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Intermediate Strategic Management. Marco Clemente Spring 2014 3 rd session – 5 March 2014. Structure and Strategy. Strategy. Structure. Philips vs. Matsushita. A comparison of attempts to shift strategies. Matsushita. Philips. Degree of centralization.

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intermediate strategic management

Intermediate Strategic Management

Marco Clemente

Spring 2014

3rd session – 5 March 2014

structure and strategy

Structure and Strategy

Strategy

Structure

Philips vs. Matsushita

slide3

A comparison of attempts to shift strategies

Matsushita

Philips

Degree of

centralization

  • 1970’s - Shift to IPC’s / Tilting matrix to PD’s
  • 1987 - 4 core LOBs / 14 PD’s to 4 global divisions
  • 1990 - Bet on 15 core multimedia technologies
  • 2001 - Eliminate “management discount” in stock price
  • 1982 - Operational Localization
  • 1986 - “Matsushita Bank”
  • 1999 - “Simple, small, speedy and strategic”

High

Low

slide4

How Philips’ strengths and core competencies became its weaknesses

Core Competencies

Core Incompetencies

Ability to adapt to local market conditions

No economy of scale in manufacturing

Strong National Organizations

NOs often working against each other

Common Market

Employee centric values

Organization with “lifers”

Focus on R&D / technical innovation

Inability to commercialize innovation

slide5

How Matsushitas’ strengths and core competencies became its weaknesses

Core competencies

Core incompetencies

Broad line of products (5000 vs. Sony’s 80)

Bloated operations & excess capacity

Centralized structure in Japan

Developing local footprint

1989

Market Crash

Strong culture at centre

Over-reliance on centre for innovation

Fast follower strategy

Weak entrepreneurial / innovation ability

agenda
Agenda

Breakoutgroupwork

Systems

  • Scorecards and strategymaps
  • Market systems
  • Planning systems

Rewards, Incentives, Motivation

Preparation Outotec and PwC

Presentations

  • The Planning school
  • The Entrepreneurialschool
work in group
Work in group

Youhavebeenappointedconsultants at a newlymergedUniversity. The Universityhas set and communicated a strategy of focusing on basicresearchexcellence and delivery of internationallyrecognizedMScprograms. In line with the strategy the organizationhasrecentlybeenrestructured. Whatshouldleadershipdonext to fosterimplementation of the strategy?

organizational configurations where are we where will we be
Organizational configurations- Where are we? Where will we be? -

“If Wal-Mart wants to achieve its strategy, it needs to get its 2.1 million employees pointing to the right direction”

“Systems support and control people as they carry out structurally defined roles and responsibilities”

* Johnson, Whittington and Scholes, Exploring Strategy 9th edition, p.431

systems1
Systems

Input: Resources ( financial, human commitment)

Output: It is about results (achieving targets/objectives)

Direct: close supervision or monitoring

Indirect: “hands-off”, controlling the condition on how people make decisions

1 a direct supervision
1.a Direct supervision

The direct control of strategic decisions of employees by one or few individuals

Advantages:

  • Central control and power
  • Close monitoring

Disadvantages:

  • Difficult to implement in long-distance
  • The controllers should know in details the jobs they supervise and not inhibit innovative experiments (e.g. in a project based consultant firms)

Where it is found

  • In almost all organizations to some degree
  • It is the main system in small organizations
  • Hierarchical structure / Central decision making
3 performance targeting systems
3. Performance targeting systems

Focus on the output of an organization (or part of an organization), such as product quality, revenues or profit

Key Performance Indicators (KPIs)

  • Either you meet them or you do not meet them

When used?

  • Large businesses: cascades down from the centreto the business units
  • Regulated markets: e.g. in privatized utilities markets, they agree on performance indicators
  • Public services: recent trend to improve service level
challenges
Challenges

You get what you measure

Inappropriate measures of performance

  • E.g. short terms vs. long term. Is cut in R&D beneficial for Philips?

Inappropriate target levels

  • Incentives to give pessimistic forecast vs. unrealistic ambitious targets

Excessive internal competition

  • little incentives to collaborare or “non-agreed” targets
solution 1 balanced scorecard
Solution 1: Balanced scorecard

They set performance targets according to a range of perspectives, not only financial

Four perspectives:

  • Financial (e.g. profit margins or cash flow)
  • Customer (e.g. delivery times or service levels)
  • Internal (e.g. operational efficiency)
  • Innovation or learning (e.g. activities important for long-run)
solution 2 strategy map
Solution 2: Strategy map

They link different performance targets into a mutually supportive causal chain supporting strategic objectives

  • It reduces the problem of partial measures
  • It does not address the problem of inappropriate target levels and internal competition

More in the PwC presentation

4 market systems
4. Market systems

They involve some formalized system of “contracting” for resources or inputs form other parts of an organization and for supplying outputs to other parts of an organization

Competitive internal markets

  • Competitive bidding: investment bank at the corporate centre
  • Customer-supplier relationship inside the company

Transfer prices: between internal business units (extensively regulated in practice)

Service-level agreement: to ensure appropriate service

4 market systems1
4. Market systems

Advantages

  • When detailed direct control or input are impractical

Disadvantages

  • Increase bargaining power
  • Time consuming
  • New bureaucracy
  • Dysfunctional competition
macquarie the millionaire factory
Macquarie – The “Millionaire Factory”

It can produce highly innovative ideas:

  • “freedom with boundaries”: a federation of businesses in which entrepreneurs can thrive
  • One employee: “Walking into Macquarie is like walking into a Turkish bazaar. Everyone has the same rug and they’re all competing to sell the same rug”

Dangers:

  • I am starting to detect some hubris at the bank. It has done so well I is inevitable. Allan (Moss) is loyal to those he trusts and only time will tell whether he is trusing his lieutenants a bit too much
            • New CEO in 2008: Nicholas Moore
            • Share price:

66$ in 2008 / 16$ in 2009 / 55$ in 2010

            • http://www.dailyreckoning.com.au/macquarie-allan-moss/2007/05/17/
1 b planning systems
1.b Planning Systems

They plan and control the allocation of resources and monitor their utilization

  • Financial inputs (as in budgeting)
  • Human inputs (as in planning for managerial succession)
  • Long-term investments (as particularly in strategic planning)
dimensions
Dimensions

Planning influence: Top-down vs. bottom-up

Accountability of the business units: Low vs. high

strategy styles
Strategy styles

Strategic planning

  • The “archetypal” planning system
  • Strong planning influence from the corporate centre
  • Business units not strictly accountable
  • When appropriate? Large, risky and long-range investments

Financial control

  • Little central planning. Business units set strategic plans (some negotiation with the centre)
  • Business units are accountable
  • Failure may lead to dismissal
  • When appropriate? Small, relatively frequent and non-capital-intensive

Strategic control

  • A compromise between strategic and financial
  • Corporate centre acts as coach to its business units managers
  • Usually it also uses strong cultural systems
dominated strategies
“Dominated” strategies

“South-west” corner: Relax combination

  • Weak direction from the centre and low accountability from the business units

“North-east” corner: Harsh combination

  • Strong direction fro the centre and strict accountability
incentives and motivation
Incentives and motivation

What motivates you?

rewards and incentive systems
Rewards and Incentive systems
  • Focuses efforts on high-priority tasks
  • Motivates individual and collective task performance
  • Can be an effective motivator and control mechanism
  • Powerful means of influencing an organization’s culture
rewards and incentive systems1
Rewards and Incentive systems
  • Potential downside: “you get what you measure”
    • May reflect differences among functional areas, products, services and divisions
    • Internal politics, internal competition
    • Wrong behavior
    • Shared values may emerge in subculture in opposition to patterns of the dominant culture
    • Subcultures may arise in different business units with multiple reward systems
common mistakes in reward systems
Common mistakes in reward systems

We hope for… But we often reward for…

Long term growth Quarterly earnings

Teamwork Individual effort

Setting stretch goals Achieving goals

Downsizing Adding staff

Candor Reporting good news (even if not true)

rewards and incentive systems2
Rewards and Incentive systems
  • Creating effective reward and incentive programs
    • Objectives are clear, well understood and broadly accepted
    • Rewards are clearly linked to performance and desired behaviors
    • Performance measures are clear and highly visible
    • Feedback is prompt, clear, and unambiguous
    • Compensation “system” is perceived as fair and equitable
    • Structure is flexible; it can adapt to changing circumstances
people adapt to incentives
People adapt to incentives

Incentive Life-cycles: Learning and the division of value in firms (Obloj and Sengul2012)

organizational justice not only money
Organizational justice: not only money

Employees perception of the fairness of treatment received from organization, e.g. if a company makes layoffs, it can affect the performance of the employees who remain

Three dimensions:

Distributive justice

  • how do tangible (e.g. money) and intangible (e.g. recognition) are distributed?

Procedural justice

  • How does the process is done (e.g. involvement, ethics…)? How does decisions are made/

Interactional justice

  • Interpersonal: perception of how you treat people (one leaves his/her boss, not the company)
  • Informational justice: explanations
dan ariely what makes us feel good about our work
Dan Ariely: What makes us feel good about our work

http://www.youtube.com/watch?v=5aH2Ppjpcho

what prevents us to use research methods

What prevents us to use Research Methods?

Another TED video: http://www.ted.com/talks/dan_ariely_on_our_buggy_moral_code

What is the best way to take out bandage?

Why?

“Given the fact that the nurse thought her intuition was right, it was very difficult for her to accept doing a difficult experiment to check if she was wrong”

From low pain to high pain

  • Long – lower intensity

From high pain to low pain

“How better your life would be, if you will be willing to test systematically your intuitions”

2 motivations
2 motivations

Intrinsic Motivation

(personally rewarded)

Extrinsic Motivation

(earn a reward / avoid a punishment)

details think about your image and aalto image
Details – Think about your image and Aalto image
  • How many people attending
  • Where to seat: front vs. back
  • Computers / Iphones
  • Dress

Transmission

SENDER

RECEIVER

Feedback

the planning school
The Planning School:
  • http://www.youtube.com/watch?v=CRaMEVRLzWY&feature=youtu.be
the entrepreneurial strategy school

The entrepreneurial strategy school

TU-91.1012 Intermediate strategic management

Team SiMa

entrepreneurial school
Entrepreneurial school?
  • Focus: the persona of the entrepreneur
    • A leader with a vision
    • Pragmatic with judgment, wisdom, and need for achievement, prone to overconfidence
    • Example: Steve Jobs
  • Fast adaptation to emerging opportunities
    • Deliberate overall vision, details emerge
  • Strategy tends to take the form of niche
    • Protection from outright competition
leader with a vision
Leader with a vision
  • Vision: mental representation of strategy
    • Created in the head of the leader
    • Inspiration of what needs to be done
  • We’re gambling on our vision, and would rather do that than make “me too” products. - Steve Jobs, 1984
semiconscious formation of strategy
Semiconscious formation of strategy
  • Rooted in the experience and intuition of the leader
    • Non-conscious recognition of features or patterns
  • Moving forward with large decisions in uncertainty
    • Identify an opportunity and pursue it
  • Growth is a dominant goal
    • Achievement motivates the entrepreneur
vision promotion and control
Vision promotion and control
  • The leader focuses the company’s attention on the vision
  • The leader has personal control of the implementation
    • Power is centralized in the leader
  • Controlled boldness: bold ideas with careful execution
    • Trying out an innovative idea in one place first
strategy both deliberate and emergent
Strategy both deliberate and emergent
  • The leader has a vision, a dream that he or she wants to achieve in the long term
  • But he or she has not charted plan or formalized procedures: This leaves the company flexible
    • A survey about the 500 fastest growing companies in the US, stated that the 67% of them had not a plan or had just a rudimentary plan
  • So the strategy is deliberate in its broad lines, but emergent in its detail
simple structure
Simple structure
  • The structure of the company has to be simple and responsive to the leader’s directive
    • This is common in a startup company or individual enterprise, but it must also be true in a large organization that needs to make a turnaround
  • The leader must have the power to override the procedures and impose his or her vision
protected niche
“Protected” niche
  • This strategy tends to lead the company into a niche, a market position protected from the competitors
  • The niche emerges from the vision of the entrepreneur and differentiates the company from the others in the market
the planning school strategy formation as a f ormal process
The Planning School:Strategy Formation as a Formal Process

A systematic plan for five to ten years

  • Operations planning during WW2
  • Systems sciences in the 1950s
  • “Corporate strategy” by Igor Ansoff (1965)
  • Same period of Design (but much less successful afterwards)
    • Lots of of articles in the 1970s (in number, but not in quality)c v
formal planning approach
Formal planning approach

Enter the Planner:

decomposition

elaboration

formalization

Strategies as formal plans

slide54

Definition

Planning is a formalized procedure to produce articulated results by using an integrated system of decisions

Basic idea:

“Take the SWOT model, divide into neatly delineated steps, articulate each of these with lots of checklists and techniques, and give special attention to the setting of objectives on the front end and the elaboration of budgets and operating plans on the back end” (p. 49)

slide56

Set objectives

Begin with the SWOT model

Divide it into neatly delineated steps

Use checklists and techniques

Operating plans

and budgets

Strategic planning model

slide57

Stages in the planning process

Quantify goals into numerical objectives

Objective-setting

External audit

Forecasts about future conditions

Internal audit

Strengths and weaknesses checklist

Evaluation

Use of formal measures

Operationalization

Decomposition into substrategies

Scheduling

Planning the plan

slide59

Figure 3.2 Stanford Research Institute’s proposed ‘system of plans’ Source: Figure Courtesy of SRI International

The elaboration of a plan can become very elaborated: “System of Plans” by Stranford Research Institute’s

premises of the school
Premises of the school
  • Strategies result from a controlled, conscious process of formal planning, decomposed into distinct steps, each delineated by checklists and supported by techniques
  • Responsibility rests with the CEO in principle; responsibility for its execution rests with staff planners in practice
  • Strategies need to be made explicit so that they can then be implemented through detailed attention to objectives, budgets, programs, and operating plans of various kinds
slide62

The intuitive fallacy of strategic planning

A European traveller with an interest in Eastern philosophy asked a guru for clarification of certain aspects of traditional Hindu theory of the universe.

“Is it true,” he said, “that you believe that the earth is supported by elephants?”

“Yes,” answered the guru, “it is true”.

“If this is the case, what supports these elephants?”, asked the traveller.

“The elephants stand on top of other elephants,” answered the guru, “and they in turn, stand on top of other elephants.”

“And what supports the entire thing?”, asked the traveller..

The guru thought for a moment and said:

“It is elephants all the way down…”

slide63

Strengths of strategic planning

  • Useful data inputs for “front end” strategic process
  • Useful analytical scrutiny of current strategies
  • Encourages examination of strategic issues
slide64

Weaknesses of strategic planning

  • Research suggests that “planning payoff” is low.
  • Employee commitment is displaced by calculation.
  • Planning encourages inflexibility and promotes politics
  • Planning often degenerates into a ritual exercise.
slide65

Fallacies of strategic planning

  • The fallacy of predetermination
    • Planning is feasible if you know the future
  • The fallacy of detachment
    • People are unreliable, let the system do the thinking
  • The fallacy of formalization
    • Information processing will produce understanding
    • Can innovation being “institutionalized”?
  • Where is “meaning” (Dan Ariely talk)?
slide66

Grand fallacy of strategic planning

  • Because analysis is not synthesis…
  • strategic planning has never been strategy making
  • Analysis may precede and support, it may follow and elaborate synthesis, but it cannot substitute for synthesis.
  • Analysis cannot forecast discontinuities, to inform detached managers, to create novel strategies
slide67
Thus

“Strategic Planning” an oxymoron

Extrapolation or modification of existing strategies (positions within perspective)

Imitation strategies (‘industry recipes’)

What works sometimes is

  • Strategic programming (after strategy formation)
  • Or strategic analysis (before it)
  • Or perhaps the informal model as a conceptual framework
slide68

When does planning work -and necessary

  • When environment is stable
  • When organizations have a great deal of control over environment
  • When organizations confront a major discrete decision that cannot be broken down into incremental steps
the entrepreneurial school strategy formation as a visionary process
The Entrepreneurial School:Strategy Formation as a Visionary Process

A leader’s perspective of some desired future state

  • Karl Marx
  • Joseph Schumpeter
  • Literature on great leaders
the entrepreneurial personality
The Entrepreneurial personality
  • Resilience
  • Calculator rather than gambler
  • Overconfident
  • Optimism to the point of un-realism

Are these characteristics innate or acquired?

who are you
Who are you?

Administrative

  • What resources do I control?
  • What structure determines my organization’s relationship to its market?
  • How can I minimize the impact of others on my ability to perform?
  • What opportunity is appropriate?

Entrepreneurial

  • Where is the opportunity?
  • How do I capitalize on it?
  • What resources do I need?
  • How do I gain control over them?
  • What structure is best?
slide72

The entrepreneurial orientation in strategy

Strategy making is dominated by active search for new opportunities.

Power is centralized in the hands of the chief executive.

Strategy is characterized by dramatic leaps forward in the face of uncertainty.

Growthis the dominant goal.

entrepreneurial school tools and techniques
Entrepreneurial schooltools and techniques

GUT-FEEL

INTUITION

INSIGHT

INSPIRATION

‘ENVISIONING’

luck or strategy
Luck or strategy?

Can you have a consistent pattern of success by luck?

http://www.hec.edu/Press-room/News/Theory-or-Intuition-what-makes-a-good-decision-by-HEC-Prof.-Itzhak-Gilboa

slide75

Visionary leadership

  • A vision is something you can vividly see in your mind’s eye.
  • A vision is a mental image.
  • A vision is a target that beckons -- a future state.
  • A vision focuses the emotional and spiritual resources of the organization (vs. a manager focusing on physical resources).
  • A vision should energize.

ENVISION:  Create the future

ENGAGE:  Build relationships &

Collaboration

ENERGIZE: Inspire others

ENABLE:  Build capability

EXECUTE:  Deliver outstanding results

slide76

Premises of the visionary model

  • Strategy formation is a semi-conscious process in the mind of a leader.
  • Deep experience in a given context enables the leader to form a vision – a perspective – of where the organization must go in the future.
  • That vision serves as an umbrella within which specific decisions can be taken and detailed strategies can emerge.
  • That vision is kept informal and personal to allow it to remain rich and flexible.
inc 500 list of fastest growing u s companies
Inc 500 list of fastest growingU.S. Companies
  • 41% had no plan at all
  • 26% had ‘back-of-envelope plan’
slide78

Strengths of the entrepreneurial school

  • Flexible and adaptable
  • Is highly “synthetic”
  • Takes advantage of deep knowledge
  • Minimizes organizational politics (what the entrepreneur says goes!)
  • Charismatic leadership provides motivation for implementation.
slide79

Weaknesses of the entrepreneurial school

  • Few checks on the power of the leader
  • Highly resistant to change if leader stops changing
  • Narrow organizational control
  • Succession problems
  • Little participation from below often produces low commitment
  • Danger of “capture”- vision escapes the confines of reality
depends on the point of view
Depends on the point of view…

Genius or crazy? Saints or heretics?

a nd of the results nonconformity and performance
and of the results…- Nonconformity and performance

“Identities as lenses: how organizational identitfy affects audiences’ evaluation of organizational performance” (Smith, 2011)

Nonconformist organizations (hedge funds) are excessivelypenalized if they are unsuccessful

Nonconformist organizations (hedge funds)are excessivelyrewarded if they are successful

for which company is more suitable
For which company is more suitable?

Start-ups

  • What about 2nd and 3rd generation?

Intrapreneurship