Implementing Strategy Givindrajan Style

Implementing Strategy: Management Control Systems http://oracle-www.dartmouth.edu/dart/groucho/tuck_mba_program.syllabus?p_id=SCS

Faculty

Vijay Govindarajan

Objectives I. Course Objectives The best thought-out plans in the world aren't worth the paper they're written on if you can't pull them off. Ralph S. Larsen Chairman and CEO, Johnson & Johnson The central focus of this course is strategy implementation. In particular, the course is designed to allow you to gain knowledge, insight, and analytical skills related to how a corporation's senior executives design and implement the ongoing management systems that are used to plan and control the firm's performance. Elements of management systems include strategic planning; budgeting; resource allocation; performance measurement, evaluation, and reward; and transfer pricing. Management control is a must in any organization where decentralization exists. One perspective argues that management systems must "fit" the firm's strategy. This implies the strategy is first developed through a formal and rational process, and this strategy then drives the design of the firm's management systems. An alternate view is that strategies emerge through trial-and-error and ad hoc processes, which are significantly influenced by the firm's management systems. In this perspective, management systems can influence the strategy formulation process and thus, to some extent, drive the firm's strategy. We will explore both perspectives as well as their implications in terms of the design and operation of management systems. The importance of the subject matter covered in this course is captured in the widely accepted "truism" that over 90 percent of businesses (as well as nonprofit organizations) founder on the rocks of implementation; either the strategies never come into being or get distorted, or the implementation is much more costly and time consuming than anticipated. However laudable strategic intentions may be, if they do not become reality, they usually are not worth the paper on which they are written. Conversely, high-performing companies excel at execution. This course will provide you with concepts, frameworks, and tools to help you gain that "execution advantage." Consider the collapse of companies such as Tyco, Global Crossing, WorldCom, and Enron. Part of the reason for their demise was the lapse in controls. CEO and top management compensation in these companies was so heavily tied to stock options which motivated them to manipulate financials to buoy the short-term stock price. Consider world-class companies, such as Johnson & Johnson, 3M Corporation, Lincoln Electric and Nucor Corporation. Their long-term success is not just because they have developed good strategies, but, more importantly, they have designed systems and processes that energize their employees to execute those strategies effectively. We will do case studies on J&J, 3M, Lincoln Electric and Nucor to drive home the power of these companies' implementation capabilities. II. Target Audience Most of you will soon be in positions where you will be directly responsible for strategy implementation. You will either have to manage others within a certain management control system or you will be the "sufferer" of such a system! Either way, the materials covered in this course would be highly relevant to your immediate job situations, no matter what career tracks you might choose. The course is particularly appropriate for any prospective general manager of established or entrepreneurial ventures, as well as for those contemplating careers in management consultancy and brand management. The perspective of the course is that of a general manager who is charged with formulating and implementing strategies. This course is not "technical" in nature, even though some calculations are involved. However, the main prerequisite to successfully complete this course is to be able to, and willing to, think.

Requirements III. Requirements Class Preparation Catch a fish for a man and he is fed for a day. Teach a man to fish and he is fed for life. Chinese Proverb The most important requirements for this course are a thorough preparation and analysis of the assigned case and reading materials and active participation in the classroom. The course is built almost exclusively around the case method. The cases in this course raise issues that are evergreen--i.e., these issues were relevant 30 years

ago, they are relevant today, and they will be relevant 30 years from now. As captured in the proverb above, the learning in this class focuses more on the thought process in analyzing business situations, not just on the solutions per se. We will only discuss the assigned case each day; we will not explicitly discuss the assigned readings but they will help you in tackling the case. In order to derive maximum benefit from the cases, it is essential that you mentally "get inside" the case situation. Do not approach a case as you would a book chapter or magazine article. You are a participant, not an observer. If a case centers on a decision that needs to be made, put yourself in the shoes of the decision maker. Feel the frustration he or she feels with respect to data limitations. Feel the pressures he or she feels with respect to difficult tradeoffs, limited resources, political conflicts, etc. Once in class, share your ideas with others as we work together to resolve the issues. The cases included in this course represent broad organizational situations and encompass many facets of a company's control systems. In some instances, the case may represent a good system and you are expected to learn what makes the system work well. Other cases may present a system that has failed and the purpose here is to learn from the failures. Cases seldom present examples of absolutely perfect or totally flawed systems. There are always some weaknesses in the best control systems. However, the evaluation of these weaknesses is always relative to the resources--monetary, manpower, etc.--available to a company. Thus, it may be costly to remove flaws. Any recommendation for changes when analyzing cases should carefully weigh the organizational costs involved. In preparing the cases, the following simple rules may be helpful: * Do not automatically assume a case represents a good or a bad system. Adopt a framework that allows you to evaluate each case on its merits. In fact, the frameworks are among the key takeaways from this course; they can be used to tackle implementation dilemmas you inevitably will encounter in your career. * Adopt a management posture in analyzing cases. Use the assignment questions as a guide only. Your answer should highlight what you, as a manager, see as the strengths or weaknesses in a given situation. * Become familiar with the facts of a case. Outline the industry, the competitive context, and the core strategic tasks at which the firm should excel. You will have to evaluate the control systems of the firm in the context of its strategy. * Support your analysis with facts from the case. Most cases will not contain all the data you might like to have. Nevertheless, you'll be surprised at how easily you can make accurate inferences and useful assumptions if you simply give the current management the benefit of the doubt, that is, if you assume (in the absence of contrary data) they are running the business as you would run it--smartly! If there are contrary data, it's wise to think again. Maybe they're right, and your task is to understand why the company does what it does. * You are encouraged to test your ideas on others prior to the class meeting. Students tend to find study groups very beneficial in this course. For the sake of preparation, you should assume every class will begin with you being called upon to lead off. In the Classroom I expect you to have already thought through and analyzed the cases when you come to class. This way, we can devote the bulk of the class time to thinking about, and responding to, each other's analyses of the cases and only the necessary minimum to getting the facts out. I encourage active student participation in class. I should point out that typically most students tend to underestimate, rather than overestimate, the value of what they have to say. Thus, if you are ever in doubt, I encourage you to speak up. My role in the class is to help facilitate discussion. In part, I serve as a recording secretary, clarifier, and intensive questioner in order to help you present and develop your ideas. My primary role is to manage the class process and to ensure the class achieves an understanding of the case situation. Clearly, there is no single correct solution to any of these problems. There are, however, many wrong solutions. There are also solutions that are inadequately supported with analysis, and there are solutions and analyses that are ineffective because they are not presented in an orderly and persuasive fashion. We should work together to see to it that each class session is a lively, stimulating, and intellectually rewarding venture in group learning. We are individually and collectively responsible for achieving that end. I do have a specific point of view on the cases, having taught them for 20 years! Of course, I will try to keep an open mind and listen to what you have to say during class. At the end of each class, I will share with you my point of view on the case. This is not to imply that my view represents the right answer but just to give you the benefit of my thinking. Please just treat my concluding remarks as just that, one more point of view on the case; it is perfectly OK for you to disagree with my views! Evaluation of Class Participation Clearly, you must participate in class if you are going to share your ideas with others. There is no need to contribute in every class. Some of the best contributors in the past have been those who participated in only a few sessions. Their contributions, however, were truly insightful and persuasive. The issue is one of quality, not quantity or frequency.

Below is a description of how I propose to "calibrate" your class contributions: Outstanding Contributor: Contributions in class reflect exceptional preparation. Ideas offered are always substantive and provide one or more major insights as well as direction for the class. Arguments, when offered, are well substantiated and persuasively presented. If this person were not a member of the class, the quality of the discussions would be diminished significantly. Good Contributor: Contributions in class reflect thorough preparation. Ideas offered are usually substantive and provide good insights and sometimes direction for the class. Arguments, when presented, generally are well substantiated and often are persuasive. If this person were not a member of the class, the quality of the discussions would be diminished considerably. Adequate Contributor: Contributions in class reflect satisfactory preparation. Ideas offered are sometimes substantive and provide generally useful insights but seldom offer a major new direction for discussion. Arguments, which are presented sometimes, are fairly well substantiated and sometimes persuasive. If this person were not a member of the class, the quality of the discussions would be diminished somewhat. Non-participant: This person has said little or nothing in class to date. Hence, there is inadequate basis for evaluation. If this person were not a member of the class, the quality of the discussions would not be changed. Unsatisfactory Contributor: Contribution in class reflects inadequate preparation. Ideas offered are seldom substantive; provide few, if any, insights; and never offer a constructive direction for the class. Integrative comments and effective arguments are absent. Class contributions are, at best, "cherry-picking" efforts, making isolated, obvious, or confusing points. If this person were not a member of the class, valuable airtime would be saved. Additional Guidelines 1. Attendance is obviously important; scheduling of other activities, including job interviews, should avoid conflict with class meetings. 2. Classes will begin and end on time. I appreciate your presence in the classroom before the class starts. 3. Please bring your name cards to class. 4. Each class will start with a "cold" call. Please refer to the daily schedule for the structure of cold calls. If you are not prepared for class, please notify me in advance. 5. With the possible exception of the "wrap-up" period at the end of each class, note taking is unnecessary. My notes summarizing the key issues raised in each class will be available as a handout. You can pick up the handout at start of each class.

Materials

Materials Course Packet; Management Control Systems by Robert N. Anthony and Vijay Govindarajan, McGraw-Hill, 11th Edition, 2004 (ISBN 0-07-281931-6) (Referred to as "MCS" in the daily schedule). The text is available at Wheelock Books. Tuck Honor Code The Tuck Honor Code strictly applies to this course. The following statements should help define its role in this course: You are encouraged to form study groups to prepare the assigned case for each day. However, you should not use any handouts from previous years. The exam must reflect individual effort only. Do not consult with other people and do not share your answers while taking the exam. The three-hour exam will be open book and open notes, but you may refer only to your own notes. Please report any suspected Honor Code violations to Professor Govindarajan or the Judicial Board. You should also feel free to ask for clarification of "gray areas."

Topics Part I - ASSIGNING FINANCIAL RESPONSIBILITY TO ORGANIZATIONAL SUBUNITS In order to implement strategy, management must focus on both financial as well as non-financial performance measures. In the first three sessions, we will focus primarily on the considerations involved in assigning financial responsibility to various organizational subunits. The key concepts we will cover in these sessions include: cost centers, revenue centers, profit centers, investment centers, and transfer pricing. In session four we will focus explicitly on the balanced scorecard, which blends financial measures with non-financial measures, as a tool for strategy execution.

Part II - LINKING CONTROLS TO STRATEGIES Part III - THE BALANCED SCORECARD Part IV - MANAGEMENT SYSTEMS AND INNOVATION

Visitors

Guy A Hocker President RTS Partners

Grading Class Participation Final Examination (take-home exam) Grading for the course will be based on class participation and the final examination (a case). The final exam is cumulative and is designed to be a fair test of your comprehension of the ideas discussed in class. The best way to prepare for the final is to prepare carefully for each of the classes that precede it.

Schedule

Session 1 Monday, 03/28 Cost Centers and Profit Centers Concepts Covered Every responsibility center uses inputs and produces outputs and ties up investment to process inputs into outputs. Responsibility centers fall into four categories based on the financial measurements used to report the inputs, outputs, and investment of their operations. These categories are: (1) revenue centers, (2) cost centers (or expense centers), (3) profit centers, and (4) investment centers. We will primarily deal with revenue centers, cost centers and profit centers in this session. In a cost center, the system measures inputs (i.e., costs) in financial terms. In a profit center, the system measures both inputs (i.e., costs) and outputs (i.e., revenues) in financial terms. In a revenue center (typically used for marketing units), the system measures outputs (i.e., revenues) in financial terms. The manager is also held accountable for the expenses incurred directly within the unit. But a revenue center is not charged for the cost of manufacturing the product.

Read: Re-read the "Course Objectives," "Target Audience," and "Requirements" sections of the course syllabus. MCS, Chapter 1, pp. 1-17 and Chapter 3, pp. 93-108. These two chapters are optional reading; a quick skim would give you useful background to the course. MCS, Part I, pp. 49-50 and Chapter 4, 147-156. These pages are required reading. Case: Case 4-1 Vershire Company, MCS, pp. 164-169. Assignment: Should the plant manager be held responsible for profits? Why? Why not? Evaluate this question within the strategic context of Vershire Company.

Session 2 Tuesday, 03/29 Transfer Pricing Concepts Covered This session focuses on the optimal transfer price method. When one profit center transfers products/services to another profit center inside the firm, the value of the products/services tranferred is the transfer price. The transfer price becomes "sales revenue" for one profit center and "cost of goods sold" for another profit center.

Read: MCS, Chapter 5, 204-217 and Chapter 6, pp. 243-260. Case: Case 6-2 Birch Paper Company, MCS, pp. 267-268. Assignment: At the end of the case.

Part II - LINKING CONTROLS TO STRATEGIES Session 3 Tuesday, 04/04 Linking Incentive Systems to Strategy Read: MCS, Chapter 12, pp. 565-585. Case: Case 12-1 Lincoln Electric Company (A), pp. 587-603 Assignment: At the end of the case

Tuesday, 04/05 RESCHEDULED THIS SESSION IS RESCHEDULED FOR WEDNESDAY APRIL 13TH. WE WILL HAVE A GUEST SPEAKER--HENCE IT WILL BE A COMBINED SESSION IN COOK AUDITORIUM.

Session 4 Monday, 04/11 Use of Management Systems to Support Strategy Execution Nucor (the assigned case for this session), Jet Blue, and Dell have a few things in common: (a) They outperform their rivals in their industry by a mile; (b) Execution is a major source of their competitive advantage, and (c) The three companies have several execution philosophies that are similar (strong P&L accountability, empowerment, egalitarian culture, etc.). No matter whether you are competing in a high tech industry (a la Dell) or in a service industry (a la Jet Blue), or in a manufacturing industry (a la Nucor), strategy execution is fundamental to success and there are key elements in execution that have broad applicability across industries. During class today, we will only discuss the Nucor case. The Harvard Business Review interviews are background reading.

Read: "Conversation: Lessons from the Slums of Brazil," by David Neeleman, CEO, Jet Blue, Harvard Business Review, March 2005, page 24. (HBR F0503K)

"Execution Without Excuses," Interview with Michael Dell and Kevin Rollins, Chairman and CFO, Dell Computer, by Tom Stewart, Harvard Business Review, March 2005, pp. 102-111. (HBR R0503G)

Case: Case 1-1 Nucor Corporation (A), MCS, pp. 19-30.

Assignment: At the end of the case

Tuesday, 04/12 RESCHEDULED THIS SESSION IS RESCHEDULED FOR WEDNESDAY APRIL 20TH. WE WILL HAVE A GUEST SPEAKER. CLASSES WILL BE 2 CONSECUTIVE SESSIONS IN ROSENWALD CLASSROOM. FIRST SESSION FROM 4:45-6:00 PM AND SECOND SESSION FROM 6:15-7:30. BECAUSE OF THE LATENESS OF THE DAY YOU MAY CHOOSE WHICHEVER OF THE 2 SESSIONS YOU WISH TO ATTEND DEPENDING ON YOUR SCHEDULE.

Session 5 Wednesday, 04/13 Executing Global Strategies SPECIAL COMBINED CLASSES SESSION IN COOK AUDITORIUM TIME: 4:45 pm to 6:00 pm Guest Speaker: TBA

Session 6 Monday, 04/18 How Do Control Systems Influence Strategy? Read: Codman and Shurtleff, Inc., A Division of Johnson & Johnson, pp. 331-344 (Course Packet) Assignment Questions: 1. J&J operates in three major business segments: consumer products, pharmaceutical products, and professional products. What are the key uncertainties faced by J&J in these three business segments? How critical is innovation for J&J's success? 2. Evaluate the planning and control systems in use at J&J. Who gets involved, when, and in what way? What are the strengths and weaknesses of these systems, especially from the standpoint of encouraging innovation within the firm on an ongoing basis? 3. Over the last several years, Fortune magazine has polled the CEOs of the 250 largest U.S. companies to gather data on the management quality of major U.S. corporations. CEOs responding to the survey have repeatedly ranked Johnson & Johnson one of the most innovative and well managed firms in its industry. What role, if any, do you believe J&J's management planning and control systems play in achieving--or hindering--innovation? 4. From information provided in the case, suggest how you would design the incentive and reward systems for Roy Black and the Codman & Shurtleff board to capture maximum benefit from planning and control procedures. How would you deal with relating pay to performance in rapidly changing environments?

Part III - THE BALANCED SCORECARD Session 7 Tuesday, 04/19

The Balanced Scorecard Visitors Guy A Hocker Read: MCS, Chapter 11, pp. 493-508. Guest Speaker: Guy Hocker, President, RTS Partners, LLC

Session 8 Wednesday, 04/20 Execution Plan for Breakthrough Business Within Established Organizations SPECIAL CLASS SESSION HOURS IN ROSENWALD ON 4/2O SECTION 1 CLASS: 4:45-6:00 pm. IF YOU DO NOT HAVE CONFLICTS PLEASE ATTEND THIS TIME SESSION. OTHERWISE, THERE WILL BE A 2nd SESSION AT 6:15 pm. SECTION 2 CLASS: 6:15-7:30 pm. IF YOU DO NOT HAVE CONFLICTS PLEASE ATTEND THIS TIME SESSION. OTHERWISE THERE IS AN EARLIER SESSION AT 4:45 pm.

Read: Govindarajan, Vijay and Trimble, Chris (2005), "Building Breakthrough Business Within Established Organizations," Harvard Business Review, May 2005. (Since this article will be published after the course is over, I will distribute the article later.)

Session 9 Monday, 04/25 Organizational DNA for Strategy Execution in Dynamic Environments We live in an era of almost constant change. First, new technologies continue to emerge at an ever-more rapid pace. Second, globalization brings with it new markets, new customers, nontraditional competitors, and new challenges. Third, the Internet has created much greater transparency to any company's strategy, actions, and performance. As a result of these forces, companies in several industries find their strategies need almost constant renewal. This is because the old assumptions are no longer valid, or because the previous strategy has been imitated and neutralized by competitors, or because technological developments and emerging new customer segments offer unanticipated opportunities. Rooted in these premises, the leadership challenge raises the question, What kind of organizational DNA (structure, systems, culture, people, processes, etc.) must a company have in order to anticipate and respond to changes on a continual basis? Read: Case: Case 13-2 3M Corporation, MCS, pp. 654-655 Discussion Questions: 1. Despite the "boom-and-bust" in Silicon Valley during 1995-2001, the Valley has been a source of high technology innovation over a 30-year period. What are the fundamental drivers of success for strategic innovation in Silicon Valley? What is the organizational DNA of Silicon Valley? 2. How has 3M Corporation brought "Silicon Valley DNA" inside?

3. How do you "bring Silicon Valley inside" an established corporation?

EXAM