Part6 Strategy

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Copyright by Authors Tom Koplyay and David Goldsmith July 1998 6-1

Strategy Implementation




Strategic Implementation

Strategic Alternative– Status quo– Concentration– Horizontal Integration– Vertical Integration– Diversification

– Joint Venture– Retrenchment– Divestiture or Liquidation– Innovation– Restructuring

• Each with its own focus– Internal or external– Product– Market

– Control– Risk – etc...




Status Quo

Strategic Alternative• Status Quo

– Concentration– Horizontal Integration– Vertical Integration

– Diversification– Joint Venture– Retrenchment– Divestiture or Liquidation– Innovation– Restructuring

Focus– Internal– Stability– Continue in present

products/markets




Concentration

Strategic Alternative– Status Quo

• Concentration– Horizontal Integration– Vertical Integration


Focus– Internal– Single product line– Do one thing well




Horizontal Integration

Strategic Alternative– Status Quo– Concentration

• Horizontal Integration– Vertical Integration


Focus– External– Ownership of control of

competitors– Gain market power and

economies of scale




Vertical Integration

Strategic Alternative– Status Quo– Concentration– Horizontal Integration

• Vertical Integration


Focus– External– Transform cost centres to

profit centres– Improve economies of scale,

reduce dependence onsuppliers or distributors




Diversification

Strategic Alternative– Status Quo– Concentration– Horizontal Integration– Vertical Integration

• Diversification– Joint Venture– Retrenchment– Divestiture or Liquidation– Innovation– Restructuring

Focus– External or Internal– Broadening of product line– Reduce competitive pressure;

gain greater profitability;

spread risk




Joint Venture


– Diversification• Joint Venture– Retrenchment– Divestiture or Liquidation– Innovation– Restructuring

Focus– External– Complementary benefits– Spread risk; create synergy




Retrenchment


– Diversification– Joint Venture• Retrenchment

– Divestiture or Liquidation– Innovation– Restructuring

Focus– Internal– Reduction of activity or

operations– Respond to adversity by

permanent phase-out




Divestiture or Liquidation

Strategic Alternative– Status Quo– Concentration– Horizontal Integration– Vertical Integration– Diversification– Joint Venture– Retrenchment

• Divestiture or Liquidation– Innovation– Restructuring

Focus– Internal– Removal of entity that does not

fit– Realign products/markets or

organization




Innovation

Strategic Alternative– Status Quo– Concentration– Horizontal Integration– Vertical Integration– Diversification– Joint Venture– Retrenchment– Divestiture or Liquidation

• Innovation– Restructuring

Focus– Internal– Seizing of leadership position– Take initiative; gain position

early in product life cycle




Restructuring

Strategic Alternative– Status Quo– Concentration– Horizontal Integration– Vertical Integration– Diversification– Joint Venture– Retrenchment– Divestiture or Liquidation– Innovation

• Restructuring

Focus– internal– Cost reduction, growth

potential– Concentrate on products and

divisions with high potential




Strategy Implementation Variables

Effectiveness Efficiency

Staffing andLeadership Style

IM and DecisionMaking Process

Recruiting, selectionTransfer, promotionTraining and developmentLeadership

Division of laborShapeDistribution of power

Structure

Reward Systems

CompensationPromotion

Job designSpecial awardsPerformance measures

Planning and controlResource allocation systemsIntegrating roles anddepartmentsInformation systems

Key Tasks








Connections

Strategy

Product BasedNiche BasedMarket Based

Market Structure

Market ShareMarket StrengthMarket GrowthMarket Margins

PerformanceROA, ROCEROIROEEPSGrowth

External

ContingenciesStrategic PerformanceTechnologyEnvironmentFirm Size

Centre of Gravity

StructureFunctionalM-Form (SBU, Core)HoldingMatrix (weak, strong,balanced)




(Cash Generation)

I n d u s

t r y G r o w

t h R a t e

( C a s h

u s e

)

Strategic Controls

High

Low

Low Relative Market Share High

? ??? ?

$






Decision Style Model

Analytic(Achievement)

Dell

Conceptual(Recognition)

Stentor

Directive(Power)

Gp Schneider

Behavioral(Affiliation)Giant Tiger

Task People

LowStructure

HighStructure

VALUES ORIENTATION




Leadership Styles

Logical

Production/peoplebased

(IBM system integration)

Theory J

Inspirational

Creativity based(IBM software)

Theory E

DirectiveProduction/asset based

(IBM chipmanufacturing)

Theory J,Z

SupportiveTeam/knowledge based

(IBM outsourcing)

Theory J,Z

Efficiency Effectiveness




Types of Change

• Theory X - Control• Theory Y - Incentives• Theory Z - Paternalistic

(Japanese) hierarchy, rigidity• Theory J - X + Y• Theory E - Opportunistic

• Change hygiene factors

– Executive style– Corporate Culture– Individual values– Organizational commitment




Organizational Cultures

QualityPlanning/

Problem Solving

Accepts change

CreativeRisk TakingInnovative

Initiates change

ProductionProductivity/Procedures

Resists change

SupportiveTeamwork

Responds to change

Technical Social

Efficiency =differentiation

Effectiveness =integration

Organizational Culture




Importance of Cultural Fit to Strategic Change

Constrained

Reconsidercultural change

Supportive

Incorporate cultureexplicitly in pursuing

strategy

Inconsistent

Consider factorsother than culture

Related

Minimal attentionrequired to cultural

elements

I m p o r t a n c e o

f

E l e m e n

t s i n

C u

l t u r e

Compatibility of Elements withProposed Strategy

00

10

10




Staffing Follows Strategy

Organizational Life Cycle

ProductDifferentiation

Focus Niche Cost Focus Cost Leadership

•Generalists

•Risk takers•Reactive•Improvisers•Resultsmotivated•Changepromoting•Undisciplined

•Specialists•Risk avoiders•Anticipative

•Processmotivated•Predictable•Change resistant•Disciplined

•Functionalgrouping•Risk reduction

•Some planning•Results/processtradeoffs•Change accepting• Team discipline

•Functionaldifferentiation•Risk containment•Proactive butreactivecapability

•Changequestioning•Discipline byroutines




Information/Decision Making Follows Strategy



•Reactive•Inductive•Informal•External focus•Spontaneous

•Sporadic•Widely shared

•Proactive•Deductive•Structured process

•System based•Internal focus•Deliberate•Continuous•Compartmentalized•Some planning

•Experiencebased•Formulize byfunctions•More organized•Regular sharingby skills andfunctions

•Planning andguessing•Experienceanchored•Formal systemsand executive byfunction•More internal•Organized•Regular silosemerging





Impact of Information Needs on Structure

• Factors increasing information flows in organizations– More team based decisions– Decentralized decision making– Smaller span of control– Emphasis on quality/innovation/customer– Higher level skills– Weakening of culture/structure/performance

– Unstable market dynamics– Geographical dispersion– complexity of performance

• Standards and measurement




Incentives Follows Strategy



•Long term•Output oriented•Team based•Uniform•Subjective

•Risk promoting•Informal

•Short term(quarterly)•Process oriented•Individual based•Differentiated (byfunctions )•Objective(Formulize based)•Risk Avoiding•Formalized

•Medium term•Output/productionoriented•Team andindividual•Segregated byfunction•Objective withsubjective elements• More risk averse•Mostly informalwith formalcomponents

•Shorter term(yearly)

•Quality/reliability based•More individualand some team•Differentiationby functions andlevels•Risk tolerance•Formalized withsome informalaspects





Incentives

• Why bonus pay?– Variable cost base– Responds to extra performance– Links to corporate goals

– Flexibility in design and implementation




• Basic requirements (SMART)– Specific

• Line of sight / match– M eaningful

• Reality / perception (ROI)– Achievable

• Levels of expectation / control– R eliable

• Easy to determine

– T imely• Pay-off proximity

Incentives




• Organizational hygiene factors– Organizational stability• Competitive stability

– Consistent measurements

• Absolute / relative results– Positive culture

• Leadership / champion / change agents

– Employee buy-in

• Track record (premise / promise)

Incentives




• Measurement Challenges– Objective / subjective component– Outcome / process orientation– Time span

– Performance level specificity– Performance variation sensitivity

• (0/1 schemes vs. continuity)

Incentives




• Linkage between individual performance and corporate

goals• Maximize payoff/payout ratio• Accuracy of measurement

– Verifiable and objective methods to determine results

• Proximity of payoff to accomplishment• Maximum control by employee of factors producing

expected achievements

• Buy-in by employees– Preset, stable, simple, fair and challenging standards orperformance and meaningful incentives

Design Criteria for Good Incentive Measures




Key Aspects of Incentive Compensation

PolicyIssues

FinancialInstruments

PerformanceMeasures

Degree of Discretion inAllocating

Bonus Awards

Size andFrequencyOf Awards

Short runvs. longrun

Mix of currentbonus awardsand stock options shouldreflect the

relevant timehorizon forpolicy levelexecs

Deferred

instruments areweak reinforcers of short-termperformance

Mix of quantitativemeasures of performance andmore qualitative

measures shouldreflect therelevant timehorizon for execs.

Qualitative

measures usuallyreflect long runconsiderationsmore effectivelythan quantitativemeasures.

Non-discretionary,formula basedbonuses tend toencourage a short-run point of view

Frequentbonus awardsencourageconcentrationon short-term

performance







PolicyIssues

FinancialInstr.s

PerformanceMeasures


Bonus Awards

Size andFrequencyOf

AwardsInter-divisionalrelationships

Bonus pools canbe based ondivisionalperformance, totalcorporate

performance orsome mix of thetwo. Eacharrangement sendsdifferent signalsin terms of

interdivisionalcooperation

Non- discretionary,formula basedbonuses for divisionmanagers are mostpractical in

companies wherelittle cooperationamong divisions isrequired.

Discretionary

bonuses arepractical when topmanagement wantsto encouragecooperation amongdivisions.





PolicyIssues

FinancialInstr.s

PerformanceMeasures


Bonus Awards

Size andFrequencyOf

AwardsCompany-divisionrelationships

Stock optionscaneffectivelylink theinterests of

divisionpersonnel tothe interestsof thecorporation

Use of objectivemeasures of performance fordivision managersis more

meaningful wherethe primary roleof headquarters isto allocate capitalthan it is ininstances where

the head officeplays an importantrole in “managingthe business” of the divisions.

Non- discretionary,formula basedbonuses for divisionmanagers are mostpractical in

companies whereheadquarters doesnot interfere inmanagement of theprofit centers.Discretionary

bonuses are mostuseful when topmanagement wantsto exert a directinfluence in thedivisions.




Structure Follows Strategy



Lack of Market Match (Invent)

•Entrepreneur

Lack of Market Research (Adapt)

•SBU•Matrix Lack of market

Fit (Align)

•FunctionalStructure

Lack of Market Flexibility(Control)

•DivisionalStructure





• Example– GVA horizontal Functional Strategy– GVA Vertical Divisional Strategy

• Whenever market rejuvenates– Delayer structure

• Structure– Effectiveness shallow structure– Productivity deep structure

Structure - follows Strategy




Entrepreneurial Structure

Entrepreneurial Firm

Employees

President

• Context:• Environment: Highly uncertain/Unstable

• Technology: Simple/Routine• Size: Small




• Internal Systems– Market capture/Product introduction– Informal contacts– Lack of consistency/reliability of information flow

• Strengths– Pursuits, maximum flexibility and innovation– Rapid response to start-up situation– Pursuits initiative & informality

• Weaknesses– Critical dependence on CEO

– Employer flexibility is a must– Non-specialization leads to inefficiencies– Avoidance of responsibility by individuals– Manageable to adjust high growth

Entrepreneurial Structure




Functional/Bureaucratic Structure

• Context: Lower uncertainty, more stability• Technology: Routine, low interdependence

• Size: Small to medium• Goals: Internal efficiency, technical quality, sales growth

CEO

Marketing Finance HR Engineering Operations




• Internal Systems– Internal efficiency, technical quality– Cost basis planing & budgeting

• Strengths– Economies of scale– Skill development– Best in small to medium companies– Best for one or few products

• Weaknesses– Slow response time– Hierarchy overload– Low innovation– Restricted view of goals

Functional/Bureaucratic Structure




Divisional Structure

Divisional/Product Firm

Corporate Staff

ManagerDivision A

ManagerDivision B

ManagerDivision C

CEO

• Context:• Technology: Non-routine, high interdependence• Size: Large

• Goals: External effectiveness, adaptation, client satisfaction

d l l




Product/Multi-Divisional Structure

Internal System• Goals: Effectiveness, client satisfaction• Profit-based planning• Product managers formal authority

Strengths• Fast change in unstable environment• High client satisfaction• high functional coordination• decentralized decision making

Weaknesses

• Poor economies of scale• Poor coordination across product lines• Eliminates tech specialization




GeneralManager

Head of Marketing

Head of R&D

Head of Professional

Services

Head of Corporate

Services

MarketingSpecialist

R&DSpecialist

ProfessionalSpecialist

Specialist(e.g. Finance)

DirectorProgram 1

Head of Programs

DirectorProgram 2

DirectorProgram 3

MarketingSpecialist

MarketingSpecialist

R&DSpecialist

R&DSpecialist





Matrix Structure

Environment: high uncertainty, high stability, changing, constant demandsTechnology: innovative, many interdependenciesSize: moderate to largeGoal: external effectiveness, innovation, tech specialization, adaptive

capacity

M i S




Internal System• Dual goals: product & technical• Plan & budget by product & function

• Joint authority: functional/product

Strengths• Flex sharing HR• Suitable for unstable environment• Best in medium-sized company withmany products

Weaknesses• Two bosses• requires good interpersonal skills• Frequent coordination meetings• Must be a collegial culture

Matrix Structure




Symptoms of Structural Deficiency

A. Decision making is delayed or lacking in quality-decision makers may be overloaded-delegation to lower levels may be insufficient

B. The organization does not respond innovatively to achanging environment.

-lack of horizontal coordination-department responsibilities including environmentscanning and innovation must be specified.

C. Too much conflict is evident-conflicting departmental goals-horizontal linkages mechanisms are not adequate




StructuresDesign Principles

- formal reporting relationships- groupings of individuals into departments- systems regulating communications coordination and integration

Vertical Structures (efficiency)- linkage mechanisms- chain of command- rules and procedures

- plans and schedules- vertical information flow and filters- “systems based”

Horizontal Structures (effectiveness)- linkage mechanisms- teams and task forces- integrating departments- direct contact- organizational goal setting

I i M h i




Integrating Mechanisms

• Hierarchy

• Rules

• Goal Setting (Planning)

• Direct Contact

• Interdepartmental Liaison Rules• Temporary Task Forces

• Permanent Teams

• Integrating Roles

• Integrating Departments

I i M h i




Integrating Mechanisms

HierarchyRulesGoal Setting

(Budgeting/Planning)Direct ContactInterdepartmentalLiaison

TemporaryTask ForcePermanentTeamsIntegratingRolesIntegratingDepartments

Centreof gravity

High

Low

Diversity (tasks)Info. incentives staffing

Low

High

Cost of maintenance

Low

High

Degree of centralization

High

Low

Org/Env.stability

High

Low

O

O

O

Y

Y

Y

Y

Y

Y

X

x

x

x

x

x

behaviour control/passiveX organization control/passiveY contingency basedO prescription based

B i P fil




Business Profiles

Product Service Service/Product

Structural high low medium

rigidityInfo. Flow low high medium

Use of incentivesas control low high medium

Staffing skills

span (variety) low high medium

Centres of Gr it




Centres of Gravity

Supply Flow

Supply Stages or Vertical Integration in Manufacturing

Centres of Gravity




Centres of Gravity

Weyerhauser

International Paper

Container Corporation

Appleton

Proctor & Gamble

Paper Companies - Different Centres of Gravity



Business Stages




Business Stages

StageStage 1 -

EntrepreneurialSingle Business(MarketIntroduction)

Business Dynamics•Entrepreneurial

management style•Small size, informal and“vague” structure

•Emphasis on creating

initial product andmarketing

Transitional Crisis•Entrepreneurial skills not

appropriate to manage demandsof growth

•Founder may be unwilling toacknowledge that he can nolonger the company on his own

•Effective transition to Stage 2requires introduction of professional manager

Business Stages




Business StagesStageStage 2 -ProfessionalSingle Business

(Growth Stage)

Business Dynamics•Centralized analyticaldecision making anddirective leadership

•Formalized, functionalorganization structure

•Emphasis on increasedefficiency in operations

Transitional Crisis•Decision to diversify into amulti-business operationsrepresents a major shift in

strategy requiring newmanagement behaviour

Stage 3 -ProfessionalMulti Business(Maturity)

•Decentralized analyticaldecision making

•Divisional or strategicbusiness unit (SBU)structure

•Emphasis on portfoliomanagement, especiallywhere businesses are

unrelated

Strategy Organization Fit





Strategy

Rewards

Dominant Business

•Performance againstfunctional objectives

•Mix of objective andsubjectiveperformancemeasures

Unrelated Diversified

•Formula-based bonuson ROI or profitabilityof divisions

•Equity rewards

•Strict objective,impersonal evaluation

Related Diversified

•Bonus based ondivisional andcorporate profitperformance

•Mix of objective andsubjectiveperformancemeasures






Strategy

Peopleandcareers

Dominant Business

•Primarily functionalspecialists

•Some inter-functional movementto develop somegeneral managers


•Aggressive,independent generalmanagers of divisions

•Career developmentopportunities areprimarilyintradivisional

Related Diversified

•Broad requirementsfor general managersand integrators

•Career developmentscross-functional,interdivisional, andcorporate-divisional






Strategy

Informationand decisionprocess

Dominant Business

•Coordination andintegration throughstructure, rules,planning and

budgeting•Use of integratingroles for projectactivity acrossfunctions


•No integration acrossbusinesses

•Coordination andinformation flowsbetween corporate anddivision levels aroundmanagementinformation systemsand budgets

Related Diversified

•Coordinate andintegrate acrossbusinesses andbetween levels with

planning, integratingroles, integratingdepartments






Strategy

Structureanddecision-making style

Dominant Business

•Centralizedfunctional

•Top control of strategic decisions

•Delegation of operations throughplans andprocedures


•Highly decentralizedproduct divisions/profitcentres

•Small corporate office

•No centralized linefunctions

•Almost completedelegation of operations and strategywithin existingbusinesses

•Control throughresults, selection of management, andcapital allocation

Related Diversified

•Multidivisional/ profit centres

•Grouping of highlyrelated business withsome centralizedfunctions withingroups

•Delegatedresponsibility foroperations

•Shared responsibility

for strategy






Strategy

StrategicFocus/ Task Focus

Dominant Business

•Verticallyintegrated

•Degree of integration

•Market share

•Product linebreadth


•Growth throughacquisition

•Degree of diversity

•Types of business•Resource allocationacross discretebusinesses

Related Diversified

•Growth throughinternal development,some acquisition

•Realization of synergy from relatedproducts,technologies, markets

•Resource allocation

Project Profiles




j

Internally/ investor fundedInternally fundedOutside funded (venture capital)

Focus both on company and targetFocus outside companyCompany based

Asset centred(people problems)

People/asset centredPeople centred

Payoff only end of projectPayoff spread out in timeHigh immediate payoff

Longer duration(2-3 years)Longer duration(6-18 months)Short duration(3-12 months)

Inter-company basedFunctional based (marketing,logistics,etc)

Portfolio based(R&D motivated)

Alliances focus:M&A, joint ventures

Delivery focus: suppliers/channelsProduct focus

Medium success rate(10-30%)

Higher success rate(>50%)

Low success rate(1-10%)

Supports implementationSupports strategy /implementationSupports strategy

Lifecycle Summary




y y

IntroTake off

Shake out

External/ Internalforces

External/ Internalforces

Leveling Maturity

Decline

External forces External forces Internal forces

SpecificStrategy

Focus

Diversify

Status QuoInnovation(product)

DivestLiquidate

RestructureInnovation(process)

HorizontalVerticalExpansion

Joint venture

RetrenchStatus Quo

GenericStrategy

Focus/niche Cost Leadership

No structureculture max

Structures Defensive

Functionalculture

DivisionalM-Divculture

DivisionalFunctional

Matrixculture

Concentration

Lifecycle Summary




y y

MarketStructure

Product

sharestrengthgrowthmargins

Tech Focus Product Process Process

Sales/

product design

Incentive

Emphasis

advertising

processmanufacturingfinance

process

manuf.finance

Mkt share minMkt strengthmaxMkt growthmargins max

Intro Take Off Maturity DeclineLeveling

Product /process




Sales/ product designmanufacturing

marketingproduct designprocess innov.manufacturingfinance

Incentive

Features

Discretionary

risk takingIndividualshort term

Formula based

risk averselong termmultilevel

Multi level

long horizonsrisk aversecompanyperformance

Predetermined

risk managementcompany/ individualmedium term

MBO

medium termcompanybasedrisk avoidance

Lifecycle Summary




y y

StrategicInfo

single

volumesprod capacityproduct designinternalcontrols

Relatednessof businesses

single/ dominant

relateddiversifiedunrelated-SBU

dominantstronglyrelated

marketsfinancing


dominant /stronglyrelated

Costsmargins

mkt sharecostsadjacentmarkets

marginscompetitorsmkt fragmentprod. Costs

strategiccontrols

Career pathsto top mgt

entrepreneur Marketingfinance

accountingplanning

Accountingfinance

sales

Product devel.Functional

manager

Manuf.Sales

accounting

Centre of Gravity

unique deeperspread

deeperspreaddeeper

CEOLeadershipSource

Functionalmanagers

Culturecorporate plansexecutive

Portfoliodirectionexecutive

CEOorganizationalperformance

Lifecycle Summary




Priorities

external

Organizationstabilitycash flowmarket growth

internal internalStrategicFocus

Product/ market match


internal /external

Productioncosts

Productionmarket share

Product mixmarketsdynamics

internal /external

Project Profiles Along the Lifecycle






•Supports strategy•Low success rate(1-10%)

•Product focus•Portfolio based(R&D motivated)•Short duration(3-12 months)

•High immediate payoff •People centred•Company based

•Outside funded (venturecapital)

•Supportsimplementation•Medium success rate(10-30%)

•Alliances focus:M&A, joint ventures•Inter-company based•Longer duration(2-3 years)

•Payoff only end of project•Asset centered(people problems)

•Focus both on companyand target•Internally/ investorfunded

•Supportsstrategy/implementation•Higher success rate(>50%)

•Delivery focus:suppliers/channels•Functional based(marketing, logistics,etc)

•Longer duration(6-18 months)•Payoff spread out intime•People/asset centred•Focus outside company

•Internally funded


Startup Projects

Growth Phase Projects

Mature Phase Projects

Documents

Part6 Strategy