Implementing Strategy

Seminar in Strategy and Policy Implementing Strategy Dr. Eliot S. Elfner St. Norbert College BUAD 485 C & D St. Norbert College Seminar in Policy and Strategy

Corporate Governance St. Norbert College Seminar in Policy and Strategy

The Strategic Management Process St. Norbert College Seminar in Policy and Strategy

Corporate Governance • Corporate governance is: • A relationship among stakeholders used to determine and control the strategic direction and performance of organizations • Concerned with making strategic decisions more effectively • Used to establish order between a firm’s owners and its top-level managers whose interests may be in conflict St. Norbert College Seminar in Policy and Strategy

The Firm The Firm Internal Governance Mechanisms Governance Mechanisms • Executive Compensation • Use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests External Governance Mechanisms • Market for Corporate Control • Purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness St. Norbert College Seminar in Policy and Strategy

Separation of Ownership andManagerial Control • Basis of the Modern Corporation • Shareholders purchase stock, becoming residual claimants • Shareholders reduce risk by holding diversified portfolios • Professional managers are contracted to provide decision making • Modern public corporation form leads to efficient specialization of tasks: • Risk bearing by shareholders • Strategy development and decision making by managers St. Norbert College Seminar in Policy and Strategy

Managerial Opportunism • The seeking of self-interest with guile (cunning or deceit) • Managerial opportunism is: • An attitude (inclination) • A set of behaviors (specific acts of self-interest) • Managerial opportunism prevents the maximization of shareholder wealth (the primary goal of owner/principals) St. Norbert College Seminar in Policy and Strategy

An Agency Relationship Hire and create Figure 10.1 St. Norbert College Seminar in Policy and Strategy

Agency Costs and Governance Mechanisms • Principals may engage in monitoring behavior to assess the activities and decisions of managers • However, dispersed shareholding makes it difficult and inefficient to monitor management’s behavior • Boards of Directors have a fiduciary duty to shareholders to monitor management • However, Boards of Directors are often accused of being lax in performing this function St. Norbert College Seminar in Policy and Strategy

Manager and Shareholder Risk and Diversification St. Norbert College Seminar in Policy and Strategy

Governance MechanismsOwnership Concentration • Large block shareholders have a strong incentive to monitor management closely: • Their large stakes make it worth their while to spend time, effort and expense to monitor closely • They may also obtain Board seats which enhances their ability to monitor effectively • Financial institutions are legally forbidden from directly holding board seats • The increasing influence of institutional owners (stock mutual funds and pension funds) • Have the size (proxy voting power) and incentive (demand for returns to funds) to discipline ineffective top-level managers • Can affect the firm’s choice of strategies • Shareholder activism: • Shareholders can convene to discuss corporation’s direction • If a consensus exists, shareholders can vote as a block to elect their candidates to the board • Proxy fights • There are limits on shareholder activism available to institutional owners in responding to activists’ tactics St. Norbert College Seminar in Policy and Strategy

Governance MechanismsBoard of Directors • Group of elected individuals that acts in the owners’ interests to formally monitor and control the firm’s top-level executives, has the power to: • Direct the affairs of the organization • Punish and reward managers • Protect owners from managerial opportunism • Composition of Boards: • Insiders: the firm’s CEO and other top-level managers • Related Outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm • Outsiders: individuals who are independent of the firm’s day-to-day operations and other relationships • Criticisms of Boards of Directors include: • Too readily approve managers’ self-serving initiatives • Are exploited by managers with personal ties to board members • Are not vigilant enough in hiring and monitoring CEO behavior • Lack of agreement about the number of and most appropriate role of outside directors • Enhancing the effectiveness of boards and directors: • More diversity in the backgrounds of board members • Stronger internal management and accounting control systems • More formal processes to evaluate the board’s performance • Adopting a “lead director” role • Changes in compensation of directors St. Norbert College Seminar in Policy and Strategy

Sarbanes-Oxley Act of 2002 • “Trust, but Verify” • SOX Section 302 - Corporate Responsibility for Financial Reports – CEO & CFO Sign Off • a) CEO and CFO must review all financial reports. • b) Financial report does not contain any misrepresentations. • c) Information in the financial report is "fairly presented". • d) CEO and CFO are responsible for the internal accounting controls. • e) CEO and CFO must report any deficiencies in internal accounting controls, or any fraud involving the management of the audit committee. • f) CEO and CFO must indicate any material changes in internal accounting controls. St. Norbert College Seminar in Policy and Strategy

Governance MechanismsExecutive Compensation • Forms of compensation: • Salary, bonuses, long-term performance incentives, stock awards, stock options • Factors complicating executive compensation: • Strategic decisions by top-level managers are complex, non-routine and affect the firm over an extended period • Other variables affecting the firm’s performance over time • Limits on the effectiveness of executive compensation: • Unintended consequences of stock options • Firm performance not as important as firm size • Balance sheet not showing executive wealth • Options not expensed at the time they are awarded St. Norbert College Seminar in Policy and Strategy

Governance MechanismsMarket for Corporate Control • Individuals and firms buy or take over undervalued corporations • Ineffective managers are usually replaced in such takeovers • Threat of takeover may lead firm to operate more efficiently • Changes in regulations have made hostile takeovers difficult • Managerial defense tactics increase the costs of mounting a takeover • Defense tactics may require: • Asset restructuring • Changes in the financial structure of the firm • Shareholder approval • Market for corporate control lacks the precision of internal governance mechanisms St. Norbert College Seminar in Policy and Strategy

Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Governance Mechanisms and Ethical Behavior (cont’d) It is important to serve the interests of the firm’s multiple stakeholder groups! • Shareholders in this group are viewed as the most important stakeholder group • The focus of governance mechanisms is to control managerial decisions to assure shareholder interests • Interests of shareholders is served by the Board of Directors • Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders may withdraw their support of the firm if their needs are not met, at least minimally • Some observers believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders’ interests • Importance of maintaining ethical behavior is seen in the examples of Enron, WorldCom, HealthSouth and Ahold NV St. Norbert College Seminar in Policy and Strategy

Organizational Structure and Controls St. Norbert College Seminar in Policy and Strategy

Organizational Structure • Organizational structure specifies: • The firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes • The work to be done and how to do it, given the firm’s strategy or strategies • It is critical to match organizational structure to the firm’s strategy St. Norbert College Seminar in Policy and Strategy

Organizational Structure • Effective structures provide: • Stability • Flexibility • Structural stability provides: • The capacity required to consistently and predictably manage daily work routines • Structural flexibility provides for: • The opportunity to explore competitive possibilities • The allocation of resources to activities that shape needed competitive advantages St. Norbert College Seminar in Policy and Strategy

Organizational Controls • Purposes of Organizational Controls: • Guide the use of strategy • Indicate how to compare actual results with expected results • Suggest corrective actions to take when the difference between actual and expected results is unacceptable • Two types of organizational controls • Strategic controls • Financial controls St. Norbert College Seminar in Policy and Strategy

Organizational Controls Strategic Controls Organizational Controls • Subjective Criteria • Are concerned with examining the fit between: • What the firm might do (opportunities in its external environment • What the firm can do (competitive advantages) • Evaluate the degree to which the firm focuses on the requirements to implement its strategy St. Norbert College Seminar in Policy and Strategy

Organizational Controls Strategic Controls Financial Controls Organizational Controls • Objective criteria • Accounting-based measures include: • Return on investment • Return on assets • Market-based measures include: • Economic Value Added (EVA) St. Norbert College Seminar in Policy and Strategy

Strategy and Structure Growth Pattern • As firms grow larger and become more complex, structural challenges emerge • Firms’ larger sizes dictate the need for more sophisticated workflows and integrating mechanisms • Simple • Functional • Multidivisional Efficient implementation of formulated strategy Efficient implementation of formulated strategy St. Norbert College Seminar in Policy and Strategy

Functional Structure for Cost Leadership Strategy Notes: • Operations is the main function • Process engineering is emphasized rather than new product R&D • Relatively large centralized staff coordinates functions • Formalized procedures allow for emergence of a low-cost culture • Overall structure is mechanical; job roles are highly structured St. Norbert College Seminar in Policy and Strategy

Functional Structure for Differentiation Strategy Notes: • Marketing is the main function for keeping track of new product ideas• New product R&D is emphasized • Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other • Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished • Overall structure is organic; job roles are less structured St. Norbert College Seminar in Policy and Strategy

Variations of the Multidivisional Structure St. Norbert College Seminar in Policy and Strategy

Related-Constrained Strategy Notes • Structural integration devices create tight links among all divisions • Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions • R&D is likely to be centralized• • Rewards are subjective and tend to emphasize overall corporate performance in addition to divisional performance • Culture emphasizes cooperative sharing Figure 11.5 St. Norbert College Seminar in Policy and Strategy

Unrelated Strategy Notes • Corporate headquarters has a small staff • Finance and auditing are the most prominent functions in the headquarters office to manage cash flow and assure the accuracy of performance data coming from divisions • The legal affairs function becomes important when the firm acquires or divests assets • Divisions are independent and separate for financial evaluation purposes • Divisions retain strategic control, but cash is managed by the corporate office • Divisions compete for corporate resources Figure 11.7 St. Norbert College Seminar in Policy and Strategy

Worldwide Geographic Area Structure: Multidomestic Strategy Notes: • The perimeter circles indicate decentralization of operations• Emphasis is on differentiation by local demand to fit an area or country culture• Corporate headquarters coordinates financial resources among independent subsidiaries• The organization is like a decentralized federation Figure 11.8 St. Norbert College Seminar in Policy and Strategy

Worldwide Product Divisional Structure: Global Strategy Notes • The headquarters’ circle indicates centralization to coordinate information flow among worldwide products • Corporate headquarters uses many intercoordination devices to facilitate global economies of scale and scope • Corporate headquarters also allocates financial resources in a cooperative way• The organization is like a centralized federation Figure 11.9 St. Norbert College Seminar in Policy and Strategy

Strategic Leadership St. Norbert College Seminar in Policy and Strategy

Effective Strategic Leadership Shapes the Formulation of Strategic Mission Strategic Intent Influences and Successful Strategic Actions Formulation of Strategies Implementation of Strategies Yields Yields Strategic Competitiveness Above-average Returns Strategic Leadership and the Strategic Management Process St. Norbert College Seminar in Policy and Strategy

External Environment Managerial Discretion Factors Affecting Managerial Discretion • External Environment • Industry structure • Rate of market growth • Number and type of competitors • Nature and degree of political/legal constraints • Degree to which products can be differentiated St. Norbert College Seminar in Policy and Strategy

External Environment Characteristics of the Organization Managerial Discretion Factors Affecting Managerial Discretion • Characteristics of the Organization • Size • Age • Culture • Availability of resources • Patterns of interaction among employees St. Norbert College Seminar in Policy and Strategy

External Environment Characteristics of the Organization Managerial Discretion Characteristics of the Manager Factors Affecting Managerial Discretion • Characteristics of the Manager • Tolerance for ambiguity • Commitment to the firm and its desired strategic outcomes • Interpersonal skills • Aspiration level • Degree of self-confidence St. Norbert College Seminar in Policy and Strategy

Effects of CEO Succession and Top Management Team Composition St. Norbert College Seminar in Policy and Strategy

Exercise of Effective Strategic Leadership St. Norbert College Seminar in Policy and Strategy

Establishing Balanced Organizational Controls • Balanced Scorecard • Framework used to verify that the firm has established both strategic and financial controls to assess its performance • Prevents overemphasis of financial controls at the expense of strategic controls • Four perspectives of balanced scorecard • Financial • Customer • Internal business processes • Learning and growth St. Norbert College Seminar in Policy and Strategy

Financial Customer Strategic and Financial Controls in a Balanced Scorecard Framework • Cash flow • Return on equity • Return on assets • Assessment of ability to anticipate customer needs • Effectiveness of customer service needs • Percentage of repeat business • Quality of communications with customers Adapted from Figure 12.5 St. Norbert College Seminar in Policy and Strategy

Internal Business Processes Strategic and Financial Controls in a Balanced Scorecard Framework • Asset utilization improvements • Improvements in employee morale • Changes in turnover rates • Improvements in innovation ability • Number of new products compared to competitors’ • Increases in employees’ skills Learning and Growth St. Norbert College Seminar in Policy and Strategy

Strategic Entrepreneurship St. Norbert College Seminar in Policy and Strategy

Strategic Entrepreneurship • Strategic Entrepreneurship • Taking entrepreneurial actions using a strategic perspective • Engaging in simultaneous opportunity seeking and competitive advantage seeking behaviors • Designing and implementing entrepreneurial strategies to create wealth • Strategic entrepreneurship actions can be taken by: • Individuals • Corporations St. Norbert College Seminar in Policy and Strategy

Strategic Entrepreneurship and Innovation • Entrepreneurship is concerned with: • The discovery of profitable opportunities • The exploitation of profitable opportunities • Firms that encourage entrepreneurship are: • Risk takers • Committed to innovation • Proactive in creating opportunities rather than waiting to respond to opportunities created by others St. Norbert College Seminar in Policy and Strategy

Entrepreneurial Opportunities • Entrepreneurial Opportunities • Conditions in which new products or services can satisfy a need in the market • Entrepreneurs or entrepreneurial managers must be able to: • Identify opportunities not perceived by others • Take actions to exploit the opportunities • Establish a competitive advantage St. Norbert College Seminar in Policy and Strategy

The act of creating or developing a new product or process Brings something new into being Technical criteria are used to determine the success of an invention Invention Innovation Process St. Norbert College Seminar in Policy and Strategy

The process of creating a commercial product from an invention Brings something new into use. Commercial criteria are used to determine the success of an innovation Invention Innovation Innovation Process St. Norbert College Seminar in Policy and Strategy

The adoption of an innovation by similar firms Usually leads to product or process standardization Products based on imitation often are offered at lower prices but with fewer features Invention Innovation Imitation Innovation Process St. Norbert College Seminar in Policy and Strategy

Implementing Strategy