Hierarchy of Strategy Corporate Strategy:
Overall Direction of Company and Management
of Its Businesses
Business Strategy:
Competitive and Cooperative Strategies
Functional Strategy:
Maximize Resource Productivity
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52 PART 1 Introduction to Strategic Management and Business Policy
■■ Google: Google’s health care plan includes their onsite medical staff. Any employee who feels ill at work can make an appointment with the doctor at the Googleplex. This supports the Google HRM functional strategy to support its employees.
■■ General Electric: GE must be number one or two wherever it competes. (This sup- ports GE’s objective to be number one in market capitalization.)
■■ Starbucks: All Starbucks employees are offered a Total Pay Package that includes a 401(k) savings plan, stock options, and an employee stock purchase plan. This goes a long way toward their goal of having every employee feel like a partner in the business.
■■ Ryanair: Ryanair charges for everything a passenger might want or need on a flight. The only thing you get with your ticket is the right to a seat on the plane (and that seat depends upon how fast you can run across the tarmac to the plane).
Policies such as these provide clear guidance to managers throughout the organiza- tion. (Strategy formulation is discussed in greater detail in Chapter 6, 7, and 8.)
STRATEGy IMPLEMENTATION Strategy implementation is a process by which strategies and policies are put into action through the development of programs, budgets, and procedures. This process might involve changes within the overall culture, structure, and/or management system of the entire organization. Except when such drastic corporatewide changes are needed, how- ever, the implementation of strategy is typically conducted by middle- and lower-level managers, with review by top management. Sometimes referred to as operational plan- ning, strategy implementation often involves day-to-day decisions in resource allocation.
Programs and Tactics: Defining Actions A program or a tactic is a statement of the activities or steps needed to support a strat- egy. The terms are interchangeable. In practice, a program is a collection of tactics where a tactic is the individual action taken by the organization as an element of the effort to accomplish a plan. A program or tactic makes a strategy action-oriented. It may involve restructuring the corporation, changing the company’s internal culture, or beginning a new research effort. For example, Boeing’s strategy to regain industry leadership with its 787 Dreamliner meant that the company had to increase its manufac- turing efficiency in order to keep the price low. To significantly cut costs, management decided to implement a series of tactics:
■■ Outsource approximately 70% of manufacturing. ■■ Reduce final assembly time to three days (compared to 20 for its 737 plane) by hav-
ing suppliers build completed plane sections. ■■ Use new, lightweight composite materials in place of aluminum to reduce inspection time. ■■ Resolve poor relations with labor unions caused by downsizing and outsourcing.
Another example is a set of programs or tactics used by automaker BMW to achieve its objective of increasing production efficiency by 5% each year: (a) shorten new model development time from 60 to 30 months, (b) reduce preproduction time from a year to no more than five months, and (c) build at least two vehicles in each plant so that production can shift among models depending upon demand.
Budgets: Costing Programs A budget is a statement of a corporation’s programs in terms of dollars. Used in planning and control, a budget lists the detailed cost of each program. Many corporations demand a
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CHAPTER 1 Basic Concepts of Strategic Management 53
certain percentage return on investment, often called a “hurdle rate,” before management will approve a new program. This is done so that the new program has the potential to significantly add to the corporation’s profit performance and thus build shareholder value. The budget not only serves as a detailed plan of the new strategy in action, it also specifies through proforma financial statements the expected impact on the firm’s financial future.
A company that has really invested in the future is Nordstrom. The company plans to spend upwards of US$4.3 billion over the next few years to dramatically grow their online and store presence. The company has a goal of reaching US$20 billion in sales by 2020 (up from roughly US$13 billion in 2015). The CEO is aiming to integrate their ecommerce platform and store operations, both in their luxury stores as well as their rack outlets.48
Procedures: Detailing Activities Procedures, sometimes termed Standard Operating Procedures (SOP), are a system of sequential steps or techniques that describe in detail how a particular task or job is to be done. They typically detail the various activities that must be carried out in order to complete the corporation’s program. For example, when the home improvement retailer Home Depot noted that sales were lagging because its stores were full of clogged aisles and had long checkout times and too few salespeople, management changed its proce- dures for restocking shelves and pricing the products. Instead of requiring its employees to do these activities at the same time they were working with customers, management moved these activities to when the stores were closed at night. Employees were then able to focus on increasing customer sales during the day. Both UPS and FedEx put such an emphasis on consistent, quality service that both companies have strict rules for employee behavior, ranging from how a driver dresses to how keys are held when approaching a cus- tomer’s door. (Strategy implementation is discussed in more detail in Chapter 9 and 10.)
EVALUATION AND CONTROL Evaluation and control is a process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Managers at all levels use the resulting information to take corrective action and resolve problems. Although evaluation and control is the final major element of strategic man- agement, it can also pinpoint weaknesses in previously implemented strategic plans and thus stimulates the entire process to begin again.
Performance is the end result of activities.49 It includes the actual outcomes of the strategic management process. The practice of strategic management is justified in terms of its ability to improve an organization’s performance, typically measured in terms of profits and return on investment. For evaluation and control to be effective, managers must obtain clear, prompt, and unbiased information from the people below them in the corporation’s hierarchy. Using this information, managers compare what is actually happening with what was originally planned in the formulation stage.