Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage

Strategy: Defined as a set of related actions that managers take to increase their company’s performance.
Strategic Leadership: The process of creating competitive advantage through effective management of the strategy-making process. It involves two distinct phases:
- Strategy Formulation: The task of selecting strategies based on a rigorous analysis of an organization’s external and internal environment.
- Strategy Implementation: The task of putting the formulated strategies into action.

Superior Performance: The ultimate goal of strategic leadership, which is measured by shareholder value and profitability.
Shareholder Value: The returns that shareholders earn from purchasing shares in a company. These returns consist of two components:
- Capital Appreciation: The increase in the value of the company’s shares.
- Dividend Payments: Regular payments made to stockholders from company profits.
Risk Capital: The equity capital invested in a business with no guarantee that stockholders will recoup their cash or earn a decent return.
Profitability: The return a company makes on the capital invested in the enterprise.
- Return on Invested Capital (ROIC): A key metric calculated as:

$\text{ROIC} = \frac{\text{Net Profit}}{\text{Capital Invested}}$

*   ROIC measures how efficiently and effectively the capital is used to satisfy customer needs.

Profit Growth: The increase in net profit over time. Managers can grow profits by:
- Selling products in rapidly growing markets.
- Gaining market share from rivals.
- Selling more products to existing customers.
- Expanding operations overseas or diversifying into entirely new businesses.
Determinants of Shareholder Value (Figure 1.1):
- The effectiveness of strategies leads to both Profitability (ROIC) and Profit Growth.
- Both Profitability and Profit Growth together determine the overall Shareholder Value.

Competitive Advantage: Achieved when a company’s profitability is greater than the average profitability of firms in its industry.
Sustained Competitive Advantage: Occurs when a company’s strategies enable it to maintain above-average profitability for a number of years.
Business Model: A manager’s mental model or conception of how strategies should work together as a whole to enable the company to achieve competitive advantage.
Factors of Performance:
- A company’s profitability and profit growth are determined by its relative success within its industry and the overall performance of its industry compared to others.
Nonprofit Sector Considerations:
- Strategic planning is as vital for nonprofits as it is for-profit firms.
- Nonprofits are expected to use resources efficiently and operate effectively, often competing for scarce resources (grants, donations) in a manner similar to businesses.

General Managers: Managers who bear responsibility for the overall performance of the entire company or for one of its major self-contained subunits/divisions.
Functional Managers: Managers responsible for supervising a particular task, activity, or operation (e.g., accounting, marketing, R&D, IT, or logistics).
Multidivisional Company: A company that competes in several different businesses and has created separate, self-contained divisions to manage each.
Levels of Strategic Management (Figure 1.2):
- Corporate Level: Includes the Chief Executive Officer (CEO), Board of Directors, and corporate staff. They oversee strategy development for the entire organization, link strategic development to shareholders, and ensure strategies are consistent with superior profitability.
- Business Level: Includes divisional managers and staff. A Business Unit is a self-contained division providing a product/service for a specific market. Managers translate corporate intents into concrete strategies for individual businesses.
- Functional Level: Includes functional managers responsible for specific business functions. They develop functional strategies to fulfill objectives set by business- and corporate-level managers and provide vital information for strategy formulation.

Main Components of the Strategic Planning Process:
1. Select the Corporate Mission and Goals: Define the purpose and desired future state.
2. External Analysis: Identify opportunities and threats in the competitive environment.
3. Internal Analysis: Identify the organization’s strengths and weaknesses.
4. Select Strategies: Choose organizational strategies that build on strengths, correct weaknesses, and align with the mission to create a viable business model.
5. Implement Strategies: Put the chosen strategies into action across the organization.

Mission: The purpose of the company; a statement of what the company strives to do.
Vision: The articulation of a company’s desired achievements or future state.
Values: A statement of how employees should conduct themselves and their business to help achieve the mission.
Major Goals: Characteristics of a well-constructed goal include:
- Precise and measurable.
- Address crucial issues.
- Challenging but realistic.
- Specified time parameters (deadlines).
Defining the Business (Figure 1.4): Managers must define the business by asking:
- Who is being satisfied? (Customer groups)
- What is being satisfied? (Customer needs)
- How are customer needs being satisfied? (Distinctive competencies)

SWOT Analysis: The comparison of Strengths, Weaknesses, Opportunities, and Threats.
- Purpose: To identify strategies to exploit opportunities, counter threats, protect strengths, and eradicate weaknesses.
- Goal: To create or fine-tune a company-specific business model that aligns resources/capabilities with environmental demands.
Hierarchy of Strategies:
- Functional-level strategies: Aimed at improving the effectiveness of operations within the company.
- Business-level strategies: Encompasses the overall competitive theme (positioning in the marketplace) to gain a competitive advantage.
- Global strategies: Address how to expand operations outside the home country.
- Corporate-level strategies: Determine what businesses the company should be in to maximize long-term profitability and profit growth.

Implementation: Taking action at all levels (functional, business, corporate) to execute the plan. This includes designing the organizational structure, culture, and control systems.
Feedback Loop: Provides information to the corporate level regarding which strategic goals are being achieved. It indicates the degree of competitive advantage being created and sustained, allowing for strategy adjustments.

Knowledge Check 1.1: Which of the following best explains strategy?
- Answer: b. The actions an organization takes to attain its goals.
Discussion Activity 1: How is profitability different from competitive advantage?
- Debrief: Profitability is the return on capital invested $\left( \text{Revenue} - \text{Expenses} \right)$ . It is determined by the strategies adopted. Competitive advantage is a relative measure; it is indicated when a company achieves greater profitability and profit growth than its industry rivals through more effective actions and strategies.