CHAPTER 12 IMPLEMENTING AND EXECUTING STRATEGY: BUDGETS, POLICIES, BEST PRACTICES, SUPPORT SYSTEMS, AND REWARDS Screen graphics created by: Jana F. Kuzmicki, PhD, Mississippi University for Women

Paul Allaire CEO, Xerox Corp. “If you talk about change but don’t change the reward and recognition system, nothing changes.” Paul Allaire CEO, Xerox Corp. “Quote” McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2

Chapter Outline Linking Budgets to Strategy Creating Strategy-Supportive Policies Instituting Best Practices and a Commitment to Continuous Improvement Installing Support Systems Strategy-Supportive Motivational Practices and Reward Systems

LINK BUDGETS TO STRATEGY McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4

Linking Budgets to Strategy Allocating resources in ways that support effective strategy execution involves Funding capital projects that can make a contribution to strategy implementation Funding efforts to strengthen competencies and capabilities or to create new ones Shifting resources—downsizing some areas, upsizing others, killing activities no longer justified, and funding new activities with a critical strategy role

Strategic Management Principle Depriving strategy-critical groups of the funds needed to execute their pieces of the strategy can undermine the implementation process!

ESTABLISH STRATEGY-SUPPORTIVE POLICIES McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 7

How Policies and Procedures Aid Strategy Implementation Provide top-down guidance regarding expected behaviors Help align internal actions with strategy, channeling efforts along the intended path Enforce consistency in performance of activities in geographically scattered units Serve as powerful lever for changing corporate culture to produce stronger fit with a new strategy

Creating Strategy-Supportive Policies and Procedures Role of new policies Channel behaviors and decisions to promote strategy execution Counteract tendencies of people to resist chosen strategy Too much policy can be as stifling as Wrong policy or as Chaotic as no policy Often, the best policy is empowering employees and letting them operate between the white lines anyway they think best

INSTITUTE BEST PRACTICES AND MECHANISMS FOR CONTINUOUS IMPROVEMENT McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 10

Instituting Best Practices and Continuous Improvement Searching out and adopting best practices is integral to effective implementation Benchmarking has spawned new approaches to improve strategy execution Reengineering TQM Continuous improvement programs

Characteristics of Benchmarking Involves determining how well a firm performs particular activities and processes against “Best in industry” and/or “Best in world” performers Represents a solid methodology to identify options to improve Caution - Exact duplication of best practices of other firms is not feasible due to differences in implementation situations Best approach - Best practices of other firms need to be modified or adapted to a firm’s own specific situation Best Practices

What is 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 activities, Involvement and empowerment of employees at all levels, Team-based work design, Benchmarking, and Fully satisfying customer expectations

Goals of Quality Improvement Programs Defect-free manufacture Superior product quality Superior customer service Total customer satisfaction

Popular TQM Approaches Deming’s 14 Points 1992 Baldridge Award Criteria The Juran Trilogy Crosby’s 14 Quality Steps

Table 12.1: Components of Popular TQM Approaches Deming’s 14 Points 1. Constancy of purpose 2. Adopt the philosophy 3. Don’t rely on mass inspection 4. Don’t award business on price 5. Constant improvement 6. Training 7. Leadership 8. Drive out fear 9. Break down barriers 10. Eliminate slogans and exhortations 11. Eliminate quotas 12. Pride of workmanship 13. Education and retraining 14. Plan of action

Table 12.1: Components of Popular TQM Approaches The Juran Trilogy Quality Planning Quality Control Quality Improvement Set goals Identify customers and their needs Develop products and processes Evaluate performance Compare to goals and adapt Establish infrastructure Identify projects and teams Provide resources and training Establish controls

Table 12.1: Components of Popular TQM Approaches Crosby’s 14 Quality Steps 1. Management commitment 2. Quality improvement teams 3. Quality measurement 4. Cost of quality evaluation 5. Quality awareness 6. Corrective action 7. Zero-defects committee 8. Supervisor training 9. Zero-defects day 10. Goal-setting 11. Error cause removal 12. Recognition 13. Quality councils 14. Do it over again

Table 12.1: Components of Popular TQM Approaches 1992 Baldridge Award Criteria (1000 points) 1. Leadership (90 points) 2. Information & analysis (80 points) 3. Strategic quality planning (60 points) 4. Human resource development (150 points) 5. Management of process quality (140 points) 6. Quality & operation results (180 points) Quality 7. Customer focus & satisfaction (300 points)

Twelve Aspects Common to TQM and Continuous Improvement Programs 1. Committed leadership 2. Adoption and communication of TQM 3. Closer customer relationships 4. Closer supplier relationships 5. Benchmarking 6. Increased training 7. Open organization 8. Employee empowerment 9. Zero-defects mentality 10. Flexible manufacturing 11. Process improvement 12. Measurement

Implementing a Philosophy of Continuous Improvement Instill enthusiasm to do things right throughout company Strive to achieve little steps forward each day, (what the Japanese call kaizen) Ignite creativity in employees to improve performance of value-chain activities Preach there is no such thing as good enough Reform the corporate culture

Characteristics of TQM/Continuous Improvement Programs Valuable competitive asset in a company’s resource portfolio Have hard-to-imitate aspects Require substantial investment of management time and effort Expensive in terms of training and meetings Seldom produce short-term results Long-term payoff —instilling a TQM culture

TQM vs. Process Reengineering Aims at quantum gains of 30 to 50% or more TQM Stresses incremental progress Techniques are not mutually exclusive Reengineering - Used to produce a good basic design yielding dramatic improvements TQM - Used to perfect process, gradually improving efficiency and effectiveness

Using Best Practice Programs as an Implementation Tool Select indicators of successful strategy execution Benchmark against best practice companies Reengineer business processes Build a TQ culture Requires top management commitment Install TQ-supportive employee practices Empower employees to do the right things Provide employees with quick access to required information Preach that performance can be improved

INSTALL SUPPORT SYSTEMS McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 25

Installing Support Systems Essential to promote successful strategy execution Types of support systems On-line data systems Internet and company intranets Electronic mail E-commerce systems Mobilizing information and creating systems to use knowledge effectively can yield Competitive advantage

Examples: Support Systems Airlines Computerized reservation system Federal Express Computerized parcel-tracking system, leading-edge flight operations systems, and e-business tools

Examples: Support Systems Otis Elevator Sophisticated maintenance support system Arthur Andersen Internet and digital technology (Knowledge Xchange system has data, voice, and video capabilities) links more than 70,000 people in 382 offices in 81 countries

Examples: Support Systems Domino’s Pizza Computerized systems at each outlet facilitate ordering, inventory, payroll, cash flow, and work flow functions Mrs. Fields’ Cookies System to monitor sales, at 15-minute intervals, to suggest product mix changes and to improve customer response

Strategic Management Principle Innovative, state-of-the-art support systems can be a basis for competitive advantage if they give a firm capabilities that rivals can’t match!

Formal Reporting of Strategy-Critical Information Accurate, timely information is essential to guide action Prompt feedback on implementation activities is needed before actions are fully completed Key strategic performance indicators must be tracked as often as practical Barometers of overall performance Statistical information Reports and meetings Personal contact

What Areas Should Information Systems Address? Customer data Operations data Employee data Supplier/partner/collaborative ally data Financial performance data

Exercising Adequate Control Over Empowered Employees Challenge How to ensure actions of employees stay within acceptable bounds Purpose of diagnostic control systems Relieve managers of burden of constant monitoring Control methods Establish boundaries on what not to do, allowing freedom to act with limits Face-to-face meetings to assess performance

DESIGN STRATEGY-SUPPORTIVE REWARD SYSTEMS McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 34

Gaining Commitment: Components of an Effective Reward System Monetary Incentives Salary raises Performance bonuses Stock options Retirement packages Promotions Perks Non-monetary Incentives Praise Constructive criticism Special recognition More, or less, job security Interesting assignments More, or less, job responsibility

Approaches: Motivating People to Execute the Strategy Well Inspire employees to do their best Get employees to buy into strategy Structure individual efforts in teams to facilitate a supportive climate Allow employees to participate in decisions about their jobs Make jobs interesting and satisfying Devise strategy-supportive motivational approaches

Examples: Motivational Practices No Lay-Off Policies Japanese automobile producers, along with several U.S. based companies (Southwest Airlines, FedEx, Lands’ End, and Harley Davidson) have no lay-off policies, using employment security both as a positive motivator and a means of reinforcing good strategy execution.

Examples: Motivational Practices Stock Options More than 35 of the 58 publicly held companies on the 1999 list of the 100 Best Companies to Work for in America (includes Cisco Systems, Procter & Gamble, Merck, Charles Schwab, General Mills, Amgen, and Tellabs) provide stock options to all employees. Having employee-owners sharing in a company’s success is widely viewed as a positive motivator.

Examples: Motivational Practices Nordstrom Pay salespeople higher than prevailing rates, plus commission. “Rule #1: Use good judgment in all situations. There will be no additional rules.” Cisco Systems Offers on-the-spot bonuses of up to $2,000 for exceptional performance.

Examples: Motivational Practices Microsoft Team members enjoy working 60-80 hours per week for a leading edge company, accompanied by attractive pay and lucrative stock options. Lincoln Electric Rewards productivity by paying for each piece produced (defects can be traced to worker causing them). Bonuses of 50 to 100% are common.

Balancing Positive vs. Negative Rewards Elements of both are necessary Challenge and competition are necessary for self-satisfaction Prevailing view Positive approaches work better than negative ones in terms of Enthusiasm Effort Creativity Initiative

Linking the Reward System to Performance Outcomes Rewards are the single most powerful tool to win commitment to the strategy Objectives Generously reward those achieving objectives Deny rewards to those who don’t Make strategic performance measures the dominant basis for designing incentives, evaluating efforts, and handing out rewards

Strategic Management Principle A properly designed reward structure is management’s most powerful tool for mobilizing organizational commitment to successful strategy execution!

Strategic Management Principle The unwavering standard for judging whether individuals, teams, and organizational units have done a good job must be whether they achieve performance targets consistent with effective strategy execution!

Key Considerations in Designing Reward Systems Create a results-oriented system Reward people for results, not for activity Define jobs in terms of what to achieve Incorporate several performance measures Tie incentive compensation to relevant outcomes Top executives—Key measures of overall firm performance Department heads, teams, and individuals Incentives tied to achieving performance targets in their areas of responsibility

Guidelines for Designing an Effective Compensation System 1. Payoff must be a major, not minor, piece of total compensation package 2. Incentive plan should extend to all employees 3. Administer system with scrupulous fairness 4. Link incentives to achieving only the performance targets in strategic plan 5. Targets each person is expected to achieve must involve outcomes that can be personally affected 6. Keep time between performance review and payment short 7. Make liberal use of non-monetary rewards 8. Avoid ways of rewarding non-performers