Intermediate Strategic Management

1. Intermediate Strategic Management Marco Clemente Spring 2014 3rd session – 5 March 2014

2. Structure and Strategy Strategy Structure Philips vs. Matsushita

3. A comparison of attempts to shift strategies Matsushita Philips Degree of centralization • 1970’s - Shift to IPC’s / Tilting matrix to PD’s • 1987 - 4 core LOBs / 14 PD’s to 4 global divisions • 1990 - Bet on 15 core multimedia technologies • 2001 - Eliminate “management discount” in stock price • 1982 - Operational Localization • 1986 - “Matsushita Bank” • 1999 - “Simple, small, speedy and strategic” High Low

4. How Philips’ strengths and core competencies became its weaknesses Core Competencies Core Incompetencies Ability to adapt to local market conditions No economy of scale in manufacturing Strong National Organizations NOs often working against each other Common Market Employee centric values Organization with “lifers” Focus on R&D / technical innovation Inability to commercialize innovation

5. How Matsushitas’ strengths and core competencies became its weaknesses Core competencies Core incompetencies Broad line of products (5000 vs. Sony’s 80) Bloated operations & excess capacity Centralized structure in Japan Developing local footprint 1989 Market Crash Strong culture at centre Over-reliance on centre for innovation Fast follower strategy Weak entrepreneurial / innovation ability

6. How the past (not necessarily structure) can impact strategy- Ryanair vs. incumbents

7. Agenda Breakoutgroupwork Systems • Scorecards and strategymaps • Market systems • Planning systems Rewards, Incentives, Motivation Preparation Outotec and PwC Presentations • The Planning school • The Entrepreneurialschool

8. Breakoutgroupwork

9. Work in group Youhavebeenappointedconsultants at a newlymergedUniversity. The Universityhas set and communicated a strategy of focusing on basicresearchexcellence and delivery of internationallyrecognizedMScprograms. In line with the strategy the organizationhasrecentlybeenrestructured. Whatshouldleadershipdonext to fosterimplementation of the strategy?

10. Systems

11. Organizational configurations- Where are we? Where will we be? - “If Wal-Mart wants to achieve its strategy, it needs to get its 2.1 million employees pointing to the right direction” “Systems support and control people as they carry out structurally defined roles and responsibilities” * Johnson, Whittington and Scholes, Exploring Strategy 9th edition, p.431

12. Systems Input: Resources ( financial, human commitment) Output: It is about results (achieving targets/objectives) Direct: close supervision or monitoring Indirect: “hands-off”, controlling the condition on how people make decisions

13. 1.a Direct supervision The direct control of strategic decisions of employees by one or few individuals Advantages: • Central control and power • Close monitoring Disadvantages: • Difficult to implement in long-distance • The controllers should know in details the jobs they supervise and not inhibit innovative experiments (e.g. in a project based consultant firms) Where it is found • In almost all organizations to some degree • It is the main system in small organizations • Hierarchical structure / Central decision making

14. 2. Cultural systems Next class

15. 3. Performance targeting systems Focus on the output of an organization (or part of an organization), such as product quality, revenues or profit Key Performance Indicators (KPIs) • Either you meet them or you do not meet them When used? • Large businesses: cascades down from the centreto the business units • Regulated markets: e.g. in privatized utilities markets, they agree on performance indicators • Public services: recent trend to improve service level

16. Challenges You get what you measure Inappropriate measures of performance • E.g. short terms vs. long term. Is cut in R&D beneficial for Philips? Inappropriate target levels • Incentives to give pessimistic forecast vs. unrealistic ambitious targets Excessive internal competition • little incentives to collaborare or “non-agreed” targets

17. Solution 1: Balanced scorecard They set performance targets according to a range of perspectives, not only financial Four perspectives: • Financial (e.g. profit margins or cash flow) • Customer (e.g. delivery times or service levels) • Internal (e.g. operational efficiency) • Innovation or learning (e.g. activities important for long-run)

18. Solution 2: Strategy map They link different performance targets into a mutually supportive causal chain supporting strategic objectives • It reduces the problem of partial measures • It does not address the problem of inappropriate target levels and internal competition More in the PwC presentation

19. 4. Market systems They involve some formalized system of “contracting” for resources or inputs form other parts of an organization and for supplying outputs to other parts of an organization Competitive internal markets • Competitive bidding: investment bank at the corporate centre • Customer-supplier relationship inside the company Transfer prices: between internal business units (extensively regulated in practice) Service-level agreement: to ensure appropriate service

20. 4. Market systems Advantages • When detailed direct control or input are impractical Disadvantages • Increase bargaining power • Time consuming • New bureaucracy • Dysfunctional competition

21. Macquarie – The “Millionaire Factory” It can produce highly innovative ideas: • “freedom with boundaries”: a federation of businesses in which entrepreneurs can thrive • One employee: “Walking into Macquarie is like walking into a Turkish bazaar. Everyone has the same rug and they’re all competing to sell the same rug” Dangers: • I am starting to detect some hubris at the bank. It has done so well I is inevitable. Allan (Moss) is loyal to those he trusts and only time will tell whether he is trusing his lieutenants a bit too much • New CEO in 2008: Nicholas Moore • Share price: 66$ in 2008 / 16$ in 2009 / 55$ in 2010 • http://www.dailyreckoning.com.au/macquarie-allan-moss/2007/05/17/

22. 1.b Planning Systems They plan and control the allocation of resources and monitor their utilization • Financial inputs (as in budgeting) • Human inputs (as in planning for managerial succession) • Long-term investments (as particularly in strategic planning)

23. Dimensions Planning influence: Top-down vs. bottom-up Accountability of the business units: Low vs. high

24. Strategy styles Strategic planning • The “archetypal” planning system • Strong planning influence from the corporate centre • Business units not strictly accountable • When appropriate? Large, risky and long-range investments Financial control • Little central planning. Business units set strategic plans (some negotiation with the centre) • Business units are accountable • Failure may lead to dismissal • When appropriate? Small, relatively frequent and non-capital-intensive Strategic control • A compromise between strategic and financial • Corporate centre acts as coach to its business units managers • Usually it also uses strong cultural systems

25. “Dominated” strategies “South-west” corner: Relax combination • Weak direction from the centre and low accountability from the business units “North-east” corner: Harsh combination • Strong direction fro the centre and strict accountability

26. Rewards, Incentives and Motivation

27. Incentives and motivation What motivates you?

28. Rewards and Incentive systems • Focuses efforts on high-priority tasks • Motivates individual and collective task performance • Can be an effective motivator and control mechanism • Powerful means of influencing an organization’s culture

29. Rewards and Incentive systems • Potential downside: “you get what you measure” • May reflect differences among functional areas, products, services and divisions • Internal politics, internal competition • Wrong behavior • Shared values may emerge in subculture in opposition to patterns of the dominant culture • Subcultures may arise in different business units with multiple reward systems

30. Common mistakes in reward systems We hope for… But we often reward for… Long term growth Quarterly earnings Teamwork Individual effort Setting stretch goals Achieving goals Downsizing Adding staff Candor Reporting good news (even if not true)

31. Rewards and Incentive systems • Creating effective reward and incentive programs • Objectives are clear, well understood and broadly accepted • Rewards are clearly linked to performance and desired behaviors • Performance measures are clear and highly visible • Feedback is prompt, clear, and unambiguous • Compensation “system” is perceived as fair and equitable • Structure is flexible; it can adapt to changing circumstances

32. Still…What wrong incentives can produce

33. People adapt to incentives Incentive Life-cycles: Learning and the division of value in firms (Obloj and Sengul2012)

34. Organizational justice: not only money Employees perception of the fairness of treatment received from organization, e.g. if a company makes layoffs, it can affect the performance of the employees who remain Three dimensions: Distributive justice • how do tangible (e.g. money) and intangible (e.g. recognition) are distributed? Procedural justice • How does the process is done (e.g. involvement, ethics…)? How does decisions are made/ Interactional justice • Interpersonal: perception of how you treat people (one leaves his/her boss, not the company) • Informational justice: explanations

35. Dan Ariely: What makes us feel good about our work http://www.youtube.com/watch?v=5aH2Ppjpcho

36. Pre-industrial revolution vs. Knowledge economy

37. What prevents us to use Research Methods? Another TED video: http://www.ted.com/talks/dan_ariely_on_our_buggy_moral_code What is the best way to take out bandage? Why? “Given the fact that the nurse thought her intuition was right, it was very difficult for her to accept doing a difficult experiment to check if she was wrong” From low pain to high pain • Long – lower intensity From high pain to low pain “How better your life would be, if you will be willing to test systematically your intuitions”

38. 2 motivations Intrinsic Motivation (personally rewarded) Extrinsic Motivation (earn a reward / avoid a punishment)

39. Otherdeadlinesnextweek

40. Presentations of Outotec and Pwc

41. Details – Think about your image and Aalto image • How many people attending • Where to seat: front vs. back • Computers / Iphones • Dress Transmission SENDER RECEIVER Feedback

42. Presentations of school of strategy

43. The Planning School: • http://www.youtube.com/watch?v=CRaMEVRLzWY&feature=youtu.be

44. The entrepreneurial strategy school TU-91.1012 Intermediate strategic management Team SiMa

45. Entrepreneurial school? • Focus: the persona of the entrepreneur • A leader with a vision • Pragmatic with judgment, wisdom, and need for achievement, prone to overconfidence • Example: Steve Jobs • Fast adaptation to emerging opportunities • Deliberate overall vision, details emerge • Strategy tends to take the form of niche • Protection from outright competition

46. Leader with a vision • Vision: mental representation of strategy • Created in the head of the leader • Inspiration of what needs to be done • We’re gambling on our vision, and would rather do that than make “me too” products. - Steve Jobs, 1984

47. Semiconscious formation of strategy • Rooted in the experience and intuition of the leader • Non-conscious recognition of features or patterns • Moving forward with large decisions in uncertainty • Identify an opportunity and pursue it • Growth is a dominant goal • Achievement motivates the entrepreneur

48. Vision promotion and control • The leader focuses the company’s attention on the vision • The leader has personal control of the implementation • Power is centralized in the leader • Controlled boldness: bold ideas with careful execution • Trying out an innovative idea in one place first

49. Strategy both deliberate and emergent • The leader has a vision, a dream that he or she wants to achieve in the long term • But he or she has not charted plan or formalized procedures: This leaves the company flexible • A survey about the 500 fastest growing companies in the US, stated that the 67% of them had not a plan or had just a rudimentary plan • So the strategy is deliberate in its broad lines, but emergent in its detail

50. Simple structure • The structure of the company has to be simple and responsive to the leader’s directive • This is common in a startup company or individual enterprise, but it must also be true in a large organization that needs to make a turnaround • The leader must have the power to override the procedures and impose his or her vision