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STRATEGIC MANAGEMENT & BUSINESS POLICY13TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. ©2012 9-2

Strategy implementation – the activities and choices required for the execution of a strategic plan

Poor implementation is the cause of strategic failures, i.e. poor communications, unrealistic synergy expectations, missing master plan, lost momentum, lack of top management commitment.

A company has only 2 years to make an acquisition perform, because 70%-85% of all merger synergies realize within year 1, with the remainder in year 2.

• To begin with the implementation process, strategy makers must consider 3 questions:

1. Who are the people to carry out the strategic plan?

2. What must be done to align company operations in the intended direction?

3. How is everyone going to work together to do what is needed?

When companies implement a strategic change, more than 50% experienced the following 10 problems:



1. Took more time than planned

2. Unanticipated major problems

3. Poor coordination

4. Competing activities and crises created distractions

5. Involved employees with insufficient capabilities

6. Working-level employees poorly trained

7. Uncontrollable external environmental factors

8. Poor departmental leadership and direction

9. Inadequately defined implementation tasks and activities

10. Inefficient information system to monitor activities

• Who implements strategy?

Everyone, down to the first-line supervisor and employee. People crucial to the success of the implementation probably had little do to with corporate development and strategy before, unless changes in mission, objectives, strategies and their importance are clearly communicated, there can be a lot of resistance, managers would try to influence top management into drop its new plans and returning to its old ways.

• What must be done?

Managers work to achieve synergy to establish and maintain a company’s distinctive advantage.



Developing Programs, Budgets and Procedures

• Programs - make strategies action-oriented

An example is Xerox undertook a turnaround strategy by reducing its costs and expenses. Management introduced Lean Six Sigma program to identify and improve a poorly performing process. Top executives are trained and 250 Six Sigma projects are launched. The result was US$6 million saving in one year.


• Matrix of Change – compare programs and activities of proposed program and current program. Matrix of Change provides guidance on where, when and how fast to implement change

Feasibility – Are the current activities stable? Do the proposed programs and activities constitute a stable system? Is the transition difficult?

Sequence – Where to begin where to stop?

Location – Better off with a new site? Is reorganizing current facilities better off? (i.e. move from IFC to ICC, moving from Europe to the US…)

Pace - How fast, how radical is the change?

Stakeholders – Further input? Which new programs offer greatest value?


• Budget - provides the last real check on the feasibility of the strategy.

Cadbury Schweppes’ depends on cocoa produced from Ghana, where 70% of Cadbury’s cocoa is produced. It decided to develop a program to show cocoa farmers use fertilizers and by working with each other. Cadbury budgeted US$87 million for Cadbury Cocoa Partnership program in 2008 over a 10-year period.


• Procedures - often called Standard Operating Procedures (“SOP”) or organizational routines - detail the various activities that must be carried out to complete a corporation’s programs.

Once in place, procedures must be updated to reflect any changes in technology and in strategy.

Example is in a retail store, procedures ensure that day-to-day operations will be consistent over time and among all, eliminate poor service by making sure employees do not use excuses to justify poor behavior. McDonald’s developed very detailed procedures.



Achieving Synergy

• Synergy – One of the goals in strategy implementation is synergy between and among functions and business units. Synergy exists if the return on investment is greater than what the return would be if each division were an independent business

According to Goold & Campbell, synergy can take one of six forms:

1. Shared know-how – P&G bought Gillette was to combine P&G’s knowledge in female consumer with Gillette’s knowledge of the male consumer.

2. Coordinated strategies – reduce inter-unit competition and develop a response to common competitors, i.e. combined and enhanced R&D capability

3. Shared tangible resources – i.e. the alliance between Renault and Nissan allowed it to build new factories that would build both Renault and Nissan.


4. Economies of scale or scope – reduce inventory, increase capacity utilization, improve market access. This was the reason Delta bought Northwest.

5. Pooled negotiating power – combined units gain purchasing power over common suppliers/distributors and reduce costs and improve quality. Macy’s bought May Company enabling Federal Department stores (changed name to Macy’s) to gain purchasing economies for all of its stores.


6. New business creation – Exchanging knowledge and skills can facilitate new products and services, i.e. Oracle bought a number of software companies to create a suite of software code named “Project Fusion”, which help companies run everything from accounting and sales to customer relations to supply-chain management.


Structure Follows Strategy – in a study of DuPont, GM, Sears, Standard Oil, Alfred Chandler concluded that changes in corporate strategy lead to changes in organizational structure, following is the sequence:

1. New strategy is created

2. New administrative problems emerge

3. Economic performance declines

4. New appropriate structure invented

5. Profit returns to its previous level

• Chandler found that when products are limited, large companies such as Du Pont, GM, Sears centralize their functional structure. As they add product lines, purchase own sources of supply, create own distribution network, they shifted to a decentralized structure with several semi-autonomous divisions.

• Alfred Sloan, (MIT) former CEO of GM saw GM’s in the 1920’s as “Top management decides a strategy, divisions (i.e. Chevrolet, Buick) were free to choose how to implement it.” and this is effective in product development.

• Firms in the same industry organize themselves similar one to another, i.e. auto followed GM’s divisional structure, consumer followed P&G’s brand management.


4 Stages of Corporate Development

1. Simple Structure – stage I

• The advantage is flexible and dynamic - the entrepreneur, who found the company to promote a product or a service. Little structure - the entrepreneur supervises the activities and of every employee.

• The drawback is its extreme reliance on the entrepreneur to decide strategies and detailed procedures. It can lead to crisis of leadership.

2. Functional Structure – stage II

• Entrepreneur is replaced by a team of managers who have functional specializations. The transition requires substantial managerial style change for CEO, especially if he/she was the Stage I entrepreneur. He/she has to learn how to delegate.

• Stage II strategy favors dominance through horizontal and vertical integration. The strength is in its concentration and specialization in one industry, weakness is all eggs are in one basket. Once a functional firm diversifies into other products in different industries, structure breaks down. A crisis of autonomy develops, managers need more decision-making freedom than management is willing to delegate.

3. Divisional Structure – stage III

• Structure typified by the company’s managing diversified product lines in numerous industries/geographical locations. It moves to a divisional structure with centralized headquarters but decentralized operating divisions.

• A crisis of control develops, various units optimize their own sales and profits without regard to the overall corporations, whose headquarters seem far away, and almost irrelevant.

• Recently divisions have been evolving to SBUs to better reflect product-market considerations. HQ attempts to co-ordinate activities of operating units through performance-result oriented control and reporting system. The units are not tightly controlled but are held responsible for their performance results.

• The advantage is its almost unlimited resources. Its weakness is that it is usually so large so complex that it become inflexible. GM, DuPont are examples of Stage III companies.


4. Beyond SBU’s – stage IV

• SBUs result in red-tap crisis, the co. is too complex to be managed through formal programs and systems, i.e. Pfizer’s acquisition of Warner-Lambert & Pharmacia resulted in 14 layers of structure between the scientists and the top executives and forced scientists to spend most of their time in meetings.

• Matrix and network may be the future, in which people and groups worked around temporary projects, sophisticated information system support these collaborative activities.

•


Blocks to Changing Stages

• Internal

- Lack of resources

- Lack of ability

- Refusal of top management to delegate • External

- Economy

- Labor shortages

- Lack of market growth

• Chandler noted that the successful founder/CEO in stage I is rarely the person who created the new structure to fit the new strategy, as a result, the transition was often painful.

That was also true for Ford Motor under Henry Ford I, Apple under Steve Jobs, and GM under Edwin Land.

The difficulty in moving to a new stage is compounded by the founder’s maneuvering in hiring, training, and grooming his or her own team of managers. The team tends to maintain the founder’s influence throughout the organization after the founder is gone.


Blocks to Changing Stages (Entrepreneurs)

• Loyalty to comrades – could become a liability as “favoritism”.

• Task orientation – focusing on the job is good at first but then become excessive attention to detail

• Single-mindedness – a grand vision is needed, can become tunnel vision as the company grows into more markets and products.

• Working in isolation – good for a brilliant scientist, disastrous for a CEO with multiple objectives

• A revival phase may occur sometime during the maturity or decline stages. Developing new combinations of existing resources to introduce new products or acquiring new resources through acquisitions enable firms to regain growth. But firms in decline are less likely to seek for new technologies suggests it is difficult to revive decline.

• Unless a company is able to resolve the critical issues in the declining stage, it is likely to move to bankruptcy - Macy’s, Eastern Airlines, Pam Am…fewer than 20% of companies entering chapter 11 in the US emerge as going concern. Also, few firms will move through these 5 stages in order.



Advanced Types of Organizational Structures

• Matrix structure - functional and product forms are combined simultaneously at the same level of the organization. Employees have 2 or more supervisors, a product or project managers, and a functional manager.

The “home” department, engineering, manufacturing, or sales – is usually functional and is reasonable permanent. People from these functional unites are often assigned to one or more temporary projects


Conditions for Matrix structures include:

• The matrix structure is very useful when the external environment, especially technology, is very complex and changing. However, it does create conflicts around duties, authority, and resource allocation

If the goals are vague or technology used is poorly understood, a power struggle between functional and product managers is likely.


Phases of Matrix Structure Development (Davis and Lawrence)

1.Temporary cross-functional task forces – used when a new product line is being introduced. A project manager is in charge as the key horizontal link.

2.Product/brand management – if the cross-functional tasks become more permanent, the project manager becomes a product/brand manager, and a second phase begins. Function is still the primary >>>

organizational structure, but the brand or product managers act as the linkage of semi-permanent products and brands.

3. Mature matrix – this phase is the true dual authority structure. Both the functional and products structures are permanent, all employees have a vertical functional supervisor, and a horizontal product supervisor, both have equal authority and must work together to resolve disagreements.

Boeing, Philips are examples of companies that use a mature matrix structure.



Network Structure – The Virtual Organization

• Eliminates in-house business functions, which are outsourced, this virtual organization is composed of project groups or collaborations linked by constantly changing non-hierarchical and electronic networks.

• Useful in unstable environments that require innovation and quick response. Instead of salaried staff, people, including suppliers and contractors, are contracted for a specific project or length of time.

Sophisticated information technology justifying a “buy” over a “make” decision. Rather than locating in a single building, the business functions (small HQs) are scattered worldwide, acting as a “broker” electronically linked to other parts of the organization.

Entrepreneurial ventures often start out as network organization. People can now run their companies out of their home. Larger companies used network to outsource parts of their functions, under their standard.



Network Structure – Cellular/Modular Organization

Advantages:• Increased flexibility and adaptability• Ability to concentrate on distinctive competencies

Disadvantages:• Transitional structure• Tension among numerous partners• Overspecialization, lack of internal synergy


Reengineering and Strategy Implementation

Reengineering - the radical redesign of business processes to achieve major gains in cost, service, or time. It is a program to implement a turnaround strategy

Reengineering examines old rules, policies, procedures that have never been questions before which may be based on assumptions about technology, people, goals that many no longer be relevant. Reengineering is asking, “If it were a new company, how would we run this place?”


Principles for Reengineering (Michael Hammer)

1. Design a person’s or a department’s job around an objective or outcome, not a task or a series of tasks.

2. With current IT capability, have those who use the output of the process perform the process

3. People, or departments that produce information can also process it for use instead of sending the raw data to others in the organization to interpret.

4. Information/data can be put on a network so that all can assess it.

5. With the current IT capability, companies can provide services locally, while keeping the actual resources in a centralized location for coordination purpose.

6. Instead of having separate units perform different activities that must eventually come together, have them communicate while they work so that they can do the integrating.

7. People who do the work should make the decisions and be self-controlling.

Companies, like Caterpillar, found reengineering reduces cost, increases productivity and product quality, and more successful in re-designing specific processes instead of changing the entire company.



• Six Sigma – Started by Motorola as a quality program in the 80s, for achieving near perfect results on a production line. Six Sigma reduces defects to 3.4 per million – thus reducing waste and saving money. The process has 5 steps

1. Define a process where results are below average

2. Measure the process to determine current performance

3. Analyze the information to determine problems

4. Improve the process and eliminate the error

5. Establish preventive controls

• Savings ranged from 1.2% to 4.5% of annual revenue for a number of Fortune 500 firms. At Dow Chemical, each Six Sigma project saves US$500,000 in the first year. At 3M, it speeded up R&D, and analyzed why top sales people sold more than others.

But training costs in the beginning may outweigh any savings, especially where a process cannot be easily standardized, compiling and analyzing data may be costly.

Another disadvantage is it leads to minor innovations based on previous work, rather than “blue-sky” projects.


Prentice Hall, Inc 9-45

• Lean Six Sigma – Developed by Toyota, this process incorporates Six Sigma with lean manufacturing- removes unnecessary production steps and fixes the remaining steps


Designing Jobs to Implement Strategy

Job Design - an attempt to make individual tasks more relevant to the company and to the employees. To minimize adverse consequences of task specialization, companies to new job design techniques:

• Job enlargement – combining tasks• Job rotation – moving through several tasks to

increase varieties • Job enrichment - giving more autonomy and control


International Issues in Strategy Implementation

• Multinational Corporation (MNC) - a highly developed international company with a deep involvement throughout the world with a worldwide perspective in its management and decision making

The global MNCs faces achieving economies of scale through standardization, while responding to local differences. According to Spuller’s Global Competitive Strategy, the forces pushing for standardization and customization are:


Forces for Standardization

• Convergence of customer preferences and incomes• Competition from other global products• Growing customer awareness of international brands• Economies of scale• Falling trading costs across countries• Cultural exchange and business interactions among

countries


Forces for Customization

• Differences in customer preferences• Differences in customer incomes• Need to build local brand reputation• Competition from domestic companies• Variations in trading costs • Local regulatory requirements

In some MNC, strategic alliances may complement or substitute an internal function. The issue centralization and decentralization becomes important.


• International Strategic Alliances

Strategic alliances such as JVs, licensing agreement between an MNC and a local partner in a host country can help the MNC gain entry into other countries. The key is to select a local partner. Research reveals that firms favor past partners when forming new alliances.

Key drivers for strategic fit between alliance partners are the following:

1. Partners must agree on fundamental values and vision

2. Alliance must be derived from business, corporate and functional strategy

3. Alliance must be important to both partners, especially to top management

4. Partners must be mutually dependent for achieving clear and achievable objectives

5. Activities must add value to the partners and customers

6. Alliance must be accepted by stakeholders

7. Partners contribute strengths while protecting core competencies



• Stages of International Development

1. Domestic company – the company exports products through local dealers and distributors in the foreign countries. Export department at the HQ handles everything

2 Domestic company with export division – the company establishes its own sales company with offices in other countries to eliminate middlemen and to better control marketing. The company establishes a export division to oversee foreign sales offices.

3: Primarily domestic co. with int’l division – the co. establishes manufacturing facilities in addition to sales and services offices in key countries. It establishes an int’l division with responsibilities for most of the business functions in these countries.

4: MNC with multi-domestic emphasis – the co. establishes local operating division or co. in the host country, i.e. Ford UK, Citi HK. Local division achieves autonomy and self-sufficiency, and is managed as if each is a domestic co.

5. MNC with global emphasis – a co. has worldwide HRM, R&D and financing strategies. The global MNC is a matrix around geographic areas, products, and functions. All managers are responsible for dealing in int’l and domestic issues.



• Centralization vs. Decentralization

To deal with the problems of centrally organized to achieve synergy or decentralize authority to meet the demand of the local market or host government, MNCs tend to structure themselves either along product groups or geographic areas. They may even combine both to form a matrix structure, such as 3M, where one side of 3M matrix represents products another side represent int’l countries.

Nestle’s structure is decentralized to geographic entities, in which entities have their own products (Fig. 9-3).

• Product group structure - enables the company to introduce and manage a similar line of products around the world

• Geographic area structure - allows the company to tailor products to regional differences and to achieve regional coordination

Nestle, found decentralized geographic area structure had became inefficient. CEO Peter Brabeck - Letmathe acted to eliminate country-by-country responsibilities for some functions, and established 5 centers worldwide to handle coffee and coca purchasing. Yet, Nestle is still using 3 different software versions of accounting, planning, and inventories for Europe, the Americas, Asia, Oceania, and Africa.



1. How should a corporation attempt to achieve synergyamong functions and business units?

2. How should an owner-manager prepare a company forits movement from Stage I to Stage II?

3. How can a corporation keep from sliding into the Declinestage of the organizational life cycle?

4. Is reengineering just another fad, or does it offersomething of lasting value?

5. How is the cellular/modular structure different from thenetwork structure?


PowerPoint created by:

Ronald Heimler

• Dowling College- MBA• Georgetown University- BS Business Administration• Adjunct Professor- LIM College, NY• Adjunct Professor- Long Island University, NY• Lecturer- California State Polytechnic University,

Pomona, CA• President- Walter Heimler, Inc.

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