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Chapter 10 Building an Organization Capable of Good Strategic Execution

CHAPTER 10

BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGIC EXECUTION CHAPTER SUMMARY Chapter Ten examines the process of executing an organizational strategy. It has an emphasis on the conversion of a strategy into actions and good results for organizations. The chapter explores how executing strategy is an operations-driven activity that revolves around the management of people and business processes. It denotes that successfully executing a strategy depends on doing a good job of working with and through others, building and strengthening competitive capabilities, motivating and rewarding people in a strategy-supportive manner, and instilling a discipline of getting things done.

LECTURE OUTLINE I. Introduction 1. Just because senior managers announce a new strategy does not mean that organizational members will agree with it or enthusiastically move forward in implementing it. It takes adept managerial leadership to convincingly communicate the new strategy and the reasons for it, overcome pockets of doubt and disagreements, secure the commitment and enthusiasm of concerned parties, build consensus on all the hows of implementation and execution, and move forward to get all the pieces into place. 2. Executing strategy is a job for the whole management team, not just a few senior managers. 3. Strategy execution requires every manager to think through the answer to “What does my area have to do to implement its part of the strategic plan and what should I do to get these things accomplished effectively and efficiently?” II. A Framework for Executing Strategy 1. Executing strategy entails figuring out all the hows—the specific techniques, actions, and behaviors— that are needed for a smooth strategy-supportive operation—and then following through to get things done and deliver results.

CORE CONCEPT Good strategy execution requires a team effort. All managers have strategyexecuting responsibility in their areas of authority, and all employees are participants in the strategy execution process.

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2. Management’s handling of the strategy implementation process can be considered successful if and when the company achieves the targeted strategic and financial performance and shows good progress in making its strategic vision a reality. A. The Principal Management Components of the Strategy Executing Process 1. Despite the need to tailor a company’s strategy-executing approaches to the particulars of its situation, certain managerial bases have to be covered no matter what the circumstances. 2. Figure 10.1, The Ten Basic Tasks of the Strategy Execution Process, depicts the eight managerial tasks that come up repeatedly in a company’s efforts to execute strategy. 3. The eight managerial tasks that crop up repeatedly in company efforts to execute strategy include: a. Staff the organization with managers and employees capable of executing the strategy well. b. Build the organizational capabilities required for successful strategy execution. c. Create a strategy-supportive organizational structure. d. Allocate sufficient budgetary (and other) resources to the strategy execution effort. e. Institute policies and procedures that facilitate strategy execution. f. Adopt best practices and business processes that drive continuous improvement in strategy execution activities. g. Install information and operating systems that enable company personnel to carry out their strategic roles proficiently. h. Tie rewards and incentives directly to the achievement of strategic and financial targets. i. Instill a corporate culture that promotes good strategy execution. j. Exercise the internal leadership needed to propel strategy implementation forward. 4. In devising an action agenda for implementing and executing strategy, the place for managers to start is with a probing assessment of what the organization must do differently and better to carry out the strategy successfully. They should then consider precisely how to make the necessary internal changes as rapidly as possible. 5. When strategies fail, it is often because of poor execution—things that were supposed to get done slip through the cracks. 6. The bigger the organization, the more that successful strategy execution depends on the cooperation and implementing skills of operating managers who can push needed changes at the lowest organizational levels and deliver results. 7. Regardless of the organization’s size and the scope of the changes, the most important leadership trait is a strong, confident sense of what to do and how to do it. 8. What’s Covered in Chapters 10, 11, and 12 - This chapter and the next two will explore what is involved in performing the ten key managerial tasks that shape the process of implementing and executing strategy. a. This chapter explores the first three of these tasks (1) staffing the organization with people capable of executing the strategy well, (2) building the organizational capabilities needed for successful strategy execution, and (3) creating an organizational structure supportive of the strategy execution process.

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b. Chapter 11 concerns the tasks of allocating resources, instituting strategy-facilitating policies and procedures, employing business process management tools and best practices, installing operating and information systems, and tying rewards to the achievement of good results. c. Chapter 12 deals with the two remaining tasks: creating a strategy-supportive corporate culture and exercising the leadership needed to drive the execution process forward. III. Building an Organization Capable of Good Strategy Execution: Where to Begin 1. Building a capable organization is always a top priority in strategy execution. Three types of organization-building actions that are paramount include: a. Staffing the organization b. Building and strengthening core competencies and competitive capabilities c. Structuring the organization and work effort 2. Figure 10.2, Building an Organization Capable of Proficient Strategy Execution: Three Types of Paramount Actions, looks at the three components necessary for building a capable organization. IV. Staffing the Organization 1. No company can hope to perform the activities required for successful strategy execution without attracting and retaining talented managers and employees with suitable skills and intellectual capital. A. Putting Together a Strong Management Team 1. Assembling a capable management team is a cornerstone of the organization-building task. 2. The task of implementing challenging strategic initiatives must be assigned to executives who have the skills and talents to handle them and who can be counted on to get the job done well. B. Recruiting and Retaining Capable Employees 1. Staffing the organization with the right kinds of people must go much deeper than managerial jobs in order to build an organization capable of effective strategy execution. 2. In high-tech companies, the challenge is to staff work groups with gifted, imaginative, and energetic people who can bring life to new ideas quickly. 3. Illustration Capsule 10.1, Build From Within”: P&G’s Approach to Management Development, describes Proctor and Gamble’s approach to developing a high-caliber management team.

ILLUSTRATION CAPSULE 10.1

“Build From Within”: P&G’s Approach to Management Development Discussion Question: Identify the five key elements of P&G’s management development life cycle. Answer: The management “pipeline” is created through five key stages including (1) a rigorous training process, (2) extensive on the job and formal training opportunities, (3) detailed development and career planning, (4) clear path to leadership, and (5) actively managed succession planning.

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4. In many industries adding to a company’s talent base and building intellectual capital is more important to strategy execution than additional investments in plants, equipment, and capital projects. 5. The practices listed next are common among companies dedicated to staffing jobs with the most capable people they can find: a. Putting forth considerable effort on screening and evaluating job applicants b. Providing employees with training programs that continue throughout their careers. c. Offering promising employees challenging, interesting, and skill-stretching assignments. d. Rotating people through jobs that span functional and geographic boundaries. e. Making the work environment stimulating and engaging so employees will consider the com­ pany a great place to work. f. Striving to retain talented high-performing employees via promotions, salary increases, performance bonuses, stock options and equity ownership, fringe benefit packages, and other perks. g. Coaching average performers to improve their skills while weeding out underperformers and benchwarmers V. Acquiring, Developing, and Strengthening Key Resources and Capabilities 1. A top organization-building priority in the strategy implementing/executing process is the need to build and strengthen competitively valuable core competencies and organizational capabilities. A. Three Approaches to Building and Strengthening Capabilities 1. Building core competencies and competitive capabilities is a time consuming, managerially chal­ lenging exercise. The capability building process has three common approaches. 2. Developing Capabilities Internally – First, the organization must develop the ability to do something, however imperfectly or inefficiently. Second, as experience grows and company personnel learn how to perform the activity consistently well and at an acceptable cost, the ability evolves into a tried and true competence or capability. Third, should the organization continue to polish and refine its know-how and otherwise sharpen its performance such that it becomes better than rivals at performing the activity, the core competence rises to the rank of a distinctive competence, thus providing a path to competitive advantage.

ILLUSTRATION CAPSULE 10.2

Toyota’s Legendary Production System: A Capability That Translates into Competitive Advantage Discussion Question: What two TPS techniques do you think are the most unusual? How do you think these help Toyota to pursue a more efficient manufacturing operation? Answer: Students should select two choices from among the eight listed in this example. Student responses will vary, but students should be exhibiting some personal viewpoints or perspectives that otherwise may not have been brought to light. This sharing should facilitate further classroom discussion about quality control.

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3. Acquiring capabilities through mergers and acquisitions – Sometimes a company can refresh and strengthen its competencies by acquiring another company with attractive resources and capabilities. The primary advantage of this method is speed and these types of acquisitions are essential in two situations. First, when a market opportunity can slip by faster than a needed capability can be created internally. Second, when industry conditions, technology, or competitors are moving at such a rapid clip that time is of the essence. 4. Accessing capabilities via collaborative partnerships – Sometimes a company can access capabilities via collaborative partnerships with suppliers, competitors, or other companies having the cutting-edge expertise. First, Outsource the function requiring the capabilities to a key supplier or another provider. Second, Collaborate with a firm that has complementary resources and capabilities in a joint venture, strategic alliance, or other type of partnership established for the purpose of achieving a shared strategic objective. Third, Engage in a collaborative partnership for the purpose of learning how the partner does things, internalizing its methods and thereby acquiring its capabilities. B. The Strategic Role of Employee Training 1. Training and retraining are important when a company shifts to a strategy requiring different skills, competitive capabilities, managerial approaches, and operating methods. 2. The strategic importance of training has not gone unnoticed. Over 600 companies have established internal “universities” to lead the training effort, facilitate continuous organizational learning, and help upgrade company competencies and capabilities. C. Strategy Execution Capabilities and Competitive Advantage 1. Superior strategy execution capabilities allow companies to get the most from their organizational resources and competitive capabilities. 2. Superior strategy execution capabilities are the only source of sustainable competitive advantage when strategies are easy for rivals to copy. VI. Organizing the Work Effort with a Supportive Organizational Structure A. Deciding Which Value Chain Activities to Perform Internally and Which to Outsource 1. Outsourcing assorted administrative support activities and perhaps even core or primary value chain activities can enable the company to concentrate its full energies and resources on even more competently performing those value chain activities that are at the core of its strategy and for which it can create unique value. 2. Figure 10.3, Structuring the Work Effort to Promote Successful Strategy Execution, looks at some of the considerations that are common to most all organizations. 3. When a company uses outsourcing to zero in on even better performance of those truly strategycritical of those truly strategy-critical activities where its expertise is most need, then it may be able to realize three very positive benefits. a. The company improves its chances for outclassing rivals in the performance of those activities and turning a core competence into a distinctive competence. b. The streamlining of internal operations that flows from outsourcing often acts to decrease internal bureaucracies, flatten the organization structure, speed internal decision making and shorten the time it takes to respond to changing market conditions. c. Partnerships can add to a company’s arsenal of capabilities and contribute to better strategy execution. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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4. As a general rule, companies refrain from outsourcing those value chain activities over which they need direct strategic and operating control in order to build core competencies, achieve competitive advantage, and effectively manage key customer-supplier-distributor relationships. 5. A company that goes overboard on outsourcing can hollow out its knowledge base so as to leave itself at the mercy of outside suppliers and short of the resource strengths to be master of its own destiny. B. Aligning the Firm’s Organizational Structure with Its Strategy 1. Some activities in the value chain are always more critical to strategic success and competitive advantage than others.

CORE CONCEPT A firm’s organizational structure comprises the formal and informal arrangement of tasks, responsibilities, lines of authority, and reporting relationships by which the firm is administered.

ILLUSTRATION CAPSULE 10.3

Which Value Chain Activities Does Apple Outsource and Why? Discussion Question: What key value chain activities does Apple outsource and not outsource, and why did the firm select them? Answer: Apple has chosen to focus their internal resources on their key success factors in new product development and product design as these provide the company with a sustainable competitive advantage. The company has outsourced manufacturing because it does not provide a unique competitive advantage. Flexible manufacturing process are well developed and easily copied. 2. Making Strategy Critical Activities the Main Building Blocks of Organizational Structure – The rationale for making strategy-critical activities the main building blocks in structuring a business is compelling: if activities crucial to strategic success are to have the resources, decision-making influence, and organizational impact they need, they have to be centerpieces in the organizational scheme. 3. Matching Type of Organizational Structure to Strategy Execution Requirements – Organ­ izational structures can be classified into a limited number of standard types. The type that is most suitable for a given firm will depend on the firm’s size and complexity as well as its strategy. a. Simple Structure – A simple structure is one in which a central executive (often the ownermanager) handles all major decisions and oversees the operations of the organization with the help of a small staff. b. Functional Structure – A functional structure is one that is organized along functional lines, where a function represents a major step in the firm’s value chain, such as R&D, engineering and design, manufacturing, sales and marketing, logistics, and customer service. c. Multidivisional Structure – A multidivisional structure is a decentralized structure consisting of a set of operating divisions organized along market, customer, product, or geographic lines, and a central corporate headquarters, which monitors divisional activities, allocates resources, performs assorted support functions, and exercises overall control. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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d. Matrix Structure – A matrix structure is a combination structure in which the organization is organized along two or more dimensions at once (e.g., business, geographic area, value chain function) for the purpose of enhancing cross-unit communication, collaboration, and coordination.

CORE CONCEPT A simple structure consists of a central executive who handles all major decisions and oversees all operations with the help of a small staff.

CORE CONCEPT A functional structure is organized into functional departments, with departmental managers who report to the CEO and small corporate staff.

CORE CONCEPT A multidivisional structure is a decentralized structure consisting of a set of operating divisions organized along business, product, customer group, or geographic lines, and a central corporate headquarters that allocates resources, provides support functions, and monitors divisional activities.

CORE CONCEPT A matrix structure is a structure that combines two or more organizational forms, with multiple reporting relationships. It is used to foster cross-unit collaboration.

C. Determining the Degree of Authority and Independence to Give Each Unit and Each Employee 1. The two extremes are to centralize decision-making at the top (the CEO and a few close lieutenants) or to decentralize decision-making by giving managers and employees considerable decisionmaking latitude in their areas of responsibility. 2. Table 10.1, Advantages and Disadvantages of Centralized versus Decentralized DecisionMaking, shows the two approaches to decision-making are based on sharply different underlying principles and beliefs, with each having pros and cons. 3. Centralized Decision-Making: Pros and Cons In a highly centralized organization structure, top executives retain authority for most strategic and operating decisions and keep a tight rein on business-unit heads, department heads, and the managers of key operating units; comparatively little discretionary authority is granted to front-line supervisors and rank and file employees. a. Key advantages include: (1) Fixes accountability through tight control from the top (2) Elim­ inates potential for conflicting goals and actions on the part of lower-level managers (3) Facilitates quick decision making and strong leadership under crisis situations b. Key disadvantages include: (1) Lengthens response times by those closest to the market conditions because they must seek approval for their actions (2) Does not encourage responsibility among lower-level managers and rank-and-file employees (3) Discourages lower-level managers and rank-and-file employees from exercising any initiative © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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4. Decentralized Decision-Making: Pros and Cons In a highly decentralized organization, decisionmaking authority is pushed down to the lowest organizational level capable of making timely, informed, competent decisions. The objective is to put adequate decision-making authority in the hands of those closest to and most familiar with the situation and train them to weigh all the factors and exercise good judgment. a. Key advantages include: (1) Encourages company employees to exercise initiative and act responsibly (2) Promotes greater motivation and involvement in the business on the part of more company personnel (3) Spurs new ideas and creative thinking (4) Allows for fast response to market change (5) Entails fewer layers of management b. Key disadvantages include: (1) Higher-level managers may be unaware of actions taken by empowered personnel under their supervision (2) Puts the organization at risk if empowered employees happen to make “bad” decisions (3) Can impair cross-unit collaboration 5. Capturing Cross-Business Strategic Fits in a Decentralized Structure: Diversified companies striving to capture cross-business strategic fits have to beware of giving business heads full rein to operate independently when cross-business collaboration is essential in order to gain strategic fit benefits. D. Facilitating Collaboration with External Partners and Strategic Allies 1. Someone or some group must be authorized to collaborate with each major outside constituency involved in strategy execution. 2. Building organizational bridges with external allies can be accomplished by appointing “relationship managers” with responsibility for making particular strategic partnerships or alliances generate the intended benefits. 3. Organizing and managing a network structure provides another mechanism for encouraging more effective collaboration and cooperation among external partners.

CORE CONCEPT A network structure is the arrangement linking a number of independent organizations involved in some common undertaking. E. Further Perspectives on Structuring the Work Effort 1. All organization designs have their strategy-related strengths and weaknesses. To do a good job of matching structure to strategy, strategy implementers first have to pick a basic design and modify it as needed to fit the company’s particular business lineup. They must then: a. Supplement the design with appropriate coordinating mechanisms (cross-functional task forces, special project teams, self-contained work teams, and so on) and b. Institute whatever networking and communications arrangements it takes to support effective execution of the firm’s strategy. 2. Effectively managing both internal organization processes and external collaboration to create and develop competitively valuable organizational capabilities remains a top challenge for senior executives in today’s companies.

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ASSURANCE OF LEARNING EXERCISES 1. The heart of Toyota’s strategy in motor vehicles is to out compete rivals by manufacturing world-class, quality vehicles at lower costs and selling them at competitive price levels. Executing this strategy requires top-notch manufacturing capability and super-efficient management of people, equipment, and materials. Illustration Capsule 10.2, discusses the principles, practices, and techniques grounded in Toyota’s famed Toyota Production System. How does Toyota’s philosophy of dealing with defects, empowering employees, and developing capabilities impact strategy execution? Why are its slogans such as “Never be satisfied” and “Ask yourself ‘Why?’ five times” important? Answer: The student should identify that the slogans discussed serve as constant reminders of the underlying values of quality and continuous improvement. The use of slogans in highlighting important values is a key component in developing and maintaining a positive culture. 2. Procter and Gamble’s systematic approach to management development is discussed in Illustration Capsule 10.1. Based upon the information provided in the capsule, explain how the company’s approach to recruiting and its promotion from within policy helps build managerial talent. Explain why its formal training opportunities and career planning efforts help the company retain its most valuable employees. How does Procter and Gamble make sure that its managers are good at knowing what needs to be done and are skilled in “making it happen.” Answer: The student should identify that Proctor and Gamble has formalized the entire process of developing and training their management in order to ensure that the company can continue to grow as existing managers retire and leave the firm and as the company develops new business opportunities. P&G’s management “pipeline” is created through five key stages including (1) a rigorous training process, (2) extensive on the job and formal training opportunities, (3) detailed development and career planning, (4) clear path to leadership, and (5) actively managed succession planning. Through this detailed and formalized process, the firm can be sure that it has a sustainable supply of managers that are skilled at “making it happen”. 3. Review the Careers link on L’Oréal’s worldwide corporate Web site (www.loreal.com and click on the company’s worldwide corporate Web site option). The section provides extensive information about personal development, international learning opportunities, integration of new hires into existing teams, and other areas of management development. How do the programs discussed help L’Oréal to hire good people and build core competencies and competitive capabilities? Please use the chapter’s discussions of recruiting, training, and retaining capable employees and building core competencies and competitive capabilities as a guide for preparing your answer. Answer: The student should note that the textbook discussion on building core competencies and competitive capabilities begins on page 336 and they should use this as a guide for preparing their answers. Specifically, answers could include a discussion of company-specific competencies and capabilities that have been instrumental in driving the company’s success in its marketplace. Students should be able to define what makes these features into competitive competencies and capabilities.

For example, one of the four traits related to building core competencies and competitive capabilities is they can be viewed as bundles of skills and know-how that often grow out of the combined efforts of crossfunctional work groups and departments performing complementary activities at different locations in a firm’s value chain. Students should point out that L’Oreal has several career programs which are likely to facilitate this trait. They include the management trainee program (can include hands-on assignments in field sales, category management, market research, finance, and marketing services); L’Oreal Fit (a twoyear personalized integration and support program adaptable to the needs of all new employees); and a growth and personal development program (includes training programs, field visits, and distance learning opportunities based on an individual’s professional needs). Students should recognize these programs are managerial activities to strengthen the company’s base of skills, knowledge, and intellect that are related to developing core competencies and competitive capabilities.

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4. Examine the overall corporate organizational structure chart for Exelon Corporation. The chart can be found by going to www.exeloncorp.com and using the Web site search feature to locate “organizational charts.” Does it appear that strategy-critical activities are the building blocks of Exelon’s organizational arrangement? Is its organizational structure best characterized as a departmental structure tied to functional, process, or geographic departments? Is the company’s organizational structure better categorized as a divisional structure? Would you categorize Exelon’s organizational structure as a matrix arrangement? Explain your answer. Answer: In examining the site, the student should find that the Exelon family of companies includes Exelon Generation, Exelon Transmission Company, ComEd, and PECO which share a corporate services and support unit, Exelon Business Services Company. With a nationwide reach and strong positions in the Midwest and Mid-Atlantic regions, it appears Exelon has designed its organizational structure based on key value chain activities that are the main building blocks in its structure – generation, transmission, and delivery. Regarding strategic success, Exelon was ranked #134 on the 2009 FORTUNE 500 list, and #1 on the Utilities: Gas and Electric industry list. In addition, it was named #7 in Businessweek’s list of 50 top performing companies in 2008. Exelon’s organizational structure is best characterized as a divisional structure. The major building blocks of this structure are generation and marketing, transmission, and delivery. The Web site link is http:// www.exeloncorp.com/peopleandculture/ corporatestructure/overview.aspx. 5. Using Google Scholar or your university library’s access to EBSCO, InfoTrac, or other online databases, do a search for recent writings on decentralized decision making and employee empowerment. According to the articles you find in the various management journals, what are the conditions under which decision making should be pushed down to lower levels of management? Answer: The student should note that possible databases include Academic Search Premier, EBSCO, LexisNexis Academic, or Business Source Premier. Students should provide cited information from the articles they choose and demonstrate the relevance to decentralized decision making and employee empowerment. Criteria for the effective use of these management approaches should be demonstrated in student discussions. Using the search terms of “decision making and employee empowerment,” several articles were located. Two of the recent scholarly journal articles are provided below: High-Involvement Work Practices: Are They Really Worth It? Maura J Mills, Satoris S Culbertson. The Academy of Management Perspectives. Briarcliff Manor: Aug 2009. Vol. 23, Iss. 3; p. 93 Employee Empowerment: A Conceptual Analysis. Manoj K Sharma, Gurvinder Kaur. Journal of Global Business Issues. Burbank: Summer 2008. Vol. 2, Iss. 2; p. 7 (6 pages)

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