The Role of The Board

Strategy: A view from the topChapter 2Strategy and PerformanceMichael SimpsonAndrew VargasMeghan DavidsonJustin PickardIntroductionCarefully crafted strategies often only deliver a fraction of their promised financial value.Good to Great and 4+2 theoriesStrategy and Performance: A Conceptual FrameworkThe Role of the BoardFrom Good to GreatTop leadership defines a difference between good and great companies.Level 5 LeadershipLevel 5 leaders display a mix of intense determination and profound humilityLevel 5 leaders can look past personal financial gain for the good of the company.From Good to Great contNature 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 environmentIn todays market, trends in consumer markets are constantly changingFrom Good to Great contHedgehog conceptCollins 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.4+2 FormulaJoyce, Nohria, and Roberson ran the studyExamined 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 areasstrategy, 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.

4+2 contExcelling at four primary practicesStrategy: Devise and maintain a clearly stated, focused strategyExecution: Develop and maintain flawless operational executionCulture: Develop and maintain a performance-oriented cultureStructure: Build and maintain a fast, flexible, flat organization4-2 contEmbracing 2 of 4 secondary practicesTalent: Hold on to talented employeesInnovation: Make industry-transforming innovationLeadership: Find leaders who are committed to the business and its peopleMergers and Partnerships: Seek growth through mergers and partnershipsA Conceptual FrameworkBoth of the studies show no single individual can do all for success.Willingness of manager to meet not individual responsibilities but performance of companyFocus on organizational environment that meets objectives of the company.Success requires right people have clear authority to make decisions.A Conceptual Framework Cont.3 Interrelated ComponentsPurpose, Strategy, and Leadership

5 Interacting ComponentsStructure, Systems, Processes, People, and Culture

Performance/ Control

A Conceptual Framework Cont.

Strategy, Purpose, and LeadershipIn 1920s 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.

Strategy and Organizational ChangeImportant 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.

Strategy and Organizational Change Cont.STRUCTURETo 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.

Strategy and Organizational Change Cont.SYSTEMS and PROCESSESHaving 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.Strategy and Organizational Change Cont.PEOPLEAttracting, 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 tomorrows skills for strategic flexibility.Strategy and Organizational Change Cont.CULTUREDefined as shared systems of values, assumptions, and beliefs among a companys 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.

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 professionalsThe Balanced ScorecardThe 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.The Balanced ScorecardThe 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 companys shareholders?Apple Computer CorporationHistorically, 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.

The Balanced ScorecardCustomer-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.

A Management SystemThe Balanced Scorecard encompasses four management processes:Translating a visionCommunicating goals and linking rewards to performanceImproving business planningGathering feedback and learningThe Balanced ScorecardBy 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.Performance and ControlMost 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.Performance and ControlOn 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.The Role of The BoardDirect the affairs of the companyIn 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.

The Role of The Board1. Define its role, agenda, and information needsProvides management with guidance and supportCollaboration with management2. Ensure that management not only performs, but performs with integrityMust start when manager is hiredContinuously throughout careerThe Role of the Board3. Set expectations about the tone and culture of the companyFrom top management to entry level positionsSenior management must help set tone and culture4. Formulate corporate strategy with managementContinually fine-tune the corporate strategyBenchmarksClear Understanding from board to managers

The Role of the Board5. Ensure that the corporate culture, the agreed strategy, and the companys approach to audit and accounting, internal controls, and disclosure are consistent and alignedKey drivers of corporate performance & cultureMust compliment one another6. Help management understand the expectations of shareholders and regulators.Boards add value when helping management

What should boards ask?P.F Kocourek et al. suggests 12 questions boards should ask:1.Strategic Direction (p. 50)2.Resource allocationGood to Great First whothen whatBus example3.Management- Level 5 leadership Builds enduring greatness through a paradoxical blend of personal humility and professional will

What should boards ask?4.Financial Accountability5.Operating Controls6.Constituency Protection7.Litigation and Disputation8.Crises and Contingences9.Management Priorities

What should boards ask?10.Past and Present Performance11.Underlying Causes- Blue Ocean Strategy12. Performance Potential