Strategy: A view from the top Chapter 2 Strategy and Performance

1. Strategy: A view from the topChapter 2Strategy and Performance Michael Simpson Andrew Vargas Meghan Davidson Justin Pickard

2. Introduction “Carefully crafted strategies often only deliver a fraction of their promised financial value.” Good to Great and 4+2 theories Strategy and Performance: A Conceptual Framework The Role of the Board

3. From Good to Great Top leadership defines a difference between good and great companies. “Level 5 Leadership” Level 5 leaders display a mix of intense determination and profound humility Level 5 leaders can look past personal financial gain for the good of the company.

4. From Good to Great cont… “Nature of the leadership team.” Collins states the importance of developing a high quality leadership team before setting a strategy. “Identify defining facts in the company and in the larger business environment” In today’s market, trends in consumer markets are constantly changing

5. From Good to Great cont… Hedgehog concept Collins compared business strategy to the defense mechanism of a hedgehog. While a fox may be smarter than a hedgehog, his ever changing strategy will be hard pressed to beat the simplicity and repetitiveness of a hedgehog curling into a ball.

6. 4+2 Formula Joyce, Nohria, and Roberson ran the study Examined over 200 well-established management practices over a 10-year period by 160 companies. The study shows that companies outperform industry peers when they excel in 4 primary areas—strategy, execution, culture, and structure. Companies should also excel in 2 of the following secondary management practices: talent, innovation, leadership, and mergers and partnerships. Companies should also excel in 2 of the following secondary management practices: talent, innovation, leadership, and mergers and partnerships.

7. 4+2 cont… • Excelling at four primary practices • Strategy: Devise and maintain a clearly stated, focused strategy • Execution: Develop and maintain flawless operational execution • Culture: Develop and maintain a performance-oriented culture • Structure: Build and maintain a fast, flexible, flat organization

8. 4-2 cont… Embracing 2 of 4 secondary practices Talent: Hold on to talented employees Innovation: Make industry-transforming innovation Leadership: Find leaders who are committed to the business and its people Mergers and Partnerships: Seek growth through mergers and partnerships

9. A Conceptual Framework Both of the studies show no single individual can do all for success. Willingness of manager to meet not individual responsibilities but performance of company Focus on organizational environment that meets objectives of the company. Success requires right people have clear authority to make decisions.

10. A Conceptual Framework Cont. • 3 Interrelated Components • Purpose, Strategy, and Leadership • 5 Interacting Components • Structure, Systems, Processes, People, and Culture • Performance/ Control

11. A Conceptual Framework Cont.

12. Strategy, Purpose, and Leadership • In 1920’s GM systematize behavior and minimize ineffective and counter effective actions. • This way was dominant but became weakness. • With global competition now increasing need for corporate purpose developed. • Need for greater sense of Direction. • Involve employees at all levels in strategic management process. • Executive Agendas included more precise and direct items.

13. Strategy and Organizational Change Important for Executives who develop and implement these strategic directions to know dynamics. Five variables are: structure, systems, processes, people, and culture. An implementation effort must focus on all of these variables in order to succeed.

14. Strategy and Organizational Change Cont. • STRUCTURE • To be more competitive companies have shed layers of management and have flatter structures. • Adopt a structure that has ability to adapt and evolve strategically. • Goal of organization to create environment that allocates resources effectively and is naturally self correcting when strategic changes need to be made. • There is no right form of organization, but organization must have transparency.

15. Strategy and Organizational Change Cont. • SYSTEMSandPROCESSES • Having the right systems and processes enhances organizational effectiveness and eases change. • Superior support systems help a company adapt more quickly and effectively to changing requirements. • A process is a systematic way of doing things and define organizational roles and relationships. • Processes look beyond immediate change, but rather on developing a stronger capacity for adapting to change.

16. Strategy and Organizational Change Cont. • PEOPLE • Attracting, motivating, and retaining the right people have become important strategic objectives. • Companies have now recognized the expensive costs to replace knowledge and talent. • A greater emphasis is now on rewarding talented individuals. • Companies are also developing tomorrow’s skills for strategic flexibility.

17. Strategy and Organizational Change Cont. • CULTURE • Defined as shared systems of values, assumptions, and beliefs among a company’s employee. • Performance linked to strength of company culture. • Elements of strong company culture include: leaders who demonstrate strong values that align with the competitive conditions, company commitment to operate under guiding principles, and a concern for employees, customers, and shareholders.

18. Strategy and Organizational Change Cont. • CULTURE cont. • Words that describe culture can be found in mission statement or code of ethics. • Companies recognize that corporate culture can set them apart from other competitors which in turn lead to better employee behavior and effectiveness. • A failure to recognize cultural elements can have adverse effects on its employees. • Ex: Pharmaceutical company and R&D professionals

19. The Balanced Scorecard The Balanced Scorecard was developed by Robert Kaplan and David Norton. It is a set of measures that are designed to provide a quick view of the business. It requires managers to look at their business from innovation and learning, financial perspectives, company capability, and customer.

20. The Balanced Scorecard • The Balanced Scorecard answers the following questions: • How do customers see us? • At what must we excel? • Can we continue to improve and create value? • How do we look to our company’s shareholders?

21. Apple Computer Corporation Historically, Apple was focused on creating the better computer. By using the Balanced Scorecard, Apple introduced customer satisfaction methods. Now, employees focus on customer satisfaction metrics and Apple functions as a customer-driven company.

22. The Balanced Scorecard Customer-based measures have to be translated into what the company must do internally to meet the customers’ expectations. After these measures are translated, managers must focus on the internal business processes to meet these needs and expectations.

23. A Management System • The Balanced Scorecard encompasses four management processes: • Translating a vision • Communicating goals and linking rewards to performance • Improving business planning • Gathering feedback and learning

24. The Balanced Scorecard By creating a Balanced Scorecard, companies are forced to integrate the strategic planning and budgeting processes. The business-planning process consists of a set of long-term targets in all four areas of the Balanced Scorecard.

25. Performance and Control Most methods for evaluating performance at different levels in an organization are focused on outcome control. Outcome control is attaining certain targets while pursuing specific goals. This is achieved by altering the incentive structures.

26. Performance and Control • On the other hand, when changing and existing corporate culture to increase better performance or create a new strategic direction, outcome control may not be the best solution. • Behavior control may be a better choice. • With this style the company directly monitors the structures by approving capital expenditure requests or hiring and promotion decisions.

27. The Role of The Board • “Direct the affairs of the company” • In order for the board to direct, they must focus its attention and efforts on creating a high performance culture. • 6 objectives for creating a high performance culture.

28. The Role of The Board 1. Define its role, agenda, and information needs • Provides management with guidance and support • Collaboration with management 2. Ensure that management not only performs, but performs with integrity • Must start when manager is hired • Continuously throughout career

29. The Role of the Board 3. Set expectations about the tone and culture of the company • From top management to entry level positions • Senior management must help set tone and culture 4. Formulate corporate strategy with management • Continually fine-tune the corporate strategy • Benchmarks • Clear Understanding from board to managers

30. The Role of the Board 5. Ensure that the corporate culture, the agreed strategy, and the company’s approach to audit and accounting, internal controls, and disclosure are consistent and aligned • Key drivers of corporate performance & culture • Must compliment one another 6. Help management understand the expectations of shareholders and regulators. • Boards add value when helping management

31. What should boards ask? P.F Kocourek et al. suggests 12 questions boards should ask: 1. Strategic Direction (p. 50) 2. Resource allocation • Good to Great – “First who…then what” • Bus example 3. Management -Level 5 leadership “ Builds enduring greatness through a paradoxical blend of personal humility and professional will”

32. What should boards ask? 4. Financial Accountability 5. Operating Controls 6. Constituency Protection 7. Litigation and Disputation 8. Crises and Contingences 9. Management Priorities

33. What should boards ask? 10. Past and Present Performance 11. Underlying Causes - Blue Ocean Strategy 12. Performance Potential