STRATEGY

Strategy – Core
Arthur A. Thompson
Core Concepts and
ConceptsAnalytical
and Analytic
Approaches
5th Edition (2018-2019)
Approaches 5e
The University of Alabama
Authur A. Thompson, The University of
Alabama
CHAPTER 11
CHAPTER 1 What Is Strategy and Why
Managing Internal
Is It Important?
Operations:
Actions That
Promote Good
Strategy Execution

An e-book published and distributed Copyright © 2018 by Arthur A. Thompson, Glo-Bus Software, Inc.
by McGraw Hill Education, Burr Ridge, Illinois All rights reserved. Not for distribution.
 “Winning companies know
how to do their work better.”

Michael Hammer and

James Champy

Copyright © 2018 by Glo-Bus Software, Inc. 11–2

 “Companies that make best practices a priority
are thriving, thirsty, learning organizations.
They believe that everyone should always be
searching for a better way. Those kinds of
companies are filled with energy and curiosity
and a spirit of can-do.”

Jack Welch,
former CEO, General Electric

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 “Motivation is the art of getting people
to do what you want them to do
because they want to do it..”

Dwight D. Eisenhower,
thirty-fourth President of the United State

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 “Pay your people the least possible
and you’ll get the same from them.”

Malcolm Forbes,
late Publisher of Forbes Magazine

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 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.

Copyright © 2018 by Glo-Bus Software, Inc. 11–6

 Chapter 11 Roadmap

 Steering Needed Resources to Execution-Critical

Activities
 Instituting Policies and Procedures that Facilitate
Strategy Execution
 Adopting Best Practices and Striving for
Continuous Improvement
 Installing Information and Operating Systems
 Using Rewards and Incentives to Promote Better
Strategy Execution

Copyright © 2018 by Glo-Bus Software, Inc. 11–7

 Steering Needed Resources
to Execution-Critical Activities
 Good strategy execution requires:
► Top management involvement in directing the proper kinds
and amounts of resources to various organizational units so
that the units can effectively and efficiently execute their parts
of the strategic plan.
► Changes in strategy and efforts to improve execution of an
existing strategy typically entail budget reallocation and
resource shifting.
• Previously important units with a lesser role in a new strategy may need
downsizing.
• Units that now have a bigger strategy-critical role may need more people,
new equipment, additional facilities, and above-average increases in their
operating budgets, especially if they need to develop and strengthen
particular resources, competencies, and capabilities.
Copyright © 2018 by Glo-Bus Software, Inc. 11–8
 Guidelines for Allocating Resources
to Promote Good Strategy Execution
 Expenditures for operations and capital improvements must be
► Driven by what it takes to achieve good strategy execution (to amply
fund performance of strategy-critical value chain activities)
► Lean (to operate cost-efficiently).
 Underfunding organizational units and activities pivotal to
strategic success impedes the implementing and executing of
strategy.
 Overfunding of particular organizational units and value chain
activities wastes organizational resources and reduces financial
performance.

Copyright © 2018 by Glo-Bus Software, Inc. 11–9

 Core Concept
Good strategy execution requires steering the
proper kinds and amounts of resources to the
enterprise’s various organization units and
strategy-critical value chain activities.

Visible actions to reallocate operating funds and

increase/decrease the staffing of certain organizational
units give credibility to management’s intent to
institute internal change and signal personnel to
exhibit a sense of urgency in putting the new strategy
elements into place and/or improving the performance
of activities essential to better strategy execution.
Copyright © 2018 by Glo-Bus Software, Inc. 11–10
 Ensuring That Policies and Procedures
Facilitate Strategy Execution
 When a firm puts new strategy elements in place or
improves its strategy execution capabilities, some changes
in work practices and behavior of personnel are usually
called for.
 Well-conceived policies and procedures facilitate good
strategy execution by:
► Providing top-down guidance in how certain things need to be done
► Helping enforce needed consistency in how execution-critical
activities are performed in geographically scattered operating units
► Promoting the creation of a work climate that facilitates good strategy
execution

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Figure 11.1 How Prescribed Policies and Procedures Facilitate Strategy
Execution

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 Core Concept

A company’s policies and procedures provide

guidance for conducting particular aspects of the
company’s business and a set of white lines and
routines for steering employee behavior.

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 Core Concept

A company’s policies and procedures can either

support or hinder good strategy execution.
Well-conceived policies and procedures aid
strategy execution; out-of-sync ones are barriers.

Instituting strategy-facilitating policies can mean more

policies, fewer policies, or different policies. It can
mean policies that require things to be done a certain
way or policies that give employees some leeway
between the white lines.

Copyright © 2018 by Glo-Bus Software, Inc. 11–14

 Rigid Policies or Room for
Independent Action?
 One of the big policy-making issues concerns what activities need to
be rigidly prescribed and what activities ought to allow room for
independent action on the part of empowered personnel
 Too much policy can erect as many obstacles as wrong policy or be as
confusing as no policy. There is wisdom in a middle-ground approach:
► Prescribe enough policies to give organization members clear
direction and to place desirable boundaries on their actions, then
empower them to act within these boundaries however they think
makes sense.
Allowing company personnel to act anywhere between the “white lines” is
especially appropriate when individual creativity and initiative
are more essential to good strategy execution than
standardization and strict conformity.

Copyright © 2018 by Glo-Bus Software, Inc. 11–15

Adopting Best Practices and Employing Process
Management Tools to Improve Execution
 Managers can promote competent strategy execution by pushing
organization units and personnel to identify and adopt the best
practices for performing value chain activities and, further, insisting
on continuous improvement in how internal operations are
conducted
 Benchmarking a firm’s performance of particular activities and
business processes against “best-in-industry” and “best-in-world”
performers is a powerful tool for gauging how well a firm is executing
pieces of its strategy and performing particular value chain
activities
 Benchmarking provides yardsticks for
► Judging the effectiveness and efficiency of internal operations
► Setting performance standards for organization units to meet or beat

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 Strategic Insight

Managerial efforts to identify and adopt best

practices are a powerful tool for promoting
operating excellence and better strategy
execution.

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 Core Concept
A best practice is a means of performing an activity or
process that yields results consistently superior to other
approaches.
A method of performing an activity or process qualifies as
a best practice when at least one enterprise has shown
that it is unusually effective in:
• Significantly lowering costs
• Improving quality or performance
• Shortening time requirements or enhancing safety OR
• Delivering other highly positive outcomes
A best practice can evolve over time
as improvements are discovered.

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How the Process of Identifying and Incorporating
Best Practices Works
 The role of benchmarking is to:
► Look outward to find best practices of other firms
► Develop measures of how well a firm’s own performance
of the activity compares to the best-practice standard of
outside enterprises
 Then the firm must
► Adapt the best practices to fit its own circumstances
► Implement its customized version of the best practice
► Continue to track how well its performance outcomes
compare to those achieved elsewhere

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 Strategic Insight

Implementing use of best practices across a

company’s entire value chain is a powerful way for
managers to push a company along the path to
operating excellence and good strategy execution.

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Figure 11.2 From Benchmarking and Best-Practice Implementation
to Operating Excellence

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 Best Practice Adoption + Benchmarking =
Powerful Tools for Achieving Operating
Excellence
 Successfully adapting a best practice methodology
improves a firm’s performance of that activity, perhaps
dramatically, promoting better strategy execution
 Benefits of best practices and benchmarking
► Using best practices extensively in value chain activities increases
both the effectiveness and the efficiencies of those activities
► Benchmarking data confirms the achievement of superior outcomes
in the performance of value chain activities

Wide-scale use of best practices across a firm’s

entire value chain promotes operating excellence
and good strategy execution.
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Business Process Reengineering, TQM, and Six
Sigma Quality Programs: Tools for Promoting
Operating Excellence
 Three other potent management tools for
improving the performance of certain internal
activities and thereby moving closer to operating
excellence and more competent strategy
execution are:
► Business process reengineering
► Total quality management (TQM) programs
► Six Sigma programs

Copyright © 2018 by Glo-Bus Software, Inc. 11–23

 Business Process Reengineering
 When strategically relevant activities are distributed
piecemeal across several functional departments:
► Inefficiencies are created and optimal performance is impeded
► Accountability is lacking since no one functional manager is
responsible for optimum performance of the entire activity
 Solution  Business Process Reengineering
► Involves redesigning and streamlining workflows and work process
steps, with the goal of achieving quantum gains in performance
of the activity
► Often leads to the establishment of process departments and/or
cross-functional work groups that unify performance of
activities, improving overall performance and lowering costs, which
in turn promotes operating excellence

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 Core Concept

Business process reengineering involves

radically redesigning and streamlining how an
activity is performed, with the intent of achieving
quantum improvements in performance.

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 Total Quality Management Programs

 TQM is a management approach that emphasizes:

► Continuous improvement in all phases of operations
► 100 percent accuracy in performing tasks
► Involvement and empowerment of employees at all levels
► Team-based work design
► Benchmarking
► Total customer satisfaction

TQM entails creating a total quality culture focused on

continuously improving the performance of every task
and value chain activity.

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 Core Concept

TQM entails creating a total quality culture bent on

continuously improving the performance of every
task and value chain activity.
TQM stresses ongoing incremental progress,
striving for inch-by-inch gains again and again in a
never-ending stream.

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 How TQM Works
 Implementing and executing a TQM program
► Involves reforming the firm’s culture and focusing on a total quality/
continuous improvement philosophy
► Aims to instill enthusiasm and commitment to doing things right from the top
to the bottom of the organization
► Involves an ongoing search for ways to improve
 TQM doctrine
► There is no such thing as “good enough” and everyone has a responsibility
to participate in continuous improvement
► TQM is a race without a finish—success comes from making small steps
forward each day
 TQM takes a fairly long time to show significant results—very little
benefit emerges in the first six months. But TQM programs can deliver
good long-term results if top executives succeed in creating a culture
and work climate where TQM philosophies and practices can thrive.

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 Six Sigma Programs
 Six Sigma techniques entail the use of advanced
statistical methods to identify and remove the causes of
defects (errors) and undesirable variations in performing an
activity or business process
 When performance of an activity or process reaches “Six
Sigma quality,” there are not more than 3.4 defects/errors
per million iterations (equal to 99.9997% accuracy)
 The statistical thinking underlying Six Sigma is based on
three principles:
1. All work is a process
2. All processes have variability
3. All processes create data that explains variability
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 Core Concept

Six Sigma programs use advanced statistical

methods to enable an activity or process to be
performed with 99.9997 percent accuracy—fewer
than 3.4 million defects per million iterations.

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 Two Main Types of Six Sigma Programs
 Type 1
► Using Six Sigma methods to improve existing processes falling
below specification and needing incremental improvement
► Useful for improving performance when there are wide variations
in how well an activity is being performed
 Type 2
► Using Six Sigma techniques to develop new processes or products
at Six Sigma quality levels

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 The Challenges of Successfully Employing
Six Sigma Programs
 An enterprise that systematically applies Six Sigma
methods to its value chain, activity by activity, can make
major strides in improving the proficiency with which its
strategy is executed provided:
► Top management is genuinely committed to employing Six Sigma
programs and methods of operating

► Senior management spends the time it takes to establish and nurture

a Six Sigma-style quality culture

► Management is able to fully involve employees and train adequate

numbers of Six Sigma green belt, black belt, and master black belt
personnel to conduct the Six Sigma programs competently

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 A Drawback of Six Sigma Programs
 Six Sigma techniques can stifle innovation and creativity
 The strength of Six Sigma techniques is developing and
improving how activities and processes are performed, but
creative processes such as R&D and new product
development involve (or require):
► Outside-the-box brainstorming
► Trial-and-error experimentation
► Innovative exploration of ideas and approaches, with many being
discarded and those that appear promising going through multiple
testing, revisions, and prototyping to identify what works best
 Six Sigma users have backed off using strict Six Sigma
procedures for activities where personnel need free rein to
discover new and better ways of doing things
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 The Difference between Business Process
Reengineering and Continuous Improvement
Programs
 Business process reengineering aims at one-time
quantum improvement whereas both TQM and Six
Sigma programs aim at ongoing incremental
improvements
► Reengineering can be used first to produce a good basic
design that yields quick dramatic improvements in
performing a business process
► TQM or Six Sigma programs can then be used as a
follow-on to achieve gradual improvements beyond the
one-time quantum gain

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 Capturing the Benefits of Initiatives
to Improve Operations
 Benchmarking, best practices, business process
reengineering, TQM, and Six Sigma techniques help a firm:
► Execute its strategy proficiently
► Improve the performance of value chain activities
► Strengthen organizational capabilities
► Build a culture of operating excellence
While rivals can also implement benchmarking, best practices, and
continuous improvement programs, it is much more difficult and time-
consuming for them to instill a deeply ingrained culture of operating
excellence, thus enabling a successful first-mover to achieve a
potentially sustainable competitive advantage

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 Core Concept
The purpose of using benchmarking, best practices,
business process reengineering, TQM, and Six Sigma
programs is to improve the performance of all value chain
activities, become ever more proficient in executing the
firm’s strategy, and create a work climate and culture
where personnel constantly strive for operating excellence.

When a firm’s use of the tools proves successful,

it often gains a competitive advantage over rivals
based on superior strategy execution capabilities.

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 Installing Information and Operating
Systems
 State-of-the-art operating systems and real time
data
► Help strengthen operating capabilities and improve the
performance of value chain activities
► Are integral to competent strategy execution and
operating excellence
► Provide a competitive advantage by giving a firm
capabilities that rivals do not have and are unable to
match (without the expenditure of considerable time,
money, and organizational effort)

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 Core Concept

State-of-the-art operating systems and real-time

data are integral to competent strategy execution
and operating excellence.
They can also be a basis for competitive
advantage if they give a firm competitively
valuable capabilities that rivals do not have or
cannot offset with other capabilities they have
developed.

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 Example: Execution-Critical Support
Systems at FedEx
 Internal communication systems that coordinate
100,000 vehicles and 650 aircraft handling an
average of 17.7 million packages per day
 Leading-edge flight operations systems allow a
single controller to redirect many FedEx aircraft at
once, overriding their flight plans should weather
or other contingencies arise
 E-business logistics management tools allow
customers to ship and track their packages online

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 Other Examples of Execution-Critical
Support Systems
 [Link]
► Global network of warehouses where computers control order-
picking by sending signals to wireless receivers
 Otis Elevator
► Sophisticated support systems for monitoring, maintaining, and
quickly repairing the 2.6 million elevators, escalators, and moving
sidewalks it has installed for customers

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 Why Information Systems and Performance
Tracking Matter
 Information about daily operations is essential if managers
are to gauge how well the strategy execution process is
proceeding. Information systems need to cover five broad
areas:
► Customer data
► Operations data
► Employee data
► Supplier/partner/collaborative ally data
► Financial performance data

 All key strategic performance indicators must be tracked

and reported in real time where possible
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 The Benefits of Real-Time Information and
Performance Tracking
 Real-Time Information Systems
► Permit timely tracking of key performance indicators across all aspects
of the business

► Allow managers to gather and review information rapidly, to quickly identify

and diagnose problems, and to initiate corrective actions

► Enable managers to gauge how well the execution process is proceeding

► Provide a means for managers to exercise control over operations

► Provide empowered personnel with information essential to performing their

jobs (responding to customer inquiries, providing personalized customer
service)

Amazon CEO Jeff Bezos, a proponent of managing by the numbers, says:

“The trouble with most corporations is that they make judgment-based
decisions when data-based decisions could be made.”

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 Tying Rewards and Incentives Directly to
Achieving Good Execution-Critical Outcomes
 It is essential that personnel be enthusiastically committed
to executing strategy proficiently and achieving performance
targets
 Enlisting such organization commitment requires an
assortment of motivational techniques and rewards
► Just talking about how important new operating practices and the
achievement of performance targets are to the firm’s well-being
seldom commands people’s best efforts for very long
An effectively designed system of incentives and rewards
is a very powerful management tool for winning employee
commitment to diligent, competent strategy execution
and operating excellence.

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 Core Concept

A well designed reward structure is management’s

single most powerful tool for mobilizing
organizational commitment to successful strategy
execution.

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 Incentives and Motivational Practices That
Facilitate Good Strategy Execution
 Providing attractive financial compensation
 Providing attractive perks and fringe benefits
 Relying on promotion from within whenever possible.
 Inviting and acting on ideas and suggestions from employees.
 Giving awards and public recognition to high performers and
showcasing company successes.
 Creating a work atmosphere in which there is genuine sincerity, caring,
and mutual respect among workers and between management and
employees.
 Stating the strategic vision in inspirational terms that make employees
feel they are doing something worthwhile in a larger social sense.
 Providing an appealing workplace environment.
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 Components of an Effective Reward System

 Monetary  Non-Monetary
Incentives Incentives
► Base pay increases ► Praise/constructive
► Performance bonuses criticism
► Profit sharing plans ► Special recognition

► Stock options ► More/less job security

► Retirement packages ► Stimulating or dead-end job

► Piecework incentives
assignments
► More/less autonomy
► Rapid/slow promotion

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 Striking the Right Balance between
Rewards and Punishment
 There is scant evidence that a no-pressure/no-adverse-
consequences work environment leads to superior strategy
execution or operating excellence. Hence, it is unwise to:
► Take off the pressure for good individual and group performance

► Play down the adverse consequences of shortfalls in performance

 Nonetheless, it is usually best to emphasize positive rather

than negative approaches
► Too much stress, internal competitiveness, job insecurity, and
unpleasant consequences can have a counterproductive impact
on workforce morale and strategy execution

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 Linking Rewards to Achieving
the Right Outcomes
 A well-designed incentive system emphasizes rewarding
people for accomplishing results, not for dutifully performing
assigned tasks
► Focus must be on “what to achieve”, NOT ON “what to do”

► Reward people for achieving the right results, NOT for activity or
trying hard

► Performing assigned tasks is not equivalent to achieving intended

outcomes

Every organization unit, manager, team or work group, and employee

must be held accountable for achieving outcomes that contribute to
good strategy execution and business performance

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 Linking the Reward System
to Performance Outcomes
 Tying rewards to the achievement of strategic and
financial performance targets is management’s single
most powerful tool to win the commitment of
personnel to effective strategy execution
 Generously reward people who meet or beat performance
targets
 Deny rewards to those who don’t
► Incentives/rewards should never be awarded for “a commendable
effort,” always staying busy, coming to work on time, or “trying hard”

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 Core Concept
Incentives must be based on accomplishing the
right results, not on dutifully performing assigned
tasks.

People should never be rewarded just because

they “work hard” or “put forth a good effort.”

Incentives work best when tied directly to

achieving performance outcomes linked to good
strategy execution and good financial
performance.

Copyright © 2018 by Glo-Bus Software, Inc. 11–50

 Guidelines for Designing Effective
Incentive Compensation Systems
 Make the performance payoff a major, not minor, piece of the total
compensation package
 Have incentives that extend to all managers and all workers, not just
top management
 Administer the reward system with scrupulous objectivity and fairness
 Make sure that the performance targets each individual or team is
expected to achieve involve outcomes that the individual or team can
personally affect
 Keep the time between achieving the target performance outcome and
the payment of the reward as short as possible
 Absolutely avoid skirting the system to find ways to reward effort rather
than results

Copyright © 2018 by Glo-Bus Software, Inc. 11–51

 Core Concept
The unwavering standard for judging whether
individuals, teams, and organizational units have
done a good job must be whether they meet or
beat performance targets that reflect good
strategy execution.
 Once “good excuses” start to creep into justifying
rewards for subpar results, the door is open for all kinds
of reasons why actual performance failed to match
targeted performance.
 A “no excuses” standard is more evenhanded, easier to
administer, and more conducive to creating a results-
oriented work climate
Copyright © 2018 by Glo-Bus Software, Inc. 11–52
 Questions for Company Co-Managers
 What specific actions has your company taken to manage
internal operations so as to promote good strategy
execution and operating excellence?
 What specific evidence (based on the industry
benchmarking data and other operating statistics) can you
cite that indicates your company is making reasonable
progress toward achieving operating excellence?
 Is there hard evidence (from the industry benchmarking
data and other operating statistics) that your company is
not as close to achieving operating excellence as are one
or more rival companies?

Copyright © 2018 by Glo-Bus Software, Inc. 11–53