The Strategic Management Process

Opening Case: DELL Computer

The Opening Case tells the story of Dell Computer, from its earliest days as a start-up in Michael Dell’s college dorm room, to an extremely successful giant corporation, with estimated sales of over $30 billion in 2002. Dell has the highest profitability in its industry, has maintained that leadership for several years, and even stayed profitable during the recent downturn in high technology industries.

Dell’s phenomenal success is directly attributable to its direct-sales business model, which allows the firm to cut costs and lower prices by eliminating the middlemen: wholesalers and retailers. Dell’s model also allows buyers to customize their computers quickly and easily, thus providing a high value-added product for a lower price than traditional PC makers. Another important aspect of Dell’s business model is a just-in-time supply chain, with purchases made in great quantities, allowing the firm to further reduce inventory, obsolescence, and cost of raw materials.

Teaching Note: This Opening Case provides an excellent opportunity to discuss many of the concepts that will be introduced in Chapter 1. For example, Dell developed a business model that was unique and revolutionary at the time. The model allowed the firm to add value for customers while keeping costs low, improving both effectiveness and efficiency. Because the model was unique and led to improved effectiveness and efficiency, the firm achieved a sustained competitive advantage. The business model was developed by Michael Dell, and thus provides an example of effective strategic leadership and vision. This case may be used to point out to students that every firm, no matter how successful, is vulnerable to competitive attack. Although Dell dominates its industry today, so too did IBM dominate at one time, as did Apple, Osborne, and Atari. To highlight Dell’s current advantages, one avenue of discussion would involve asking students to describe conditions under which Dell might lose its competitive advantage.

Lecture Outline

I.      Overview

A.    Why do some organizations succeed and others fail? An answer can be found in the subject matter of this course. This course is about strategic management and the advantages that accrue to organizations that think strategically.

B.    A strategy is a course of action that managers take in the effort to attain superior performance.

C.    Understanding the roots of success and failure is not an empty academic exercise. Through such understanding comes a better appreciation for the strategies that must be pursued to increase the probability of success and reduce the probability of failure.

II.    Superior Performance and Competitive Advantage

A.    For businesses, superior performance is demonstrated through above-average profitability, as compared to other firms in the same industry. Profitability is typically measured using after-tax return on invested capital.

B.    The strategies that an organization’s managers pursue have a major impact on its performance relative to its peers.

C.    When a firm’s profitability is greater than the average profitability for all firms in its industry, it has a competitive advantage over its rivals. The greater the profitability, the greater is its competitive advantage. A sustained competitive advantage occurs when a firm maintains above-average profitability for a number of years.

D.    A business model describes managers’ beliefs about how a firm’s strategies will lead to competitive advantage and superior profitability. An appropriate business model is one component of a successful strategy.

E.     Another component of a successful strategy is a favorable competitive or industry environment.

F.     Strategic management is relevant to many different kinds of organizations, from large multibusiness organizations to small one-person enterprises and from publicly held profit-seeking corporations to nonprofit organizations.

III.   Strategic Managers and Strategic Leadership

A.    General managers are responsible for the overall performance of the organization or for one of its major self-contained divisions.

B.    Functional managers are responsible for specific business functions, such as human resources, purchasing, production, sales, customer service, and accounts.

C.    The three main levels of management are the corporate level, the business level, and the functional level. General managers are found at the first two of these levels but their strategic roles differ, depending on their sphere of responsibility. Functional managers too have a strategic role, though of a different kind.

D.    The corporate level consists of the CEO, board of directors, and corporate staff. The CEO’s role is to define the mission and goals of the firm, determine what businesses the firm should be in, allocate resources to the different business areas of the firm, and formulate and implement strategies that span individual businesses.

E.     The business level consists of the heads of the individual business units (divisions) and their support staff. Business unit (divisional) CEOs’ role is to translate general statements of intent at the corporate level into concrete strategies for individual businesses.

F.     The functional level consists of the managers of specific business operations. They develop functional strategies that help fulfill the business- and corporate-level strategic goals. They provide most of the information that makes it possible for business and corporate-level general managers to formulate strategies. They are closer to the customer than the typical general manager, and therefore functional managers may generate important strategic ideas. They are responsible for the implementation of corporate- and business-level decisions.

IV.   Strategic Planning

A.    The formal strategic management planning process can be broken down into a number of components. Each component forms a section of this course. Thus it is important to understand how the different components fit together.

B.    Together, the components form a cycle, from strategy formulation to implementation. After implementation, the results that are obtained must be monitored, and the results become an input to the formulation process on the next cycle. Thus the strategic process is continuous.

C.    The components are organized into two phases. The first phase is strategy formulation, which includes selection of the corporate mission, values, and goals; analysis of the external and internal environments; and the selection of appropriate strategies.

D.    The second phase is strategy implementation, which includes corporate governance and ethics issues, as well as the actions that managers take to translate the formulated strategy into reality.

Strategy in Action 1.1: Strategic Planning at Microsoft

At first glance, formal strategic planning may seem to be incompatible with the unpredictable changes and the free-wheeling cultures of high-technology firms. But Microsoft, a dominant high-tech organization, has had a formal planning process in place since 1994, when CEO Bill Gates hired Bob Herbold to head the operations staff. Herbold’s planning system looked at strategies for extending and maintaining the company’s established products, such as MS Windows, as well as strategies for speeding, developing, and easing adoption of its newer products, such as MSN and X-Box. The plan looks at goal and financial information from each of Microsoft’s divisions for three years into the future, and is updated annually. The planning process includes functional and top managers. The resulting strategic plans are used to determine resource allocation within the firm, as well as for strategic control and monitoring. Microsoft managers realize the need for flexibility as industry conditions change, but the formal plan provides a foundation for action that enables, rather than hinders, creativity and flexibility.

Teaching Note: This insert provides an example of how a large, diversified firm, with many products in many different stages of development, competing in a rapidly changing environment, has a powerful need for formal strategic planning. In fact, such firms’ need for formal planning is perhaps greater than smaller, less diversified firms or firms in industries that change slowly. One common, yet false, assumption made by students is that complexity or unpredictability can eliminate or reduce the need for planning. Through the example of this case, you can demonstrate that the opposite is true—that complex firms in difficult environments have a critical need for a consistent planning process, which allows comparison across divisions and across time.

E.     Corporate Mission, Values and Goals

1.     A corporate mission or vision is a formal statement of what the company is trying to achieve over a medium- to long-term time frame. The mission states why an organization exists and what it should be doing. Abell used a customer-oriented definition when he claimed that a mission statement should describe the customer, their needs, and the method the firm will use to satisfy those needs.

2.     The values of a company state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission. Values are the foundation of a company’s organizational culture. Values include respect for the organization’s diverse stakeholders.

3.     A goal is a desired future state or an objective to be achieved. Corporate goals are a more specific statement of the ideas articulated in the corporate mission. Well-constructed goals are precise and measurable, address crucial issues, are challenging but realistic, and have a specified time horizon for completion.

4.     A major goal of business is to provide high returns to shareholders, either through dividends or through an appreciation in the value of the shares. High profitability will enable the firm to pay high dividends as well as create an appreciation in share value. Thus, high profitability provides the best return to shareholders. However, managers must be aware that the profitability should be sustainable, and they should not sacrifice long-term profits for short-run profits.

F.     External analysis identifies strategic opportunities and threats that exist in three components of the external environment: the specific industry environment within which the organization is based, the country or national environment and the macroenvironment.

G.    Internal analysis identifies the strengths and weaknesses of the organization. This involves identifying the quantity and quality of an organization’s resources.

H.    Together, the external and internal analyses result in a SWOT analysis, delineating a firm’s strengths, weaknesses, opportunities, and threats. The SWOT analysis is then used to create a business model to achieve competitive advantage, by identifying strategies that align, fit, or match a company’s resources to the demands of the environment. This model is called a fit model.

I.      Strategic choice involves generating a series of strategic alternatives, based on the firm’s mission, values, goals, and SWOT analysis, and then choosing those strategies that achieve the best fit. Organizations identify the best strategies at the functional, business, global, and corporate levels.

1.     Functional-level strategy is directed at improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources.

2.     The business-level strategy of a company encompasses the overall competitive theme that a company chooses to stress, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings.

3.     More and more, to achieve a competitive advantage and maximize performance, a company has to expand its operations outside the home country. Global strategy addresses how to expand operations outside the home country.

4.     Corporate-level strategy must answer this question: What businesses should we be in to maximize the long-run profitability of the organization? The answer may involve vertical integration, diversification, strategic alliances, acquisition, new ventures, or some combination thereof.

J.      Strategy implementation consists of a consideration of corporate governance and business ethics, as well as actions that should be taken, for companies that compete in a single industry and companies that compete in more than one industry or country.

V.    Strategy as an Emergent Process

A.    The formal planning process implies that all strategic decision making is rational, structured, and led by top management. However, some criticisms of the formal planning process include the charge that the real world is often too unpredictable, that lower-level employees often play an important role in the formulation process, and that successful strategies are often the result of good luck rather than rational planning.

B.    We live in an uncertain world, in which even thoughtful strategic plans may be rendered useless by rapid environmental changes. Therefore organizations must be able to respond quickly to changing circumstances. According to critics, such a flexible approach to strategy making is not possible within the framework of the traditional strategic planning process, with its implicit assumption that an organization’s strategies need to be reviewed only during the annual strategic planning exercise.

Strategy in Action 1.2: A Strategic Shift at Microsoft

Microsoft is the dominant software company in the world. Nevertheless, Microsoft was caught off guard by the rapid rise of the Internet and the invention of the Java computer programming language. This led to the sudden emergence of companies such as Netscape and Sun Microsystems as potential competitors. Microsoft initially ignored these two developments, but later decided to respond. The firm’s goal was still to be the dominant software maker; however, its strategy to achieve this goal shifted to a reliance on industry standards, which made its products able to work in many different hardware and software environments. In addition, Microsoft decided to give away its own Web browser and Web server software for free; decided to incorporate “browser functions” in future software; and developed new versions of the software package Word that would enable users to convert their documents into HTML format that could be transmitted over the Web. The software giant surprised observers by announcing an alliance with rival America Online (AOL), the world’s largest on-line service, and Microsoft also cut a deal with Intel.

Teaching Note: The key point here is that strategy is not only a rational and deterministic planning process. Instead, strategy is constantly shaped by unforeseen events in an unpredictable environment. Ask students to consider the risks and benefits of following the strategic advice of just a few managers, in light of the material about biases in strategic decision making. Another discussion starter would be to ask students if they know of other actions that Microsoft took to increase the chances of success of this fairly risky shift in strategy. For example, at the same time as the case, Microsoft was entering into contractual relationships with PC makers to ensure that its products were bundled with every new PC purchased. (Some of these actions were found to be illegal; most were unethical; and they provide one of the bases for the antitrust lawsuits that were filed against Microsoft.)

Strategy in Action 1.3: The Genesis of Autonomous Action at 3M

Serendipity, or luck, often plays a part in the development of successful strategies. 3M is renowned for its ability to capitalize on that luck, using events that seem to be random or accidental to inspire new products and strategies. The development of the waterproofing Scotch Guard products happened as the result of an accident in a lab experiment. In another example, an employee developed a product, terminal emulation software, purposefully for his own personal use, but was unaware at the time that the market demand for that product would be extraordinarily high. However, firms have to be prepared for happy accidents and recognize their potential contribution. In one sad example, Western Union turned down the opportunity to purchase Bell’s patent on the telephone, believing that their extremely successful telegraph business would continue to dominate the communications industry.

Teaching Note: An interesting discussion could be generated from this case by asking students to consider what kind of organization culture, policies, structure, leadership, and so on would be necessary to encourage employees’ creativity and autonomy, as opposed to the closed mindset displayed by Western Union. Tolerance of failure is perhaps the most important characteristic in encouraging creativity, because a firm that punishes failed experiments will find that employees are unwilling to experiment. Yet failure is abhorred and punished severely in most organizations. You can point out to students that 3M gives its R&D employees funds, space, and time to pursue experiments of personal interest, with the requirement that any promising developments be reported and pursued further. Post-It notes is another 3M product that grew from a failed experiment, when an experiment produced a very weak glue rather than the powerful glue that was intended. Classroom discussion can also be enlivened and humor introduced if you describe, or ask students to describe, other innovations that were not pursued, to disastrous results. For example, when a Harvard M.B.A. student wrote a paper proposing a profit-making delivery service, he hoped his professor would help him find venture financing, but instead, received a D on the assignment. The professor believed that no firm would ever be able to deliver packages more efficiently or cheaply than the government-subsidized U.S. Postal Service. The student went on to become the founder of Federal Express.

C.    Mintzberg believed that strategies can emerge from deep within an organization, and therefore, he defined strategy as a pattern in a stream of decisions or actions. The pattern is a product of whatever aspects of an organization’s intended (planned) strategy are actually realized and of its emergent (unplanned) strategy. Strategies that are intended may be deliberately implemented, or realized. They may also be abandoned, or unrealized. Unintended strategies may spring from anywhere in the organization, or “emerge,” and are thus called emergent strategies.

D.    Nevertheless, top management still has to evaluate the worth of emergent strategies and determine whether each one fits the organization’s needs and capabilities. This involves analyzing the organization’s external environment and internal operations. Moreover, an organization’s capability to produce emergent strategies is a function of the kind of culture fostered by its structure and control systems.

E.     Thus the different components of the strategic management process are just as important from the perspective of emergent strategies as they are from the perspective of intended strategies. The formulation of intended strategies is a top-down process, whereas the formulation of emergent strategies is a bottom-up process.

F.     In practice, the strategies of many firms are a mix of the intended and the emergent. The trick for managers is to recognize the process of emergence and to intervene selectively, killing off bad emergent strategies but nurturing good ones (strategic management process for intended and emergent strategies).

VI.   Strategic Planning in Practice

A.    Research indicates that formal planning does help companies make better strategic decisions.

B.    However, one mistake made by planners is to focus on the present, which is known, and neglect to study the future, which is more unpredictable but also more essential for strategic decisions. Studying the future means making accurate estimates of future conditions. The text highlights the use of scenario planning, which was developed at Royal Dutch/Shell and is a helpful forecasting technique.

Strategy in Action 1.4: Scenario Planning at Duke Energy

Duke Energy is one of the nation’s largest energy generators and marketers, and has been suffering increasingly intense competition as that industry becomes more uncertain and complex. Demand for energy is strongly dependent upon the economic cycle, which itself is highly unpredictable. In addition, energy generation capacity must be planned at least five years in advance, is very costly to develop, and can sit idle for some time if forecasts are inaccurate. To cope with this uncertainty, Duke managers developed three possible future industry scenarios. In the first, demand slips; in the second, energy trading becomes dominated by Internet firms, rather than traditional marketers such as Duke; and in the third, demand grows, as does competition. For each scenario, managers identified about 20 signals that would indicate the scenario was developing in reality. Monitoring these signals pointed to the likelihood of the third scenario dominating the industry trends, and managers immediately began to make decisions that would maximize performance under that scenario, such as increasing capacity. Duke executives also realized that they could take some relatively simple and inexpensive actions that would enable them to hedge their bets, in case another scenario developed instead.

Teaching Note: Scenario planning can be a very useful technique but it depends upon having the information and ability to identify relevant signals, interpret trends, and so on. One way to help students understand scenario planning is to have a short classroom activity devoted to developing scenarios for some future time in the students’ lives, such as determining what they will be doing in five years’ time. Ask students to help develop two scenarios of their future, while you write their ideas down. They should identify relevant variables, which might include such items as the unemployment rate, their satisfaction or lack of satisfaction with their first professional job after graduation, and so on. For example, one scenario might be “Still Working at My First Job,” another might be “Returning to Graduate School,” whereas another might be “Switching Career Fields.” Help students think about what data they need to evaluate, what the relevant signposts might be, and what differing actions they might take in response to the scenario planning results. Yet another interesting concept is the extent to which the students could hedge their bets, taking actions that will help to achieve success no matter what the scenario. For example, savings could be used to support them while they take a short career break under one scenario, while they could be used to pay for graduate school in another scenario.

C.    Another serious mistake that is often associated with the use of formal planning is ignoring the potential contributions of any employees that are not part of the top management team. This error is known as ivory-tower planning. This approach can result in strategic plans that are formulated by planning executives who have little understanding or appreciation of operating realities and are not the ones who must implement the plans. This separation between thinking and doing causes more harm than good.

1.     Correcting the ivory-tower approach to planning involves recognizing that, to succeed, planning must embrace all levels of the corporation. Most of the planning can and should be done by functional managers. They are the ones closest to the facts. The role of corporate-level planners should be that of facilitators who help functional managers do the planning.

2.     It is not enough just to involve lower-level managers in the strategic planning process. They also need to perceive that the decision-making process is just. Procedural justice is the extent to which the dynamics of a decision-making process are judged to be fair. Three criteria have been found to influence the extent to which strategic decisions are seen as just: engagement, explanation, and clarity of expectations.

D.    Another serious error was pointed out by Hamel and Prahalad, who assert that adopting the fit model to strategy formulation leads to a mindset in which management focuses too much upon the existing resources of a company and current environmental opportunities—and not enough on building new resources and capabilities to create and exploit future opportunities. When companies have bold ambitions that outstrip their existing resources and capabilities and want to achieve global leadership, then they build the resources and capabilities that would enable them to attain this goal. The top management of these companies created an obsession with winning at all levels of the organization and then sustained that obsession over the long term. Hamel and Prahalad refer to this obsession as strategic intent.

VII. Strategic Leadership and Decision Making

A.    One of the key strategic roles of any manager, whether general or functional, is to provide strategic leadership for subordinates. Strategic leadership refers to the ability to articulate a strategic vision for the company and to motivate others to buy into that vision. Strong leaders meet six criteria.

1.     Strong leaders have a vision of where the organization should go, are eloquent enough to communicate this vision to others within the organization in terms that energize people, and consistently articulate their vision until it becomes part of the culture of the organization.

2.     Strong leaders demonstrate their commitment to their vision by actions and words, and they often lead by example.

3.     Strong leaders are well informed, developing a network of formal and informal sources of information that keep them well apprised of what is going on within their company. They develop “backchannel” ways of finding out what is going on within the organization so that they do not have to rely on formal information channels.

4.     Strong leaders are skilled delegators. They recognize that, unless they delegate, they can quickly become overloaded with responsibilities. Besides, they recognize that empowering subordinates to make decisions is an effective motivational tool. Empowerment also makes sense when it results in shifting decisions to those who must implement them.

5.     Strong leaders are politically astute. They play the power game with skill, preferring to build consensus for their ideas rather than use their authority to force ideas through. They act as members or leaders of a coalition rather than as dictators. Recognizing the uncertain nature of their forecasts, they commit to a vision rather than to specific projects or deadlines. They also realize that a big change may be more easily implemented in small, piecemeal steps.

6.     Strong leaders exhibit emotional intelligence, which includes self-awareness, self-regulation, motivation, empathy, and social skills. Leaders who exhibit a high degree of emotional intelligence tend to be more effective.

B.    The best-designed strategic planning systems will fail to produce the desired results if strategic decision makers fail to use the information at their disposal effectively. Our rationality as decision makers is bounded by our own cognitive capabilities. Experimental evidence shows that all humans suffer from innate flaws in their reasoning ability, which are called cognitive biases. We tend to fall back on certain rules of thumb, or heuristics, when making decisions, and sometimes they lead to severe and systematic errors in the decision-making process. However, to the extent that managers are aware of their own cognitive biases, they can attempt to compensate for the resulting weaknesses through some decision-making improvement techniques.

1.     The prior hypothesis bias refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make decisions on the basis of these beliefs, even when presented with evidence that their beliefs are wrong.

2.     Escalating commitment occurs when, having already committed significant resources to a project, decision makers commit even more resources if they receive feedback that the project is failing. This may be an irrational response; a more logical response may be to abandon the project and move on, rather than escalate commitment.

3.     Reasoning by analogy involves the use of simple analogies to make sense out of complex problems. However, because they oversimplify a complex problem, such analogies can be misleading.

4.     Representativeness refers to the tendency on the part of many decision makers to generalize from a small sample or even a single vivid anecdote. Generalizing from small samples violates the statistical law of large numbers, which tells us that it is inappropriate to generalize from a small sample, to say nothing of a single case.

5.     The illusion of control is the tendency on the part of decision makers to overestimate their ability to control events. Top-level managers seem to be particularly prone to this bias. Having risen to the top of an organization, they tend to be overconfident about their ability to succeed.

C.    Another cause of poor strategic decision making appears to be a phenomenon referred to as groupthink. Groupthink occurs when a group of decision makers decides on a course of action without questioning underlying assumptions. Typically, a group coalesces around commitment to a person or policy. Information that could be used to question the policy is ignored or filtered out, while the group develops after-the-fact rationalizations for its decision. Thus commitment is based on an emotional rather than an objective assessment of what is the correct course of action.

D.    The existence of cognitive biases and groupthink raises the problem of how to bring critical information to bear on the decision mechanism to ensure that strategic decisions made by the firm are realistic. Two techniques that have been proposed to guard against this problem are devil’s advocacy and dialectic inquiry.

1.     Devil’s advocacy involves the generation of a plan and a critical analysis of it. A member of the group should act as the devil’s advocate, bringing out all the reasons why the proposal should not be adopted. Thus decision makers can be made aware of the possible perils of recommended courses of action.

2.     Dialectic inquiry involves the generation of a plan and a counterplan reflecting plausible but conflicting courses of action. A debate between advocates of the plan and those of the counterplan should be considered by senior strategic managers. The debate is intended to reveal problems with definitions, recommended courses of action, and assumptions. As a consequence, corporate decision makers and planners can form a new, more encompassing final plan (a synthesis).

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