1. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-1

2. Managing Internal Operations in Ways That Promote Good Strategy Execution Chapter 9 Screen graphics created by: Jana F. Kuzmicki, PhD Troy University - Florida and Western Region

3. “If you talk about change but don’t change the reward and recognition system, nothing changes.” Quote... Paul Allaire

4. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-4 Chapter Outline Marshaling Resources Behind the Drive for 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 Leading the Strategy Execution Process

5. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-5 MARSHALING RESOURCES TO SUPPORT STRATEGY EXECUTION

6. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-6 Allocating Resources to Support Strategy Execution Allocating resources in ways to support effective strategy execution involves  Funding internal initiatives and operating improvements that can make a contribution to implementing and executing the chosen strategy  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

7. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-7 Allocating Resources to Support the Execution of a New Strategy Implementing and executing an altogether new strategy often requires an overhaul of how  Capital allocations are made  Size of each business unit’s operating budget Important for the funding requirements of the new strategy to drive budget allocations Under-funding organizational units and activities pivotal to strategic success impedes execution and the drive for operating excellence Over-funding raises costs and wastes resources

8. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-8 ESTABLISH STRATEGY- SUPPORTIVE POLICIES

9. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-9 Fig. 9.1: How Prescribed Policies and Procedures Facilitate Strategy Execution

10. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-10 Role of policies and procedures  Paint the “white lines” and channel behaviors and actions in ways that support good strategy execution  Counteract tendencies of people to resist chosen strategy and needed operating practices Too much policy (thick policy manuals) can be as stifling as  Wrong policy or as  Chaotic as no policy Often, the best policy is empowering employees to operate between the “white lines” anyway they think best Creating Strategy-Supportive Policies and Procedures

11. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-11 ADOPTING BEST PRACTICES AND STRIVING FOR CONTINUOUS IMPROVEMENT

12. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-12 Instituting Best Practices and Continuous Improvement Searching out and adopting best practices is  A powerful tool for promoting operating excellence  Integral to effective strategy execution Benchmarking is the backbone of the process of identifying, studying, and implementing best practices Key tools to promote continuous improvement  Business process reengineering  TQM  Six-sigma quality programs

13. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-13 What Is a Best Practice? A best practice is a means of performing any activity that at least one company has proved works particularly well  Because the procedures employed have proven to be very effective  Because the procedures have resulted in low costs Adoption of best practices is a company’s best or most reliable path to operating excellence Best Practices

14. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-14 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 Characteristics of Best Practices

15. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-15 Helps determine 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 all value chain activities, especially strategy-critical activities Caution – Imitating best practices of other firms is typically not feasible due to differences in company and operating situations  Best practices of other firms typically need to be adapted to fit a firm’s own specific situation The Role of Benchmarking in the Strategy Execution Process

16. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-16 Fig. 9.2: From Benchmarking and Best-Practice Implementation to Operating Excellence

17. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-17 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 the activity is performed and often lowers costs  Promotes operating excellence Business Process Reengineering: A Contributor to Operating Excellence

18. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-18 Examples of Fragmented Strategy-Critical Value Chain Activities Filling customer orders Speeding new products to market Improving product quality Supply chain management Building capability to conduct business via the Internet Obtaining feedback from customers, making product modifications to meet their needs

19. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-19 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  Total customer satisfaction

20. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-20 Popular TQM Approaches Popular TQM Approaches Deming’s 14 Points Baldridge Award Criteria The Juran Trilogy Crosby’s 14 Quality Steps

21. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-21 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

22. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-22 Six-Sigma is a disciplined, statistics-based system aimed at having not more than 3.4 defects per million iterations for any business practice – from manufacturing to customer transactions 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)  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

23. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-23 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 A company systematically applying Six-Sigma to its value chain activities can significantly improve the proficiency of strategy implementation Three challenges in implementing Six-Sigma quality programs 1. Obtain managerial commitment 2. Establish a quality culture 3. Full involvement of employees

24. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-24 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

25. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-25 Business process 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

26. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-26 Select indicators of successful strategy execution Benchmark against best practice companies Build a total quality culture  Requires top management commitment  Install quality-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

27. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-27 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 The Benefits of Employing Continuous Improvement Programs

28. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-28 INSTALL INFORMATION AND OPERATING SYSTEMS

29. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-29 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 and capabilities effectively can yield  Competitive advantage

30. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-30 On-line reservation system Accurate and expeditious baggage handling system Strict aircraft maintenance program Airlines Examples of Support Systems

31. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-31 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

32. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-32 Sophisticated maintenance support system Otis Elevator Most sophisticated retailing systems of any retailer in world Wal-Mart Examples of Support Systems

33. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-33 Examples of Support Systems Computerized systems at each outlet facilitate ordering, inventory, payroll, cash flow, and work flow functions Domino’s Pizza Systems have been developed for real-time monitoring of new listings, bidding activity, Web site traffic, and page views eBay

34. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-34 What Areas Should Information Systems Address? Customer data Operations data Employee data Supplier/partner/collaborative ally data Financial performance data

35. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-35 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

36. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-36 TYING REWARDS AND INCENTIVES TO STRATEGY EXECUTION

37. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-37 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 Gaining Commitment: Components of an Effective Reward System

38. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-38 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 Motivational Techniques That Help Promote Good Strategy Execution

39. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-39 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

40. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-40 Nordstrom Pay salespeople higher than prevailing rates, plus commission. “Rule #1: Use good judgment in all situations. There will be no additional rules.” Amazon.com Hands out Just Do It awards to employees who do something they think will help Amazon without getting their boss’s permission; the action has to be well thought through but doesn’t have to succeed. Examples: Motivational Practices

41. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-41 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. 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. Examples: Motivational Practices

42. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-42 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 Balancing Positive vs. Negative Rewards

43. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-43 Tying rewards to the achievement of strategic and financial objectives is management’s single most powerful tool to win commitment of employees to effective strategy execution Objectives in designing a 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

44. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-44 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

45. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-45 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

46. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-46 STRATEGIC LEADERSHIP STRATEGIC LEADERSHIP

47. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-47 Visionary Chief Entrepreneur & Strategist Capabilities Builder Resource Acquirer & Allocator Culture Builder Chief Administrator & Strategy Implementer Process Integrator Coach Crisis Solver Taskmaster Spokesperson Negotiator Motivator Arbitrator Consensus Builder Policymaker Policy Enforcer Mentor Head Cheerleader Numerous Roles of Strategic Leaders

48. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-48 1. Stay on top of what’s happening 2. Put constructive pressure on company to achieve good results and operating excellence 3. Lead development of stronger core competencies and competitive capabilities 4. Display ethics leadership and lead social responsibility initiatives 5. Take corrective actions to improve overall strategic performance Leadership Tasks of the Strategy Implementer Bill Gates Microsoft

49. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-49 Develop a broad network of formal and informal sources of information Talk with many people at all levels Be an avid practitioner of MBWA  Observe situation firsthand Monitor operating results regularly Get feedback from customers Watch competitive reactions of rivals Role #1: Stay on Top of What’s Happening

50. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-50 Successful leaders spend time  Mobilizing organizational energy behind  Good strategy execution and  Operating excellence  Nurturing a results-oriented work climate  Promoting “enabling” cultural drivers  Strong sense of involvement on part of company personnel  Emphasis on individual initiative and creativity  Respect for contributions of individuals and groups  Pride in doing things right Role #2: Put Constructive Pressure on Company to Achieve Good Results and Operating Excellence

51. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-51 Treat employees with dignity and respect Make champions out of people who excel Encourage employees to use initiative and creativity Set stretch objectives and expectations that employees are to give their best Focus attention on continuous improvement Use full range of motivational techniques and compensation incentives to  Inspire employees  Nurture a results-oriented climate  Enforce high-performance standards Celebrate individual, group, company successes Approaches to Instilling a Spirit of High Achievement

52. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-52 Top management intervention is required to establish better or new  Resource strengths and competencies  Competitive capabilities Senior managers must lead the effort because  Competencies reside in combined efforts of different work groups and departments, thus requiring cross-functional collaboration  Stronger competencies and capabilities can lead to a competitive edge over rivals Role #3: Promote Stronger Core Competencies and Capabilities

53. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-53 Set an excellent example in  Displaying ethical behaviors  Demonstrating character and personal integrity in actions and decisions Declare support of company’s ethics code and expect all employees to conduct themselves in an ethical fashion Encourage compliance and establish tough consequences for unethical behavior Role #4: Display Ethics Leadership and Lead Social Responsibility Initiatives

54. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-54 Set an excellent ethical example Provide training to employees about what is ethical and what isn’t Declare unequivocal support of ethics code Act as final arbiter on hard calls  Remove people from key positions if found guilty of a violation  Reprimand people lax in monitoring ethical compliance Roles of a Manager in Enforcing Ethical Behavior

55. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-55 Actions Demonstrating Commitment to a Strategy of Social Responsibility Craft a strategy that positively improves well-being of employees, environment, communities, and society Use social and environmental metrics to evaluate company performance Tie social and environmental performance to executive compensation Take special pains to protect environment Take an active role in community affairs Generously support charitable causes and projects benefiting society Support workforce diversity and commit to overall well-being of employees

56. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9-56 Role #5: Lead the Process of Making Corrective Adjustments Requires deciding  When adjustments are needed  What adjustments to make Involves  Adjusting long-term direction, objectives, and strategy on an as-needed basis in response to unfolding events and changing circumstances  Promoting fresh initiatives to bring internal activities and behavior into better alignment with strategy  Making changes to pick up the pace when results fall short of performance targets