Implementing Strategy

Introduction to Strategic Management Formulating Strategy

Implementing Strategy Corporate Governance Internal/External Mechanisms Managerial Opportunism Agency Relationships Ownership Concentration Board of Directors Sarbanes-Oxley Executive Compensation Market Forces Organizational Structure Stability/Flexibility Examples Strategic Leadership Managerial Discretion Succession Issues Balanced Scorecard Strategic Entrepreneurship Invention Innovation Imitation

St. Norbert CollegeSeminar in Policy and Strategy

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Implementing Strategy

Dr. Eliot S. ElfnerSt. Norbert CollegeBUAD 485 C & D

Seminar in Strategy and Policy




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Corporate Governance




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The Strategic Management Process




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Corporate Governance

• Corporate governance is:– A relationship among stakeholders used to

determine and control the strategic direction and performance of organizations

– Concerned with making strategic decisions more effectively

– Used to establish order between a firm’s owners and its top-level managers whose interests may be in conflict




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Internal Governance Mechanisms• Executive Compensation

– Use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests

• Market for Corporate Control– Purchase of a firm that is

underperforming relative to industry rivals in order to improve its strategic competitiveness

External Governance Mechanisms

Governance Mechanisms




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Separation of Ownership andManagerial Control

• Basis of the Modern Corporation– Shareholders purchase stock, becoming residual

claimants– Shareholders reduce risk by holding diversified

portfolios– Professional managers are contracted to provide

decision making• Modern public corporation form leads to

efficient specialization of tasks:– Risk bearing by shareholders– Strategy development and decision making by

managers




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Managerial Opportunism

• The seeking of self-interest with guile (cunning or deceit)

• Managerial opportunism is:– An attitude (inclination)– A set of behaviors (specific acts of self-

interest)• Managerial opportunism prevents the

maximization of shareholder wealth (the primary goal of owner/principals)




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An Agency Relationship

Figure 10.1Figure 10.1

Hire

and create




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Agency Costs and Governance Mechanisms

• Principals may engage in monitoring behavior to assess the activities and decisions of managers– However, dispersed shareholding makes it

difficult and inefficient to monitor management’s behavior

• Boards of Directors have a fiduciary duty to shareholders to monitor management– However, Boards of Directors are often accused

of being lax in performing this function




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Manager and Shareholder Risk and Diversification




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• Large block shareholders have a strong incentive to monitor management closely:

– Their large stakes make it worth their while to spend time, effort and expense to monitor closely

– They may also obtain Board seats which enhances their ability to monitor effectively

• Financial institutions are legally forbidden from directly holding board seats

• The increasing influence of institutional owners (stock mutual funds and pension funds)

– Have the size (proxy voting power) and incentive (demand for returns to funds) to discipline ineffective top-level managers

– Can affect the firm’s choice of strategies• Shareholder activism:

– Shareholders can convene to discuss corporation’s direction– If a consensus exists, shareholders can vote as a block to elect their

candidates to the board– Proxy fights– There are limits on shareholder activism available to institutional

owners in responding to activists’ tactics

Governance MechanismsOwnership Concentration




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Governance MechanismsBoard of Directors

• Group of elected individuals that acts in the owners’ interests to formally monitor and control the firm’s top-level executives, has the power to:

– Direct the affairs of the organization– Punish and reward managers– Protect owners from managerial opportunism

• Composition of Boards:– Insiders: the firm’s CEO and other top-level managers– Related Outsiders: individuals uninvolved with day-to-day operations, but who

have a relationship with the firm– Outsiders: individuals who are independent of the firm’s day-to-day operations

and other relationships• Criticisms of Boards of Directors include:

– Too readily approve managers’ self-serving initiatives– Are exploited by managers with personal ties to board members– Are not vigilant enough in hiring and monitoring CEO behavior– Lack of agreement about the number of and most appropriate role of outside

directors• Enhancing the effectiveness of boards and directors:

– More diversity in the backgrounds of board members– Stronger internal management and accounting control systems– More formal processes to evaluate the board’s performance– Adopting a “lead director” role– Changes in compensation of directors




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Sarbanes-Oxley Act of 2002

• “Trust, but Verify”• SOX Section 302 - Corporate Responsibility for

Financial Reports – CEO & CFO Sign Off– a) CEO and CFO must review all financial reports.– b) Financial report does not contain any

misrepresentations.– c) Information in the financial report is "fairly presented".– d) CEO and CFO are responsible for the internal

accounting controls.– e) CEO and CFO must report any deficiencies in internal

accounting controls, or any fraud involving the management of the audit committee.

– f) CEO and CFO must indicate any material changes in internal accounting controls.




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• Forms of compensation:– Salary, bonuses, long-term performance incentives, stock

awards, stock options

• Factors complicating executive compensation:– Strategic decisions by top-level managers are complex, non-

routine and affect the firm over an extended period– Other variables affecting the firm’s performance over time

• Limits on the effectiveness of executive compensation:– Unintended consequences of stock options– Firm performance not as important as firm size– Balance sheet not showing executive wealth– Options not expensed at the time they are awarded

Governance MechanismsExecutive Compensation




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Governance MechanismsMarket for Corporate Control

• Individuals and firms buy or take over undervalued corporations– Ineffective managers are usually replaced in such takeovers

• Threat of takeover may lead firm to operate more efficiently• Changes in regulations have made hostile takeovers difficult• Managerial defense tactics increase the costs of mounting a

takeover• Defense tactics may require:

– Asset restructuring– Changes in the financial structure of the firm– Shareholder approval

• Market for corporate control lacks the precision of internal governance mechanisms




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OrganizationalOrganizationalStakeholdersStakeholders

Governance Mechanisms and Ethical Behavior (cont’d)

• Some observers believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders’ interests

• Importance of maintaining ethical behavior is seen in the examples of Enron, WorldCom, HealthSouth and Ahold NV

Product MarketProduct MarketStakeholdersStakeholders

Capital MarketCapital MarketStakeholdersStakeholders

It is important to serve the interests of the firm’s multiple stakeholder groups!

• Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders may withdraw their support of the firm if their needs are not met, at least minimally

• Shareholders in this group are viewed as the most important stakeholder group

• The focus of governance mechanisms is to control managerial decisions to assure shareholder interests

• Interests of shareholders is served by the Board of Directors




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Organizational Structure and Controls




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Organizational Structure

• Organizational structure specifies:– The firm’s formal reporting

relationships, procedures, controls, and authority and decision-making processes

– The work to be done and how to do it, given the firm’s strategy or strategies

• It is critical to match organizational structure to the firm’s strategy




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Organizational Structure

• Effective structures provide:– Stability– Flexibility

• Structural stability provides: – The capacity required to consistently and

predictably manage daily work routines• Structural flexibility provides for:

– The opportunity to explore competitive possibilities

– The allocation of resources to activities that shape needed competitive advantages




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Organizational Controls

• Purposes of Organizational Controls:– Guide the use of strategy– Indicate how to compare actual results with

expected results– Suggest corrective actions to take when the

difference between actual and expected results is unacceptable

• Two types of organizational controls– Strategic controls– Financial controls




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• Subjective Criteria– Are concerned with examining the fit between:

• What the firm might do (opportunities in its external environment

• What the firm can do (competitive advantages)

– Evaluate the degree to which the firm focuses on the requirements to implement its strategy

OrganizationalOrganizationalControlsControls

StrategicStrategicControlsControls




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• Objective criteria– Accounting-based measures include:

• Return on investment

• Return on assets

– Market-based measures include:• Economic Value Added (EVA)

OrganizationalOrganizationalControlsControls

StrategicStrategicControlsControls

FinancialFinancialControlsControls




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Strategy and Structure Growth Pattern

Efficient implementation of formulated strategy

Efficient implementation of formulated strategy

• As firms grow larger and become more complex, structural challenges emerge

• Firms’ larger sizes dictate the need for more sophisticated workflows and integrating mechanismsSimpleFunctionalMultidivisional




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Functional Structure for Cost Leadership Strategy

Notes: • Operations is the main function• Process engineering is emphasized rather than new product R&D• Relatively large centralized staff coordinates functions• Formalized procedures allow for emergence of a low-cost culture• Overall structure is mechanical; job roles are highly structured




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Functional Structure for Differentiation Strategy

Notes:• Marketing is the main function for keeping track of new product ideas• New product R&D is emphasized• Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other• Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished• Overall structure is organic; job roles are less structured




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Variations of the Multidivisional Structure




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Related-Constrained Strategy

Notes• Structural integration devices create tight links among all divisions• Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions• R&D is likely to be centralized•

• Rewards are subjective and tend to emphasize overall corporateperformance in addition to divisional performance

• Culture emphasizes cooperative sharing





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Unrelated Strategy


Notes• Corporate headquarters has a small staff• Finance and auditing are the most prominent functions in the headquarters office to manage cash flow and assure the accuracy of performance data coming from divisions

• The legal affairs function becomes important when the firm acquires or divests assets• Divisions are independent and separate for financial evaluation purposes• Divisions retain strategic control, but cash is managed by the corporate office• Divisions compete for corporate resources




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Worldwide Geographic Area Structure: Multidomestic Strategy

Notes:

• The perimeter circles indicate decentralization of operations• Emphasis is on differentiation by local demand to fit an area or country culture• Corporate headquarters coordinates financial resources among independent subsidiaries• The organization is like a decentralized federation





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Worldwide Product Divisional Structure: Global Strategy

Notes• The headquarters’ circle indicates centralization to coordinate information flow among worldwide products• Corporate headquarters uses many intercoordination devices to facilitate global economies of scale and scope• Corporate headquarters also allocates financial resources in a cooperative way• The organization is like a centralized federation





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Strategic Leadership




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Strategic Leadership and the Strategic Management Process

Effective Strategic Leadership

Strategic Intent Strategic Mission

Successful Strategic Actions

Formulation of Strategies

Implementation of Strategies

Strategic CompetitivenessAbove-average Returns

Shapes theFormulation of

andInfluences

YieldsYields




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Factors Affecting Managerial Discretion

External Environment

Managerial Discretion

External Environment• Industry structure• Rate of market growth• Number and type of

competitors• Nature and degree of

political/legal constraints• Degree to which products

can be differentiated




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Characteristics of the Organization


Characteristics of the Organization• Size• Age• Culture• Availability of resources• Patterns of interaction among employees




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Characteristics of the Organization


Characteristics of the Manager

Characteristics of the Manager

• Tolerance for ambiguity• Commitment to the firm

and its desired strategic outcomes

• Interpersonal skills• Aspiration level• Degree of self-

confidence




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Effects of CEO Succession and Top Management Team Composition




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Exercise of Effective Strategic Leadership




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Establishing Balanced Organizational Controls

• Balanced Scorecard– Framework used to verify that the firm has

established both strategic and financial controls to assess its performance

– Prevents overemphasis of financial controls at the expense of strategic controls

• Four perspectives of balanced scorecard– Financial– Customer– Internal business processes– Learning and growth




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Customer

Strategic and Financial Controls in a Balanced Scorecard Framework

Adapted from Adapted from Figure 12.5Figure 12.5

Financial• Cash flow• Return on equity• Return on assets

• Assessment of ability to anticipate customer needs

• Effectiveness of customer service needs

• Percentage of repeat business

• Quality of communications with customers




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Learning and

Growth

• Improvements in innovation ability

• Number of new products compared to competitors’

• Increases in employees’ skills

Strategic and Financial Controls in a Balanced Scorecard Framework

Internal Business Processes

• Asset utilization improvements• Improvements in employee morale• Changes in turnover rates




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Strategic Entrepreneurship




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Strategic Entrepreneurship

• Strategic Entrepreneurship– Taking entrepreneurial actions using a strategic

perspective– Engaging in simultaneous opportunity seeking

and competitive advantage seeking behaviors– Designing and implementing entrepreneurial

strategies to create wealth• Strategic entrepreneurship actions can be

taken by:– Individuals– Corporations




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Strategic Entrepreneurship and Innovation

• Entrepreneurship is concerned with:– The discovery of profitable opportunities– The exploitation of profitable opportunities

• Firms that encourage entrepreneurship are:– Risk takers– Committed to innovation– Proactive in creating opportunities rather than

waiting to respond to opportunities created by others




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Entrepreneurial Opportunities

• Entrepreneurial Opportunities– Conditions in which new products or

services can satisfy a need in the market• Entrepreneurs or entrepreneurial

managers must be able to:– Identify opportunities not perceived by

others– Take actions to exploit the opportunities– Establish a competitive advantage




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Innovation Process

• The act of creating or The act of creating or developing a new product or developing a new product or processprocess

• Brings something new into Brings something new into beingbeing

• Technical criteria are used to Technical criteria are used to determine the success of an determine the success of an inventioninvention

InventionInvention




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Innovation Process

• The process of creating a The process of creating a commercial product from an commercial product from an inventioninvention

• Brings something new into use.Brings something new into use.• Commercial criteria are used to Commercial criteria are used to

determine the success of an determine the success of an innovationinnovation

InventionInvention

InnovationInnovation




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Innovation Process

• The adoption of an The adoption of an innovation by similar innovation by similar firmsfirms

• Usually leads to product Usually leads to product or process or process standardizationstandardization

• Products based on Products based on imitation often are imitation often are offered at lower prices offered at lower prices but with fewer featuresbut with fewer features

InventionInvention

InnovationInnovation

ImitationImitation




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Incremental and Radical Innovation

• Incremental Innovation– Most innovations are

incremental– Provides small

increments in current product lines

– Improves existing knowledge and processes

– Can create value

• Radical Innovation– Are rare because of

difficulty and risk– Provides significant

technological breakthroughs

– Creates new knowledge and processes

– Can create value




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Internal Corporate Venturing:A Model




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Cross–Functional Product Development Teams

• Facilitate integration of Facilitate integration of activities associated with activities associated with different organizational different organizational functionsfunctions– Design, manufacturing, Design, manufacturing,

marketing, etc.marketing, etc.

• New product development New product development processes can be completed processes can be completed more quicklymore quickly– Products can be more easily Products can be more easily

commercialized when cross-commercialized when cross-functional teams work effectivelyfunctional teams work effectively

Cross-functionalCross-functionalProduct DevelopmentProduct Development

Team Team




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Cross–Functional Product Development Teams

• Product development Product development stages are grouped into stages are grouped into parallel or overlapping parallel or overlapping processes, allowing the processes, allowing the firm to tailor its product firm to tailor its product development effortsdevelopment efforts

– Unique core Unique core competenciescompetencies

– Needs of the marketNeeds of the marketCross-functionalCross-functional

Product DevelopmentProduct Development Team Team




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Creating Value from Innovation




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Creating Value through Strategic Entrepreneurship

• Be effective in identifying opportunities• Be flexible and willing to take risks• Have sufficient resources and capabilities to exploit

identified opportunities• Sustain a competitive advantage while identifying

and exploiting opportunities• Develop an entrepreneurial mind-set among

managers and employees• Seek to enter and compete in international markets




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Implementing StrategyThe End

Dr. Eliot S. ElfnerSt. Norbert CollegeBUAD 485 C & D

Seminar in Strategy and Policy

Documents

Implementing Strategy