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MANAGEMENT POLICY AND STRATEGY
SESSION - IXImplementing Strategy Functional Tactics and
Policies
Prof. SushilDepartment of Management
StudiesIndian Institute of Technology,
DelhiINDIA
Email: [email protected]
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Strategy Implementation
Identify short-term objectives
Initiate specific functional tactics
Communicate policies to empower people
Design effective support systems
Involves developme
nt of support systems
that
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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 objectives1. “Operationalize” long-term objectives
2. Raise issues and potential conflicts requiring coordination to avoid dysfunctional consequences
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
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
Chief Executive Officer
MarketingFinance and accounting
Manufacturing
•Distribution channels
•Customer service
•Inventory obsolescence
•Communications and data processing
•Carrying inventory
•Production supply alternatives
•Warehousing
•TransportationResp
on
sib
ilit
ies
Ob
jecti
ves
•More inventory •Less inventory
•Frequent short runs•Long production runs•Fast order processing•Cheap order processing
•Fast delivery•Lowest cost routing
•Field warehousing •Less warehousing •Plant warehousing
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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
Action plans enhance short-term objectives in three ways
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Qualities of Effective Short-term Objectives
Priorities
Measurable
Linked to long-term objectives
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Value-Added Benefits of Short-Term Objectives
Provide basis for accomplishing
conflicting concerns
Give operating personnel a better
understanding of their role in a firm’s mission
Motivation - Clarify personal and group
roles in a firm’s strategies
Provide basis for strategic control
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What are Functional Tactics?
Key, routine activities that must be undertaken in each
functional area to provide the
Translate grand strategies into action designed to accomplish
specific short-term objectives
business’s products
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Functional Tactics at General Cinema Corporation
Soft drink
bottlers
Movie exhibitio
n
Sunkist
products
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.
Functional tactics: MarketingSeek 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.
Functional tactics: FinanceUse lease or sale and leaseback arrangements of each theater to maximize cash flow for corporate expansions; seek profitability through volume, not higher ticket prices.
Functional tactics: Operations
Use multiscreen facilities with minimal maintenance requirements and a joint service area to serve each minitheater.
Corporate Strategy Business Strategies Functional Tactics
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.
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Differences Between Business Strategies and Functional Tactics
Time Horizon
•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
Specificity
•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
Participants
•General managers establish long-term objectives and overall business strategies
•Operating managers establish short-term objectives and functional tactics leading to business level success
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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 firm’s 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
Sourcing
Operations planning and control
•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?
•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?
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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
Price
•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?•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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16Key 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
Capital allocation
•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?
•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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19Key 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 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
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Key Functional Tactics in R&D
Functional Tactic
Typical Questions the Functional Tactic Should Answer
Basic research vs. product and process development
Time horizon
•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?
•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 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?
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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 Firm’s 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 orientationCareer development and training
•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?
•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 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?
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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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27Emerging Implications for HRM Tactics
Contd….
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
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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
1. Establish indirect control over independent action by clearly stating how things are to be done now
2. Promote uniform handling of similar activities 2. Promote uniform handling of similar activities
3. Ensure quicker decisions by standardizing answers to previously answered questions
3. Ensure quicker decisions by standardizing answers to previously answered questions
4. Institutionalize basic aspects of organization behavior 4. Institutionalize basic aspects of organization behavior
5. Reduce uncertainty in repetitive and day-to-day decision making 5. Reduce uncertainty in repetitive and day-to-day decision making
6. Counteract resistance to or rejection of chosen strategies by organization members
6. Counteract resistance to or rejection of chosen strategies by organization members
7. Offer predetermined answers to routine problems 7. Offer predetermined answers to routine problems
8. Afford managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations
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 policy’s meaning, content, and intended use
1. Require managers to think through policy’s meaning, content, and intended use
2. Reduce misunderstanding2. Reduce misunderstanding
3. Make equitable and consistent treatment of problems more likely
3. Make equitable and consistent treatment of problems more likely
4. Ensure unalterable transmission of policies4. Ensure unalterable transmission of policies
5. Communicate authorization or sanction of policies more clearly
5. Communicate authorization or sanction of policies more clearly
6. Supply a convenient and authoritative reference6. Supply a convenient and authoritative reference
7. Systematically enhance indirect control and organization-wide coordination of the key purposes of policies
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 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.
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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 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).
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33SELECTED 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).
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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.)
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Types of Executive Bonus Compensation
Bonus Type RationaleDescription Shortcomings
Stock option grants
Restricted stock plan
Golden handcuffs
Provides incentive for executive to create wealth for shareholders as measured by increase in firm’s share price
Promotes longer executive tenure than other forms of compensation
Offers an incentive for executive to remain with the firm
Right to purchase stock in the future at a price set now; compensation determined by “spread”Shares given to executive who is prohibited from selling them for a specific time periodBonus income deferred in a series of annual installments; forfeited with executive resignation
Movement in share price does not explain all dimensions of managerial performanceNo downside risk to executive, who always profits unlike other shareholdersMay promote risk-averse decision making due to downside risk borne by executive
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Types of Executive Bonus CompensationContd...
Bonus Type RationaleDescription Shortcomings
Golden parachute
Cash based on internal performance using finance measures
Offers an incentive for executive to remain with firm
Offsets limitations of focusing on market-based measures of performance
Executive has right to collect bonus if loses position due to takeover, firing, retirement, or resignationBonus compensation based on accounting performance measures such as return on equity
Compensation is achieved whether or not wealth is created;rewards either success or failureWeak correlation between earnings measures and shareholder wealth creation
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Compensation Plan Selection Matrix
Type of Bonus CompensationGolden Parachu
tes
Restricted Stock
Plans
Stock Options
Golden Handcuf
fsCashStrategi
c Goal Rationale
X
X
X
Achieve corporate turnaroundCreate and support growth opportunitiesDefend against unfriendly takeover
Executive profits only if turnaround is successful in returning wealth to shareholdersRisk associated with growth strategies warrants use of this high-reward incentiveHelps remove temptation for executive to evaluate takeover based on personal benefits
X
X
Evaluate suitors objectively
Globalize operations
Compensates executive if job is lost due to a merger favorable to the firmRisk of expanding overseas requires a plan that compensates only for achieved success
XGrow share price incrementally
Accounting measures can identify periodic performance benchmarks
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Compensation Plan Selection Matrix (concluded)
Type of Bonus Compensation
Golden Parachu
tes
Restricted Stock
Plans
Stock Options
Golden Handcuf
fsCashStrategi
c Goal Rationale
X
X
Improve operational efficiencyIncrease assets under management
Accounting measures represent observable and agreed-upon measures of performanceExecutive profits proportionally as asset growth leads to long-term growth in share price
XReduce executive turnover
Handcuffs provide executive tenure incentives
X
X
Restructure organizationStreamline operations
Risk associated with major change in firm’s assets warrant use of this high-reward incentive
Rewards long-term focus on efficiency and cost control
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STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997General 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.
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40STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997
Contd...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
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41STRATEGIC LEADERSHIP AT GENERAL ELECTRIC: 1947 TO 1997
Contd...
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
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42STRATEGIC 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
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
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43STRATEGIC 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 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.
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44STRATEGIC 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 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
