Chapter Performance, Governance, Ethics and Implementation

Major Causes of Poor Performance Poor Management High Cost Structure Inadequate Differentiation Overexpansion Structural Shifts in Demand Organizational Inertia

Stakeholder View of Strategy

Board of Directors Governance mechanism of owners to oversee, evaluate and ratify the actions of management Rises out of agency problem – separation of ownership and management –setting corporate strategy, direction, mission, values –hire/fire CEO/TMT –control, monitor, supervise TMT –review/approve resource allocations –protect shareholders interests

Board of Directors Sam Nunn- ex-Senator from Georgia sits on Coke’s and Dell’s Board Nancy Reagan sat on Revlon’s board Hank Aaron sat on Coke’s board Sally Ride sat on three boards Martha Stewart and Kim Alexis sat on Drugstore.com Al Haig and Colin Powell sat on AOL’s board

Board Involvement Mostly little or no involvement Boards tend to be dominated by management Keys to board power –CEO/Chairman duality –insiders vs. outsiders outsiders often weak, unknowledgeable –effective board process

Trends in Governance Legal action against boards Institutional investors becoming increasingly powerful Special interests groups and social institutional owners Internationalization of board composition Presiding and Lead Directors – 1/3 of S&P 500 – Presiding run meetings sans CEOs, Leads are actively involved

Median CEO pay rose 14% to $13.2 million is a year when S&P was down over 22% One company’s stock slides 71%, CEO compensation falls 12% ….. to only $82 million ….. Dennis Kozlowski – Tyco’s frequently indicted CEO ….. which is not as bad as what the CFO made - $136 million Bob Nardelli at HD has a “target bonus” minimum of $3 million and could get as much as $82 million upon his exit. James McNerney – “cause shall not include any one or more of the following: bad judgment or negligence.” Executive Compensation

Steve Jobs, Apple78.1M-34.6 David Cote, Honeywell 68.5M-27.3% John Chamber, Cisco54.8M-27.7 Pat Russo, Lucent38.2M-75.4% Scott McNealy, Sun Microsystems 31.7M-74.7%

Executive Compensation Aligning the interests of shareholders and managers by rewarding them for pursuing their interests Peter Drucker - “There are only bad and worse executive compensation packages. Most encourage the top management to milk the company” Warren Buffett - “...mediocre CEOs are getting incredibly overpaid” Top execs make over 200 times the average worker, up from 44 only 30 years ago.

Executive Compensation Bonuses, incentives and stock ownership –difficulty in evaluating decision making financial objectives used –lengthy feedback period –beyond managerial control –managerial manipulation Stock Options –riding the stock market wave –strike period is too long –growth, not cost-cutting, should be rewarded –require holding the stock after exercise –expense options against profits

Corporate Social Performance Friedman – “The Social Responsibility of Business Is to Increase Its Profits“ Corporations as Citizens Corporations dependent upon its stakeholders Corporations that are attentive to their stakeholders can gain competitive advantages Corporations, which control resources beyond those held by individuals, have an even greater responsibility to be “good citizens”

Ethical Litmus Tests A. Accepted values and standards of the organization B. Open communication to all stakeholders – 60 Minutes test C. Peer review

Implementation and Control The best game plan in the world never tackled anybody – Vince Lombardi

Implementation and Control Strategies are intellectually simple, their execution is not – CEO, Allied Signal

Implementation and Control We would be in some form of denial if we didn’t see that execution is the true measure of success – CEO, AT&T

Implementation and Control Winning companies know how to do their work better – Michael Hammer and James Champy

Implementation and Control If you talk about change, and do not change the recognition system, nothing changes – CEO, Xerox

Implementation and Control Weak leadership can wreck the soundest strategy: forceful execution of even a poor plan can often bring victory – Sun Zi

Implementation and Control “Cheshire Cat, would you tell me, please, which way I ought to go from here?” asked Alice. “That depends a good deal on where you want to get to,” said the cat

Implementation and Control Weak Executions? We can all think of a thousand of examples –Burger King –Blimpies Strong Executions? We can think of far fewer examples –Perdue –L.L Bean vs. American Express

Implementing Strategy

Strategic Control Systems Firm’s assumptions, premises, goals and strategies are constantly monitored, tested and evaluated – internally and externally Formulate Goals Implement Strategies Strategic Control

Strategic Control Systems Strategic Control is an on-going process –Time lags shortened –Changes in environments detected sooner –Speed and flexibility increased

Strategic Control at American Airlines 1. Flight seats from Chicago to Phoenix with seven fare buckets, ranging from $238 to $ Adjusts the # of seats per bucket based on sales, historical patterns, connections 3. If sales slow, more seats added to discount fares; If business class is filling, seats removed from the discount buckets 4. 4 weeks out, 69 of 125 seats sold; sales in the bottom 3 buckets halted 5. 1 day out, 130 of 125 seats sold; 5 more opened at full fair 6. Departs with 125 passengers, no empty seats and no bumped travelers 7. This route then becomes part of the historical pattern

3 Strategic Control Levers A. Personal Control – face to face B. Output Control –forecasts and outcomes C. Behavioral Control – standardize the means for accomplishing goals - rules and procedures

Rewards Get employees focused on high-priority tasks, motivating high levels of individual and collective performance –You get what you measure and reward –Reinforce organizational goals and values

Designing Effective Rewards A. 1) Performance payoff needs to be significant – at least 10% B. 2) Everyone should be eligible C. 3) Has to be fair D. 4) Control over outcomes E. 5) Short cycle F. 6) Non monetary rewards G. 7) Make sure the slackers are not rewarded

Culture Shared values (what is important) and beliefs that shape a company’s people, structure and control systems to produce norms (how we do things) Determines acceptable/expect behaviors Federal Express vs. UPS Home Depot Dupont – accidents reported to CEO within 24 hours. 17 times better than industry, 68 better than manufacturing Culture can have positive, and potentially negative, affects Apple and Logitech

Sustaining an Effective Culture Does not happen overnight – cultivated instead of built Storytelling HP 3M sandpaper Pepsi’s 99.5% service level Pep Rallies - Burger Contests Culture Committees – Institutionalize culture “Walking the walk”

8 Steps in Strategy Implementation 1. Build a capable organization to carry out strategy 2. Develop budgets and steer resources appropriately to critical activities 3. Establish strategy-supportive policies and procedures 4. Institutionalize best practices and continuous improvement

8 Steps in Strategy Implementation 5. Install information/communication system to help employees compete 6. Tie rewards/incentive to execution and achievement of strategic objectives 7. Create a strategy supportive culture 8. Display strategic leadership and continually push for its effective implementation