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Modern Competitive Strategy
3rd Edition
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin
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Chapter 6
Strategy Execution
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What Is Strategy Execution?
Strategy execution Building the resources and capabilities that lead to competitive
advantage through critical value and cost drivers Not the same as strategic planning
A relatively simple business with a valuable protected resource may not need planning—but it must execute.
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Characteristics of Resources
Resources: Observable Tradable Contribute to the firm’s
market position by improving value or lowering cost, or both.
Produce an economic advantage if difficult to imitate or neutralize.
Examples: Patents Natural resources Brand Distribution network Proprietary process Geographic location
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Characteristics of a Capability
Cannot be readily observed Not tradable separately from whole unit Contributes to higher value, lower cost or both Developed by people through coordinated action Less stable than a resource Developed independently of resources Can derive its strategic value from its use in support of
the firm’s resources
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Linking Resources and Capabilities
Capabilities contribute to performance by supporting resources
A firm’s expertise in exploiting a resource strongly influences how much it is worth to the company
Resource Complementarity Complementarity between the asset being auctioned and the
existing resources of the bidding firms determines the least amount each will bid
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Makadok’s Model for Relating Resources and Capabilities
How can a firm become more profitable than competitors after bidding for a resource? Have stronger complementarities between the resources
of the firm and the resource being auctionedHigher complementarity allows the firm to raise its bid
Develop a better forecast of economic returns to the resource after it is acquired (resource picking)
Bid depends on forecast Have stronger capabilities that increase the returns to
the target’s resourceRaises the firm’s bid
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Building Capabilities
Capabilities are produced by specific activities and policies
Two frameworks for mapping activities and policies are: Value chain framework Activity system framework
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Figure 5.1
Porter’s Value Chain
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Activity Systems
Interconnected components of a firm that contribute to its market position Policies Programs Value chain activities Product characteristics Key resources Firm’s structure and culture
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Figure 5.2
Vanguard’s Activity System at the Beginning of 1997
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Vanguard Activity System
Core elements: The fund family’s mutual structure (not stock)
Direct distribution (no brokers)
Focus on conservatively managed funds (low risk)
Low transaction and account maintenance cost
Candid communication (strong culture)
Focus on long-term performance
High-quality service (higher retention rates)
Supporting elements
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Figure 5.3
The Elements of Strategy Execution
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Organizational Dimensions of Strategy Execution
Complementarity and consistency among the firm’s resources, tasks and policies in support of a firm’s market position
Control and coordination systems for the design and execution of tasks
Compensation and incentive systems Culture and learning behavior
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Complementarity and Consistency
Complementary resources or capabilities Produce a more effective outcome together than independently
Example: Stores and catalogue operations for internet retailing
Consistency (fit) Resources or capabilities are jointly aligned with the
requirements of the firm’s market positionExample: The alignment of Vanguard’s activity system with its
low cost position
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Control and Coordination Systems
Coordination mechanisms Standardized procedures Joint planning Liaison personnel Task forces with members from multiple activities Teams that institutionalize the task forces Hierarchical referral up the chain of command
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Types of Hierarchical Structure
Figure 5.4
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Benefits of a Functional Structure
Lower costs Reduced overhead Standardized procedures within functions Continuous process innovation within functions Power over suppliers through increased scale in purchasing
Increased expertise within functions that may result in value to the customer Specific technology development Skills in sales and marketing research Quality improvements in operations, logistics and service
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Benefits of a Geography-based Structure
Increased focus on the characteristics of geographical regions Unique local competitors Unique local suppliers Unique local customer preferences
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Benefits of aCustomer-Based Organization
Increases focus on unique characteristics of customer segments Unique marketing requirements
Example: Knowledge of customer industry Unique customer preferences
Example: Products tied to unique practices in each segment
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Matrix Organization
Organized on two or more dimensions: Function and geography, function and customer Managers report to both functional and geographical
executives who report to president Avoids problems of putting one dimension over another
in the hierarchy: Dimensions are roughly equal in importance
Can be hard to manage because of conflicting demands of different dimensions
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Incentive Systems
Incentive compensation systems contribute to strategy execution
Goals Measure outcomes for tasks that affect the firm’s market
position Goal setting and rewards
Set appropriate targets for each outcome Reward managers for achieving targets
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Problems Inherent in Incentive Systems
Controllability Occurs when managers are unable to identify how much of the
firm’s performance is due to skill, effort or luck Alignment
Occurs when crucial tasks that contribute to performance are not measurable, leading to overweighting of tasks that can be measured
Interdependency Occurs when performance depends on the effort of a team and
it is hard to identify individual contributions
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Dilemmas of Noise and Distortion
Noise = measurement error Controllability and interdependency increase noise that lowers
the ability of management to measure its current progress in achieving important results
Distortion = misalignment of measurement Distortion is increased through the improper weighting of tasks
There is an inevitable tradeoff between these dilemmas
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Piece-Rate
Piece-rate pay Pay related to the quantity of output of a person over a period
of time Piece-rate systems are appropriate when there is:
Employees control the pace of production
Performance standards are perceived as fair
Group members preferences are similar
Cooperation and innovation are rewarded
Lower bound on quality is explicit
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Culture and Learning
Culture Can be seen as the development and maintenance of focal
points for decision making Learning
Single loop learning occurs within the constraints of a problem Double loop learning raises questions about the task
parameters Effective strategy execution requires know-how and
involvement in both types of problem solving
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Target market position-Desired value drivers-Desired cost drivers
Target market position-Desired value drivers-Desired cost drivers
Capability planning-Product-Process
Capability planning-Product-Process
Desired operational capabilities
Desired operational capabilities
Design of activities and tasks
Design of activities and tasks
Design organizational dimensions of execution
-Control and coordination-Compensation and incentives-Complementarity and consistency-Culture
Design organizational dimensions of execution
-Control and coordination-Compensation and incentives-Complementarity and consistency-Culture
Actual executionActual execution
Identify -Knowledge gaps-Cooperation problems-Coordination problems
Identify -Knowledge gaps-Cooperation problems-Coordination problems
Single loop learning: -Problem solve
Double loop learning:-Discover new processes, practices and policies
Single loop learning: -Problem solve
Double loop learning:-Discover new processes, practices and policies
Capability Planning and Learning
Revise targetRevise target
Revise planningRevise planning
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