global sales and distribution
• Bond and credit ratings of x capabilities than rivals
• Internal cash flows of x dollars to fund new capital • Consistently getting new or improved products to market
investment ahead of rivals
ILLUSTRATION
CAPSULE 2.3 Examples of Company Objectives

WALGREENS
Increase revenues from $72 billion in 2012 to more than
$130 billion in 2016; increase operating income from
$3.5 billion in 2012 to $8.5 billion to $9.0 billion by 2016;
increase operating cash flow from $4.4 billion in 2012 to
approximately $8 billion in 2016; generate $1 billion in
cost savings from combined pharmacy and general mer-
chandise purchasing synergies by 2016.

PEPSICO
Accelerate top-line growth; build and expand our better-
for-you snacks and beverages and nutrition businesses;
improve our water use efficiency by 20 percent per unit
of production by 2015; reduce packaging weight by 350 57 percent in 2015; increase number of KFC units in
million pounds; improve our electricity use efficiency Africa from 655 in 2010 to 2,100 in 2020; increase KFC
by 20 percent per unit of production by 2015; maintain revenues in Africa from $865 million in 2010 to $1.94
appropriate financial flexibility with ready access to global billion in 2014; increase number of KFC units in India
capital and credit markets at favorable interest rates. from 101 in 2010 to 1,250 in 2020; increase number of
KFC units in Vietnam from 87 in 2010 to 500 in 2020;
YUM! BRANDS (KFC, PIZZA HUT, TACO increase number of KFC units in Russia from 150 in
BELL, WINGSTREET) 2010 to 500 in 2020; open 100 new Taco Bell units
in international markets in 2015; increase annual cash
Increase operating profit derived from operations flows from operations from $1.5 billion in 2010 to $2.1
in emerging markets from 48 percent in 2010 to billion in 2015.

Source: Information posted on company websites.

company is achieving ambitious strategic objectives such that its competitive strength
and market position are on the rise, then there’s reason to expect that its future finan-
cial performance will be better than its current or past performance. If a company
is losing ground to competitors and its market position is slipping—outcomes that
reflect weak strategic performance (and, very likely, failure to achieve its strategic
objectives)—then its ability to maintain its present profitability is highly suspect.
Consequently, it is important to use a performance measurement system that
strikes a balance between financial objectives and strategic objectives.6 The most CORE CONCEPT
widely used framework of this sort is known as the Balanced Scorecard.7 This is
a method for linking financial performance objectives to specific strategic objec- The Balanced Scorecard
tives that derive from a company’s business model. It provides a company’s employ- is a widely used method
ees with clear guidelines about how their jobs are linked to the overall objectives for combining the use of
of the organization, so they can contribute most productively and collaboratively both strategic and financial
to the achievement of these goals. In 2010, nearly 50 percent of global companies objectives, tracking their
used a balanced-scorecard approach to measuring strategic and financial perfor- achievement, and giving
mance.8 Organizations that have adopted the balanced-scorecard approach include management a more
7-Eleven, Allianz Italy, Wells Fargo, Ford Motor, Verizon, SAS Institute, Exxon- complete and balanced
Mobil, Caterpillar, Pfizer, and DuPont.9 Illustration Capsule 2.3 provides selected view of how well an
organization is performing.
strategic and financial objectives of three prominent companies.

29
30 PART 1 Concepts and Techniques for Crafting and Executing Strategy

Setting Objectives for Every Organizational Level

Objective setting should not stop with top management’s establishing of companywide
performance targets. Company objectives need to be broken down into performance
targets for each of the organization’s separate businesses, product lines, functional
departments, and individual work units. Employees within various functional areas
and operating levels will be guided much better by specific objectives relating directly
to their departmental activities than broad organizational-level goals. Objective setting
is thus a top-down process that must extend to the lowest organizational levels. This
means that each organizational unit must take care to set performance targets that
support—rather than conflict with or negate—the achievement of companywide stra-
tegic and financial objectives.
The ideal situation is a team effort in which each organizational unit strives to
produce results that contribute to the achievement of the company’s performance tar-
gets and strategic vision. Such consistency signals that organizational units know their
strategic role and are on board in helping the company move down the chosen strategic
path and produce the desired results.

STAGE 3: CRAFTING A STRATEGY

As indicated in Chapter 1, the task of stitching a strategy together entails addressing a
LO 3 series of “hows”: how to attract and please customers, how to compete against rivals,
Why the strategic how to position the company in the marketplace, how to respond to changing mar-
initiatives taken at ket conditions, how to capitalize on attractive opportunities to grow the business, and
various organizational how to achieve strategic and financial objectives. Astute entrepreneurship is called for
levels must be in choosing among the various strategic alternatives and in proactively searching for
tightly coordinated to
achieve companywide opportunities to do new things or to do existing things in new or better ways.10 The
performance targets. faster a company’s business environment is changing, the more critical it becomes for
its managers to be good entrepreneurs in diagnosing the direction and force of the
changes under way and in responding with timely adjustments in strategy. Strategy
makers have to pay attention to early warnings of future change and be willing to
experiment with dare-to-be-different ways to establish a market position in that future.
When obstacles appear unexpectedly in a company’s path, it is up to management to
adapt rapidly and innovatively. Masterful strategies come from doing things differ-
ently from competitors where it counts—out-innovating them, being more efficient,
being more imaginative, adapting faster—rather than running with the herd. Good
strategy making is therefore inseparable from good business entrepreneurship. One
cannot exist without the other.

Strategy Making Involves Managers at All

Organizational Levels
A company’s senior executives obviously have lead strategy-making roles and respon-
sibilities. The chief executive officer (CEO), as captain of the ship, carries the mantles
of chief direction setter, chief objective setter, chief strategy maker, and chief strategy
implementer for the total enterprise. Ultimate responsibility for leading the strategy-
making, strategy-executing process rests with the CEO. And the CEO is always
fully accountable for the results the strategy produces, whether good or bad. In some
 CHAPTER 2 Charting a Company’s Direction 31

enterprises, the CEO or owner functions as chief architect of the strategy, person-
ally deciding what the key elements of the company’s strategy will be, although he or
she may seek the advice of key subordinates and board members. A CEO-centered
approach to strategy development is characteristic of small owner-managed companies
and some large corporations that were founded by the present CEO or that have a CEO
with strong strategic leadership skills. Steve Jobs at Apple, Reed Hastings at Netflix,
Meg Whitman at eBay and now at Hewlett-Packard, Warren Buffet at Berkshire
Hathaway, and Howard Schultz at Starbucks are prominent examples of corporate
CEOs who have wielded a heavy hand in shaping their company’s strategy.
In most corporations, however, strategy is the product of more than just the CEO’s
handiwork. Typically, other senior executives—business unit heads, the chief financial
officer, and vice presidents for production, marketing, and other functional departments
have influential strategy-making roles and help fashion the chief strategy components.
Normally, a company’s chief financial officer is in charge of devising and implementing
an appropriate financial strategy; the production vice president takes the lead in devel-
oping the company’s production strategy; the marketing vice president orchestrates
sales and marketing strategy; a brand manager is in charge of the strategy for a particu-
lar brand in the company’s product lineup; and so on. Moreover, the strategy-making
efforts of top managers are complemented by advice and counsel from the company’s
board of directors; normally, all major strategic decisions are submitted to the board of
directors for review, discussion, and official approval.
But strategy making is by no means solely a top management function, the exclusive
province of owner-entrepreneurs, CEOs, high-ranking executives, and board members.
The more a company’s operations cut across different products, industries, and geo-
graphic areas, the more that headquarters executives have little option but to delegate In most companies, crafting
and executing strategy is
considerable strategy-making authority to down-the-line managers in charge of par-
a collaborative team effort
ticular subsidiaries, divisions, product lines, geographic sales offices, distribution
in which every manager
centers, and plants. On-the-scene managers who oversee specific operating units can
has a role for the area he
be reliably counted on to have more detailed command of the strategic issues and or she heads; it is rarely
choices for the particular operating unit under their supervision—knowing the pre- something that only high-
vailing market and competitive conditions, customer requirements and expectations, level managers do.
and all the other relevant aspects affecting the several strategic options available.
Managers with day-to-day familiarity of, and authority over, a specific operating unit
thus have a big edge over headquarters executives in making wise strategic choices for
their operating unit. The result is that, in most of today’s companies, crafting and exe-
cuting strategy is a collaborative team effort in which every company manager plays
a strategy-making role—ranging from minor to major—for the area he or she heads.
Take, for example, a company like General Electric, a global corporation with more
than $220 billion in revenues, more than 300,000 employees, operations in some 160
countries, and businesses that include jet engines, lighting, power generation, electric
transmission and distribution equipment, housewares and appliances, medical equip-
ment, media and entertainment, locomotives, security devices, water purification, and
financial services. While top-level headquarters executives may well be personally
involved in shaping GE’s overall strategy and fashioning important strategic moves,
they simply cannot know enough about the situation in every GE organizational unit
to direct every strategic move made in GE’s worldwide organization. Rather, it takes
involvement on the part of GE’s whole management team—top executives, business
group heads, the heads of specific business units and product categories, and key man-
agers in plants, sales offices, and distribution centers—to craft the thousands of strate-
gic initiatives that end up composing the whole of GE’s strategy.
 32 PART 1 Concepts and Techniques for Crafting and Executing Strategy

A Company’s Strategy-Making Hierarchy

In diversified companies like GE, where multiple and sometimes strikingly different
businesses have to be managed, crafting a full-fledged strategy involves four distinct
types of strategic actions and initiatives. Each of these involves different facets of the
company’s overall strategy and calls for the participation of different types of manag-
ers, as shown in Figure 2.2.
As shown in Figure 2.2, corporate strategy is orchestrated by the CEO and
CORE CONCEPT other senior executives and establishes an overall strategy for managing a set of
Corporate strategy businesses in a diversified, multibusiness company. Corporate strategy concerns
establishes an overall game how to improve the combined performance of the set of businesses the company
plan for managing a set of has diversified into by capturing cross-business synergies and turning them into
businesses in a diversified, competitive advantage. It addresses the questions of what businesses to hold or
multibusiness company. divest, which new markets to enter, and how to best enter new markets (by acquisi-
Business strategy is tion, creation of a strategic alliance, or through internal development, for example).
primarily concerned Corporate strategy and business diversification are the subjects of Chapter 8, in
with strengthening the which they are discussed in detail.
company’s market position Business strategy is concerned with strengthening the market position, building
and building competitive competitive advantage, and improving the performance of a single line of busi-
advantage in a single- ness unit. Business strategy is primarily the responsibility of business unit heads,
business company or in a although corporate-level executives may well exert strong influence; in diversified
single business unit of a companies it is not unusual for corporate officers to insist that business-level objec-
diversified multibusiness tives and strategy conform to corporate-level objectives and strategy themes. The
corporation.
business head has at least two other strategy-related roles: (1) seeing that lower-
level strategies are well conceived, consistent, and adequately matched to the over-
all business strategy, and (2) keeping corporate-level officers (and sometimes the
CORE CONCEPT board of directors) informed of emerging strategic issues.
Business strategy
Functional-area strategies concern the approaches employed in managing
is strategy at the
particular functions within a business—like research and development (R&D),
single-business level, production, procurement of inputs, sales and marketing, distribution, customer ser-
concerning how to improve vice, and finance. A company’s marketing strategy, for example, represents the
performance or gain a managerial game plan for running the sales and marketing part of the business. A
competitive advantage in a company’s product development strategy represents the game plan for keeping the
particular line of business. company’s product lineup in tune with what buyers are looking for.
Functional strategies flesh out the details of a company’s business strategy.
Lead responsibility for functional strategies within a business is normally delegated
to the heads of the respective functions, with the general manager of the business hav-
ing final approval. Since the different functional-level strategies must be compatible
with the overall business strategy and with one another to have beneficial impact, the
general business manager may at times exert stronger influence on the content of the
functional strategies.
Operating strategies concern the relatively narrow approaches for managing
key operating units (e.g., plants, distribution centers, purchasing centers) and specific
operating activities with strategic significance (e.g., quality control, materials purchas-
ing, brand management, Internet sales). A plant manager needs a strategy for accom-
plishing the plant’s objectives, carrying out the plant’s part of the company’s overall
manufacturing game plan, and dealing with any strategy-related problems that exist
at the plant. A company’s advertising manager needs a strategy for getting maximum
audience exposure and sales impact from the ad budget. Operating strategies, while
of limited scope, add further detail and completeness to functional strategies and to
 CHAPTER 2 Charting a Company’s Direction 33

FIGURE 2.2 A Company’s Strategy-Making Hierarchy

Corporate
Strategy
Orchestrated by
(for the set of businesses as a whole)
the CEO and
other senior • How to gain advantage from managing a
In the case of a
executives. set of businesses
single-business
company, these
two levels of the
strategy-making
hierarchy merge
into one level—
Two-Way Influence
Business
Strategy—that is
Orchestrated orchestrated by
by the senior the company’s
executives Business Strategy CEO and other
of each line of (one for each business the top executives.
business, often company has diversified into)
with advice from • How to gain and sustain a competitive
the heads of advantage for a single line of business
functional areas
within the
business and
other key people.

Two-Way Influence

Orchestrated by
the heads of major
Functional Area Strategies
functional
(within each business)
activities within
a particular • How to manage a particular activity within
business, often in a business in ways that support the
collaboration with business strategy
other key people.

Orchestrated by Two-Way Influence

brand managers,
plant managers,
and the heads of
other strategically Operating Strategies
important (within each functional area)
activities, such as • How to manage activities of strategic
distribution, significance within each functional area,
purchasing, and adding detail and completeness
website
operations, often
with input from
other key people.
 34 PART 1 Concepts and Techniques for Crafting and Executing Strategy

the overall business strategy. Lead responsibility for operating strategies is usually
delegated to frontline managers, subject to the review and approval of higher-ranking
managers.
Even though operating strategy is at the bottom of the strategy-making hierarchy,
its importance should not be downplayed. A major plant that fails in its strategy to
achieve production volume, unit cost, and quality targets can damage the company’s
reputation for quality products and undercut the achievement of company sales and
profit objectives. Frontline managers are thus an important part of an organization’s
strategy-making team. One cannot reliably judge the strategic importance of a given
action simply by the strategy level or location within the managerial hierarchy where
it is initiated.
In single-business companies, the uppermost level of the strategy-making hierar-
chy is the business strategy, so a single-business company has three levels of strategy:
business strategy, functional-area strategies, and operating strategies. Proprietorships,
partnerships, and owner-managed enterprises may have only one or two strategy-
A company’s strategy is at making levels since their strategy-making process requires only a few key people.
full power only when its The larger and more diverse the operations of an enterprise, the more points of
many pieces are united. strategic initiative it has and the more levels of management that have a significant
strategy-making role.

Uniting the Strategy-Making Hierarchy

Ideally, the pieces of a company’s strategy up and down the strategy hierarchy should
be cohesive and mutually reinforcing, fitting together like a jigsaw puzzle. Anything
less than a unified collection of strategies weakens the overall strategy and is likely
to impair company performance.11 It is the responsibility of top executives to achieve
this unity by clearly communicating the company’s vision, objectives, and major strat-
egy components to down-the-line managers and key personnel. Midlevel and front-
line managers cannot craft unified strategic moves without first understanding the
company’s long-term direction and knowing the major components of the corporate
and/or business strategies that their strategy-making efforts are supposed to support
and enhance. Thus, as a general rule, strategy making must start at the top of the orga-
nization and then proceed downward from the corporate level to the business level and
then from the business level to the associated functional and operating levels. Once
strategies up and down the hierarchy have been created, lower-level strategies must be
scrutinized for consistency with and support of higher-level strategies. Any strategy
conflicts must be addressed and resolved, either by modifying the lower-level strate-
gies with conflicting elements or by adapting the higher-level strategy to accommodate
what may be more appealing strategy ideas and initiatives bubbling up from below.

A Strategic Vision 1 Mission 1 Objectives 1

Strategy 5 A Strategic Plan
CORE CONCEPT Developing a strategic vision and mission, setting objectives, and crafting a strat-
egy are basic direction-setting tasks. They map out where a company is headed, its
A company’s strategic purpose, the targeted strategic and financial outcomes, the basic business model,
plan lays out its future and the competitive moves and internal action approaches to be used in achieving
direction, business purpose,
the desired business results. Together, these elements constitute a strategic plan
performance targets, and
for coping with industry conditions, outcompeting rivals, meeting objectives, and
strategy.
making progress toward aspirational goals.12 Typically, a strategic plan includes a
 CHAPTER 2 Charting a Company’s Direction 35

commitment to allocate resources to the plan and specifies a time period for achieving
goals (usually three to five years).
In companies that do regular strategy reviews and develop explicit strategic plans, the
strategic plan usually ends up as a written document that is circulated to most managers.
Near-term performance targets are the part of the strategic plan most often communicated
to employees more generally and spelled out explicitly. A number of companies summa-
rize key elements of their strategic plans in the company’s annual report to shareholders,
in postings on their websites, or in statements provided to the business media; others,
perhaps for reasons of competitive sensitivity, make only vague, general statements about
their strategic plans.13 In small, privately owned companies, it is rare for strategic plans
to exist in written form. Small-company strategic plans tend to reside in the thinking
and directives of owner-executives; aspects of the plan are revealed in conversations with
company personnel about where to head, what to accomplish, and how to proceed.

STAGE 4: EXECUTING THE STRATEGY

Managing the implementation of a strategy is easily the most demanding and
time-consuming part of the strategy management process. Converting strategic plans LO 4
into actions and results tests a manager’s ability to direct organizational change, moti- What a company
vate employees, build and strengthen competitive capabilities, create and nurture a must do to achieve
strategy-supportive work climate, and meet or beat performance targets. Initiatives to operating excellence
put the strategy in place and execute it proficiently must be launched and managed on and to execute its
strategy proficiently.
many organizational fronts.
Management’s action agenda for executing the chosen strategy emerges from
assessing what the company will have to do to achieve the targeted financial and
strategic performance. Each company manager has to think through the answer to
the question “What needs to be done in my area to execute my piece of the strategic
plan, and what actions should I take to get the process under way?” How much inter-
nal change is needed depends on how much of the strategy is new, how far internal
practices and competencies deviate from what the strategy requires, and how well the
present work culture supports good strategy execution. Depending on the amount of
internal change involved, full implementation and proficient execution of the company
strategy (or important new pieces thereof) can take several months to several years.
In most situations, managing the strategy execution process includes the following
principal aspects:
• Creating a strategy-supporting structure.
• Staffing the organization to obtain needed skills and expertise.
• Developing and strengthening strategy-supporting resources and capabilities.
• Allocating ample resources to the activities critical to strategic success.
• Ensuring that policies and procedures facilitate effective strategy execution.
• Organizing the work effort along the lines of best practice.
• Installing information and operating systems that enable company personnel to
perform essential activities.
• Motivating people and tying rewards directly to the achievement of performance
objectives.
• Creating a company culture conducive to successful strategy execution.
• Exerting the internal leadership needed to propel implementation forward.
 36 PART 1 Concepts and Techniques for Crafting and Executing Strategy

Good strategy execution requires diligent pursuit of operating excellence. It is a job

for a company’s whole management team. Success hinges on the skills and coopera-
tion of operating managers who can push for needed changes in their organizational
units and consistently deliver good results. Management’s handling of the strategy
implementation process can be considered successful if things go smoothly enough
that the company meets or beats its strategic and financial performance targets and
shows good progress in achieving management’s strategic vision.

STAGE 5: EVALUATING PERFORMANCE AND

INITIATING CORRECTIVE ADJUSTMENTS
The fifth component of the strategy management process—monitoring new external
developments, evaluating the company’s progress, and making corrective adjustments—
is the trigger point for deciding whether to continue or change the company’s vision
and mission, objectives, strategy, and/or strategy execution methods.14 As long as the
company’s strategy continues to pass the three tests of a winning strategy discussed in
Chapter 1 (good fit, competitive advantage, strong performance), company executives
may decide to stay the course. Simply fine-tuning the strategic plan and continuing
with efforts to improve strategy execution are sufficient.
But whenever a company encounters disruptive changes in its environment, ques-
tions need to be raised about the appropriateness of its direction and strategy. If a
company experiences a downturn in its market position or persistent shortfalls in per-
formance, then company managers are obligated to ferret out the causes—do they
relate to poor strategy, poor strategy execution, or both?—and take timely corrective
action. A company’s direction, objectives, and strategy have to be revisited anytime
external or internal conditions warrant.
Likewise, managers are obligated to assess which of the company’s operating
A company’s vision, mission, methods and approaches to strategy execution merit continuation and which need
objectives, strategy, and improvement. Proficient strategy execution is always the product of much orga-
approach to strategy
nizational learning. It is achieved unevenly—coming quickly in some areas and
execution are never final;
proving troublesome in others. Consequently, top-notch strategy execution entails
managing strategy is an
vigilantly searching for ways to improve and then making corrective adjustments
ongoing process.
whenever and wherever it is useful to do so.

CORPORATE GOVERNANCE: THE ROLE OF

THE BOARD OF DIRECTORS IN THE STRATEGY-
CRAFTING, STRATEGY-EXECUTING PROCESS
Although senior managers have the lead responsibility for crafting and executing a
LO 5 company’s strategy, it is the duty of a company’s board of directors to exercise strong
The role and oversight and see that management performs the various tasks involved in each of the
responsibility five stages of the strategy-making, strategy-executing process in a manner that best
of a company’s serves the interests of shareholders and other stakeholders.15 A company’s board of
board of directors directors has four important obligations to fulfill:
in overseeing
the strategic 1. Oversee the company’s financial accounting and financial reporting practices.
management process. While top executives, particularly the company’s CEO and CFO (chief financial
 CHAPTER 2 Charting a Company’s Direction 37

officer), are primarily responsible for seeing that the company’s financial state-
ments fairly and accurately report the results of the company’s operations, board
members have a legal obligation to warrant the accuracy of the company’s
financial reports and protect shareholders. It is their job to ensure that generally
accepted accounting principles (GAAP) are used properly in preparing the com-
pany’s financial statements and that proper financial controls are in place to pre-
vent fraud and misuse of funds. Virtually all boards of directors have an audit
committee, always composed entirely of outside directors (inside directors hold
management positions in the company and either directly or indirectly report to
the CEO). The members of the audit committee have the lead responsibility for
overseeing the decisions of the company’s financial officers and consulting with
both internal and external auditors to ensure accurate financial reporting and ade-
quate financial controls.
2. Critically appraise the company’s direction, strategy, and business approaches.
Board members are also expected to guide management in choosing a strategic
direction and to make independent judgments about the validity and wisdom of
management’s proposed strategic actions. This aspect of their duties takes on
heightened importance when the company’s strategy is failing or is plagued with
faulty execution, and certainly when there is a precipitous collapse in profitabil-
ity. But under more normal circumstances, many boards have found that meeting
agendas become consumed by compliance matters with little time left to discuss
matters of strategic importance. The board of directors and management at Philips
Electronics hold annual two- to three-day retreats devoted exclusively to evaluat-
ing the company’s long-term direction and various strategic proposals. The com-
pany’s exit from the semiconductor business and its increased focus on medical
technology and home health care resulted from management-board discussions
during such retreats.16
3. Evaluate the caliber of senior executives’ strategic leadership skills. The board
is always responsible for determining whether the current CEO is doing a good
job of strategic leadership (as a basis for awarding salary increases and bonuses
and deciding on retention or removal).17 Boards must also exercise due diligence
in evaluating the strategic leadership skills of other senior executives in line to
succeed the CEO. When the incumbent CEO steps down or leaves for a posi-
tion elsewhere, the board must elect a successor, either going with an insider or
deciding that an outsider is needed to perhaps radically change the company’s
strategic course. Often, the outside directors on a board visit company facilities
and talk with company personnel personally to evaluate whether the strategy
is on track, how well the strategy is being executed, and how well issues and
problems are being addressed by various managers. For example, independent
board members at GE visit operating executives at each major business unit once
a year to assess the company’s talent pool and stay abreast of emerging strate-
gic and operating issues affecting the company’s divisions. Home Depot board
members visit a store once per quarter to determine the health of the company’s
operations.18
4. Institute a compensation plan for top executives that rewards them for actions
and results that serve shareholder interests. A basic principle of corporate gov-
ernance is that the owners of a corporation (the shareholders) delegate operating
authority and managerial control to top management in return for compensa-
tion. In their role as agents of shareholders, top executives have a clear and
 38 PART 1 Concepts and Techniques for Crafting and Executing Strategy

unequivocal duty to make decisions and operate the company in accord with
shareholder interests. (This does not mean disregarding the interests of other
stakeholders—employees, suppliers, the communities in which the company
operates, and society at large.) Most boards of directors have a compensa-
tion committee, composed entirely of directors from outside the company, to
develop a salary and incentive compensation plan that rewards senior execu-
tives for boosting the company’s long-term performance on behalf of share-
holders. The compensation committee’s recommendations are presented to
the full board for approval. But during the past 10 to 15 years, many boards
of directors have done a poor job of ensuring that executive salary increases,
bonuses, and stock option awards are tied tightly to performance measures that
are truly in the long-term interests of shareholders. Rather, compensation pack-
ages at many companies have increasingly rewarded executives for short-term
performance improvements—most notably, for achieving quarterly and annual
earnings targets and boosting the stock price by specified percentages. This has
had the perverse effect of causing company managers to become preoccupied
with actions to improve a company’s near-term performance, often motivating
them to take unwise business risks to boost short-term earnings by amounts
sufficient to qualify for multimillion-dollar compensation packages (that many
see as obscenely large). The focus on short-term performance has proved
damaging to long-term company performance and shareholder interests—
witness the huge loss of shareholder wealth that occurred at many financial
institutions in 2008–2009 because of executive risk taking in subprime loans,
credit default swaps, and collateralized mortgage securities. As a consequence,
the need to overhaul and reform executive compensation has become a hot
topic in both public circles and corporate boardrooms. Illustration Capsule
2.4 discusses how weak governance at the mortgage companies Fannie Mae
and Freddie Mac allowed opportunistic senior managers to secure exorbitant
bonuses while making decisions that imperiled the futures of the companies
they managed.
Every corporation should have a strong independent board of directors that
Effective corporate (1) is well informed about the company’s performance, (2) guides and judges the
governance requires CEO and other top executives, (3) has the courage to curb management actions
the board of directors to the board believes are inappropriate or unduly risky, (4) certifies to shareholders
oversee the company’s that the CEO is doing what the board expects, (5) provides insight and advice to
strategic direction, evaluate management, and (6) is intensely involved in debating the pros and cons of key
its senior executives, handle
decisions and actions.19 Boards of directors that lack the backbone to challenge a
executive compensation,
strong-willed or “imperial” CEO or that rubber-stamp almost anything the CEO
and oversee financial
recommends without probing inquiry and debate abdicate their fiduciary duty to
reporting practices.
represent and protect shareholder interests.
ILLUSTRATION Corporate Governance Failures
CAPSULE 2.4 at Fannie Mae and Freddie Mac

Excessive executive compensation in the financial services

industry ranks high among examples of failed corporate
governance. Corporate governance at the government-
sponsored mortgage giants Fannie Mae and Freddie Mac
was particularly weak. The politically appointed boards
at both enterprises failed to understand the risks of the
subprime loan strategies being employed, did not ade-
quately monitor the decisions of the CEO, did not exer-
cise effective oversight of the accounting principles being
employed (which led to inflated earnings), and approved
executive compensation systems that allowed manage-
ment to manipulate earnings to receive lucrative perfor-
mance bonuses. The audit and compensation committees
at Fannie Mae were particularly ineffective in protecting
shareholder interests, with the audit committee allowing
the company’s financial officers to audit reports prepared
under their direction and used to determine performance
bonuses. Fannie Mae’s audit committee also was aware
of management’s use of questionable accounting prac-
tices that reduced losses and recorded one-time gains
to achieve financial targets linked to bonuses. In addition,
the audit committee failed to investigate formal charges
of accounting improprieties filed by a manager in the
Office of the Controller.
Fannie Mae’s compensation committee was equally
ineffective. The committee allowed the company’s CEO,
Franklin Raines, to select the consultant employed to declined from a high of $70 in 2005 to $25 at year-end
design the mortgage firm’s executive compensation plan 2007. During Syron’s tenure as CEO, the company became
and agreed to a tiered bonus plan that would permit embroiled in a multibillion-dollar accounting scandal, and
Raines and other senior managers to receive maximum Syron personally disregarded internal reports dating to
bonuses without great difficulty. The compensation plan 2004 that cautioned of an impending financial crisis at
allowed Raines to earn performance-based bonuses of $52 the company. Forewarnings within Freddie Mac and by
million and a total compensation of $90 million between federal regulators and outside industry observers proved
1999 and 2004. Raines was forced to resign in December to be correct, with loan underwriting policies at Freddie
2004 when the Office of Federal Housing Enterprise Mac and Fannie Mae leading to combined losses at the
Oversight found that Fannie Mae executives had fraudu- two firms in 2008 of more than $100 billion. The price of
lently inflated earnings to receive bonuses linked to finan- Freddie Mac’s shares had fallen to below $1 by the time of
cial performance. Securities and Exchange Commission Syron’s resignation in September 2008.
investigators also found evidence of improper accounting Both organizations were placed into a conservator-
at Fannie Mae and required the company to restate its ship under the direction of the U.S. government in Sep-
earnings between 2002 and 2004 by $6.3 billion. tember 2008 and were provided bailout funds of more
Poor governance at Freddie Mac allowed its CEO than $180 billion by mid-2012. At that point, the U.S.
and senior management to manipulate financial data to Treasury amended the organizations’ bailout terms to
receive performance-based compensation as well. Fred- require that all profits be transferred to the government
die Mac CEO Richard Syron received 2007 compensation while downsizing the firms. By early 2014, the bailout
of $19.8 million while the mortgage company’s share price had finally been fully repaid.
Sources: Chris Isidore, “Mortgage Bailout Now Profitable for Taxpayers,” CNNMoney, February 21, 2014; Alan Zibel and Nick Timiraos
“Fannie, Freddie Bailout Receives Revamp,” The Wall Street Journal Online, August 17, 2012; Eric Dash, “Fannie Mae to Restate Results
by $6.3 Billion because of Accounting,” The New York Times Online, December 7, 2006; Annys Shin, “Fannie Mae Sets Executive Salaries,”
The Washington Post, February 9, 2006, p. D4; and Scott DeCarlo, Eric Weiss, Mark Jickling, and James R. Cristie, Fannie Mae and
Freddie Mac: Scandal in U.S. Housing (Nova, 2006), pp. 266–286.

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KEY POINTS
The strategic management process consists of five interrelated and integrated stages:
1. Developing a strategic vision of the company’s future, a mission statement that
defines the company’s current purpose, and a set of core values to guide the pur-
suit of the vision and mission. This stage of strategy making provides direction
for the company, motivates and inspires company personnel, aligns and guides
actions throughout the organization, and communicates to stakeholders manage-
ment’s aspirations for the company’s future.
2. Setting objectives to convert the vision and mission into performance targets that
can be used as yardsticks for measuring the company’s performance. Objectives
need to spell out how much of what kind of performance by when. Two broad
types of objectives are required: financial objectives and strategic objectives. A
balanced-scorecard approach for measuring company performance entails setting
both financial objectives and strategic objectives.
3. Crafting a strategy to achieve the objectives and move the company along the stra-
tegic course that management has charted. Masterful strategies come from doing
things differently from competitors where it counts—out-innovating them, being
more efficient, being more imaginative, adapting faster—rather than running with
the herd. In large diversified companies, the strategy-making hierarchy consists
of four levels, each of which involves a corresponding level of management: cor-
porate strategy (multibusiness strategy), business strategy (strategy for individual
businesses that compete in a single industry), functional-area strategies within
each business (e.g., marketing, R&D, logistics), and operating strategies (for key
operating units, such as manufacturing plants). Thus, strategy making is an inclu-
sive collaborative activity involving not only senior company executives but also
the heads of major business divisions, functional-area managers, and operating
managers on the frontlines.
4. Executing the chosen strategy and converting the strategic plan into action. Man-
agement’s agenda for executing the chosen strategy emerges from assessing what
the company will have to do to achieve the targeted financial and strategic per-
formance. Management’s handling of the strategy implementation process can be
considered successful if things go smoothly enough that the company meets or
beats its strategic and financial performance targets and shows good progress in
achieving management’s strategic vision.
5. Monitoring developments, evaluating performance, and initiating corrective ad-
justments in light of actual experience, changing conditions, new ideas, and new
opportunities. This stage of the strategy management process is the trigger point
for deciding whether to continue or change the company’s vision and mission,
objectives, strategy, and/or strategy execution methods.
The sum of a company’s strategic vision, mission, objectives, and strategy consti-
tutes a strategic plan for coping with industry conditions, outcompeting rivals, meet-
ing objectives, and making progress toward aspirational goals. Stretch objectives spur
exceptional performance and help build a firewall against contentment with modest
gains in organizational performance. A company exhibits strategic intent when it
relentlessly pursues an ambitious strategic objective, concentrating the full force of its
resources and competitive actions on achieving that objective.

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