MANAGEMENT POLICY AND STRATEGY SESSION - IX

1. MANAGEMENT POLICY AND STRATEGYSESSION - IX Implementing Strategy Functional Tactics and Policies Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in

2. Involves development of support systems that Strategy Implementation Identify short-term objectives Initiate specific functional tactics Communicate policies to empower people Design effective support systems

3. What are Short-Term Objectives? Provide specific guidance for what is to be done, translating vision into action

4. 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

5. Chief Executive Officer Marketing Finance and accounting Manufacturing • Distribution channels • Customer service • Inventory obsolescence • Communications and data processing • Carrying inventory • Production supply alternatives • Warehousing • Transportation Responsibilities • More inventory • Less inventory • Frequent short runs • Long production runs Objectives • Fast order processing • Cheap order processing • Lowest cost routing • Fast delivery • Field warehousing • Less warehousing • Plant warehousing Potential Conflicting Objectives and Priorities

6. Action plans enhance short-term objectives in three ways Relationship of Action Plans to Short-Term 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

7. Measurable Priorities Linked to long-term objectives Qualities of Effective Short-term Objectives

8. Value-Added Benefits of Short-Term Objectives Give operating personnel a better understanding of their role in a firm’s mission Provide basis for accomplishing conflicting concerns Provide basis for strategic control Motivation - Clarify personal and group roles in a firm’s strategies

9. Key, routine activities that must be undertaken in each functional area to provide the business’s products Translate grand strategies into action designed to accomplish specific short-term objectives What are Functional Tactics?

10. Corporate strategy Achieve 15-20 % 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. Functional Tactics at General Cinema Corporation Corporate Strategy Business Strategies Functional Tactics Functional tactics: Marketing Seek only first-run films by outbidding competition in each local market; provide primarily family-oriented movies; and maintain an admission price only slightly above that of local competition. 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. Soft drink bottlers Functional tactics: Finance Use lease or sale and leaseback arrangements of each theater to maximize cash flow for corporate expansions; seek profitability through volume, not higher ticket prices. Movie exhibition Functional tactics: Operations Use multiscreen facilities with minimal maintenance requirements and a joint service area to serve each minitheater. Sunkist products

11. Time Horizon Specificity Participants • 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 • 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 • General managers establish long-term objectives and overall business strategies • Operating managers establish short-term objectives and functional tactics leading to business level success Differences Between Business Strategies and Functional Tactics

12. Characteristics of Functional Tactics in Production/Operations • Viewed as core function of an organization • Involves converting inputs into value-enhanced output • Focuses on decisions regarding • Basic nature of firm’s POM system, • Seeks optimum balance between investment input and production/operations output • Location • Facilities design • Process planning on a short-term basis

13. Key Functional Tactics in POM Functional Tactic Typical Questions the Functional Tactic Should Answer Facilities and equipment • How centralized should the facilities be? • How integrated should the separate processes be? • To what extent should further mechanization or automation be pursued? • Should size and capacity be oriented toward peak or normal operating levels? Sourcing • How many sources are needed? • How should suppliers be selected, and how should relationships with suppliers be managed over time? • What level of forward buying (hedging) is appropriate? • Should work be scheduled to order or to stock? • What level of inventory is appropriate? • How should inventory be used (FIFO/LIFO), controlled, and replenished? • What are the key foci for control efforts? • Should maintenance be oriented to prevention or to breakdown? Operations planning and control

14. Characteristics of Functional Tactics in Marketing • Lead to strategic success of the firm through the profitable sale of products/services in target markets • Clearly identify customer needs that products/services aim to meet • Identify where, when, and by whom products/services are to be sold • Define how firm will communicate with target markets • Directly influence supply, demand, profitability, consumer perception, and regulatory response through pricing

15. Key Functional Tactics in Marketing Functional Tactic Typical Questions the Functional Tactic Should Answer Product or service • Which products do we emphasize? • Which products/services contribute most to profitability? • What product/service image do we seek to project? • What consumer needs does the product/service seek to meet? • What changes should be influencing our customer orientation? Price • Are we competing primarily on price? • Can we offer discounts or other pricing modifications? • Are our pricing policies standard nationally, or is there regional control? • What price segments are targeting? • What is the gross profit margin?

16. Key Functional Tactics in MarketingContd... Functional Tactic Typical Questions the Functional Tactic Should Answer Place • What level of market coverage is necessary? • Are there priority geographic areas? • What are the key channels of distribution? • What are the channel objectives, structure, and management? • What sales organization do we want? Promotion • What are the key promotion priorities and approaches? • Which advertising/communication priorities and approaches are linked to different products, markets, and territories? • Which media would be most consistent with the total marketing strategy?

17. Characteristics of Functional Tactics in Accounting and Finance • Time frame of finance tactics varies because they direct use of financial resources supporting the business strategy, long-term goals, and annual objectives • Long-term tactics guide decisions in • Long-term capital investment • Debt financing • Dividend allocation • Leveraging • Short-term tactics guide decisions in • Managing working capital and short-term assets • Accounting-focused tactics have taken on increased strategic significance in last decade

18. Key Functional Tactics in Finance and Accounting Functional Tactic Typical Questions the Functional Tactic Should Answer Capital acquisition • What is an acceptable cost of capital? • What is desired proportion of short- and long-term debt? Preferred and common stock? • What balance is desired between internal and external funding? • What risk and ownership restrictions are appropriate? • What level and forms of leasing should be used? Capital allocation • What are the priorities for capital allocation projects? • On what basis should the final selection of projects be made? • What level of capital allocation can be made by operating managers without higher approval?

19. Key Functional Tactics in Finance and AccountingContd…. Functional Tactic Typical Questions the Functional Tactic Should Answer Dividend and working capital manage-ment • What portion of earnings should be paid out as dividends? • Are things other than cash appropriate as dividends? • What are the cash flow requirements? Minimum and maximum? • How liberal/conservative should credit policies be? • What limits, payment terms, and collection procedures are necessary? • What payment timing and procedure should be followed?

20. Characteristics of Functional Tactics in R&D • Assumed a key strategic role in many firms due to increasing rate of technological change • May be more critical instruments of business strategy in some industries than in others

21. Key Functional Tactics in R&D Functional Tactic Typical Questions the Functional Tactic Should Answer Basic research vs. product and process development • To what extent should innovation and breakthrough research be emphasized? In relation to the emphasis on product development, refinement, and modification? • What critical operating processes need R&D attention? • What new products are necessary to support growth? Time horizon • Is the emphasis short-term or long-term? • Which orientation best supports the business strategy? The marketing and production strategy?

22. Key Functional Tactics in R&DContd... Functional Tactic Typical Questions the Functional Tactic Should Answer Organizational fit • Should R&D be done in-house or contracted out? • Should R&D be centralized or decentralized? • What should be the relationship between the R&D units and product managers? Marketing managers? Production managers? Basic R&D posture • Should the firm maintain an offensive posture, seeking to lead innovation in its industry? • Should the firm adopt a defensive posture, responding to the innovations of its competitors?

23. Characteristics of Functional Tactics in HRM • Assumed increasing strategic importance in the 1990s • Aid long-term success in • Development of managerial talent and competent employees • Creating systems to manage compensation or regulatory concerns • Guiding effective utilization of human resources to achieve both the • Firm’s short-term objectives • Employees’ satisfaction and development

24. Key Functional Tactics in HRM Functional Tactic Typical Questions the Functional Tactic Should Answer Recruitment, selection, and orientation • What key human resources are needed to support chosen strategy? • How do we recruit these human resources? • How sophisticated should our selection process be? • How should we introduce new employees to the organization? Career development and training • What are our future human resource needs? • How can we prepare our people to meet these needs? • How can we help our people develop? Compensa-tion • What levels of pay are appropriate for the tasks we require? • How can we motivate and retain good people? • How should we interpret our payment, incentive, benefit, and seniority policies?

25. Key Functional Tactics in HRMContd…. Functional Tactic Typical Questions the Functional Tactic Should Answer Evaluation, discipline, and control • How often should we evaluate our people? Formally or informally? • What disciplinary steps should we take to deal with poor performance or inappropriate behavior? • In what ways should we “control” individual and group performance? Labor relations and EEO requirements • How can we maximize labor-management cooperation? • How do our personnel practices affect women/minorities/ • Should we have hiring policies?

26. Emerging Implications for HRM Tactics • Traditional HRM Ideas • Emphasis solely on physical skills • Expectation of predictable, repetitious behavior • Comfort with stability and conformity • Avoidance of responsibility and decision making • Training covering only specific tasks • Emphasis placed on outcomes / results • Emerging HRM Ideas • Emphasis on total contribution to firm • Expectation of innovative and creative behavior • Tolerance of ambiguity and change • Accepting responsibility for making decisions • Broad continuous development • Emphasis placed on processes / means

27. Emerging Implications for HRM TacticsContd…. • Traditional HRM Ideas • High concern for quantity • Concern for individual efficiency • Functional and subfunctional specialization • Labor force seen as unnecessary expense • Work force is management’s adversary • Emerging HRM Ideas • High concern for total customer value • Concern for overall effectiveness • Cross-functional integration • Labor force seen as critical investment • Management and work force are partners

28. Role of Policies in Implementing Strategy • Directives designed to guide thinking, decisions, and actions of managers and employees in implementing strategy • 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

29. Why Policies Empower People 1. Establish indirect control over independent action by clearly stating how things are to be done now 2. Promote uniform handling of similar activities 3. Ensure quicker decisions by standardizing answers to previously answered questions 4. Institutionalize basic aspects of organization behavior 5. Reduce uncertainty in repetitive and day-to-day decision making 6. Counteract resistance to or rejection of chosen strategies by organization members 7. Offer predetermined answers to routine problems 8. Afford managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations

30. Advantages of Formal Written Policies 1. Require managers to think through policy’s meaning, content, and intended use 2. Reduce misunderstanding 3. Make equitable and consistent treatment of problems more likely 4. Ensure unalterable transmission of policies 5. Communicate authorization or sanction of policies more clearly 6. Supply a convenient and authoritative reference 7. Systematically enhance indirect control and organization-wide coordination of the key purposes of policies

31. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION • A Policy is a broad guideline for decision making that links the formulation of strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and strategies. • Maytag Company: Maytag will not approve any cost reduction proposal if it reduces product quality in any way. (This policy supports Maytag’s strategy for Maytag brands to compete on quality rather than on price.) • Intel: Cannibalize your product line (undercut the sales of your current products) with better products before a competitor does it to you. (This supports Intel’s objective of market leadership.) • General Electric: GE must be number one or two wherever it competes. (This supports GE’s objective to be number one in market capitalization). • America Online: The company could have used a policy stating that a new marketing program would not be implemented until proper support was in place.

32. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION Contd... • 3 M Corporation has a personnel policy, called the 15 percent rule, that allows virtually any employee to spend up to 15 per cent of the workweek on anything that he or she wants to, as long as it’s product related. (This policy supports 3M’s corporate strategy of being a highly innovative manufacturer, with each division required to have a quarter of its annual sales come from products introduced within the past five years.) • Wendy’s has a purchasing policy that gives local store managers the authority to buy fresh meat and produce locally, rather than from regionally designated or company-owned sources. (This policy supports Wendy’s functional strategy of having fresh, unfrozen hamburgers daily).

33. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION Contd... • General Cinema has a financial policy that requires annual capital investment in movie theaters not to exceed annual depreciation. (By seeing that capital investment is no greater than depreciation, this policy supports General Cinema’s financial strategy of maximizing cash flow-in this case, all profit - to its growth areas. The policy also reinforces General Cinema’s financial strategy of leasing as much as possible.) • IBM had a marketing policy of not giving free IBM personal computers (PCs) to any person or organization. • (This policy attempted to support IBM’s image strategy by maintaining its image as professional, high-value, service business at it sought to dominate the PC market).

34. SELECTED POLICIES THAT AID STRATEGY IMPLEMENTATION Contd... • Grown, Cork, and Seal Company has an R&D policy of not investing any financial or people resources in basic research. (This policy supports Crown, Cork, and Seal’s functional strategy, which emphasized customer services, not technical leadership). • Nations Bank of South Carlina has an operating policy that requires annual renewal of the financial statement of all personal borrowers. • (This policy supports NationsBank’s financial strategy, which seeks to maintain a loan-to-loss ratio below the industry norm.)

35. Types of Executive Bonus Compensation Bonus Type Description Rationale Shortcomings Stock option grants Right to purchase stock in the future at a price set now; compensation determined by “spread” Provides incentive for executive to create wealth for shareholders as measured by increase in firm’s share price Movement in share price does not explain all dimensions of managerial performance Restricted stock plan Shares given to executive who is prohibited from selling them for a specific time period Promotes longer executive tenure than other forms of compensation No downside risk to executive, who always profits unlike other shareholders Golden handcuffs Bonus income deferred in a series of annual installments; forfeited with executive resignation Offers an incentive for executive to remain with the firm May promote risk-averse decision making due to downside risk borne by executive

36. Types of Executive Bonus CompensationContd... Bonus Type Description Rationale Shortcomings Golden parachute Executive has right to collect bonus if loses position due to takeover, firing, retirement, or resignation Offers an incentive for executive to remain with firm Compensation is achieved whether or not wealth is created;rewards either success or failure Cash based on internal performance using finance measures Bonus compensation based on accounting performance measures such as return on equity Offsets limitations of focusing on market-based measures of performance Weak correlation between earnings measures and shareholder wealth creation

37. Type of Bonus Compensation Strategic Goal Cash Golden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Achieve corporate turnaround X Executive profits only if turnaround is successful in returning wealth to shareholders Create and support growth opportunities X Risk associated with growth strategies warrants use of this high-reward incentive Defend against unfriendly takeover X Helps remove temptation for executive to evaluate takeover based on personal benefits Evaluate suitors objectively X Compensates executive if job is lost due to a merger favorable to the firm Globalize operations X Risk of expanding overseas requires a plan that compensates only for achieved success Grow share price incrementally X Accounting measures can identify periodic performance benchmarks Compensation Plan Selection Matrix

38. Type of Bonus Compensation Strategic Goal Cash Golden Handcuffs Golden Parachutes Restricted Stock Plans Stock Options Rationale Improve operational efficiency X Accounting measures represent observable and agreed-upon measures of performance Increase assets under management X Executive profits proportionally as asset growth leads to long-term growth in share price Reduce executive turnover X Handcuffs provide executive tenure incentives Restructure organization X Risk associated with major change in firm’s assets warrant use of this high-reward incentive Streamline operations X Rewards long-term focus on efficiency and cost control Compensation Plan Selection Matrix (concluded)

39. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997 General Electric - An Introduction • July 1997 - Business Week issue cited GE as “Most Valuable Company” with worldwide market capitalization of $198.09 billion. • GE - established in 1878 with a group of investors joining together to finance Edison’s incandescent lamp. • Company grew; by 1939 sales $342 million; due to WWII increased to $1.4 billion in 1943. • Case illustrate systematic implementation of strategic planning at GE to market performance in four phases over a span of 50 years - 47 to 97.

40. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997Contd... Phase I: Coordiner’s Enterpreneurial Era • 1947 CEO Charles Wilson tells Cordiner to study managing the fast paced growth. • Cordiner identified three areas of change - (1) More decentralized decision making (2) Long range planning system and (3) More entrepreneurial minded managers to meet growth challenges. • 1950 - Cordiner becomes CEO, Identifies GE’s new “Marketing Concept” PR I, PR II, (SP) (Target) • This phase originated the GE Strategic Planning concept

41. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997Contd... Phase I: Coordiner’s Enterpreneurial Era • Think like entrepreneurs • Make markets and customer values central focus for strategic planning • Once market opportunities identified, plan and make resource allocations. • Plan so that available resources can be leveraged for long term objectives. • Managers evaluated on performance against intermediate goals set in long term plan. • “Reinvest” profits for long-term goals

42. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997Contd... Phase II: Borch and Implementing Strategic Planning Concept (63 to 71) • 1963 - Borch succeeds Cordiner as CEO inheriting three problems • (1) Implementing and integration of marketing concept • (2) Greater corporate control over 70 semi-independent division vice-presidents • (3) Reviewing and presentation process for BSU plans too bureaucratic • With aid of Mckinsey Borch integrates marketing concept in GE’s system with the development of Strategic Business Units (Staff / Line Groups) • Again withMcKinsey’s aid identifies the method for developing and managing SBUs through the concept of Portfolio Management

43. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997Contd... Phase III: Implementing Strategic Planning Concept (72 to 81) • 1972 - Reginald Jones succeeds Borch • Identified six important sectors which divided GE’s business into six broad areas. • Sector vice-presidents named to plan and have related units reporting to them. They would report to two senior vice-chairman. • Enabled strategic planning concept to become worldwide concept • Simplified presentations of SBU plans-without visual aids. Review layers in SBU plans reduced from 43 to 6. • Six strategic sectors in which GE will compete in for the future; GE’s intent for venturing for alliances around the world.

44. STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997Contd... Phase IV: Welch: Strategic Thining and Visionary Leadership 1981 - Jack Welch becomes CEO • Two basic objectives: SBUs should be number one or two in their markets; compete in three interrelated “circles” (high technology markets, service markets, core market- engines, appliances etc.). • Long term “stretch” goals-externally oriented for comparisons against total market. Incremental goals internally oriented. • Renetrated newer markets - India, China, Mexico • Removed layers of management and bureaucracy in planning process. One page Reports submitted on key issues. • Formulated strategy for 21st century - penetrate global market; service contracts with large customers of both GE and non-GE equipment.

45. Learning From GE • Focus on improving both internally and externally • Marketing Concept - without marketing’s input strategic planning is useless. • Disciplined yet flexible approach- SBU managers free to use any methods to analyze markets and operate. • Focus on long-range performance and fit rather than incremental gains. • CEO - selection is of utmost importance and central to strategic planning