Key Terms in Strategic Management

As we use our ongoing three-phase strategic management process of diagnosis, formulation, and implementation, we deal with several interrelated components: mission, corporate values and philosophy, goals and objectives, critical issues, and strategies. Let's review what these terms mean. 1. MISSION The organization's mission is its purpose, its reason for being. It should describe the organization's major areas of interest, the scope of its intended actions, the basic needs it intends to satisfy - for whom and in what ways, and possibly some of its primary values. It should provide the organization with an overall sense of purpose and provide long-term direction. Often, the mission statement will be elaborated with separate statements of company values, principles, and philosophy, plus broad strategic goals that identify key results areas for the organization. A mission statement may remain unchanged for many years. A few examples of mission statements are: • Hewlett-Packard Company: Hewlett-Packard is a major designer and manufacturer of electronic products and systems for measurement and computation. HP's basic business purpose is to provide the capabilities and services needed to help customers worldwide improve their personal and business effectiveness. • American Red Cross: The mission of the American Red Cross is to improve the quality of human life; to enhance self-reliance and concern for others; and to help people avoid, prepare for, and cope with emergencies. • Otis Elevator: Our mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher reliability than any similar enterprise in the world. • Health Net: Our mission is to promote good health while providing, as a federally qualified Health Maintenance Organization, a quality health care delivery system to the greatest number of people in California at the most reasonable, competitive cost by sharing the financial risk with the medical community, the employer groups, and the members. The final form of mission statements is usually deceptively simple and general. However, the extensive discussion and work that goes into developing a good mission statement are very valuable for the participants. It usually is not particularly useful for subdivisions within an organization to develop separate mission statements. Their contribution to and elaboration of the mission of the overall organization is best carried out by participation in dealing with the following components. 2. GOALS/OBJECTIVES Setting objectives converts the mission and broad direction of the organization into more definitive and specific statements of what will be accomplished. Both broad and specific objectives, and both long-range and shorter-range objectives, are needed. Although many writers like to distinguish between goals and objectives, they do not agree on the distinction, resulting in total confusion in the literature with some putting each as the larger category. For example, some people like to speak of "goals" as broad, strategic statements, and then speak of "objectives" as more specific performance results to be attained; others reverse the hierarchy of these two terms. Therefore, I do not make a distinction between the two terms, and recognize that there are at least three dimensions that define the range of objectives needed in an organization: (a) broad through specific objectives, (b) short through long-range, and (c) a hierarchy of objectives, from overall corporate objectives through objectives through objectives for the smallest organizational subdivision and on to individual objectives. It is vital to integrate objectives across these three dimensions, and also across divisions in the company to avoid sub-optimization. Examples of broad objectives are: • Maintain a healthy net growth rate of profitable members each year. (Health Net) • Become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in. (General Electric) Examples of more specific objectives are: • Between 1/1/09 and 12/31/09, increase net membership by 50,000 members with a medical loss ratio for the new members equal to or less than that for existing members, with new business sales and in-group growth each generating half the members. (an HMO) • By the end of 2008, achieve a return on equity of 20% or above for the year and net earnings growth averaging 5% per year over a rolling three-year period. (Quaker Oats Co.) It is vital to integrate objectives across the three dimensions mentioned above, including integration of objectives at various levels in the hierarchy, and to eliminate inconsistencies and conflicts among objectives. Three questions that can help in this integration are (to be asked by each management individual as she/he sets objectives): • • What are my organization's objectives and how does my position help the organization achieve them? What key results am I responsible for achieving? • How does my position help my boss achieve his/her objectives? It is important to define objectives in terms of results and outcomes, not activities. As a manager develops objectives, including dealing with the three questions in the previous paragraph, it helpful to keep these points in mind: • • • You aren't paid to be busy; you're paid to get things done. You aren't paid for working hard; you're paid for accomplishing things. You aren't paid (just) to be complete and efficient; you're paid to be effective (i.e., do what is really needed). It is helpful to put objectives in writing, framed as positive results to be achieved rather than problems to be avoided, and stated in observable behavioral terms usually with performance indicators and time-frames. 3. CRITICAL ISSUES Critical issues are a small number (typically 2 to 5) of issues that should receive particularly high priority attention from the management of the organization at this time. They are critical and deserving of this unique, high-priority attention because they are threats, problems, or opportunities that will have a major impact on the organization's survival and/or success. They often are issues that define major barriers to achieving key organization objectives. Some examples of critical issues: • Fierce competition with rate wars, plus customer demands for lower rates, led by PERS, threaten to prevent us from maintaining a healthy net growth rate of profitable members. • Company ABC, a formidable new competitor, has entered our marketplace. A very large, national company with vastly greater resources than ours has started a major campaign to enter our traditional market area, with rates below our costs and very aggressive promotional tactics. • Our administrative cost-to-revenue ratio is 20% higher during the first half of this year than for the previous four years, threatening our traditional competitive advantage of providing the lowest administrative costs among our major competitors. • Proposed state legislation, predicted likely to be passed by July 1, will remove most of the regulations limiting mergers and acquisitions in our industry. This change, plus the shaky financial condition of many of our competitors, creates attractive opportunities for strategic acquisitions, if we move quickly. It is important to frame the critical issues as issues, rather than as the actions to be taken or solutions to an issue. In contrast to objectives, which tend to be set at regular intervals and are often connected to budgeting and planning processes, the set of critical issues is a dynamic list that is kept current at all times, with issues falling off the list as they are no longer "critical," and others added as they become "critical." 4. STRATEGIES Strategies are the ways the organization will achieve its objectives, considering its present situation and critical issues. Objectives are the "ends," and strategies are the "means" of accomplishing them. Crafting strategies is an ongoing effort. While an organization's mission and longterm objectives may remain unchanged for several years, strategy is always evolving, partly to respond to ever-changing events in the external environment, partly from proactive efforts of managers to create new opportunities, and partly from fresh ideas about how to make the strategies work better. Strategy-making thus proceeds on two fronts -- one proactively thought through in advance, the other conceived in response to new developments, special opportunities, and experience with the successes and failures of prior strategic actions. It is useful to think of strategies on three levels; these sets of strategies must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy: • • • Corporate Strategy: Roughly, what business(es) should we be in and how shall we fundamentally connect those business segments? Competitive (or Business) Strategy: How the company or its strategic business units (SBU's) will compete successfully within each business segment. Functional or Operational Strategy: How the company and its units will carry out their functional activities to maximize resource productivity (be efficient) and to develop distinctive competencies. Example of a general, long-term strategy: • Position Health Net as "California's Health Plan" - a regional, high-end health plan that dominates the California market with a comprehensive, balanced business and product mix. Serve a broad spectrum of the health needs of our constituencies by diversifying into related health promotion and health care products. Become the largest health plan in California through a combination of acquisitions and internal growth. Examples of more specific strategies: • • Use differentiation (in quality of medical groups, comprehensive and convenient geographic coverage through the state, and wellness programs) as our primary competitive strategy, supported by highly effective marketing and a competitive product mix that complements our central HMO product Achieve roughly half our net membership growth through each of new business sales and in-group growth • Obtain additional membership growth through highly selective acquisitions of competitor HMOs 5. SOME OTHER IMPORTANT CONCEPTS & TERMS Here are some of the other major concepts and terms that you need to learn/relearn or sharpen your understanding of their meanings in order to deal with strategic management and this course. Although we will encounter and deal with them during the course, it will help you to review them at least initially during the first couple of weeks of the course. You need to go beyond memorizing textbook definitions to understand what they mean in terms of real organizations. • • • • • • • • • • • • • • • • • • • • • • • • strategic business unit (SBU) value chain economies of scale economies of scope financial analysis: key ratios (know 5 general types of ratios & what they mean) 4 P's of marketing market share product life cycle industry life cycle experience curve technology S-curves organizational culture (Porter's) five-forces analysis of the industry competitive environment key success factors barriers to entry substitutes (product substitutes) stakeholders & stakeholder analysis competitive advantage comparative advantage corporate-level strategy competitive (or business-level) strategy (including Porter's four generic competitive strategies) functional strategy portfolio analysis (BCG model and GE business screen) vertical integration: backward & forward integration • • • • horizontal integration diversification: definition, types & levels 1st, 2nd and late movers synergy