CHAPTER 12 IMPLEMENTING AND EXECUTING STRATEGY BUDGETS POLICIES

CHAPTER 12 IMPLEMENTING AND EXECUTING STRATEGY: BUDGETS, POLICIES, BEST PRACTICES, SUPPORT SYSTEMS, AND REWARDS Screen graphics created by: Jana F. Kuzmicki, Ph. D, Mississippi University for Women Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 1

“If you talk about change but don’t change the reward and recognition system, nothing changes. ” Paul Allaire CEO, Xerox Corp. “Quote” Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 2

Chapter Outline u Linking Budgets to Strategy u Creating Strategy-Supportive Policies u Instituting Best Practices and a Commitment to Continuous Improvement u Installing Support Systems u Strategy-Supportive Motivational Practices and Reward Systems Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 3

LINK BUDGETS TO STRATEGY Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. ,

Linking Budgets to Strategy u Allocating resources in ways that support effective strategy execution involves è Funding capital projects that can make a contribution to strategy implementation è Funding efforts to strengthen competencies and capabilities or to create new ones è Shifting resources—downsizing some areas, upsizing others, killing activities no longer justified, and funding new activities with a critical strategy role Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 5

Strategic Management Principle Depriving strategy-critical groups of the funds needed to execute their pieces of the strategy can undermine the implementation process! Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 6

ESTABLISH STRATEGYSUPPORTIVE POLICIES Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All

How Policies and Procedures Aid Strategy Implementation u Provide top-down guidance regarding expected behaviors u Help align internal actions with strategy, channeling efforts along the intended path u Enforce consistency in performance of activities in geographically scattered units u Serve as powerful lever for changing corporate culture to produce new strategy Mc. Graw-Hill/Irwin stronger fit with a © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 8

Creating Strategy-Supportive Policies and Procedures u Role of new policies è Channel behaviors and decisions to promote strategy execution è Counteract tendencies of people to resist chosen strategy u Too much policy can be as stifling as è Wrong policy or as è Chaotic as no policy u Often, the best policy is empowering employees and letting them operate between the white lines anyway they think best Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 9

INSTITUTE BEST PRACTICES AND MECHANISMS FOR CONTINUOUS IMPROVEMENT Mc. Graw-Hill/Irwin © 2003 The Mc.

Instituting Best Practices and Continuous Improvement u Searching out and adopting best practices is integral to effective implementation u Benchmarking has spawned new approaches to improve strategy execution è Reengineering è TQM è Continuous improvement programs Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 11

Characteristics of Benchmarking u Involves determining how well a firm performs particular activities and processes against è “Best in industry” and/or “Best in world” performers s u Represents a solid methodology ractice Best P to identify options to improve u Caution - Exact duplication of best practices of other firms is not feasible due to differences in implementation situations u Best approach - Best practices of other firms need to be modified or adapted to a firm’s own specific situation Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 12

What is Total Quality Management? u TQM is a philosophy of managing a set of business practices that emphasizes è Continuous improvement in all phases of operations, è 100 percent accuracy in performing activities, è Involvement and empowerment of employees at all levels, è Team-based work design, è Benchmarking, and è Fully satisfying customer expectations Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 13

Goals of Quality Improvement Programs u Defect-free manufacture u Superior product quality u Superior customer service u Total customer satisfaction Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 14

Popular TQM Approaches Deming’s 14 Points The Juran Trilogy Crosby’s 14 Quality Steps 1992 Baldridge Award Criteria Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 15

Table 12. 1: Components of Popular TQM Approaches Deming’s 14 Points 1. Constancy of purpose 2. Adopt the philosophy 3. Don’t rely on mass inspection 4. Don’t award business on price 5. Constant improvement 6. Training 7. Leadership Mc. Graw-Hill/Irwin 8. Drive out fear 9. Break down barriers 10. Eliminate slogans and exhortations 11. Eliminate quotas 12. Pride of workmanship 13. Education and retraining 14. Plan of action © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 16

Table 12. 1: Components of Popular TQM Approaches The Juran Trilogy Quality Planning • Set goals Quality Control • Evaluate performance • Identify customers and their needs • Compare to goals and adapt • Develop products and processes Quality Improvement • Establish infrastructure • Identify projects and teams • Provide resources and training • Establish controls Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 17

Table 12. 1: Components of Popular TQM Approaches Crosby’s 14 Quality Steps 1. Management commitment 2. Quality improvement teams 8. Supervisor training 9. Zero-defects day 10. Goal-setting 3. Quality measurement 4. Cost of quality evaluation 5. Quality awareness 6. Corrective action 7. Zero-defects committee Mc. Graw-Hill/Irwin 11. Error cause removal 12. Recognition 13. Quality councils 14. Do it over again © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18

Table 12. 1: Components of Popular TQM Approaches 1992 Baldridge Award Criteria (1000 points) 1. Leadership points) (90 2. Information & analysis (80 points) 3. Strategic quality planning (60 points) Mc. Graw-Hill/Irwin 4. Human resource development (150 points) Quality 7. Customer focus & satisfaction (300 points) 5. Management of process quality (140 points) 6. Quality & operation results (180 points) © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 19

Twelve Aspects Common to TQM and Continuous Improvement Programs 1. Committed leadership 7. Open organization 2. Adoption and communication of TQM 8. Employee empowerment 3. Closer customer relationships 4. Closer supplier relationships 9. Zero-defects mentality 10. Flexible manufacturing 5. Benchmarking 11. Process improvement 6. Increased training 12. Measurement Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 20

Implementing a Philosophy of Continuous Improvement u Instill enthusiasm to do things right throughout company u Strive to achieve little steps forward each day, (what the Japanese call kaizen) u Ignite creativity in employees to improve performance of value-chain activities u Preach there is no such thing as good enough u Reform the corporate culture Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 21

Characteristics of TQM/Continuous Improvement Programs u Valuable competitive asset in a company’s resource portfolio u Have hard-to-imitate aspects u Require substantial investment of management time and effort u Expensive in terms of training and meetings u Seldom produce short-term results u Long-term payoff —instilling a TQM culture Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 22

TQM vs. Process Reengineering u Reengineering è Aims at quantum gains of 30 to 50% or more u TQM è Stresses incremental progress u Techniques are not mutually exclusive è Reengineering - Used to produce a good basic design yielding dramatic improvements è TQM - Used to perfect process, gradually improving efficiency and effectiveness Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 23

Using Best Practice Programs as an Implementation Tool u Select indicators of successful strategy execution u Benchmark against best practice companies u Reengineer business processes u Build a TQ culture è Requires top management commitment è Install TQ-supportive employee practices è Empower employees to do the right things è Provide employees with quick access to required information è Preach that performance can be improved Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 24

INSTALL SUPPORT SYSTEMS Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All

Installing Support Systems u Essential to promote successful strategy execution u Types of support systems è On-line data systems è Internet and company intranets è Electronic mail è E-commerce systems u Mobilizing information and creating systems to use knowledge effectively can yield è Competitive advantage Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 26

Examples: Support Systems Airlines Computerized reservation system Federal Express Computerized parcel-tracking system, leading-edge flight operations systems, e-business tools Mc. Graw-Hill/Irwin and © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 27

Examples: Support Systems Otis Elevator Sophisticated maintenance support system Arthur Andersen Internet and digital technology (Knowledge Xchange system has data, voice, and video capabilities) links more than 70, 000 people in 382 offices in 81 countries Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 28

Examples: Support Systems Domino’s Pizza Computerized systems at each outlet facilitate ordering, inventory, payroll, cash flow, and work flow functions Mrs. Fields’ Cookies System to monitor sales, at 15 -minute intervals, to suggest product mix changes and to improve customer response Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 29

Strategic Management Principle Innovative, state-of-the-art support systems can be a basis for competitive advantage if they give a firm capabilities that rivals can’t match! Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 30

Formal Reporting of Strategy-Critical Information u Accurate, timely information is essential to guide action u Prompt feedback on implementation activities is needed before actions are fully completed u Key strategic performance indicators must be tracked as often as practical u Barometers of overall performance è Statistical information è Reports and meetings è Personal contact Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 31

What Areas Should Information Systems Address? u Customer data u Operations data u Employee data u Supplier/partner/collaborative ally data u Financial performance data Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 32

Exercising Adequate Control Over Empowered Employees u Challenge è How to ensure actions of employees stay within acceptable bounds u Purpose of diagnostic control systems è Relieve managers of burden of constant monitoring u Control methods è Establish boundaries on what not to do, allowing freedom to act with limits è Face-to-face meetings to assess performance Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 33

DESIGN STRATEGYSUPPORTIVE REWARD SYSTEMS Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. ,

Gaining Commitment: Components of an Effective Reward System Monetary Incentives Non-monetary Incentives è Praise è Salary raises è Performance bonuses è Stock options è Retirement packages è Promotions è Perks Mc. Graw-Hill/Irwin è Constructive criticism è Special recognition è More, or less, job security è Interesting assignments è More, or less, job responsibility © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 35

Approaches: Motivating People to Execute the Strategy Well u Inspire employees to do their best u Get employees to buy into strategy u Structure individual efforts in teams to facilitate a supportive climate u Allow employees to participate in decisions about their jobs u Make jobs interesting and satisfying u Devise strategy-supportive motivational approaches Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 36

Examples: Motivational Practices No Lay-Off Policies Japanese automobile producers, along with several U. S. based companies (Southwest Airlines, Fed. Ex, Lands’ End, and Harley Davidson) have no lay-off policies, using employment security both as a positive motivator and a means of reinforcing good strategy execution. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 37

Examples: Motivational Practices Stock Options More than 35 of the 58 publicly held companies on the 1999 list of the 100 Best Companies to Work for in America (includes Cisco Systems, Procter & Gamble, Merck, Charles Schwab, General Mills, Amgen, and Tellabs) provide stock options to all employees. Having employee-owners sharing in a company’s success is widely viewed as a positive motivator. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 38

Examples: Motivational Practices Nordstrom Pay salespeople higher than prevailing rates, plus commission. “Rule #1: Use good judgment in all situations. There will be no additional rules. ” Cisco Systems Offers on-the-spot bonuses of up to $2, 000 for exceptional performance. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 39

Examples: Motivational Practices Microsoft Team members enjoy working 60 -80 hours per week for a leading edge company, accompanied by attractive pay and lucrative stock options. Lincoln Electric Rewards productivity by paying for each piece produced (defects can be traced to worker causing them). Bonuses of 50 to 100% are common. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 40

Balancing Positive vs. Negative Rewards u Elements of both are necessary è Challenge and competition are necessary for self-satisfaction u Prevailing view è Positive approaches work better than negative ones in terms of l Enthusiasm l Effort l Creativity l Initiative Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 41

Linking the Reward System to Performance Outcomes u Rewards are the single most powerful tool to win commitment to the strategy u Objectives è Generously reward those achieving objectives è Deny rewards to those who don’t è Make strategic performance measures the dominant basis for designing incentives, evaluating efforts, and handing out rewards Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 42

Strategic Management Principle A properly designed reward structure is management’s most powerful tool for mobilizing organizational commitment to successful strategy execution! Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 43

Strategic Management Principle The unwavering standard for judging whether individuals, teams, and organizational units have done a good job must be whether they achieve performance targets consistent with effective strategy execution! Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 44

Key Considerations in Designing Reward Systems u Create a results-oriented system u Reward people for results, not for activity u Define jobs in terms of what to achieve u Incorporate several performance measures u Tie incentive compensation to relevant outcomes è Top executives—Key measures of overall firm performance è Department heads, teams, and individuals Incentives tied to achieving performance targets in their areas of responsibility Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 45

Guidelines for Designing an Effective 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 Mc. Graw-Hill/Irwin 5. Targets each person is expected to achieve must involve outcomes that can be personally affected 6. Keep time between performance review and payment short 7. Make liberal use of nonmonetary rewards 8. Avoid ways of rewarding non-performers © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 46