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Major Causes of Poor Performance
• Poor Management• High Cost Structure• Inadequate Differentiation• Overexpansion• Structural Shifts in Demand • Organizational Inertia
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
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
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