CHAPTER 1
Strategic Leadership: Managing the
Strategy-Making Process for Competitive
Advantage
Synopsis of Chapter
This chapter is an introductory chapter. Its purpose is to define critical concepts and introduce the
main components of the strategic leadership and management process. This chapter serves to
establish the context within which subsequent chapters fit.
Chapter 1 begins with a discussion of the concept of strategy. The strategies an organization
pursues have a major impact upon its performance relative to its peers. The firm’s top managers
have direct responsibility for choosing strategies that will lead to superior performance and
provide competitive advantage.
Next, the chapter equates superior performance with profitability, for profit-seeking enterprises.
Sustained competitive advantage occurs when a firm is able to maintain above average
profitability over an extended period of time. Strategic management is just as crucial to nonprofits
as it is to profit-seeking businesses. Much of this book is about identifying and describing the
strategies that managers can pursue to achieve superior performance and provide their company
with a competitive advantage. The book will provide a thorough understanding of the business
model analytical techniques and skills necessary to identify and implement strategies
successfully.
A discussion of strategic managers and the strategy-making process follows. Strategic managers
are the linchpin in the strategy-making. Strategy-making is the process by which managers
formulate and implement a set of strategies for a company, the aim of which is to attain
competitive advantage. It examines the types of strategic managers, their roles and their
responsibilities at three main levels within an organization—corporate, business, and functional.
This chapter also gives an overview of the formal strategic management process. The process
consists of two phases. The first phase, formulation, includes the establishment of corporate
mission, values, and goals; analysis of the external environment; analysis of the internal
environment; and selection of an appropriate functional-, business-, global, or corporate-level
strategy. The second phase, implementation, consists of the actions taken to carry out the chosen
strategy such as appropriate governance and ethics, designing an organizational structure,
designing an organization culture, and designing organization controls.
The traditional concept of the strategic planning process is one that is rational and deterministic,
,and orchestrated by senior managers. However, strategies may also emerge through other
mechanisms.
The next section of this chapter presents a discussion of strategic planning in practice. Formal
planning helps companies make better strategic decisions, and the use of decision aids can help
managers make better forecasts. However, formal strategic planning systems do not always
produce the desired results.
The next section of the chapter stresses the importance of strategic decision-making by providing
an understanding of how cognitive biases impact strategic decision making along with techniques
for improving decision making.
The final section of the chapter addresses key characteristics of good strategic leadership that will
lead organizations to high performance.
By the end of this chapter, students will understand how strategic leaders can manage the
strategy-making process, formulating and implementing strategies that enable a company to
achieve a competitive advantage and superior performance. Moreover, they will have an
appreciation for how the strategy-making process can go wrong, and what managers can do to
make this process more effective.
Learning Objectives
1Number range NL_a. Explain what is meant by “competitive advantage.”
2Number range NL_a. Discuss the strategic role of managers at different levels within an
organization.
3Number range NL_a. Identify the primary steps in a strategic planning process.
4Number range NL_a. Discuss the common pitfalls of planning, and how those pitfalls can be
avoided.
5Number range NL_a. Outline the cognitive biases that might lead to poor strategic decisions,
and explain how these biases can be overcome.
6Number range NL_a. Discuss the role strategic leaders play in the strategy-making process.
NUMBER RANGE NL1Opening Case
Wal-Mart
The opening case examines Wal-Mart’s persistently superior profitability, which reflects a
competitive advantage that is based upon a number of strategies. Wal-Mart’s competitive
advantage was based on a business model of targeting small southern towns as well as the
urban and suburban locations. Wal-Mart grew quickly by pricing its products lower than
those of local retailers, often putting them out of business. The company was also an
innovator in information systems, logistics, and human resource practices. These strategies
,resulted in higher productivity and lower costs as compared to rivals, which enabled the
company to earn a high profit while charging low prices. Wal-Mart led the way among U.S.
retailers in developing and implementing sophisticated product tracking systems using bar-
code technology and checkout scanners. This information technology enabled Wal-Mart to
track what was selling and adjust its inventory accordingly so that the products found in
each store matched local demand, thereby avoiding overstocking. With regard to human
resources, Sam Walton believed that employees should be respected and rewarded for
helping to improve the profitability of the company. By the time the 1990s came along, Wal-
Mart was already the largest seller of general merchandise in the United States. But, rivals
Target and Costco have continued to improve their performance, and Costco in particular is
now snapping at Wal-Mart’s heals.
Teaching Note:
This Opening Case provides an excellent opportunity to discuss many of the concepts that will be
introduced in Chapter 1. For example, Wal-Mart developed a business model that was unique and
revolutionary at the time. The model allowed the firm to keep costs low and capture a greater
portion of the profits. Because the model was unique and led to improved effectiveness and
efficiency, the firm achieved a sustained competitive advantage. The business model was
developed by Sam Walton and provides an example of effective strategic leadership and vision.
This case may be used to point out to students that every firm, no matter how successful, is
vulnerable to competitive attack.
Figure 1.1: Profitability of Wal-Mart and Competitors, 2003-2012
Lecture Outline
INumber range NLA. Overview
This book argues that the strategies that a company’s managers pursue have a major impact on
the company’s performance relative to that of its competitors. A strategy is a set of related
actions that managers take to increase their company performance. This book identifies and
describes the strategies that managers can pursue to achieve superior performance and provide
their companies with a competitive advantage. One of its aims is to give the students a thorough
understanding of the analytical techniques and skills necessary to identify and implement
strategies successfully.
Strategic leadership is about how to most effectively manage a company’s strategy-making
process to create competitive advantage. The strategy-making process is the process by
, which managers select and then implement a set of strategies that aim to achieve a
competitive advantage. Strategy formulation is the task of selecting strategies, whereas
strategy implementation is the task of putting strategies into action, which includes
designing, delivering, and supporting products; improving the efficiency and effectiveness
of operations; and designing a company’s organization structure, control systems, and
culture.
IINumber range NLA. Strategic Leadership, Competitive Advantage, and Superior
Performance
Strategic leadership is concerned with managing the strategy-making process to increase
the performance of a company, thereby increasing the value of the enterprise to its owners,
its shareholders. To increase shareholder value, managers must pursue strategies that
increase the profitability of the company and ensure that profits grow (Figure 1.2). To do
this, a company must be able to outperform its rivals; it must have a competitive advantage.
Figure 1.2: Determinants of Shareholder Value
ANumber range NL1. Superior Performance:
Maximizing shareholder value is the ultimate goal of profit making companies for two
reasons:
Shareholders provide a company with the risk capital that enables managers to buy
the resources needed to produce and sell goods and services. Risk capital is capital
that cannot be recovered if a company fails and goes bankrupt.
Number range NL_aShareholders are the legal owners of a corporation, and their
shares therefore, represent a claim on the profits generated by a company. Thus,
mangers have an obligation to invest those profits in ways that maximize shareholder
value.
Shareholder value means the returns that shareholders earn from purchasing shares
in a company. These returns come from two sources:
Capital appreciation in the value of a company’s shares
Dividend payments
One way of measuring the profitability of a company is by the return that it makes on
the capital invested in the enterprise. The return on invested capital (ROIC) that a
company earns is defined as its net profit over the capital invested in the firm
(profit/capital invested). Net profit means net income after tax. Capital means the
Strategic Leadership: Managing the
Strategy-Making Process for Competitive
Advantage
Synopsis of Chapter
This chapter is an introductory chapter. Its purpose is to define critical concepts and introduce the
main components of the strategic leadership and management process. This chapter serves to
establish the context within which subsequent chapters fit.
Chapter 1 begins with a discussion of the concept of strategy. The strategies an organization
pursues have a major impact upon its performance relative to its peers. The firm’s top managers
have direct responsibility for choosing strategies that will lead to superior performance and
provide competitive advantage.
Next, the chapter equates superior performance with profitability, for profit-seeking enterprises.
Sustained competitive advantage occurs when a firm is able to maintain above average
profitability over an extended period of time. Strategic management is just as crucial to nonprofits
as it is to profit-seeking businesses. Much of this book is about identifying and describing the
strategies that managers can pursue to achieve superior performance and provide their company
with a competitive advantage. The book will provide a thorough understanding of the business
model analytical techniques and skills necessary to identify and implement strategies
successfully.
A discussion of strategic managers and the strategy-making process follows. Strategic managers
are the linchpin in the strategy-making. Strategy-making is the process by which managers
formulate and implement a set of strategies for a company, the aim of which is to attain
competitive advantage. It examines the types of strategic managers, their roles and their
responsibilities at three main levels within an organization—corporate, business, and functional.
This chapter also gives an overview of the formal strategic management process. The process
consists of two phases. The first phase, formulation, includes the establishment of corporate
mission, values, and goals; analysis of the external environment; analysis of the internal
environment; and selection of an appropriate functional-, business-, global, or corporate-level
strategy. The second phase, implementation, consists of the actions taken to carry out the chosen
strategy such as appropriate governance and ethics, designing an organizational structure,
designing an organization culture, and designing organization controls.
The traditional concept of the strategic planning process is one that is rational and deterministic,
,and orchestrated by senior managers. However, strategies may also emerge through other
mechanisms.
The next section of this chapter presents a discussion of strategic planning in practice. Formal
planning helps companies make better strategic decisions, and the use of decision aids can help
managers make better forecasts. However, formal strategic planning systems do not always
produce the desired results.
The next section of the chapter stresses the importance of strategic decision-making by providing
an understanding of how cognitive biases impact strategic decision making along with techniques
for improving decision making.
The final section of the chapter addresses key characteristics of good strategic leadership that will
lead organizations to high performance.
By the end of this chapter, students will understand how strategic leaders can manage the
strategy-making process, formulating and implementing strategies that enable a company to
achieve a competitive advantage and superior performance. Moreover, they will have an
appreciation for how the strategy-making process can go wrong, and what managers can do to
make this process more effective.
Learning Objectives
1Number range NL_a. Explain what is meant by “competitive advantage.”
2Number range NL_a. Discuss the strategic role of managers at different levels within an
organization.
3Number range NL_a. Identify the primary steps in a strategic planning process.
4Number range NL_a. Discuss the common pitfalls of planning, and how those pitfalls can be
avoided.
5Number range NL_a. Outline the cognitive biases that might lead to poor strategic decisions,
and explain how these biases can be overcome.
6Number range NL_a. Discuss the role strategic leaders play in the strategy-making process.
NUMBER RANGE NL1Opening Case
Wal-Mart
The opening case examines Wal-Mart’s persistently superior profitability, which reflects a
competitive advantage that is based upon a number of strategies. Wal-Mart’s competitive
advantage was based on a business model of targeting small southern towns as well as the
urban and suburban locations. Wal-Mart grew quickly by pricing its products lower than
those of local retailers, often putting them out of business. The company was also an
innovator in information systems, logistics, and human resource practices. These strategies
,resulted in higher productivity and lower costs as compared to rivals, which enabled the
company to earn a high profit while charging low prices. Wal-Mart led the way among U.S.
retailers in developing and implementing sophisticated product tracking systems using bar-
code technology and checkout scanners. This information technology enabled Wal-Mart to
track what was selling and adjust its inventory accordingly so that the products found in
each store matched local demand, thereby avoiding overstocking. With regard to human
resources, Sam Walton believed that employees should be respected and rewarded for
helping to improve the profitability of the company. By the time the 1990s came along, Wal-
Mart was already the largest seller of general merchandise in the United States. But, rivals
Target and Costco have continued to improve their performance, and Costco in particular is
now snapping at Wal-Mart’s heals.
Teaching Note:
This Opening Case provides an excellent opportunity to discuss many of the concepts that will be
introduced in Chapter 1. For example, Wal-Mart developed a business model that was unique and
revolutionary at the time. The model allowed the firm to keep costs low and capture a greater
portion of the profits. Because the model was unique and led to improved effectiveness and
efficiency, the firm achieved a sustained competitive advantage. The business model was
developed by Sam Walton and provides an example of effective strategic leadership and vision.
This case may be used to point out to students that every firm, no matter how successful, is
vulnerable to competitive attack.
Figure 1.1: Profitability of Wal-Mart and Competitors, 2003-2012
Lecture Outline
INumber range NLA. Overview
This book argues that the strategies that a company’s managers pursue have a major impact on
the company’s performance relative to that of its competitors. A strategy is a set of related
actions that managers take to increase their company performance. This book identifies and
describes the strategies that managers can pursue to achieve superior performance and provide
their companies with a competitive advantage. One of its aims is to give the students a thorough
understanding of the analytical techniques and skills necessary to identify and implement
strategies successfully.
Strategic leadership is about how to most effectively manage a company’s strategy-making
process to create competitive advantage. The strategy-making process is the process by
, which managers select and then implement a set of strategies that aim to achieve a
competitive advantage. Strategy formulation is the task of selecting strategies, whereas
strategy implementation is the task of putting strategies into action, which includes
designing, delivering, and supporting products; improving the efficiency and effectiveness
of operations; and designing a company’s organization structure, control systems, and
culture.
IINumber range NLA. Strategic Leadership, Competitive Advantage, and Superior
Performance
Strategic leadership is concerned with managing the strategy-making process to increase
the performance of a company, thereby increasing the value of the enterprise to its owners,
its shareholders. To increase shareholder value, managers must pursue strategies that
increase the profitability of the company and ensure that profits grow (Figure 1.2). To do
this, a company must be able to outperform its rivals; it must have a competitive advantage.
Figure 1.2: Determinants of Shareholder Value
ANumber range NL1. Superior Performance:
Maximizing shareholder value is the ultimate goal of profit making companies for two
reasons:
Shareholders provide a company with the risk capital that enables managers to buy
the resources needed to produce and sell goods and services. Risk capital is capital
that cannot be recovered if a company fails and goes bankrupt.
Number range NL_aShareholders are the legal owners of a corporation, and their
shares therefore, represent a claim on the profits generated by a company. Thus,
mangers have an obligation to invest those profits in ways that maximize shareholder
value.
Shareholder value means the returns that shareholders earn from purchasing shares
in a company. These returns come from two sources:
Capital appreciation in the value of a company’s shares
Dividend payments
One way of measuring the profitability of a company is by the return that it makes on
the capital invested in the enterprise. The return on invested capital (ROIC) that a
company earns is defined as its net profit over the capital invested in the firm
(profit/capital invested). Net profit means net income after tax. Capital means the
