Because learning changes everything.

CHAPTER 2
Strategy Formulation,
Execution, and
Governance

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 LEARNING OBJECTIVES

1. Understand why it is critical for a firm’s managers to have a clear

strategic vision of where a firm needs to head and why.
2. Explain the importance of setting both strategic and financial
objectives.
3. Explain why the strategic initiatives taken at various
organizational levels must be tightly coordinated to achieve
companywide performance targets.
4. Recognize what a firm must do to achieve operating excellence
and to execute its strategy proficiently.
5. Identify the role and responsibility of a firm’s board of directors
in overseeing the strategic management process.

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 The Strategy Formulation, Strategy Execution Process

1. Develop a strategic Vision and Mission. What we want to be

2. Set objectives.

3. Craft a strategy. How we can be there

4. Implement and execute the chosen strategy.

5. Evaluate and analyze the external environment

and the firm’s internal situation and What we are

performance.

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 FIGURE 2.1 The Strategy Formulation, Strategy Execution Process

What we want to
be How we can be there What we are

Access the text alternative for slide images.

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 Stage 1: Developing a Strategic Vision, a Mission,
and Core Values
A Strategic Vision:
• Is top management’s view of “where we are going.”
• Defines the firm’s direction and its future product-market-customer-
technology focus to stakeholders.
• Is distinctive and specific to a particular organization.
• Avoids use of generic, and uninspiring language that could apply
to most any firm.
• Definitively states how the company’s leaders intend to position
the firm beyond where it is today.

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 CORE CONCEPT: Strategic Vision

A strategic vision describes “where we are going”—the course

and direction management has charted and the company’s future
product-customer-market-technology focus.

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 TABLE 2.2 Characteristics of Effectively Worded Vision Statements

TYPE DESCRIPTION
Graphic Paints a picture of the kind of company that management is trying to create and
the market position(s) the company is striving to stake out.
Directional Is forward looking; describes the strategic course that management has charted
and the kinds of product-market-customer-technology changes that will help the
company prepare for the future.
Focused Is specific enough to provide managers with guidance in making decisions and
allocating resources.
Flexible Is not so focused that it makes it difficult for management to adjust to changing
circumstances in markets, customer preferences, or technology.
Feasible Is within the realm of what the company can reasonably expect to achieve.

Desirable Indicates why the directional path makes good business sense.
Easy to Is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple,
communicate memorable “slogan”

Source: Based partly on John P. Kotter, Learning Change (Harvard Business School Press, 1996)

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 Expressing the Essence of the Vision in a Slogan

Disney
• To "create happiness by providing the finest in entertainment for
people of all ages, everywhere.“

The Mayo Clinic

• The best care to every patient every day.

Greenpeace
• To halt environmental abuse and promote environmental
solutions.

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Why a Sound, Well-Communicated Strategic Vision Matters

It crystallizes senior executives’ own views about the

firm’s long-term direction.
It reduces the risk of planless decision making by
management at all levels.
It is a tool for winning the support of employees to help
make the vision a reality.
It provides a beacon for lower-level managers in forming
departmental missions.
It helps an organization prepare for the future.

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 Strategic Vision versus Mission Statement

A strategic vision concerns a A firm’s mission statement

firm’s future strategic course— focuses on its present business
“where we are headed and our scope and purpose—
future focus.” “who we are, what we do, and
• Markets to be pursued. why we are here.”
• Future product, market, • Current product and service
customer and technology focus. offerings.
• Customer needs being served.
• Company identity.

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 CORE CONCEPT: Mission Statement

A well-conceived mission statement conveys a

company’s purpose in language specific enough to give
the company its own identity.

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 Example of a Mission Statement

The mission of St. Jude Children’s Research Hospital: “To advance

cures, and means of prevention, for pediatric catastrophic diseases
through research and treatment. Consistent with the vision of our
founder Danny Thomas, no child is denied treatment based on
race, religion or a family’s ability to pay.”

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 CORE CONCEPT: Values

A company’s values are the beliefs, traits, and behavioral norms

that its personnel are expected to display in conducting the
company’s business and pursuing its strategic vision and mission.

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Stage 2: Setting Objectives

Purpose in Setting Objectives

• To convert the strategic vision into specific performance targets.
• To create yardsticks to track progress and measure performance.

Valuable Objectives
• Are well-stated (clearly worded).
• Are challenging, yet achievable such that they stretch the organization
to perform at its full potential.
• Are quantifiable (measurable).
• Contain a specific deadline for achievement.

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 CORE CONCEPT: Objectives, Stretch Objectives,
and Strategic Intent

Objectives are an organization’s performance targets—the results

management wants to achieve.

Stretch objectives set performance targets high enough to stretch

an organization to perform at its full potential and deliver the
best possible results.

Strategic intent is embodied in the organization’s relentless pursuit

of an ambitious strategic objective, concentrating the full force of
its resources and competitive actions on achieving that objective.

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 CORE CONCEPT: Financial Objectives and
Strategic Objectives

Objectives are an organization’s performance targets—results

management wants to achieve.

Financial objectives relate to the financial performance targets

management has established for the organization to achieve.
Strategic objectives relate to target outcomes that indicate a
company is strengthening its market standing, competitive
strength, and future business prospects.

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 CORE CONCEPT: The Balanced Scorecard

The balanced scorecard is a widely used method for combining

the use of both strategic and financial objectives, tracking their
achievement, and giving management a more complete and
balanced view of how well an organization is performing.

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 Table 2.4 The Balanced Scorecard Approach
to Performance Measurement
Financial Objectives. Strategic Objectives.
• An x percent increase in annual • Win an x percent market share.
revenues. • Achieve customer satisfaction rates of x percent.
• Annual increases in earnings per • Achieve a customer retention rate of x percent.
share of x percent.
• Acquire x number of new customers.
• An x percent return on capital
• Introduce x number of new products in the next
employed (ROCE) or shareholder
three years.
investment (ROE).
• Reduce product development times to x months.
• Internal cash flows of x to fund
new capital investment. • Increase the percentage of sales coming from
new products to x percent.
• Improve information systems capabilities to give
managers defect information in x minutes.
• Improve teamwork by increasing the number of
projects involving more than one business unit to
x.

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 Short-Term and Long-Term Objectives
Short-term Objectives Long-term Objectives
• Are targets to be • Are targets to be achieved
achieved soon. within 3 to 5 years.
• Represent milestones or
stair steps for reaching
long-range performance.

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The Need for Objectives at All Organizational Levels

Objectives are needed at all levels

• To set business-level objectives.
• To set establish functional-area objectives.
• To set operating-level objectives.

Long-term objectives take priority over short-term

objectives.

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Stage 3: Crafting a Strategy

Crafting a strategy means asking:

• How to attract and please customers?

• How to compete against rivals?
• How to position the firm in the marketplace and capitalize on attractive
opportunities to grow the business?
• How best to respond to changing economic and market conditions?
• How to manage each functional piece of the business?
• How to achieve the firm’s performance targets?

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A Company’s Strategy-Making Hierarchy

A firm’s strategy is a collection of initiatives undertaken by

managers at all levels in the organizational hierarchy

Crafting strategy is a collaborative effort

• Involves managers from various levels of the organization.
• Should be cohesive and mutually reinforcing, fitting together like a jigsaw
puzzle.
• Requires choosing among the various strategic alternatives.

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 CORE CONCEPT: Corporate Strategy and Business Strategy

Corporate strategy establishes an overall game plan for

managing a set of businesses in a diversified, multibusiness
company.

Business strategy is primarily concerned with strengthening

the company’s market position and building competitive
advantage in a single business company or a single business
unit of a diversified multibusiness corporation.

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 The Strategy-Making Hierarchy
STRATEGY DESCRIPTION
Corporate Is orchestrated by the CEO and other senior executives and establishes
strategy an overall game plan for managing a set of businesses in a diversified,
multibusiness company.
Addresses the questions of how to capture cross-business synergies,
what businesses to hold or divest, which new markets to enter, and how
to best enter new markets—by acquisition, creation of a strategic
alliance, or through internal development.
Business Is primarily concerned with building competitive advantage in a single
strategy business unit of a diversified company or strengthening the market
position of a nondiversified single business company.
Functional- Are concerned with actions related to particular functions or processes
area within a business (marketing strategy, production strategy, finance
strategies strategy, customer service strategy, product development strategy, and
human resources strategy).
Operating Are relatively narrow strategic initiatives and approaches for managing
strategies key operating units (plants, distribution centers, geographic units) and
specific operating activities such as materials purchasing or Internet sales.

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 Stage 4: Implementing and Executing the Chosen Strategy
Managing the strategy execution process involves:
• Exerting the internal leadership • Installing information and
needed to propel implementation operating systems that enable
forward personnel to perform essential
activities
• Creating a company culture and
work climate conducive to • Ensuring that policies and
successful strategy execution procedures facilitate rather than
impede effective execution
• Tying rewards and incentives
directly to the achievement of • Allocating ample resources to
performance objectives activities critical to good strategy
execution
• Pushing for continuous
improvement in how value chain • Staffing the organization to
activities are performed provide needed skills and expertise

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 Stage 5: Evaluating Performance and Initiating
Corrective Adjustments

Deciding if there is a need for change:

• Monitoring for disruptive developments.
• Evaluating the firm’s recent performance.
• Making corrective adjustments to strategy.

Strategy execution is an ongoing and uneven process of

organizational learning.
• A firm’s vision, objectives, strategy, and approach to strategy
execution are never final.

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Corporate Governance: The Board of Directors

The Role of the Board of Directors in the Strategy-

Formulation, Strategy-Execution Process:

• Oversee the firm’s financial accounting and reporting practices.

• Diligently critique and oversee the company’s direction, strategy,
and business approaches.
• Evaluate the caliber of senior executives’ strategy-making and
strategy-executing skills.
• Institute a compensation plan for top executives that rewards
them for actions and results that serve shareholder interests.

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Strong Boards Lead to Good Corporate Governance

A Strong, Independent Board of Directors

• Is well informed about the company’s performance.

• Guides and judges the CEO and other top executives.
• Has the courage to curb management actions it believes are
inappropriate or unduly risky.
• Certifies to shareholders that the CEO is doing what the board expects.
• Provides insight and advice to management.
• Is intensely involved in debating the pros and cons of key decisions and
actions.

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