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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All ...

  1. 1. CHAPTER 9 Implementing Strategy Through Short-Term Objectives, Functional Tactics, Reward System, and Employee Empowerment
  2. 2. Chapter Topics <ul><li>Short-Term Objectives </li></ul><ul><li>Functional Tactics that Implement Business Strategies </li></ul><ul><li>Empowering Operating Personnel: The Role of Policies </li></ul><ul><li>Executive Bonus Compensation Plans </li></ul>
  3. 3. Strategy Implementation “ Planning their Work” “ Working their Plan” Strategy Formulation Strategy Implementation
  4. 4. Strategy Implementation Identify short-term objectives Initiate specific functional tactics Communicate policies to empower people Design effective rewards
  5. 5. What are Short-Term Objectives? Provide specific guidance for what is to be done, translating vision into action
  6. 6. Role of Short-Term Objectives in Implementing Strategy <ul><li>“ Operationalize” long-term objectives </li></ul><ul><li>Raise issues and potential conflicts requiring coordination to avoid dysfunctional consequences </li></ul><ul><li>Identify measurable outcomes of functional activities to be used to make feedback, correction, and evaluation more relevant and acceptable </li></ul>
  7. 7. Ex. 9-1: Potential Conflicting Objectives and Priorities Chief Executive Officer Marketing Finance and Accounting Manufacturing <ul><li>Distribution channels </li></ul><ul><li>Customer service </li></ul><ul><li>Inventory obsolescence </li></ul><ul><li>Communications and data processing </li></ul><ul><li>Carrying inventory </li></ul><ul><li>Production supply alternatives </li></ul><ul><li>Warehousing </li></ul><ul><li>Transportation </li></ul><ul><li>More inventory </li></ul><ul><li>Frequent short runs </li></ul><ul><li>Fast order processing </li></ul><ul><li>Fast delivery </li></ul><ul><li>Field warehousing </li></ul><ul><li>Less inventory </li></ul><ul><li>Long production runs </li></ul><ul><li>Cheap order processing </li></ul><ul><li>Lowest cost routing </li></ul><ul><li>Less warehousing </li></ul><ul><li>Plant warehousing </li></ul>Objectives Responsibilities
  8. 8. Relationship of Action Plans to Short-Term Objectives Specificity – Identify functional activities to be undertaken to build competitive advantage Provide a clear time frame for completion Identify who is responsible for each action in the plan
  9. 9. Qualities of Effective Short-Term Objectives Measurable Priorities Linked to long-term objectives
  10. 10. Ex. 9-3: Creating Measurable Objectives (Selected) To conduct a public opinion poll using random samples in the five largest U.S. metropolitan markets to determine average scores on 10 dimensions of corporate responsibility by May 15, 2004. To increase our score on those dimensions by an average of 7.5 percent by May 1, 2005 To improve the firm’s image To reduce the time lapse between order date and delivery by 8 percent (2 days) by June 1, 2004 To improve support of the sales effort To reduce turnover (absenteeism, number of rejects, etc.) among sales managers by 10 percent by January 1, 2004 Assumption: Morale is related to measurable outcomes (i.e., high and low morale are associated with different results) To improve morale in the division (plant, department, etc.) Examples of Objectives with Measurable Criteria for Performance Examples of Deficient Objectives
  11. 11. Value-Added Benefits of Short-Term Objectives Give operating personnel a better understanding of their role in a firm’s mission Provide basis for accomplishing conflicting concerns Motivation – clarify personnel and group roles in a firm’s strategies Provide basis for strategic control
  12. 12. What are Functional Tactics? Key, routine activities that must be undertaken in each functional area to provide the business’s products and services Translate grand strategies into action designed to accomplish specific short-term objectives
  13. 13. Ex. 9-4: Functional Tactics at General Cinema Corporation Corporate Strategy Achieve 15-20 percent 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 soft drink bottling operations 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 – 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 thru’ volume, not higher ticket prices Functional Tactics – Operations Use multiscreen facilities with minimal maintenance requirements and a joint service area to serve each minitheater Soft drink bottling Movie exhibition Sunkist products Corporate Strategy Business Strategies Functional Tactics
  14. 14. Business Strategies and Functional Tactics … are different in three ways Time horizon Specificity Participants who develop them
  15. 15. Differences Between Business Strategies and Functional Tactics <ul><li>General managers establish long-term objectives and overall business strategies </li></ul><ul><li>Operating managers establish short-term objectives and functional tactics leading to business level success </li></ul><ul><li>Greater specificity of functional tactics contributes to successful implementation by </li></ul><ul><li>Ensuring functional managers focus on accomplishments </li></ul><ul><li>Clarifying for top managers how functional managers intend to accomplish business strategy </li></ul><ul><li>Facilitating coordination among operating units </li></ul><ul><li>Shorter time horizon of functional tactics contributes to successful implementation by </li></ul><ul><li>Focusing attention on what needs to be done now </li></ul><ul><li>Allowing functional managers to adjust to changing current conditions </li></ul>Participants Specificity Time Horizon
  16. 16. What Are Policies? Policies are directives designed to guide the thinking, decisions, and actions of managers and their subordinates in implementing a firm’s strategy
  17. 17. Role of Policies in Implementing Strategy <ul><li>Previously referred to as standard operating procedures , policies increase managerial effectiveness by </li></ul><ul><ul><li>Standardizing many routine decisions </li></ul></ul><ul><ul><li>Clarifying discretion managers and employees can exercise in implementing functional tactics </li></ul></ul><ul><li>Should be derived from functional tactics with key purpose of aiding strategy execution </li></ul>
  18. 18. Empowerment and Policies Training, self-managed work groups, eliminating whole levels of management in organizations, and aggressive use of automation are some of the ways of empowering employees. At the heart of empowerment is the need to ensure that decision making is consistent with the mission, strategy, and tactics of the business while at the same time allowing considerable latitude to operating personnel. One way operating managers do this is through the use of policies
  19. 19. Why Policies Empower People <ul><li>Establish indirect control over independent action by clearly stating how things are to be done now </li></ul><ul><li>Promote uniform handling of similar activities </li></ul><ul><li>Ensure quicker decisions by standardizing answers to previously answered questions </li></ul><ul><li>Institutionalize basic aspects of organizational behavior </li></ul>
  20. 20. Why Policies Empower People <ul><li>Reduce uncertainty in repetitive and day-to-day decision making </li></ul><ul><li>Counter resistance to or rejection of chosen strategies by organization members </li></ul><ul><li>Offer predetermined answers to routine problems </li></ul><ul><li>Afford managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations </li></ul>
  21. 21. Advantages of Formal Written Policies <ul><li>Require managers to think through policy’s meaning, content, and intended use </li></ul><ul><li>Reduce misunderstanding </li></ul><ul><li>Make equitable and consistent treatment of problems more likely </li></ul><ul><li>Ensure unalterable transmission of policies </li></ul><ul><li>Communicate authorization or sanction of policies more clearly </li></ul><ul><li>Supply a convenient and authoritative reference </li></ul><ul><li>Systematically enhance indirect control and organization-wide coordination of the key purpose of policies </li></ul>
  22. 22. Executive Bonus Compensation Plans The goal of an executive bonus compensation plan is to motivate executives to achieve maximization of shareholder wealth – the underlying goal of most firms
  23. 23. Executive Bonus Compensation Plans Major Plan Types Stock Options Restricted Stock Golden Handcuffs Golden Parachutes Cash
  24. 24. Ex. 9-8: Types of Executive Bonus Compensation Plans No downside risk to executive, who always profits unlike other shareholders Promotes longer executive tenure than other forms of compensation Shares given to executive who is prohibited from selling them for a specific time period. May also include performance restrictions Restricted stock plan Movement in share price does not explain all dimensions of managerial performance Provides incentive for executive to create wealth for shareholders as measured by increase in firm’s share price Right to purchase stock in the future at price set now. Compensation is determined by “spread” between option price and exercise price Stock option grants Shortcomings Rationale Description Bonus Type
  25. 25. Ex. 9-8 (contd.) Compensation is achieved whether or not wealth is created for shareholders. Rewards either success or failure Offers an incentive for executive to remain with the firm Executives have right to collect the bonus if they lose position due to takeover, firing, retirement, or resignation Golden parachute May promote risk-averse decision making due to downside risk borne by executive Offers an incentive for executive to remain with the firm Bonus income deferred in a series of annual installments. Deferred amounts not yet paid are forfeited with executive resignation Golden Handcuffs Shortcomings Rationale Description Bonus Type
  26. 26. Ex. 9-8 (contd.) Weak correlation between earnings measures and shareholder wealth creation. Annual earnings do not capture future impact of current decisions Offsets the limitations of focusing on market-based measures of performance Bonus compensation based on accounting performance measures such as return on equity Cash based on internal business performance using financial measures Shortcomings Rationale Description Bonus Type
  27. 27. Ex. 9-9: Compensation Plan Selection Matrix Helps remove temptation for executive to evaluate takeover based on personal benefits X Defend against unfriendly takeover Risk associated with growth strategies warrants the use of this high-reward incentive X Create and support growth opportunities Executive profits only if turnaround is successful in returning wealth to shareholders X Achieve corporate turnaround Rationale Stock Options Restricted Stock Plans Golden Parachutes Golden Handcuffs Cash Strategic Goal
  28. 28. Ex. 9-9 (contd.) Accounting measures can identify periodic performance benchmarks X Grow share price incrementally Risk of expanding overseas requires a plan that compensates only for achieved success X Globalize operations Compensates executive if job is lost due to a merger favorable to the firm X Evaluate suitors objectively Rationale Stock Options Restricted Stock Plans Golden Parachutes Golden Handcuffs Cash Strategic Goal
  29. 29. Ex. 9-9 (contd.) Handcuffs provide executive tenure incentive X Reduce executive turnover Executive profits proportionally as asset growth leads to long-term growth in share price X Increase assets under management Accounting measures represent observable and agreed-upon measures of performance X Improve operational efficiency Rationale Stock Options Restricted Stock Plans Golden Parachutes Golden Handcuffs Cash Strategic Goal
  30. 30. Ex. 9-9 (contd.) Rewards long-term focus on efficiency and cost control X Streamline operations Risk associated with major change with firm’s assets warrant use of this high-reward incentive X Restructure organization Rationale Stock Options Restricted Stock Plans Golden Parachutes Golden Handcuffs Cash Strategic Goal