1. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 CHAPTER 9 Implementing Strategy Through Short-Term Objectives, Functional Tactics, Reward System, and Employee Empowerment

2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 Chapter Topics Short-Term Objectives Functional Tactics that Implement Business Strategies Empowering Operating Personnel: The Role of Policies Executive Bonus Compensation Plans

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 Strategy Implementation “Planning their Work”“Working their Plan” Strategy FormulationStrategy Implementation

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Strategy Implementation Identify short-term objectives Initiate specific functional tactics Communicate policies to empower people Design effective rewards

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 What are Short-Term Objectives? Provide specific guidance for what is to be done, translating vision into action

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 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 and acceptable

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Ex. 9-1: 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 More inventory Frequent short runs Fast order processing Fast delivery Field warehousing Less inventory Long production runs Cheap order processing Lowest cost routing Less warehousingPlant warehousing Objectives Responsibilities

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Qualities of Effective Short-Term Objectives Measurable Priorities Linked to long-term objectives

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Ex. 9-3: Creating Measurable Objectives (Selected) Examples of Deficient Objectives Examples of Objectives with Measurable Criteria for Performance To improve morale in the division (plant, department, etc.) 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 support of the sales effort To reduce the time lapse between order date and delivery by 8 percent (2 days) by June 1, 2004 To improve the firm’s imageTo 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

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 Business Strategies and Functional Tactics … are different in three ways Time horizon Specificity Participants who develop them

15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Differences Between Business Strategies and Functional Tactics Time HorizonSpecificityParticipants 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 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 General managers establish long-term objectives and overall business strategies Operating managers establish short-term objectives and functional tactics leading to business level success

16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 17 Role of Policies in Implementing Strategy Previously referred to as standard operating procedures, policies 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

18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 19 Why Policies Empower People Establish indirect control over independent action by clearly stating how things are to be done now Promote uniform handling of similar activities Ensure quicker decisions by standardizing answers to previously answered questions Institutionalize basic aspects of organizational behavior

20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 20 Why Policies Empower People Reduce uncertainty in repetitive and day-to-day decision making Counter resistance to or rejection of chosen strategies by organization members Offer predetermined answers to routine problems Afford managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations

21. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 21 Advantages of Formal Written Policies Require managers to think through policy’s meaning, content, and intended use Reduce misunderstanding Make equitable and consistent treatment of problems more likely Ensure unalterable transmission of policies Communicate authorization or sanction of policies more clearly Supply a convenient and authoritative reference Systematically enhance indirect control and organization-wide coordination of the key purpose of policies

22. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 23 Executive Bonus Compensation Plans Major Plan Types Stock Options Restricted Stock Golden HandcuffsGolden Parachutes Cash

24. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 24 Ex. 9-8: Types of Executive Bonus Compensation Plans Bonus TypeDescriptionRationaleShortcomings Stock option grants Right to purchase stock in the future at price set now. Compensation is determined by “spread” between option price and exercise price 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 Restricted stock plan Shares given to executive who is prohibited from selling them for a specific time period. May also include performance restrictions Promotes longer executive tenure than other forms of compensation No downside risk to executive, who always profits unlike other shareholders

25. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 25 Ex. 9-8 (contd.) Bonus TypeDescriptionRationaleShortcomings Golden Handcuffs Bonus income deferred in a series of annual installments. Deferred amounts not yet paid are forfeited with executive resignation Offers an incentive for executive to remain with the firm May promote risk- averse decision making due to downside risk borne by executive Golden parachute Executives have right to collect the bonus if they lose position due to takeover, firing, retirement, or resignation Offers an incentive for executive to remain with the firm Compensation is achieved whether or not wealth is created for shareholders. Rewards either success or failure

26. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 26 Ex. 9-8 (contd.) Bonus TypeDescriptionRationaleShortcomings Cash based on internal business performance using financial measures Bonus compensation based on accounting performance measures such as return on equity Offsets the limitations of focusing on market-based measures of performance Weak correlation between earnings measures and shareholder wealth creation. Annual earnings do not capture future impact of current decisions

27. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 27 Ex. 9-9: Compensation Plan Selection Matrix Strategic Goal CashGolden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Achieve corporate turnaround X Executive profits only if turnaround is successful in returning wealth to shareholders Create and support growth opportunities X Risk associated with growth strategies warrants the use of this high-reward incentive Defend against unfriendly takeover X Helps remove temptation for executive to evaluate takeover based on personal benefits

28. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 28 Ex. 9-9 (contd.) Strategic Goal CashGolden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Evaluate suitors objectively X Compensates executive if job is lost due to a merger favorable to the firm Globalize operations X Risk of expanding overseas requires a plan that compensates only for achieved success Grow share price incrementally X Accounting measures can identify periodic performance benchmarks

29. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 29 Ex. 9-9 (contd.) Strategic GoalCash Golden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Improve operational efficiency X Accounting measures represent observable and agreed-upon measures of performance Increase assets under management X Executive profits proportionally as asset growth leads to long- term growth in share price Reduce executive turnover X Handcuffs provide executive tenure incentive

30. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 30 Ex. 9-9 (contd.) Strategic GoalCashGolden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Restructure organization X Risk associated with major change with firm’s assets warrant use of this high- reward incentive Streamline operations X Rewards long-term focus on efficiency and cost control