McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

Chapter 10: Building an Chapter 10: Building an

Organization Capable ofOrganization Capable of

Good Strategy ExecutionGood Strategy Execution

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““The best game plan inThe best game plan in

the world never blockedthe world never blocked

or tackled anybody.”or tackled anybody.”

Vince LombardiVince Lombardi

““A second-rate strategy A second-rate strategy perfectly executed will beat a perfectly executed will beat a

first-rate strategy poorly first-rate strategy poorly executed every time.”executed every time.”

Richard M. KovacevichRichard M. KovacevichChairman and CEO, Wells FargoChairman and CEO, Wells Fargo

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Chapter Learning Objectives

1. Gain command of what managers must do to promote successful strategy execution.

2. Understand why good strategy execution requires astute managerial actions to build core competencies and competitive capabilities.

3. Learn what issues to consider in organizing the work effort and why strategy-critical activities should be the main building blocks of the organizational structure.

4. Become aware of the pros and cons of centralized and decentralized decision making in implementing and executing the chosen strategy.

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Chapter Roadmap

A Framework for Executing Strategy

Building an Organization Capable of Good Strategy Execution

Staffing the Organization

Building Core Competencies and Competitive Capabilities

Execution-Related Aspects of Organizing the Work Effort

Crafting vs. Executing Strategy

Crafting the Strategy Primarily a market-driven

activity Successful strategy making

depends on Business vision Perceptive analysis of

market conditions and company capabilities

Attracting and pleasing customers

Outcompeting rivals Using company

capabilities to forge a competitive advantage

Executing the Strategy Primarily an operations-

driven activity Successful strategy

execution depends on Doing a good job of

working through others Good organization-

building Building competitive

capabilities Creating a strategy-

supportive culture Getting things done and

delivering good results

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An action-oriented, make-things happen task involving management’s ability toDirect organizational change

Achieve continuous improvement in operations and business processes

Move toward operatingexcellence

Create and nurture astrategy-supportive culture

Consistently meet or beat performance targets

Tougher and more time-consuming than crafting strategy

Implementation involves . . .

Executing the Strategy

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Implementing a New StrategyRequires Adept Leadership

Implementing a new strategytakes adept leadership to

Convincingly communicatereasons for the new strategy

Overcome pockets of doubt

Secure commitment of concerned parties

Build consensus and enthusiasm

Get all implementation pieces in place and coordinated

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Why Executing Strategy Isa Tough Management Job

Overcoming resistance to change

Wide array of demanding managerialactivities to be performed

Numerous ways to tackle each activity

Number of bedeviling issues to be worked out

Demands good people management skills

Requires launching and managinga variety of initiatives simultaneously

Hard to integrate efforts of many different work groups into a smoothly-functioning whole

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Who Are the Strategy Implementers?

Implementing and executing strategy involves a company’s wholemanagement team and all employees Just as every part of a watch plays a role in

making the watch function properly, it takesall pieces of an organization working cohesively for a strategy to be well-executed

Top-level managers must lead theprocess and orchestrate major initiatives But they must rely on cooperation of

Middle and lower-level managers to see things go well in various parts of an organization and

Employees to perform their roles competently

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Goals of the Strategy Implementing-Executing Process

Unite total organization behind strategy

See that activities are done ina manner that is conducive tofirst-rate strategy execution

Generate commitment so an enthusiasticcrusade emerges to carry out strategy

Fit how organization conducts itsoperations to strategy requirements

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Every manager has an active role

No proven “formula” for implementing particular types of strategies

There are guidelines, but no absolute rules and “must do it this way” rules

Many ways to proceed that are capable of working

Cuts across many aspects of “how to manage”

Characteristics of the Strategy Implementation Process

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Each implementation situation occurs in a different context, affected by differing Business practices and competitive situations

Work environments and cultures

Policies

Compensation incentives

Mix of personalities and firm histories

Approach to implementation/execution has be customized to fit the situation

People implement strategies - Not companies!

Characteristics of the Strategy Implementation Process (continued)

Figure 10.1: The Eight Components of Strategy Execution

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Communicate the case for change Build consensus on how to proceed Arouse enthusiasm for the strategy

to turn implementation process intoa companywide crusade

Empower subordinates to keep process moving Establish measures of progress and deadlines Reward those who achieve implementation

milestones Direct resources to the right places Personally lead strategic change process

and the drive for operating excellence

What Top Executives Have to Do inLeading the Implementation Process

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Test Your Knowledge

Management's handling of the strategy implementation/execution process can be considered successful

A. so long as a company is profitable.

B. if and when the company meets or beats its performance targets and shows good progress in achieving its strategic vision for the company.

C. once the company's management team convinces a majority of company personnel that the company is headed in the right direction.

D. if management is able to put the strategy in place within 6 months.

E. once a capable top management team has been hired, employees have been appropriately empowered, and effective training programs for company personnel have been put in place.

BUILDING A CAPABLE BUILDING A CAPABLE

ORGANIZATION — WHAT ORGANIZATION — WHAT

IS INVOLVED?IS INVOLVED?

Figure 10.2: The Three Components of Building anOrganization Capable of Proficient Strategy Execution

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Assembling a capable management team is a cornerstone of the organization-building task

Find the right people to fill each slot

Existing management teammay be suitable

Core executive groupmay need strengthening

Promote from within

Bring in skilled outsiders

Putting Together aStrong Management Team

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Selecting the Management Team:Key Considerations

Determine mix of

Backgrounds

Experiences and know-how

Beliefs and values

Styles of managing and personalities

Personal chemistry must be right

Talent base needs to be appropriate

Picking a solid management team needs to be acted on early in implementation process

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The quality of a company’speople is an essential ingredientof successful strategy execution

Biggest challenge facing companies How to recruit and retain the best

and brightest talent with strongskill sets and management potential

Intellectual capital, not tangible assets, is increasingly being viewed as the most important investment Talented people are a prime source of

competitive advantage

Recruiting and Retaining Talented Employees: Implementation Issues

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Key Human Resource Practices toAttract and Retain Talented Employees

Spend considerable effort in screeningjob applicants, selecting only those with Suitable skill sets Energy and initiative Personality traits that mesh well with firm’s work

environment and culture Judgment and aptitudes for learning

Put employees through training programs throughout their careers

Give promising employeeschallenging, interesting, andskills-stretching assignments

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Rotate employees through jobs with great content, spanning functional and geographic boundaries

Encourage employees to Be creative and innovative Challenge existing ways of

doing things and offer better ways Submit ideas for new products or businesses

Foster a stimulating work environment Exert efforts to retain high-potential employees

with excellent salary and benefits Coach average employees to improve their

skills

Key Human Resource Practices to Attract and Retain Talented Employees (continued)

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Building Core Competenciesand Competitive Capabilities

Crafting the strategy involves

Identifying the desired competencies andcapabilities to build into the strategy to helpachieve a competitive advantage

Good strategy execution requires

Putting desired competencies and capabilities in place,

Upgrading them as needed, and

Modifying them as marketconditions evolve

Example: Intel’s Core Competence

Design and mass productionof complex chips

for personal computers

Example: Procter & Gamble’sCore Competencies

Superb marketing-distribution skills and R&D

capabilities in five core technologies - fats,

oils, skin chemistry, surfactants, emulsifiers

Example: Ciba Specialty Chemicals Core Competence

Technology-based competencies allowing it to quickly manufacture products for customers

wanting customized products relating to coloration, brightening and whitening, water treatment and

paper processing, freshness, and cleaning

Example: Disney’s Core Competencies

Theme park operation

Family entertainment

Example: Toyota’s Core Competence

Legendary “production system” giving it

the capability to produce high-quality

vehicles at relatively low costs

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1. First develop ability to do something

2. Build experience and gradually transform the ability into a core competence and proven capability

3. Continue to refine and polish the competence/capability, striving to perform the activity better than rivals, thereby turning the core competence into a distinctive competence and providing a path to competitive advantage!

Three-Stage Process of Developing Competencies and Capabilities

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Develop ability to do something consistently well and at acceptable cost

Select people with relevant skills/experience

Broaden or expandindividual abilities as needed

Mold efforts and work products ofindividuals into a cooperative effortto create organizational ability

Step 1 in Developing Competencies

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As experience builds and company learns how to perform the activity consistently well and at acceptable cost, transform the ability into a core competence and capability

Typically, a core competence or competitive capability emerges from establishing and nurturing collaborative relationshipsBetween individuals and groups in different

departmentsBetween a company and its strategic allies

Step 2 in Developing Competencies

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If and when a company masters the activity, not just performing it really well but performing it better than rivals, the “core competence” (and now “proven capability”) becomes aDistinctive competence and

Holds potential forcompetitive advantage

Step 3 in Developing Competencies

This is the optimal outcome of the process of building competitively potent competencies and capabilities!

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1. Competencies are bundles of skills and know-how growing from combined efforts of cross-functional departments

2. Normally, competencies emerge incrementally from various company effortsto deal effectively with market conditions

3. Leveraging competencies into competitive advantage requires concentrating more effort and talent than rivals on strengthening competencies to create valuable capabilities

4. Sustaining competitive advantage requires adjusting competencies to new conditions

Managing the Process of Building Competences: Four Key Traits

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Internal development involves eitherStrengthening the company’s base of skills,

knowledge, and intellect or

Coordinating and networking the effortsof various work groups and departments

Partnering with key suppliers,forming strategic alliances,or maybe even outsourcingcertain activities to specialists

Buying a company that has the required capabilities and integrating these competencies into the firm’s value chain

Approaches to Developing Competencies

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Competencies and capabilities mustcontinuously be modified and perhapseven replaced with new ones due to New strategic requirements

Evolving market conditions

Changing customer expectations

Ongoing efforts to keep core competencies up-to-date can provide a basis for sustaining both Effective strategy execution and

Competitive advantage

Updating Competencies andCapabilities as Conditions Change

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Training plays a critical role in implementation when a firm shifts to a strategy requiring different Skills or core competencies Competitive capabilities Managerial approaches Operating methods

Types of training approaches Internal “universities” Orientation sessions for new employees Tuition reimbursement programs Online training courses

Strategic Role of Employee Training

Competitive Advantage Potentialof Competencies and Capabilities

When it is difficult to outstrategize rivals with a superior strategy . . .

. . . Best avenue to industry leadership is to out-compete

rivals withsuperior strategy execution!

Building competencies and capabilitiesrivals can’t match is one of the

best ways to out-compete them!

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Test Your Knowledge

When it is difficult or impossible to out-strategize rivals (beat them with a superior strategy), the other main avenue to competitive advantage is to

A. institute a lower cost organization structure.

B. outcompete them with smarter managers.

C. do a better job of selecting and training employees.

D. outexecute them (beat them by performing certain value chain activities in superior fashion).

E. do a better job of empowering and motivating employees.

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Execution-Related Aspectsof Organizing Work Efforts

Few hard and fast rules for organizing One Big Rule: Role and purpose of

organization structure is to support and facilitate good strategy execution!

Each firm’s structure is idiosyncratic, reflecting Prior arrangements and internal politics Executive judgments and preferences about how

to arrange reporting relationships How best to integrate and coordinate work effort

of different work groups and departments

Vice President Vice President Vice President

CEO

Figure 10.3: Structuring the Work Effort toPromote Successful Strategy Execution

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Step 1Step 1:: Decide Which Value Chain Activities to Perform Internally and Which to Outsource

Involves deciding which activities areessential to strategic success

Most strategies entail certain crucial business processes or activities that must be performed exceedingly well or in closely coordinated fashion if the strategy is to be executed with real proficiency

These processes/activities usually need to be performed internally

Other activities, such as routine administrative housekeeping and some support functions, may becandidates for outsourcing

Criticalactivities

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Determining Strategy-Critical Activities: Issues to Consider

1. What functions or business processeshave to be performed extra well or intimely fashion to achieve competitive advantage?

2. In what value-chain activities wouldpoor execution seriously impairstrategic success?

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A company improves its chances for outclassing rivals inPerforming strategy-critical activities andTurning a core competence into a distinctive

competence Streamlining of internal operations that flows

from outsourcing acts toDecrease internal bureaucraciesFlatten organization structureSpeed decision-makingIncrease competitive responsiveness

Partnerships can add to a company’s arsenal of capabilities and contribute to better strategy execution

Potential Advantages ofOutsourcing Non-Critical Activities

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Appeal of Outsourcing

Outsourcing non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it

Can create unique value

Can be best in the industry

Needs direct control to

Build core competencies

Achieve competitive advantage

Manage key customer-supplier-distributor relationships

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Potential Advantages of Partnering

By building, improving, and then leveraging partnerships, a firm enhances its overall capabilities and builds resource strengths that

Deliver value to customers

Rivals can’t quite match

Consequently pave the wayfor competitive success

Partnering makes strategic sense when theresult is to enhance a company’s

competencies and competitive capabilities.

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Dangers of Outsourcing

A company must guard against hollowing out its knowledge base and capabilities

Way to guard against pitfalls of outsourcing

Avoid sourcing key components from a single supplier

Use two or three suppliers to minimizedependence on any one supplier

Regularly evaluate suppliers

Work closely with key suppliers

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For Discussion: Your Opinion

While critics complain about companies that have outsourced functions once performed in-house to foreign suppliers (who can perform the functions more cheaply) because such outsourcing results in involuntary layoffs or job cuts, it is really fairer and more accurate to view outsourcing as a means whereby a company can enhance its competitiveness, achieve acceptable financial performance, and thereby better protect the jobs of the remaining employees. True or false? Explain.

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Assign managers of strategy-critical activities a visible, influential position

Avoid fragmenting responsibility for strategy-critical activities across many departments

Provide coordinating linkages between related work groups

Meld into a valuablecompetitive capability

Assignmanagerskey roles

Primary activities

Strategicrelation-

ships

Coordi-nation

Valuablecapability

Supportfunctions

Step 2Step 2:: Make Strategy-CriticalActivities the Main Building Blocks

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What Types of OrganizationalStructures Fit Which Strategies?

A company operating in one business

Functional department structure

A company with operations in various parts of the world

Geographic organizational units

A vertically integrated company

Divisional organizational structure

A diversified company

Individual business units, with each business unit operating as independent profit center

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In a centralized structure

Top managers retain authorityfor most decisions

In a decentralized structure

Managers and employees areempowered to make decisions

Trend in most companies

Shift from authoritarian to decentralizedstructures stressing empowerment

Step 3Step 3:: Determine How MuchAuthority to Delegate to Whom

Table 10.1: Advantages and Disadvantages ofCentralized versus Decentralized Decision Making

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Characteristics ofCentralized Decision Making

Top executives retain authority For most strategic and operating decisions and Keep a tight rein on lower-level managers

Minimal discretionary authority is granted to Frontline supervisors Rank-and-file employees

Key advantage – Tight control by topmanagers fixes accountability

Disadvantages Lengthens response time to changing conditions Does not encourage responsibility among lower-level

managers and employees Discourages lower-level managers and employees from

exercising initiative

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Advantages of a Decentralized Structure

Creates a more horizontal structurewith fewer management layers

Managers and employees developtheir own answers and action plansMake decisions in their areas of responsibility

Held accountable for results

Shortens organizational response times and spursNew ideas

Creative thinking and innovation

Greater involvement of managers and employees

Jobs can be defined more broadly Fewer managers are needed Electronic communication systems provide quick, direct

access to data Genuine gains in morale and productivity

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Place limits on authority empowered employees can exercise

Hold people accountable for their decisions

Institute compensation incentives that reward employees for doing their jobs in a manner contributing to good company performance

Create a corporate culture wherethere’s strong peer pressure onemployees to act responsibly

Maintaining Control ina Decentralized Structure

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For Discussion: Your Opinion

A decentralized organization structure is more

likely to further the cause of good strategy

execution than is a centralized organization

structure. True or false? Explain.

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Classic method of coordinating activities – Have related units report to single manager Upper-level managers have clout

to coordinate efforts of their units

Support activities should bewoven into structure to Maximize performance of primary activities Contain costs of support activities

Formal reporting relationships often need to be supplemented to facilitate coordination

Step 4Step 4: Provide for InternalCross-Unit Coordination

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Guard Against FunctionalDesigns That Fragment Activities

Scattering pieces of critical business processes across several specialized departments results in Many hand-offs which

Lengthens completion time Drives up administrative costsIncreases risk of details

falling through the cracks Obsession with activity rather than result

Solution Business process reengineering Involves pulling strategy-critical processes

from functional departments to create process departments or cross-functional work groups

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Examples of Fragmented Strategy-Critical Activities

Filling customer orders

Speeding new products to market

Improving product quality

Supply chain management

Building capability to conductbusiness via the Internet

Obtaining feedback from customers, making product modifications to meet their needs

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Cross-functional task forces

Dual reporting relationships

Informal networking

Voluntary cooperation

Incentive compensation tiedto group performance

Teamwork and cross-departmental cooperation

Coordinating Mechanisms to Supplement the Basic Organization

Structure

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Step 5Step 5: Provide forCollaboration With Outsiders

Need multiple ties at multiple levels to ensure

Communication

Coordination and control

Find ways to produce collaborativeefforts to enhance firm’s capabilitiesand resource strengths

While collaborative relationshipspresent opportunities, nothingvaluable is realized until therelationship develops into an enginefor better organizational performance

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Get right people together

Promote good rapport

See plans for specific activitiesare developed and implemented

Help adjust internal procedures and communication systems to

Iron out operating dissimilarities

Nurture interpersonal ties

Roles of Relationship ManagersWith Strategic Partners

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Test Your Knowledge

Which one of the following tends to be most important in building an organization capable of good strategy execution?

A. Selecting a capable management team and selecting and training employees

B. Building and strengthening competencies and competitive capabilities

C. Empowering employees and utilizing the advantages of decentralized decision-making

D. Making strategy-critical activities the main building blocks in the organizational scheme

E. None of the above is necessarily more or less important—what factors prove to be particularly important in building an organization that is capable of good strategy execution can vary from company to company and situation to situation.

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Current Organizational Trends

Numerous companies have completedthe task of remodeling traditional, hierarchical structures built on

Functional specialization and

Centralized authority

Corporate downsizing movement in thelate 1980s and early 1990s was aimed at

Recasting authoritarian, pyramidalorganizational structures

Into flatter, decentralized structures

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Centralized or authoritarian structures have often turned out to be a liability where

Customer preferences shift fromstandardized to customized products

Product life-cycles grow shorter

Flexible manufacturing replaces mass production

Customers want to be treated as individuals

Pace of technological change accelerates

Market conditions are fluid

Drawbacks of CentralizedAuthoritarian Structures

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Organizational Structures ofthe Future: Overall Themes

Revolutionary changes in how work is organized have been triggered by New strategic priorities

Rapidly shifting competitive conditions

Tools of organizational design include Empowered managers and workers

Reengineered work processes

Self-directed work teams

Rapid incorporation of Internettechnology

Networking with outsiders

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Characteristics ofOrganizations of the Future

Extensive use of Internet technologyand e-commerce business practices

Fewer barriers between Different vertical ranks Functions and disciplines Units in different geographic locations Company and its suppliers, distributors,

strategic allies, and customers

Capacity for change and rapid learning Collaborative efforts among people in different

functions and geographic locations Assembling work teams including more members

dispersed over a wider geographic area

Change &Learning