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CHAPTER 9
Implementing Strategy Through Short-Term Objectives, Functional Tactics, Reward System, and Employee Empowerment
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Chapter Topics
Short-Term Objectives Functional tactics that Implement Business Strategies Empowering Operating Personnel: The Role of Policies Executive Bonus Compensation Plans

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Strategy Implementation

Planning their Work

Working their Plan

Strategy Formulation

Strategy Implementation

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Strategy Implementation

Identify short-term objectives

Initiate specific functional tactics

Communicate policies to empower people

Design effective rewards

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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 and acceptable
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Ex. 9-1: Potential Conflicting Objectives and Priorities


Chief Executive Officer
Finance and Accounting Communications and data processing Carrying inventory Manufacturing Production supply alternatives Warehousing Transportation

Marketing Distribution channels Customer service Inventory obsolescence

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

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Relationship of Action Plans to ShortTerm 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

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Qualities of Effective Short-Term Objectives

Measurable

Priorities

Linked to long-term objectives

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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 firms 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, 2004. To increase our score on those dimensions by an average of 7.5 percent by May 1, 2005

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Value-Added Benefits of Short-Term Objectives


Give operating personnel a better understanding of their role in a firms mission Provide basis for accomplishing conflicting concerns Provide basis for strategic control

Motivation clarify personnel and group roles in a firms strategies

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What are Functional Tactics?

Key, routine activities that must be undertaken in each functional area to provide the businesss products and services

Translate grand strategies into action designed to accomplish specific shortterm objectives

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Ex. 9-4: Functional Tactics at General Cinema Corporation Functional Tactics


Corporate Strategy

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
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Soft drink bottling

Business Strategies

Movie exhibition

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
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Business Strategies and Functional Tactics


are different in three ways

Time horizon Participants who develop them

Specificity

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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

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

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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

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What Are Policies?


Policies are directives designed to guide the thinking, decisions, and actions of managers and their subordinates in implementing a firms strategy

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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
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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
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Why Policies Empower People


(contd.)

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
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Advantages of Formal Written Policies


Require managers to think through policys 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
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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

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Executive Bonus Compensation Plans


Major Plan Types Stock Options

Restricted Stock

Cash

Golden Handcuffs

Golden Parachutes

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Ex. 9-8: Types of Executive Bonus Compensation Plans


Bonus Type
Stock option grants

Description
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

Rationale
Provides incentive for executive to create wealth for shareholders as measured by increase in firms share price Promotes longer executive tenure than other forms of compensation

Shortcomings
Movement in share price does not explain all dimensions of managerial performance No downside risk to executive, who always profits unlike other shareholders

Restricted stock plan

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Ex. 9-8 (contd.)


Bonus Type
Golden Handcuffs

Description
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

Rationale
Offers an incentive for executive to remain with the firm

Shortcomings
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

Golden parachute

Offers an incentive for executive to remain with the firm

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Ex. 9-8 (contd.)


Bonus Type
Cash based on internal business performance using financial measures

Description
Bonus compensation based on accounting performance measures such as return on equity

Rationale
Offsets the limitations of focusing on market-based measures of performance

Shortcomings
Weak correlation between earnings measures and shareholder wealth creation. Annual earnings do not capture future impact of current decisions

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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 Restricted Stock Parachutes Stock Plans Options

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

X X

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Ex. 9-9 (contd.)


Strategic Goal
Evaluate suitors objectively

Cash

Golden Handcuffs

Golden Restricted Stock Parachutes Stock Plans Options

Rationale
Compensates executive if job is lost due to a merger favorable to the firm

X X X

Globalize operations

Risk of expanding overseas requires a plan that compensates only for achieved success Accounting measures can identify periodic performance benchmarks

Grow share price incrementally

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Ex. 9-9 (contd.)


Strategic Goal
Improve operational efficiency Increase assets under management Reduce executive turnover

Cash

Golden Handcuffs

Golden Restricted Stock Parachutes Stock Plans Options

Rationale
Accounting measures represent observable and agreed-upon measures of performance

X X

Executive profits proportionally as asset growth leads to long-term growth in share price Handcuffs provide executive tenure incentive

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Ex. 9-9 (contd.)

Strategic Goal
Restructure organization

Cash

Golden Handcuffs

Golden Restricted Stock Parachutes Stock Plans Options

Rationale
Risk associated with major change with firms assets warrant use of this highreward incentive Rewards long-term focus on efficiency and cost control

X X

Streamline operations

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