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Chapter 2

Chapter 2. Leading Strategically Through Effective Vision and Mission. Key points in Chapter 2 . The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy). Managerial Discretion and Decision Biases. Discretion – latitude for action or decision making

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Chapter 2

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  1. Chapter 2 Leading Strategically Through Effective Vision and Mission

  2. Key points in Chapter 2 The roles that leaders play Skill sets of effective strategic leaders (Level 5 hierarchy)

  3. Managerial Discretion and Decision Biases • Discretion – latitude for action or decision making • Hubris – excessive pride, leading to a feeling of invincibility • Heuristics – rules of thumb used in decision making

  4. Decision-Making Biases • Reliance on previously formed beliefs • Focus on limited objectives • Exposure to limited decision alternatives • Illusion of control • Reliance on a limited set of heuristics

  5. Hubris • Excessive pride that leads to a feeling of invincibility • Magnifies the effects of decision-making biases

  6. Implications for IBP • Be sure you don’t fall prey to decision making biases • Be sure you understand the effects of hubris • Play the role of Devil’s Advocate • Question decisions constructively

  7. Strategic Vision vs. Mission • A strategic vision concerns “wherewe are going” or ”what do we want to be.” • Markets to be pursued • Future product/ market/customer/ technology focus • Kind of company management is trying to create • The mission statement focuses on its “who we are and what we do” • Current product and service offerings • Customer needs being served • Technologicaland businesscapabilities

  8. Mission Statements • Boundaries of the currentbusiness • Fundamental purpose that sets it apart from other firms of its type • Conveys • Who we are, • What we do, and • Why we are here

  9. Objectives • Turns mission into performance outcomes • Organizations produce what is measured • Long and Short term

  10. Control Systems • Financial Controls • focus on short-term financial outcomes • produce risk-averse managerial decisions • Strategic Controls • focus on the content of strategic actions • encourage decisions that incorporate moderate and acceptable levels of risk

  11. Leading versus Lagging Indicators • Current financial results are “lagging indicators” reflecting results of past decisions and actions—good profitability now does not translate into stronger capability for delivering better financial results later • However, meeting or beating strategic performance targets signals growing competitiveness & strength in the marketplace, thus developing the capability for better financial performance in the years ahead • Good strategic performance is thus a “leading indicator” of a company’s capability to deliver improved future financial performance

  12. Controls in Balanced Scorecard Framework

  13. Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

  14. “Computers in the future may weigh no more than 1.5 tons”

  15. “Computers in the future may weigh no more than 1.5 tons” • Popular Science Magazine, forecasting the relentless march of Science - 1949

  16. In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000

  17. “I think there is a world market for maybe five computers” • Thomas Watson, Chairman of IBM, 1943

  18. “But what….is it good for?” • Engineer at IBM, commenting on the microchip, 1968

  19. “The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible” • Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service

  20. FedEx now delivers well over 7.5 million packages a day – 2.7 billion a year

  21. “We don’t like their music and guitar music is on the way out” • Decca Records Company in rejecting the Beatles, 1962

  22. “ Who the hell wants to hear actors talk” H. M. Warner, 1927

  23. “There is no reason why anyone would want a computer in their home” Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977

  24. “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.” Internal Memo, Western Union, 1876

  25. “Everything that can be invented has been invented” Charles H. Duell, Commissioner of the U.S. Patents Office, 1899

  26. “640K of RAM ought to be enough for anybody” Bill Gates, 1981

  27. Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ, Oct 1, 2003

  28. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002

  29. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002 September 2003, “The Big Three” became GM, Ford, and Toyota

  30. “Nothing important happened today” Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England

  31. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett • Skate to where the puck is going, not to where the puck has been. Wayne Gretsky

  32. Components of External Analysis • Scanning – Identifying early signals • Monitoring – Following signals or change identifies in scanning to identify patterns • Forecasting – Projections of what might happen • Assessing – Determining the timing and significance of forecasted change

  33. General or Macro Environment • Demographic • Economic • Political • Sociocultural • Technological • Environmental

  34. 1) Demographic Segment • Characteristics of the population • e.g., age, race, gender, sexual orientation and social classes • Ethnic structure • Income distribution • Geographic distribution

  35. 2) Economic Segment • General health/wellbeing of the local, regional, national or global economy. • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

  36. 3) Political/Legal Segments • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

  37. 4) SocioculturalSegment • Attitudes of society towards work, careers, products, services and consumer activism. • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

  38. 5) Technological Segment • Changes in technology that affect the workplace, and the products and services consumers expect • e.g., Information technologies, entertainment technologies, product technologies.

  39. 6) Environmental • Environmental and ecological issues (on supple and waste side), including pressure from NGOs and activists.

  40. General Environment • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance • Cast a wide net and to identify the emerging trends • Then determine which factors are relevant, and how these changes will have an effect upon the firm.

  41. ROIC Across Industries 1995-2004

  42. Porter’s Five Forces • Competitive Rivalry • Power of Buyers • Power of Suppliers • Potential Entrants • Substitute Products Each of these forces affect costs/prices, therefore, profitability

  43. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Suppliers of Key Inputs Buyers Potential New Entrants

  44. Porter’s 5-forces is all about margins { Price What factors increase/decrease margins within an industry, thus affecting profitability. Profits Costs

  45. When industry structural variables are weak…... Prices can be kept high { Profits can soar Costs can be kept low

  46. When industry structural variables are strong Prices will be pushed down { Profits shrink Costs will rise

  47. Suppose you had to start a new business and start generating revenues… … today … in a week … in 2 months … in 1 year What kind of businesses might you start?

  48. Potential New Entrants • Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. • Firms can create “barriers to enter” • Barriers of entry are desirable for entrenched firms

  49. Barriers to Entry • Economies of scale • Product differentiation & loyalty • Capital & resource requirement • Switching costs • Distribution • Cost disadvantage independent of size • Regulatory policies • Access to technology & know-how • Learning, costs, experience curves • Threat of retaliation

  50. Suppliers • Who are you key suppliers? • Suppliers are a strong competitive force when: • Only a few suppliers exist and is more concentrated than industry to which it is selling • Few substitutes available to the industry firm • Industry not important buyers to supplier group • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality • It is costly for buyers to switch suppliers • Forward integration by suppliers is a credible threat • Suppliers can supply at a lower cost

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