Strategic Management II

Part Three – Strategy

Implementation, Control and
Innovation
Lesson – 09
Implementation

Pearce, Robinson and Mital -

Tenth Edition
– Chapter 10 - Lesson 09
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
1/48
 Strategic Management Model
Major impact Company Mission
and social
Minor impact responsibility

External possible?
Internal
environment analysis
desired?

Strategic Analysis and Choice

Feedback
Feedback

Long-term Generic and

Objectives Grand Strategies

Short-term Functional tactics Policies that

Objectives empower

Strategic Control,
Organisational structure,
Innovation and Entrepreneurship
Leadership and Culture.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
2/48
 Learning Objectives
• Understand how short-term objectives are used in strategy
implementation.
• Identify and apply the qualities of good short-term objectives to your
own experiences.
• Illustrate what is meant by functional tactics and understand how
they are used in strategy implementation.
• Gain a general sense of what outsourcing is and how it becomes a
choice in functional tactics decisions for strategy implementation.
• Understand what policies are and how to use policies to empower
operating personnel in implementing business strategies and
functional tactics.
• Understand the use of financial reward in executive compensation.
• Identify different types of executive compensation and when to use
each in strategy implementation.

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
3/48
 Strategy Implementation

“Planning their Work” “Working their Plan”

Strategy Formulation Strategy Implementation

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
4/48
 Strategy Implementation
• To shift successfully from “planning their
work” to “working their plan”, managers
must do four things well:
– Identify short-term objectives
– Initiate specific functional tactics
– Communicate policies that empower people in
the organisation
– Design effective rewards. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
5/48
 Short-Term Objectives

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
6/48
 Short-Term Objectives – (1/3)
• Short-term objectives provide specific guidance
for what is to be done, translating vision into
action.
• Short-term objectives help implement strategies
in three ways:
– First, they operationalise the long-term objectives –
break down into sub-objectives.
– Second, raise issues and potential conflicts within the
organisation that force coordination to avoid
otherwise dysfunctional consequences.
– Third, they identify measurable outcomes of action
plans or functional activities. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
7/48
 Short-Term Objectives – (2/3) - Potential
Conflicting Objectives and Priorities

Chief Executive Officer

Responsibilities

Marketing Finance and Accounting Manufacturing

•Distribution channels •Communications •Production
•Customer service and data processing supply
•Inventory obsolescence •Carrying inventory alternatives
•Warehousing
•Transportation

•More inventory •Less inventory

Objectives

•Frequent short runs •Long production

•Fast order processing •Cheap order processing runs
•Fast delivery •Lowest cost routing
•Field warehousing •Less warehousing •Plant warehousing

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
8/48
 Short-Term Objectives – (3/3)
• Short-term objectives are usually
accompanied by action plans, which
enhance these objectives in three ways.
(relationship of short-term objectives to
action plans):
– First, action plans usually identify tactics and
activities – that is, specificity.
– Second, provide a clear time frame
– Third, is identification of who is responsible –
that is accountability is set.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
9/48
 Qualities of Effective Short-Term
Objectives

Measurable

Linked to
Priorities long-term
objectives

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
10/48
 Qualities of Effective Short-Term
Objectives – Measurable – (1/2)
• Short-term objectives are more consistent
when they clearly state what is to be
accomplished, when it will be
accomplished, and how its
accomplishments will be measured.
• Such objectives can be used to monitor
both the effectiveness of each activity and
the collective progress across several
interrelated activities.

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
11/48
 Qualities of Effective Short-Term
Objectives – Measurable – (2/2)
• Measurable objectives make misunderstanding
less likely among interdependent managers who
must implement action plans.
• It is far easier to quantify the objectives of line
units than of certain staff areas.
• Difficulties in quantifying the objectives often can
be overcome by initially focusing on measurable
activity and then identifying measurable
outcomes. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
12/48
 Creating Measurable Objectives
(Selected)

Examples of Deficient Examples of Objectives with Measurable Criteria for

Objectives Performance
To improve morale in To reduce turnover (absenteeism, number of rejects, etc.)
the division (plant, among sales managers by 10 percent by January 1, 2011
department, etc.) Assumption: Morale is related to measurable outcomes (i.e.,
high and low morale are associated with different results)

To improve support of To reduce the time lapse between order date and delivery by
the sales effort 8 percent (2 days) by June 1, 2011

To improve the firm’s To conduct a public opinion poll using random samples in the
image five largest Indian metropolitan markets to determine average
scores on 10 dimensions of corporate responsibility by May
15, 2011. To increase our score on those dimensions by an
average of 7.5 percent by May 1, 2011

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
13/48
 Qualities of Effective Short-Term
Objectives – Priorities – (1/2)
• Although all annual objectives are
important, some deserve priority because
of a timing consideration or their particular
impact on a strategy’s success.
• If such priorities are not established,
conflicting assumptions about the relative
importance of annual objectives may
inhibit progress toward strategic
effectiveness.

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
14/48
 Qualities of Effective Short-Term
Objectives – Priorities – (2/2)
• Priorities are established in various ways.
• A simple ranking may be based on
discussion and negotiation during the
planning process.
• Whatever the method, recognising
priorities is an important dimension in the
implementation value of short-term
objectives.

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
15/48
 Qualities of Effective Short-Term Objectives
– Linked to Long-Term Objectives
• Short-term objectives can add breadth and
specificity in identifying what must be
accomplished to achieve long-term
objectives.
• The link between short-term and long-term
objectives should resemble cascades (=
series of waterfalls) through the firm from
basic long-term objectives to specific
short-term objectives in key operation
areas.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
16/48
 Value-Added Benefits of Short-
Term Objectives And Action Plans
Give operating personnel a
better understanding of their
role in a firm’s mission

Provide basis for Provide basis for strategic

accomplishing conflicting control
concerns

Motivation – clarify
personnel and group roles
in a firm’s strategies

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
17/48
 Functional Tactics That Implement
Business Strategies

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
18/48
 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

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
19/48
 Functional Tactics at General Cinema
Corporation
Functional Tactics

Functional Tactics – Marketing

Seek only first-run films by
Corporate Strategy Soft outbidding competition in each local
drink Business Strategies
market; provide primarily family-
Corporate Strategy bottling oriented movies , and maintain an
Concentration and admission price only slightly above
Achieve 15-20 percent market development that of local competition
annual growth through selective Functional Tactics – Finance
existing businesses Maintain and Use lease or sale and leaseback
and carefully selected selectively expand arrangements of each theater to
diversification into leading nationwide maximize cash flow for corporate
Movie
leisure-oriented, expansions; seek profitability thru’
exhibition position in the movie
consumer-oriented volume, not higher ticket prices
exhibition industry to
product/service provide positive cash Functional Tactics – Operations
businesses to absorb flow for corporate Use multiscreen facilities with
increasing cash flow diversification minimal maintenance requirements
from theater and soft and a joint service area to serve each
drink bottling minitheater
operations
12/09/2010/ PK Sarkar / Lesson
Sunkist products 09 - Implementation
Master
20/48
 Differences Between Business Strategies
and Functional Tactics – (1/2)
• Time horizon
• Specificity
• Participants who develop them #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
21/48
 Differences Between Business Strategies
and Functional Tactics – (2/2)
Time Horizon Specificity Participants
•Shorter time horizon •Greater specificity of
of functional tactics functional tactics
contributes to contributes to successful •General managers
successful implementation by establish long-term
implementation by 9Ensuring functional objectives and overall
9Focusing attention managers focus on business strategies
on what needs to be accomplishments •Operating managers
done now establish short-term
9Clarifying for top
objectives and
9Allowing functional managers how functional
functional tactics
managers to adjust managers intend to
leading to business
to changing current accomplish business
level success
conditions strategy
9Facilitating coordination
among operating units
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
22/48
 Outsourcing Functional Activities

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
23/48
 Outsourcing Functional Activities –
(1/4)
• A generation ago, it was conventional wisdom
that a business has a better chance of success if
it controls the doing of everything necessary to
produce its products or services.
• Referring to value chain approach, the “wise”
manager would have sought to maintain control
of virtually all the “primary” activities and the
“support” activities associated with the firm’s
work. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
24/48
 Outsourcing Functional Activities –
(2/4)
• Starting for most firms with the outsourcing
of producing payroll each month,
companies worldwide are now embracing
the idea that the best way to implement
their strategies is to retain responsibility for
executing some functions while seeking
outside people and companies to do key
support and key primary activities where
they can do so more effectively and more
inexpensively.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
25/48
 Outsourcing Functional Activities –
(3/4)
• Outsourcing, then, is acquiring an activity,
service, or product necessary to provide a
company’s products or services from “outside”
the people or operations controlled by that
acquiring company.
• Outsourcing, endorsed as a cost-cutting
measure by such management gurus as Peter
Drucker and Tom Peters, has emerged as the
most sweeping trend to hit management since
reengineering.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
26/48
 Outsourcing Functional Activities –
(4/4)
• The important point to recognise at this point is
that functional activities long associated with
doing the work of any business organisation are
increasingly subject to be outsourced if they can
be done more cost effectively by other providers.
• So it becomes critical for managers
implementing strategic plans to focus company
activities on functions deemed central to the
company’s competitive advantage and to seek
others outside the firm’s structure to provide the
functions that are necessary, but not within the
scope of the firm’s core competencies.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
27/48
 Empowering Operating
Personnel – The Role of
Policies

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
28/48
 Empowerment and Policies – (1/2)

• Empowerment is the act of allowing an

individual or team the right and flexibility to make
decisions and initiate action.
• It is being expanded and widely advocated in
many organisations today.
• Training, self-managed work groups, eliminating
whole levels of management in organisations,
and aggressive use of automation are some of
the ways and ramifications of this fundamental
change in the way business organisations
function.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
29/48
 Empowerment and Policies – (2/2)

• 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.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
30/48
 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. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
31/48
 Role of Policies in Implementing
Strategy
• Often referred to as standard operating
procedures (or instructions), policies
increase managerial effectiveness by:
• Standardising many routine decisions, and
• Clarifying the discretion managers and
employees can exercise in implementing
functional tactics.
• Logically, Policies should be derived from
functional tactics with key purpose of
aiding strategy execution. #
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
32/48
 Creating Policies That Empower
People – (1/3)
• Policies communicate guidelines to
decisions. They are designed to control
decisions while defining allowable
discretion within which operational
personnel can execute business activities;
they do this in several ways:
– (1/8)Establish indirect control over
independent action by clearly stating how
things are to be done now
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
33/48
 Creating Policies That Empower
People – (2/3)
– (2/8) Promote uniform handling of similar
activities
– (3/8) Ensure quicker decisions by
standardising answers to previously answered
questions
– (4/8) Institutionalise basic aspects of
organisational behaviour
– (5/8) Reduce uncertainty in repetitive and
day-to-day decision making.

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
34/48
 Creating Policies That Empower
People – (3/3)
– (6/8) Counter resistance to or rejection of
chosen strategies by organisation members
– (7/8) Offer predetermined answers to routine
problems
– (8/8) Afford managers a mechanism for
avoiding hasty and ill-conceived decisions in
changing operations #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
35/48
 Policies May Be Written and
Formal Or Unwritten and Informal
• Informal, unwritten policies are usually
associated with a strategic need for competitive
secrecy.
– Some policies of this kind, such as promotion from
within, are widely known (or expected) by employees
and implicitly sanctioned by management.
– Managers and employees often like the latitude
granted by unwritten and informal policies.
– However, such policies may detract from the long-
term success of a strategy. #

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
36/48
 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 authorisation or sanction of policies more
clearly
• Supply a convenient and authoritative reference
• Systematically enhance indirect control and
organisation-wide coordination of the key purpose of
policies
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
37/48
 Policies Empower People To Act
• Compensation, at least theoretically, rewards
their action.
• The last decade has seen many firms realise
that the link between compensation, particularly
executive management compensation, and
value-building strategic outcomes within their
firms was uncertain.
• The recognition of this uncertainty has brought
about increased recognition of the need to link
management compensation with the successful
implementation of strategies that build long-term
shareholder value.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
38/48
 Executive Bonus Compensation
Plans

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
39/48
 Executive Bonus Compensation Plans

• The goal of an executive bonus compensation

plan is to motivate executives to achieve
maximisation of shareholder wealth – the
underlying goal of most firms.
• However, we know from agency theory that the
goal of shareholder wealth maximisation is not
the only goal that managers pursue.
• Hence, an executive compensation plan that
contains a bonus component can be used to
orient management’s decision making towards
the owners’ goals.
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
40/48
 Executive Bonus Compensation Plans
Major Plan Types

Stock Options

Restricted Stock Cash

Golden Handcuffs Golden Parachutes

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
41/48
 Types of Executive Bonus Compensation
Plans – (1/3)

Bonus Description Rationale Shortcomings

Type
Stock option Right to purchase stock Provides incentive Movement in
grants in the future at price set for executive to share price does
now. Compensation is create wealth for not explain all
shareholders as
determined by “spread” dimensions of
measured by
between option price and increase in firm’s managerial
exercise price share price performance
Restricted Shares given to Promotes longer No downside risk
stock plan executive who is executive tenure to executive, who
prohibited from selling than other forms always profits
them for a specific time of compensation unlike other
period. May also include shareholders
performance restrictions

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
42/48
 Types of Executive Bonus Compensation
Plans – (2/3)
Bonus Description Rationale Shortcomings
Type
Golden Bonus income deferred Offers an May promote risk-
Handcuffs in a series of annual incentive for averse decision
installments. Deferred executive to making due to
amounts not yet paid are remain with the downside risk
forfeited with executive firm borne by
resignation executive
Golden Executives have right to Offers an Compensation is
parachute collect the bonus if they incentive for achieved whether
lose position due to executive to or not wealth is
takeover, firing, remain with the created for
retirement, or resignation firm shareholders.
Rewards either
success or failure
12/09/2010/ PK Sarkar / Lesson 09 - Implementation
Master
43/48
 Types of Executive Bonus Compensation
Plans – (3/3)

Bonus Description Rationale Shortcomings

Type
Cash based Bonus compensation Offsets the Weak correlation
on internal based on accounting limitations of between earnings
business performance measures focusing on measures and
performance such as return on equity market-based shareholder
using measures of wealth creation.
financial performance Annual earnings
measures do not capture
future impact of
current decisions

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
44/48
 Compensation Plan Selection Matrix – (1/4)

Strategic Cash Golden Golden Restricted Stock Rationale

Handcuffs Parachutes Stock Options
Goal
Plans
Achieve Executive profits
corporate X only if turnaround is
successful in
turnaround
returning wealth to
shareholders
Create and Risk associated with
support growth X growth strategies
warrants the use of
opportunities
this high-reward
incentive
Defend against Helps remove
unfriendly X temptation for
executive to evaluate
takeover
takeover based on
personal benefits

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
45/48
 Compensation Plan Selection Matrix – (2/4)

Strategic Cash Golden Golden Restricted Stock Rationale

Handcuffs Parachutes Stock Options
Goal
Plans
Evaluate suitors Compensates
objectively X executive if job is
lost due to a merger
favorable to the firm
Globalise Risk of expanding
operations X overseas requires a
plan that
compensates only
for achieved success
Grow share Accounting
price X measures can
identify periodic
incrementally
performance
benchmarks

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
46/48
 Compensation Plan Selection Matrix – (3/4)

Strategic Cash Golden Golden Restricted Stock Rationale

Handcuffs Parachutes Stock Options
Goal
Plans
Improve Accounting
operational X measures represent
observable and
efficiency
agreed-upon
measures of
performance
Increase assets Executive profits
under X proportionally as
asset growth leads
management
to long-term growth
in share price
Reduce Handcuffs provide
executive X executive tenure
incentive
turnover

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
47/48
 Compensation Plan Selection Matrix – (4/4)

Strategic Cash Golden Golden Restricted Stock Rationale

Handcuffs Parachutes Stock Options
Goal
Plans
Restructure Risk associated with
organisation X major change with
firm’s assets warrant
use of this high-
reward incentive
Streamline Rewards long-term
operations X focus on efficiency
and cost control

12/09/2010/ PK Sarkar / Lesson 09 - Implementation

Master
48/48