Chapter 10

Implementation

0Chapter Summary

The first concern in the implementation of business strategy is to translate that strategy into
action throughout the organization. This chapter discusses five considerations for
accomplishing this. Short-term objectives translate long-range aspirations into this year’s
targets for action. Functional tactics translate business strategy into daily activities people
need to execute. Outsourcing nonessential functions normally performed in-house frees up
resources and the time of key people to concentrate on leveraging the functions and activities
critical to the core competitive advantages around which the firm’s long range strategy is
built. Policies are empowerment tools that simplify decision making by empowering
operating managers and their subordinates. Rewards that align manager and employee
priorities with organizational objectives and shareholder value provide very effective
direction in strategy implementation.

0Learning Objectives

1. Understand how short-term objectives are used in strategy implementation.

2. Identify and apply the qualities of good short-term objectives to your own experiences.
3. Illustrate what is meant by functional tactics and understand how they are used in strategy
implementation.
4. Gain a general sense of what outsourcing is and how it becomes a choice in functional
tactics decisions for strategy implementation.
5. Understand what policies are and how to use policies to empower operating personnel in
implementing business strategies and functional tactics.
6. Understand the use of financial reward in executive compensation.
7. Identify different types of executive compensation and when to use each in strategy
implementation.

0Lecture Outline

I0. Short-Term Objectives

A0. To makes business strategies, grand strategies, and long-term objectives become a
reality, the people in an organization who actually “do the work” of the business need
guidance in exactly what they need to do.

10. Short-term objectives held do this.

a) Short-term objectives are measurable outcomes achievable or intended

to be achieved in one year or less.
b) They are specific, usually quantitative, results operating managers set
out to achieve in the immediate future.

2. Short-term objectives help implement strategy in at least three ways:

208
 a) Short-term objectives “operationalize” long-term objectives.
b) Discussion about and agreement on short-term objectives help raise
issues and potential conflicts within an organization that usually require
coordination to avoid otherwise dysfunctional consequences.
c) Exhibit 10.1, Potential Conflicting Objectives and Priorities,
illustrates how objectives within marketing, manufacturing, and
accounting units within the same firm can be very different even when
created to pursue the same firm objective.
d) Finally, short-term objectives assist strategy implementation by
identifying measurable outcomes of action plans or functional activities,
which can be used to make feedback, correction, and evaluation more
relevant and acceptable.

3. Short-term objectives are usually accompanied by action plans, which

enhance these objectives in three ways.

a) First, action plans usually identify functional tactics and activities that
will be undertaken in the next week, month, or quarter as part of the
business’s effort to build competitive advantage.
b) The important point here is specificity—what exactly is to be done.
c) We will examine functional tactics in a subsequent section of this
chapter.
d) The second element of an action plan is a clear time frame for
completion—when the effort will begin and when its results will be
accomplished.
e) A third element action plans contain is identification of who is
responsible for each action in the plan.
f) This accountability is very important to ensure action plans are acted
upon.

4. Because of the particular importance of short-term objectives in strategy

implementation, the next section addresses how to develop meaningful short-
term objectives.

a) Exhibit 10.2, Top Strategist, provides a BusinessWeek interview with

Symantec CEO John Thompson about the nature and importance of
short-term objectives to Symantec’s success.

B. Qualities of Effective Short-Term Objectives

1. Measurable

a) Short-term objectives are more consistent when they clearly state what is
to be accomplished, when it will be accomplished, and how its
accomplishments will be measured.
b) Such objectives can be used to monitor both the effectiveness of each
activity and the collective progress across several interrelated activities.
c) Exhibit 10.3, Creating Measurable Objectives, illustrates several
effective and ineffective short-term objectives.

209
 d) Measurable objectives make misunderstanding less likely among
interdependent managers who must implement action plans.
e) It is far easier to quantify the objectives of line units than of certain staff
areas.
f) Difficulties in quantifying the objectives often can be overcome by
initially focusing on measurable activity and then identifying
measurable outcomes.

2. Priorities

a) Although all annual objectives are important, some deserve priority

because of a timing consideration or their particular impact on a
strategy’s success.

(1) If such priorities are not established, conflicting assumptions about

the relative importance of annual objectives may inhibit progress
toward strategic effectiveness.
(2) Anne Mulcahy’s turnaround of Xerox described at the beginning of
this chapter emphasized several important shot-term objectives.
(3) But it was clear throughout Xerox that her highest priority in the
first two years was to dramatically lower overhead and production
costs so as to satisfy the difficult challenge of continuing to invest
heavily in R&D while also restoring profitability.

b) Priorities are established in various ways.

(1) A simple ranking may be based on discussion and negotiation

during the planning process.
(2) However, this does not necessarily communicate the real difference
in the importance of objectives, so such terms as primary, top, and
secondary may be used to indicate priority.
(3) Some firms assign weights to establish and communicate the
relative priority of objectives.
(4) Whatever the method, recognizing priorities is an important
dimension in the implementation value of short-term objectives.

3. Linked to Long-Term Objectives

a) Short-term objectives can add breadth and specificity in identifying what

must be accomplished to achieve long-term objectives.
b) The link between short-term and long-term objectives should resemble
cascades through the firm from basic long-term objectives to specific
short-term objectives in key operation areas.

(1) The cascading effect has the added advantage of providing a clear
reference for communication and negotiation, which may be
necessary to integrate and coordinate objectives and activities at
the operating level.

C. The Value-Added Benefits of Short-Term Objectives and Action Plans

210
 1. One benefit of short-term objectives and action plans is that they give
operating personnel a better understanding of their role in the firm’s mission.

a) Clarity of purpose can be a major force in helping use a firm’s “people

assets” more effectively, which may add tangible value.

2. A second benefit of short-term objectives and action plans comes from the
process development.

a) If the managers responsible for this accomplishment have participated in

their development, short-term objectives and action plans provide valid
bases for addressing and accommodating conflicting concerns that might
interfere with strategic effectiveness (see Exhibit 10.1).
b) Meetings to set short-term objectives and action plans become the forum
for raising and resolving conflicts between strategic intentions and
operating realities.

3. A third benefit of short-term objectives and action plans is that they provide a
basis for strategic control.

a) The control of strategy will be examined in detail in Chapter 12.

b) However, it is important to recognize here that short-term objectives and
action plans provide a clear, measurable basis for developing budgets,
schedules, trigger points, and other mechanisms for controlling the
implementation of strategy.
c) Exhibit 10.2, Top Strategist, describes how new Symantec CEO John
Thompson used short-term objectives as a key basis for strategic control.

4. A fourth benefit is often a motivational payoff.

a) Short-term objectives and action plans that clarify personal and group
roles in a firm’s strategies and are also measurable, realistic, and
challenging can be powerful motivators of managerial performance—
particularly when these objectives are linked to the firm’s reward
structure.

II. Functional Tactics That Implement Business Strategies

A. Functional tactics are the key, routine activities that must be undertaken in each
functional area to provide the business’s products and services.

1. In a sense, functional tactics translate thought (grand strategy) into action

designed to accomplish specific short-term objectives.

a) Every value chain activity in a company executes functional tactics that

support the business’s strategy and help accomplish strategic objectives.

2. Exhibit 10.4, Strategy in Action, illustrates the difference between

functional tactics and business strategy.

211
 a) It also shows that functional tactics are essential to implement business
strategy.
b) To increase the likelihood that strategies are successful, specific
functional tactics are needed for the firm’s operating components.
c) These functional tactics clarify the business strategy, giving specific,
short-term guidance to operating managers and employees in the areas
of marketing, operations, and finance.

B. Differences between Business Strategies and Functional Tactics

1. Functional tactics are different from business or corporate strategies in three

fundamental ways:

a) Time horizon.
b) Specificity.
c) Participants who develop them.

2. Time Horizon

a) Functional tactics identify activities to be undertaken “now” or in the

immediate future.

(1) Business strategies focus on the firm’s posture three to five years
out.
(2) Strategy in Action Exhibit 10.5 shows 3M CEO McNervey using
3M’s famous sticky notes to identify two functional tactics to
implement each of 3M’s four strategic priorities for the next five
years.

b) The shorter time horizon of functional tactics is critical to the successful

implementation of a business strategy for two reasons.

(1) It focuses the attention of functional managers on what needs to be

done now to make the business strategy work.
(2) It allows functional managers like those at 3M to adjust to
changing current conditions.

3. Specificity

a) Functional tactics are more specific than business strategies.

(1) Business strategies provide general direction.

(2) Functional tactics identify the specific activities that are to be
undertaken in each functional area and thus allow operating
managers to work out how their unit is expected to pursue short-
term objectives.
(3) Exhibit 10.4, Strategy in Action, illustrates the nature and value
of specificity in functional tactics versus business strategy at
California Pizza Kitchen.

212
 b) Specificity in functional tactics contributes to successful implementation
by:

(1) Helping ensure that functional managers know what needs to be

done and can focus on accomplishing results.
(2) Clarifying for top management how functional managers intend to
accomplish the business strategy, which increases top
management’s confidence in and sense of control over the business
strategy.
(3) Facilitating coordination among operating units within the firm by
clarifying areas of interdependence and potential conflict.

4. Participants

a) Different people participate in strategy development at the functional

and business levels.

(1) Business strategy is the responsibility of the general manager of a

business unit.
(2) That manager typically delegates the development of functional
tactics to subordinates charged with running the operating areas of
the business.
(3) The manager of a business unit must establish long-term objectives
and a strategy that corporate management feels contributes to
corporate-level goals.
(4) Similarly, key operating managers must establish short-term
objectives and operating strategies that contribute to business-level
goals.
(5) Just as business strategies and objectives are approved through
negotiation between corporate managers and business managers,
so, too, are short-term objectives and functional tactics approved
through negotiation between business managers and operating
managers.

b) Involving operating managers in the development of functional tactics

improves their understanding of what must be done to achieve long-term
objectives and, thus, contributes to successful implementation.

(1) It also helps ensure that functional tactics reflect the reality of the
day-to-day operating situation.
(2) Perhaps most important, it can increase the commitment of
operating managers to the strategies developed.

III. Outsourcing Functional Activities

A. A generation ago, it was conventional wisdom that a business has a better chance of
success if it controls the doing of everything necessary to produce its products or
services.

213
1. Referring back to Chapter 6’s value chain approach, the “wise” manager
would have sought to maintain control of virtually all the “primary” activities
and the “support” activities associated with the firm’s work.

a) Starting for most firms with the outsourcing of producing payroll each
week, companies worldwide are embracing the idea that the best way to
implement their strategies is to retain responsibility for executing some
functions while seeking outside people and companies to do key support
and key primary activities where they can do so more effectively and
more inexpensively.
b) Outsourcing, then, is acquiring an activity, service, or product
necessary to provide a company’s products or services from “outside”
the people or operations controlled by that acquiring company.

2. More and more entrepreneurs are turning to outside help at home and abroad
these days.

a) While exact numbers are hard to come by, a study released in January by
Cutting Edge Information, a Durham (North Carolina) consulting firm,
found that 90 percent of all U.S. businesses now outsource some work.

(1) While some of that may be temporary—employers of all sizes have

always relied on outside workers as demand picks up following a
recession—most job-watchers now believe small businesses will
continue to turn to outsiders even as the economy strengthens.
(2) The reason: They face the same relentless pressure to cut prices as
their bigger brethren.

b) Outsourcing, endorsed as a cost-cutting measure by such management

gurus as Peter Drucker and Tom Peters, has emerged as the most
sweeping trend to hit management since reengineering.

(1) In the rush to improve efficiency, Corporate America is going to

outsiders to buy evermore products and services that were once
made by its own employees.

c) Companies are parceling out everything from mailroom management to

customer service, from pieces of human resources departments to
manufacturing and distribution.
d) It’s hardly just rote work that’s being outsourced—even such key
functions are marketing are now up for bidding.
e) The hype over outsourcing’s benefits, however, disguises numerous
problems.
f) Relentless cost cutting is the main force behind the trend.
g) The important point to recognize at this point is that functional activities
long associated with doing the work of any business organization are
increasingly subject to be outsourced if they can be done more cost
effectively by other providers.

(1) So it becomes critical for managers implementing strategic plans to

focus company activities on functions deemed central to the

214
 company’s competitive advantage and to seek others outside the
firm’s structure to provide the functions that are necessary, but not
within the scope of the firm’s core competencies.
(2) And, increasingly, this decision considers every organizational
activity fair game—even marketing, product design, innovation.

IV. Empowering Operating Personnel: The Role of Policies

A. Specific functional tactics provide guidance and initiate action implementing a

business’s strategy, but more is needed.

1. Supervisors and personnel in the field have been charged in today’s

competitive environment with being responsible for customer value—for
being the “front line” of the company’s effort to truly meet customers’ needs.

a) Meeting customer needs, becoming obsessed with quality service, was

the buzzword that started organizational revolutions in the 1980s.
b) Efforts to do so often failed because employees that were the real
contact point between the business and its customers were not
empowered to make decisions or act to fulfill customer needs.
c) One solution has been to empower operating personnel by pushing down
decision making to their level.

2. Empowerment is the act of allowing an individual or team the right and

flexibility to make decisions and initiate action.

a) It is being expanded and widely advocated in many organizations today.

b) Training, self-managed work groups, eliminating whole levels of
management in organizations, and aggressive use of automation are
some of the ways and ramifications of this fundamental change in the
way business organizations function.
c) At the heart of this effort is the need to ensure that decision making is
consistent with the mission, strategy, and tactics of the business while at
the same time allowing considerable latitude to operating personnel.
d) One way operating managers do this is through the use of policies.

3. Policies are directives designed to guide the thinking, decisions, and actions
of managers and their subordinates in implementing a firm’s strategy.

a) Sometimes called standard operating procedures, policies increase

managerial effectiveness by standardizing many routine decisions and
clarifying the discretion managers and subordinates can exercise in
implementing functional tactics.
b) Logically, policies should be derived from functional tactics with the
key purpose of aiding strategy execution.
c) Exhibit 10.6, Strategy in Action, illustrates selected policies of several
well-known firms.

B. Creating Policies That Empower

215
1. Policies communicate guidelines to decisions. They are designed to control
decisions while defining allowable discretion within which operational
personnel can execute business activities; they do this in several ways:

a) Policies establish indirect control over independent action by clearly

stating how things are to be done now.

(1) By defining discretion, policies in effect control decisions yet

empower employees to conduct activities without direct
intervention by top management.

b) Policies promote uniform handling of similar activities.

(1) This facilitates the coordination of work tasks and helps reduce
friction arising from favoritism, discrimination, and the disparate
handling of common functions—something that often hampers
operating personnel.

c) Policies ensure quicker decisions by standardizing answers to previously

answered questions that otherwise would recur and be pushed up the
management hierarchy again and again—something that required
unnecessary levels of management between senior decision makers and
field personnel.
d) Policies institutionalize basic aspects of organization behavior.

(1) This minimizes conflicting practices and establishes consistent

patterns of action in attempts to make the strategy work—again,
freeing operating personnel to act.

e) Policies reduce uncertainty in repetitive and day-to-day decision

making, thereby providing a necessary foundation for coordinated,
efficient efforts and freeing operating personnel to act.
f) Policies counteract resistance to or rejection of chosen strategies by
organization members.

(1) When major strategic change is undertaken, unambiguous

operating policies clarify what is expected and facilitate
acceptance, particularly when operating managers participate in
policy development.

g) Policies afford managers a mechanism for avoiding hasty and ill-

conceived decisions in changing operations.

(1) Prevailing policy can always be used as a reason for not yielding to
emotion-based, expedient, or temporarily valid arguments for
altering procedures and practices.

2. Policies may be written and formal or unwritten and informal.

a) Informal, unwritten policies are usually associated with a strategic need

for competitive secrecy.

216
 (1) Some policies of this kind, such as promotion from within, are
widely known (or expected) by employees and implicitly
sanctioned by management.
(2) Managers and employees often like the latitude granted by
unwritten and informal policies.
(3) However, such policies may detract from the long-term success of
a strategy.

b) Formal, written policies have at least seven advantages:

(1) They require managers to think through the policy’s meaning,

content, and intended use.
(2) They reduce misunderstanding.
(3) They make equitable and consistent treatment of problems more
likely.
(4) They ensure unalterable transmission of policies.
(5) They communicate the authorization or sanction of policies more
clearly.
(6) They supply a convenient and authoritative reference.
(7) They systematically enhance indirect control and organizationwide
coordination of the key purposes of policies.

3. The strategic significance of policies can vary.

a) At one extreme are such policies as travel reimbursement procedures,

which are really work rules and may not have an obvious link to the
implementation of a strategy.
b) Exhibit 10.7, Strategy in Action, provides an interesting example of
how the link between a simple policy and strategy implementation
regarding customer service can have serious negative consequences
when it is neither obvious to operating personnel nor well thought out by
bank managers.
c) At the other extreme are organizationwide policies that are virtually
functional strategies, such as Wendy’s requirement that every location
invest 1 percent of its gross revenue in local advertising.

4. Policies can be externally imposed or internally derived.

a) Policies regarding equal employment practices are often developed in

compliance with external requirements, and policies regarding leasing or
depreciation may be strongly influenced by current tax regulations.

5. Regardless of the origin, formality, and nature of policies, the key point to
bear in mind is that they can play an important role in strategy
implementation.

a) Communicating specific policies will help overcome resistance to

strategic change, empower people to act, and foster commitment to
successful strategy implementation.

217
 6. Policies empower people to act.

a) Compensation, at least theoretically, rewards their action.

b) The last decade has seen many firms realize that the link between
compensation, particularly executive management compensation, and
value-building strategic outcomes within their firms was uncertain.
c) The recognition of this uncertainty has brought about increased
recognition of the need to link management compensation with the
successful implementation of strategies that build long-term shareholder
value.
d) The next section examines this development and major types of
executive bonus compensation plans.

V. Executive Bonus Compensation Plans

A. Major Plan Types

1. The goal of an executive bonus compensation plan is to motivate executives

to achieve maximization of shareholder wealth—the underlying goal of most
firms.

a) Because shareholders are both owners and investors of the firm, they
desire a reasonable return on their investment.

(1) Because they are absentee landlords, shareholders want the

decision-making logic of their firm’s executives to be concurrent
with their own primary motivation.

b) However, agency theory instructs us that the goal of shareholder wealth

maximization is not the only goal that executives may pursue.

(1) Alternatively, executives may choose actions that increase their

personal compensation, power, and control.
(2) Therefore, an executive compensation plan that contains a bonus
component can be used to orient management’s decision making
toward the owner’s goals.
(3) The success of bonus compensation as an incentive hinges on a
proper match between an executive bonus plan and the firm’s
strategic objectives.

2. Stock Options

a) A common measure of shareholder wealth creation is appreciation of

company stock price.

(1) Therefore, a popular form of bonus compensation is stock options.

(2) Stock options have typically represented more than 50 percent of a
chief executive officer’s average pay package.
(3) Stock options provide the executive with the right to purchase
company stock at a fixed price in the future.

218
 (4) The precise amount of compensation is based on the difference, or
“spread,” between the option’s initial price and its selling, or
exercised price.
(5) As a result, the executive receives a bonus only if the firm’s share
price appreciates.
(6) If the share price drops below the option price, the options become
worthless.

b) Stock options were the source of extraordinary wealth creation for

executives, managers, and rank-and-file employees in the technology
boom of the last decade.

(1) Behind using options as compensation incentives was the notion

that they were essentially free.
(2) Although they dilute shareholders’ equity when they’re exercised,
taking the cost of stock options as an expense against earnings was
not required.
(3) That, in turn, helped keep earnings higher than actual costs to the
company and its shareholders.
(4) The bear market and corporate scandals of the last few years
brought increased scrutiny on the use of an accounting for stock
options.
(5) Recent changes in SEC guidelines have encouraged expensing
stock options to more accurately reflect company performance.

c) Restricted stock has the advantage of offering employees more certainty,

even if there is less potential for a big win.

(1) It also means shareholders don’t have to worry about massive

dilution after employees exercise big stock gains, as happened in
the 1990s.
(2) Another advantage is that grants of restricted stock are much easier
to value than options because restricted stock is equivalent to a
stock transfer at the market price.
(3) That improves the transparency of corporate accounting.

d) Research suggests that stock option plans lack the benefits of plans that
include true stock ownership.

(1) Stock option plans provide unlimited upside potential for

executives, but limited downside risk because executives incur only
opportunity costs.
(2) Because of the tremendous advantages to the executive of stock
price appreciation, there is an incentive for the executive to take
undue risk.
(3) Thus, supporters of stock ownership plans argue that direct
ownership instills a much stronger behavioral commitment, even
when the stock price falls, because it binds executives to their firms
more than do options.

219
 e) Options may have been overused in last bull market, but evidence
suggests that the smart use of options and other incentive compensation
does boost performance.

(1) Companies that spread ownership throughout a large portion of

their workforce deliver higher returns than similar companies with
more concentrated ownership.
(2) If options seemed for a time to be the route that enriched CEOs,
employees, and investors alike, it still appears they will be used,
although with less emphasis than a mix of options, restricted stock,
and cash bonuses.
(3) Whatever the exact mix, they are likely to be more closely tied to
achieving specific operating goals.

3. Restricted Stock

a) A restricted stock plan is designed to provide benefits of direct

executive stock ownership.

(1) In a typical restricted stock plan, an executive is given a specific

number of company stock shares.
(2) The executive is prohibited from selling the shares for a specified
time period.
(3) Should the executive leave the firm voluntarily before the restricted
period ends, the shares are forfeited.
(4) Therefore, restricted stock plans are a form of deferred
compensation that promotes longer executive tenure than other
types of plans.

b) In addition to being contingent on a vesting period, restricted stock plans

may also require the achievement of predetermined performance goals.

(1) Price-vesting restricted stock plans tie vesting to the firm’s stock
price in comparison to an index or to reaching a predetermined goal
or annual growth rate.
(2) If the executive falls short on some of the restrictions, a certain
amount of shares are forfeited.
(3) The design of these plans motivates the executive to increase
shareholder wealth while promoting a long-term commitment to
stay with the firm.

c) If the restricted stock plan lacks performance goal provisions, the

executive needs only to remain employed with the firm over the vesting
period to cash in on the stock.

(1) Performance provisions make sure executives are not compensated

without achieving some level of shareholder wealth creation.
(2) Like stock options, restricted stock plans offer no downside risk to
executives because the shares were initially gifted to the executive.
(3) Unlike options, the stock retains value tied to its market share once
ownership is fully vested.

220
 (4) Shareholders, on the other hand, do suffer a loss in personal wealth
resulting from a share price drop.

4. Golden Handcuffs

a) The rationale behind plans that defer compensation forms the basis for
another type of executive compensation called golden handcuffs.

(1) Golden handcuffs refer to either a restricted stock plan, where the
stock compensation is deferred until vesting time provisions are
met, or to bonus income deferred in a series of annual installments.
(2) This type of plan may also involve compensating an executive a
significant amount upon retirement or at some predetermined age.
(3) In most cases, compensation is forfeited if the executive voluntarily
resigns or is discharged before certain time restrictions.

b) Many boards consider their executives’ skills and talents to be their

firm’s most valuable assets.

(1) These “assets” create and sustain the professional relationships that
generate revenue and control expenses for the firm.
(2) Research suggests that the departure of key executives is unsettling
for companies and often disrupts long-range plans when new key
executives adopt a different management strategy.
(3) Thus, the golden handcuffs approach to executive compensation is
more congruent with long-term strategies than short-term
performance plans, which offer little staying-power incentive.

c) Firms may turn to golden handcuffs if they believe stability of

management is critical to sustained growth.
d) Deferred compensation is worrisome to some executives.

(1) In cases where the compensation is payable when the executives

are retired and no longer in control, as when the firm is acquired by
another firm or a new management hierarchy is installed, the
golden handcuff plans are considerably less attractive to
executives.

e) Golden handcuffs may promote risk averseness in executive decision

making due to the huge down risk borne by executives.

(1) This risk averseness could lead to mediocre performance results

from executives’ decisions.
(2) When executives lose deferred compensation if the firm discharges
them voluntarily or involuntarily, the executive is less likely to
make bold and aggressive decisions.
(3) Rather, the executive will choose safe, conservative decisions.

5. Golden Parachutes

221
 a) Golden parachutes are a form of bonus compensation that is designed
to retain talented executives.

(1) A golden parachute is an executive perquisite that calls for a

substantial cash payment if the executive quits, is fired, or simply
retires.
(2) In addition, the golden parachute may also contain covenants that
allow the executive to cash in on noninvested stock compensation.

b) The popularity of golden parachutes grew during the last decade, when
abundant hostile takeovers would often oust the acquired firm’s top
executives.

(1) In these cases, the golden parachutes encouraged executives to take

an objective look at takeover offers.
(2) The executives could decide which move was in the best interests
of the shareholders, having been personally protected in the event
of a merger.
(3) The “parachute” helps soften the fall of the ousted executive.
(4) It is “golden” because the size of the cash payment often varies
from several to tens of millions of dollars.

c) By design, golden parachutes benefit top executives whether or not there

is evidence that value is created for shareholders.

(1) In fact, research has suggested that since high-performing firms are
rarely taken over, golden parachutes often compensate top
executives for abysmal performance.
(2) Recent stockholder reactions to excessive executive compensation
regardless of company performance are seen in Exhibit 10.9,
Strategy in Action.

6. Cash

a) Executive bonus compensation plans that focus on accounting measures

of performance are designed to offset the limitations of market-based
measures of performance.

(1) This type of plan is most usually associated with the payment of
periodic (quarterly or annual) cash bonuses.
(2) Market factors beyond the control of management, such as pending
legislation, can keep a firm’s share price repressed even though a
top executive is exceeding the performance expectations of the
board.
(3) In this situation, a highly performing executive loses bonus
compensation due to the undervalued stock.
(4) However, accounting measures of performance correct for this
problem by tying executive bonuses to improvements in internally
measured performance.

222
 b) Traditional accounting measures, such as net income, earnings per share,
return on equity, and return on assets, are used because they are easily
understood, are familiar to senior management, and are already tracked
by firm data systems.

c) Critics argue that because of inherent flaws in accounting systems,

basing compensation on these figures may not result in an accurate
gauge of managerial performance.

(1) Return on equity estimates, for example, are skewed by inflation

distortions and arbitrary cost allocations.
(2) Accounting measures are also subject to manipulation by firm
personnel to artificially inflate key performance figures.
(3) Firm performance schemes, critics believe, need to be based on a
financial measure that has a true link to shareholder value creation.
(4) This issue led to the creation of the Balanced Scorecard, which
emphasizes not only financial measures, but also such measures as
new product development, market share, and safety as discussed in
Chapter 12.

B. Matching Bonus Plans and Corporate Goals

1. Exhibit 10.10, Compensation Plan Selection Matrix, provides a summary

of the five types of executive bonus compensation plans.

a) The figure includes a brief description, a rationale for implementation,

and the identification of possible shortcomings for each of the
compensation plans.
b) Not only do compensation plans differ in the method through which
compensation is rewarded to the executive, but they also provide the
executive with different incentives.

2. Exhibit 10.10 matches a company’s strategic goal with the most likely
compensation plan.

a) On the vertical axis are common strategic goals.

b) The horizontal axis lists the main compensation types that serve as
incentives for executives to reach the firm’s goals.
c) A rationale is provided to explain the logic behind the connection
between the firm’s goal and the suggested method of executive
compensation.

3. Researchers emphasize that fundamental to these relationships is the

importance of incorporating the level of strategic risk of the firm into the
design of the executive’s compensation plan.

a) Incorporating an appropriate level of executive risk can create a desired

behavioral change commensurate with the risk level of strategies
shareholders and their firms want.

223
 b) To help motivate an executive to pursue goals of a certain risk-return
level, the compensation plan can quantify that risk-return level and
reward the executive accordingly.

4. The links we show between bonus compensation plans and strategic goals
were derived from the results of prior research.

a) The basic principle underlying Exhibit 10.10 is that different types of

bonus compensation plans are intended to accomplish different
purposes; one element may serve to attract and retain executives,
another may serve as an incentive to encourage behavior that
accomplishes firm goals.
b) Although every strategy option has probably been linked to each
compensation plan at some time, experience shows that there may be
scenarios where a plan type best fits a strategy option.
c) Exhibit 10.10 attempts to display the “best matches.”

5. Once the firm has identified strategic goals that will best serve shareholders’
interests, an executive bonus compensation plan can be structured in such a
way as to provide the executive with an incentive to work toward achieving
these goals.

Discussion Questions and Case

Questions for Discussion

1. How does the concept “translate thought into action” bear on the relationship between
business strategy and operating strategy? Between long-term and short-term
objectives?

Business strategy is strategy formulation. It is based on a sound analysis of the business’s

internal and external environment. However, currently they are still rather abstract
(comparatively) notions of how the firm should compete. To make business strategy
become a reality, the people in an organization that actually “do the work” of the business
need guidance in exactly what needs to be done today and tomorrow to make those long-
term strategies become reality. Thus, as the strategy moves from a business strategy to an
operating strategy it becomes more specific and action oriented. Similarly, short-term
objectives “operationalize” long-term objectives. They provide specific guidance for the
immediate time frame that helps in achieving the long-term objectives.

2. How do functional tactics differ from corporate and business strategies?

Pages 298-301 describe the role of functional tactics. Functional tactics are the key,
routine activities that must be undertaken in each functional area – marketing, finance,
production/operations, R&D, and human resource management – to provide the
business’s products and services. In a sense, functional tactics translate thought (grand
strategy) into action designed to accomplish specific short-term objectives. Exhibit 10.4

224
 on page 300 illustrates the differences between functional tactics and corporate and
business strategy using the example of California Pizza Kitchen.

3. What key concerns must functional tactics address in marketing? Finance? POM?
Personnel?

The example of California Pizza Kitchen shown in Exhibit 10.4 on page 300 helps answer
this question. In addition, Appendix 9 covers functional tactics in detail. In the finance
area functional tactics must address issues such as the kind of financing arrangement to
be used for expansion, providing financial help to key suppliers, and the firm’s dividend
policy. In marketing the areas covered could be: What product mix should we offer to
attract our customers? What should our pricing policy be? In operations: How to get
economies of scale? Where should we locate our manufacturing facilities? In personnel:
What should be our recruitment methods? How should we compensate our employees?

4. How do policies aid strategy implementation? Illustrate your answer.

Pages 303-306 cover the role of policies. While specific functional tactics provide
guidance and initiate action implementing a business’s strategy, employees also need to
be empowered to make decisions or fulfill customer needs. Policies provide this
empowerment. They are directives designed to control decisions while defining allowable
discretion within which operational personnel can execute business activities.

5. Use Exhibits 10.8 and 10.10 to explain five executive bonus compensation plans.

Exhibit 10.8 (page 307) describes the five types of executive bonus compensation plans
and Exhibit 10.10 (page 313) matches each plan to the strategic goal of the organization.

Stock option grants give the right to purchase stock in the future at a price set now. It is a
good plan to use in corporate turnaround and growth situations, when operations need to
be globalized and in a restructuring situation.

In a restricted stock plan, shares are given to executives who are prohibited from selling
them for a specific time period. They are good to use when the goal is to increase assets
under management and when there is a need to streamline operations.

When bonus income is deferred in a series of annual installments, the plan is called a
golden handcuff. This is a good plan to use when the goal is to reduce corporate turnover.

Golden parachutes give executives the right to collect the bonus if they lose their position
due to takeover, firing, retirement, or resignation. When the goal is to defend against
unfriendly takeovers or there is a need to evaluate suitors objectively, a golden parachute
is useful.

Finally, a cash based bonus system pays a bonus based on accounting performance
measures such as return on equity. This system is used when the goal is to grow the share
price incrementally or to improve operational efficiency.

6. Illustrate a policy, an objective, and a functional tactic in your personal career strategy.

225
 A policy is a guide to action. A policy in a person’s career strategy could relate to
behaving ethically in all situations. An objective could be to get a management position
by age 30. A functional tactic would be to extend one’s formal education by getting an
MBA. Students are likely to come up with a variety of policies, objectives, and functional
tactics.

7. Why are short-term objectives needed when long-term objectives are already available?

Short-term objectives “operationalize” long-term objectives. In other words, while long-

term objectives help in ensuring that the firm is pursuing its strategy in the long-term, it
needs several short-term measures to guide immediate thinking. For example, if we
commit to a 20 percent gain in revenue over five years (long-term objective), what is our
specific target or objective in revenue during the current year, month, or week to indicate
that we are making progress (short-term objectives)?

Discussion Case – “Toyota Implements a Low-Cost Strategy”

Case Summary
Five years ago, Toyota Motor Corp. stunned the auto world by embarking on a plan to slash
costs 30% across the board for the car parts it buys. The bold plan to squeeze its own network
of traditional suppliers, known as keiretsu, was designed to make sure the Toyota group
would retain its competitive edge against a spate of global auto alliances such as
DaimlerChrysler, which promised gigantic synergies from their bigger size. DaimlerChrysler
is still struggling to make its merger pay off, but Toyota’s cost-cutting program, dubbed
CCC21 (Construction of Cost Competitiveness for the 21 Century), has been a remarkable
success. With just one year to go, the plan is on track to save the auto maker $10 billion over
its five-year time frame. Not only is CCC21 sourcing components more cheaply but Toyota
has also improved the parts’ quality. Toyota may be under more pressure now to cut costs
than when it began CCC21. So, the drive is on to replace expensive materials, benchmark
Toyota’s auto parts against Chinese-level pricing, and squeeze its Japanese suppliers further
by relying more on non-keiretsu parts makers.

Among the most pernicious threats: the surge in prices of crucial items such as sheet steel due
to higher costs for raw materials like iron ore and coal. Blame China’s voracious demand for
steel and a shortage of Asian blast furnace capacity—factors that are unlikely to go away
anytime soon. What’s more, the strong yen means Toyota’s reported profits from outside
Japan come in lower, increasing the pressure to cut expenses. To cope, Watanabe is pushing
Toyota to winnow down the number of steel parts it uses in an average vehicle from 610 to
about 500, although it won’t say by when or how much savings that will net. Toyota will
probably turn to more steel substitutes such as aluminum and heavy-duty advanced plastics
and resins. Moving away from steel goes hand-in-hand with the company’s longer term goal
of cutting the weight of its vehicles to increase fuel efficiency and rust-proof durability.

The China benchmark Toyota adopted will increase the pressure on Toyota’s traditional
suppliers. But so will the company’s efforts to court more non-Japanese suppliers to find the
best price. And parts makers like Bosch and Delphi, which turn out everything from air bags
to transmissions, are now more willing to meet demanding specifications. Non-keiretsu
suppliers see their best chance in markets where Toyota is expanding fastest, especially

226
China, where the Japanese auto maker is eager to catch up with established rivals like GM
and Volkswagen.

Key Issues Addressed

• Identify short-term objectives and explain their importance. Please refer to the section titled
“Short-Term Objectives” on pages 293-298.

• Identify and explain the purpose of functional tactics in each functional area. Please refer to
the section titled “Functional Tactics That Implement Business Strategies ” on pages 298-
301.

• Explain how outsourcing can provide cost savings to a firm. Please refer to the section titled
“Outsourcing Functional Activities” on pages 301-302.

Case Discussion Questions

1. What was Toyota’s long-range strategy and its long-range goal in 2000?

Toyota’s long-range strategy was to sustain its competitive edge by squeezing its own
network of traditional suppliers in an effort to cut costs dramatically. It implemented a
cost-cutting program called CCC21, or Construction of Cost Competitiveness for the
21st Century. That goal, specifically, was to cut costs 30% across the board for the car
parts it buys within a five-year time frame.

20. What shot-term objectives did Toyota pursue?

Watanabe has prompted the Toyota CCC21 team to eliminate waste anywhere possible.
In the short-term, this year for example, the company sought to cut $2 billion. It is also
trying to cut the number of steel parts from an average of 610 to about 500 per vehicle.

Short-term objectives are discussed in the text on pages 293-298.

3. What functional tactics did Toyota employ? How did it use outsourcing?

Watanabe has also sought to use a China benchmark—requiring the company’s keiretsu
suppliers to compete against a benchmark of 180 key parts. The keiretsu outfits have to
learn to meet the benchmark or risk losing Toyota’s business. Toyota worked with an
affiliate, Denso, for example, to consolidate production of air-conditioning vents to just
four key styles, down from 27 previously. This resulted in a 28% cost reduction, but
Watanabe still wasn’t happy, as he wanted just three. (Refer to the case, page 316,
paragraph 9). Toyota is putting pressure on its traditional suppliers, and is also turning
to non-Japanese suppliers to find the best price. (Refer to the case, page 316, paragraph
12). Toyota uses outsourcing now to produce a large percent of its parts, and it requires
its suppliers to meet demanding specifications.

4. Did any operating policies emerge to help implement CCC21?

227
 Some operating policies did emerge to help implement CCC21. Watanabe has led the
company to use the policies of always emphasizing quality and cutting costs. The
company generally emphasizes streamlining operations. It tries to limit the number of
styles or models of standard items used in its various models of vehicles (an example is
the horn). Another “standard operating procedure” is constant goal of kawaita zokin wo
shiboru, or “wringing drops from a dry towel” (see the case, page 316, paragraph 4).

Policies are discussed in the text under the section titled “Empowering Operating
Personnel: The Role of Policies,” on pages 303-306.

5. How have very specific functional tactics, activities, and short-term objectives helped
Toyota achieve its long-range goal? Give one example.

These functional tactics, activities, and short-term objectives have helped Toyota
achieve its long-range goal. They helped keep the company on pace to meet its long-
term goal, which was to reduce costs by 30% in five years, and save $2 billion. It
announced this year that by the end of the initiative, they will have saved $1.7 billion,
which is 15 percent short of its annual target. One good example of Watanabe’s cost-
consciousness and the short-term goal of eliminating redundancies is the vehicles’ horn.
Under Watanabe’s prodding, one Toyota CCC21 team disassembled the horns made by
a Japanese supplier and found ways to eliminate six of 28 components, resulting in a
40% cost reduction for that particular part. Another example is the paring down of the
interior assist grips above each door. There were once 35 different grips, but now the
entire 90-model lineup shares just three basic styles. (Refer to the case, page 316,
paragraph 4).

6. What does it appear Toyota must do in the next 5 to 10 years if it seeks to continue with
its current long-range strategy?

The company will have to continue to place demands on its suppliers, and hold them to
a standard such that if they cannot meet Toyota’s specifications, they will lose the
business at least temporarily. It can utilize outsourcing to its advantage in areas outside
of just parts-sourcing. They should examine other functional areas where they could cut
costs, improve efficiencies, and reduce redundancies. They should also continue to
focus on the lowest costs for its auto parts. Right now, this means benchmarking with
China, but in the future it could mean reevaluating that goal and pursuing a different,
more competitive benchmark. The firm has taken great strides to make cost-efficiency a
part of the culture as well as an explicit part of the firm’s short-term and long-term
objectives. It could also consider offering incentives for achieving particular cost
efficiencies after the expiration of the current initiative in March.

228