Download MANAGEMENT POLICY AND STRATEGY SESSION - IX Implementing Strategy Functional Tactics and Policies

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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]
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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
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What are Short-Term Objectives?
Provide specific guidance for
what is to be done,
translating vision into action
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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
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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
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•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
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Relationship of Action Plans to Short-Term
Objectives
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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
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Qualities of Effective Short-term
Objectives
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Measurable
Priorities
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Linked to long-term
objectives
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Value-Added Benefits of Short-Term
Objectives
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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
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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
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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.
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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.
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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
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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
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Participants
•General managers
establish long-term
objectives and
overall business
strategies
•Operating
managers
establish shortterm objectives
and functional
tactics leading to
business level
success
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Characteristics of Functional Tactics in
Production/Operations



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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
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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?
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Characteristics of Functional Tactics in
Marketing





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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
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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?
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Key Functional Tactics in Marketing
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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?
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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


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Managing working capital and short-term assets
Accounting-focused tactics have taken on increased
strategic significance in last decade
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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
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• 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?
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Key Functional Tactics in Finance and Accounting
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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?
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Characteristics of Functional Tactics in
R&D


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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
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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?
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Key Functional Tactics in R&D
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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
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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.
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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


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Firm’s short-term objectives
Employees’ satisfaction and development
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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?
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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?
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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
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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
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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
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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
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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
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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
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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
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31
SELECTED POLICIES THAT AID STRATEGY
IMPLEMENTATION
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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.
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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).
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SELECTED POLICIES THAT AID STRATEGY
IMPLEMENTATION
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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).
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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.)
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35
Types of Executive Bonus Compensation
Bonus Type
Stock option
grants
Restricted
stock plan
Golden
handcuffs
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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
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Types of Executive Bonus Compensation
36
Contd...
Bonus Type
Golden
parachute
Cash based on
internal
performance
using finance
measures
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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
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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.
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STRATEGIC LEADERSHIP AT GENERAL
ELECTRIC: 1947 TO 1997
Phase I: Coordiner’s Enterpreneurial Era
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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
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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
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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
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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.
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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
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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.