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© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 MANAGEMENT POLICY AND STRATEGY SESSION - IX Implementing Strategy Functional Tactics and Policies.

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Presentation on theme: "© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 MANAGEMENT POLICY AND STRATEGY SESSION - IX Implementing Strategy Functional Tactics and Policies."— Presentation transcript:

1 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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

2 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 2 Strategy Implementation Identify short-term objectives Initiate specific functional tactics Communicate policies to empower people Design effective support systems Involves development of support systems that

3 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 3 What are Short-Term Objectives? Provide specific guidance for what is to be done, translating vision into action

4 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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

5 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 5 Potential Conflicting Objectives and Priorities Chief Executive Officer Marketing Finance and accounting Manufacturing Distribution channels Customer service Inventory obsolescence Communications and data processing Carrying inventory Production supply alternatives Warehousing Transportation Responsibilities Objectives More inventory Less inventory Frequent short runs Long production runs Fast order processing Cheap order processing Fast delivery Lowest cost routing Field warehousing Less warehousing Plant warehousing

6 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 6 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 Action plans enhance short-term objectives in three ways

7 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 7 Qualities of Effective Short-term Objectives Priorities Measurable Linked to long-term objectives

8 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 8 Value-Added Benefits of Short-Term Objectives Provide basis for accomplishing conflicting concerns Give operating personnel a better understanding of their role in a firm’s mission Motivation - Clarify personal and group roles in a firm’s strategies Provide basis for strategic control

9 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 9 What are Functional Tactics? Key, routine activities that must be undertaken in each functional area to provide the Translate grand strategies into action designed to accomplish specific short-term objectives business’s products

10 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 10 Functional Tactics at General Cinema Corporation 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: 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. Corporate StrategyBusiness StrategiesFunctional Tactics Corporate strategy Achieve % 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.

11 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 11 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 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 Participants General managers establish long-term objectives and overall business strategies Operating managers establish short- term objectives and functional tactics leading to business level success

12 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 12 Characteristics of Functional Tactics in Production/Operations 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

13 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 13 Key Functional Tactics in POM Functional Tactic Typical Questions the Functional Tactic Should Answer Facilities and equipment Sourcing Operations planning and control How centralized should the facilities be? How integrated should the separate processes be? To what extent should further mechanization or automation be pursued? 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 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? How should inventory be used (FIFO/LIFO), controlled, and replenished? What are the key foci for control efforts? Should maintenance be oriented to prevention or to breakdown?

14 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 14 Characteristics of Functional Tactics in Marketing 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

15 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 15 Key Functional Tactics in Marketing Functional Tactic Typical Questions the Functional Tactic Should Answer Product or service Price Which products do we emphasize? Which products/services contribute most to profitability? What product/service image do we seek to project? What consumer needs does the product/service seek 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 regional control? What price segments are targeting? What is the gross profit margin?

16 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 16 Key Functional Tactics in Marketing Contd... Functional Tactic Typical Questions the Functional Tactic Should Answer Place What level of market coverage is necessary? Are there priority geographic areas? What are the key channels of distribution? What are the channel objectives, structure, and management? What sales organization do we want? Promotion What are the key promotion priorities and approaches? Which advertising/communication priorities and approaches are linked to different products, markets, and territories? Which media would be most consistent with the total marketing strategy?

17 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 17 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 Managing working capital and short-term assets Accounting-focused tactics have taken on increased strategic significance in last decade

18 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 18 Key Functional Tactics in Finance and Accounting Functional Tactic Typical Questions the Functional Tactic Should Answer Capital acquisition Capital allocation What is an acceptable cost of capital? What is desired proportion of short- and long-term debt? Preferred and common stock? What balance is desired between internal and external funding? What risk and ownership restrictions are appropriate? What level and forms of leasing should be used? 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?

19 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 19 Key Functional Tactics in Finance and Accounting Contd…. Functional Tactic Typical Questions the Functional Tactic Should Answer Dividend and working capital manage- ment What portion of earnings should be paid out as dividends? Are things other than cash appropriate as dividends? What are the cash flow requirements? Minimum and maximum? How liberal/conservative should credit policies be? What limits, payment terms, and collection procedures are necessary? What payment timing and procedure should be followed?

20 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 20 Characteristics of Functional Tactics in R&D 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

21 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 21 Key Functional Tactics in R&D Functional Tactic Typical Questions the Functional Tactic Should Answer Basic research vs. product and process development Time horizon To what extent should innovation and 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? Is the emphasis short-term or long-term? Which orientation best supports the business strategy? The marketing and production strategy?

22 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 22 Key Functional Tactics in R&D Contd... Functional Tactic Typical Questions the Functional Tactic Should Answer Organizational fit 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? Basic R&D posture Should the firm maintain an offensive posture, seeking to lead innovation in its industry? Should the firm adopt a defensive posture, responding to the innovations of its competitors?

23 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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 Firm’s short-term objectives Employees’ satisfaction and development

24 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 24 Key Functional Tactics in HRM Functional Tactic Typical Questions the Functional Tactic Should Answer Recruitment, selection, and orientation Career development and training What key human resources are needed to support chosen strategy? How do we recruit these human resources? How sophisticated should our selection process be? How should we introduce new employees to the organization? What are our future human resource needs? How can we prepare our people to meet these needs? How can we help our people develop? Compensa- tion What levels of pay are appropriate for the tasks we require? How can we motivate and retain good people? How should we interpret our payment, incentive, benefit, and seniority policies?

25 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 25 Key Functional Tactics in HRM Contd…. Functional Tactic Typical Questions the Functional Tactic Should Answer Evaluation, discipline, and control 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? Labor relations and EEO requirements How can we maximize labor-management cooperation? How do our personnel practices affect women/minorities/ Should we have hiring policies?

26 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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 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

27 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 27 Emerging Implications for HRM Tactics 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 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

28 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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

29 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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

30 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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 organization- wide coordination of the key purposes of policies

31 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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.

32 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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).

33 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 33 SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION 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).

34 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 34 SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION 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.)

35 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 35 Types of Executive Bonus Compensation Bonus TypeRationaleDescriptionShortcomings Stock option grants Restricted stock plan Golden handcuffs Provides incentive for executive to create wealth for shareholders as measured by increase in firm’s share price Promotes longer executive tenure than other forms of compensation Offers an incentive for executive to remain with the firm Right to purchase stock in the future at a price set now; compensation determined by “spread” 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 Movement in share price does not explain all dimensions of managerial performance No downside risk to executive, who always profits unlike other shareholders May promote risk- averse decision making due to downside risk borne by executive

36 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 36 Types of Executive Bonus Compensation Contd... Bonus TypeRationaleDescriptionShortcomings Golden parachute Cash based on internal performance using finance measures Offers an incentive for executive to remain with firm Offsets limitations of focusing on market- based measures of performance 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 Compensation is achieved whether or not wealth is created;rewards either success or failure Weak correlation between earnings measures and shareholder wealth creation

37 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 37 Compensation Plan Selection Matrix Type of Bonus Compensation Golden Parachute s Restricted Stock Plans Stock Options Golden Handcuffs Cash Strategic Goal Rationale X X X Achieve corporate turnaround Create and support growth opportunitie s Defend against unfriendly takeover Executive profits only if turnaround is successful in returning wealth to shareholders Risk associated with growth strategies warrants use of this high-reward incentive Helps remove temptation for executive to evaluate takeover based on personal benefits X X Evaluate suitors objectively Globalize operations Compensates executive if job is lost due to a merger favorable to the firm Risk of expanding overseas requires a plan that compensates only for achieved success X Grow share price incrementally Accounting measures can identify periodic performance benchmarks

38 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 38 Compensation Plan Selection Matrix (concluded) Type of Bonus Compensation Golden Parachute s Restricted Stock Plans Stock Options Golden Handcuffs Cash Strategic Goal Rationale X X Improve operational efficiency Increase assets under managemen t Accounting measures represent observable and agreed-upon measures of performance Executive profits proportionally as asset growth leads to long- term growth in share price X Reduce executive turnover Handcuffs provide executive tenure incentives X X Restructure organization Streamline operations 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

39 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 39 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 General Electric - An Introduction July Business Week issue cited GE as “Most Valuable Company” with worldwide market capitalization of $ 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 Case illustrate systematic implementation of strategic planning at GE to market performance in four phases over a span of 50 years - 47 to 97.

40 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 40 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 Contd... Phase I: Coordiner’s Enterpreneurial Era 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 Cordiner becomes CEO, Identifies GE’s new “Marketing Concept” PR I, PR II, (SP) (Target) This phase originated the GE Strategic Planning concept

41 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 41 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 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

42 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 42 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 Contd... Phase II: Borch and Implementing Strategic Planning Concept (63 to 71) 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

43 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 43 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 Contd... Phase III: Implementing Strategic Planning Concept (72 to 81) 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 vice- chairman. 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.

44 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 44 STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 Contd... Phase IV: Welch: Strategic Thining and Visionary Leadership 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.

45 © 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 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


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