Chapter 2Strategic Management: Creating Competitive Advantage

Strategic Management: creating competitive advantages

Vision What organization want to become in future.

Mission What is the purpose of the existence of the organization.

Objectives Objectives are the targets towards which management is directed.

Strategy The process of determining appropriate courses of action for achieving organizational objectives

Elements of a mission statement Clearly articulated. – easy to understand the values and

purpose. Relevant – in terms of its history, culture and shared

values. Current – not outdated Written in a Positive (Inspiring) Tone – capable of inspiring

and stimulating Commitment towards fulfilling the mission. Unique – not copied from similar units. Enduring – Should guide, inspire and challenging. Adapted to the Target Audience – stock holders,

consumers, employees through shared values and standards of behavior.

The following points are to be noted to arrive a mission

statement Mission should be clear, both in terms of intentions and words used.

It should be feasible, neither too high to be unachievable, nor too low to demotivate the people for work.

.It should be precise but explanatory, neither too narrow so as to restrict the organization’s activities, nor too broad to make itself meaningless.

It should be distinctive, both in terms of the organization’s contributions to the society and how these contributions can be made.

Organizations sometimes summarize goals and objectives into a mission statement and/or a vision statement:

While the existence of a shared mission is extremely useful, many strategy specialists question the requirement for a written mission statement. However, there are many models of strategic planning that start with mission statements, so it is useful to examine them here.

A Mission statement tells you the fundamental purpose of the organization. It concentrates on the present. It defines the customer and the critical processes. It informs you of the desired level of performance.

A Vision statement outlines what the organization wants to be. It concentrates on the future. It is a source of inspiration. It provides clear decision-making criteria.

Mission statements often contain the following:

Purpose and aim of the organization The organization's primary stakeholders:

clients, stockholders, etc. Responsibilities of the organization toward

these stakeholders Products and services offered

Vision & Mission

Infosys' Vision:

"To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people."

Infosys' Mission Statement :

"To achieve our objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large."

Motto

‘Science’ as a means to ‘Technology Up-gradation and Development’

Invent -> Perfect -> Implement

Vision To establish a centre of excellence for Research & Development in PET homo and co-polymer fibres and resins through

disciplined, motivated and time bound execution of projects. To create an environment conducive to intellectual growth, efficient flow of information and accountability in order to achieve

a productive and sustained phase of research activities. To closely interact with the business group companies and technical groups for short, medium and long-term quality and

process issues. To thrive to become a catalyst to the growth of company's polyester business. To leverage synergy between Reliance's PET, Polymers and Fibre intermediate businesses. To create, maintain and pursue strategic research alliance for top end research activities.

Mission

Achieve 'Global leadership in Polymers, Fibres and Resin businesses' through innovative Research and Technology Development in materials, processes, products and applications through efficient, disciplined, target oriented and cost effective Research and Development activities.

To arrive at a Mission Statement, following questions

are answered What is the basic purpose of your organizations? What is unique about your organization? What is likely to be different about your business

five years down the road? What is in your company that will make it stand out

in a crowd? Who are, and who should be, your principal

customers? What, and what should be, your principal economic

concerns? What are the basic beliefs, values and philosophical

priorities of your firm?

Vision: Defines the desired or intended future state of a specific organization or enterprise in terms of its fundamental objective and/or strategic direction. Vision is a long term aim, a view of how the organization would like the world in which it operates to be.

Setting Objectives

Provide direction – direction for the functioning of the organization. When objectives are clear, the aims of the activities of different people in the organization converge for the achievement of the common purpose.

Justify the organization – indicates the purpose and aims and thereby the social justification for the existence of the organization.

Definition: The desired or needed result to be achieved by a specific time.

An objective is broader than a goal, and one objective can be broken down into a number of specific goals.

The guidelines are

Must be clearly specified. Must be set taking into account the various factors affecting their

achievement. Should be consistent with organizational mission. Should be rational and realistic rather than idealistic Should be achievable but must provide challenge to those

responsible for achievement. Should yield specific results when achieved. Should be desirable for those who are responsible for the

achievement. Should start with the word ‘to’ and be followed by an

achievement. Should be consistent over the period of time. Should be periodically reviewed.

Basis for Management by Objectives - Management for results.

Help strategic planning/management; a means to achieve objectives, thus help effective function of the organization in a given environment.

Help coordination – the attention of the employees to desirable standards of behavior

Provide standards for assessment and control - . Making clear what the results should be, provide the basis for control and assessment of organizational performance.

Help decentralization – by assigning decision-making to lower level personnel, given a subordinate executive or operator considerable leeway in deciding how to perform his work.

Financial Objective

The primary objective is concerned with the return to shareholders.

A satisfactory return; for a company must be sufficient to reward shareholders adequately in the long run for the risks they take. The reward will take the form of profits which can lead to dividends or in increase in the market value of shares.

The size of return which is adequate for ordinary shareholders will vary according to the risk involved.

There are different ways of expressing a financial objective in quantitative terms. Financial objectives would include the following.

Profitability - It is just not the profit for every year. The investment must provide future appreciation of worth and increased profits in future.

Return on investment (ROI) or return on capital employed (ROCE) - The return on investment must be on increase year after year.

Low Risk - High risk projects might promise a high return but it may be safer to opt for a project with a lower return but a greater guarantee of success.

Share price, earnings, dividends and market value - Earnings per share or dividend payments are measures which recognize that a company is owned by its shareholder –investors. Lesser the EPS, shareholders are likely to sell the shares.

Market capitalization - total value of business shares on the stock market. When the earnings and dividends are low, the market value of shares also drops.

Price/earnings ratio - measures the relationship between earnings per share and the price at which the shares are traded. It is the market value divided by earnings per share. This should not comedown.

Growth - The financial performance is measured in terms of growth of the business like turnover, EPS, increase in market share, export etc.

“Developing a business strategy is

no longer an iterative process. It has

become a continuous cycle of plan, execute, measure, and adjust”

“Developing a business strategy is

no longer an iterative process. It has

become a continuous cycle of plan, execute, measure, and adjust”

A & M, 2000

Balanced Scorecard (The Basics)

“The Balanced Scorecard provides executives with a comprehensive framework that translates a company’s vision and strategy into a coherent set of performance measures.”

Kaplan and Norton

Balanced ScorecardProcess

…a management and measurement system whose purpose is to…

“translate strategy into a limited set of measures that uniquely communicate your vision to the organisation”

Kaplan and Norton

...its key management perspectives are ...

A Balanced Scorecard is :

Balanced ScorecardBalanced View of Measures of Performance

DefectsAdministrative Expense RatioNew Product Launches

InternalProcess

Learning andGrowth

FinancialSales GrowthReturn on EquityEVA Economic Value Added , CFROI Cash Flow Return on Investment

CustomerCustomer SatisfactionNew Customers/MonthCustomer Profitability

Employee RetentionTraining LevelsCustomer Database Accuracy

What is the Balanced Scorecard? It addresses four basic questions:

People: How can we develop our people and their capabilities?

Business Process: What must we excel at to meet customer needs?

Customers: How do customers see us and value our services?

Financial: How are we faring with shareholder returns?

Kaplan & Norton’s Balanced Scorecard

An approach that tries to integrate the different measures of performance is the balanced scorecard. Where key linkages between operating and financial performance are brought to light. This offers four perspectives

(1) Financial (2) Customer (3) Innovation and learning (4) Internal business.

The Balanced Scorecard

Definition:

The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.

The Balanced Scorecard

Purpose of Balanced Scorecard: A method of implementing a business strategy by translating it into a set of performance measures derived from strategic goals that allocate rewards to executives and managers based on their success at meeting or exceeding the performance measures.

The Balanced ScorecardWhat is it?

The Balanced Scorecard:

Balances financial and non-financial measures

Balances short and long-term measures

Balances performance drivers (leading indicators) with outcome measures (lagging indicators)

Should contain just enough data to give a complete picture of organizational performance… and no more!

Leads to strategic focus and organizational alignment.

The Balanced ScorecardWhy do it?

• To achieve strategic objectives. • To provide quality with fewer resources.• To eliminate non-value added efforts.• To align customer priorities and expectations with the customer.• To track progress.• To evaluate process changes.• To continually improve.• To increase accountability.

AboutAboutOracle Balanced ScorecardOracle Balanced Scorecard

Balanced Scorecard Framework

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Strategy Assessment

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Strategy and Indicator Libraries

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• Strategy MapsStrategy Maps• Custom ViewsCustom Views• DashboardsDashboards• PortletsPortlets

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The Balanced Scorecard(Source: Kaplan & Norton, 1996) Reasons for the Need of a Balanced

Scorecard

1. Focus on traditional financial accounting measures such as ROA, ROE, EPS gives misleading signals to executives with regards to quality and innovation. It is important to look at the means used to achieve outcomes such as ROA, not just focus on the outcomes themselves.

The Balanced Scorecard(Source: Kaplan & Norton, 1996) Reasons for the Need of a Balanced

Scorecard

2. Executive performance needs to be judged on success at meeting a mix of both financial and non-financial measures to effectively operate a business.

The Balanced Scorecard(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

3. Some non-financial measures are drivers of financial outcome measures which give managers more control to take corrective actions quickly. (Example: controls in jet cockpit for pilot)

Reasons for the Need of a Balanced Scorecard

4. Too many measures, such as hundreds of possible cost accounting index measures, can confuse and distract an executive from focusing on important strategic priorities. The balanced scorecard disciplines an executive to focus on several important measures that drive the strategy.

The Balanced Scorecard(Source: Kaplan & Norton, 1996)

1. Financial: How do we look to our Shareholders?

2. Customer: How do our Customers See Us?

3. Internal Business Process: What should we do that is Excellent?

4. Employee and Organization Innovation and Learning: Can we continue to Improve and Add Value?

The Balanced Scorecard(Source: Kaplan & Norton, 1996)

Balanced Scorecard Perspectives

Financial Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996) Financial measures are outcomes that

represent the executive’s success at achieving strategic performance goals

Financial measures are influenced by the Stage of the Life Cycle which reflects different strategic priorities

Internal Business Process Measures and the Balanced Scorecard (Source: Kaplan & Norton, 1996)

Internal Business Process Measures

Quality Yield Throughput Cycle time Cost efficiency

Order Fulfillment Procurement Repair service

quality/downtime Warranty quality

The scorecard should be used flexibly. The process of deciding what to measure forces a business to clarify its strategy. For example, a manufacturing company may find that 50 -60% of costs are represented by bought-in components, so measurements relating to suppliers could usefully be added to the scorecard. These could include payment terms, lead times, or quality considerations etc. For an IT Co., the manpower cost & establishment cost may go up to 40-50%. Hence it should concentrate on Manpower cost.

A method of evaluating performance for a particular organization that emphasizes factors that can create long term economic value such as business processes, innovation and customer orientation, rather than traditional financial measure. The theme is Control through Performance.

Company Philosophy

It is in the form of a Statement. It projects the ethical and value based

concept (philosophy) a Company contributes to public.

This is more related to the Social Responsibility & Public Good.

The corporation is a creation of society whose purpose is the production and distribution of needed goods and services, for profit of society and itself.

The Company in it’s own interest has to promote the public welfare in a positive way.

Indeed, the corporate interest broadly defined by management can support involvement in helping to solve virtually any social problem, because people who have good environment, education and opportunity make better employees, customers and neighbors for business than those who are poor, ignorant and oppressed.

Pollution control, contributing to public cause in the areas of health, education & poverty.

Payment of taxes genuinely, fair wages to employees, quality products/services to consumers, all actions are based on legal and moral foundation etc.

Hierarchy of Strategic Intent

Strategic intent – an obsession with winning, unfettered (free) by their resource constraints – in their envisioning of the future.

The Strategic Intent is one of the approach to Competitive Advantage. Other approaches are

(1) Generic competitive strategy (2) Benchmarking (3) Synergistic approach and (4) Critical success factors approach

Michael Porter …  

“An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”  

According to Michael Porter, the three methods for creating a sustainable competitive advantage are through:

1. Cost leadership - Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost;

2. Differentiation - Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost;

Strategic Intent implies ambition and obsession for winning. Hamel and Prahald emphasized on strategic intent as a means for competitive advantage view that competitive battle through competitive innovation, which is the art of containing competitive risks within manageable proportions.

Keeping score of existing advantages is not the same as building new advantages.

The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic (imitate) the ones you possess today.

An organization’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all.

Competitive advantage occurs when a organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors.

These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources.

This is done through, (1) Layers of Advantage - involves

generating layers of advantage on top of another advantage and moving up in value chain.

(2) Loose Bricks – creating advantage in those areas which have been let loose by the existing competitors.

(3) Changing the Rules of Engagement - studying the Critical Success Factors (CSF) of competitors and innovating for different environment.

(4) Collaborating – If you cannot compete on your own, collaborate with others, who has better competitive advantage.

Merging the Strategic Vision, Objective and Strategy into a

Strategic Plan The Vision is the primary statement. Based on Vision statement, the Mission statement is formed.

The Objectives of the Company helps to prepare Strategic plan in various areas like marketing, finance, production.

Hence the genesis is Vision and Objectives of the Company helps to draw the Strategic Plan in different areas of the Organization & Business.

The strategic plan projects a prescriptive model based on predictive environment which is a road map for execution.

Strategic plan is translated into the operations planning.

Any deviation required is to be directed by strategic plan which takes care of the corporate objective and factors commanding the change.

The emergent strategy is “let us try this strategy and continue it or

change it depending in our experience. The prescriptive strategy prescribed, “this is

our strategy for the next five years, administer it.

“The emergent approach holds that the long term being uncertain, it is unrealistic to prescribed in advance a strategy with long term perspective.

The strategy should evolve responding to emerging developments, and therefore, to some extent, strategy development and implementation occur concurrently.

EXAMPLES Mission statement always highlights what it can do for the

Nation (society in general) while purpose suggests how this contribution can be made)

HINDUSTAN LEVER -Mission: “Hindustan Lever’s commitment to national priorities ensures that the Co is a part of people’s lives at the grass roots level, making a difference to India and Indians – in depth, in width and in size. Hindustan Level has always identifies itself with the nation’s priorities – employment generation, development of backward areas, agricultural linkages, exports, and contribution to the exchequer.

The Co’s Philosophy indicates the approach that will be adopted in dealing with various stakeholders.

Mission: Defines the fundamental purpose of an organization or an enterprise, basically describing why it exists. A corporate Mission can last for many years, or for the life of the organization. It is not an objective with a timeline, but rather the overall goal that is accomplished over the years as objectives are achieved that are aligned with the corporate mission.

Values: Beliefs that are shared among the stakeholders of an organization. Values drive an organization's culture and priorities.

TATA

Mission To be a competitive value provider in international business for Group companies and all our partners.

Vision 2008 Become a globally networked enterprise seizing opportunities

worldwide to generate USD 25 million annual profits by 2008. Vivid Description of Vision

By 2008, we would have Achieved aggressive and profitable growth of our 5 core

businesses and initiated new businesses

Become a cohesive, integrated and synergised global entity providing horizontal and vertical reach and infrastructure to all our partners worldwide

Consistently achieved customer delight by focussing on value adding activities throughout our value chain

Achieved best partner status with Group Companies in international business on a sustained basis

A strong global supply base for world class goods and services

Become a learning and knowledge rich organization acknowledged as thought leaders in international business

Institutionalized Tata Business Excellence Model and achieved best in class status

Effective and responsive systems and processes that will underpin our business decisions to manage risks

Become an exciting organization which attracts and retains best talent worldwide for global competitiveness

Become a proactive, integral and responsible member of our environment and communities

Some mission statements are complex, long, and very broad,

for example “Since its inception in 1982, La Unidad Latina has remained on the vanguard of political and community empowerment by developing influential leaders that strive to exert knowledge and power into its peers in order to attain mutual success.

LUL is committed to academic excellence, leadership development and cultural enlightenment, enhanced by a diverse cognizant membership. LUL strives to preserve and promote an inclusive intellectual environment for its members, in addition to the general community.[1]”In contrast, some mission statements are simple and direct, for example:

“To protect and promote the interests of motorcyclists while serving the needs of its members.[2]”The classic example of the mission statement is the Preamble to the Constitution of the United States:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.[3]

In developing a mission statement: Encourage as much input as feasible from

employees, volunteers, and other stakeholders

Publicize it broadly Limit to a few statements.

Infosys‘-VISION-MISSION

Infosys' Vision:

"To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people."

Infosys' Mission Statement :

"To achieve our objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large."

Three Components of the mission statement

* the needs to be served by the company

* the targeted customer group * how the company will provide

the product/service

Reason for Being

This is the soul-searching activity, where the organisation tries to answer the critical questions like `why are we here' and 'where are we today'?

A mission statement concerns what an organization is all about.

A vision statement is what the organization wants to become.

A mission statement answers three key questions: What do we do? For whom do we do it? What is the benefit?

Centers for Disease Control

Mission To promote health and quality of life by preventing and controlling disease, injury, and disability

Vision Healthy People in a Healthy World

Centers for Disease Control Mission To protect, maintain and improve the

health of all Minnesotans

Vision Keeping All Minnesotans Healthy

A vision statement, on the other hand, describes how the future will look if the organization achieves its mission.

A mission statement gives the overall purpose of an organization,

while a vision statement describes a picture of the "preferred future."

A mission statement explains what the organization does, for whom and the benefit.

A vision statement, on the other hand, describes how the future will look if the organization achieves its mission.

VISION, MISSION,VALUES AND

OBJECTIVES- BEL   VISION

   - To be a world-class enterprise in professional electronics.             MISSION

- To be a customer focused, globally competitive company in defence electronics and in other chosen areas of professional electronics, through quality, technology and innovation.

VALUES 

   - Putting customers first.    - Working with transparency, honesty & integrity.    - Trusting and respecting individuals.    - Fostering team work.    - Striving to achieve high employee satisfaction.    - Encouraging flexibility & innovation.    - Endeavouring to fulfill social responsibilities.    - Proud of being a part of the organization.

OBJECTIVES 

   - To be a customer focussed company providing state-of-the-art products & solutions at competitive prices, meeting the demands of quality, delivery & service.    - To generate internal resources for profitable growth.    - To attain technological leadership in defence electronics through in-house R&D, partnership with defence/research laboratories &      

academic institutions.    - To give thrust to exports.    - To create a facilitating environment for people to realise their full potential through continuous

learning & team work.    - To give value for money to customers & create wealth for shareholders.    - To constantly benchmark company’s performance with best-in-class internationally.    - To raise marketing abilities to global standards.    - To strive for self-reliance through indigenisation

BSNL-VISION  

To become the largest telecom Service Provider in  Asia.  

MISSION    To provide world class State-of-art technology

telecom services to its customers on demand at competitive prices.  

To Provide world class telecom infrastructure in its area of operation and to contribute to the growth of the country's economy.

OBJECTIVES  

  To be the Lead Telecom Services Provider.

  To provide quality and reliable fixed telecom service

to our customer and there by increase customer's confidence. 

To provide mobile telephone service of high quality and become no. 1 GSM operator in its area of operation.

To provide point of interconnection to other service provider as per their requirement promptly.

To facilitate R & D activity in the country. Contribute towards: National Plan Target of 500 million subscriber base

for India by 2010. Broadband customers base of 20 million in India by

2010 as per Broadband Policy 2004. Providing telephone connection in villages as per

government policy. Implementation of Triple play as a regular

commercial proposition.

Corporate vision is a short, inspiring statement of what the organization intends to become and to achieve at some point in the future,

often stated in competitive terms. Vision refers to the category of intentions that

are broad, all-inclusive and forward-thinking.

It is the image that a business must have of its goals before it sets out to reach them.

It describes aspirations for the future, without specifying the means that will be used to achieve those desired ends.

The Ford Motor Company vision is 'to become the world's leading consumer company for automotive products and services'.

A five-component approach to promote successful organizational

performance

1. Vision formulation which leads to the statement of the Mission.

2. The mission is then converted into performance Objectives

3. To achieve objectives you develop Strategies

4. Strategy Implementation 5. Evaluation of performance  

Mission Statement & its Purpose Sense of Purpose & Aspiration Company Image Statement of Company Values, Culture and

Ethics Role as a Guide for the Strategy Process

Model of Strategic Management: Mission & goals Environmental analysis Strategic formulation Strategy implementation Strategy evaluation

Strategic Management

Strategic management is the study of why some firms outperform others How to compete in order to create competitive

advantages in the marketplace How to create competitive advantages in the

market place Unique and valuable Difficult for competitors to copy or substitute

Strategic Management

Analysis Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm

Strategic decisions What industries should we compete in? How should we compete in those industries?

Actions Allocate necessary resources Design the organization to bring intended strategies to

reality

Mission Statement

Business Definition Major Goals of the Firm Philosophies Guiding Principles Considerations of stakeholders

1.The vision formulation which leads to the statement of the Mission

Mission   * what is business? * what will be the business? * it established long-term direction * it needs to use simple terminology * it needs to be inspirational buy in * recognition of threats & opportunities * entrepreneurial spirit

2. The mission is then converted into

performance objectives

* measurable statements * specified performance * specified time * short-range objectives * long-range objectives * top-down rather than bottom-up

Strategic Management:

A continuous activity that requires a constant adjustment of three major interdependent poles:

the values of senior management,

the environment,

the resources available.

Strategic Management

Social Responsibility

Social responsibility: the expectation that businesses or individuals will strive to improve the overall welfare of society Managers must take active steps to make society

better Socially responsible behavior changes over time Triple bottom line

Strategic Management Perspective

Integrative view of the organization Assess how functional areas and activities “fit

together” to achieve goals and objectives All managers and employees must take and

integrative, strategic perspective of issues facing the organization

Strategic Management Perspective

Key driving forces increasing the need for strategic perspective and involvement Globalization Technology Intellectual capital

These forces are Interrelated Accelerating the rate of change and uncertainty

Crafting Strategy Is anExercise in Entrepreneurship Strategy-making is a market-driven activity that

involves Studying market trends and competitors’ actions Keen observation of customer needs Scrutinizing business possibilities based on new

technologies Building firm’s market position via acquisitions or new

product introductions Pursuing ways to strengthen firm’s competitive capabilities Proactively searching out opportunities to

Do new things or Do existing things in new or better ways

Ethical and moral standards go beyond

Prohibitions of law and the language of “thou shalt not”

to issues of Duty and “right” vs. “wrong”

Ethical and moral standards address“What is the right thing to do?”

Two criteria of an ethical strategy: Does not entail actions and behaviors that cross the line from

“can do” to “should not do’ and “unsavory” or “shady” and

Allows management to fulfill its ethical duties to all stakeholders

Linking Strategy With Ethics