McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

Chapter 11: Managing Internal Chapter 11: Managing Internal

Operations: Actions That Promote Operations: Actions That Promote

Good Strategy ExecutionGood Strategy Execution

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““Winning companies know how Winning companies know how

to do their work better.” to do their work better.”

Michael Hammer and James ChampyMichael Hammer and James Champy

““If you want people motivated If you want people motivated

to do a good job, give them ato do a good job, give them a

good job to do.”good job to do.”

Frederick HerzbergFrederick Herzberg

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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.

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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 MARSHALING RESOURCES

BEHIND THE DRIVE FOR GOOD BEHIND THE DRIVE FOR GOOD

STRATEGY EXECUTION STRATEGY EXECUTION

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Allocating Resources toSupport Strategy Execution

Allocating resources in ways to support effective strategy execution involves

Funding strategic initiatives that can makea contribution to strategy implementation

Funding efforts to strengthen competenciesand capabilities or to create new ones

Shifting resources — downsizingsome areas, upsizing others, killingactivities no longer justified, and fundingnew activities with a critical strategy role

ESTABLISH POLICIES AND ESTABLISH POLICIES AND

PROCEDURES TO FACILITATE PROCEDURES TO FACILITATE

STRATEGY EXECUTIONSTRATEGY EXECUTION

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Role of new policies Channel behaviors and decisions

to promote strategy execution

Counteract tendencies ofpeople 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-SupportivePolicies and Procedures

Figure 11.1: How Prescribed Policies andProcedures Facilitate Strategy Execution

ADOPTING BEST PRACTICES ADOPTING BEST PRACTICES

AND STRIVING FOR AND STRIVING FOR

CONTINUOUS IMPROVEMENTCONTINUOUS IMPROVEMENT

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Instituting Best Practicesand Continuous Improvement

Identifying and adopting best practicesis integral to effective implementation

Benchmarking is the backbone of theprocess of identifying, studying, andimplementing best practices

Key tools to promote continuous improvement

Six Sigma quality control

Business process reengineering

TQM

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What Is a Best Practice?

An activity that at leastone company has provedworks 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

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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 dueto differences in implementation situations

Best approach – Best practices of otherfirms need to be modified or adaptedto fit a firm’s own specific situation

Characteristics of Benchmarking

Figure 11.2: From Benchmarking and Best-PracticeImplementation to Operating Excellence

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Business Process Reengineering:A Contributor to Operating Excellence

Often the performance of strategicallyrelevant activities is scatteredacross 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

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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 empowermentof employees at all levels

Team-based work design

Benchmarking and

Total customer satisfaction

Popular TQM Approaches

Deming’s

14 Points

Baldridge AwardCriteria

The Juran

Trilogy

Crosby’s 14

Quality Steps

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Implementing a Philosophyof Continuous Improvement

Reform the corporate culture

Instill enthusiasm to do thingsright throughout company

Strive to achieve little steps forwardeach day (what the Japanese call kaizen)

Ignite creativity in employees to improveperformance of value-chain activities

Preach there is no such thing as good enough

Understand it is a race without a finish

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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 specificationand needing incremental improvement

A great tool for improving performancewhen there are wide variations in howwell 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 Toolfor Promoting Operating Excellence

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Characteristics ofSix Sigma Quality Programs

Six Sigma is based on three principles1. All work is a process2. All processes have variability3. 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 improvementsin operating efficiency and

Giving freer rein to R & D and other processesfocusing on new ways to offer value to customers

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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

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Guidelines for ImplementingSix 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

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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 Reengineeringvs. Total Quality Programs

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Select indicators of successfulstrategy 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

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The Benefits of EmployingContinuous Improvement Programs

Can greatly enhance a company’s Competitive capabilities

Ability to achieve a competitive advantage

Have hard-to-imitate aspects

Require substantial investmentof management time and effort

Expensive in terms of training and meetings

Seldom produce short-term results

Long-term payoff — instilling a culturethat strives for operating excellence

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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 INFORMATIONINSTALL INFORMATION

AND OPERATING SYSTEMSAND OPERATING SYSTEMS

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Installing Strategy-SupportiveInformation and Operating Systems

Good information and operating systems areessential 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 systemsto 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

AirlinesAirlines

Examples of Support Systems

Internal communication systems allowing itto coordinate 70,000 vehicles handling anaverage of 5.5 million packages per day

Leading-edge flight operations systemsallow a single controller to direct as manyas 200 of 650-plus aircraft simultaneously

E-business tools for customers

Federal ExpressFederal Express

Examples of Support Systems

Sophisticated maintenance support system

Otis ElevatorOtis Elevator

Systems have been developed forreal-time monitoring of new listings, bidding

activity, Web site traffic, and page views

eBayeBay

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What Areas ShouldInformation Systems Address?

Customer data

Operations data

Employee data

Supplier/partner/collaborative ally data

Financial performance data

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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 betterdecisions on a real-time basis

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Challenge

How to ensure actions of employeesstay within acceptable bounds

Control approaches

Managerial control

Establish boundaries on what not todo, allowing freedom to act with limits

Track and review daily operating performance

Peer-based control

Exercising Adequate ControlOver Empowered Employees

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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 TYING REWARDS AND

INCENTIVES TO STRATEGY INCENTIVES TO STRATEGY

EXECUTIONEXECUTION

Gaining Commitment: Componentsof an Effective Reward System

Monetary IncentivesMonetary Incentives

Base pay increases

Performance bonuses

Profit sharingplans

Stock options

Retirement packages

Piecework incentives

Non-Monetary IncentivesNon-Monetary Incentives

Praise

Constructivecriticism

Special recognition

More, or less, job security

Stimulating assignments

More, or less,autonomy

Rapid promotion

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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 strategicinformation with employees

Have knockout facilities Be flexible in how company approaches people

management in multicultural environments

Approaches: Motivating Peopleto Execute the Strategy Well

Examples: Motivational Practices

Lincoln ElectricLincoln Electric

Rewards productivity by paying for each pieceproduced (defects can be traced to worker causing them).

Highest rated workers receive bonuses of as much110% of their piecework compensation.

GoogleGoogle

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

WegmansWegmans

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 EnterprisesJM 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

NordstromNordstrom

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 MarketsUkrop’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. GoreW. 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.

AmgenAmgen

Employees get 16 paid holidays, generousvacation time, tuition reimbursements up to $10,000,on-site massages, a discounted car wash, and the

convenience of shopping at on-site farmers’ markets.

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Elements of both are necessary

Challenge and competition arenecessary for self-satisfaction

Prevailing view

Positive approaches work betterthan negative ones in terms of

Enthusiasm

Dedication

Creativity

Initiative

Balancing Positive vs. Negative Rewards

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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 dominantbasis for designing incentives,evaluating efforts, and handing out rewards

Linking the Reward Systemto Performance Outcomes

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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.

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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 toachieving performance targetsin their areas of responsibility

Key Considerations inDesigning Reward Systems

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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 anEffective 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 reviewand payment short

7. Make liberal use ofnon-monetary rewards

8. Avoid ways of rewarding non-performers

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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.