MANAGEMENT POLICY AND STRATEGY SESSION - IX

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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_at_dms.iitd.ernet.in

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Strategy Implementation
Identify short-term objectives
Initiate specific functional tactics
Communicate policies to empower people
Design effective support systems
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What are Short-Term Objectives?
Provide specific guidance for what is to be done,
translating vision into action
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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
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Potential Conflicting Objectives and Priorities
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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
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Qualities of Effective Short-term Objectives
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Value-Added Benefits of Short-Term Objectives
Give operating personnel a better understanding
of their role in a firms mission
Provide basis for accomplishing conflicting
concerns
Provide basis for strategic control
Motivation - Clarify personal and group roles in
a firms strategies
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What are Functional Tactics?
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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
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Differences Between Business Strategies and
Functional Tactics
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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 firms POM system,
• Seeks optimum balance between investment input
  and production/operations output
• Location
• Facilities design
• Process planning on a short-term basis

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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
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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

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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?

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Key Functional Tactics in Marketing Contd..
.
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?

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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

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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?

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Key Functional Tactics in Finance and
Accounting Contd.
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?

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Characteristics of Functional Tactics in RD

• 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

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Key Functional Tactics in RD
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 RD
  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?

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Key Functional Tactics in RD Contd...
Functional Tactic
Typical Questions the Functional Tactic Should
Answer
Organizational fit

• Should RD be done in-house or contracted out?
• Should RD be centralized or decentralized?
• What should be the relationship between the RD
  units and product managers? Marketing managers?
  Production managers?

Basic RD 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?

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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
• Firms short-term objectives
• Employees satisfaction and development

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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?

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Key Functional Tactics in HRM Contd.
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?

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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

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Emerging Implications for HRM Tactics Contd
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• Traditional HRM Ideas
• High concern for quantity
• Concern for individual efficiency
• Functional and subfunctional specialization
• Labor force seen as unnecessary expense
• Work force is managements 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

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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

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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
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Advantages of Formal Written Policies
1. Require managers to think through policys
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
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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
  corporations 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 Maytags
  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 Intels objective of market
  leadership.)
• General Electric GE must be number one or two
  wherever it competes. (This supports GEs
  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.

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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 its product related.
• (This policy supports 3Ms 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.)
• Wendys 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 Wendys functional
  strategy of having fresh, unfrozen hamburgers
  daily).

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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
  Cinemas financial strategy of maximizing cash
  flow-in this case, all profit - to its growth
  areas. The policy also reinforces General
  Cinemas 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 IBMs image
  strategy by maintaining its image as
  professional, high-value, service business at it
  sought to dominate the PC market).

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SELECTED POLICIES THAT AID STRATEGY
IMPLEMENTATION Contd...

• Grown, Cork, and Seal Company has an RD policy
  of not investing any financial or people
  resources in basic research.
• (This policy supports Crown, Cork, and Seals
  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 NationsBanks financial
  strategy, which seeks to maintain a loan-to-loss
  ratio below the industry norm.)

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Types of Executive Bonus Compensation
Bonus Type
Rationale
Description
Shortcomings
Stock option grants
Provides incentive for executive to create wealth
for shareholders as measured by increase in
firms share price
Right to purchase stock in the future at a price
set now compensation determined by spread
Movement in share price does not explain all
dimensions of managerial performance
Restricted stock plan
Promotes longer executive tenure than other forms
of compensation
Shares given to executive who is prohibited from
selling them for a specific time period
No downside risk to executive, who always profits
unlike other shareholders
Golden handcuffs
Offers an incentive for executive to remain with
the firm
Bonus income deferred in a series of annual
installments forfeited with executive resignation
May promote risk-averse decision making due to
downside risk borne by executive
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Types of Executive Bonus Compensation Contd
...
Bonus Type
Rationale
Description
Shortcomings
Golden parachute
Offers an incentive for executive to remain with
firm
Executive has right to collect bonus if loses
position due to takeover, firing, retirement, or
resignation
Compensation is achieved whether or not wealth is
createdrewards either success or failure
Cash based on internal performance using finance
measures
Offsets limitations of focusing on market-based
measures of performance
Bonus compensation based on accounting
performance measures such as return on equity
Weak correlation between earnings measures and
shareholder wealth creation
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Compensation Plan Selection Matrix
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Compensation Plan Selection Matrix (concluded)
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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 Edisons
  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.

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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC 1947 TO
1997 Contd...

• Phase I Coordiners 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 GEs new
  Marketing Concept PR I, PR II, (SP) (Target)
• This phase originated the GE Strategic Planning
  concept

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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC 1947 TO
1997 Contd...

• Phase I Coordiners 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

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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC 1947 TO
1997 Contd...

• 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 GEs system with the development of
  Strategic Business Units (Staff / Line Groups)
• Again withMcKinseys aid identifies the method
  for developing and managing SBUs through the
  concept of Portfolio Management

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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC 1947 TO
1997 Contd...

• Phase III Implementing Strategic Planning
  Concept (72 to 81)
• 1972 - Reginald Jones succeeds Borch
• Identified six important sectors which divided
  GEs 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 GEs intent for venturing for
  alliances around the world.

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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC 1947 TO
1997 Contd...

• 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.

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Learning From GE

• Focus on improving both internally and externally
• Marketing Concept - without marketings 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