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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 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
Executive Compensation - 2002
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.”
Steve Jobs, Apple
78.1M
-34.6
David Cote,
68.5M
Honeywell
John Chamber, Cisco 54.8M
-27.3%
Pat Russo, Lucent
38.2M
-75.4%
Scott McNealy, Sun
Microsystems
31.7M
-74.7%
-27.7
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
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
Implement
Strategies
Formulate
Goals
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.
2.
3.
4.
5.
6.
7.
Flight 2015 125 seats from Chicago to Phoenix with
seven fare buckets, ranging from $238 to $1404
Adjusts the # of seats per bucket based on sales,
historical patterns, connections
If sales slow, more seats added to discount fares; If
business class is filling, seats removed from the discount
buckets
4 weeks out, 69 of 125 seats sold; sales in the bottom 3
buckets halted
1 day out, 130 of 125 seats sold; 5 more opened at full
fair
Departs with 125 passengers, no empty seats and no
bumped travelers
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 –
B.
C.
D.
E.
F.
G.
at least 10%
2) Everyone should be eligible
3) Has to be fair
4) Control over outcomes
5) Short cycle
6) Non monetary rewards
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 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