STRATEGIC MANAGEMENT

Fred R. David
CHAPTER 7
Implementing Strategies:
Management & Operations Issues
MS-Level Comprehensive Study Notes

Topics Covered in These Notes

Nature of Strategy Implementation • Annual Objectives • Policies • Resource Allocation •
Managing Conflict • Matching Structure with Strategy • Functional / Divisional / SBU / Matrix
Structures • Restructuring & Reengineering • Performance-Pay Linkage • Managing Resistance
to Change • Strategy-Supportive Culture • Production/Operations • Human Resources •
ESOPs • Work-Life Balance • MCQs & Conceptual Q&A
 1. THE NATURE OF STRATEGY IMPLEMENTATION
Strategy implementation means translating strategic thought into strategic action. Even the most perfect
strategic plan serves little purpose if it is not implemented properly.

1.1 Key Insight — Why Implementation is Harder than Formulation

Core Principle
Successful strategy formulation does NOT guarantee successful strategy implementation. It
is always MORE DIFFICULT to DO something (implementation) than to SAY you are going
to do it (formulation). Change comes through IMPLEMENTATION and EVALUATION — not
through the plan itself.

1.2 Strategy Formulation vs. Strategy Implementation — Comparison Table

Dimension Strategy FORMULATION Strategy IMPLEMENTATION

Focus Positioning forces before Managing forces during action

action
Emphasis Effectiveness Efficiency
Nature Primarily intellectual process Primarily operational process
Skills Required Intuitive & analytical skills Motivation & leadership skills
Coordination Among a few individuals Among many individuals
Time Frame Long-term oriented Day-to-day, short-to-medium
term

📝 MS Exam Tip: MCQ Favourite: Strategy formulation focuses on EFFECTIVENESS;

strategy implementation focuses on EFFICIENCY. Formulation is intellectual;
implementation is operational.

1.3 Management Issues Central to Strategy Implementation

According to Table 7-1 in the textbook, the following management activities are central:
● Establish annual objectives
● Devise policies
● Allocate resources
● Alter existing organizational structure
● Restructure and reengineer
● Revise reward and incentive plans
● Minimize resistance to change
● Match managers with strategy
● Develop a strategy-supportive culture
● Adapt production/operations processes
● Develop an effective human resources function
● Downsize and furlough as needed
● Link performance and pay to strategies
 2. ANNUAL OBJECTIVES
Annual objectives are short-term milestones that organizations must achieve to reach long-term
objectives. Establishing them is a DECENTRALIZED activity involving all managers.

2.1 Why Annual Objectives are Essential (4 Main Reasons)

1. Represent the basis for ALLOCATING RESOURCES
2. Are a PRIMARY MECHANISM for evaluating managers
3. Are the major instrument for MONITORING PROGRESS toward long-term objectives
4. Establish organizational, divisional, and departmental PRIORITIES

2.2 Purposes of Annual Objectives

● Serve as GUIDELINES for action — direct and channel efforts of organization members
● Provide a source of LEGITIMACY — justify activities to stakeholders
● Serve as STANDARDS OF PERFORMANCE
● Are an important source of EMPLOYEE MOTIVATION and identification
● Give INCENTIVES for managers and employees to perform
● Provide a BASIS FOR ORGANIZATIONAL DESIGN

2.3 Characteristics of GOOD Annual Objectives (SMART+)

Quality Explanation
Measurable State quantity, quality, cost, and time — must be
verifiable
Consistent Consistent with long-term objectives and across
divisions/departments
Reasonable Realistic and achievable given available
resources
Challenging Ambitious enough to motivate performance
Clear Unambiguous — avoid 'maximize', 'minimize', 'as
soon as possible', 'adequate'
Communicated Communicated throughout the organization
Time-bound Characterized by an appropriate time dimension
Rewarded Accompanied by commensurate rewards and
sanctions

📝 MS Exam Tip: Avoid terms like 'maximize', 'minimize', 'as soon as possible', and
'adequate' in objective statements — they are vague and not measurable.
2.4 Vertical vs. Horizontal Consistency
Vertical Consistency: Objectives at lower levels support objectives at higher levels (departmental
→ divisional → corporate).
Horizontal Consistency: Objectives across departments/functions do not conflict with each other.
E.g., manufacturing should not produce more than marketing can sell.
 3. POLICIES
Policies are instruments for strategy implementation. They are specific guidelines, methods,
procedures, rules, forms, and administrative practices established to support work toward stated goals.

3.1 Functions of Policies

● Facilitate solving RECURRING PROBLEMS
● Guide the IMPLEMENTATION OF STRATEGY
● Set BOUNDARIES, CONSTRAINTS, and LIMITS on administrative actions
● Clarify what CAN and CANNOT be done in pursuit of objectives
● Provide a basis for MANAGEMENT CONTROL
● Allow COORDINATION across organizational units
● REDUCE the amount of time managers spend making decisions
● Promote DELEGATION of decision making to appropriate levels

3.2 Hierarchy of Policies Example

Company Strategy → Divisional Objective → Departmental Objective

Company Strategy: Acquire a chain of retail stores → Supporting Policy: 'All stores open
8AM–8PM Mon–Sat.' Divisional Objective: Increase revenue from $10M to $15M →
Supporting Policy: 'Salespersons file weekly activity reports.' Production Objective:
Increase production from 20,000 to 30,000 units → Supporting Policy: 'Employees may
work up to 20 overtime hours per week.'

📝 MS Exam Tip: Policies should be stated IN WRITING whenever possible. They represent
the means for carrying out strategic decisions.
 4. RESOURCE ALLOCATION
Resource allocation is a central management activity that allows for strategy execution. Strategic
management enables resources to be allocated according to priorities established by annual objectives.

4.1 Four Types of Resources

5. Financial Resources
6. Physical Resources
7. Human Resources
8. Technological Resources

4.2 Factors That Prohibit Effective Resource Allocation

● Overprotection of resources
● Too great an emphasis on short-run financial criteria
● Organizational politics
● Vague strategy targets
● Reluctance to take risks
● Lack of sufficient knowledge

📝 MS Exam Tip: Strategic management is sometimes called a 'RESOURCE ALLOCATION

PROCESS.' Effective resource allocation does not guarantee successful implementation —
programs, personnel, controls, and commitment must also be present.

4.3 Managing Conflict in Resource Allocation

Conflict = a disagreement between two or more parties on one or more issues. It can arise from
interdependency of objectives and competition for limited resources.

THREE APPROACHES TO CONFLICT RESOLUTION:

Approach Description
Avoidance Ignoring the problem or physically separating
conflicting parties. Hope the conflict resolves
itself.
Defusion Playing down differences; accentuating
similarities; compromising; appealing to
majority rule or higher authority; redesigning
positions.
Confrontation Exchanging members of conflicting parties;
holding meetings where parties present views
and work through differences. Most effective
long-term.
 5. MATCHING STRUCTURE WITH STRATEGY
Changes in strategy often REQUIRE changes in organizational structure for two major reasons:
9. Structure largely dictates HOW OBJECTIVES AND POLICIES will be established
10. Structure dictates HOW RESOURCES WILL BE ALLOCATED

5.1 Chandler's Strategy-Structure Relationship

Alfred Chandler's Classic Finding (MIT Press, 1962)

New strategy is formulated → New administrative problems emerge → Organizational
performance declines → A new organizational structure is established → Organizational
performance improves. Conclusion: STRUCTURE FOLLOWS STRATEGY. Declining
financial performance is the signal that structure needs to change.

5.2 Symptoms of an Ineffective Organizational Structure

● Too many LEVELS OF MANAGEMENT
● Too many MEETINGS attended by too many people
● Too much attention directed toward solving INTERDEPARTMENTAL CONFLICTS
● Too large a SPAN OF CONTROL
● Too many UNACHIEVED OBJECTIVES
● DECLINING corporate or business performance
● LOSING ground to rival firms
● Revenue/earnings per employee low compared to rival firms

5.3 General Size → Structure Pattern

● SMALL firms → Functional (centralized) structure
● MEDIUM firms → Divisional (decentralized) structure
● LARGE firms → SBU or Matrix structure
 6. SEVEN TYPES OF ORGANIZATIONAL STRUCTURES

Structure Also Known As Key Advantages Key Disadvantages

Functional Centralized Simple, inexpensive, Accountability forced to

promotes top, limited career dev,
specialization, rapid communication
decisions problems

Divisional — By Region Tailored to local needs, Can be costly,

Geographic local decision-making duplication of
resources

Divisional — Product By Product/Service Strict control over Costly, requires skilled

product lines, clear managers
accountability

Divisional — By Market Segment Caters to specific May give special

Customer customer groups treatment to some
effectively customers

Divisional — Process By Production Process Each process May duplicate support

accountable for functions
profits/revenue

SBU Strategic Business Unit Improves coordination Additional layer of

of similar divisions, management,
manageable control ambiguous VP roles

Matrix Project + Function Clear project Violates unity of

objectives, shared command, dual budget
resources, specialized authority, most
personnel complex

6.1 Functional Structure — Detail

MOST WIDELY USED because it is the SIMPLEST and LEAST EXPENSIVE. Groups tasks by
business function: production, marketing, finance, R&D, MIS, etc.

✅ ADVANTAGES ❌ DISADVANTAGES
• Simple and inexpensive • Accountability forced to top
• Capitalizes on specialization • Delegation not encouraged
• Minimizes need for elaborate control system • Minimizes career development
• Allows rapid decision making • Low employee morale
• Inadequate planning for products/markets
• Short-term narrow thinking
• Communication problems

6.2 Divisional Structure — Detail

SECOND MOST COMMON. Organized in ONE OF FOUR WAYS: by geographic area, product/service,
customer, or process. Functional activities performed both centrally AND in each division.
 ✅ ADVANTAGES ❌ DISADVANTAGES
• Accountability is CLEAR • Can be COSTLY
• Allows local control of local situations • Duplication of functional activities
• Creates career development chances • Requires a skilled management force
• Promotes delegation of authority • Requires an elaborate control system
• Leads to competitive climate internally • Competition among divisions can be
• Allows easy adding of new products/regions dysfunctional
• Strict control and attention to • Limited sharing of ideas and resources
products/customers • Some regions/products may receive special
treatment

6.3 Strategic Business Unit (SBU) Structure — Detail

Used by LARGE conglomerates with many divisions. Groups similar divisions into SBUs and delegates
authority to a senior executive reporting to the CEO.

Example: ConAgra has three SBUs: (1) Food Service, (2) Retail, (3) Agricultural Products.

● ADVANTAGE: Improves coordination between similar divisions; makes planning and control more
manageable; channels accountability
● DISADVANTAGE: Requires an ADDITIONAL LAYER of management (increases salary
expenses); role of group VP is often ambiguous

📝 MS Exam Tip: SBU is appropriate when number, size, and diversity of divisions makes it
difficult to control and evaluate divisional operations effectively.

6.4 Matrix Structure — Detail

MOST COMPLEX of all designs. Depends on both VERTICAL AND HORIZONTAL flows of authority
and communication. Used in construction, health care, research, and defense.

Key Feature: Employees have TWO BOSSES — a project manager AND a functional manager (e.g.,
CFO). Violates the UNITY OF COMMAND principle.

✅ ADVANTAGES ❌ DISADVANTAGES
• Project objectives are clear • Requires excellent communication
• Employees see results of their work • Costly — more management positions
• Shutting down a project is easy • VIOLATES Unity of Command principle
• Facilitates use of special • Creates DUAL lines of budget authority
equipment/personnel • Creates DUAL sources of
• Functional resources SHARED (not reward/punishment
duplicated) • Creates shared authority & dual reporting
• Multiple communication channels • Requires mutual trust and understanding
 📝 MS Exam Tip: Walt Disney Corp. uses a Matrix structure. For matrix to be effective:
participative planning, training, clear roles, excellent communication, and mutual trust are
required.

6.5 Do's and Don'ts of Organizational Chart Design

● DO: Reserve title CEO for the TOP executive only
● DO: Use title 'President' for division heads (not for functional executives)
● DO: Place COO directly below CEO; division presidents report to COO
● DO: CFO, CIO, CSO, HRM, CMO etc. report directly to CEO (NOT to COO)
● DO NOT: Use dual titles (e.g., 'CEO and President') for one person
● DO NOT: Have any person report to more than one superior (violates Unity of Command)
 7. RESTRUCTURING vs. REENGINEERING

Dimension RESTRUCTURING REENGINEERING

Also Called Downsizing / Rightsizing / Process management /

Delayering Process innovation / Process
redesign
Focus Shareholder well-being Employee and customer well-
being
Scope Strategic (long-term, all Tactical (short-term, function-
functions) specific)
What Changes Size of firm — employees, WAY WORK IS CARRIED
divisions, hierarchy levels OUT — processes, jobs
Org Chart? YES — affects organizational Usually does NOT affect org
structure chart
Job Loss? Often involves layoffs Does NOT imply job loss
Purpose Primarily cost reduction Improve cost, quality, service,
and speed
Example Walt Disney merged ABC HP shares forecasts with
Network with ABC Studios supply-chain partners

7.1 Six Sigma

Developed by Motorola in 1986. A quality-boosting process improvement technique.
● Involves training key persons as Master Black Belts, Black Belts, and Green Belts
● Goal: Monitor, measure, and improve processes; eliminate defects
● Used widely in manufacturing; less successful in retail
● Made famous by Jack Welch at GE and Robert Nardelli at Home Depot

📝 MS Exam Tip: Six Sigma is more of a REENGINEERING technique (improves

processes) than restructuring. It does not eliminate people or departments; it improves how
work is done.

7.2 Benchmarking
Comparing a firm against the BEST FIRMS in the industry on performance-related criteria. Used to
rationalize the need for restructuring. Common ratios: headcount-to-sales, corporate-staff-to-operating-
employees, span-of-control.
 8. LINKING PERFORMANCE AND PAY TO STRATEGIES
A DUAL BONUS SYSTEM based on both ANNUAL OBJECTIVES and LONG-TERM OBJECTIVES is
becoming common. Bonuses should NOT be based solely on short-term results.

8.1 Forms of Incentive Compensation

Profit Sharing: More than 30% of U.S. companies use it. Employees/departments share in profits.
Critics: too many factors affect profits (taxes, pricing, acquisitions).
Gain Sharing: Employees/departments set performance targets; if results exceed objectives, ALL
members get bonuses. More than 26% of U.S. companies use it.
Dual Bonus System: CEO annual bonus could be 75% short-term + 25% long-term basis.
Percentage should VARY by hierarchical level.
Stock Options: Merck gave each of its 37,000 employees a 10-year option to buy 100 shares at
$127 — links employees to company performance.

8.2 Five Tests for a Performance-Pay Plan

11. Does the plan CAPTURE ATTENTION? Are people talking more and taking pride in successes?
12. Do employees UNDERSTAND the plan?
13. Is the plan IMPROVING COMMUNICATION about mission, plans, and objectives?
14. Does the plan PAY OUT WHEN IT SHOULD? Are incentives paid for desired results?
15. Is the COMPANY PERFORMING BETTER? Are profits up? Has market share grown?

📝 MS Exam Tip: Japan: CEO pay averages $1.3M. Europe: $6M average. USA: $12M
average. Japan uses seniority-based pay; USA uses performance-based pay.
 9. MANAGING RESISTANCE TO CHANGE
Resistance to change is the SINGLE GREATEST THREAT to successful strategy implementation. It
occurs in the form of sabotaging, absenteeism, unfounded grievances, and unwillingness to cooperate.

9.1 Three Strategies for Implementing Change

Strategy How It Works Speed / Commitment
Force Change Strategy Giving orders and enforcing FAST implementation but LOW
them; top-down mandates commitment and HIGH
resistance

Educative Change Strategy Presenting information to SLOW and DIFFICULT but

convince people of the need for GREATER COMMITMENT and
change LESS RESISTANCE

Rational / Self-Interest Convinces individuals that Most DESIRABLE; relatively

Strategy change is to their PERSONAL easy if appeal succeeds — but
ADVANTAGE rarely benefits everyone

9.2 Jack Duncan's 4 Steps of Rational Change Strategy

16. PARTICIPATION — Invite employees to participate in the change process and details of transition
17. MOTIVATION — Provide some incentive or motivation to change; self-interest is most important
18. COMMUNICATION — Help people understand the purpose for changes
19. FEEDBACK — Give and receive feedback on how things are going and progress made

📝 MS Exam Tip: Change should be viewed as a CONTINUOUS PROCESS — not a one-

time event. The new philosophy mirrors 'Continuous Quality Improvement.'
 10. CREATING A STRATEGY-SUPPORTIVE CULTURE
Changing a firm's culture to fit a new strategy is usually MORE EFFECTIVE than changing a strategy to
fit an existing culture (since new strategies are often market-driven).

10.1 Schein's 10 Elements for Linking Culture to Strategy

20. Formal statements of philosophy, charters, creeds, recruitment materials
21. Designing of physical spaces, facades, buildings
22. Deliberate role modeling, teaching, and coaching by leaders
23. Explicit reward and status system, promotion criteria
24. Stories, legends, myths, and parables about key people and events
25. What leaders pay attention to, measure, and control
26. Leader reactions to critical incidents and organizational crises
27. How the organization is designed and structured
28. Organizational systems and procedures
29. Criteria for recruitment, selection, promotion, and retirement

10.2 Ways to Alter Organizational Culture (Table 7-10)

13 Techniques:
● Recruitment
● Training
● Transfer
● Promotion
● Restructuring
● Reengineering
● Role modeling
● Positive reinforcement
● Mentoring
● Revising vision/mission
● Redesigning physical spaces
● Altering reward system
● Altering organizational policies/procedures

📝 MS Exam Tip: Culture can NEUTRALIZE strategy changes if not managed. Deal and
Kennedy: 'Unless something can be done to provide support for transitions from old to new,
the force of a culture can neutralize and emasculate strategy changes.'
 11. PRODUCTION/OPERATIONS CONCERNS IN
STRATEGY IMPLEMENTATION
Production/operations capabilities, limitations, and policies can significantly ENHANCE OR INHIBIT the
attainment of objectives. Production processes constitute more than 70% of a firm's total assets.

11.1 Key Production Decisions Affecting Strategy Implementation

● Plant size and LOCATION
● Product DESIGN
● Choice of EQUIPMENT and tooling
● Size of INVENTORY and inventory control
● QUALITY CONTROL
● COST CONTROL
● JOB SPECIALIZATION and employee training
● SHIPPING, PACKAGING, and transportation systems
● Degree of VERTICAL INTEGRATION

11.2 Just-In-Time (JIT) Production

JIT Definition & Benefit

Parts and materials are delivered to a production site JUST AS THEY ARE NEEDED rather
than being stockpiled. Significantly reduces costs of implementing strategies. Example:
Harley-Davidson reports that at one plant alone, JIT freed $22 million previously tied up in
inventory and greatly reduced reorder lead time.

11.3 Plant Location Factors

● Availability of major RESOURCES
● Prevailing WAGE RATES in the area
● TRANSPORTATION COSTS (shipping and receiving)
● Location of major MARKETS
● POLITICAL RISKS in the area/country
● Availability of TRAINABLE EMPLOYEES

11.4 Cross-Training of Employees

Employees gain a better understanding of the whole business. Benefits: better ideas in planning
sessions. Challenges: managers must shift from directing/enforcing to counseling/coaching; requires
investment in training and incentives.
 12. HUMAN RESOURCE CONCERNS IN STRATEGY
IMPLEMENTATION

12.1 Three Main Causes of HR Problems in Strategy Implementation

30. Disruption of SOCIAL AND POLITICAL STRUCTURES
31. Failure to match individuals' APTITUDES with implementation tasks
32. INADEQUATE TOP MANAGEMENT SUPPORT for implementation activities

12.2 Furloughs vs. Layoffs

Furloughs: TEMPORARY layoffs. Used as an alternative to permanent layoffs. Increasingly used
for white-collar and professional workers. Saves costs while retaining employees.
Labor Cost-Saving Tactics: Salary freeze, hiring freeze, salary reductions, reduced benefits,
reduced workweek, mandatory/voluntary furlough, contract employees, early retirement, eliminating
bonuses.

12.3 Methods to Match Managers with Strategies

● TRANSFERRING managers to new roles
● Developing LEADERSHIP WORKSHOPS
● Offering CAREER DEVELOPMENT activities
● PROMOTIONS
● JOB ENLARGEMENT (adding more tasks at same level)
● JOB ENRICHMENT (adding more challenging/meaningful work)

12.4 Employee Stock Ownership Plans (ESOPs)

An ESOP is a tax-qualified, defined-contribution, employee-benefit plan whereby employees purchase
stock of the company through borrowed money or cash contributions.

● More than 10,000 ESOP firms; covers more than 10 million employees in the USA
● ESOPs control more than $600 billion in corporate stock
● Reduces WORKER ALIENATION and stimulates PRODUCTIVITY
● Substantial TAX SAVINGS: principal, interest, and dividend payments on ESOP debt are tax-
deductible
● Banks lend money to ESOPs at interest rates BELOW PRIME
● If ESOP owns more than 50% of firm, lenders taxed on only 50% of income on loans
● INITIAL COSTS: ~$50,000 for setup; ~$15,000 annually for administration for a small/mid firm
● NOT suitable for firms with fluctuating payrolls and profits

📝 MS Exam Tip: ESOPs empower employees to work as owners. Key benefit: 'The
ownership culture really makes a difference, when management is a facilitator, not a
dictator.'
12.5 Work-Life Balance
Work/family strategies have become a COMPETITIVE ADVANTAGE for companies. Common benefits
include elder care assistance, flexible scheduling, job sharing, telecommuting, on-site childcare, and
maternity/paternity leave.

● Nearly 60 million people in the USA are part of two-career families

● Family days — bringing family to workplace — are inexpensive and increase employee pride
● Flexible working hours help balance professional and private lives

12.6 Glass Ceiling and Workforce Diversity

Glass Ceiling: The INVISIBLE BARRIER in many firms that bars women and minorities from top-
level management positions. Women make up 47% of the U.S. labor force but only 2.6% of Fortune
500 CEOs.
Research shows companies with more female executives and directors OUTPERFORM other firms.
'Brain scans prove that men and women think differently, so companies with a mix of male and female
executives will outperform competitors.' — Judy Rosener

12.7 Corporate Wellness Programs

60%+ of large U.S. companies had wellness programs by 2008 (up from 47% in 2005). Companies
implement wellness programs to reduce accelerating costs of health-care insurance. Average cost per
employee: $7,173.
13. KEY TERMS GLOSSARY

Term Definition
Annual Objectives Short-term milestones organizations must
achieve for long-term success; basis for resource
allocation and performance evaluation.
Avoidance Conflict resolution approach — ignoring the
problem hoping it resolves itself, or physically
separating parties.
Benchmarking Comparing a firm against the best firms in the
industry on performance-related criteria.
Bonus System Incentive plan linking pay to performance;
effective when it captures attention, is
understood, and pays out for desired results.
Conflict A disagreement between two or more parties on
one or more issues; can arise from competition
for resources.
Confrontation Conflict resolution — exchanging members of
parties or holding meetings to work through
differences.
Culture Shared values, beliefs, and norms within an
organization that affect behavior; needs to be
aligned with strategy.
Decentralized Structure Divisional structure where authority is delegated
to division managers; improves accountability.
Defusion Conflict resolution — playing down differences;
compromising; appealing to a higher authority.
Delayering / Downsizing / Rightsizing Synonyms for RESTRUCTURING — reducing
number of employees, divisions, or hierarchical
levels.
ESOP Employee Stock Ownership Plan — tax-qualified
plan allowing employees to own company stock;
stimulates productivity and reduces alienation.
Force Change Strategy Implementing change through orders and
mandates; fast but low commitment and high
resistance.
Furloughs Temporary layoffs used to reduce costs without
permanently eliminating positions.
Gain Sharing Incentive plan where departments set
performance targets; all members share bonuses
if targets are exceeded.
Glass Ceiling Invisible barrier barring women and minorities
from top management positions.
Horizontal Consistency Annual objectives across departments/functions
that do not conflict with each other.
JIT (Just-in-Time) Production approach delivering parts/materials
exactly when needed; reduces inventory costs.
Matrix Structure Most complex structure with both vertical and
horizontal authority flows; employees have dual
bosses.
Policy Specific guidelines, procedures, rules, and
practices established to support strategy
implementation.
Profit Sharing Sharing company profits with employees;
affected by many uncontrollable factors.
Rational Change Strategy Convincing individuals that change is to their
personal advantage; most desirable change
approach.
Reengineering Redesigning work processes using IT to improve
cost, quality, service, and speed; does not affect
org chart.
Resistance to Change The single greatest threat to successful strategy
implementation; occurs in many behavioral
forms.
Resource Allocation Central management activity that enables
strategy execution; must align with annual
objectives.
Restructuring Reducing size of firm via fewer employees,
divisions, or hierarchical levels; primary goal is
cost reduction.
SBU Structure Strategic Business Unit — groups similar
divisions into units for improved coordination and
accountability.
Six Sigma Quality improvement technique training
employees as Black Belts to monitor and improve
processes.
Vertical Consistency Lower-level objectives that support higher-level
objectives in a hierarchy.
 14. MULTIPLE CHOICE QUESTIONS (MCQs)
Practice MCQs with Answers and Explanations — MS Level

Q1. Which of the following BEST describes the relationship between strategy formulation and
implementation?
a) They are interchangeable processes
b) Formulation focuses on efficiency; implementation on effectiveness
c) Formulation is positioning forces before action; implementation is managing forces during action
d) Implementation is easier than formulation
✅ Answer: c) Formulation is positioning forces before action; implementation is managing forces during
action
💡 Explanation: Fred David explicitly contrasts these two: formulation = before action (intellectual,
effectiveness-focused); implementation = during action (operational, efficiency-focused).
Q2. Annual objectives are essential for strategy implementation because they do all of the
following EXCEPT:
a) Serve as the basis for allocating resources
b) Replace the need for long-term objectives
c) Establish organizational, divisional, and departmental priorities
d) Are a primary mechanism for evaluating managers
✅ Answer: b) Replace the need for long-term objectives
💡 Explanation: Annual objectives SUPPORT long-term objectives — they are milestones, not
replacements. All other options are explicitly stated purposes of annual objectives in Chapter 7.
Q3. Which organizational structure is the MOST COMPLEX?
a) Functional
b) Divisional by product
c) SBU (Strategic Business Unit)
d) Matrix
✅ Answer: d) Matrix
💡 Explanation: David explicitly states 'A matrix structure is the most complex of all designs because it
depends upon both vertical and horizontal flows of authority and communication.'
Q4. Restructuring is PRIMARILY concerned with the well-being of:
a) Employees
b) Shareholders
c) Customers
d) Managers
✅ Answer: b) Shareholders
💡 Explanation: David states: 'Restructuring is concerned primarily with shareholder well-being rather
than employee well-being.' Reengineering is the opposite — more concerned with employee and
customer well-being.
Q5. Which conflict resolution approach is exemplified by exchanging members of conflicting
parties so each gains the other's perspective?
a) Avoidance
b) Defusion
c) Confrontation
d) Delegation
 ✅ Answer: c) Confrontation
💡 Explanation: Confrontation includes exchanging members of conflicting parties or holding meetings
where parties present their views and work through differences.
Q6. Which of the following is an advantage of a DIVISIONAL organizational structure?
a) Simple and inexpensive
b) Promotes specialization
c) Accountability is clear
d) Minimizes need for elaborate control system
✅ Answer: c) Accountability is clear
💡 Explanation: Clear accountability is the FIRST and most important advantage of divisional structure
listed by David. Options a, b, and d are advantages of FUNCTIONAL structure.
Q7. Six Sigma was developed by which company?
a) General Electric
b) Home Depot
c) Motorola
d) Toyota
✅ Answer: c) Motorola
💡 Explanation: Developed by Motorola in 1986. It was MADE FAMOUS by Jack Welch at GE, but its
origin is Motorola.
Q8. An ESOP (Employee Stock Ownership Plan) is described as NOT suitable for:
a) Large multinational companies
b) Firms with fluctuating payrolls and profits
c) Companies seeking to reduce worker alienation
d) Firms seeking tax savings
✅ Answer: b) Firms with fluctuating payrolls and profits
💡 Explanation: David states: 'Analysts say ESOPs also do not work well in firms that have fluctuating
payrolls and profits.'
Q9. Which change strategy is described as the MOST DESIRABLE?
a) Force change strategy
b) Educative change strategy
c) Rational or self-interest change strategy
d) Avoidance change strategy
✅ Answer: c) Rational or self-interest change strategy
💡 Explanation: David states: 'The rational change strategy is the most desirable' because it convinces
individuals that change is to their personal advantage, making implementation relatively easy when it
succeeds.
Q10. According to Fred David, what is the SINGLE GREATEST THREAT to successful strategy
implementation?
a) Lack of resources
b) Poor strategy formulation
c) Resistance to change
d) Inadequate management skills
✅ Answer: c) Resistance to change
💡 Explanation: David explicitly states: 'Resistance to change can be considered the single greatest
threat to successful strategy implementation.'
Q11. Which structure groups similar divisions into units and assigns a senior executive to each
unit reporting to the CEO?
a) Functional structure
 b) Matrix structure
c) SBU structure
d) Divisional-by-process structure
✅ Answer: c) SBU structure
💡 Explanation: SBU structure groups similar divisions into strategic business units. Each SBU head
reports directly to the CEO, improving coordination and manageability.
Q12. 'Gain sharing' differs from 'profit sharing' in that:
a) Gain sharing is based on profits of the whole company
b) Gain sharing requires employees to establish performance targets that must be exceeded for
bonuses
c) Profit sharing involves individual performance targets
d) Gain sharing only applies to senior managers
✅ Answer: b) Gain sharing requires employees to establish performance targets that must be exceeded
for bonuses
💡 Explanation: Gain sharing: employees/departments set targets; if actual results exceed objectives, all
members get bonuses. Profit sharing is broader and based on overall company profits.
Q13. The concept of 'glass ceiling' refers to:
a) Transparent management reporting structures
b) Invisible barriers barring women and minorities from top management positions
c) Glass walls between departments in modern offices
d) Clear and visible performance metrics
✅ Answer: b) Invisible barriers barring women and minorities from top management positions
💡 Explanation: David defines glass ceiling as 'the invisible barrier in many firms that bars women and
minorities from top-level management positions.'
Q14. According to Chandler's strategy-structure relationship, what happens FIRST in the
sequence?
a) New organizational structure is established
b) Organizational performance improves
c) New administrative problems emerge
d) New strategy is formulated
✅ Answer: d) New strategy is formulated
💡 Explanation: Chandler's sequence: New strategy is formulated → New administrative problems
emerge → Organizational performance declines → New structure is established → Performance
improves.
Q15. Which of the following is NOT listed as a factor prohibiting effective resource allocation?
a) Overprotection of resources
b) Organizational politics
c) Increased market competition
d) Vague strategy targets
✅ Answer: c) Increased market competition
💡 Explanation: The six factors David lists are: overprotection of resources, too great an emphasis on
short-run financial criteria, organizational politics, vague strategy targets, reluctance to take risks, and
lack of sufficient knowledge. Market competition is not listed.
 15. CONCEPTUAL QUESTIONS & DETAILED ANSWERS
MS-Level Exam Preparation — Long-Answer Conceptual Questions

Q: Why is strategy implementation more difficult than strategy formulation?

A: Strategy formulation is primarily an INTELLECTUAL process requiring analytical and intuitive skills
among a few individuals. Implementation is an OPERATIONAL process requiring motivation,
leadership, and coordination among MANY individuals. Implementation involves actual behavioral
change — altering territories, closing facilities, changing compensation, hiring/firing. People resist
change due to fear of economic loss, uncertainty, and disruption of social patterns. The transition
from formulation to implementation also involves a shift in responsibility from strategists to divisional
managers, creating communication gaps. As Vince Lombardi said: 'The best game plan in the world
never blocked or tackled anybody.'
Q: Explain the concept of 'structure follows strategy' as proposed by Alfred Chandler.
A: Alfred Chandler discovered a recurring sequence in organizational development: (1) A new
strategy is formulated; (2) new administrative problems emerge; (3) organizational performance
declines; (4) a new structure is established; (5) performance improves. The core insight is that
STRUCTURE SHOULD BE DESIGNED TO FACILITATE THE STRATEGIC PURSUIT OF A FIRM
and must change when strategy changes. Without appropriate structure, even good strategies fail.
For example, small firms often use centralized functional structure; as they grow and diversify, they
shift to divisional, then SBU or matrix structures. This sequence is observable across industries and
firm sizes.
Q: Compare and contrast RESTRUCTURING and REENGINEERING. Which is more strategic in
nature?
A: RESTRUCTURING (downsizing/rightsizing/delayering) REDUCES the size of a firm — fewer
employees, divisions, or hierarchical levels. It is STRATEGIC in nature (long-term, affects all
functions) and primarily concerned with shareholder well-being. Goal: cost reduction and improved
efficiency. REENGINEERING (process management/redesign) RECONFIGURES how work is done
using information technology. It is TACTICAL (short-term, function-specific) and more concerned with
employee and customer well-being. It does NOT typically affect the org chart or cause layoffs. Goal:
improve cost, quality, service, and speed. RESTRUCTURING is MORE STRATEGIC because it has
long-term, firm-wide implications and directly affects organizational structure, while reengineering
targets specific processes.
Q: What are the seven types of organizational structures? When is each most appropriate?
A: 1. FUNCTIONAL: Best for small firms; simple and inexpensive; promotes specialization.
Appropriate when single product/service line. 2. DIVISIONAL BY GEOGRAPHIC AREA: Best when
strategies must be tailored to local customer needs in different regions (e.g., Hershey Foods' U.S.,
Canada, Mexico, Brazil divisions). 3. DIVISIONAL BY PRODUCT: Best when organization offers few
but substantially different products/services needing special emphasis (e.g., Huffy: Bicycle, Baby
Products, Sports divisions). 4. DIVISIONAL BY CUSTOMER: Best when a few major customers are
paramount and many services are provided to them (e.g., book publishers: colleges, secondary
schools, commercial schools). 5. DIVISIONAL BY PROCESS: Best when distinct production
processes represent competitive thrust (e.g., manufacturer: electrical, glass cutting, welding, grinding,
painting divisions). 6. SBU: Best for large conglomerates with many diverse divisions; groups similar
divisions for improved coordination and manageable CEO span of control. 7. MATRIX: Best when
several variables (product, customer, technology, geography) have roughly equal strategic priorities;
used in construction, healthcare, defense, research.
Q: Explain the role and benefits of ESOPs (Employee Stock Ownership Plans) in strategy
implementation.
A: An ESOP is a tax-qualified, defined-contribution benefit plan enabling employees to purchase
company stock. Benefits for STRATEGY IMPLEMENTATION: 1. OWNERSHIP ALIGNMENT:
Employees work as owners, aligning their interests with organizational success — reduces worker
alienation. 2. PRODUCTIVITY GAINS: Research shows ownership culture stimulates productivity.
Example: Wyatt Cafeterias saw 'happy to be here' attitudes that customers loved. 3. TAX SAVINGS:
Principal, interest, and dividend payments on ESOP debt are tax-deductible; banks lend below prime
rate; if ESOP owns 50%+, lenders are taxed on only 50% of loan income. 4. HOSTILE TAKEOVER
DEFENSE: ESOPs can prevent hostile takeovers (as with Wyatt Cafeterias). LIMITATIONS: Initial
setup cost ~$50,000, annual administration ~$15,000; not suitable for firms with fluctuating
payrolls/profits; ESOPs now control over $600 billion in U.S. corporate stock across 10,000+ firms.
Q: Describe the three change implementation strategies and identify which is most effective
and why.
A: Fred David identifies three change strategies: 1. FORCE CHANGE STRATEGY: Managers give
orders and enforce them. ADVANTAGE: Fast implementation. DISADVANTAGE: Low commitment,
high resistance. Suitable only for emergencies. 2. EDUCATIVE CHANGE STRATEGY: Presents
information to convince people of the need for change. ADVANTAGE: Greater commitment and less
resistance. DISADVANTAGE: Slow and difficult implementation. Suitable for non-urgent, complex
changes. 3. RATIONAL/SELF-INTEREST CHANGE STRATEGY: Convinces individuals that change
is to their personal advantage. ADVANTAGE: Most desirable; easiest implementation when
successful. DISADVANTAGE: Implementation changes are seldom to everyone's advantage. The
RATIONAL strategy is MOST EFFECTIVE because it aligns personal incentives with organizational
needs, removing the primary motivation for resistance. Jack Duncan's four steps: participation,
motivation, communication, and feedback make this strategy operational.
Q: Discuss the importance of annual objectives and policies as strategy implementation tools.
A: ANNUAL OBJECTIVES provide the operational foundation for implementation: they allocate
resources according to strategic priorities, serve as the primary mechanism for evaluating manager
performance, monitor progress toward long-term goals, and establish divisional and departmental
priorities. Good annual objectives must be MEASURABLE, CONSISTENT, REASONABLE,
CHALLENGING, CLEAR, COMMUNICATED, TIME-BOUND, and accompanied by
REWARDS/SANCTIONS. Objectives should state quantity, quality, cost, and time — vague terms
like 'maximize' or 'adequate' must be avoided. POLICIES are the day-to-day instruments that make
strategies work. They are specific guidelines, procedures, and rules that: set limits on administrative
actions; reduce manager decision-making time; promote delegation; allow coordination across units;
and ensure consistent behavior. Example: Carnival's no-smoking policy supports its strategy of
attracting health-conscious cruisers. Policies must be STATED IN WRITING and form a HIERARCHY
from company level to divisional to departmental levels, each supporting the level above.
16. CHAPTER SUMMARY — QUICK REVISION

CHAPTER 7 — ONE-PAGE MASTER SUMMARY

Implementation vs Formulation Implementation = doing (operational, efficiency,
many people); Formulation = saying (intellectual,
effectiveness, few people)

Annual Objectives 4 purposes: resource allocation basis, manager

evaluation, monitor long-term progress, establish
priorities. Must be MEASURABLE with quantity,
quality, cost, time.

Policies Instruments for implementation. Set boundaries,

reduce manager time, promote delegation. Must
be IN WRITING. Hierarchy: Company → Division
→ Department.
Resource Allocation 4 resources: financial, physical, human,
technological. Blocked by politics, overprotection,
short-term focus. Strategic management is a
'resource allocation process.'

Conflict Resolution 3 methods: Avoidance (ignore/separate),

Defusion (minimize, compromise), Confrontation
(exchange members, meet to resolve).
Confrontation is most effective long-term.

Chandler's Model New strategy → Problems → Decline → New

structure → Recovery. Structure FOLLOWS
strategy. Declining performance signals structural
change needed.

7 Structures Functional (small, centralized) → Divisional

(medium, decentralized:
geographic/product/customer/process) → SBU
(large conglomerates) → Matrix (most complex,
dual bosses)
Restructuring vs Reengineering Restructuring = WHAT (reducing size,
shareholder focus, strategic). Reengineering =
HOW (redesigning work, employee/customer
focus, tactical).

Performance-Pay Link Dual bonus (annual + long-term); Profit sharing

(30% firms); Gain sharing (26% firms;
departmental targets); 5-test checklist for
effectiveness.

Resistance to Change Greatest threat to implementation. 3 strategies:

Force (fast, low commitment), Educative (slow,
high commitment), Rational (most desirable, self-
interest).

Strategy-Supportive Culture Schein's 10 elements. 13 ways to alter culture.

Changing culture to fit strategy > changing
strategy to fit culture.
Production Issues JIT frees up inventory capital (Harley: $22M).
Plant location factors. Cross-training benefits.
Production = 70%+ of firm assets.

HR Issues 3 causes of HR problems: social disruption,

aptitude mismatch, lack of top management
support. Furloughs vs layoffs. Work-life balance
= competitive advantage.

ESOPs 10,000+ firms, 10M+ employees, $600B in stock.

Tax benefits. Not for fluctuating firms. Initial cost:
~$50K setup + $15K/year.

Glass Ceiling Invisible barrier for women/minorities. Women =

47% of U.S. workforce but 2.6% of Fortune 500
CEOs. Mixed-gender leadership outperforms
single-gender.

Best of Luck in Your MS Exams! 🎓