Chapter 12 - Lecture Note

Chapter 12 Lecture Note

Managing Internal Operations
Actions that Promote Better Strategy
Execution
Chapter Summary
Chapter Twelve discusses five additional managerial actions that facilitate the success of a company’s
strategy execution efforts. These include (1) marshaling resources to support the strategy execution effort,
(2) instituting policies and procedures that facilitate strategy execution, (3) adopting best practices and
striving for continuous improvement in how value chain activities are performed, (4) installing
information and operating systems that enable company personnel to carry out their strategic roles
proficiently, and (5) tying rewards and incentives directly to the achievement of strategic and financial
targets and to good strategy execution.

Lecture Outline
I. Marshalling Resources behind the Drive for Good Strategy Execution
1. Early in the process of implementing and executing a new or different strategy, managers need to
determine what resources will be needed and then consider whether the current budgets of
organizational units are suitable.
2. A company’s ability to marshal the resources needed to support new strategic initiatives and steer
them to the appropriate organizational units has a major impact on the strategy execution process.

Core Concept
The funding requirements of a new strategy must drive how capital allocations are made and the size
of each unit’s operating budgets. Underfunding organizational units and activities pivotal to strategic
success impedes execution and the drive for operating excellence.

3. A change in strategy nearly always calls for budget reallocations.

4. Visible actions to relocate operating funds and move people into new organizational units signal a
determined commitment to strategic change and frequently are needed to catalyze the
implementation process and give it credibility.
5. Just fine-tuning the execution of a company’s existing strategy, however, seldom requires big
movements of people and money from one area to another.

12-1
Chapter 12 - Lecture Note

II. Instituting Policies and Procedures that Facilitate Strategy Execution

Core Concept
Well-conceived policies and procedures aid strategy execution; out-of-sync ones are barriers.

1. Figure 12.1, How Prescribed Policies and Procedures Facilitate Strategy Execution, looks at
some of these effects.
2. Prescribing new policies and operating procedures designed to facilitate strategy execution has
merit from several angles:
a. It provides top-down guidance regarding how certain things now need to be done
b. It promotes the creation of a work climate that facilitates good strategy execution
3. Illustration Capsule 12.1, Granite Constructions Short Pay Policy: An Innovative Way to
Drive Better Strategy Execution, describes how this company’s policy spurs employee focus on
providing total customer satisfaction and building the company’s reputation for superior customer
service.

Illustration Capsule 12.1, Granite Constructions Short Pay Policy: An Innovative

Way to Drive Better Strategy Execution
Discussion Question: 1. Identify how this “short pay” strategy proved effective for this company.
Answer: This policy has worked exceptionally well, providing unmistakable feedback and spurring
company managers to correct any problems quickly in order to avoid repeated short payments. Under this
strategy, Graniterock has enjoyed market share increases and won the prestigious Malcolm Baldrige
National Quality Award in 1992.

III. Adopting Best Practices and Striving for Continuous Improvement

1. Company managers can significantly advance the cause of competent strategy execution by
pushing organization units and company personnel to identify and adopt the best practices for
performing value chain activities and insisting on continuous improvement in how internal
operations are conducted.
2. One of the most widely used and effective tools for gauging how well a company is executing
pieces of its strategy entails benchmarking the company’s performance of particular activities and
business processes against “best in industry” and “best in world” performers.

12-2
Chapter 12 - Lecture Note

Core Concept
Managerial efforts to identify and adopt best practices are a powerful tool for promoting operating
excellence and better strategy execution.

A. How the Process of Identifying and Incorporating Best Practices Works

1. A best practice is a technique for performing an activity or business process that at least one
company has demonstrated works particularly well.
2. To qualify as a legitimate best practice, the technique 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.

Core Concept
A best practice is any practice that at least one company has proved works particularly well.

3. Benchmarking is the backbone of the process for identifying, studying, and implementing
outstanding practices.
4. Informally, benchmarking involves being humble enough to admit that others have come up
with world-class ways to perform particular activities yet wise enough to try to learn how to
match and even surpass them.
5. Figure 12.2, From Benchmarking and Best Practices Implementation to Operating
Excellence, explores the potential pay-off from benchmarking.
6. However, benchmarking is more complicated than simply identifying which companies are
the best performers of an activity and then trying to exactly copy other companies’
approaches.
7. Normally, the outstanding practices of other organizations have to be adapted to fit the
specific circumstances of a company’s own business and operating requirements.
8. A best practice remains little more than an interesting success story unless company
personnel buy into the task or translating what can be learned from other companies into real
action and results.
9. Legions of companies across the world now engage in benchmarking to improve their
strategy execution and gain a strategic, operational, and financial advantage over rivals.

12-3
Chapter 12 - Lecture Note

B. Business Process Reengineering, Six Sigma Quality Programs, and TQM: Tools for
Promoting Operational Excellence
1. Best practice implementation has stimulated greater management awareness of the
importance of business process reengineering, total quality management (TQM) programs,
Six Sigma quality control techniques, and other continuous improvement methods.
2. Total Quality Management Programs: Total quality management (TQM) is a philosophy
of managing a set of business practices 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, and total customer
satisfaction. The managerial objective is to kindle a burning desire in people to use their
ingenuity and initiative to progressively improve their performance of value chain activities.
TQM doctrine preaches that there is no such thing as good enough and that everyone has a
responsibility to participate in continuous improvement. The long-term payoff of TQM, if it
comes, depends heavily on management’s success in implanting a culture within which TQM
philosophies and practices can thrive.

Core Concept
TQM entails creating a total quality culture bent on continuously improving the performance of
every task and value chain activity.

3. Six Sigma Quality Control: Six Sigma quality control consists of a disciplined, statistics-
based system aimed at producing not more than 3.4 defects per million iterations for any
business process – from manufacturing to customer transactions. The Six Sigma process of
define, measure, analyze, improve, and control (DMAIC) is an improvement system for
existing processes falling below specification and needing incremental improvement. The Six
Sigma process of define, measure, analyze, design, and verify (DMADV) is an improvement
system used to develop new processes or products at Six Sigma quality levels. Both Six
Sigma processes are executed by personnel who have earned Six Sigma “green belts” and Six
Sigma “black belts” and are overseen by personnel who have completed Six Sigma “master
black belt” training. The statistical thinking underlying Six Sigma is based on the following
three principles: all work is a process, all processes have variability, and all processes create
data that explains variability. Six Sigma’s DMAIC process is a particularly good vehicle for
improving performance when there are wide variations in how well an activity is performed.
A problem tailor-made for Six Sigma occurs in the insurance industry, where it is common
for top agents to outsell poor agents by a factor of 10 to 1.
4. Illustration Capsule 12.2, Whirlpool’s Use of Six Sigma to Promote Operating Excel-
lence, describes Whirlpool’s use of Six Sigma in its appliance business.

12-4
Chapter 12 - Lecture Note

Illustration Capsule 12.2, Whirlpool’s Use of Six Sigma to Promote Operating

Excellence
Discussion Question: 1. What did Whirlpool do to sustain the productivity gains and cost savings
derived through its implementation of Six Sigma?
Answer: To sustain these benefits, Whirlpool embedded Six Sigma practices within each of its
manufacturing facilities worldwide and instilled a culture based on Six Sigma and lean manufacturing
skills and capabilities.

5. The Difference Between Process Reengineering and Continuous Improvement Pro-

grams Like Six Sigma And TQM: The essential difference between business process
reengineering and continuous improvement programs is that reengineering aims at quantum
gains on the order of 30 to 50 percent or more whereas total quality programs stress
incremental progress, striving for inch-by-inch gains again and again in a never ending
stream. The two approaches to improved performance of value chain activities and operating
excellence are not mutually exclusive; it makes good sense to use them in tandem.

Core Concept
Business process reengineering aims at one time quantum improvement; continuous programs like
TQM and Six-Sigma aim at ongoing incremental improvements.

12-5
Chapter 12 - Lecture Note

C. Capturing the Benefits of Initiatives to Improve Operations

1. Usually, the biggest beneficiaries are companies that view such programs not as ends in
themselves but as tools for implementing and executing company strategy more effectively.
2. To get the most from programs for facilitating better strategy execution, managers must have
a clear idea of what specific outcomes really matter.
3. The action steps managers can take to realize full value from TQM or Six Sigma initiatives
include:
a. Visible, unequivocal, and unyielding commitment to TQM and continuous improvement
b. Nudging people toward TQM-supportive behaviors by:
i. Screening job applicants rigorously
ii. Providing quality training
iii. Using teams and team-building exercises
iv. Recognizing and rewarding individual and team efforts
v. Stressing prevention not inspection
c. Empowering employees
d. Using online systems to provide all relevant parties with the latest best practices and
actual experiences with them
e. Preaching that performance can and must be improved
4. When used effectively, TQM, Six Sigma, and other similar continuous improvement
techniques can greatly enhance a company’s product design, cycle time, production costs,
product quality, service, customer satisfaction, and other operating capabilities and can help
to deliver competitive advantage.
IV. Installing Information and Operating Systems
1. Company strategies cannot be executed well without a number of internal systems for business
operations.
2. Well-conceived, state-of-the-art operating systems not only enable better strategy execution but
also can strengthen organizational capabilities – perhaps enough to provide a competitive edge
over rivals.
3. It is nearly always better to put infrastructure and support systems in place before they are
actually needed than to have to scramble to catch up to customer demand.

12-6
Chapter 12 - Lecture Note

Core Concept
State-of-the-art support systems can be a basis for competitive advantage if they give a firm
capabilities that rivals cannot match.

A. Instituting Adequate Information Systems, Performance Tracking, and Controls

1. Accurate and timely 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:
a. Customer data
b. Operations data
c. Employee data
d. Supplier/partner/collaborative ally data
e. Financial performance data
2. Real time information systems permit company mangers to stay on top of implementation
initiatives and daily operations and to intervene if things seem to be drifting off course.
3. Statistical information gives managers a feel for the numbers, briefings and meetings provide
a feel for the latest developments and emerging issues, and personal contacts add a feel for
the people dimension. All are good barometers.

Core Concept
Having good information systems and operating data are integral to competent strategy execution
and operating excellence.

B. Exercising Adequate Controls over Empowered Employees

1. Leaving empowered employees to their own devices in meeting performance standards
without appropriate checks and balances can expose an organization to excessive risk.
V. Tying Rewards and Incentives to Strategy Execution
1. It is important for both organization subunits and individuals to be enthusiastically committed to
executing strategy and achieving performance targets.
2. To get employees’ sustained, energetic commitment, management has to be resourceful in
designing and using motivational incentives – both monetary and nonmonetary.

12-7
Chapter 12 - Lecture Note

Core Concept
A properly designed reward structure is management’s most powerful tool for mobilizing
organizational commitment to successful strategy execution.

A. Strategy-Facilitating Motivational Practices:

1. Financial incentives generally lead the list of motivating tools for trying to gain wholehearted
employee commitment to good strategy execution and operating excellence.
2. In addition, companies use a host of other motivational approaches to spur stronger employee
commitment to the strategy execution process. Some of the most important include:
a. Providing attractive perks and fringe benefits
b. Relying on promotion from within whenever possible
c. Making sure that the ideas and suggestions of employees are valued and respected
d. Creating a work atmosphere where there is genuine sincerity, caring, and mutual respect
among workers and between management and employees
e. Stating the strategic vision in inspirational terms that make employees feel they are a part
of doing something worthwhile in a larger social sense
f. Sharing information with employees about financial performance, strategy, operational
measures, market conditions, and competitors’ actions
g. Having knockout facilities
h. Being flexible in how the company approaches people management – motivation,
compensation, recognition, recruitment – in multinational, multicultural environments

Core Concept
One of management’s biggest strategy-executing challenges is to employ motivational techniques
that build a wholehearted commitment to operating excellence and winning attitudes among
employees.

3. Illustration Capsule 12.3, What Companies do to Motivate and Reward Employees,

examines some of the varieties of techniques utilized by organizations to motivate employees.

12-8
Chapter 12 - Lecture Note

Illustration Capsule 12.3, What Companies do to Motivate and Reward Employees

Discussion Question: 1. Companies engage a vast variety of employee motivational techniques. What is
the primary purpose of implementation of these techniques?
Answer: Companies utilize a myriad of motivational and reward practices and techniques to help create a
work environment that facilitates better strategy execution.

B. Striking the Right Balance Between Rewards and Punishment

1. While most approaches to motivation, compensation, and people management accentuate the
positive, companies also embellish positive rewards with the risk of punishment.
2. As a general rule, it is unwise to take off the pressure for good individual and group
performance or play down the stress, anxiety, and adverse consequences of shortfalls in
performance.
3. High performing organizations nearly always have a cadre of ambitious people who relish the
opportunity to climb the ladder of success, love a challenge, thrive in a performance-oriented
environment, and find some competition and pressure useful to satisfy their own drives for
personal recognition, accomplishment, and self-satisfaction.
4. If an organization’s motivational approaches and reward structure induce too much stress,
internal competitiveness, job insecurity, and unpleasant consequences, the impact on work
force morale and strategy execution can be counterproductive.
5. Evidence shows that managerial initiatives to improve strategy execution should incorporate
more positive than negative motivational elements because when cooperation is positively
enlisted and rewarded, rather than strong-armed by orders and threats, people tend to respond
with more enthusiasm, dedication, creativity, and initiative.
C. Linking the Reward System to Strategically Relevant Performance Outcomes
1. The most dependable way to keep people focused on strategy execution and the achievement
of performance targets is to generously reward and recognize individuals and groups who
meet or beat performance targets and deny rewards and recognition to those who do not.

12-9
Chapter 12 - Lecture Note

Core Concept
A properly designed reward system aligns the well being of organization members with their
contributions to competent strategy execution and the achievement of performance targets.

2. Strategy driven performance targets need to be established for every organization unit, every
manager, every team or work group, and perhaps, every employee.
3. Illustration Capsule 12.4, Nucor and Bank One: Two Companies that Tie Incentives
Directly to Strategy Execution, provides two vivid examples of how companies have
designed incentives linked directly to outcomes reflecting good strategy execution.

Illustration Capsule 12.4, Nucor and Bank One: Two Companies that Tie
Incentives Directly to Strategy Execution
Discussion Question: 1. Identify the prominent result that each organization sustained from
implementing a strategy that tied incentives directly to strategy execution.
Answer: Nucor’s management uses an incentive system to promote high worker productivity and drive
labor costs per ton below rivals. Bank One ties its pay scales in each of its branch offices to that branch’s
customer satisfaction ratings – the higher that branch’s satisfaction rating, the higher the pay scale at that
branch.

4. The Importance of Basing Incentives on Achieving Results, Not on Performing Assigned

Duties: To create a strategy-supportive system of rewards and incentives, a company must
emphasize rewarding people for accomplishing results, not for just dutifully performing
assigned functions.

Core Concept
It is folly to reward one outcome in hopes of getting another outcome.

5. Incentive compensation for top executives is typically tied to company profitability, the
company’s stock price performance, and perhaps such measures as market share, product
quality, or customer satisfaction.
6. Which performance measures to base incentive compensation on depends on the situation –
the priority placed on various financial and strategic objectives, the requirements for strategic
and competitive success, and what specific results are needed in different facets of the
business to keep strategy execution on track.

12-10
Chapter 12 - Lecture Note

Core Concept
The role of the reward system is to align the well being of organization members with realizing the
company’s vision, so that organization members benefit by helping the company execute its strategy
competently and fully satisfy customers.

7. Guidelines for Designing Incentive Compensation Systems: The concepts and company
experiences discussed yield the following perspective guidelines for creating an incentive
compensation system to help drive successful strategy execution:
a. The performance payoff must be a major not minor piece of the total compensation
package
b. The incentive plan should extend to all managers and workers, not just top management
c. The reward system must be administered with scrupulous objectivity and fairness
d. The incentives to performance outcomes directly linked to good strategy execution and
financial performance
e. The performance targets each individual is expected to achieve should involve outcomes
that the individual can personally affect
f. Keep the time between performance review and payment of the reward short
g. Make liberal use of nonmonetary rewards – do not rely solely on monetary rewards
h. Absolutely avoid skirting the system to find ways to reward effort rather than results
8. Once the incentives are designed, they have to be communicated and explained.

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.

9. Performance-Based Incentives and Rewards in Multinational Enterprises: In some

foreign countries, incentive pay runs counter to local customs and cultural norms.
10. Thus, multinational companies have to build some degree of flexibility into the design of
incentives and rewards in order to accommodate cross-cultural traditions and preferences.

12-11
Chapter 12 - Lecture Note

Exercises
1. Go to www.google.com and using the advanced search feature, enter “best practices.” Browse
through the search results to identify at least five organizations that have gathered a set of best
practices and are making information about them available to members. Explore at least one of the
sites to get an idea of the kind of best practice information that is available.
The individual student responses provided will vary. Possible responses to be expected may include:
The Benton Organization, Fast Company, Lucent, Xerox, and Prosci. Some expected responses for
the kind of best practice information available may include: companies that participate with best
practices, how they approach benchmarking and best practices, and benefits to the organization that
can be achieved through utilization of best practices.
2. Go to www.google.com, do a search on “Six Sigma” quality programs. Browse through the search
results and (a) identify at least three companies that offer Six Sigma training and (b) find lists of
companies that have implemented Six Sigma programs in their pursuit of operational excellence –
you should be able to cite at least 25 companies that are Six Sigma Users. Prepare a one-page report
to your instructor detailing the experiences and benefits that one company has realized from
employing Six Sigma methods in its operation. To learn more about how Six Sigma works, go to
www.isixsigma.com and explore the Six Sigma Q&A menu option.
The responses provided by the individual students will vary. Suggested responses for companies that
offer Six-Sigma training may include: BMX and ASQ. Responses for companies participating in Six
Sigma may include: Honeywell, Visteon, and General Electric. Student responses should include
specific benefits that one company has realized from using Six Sigma methods. These results will
vary per student.
3. Go to www.google.com, do a search on “total quality management.” Browse through the search
results and (a) identify companies that offer TQM training, (b) identify five books on TQM programs,
and (c) find lists of companies that have implemented TQM programs in their pursuit of operational
excellence—you should be able to name at least 20 companies that are TQM users.
The responses provided by each student will vary. Suggested responses for companies that offer TQM
training include: SAE, Brain Technologies, and Wego. Suggested books may include: Guidelines for
Process Integration and Product Improvement, The Rebel Code, and Debugging the Development
Process. Suggested responses for companies that have implemented TQM may include: Rediff,
Toyota, and Lucas.
4. Consult the latest issue of Fortune containing the annual “100 Best Companies to Work For” (usually
a late-January or early-February issue) and identify at least 5, and preferably 10, compensation
incentives that these companies use to enhance employee motivation and reward them for good
strategic and financial performance. Choose compensation methods and work practices that are
different from those cited in Illustration Capsule 12.3.
Student responses will vary. Some of the companies that are identified may include: Baptist Health
South Florida, Texas Instruments, and AFLAC. Suggested responses to be provided for compensation
incentives used to enhance employee motivation may include: rewards for performance, rewards for
advancement of skills, rewards for attendance, involving employees in strategic decision-making, and
providing flexible benefits for employees.

12-12
Chapter 12 - Lecture Note

5. Review the profiles and applications of the latest Malcolm Baldridge National Quality Award
recipients at www.quality.nist.gov. What are the standout features of the companies’ approaches to
managing operations? What do you find impressive about the companies’; policies and procedures,
use of best practices, emphasis on continuous improvement, and use of rewards and incentives?
The 2005 recipients are Sunny Fresh Foods, Inc., DynMcDermott Petroleum Operators, Park Place
Lexus, Richland College, Jenks Public Schools, and Bronson Methodist Hospital. According to the
site, “All six recipients were evaluated rigorously by an independent board of examiners in seven
areas: leadership; strategic planning; customer and market focus; measurement, analysis and
knowledge management; human resource focus; process management; and results.” Students should
be prepared to provide some secondary research on some of the companies’ policies and procedures,
continuous improvement, or rewards and incentives.
6. Using Google Scholar or your access to online business periodicals in your university’s library,
search for the term “incentive compensation” and prepare a report of one to two pages to your
instructor discussing the successful (or unsuccessful) use of incentive compensation plans by various
instructors. According to your research, what factors seem to determine whether incentive
compensation plans succeed or fail?
Many sites discuss the validity and importance of incentive compensation plans. For example,
www.shrm.org offers numerous articles regarding their appropriate use and ways to make them more
effective. Student responses should include specific factors they think contribute to the success or
failure of these plans.

12-13