Strategy Formulation HCAD 5390
Defining Future Direction • At what levels is future direction defined? • Who is responsible for defining future direction? • How is future direction expressed? Where can it be seen?
Strategy-Making Levels in an Organization Corporate Center ↓↑ Individual SBUs ↓↑ Functional Areas ↓↑ Departments ↓↑ Teams and Task Forces ↓↑ Individual Employees
Responsibility for Defining Future Direction • Board of Directors • CEO • Top Executive Team • Strategic Planning Unit • Middle Level Managers • All Employees • Suppliers and Customers
Future Direction Documents • Mission • Vision • Values • Objectives
Mission Statement • Current purpose of the organization • What it is, what it does, and what it does not do • The “business” of the firm, its domain • The areas in which it operates and the means by which it competes in those areas • The current activities and operations of the firm
Mission Statement - Spheres of Operation and Competition • Industry • Industry value chain • Products or services • Technologies and competencies • Customers and market segments • Distribution channels • Geographic areas
Reasons for a Mission Statement • Fosters organization-wide unanimity of purpose • Point of identification for employees and stakeholders • Steers operations and activities in certain directions and away from others • Basis for allocating resources • Projects coherent, positive image to external stakeholders
Characteristics of a Good Mission Statement (I) • Succinct: one page, 200-300 words • Memorable and recitable • Broad enough to allow management creativity • Narrow enough to limit management recklessness • Distinguishes firm from its competitors • Reconciles differences among stakeholders • Arouses positive feelings about the organization
Characteristics of a Good Mission Statement (II) • Tells managers where to look and where to avoid in seeking strategic opportunities • Conveys image of a successful, well managed, self-aware organization worthy of investment and support • Understood and embraced by all organization members • More immediate and pragmatic than a vision statement
Vision Statement (I) • Describes an ideal, desirable future state for the organization • A future that the organization will work actively to create for itself • Antithesis of allowing the future to shape the organization, or adapting the organization to the future
Vision Statement (II) • Empowers and motivates employees to higher levels of achievement • Value of creating “shared vision” • Can be prepared at all organizational levels • Join all stakeholders in a “future search” for a vision
Characteristics of a Good Vision Statement (I) • A kind of “dream” that inspires and drives • Different from what is being done now • Improvement over what is being done now • A “stretch” for the organization with uncertainty about the chances of achievement • Grounded in reality and possible of achievement
Characteristics of a Good Vision Statement (II) • Reflects understanding of resources and competencies, as well as external opportunities and threats • A challenge for employees to accomplish, requiring new abilities and performance at the highest levels • All stakeholders see an aspect of the vision that serves their interests
Values Statement • Guidelines for employee behavior on the job • Address beliefs and attitudes of all organization members • Implicit (organizational culture) vs. … • Explicit (code of ethics)
Values • Johnson & Johnson’s credosets its responsibilities to: • J&J product users. • J&J employees. • Communities in which J&Jemployees live and work. • J&J stockholders. Source: Courtesy of Johnson & Johnson.
Texas Health Resources • Mission, Vision and Values • MissionTo improve the health of the people in the communities we serve. • VisionTexas Health Resources, a faith-based organization joining with physicians, will be the health care system of choice. • Values • RespectRespecting the dignity of all persons, fostering a corporate culture characterized by teamwork, diversity and empowerment. • IntegrityConduct our corporate and personal lives with integrity; Relationships based on loyalty, fairness, truthfulness and trustworthiness. • CompassionSensitivity to the whole person, reflective of God's compassion and love, with particular concern for the poor. • ExcellenceContinuously improving the quality of our service through education, research, competent and innovative personnel, effective leadership and responsible stewardship of resources
Arlington Memorial Hospital • Arlington Memorial Hospital (AMH) is a full-service acute-care medical center with 417 beds, serving Arlington and its surrounding communities. Since opening its doors in 1958, AMH has contributed to the medical and health education needs of area residents, who pooled their resources to help build the original 75-bed hospital. • Today, with more than 550 physicians on the medical staff, 1,900 employees and 300 volunteers, AMH is larger and more advanced than the founders could have imagined. • But its community-oriented focus, established more than five decades ago, has not changed. AMH remains a not-for-profit, community hospital dedicated to providing quality, compassionate health care.
Parkland • Mandate • To furnish medical aid and hospital care to indigent and needy persons residing in the hospital district. • Vision • By our actions, we will define the standards of excellence for public academic health systems. • Mission • Dedicated to the health and well-being of individuals and communities entrusted to our care.
Values Issues • Violations of the law • Integrity, honesty, and ethics • Attitude toward and treatment of coworkers, customers, and suppliers • Acceptance of risk taking and failure • Attitude toward innovation and the future • Tolerance for change within the organization • Balance of profit-making and patient welfare
Complications in Values • How to communicate • How to enforce • Differences among organizational units • Differences among professions and specialties • Effect on implementation of strategies
Strategic Objectives • Long-term strategic thrusts • Designed to realize the organizational vision • Explicit and workable • Provide guidelines for specific strategies • Set at both the corporate and SBU levels
Criteria for Strategic Objectives • Based on measurable attributes • Specific unit of measurement for each attribute • Specific attribute level to be achieved • Time deadline for reaching the level • Delegate responsibility to a named person for reaching the level by the deadline
Typical Corporate Strategic Objectives • Improve market price of common stock • Increase economic profit of SBU portfolio • Increase total annual revenues of SBU portfolio • Increase portfolio cash flow to support rapid-growth SBUs • Diversify portfolio into new industries • Divest no longer related SBUs • Increasing resource sharing among SBUs
Typical SBU Strategic Objectives • Conduct a “turnaround” of the business • Improve the business’s market share • Increase the business’s revenues or profits • Improve the quality of products and services • Acquire or develop specific new technologies • Acquire or develop new employee competencies
Tips on Setting Strategic Objectives • “Stretch” the abilities of employees assigned to achieve them • Support them with appropriate resources • Tolerate risk-taking and innovation • Watch for objectives and incentives that motivate undesirable behavior • Employees assigned to achieve objectives participate in setting them
Challenges in Documents Defining Future Direction • Confusing mission and vision statements with each other • Defining visions distinguished from the competition • Overly long vision statements and too many strategic objectives • Vision and values that inspire employees • Creating documents useful in strategic management process
Distinguishing Corporations from Strategic Business Units (SBUs) Multi-SBU Corporations: • Sole separate legal entity • Authorized to execute contracts • Able to borrow money and sell equity • Produces no goods or services • Quite small staff • Primary function is to assemble and manage a portfolio of SBUs
Distinguishing Corporations from Strategic Business Units (SBUs) Strategic Business Units: • No separate legal existence • No separate ability to contract or raise capital • Produce goods and services • Compete in one or more markets • Relative autonomy to manage operations and strategy
Value-Adding Functions of the Corporate Center • Manage the Portfolio of SBUs • Raise Financial Capital for Allocation to SBUs • Allocate Resources and Services to SBUs • Facilitate Synergies Among SBUs • Choose Parenting Style for SBU Interactions • Participate in SBU Strategic Planning Process • Oversee and Monitor SBU Performance • Manage Corporate Relations With Stakeholders
Corporate Management of an SBU Portfolio (I) • In pursuit of a corporate vision • Acquires, merges with, or develops internally new SBUs • Divests existing, unwanted SBUs • Set performance goals for SBU management • Provide input to SBU strategic decisions • Count upon SBUs to perform unique strategic functions
Corporate Management of an SBU Portfolio (II) • Balance between central corporate direction and individual SBU autonomy • Control vs spontaneity • Hire good SBU managers, give them general guidelines, and let them loose … or … • Give detailed directions, watch closely, and intervene frequently
Model Portfolio Management Process • Choose strategic thrust of the corporation • Growth • Stability • Retrenchment • Choose geographic areas, markets, and products or services to offer in them • Decide how many SBUs in the portfolio and which businesses they will be
Texas Health Resources • Texas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The system's primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals. THR is also a corporate member or partner in six additional hospitals and surgery centers.
Adaptive Strategies Expansion Adaptive Strategy: • Orientation toward growth • Expand, cut back, status quo? • Concentrate within current industry, diversify into other industries? • Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?
Corporate-Level Strategic Options:Growth – Expand the Portfolio • Most common corporate-level strategy direction • Critical to maintaining share in a growing market • In pursuit of economies of scale and scope • Increase in experience and learning • Top executive egos to be satisfied
Growth By Concentration • All businesses start here • Dedicate all resources and competencies to one or a few products or services • Achieved in one of three ways: • Sell more of current products in current markets • Sell current products in new markets • Sell new products in current markets • To sell new products in new markets is diversification
Adaptive Strategies Basic Growth Strategies: Concentration • Current product line in one industry • Vertical Integration • Market Development • Product Development • Penetration Diversification • Into other product lines in other industries
Adaptive Strategies Expansion of Scope Basic Concentration Strategies: Vertical growth Horizontal growth
Adaptive Strategies Horizontal Growth • Horizontal integration
Advantages Operational focus on a single familiar industry or market. Current resources and capabilities add value. Growing with the market brings competitive advantage. Disadvantages No diversification of market risks. Vertical integration may be required to create value and establish competitive advantage. Opportunities to create value and make a profit may be missed. Concentration on a Single Business
Concentration No Longer Sufficient to Maintain Growth • Unlikely to capture a greater share of current market • Current market is stagnating, maturing, shrinking, or otherwise lacking growth potential • Excess cash on hand needs to be invested productively • Management has greater ambitions for further strategic achievement
Growth By Related Diversification • Move beyond existing markets and products • Employ existing resources and competencies • New businesses are closely connected (“related”) to existing businesses • Directions of related diversification • Vertical forward integration (toward customers) • Vertical backward integration (toward suppliers) • Horizontal expansion
Forms of Relatedness • Products or services • Markets • Processes, systems, or other operating features • Manufacturing facilities, distribution channels, marketing media, or support services • Brand image, corporate reputation, creativity or innovation skills, or general managerial expertise
Adaptive Strategies Basic Diversification Strategies: • Concentric Diversification • Conglomerate Diversification
Adaptive Strategies Concentric Diversification • Growth into related industry • Search for synergies