Which of the following is the first step of the strategy making process multiple choice question?

Essentials of Strategic Management, 6e (Gamble)

Chapter 2 Strategy Formulation, Execution, and Governance

1) Which one of the following is not one of the five stages of an ongoing, continuous strategic

management process?

A) Developing a strategic vision of what the company's future direction and focus needs to be

B) Developing a sustainable business model

C) Crafting a strategy to advance the company along the path that management has charted and

achieve its performance objectives

D) Setting objectives to measure progress toward achieving the strategic vision

E) Executing the chosen strategy efficiently and effectively

Answer: B

Explanation: As shown in Figure 2.1, the process of crafting and executing a company's strategy

is an ongoing, continuous process consisting of five interrelated stages: (1) developing a strategic

vision that charts the company's long-term direction; (2) setting objectives for measuring the

company's performance and tracking its progress in moving in the intended long-term direction;

(3) crafting a strategy for advancing the company along the path management has charted and

achieving its performance objectives; (4) executing the chosen strategy efficiently and

effectively; and (5) monitoring developments, evaluating performance, and initiating corrective

adjustments in the company's vision and mission statement, objectives, strategy, or approach to

strategy execution in light of actual experience, changing conditions, new ideas, and new

opportunities.

2) Which of the following is an integral part of the managerial process of crafting and executing

strategy?

A) Developing a proven business model

B) Setting objectives and using them as yardsticks for measuring the company's performance and

progress

C) Deciding how much of the company's resources to employ in the pursuit of sustainable

competitive advantage

D) Communicating the company's mission and purpose to all employees

E) Deciding on the composition of the company's board of directors

Answer: B

Explanation: Figure 2.1 displays the five-stage process: (1) developing a strategic vision, (2)

setting objectives, (3) crafting strategy, (4) implementing and executing the chosen strategy, and

(5) evaluating and analyzing the external environment and the company's internal situation and

performance.

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Although senior managers have lead responsibility 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).

In watching over management's strategy formulation, strategy execution actions, a company's board of directions has four important corporate governance obligations to fulfill:

1. Oversee the company's financial accounting and financial reporting practices. While top management, particularly the company's CEO and CFO is primarily responsible for seeing that the company's financial statements accurately report the results of the company's 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 (GAAP) 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 directions (inside 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.

2. Diligently critique and oversee the company's direction, strategy, and business approaches. Even though board members have a legal obligation to warrant 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 found 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 to evaluating the company's long term direction and various strategic proposals. The company's exit from the semiconductor business and its increased focus on medical technology and home health care resulted from management - board discussion during such retreats.

3. Evaluate the caliber of senior executives' strategy formulation and strategy execution skills. The board is always responsible for determing whether the current CEO is doing a good job of strategic leadership and whether senior managment is actively creating a pool of potential successors to the CEO and other top executives. Evaluation of senior executives' strategy formulation and strategy execution skills enchanced 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 emerging 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 operations.

4. Institute a compensation plan for top executives that reward them for actions and results that serve shareholder interest. A basic principle of corporate 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 shareholders interests (but this does not mean disregarding the interests of other stakeholders, particularly those of employees, with whom they also have an agency relationship). Most boards of directors ahve a compensation committee, composed entirely of directors from outside the company, to develop a salary and incentive compensation plan that rewards senior executives for boosting the company's long term performance and growing the economic value of the enterprise on behalf of shareholders; the compensation committee's recommendations are presented to the full board for approval.

During the past 10-15 years. many boards of directors have done a poor job of ensuring that executive salary increases, bonuses, and stock option awards are tied tightly to performance measures that are truly in the long term interest of shareholders. Rather, compensation packages at many companies have rewarded executives for short term performance improvements - most notably - achieving quarterly and annual earnings targets and boosting the stock price by specified percentages. This has had the perverse effect of causing company managers to become preoccupied with actions to improve a company's near term performance, even if excessively risky and damaging to long term company performance. As a consequence, the need to overhaul and reform executive compensation has become a hot topic in both public circles and corporate boardrooms.

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