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Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

CHAPTER 11

MANAGING INTERNAL OPERATIONS: ACTIONS THAT PROMOTE GOOD STRATEGY EXECUTION CHAPTER SUMMARY Chapter Eleven discusses five additional managerial actions that facilitate the success of a company’s strategy execution efforts. These include (1) allocating to the drive for good strategy execution, (2) ensuring that policies and procedures that facilitate strategy execution, (3) using process management tools to drive continuous improvement in how value chain activities are performed, (4) installing information and operating systems that enable company personnel to carry out their strategic roles proficiently, and (5) using rewards and incentives to promote better strategy execution and the achievement of strategic and financial targets.

LECTURE OUTLINE I. Allocating Resources to the Strategy Execution Effort 1. Early in the process of implementing and executing a new or different strategy, managers need to determine what resources will be needed and then consider whether the current budgets of organizational units are suitable. 2. A company’s ability to marshal the resources needed to support new strategic initiatives and steer them to the appropriate organizational units has a major impact on the strategy execution process. 3. The funding requirements of a new strategy must drive how capital allocations are made and the size of each unit’s operating budgets. Underfunding organizational units and activities pivotal to strategic success impedes execution and the drive for operating excellence. A change in strategy nearly always calls for budget reallocations. 4. Visible actions to relocate operating funds and move people into new organizational units signal a determined commitment to strategic change and frequently are needed to catalyze the implementation process and give it credibility. 5. Just fine-tuning the execution of a company’s existing strategy seldom requires big movements of people and money from one area to another. II. Instituting Policies and Procedures that Facilitate Strategy Execution 1. Well-conceived policies and procedures aid strategy execution; out-of-sync ones are barriers. 2. Figure 11.1, How Policies and Procedures Facilitate Good Strategy Execution, looks at some of these effects.

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Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

3. Prescribing new policies and operating procedures acts to facilitate strategy execution in three ways: a. They provide top-down guidance regarding how things need to be done. b. They help ensure consistency in how execution-critical activities are performed. c. They promote the creation of a work climate that facilitates good strategy execution. 4. There is wisdom in a middle approach: Prescribe enough policies to give organization members clear direction in implementing strategy and to place desirable boundaries on employees’ actions: then empower them to act within these boundaries however they think makes sense. III. Instituting Best Practices and Employing Process Management Tools to Strive for Continuous Improvement 1. Company managers can significantly advance the cause of competent strategy execution by pushing organization units and company personnel to identify and adopt the best practices for performing value chain activities and insisting on continuous improvement in how internal operations are conducted. 2. One of the most widely used and effective tools for gauging how well a company is executing pieces of its strategy entails benchmarking the company’s performance of particular activities and business processes against “best in industry” and “best in world” performers. 3. Managerial efforts to identify and adopt best practices are a powerful tool for promoting operating excellence and better strategy execution. A. How the Process of Identifying and Incorporating Best Practices Works 1. A best practice is a technique for performing an activity or business process that at least one company has demonstrated works particularly well. 2. To qualify as a legitimate best practice, the technique must have a proven record in significantly lowering costs, improving quality or performance, shortening time requirements, enhancing safety, or delivering some other highly positive operating outcome.

CORE CONCEPT A best practice is a method of performing an activity that has been shown to consistently deliver superior results compared to other methods. 3. Benchmarking is the backbone of the process for identifying, studying, and implementing outstanding practices. 4. Informally, benchmarking involves being humble enough to admit that others have come up with world-class ways to perform particular activities yet wise enough to try to learn how to match and even surpass them. 5. Figure 11.2, From Benchmarking and Best Practices Implementation to Operating Excellence, explores the potential pay-off from benchmarking. 6. However, benchmarking is more complicated than simply identifying which companies are the best performers of an activity and then trying to exactly copy other companies’ approaches. 7. Normally, the outstanding practices of other organizations have to be adapted to fit the specific circumstances of a company’s own business and operating requirements. © 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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8. A best practice remains little more than an interesting success story unless company personnel buy into the task or translating what can be learned from other companies into real action and results. B. Business Process Reengineering, Total Quality Management, and Six Sigma Quality Programs: Tools for Promoting Operating Excellence 1. Three other potent management tools for promoting operating excellence and better strategy execution business process reengineering, total quality management (TQM) programs, Six Sigma quality control techniques, and other continuous improvement methods. 2. Business Process Reengineering a. Reengineering is called for when the organization finds that execution of strategy critical activities is being hindered by an organizational arrangement where pieces of the activity are performed in several different functional departments. b. In this situation, no one manager or group is being held accountable for optimal performance of the entire activity. This can be addressed by reengineering the work effort.

CORE CONCEPT Business process reengineering involves radically redesigning and stream­lining how an activity is performed, with the intent of achieving dramatic improvements in performance. 3. Total Quality Management Programs a. Total quality management (TQM) is a philosophy of managing a set of business practices that emphasizes continuous improvement in all phases of operations—100 percent accuracy in performing tasks, involvement and empowerment of employees at all levels, team-based work design, benchmarking, and total customer satisfaction. b. The managerial objective is to kindle a burning desire in people to use their ingenuity and initiative to progressively improve their performance of value chain activities. TQM doctrine preaches that there is no such thing as good enough and that everyone has a responsibility to participate in continuous improvement. c. The long-term payoff of TQM, if it comes, depends heavily on management’s success in implanting a culture within which TQM philosophies and practices can thrive.

CORE CONCEPT Total Quality Management (TQM) entails creating a total quality culture bent on ontinuously improving the performance of every task and value chain activity. 4. Six Sigma Quality Control a. Six Sigma quality control consists of a disciplined, statistics-based system aimed at producing not more than 3.4 defects per million iterations for any business process—from manufacturing to customer transactions.

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b. The Six Sigma process of define, measure, analyze, improve, and control (DMAIC) is an improvement system for existing processes falling below specification and needing incremental improvement. The Six Sigma process of define, measure, analyze, design, and verify (DMADV) is an improvement system used to develop new processes or products at Six Sigma quality levels. c. Both Six Sigma processes are executed by personnel who have earned Six Sigma “green belts” and Six Sigma “black belts” and are overseen by personnel who have completed Six Sigma “master black belt” training. d. The statistical thinking underlying Six Sigma is based on the following three principles: all work is a process, all processes have variability, and all processes create data that explains variability.

CORE CONCEPT Six Sigma programs utilize advanced statistical methods to improve quality by reducing defects and variability in the performance of business processes. 5. Illustration Capsule 11.1, Whirlpool’s Use of Six Sigma to Promote Operating Excel­lence, describes Whirlpool’s use of Six Sigma in its appliance business.

ILLUSTRATION CAPSULE 11.1

Whirlpool’s Use of Six Sigma to Promote Operating Excellence Discussion Question: What did Whirlpool do to sustain the productivity gains and cost savings derived through its implementation of Six Sigma? Answer: To sustain these benefits, Whirlpool embedded Six Sigma practices within each of its manufacturing facilities worldwide and instilled a culture based on Six Sigma and lean manufacturing skills and capabilities.

6. The Difference Between Process Reengineering and Continuous Improvement Pro­grams Like Six Sigma And TQM a. The essential difference between business process reengineering and continuous improvement programs is that reengineering aims at quantum gains on the order of 30 to 50 percent or more whereas total quality programs stress incremental progress, striving for inch-by-inch gains again and again in a never ending stream. b. The two approaches to improved performance of value chain activities and operating excellence are not mutually exclusive; it makes good sense to use them in tandem. C. Capturing the Benefits of Initiatives to Improve Operations 1. The biggest beneficiaries are companies that view such programs not as ends in themselves but as tools for implementing and executing company strategy more effectively. 2. To get the most from programs for facilitating better strategy execution, managers must have a clear idea of what specific outcomes really matter.

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Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

3. The action steps managers can take to realize full value from TQM or Six Sigma initiatives include: a. Demonstrating visible, unequivocal, and unyielding commitment to TQM and continuous improvement b. Nudging people toward TQM-supportive behaviors by: i. Screening job applicants rigorously ii. Providing quality training for most employees iii. Using teams and team-building exercises iv. Recognizing and rewarding individual and team efforts v. Stressing prevention not inspection c. Empowering employees d. Using online systems to provide all relevant parties with the latest best practices and actual experiences with them e. Emphasizing that performance can and must be improved 4. When used effectively, TQM, Six Sigma, and other similar continuous improvement techniques are capable of improving the proficiency with which an organization performs its value chain activities. Not only do improvements from such initiatives add up over time and strengthen organizational capabilities, but they also help build a culture of operating excellence. All this lays the groundwork for gaining a competitive advantage. IV. Installing Information and Operating Systems 1. Company strategies cannot be executed well without a number of internal systems for business operations. 2. Well-conceived, state-of-the-art operating systems not only enable better strategy execution but also can strengthen organizational capabilities – perhaps enough to provide a competitive edge over rivals. 3. Having State-of-the-art support systems can be a basis for competitive advantage if they give a firm capabilities that rivals cannot match. A. Instituting Adequate Information Systems, Performance Tracking, and Controls 1. Accurate and timely information about daily operations is essential if managers are to gauge how well the strategy execution process is proceeding. Information systems need to cover five broad areas: a. Customer data b. Operations data c. Employee data d. Supplier/partner/collaborative ally data e. Financial performance data

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2. Real time information systems permit company mangers to stay on top of implementation initiatives and daily operations and to intervene if things seem to be drifting off course. 3. Statistical information gives managers a feel for the numbers, briefings and meetings provide a feel for the latest developments and emerging issues, and personal contacts add a feel for the people dimension. All are good barometers. B. Monitoring Employee Performance - Leaving empowered employees to their own devices in meeting performance standards without appropriate checks and balances can expose an organization to excessive risk. V. Using Rewards and Incentives to Promote Better Strategy Execution 1. It is essential that company personnel be enthusiastically committed to executing strategy and achieving performance targets. 2. To win employees’ sustained, energetic commitment, management has to be resourceful in designing and using motivational incentives—both monetary and nonmonetary. 3. A properly designed reward structure is management’s most powerful tool for mobilizing organizational commitment to successful strategy execution.

CORE CONCEPT Financial rewards provide high powered incentives when rewards are tied to specific outcome objectives. A. Incentives and Motivational Practices that Facilitate Good Strategy Execution 1. Financial incentives generally lead the list of motivating tools for trying to gain wholehearted employee commitment to good strategy execution and operating excellence. 2. In addition, companies use a host of other motivational approaches to spur stronger employee commitment to the strategy execution process. Some of the most important include: a. Providing attractive perks and fringe benefits b. Give awards and other forms of public recognition to high performers, and celebrate the achievement of organizational goals. c. Relying on promotion from within whenever possible d. Inviting and acting on ideas and suggestions from employees e. Invite and act on ideas and suggestions from employees. f. Create a work atmosphere where there is genuine caring, and mutual respect among workers and between management and employees g. State the strategic vision in inspirational terms that make employees feel they are a part of doing something worthwhile in a larger social sense h. Share information with employees about financial performance, strategy, operational measures, market conditions, and competitors’ actions i. Providing a comfortable and attractive working environment

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B. Striking the Right Balance Between Rewards and Punishment 1. While most approaches to motivation, compensation, and people management accentuate the positive, companies also embellish positive rewards with the risk of punishment. 2. High performing organizations nearly always have a cadre of ambitious people who relish the opportunity to climb the ladder of success, love a challenge, thrive in a performance-oriented environment, and find some competition and pressure useful to satisfy their own drives for personal recognition, accomplishment, and self-satisfaction. 3. Illustration Capsule 11.2, What Companies do to Motivate and Reward Employees, examines some of the varieties of techniques utilized by organizations to motivate employees.

ILLUSTRATION CAPSULE 11.2

What Companies do to Motivate and Reward Employees Discussion Question: Companies engage a vast variety of employee motivational techniques. What is the primary purpose of implementation of these techniques? Answer: Companies utilize a myriad of motivational and reward practices and techniques to help create a work environment that facilitates better strategy execution. 4. As a general rule, it is unwise to take off the pressure for good individual and group performance or play down the stress, anxiety, and adverse consequences of shortfalls in performance. 5. If an organization’s motivational approaches and reward structure induce too much stress, internal competitiveness, job insecurity, and unpleasant consequences, the impact on work force morale and strategy execution can be counterproductive. 6. Evidence shows that managerial initiatives to improve strategy execution should incorporate more positive than negative motivational elements because when cooperation is positively enlisted and rewarded, rather than strong-armed by orders and threats, people tend to respond with more enthusiasm, dedication, creativity, and initiative. C. Linking Rewards to Strategically Relevant Performance Outcomes 1. To create a strategy-supportive system of rewards and incentives, a company must reward people for accomplishing results, not for just dutifully performing assigned tasks. 2. Ideally, every organization unit, every manager, every team or work group, and perhaps every employee should be held accountable for achieving outcomes that contribute to good strategy execution and business performance. 3. Illustration Capsule 11.3, Nucor and Bank One: Two Companies that Tie Incentives Directly to Strategy Execution, provides a vivid example of how companies have designed incentives linked directly to outcomes reflecting good strategy execution.

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Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

ILLUSTRATION CAPSULE 11.3

Nucor Corporation: Tying Incentives Directly to Strategy Execution Discussion Question: Identify the prominent result that each organization sustained from implementing a strategy that tied incentives directly to strategy execution. Answer: Nucor’s low-cost leadership strategy entails achieving lower labor costs per ton of steel than competitors’ costs. This leads Nucor’s management team to use an incentive system to promote high worker productivity and drive labor costs per ton below rivals. 5. Guidelines for Designing Incentive Compensation Systems: The concepts and company experiences discussed yield the following perspective guidelines for creating an incentive compensation system to help drive successful strategy execution: a. Make the financial incentives a major, not minor, piece of the total compensation package. b. Have incentives that extend to all managers and all workers, not just top management. c. Administer the reward system with scrupulous objectivity and fairness. d. Ensure that the performance targets each individual or team is expected to achieve involve outcomes that the individual or team can personally affect. e. Keep the time between achieving the targeted performance outcome and the payment of the reward as short as possible. f. Avoid rewarding effort rather than results. 6. For an organization’s incentive system to work well, the details of the reward structure must be communicated and explained.

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Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

ASSURANCE OF LEARNING EXERCISES 1. Implementing and executing a new or different strategy call for new resource allocations. Using your university’s access to Lexis-Nexis or EBSCO, search for recent articles that discuss how a company has revised its pattern of resource allocation and divisional budgets to support new strategic initiatives. Answer: The responses provided by students will vary greatly. However, one example would be Exelon Corporation. www.exeloncorp.com. This company has completely aligned its organizational chart and value chain to support its corporate strategy. In the company’s website, the student will 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. 2. Policies and procedures facilitate strategy execution when they are designed to fit the company’s strategy and objectives. Using your university’s access to Lexis-Nexis or EBSCO, search for recent articles that discuss how a company has revised its policies and procedures to provide better top-down guidance to company personnel about how certain things should be done. Answer: The responses provided by students will vary greatly. However, one example would be British Petroleum following the Gulf of Mexico oil spill. Partly spurred by government pressure, BP has undertaken an overhaul of their Risk Management processes and failure mode control processes. The key changes implemented included improved management and oversight of the decision process within BP, improved communication between BP and its contractors, and more effective training of key engineering and rig personnel. 3. Illustration Capsule 11.1 discusses Whirlpool Corporation’s Operational Excellence initiative and its use of Six Sigma practices. How did the implementation of the program change the culture and mindset of the company’s personnel? List three tangible benefits provided by the program. Explain why a commitment to quality control is important in the appliance industry? Answer: The student should identify that the company was able to imbed the Six Sigma practices into each of its worldwide manufacturing facilities, resulting in a worldwide culture of lean manufacturing and production excellence. The three tangible benefits were: •

Improve product quality

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Lower production costs

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Reduce the time required to get products to market

Finally, the company was able to develop a specific competitive advantage in the appliance industry through this organizational commitment which resulted in better products at better prices for consumers. 4. Read some of the recent Six Sigma articles posted at isixsigma.com. Prepare a one-page report to your instructor detailing how Six Sigma is being used in various companies and what benefits these companies are reaping from Six Sigma implementation. Answer: Responses provided by individual students will vary. iSixSigma named Starwood Hotels and © 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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Resorts the No. 1 Best Place to Work for Six Sigma practitioners in 2009 (http://www.isixsigma.com/ index.php?option=com_k2&view=item&id=982:starwood-hotels-resorts-tops-best-places-to-worklist&Itemid=236). A review of this link provides a succinct summary of Starwood’s approach which is based on a three-pronged strategy to measure quality: improving the Guest Satisfaction Index (an independently determined numerical value based on guest surveys), increasing revenue and controlling costs. The Top 10 rankings of iSixSigma’s 2009 Best Places to Work include: (1)Starwood Hotels and Resorts (North America Division); (2) McKesson Corp; (3) Xerox Corp.; (4) Ecolab Inc.; (5) Vought Aircraft Industries Inc.; (6) Pfizer Inc.; (7) Merck & Co. Inc.; (8) Piramal Healthcare Ltd.; (9) Cardinal Health Inc.; (10) Computacenter AG & Co. oHG. It is likely that student should include specific benefits that one of these companies has realized from using Six Sigma methods. 5. Read some of the recent Six Sigma articles posted at isixsigma.com. Prepare a one-page report to your instructor detailing how Six Sigma is being used in various companies and what benefits these companies are reaping from Six Sigma implementation. Answer: Responses provided by individual students will vary. iSixSigma named Starwood Hotels and Resorts the No. 1 Best Place to Work for Six Sigma practitioners in 2009 (http://www.isixsigma.com/ index.php?option=com_k2&view=item&id=982:starwood-hotels-resorts-tops-best-places-to-worklist&Itemid=236). A review of this link provides a succinct summary of Starwood’s approach which is based on a three-pronged strategy to measure quality: improving the Guest Satisfaction Index (an independently determined numerical value based on guest surveys), increasing revenue and controlling costs. The Top 10 rankings of iSixSigma’s 2009 Best Places to Work include: (1)Starwood Hotels and Resorts (North America Division); (2) McKesson Corp; (3) Xerox Corp.; (4) Ecolab Inc.; (5) Vought Aircraft Industries Inc.; (6) Pfizer Inc.; (7) Merck & Co. Inc.; (8) Piramal Healthcare Ltd.; (9) Cardinal Health Inc.; (10) Computacenter AG & Co. oHG. It is likely that student should include specific benefits that one of these companies has realized from using Six Sigma methods. 6. Illustration Capsule 11.2 provides a sampling of motivational tactics employed by several prominent companies (many of which appear on Fortune ’s list of the 100 best companies to work for in America). Discuss how rewards at Google, Lincoln Electric, Nordstrom, W.L. Gore, and Amgen aid in the strategy execution efforts of each company. Answer: Responses will center primarily around the incentives programs that these firms use in order to improve employee performance and retention. While Google has build the dream work place, Lincoln Electric has focused on rewards based upon alignment with key corporate objectives. Nordstrom and W.L. Gore provide job enrichment incentives through decision making freedom and job selection. Key examples: •

Google – Cafés, snack centers, ice cream, gyms, etc. Building the ‘dream workplace.

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Lincoln Electric – Quality production incentives, volume production incentives, quantifiable performance measures.

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Nordstrom – Higher wages, freedom to make decisions.

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W.L.Gore – Choice of project/team to be part of

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