McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 11: Managing Internal Operations: Actions That Promote Good Strategy Execution Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

“Winning companies know how to do their work better.” Michael Hammer and James Champy

“If you want people motivated to do a good job, give them a good job to do.” Frederick Herzberg

1-4 Chapter Learning Objectives 1. Learn why resource allocation should always be based on strategic priorities. 2. Understand why policies and procedures should be designed to facilitate good strategy execution. 3. Understand why and how benchmarking, best-practices adoption, and tools for continuously improving the performance of value chain activities help an organization achieve operating excellence and superior strategy execution. 4. Understand the role of information and operating systems in enabling company personnel to carry out their strategic roles proficiently. 5. Learn how and why the use of well-designed incentives and rewards can be management’s single most powerful tool for promoting proficient strategy execution and operating excellence.

1-5 Chapter Roadmap Marshaling Resources Behind the Drive for Good Strategy Execution Instituting Policies and Procedures that Facilitate Strategy Execution Adopting Best Practices and Striving for Continuous Improvement Installing Information and Operating Systems Tying Rewards and Incentives to Strategy Execution

MARSHALING RESOURCES BEHIND THE DRIVE FOR GOOD STRATEGY EXECUTION

1-7 Allocating Resources to Support Strategy Execution Allocating resources in ways to support effective strategy execution involves  Funding strategic initiatives 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

ESTABLISH POLICIES AND PROCEDURES TO FACILITATE STRATEGY EXECUTION

1-9 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, letting them operate between the “white lines” anyway they think best Creating Strategy-Supportive Policies and Procedures

Figure 11.1: How Prescribed Policies and Procedures Facilitate Strategy Execution

ADOPTING BEST PRACTICES AND STRIVING FOR CONTINUOUS IMPROVEMENT

1-12 Instituting Best Practices and Continuous Improvement Identifying and adopting best practices is integral to effective implementation Benchmarking is the backbone of the process of identifying, studying, and implementing best practices Key tools to promote continuous improvement  Six Sigma quality control  Business process reengineering  TQM

1-13 What Is a Best Practice? An activity that at least one company has proved works particularly well A path to operating excellence Best Practices

Characteristics of Best Practices The best practice 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 To be valuable and transferable, a best practice must  Demonstrate success over time  Deliver quantifiable and highly positive results and  Be repeatable

1-15 Involves determining how well a firm performs particular activities and processes when compared against  “Best in industry” or “Best in world” performers Goal  Promote achievement of operating excellence in performing strategy-critical activities 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 fit a firm’s own specific situation Characteristics of Benchmarking

Figure 11.2: From Benchmarking and Best-Practice Implementation to Operating Excellence

1-17 Business Process Reengineering: A Contributor to Operating Excellence Often the performance of strategically relevant activities is scattered across several functional departments  Creates inefficiencies and often impedes performance  Results in lack of accountability since no one functional manager is responsible for optimum performance of an entire activity Solution  Business process reengineering  Involves pulling strategy-critical processes from functional silos to create process departments or cross-functional work groups  Unifies performance of the activity  improves how well activity is performed and often lowers costs  Promotes operating excellence

1-18 What Is Total Quality Management? 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  Total customer satisfaction

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

1-20 Implementing a Philosophy of Continuous Improvement Reform the corporate culture 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 Understand it is a race without a finish

1-21 Six Sigma is a disciplined, statistics-based system aimed at having not more than 3.4 defects per million iterations for any business practice Two approaches to Six Sigma  DMAIC process (Design, Measure, Analyze, Improve, Control)  An improvement system for existing processes falling below specification and needing incremental improvement  A great tool for improving performance when there are wide variations in how well an activity is performed  DMADV process (Define, Measure, Analyze, Design, Verify) or DFSS (Design for Six Sigma)  An improvement system used to develop new processes or products at Six Sigma quality levels Six Sigma Quality Control — A Tool for Promoting Operating Excellence

1-22 Characteristics of Six Sigma Quality Programs Six Sigma is based on three principles 1. All work is a process 2. All processes have variability 3. All processes create data to explain variability DMAIC process is a good approach to improve performance when wide variations in how well an activity is performed exist Evidence exists that innovation can be stifled by Six Sigma programs Blended approach to Six Sigma implementation involves  Pursuing incremental improvements in operating efficiency and  Giving freer rein to R & D and other processes focusing on new ways to offer value to customers

1-23 Approach of the DMAIC Process Define  What constitutes a defect? Measure  Collect data to find out why, how, and how often the defect occurs Analyze – Involves  Statistical analysis of the metrics  Identification of a “best practice” Improve  Implementation of the documented “best practice” Control  Employees are trained on the “best practice”  Over time, significant improvement in quality occurs

1-24 Guidelines for Implementing Six Sigma Quality Programs Systematic application of Six Sigma methods to a company’s value chain activities  Can significantly improve the proficiency of strategy implementation Key challenges in implementing Six Sigma quality programs 1. Obtain managerial commitment 2. Establish a quality culture 3. Full involvement of employees

1-25 Reengineering  Aims at quantum gains of 30 to 50% or more Total quality programs  Stress incremental progress Techniques are not mutually exclusive  Reengineering – Used to produce a good basic design yielding dramatic improvements  Total quality programs – Used to perfect process, gradually improving efficiency and effectiveness Business Process Reengineering vs. Total Quality Programs

1-26 Select indicators of successful strategy execution Benchmark against best practice companies 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 using on-line systems  Preach that performance can/must be improved How to Capture Benefits of Best-Practice and Continuous Improvement Programs

1-27 The Benefits of Employing Continuous Improvement Programs Can greatly enhance a company’s  Competitive capabilities  Ability to achieve a competitive advantage 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 culture that strives for operating excellence

1-28 Test Your Knowledge Which of the following is not a tool that managers can use to promote operating excellence and further the cause of good strategy execution? A. Benchmarking and adoption of best practices B. Business process reengineering C. A team-based work structure and operating excellence analysis D. Six Sigma quality control techniques E. TQM

INSTALL INFORMATION AND OPERATING SYSTEMS

1-30 Installing Strategy-Supportive Information and Operating Systems Good information and operating systems are essential for first-rate strategy execution Support systems can relate to  On-line data capabilities  Speedy delivery or repair  Inventory management  E-commerce capabilities Mobilizing information and creating systems to use knowledge effectively can yield  Competitive advantage

Examples of Support Systems On-line reservation system Accurate and expeditious baggage handling system Strict aircraft maintenance program Airlines

Examples of Support Systems Internal communication systems allowing it to coordinate 70,000 vehicles handling an average of 5.5 million packages per day Leading-edge flight operations systems allow a single controller to direct as many as 200 of 650-plus aircraft simultaneously E-business tools for customers Federal Express

Examples of Support Systems Sophisticated maintenance support system Otis Elevator Systems have been developed for real-time monitoring of new listings, bidding activity, Web site traffic, and page views eBay

1-34 What Areas Should Information Systems Address? Customer data Operations data Employee data Supplier/partner/collaborative ally data Financial performance data

1-35 Trends in Design and Use of Information Systems On-line technology  Daily statistical updates  Up-to-the minute performance monitoring  Retailers and manufacturers have up-to-the minute inventory and sales records for each item Electronic scorecards for senior managers  Gather daily or weekly statistics from different databases about inventory, sales, costs, and sales trends  Enables managers to make better decisions on a real-time basis

1-36 Challenge  How to ensure actions of employees stay within acceptable bounds Control approaches  Managerial control  Establish boundaries on what not to do, allowing freedom to act with limits  Track and review daily operating performance  Peer-based control Exercising Adequate Control Over Empowered Employees

1-37 For Discussion: Your Opinion What sort of information and operating systems would a company like Amazon.com likely need in order to facilitate good strategy execution?

TYING REWARDS AND INCENTIVES TO STRATEGY EXECUTION

Gaining Commitment: Components of an Effective Reward System Monetary Incentives Base pay increases Performance bonuses Profit sharing plans Stock options Retirement packages Piecework incentives Non-Monetary Incentives Praise Constructive criticism Special recognition More, or less, job security Stimulating assignments More, or less, autonomy Rapid promotion

1-40 Provide attractive perks and fringe benefits Rely on promotion from within when possible Make sure ideas and suggestions of employees are valued and respected Create a work atmosphere where there is genuine sincerity and mutual respect among all employees State strategic vision in inspirational terms to make employees feel they are part of something worthwhile Share financial and strategic information with employees Have knockout facilities Be flexible in how company approaches people management in multicultural environments Approaches: Motivating People to Execute the Strategy Well

Examples: Motivational Practices Lincoln Electric Rewards productivity by paying for each piece produced (defects can be traced to worker causing them). Highest rated workers receive bonuses of as much 110% of their piecework compensation. Google Employees are provided with free food, unlimited ice cream, pool and Ping-Pong tables, and complimentary massages. Employees are allowed to spend 20% of their work time on any outside activity.

Examples: Motivational Practices Wegmans Employees have flexible schedules and benefits include onsite fitness centers. Employees from cashiers to butchers to store managers are all treated equally and viewed as experts in their jobs. Employees receive 50 hours of formal training per year. JM Family Enterprises Benefits for employees include: a great lease on new Toyotas, cruises in the Bahamas on the 172-foot company yacht, office facility has a heated lap pool, a fitness center, and a free nail salon, and professionally made take-home dinners.

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.” Ukrop’s Super Markets Stores stay closed on Sunday; company pays out 20% of pretax profits to employees in the form of quarterly bonuses; and the company pays the membership tab for employees if they visit their health club 30 times a quarter.

Examples: Motivational Practices W. L. Gore Employees get to choose what project/team they work on; each team member’s compensation is based on other team members’ ranking of his/her contribution to the enterprise. Amgen Employees get 16 paid holidays, generous vacation time, tuition reimbursements up to $10,000, on-site massages, a discounted car wash, and the convenience of shopping at on-site farmers’ markets.

1-45 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  Dedication  Creativity  Initiative Balancing Positive vs. Negative Rewards

1-46 Tying rewards to the achievement of strategic and financial performance targets is management’s single most powerful tool to win the commitment of company personnel to effective strategy execution Objectives in designing the reward system  Generously reward those achieving objectives  Deny rewards to those who don’t  Make the desired strategic and financial outcomes the dominant basis for designing incentives, evaluating efforts, and handing out rewards Linking the Reward System to Performance Outcomes

1-47 Test Your Knowledge Management’s most powerful tool for mobilizing employee commitment to competent strategy execution and operating excellence is A. the use of either total quality management or Six Sigma quality control techniques. B. business process reengineering. C. a properly designed reward structure. D. making the company a great place to work in terms of pay scales, fringe benefits, and employee perks. E. effective screening of job applicants such that only the most motivated and energetic people are hired.

1-48 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 – Incentives tied to overall firm performance  Department heads, teams, and individuals – Incentives tied to achieving performance targets in their areas of responsibility Key Considerations in Designing Reward Systems

1-49 For Discussion: Your Opinion What is the logic for tying incentive compensation awards to the achievement of results as opposed to rewarding people for diligent performance of their assigned duties?

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 a 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

1-51 Test Your Knowledge A well-designed reward system A. makes strategically relevant measures of performance the dominant basis for incentive compensation. B. should strive for a 75%-25% mix between positive and negative rewards. C. should strive for a 67%-33% mix between monetary and non-monetary rewards. D. must emphasize weeding out employees who are consistently rank in the bottom 10% to 15% of the workforce in terms of overall performance and productivity. E. guarantees job security to all employees, so as to reduce stress and anxiety and to allow employees to focus all their energies on performing their assigned duties.