Divine Word College of San Jose

San Jose, Occidental Mindoro

Bachelor of Science in Accountancy

Module 3

1. Title: Business Logic

2. Scope: STRATEGIC LEADERSHIP: STRATEGY MAKING PROCESS

FOR COMPETITIVE ADVANTAGE

3. Overview:

This module identifies and describes the strategies that managers can
pursue to achieve superior performance and provide their company with a
competitive advantage. One of its central aims is to give a thorough
understanding of the analytical techniques and skills necessary to identify
and implement strategies successfully.

4. Learning Objectives:

At the end of this module, the students are expected to:

 Explain what is meant by "competitive advantage
 Discuss the strategic role of managers at different levels in an
organization
 Identify the main steps in a strategic planning process
 Discuss the main pitfalls of planning and how those pitfalls can be
avoided
 Outline the cognitive biases that might lead to poor strategic decisions
and explain how these biases can be overcome

5. Discussion of the topics:

Strategy. A set of related actions that managers take to increase their

company performance

Strategic leadership. Creating competitive advantage through effective

management of the strategy-making process Strategy formulation. Selecting
strategies based on analysis of an organization's external and internal
environment.

Strategy implementation. Putting strategies into action.

 Strategic leadership is concerned with managing the strategy-making
process to increase the performance of a company, thereby increasing the
value of the enterprise to its owners, its shareholders
Strategic leadership is concerned with managing the strategy-making
process to increase the performance of a company, To do this, a company
must be able to outperform its rivals; it must have a competitive advantage

Superior Performance
Maximizing shareholder value is the ultimate goal of profit-making
companies, for two reasons:

a. First, shareholders provide a company with the risk capital that enables
managers to buy the resources needed to produce and sell goods and
services.
b. Second, shareholders are the legal owners of a corporation, and their
shares, therefore, represent a claim on the profits generated by a company.

Thus, managers have an obligation to invest those profits in ways that

maximize shareholder value.

Risk capital is capital that cannot be recovered if a company fails and goes
bankrupt. Shareholders will not provide risk capital unless they believe that
managers are committed to pursuing strategies that provide a good return
on their capital investment. Managers must behave in a legal, ethical, and
socially responsible manner while working to maximize shareholder value.

Shareholder value, are the returns that shareholders earn from purchasing
shares in a company. These returns come from two sources:
(a) capital appreciation in the value of a company's shares and
(b) dividend payments.

For example, between January 2 and December 31. 2010, the value of one
share in Verizon Communications increased from $30.97 to $35.78, which
represents a capital appreciation of $4.81. In addition, Verizon paid out a
dividend of $1.93 per share during 2010. Thus, if an investor had bought one
share of Verizon on January 2 and held on to it for the entire year, the return
would have been $6.74 ($4.81 + $1.93), an impressive 21.8% return on her
investment

Profitability is the return that it makes on the capital invested in the

enterprise. It is the result of how efficiently and effectively managers use the
capital at their disposal to produce goods and services that satisfy customer
needs. The return on invested capital (ROIC) that a company earns is defined
as its net profit over the capital invested in the firm (profit/capital invested).
A company that uses its capital efficiently and effectively makes a positive
return on invested capital
-By net profit, we mean net income after tax.
-By capital, we mean the sum of money invested in the company: that
is, stockholders' equity plus debt owed to creditors.

The profit growth of a company can be measured by the increase in

net profit over time. A company can grow its profits if it sells products in
markets that are growing rapidly, gains market share from rivals, increases
the amount it sells to existing customers, expands overseas, or diversifies
profitably into new lines of business.

Competitive Advantage and a Company's Business Model

A company is said to have a competitive advantage over its rivals when

its profitability is greater than the average profitability and profit growth
of other companies competing for the same set of customers. The higher its
profitability relative to rivals, the greater its competitive advantage will be. A
company has a sustained competitive advantage when its strategies enable
it to maintain above average profitability for a number of years.

A business model is managers' conception of how the set of

strategies their company pursues should work together as a congruent
whole, enabling the company to gain a competitive advantage and achieve
superior profitability and profit growth.

A business model encompasses the totality of how a company will:

 Select its customers.
 Define and differentiate its product offerings.
 Create value for its customers.
 Acquire and keep customers.
 Produce goods or services.
 Lower costs.
 Deliver goods and services to the market.
 Organize activities within the company.
 Configure its resources.
 Achieve and sustain a high level of profitability.
 Grow the business over time

Strategic Managers
Managers must lead the strategy making process. In most companies.
there are two primary types of managers:
 a. general managers - who bear responsibility for the overall
performance of the company or for one of its major self-contained
subunits or divisions,
b. functional managers - who are responsible for supervising a
particular function, that is, a task, activity, or operation, such as
accounting, marketing, research and development (R&D),
information technology, or logistics

Figure 1 shows the organization of a multidivisional company. As you can see, there are three
main levels of management: corporate, business, and functional. General Managers are found at
the first two of these levels, but their strategic roles differ depending on their sphere of
responsibility.

Figure 1

1. Corporate-Level Managers
The corporate level of management occupy the apex of decision
making within the organization. It consists of:
a. the chief executive officer (CEO),
b. other senior executives,
c. corporate staff.

The CEO is the principal general manager. In consultation with

other senior executives, the role of corporate-level managers is to
oversee the development of strategies for the whole organization. This
role includes:
a. defining the goals of the organization,
 b. determining what businesses it should be in,
c. allocating resources among the different businesses,
d. formulating and implementing strategies that span individual
businesses, and providing leadership for the entire organization.
e. provide a link between the people who oversee the strategic
development of a firm and those who own it (the shareholders).

2. Business-Level Managers
A business unit is a self-contained division (with its own functions
e.g., finance, purchasing, production, and marketing departments) that
provides a product or service for a particular market.
The principal general manager at the business level, or the
business-level manager, is the head of the division. The strategic role
of these managers is to

a. translate the general statements of direction and intent that

come from the corporate level into concrete strategies for individual
businesses.
b. business level general managers are concerned with
strategies that are specific to a particular business

The general managers in each division work out for their business the
details of a business model that is consistent with this objective.

Functional-Level Managers

Functional-level managers are responsible for the specific business

functions or operations (human resources, purchasing, product development,
customer service, etc.) that constitute a company or one of its divisions.
Thus, a functional manager's sphere of responsibility is:
a. generally confined to one organizational activity
b. Functional managers nevertheless have a major strategic role: to
develop functional strategies in their area that help fulfill the strategic
objectives set by business- and corporate-level general managers.
c. Functional managers provide most of the information that makes it
possible for business-and corporate-level general managers to formulate
realistic and attainable strategies. Indeed, because they are closer to the
customer than is the typical general manager; functional managers
themselves may generate important ideas that subsequently become major
strategies for the company.

The Strategy-Making Process

A Model of the Strategic Planning Process
The formal strategic planning process has five main steps:
1. Select the corporate mission and major corporate goals.
2. Analyze the organization's external competitive environment to
identify opportunities and threats.
3. Analyze the organization's internal operating environment to identify
the organization's strengths and weaknesses.
4. Select strategies that build on the organization's strengths and
correct its weaknesses in order to take advantage of external opportunities
and counter external threats. These strategies should be consistent with the
mission and major goals of the organization. They should be congruent and
constitute a viable business model
5. Implement the strategies.

MAIN COMPONENTS OF STRATEGIC PLANNING PROCESS

Figure 2
1. Mission, Vision, Values and Goals
 Mission Statement
 The first component of the strategic management process
is crafting the organization's mission statement, which provides
the framework- or context- within which strategies are
formulated.

A mission statement has four main components:

1. A statement of the reason of being of a company or
organization its reason for existence which is normally referred
to as the mission:
2. A statement of some desired future state, usually referred to
as the vision: 3. A statement of the key values that the
organization is committed to;
4. A statement of major goals

The Mission
A company's mission describes what the company does.

For example:
 The mission of Kodak is "to provide customers with the solutions
they need to capture, store, process, output, and communicate
images -anywhere, anytime." In other words, Kodak exists to
provide imaging solutions to consumers. This is a customer-
oriented mission rather than product oriented mission.
 Facebook "To give people the power to share and make the
world more open and connected.
 Google: To organize the world's information and make it
universally accessible and useful."
 Cola Cola: "To refresh the world... To inspire moments of
optimism and happiness. To create value and make a difference

Essentially, the definition answers these questions:

a. What is our business?
b. What will it be?
c. What should it be?

"What is our business?" a company should define its business in terms

of three dimensions:
a. Who is being satisfied (what customer groups).
b. What is being satisfied (what customer needs), and
c. How customers needs are being satisfied (by what skills, knowledge,
or distinctive competencies).
 "What is our business?" a company should define its business in terms
of three dimensions:
a. Who is being satisfied (what customer groups),
b. What is being satisfied (what customer needs), and
c. How customers' needs are being satisfied (by what skills,
knowledge, or distinctive competencies).

Vision
The vision of a company defines a desired future state; it articulates,
often in bold terms, what the company would like to achieve.

Examples:
 Google: "To provide access to the world's information in one
click"
 Instagram: "Capture and share the world's moments"
 McDonald's: "To move with velocity to drive profitable growth
and become an even better McDonald's serving more customers
delicious food each day around the world."
 Starbucks: "To establish Starbucks as the premier purveyor of
the finest coffee in the world while maintaining our
uncompromising principles while we grow
A vision statement describes what a company desires to achieve in the long-
run, generally in a time frame of five to ten years, or sometimes even longer.
It depicts a vision of what the company will look like in the future and sets a
defined direction for the planning and execution of corporate-level
strategies.

Values
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.

Insofar as they help drive and shape behavior within a company,

values are commonly seen as the bedrock of a company's organizational
culture:
 the set of values, norms,
 the standards that control how employees work to achieve an
organization's mission and goals
For example:
Nucor Steel is one of the most productive and profitable steel firms in
the world. Its competitive advantage is based, in part, on the extremely high
productivity of its work force, which the company maintains is a direct result
of its cultural values, which in turn determine how it treats its employees
These values are as follows:
 "Management is obligated to manage Nucor in such a way that
employees will have the opportunity to earn according to their
productivity ”
 "Employees should be able to feel confident that if they do their jobs
properly, they will have a job tomorrow."
 "Employees have the right to be treated fairly and must believe that
they will be."
 "Employees must have an avenue of appeal when they believe they
are being treated unfairly.

Microsoft's Vision, Mission and Goals

Figure 3
Microsoft’s Mission, Vision and Values
Major Goals
Having stated the mission, vision, and key values, strategic managers
can take the next step in the formulation of a mission statement:
establishing major goals.
A goal is a precise and measurable desired future state that a
company attempts to realize
Well-constructed goals have four main characteristics:
  They are precise and measurable. Measurable goals give managers a
yardstick or standard against which they can judge their performance
 They address crucial issues. To maintain focus, managers should select
a limited number of major and important goals to assess the
performance of the company.
 They are challenging but realistic. They give all employees an incentive
to look for ways of improving the operations of an organization.
Unrealistic and too easy goals may fail to motivate managers and
other employees.
 They specify a time period in which the goals should be achieved,
when that is appropriate. Time constraints tell employees that success
requires a goal to be attained by a given date, not after that date.

2. External Analysis
The second component of the strategic management process is
an analysis of the organization's external operating environment.

Purpose of the external analvsis

a. to identify strategic opportunities and threats within the
organizations operating environment that will affect how it
pursues its mission
b. Analyze the industry environment requires and
assessment of the competitive structure of the company's
industry, including the competitive position of the company and
its major rivals.
c. It also requires analysis of the nature, stage, dynamics,
and history of the industry
d. Assessment of the impact of globalization on
competition within an industry
e. Analyze and examine the macroeconomic, social,
government, legal, international, and technological factors that
may affect the company and its industry.

3. Internal Analysis
Internal analysis, the third component of the strategic planning
process focuses on reviewing the resources, capabilities, and
competencies of a company. The goal is to identify the strengths and
weaknesses of the company.

SWOT Analysis and the Business Model

The comparison of strengths, weaknesses, opportunities, and threats is

normally referred to as a SWOT analysis. The central purpose is:
 a.- to identify the strategies to exploit external opportunities.
b. counter threats
c. build on and protect company strengths, and
d. eradicate weaknesses

Example. Time Inc. - American worldwide mass media corporation. It

owned and published over 100 magazine brands, including its namesake
Time, Sports /lustrated, Travel + Leisure, Food & Wine, Fortune, People,
InStyle, Life, Golf Magazine, Southern Living, Essence, Real Simple, and
Entertainment Weekly.

At Time Inc., managers saw the move of readership to the Web as both
an Opportunity that they must exploit and a threat to Time's established
print magazines.

Managers recognized that Time's well-known brands and strong reporting

capabilities were strengths that would serve it well online, but that an
editorial culture that marginalized online publishing was a weakness that had
to be fixed.

The strategies that managers at Time Inc. came up with included merging
the print and online newsrooms to remove distinctions between them;
investing significant financial resources in online sites; and entering into a
partnership with CNN, which already had a strong online presence

Managers compare and contrast the various alternative possible strategies

against each other and then identify the set of strategies that will create and
sustain a competitive advantage.

These strategies can be divided into four main categories:

• Functional-level strategies, directed at improving the

effectiveness of operations within a company, such as manufacturing,
marketing, materials management, product development, and customer
service.
• Business-level strategies, this refers to the business's overall
competitive theme, 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 for example, cost leadership,
differentiation, focusing on a particular niche or segment of the industry, or
some combination of these.
 • Global strategies, addresses how to expand operations outside the
home country to grow and prosper in a world where competitive advantage
is determined at a global level.
• Corporate-level strategies, which answer the primary questions:
What business or businesses should we be in to maximize the long-run
profitability and profit growth of the organization? How should we enter and
increase our presence in these businesses to gain a competitive advantage?

In essence, a SWOT analysis is a methodology for choosing between

competing business models, and for fine tuning the business model that
managers choose

For example - When Microsoft entered the videogame market with its
Xbox offering, it had to settle on the best business model for competing in
this market. Microsoft used a SWOT type of analysis to compare alternatives
and settled on a "razor and razor blades"* business model in which the Xbox
console is priced below cost to build sales (the "razor*), while profits are
made from royalties on the sale of games for the Xbox (the "blades")

4. Strategy Implementation
Strategy implementation involves taking actions at the
functional, business, and corporate levels to execute a strategic plan.
Implementation can include, for example:
a. putting quality improvement programs into place,
b. changing the way a product is designed,
c. positioning the product differently in the marketplace,
d. segmenting the marketing
e. offering different versions of the product to different consumer
groups,
f. implementing price increases or decreases,
g. expanding through mergers and acquisitions, or downsizing
the company by closing down or selling off parts of the company.

Strategy implementation also entails designing the best

organization structure and the best culture and control systems to put
a chosen strategy into action.

5. The Feedback Loop

The feedback loop indicates that strategic planning is ongoing: it
never ends. This information and knowledge is returned to the
corporate level through feedback loops, and ' becomes the input for
the next round of strategy formulation and implementation

For example, if a strategic goal proves too optimistic, the next

time, a more conservative goal is set. Or, feedback may reveal that the
business model is not working, so managers may seek ways to change
it.

Strategic Leadership
Key characteristics of good strategic leaders
(1) vision, eloquence, and consistency;
(2) articulation of a business model:
(3) commitment;
(4) being well informed;
(5) willingness to delegate and empower;
(6) astute use of power; and
(7) emotional intelligence.

1. Vision, Eloquence, and Consistency

a. One of the key tasks of leadership is to give an
organization a sense of direction.
b. They must have a clear and compelling vision of where
the organization should go.
c. Leaders must be eloquent enough to communicate this
vision to others within the organization, and consistently
articulate their vision until it becomes part of the organization's
culture.
Examples:
 John F. Kennedy - , "Ask not what your country can
do for you, ask what you can do for your country".
 Winston Churchill - "we will never surrender." / "To
improve is to change, so to be perfect is to change
often."
 Walmart founder Sam Walton who established and
articulated the vision that has been central to
Walmart's success: passing on cost savings from
suppliers and operating efficiencies to customers in
the form of everyday low prices
2. Articulation of the Business Model
Another key characteristic of good strategic leaders is their
ability to identify and articulate the business model the company
will use to attain its vision.
 A business model is managers conception of how the
various strategies that the company pursues fit together into a
congruent whole.

3. Commitment
Strong leaders demonstrate their commitment to their
vision and business model by actions and words, and they
often lead by example.

Nucor's former CEO, Ken Iverson. Nucor is a very efficient

steel maker with perhaps the lowest cost structure in the steel
industry. In his tenure as CEO, Iverson set the example: he
answered his own phone, employed only one secretary, drove
an old car, flew coach class, and was proud of the fact that his
base salary was the lowest of the Fortune 500 CEOs (Iverson
made most of his money from performance-based pay
bonuses).

This commitment was a powerful signal to employees that

Iverson was serious about doing everything possible to
minimize costs. It earned him the respect of Nucor employees
and made them more willing to work hard.'

4. Being Well Informed

Effective strategic leaders develop a network of formal and
informal sources who keep them well informed about what is
going on within their company.

At Starbucks, for example, the first thing that former CEO

Jim Donald did every morning was call5-10 stores, talk to the
managers and other employees there, and get a sense for
how their stores were performing. Donald also stopped at a
local Starbucks every morning on the way to work to buy his
morning coffee.

Herb Kelleher, the founder of Southwest Airlines, was able

to gauge the health of his company by dropping in
unannounced on aircraft maintenance facilities and helping
workers perform their tasks. Herb Kelleher would also often
help airline attendants on Southwest flights, distributing
refreshments and talking to customers. One frequent flyer on
Southwest Airlines reported sitting next to Kelleher three
times in 10 years. Each timeKelleher asked him (and others
 sitting nearby) how Southwest Airlines was doing in a number
of areas, in order to spot trends and inconsistencies.

5. Willingness to Delegate and Empower

High-performance leaders are skilled at delegation.
- Effective delegation to distribute work load and
responsibilities
- Delegation is way of empowering subordinates to
make decisions is a good motivational tool and often
results in decisions being made by those who must
implement them

6. The Astute Use of Power

Effective leaders tend to be very astute in their use of
power. Strategic leaders must often play the power game with
skill and attempt to build consensus for their ideas rather than
use their authority to force ideas through; they must act as
members of a coalition or its democratic leaders rather than
as dictators
Power comes from control over resources that are
important to the organization: budgets capital, positions,
information, and knowledge

7. Emotional Intelligence
Emotional intelligence (otherwise known as emotional
quotient or E0) is the ability to understand, use, and manage
your own emotions in positive ways to relieve stress,
communicate effectively, empathize with others, overcome
challenges and defuse conflict.

Emotional intelligence helps you build stronger

relationships, succeed at school and work, and achieve your
career and personal goals

Emotional intelligence is a term to describe a bundle of

psychological attributes that many strong and effective
leaders exhibit:
 Self-awareness_the ability to understand one's own
moods, emotions, and drives, as well as their effect
on others.
 Self-regulation the ability to control or redirect
disruptive impulses or moods, that is, to think before
acting.
  Motivation- a passion for work that goes beyond
money or status and a propensity to pursue goals
with energy and persistence.
 Empathy the ability to understand the feelings and
viewpoints of subordinates and to take those into
account when making decisions.
 Social skills- friendliness with a purpose.

Leaders who possess these attributes who exhibit a high degree of

emotional intelligence tend to be more effective than those who lack these
attributes. Their self-awareness and self-regulation help to elicit the trust and
confidence of subordinates.

6. Self-Check Test and Evaluation of Activities

Review Questions:

7. Sources and references.

 1. Strategic Management, An Integrated Approach by Charles W.L. Hill and Gareth R,
Jones 10th Edition

Prepared by:

LORENA P. FLORITA
College Instructor

Noted:

MRS. ELVIE D. ARAGONES, PhD (cand.)

Program Chairperson

Approved by:

DR. LUIS I. GANTE, JR