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1 MANAGEMENT POLICY AND STRATEGY SESSION - IX Implementing Strategy Functional Tactics and Policies Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: [email protected] Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 2 Strategy Implementation Identify short-term objectives Involves development of support systems that Initiate specific functional tactics Communicate policies to empower people Design effective support systems Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 3 What are Short-Term Objectives? Provide specific guidance for what is to be done, translating vision into action Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 4 Role of Short-Term Objectives in Implementing Strategy 1. “Operationalize” long-term objectives 2. Raise issues and potential conflicts requiring coordination to avoid dysfunctional consequences 3. Identify measurable outcomes of functional activities to be used to make feedback, correction, and evaluation more relevant Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 5 Potential Conflicting Objectives and Priorities Responsibilities Chief Executive Officer Marketing •Distribution channels •Customer service •Inventory obsolescence Objectives •More inventory Finance and accounting •Communications and data processing •Carrying inventory •Cheap order processing Irwin/McGraw-Hill •Long production runs •Lowest cost routing •Fast delivery •Field warehousing •Production supply alternatives •Warehousing •Transportation •Less inventory •Frequent short runs •Fast order processing Manufacturing •Less warehousing •Plant warehousing © 2000 The McGraw-Hill Companies, Inc. Relationship of Action Plans to Short-Term Objectives 6 Specificity - Identify functional activities to be undertaken to build competitive advantage Action plans enhance short-term objectives in three ways Provide a clear time frame for completion Identify who is responsible for each action in the plan Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Qualities of Effective Short-term Objectives 7 Measurable Priorities Irwin/McGraw-Hill Linked to long-term objectives © 2000 The McGraw-Hill Companies, Inc. Value-Added Benefits of Short-Term Objectives 8 Give operating personnel a better understanding of their role in a firm’s mission Provide basis for accomplishing conflicting concerns Provide basis for strategic control Motivation - Clarify personal and group roles in a firm’s strategies Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 9 What are Functional Tactics? Key, routine activities that must be undertaken in each functional area to provide the business’s products Translate grand strategies into action designed to accomplish specific short-term objectives Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 10 Functional Tactics at General Cinema Corporation Corporate Strategy Business Strategies Corporate strategy Achieve 15-20 % annual growth through existing businesses and carefully selected diversification into leisure-oriented, consumer-oriented product/service businesses to absorb increasing cash flow from theater and softdrink bottling operations. Irwin/McGraw-Hill Soft drink bottlers Movie exhibition Sunkist product s Concentration and market development selective Maintain and selectively expand leading nationwide position in the movie exhibition industry to provide positive cash flow for corporate diversification. Functional Tactics Functional tactics: Marketing Seek only first-run films by outbidding competition in each local market; provide primarily family-oriented movies; and maintain an admission price only slightly above that of local competition. Functional tactics: Finance Use lease or sale and leaseback arrangements of each theater to maximize cash flow for corporate expansions; seek profitability through volume, not higher ticket prices. Functional tactics: Operations Use multiscreen facilities with minimal maintenance requirements and a joint service area to serve each minitheater. © 2000 The McGraw-Hill Companies, Inc. Differences Between Business Strategies and Functional Tactics Time Horizon •Shorter time horizon of functional tactics contributes to successful implementation by •Focusing attention on what needs to be done now •Allowing functional managers to adjust to changing current conditions Irwin/McGraw-Hill Specificity •Greater specificity of functional tactics contributes to successful implementation by •Ensuring functional managers focus on accomplishments •Clarifying for top managers how functional managers intend to accomplish business strategy •Facilitating coordination among operating units 11 Participants •General managers establish long-term objectives and overall business strategies •Operating managers establish shortterm objectives and functional tactics leading to business level success © 2000 The McGraw-Hill Companies, Inc. Characteristics of Functional Tactics in Production/Operations 12 Viewed as core function of an organization Involves converting inputs into value-enhanced output Focuses on decisions regarding Basic nature of firm’s POM system, Seeks optimum balance between investment input and production/operations output Location Facilities design Process planning on a short-term basis Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 13 Key Functional Tactics in POM Functional Tactic Typical Questions the Functional Tactic Should Answer • How centralized should the facilities be? • How integrated should the separate processes be? • To what extent should further mechanization or automation be Facilities and pursued? equipment • Should size and capacity be oriented toward peak or normal operating levels? • How many sources are needed? • How should suppliers be selected, and how should Sourcing relationships with suppliers be managed over time? • What level of forward buying (hedging) is appropriate? • Should work be scheduled to order or to stock? • What level of inventory is appropriate? should inventory be used (FIFO/LIFO), controlled, and Operations • How replenished? planning • What are the key foci for control efforts? and • Should maintenance be oriented to prevention or to control breakdown? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Characteristics of Functional Tactics in Marketing 14 Lead to strategic success of the firm through the profitable sale of products/services in target markets Clearly identify customer needs that products/services aim to meet Identify where, when, and by whom products/services are to be sold Define how firm will communicate with target markets Directly influence supply, demand, profitability, consumer perception, and regulatory response through pricing Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 15 Key Functional Tactics in Marketing Functional Typical Questions the Functional Tactic Should Answer Tactic • Which products do we emphasize? • Which products/services contribute most to profitability? Product or • What product/service image do we seek to project? • What consumer needs does the product/service seek service to meet? • What changes should be influencing our customer orientation? • Are we competing primarily on price? • Can we offer discounts or other pricing modifications? • Are our pricing policies standard nationally, or is there Price regional control? • What price segments are targeting? • What is the gross profit margin? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Key Functional Tactics in Marketing 16 Contd... Functional Typical Questions the Functional Tactic Should Answer Tactic • What level of market coverage is necessary? • Are there priority geographic areas? • What are the key channels of distribution? Place • What are the channel objectives, structure, and management? • What sales organization do we want? • What are the key promotion priorities and approaches? • Which advertising/communication priorities and Promotion approaches are linked to different products, markets, and territories? • Which media would be most consistent with the total marketing strategy? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Characteristics of Functional Tactics in Accounting and Finance Time frame of finance tactics varies because they direct use of financial resources supporting the business strategy, long-term goals, and annual objectives Long-term tactics guide decisions in Long-term capital investment Debt financing Dividend allocation Leveraging Short-term tactics guide decisions in 17 Managing working capital and short-term assets Accounting-focused tactics have taken on increased strategic significance in last decade Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 18 Key Functional Tactics in Finance and Accounting Functional Typical Questions the Functional Tactic Should Answer Tactic • What is an acceptable cost of capital? • What is desired proportion of short- and long-term debt? Preferred and common stock? Capital • What balance is desired between internal and external acquisition funding? • What risk and ownership restrictions are appropriate? • What level and forms of leasing should be used? Capital allocation Irwin/McGraw-Hill • What are the priorities for capital allocation projects? • On what basis should the final selection of projects be made? • What level of capital allocation can be made by operating managers without higher approval? © 2000 The McGraw-Hill Companies, Inc. Key Functional Tactics in Finance and Accounting 19 Contd…. Functional Typical Questions the Functional Tactic Should Tactic Answer • What portion of earnings should be paid out as dividends? • Are things other than cash appropriate as Dividend dividends? and • What are the cash flow requirements? Minimum working and maximum? capital • How liberal/conservative should credit policies be? manage• What limits, payment terms, and collection ment procedures are necessary? • What payment timing and procedure should be followed? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Characteristics of Functional Tactics in R&D 20 Assumed a key strategic role in many firms due to increasing rate of technological change May be more critical instruments of business strategy in some industries than in others Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 21 Key Functional Tactics in R&D Functional Tactic Typical Questions the Functional Tactic Should Answer Basic research vs. product and process development breakthrough research be emphasized? In relation to the emphasis on product development, refinement, and modification? • What critical operating processes need R&D attention? • What new products are necessary to support growth? • To what extent should innovation and • Is the emphasis short-term or long-term? Time horizon • Which orientation best supports the business strategy? The marketing and production strategy? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Key Functional Tactics in R&D 22 Contd... Functional Tactic Organizational fit Typical Questions the Functional Tactic Should Answer • Should R&D be done in-house or contracted out? • Should R&D be centralized or decentralized? • What should be the relationship between the R&D units and product managers? Marketing managers? Production managers? • Should the firm maintain an offensive posture, Basic posture Irwin/McGraw-Hill R&D seeking to lead innovation in its industry? • Should the firm adopt a defensive posture, responding to the innovations of its competitors? © 2000 The McGraw-Hill Companies, Inc. 23 Characteristics of Functional Tactics in HRM Assumed increasing strategic importance in the 1990s Aid long-term success in Development of managerial talent and competent employees Creating systems to manage compensation or regulatory concerns Guiding effective utilization of human resources to achieve both the Irwin/McGraw-Hill Firm’s short-term objectives Employees’ satisfaction and development © 2000 The McGraw-Hill Companies, Inc. 24 Key Functional Tactics in HRM Functional Tactic Typical Questions the Functional Tactic Should Answer • What key human resources are needed to support Recruitment, chosen strategy? • How do we recruit these human resources? selection, • How sophisticated should our selection process be? and orientation • How should we introduce new employees to the organization? • What are our future human resource needs? Career development • How can we prepare our people to meet these and training needs? • What levels payour arepeople appropriate for the tasks we How can weofhelp develop? require? Compensa- • How can we motivate and retain good people? tion • How should we interpret our payment, incentive, benefit, and seniority policies? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 25 Key Functional Tactics in HRM Contd…. Functional Tactic Evaluation, discipline, and control Typical Questions the Functional Tactic Should Answer • How often should we evaluate our people? Formally or informally? • What disciplinary steps should we take to deal with poor performance or inappropriate behavior? • In what ways should we “control” individual and group performance? • How can we maximize labor-management Labor cooperation? relations and • How do our personnel practices affect EEO women/minorities/ requirements • Should we have hiring policies? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 26 Emerging Implications for HRM Tactics Traditional HRM Ideas • Emphasis solely on physical skills • Expectation of predictable, repetitious behavior • Comfort with stability and conformity • Avoidance of responsibility and decision making • Training covering only specific tasks • Emphasis placed on outcomes / results Irwin/McGraw-Hill Emerging HRM Ideas • Emphasis on total contribution to firm • Expectation of innovative and creative behavior • Tolerance of ambiguity and change • Accepting responsibility for making decisions • Broad continuous development • Emphasis placed on processes / means © 2000 The McGraw-Hill Companies, Inc. Emerging Implications for HRM Tactics 27 Contd…. Traditional HRM Ideas • High concern for quantity • Concern for individual efficiency • Functional and subfunctional specialization • Labor force seen as unnecessary expense • Work force is management’s adversary Irwin/McGraw-Hill Emerging HRM Ideas • High concern for total customer value • Concern for overall effectiveness • Cross-functional integration • Labor force seen as critical investment • Management and work force are partners © 2000 The McGraw-Hill Companies, Inc. 28 Role of Policies in Implementing Strategy Directives designed to guide thinking, decisions, and actions of managers and employees in implementing strategy Increase managerial effectiveness by Standardizing many routine decisions Clarifying discretion managers and employees can exercise in implementing functional tactics Should be derived from functional tactics with key purpose of aiding strategy execution Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 29 Why Policies Empower People 1. Establish indirect control over independent action by clearly stating how things are to be done now 2. Promote uniform handling of similar activities 3. Ensure quicker decisions by standardizing answers to previously answered questions 4. Institutionalize basic aspects of organization behavior 5. Reduce uncertainty in repetitive and day-to-day decision making 6. Counteract resistance to or rejection of chosen strategies by organization members 7. Offer predetermined answers to routine problems 8. Afford managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 30 Advantages of Formal Written Policies 1. Require managers to think through policy’s meaning, content, and intended use 2. Reduce misunderstanding 3. Make equitable and consistent treatment of problems more likely 4. Ensure unalterable transmission of policies 5. Communicate authorization or sanction of policies more clearly 6. Supply a convenient and authoritative reference 7. Systematically enhance indirect control and organizationwide coordination of the key purposes of policies Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 31 SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION A Policy is a broad guideline for decision making that links the formulation of strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and strategies. Maytag Company: Maytag will not approve any cost reduction proposal if it reduces product quality in any way. (This policy supports Maytag’s strategy for Maytag brands to compete on quality rather than on price.) Intel: Cannibalize your product line (undercut the sales of your current products) with better products before a competitor does it to you. (This supports Intel’s objective of market leadership.) General Electric: GE must be number one or two wherever it competes. (This supports GE’s objective to be number one in market capitalization). America Online: The company could have used a policy stating that a new marketing program would not be implemented until proper support was in place. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 32 SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION Contd... 3 M Corporation has a personnel policy, called the 15 percent rule, that allows virtually any employee to spend up to 15 per cent of the workweek on anything that he or she wants to, as long as it’s product related. (This policy supports 3M’s corporate strategy of being a highly innovative manufacturer, with each division required to have a quarter of its annual sales come from products introduced within the past five years.) Wendy’s has a purchasing policy that gives local store managers the authority to buy fresh meat and produce locally, rather than from regionally designated or company-owned sources. (This policy supports Wendy’s functional strategy of having fresh, unfrozen hamburgers daily). Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION 33 Contd... General Cinema has a financial policy that requires annual capital investment in movie theaters not to exceed annual depreciation. (By seeing that capital investment is no greater than depreciation, this policy supports General Cinema’s financial strategy of maximizing cash flow-in this case, all profit - to its growth areas. The policy also reinforces General Cinema’s financial strategy of leasing as much as possible.) IBM had a marketing policy of not giving free IBM personal computers (PCs) to any person or organization. (This policy attempted to support IBM’s image strategy by maintaining its image as professional, high-value, service business at it sought to dominate the PC market). Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION 34 Contd... Grown, Cork, and Seal Company has an R&D policy of not investing any financial or people resources in basic research. (This policy supports Crown, Cork, and Seal’s functional strategy, which emphasized customer services, not technical leadership). Nations Bank of South Carlina has an operating policy that requires annual renewal of the financial statement of all personal borrowers. (This policy supports NationsBank’s financial strategy, which seeks to maintain a loan-to-loss ratio below the industry norm.) Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 35 Types of Executive Bonus Compensation Bonus Type Stock option grants Restricted stock plan Golden handcuffs Irwin/McGraw-Hill Description Rationale Right to purchase stock in the future at a price set now; compensation determined by “spread” Provides incentive for executive to create wealth for shareholders as measured by increase in firm’s share price Movement in share price does not explain all dimensions of managerial performance Promotes longer executive tenure than other forms of compensation No downside risk to executive, who always profits unlike other shareholders May promote riskaverse decision making due to downside risk borne by executive Shares given to executive who is prohibited from selling them for a specific time period Bonus income deferred in a series of annual installments; forfeited with executive resignation Offers an incentive for executive to remain with the firm Shortcomings © 2000 The McGraw-Hill Companies, Inc. Types of Executive Bonus Compensation 36 Contd... Bonus Type Golden parachute Cash based on internal performance using finance measures Irwin/McGraw-Hill Description Executive has right to collect bonus if loses position due to takeover, firing, retirement, or resignation Bonus compensation based on accounting performance measures such as return on equity Rationale Shortcomings Offers an incentive for executive to remain with firm Compensation is achieved whether or not wealth is created;rewards either success or failure Offsets limitations of focusing on marketbased measures of performance Weak correlation between earnings measures and shareholder wealth creation © 2000 The McGraw-Hill Companies, Inc. 37 Compensation Plan Selection Matrix Type of Bonus Compensation Strategic Goal Cash Achieve corporate turnaround Create and support growth opportunitie s Defend against unfriendly takeover Evaluate suitors objectively Globalize operations Grow share price incrementally Irwin/McGraw-Hill Golden Handcuffs Golden Parachute s Restricted Stock Plans Stock Options X Executive profits only if turnaround is successful in returning wealth to shareholders X Risk associated with growth strategies warrants use of this high-reward incentive X Helps remove temptation for executive to evaluate takeover based on personal benefits X Compensates executive if job is lost due to a merger favorable to the firm X X Rationale Risk of expanding overseas requires a plan that compensates only for achieved success Accounting measures can identify periodic performance benchmarks © 2000 The McGraw-Hill Companies, Inc. 38 Compensation Plan Selection Matrix (concluded) Type of Bonus Compensation Strategic Goal Improve operational efficiency Cash Golden Handcuffs Restricted Stock Plans X Irwin/McGraw-Hill Rationale Executive profits proportionally as asset growth leads to longterm growth in share price X Handcuffs provide executive tenure incentives X Restructure organization Streamline operations Stock Options Accounting measures represent observable and agreed-upon measures of performance Increase assets under managemen t Reduce executive turnover Golden Parachute s X X Risk associated with major change in firm’s assets warrant use of this high-reward incentive Rewards long-term focus on efficiency and cost control © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 39 General Electric - An Introduction July 1997 - Business Week issue cited GE as “Most Valuable Company” with worldwide market capitalization of $198.09 billion. GE - established in 1878 with a group of investors joining together to finance Edison’s incandescent lamp. Company grew; by 1939 sales $342 million; due to WWII increased to $1.4 billion in 1943. Case illustrate systematic implementation of strategic planning at GE to market performance in four phases over a span of 50 years - 47 to 97. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 Phase I: Coordiner’s Enterpreneurial Era 40 Contd... 1947 CEO Charles Wilson tells Cordiner to study managing the fast paced growth. Cordiner identified three areas of change - (1) More decentralized decision making (2) Long range planning system and (3) More entrepreneurial minded managers to meet growth challenges. 1950 - Cordiner becomes CEO, Identifies GE’s new “Marketing Concept” PR I, PR II, (SP) (Target) This phase originated the GE Strategic Planning concept Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 41 Contd... Phase I: Coordiner’s Enterpreneurial Era Think like entrepreneurs Make markets and customer values central focus for strategic planning Once market opportunities identified, plan and make resource allocations. Plan so that available resources can be leveraged for long term objectives. Managers evaluated on performance against intermediate goals set in long term plan. “Reinvest” profits for long-term goals Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 42 Contd... Phase II: Borch and Implementing Strategic Planning Concept (63 to 71) 1963 - Borch succeeds Cordiner as CEO inheriting three problems (1) Implementing and integration of marketing concept (2) Greater corporate control over 70 semi-independent division vice-presidents (3) Reviewing and presentation process for BSU plans too bureaucratic With aid of Mckinsey Borch integrates marketing concept in GE’s system with the development of Strategic Business Units (Staff / Line Groups) Again withMcKinsey’s aid identifies the method for developing and managing SBUs through the concept of Portfolio Management Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 43 Contd... Phase III: Implementing Strategic Planning Concept (72 to 81) 1972 - Reginald Jones succeeds Borch Identified six important sectors which divided GE’s business into six broad areas. Sector vice-presidents named to plan and have related units reporting to them. They would report to two senior vicechairman. Enabled strategic planning concept to become worldwide concept Simplified presentations of SBU plans-without visual aids. Review layers in SBU plans reduced from 43 to 6. Six strategic sectors in which GE will compete in for the future; GE’s intent for venturing for alliances around the world. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 44 Contd... Phase IV: Welch: Strategic Thining and Visionary Leadership 1981 - Jack Welch becomes CEO Two basic objectives: SBUs should be number one or two in their markets; compete in three interrelated “circles” (high technology markets, service markets, core market- engines, appliances etc.). Long term “stretch” goals-externally oriented for comparisons against total market. Incremental goals internally oriented. Renetrated newer markets - India, China, Mexico Removed layers of management and bureaucracy in planning process. One page Reports submitted on key issues. Formulated strategy for 21st century - penetrate global market; service contracts with large customers of both GE and non-GE equipment. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 45 Learning From GE Focus on improving both internally and externally Marketing Concept - without marketing’s input strategic planning is useless. Disciplined yet flexible approach- SBU managers free to use any methods to analyze markets and operate. Focus on long-range performance and fit rather than incremental gains. CEO - selection is of utmost importance and central to strategic planning Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.