ETM 5111 Introduction to Strategy, Technology and Integration

1. ETM 5111 Introduction to Strategy, Technology and Integration Instructor: Gregory H. Watson Session 3 – Part 1

2. Session 3:Planning Technology Integration to Stimulate Innovation Instructor: Gregory H. Watson Introduction to Strategy, Technology and Integration ETM 5111 – Summer 2003

3. Today’s topics: Planning Technology Integration to Stimulate Innovation • Part 1: • Corporate Governance & Business Management • Part 2: • Business Environmental Scans for Intellectual Property Strategy • Strategic Benchmarking and Competitive Product Analysis • Part 3: • Quality Function Deployment as a Strategic Tool • Policy Deployment and the Process of Management

4. Corporate Governance & Business Management Instructor: Gregory H. Watson Introduction to Strategy, Technology and Integration ETM 5111 – Summer 2003 Session 3 – Part 1

5. Where did governance come from? • Before the American Revolution business was conducted through “crown charters” issued by the King of England. During 1776 the new federal government transferred to the states the right to establish corporate charters – in exchange for the promise that the business would obey the laws, serve the common good and cause no harm. This is the original legislative intent of corporate social responsibility (CSR). The legislative branch of government maintained oversight of corporations and the right to establish the laws that govern them. • In 1886 the US Supreme Court ruled that corporations were ‘persons’ and that they had the right to ‘equal protection’ under the Bill of Rights as individual people (Santa Clara County vs. Southern Pacific Railroad). • This ruling led to the limited liability of the corporation and dilution of the power of individual shareholders. The growth of institutional investors with their perfunctory endorsement of management proposals has led to a further dilution of individual shareholders rights. • The Board of Directors of a corporation is entrusted with oversight of the management team by the shareholders and granted the right to make business policy guiding implementation by corporate management.

6. What is governance? • Governance is a business system of institutional policies, implementing rules and operating controls that establish a framework under which a corporation is organized and managed. Governance establishes who will participate in making decisions, with what degree of authority and how they exercise their power to manage capital in the market. • Governance sets policy for corporate decisions using policy management [hoshin kanri or policy deployment] to facilitate empowerment of staff while preserving business controls necessary for accountability to shareholder-owners. • Policy management both sets strategic direction setting and deploys the policy to the organization. It’s strategic components include a moral and ethical value foundation, a framework to exercise management discipline, an approach for precision in delegation of authority, and a long-term focus on the organization’s purpose and not just its operational actions. • Governance establishes a policy framework within which business leaders make strategic decisions that fulfill organizational purpose while allowing management to set tactical actions at the operational level to deploy and execute the board of director’s guiding policy and strategic direction.

7. Enterprise Governance Policy Board / CEO Business Management General Managers Strategy Operations Management Functional Managers Performance Designing and deploying business policy:

8. How is governance exercised? How does policy management work? • Guiding policy is the output of the board of directors from the enterprise governance level to the management team through the CEO. • The business management team sets strategic direction and reports the progress toward their specified direction using a ‘balanced scorecard’ that describes the organizational performance from the perspective of each of its unique stakeholders. • Strategic direction is deployed to operational managers by a cascade of objectives and performance indicators using a customer dashboard – an action-oriented measurement system defining linkages between internal performance measures and external success measures of value delivery to the stakeholders. • Operational results are reported to business management to enable self-regulation of performance, assure objectives are met and act to achieve the desired business results.

9. How is good governance embedded into organizations? Elements of good governance: What is an appropriate way to govern? The imperatives of business governance: Manage to discover opportunities. Innovate to take advantage of opportunities. Control to assure consistency in outcomes. Operate using high ethical principles. Business should deliver value to all stakeholders!

10. Bottom line management: “You don’t have to do this, survival is not compulsory.” ~ W. Edwards Deming Manage policy, process and procedure: The discipline of policy management: • A board of directors is accountable to both company and shareholders. • Roles & Responsibilities: • The role of business leaders and board members who are leading the management system is to set guiding policy and strategic direction that the organization will execute to determine its future and manage change. • The role of business leaders and their operational managers is to execute the strategic direction applying the board’s delegated authority. • Good corporate governance must focus on ensuring that corporations take into account the interests of a wide rage of constituencies and stakeholders: • Customers-consumers-clients • Investors-owners-shareholders • Employees-associates-teammates • Legal-regulatory-community

11. What is the job of a CEO? • CEO is held accountable to shareholders for corporate performance through the board of directors who evaluates his performance. • According to one of the most successful CEO’s in the last century – General Electric’s Jack Welch – “it is the obligation of the CEO to deliver profit in the short-term and strength in the long-term.” • The CEO’s job is to deliver value that satisfies each stakeholder of the organization: owners, customers, employees, as well as the public and government. • Organizational strength creates and sustains business value by establishing a value chain that coordinates its work: R E S U L T S Value Creation Value Delivery Value Capture Design Operations Finance

12. Value is a dynamic business condition: • Growth is a requirement for success – businesses that do not expand will eventually stagnate and slide into recession. • Economic stagnation occurs when growth fails to exceed the financial impact of inflation undermining shareholder value and causing a loss of confidence among stakeholders. • Innovation is the approach to grow value and shift consumer perception about competitive proposition among alternative market choices – perception is fundamentally a social factor. • Growth in consumer-perceived value must keep pace with financial return to a company in order to attain sustainable market success. • Firms must focus on their entire value chain.

13. Success starts when a customer experiences exceptional value! The challenge of management: • Generate short-term profit and long-term strength by serving customers with excellence. Sustained performance requires continuous growth, or else entropy will cause degradation and the business will decline. • Key indicators of business success: • Gross revenue increases faster than the cost of operations. • Growth is stimulated by innovation rather than acquisition. • Artifacts of a growing business: • Transaction volume increases as transaction cost decreases. • New products have better quality than the ones they replace. • Capital payback periods are consistently reduced. • Product warranty claims, product returns, customer complaints, labor variance, scrap and rework all decrease simultaneously. • Key business results measures: • Shareholder value-added. • Brand value-added.

14. The challenge of business entropy – degradation! Diligent stewardship is needed to avoid entropy! • Minimum expectations of excellence in corporate governance: • Preserve shareholder value • Deliver satisfaction to customers • Provide security for employees • Allow supplier-partners to make a fair profit • Do no harm to the environment • Act as a good citizen in local communities • Conduct activities demonstrating high moral and ethical values • Business expectations for operational excellence: • Decrease the requirement for working capital • Decrease non-value added cycle time from work processes • Decrease cost of failures, defects, errors and missed opportunities • Enhance the work force productivity of current resources • Enhance return on capital employed by increasing asset efficiency

15. Governance decisions affecting technology: • Some of the policies that Boards of Directors that may affect technology management: • Growth policy (e.g., organic growth or by acquisition) to define opportunity management boundaries for the corporation • Design of business model and choice of product/service line • Growth targets • Merger, acquisition, strategic alliance criteria • Capital budgeting allocation • R&D budget limitations • Intellectual property policy • Discretionary compensation cap • Types of discretionary compensation available (bonus, stock grant, stock rights, stock options, etc.) • Top level of discretionary compensation affects all – due to a flow down formula

16. Personal reflection: Think about the business news that has dominated USA business press over the past several years. Much of it has emphasized the ethical and moral issues that have been exposed regarding senior managers and their poor exercise of ‘due diligence’ to separate their personal financial concerns from their job as a ‘steward’ of the shareholder’s value. Identify at least one case where you can remember moral or financial concerns with the management team and describe how better governance would have resulted in a different outcome. What was the root cause of the problem and how could it have been averted?

17. ETM – 5111: BREAK Instructor: Gregory H. Watson Summer 2003 Session 3 – End of Part 1