Strategy Implementation

(additional)

Facilitator: Bijoy S Guha

June 2010
Malcolm Baldrige Model
 Malcolm Baldrige Model
 “Total Quality Management” philosophy has led
Corporations reorient their way-of working and
thinking.
 Operating models for most companies are based on
Quality Systems
 These systems are both guides to modeling and
assessment tools
 While not being prescriptive, Quality
Management models indicate a structure and a
process towards excellence.
 The Malcolm Baldrige Model is most universally
accepted, being based on the Japanese “Deming
Award” criteria.
 Malcolm Baldrige Model…cont’d
 The root of the model  Requirements (from both
lies in P-D-S-A cycle: customer & competition)
require ‘strategies’ for
constant improvement.
 The improvement can be
Requirement achieved through rotating
P D the P-D-S-A wheel which
A S both carries the company
upwards and gives it size.
Q-Systems
 Q-systems are needed as
safety chocks and also
Time need to move with the
wheel to prevent roll
The (Quality) Journey back.
 Malcolm Baldrige Model…cont’d
 The role of “Q-Systems”:
 Q-systems act as safety nets to prevent any slippage: they
define the minimum requirements of any process;
 Q-systems provide Quality Assurance: a set of planned and
systematic actions necessary to provide appropriate confidence
that a product or service will satisfy the requirements for quality;
 Q-systems is a clear communication tool: informing the supplier-
executor-customer (the “chain”) of the linked requirements;
 Q-systems brings ‘transparency’ in the organization.
 Internationally recognized Systems:
 The ISO 9000 and ISO 14000 families are among ISO's best
known standards ever. ISO 9001:2000 and ISO 14001 (1996
and 2004 versions) are implemented by over a million
organizations in 161 countries.
Malcolm Baldrige Model…cont’d
 With ‘Quality’ scope extended to Company
Management (i.e. Performance Excellence), the
“Malcolm Baldrige Award” and “Deming Prize”
models have increasingly become popular
models.
 The Baldrige performance excellence criteria
are a framework that any organization can use
to improve overall performance.
 Seven categories make up the assessment
criteria and given different ‘weights’ in their
contribution towards excellence.
Malcolm Baldrige Model…cont’d
 Leadership — Examines how senior executives guide
the organization and how the organization addresses its
responsibilities to the public and practices good
citizenship.
 Strategic planning — Examines how the organization
sets strategic directions and how it determines key
action plans.
 Customer and market focus — Examines how the
organization determines requirements and expectations
of customers and markets; builds relationships with
customers; and acquires, satisfies, and retains
customers.
Malcolm Baldrige Model…cont’d
 Measurement, analysis, and knowledge
management — Examines the management, effective
use, analysis, and improvement of data and information
to support key organization processes and the
organization’s performance management system.
 Workforce focus — Examines how the organization
enables its workforce to develop its full potential and
how the workforce is aligned with the organization’s
objectives.
 Process management — Examines aspects of how
key production/ delivery and support processes are
designed, managed, and improved.
 Malcolm Baldrige Model…cont’d
 Results — Examines the organization’s performance and
improvement in its key business areas:
 customer satisfaction,
 financial and marketplace performance,
 human resources,
 supplier and partner performance,
 operational performance, and
 governance and social responsibility.
The category also examines how the organization performs relative to
competitors.
The Criteria work as an integrated framework for managing an
organization. They are simply a set of questions focusing on critical
aspects of management that contribute to performance excellence
Malcolm Baldrige Model…cont’d
 Malcolm Baldrige Model…cont’d
 Start by identifying one or two strengths
and one or two OFIs (opportunities for
improvement) for each Criteria Category.
For those of high importance, establish a
goal and a plan of action.
 Criteria-Category Importance
High, Medium, Low
 For High-Importance Areas: Stretch
(Strength) or Improvement (OFI) Goal: What
Action Is Planned? By When? Who Is
Responsible?
 Malcolm Baldrige Model…cont’d
For High-Importance Areas
Criteria Category Importance
High, Medium, Low Stretch (Strength) or Who Is
What Action Is Planned? By When?
Improvement (OFI) Goal Responsible?

Category 1—Leadership
Strength

1.

2.

OFI

1.

2.
 Malcolm Baldrige Model…cont’d
 The Baldrige Criteria for Performance Excellence, Lean,
ISO, Six Sigma … how do you know which performance
improvement tools are right for your organization?
These improvement tools are complementary, not mutually
exclusive. E.g. Baldrige, Lean, and Six Sigma all
 focus on results
 use a team approach
 require management by fact
 are customer- and market-focused
 require strong leadership for  long-term effectiveness
 These tools also share the concept of continuous improvement.
 One difference: the Baldrige Criteria serve as a
comprehensive framework for performance excellence.
They focus on business results as well as organizational
improvement and innovation systems.
 Malcolm Baldrige Model…cont’d
The Baldrige Criteria are built on 11 interrelated core
values and concepts:
 Visionary leadership
 Customer-driven excellence
 Organizational and personal learning
 Valuing workforce members and partners
 Agility
 Focus on the future
 Managing for innovation
 Management by fact
 Societal responsibility
 Focus on results and creating value
 Systems perspective
Corporate Governance
 Corporate Governance
 Corporate governance is most often viewed as both the
structure and the relationships which determine
corporate direction and performance.
 The Board of Directors is typically central to corporate
governance. Its relationship to the other primary
participants, typically shareholders and management, is
critical.
 The corporate governance framework also depends on
the legal, regulatory, institutional and ethical
environment of the community.
 The 20th century might be viewed as the age of
management, the early 21st century is predicted to be
more focused on governance.
 Corporate Governance …ctd
Corporate governance is a field in economics that
investigates how to secure/motivate efficient
management of corporations by the use of
incentive mechanisms, such as contracts,
organizational designs and legislation. This is often
limited to the question of improving financial
performance e.g., how the corporate owners can
secure/motivate that the corporate managers will
deliver a competitive rate of return. (Mathiesen,
2002)
 Corporate Governance …ctd
Two contrasting views on Corporate Governance:
 Agency Theory: Top managers are in effect “hired
hands” who may be more interested in their own rather
than the shareholders’ welfare. Problems highlighted by
the theory:
 Objectives are in conflict and may be too difficult/expensive for
owners ascertain what the ‘agent’ is actually doing
 Risk-taking/sharing problem which arises with divergent attitude
towards risk.
 More widespread the holding, the more the probability of the
problems
Agency theory proponents suggest that top management
have a significant ownership of the firm and have a stake
in the long-term performance. Research indicates a
positive correlation as suggested.
 Corporate Governance …ctd
 Stewardship Theory: In contrast this theory suggests that
managers are motivated to act in for the welfare of the
corporation than in their self-interest. The proposition: top
managers focus on fulfilling higher-order needs (Maslow)
and see the corporation as an extension of themselves.
Thus:
 The Top Manager thus is a ’steward’ rather than a ‘hired hand’ for
the Board
 In a widely held company, a shareholder is free to sell out and
may not be concerned about risk to the corporation – assuming
the risk is managed and the returns are adequate.
 For Top executive, mobility is not so high – particularly in difficult
times. Their interest for long-term performance is therefore high.
Stewardship theory proponents suggest that top
management care more for the company that shown by
short-term investors and shareholders.
 Corporate Governance …ctd
 Many years ago, worldwide, buyers and sellers of corporation
stocks were individual investors, such as wealthy
businessmen or families, who often had a vested, personal
and emotional interest in the corporations whose shares they
owned.
 Over time, markets have become largely institutionalized:
buyers and sellers are largely institutions (e.g., pension funds
, mutual funds, hedge funds, exchange-traded funds, other
investor groups e.g. insurance coys, banks, brokers.
 The rise of the institutional investor has brought with it some
increase of professional diligence to improve regulation of the
stock market .
 this process occurred simultaneously with the direct growth of
individuals investing indirectly in the market (e.g. individuals money in
mutual funds vis-a-vis bank accounts). In this way, the majority of
investment now is described as "institutional investment.
 Corporate Governance …ctd
 Unfortunately, there has been a concurrent lapse in the
oversight of large corporations, which are now almost all
owned by large institutions.
 The Board of Directors of large corporations used to be chosen by
the principal shareholders, who usually had an emotional as well as
monetary investment in the company (e.g. Ford), and the Board
diligently kept an eye on the company and its principal executives.
 Nowadays, if the owning institutions don't like what the
President/CEO is doing and they feel that firing them will likely be
costly (think "golden handshake") and/or time consuming, they will
simply sell out their interest.
 In 1987, the Stock Markets of the world crashed. The three
reasons cited were lack of trust, low levels of transparency
and unethical trading practices.
 The British Chamber of Commerce appointed a Committee to set up
systems by which this would not be repeated. However,
 Corporate Governance …ctd
 During the early 1990s, the Bank of Credit and Commerce
International (BCCI) in London and operating from Hong Kong,
avoided scrutiny and falsified accounts. Fake bills were allegedly
raised and payments were made.
 Soon thereafter Leeson who headed the oldest British bank
(Barrings) made certain unethical investment decisions without
covering the risk adequately. Barrings went bankrupt and the
Financial Markets of the world were shaken up.
 The BCC appointed another committee and asked Sir
Adrian Cadbury the Chairman of the Cadbury Empire to
head it. The Cadbury Committee report is the first known
report on Corporate Governance.
 Cadbury borrowed ideas from USA as well. A set of Mandatory and
a set of Non-mandatory Recommendations were issued.
 Sir Adrian Cadbury : “The system by which companies are directed
and controlled”. (The Committee on the Financial Aspects of
Corporate Governance)
 Corporate Governance …ctd
 Corporate governance - the authority structure of a firm
- lies at the heart of the most important issues of
society:
 “who has claim to the cash flow of the firm, who has a
say in its strategy and its allocation of resources.”
 The corporate governance framework shapes corporate
efficiency, employment stability, retirement security, and the
endowments of orphanages, hospitals, and ‘social
responsibility’;
 “It creates both the temptations for cheating and the
rewards for honesty, inside the firm and more
generally in the body politic.”
 It “influences social mobility, stability and fluidity… It is no
wonder then, that corporate governance provokes conflict.
Anything so important will be fought over… like other
decisions about authority”
 Corporate Governance …ctd
 The Board is mostly chosen by the President/
CEO, and may be made up primarily of their
friends and associates, such as officers of the
corporation or business colleagues.
 Since the (institutional) shareholders rarely object,
the President/CEO generally takes the Chair of
the Board position for his/herself (which makes it
much more difficult for the institutional owners to
"fire" him/her).
 Occasionally, but rarely, institutional investors
support shareholder resolutions on such matters
as executive pay and anti-takeover.
 Corporate Governance …ctd
 In 2004, OCED (Organization for Economic Cooperation
and Development comprising EU, US, Japan, Finland,
Australia, N.Z., Hungary, Czech Rep., [Link], Mexico,
Poland & Slovak Rep.) issued a guideline “OECD
Principles of Corporate Governance” wherein they defined:
 Basis for effective Corporate Governance
 The Rights of Shareholders and Key Ownership functions
 Equitable treatment of Shareholders
 The Role of Stakeholders in Corporate Governance
 Disclosure and Transparency
 The Responsibilities of the Board
 “There is no single model for good corporate governance.
However the work carried out globally some common
principles that underlie good Corporate Governance.”
(extract from the Preamble to the report)
 Corporate Governance …ctd
 With the goal of promoting better corporate governance
practices in India, the Ministry of Corporate Affairs,
Government of India, has set up National Foundation for
Corporate Governance (NFCG) in partnership with
Confederation of Indian Industry (CII), Institute of
Company Secretaries of India (ICSI) & Institute of
Chartered Accountants of India (ICAI).
 The problem in US & UK has been essentially in disciplining the
Management who ceased to be effectively accountable to the
owners;
 The challenge in India is that of disciplining the Dominant
Shareholder (be it Public Sector, the Multinational or the Indian
private sector) and protecting the minority shareholder.
 By and large, the OECD principles forms the basis for the Indian
Corporate Governance practices.
 Corporate Governance …ctd
 Trends today (particularly in US & UK):
 Boards are getting more involved in shaping rather
than supervising;
 Institutional investors are getting larger ‘share of
voice’ in Boards, thus pressure on corporate
performance. More outside Directors are being
inducted thus ‘loosening of the grip’ of CEOs;
 Boards are becoming smaller, taking on members
with specialized knowledge/expertise thus take more
control of functions;
 Globalization and Societal demands are making
Boards more international (expertise) and focusing
more on broader aspects of business e.g. CSR.
Economic Value Added
 Control of Assets Employed
 To measure the complete performance of a BU as
an economic entity (i.e. Investment Centre):
 First, BU managers should generate adequate profits
from the resources they command;
 Next, they should invest to ensure (commensurate)
profitable growth,
 disinvesting when annual rate of return form any investment is
less than the cash realizable from its sale;
 An important objective of any organization is to earn
satisfactory returns from capital the company uses;
 currently two measures are favored:
 “Return on Investment”: Ratio of “Income” over “Assets
Employed”.
 “Economic Value Added”: is a monetary amount, found by
subtracting a ‘capital charge’ from the net operating profit.
Control of Assets Employed… cont’d
Balance Sheet (in [Link])
Current Asset Current Liability
Cash 50 Accounts payable 90
Receivables 150 Other current 110
Inventory 200
400 200
Fixed Asset Corporate Equity
Cost 600 Equity 500
Depreciation (300)
Book Value 300

Total Asset 700 Total Liabilities 700

Income Statement ([Link])
Revenue 1000
Expenses (850)
Depreciation (50)
Income Before Taxes 100
Capital Charge @ 10%pa (= 500x10%) 50
EVA 50
RoI ( =100/500) 20%
 EVA – RoI: a comparison
Parameter RoI EVA
 Linkage to financial Comprehensive Unclear
statement
 Ease of use Easy calculation & Unclear
understanding. Makes
sense in absolute terms;
 Benchmark-ability Readily possible Unclear, (Capital
across businesses; charge)
 Profit incentive/drive Unclear norms Same norm for
with reluctance to comparable
invest with lesser investment;
returns;
 Overall Profits Poor direct linkage Clearer links
to profit quantum to quantum.
 Treatment of assets Unclear risk links; Differential risk
profiles easy to
factor in;
 EVA – RoI: a comparison
Assumptions: post tax rate of return on F/Asst.=10%, C/Asst. = 4%;
R.o.I Method
BU Cash R’vbl. Invtr. F/Asst. Invst. [Link] R.o.I
A $10 $20 $30 $60 $120 $ 24.0 20%
B $20 $20 $30 $50 $120 $14.4 12%
C $15 $40 $40 $10 $105 $10.5 10%
D $ 5 $10 $20 $40 $ 75 $ 3.8 5%
E $10 $ 5 $10 $10 $ 35 $ (1.8) (5)%

 = [Link] / Invst.
EVA Method
BU Profit C/Asst. Earn. F/Asst. Earn. [Link] R.o.I
A $ 24.0 $60 $2.4 $60 $6.0 $15.6 20%
B $14.4 $70 $2.8 $50 $5.0 $ 6.6 12%
C $10.5 $95 $3.8 $10 $1.0 $ 5.7 10%
D $ 3.8 $35 $1.4 $40 $ 4.0 $ (1.6) 5%
E $ (1.8) $25 $1.0 $10 $ 1.0 $ (3.8) (5)%

@4% @10 = Profit – (  Earn.)