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 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

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”

Three Major Ethical Framework A.Utilitarian – greatest good for the greatest number B.Moral rights – maintains the fundamental rights and privileges of the people affected by the decision – protecting stakeholders C.Justice model – distributes benefits and harm in a fair, equitable and impartial way

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

Thinking Ethically 1)Identify which stakeholders the decision would affect and in what ways 2)Judge the ethics of the proposed strategic decisions given the information from Step 1 3)Establish moral intent (resolve to place moral concerns ahead of other concerns) 4)Engage in ethical behavior

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

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.Performance payoff needs to be significant – at least 10% B.Everyone should be eligible C.Has to be fair D.Control over outcomes E.Short cycle F.Non monetary rewards G.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