Chapter 11: Managing Internal Operations: Actions That Promote Good Strategy Execution

1. Chapter 11: Managing Internal Operations: Actions That Promote Good Strategy Execution Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. “Winning companies know how to do their work better.” Michael Hammer and James Champy

3. “If you want people motivated to do a good job, give them agood job to do.” Frederick Herzberg

4. Chapter Learning Objectives • Learn why resource allocation should always be based on strategic priorities. • Understand why policies and procedures should be designed to facilitate good strategy execution. • 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. • Understand the role of information and operating systems in enabling company personnel to carry out their strategic roles proficiently. • 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.

5. Chapter Roadmap • Marshaling Resources Behind the Drive for Good Strategy Execution • Instituting Policies and Procedures that Facilitate Strategy Execution • Adopting Best Practices and Striving for Continuous Improvement • Installing Information and Operating Systems • Tying Rewards and Incentives to Strategy Execution

6. MARSHALING RESOURCES BEHIND THE DRIVE FOR GOOD STRATEGY EXECUTION

7. Allocating Resources toSupport Strategy Execution • Allocating resources in ways to support effective strategy execution involves • Funding strategic initiatives that can makea contribution to strategy implementation • Funding efforts to strengthen competenciesand capabilities or to create new ones • Shifting resources — downsizingsome areas, upsizing others, killingactivities no longer justified, and fundingnew activities with a critical strategy role

8. ESTABLISH POLICIES AND PROCEDURES TO FACILITATE STRATEGY EXECUTION

9. Creating Strategy-SupportivePolicies and Procedures • Role of new policies • Channel behaviors and decisionsto promote strategy execution • Counteract tendencies ofpeople to resist chosen strategy • Too much policy can be as stiflingas • Wrong policy or as • Chaotic as no policy • Often, the best policy is empowering employees, letting them operate between the “white lines” anyway they think best

10. Figure 11.1: How Prescribed Policies andProcedures Facilitate Strategy Execution

11. ADOPTING BEST PRACTICES AND STRIVING FOR CONTINUOUS IMPROVEMENT

12. Instituting Best Practicesand Continuous Improvement • Identifying and adopting best practicesis integral to effective implementation • Benchmarking is the backbone of theprocess of identifying, studying, andimplementing best practices • Key tools to promote continuous improvement • Six Sigma quality control • Business process reengineering • TQM

13. Best Practices What Is a Best Practice? • An activitythat at leastone company has provedworks particularly well • A pathto operating excellence

14. Characteristics of Best Practices • The best practice must have a proven record in • Significantly lowering costs • Improving quality or performance • Shortening time requirements • Enhancing safety or • Delivering some other highly positive operating outcome • To be valuable and transferable, a best practice must • Demonstrate success over time • Deliver quantifiable and highly positive results • and • Be repeatable

15. Characteristics of Benchmarking • Involves determining how well a firmperforms particular activitiesand processeswhen compared against • “Best in industry” or “Best in world” performers • Goal Promote achievement of operating excellence in performing strategy-critical activities • Caution Exact duplication of best practices of other firms is not feasible dueto differences in implementation situations • Best approach – Best practices of otherfirms need to be modified or adaptedto fit a firm’s own specific situation

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

17. Business Process Reengineering:A Contributor to Operating Excellence • Often the performance of strategicallyrelevant activities is scatteredacross several functional departments • Creates inefficiencies and often impedes performance • Results in lack of accountabilitysince no one functional manager is responsible for optimum performance of an entire activity • Solution Business process reengineering • Involves pulling strategy-critical processes from functional silos to create process departments or cross-functional work groups • Unifies performance of the activity improves how well activity is performed and often lowers costs • Promotes operating excellence

18. What Is Total Quality Management? • A philosophy of managing a set of business practices that emphasizes • Continuous improvement in all phases of operations • 100 percent accuracy in performing activities • Involvement and empowermentof employees at all levels • Team-based work design • Benchmarking and • Total customer satisfaction

19. Popular TQM Approaches Deming’s 14 Points The Juran Trilogy Crosby’s 14 Quality Steps Baldridge AwardCriteria

20. Implementing a Philosophyof Continuous Improvement • Reform the corporate culture • Instill enthusiasm to do thingsright throughout company • Strive to achieve little steps forwardeach day (what the Japanese call kaizen) • Ignite creativity in employees to improveperformance of value-chain activities • Preach there is no such thing as good enough • Understand it is a race without a finish

21. Six Sigma Quality Control — A Toolfor Promoting Operating Excellence • Six Sigma is a disciplined, statistics-based system aimed at having not more than 3.4 defects per million iterations for any business practice • Two approaches to Six Sigma • DMAIC process(Design, Measure,Analyze, Improve, Control) • An improvement system for existingprocesses falling below specificationand needing incremental improvement • A great tool for improving performancewhen there are wide variations in howwell an activity is performed • DMADV process(Define, Measure, Analyze, Design, Verify) orDFSS (Design for Six Sigma) • An improvement system used to develop new processes or products at Six Sigma quality levels

22. Characteristics ofSix Sigma Quality Programs • Six Sigma is based on three principles 1. All work is a process 2. All processes have variability 3. All processes create data to explain variability • DMAIC process is a good approach to improve performance when wide variations in how well an activity is performed exist • Evidence exists that innovation can be stifled by Six Sigma programs • Blended approach to Six Sigma implementation involves • Pursuing incremental improvementsin operating efficiency and • Giving freer rein to R & D and other processesfocusing on new ways to offer value to customers

23. Approach of the DMAIC Process • Define • What constitutes a defect? • Measure • Collect data to find out why, how,and how often the defect occurs • Analyze – Involves • Statistical analysis of the metrics • Identification of a “best practice” • Improve • Implementation of the documented “best practice” • Control • Employees are trained on the “best practice” • Over time, significant improvement in quality occurs

24. Guidelines for ImplementingSix Sigma Quality Programs • Systematic application of Six Sigma methods to a company’s value chain activities • Can significantly improve the proficiency of strategy implementation • Key challenges in implementing Six Sigma quality programs 1. Obtain managerial commitment 2. Establish a quality culture 3. Full involvement of employees

25. Business Process Reengineeringvs. Total Quality Programs • Reengineering • Aims at quantum gains of 30 to 50% or more • Total quality programs • Stress incremental progress • Techniques are not mutually exclusive • Reengineering – Used to produce a good basic design yielding dramatic improvements • Total quality programs– Used to perfect process, gradually improving efficiency and effectiveness

26. How to Capture Benefits of Best-Practice and Continuous Improvement Programs • Select indicators of successfulstrategy execution • Benchmark against best practice companies • Build a TQ culture • Requires top management commitment • Install TQ-supportive employee practices • Empower employees to do the right things • Provide employees with quick access to required information using on-line systems • Preach that performance can/must be improved

27. The Benefits of EmployingContinuous Improvement Programs • Can greatly enhance a company’s • Competitive capabilities • Ability to achieve a competitive advantage • Have hard-to-imitate aspects • Require substantial investmentof management time and effort • Expensive in terms of training and meetings • Seldom produce short-term results • Long-term payoff — instilling a culturethat strives for operating excellence

28. Test Your Knowledge Which of the following is not a tool that managers can use to promote operating excellence and further the cause of good strategy execution? A. Benchmarking and adoption of best practices B. Business process reengineering C. A team-based work structure and operating excellence analysis D. Six Sigma quality control techniques E. TQM

29. INSTALL INFORMATIONAND OPERATING SYSTEMS

30. Installing Strategy-SupportiveInformation and Operating Systems • Good information and operating systems areessential for first-rate strategy execution • Support systems can relate to • On-line data capabilities • Speedy delivery or repair • Inventory management • E-commerce capabilities • Mobilizing information and creating systemsto use knowledge effectively can yield • Competitive advantage

31. Examples of Support Systems • On-line reservation system • Accurate and expeditious baggage handling system • Strict aircraft maintenance program Airlines

32. Examples of Support Systems • Internal communication systems allowing itto coordinate 70,000 vehicles handling anaverage of 5.5 million packages per day • Leading-edge flight operations systemsallow a single controller to direct as manyas 200 of 650-plus aircraft simultaneously • E-business tools for customers Federal Express

33. Examples of Support Systems • Sophisticated maintenance support system Otis Elevator • Systems have been developed forreal-time monitoring of new listings, biddingactivity, Web site traffic, and page views eBay

34. What Areas ShouldInformation Systems Address? • Customer data • Operations data • Employee data • Supplier/partner/collaborative ally data • Financial performance data

35. Trends in Design and Use of Information Systems • On-line technology • Daily statistical updates • Up-to-the minute performance monitoring • Retailers and manufacturers have up-to-the minute inventory and sales records for each item • Electronic scorecards for senior managers • Gather daily or weekly statistics from different databases about inventory, sales, costs, and sales trends • Enables managers to make betterdecisions on a real-time basis

36. Exercising Adequate ControlOver Empowered Employees • Challenge • How to ensure actions of employeesstay within acceptable bounds • Control approaches • Managerial control • Establish boundaries on what not todo, allowing freedom to act with limits • Track and review daily operating performance • Peer-based control

37. For Discussion: Your Opinion What sort of information and operating systems would a company like Amazon.com likely need in order to facilitate good strategy execution?

38. TYING REWARDS AND INCENTIVES TO STRATEGY EXECUTION

39. Gaining Commitment: Componentsof an Effective Reward System • Monetary Incentives • Base pay increases • Performance bonuses • Profit sharingplans • Stock options • Retirement packages • Piecework incentives • Non-Monetary Incentives • Praise • Constructivecriticism • Special recognition • More, or less, job security • Stimulating assignments • More, or less,autonomy • Rapid promotion

40. Approaches: Motivating Peopleto Execute the Strategy Well • Provide attractive perks and fringe benefits • Rely on promotion from within when possible • Make sure ideas and suggestions ofemployees are valued and respected • Create a work atmosphere where there is genuine sincerity and mutual respect among all employees • State strategic vision in inspirational terms to make employees feel they are part of something worthwhile • Share financial and strategicinformation with employees • Have knockout facilities • Be flexible in how company approaches peoplemanagement in multicultural environments

41. Examples: Motivational Practices Google Employees are provided with free food,unlimited ice cream, pool and Ping-Pong tables, and complimentary massages. Employees are allowed to spend 20% of their work time on any outside activity. Lincoln Electric Rewards productivity by paying for each pieceproduced (defects can be traced to worker causing them). Highest rated workers receive bonuses of as much110% of their piecework compensation.

42. Examples: Motivational Practices JM Family Enterprises Benefits for employees include: a great lease on new Toyotas, cruises in the Bahamas on the 172-foot company yacht, office facility has a heated lap pool, a fitness center, and a free nail salon, and professionally made take-home dinners. Wegmans Employees have flexible schedules and benefits include onsite fitness centers. Employees from cashiers to butchers to store managers are all treated equally and viewed as experts in their jobs. Employees receive 50 hours of formal training per year.

43. Examples: Motivational Practices Ukrop’s Super Markets Stores stay closed on Sunday; company pays out 20% of pretax profits to employees in the form of quarterly bonuses; and the company pays the membership tab for employees if they visit their health club 30 times a quarter. Nordstrom Pay salespeople higher than prevailing rates,plus commission. “Rule #1: Use good judgment inall situations. There will be no additional rules.”

44. Examples: Motivational Practices W. L. Gore Employees get to choose what project/team they work on; each team member’s compensation is based on other team members’ ranking of his/her contribution to the enterprise. Amgen Employees get 16 paid holidays, generousvacation time, tuition reimbursements up to $10,000,on-site massages, a discounted car wash, and the convenience of shopping at on-site farmers’ markets.

45. Balancing Positive vs. Negative Rewards • Elements of both are necessary • Challenge and competition arenecessary for self-satisfaction • Prevailing view • Positive approaches work betterthan negative ones in terms of • Enthusiasm • Dedication • Creativity • Initiative

46. Linking the Reward Systemto 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 company personnel to effective strategy execution • Objectives in designing the reward system • Generously reward thoseachieving objectives • Deny rewards to those who don’t • Make the desired strategic andfinancial outcomes the dominantbasis for designing incentives,evaluating efforts, and handing out rewards

47. Test Your Knowledge Management’s most powerful tool for mobilizing employee commitment to competent strategy execution and operating excellence is A. the use of either total quality management or Six Sigma quality control techniques. B. business process reengineering. C. a properly designed reward structure. D. making the company a great place to work in terms of pay scales, fringe benefits, and employee perks. E. effective screening of job applicants such that only the most motivated and energetic people are hired.

48. Key Considerations inDesigning Reward Systems • Create a results-orientedsystem • Reward people for results, not for activity • Define jobs in terms of what to achieve • Incorporate several performance measures • Tie incentive compensation to relevant outcomes • Top executives – Incentives tied tooverall firm performance • Department heads, teams, andindividuals – Incentives tied toachieving performance targetsin their areas of responsibility

49. For Discussion: Your Opinion What is the logic for tying incentive compensation awards to the achievement of results as opposed to rewarding people for diligent performance of their assigned duties?

50. Guidelines for Designing anEffective Compensation System 1. Payoff must be a major, not minor, piece of total compensation package 2. Incentive plan should extend to all employees 3. Administer system with scrupulous fairness 4. Link incentives to achieving only the performance targets in strategic plan 5. Targets a person is expected to achieve must involve outcomes that can be personally affected 6. Keep time between performance reviewand payment short 7. Make liberal use ofnon-monetary rewards 8. Avoid ways of rewarding non-performers