Leadership and the Strategic

Management Process

Chapter Learning Obiectives

LO1.

Grasp why it is critical for company managers to have a clear strategic

vision oi vhere a company needs to head and why.

LOz.

Understand the importance of setting both financial and strategic

objectives and using a Balanced Scorecard to track performance.

LO3.

Understand why the strategic initiatives taken at various organizational

levels must be tightly coordinated to achieve companywide performance Ia rsels.

LO4.

Become alvare of what a company must do to achieve operating exce[lence and to execute its strategy proficientty.

LO5.

Learn what leadership skills management must exhibit

execution

LO6.

to drive stratesv

fo rwa rd.

Understand why the strategic management process is an ongoing

pfoce55.

LO7.

Become aivare of the role and responsibitity of a company's board of

directors in overseeing the strategic management process.

Chapter

Leadership and the Strategic Management Process

Crafting and executing strategy are the heart and soul of managing a business
enterprise. But exactly what is involved in developing a strategy and executing it proficiently? What are the various components of the strategy-making,
strategy-executing process and to what extent are company personnelaside from senior management-involved in the process? In this chapter we
present an overview of the ins and outs of crafting and executing company
strategies. Special attention will be given to management's direction-setting
responsibilities-charting a strategic course, setting performance targets, and
choosing a strategy capable of producing the desired outcomes. We will also
explain why strategy making is a task for a company's entire management
team and discuss which kinds of strategic decisions tend to be made at which
levels of management. The chapter concludes with a look at strategic leadership by a company's board of directors and how good corporate Bovernance
protects shareholder interests and promotes good management.

The Strategic Management Process

The managerial process of crafting and executing a company's strategy consists of five integrated stages:

7. Dcaeloping a strategic aision of tli:e company's future direction

2.

and focus.

Setting objectioes to measure progress toward achieving the strategic

vision.

3. Crafting a sbatery to achieve the objectives.

4. Implementing and executing the chosen stratery

efficiently and effectively.

5. Eoaluating

petformance and initiating correctiae adjustments that arc

needed in the company's long-term direction, objectives, strategy, or
approach to strategy execution.

Figure 2.1 displays this five-stage process. The model illustrates the need for
management to evaluate a number of external and internal factors in deciding

IGURtr

2.

The strategic Managemnt Process

Part

One:

Section A: Introduction and Overview

upon a strategic direction, appropriate objectives, and approaches to crafting

and executing strategy-see Tablc 2.1. Managcment's decisions that are made
in the strategic management process must be shaped by the prevailing economic conditions and competitive environment and the company's own internal resources and competitive capabilities. These strategy shaping conditions
will be the focus of Chapters 3 and 4.

Table 2.1

EXTERNAL CONSIDERATIONS

What are the industry's dominanl economic

characteristics? Industry fcaturcs such as markct sizc
and growth rate, the nunrber and relative sizes of buvers
and sellers, the speed of product innovation, the pace of
technological change, the importance of scale econo
mies, and the geographic scope of competitive rivalry
havc significant bcaring on managcment's dccrsons
regarding the vision, strategic and financial objectives,
and business strategy.

NTERNAL CONSIDERATIONS

How well is the present strategy working? The

strongcr a company's current ovcrall performance,
the less likel;, the need for radical strategy changes.
The r,veaker a company's performance, the mcre its
current vson, strategy, and approach to strategy
execution must be questioned.
What are the company's competitively valuable
resources/ capabilities, and internal weaknesses?

facing, and how strong is each force? A company's

stratcgv must shicld it from as many of thc prcvarlrng
competitive pressures as possible and attempt to shitt
competition in the company's favor.

A company's strengths are strategically relevant

because they are the logical building blocks for its
strategy and approach to executng the strategy;
intcrnal wcakncsscs arc rmportant for stratcgy makers
and strategy executers to consider because they may
represent vulnerabil ities that need correction.

What forces are driving change in the industry? In

dcciding upon stratcgrc choiccs and appropriate objectives, managers must consider if the industry driving
forces are causing demand to increase or decrease,
make competition more or less intense, and lead t<.r
higher or lower industry profitabilit,v.

Are the company's prices and costs competitive?

Managers charged with strategy making or stratcgy
execution must determne whether the comoanv is
performing internal functions and activities in a costeffective manner and if the comoanv's costs are in line
rvith those of comoetitors.

What market positions do industry rivals occupy and

what strategic moves are rivals likely to make next?

ls the company competitively stronBer o weaker

than key rivals? Management should buiid the com-

Industry driving forces and competitive forces [vor

some strateSc groups and hurt others. Also, managers

pany/s strateBy and approach lo execuling the strategy

around its competitve strengths and should improve
areas where the comoanv is vulnerable to best detend
or enhance its market position.

What kind of competitive forces are industry members

who fail to studr competitors risk being caught unpre

pared by the strategic moves of rivals.

Whal are lhe key factors for future competitive

success? All industries are characterized by a set of
strategy elements, compettve capabilities. or product
attributes that all comoanics must mastcr to bc successful. Managers should make the industry's key success
factors cornerstones of its stratecv and standout internal
comoetitive caoabi I ities.

What ae the company's exlernal opporlunities and

threats? Management's strategy should attempt to
capture the conrpany's most ttractive opportunities and
defend against threats to its well-being,

Chapter

Leadership and the Strategc Management Process

The model shown in Figure 2.1 also illustrates the need for management
to evaluate the company's performance on an ongo.ing basis. Any indication
that the company is failing to achieve its objectives calls for corrective adjustments in one of the first four stages of the process. It's quite possible that the
company's implementation efforts have fallen short and that new taclics must
be devised to fully exploit the potential of the company's strategy. If management determines that the company's execution efforts are sufficient, it should
challenge the assumptions underlying the company's business strategy and
alter the strategy to better fit competitive conditions and the company's internal capabilities. If the company's strategic approach to competition is rated as
sound, then perhaps management set overly ambitious targets for the companv's performance.
The evaluation stage of the strategic management process shown in
Figure 2.1 also allows for a change in the company's vision, but this should
oniy be necessary when it becomes evident to management that the industry
has changed in a significant way that renders its vision obsolete. Such occasions can be referred to as strategic inflection points. When a company reaches
a strategic iflection point, management has some tough decisions to make
about the company's direction, because abandoning an established course caries considerable risk. However, responding to r-rnfolding changes in the marketplace in timely fashion lessens a company's chances of becoming trapped
in a stagnant or declining business or letting attractive new growth opportunities slip away.
The first three stages of the strategic management A company's sfuategc plan lays out its future
process make up a strategic pian. A shategic plan maPS direction, performance targets, and strategy.
out where a company is headed, establishes strategic
and financial targets, and outlines the competitive moves and approaches to
be used in achieving the desired business results.l

Developing a Strategic Vision: Stage

Strategic Management Process

r of the

Top management's views about the company's direction and fufure productcustomer-market-technology focus are shaped by its views of the external

industry and competitive environment and internal

situation and constitute a strategic vision for the company. A ctearly articulated stratesic r.iri,.,

.o*-.,.i- Irffffl: H:l'.:Tl[:.,}1il:#fr'..,

about

cates management's aspirations to stakeholders

u,

iurt

and the company's future productfocus.

"w,here we are going" and helps steer the energies customermarket-technology

of company personnel in a common direction. For
'For an excellent discussion of rvhy a strategic pLan needs to be more than a lst of bullet points
and should in tact tell an engaging, insightful, stage-settng story that lays out the industry and
competitive situation as well as the vision, objectives, and strategy, see Gordon Shaq Robert
Brown, and Philip Bromiley, "Strategic Stories: How jM ls Rewriting Business Ptannn9," Horvord
Busness Revew 76, no. 3 (May June 1998), pp. 41-50. Fot a valuable discussion of the role of
mission, vision, objectives, and strategy statements in provding organizational directon, see
David f. Collins and Michael G. Rukstad, "Can You Say What Your Strategy ls?" Horvord Business
Revew 86, no. 4 (April 2oo8), pp. 82-90

Part

One:

Section A: lntroduction and Overview

instance, Henry Ford's vision of a car in every garage had power because it
captured the imagination of others, aided internal efforts to mobilize the Ford
Motor Company's resources, and served as a reference point for lauging the
merits of the companv's strategic actions.

Well-conceived visions are specific to a particular organization; they avoid

generic, feel-good statements like "We will become a global leader and the
first choice of customers in cvcry markct wc choose to serve"-which could
apply to any of hundreds of organizations.'? And they are not the product of
a committee charged with coming up with an innocuous but well-meaning
one-sentence vision that wins consensus approval from various stakeholders. Nicely worded vision statements with no specifics about the company's
product-market-c ustomer-technology focus fall well short of what it takes for
a vision to measure up.
For a strategic vision to function as a valuable managerial tool, it must provide understanding of what management wants its business to look like and
provide managers with a reference point in making strategic decisions. It must
say something definitive about how the company's lcadcrs intcnd to position
the company beyond where it is today. Table 2.2 lists some characteristics of
ef fecti ve v ision statements.

A surprising number of the vision statements found on company Web

sites and in annual reports are vague and unrevealing, saying very little
about the company's future product-market-cusiomer-technology focus.
'For a more in-depth discussion of the chaltenges of deveLoping a well-conceved vision, as wetl
as some good examples, see Hugh Davidson, The Committed Enterprse: How to Make Vision and
Volues Work (Oxford: Butterworth Henemann, zooz), Chapter 2; W Chan Km and Rene Mauborgne, "Charting Your Companyb Futute," Har'/ord Busness Revew 80, no. 6 Uune 2oo2), pp.
77 8-l,i lames C. Coltins and Jerry l. Porras, "Buitdng Your Company's Vision," Harvord Busness
Review 74, no. 5 (September October 1996), pp.65 77, Jim Collins and Jerry Porras, Built to Last:
Successful Hobits of Visionary Componies (New York: HarperCotlins, 1994), Chapter rr; and Michel
Robe(t, Strotegy Pure ond 5inple ll (New York: McGraw-Hitl, 1998), Chapters z. 3, and 6.

Table 2.2

Craphic-Paints a picture of

Lhe kind oi company that management is trying to create and

the market position(s) the company is striving to stake out.

Directional-ls forward looking; describes the strategic course tht nranalement has
charted and the kincls oi product-ma rke[-customer-tech nology changes that will help the
(ompdny prepare for lhe future.
Focused-ls specific enouglr to provide nranagers with guidance in making decisions and
allocating resou rces.

Flexible-ls not so locused that it nrakes it difficult or managenrent to adjust to changing

circumstances in markets, custonrer preferences, or technolo1v.
Feasible

ls

within the realm of

,,r,hat

thc company can rcasonably cxpect to achievc.

Desirable--lnd icates why the directional path makes good busrness sense.

lo communicate-ls explainalrle in 5-10 minutes and, iclealll,, can Lre recluced to a

simp)e, memorable "slogan" (like Henry Ford's famous vision of "a car in every garage").
Easy

Source: Based partfy on John P. Kolet, Lpdcling (-hrge (tioston: Harvard uusiness S.hool I'ress, '1996),

72.

Chapter

Leadership and the Strategic Management Process

l9

Some could apply to most any company in anv industry. Manv read like a
public relations statement-lofty w,ords that someone came up with because
it is fashionable for companies to hav-e an official vision statement.s Table 2.3
provides a list of the most common shortcomings in companr vision statements. Like any tool, vision statements can be used properly or improperlyi
either clearLy conveying a company's strategic course or not. Concepts &
Connections 2.1 provicles a critique of the strategic visions of several prominent companies.

How a Strategic Vision Differs from a Mission Statement

The defining characteristic of a well-conceived strategic vision is ln'hat it says
about the com'rany's.firt ure strategic coursc-" zulrcre ztte nre headed nnd zthnt our
-future product cltstlmer market teclmologv foctts utill be."

The mission statements of most companies say much The distinction between a strategc vision and a
morc about thc cntcrprisc's present business scope and mtssion statement is fairly clear-cut: A strategic
purpose-"rvho we are, n hat we do, and why we are vsion portrays a company's future business
here." Very felv mission statements are forwarcl look- scope ("where we are going") whereas a
ing in conient or emphasis. Consicler, for example, the comPany's mission typically describes its
purpose ("who we are,
mission statement of rrader Joe's (a specialt.v grocery T:-T lltli::sJald
cnarn)i

what we do, and whv we are here").

The mission of Trader Joe's is to give our customers the best food and ber.erage
valucs that thcy can find anylvhcrc and to pror.rde them with the information
required for informed buyrng decrsions. We providc thcsc r,r'ith a dcdication to
the highest quality clf customer satisfaction tlelivered lvith a sense of r+'armth,
friendliness, fun, individual pride, ancl company spirit.
, Hugh Davidson, The Commtted Enterprse (Oxford: Butterworth Heinemann, zooz), pp. zo

and s.

Table 2.3

incomplete Short on specifics about lvhere the company is headed or what the
company is doing to prepare for the future.
Vague or

Not forward looking-Doesn't indicate rvhether rr how ntanagernent inLends to alter the
cLlmpan,v's current product-market-customt:r-technology focus

Too broad-So .rll-irrclLrsive that the conrl:rany coulcl heacl in most any direction, pursuc
'rrr).1 ,rrr) uf-l,urlit) {rr ert-r 1r\l lrv llu.ie..
Bland or uninspiring-Lacks the por'ver to motivatc company pcrsonncl or inspirc share
holcler conficience alouL the conrDnv's cJirecLion,

Nol distinctive-Providcs no uniquc company idcntity; could apply to companies in anv

oi severl indLrstries (irrcluding riv.rls orer.rting in the sne nrarket arena).
Too reliant on superlatives-Docsn't say anvthing specific about the company's strategic
course levoncl the pursuit of such distinctions as bcrng a rccognizcd lcadcr, a global or
worlcl,,vicle le.rder, or the f irst choice of custonrers.
Sourccs: B;sed on in)rnra(ion in Hugh Dav dson, The CannItcd Elcrprrsc (Oxiord: Buttcnvorth Hcinc
mann, 20021. chapter 2; rnd Nlichel Robert. Suategf t'urc n(l \impl(, // (Ncw York: M.(;rew-Hill, t 998),
ahD(crs 2, J, (i 6.

Part

One:

Section A: Introduction and Overview

EXAMPLES OF STRATEGIC VISIOI{S-HOW

WEtt

VISION STATEMENT

DO THEY MEASURE UP?

EfFECTIVE ETEMTNTS

Red Hat Linux

To extend our position as the most trusted Linux and

open source provider to the enterprise. We intend to

grow the markct for Linux through a complete range of
enterprise Red Hat Linux software, a powerful Internet
management platform, and associated support and

.
.
.
.
.

servrceS.

Directional

snonrcomrlcs

Bland or
un Insprfl ng

Focused
Feasble

Desrable
Easy to
communicate

UBS

We are determined to be the best global financial

services comoanv. We focus on wealth and asset management, and on investment banking and securities
businesses. We continually earn recogniton and trust
from clients, shareholders, and staff through our ability to anticipate, learn and shape our future. We share
a common ambition to succeed by delivering quality in what we do. Our purpose is to help our clients
make financial decisions with confidence. We use our
resources to develop effective solutions and services for
our clients. We foster a distinctive, meritocratic culture
of ambition, performance and learning as ths attracts,
retains and develops the best talent for our company.
By growing both our client and our talent franchises,
we add sustainable value for our shareholders.

Caterpillar
Be the slobal leader in customer varue.

.
.
.

Focused

Feasible

Desirable

.
.

Not forwardlooking
Bland or
un Insprfl nE

.
.
.

Drectonal

Vague or

Desirable
Easy to
communicate

incomplete
Could apply
to many
companres In

many industrics
eBay

Provide a global trading platform where practically anyone can trade prctically anything.

Craphic
Flcxible
Easy to
Communicate

Too broad

Sourccs: Company doumenti and Web sites.

Note that Trader Joe's mission statement does a good job of conveying "who
we are, what we do, and why we are here," but it provides no sense of "where
we are headed." (Some companies use the term business purpose instead of
mission statement i describing themselves; in acfual practice, there seems to

Chapter

Leadership and the Strategic Management Process

be no meaningful difference between the terms mission statement and business

purpose-which one is used is a matter of preference.)

To reflect common management practice, we

will use the term

mission

statement to refer to an enterprise's description of its present busrness and its

purpose for existence. Ideally, a company mission statement is sufficiently

descriptive to:

.
.
.
.

ldentif!

the company's products or seraices.

Specifu the buyer needs

it

seeks

to satisfy.

SpecifA the customer groups or markets

it

is endeaaoring to serue.

Specifu its approach to pleasing customers.

Occasionally, companies state that their mission is to simply eam a profit. This
is misguided. Profit is more correctly an objectioe and a result of what a com-

pany does.
An example of a well-stated mission statement with ample specifics about
what the organization does is that of the Occupational Safety and Health
Administration (OSHA): "to assure the safety and health of America's workers by setting and enforcing standards; providing training, outreach, and
education; establishing partnerships; and encouraging continual improvement in workplace safety and health." Google's mission statement, while
short, still captures the essence of what the company is about: "to organize
the world's information and make it universally accessible and useful." An
example of a not-so-revealing mission statement is that of Microsoft. "To
help people and businesses throughout the world realize their full potential" says nothing about its products or business makeup and could apply
to many companies in many differeni industries. A mission statement that
provides scant indication of "who we are and what we do" has no apparent
value.

The lmportance of Communicating the Strategic Vision

Astrategic vision has little value to the organization unless it's effectively communicated down the line to lower-level managers and employees. It would
be dfficult for a vision statement to provide direction to decision makers and
energize employees toward achieving long-term strategic intent unless they
know of the vision and obseve management's commitment to that vision.
Communicating the vision to organization members nearlv always means
putting "where we are going and why" in writing, distrbuting the statement
organizationwide, and having executives personally explain the vision and
its rationale to as many people as feasible. Ideally, executives should present
their vision for the company in a manner that reaches out and grabs people's
attention. An engaging and convincing strategic vision has enormous motivational value-for the same reason that a stone mason is inspired by building a great cathedral for the ages. Therefore, an executive's ability to paint a
convincing and inspiring picture of a company's journey to a future destination is an important element of effective sffategic leadership.a
4

lbid., pp. 3, 54.

99

Pat.l

One:

Section A: lntroducton and Overview

The Benefits of an Effective Strategic Vision

In sum, a rvell-conceived, effectively communicated strategic vision pays off
il several respects: (1) it crystallizes senior executives'own views about the
firm's long-term direction; (2) it reduces the risk of rudderless decision making by management at all levels; (3) it is a tool for winning the support of
emplovees to he1-r make the vision a reality; (4) it provides a beacon for lowerlevel managers in forming departmental missions; and (5) it helps an organization prepare for the future.

Setting Objectives: Stage z of the Strategic

Management Process
Thc managcrial purpose of setting objectives is to convert the strategic vision
into spccific pcrformance targets. Objectives reflect management's aspirations
for cr>mpany performance in light of thc industry's prevailing economic and
competitive conditions and the companv/s internal capabilities. Wcll-statcd
objectives are qua nt ifinble, or mensurable, and contain a deadline for achieuement.
Coucrete, measurable obiectives are mana;erially valuable because they serve
as yardsticks for trackirg a company's performance and progress tor,r.ard its
vision. Vague targets like "maximize profits," "reduce costs," "become more
cfficicnt," or "incrcase sales," rvhich specify neither how much nor when, offer
little value as a management tool to improrue company performance. Icleally,
managers should devek>p challenging, yet achiez,table objcctivcs lhal stretch an
organzntiou to perforrn nt its full potentinl. As Mitchell Leibovitz, former CEO of
the auto parts ancl service retailer Pep Boys, once said, "lf you want to have
ho-hum results, have ho-hurn objectives."

What Kinds of Objectives to Set-The Need

for a Balanced Scorecard
distinct typcs of performance yardsticks are required: those relating
to financial performance and thosc rclating to strategic performance. Financial

Tr,vo r.erv

frnancial
estab-

objectives communicate management's targets for

financial perform
objectives
relate to revenue
retum on

Financal objectives relate to the

performance targets management has
o a comPalished for the organization to achieve. Strategic investment.
ny's
marketing
standing and competitive vitality. The
oblectives relate to target outcomes
indicate a company is strengthening its market importance of attaining financial objectives is intuitive.
standing, competitive vitality, and
Without adequate profitabilify and firancial strength, a

Strate

that

business

prospects.

future

companv's long-tcrm health and ultimate survival s

;eopirclized. Fu-rthermore, subpar earnings and a weak
balance sheet alarm shareholders and creditors and put the jobs of senior executives at risk. However, good financial performance, by itself, is not enough.
A company's financial objectives are really lngging intlicntors thai reflect
thc results of past decisions and organizational activities.5 The results of
t

Robert S. Kaplan and Davld P Norton, The Strotegy Focused Organization (Boston: Harvard
Business School Press,2ool), p. 3.

Chapter

Leadership and the Strategic Management Process

past decisions and organizational activities are not reliable indicators of a

company's future prospects. Companies that have been poor financial performers are sometimes able to turn thin;s around and good financial performers on occasion fall upon hard times. Hence, the best and most reliable
predictors of a company's success in the marketplace and future financial
performance are strategic objectives. Strategic outcomes are leading indicators of a company's future financial performance and business prospects. The
accomplishment of strategic objectives signals the company is well-positioned
to sustain or improvc its performance. For instance, if a company is achieving ambitious strategic objectives, then there's reason to cxpect that itstfur"e
financial performance will be better than its current or past performance. If
a company begins to lose competitive strength and fails to achieve important strategic objectives, then its ability to maintain its present profitability
is

highly suspect.

Consequently, utilizing a performance measurement system that strikes a

balance between financial objectives and strategic objectives is optimal.6 Just
tracking a company's financial performance overlooks the fact that what ultimately enables a company to deliver better financial results is the achievement

of strategic objectives that imptovc its competitiveness and market strength.

Representative examples of financial and strategic objectives that companies
often include in a balanced scorecard approach to measuring their performance are displayecl in Table 2.4.7
In 2008, nearly 60 percent of global companies used a balanced scorecard
approach to measuring strategic and financial performance.s Examples of
organizations that have adopted a balanced scorecard approach to setting
objectives and measuring performancc include UPS, Ann Taylor Stores, UK
Ministry of Defense, Caterpillar, Daimler AG, Hilton Hotels, Duke University
Hospital, and Siemens AG.e Concepts and Connections 2.2 provides selected
strategic and financial objectives of four prominent companies.

SHORT-TER\{ AND LONC-l HnM OTJECTIVES A company's set

of financial and strategic objectives should include both near-term and longterm performance targets. Short-term objectives focus attention on delivering
performance improvements n the current period, r,+.hile long-term targets
force the organization to consider how actions currently under way will
fbid., p. 7. Also, see Robert S. Kaplan and Davd P. Norton, The Balanced Scorecard: Tronslotng
Strotegy nto Acton (Bostonr Harvard Business School Press, 1996), p. ro; Kevin B. Hendricks,
Larry Menor, and Christine Wiedman, "The Balanced Scorecard: To Adopt or Not to Adopt," lvey
Business lournal 69, no. z (Novem ber-December zoo4), pp. t-7; and Sandy Richardson, "The Key
Elements of Balanced Scorecard Success," lvey Business Journal 69, no. z (November December
zoo4), pp. 7-9.
7 Kaplan and Norton, rl?e Balonced Srcrecord: Transloting Strotegy into Acton, pp.25 29.
Kaplan and Norton classiry strategc obiectives under the categories of customeFrelated, business
processes, and learning and growth. In practice, companes using the Balanced Scorecard may
choose categories of strategic objectives that best reflect the organization's value-creating activit|es ano proces5es.
3 Information posted
on the Web site of Bain and Company, www.bain.com, accessed May 22,
"

2OO9.

,Information posted on the Web ste of Balanced Scorecard Institute, accessed May 27,2oo9.

Part

Ore:

Section A: Introduction and Overvlew

EXAMPLES OF COMPANY OBJECTIVES

Japan during zooS and 2oo9; increase number of interna-

General Motors
Reduce the percentage of automobiles using conventional
internal combustion engines (lCE) through the develop-

ment of hybrd lcEs, ptug-in hybrid lcEs, range-extended

electric vehicles, and hydrogen fueI cell electric engines;
reduce automotive structural costs to benchmark levels
of 23 percent of revenue by zorz from 34 percent in
zoo5; and reduce annual U.S. labor costs by an additionat $5 biltion by zorr.

The Home Depot

tonal restaurant locations from rz,ooo in 2ooZ to 15,ooo

in zotzi increase operating proflt from international
operatons from $48o million in 2ool to $/Zo million
in zorz; expand Pizza Hut's menu to include pasta and
chicken dishes; decrease the number of company owned
restaurant units in U.S. from zo"/a of units in zooT Lo Less
than 10% of units by zoro; and increase the number of
Taco BelL units in the U.S. 6y 2"k-'/o annually between
2oo8 and 2o1o.

Avon

Be the number one destination for professionaL contractors, whose business accounted for roughly 30 percent

of zoo6 sales; mprove in-stock positions so customers

can nd and buy exactty what they need; deliver differentiated customer service and the know.how that our
customers have come to expect from lhe Home Depot;
repurchase $22.5 biLtion of outstanding shares during
zooS; and open 55 new store iocatons wth 5 store relocations n 2oo8.

Yum Restaurants (KFC, Pizza Hut, and

Taco Bell)

Increase our beauty sales and market share; strengthen

our brand image; enhance the representative experence;
realize annualized cost savings of $43o miLlion through
improvements in marketing processes, sales model and
organizatonal activities; ad achieve annuaiized cost
savings of $zoo miltion through a stralegic sourcing
in tatve.

Source: Iniormation posted on company Web s tes,

accessed l\4arch 27, 2008,

Open 1oo+ KFC restaurants in Vietnam by zoro; expand

Taco Bell restaurant concept to Dubai, India, Spain and

colnpany at a latet'date. Specifically; long-tcrm objectives stand as a

barriel to a nearsighted management philosophy and an undue focus on shortterm results. \{hen tradc-offs havc to be made betw,een achieving long-run
and short-rlrn obicctivcs, long run objectives should take precedence (unless
the achievement of one or more short-run performance targets has unique
lmport;rnce).
rffect the

,f

Objective setting shoulcl not stop rvith the est.lblishment of cot'nranywicle

performance targets. Company objectives need to be broken down into pcrformance targets for each of the organization's separate businesscs, product
lines, fr-rnctional c-lerarhlents, and individual lvork units. EmPloyces '"r'ithin
various functional areas and operating lcvcls r'r,ill be guided much better by
narrow obtectivcs rclating dircctly to their departmental activities than broacl

Chaptcr

Leadership and the Strategic fvlanagement Process

96

Table 2.4

TINANCIAT OBIECTIVES

An x perccnt Incrcase

tn.innual revenLtes
Annual increases in

.
.
.

earnings per sharc ol x

pcrccnt
An x percent return
on capital employed
(ROC[) or shareholder
invcstmcnt (R()E)
Boncl nd credit r.rtings

ofx
Internal cash floivs of
x to fund ne$, capjtal
nvestmenI

STRATECtC OBIECTTVES
..lr.r percett
market share
Achieving customer
satisfact on rates of
x percent
Achieving a customer
retention rate of
x percent
Acquire x rrunrber of

Winning

Increase Percentcrge

new'cLts[omeTS

of sales coming from

ne\'v prod ucts to
x pefcent
Inrprove iniormation
systems capabi I rties to
give frontline managcrs dcfcct information
in x nr inu tes
lmprove teamwork by

Introduction of x
numbcr of ncw
proclucts in the next

in creasin g the number

of proiects involving
more than one busi-

three yea rs
Reduce product

ness unrt to x

dcvclopmcnt timcs
to x nronths

organizational leve1 goals. Oblective setting is thus a top-dolvn process that

must extend to the lowest organizational levels. And it means that each organizational unit must take care to set performance targets that sr-rpport-rather
than conflict with or negate the achievement of companvwide strategrc and
financial obiectives.

Crafting a Strategy: Stage 3 of the Strategic

Management Process
As discussed in Chapter 1, managcment's strategic approach to achieving
organizational obiectives, competing successfully, and building competitively
important capabiliires must be well-matched to the company's external and
internal situation. The business strategy elements crafted bv management
must also bc cohesive and mutually reinforcing, fitting together like a jigsaw
ptzA.e. To achieve such unitv top cxccutivcs must clcar'ly articulate key strategic themes to guide krn er-level strategy makers. For example, functional
area managers of a companv pursuing a cost-based
advantage must aclopt unit-level strategies that miniCorporate strategy ensures consistency in
mize cost. Figure 2.2 illustrates the strategy levels of
strategic approach among businesses of a
diversified, multrbusiness corporation. Business
a single business company rvith a relatively simple
sategy is primarily concerned with strengthenbusincss structure. A diversified, multibusiness coming the company's market positon and buldng
pany r,r,ould also havc an ovcrarching corporatclcvcl
compeiitive advantage in a single business
stratey beyond what is shown in Figure 2.2 to ensure
company or a sngle business unit of a dversconsistencv in strategy among all businesses in its
rrortfolio.

fred multibusiness corooraton.

Part

One:

FIGURE 2.2

Section A: Introduction and Overview

stretegy-Making Hiererchy

br

e Slnde Buslness Company

Orchestrated by the CE0

and senior executives of a
busness, often with advice
and input from the heads
of functonal area activities
wthin the business and
other key people

Two-way Influence

Orchestrated by the heads

of mator functonal
activites within a business,
often in collaboration with
other key people

Orchestrated by brand
managers; the operating

Two-Way Inf,uence

managers of ptants,

distribution cenlers, and

geographic units; and the
managers of strategically
important adivities like
advertsing and Web ste
operations, often in
colLaboration with other
Key peopLe

,ln most companies,

A key element of the strategy-making hierarchy shown in Figure 2.2 is the

two-way influence between management at various levels of the organization
in crafting the business strategy. Managers at the top of the organization might
have concep tu alized a ground-breaking strategy capable of yielding significant marketplace advantages, but
crafting strategy is a

such plans may not match the current competitive

capabilities of the organization. In many ways, managers closest to operations are in the best position to
levels.
strategy
is
rarely
organizaonal
Crafting
determine if an organization is capable of executing a
sornething only highJevel executives do.
planned strategy. You should conclude from examining the figure that strategy-making efforts require collaboration among managers throughout the organization and must be coordinated across functional
areas to have a good chance of bringing success to the organization.
As shown in Figure 2.2, a company's business strategy is the responsibility of the CEO and other senior executives and is primarily concemed with
strengthening the company's market position and building competitive
advantage. Functional-area strategies concern the actions related to particular functions or processes within a business. A company's product development shategy, for example, represents the managerial game plan for creating
new products that are in tune with what buyers are looking for. Functional
c{toretu6 toam effort that includes

managers in various positions and at various

Chapter

Leadership and the Strategic Management Process

strategies add detail to the company's businessJevel strategy and specify

what resources and organizational capabilities are needed to put the company's overall business strategy into action. Lead responsibility for functional
strategies within a business is normally delegated to the heads of the respective functions, with the general manager of the business having final approval
over functional strategies. For the overail business strategy to have maximum
impact, a business's marketing strategy, production stategy, finance strategy, customer service strategy, product development strategy, and human
resources strategy should be compatible and mutually reinforcing rather than
each serving its own narrower purpose.
Operating strategies concern the relatively narrow stratcgic initiatives and
approaches for managing key operating units (plants, distribution ccntcrs,
geographic units) and specific operating activities such as materials purchasing or Internet sales. A distribution center manager of a company promising customers speedy deliveries must have a strategy to ensure that finished
goods are rapidly turned around and shipped out to customers once they are
received from the company's manufacturing facilities. Operating strategies
are limited in scope, but add further cletail to functional strategies and the
overall business strategy. Lead responsibility for operating strategies is r-rsually delegated to frontline managers/ subject to review and approval by higher
ranking managers.
As mentioned earlier in this section, the purpose of a corporate strategy is
to ensure consistency in strategic approach among the businesscs of a diversified, multibusiness corporation. Corporate strategy and business diversification are discussed in detail in Chapter 8. In short, wiruring corporate strategies
build shareholder value by combining businesses to yield a 1 + L : 3 effect.
The best corporate strategies utilized in multibusiness companies identify
attractive industries to diversify into, allocate financial resoLrrces to business
units most likely to record above-average earnings, and capture cross-business
cost sharing and skills transfer slmergies. Senior corporate executives normally have lead responsibility for dcvising corporate strategy- Key businessunit heads may also be influential, especially in strategic decisions affecting
the businesses they head. Major strategic decisions are usually reviewed and
approved by the company's board of directors.

lmplementing and Executing the Chosen

Strategy: Stage 4 of the Strategic
Management Process
Managing the implementation and execution of strategy is easily the most
demanding and time-consuming part of the strategic management process.
Cood strategy execution entails that managers pay careful attention to how
key internal business processes are performed and see to it that employees'
efforts are directed toward the accomplishment of dcsired operational outcomes. The task of implementing and executing the strategy also necessitates
an ongoing analysis of the efficiency and effectiveness of a company's internal
activities and a managerial awareness of ner- technological developments that

98

Part

One:

Section A: Introduction and Overview

mlght improve business processes. In most situations, managing thc strategy

execution process includes the following principal aspects:

.
.
.
.
.
.

Staffing the organization to provide needed skills and expcrtisc.

Allocating ample resources to activities critical to good strategv execution.
Ensuring that policies and proccdurcs facilitate rather than impede effective execution.
Installing information and operating systems that enable company personlel to perform essential activities.
Pushing fo contiruous improvement in hon- r'alue chain activities are
performed.
Tying rcwards and incentives directly to the achievement of performance
objectives.

.
.

Creating a companv culture and rvork climate conducivc to successful

strategy executlon.

Exerting the internal leadership needed to propel implementation

forward.

Evaluating Performance and Initiating

Corrective Adjustments: Stage 5 of the
Strategic Management Process
The fifth stage of the strategy managcment process-monitoring nen, external developments, cvaluating the company's progress, and rnaking corrective
adiustments is the trigger point for <leciding whether to continue or change
the company's vision, objectives, strategy, ar-rd/or strategy execution methods.
So long as the company's direct.ion and strategy seem r,r.elL matched to industry
and competitive conditions and performance targets are being met, company
executives may well decide to stay the course. Simply finc-tuning the strategic
plan and continuing with efforts to improve sffategy execution are sufficient.
But whenever a company encounters disruptive changes in its environment,
questions need to be raised about the appropriateness of its direction and strategy. If a company experiences a downturn in its market position or persistent
shortfalls in performance, then company managers are obligated to fcrret out
the causes-do they relate to poor strategy, poor strategy execution, or both?
and take timelv corrective action. A company's direction, objcctives, and strategv have to be revisited any timc cxtemal or internal conditrons warrant.

Also, it is not unusual for a company to find that

one or more aspects of its strategy implementation
A company's vision, ob.jectives, strategy, and
approach to strategy execution are never inal; and execution are not going as well as intended. Proficient strategv executlon is alr,r'ays the 'rroduct of much
managing strategy is an ongoing process, not
organizational learning. It is achieved unevenlvan every+ow-and-then task.
coming quickly in some areas and proving nettlesome
in othcrs. Succcssful strategy execution entails vigilantly searching for n'ays
to improve and then making corrective adjustments rn'henever and wherever
it is useful to do so.

Chapter

Leadership and the Strategc Management Process

Leading the Strategic Management Process

The litany of Ieading and managing the strategy process is simple enough:
Craft a sound strategic plan, implement it, execute it to the fullest, adiust it as
needed., and win! But the leadership challenges are significant ard diverse,
Exerting take-charge leadership and achieving results thrusts top executives
and senior managers into a variety of leadership roles: visionary, strategist,
resource acquirer, capabilities builder, motivator, and crisis solve to mention
a few. Thee are times when leading the strategic management process entails
being authoritarian and hardnosed, times when it is best to be a perceptive
listener and a compromising decision maker, and times when matters are best
delegated to people closest to the scene of the action.
In general, leading the strategic management process calls for several
actions on the part of senior executives:

1. Making sure the company has a good strategic plan.

2. Staying on top of what is happening.
3. Putting constructive pressure on organizational units

to achieve good

results and operating excellence.

4.

Pushing corrective actions to improve both the company's strategy and

how well it is being executed.

5.
6.

Leading the development of stronger competitive capabilities.

Displaying ethical integrity and leading social responsibility initiatives.

N{AKINC SURI A COMPANY HAS A GOOD STRATEGIC I'LAN It

CEO-to ensure
that a company has a sound and cohesive sttategic pian. There are two
is the responsibility of top executives-most especially the

things that the CEO and other topJevel executives should do in leading the
development of a good shategic plan. One is to efectioely communicate the
cofttpany's oision, objectirtes, and major strtery components to down-the-Iine
managers and key personnel. The greater the numbers of company personnel who know, understand, and buy into the company's long-term direction
and overall strateg, the smaller the risk that organization units will go off in
conflicting strategic directions. The second is to exercise due diligence in retiewitrg lower-Ieael strategies for consistency and support of higher level strategies.
Any strategy conflicts must be addressed and resolved, either by modifying the lower-level strategies with conflicting elements or by adapting the
higherJevel strategy to accommodate what may be more appealing strategy
ideas and initiatives bubbling from below. Anything less than a unified colIection of strategies weakens the ooerall strategy and is likely to impair company
performance.

STAYINC ON TOP OF HOW WELL THINGS ARE

GOING

One of the

best ways for executives to stay on top of the strategy execution process is
by making regular visits to the field and talking with many different people at many different levels-a technique often labeled managing by ualking around (MBWA). Walmart executives have had a long-standing practice

Part

One:

Section A: Introduction and Overview

of spending two to three days every week visiting Walmart's stores

and

talking with store managers and employees. Sam Walton, Walmart's founder,
insisted, "The key is to get out into the store and listen to what the associates have to say." fack Welch, the highly effective CEO of General Electric
(GE) from 1980 to 2001, not only spent several days each month personally
visiting GE operations and talking with major customers, but also arranged
his schedule so that he could spend time exchanging information and ideas
with GE managers from all over the world who were attending classes at the
company's leadership development center near GE's headquarters. feff Bezos,
Amazon.com's CEO, is noted for his frequent facilities visits and his insistence
that other Amazon managers spend time in the trenches with their people to
prevent overly abstract thinking and getting discorurected from the reality of
what's happening.lo
Most managers practice MBWA, attaching great importance to gathering
information from people at diffeent organizational levels about how well
various aspects of the strategy execution process are going. They believe facilities visits and face-to-face contacts give them a good feel for what progress is
being made, what problems are being encountered, and whether additional
resources or different approaches may be needed. Just as important, MBWA
provides opportunities to give encouragement, lift spirits, shift attention frorn
old to new priorities, and create excitement-all of which help mobilize organizational efforts behind strategy execution.

PUTTING CONSTI(UCTIVE PRESSURE ON ORCANIZATIONAL

UNITS TO ACHIEVE GOOD RESULTS AND OPERATING
EXCELLENCE Managers have to be out front in mobilizing the effort
for good strategy execution and operating excellence. Part of the leadership
requirement here entails fostering a results-oriented work climate, where performance standards are high and a spirit of achievement is pervasive. Successfully leading the effort to foster a results-oriented, high performance culture
generally entails such leadership actions and managerial practices as:

.
.
.
.
.

Treatin| employees with dignity and respect.

Encouraging employees to use initiatiae and creatiaity in performing their work'

Settin| stretch objectiaes and clearly communicating an expectation that company personnel are to gioe their best in achieuing performance targets.
Focusing attention on continuous improaement.

Llsing
r ezo ar d

full range of motiuational techniques and compensation incentiues to

high p erfor mance.

the

Celebrating indiaidual, group, and compny successes. Top management

should miss no opportunity to express respect for individual employees and

show their appreciation of extraordinary individual and group

effort.rr
Fred Vogelstein, "Winning the Amazon Way,' Foftune, May 26,2oo3, p.64.
leffrey Pfeffer, "Producing Sustainable Competitve Advantage through the Effective Management
of People," Academy of Manogement Executve 9, no. r (February 1995),
pp. 55-69.

'"

"

Chapter

Leadership and the Strategic Management Process

While leadership efforts to instill a spirit of high achievement into the

culture usually accentuate the positive, there are negative reinforcers too.
Low-performing workers and people who reject the results-oriented cultural
emphasis have to be weeded out or at least moved to out-of-the-way positions. Average performers have to be candidly counseled that they have limited career potential unless they show more progress in the form of additional
effort, better skills, and improved ability to deliver good results. In addition,
managers whose units consistently perform poorly have to be replaced.

PUSHINC CORRECTIVI ACTIONS TO IMPROVE BOTH THE

COIVII'ANY'S STRATECY AND IIOW WEI,I, IT IS BEING EXECUTED
The leadership challenge of making corrective adjustments is twofold: deciding when adjustments are needed and deciding what adjustments to make.
Both decisions are a norrnal and necessary part of managing the strategic management process/ since no scheme for implementing and executing strategy
can foresee all the events and problems that will arise.l2 There comes a time at
every company when managers have to fine-tune or overhaul the company's
strategy or its approaches to strategy execution and push for better results.
Clearly, when a company's strategy or its execution efforts are not delivering
good results. it is the leader's responsibility to step forward and push corrective actions.

I,FADING THE DEVELOPMENT OF' tsETTER COMPETITIVI CAPABILITI ES A company that proactively tries to strengthen its competitive
capabilities not only adds power to its strategy and to its potential for winning competitive advantage but also enhances its chances for achieving good
strategy execution and operating excellence. Senior management usually has
to lend the strengthening effort because competencies and competitive capabilities are spawned by the combined efforts of different work groups, departments, and strategic allies. The tasks of developing human skills, knowledge
bases, and intellectual assets and then integrating them to forge competitively
advantageous competencies and capabilities is an exercise best orchestrated
by senior managers who appreciate their significance and who have the clout
to enforce the necessary cooperation among individuals, groups, departments,
and extemal allies. Aside from leading efforts to strengthen existing competitive capabilities, effecve strateBy leadership also entails trying to anticipate
changes in customer-market requirements and proactively build neu competencies and capabilities that hold promise for building an enduring competitive edge over rivals. Senior managers are i the best position to see the
need and potential of such new capabilities and then to play a lead role in the
capability-building process.

DISI'LAYING ETHICAL INTECRITY AND LEADINC SOCIAL

RESPONSItsILlTY INITIATIVES For an organization to avoid the pitfalls
of scandal and disgrace related to unethical business practices, management
"For an excellent discussion of strategy as a dynamic process involving continuous, unending
creation and re-creation of strategy, see Cynthia A. Montgomery "Putting Leadership Back into
Strategy," H1Nord Busness Review 86, no. r (January 2oo8), pp. 54-o.

Part

One:

Section A: Introducton and overview

must be openly and unsweruingly committed to ethical conduct and socially

redeeming business principles. Leading the effort to oPerate the company's
business in an ethically principled fashion has three pieces.

First and foremost, the CEO and othcr senior executives must set an excellent example in their own ethical behavior, demonstrating character and
personal integrity in their actions and decisions. The behavior of senior
executives is always watched carefully, sending a clear message to company personnel regarding what the "real" standards of Personai conduct
arc.

Second, top managemcnt must declare unequivocal support of the company's ethical code and take an uncomPromising stand on expecting all
companv pcrsonnel to adhere to the company's ethical prncipies.

Third, top management must be prepared to act as the final arbiter on

hard calls; this means removing people from key positions or terminating them when they are guilty of a violation. It also means reprimanding
those who have been lax in enforcing ethical compliance. Failure to act
swiftly and decisively in punishing ethical misconduct is interpreted as a
lack of real commitment.

The exercise of social responsibilitv just as with observance of ethical

principles, requires top executive leadership. What separates companies
that make a sincere effort to be good corPorate citizens from companies that
are content to do only what is legally required are company leaders who
believe stronSly that just making a profit is not good enough. Such leaders
are committed to a higher standard of performance that includes social and
environmental metics as well as financial and strategic metrics. The strength
of the commitment from the top-typically a company's CEO and board of
directos-ultimately determines whether a comPany will implement and
execute a full-fledged stategy of social responsibility that protects the environment, actively participates in community affairs, supports charitable
causes, and has a positive impact on n'okforce diversity and the overall
well-being of employees.

Strategic Leadership from the Board of Directors

Although senior managers have lead responsibillfy for crafting and executing a
company/s strategy, it is the duty of the board of directors to exercise strong
oversight and see that the five tasks of strategic management are done in a
manner that benefits shareholders (in the case of investor-owned enterprises)
or stakeholders (in the case of not-for-profit organizations). ln watching over
management's strategy-making, sttategy-executing actions, a comPany's
board of directors has four important corporate governance obligations to
fulf11:

1.. ()aersee the companq's finnncial accounting and financial reporting practices.
White top management, particularly the company's CEO and CFO (chief
financial officer), is primarily responsible for seeing that the company's
financial statements accuratelv report the results of the companY's

Chapter

Leadership and the Strategic Management Process

operations, board members have a fiduciary duty to protect shareholders by exercising oversight of the company's financial practices. In addition, corporate boards must ensure that generally acceptable accounting
principles (CAAP) are properly used in preparing the company's
financial statements and determine whether proper financial controls
are in place to prevent fraud and misuse of funds. Virtually all boards
of directors monitor the financial reporting activities by appointing an
audit committee, always composed entirely of outside directors (irtside
directors hold management positions in the company and either directly
or indirectly report to the CEO). The members of the audit committee
have lead responsibility for overseeing the decisions of the company's
financial officers and consulting with both internal and external auditors to ensure that financial reports are accurate and adequate financial
controls are in place. Faulty oversight of corporate accounting and financial reporting practices by audit committees and corporate boards during the early 2000s resulted in the federal investigation of more than 20
major corporations between 2000 and 2002. The investigations of such
well-known companies as AOL Time Warner, Clobal Crossing, Enron,
Qwest Communications, and WorldCom found that upper management
had employed fraudulent or unsound accounting practices to artificially
inflate revenues, overstate assets, and reduce expenses. The scandals
resulted ir the conviction of a number of corporate executives and the
passage of the Sarbanes-Oxley Act of 2002, which tightened financial
reporting standards and created additional compliance requirements for
public boards.

2.

Be inquiring critics and ooersee the company's direction, stratery, and business
npproaches. Even though board members have a legal obligation to war-

rant the accuracy of the company's financial reports, directors must set
aside time to guide management in choosing a strategic direction and to
make independent judgments about the validity and wisdom of management's proposed strategic actions. Many boards have for.rnd that meeting
agendas become consumed by compliance matters and little time is left
to discuss matters of strategic importance. The board of directors and
management at Philips Electronics hold annual two- to three-day retreats
devoted exclusivelv to evaluating the company's long-term direction and
various strategic proposals. The company's exit from the semiconductor
business in 200 and its increased focus on medical technology and home
health care resulted frorn rnanagement-board discussions during such
retreats.ls

3.

tlt caliber of senior exeuiaes' strategy-making and strategy-executing

skllls. The board is always responsible for determinig whether the
current CEO is doing a good job of strategic leadership and whether
senior management is actively creating a pool of potential successors
to the CEO and other top executives.l+ Evaluation of senior executives'
Eaaluate

'rAs discussed n Jay W. Lorsch and Robert C. Clark, "Leading from the Boardroom," Horvord 8us'
ness Review 86, no. 4 (April zoo8), pp. ro5-rrr.
'4lbd.. o. 110.

Part C)nc: Scction A: lntroducton and Overvicw

CORPORATE GOVERNANCE FAILURES AT FANNIE MAE AND FREDDIE MAC

Executive compensation in the financiat services industry during the mid-2ooos ranks high among examples
of failed corporate governance. Corporate governance at
the gove rnment-sponso red mortgage giants Fannie Mae
and Freddie Mac was particularly weak. The politically
appointed boards at both enterprises faiLed to understand the risks of the subprime loan strategres berng

to restate its earnings between 2oo2 and zoo4 by

employed, did not adequatety monitor the decisions

declined from a high of 5Zo in zoo5 to $25 at ycar'end

2ao7. Dur ng Syron's tenure as CEO the company become
embrorled rn a muLtibiLlion-dolLar accountng scandal and
Syron personally disregarded internal reports datng to
2oo4 that cautroned of an impending financal crisis at
the company. Forewarnngs within Freddie Mac and by
federal regulators and outside industry observers proved
to be correct, wth loan underwritng policies at Freddie
Mac and Fannie Me leading to combined losses at the
two firms in zooS of more than $roo billion. The price of
Freddie Mac's shares had fallen to below $r by the time
of Syron's resignation in September 2oo8.

of the CEO, did not exercise effective oversight of the

accountlng principtes being employed (which led to
inflated earnings), and approved executive compensation
systems that altowed management to manipuLate earnngs to receive [ucrative performance bonuses. The audit
and compensaton commttees at Fannie Mae were partic'
ularly lneffective in protecting shareholder interests, with
the audit committee alLowing the GSE's financial officers
to audit reports prepared under their direction and used
to determine performance bonuses. Fanne Mae's audit
committee also was aware of management's use of ques'
tionable accounting practices that reduced losses and
recorded one'time gans to achieve EPS targets linked
to bonuses. In additon, the audit committee failed to
investigate formal charges of accounting impropretes
fiLed by a manager in the Office of the Controller
Fannle Mae's compensation committee was equally
ineffective. The committee allowed the company's CEO,
Franklin Raines, to seLect the consultant emploved to
design the mortgage flrm's executive compensation plan
and agreed to a tered bonus pLan that woutd permit
Raines and other senior managers to receive maximum
bonuses without great difficulty. The compensation plan
allowed Ranes to earn performance-based bonuses
of $52 mi{lion and totaI compensation of $9o mllion
between 1999 and 2oo4. Raines was forced to resign
in December zoo4 when the 0ffice of FederaI Housing
Enterprise Oversight found that Fannie Mae executives
had frauduLently inflated earnings to receive bonuses
linked to financial performance. Securites and Exchange

Commission investigators

also found evidence

improper accounting at Fannie IMae and required lhe

oI

GSE

$6.3

illio n.

Poor governance at Freddie Mac allowed its CEO

and senior managernent to manipuLate flnancial data to
receive pe rforman ce-based compensation as wel[. Freddie
Mac CEO Richard Syron received zooT compensation of
$19.8 million while the mortgage company's share price

Both organizations were placed into a conservatorship under the direction of the U.S. governrnent in
September 2oo8 and were provided bailout funds of
nearly $60 billion by April zoog- In lMay zoo9, Fannie Mae
had requested another $r9 bitlion of the $4oo blllon
cornmitted by the U.S. government to cover the operating losses of the two government-sponsored mortgage
firms. As of iune zoo9, the U.S. government has spent
more than $2.5 trilLion to bail out flnancial institutions
damaged by the subprime mortgage market and other
risky loans and had made commitments totaling $rz.z
trillion to provide long-term stabiIity to the financial services in d ustry.
Sources: "Adding Up the Governments TotaL Bailo!t Tab,"
Net York Timcs Onlnc, Febtuav 4, 2oo9; Eic Dasn,
"Fannie Mae to Rstate ResuLts by $6.3 biLlion because of
Accounting," Ncw York Timcs Orllne, wwo.nytlmes.com,
December 7, 2006; Anys 5hn, "Fann e fl4ae lets Executrve
Salaties," Woshingtolr Pos, Fbruary 9, 2006, p. D4; and
Scott Decarlo, Eri. Weiss, .4ark Jlckling, and james R Crist e,
Fannie Moe ancl Fredclie ll,ac: Scondol in U.S. Housing
(Nova Publlshers, ?oo6j, pp ?66-286

Chapter

Leadershp and the Strategic Management Process

strategy-making and strategy-executing skills is enhanced when outside

directors go into the field to personally evaluate how well the strategy
is being executed. Independent board members at GE visit operating
executives at each major business unit once per year to assess the company's talent pool and stay abreast of emer;ing strategic and operating
issues affecting the company's divisions. Home Depot board members
visit a store once per quarter to determine the health of the company's
opcrations.rs

4.

plan. for top executiues that rezuards them for actiotts

and results that serue sharcholder interests. A basic principle of corpo-

Institute a conpensation

rate governance is that the owners of a corporation delegate operating authority and managerial control to top management in return for
compensation. In their role as an agent of shareholders, top executives
have a clear and unequivocal duty to make decisions and operate the
company in accord with shareholder interests (but this does not mean
disregarding the interests of other stakeholders, particularly those of
empkryees, with whom they also have an agency relationship). Most
boards of directors have a compensation committee, composed entirely
of outside directors, to develop salary and incentive compensation plans
that make it in the self-interest of executives to oPerate ihe business in
a manner that benefits the owners. It is also incumbent on the board
of directors to prevent managcmcnt from gaining executive perks and
privileges that simply line the financial pockets of executives. Concepts
& Connections 2.3 discusses how weak governance at Fannie Mae and
Freddie Mac allowed opportunistic senior managers to secure excessive,
if not obscene, compensation, while making decisions that imperiled the
futures of the companies they managed.
Every corporation should have a strong, independent board of directors that
(1) is well-informed about the company's performance, (2) guides and judges
the CEO and other top executives, (3) has the courage to curb management
actions they believe are inappropriate or unduly risky, (4) certifies to shareholders that the CEO is doing what the board expects, (5) provides insight and
advice to management, and (6) is intensely involved in debating the pros and
cons of key decisions and actions.l Boards of directors that lack the backbone
to challenge a strong-willed or "imperial" CEO or that rubberstamp most
anything the CEO recommends without probing inquiry and debate abandon
their duty to represent and protect shareholder interests.
'5

As discussed in Stephen P Kaufman, "Evaluating the CEO," Harvord Business Revew 86, no- 70

(October 2oo8), pp. 53-57.

'6 For

a discussion of what it takes for the corporate governance system to function properly, see

David A. Nadter, "Buildng Better Boards," Horuard Business Review 82, no. 5 (May 2oo4), pp.
1o2-1o5; Cyntha A. Montgomery and Rhonda Kaufman, "The Board's Missing Link," Harvord Business Review 8r, no. 3 (March zoo3), pp. 86-513; and John Carver, "What Contnues to Be Wrong
with Corporate Governance and How to Fix lt," lvey Business Journol 68, no. 1 (September/October
zoo3), pp. r-5. See atso Gordon Donaldson, 'A New Too[ for Boards: The Strategic Audr," Horvard
Busness Review 7J, no. 4 0uly-August

199), pp. 99-107.

Kev Points
The strategic management process consists of five interrelated and integrated stages:

Dneloping a strategic ztision of where the company needs to head and what its future
product-customer-maket-technology focus should be. This managerial step prr>
vdes long-term directicn, infuses the organization with a sense of purpcsefr-rl acon,
and communicates to stakeholders management's aspiratioru for the company.
Setting objectiaes and using the targeted results as yardsticks for measuring the
company's performance. Objectives need to spell out ftoar much of what kind of
performance br when. Abalanced scorecard approach for measuring company performance entails setting bothJinancial objectioes and strategic objectixes.
Crafting a strategy to achime the objectiaes and move the company along the strategic
course that management has charted. The total strategy that emerges is really a
collection of strategic actions and business approaches initiated partly by senior
company executives, partly by the heads of major business divisions, partly by
functional-area managers, and partly by operating managers on the fontlines. A
single business enteprise has three levels of strategy-business strategy for the
company as a whole, functional-aea strategies for each main area within the business, and operating strategies undertaken by lower-echelon managers. In diversified, multibusiness companies, the strategy-making task involves four distinct
types or levels of strategy: corporate strategy for the company as a whole, business
strategy (one for each business the company has diversified into), functional-area
strategies within each business, and operating strategies. Typica-lly, the strategymaking task is more top-down than bottom-up, with higher-level strategies
serving as the guide for developing lowerJevel strategies.
Implementing and executing the chosen strategy effciently and {fectiaely. Managing the implementation and execution of strategy is an operatioru-oriented,
make-things-happen activity aimed at shaping the performance of core business

activities in a strategy supportive mrnnet Management's handling of the strategy implementation process can be consideed successful if things go smoothly
enough that the company meets or beats its strategic and financial performance
targets and shows good progress in achieving management's strategic vision.
5.

Eaaluating performance anil initiating correctizte adjustments in vision, Iong-term

direction, objectives, strategy, or execution in light of actual experience, changing
conditions, new ideas, and new opportunies. This stage of the strategy management process is the trigger point for deciding whether to continue or change the
company's vision, objectives, strategy, and/or strategy execution methods.

The sum of a company's strategic vision, obiectives, and strategy constitutes a strategic
plan.

Managers must demonstrate strong leadership to push stategy formulation and

execution forward. fn general, leading the drive for good strategy making and strategy
execution calls for six actions on the part of the manager in charge:
1.

Making sure the company has a good strategic plan.

Staying on top of what is happening.

J.

Putting construcve pressure on organizational units to achieve good results and

operating excellence.
Pushing corrective actions to improve both the company's strategy and how well
it is being executed.

5.
6.

Leacling tl.re develo.:ment of strongcr competitive capabilities.

Displaying cthical integrity and leading social responsibility initiatives-

tsoards of directors have a duty to shareholders to plav a vigilant role in overseeing

management's handling of a company's stratcgy-making, strategy-executing process.
A company.'s board is obligated to (1) ensure that thc company issues accurate financial reports and has adequate financial controls, (2) critically apPraise and ultimately
approvc strategic action plans, (3) evaluate the strategic leadership skills of thc CEO,
and (4) institute a compensation plan for top executives that rewards them for actions
and results that serve stakeholder interests, most especially those of sharel.rolders.

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1 1.

Using the information in Tables 2.2 and 2.3, critique the adequacy and merit of the
following vision statements, listing effective elements and shortcomings. Rank
the vision statements from best to worst once you complete your evaluation.
EFFECTIVE
ETEMENTS

VISION STATEMENT

wells targo

\ /c \\,ant to satisf,v

aLl of our customers' iinancial neerls, he

eed i n.rnciallv, be the prcrricr provider of tinancia services in every one of our markets, nd be known s
rne, \mt,r r.r's greal r o'patrie'.

them

-.uc r

Hilton Hotels Corporation

Our vision s to bc the frrst choice oi the worlcl's lravelers.
Hilkrn intenrls kr bui ri on the rich heritagc and strength ot
our oranos DYI
. Cons stently dc ighting our customers
, Investing n our lea|n rnembers

.
.
.
.
.
H.

Del vering lnnovtive prrxlu<rts arxl serv ces

Continuously improving performance
lncreas ng sharcholdcr value
Creting a culture of pridc
Strengthening, the loyalty oi our constituents

l. Heinz Company

Be the rvor d's premier food company, offering nutritious,

sul)erior tstinB hxrds lo people every\a,hcrc. Bclng the pre

micr food companv does not mean be ng the biggest but it
does mean being the best in terms of consunrer valuc, cus
tonrer service, employee taLent, and consistent and pred ctable Browth
Chcvron
To be lhe global cncrgy conlpany most admired for ts people,
partnership and performance Our vision mens we:
e provide energy products vital to sustainable ec tnottric
pro1ress anil hunran deve oprrer'rt throughout the
rvorld;
. .rre pcople and an organizatlon wtth super or cPbrlitres and ( omrnitrlret;
. are the plner ol choice;
. deliver world class performance;
. crn the dmiratlon oi all our sta keho lders-rnvestr)rs.
cusk)mer\, hosl qovernnrents. local conrmunitics.nd
our cmplo,vees not onlv for the goals rve achicve but
how we.rchieve thern
Source: Compay Web silcs and annua reports

SHORTCOMINGS

Assurance
of Learning
Exercises

Go to www.dell.com/speeches and read Michael Dell's recent speeches. Do

Michael Dell's speeches provide evidence that he is an effective leader at Dell
Computer? Is there evidence he is concemed with (1) staying on top of what is
happening and identifying obstacles to good strategy execution, (2) pushing the
organization to achieve good esults and opetating excellence, and (3) displaying
ethical integrity and spearheading social responsibility initiatives?
Go to www.dell.com/leadership and read the sections dedicated to its board of
directors and corporate governance. Is there evidence of effective governance at
Dell in regard to (1) accurate financial reports and controls, (2) a critical apptaisal
of strategic action plans, (3) evaluation of the shategic leadership skills of the

LO5

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CEO, and (4) executive compensation?

Meet with your co-managers and prepare a strategic vision statement for your
comPany. It should be at least one sentence long and no longer than a brief
para$aph. Whm you are finished check to see if your vision statement meets
the conditions for an effectively worded strategic vision set forth in Table 2.2 and
avoids the shortcomjngs set forth in Table 2.3. If not, then revise it accordingly.
What would be a good slogan that captures the essence of your strategic vision
and that could be used to help communicate the vision to company personnel,
shaeholders, and other stakeholders?

LOl

What are your company's financial objectives? What are your company's strate-

LOz

gic obiectives?
J.

What ae the 3-4 key elements of your company's strategy?

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