CHAPTER 9. Implementing Strategy Through Short-Term Objectives, Functional Tactics, Reward System, and Employee Empowerment.

Transcription

1 1 CHAPTER 9 Implementing Strategy Through Short-Term Objectives, Functional Tactics, Reward System, and Employee Empowerment

2 2 Chapter Topics Short-Term Objectives Functional Tactics that Implement Business Strategies Empowering Operating Personnel: The Role of Policies Executive Bonus Compensation Plans

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 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 7 Ex. 9-1: Potential Conflicting Objectives and Priorities Chief Executive Officer Objectives Responsibilities 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 Cheap order processing Less warehousing Long production runs Lowest cost routing Plant warehousing

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) Examples of Deficient Objectives To improve morale in the division (plant, department, etc.) To improve support of the sales effort To improve the firm s image Examples of Objectives with Measurable Criteria for Performance 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 reduce the time lapse between order date and delivery by 8 percent (2 days) by June 1, 2004 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, To increase our score on those dimensions by an average of 7.5 percent by May 1, 2005

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 Provide basis for strategic control Motivation clarify personnel and group roles in a firm s strategies

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 shortterm objectives

13 Ex. 9-4: Functional Tactics at General Cinema Corporation Functional Tactics 13 Corporate Strategy Corporate Strategy Achieve 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 Soft drink bottling Movie exhibition Business Strategies 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 familyoriented 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 Sunkist products

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 Time Horizon Specificity Participants 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 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 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 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 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 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 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 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 Cash Golden Handcuffs Golden Parachutes

24 24 Ex. 9-8: Types of Executive Bonus Compensation Plans Bonus Type Description Rationale Shortcomings Stock option grants Restricted stock plan Right to purchase stock in the future at price set now. Compensation is determined by spread between option price and exercise price Shares given to executive who is prohibited from selling them for a specific time period. May also include performance restrictions 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 Movement in share price does not explain all dimensions of managerial performance No downside risk to executive, who always profits unlike other shareholders

25 25 Ex. 9-8 (contd.) Bonus Type Description Rationale Shortcomings Golden Handcuffs Golden parachute Bonus income deferred in a series of annual installments. Deferred amounts not yet paid are forfeited with executive resignation 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 Offers an incentive for executive to remain with the firm May promote riskaverse decision making due to downside risk borne by executive Compensation is achieved whether or not wealth is created for shareholders. Rewards either success or failure

26 26 Ex. 9-8 (contd.) Bonus Type Description Rationale Shortcomings 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 27 Ex. 9-9: Compensation Plan Selection Matrix Strategic Goal Achieve corporate turnaround Create and support growth opportunities Defend against unfriendly takeover Cash Golden Handcuffs Golden Parachutes X Restricted Stock Plans Stock Options X X Rationale Executive profits only if turnaround is successful in returning wealth to shareholders Risk associated with growth strategies warrants the use of this high-reward incentive Helps remove temptation for executive to evaluate takeover based on personal benefits

28 28 Ex. 9-9 (contd.) Strategic Goal Evaluate suitors objectively Cash Golden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Globalize operations X Grow share price incrementally X X Rationale 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 Accounting measures can identify periodic performance benchmarks

29 29 Ex. 9-9 (contd.) Strategic Goal Cash Golden Handcuffs Improve operational efficiency Increase assets under management Reduce executive turnover X X Golden Parachutes Restricted Stock Plans X Stock Options Rationale Accounting measures represent observable and agreed-upon measures of performance Executive profits proportionally as asset growth leads to longterm growth in share price Handcuffs provide executive tenure incentive

30 30 Ex. 9-9 (contd.) Strategic Goal Cash Golden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Restructure organization X Streamline operations X Rationale Risk associated with major change with firm s assets warrant use of this high-reward incentive Rewards long-term focus on efficiency and cost control