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Chapter 11 - 12

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 DirectorsGovernance 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 - 2002

Steve Jobs, Apple 78.1M -34.6

David Cote, Honeywell

68.5M -27.3%

John Chamber, Cisco 54.8M -27.7

Pat Russo, Lucent 38.2M -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”

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

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


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


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


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


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


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


“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


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

StrategicControl

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 Airlines1. Flight 2015 125 seats from Chicago to Phoenix with

seven fare buckets, ranging from $238 to $14042. Adjusts the # of seats per bucket based on sales, historical

patterns, connections3. 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 fair6. Departs with 125 passengers, no empty seats and no

bumped travelers7. 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

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

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

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 behaviorsFederal Express vs. UPSHome DepotDupont – accidents reported to CEO within 24 hours. 17

times better than industry, 68 better than manufacturingCulture can have positive, and potentially negative, affects

Apple and Logitech

Sustaining an Effective Culture

Does not happen overnight – cultivated instead of built

StorytellingHP

3M sandpaper

Pepsi’s 99.5% service level

Pep Rallies - Burger Contests

Culture Committees – Institutionalize culture

“Walking the walk”

8 Steps in Strategy Implementation1. Build a capable organization to carry out

strategy2. Develop budgets and steer resources

appropriately to critical activities3. Establish strategy-supportive policies and

procedures4. Institutionalize best practices and

continuous improvement

8 Steps in Strategy Implementation5. Install information/communication system

to help employees compete6. Tie rewards/incentive to execution and

achievement of strategic objectives7. Create a strategy supportive culture8. Display strategic leadership and

continually push for its effective implementation

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