Faculty
Professor 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 implemented through 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 creation of 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 a 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 these four companies 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 critical thinking.
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.
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.
Cold Calls
As a matter of policy, I do not use cold calls. This is an elective course. You have signed up because you want to learn this material. I know you will be well prepared for class. I do not need to use cold calls to motivate you to do the class assignments. I do recognize this is a large class and we might not get everyone’s contributions. If you want to participate, please raise your hand. You can also contact me outside of the class if you have special needs. I do grade class participation. Please note that you can obtain an "Honors” grade in the course even if you have not spoken once in class as long as you show your learning in the final exam. There is no pressure for you to participate.
Additional Guidelines
Attendance is obviously important; scheduling of other activities, including job interviews, should avoid conflict with class meetings.
It is my responsibility to make the “learning quotient” high enough for you to want to attend class. If you have to miss a class for unavoidable reasons, there is no need to inform me. There are no “make-up” requirements for missed classes. Please be sure you ask one of your colleagues to pick up a copy of the handout.
Classes will begin and end on time. I appreciate your presence in the classroom before the class starts.
Please bring your name cards to class.
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. At the end of each class, I will put the handouts for that session on the Tuck server.
Materials
Management Control Systems by Robert N. Anthony and Vijay Govindarajan, McGraw-Hill, 12th Edition, 2007. 2007 (ISBN 0-07-310089-7) (Referred to as “MCS” in the daily schedule).
Most of the reading and all the cases (except one) are in the MCS textbook. The final exam is a case from the book also. Please secure a copy of the book from the Wheelock Bookstore. Please note that the publisher has not given us permission to photocopy cases or chapters from the book.
Course Packet
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 case for the final exam will be from the MCS textbook. The best way to prepare for the final is to prepare carefully for each of the classes that precede it. As mentioned earlier, class participation is not required to earn an “Honors” grade in the course.
Luncheons
There will be 6 luncheons held this semester for students to attend. The luncheons will be held on:
- Monday, October 26 – Noon – 1pm - Lindenauer Dining Room, Byrne Hall
- Tuesday, November 3 – Noon – 1pm - Executive Dining Room, Byrne Hall
- Monday, November 9 – Noon – 1pm - Lindenauer Dining Room, Byrne Hall
- Tuesday, November 10 – Noon – 1pm - Lindenauer Dining Room, Byrne Hall
- Monday, November 16 – Noon – 1pm - Lindenauer Dining Room, Byrne Hall
- Tuesday, November 17 – Noon – 1pm - Lindenauer Dining Room, Byrne Hall
* Locations may need to be changed
If you would like to attend one of these dates, please sign up in the Course Folder. Please only sign up for one luncheon. There will be a maximum of 10 students per luncheon. Please pick up your lunch at Byrne and join the luncheon. This is an opportunity for us to converse about the course or any other matter in an informal setting.
Schedule
Session 1
Monday, Oct. 12
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. In a revenue center, 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, “Nature of Management Control Systems”, pp. 1–18
MCS, Part I, "The Management Control Environment", pp. 51-52
MCS, Chapter 4: “Responsibility Centers: Revenue and Expense Centers”, pp. 128-138
MCS, Chapter 5: “Profit Centers”, pp. 185-199
Case:
4-1 Vershire Company, MCS, pp. 145-150
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
Monday, October 26
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. The central criteria in designing a transfer pricing system is “goal congruence”. This criteria can be stated as follows: How should the transfer prices be set so that the actions taken by division managers in their own interest will also be in the best interest of the overall company?
Read:
MCS, Chapter 6: “Transfer Pricing”, pp. 230-247
Case:
6-2 Birch Paper Company, MCS, pp. 254-255
Assignment Questions:
At the end of the case
Session 3
Tuesday, October 27
Investment Centers
Concepts Covered
This session will focus on investment centers. In an investment center, both the profit and the investment (e.g., the assets or capital) used in a responsibility center are measured. There are two ways to relate profits to assets employed: return on investment (ROI) and Economic Value Added (EVA). Some people use the term “Residual Income” to refer to EVA.
ROI =
Profits
Assets Employed
EVA = Profits Less (Assets Employed multiplied by Cost of Capital)
Read:
MCS, Chapter 7: “Measuring and Controlling Assets Employed”, pp. 270-290
Case:
7-3 Quality Metal Service Center, MCS, pp. 300-308
Assignment:
At the end of the case.
Session 4 — No class
Monday, November 2
There will be no class on Monday, November 2 due to an unavoidable conflict. I will reschedule this class; all the same, I’ve attempted to cover all the concepts and ideas in the remainder of the course.
Session 5
Tuesday, Nov. 3
Strategy Execution Framework
GUEST SPEAKER:
Guy Hocker, an expert on designing balance scorecard to drive strategy execution.
Read:
MCS, Chapter 11: “Performance Measurement”, pp. 460-475
Session 6
Monday, Nov. 9
Implementing Six Sigma Strategy
Read:
MCS Chapter 12: “Management Compensation”, pp. 513-535
Case:
12-1 Lincoln Electric Company (A), MCS, pp. 536-553
Assignment:
At the end of the case
Session 7
Tuesday, Nov. 10
Implementing Radical Process Innovation
Read:
Case:
Case 1-1 Nucor Corporation (A), MCS, pp. 19-30.
“The Art of Motivation”, BusinessWeek, May 1, 2006, pp. 56-62 (Course Packet)
Assignment: At the end of the case
Note: Nucor Corporation (A) case is set in 1998. The 2006 BusinessWeek article highlights how the management systems at Nucor continue to support process innovations.
Session 8
Monday, Nov. 16
Implementing Product Innovation Strategy
Read:
“Building Breakthrough Businesses Within Established Organizations”, Vijay Govindarajan and Chris Trimble, Harvard Business Review, 5/05, (Course Packet)
“Do Ideas Cost Too Much”, BusinessWeek, April 20, 2009, pp. 46-48 (Course Packet).
Case:
Codman and Shurtleff, Inc., A Division of Johnson & Johnson (HBS 187-081)(Course Packet)
Assignment Questions:
J&J operates in three major business segments: consumer products, pharmaceutical products, and professional products. Codman and Shurtleff is part of the professional products segment. What are the key uncertainties faced by J&J in these three business segments? How critical is innovation for J&J's success?
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?
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?
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?
Session 9
Tues. Nov 17
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:
“The World’s Most Innovative Companies”, BusinessWeek, April 24, 2006, pp.62-74 (Course Packet
“At 3M, A Struggle Between Efficiency and Creativity”, Cover story, BusinessWeek, June 11, 2007, pp. 8-14
Optional Reads:
“The Emotionally Bonded Organization: Why Emotional Infrastructure Matters and How Leaders Can Build It" (Course Packet)
[NOTE]: This article is a draft intended for Harvard Business Review. Since this is work-in-progress, your comments on the draft are welcome. Email your thoughts on the draft to me at vijay.govindarajan@tuck.dartmouth.edu.]
“How Is GE Disrupting Itself”, Harvard Business Review, October, 2009, (with Jeff Immelt and Chris Trimble)
Case:
13-2 3M Corporation, MCS, pp. 595-596
Discussion Questions:
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?
How has 3M Corporation brought "Silicon Valley DNA" inside?
Note: The 3M Corporation case is set in 2000. The 2006 and 2007 BusinessWeek articles update the case. During Jim McNerney tenure (2000-06), 3M abandoned many of the management systems that support innovation. Fortunately, under George Buckley, the current CEO, 3M has embraced the social ecology for innovation.
THREE-HOUR TAKE-HOME FINAL EXAM
The case for the exam will be from the MCS book
The final exam will be given to the students on November 10 and is due back on or before November 24 @5PM. There will be a "Drop off box" outside Donna McMahon's office (Tuck 205J).
