Strategy Implementation & Governance

1. Strategy Implementation & Governance Dr. Payne (9)

2. The sum total of the activates and choices required for the execution of a strategic plan – it is the process by which strategies are put into action through budgets, programs, and procedures. Three key questions: Who are the people who will carry out the strategic plan? What specifically must be done? How are they going to do what is needed? Top 10 Problems in Implementation: Slower implementation than originally planned. Unanticipated major problems Ineffective coordination of activities Competing activities and crises that distract attention Insufficient capabilities of the involved employees Inadequate training and instruction of lower-level employees Uncontrollable external environmental factors Inadequate leadership and direction by departmental managers Poor definition of key implementation tasks and activities Inadequate monitoring of activities by the information system What is Strategy Implementation?

3. Formulate Strategies Implement Strategies Strategic Control Traditional Implementation • Best when in stable and simple environment. • Goals and objectives should be measured easily with a high degree of certainty. • Quantitative controls are typical.

4. FormulateStrategies ImplementStrategies BehavioralControl InformationalControl StrategicControl Contemporary Implementation • Adaptive and anticipating – “two-way” • Information controls ask “Are we doing the right things?” • Behavioral controls ask “Are we doing things right?” • Environmental Fit is key.

5. Eight Components of Implementation Allocating Resources Building a Capable Organization Establishing Strategy- Supportive Policies Strategy Implementer’s Action Agenda Instituting Best Practices for Continuous Improvement Exercising Strategic Leadership Shaping Corporate Culture to Fit Strategy Installing Support Systems to Carry out Strategic Roles Tying Rewards to Achievement of Key Strategic Targets

6. Implementation involves a the wholemanagement team Every unitand all employees have a role and need to be committed CEO, other senior executives, and heads of major organizational units, must lead the process and orchestrate major initiatives Butthey must rely on middle and lower-level managers to push things on the front line and see that strategy is well-executed on a daily basis Who Implements? Implementation Requires Leadership, Governance, and Ethics

7. T. Payne “The Corporate Problem” • Individual shareholders, unless they are managers or hold a very large block of stock, have very little influence on the company. • Managers are “agents” of shareholders and make most of the important decisions with regard to organizational operations. • Agency/TCE – suggest that managers serve their own interests at the expense of shareholders (Williamson, 1984). • Stewardship Theory – suggests that managers should be given maximum liberty to make decisions so that they are not encumbered by rules and influences that can jeopardize optimal performance (Davis, Schoorman, & Donaldson, 1997). • Managers’ interests are often in conflict with shareholders. • Consider dividend payments vs. reinvestment in the firm.

8. T. Payne Issuing two classes of stock Some companies may give different voting rights to different stockholders, even though the shares may have the same market value Dual Positioning of CEO and Chairman of the Board This often shifts too much power to the managers, not allowing the other board members to exercise their power on the behalf of the shareholders. Andrew Grove, chairman of Intel Corp. said, “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the CEO, or is the CEO and employee? If he’s an employee, he needs a boss, and that boss is the board. The chairman runs the board. How can the CEO be his own boss?” What are the positives to the Dual positioning?? Company Practices

9. Mechanisms for Governance • Behavioral or Outcomes-based Contracts – specify how or what are to be rewarded. • Boards of Directors – have fiduciary responsibility to safeguard stockholders’ investments. Made up of Insiders and Outsiders – Insiders have information and understanding; outsiders should monitor and oversee functions, but often lack objectivity and sophistication. • Roles of BOD: • Establish policies and objectives • Elect, monitor, advise, evaluate and compensate officers. • Protect the value of corporate assets. • Monitor, approve, and report on the financial condition of company. • Delegate selected board powers to others. • Ensure that the charter and by-laws are enforced and revised. • Maintain the integrity of the board. • Pay-for-Performance of CEO– shown little correlation to company performance.

10. Good BODs INDEPENDENCE - No more than two directors should be current or former company executives, and none should do business with the company or accept consulting or legal fees from it. The audit, compensation, and nominating committees should be made up solely of independent directors.STOCK OWNERSHIP- Each director should own an equity stake in the company worth at least $150,000, excluding stock options. The only exception: new board members who haven't had time to build a large stake.DIRECTOR QUALITY - Boards should include at least one independent director with experience in the company's core business and one who is the CEO of an equivalent-size company. Fully employed directors should sit on no more than four boards, retirees no more than seven. Each director should attend at least 75% of all meetings.BOARD ACTIVISM - Boards should meet regularly without management present and should evaluate their own performance every year. Audit committees should meet at least four times a year. Board should be frugal on executive pay, decisive when planning a CEO succession, diligent in oversight responsibilities, and quick to act when trouble strikes.

11. Three key implementation tasks: Selecting people for key positions Either insiders or skilled external implementation specialists Consider culture, mix of skills, experience, beliefs, etc. Developing skills, competencies and capabilities Organizing processes and execution Select able people for key positions Develop skills, core competencies, managerial talents, competitive capabilities Organize business processes, value chain activities, and decision-making to promote successful strategy execution What Must Be Done?

12. Changes to structure are often keys to strategy implementation success. A Few hard and fast rules for organizing: Main rule:Structure mustsupport and facilitategood strategy execution. Research indicates: Structure affects performance Structure merits reassessment whenever strategy changes New strategy typically involves different skills and key activities How work is structured is a means to an end-- not an end in itself! All the basic structures have strategic advantages and disadvantages There is no ideal organization design To do a good job ofmatchingstructure to strategy Pick a basic design Modify as needed Supplement with coordinating mechanisms and communication arrangements How is it Going to Get Done?Change Structure?

13. General Manager General Manager Research & Development Manufacturing Human Resources Foundry & Castings Screw Machining Inspection Customer Service Engineering Marketing Finance & Accounting Milling & Grinding Finishing & Heat Treating Loading & Shipping Billing & Accounting Structural Forms Traditional FunctionalStructure Process-Oriented Functional Structure

14. CEO CEO Corporate Staff Corporate Services GM Europe GM North America GM Latin America GM Asia Pacific GM Central Asia & Africa GM Business A GM Business C GM Business B District Staff Functional/Process Departments Functional/Process Departments Functional/Process Departments Engineering & Prod. Design Production Marketing & Distribution Structural Forms (2) GeographicStructure Decentralized Line-of-Business Structure

15. General Manager CEO Head R&D Head Manufacture Head Marketing Head Finance Corporate Services Venture Manager 1 R&D Specialists Production Specialists Marketing Specialists Finance Specialists Venture Manager 2 Group VP SBU I Group VP SBU III Group VP SBU II R&D Specialists Production Specialists Marketing Specialists Finance Specialists Venture Manager 3 R&D Specialists Production Specialists Marketing Specialists Finance Specialists Strategically Related Business Units Strategically Related Business Units Strategically Related Business Units Venture Manager 4 R&D Specialists Production Specialists Marketing Specialists Finance Specialists Structural Forms (3) SBU Structure Matrix Structure

16. Allows firms to compete on a: Larger or global scaleand Preserve independence Types of alliances: Joint research efforts Technology-sharing Joint use of production facilities Marketing one another’s products Joint manufacturing or assembly Guidelines: Pick a compatible partner Choose ally whose strengths complement products and customers Learn thoroughly & rapidly about partner’s technology & management Do not share competitively sensitive information View alliance as temporary, not permanent Achieving Flexibility & Competitivenessvia Strategic Alliances

17. Benefits of Alliances: Gain scale economies in production and/or marketing Fill gaps in technical expertise or knowledge of local markets Share distribution facilities and dealer networks Direct combined competitive energies toward defeating mutual rivals Pitfalls of Alliances: Becoming too dependent on another firm for essential expertise over the long-term Different motives and conflicting objectives Time consuming Language and cultural barriers Mistrust when collaborating in competitively sensitive areas Clash of egos and company cultures Benefits and Pitfalls of Strategic Alliances

18. Eli Lilly: Multiple Alliances Commercial Alliance Takeda and Lilly are collaborating to copromote Takeda's novel insulin sensitivity enhancer, Actos, in the United States and more than 70 other countries. Pioneered by Takeda, the thiazolidinedione class of insulin sensitivity enhancers - TZDs - represent a new treatment for patients with type 2 diabetes that treats one of the underlying causes of the disease. Today, worldwide costs for treating diabetes are estimated at more than $200 billion annually, and it is projected that, over the next decade, those costs could double due to the related complications of diabetes, such as kidney damage, limb amputation, and problems with eyesight. R&D Alliance Lilly and Ligand are collaborating to discover and develop products based upon Ligand's intracellular receptor technology. The collaboration is focusing on products with broad applications across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity. Manufacturing Alliance Lilly and Lonza are collaborating on the development and manufacturing of Zovant. Lonza Biologics, the leading contract manufacturer of proteins in mammalian cell culture is part of the Lonza Group, the specialty chemical manufacturer headquartered in Switzerland. Zovant is a treatment for severe sepsis.

19. How is it Going to Get Done?Develop Functional Strategies Functional Strategies: The collective pattern of day-to-day decisions made and actions taken by employees responsible for value activities. These include… • R&D Strategy • Research focus/orientation • Project priorities (budget, quality, time) • Relationships to external organizations • Information Systems • Hardware/software capability and integration • Linkages to external organizations • Investments needed • HR Strategy • Recruitment, Selection, Appraisals, Salaries, Wages, Training, etc. • Financial Strategy • Capital, Investments, Returns • Resource allocation • Marketing Strategy • Customer Targeting • Product/service positioning, mix, breadth, and pricing • Promotions practices • Distribution channels • Customer service policies • Product/service policies • Marketing research • Operations Strategy • Capacity planning • Location and layout of facility • Equipment choices • Scheduling • Workforce policies

20. Allocating resources in ways that support effective strategy execution involves: Funding capital projects that can make a contribution to strategy implementation Funding efforts to strengthen competencies and capabilities or to create new ones Shifting resources--downsizing some areas, upsizing others, Killing activities that are no longer justified, and funding new activities with a critical strategy role Budgeting

21. Provide top-down guidance regarding expected behaviors Help align internal actions with strategy, channeling efforts along the intended path Enforce consistency in performance of activities in geographically scattered units Serve as powerful lever for changing corporate culture to produce stronger fit with a new strategy Role of new policies Channel behaviors and decisions to promote strategy execution Counteract tendencies of people to resist chosen strategy Too muchpolicy can be as stifling as: Wrong policyor as Chaotic as no policy Often, the best policyis a willingness to empower employees Policies and Procedures

22. Essential to promote successful strategy execution Types of support systems: On-line data systems Internet and company intranets Electronic mail Web pages Mobilizing information and creating systems to use knowledge effectively can yield competitive advantage. Examples: FedEx – Computerized parcel-tracking system and leading-edge flight operations systems. Proctor & Gamble – System to obtain early warning signs of product problems and changing tastes. Arthur Andersen– Electronic system, with data, voice, and video capabilities, linking more than 82,000 people in 360 cities in 76 countries. Installing Support Systems

23. Control: Challenge is how to ensure actions of employees stay within acceptable bounds Purpose of diagnostic control systems is to relieve managers of burden of constant monitoring Control methods establish boundaries on what not to do, allowing freedom to act with limits. Culture, rewards and boundaries are levers to control. Rewards (Two Types): Monetary Incentives Salary raises Performance bonuses Stock options Retirement packages Promotions Perks Control and Rewards • Non-Monetary Incentives • Praise • Constructive criticism • Special recognition • More, or less, job security • Interesting assignments • More, or less, job responsibility

24. Level of Strategy Type of Strategy Need for Interdependence Primary Type of Rewards and Controls Business-Level Overall cost Leadership Low Quantitative Business-Level Differentiation High Qualitative Corporate-Level Related Diversification High Qualitative Corporate-Level Unrelated Diversification Low Quantitative Strategy’s Relationship to Rewards & Controls