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CHAPTER 10

Building an
Organization
Capable of Good
Strategy Execution
People, Capabilities,
and Structure

Learning Objectives

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 What managers must do to execute strategy successfully.

LO 2 Why hiring, training, and retaining the right people constitute a key component of the
strategy execution process.

LO 3 That good strategy execution requires continuously building and upgrading the
organization’s resources and capabilities.

LO 4 What issues to consider in establishing a strategy-supportive organizational structure
and organizing the work effort.

LO 5 The pros and cons of centralized and decentralized decision making in implementing
the chosen strategy.

© ImageZoo/Alamy Stock Photo

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In the end, a strategy is nothing but good intentions
unless it’s effectively implemented.

Clayton M. Christensen—Professor and consultant

I try to motivate people and align our individual incen-
tives with organizational incentives. And then let
people do their best.

John Liu—Director, Whirlpool Corporation

People are not your most important asset. The right
people are.

Jim Collins—Professor and author

Once managers have decided on a strategy, the
emphasis turns to converting it into actions and good
results. Putting the strategy into place and getting the
organization to execute it well call for different sets of
managerial skills. Whereas crafting strategy is largely
an analysis-driven activity focused on market condi-
tions and the company’s resources and capabilities,
executing strategy is primarily operations-driven,
revolving around the management of people, busi-
ness processes, and organizational structure. Suc-
cessful strategy execution depends on doing a good
job of working with and through others; building and
strengthening competitive capabilities; creating
an appropriate organizational structure; allocating
resources; instituting strategy-supportive policies,
processes, and systems; and instilling a discipline of
getting things done. Executing strategy is an action-
oriented task that tests a manager’s ability to direct
organizational change, achieve improvements in
day-to-day operations, create and nurture a culture
that supports good strategy execution, and meet or
beat performance targets.

Experienced managers are well aware that it is
much easier to develop a sound strategic plan than
it is to execute the plan and achieve targeted out-
comes. A recent study of 400 CEOs in the United
States, Europe, and Asia found that executional
excellence was the number-one challenge facing
their companies.1 According to one executive, “It’s
been rather easy for us to decide where we wanted
to go. The hard part is to get the organization to

act on the new priorities.”2 It takes adept manage-
rial leadership to convincingly communicate a new
strategy and the reasons for it, overcome pockets
of doubt, secure the commitment of key personnel,
build consensus for how to implement the strategy,
and move forward to get all the pieces into place
and deliver results. Just because senior manag-
ers announce a new strategy doesn’t mean that
organization members will embrace it and move
forward enthusiastically to implement it. Company
personnel must understand—in their heads and
hearts—why a new strategic direction is necessary
and where the new strategy is taking them.3 Institut-
ing change is, of course, easier when the problems
with the old strategy have become obvious and/or
the company has spiraled into a financial crisis.

But the challenge of successfully implementing
new strategic initiatives goes well beyond manage-
rial adeptness in overcoming resistance to change.
What really makes executing strategy a tougher,
more time-consuming management challenge
than crafting strategy are the wide array of mana-
gerial activities that must be attended to, the many
ways to put new strategic initiatives in place and
keep things moving, and the number of bedeviling
issues that always crop up and have to be resolved.
It takes first-rate “managerial smarts” to zero in on
what exactly needs to be done and how to get
good results in a timely manner. Excellent people-
management skills and perseverance are needed
to get a variety of initiatives underway and to

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The managerial approach to implementing and executing a strategy always has
to be customized to fit the particulars of a company’s situation. Making minor
changes in an existing strategy differs from implementing radical strategy
changes. The techniques for successfully executing a low-cost provider strategy
are different from those for executing a high-end differentiation strategy. Imple-
menting a new strategy for a struggling company in the midst of a financial crisis
is a different job from improving strategy execution in a company that is doing
relatively well. Moreover, some managers are more adept than others at using par-
ticular approaches to achieving certain kinds of organizational changes. Hence,
there’s no definitive managerial recipe for successful strategy execution that cuts
across all company situations and all strategies or that works for all managers.
Rather, the specific actions required to execute a strategy—the “to-do list” that

constitutes management’s action agenda—always represent management’s judgment
about how best to proceed in light of prevailing circumstances.

The Principal Components of the Strategy
Execution Process
Despite the need to tailor a company’s strategy-executing approaches to the situation
at hand, certain managerial bases must be covered no matter what the circumstances.
These include 10 basic managerial tasks (see Figure 10.1):

1. Staffing the organization with managers and employees capable of executing the
strategy well.

2. Developing the resources and organizational capabilities required for successful
strategy execution.

3. Creating a strategy-supportive organizational structure.
4. Allocating sufficient resources (budgetary and otherwise) to the strategy execu-

tion effort.

LO 1

What managers
must do to execute
strategy successfully.

CORE CONCEPT

Good strategy execution
requires a team effort. All
managers have strategy-
executing responsibility in
their areas of authority, and
all employees are active
participants in the strategy
execution process.

integrate the efforts of many different work groups
into a smoothly functioning whole. Depending on
how much consensus building and organizational
change is involved, the process of implementing
strategy changes can take several months to sev-
eral years. And executing the strategy with real pro-
ficiency takes even longer.

Like crafting strategy, executing strategy is a job
for a company’s whole management team—not just
a few senior managers. While the chief executive offi-
cer and the heads of major units (business divisions,
functional departments, and key operating units)
are ultimately responsible for seeing that strategy is

executed successfully, the process typically affects
every part of the firm—all value chain activities and
all work groups. Top-level managers must rely on the
active support of middle and lower managers to insti-
tute whatever new operating practices are needed
in the various operating units to achieve proficient
strategy execution. Middle and lower-level manag-
ers must ensure that frontline employees perform
strategy-critical value chain activities proficiently
and produce operating results that allow company-
wide performance targets to be met. Consequently,
all company personnel are actively involved in the
strategy execution process in one way or another.

A FRAMEWORK FOR EXECUTING STRATEGY

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5. Instituting policies and procedures that facilitate strategy execution.
6. Adopting best practices and business processes to drive continuous improvement

in strategy execution activities.
7. Installing information and operating systems that enable company personnel to

carry out their strategic roles proficiently.
8. Tying rewards and incentives directly to the achievement of strategic and

financial targets.
9. Instilling a corporate culture that promotes good strategy execution.
10. Exercising strong leadership to drive the execution process forward and attain

companywide operating excellence as rapidly as feasible.

How well managers perform these 10 tasks has a decisive impact on whether
the outcome of the strategy execution effort is a spectacular success, a colossal
failure, or something in between.

In devising an action agenda for executing strategy, managers should start by
conducting a probing assessment of what the organization must do differently
to carry out the strategy successfully. Each manager needs to ask the question
“What needs to be done in my area of responsibility to implement our part of the
company’s strategy, and what should I do to get these things accomplished in a
timely fashion?” It is then incumbent on every manager to determine precisely
how to make the necessary internal changes. Successful strategy implementers
have a knack for diagnosing what their organizations need to do to execute the
chosen strategy well and figuring out how to get these things done efficiently.
They are masters in promoting results-oriented behaviors on the part of company
personnel and following through on making the right things happen to achieve the
target outcomes.4

When strategies fail, it is often because of poor execution. Strategy execution
is therefore a critical managerial endeavor. The two best signs of good strategy
execution are whether a company is meeting or beating its performance targets
and whether it is performing value chain activities in a manner that is conducive
to companywide operating excellence. In big organizations with geographically
scattered operating units, senior executives’ action agenda mostly involves com-
municating the case for change, building consensus for how to proceed, installing
strong managers to move the process forward in key organizational units, direct-
ing resources to the right places, establishing deadlines and measures of progress,
rewarding those who achieve implementation milestones, and personally leading
the strategic change process. Thus, the bigger the organization, the more that suc-
cessful strategy execution depends on the cooperation and implementation skills of
operating managers who can promote needed changes at the lowest organizational
levels and deliver results. In small organizations, top managers can deal directly
with frontline managers and employees, personally orchestrating the action steps
and implementation sequence, observing firsthand how implementation is progress-
ing, and deciding how hard and how fast to push the process along. Whether the
organization is large or small and whether strategy implementation involves sweep-
ing or minor changes, effective leadership requires a keen grasp of what to do and
how to do it in light of the organization’s circumstances. Then it remains for com-
pany personnel in strategy-critical areas to step up to the plate and produce the
desired results.

When strategies fail,
it is often because of
poor execution. Strategy
execution is therefore
a critical managerial
endeavor.

The two best signs of
good strategy execution
are whether a company
is meeting or beating its
performance targets and
whether it is performing
value chain activities in a
manner that is conducive
to companywide operating
excellence.

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What’s Covered in Chapters 10, 11, and 12 In the remainder of
this chapter and in the next two chapters, we discuss what is involved in perform-
ing the 10 key managerial tasks that shape the process of executing strategy. This
chapter explores the first three of these tasks (highlighted in blue in Figure 10.1):
(1) staffing the organization with people capable of executing the strategy well,
(2) developing the resources and building the organizational capabilities needed
for successful strategy execution, and (3) creating an organizational structure sup-
portive of the strategy execution process. Chapter 11 concerns the tasks of allo-
cating resources (budgetary and otherwise), instituting strategy-facilitating policies
and procedures, employing business process management tools and best practices,
installing operating and information systems, and tying rewards to the achievement
of good results (highlighted in green in Figure 10.1). Chapter 12 deals with the two
remaining tasks: instilling a corporate culture conducive to good strategy execution,
and exercising the leadership needed to drive the execution process forward (high-
lighted in purple).

FIGURE 10.1 The 10 Basic Tasks of the Strategy Execution Process

Develop the resources
and organizational capabilities

required for successful
strategy execution

Exercise strong
leadership to propel
strategy execution

forward

Tie rewards and
incentives directly to the
achievement of strategic
and financial targets

Install information and
operating systems that support

strategy execution activities

Adopt best practices
and business processes

that drive continuous
improvement

Institute policies and
procedures that

facilitate strategy
execution

Allocate su�cient
resources to the

strategy execution
e�ort

Instill a corporate
culture that promotes

good strategy
execution

Sta� the organization
with the right people for
executing the strategy

Establish a strategy-
supportive organizational

structure

The Action
Agenda for
Executing
Strategy

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Proficient strategy execution depends foremost on having in place an organization
capable of the tasks demanded of it. Building an execution-capable organization is thus
always a top priority. As shown in Figure 10.2, three types of organization- building
actions are paramount:

1. Staffing the organization—putting together a strong management team, and
recruiting and retaining employees with the needed experience, technical skills,
and intellectual capital.

2. Acquiring, developing, and strengthening the resources and capabilities required
for good strategy execution—accumulating the required resources, developing

BUILDING AN ORGANIZATION CAPABLE OF GOOD
STRATEGY EXECUTION: THREE KEY ACTIONS

FIGURE 10.2 Building an Organization Capable of Proficient Strategy Execution:
Three Key Actions

Strategy-
Supportive

Resources and
Capabilities

Strategy-
Supportive

Organizational
Structure

Sta�ng the Organization

Acquiring, Developing, and Strengthening Key
Resources and Capabilities

Putting together a strong management team
Recruiting and retaining talented employees

Developing a set of resources and capabilities
suited to the current strategy
Updating resources and capabilities as external
conditions and the firm’s strategy change
Training and retaining company personnel to
maintain knowledge-based and skills-based
capabilities

Structuring the Organization and Work E�ort
Instituting organizational arrangements that
facilitate good strategy execution

Deciding how much decision-making authority
to delegate

Establishing lines of authority and reporting
relationships

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proficiencies in performing strategy-critical value chain activities, and updating
the company’s capabilities to match changing market conditions and customer
expectations.

3. Structuring the organization and work effort—organizing value chain activities
and business processes, establishing lines of authority and reporting relationships,
and deciding how much decision-making authority to delegate to lower-level
managers and frontline employees.

Implementing a strategy depends critically on ensuring that strategy-supportive
resources and capabilities are in place, ready to be deployed. These include the skills,
talents, experience, and knowledge of the company’s human resources (managerial
and otherwise)—see Figure 10.2. Proficient strategy execution depends heavily on
competent personnel of all types, but because of the many managerial tasks involved
and the role of leadership in strategy execution, assembling a strong management team
is especially important.

If the strategy being implemented is a new strategy, the company may need to add
to its resource and capability mix in other respects as well. But renewing, upgrad-
ing, and revising the organization’s resources and capabilities is a part of the strategy
execution process even if the strategy is fundamentally the same, since strategic assets
depreciate and conditions are always changing. Thus, augmenting and strengthening
the firm’s core competencies and seeing that they are suited to the current strategy are
also top priorities.

Structuring the organization and work effort is another critical aspect of building
an organization capable of good strategy execution. An organization structure that
is well matched to the strategy can help facilitate its implementation; one that is not
well suited can lead to higher bureaucratic costs and communication or coordination
breakdowns.

LO 2

Why hiring, training,
and retaining
the right people
constitute a key
component of the
strategy execution
process.

STAFFING THE ORGANIZATION
No company can hope to perform the activities required for successful strategy execu-
tion without attracting and retaining talented managers and employees with suitable
skills and intellectual capital.

Putting Together a Strong Management Team
Assembling a capable management team is a cornerstone of the organization- building
task.5 While different strategies and company circumstances often call for different
mixes of backgrounds, experiences, management styles, and know-how, the most
important consideration is to fill key managerial slots with smart people who are
clear thinkers, good at figuring out what needs to be done, skilled in managing peo-
ple, and accomplished in delivering good results.6 The task of implementing chal-
lenging strategic initiatives must be assigned to executives who have the skills and
talents to handle them and who can be counted on to get the job done well. Without
a capable, results-oriented management team, the implementation process is likely
to be hampered by missed deadlines, misdirected or wasteful efforts, and manage-
rial ineptness. Weak executives are serious impediments to getting optimal results
because they are unable to differentiate between ideas that have merit and those that

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are misguided—the caliber of work done under their supervision suffers.7 In contrast,
managers with strong strategy implementation capabilities have a talent for asking
tough, incisive questions. They know enough about the details of the business to be
able to ensure the soundness of the decisions of the people around them, and they can
discern whether the resources people are asking for to put the strategy in place make
sense. They are good at getting things done through others, partly by making sure they
have the right people under them, assigned to the right jobs. They consistently follow
through on issues, monitor progress carefully, make adjustments when needed, and
keep important details from slipping through the cracks. In short, they understand
how to drive organizational change, and they know how to motivate and lead the com-
pany down the path for first-rate strategy execution.

Sometimes a company’s existing management team is up to the task. At other
times it may need to be strengthened by promoting qualified people from within
or by bringing in outsiders whose experiences, talents, and leadership styles bet-
ter suit the situation. In turnaround and rapid-growth situations, and in instances
when a company doesn’t have insiders with the requisite know-how, filling key
management slots from the outside is a standard organization-building approach.
In addition, it is important to identify and replace managers who are incapable,
for whatever reason, of making the required changes in a timely and cost-effective
manner. For a management team to be truly effective at strategy execution, it must
be composed of managers who recognize that organizational changes are needed
and who are ready to get on with the process.

The overriding aim in building a management team should be to assemble a criti-
cal mass of talented managers who can function as agents of change and further the
cause of excellent strategy execution. Every manager’s success is enhanced (or lim-
ited) by the quality of his or her managerial colleagues and the degree to which they
freely exchange ideas, debate ways to make operating improvements, and join forces
to tackle issues and solve problems. When a first-rate manager enjoys the help and
support of other first-rate managers, it’s possible to create a managerial whole that is
greater than the sum of individual efforts—talented managers who work well together
as a team can produce organizational results that are dramatically better than what one
or two star managers acting individually can achieve.8

Illustration Capsule 10.1 describes Deloitte’s highly effective approach to develop-
ing employee talent and a top-caliber management team.

Recruiting, Training, and Retaining
Capable Employees
Assembling a capable management team is not enough. Staffing the organization
with the right kinds of people must extend to all kinds of company personnel for value
chain activities to be performed competently. The quality of an organization’s people
is always an essential ingredient of successful strategy execution— knowledgeable,
engaged employees are a company’s best source of creative ideas for the nuts-and-
bolts operating improvements that lead to operating excellence. Companies like
Mercedes-Benz, Alphabet, SAS, Boston Consulting Group, Edward Jones, Quicken
Loans, Genentech, Intuit, Salesforce.com, and Goldman Sachs make a concerted
effort to recruit the best and brightest people they can find and then retain them
with excellent compensation packages, opportunities for rapid advancement and
professional growth, and interesting assignments. Having a pool of “A players” with
strong skill sets and lots of brainpower is essential to their business.

Putting together a talented
management team with the
right mix of experiences,
skills, and abilities to get
things done is one of
the first steps to take in
launching the strategy-
executing process.

In many industries, adding
to a company’s talent base
and building intellectual
capital are more important
to good strategy execution
than are additional
investments in capital
projects.

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ILLUSTRATION
CAPSULE 10.1

Hiring, retaining, and cultivating talent are critical activi-
ties at Deloitte, the world’s largest professional services
firm. By offering robust learning and development pro-
grams, Deloitte has been able to create a strong talent
pipeline to the firm’s partnership. Deloitte’s emphasis
on learning and development, across all stages of the
employee life cycle, has led to recognitions such as
being ranked number-one on Chief Executives’s list of
“Best Private Companies for Leaders” and being listed
among Fortune’s “100 Best Companies to Work For.”
The following programs contribute to Deloitte’s success-
ful execution of its talent strategy:

• Clear path to partnership. During the initial recruiting
phase and then throughout an employee’s tenure at
the firm, Deloitte lays out a clear career path. The path
indicates the expected timeline for promotion to each
of the firm’s hierarchy levels, along with the competen-
cies and experience required. Deloitte’s transparency
on career paths, coupled with its in-depth performance

management process, helps employees clearly under-
stand their performance. This serves as a motivational tool
for top performers, often leading to career acceleration.

• Formal training programs. Like other leading organiza-
tions, Deloitte has a program to ensure that recent col-
lege graduates are equipped with the necessary training
and tools for succeeding on the job. Yet Deloitte’s com-
mitment to formal training is evident at all levels within
the organization. Each time an employee is promoted,
he or she attends “milestone” school, a weeklong simu-
lation that replicates true business situations employees
would face as they transition to new stages of career
development. In addition, Deloitte institutes manda-
tory training hours for all of its employees to ensure
that individuals continue to further their professional
development.

• Special programs for high performers. Deloitte also
offers fellowships and programs to help employees
acquire new skills and enhance their leadership devel-
opment. For example, the Global Fellows program helps
top performers work with senior leaders in the organi-
zation to focus on the realities of delivering client ser-
vice across borders. Deloitte has also established the
Emerging Leaders Development program, which utilizes
skill building, 360-degree feedback, and one-on-one
executive coaching to help top-performing managers
and senior managers prepare for partnership.

• Sponsorship, not mentorship. To train the next genera-
tion of leaders, Deloitte has implemented formal men-
torship programs to provide leadership development
support. Deloitte, however, uses the term sponsorship to
describe this initiative. A sponsor is tasked with taking
a vested interest in an individual and advocating on his
or her behalf. Sponsors help rising leaders navigate the
firm, develop new competencies, expand their network,
and hone the skills needed to accelerate their career.

Management Development at
Deloitte Touche Tohmatsu Limited

© Mathias Beinling/Alamy Stock Photo

Note: Developed with Heather Levy.

Sources: Company websites; www.accountingweb.com/article/leadership-development-community-service-integral-deloitte-
university/220845 (accessed February 2014).

Facebook makes a point of hiring the very brightest and most talented program-
mers it can find and motivating them with both good monetary incentives and the
challenge of working on cutting-edge technology projects. McKinsey & Company, one
of the world’s premier management consulting firms, recruits only cream-of-the-crop
MBAs at the nation’s top-10 business schools; such talent is essential to McKinsey’s
strategy of performing high-level consulting for the world’s top corporations. The lead-
ing global accounting firms screen candidates not only on the basis of their accounting

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expertise but also on whether they possess the people skills needed to relate well with
clients and colleagues. Zappos goes to considerable lengths to hire people who can
have fun and be fun on the job; it has done away with traditional job postings and
instead asks prospective hires to join a social network, called Zappos Insiders, where
they will interact with current employees and have opportunities to demonstrate their
passion for joining the company. Zappos is so selective about finding people who fit
their culture that only about 1.5 percent of the people who apply are offered jobs.

In high-tech companies, the challenge is to staff work groups with gifted, imag-
inative, and energetic people who can bring life to new ideas quickly and inject into
the organization what one Dell executive calls “hum.”9 The saying “People are
our most important asset” may seem trite, but it fits high-technology companies
precisely. Besides checking closely for functional and technical skills, Dell tests
applicants for their tolerance of ambiguity and change, their capacity to work in
teams, and their ability to learn on the fly. Companies like Zappos, Amazon.com,
Google, and Cisco Systems have broken new ground in recruiting, hiring, culti-
vating, developing, and retaining talented employees—almost all of whom are in
their 20s and 30s. Cisco goes after the top 10 percent, raiding other companies and
endeavoring to retain key people at the companies it acquires. Cisco executives
believe that a cadre of star engineers, programmers, managers, salespeople, and
support personnel is the backbone of the company’s efforts to execute its strategy and
remain the world’s leading provider of Internet infrastructure products and technology.

In recognition of the importance of a talented and energetic workforce, companies
have instituted a number of practices aimed at staffing jobs with the best people they
can find:

1. Spending considerable effort on screening and evaluating job applicants—
selecting only those with suitable skill sets, energy, initiative, judgment, aptitude
for learning, and personality traits that mesh well with the company’s work envi-
ronment and culture.

2. Providing employees with training programs that continue throughout their careers.
3. Offering promising employees challenging, interesting, and skill-stretching

assignments.
4. Rotating people through jobs that span functional and geographic boundaries.

Providing people with opportunities to gain experience in a variety of interna-
tional settings is increasingly considered an essential part of career development
in multinational companies.

5. Making the work environment stimulating and engaging so that employees will
consider the company a great place to work.

6. Encouraging employees to challenge existing ways of doing things, to be creative
and innovative in proposing better ways of operating, and to push their ideas for
new products or businesses. Progressive companies work hard at creating an envi-
ronment in which employees are made to feel that their views and suggestions
count.

7. Striving to retain talented, high-performing employees via promotions, salary
increases, performance bonuses, stock options and equity ownership, benefit
packages including health insurance and retirement packages, and other perks,
such as flexible work hours and onsite day care.

8. Coaching average performers to improve their skills and capabilities, while weed-
ing out underperformers.

The best companies
make a point of recruiting
and retaining talented
employees—the objective
is to make the company’s
entire workforce
(managers and rank-and-
file employees) a genuine
competitive asset.

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High among the organization-building priorities in the strategy execution process is
the need to build and strengthen the company’s portfolio of resources and capabili-
ties with which to perform strategy-critical value chain activities. As explained in
Chapter  4, a company’s chances of gaining a sustainable advantage over its market
rivals depends on the caliber of its resource portfolio. In the course of crafting strategy,
managers may well have well have identified the strategy-critical resources and capa-
bilities it needs. But getting the strategy execution process underway requires acquir-
ing or developing these resources and capabilities, putting them into place, upgrading
them as needed, and then modifying them as market conditions evolve.

If the strategy being implemented has important new elements, company man-
agers may have to acquire new resources, significantly broaden or deepen certain
capabilities, or even add entirely new competencies in order to put the strategic initia-
tives in place and execute them proficiently. But even when a company’s strategy has
not changed materially, good strategy execution still involves upgrading the firm’s
resources and capabilities to keep them in top form and perform value chain activities
ever more proficiently.

Three Approaches to Building and
Strengthening Capabilities

Building the right kinds of core competencies and competitive capabilities and
keeping them finely honed is a time-consuming, managerially challenging exer-
cise. While some assistance can be gotten from discovering how best-in-industry
or best-in-world companies perform a particular activity, trying to replicate and
then improve on the capabilities of others is easier said than done—for the same
reasons that one is unlikely to ever become a world-class halfpipe snowboarder just
by studying legendary Olympic gold medalist Shaun White.

With deliberate effort, well-orchestrated organizational actions and contin-
ued practice, however, it is possible for a firm to become proficient at capability
building despite the difficulty. Indeed, by making capability-building activities

a routine part of their strategy execution endeavors, some firms are able to develop
dynamic capabilities that assist them in managing resource and capability change,
as discussed in Chapter 4. The most common approaches to capability building
include (1) developing and strengthening capabilities internally, (2) acquiring capa-
bilities through mergers and acquisitions, and (3) developing new capabilities via
collaborative partnerships.

Developing Capabilities Internally Internal efforts to create or upgrade
capabilities is an evolutionary process that entails a series of deliberate and well-
orchestrated steps as organizations search for solutions to their problems. The process
is a complex one, since capabilities are the product of bundles of skills and know-how
that are integrated into organizational routines and deployed within activity systems
through the combined efforts of teams that are often cross-functional in nature, span-
ning a variety of departments and locations. For instance, the capability of speed-
ing new products to market involves the collaborative efforts of personnel in R&D,

LO 3

That good strategy
execution requires
continuously building
and upgrading
the organization’s
resources and
capabilities.

Building new competencies
and capabilities is a
multistage process that
occurs over a period of
months and years. It is
not something that is
accomplished overnight.

DEVELOPING AND BUILDING CRITICAL
RESOURCES AND CAPABILITIES

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engineering and design, purchasing, production, marketing, and distribution. Simi-
larly, the capability to provide superior customer service is a team effort among people
in customer call centers (where orders are taken and inquiries are answered), shipping
and delivery, billing and accounts receivable, and after-sale support. The process of
building a capability begins when managers set an objective of developing a particular
capability and organize activity around that objective.10 Managers can ignite the pro-
cess by having high aspirations and setting “stretch objectives” for the organization, as
described in Chapter 2.11

Because the process is incremental, the first step is to develop the ability to do
something, however imperfectly or inefficiently. This entails selecting people with
the requisite skills and experience, upgrading or expanding individual abilities as
needed, and then molding the efforts of individuals into a joint effort to create
an organizational ability. At this stage, progress can be fitful since it depends on
experimenting, actively searching for alternative solutions, and learning through
trial and error.12

As experience grows and company personnel learn how to perform the activi-
ties consistently well and at an acceptable cost, the ability evolves into a tried-
and-true competence. Getting to this point requires a continual investment of
resources and systematic efforts to improve processes and solve problems creatively as
they arise. Improvements in the functioning of a capability come from task repetition
and the resulting learning by doing of individuals and teams. But the process can be
accelerated by making learning a more deliberate endeavor and providing the incen-
tives that will motivate company personnel to achieve the desired ends.13 This can be
critical to successful strategy execution when market conditions are changing rapidly.

It is generally much easier and less time-consuming to update and remodel a com-
pany’s existing capabilities as external conditions and company strategy change than
it is to create them from scratch. Maintaining capabilities in top form may simply
require exercising them continually and fine-tuning them as necessary. Similarly,
augmenting a capability may require less effort if it involves the recombination of
well-established company capabilities and draws on existing company resources. For
example, Williams-Sonoma first developed the capability to expand sales beyond its
brick-and-mortar location in 1970, when it launched a catalog that was sent to cus-
tomers throughout the United States. The company extended its mail-order business
with the acquisitions of Hold Everything, a garden products catalog, and Pottery Barn,
and entered online retailing in 2000 when it launched e-commerce sites for Pottery
Barn and Williams-Sonoma. The ongoing renewal of these capabilities has allowed
Williams-Sonoma to generate revenues of nearly $5 billion in 2014 and become the
21st largest online retailer in the United States. Toyota, en route to overtaking General
Motors as the global leader in motor vehicles, aggressively upgraded its capabilities
in fuel-efficient hybrid engine technology and constantly fine-tuned its famed Toyota
Production System to enhance its already proficient capabilities in manufacturing top-
quality vehicles at relatively low costs.

Managerial actions to develop core competencies and competitive capabilities gen-
erally take one of two forms: either strengthening the company’s base of skills, knowl-
edge, and experience or coordinating and integrating the efforts of the various work
groups and departments. Actions of the first sort can be undertaken at all managerial
levels, but actions of the second sort are best orchestrated by senior managers who not
only appreciate the strategy-executing significance of strong capabilities but also have
the clout to enforce the necessary cooperation and coordination among individuals,
groups, and departments.14

A company’s capabilities
must be continually
refreshed and renewed
to remain aligned with
changing customer
expectations, altered
competitive conditions, and
new strategic initiatives.

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Acquiring Capabilities through Mergers and Acquisitions
Sometimes the best way for a company to upgrade its portfolio of capabilities is by
acquiring (or merging with) another company with attractive resources and capabili-
ties.15 An acquisition aimed at building a stronger portfolio of resources and capabili-
ties can be every bit as valuable as an acquisition aimed at adding new products or
services to the company’s lineup of offerings. The advantage of this mode of acquiring
new capabilities is primarily one of speed, since developing new capabilities internally
can, at best, take many years of effort and, at worst, come to naught. Capabilities-
motivated acquisitions are essential (1) when the company does not have the ability
to create the needed capability internally (perhaps because it is too far afield from its
existing capabilities) and (2) when industry conditions, technology, or competitors are
moving at such a rapid clip that time is of the essence.

At the same time, acquiring capabilities in this way is not without difficulty. Capa-
bilities involve tacit knowledge and complex routines that cannot be transferred read-
ily from one organizational unit to another. This may limit the extent to which the
new capability can be utilized. For example, Facebook acquired Oculus VR, a com-
pany that makes virtual reality headsets, to add capabilities that might enhance the
social media experience. Transferring and integrating these capabilities to other parts
of the Facebook organization prove easier said than done, however, as many technol-
ogy acquisitions fail to yield the hoped-for benefits. Integrating the capabilities of two
companies is particularly problematic when there are underlying incompatibilities in
their supporting systems or processes. Moreover, since internal fit is important, there
is always the risk that under new management the acquired capabilities may not be as
productive as they had been. In a worst-case scenario, the acquisition process may end
up damaging or destroying the very capabilities that were the object of the acquisition
in the first place.

Accessing Capabilities through Collaborative Partnerships A
third way of obtaining valuable resources and capabilities is to form collaborative
partnerships with suppliers, competitors, or other companies having the cutting-edge
expertise. There are three basic ways to pursue this course of action:

1. Outsource the function in which the company’s capabilities are deficient to a key
supplier or another provider. Whether this is a wise move depends on what can be
safely delegated to outside suppliers or allies and which internal capabilities are
key to the company’s long-term success. As discussed in Chapter 6, outsourcing
has the advantage of conserving resources so that the firm can focus its energies
on those activities most central to its strategy. It may be a good choice for firms
that are too small and resource-constrained to execute all the parts of their strategy
internally.

2. Collaborate with a firm that has complementary resources and capabilities in
a joint venture, strategic alliance, or other type of partnership established for
the purpose of achieving a shared strategic objective. This requires launching
initiatives to identify the most attractive potential partners and to establish col-
laborative working relationships. Since the success of the venture will depend
on how well the partners work together, potential partners should be selected as
much for their management style, culture, and goals as for their resources and
capabilities. In the past 15 years, close collaboration with suppliers to achieve
mutually beneficial outcomes has become a common approach to building
supply chain capabilities.

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3. Engage in a collaborative partnership for the purpose of learning how the part-
ner does things, internalizing its methods and thereby acquiring its capabilities.
This may be a viable method when each partner has something to learn from the
other and can achieve an outcome beneficial to both partners. For example, firms
sometimes enter into collaborative marketing arrangements whereby each partner
is granted access to the other’s dealer network for the purpose of expanding sales
in geographic areas where the firms lack dealers. But if the intended gains are
only one-sided, the arrangement more likely involves an abuse of trust. In con-
sequence, it not only puts the cooperative venture at risk but also encourages the
firm’s partner to treat the firm similarly or refuse further dealings with the firm.

The Strategic Role of Employee Training
Training and retraining are important when a company shifts to a strategy requiring
different skills, competitive capabilities, and operating methods. Training is also stra-
tegically important in organizational efforts to build skill-based competencies. And it
is a key activity in businesses where technical know-how is changing so rapidly that
a company loses its ability to compete unless its employees have cutting-edge knowl-
edge and expertise. Successful strategy implementers see to it that the training func-
tion is both adequately funded and effective. If better execution of the chosen strategy
calls for new skills, deeper technological capability, or the building and using of new
capabilities, training efforts need to be placed near the top of the action agenda.

The strategic importance of training has not gone unnoticed. Over 4,000 com-
panies around the world have established internal “universities” to lead the training
effort, facilitate continuous organizational learning, and upgrade their company’s
knowledge resources. Many companies conduct orientation sessions for new employ-
ees, fund an assortment of competence-building training programs, and reimburse
employees for tuition and other expenses associated with obtaining additional college
education, attending professional development courses, and earning professional cer-
tification of one kind or another. A number of companies offer online training courses
that are available to employees around the clock. Increasingly, companies are expect-
ing employees at all levels are expected to take an active role in their own professional
development and assume responsibility for keeping their skills up to date and in sync
with the company’s needs.

Strategy Execution Capabilities
and Competitive Advantage
As firms get better at executing their strategies, they develop capabilities in the
domain of strategy execution much as they build other organizational capabilities.
Superior strategy execution capabilities allow companies to get the most from their
other organizational resources and competitive capabilities. In this way they contrib-
ute to the success of a firm’s business model. But excellence in strategy execution can
also be a more direct source of competitive advantage, since more efficient and effec-
tive strategy execution can lower costs and permit firms to deliver more value to cus-
tomers. Superior strategy execution capabilities may also enable a company to react
more quickly to market changes and beat other firms to the market with new prod-
ucts and services. This can allow a company to profit from a period of uncontested
market dominance. See Illustration Capsule 10.2 for an example of Zara’s route to
competitive advantage.

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ILLUSTRATION
CAPSULE 10.2

Zara, a major division of Inditex Group, is a leading “fast
fashion” retailer. As soon as designs are seen in high-end
fashion houses such as Prada, Zara’s design team sets to
work altering the clothing designs so that it can produce
high fashion at mass-retailing prices. Zara’s strategy is
clever, but by no means unique. The company’s com-
petitive advantage is in strategy execution. Every step
of Zara’s value chain execution is geared toward putting
fashionable clothes in stores quickly, realizing high turn-
over, and strategically driving traffic.

The first key lever is a quick production process.
Zara’s design team uses inspiration from high fashion
and nearly real-time feedback from stores to create
up-to-the-minute pieces. Manufacturing largely occurs
in factories close to headquarters in Spain, northern
Africa, and Turkey, all areas considered to have a high

cost of labor. Placing the factories strategically close
allows for more flexibility and greater responsive-
ness to market needs, thereby outweighing the addi-
tional labor costs. The entire production process, from
design to arrival at stores, takes only two weeks, while
other retailers take six months. Whereas traditional
retailers commit up to 80 percent of their lines by the
start of the season, Zara commits only 50 to 60 per-
cent, meaning that up to half of the merchandise to hit
stores is designed and manufactured during the sea-
son. Zara purposefully manufactures in small lot sizes
to avoid discounting later on and also to encourage
impulse shopping, as a particular item could be gone
in a few days. From start to finish, Zara has engineered
its production process to maximize turnover and turn-
around time, creating a true advantage in this step of
strategy execution.

Zara also excels at driving traffic to stores. First, the
small lot sizes and frequent shipments (up to twice a
week per store) drive customers to visit often and pur-
chase quickly. Zara shoppers average 17 visits per year,
versus 4 to 5 for The Gap. On average, items stay in a
Zara store only 11 days. Second, Zara spends no money
on advertising, but it occupies some of the most expen-
sive retail space in town, always near the high-fashion
houses it imitates. Proximity reinforces the high-fashion
association, while the busy street drives significant foot
traffic. Overall, Zara has managed to create competitive
advantage in every level of strategy execution by tightly
aligning design, production, advertising, and real estate
with the overall strategy of fast fashion: extremely fast
and extremely flexible.

Zara’s Strategy Execution
Capabilities

© Andrey Rudakov/Bloomberg via Getty Images

Note: Developed with Sara Paccamonti.

Sources: Suzy Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,” The New York Times, November 9, 2012, www.nytimes
.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html?pagewanted=all (accessed February 5, 2014);
Seth Stevenson, “Polka Dots Are In? Polka Dots It Is!” Slate, June 21, 2012, www.slate.com/articles/arts/operations/2012/06/zara_s_fast_
fashion_how_the_company_gets_new_styles_to_stores_so_quickly.html (accessed February 5, 2014).

Because strategy execution capabilities are socially complex capabilities that
develop with experience over long periods of time, they are hard to imitate. And
there is no substitute for good strategy execution. (Recall the tests of resource
advantage from Chapter 4.) As such, they may be as important a source of sus-
tained competitive advantage as the core competencies that drive a firm’s strategy.
Indeed, they may be a far more important avenue for securing a competitive edge
over rivals in situations where it is relatively easy for rivals to copy promising strat-
egies. In such cases, the only way for firms to achieve lasting competitive advan-

tage is to out-execute their competitors.

Superior strategy execution
capabilities are the only
source of sustainable
competitive advantage
when strategies are easy for
rivals to copy.

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While there are few hard-and-fast rules for organizing the work effort to support good
strategy execution, there is one: A firm’s organizational structure should be matched
to the particular requirements of implementing the firm’s strategy. Every company’s
strategy is grounded in its own set of organizational capabilities and value chain activ-
ities. Moreover, every firm’s organizational chart is partly a product of its particu-
lar situation, reflecting prior organizational patterns, varying internal circumstances,
executive judgments about reporting relationships, and the politics of who gets which
assignments. Thus, the determinants of the fine details of each firm’s organizational
structure are unique. But some considerations in organizing the work effort are com-
mon to all companies. These are summarized in Figure 10.3 and discussed in the
following sections.

Deciding Which Value Chain Activities to Perform
Internally and Which to Outsource
Aside from the fact that an outsider, because of its expertise and specialized know-
how, may be able to perform certain value chain activities better or cheaper than a
company can perform them internally (as discussed in Chapter 6), outsourcing can
also sometimes contribute to better strategy execution. Outsourcing the performance

MATCHING ORGANIZATIONAL STRUCTURE
TO THE STRATEGY

FIGURE 10. 3 Structuring the Work Effort to Promote Successful
Strategy Execution

An
Organizational

Structure
Matched

to the
Requirements

of
Successful
Strategy

Execution

Decide which value chain activities to perform
internally and which ones to outsource

Align the organizational structure with the
strategy

Decide how much authority to centralize at the
top and how much to delegate to down-the-
line managers and employees

Facilitate collaboration with external partners
and strategic allies

LO 4

What issues
to consider in
establishing a
strategy-supportive
organizational
structure and
organizing the work
effort.

A company’s organizational
structure should be
matched to the particular
requirements of
implementing the firm’s
strategy.

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of selected activities to outside vendors enables a company to heighten its strategic
focus and concentrate its full energies on performing those value chain activities
that are at the core of its strategy, where it can create unique value. For example,
E. & J. Gallo Winery outsources 95 percent of its grape production, letting farm-
ers take on weather-related and other grape-growing risks while it concentrates its
full energies on wine production and sales.16 Broadcom, a global leader in chips
for broadband communication systems, outsources the manufacture of its chips to
Taiwan Semiconductor, thus freeing company personnel to focus their full energies
on R&D, new chip design, and marketing. Nike concentrates on design, marketing,
and distribution to retailers, while outsourcing virtually all production of its shoes
and sporting apparel. Illustration Capsule 10.3 describes Apple’s decisions about
which activities to outsource and which to perform in-house.

Such heightened focus on performing strategy-critical activities can yield three
important execution-related benefits:

∙ The company improves its chances for outclassing rivals in the performance of
strategy-critical activities and turning a competence into a distinctive compe-
tence. At the very least, the heightened focus on performing a select few value
chain activities should promote more effective performance of those activities.
This could materially enhance competitive capabilities by either lowering costs
or improving product or service quality. Whirlpool, ING Insurance, Hugo Boss,
Japan Airlines, and Chevron have outsourced their data processing activities to
computer service firms, believing that outside specialists can perform the needed
services at lower costs and equal or better quality. A relatively large number of
companies outsource the operation of their websites to web design and hosting
enterprises. Many businesses that get a lot of inquiries from customers or that
have to provide 24/7 technical support to users of their products around the world
have found that it is considerably less expensive to outsource these functions to
specialists (often located in foreign countries where skilled personnel are readily
available and worker compensation costs are much lower) than to operate their
own call centers. Dialogue Direct is a company that specializes in call center oper-
ation, with 14 such centers located in the United States.

∙ The streamlining of internal operations that flows from outsourcing often acts to
decrease internal bureaucracies, flatten the organizational structure, speed inter-
nal decision making, and shorten the time it takes to respond to changing mar-
ket conditions. In consumer electronics, where advancing technology drives new
product innovation, organizing the work effort in a manner that expedites getting
next-generation products to market ahead of rivals is a critical competitive capa-
bility. The world’s motor vehicle manufacturers have found that they can shorten
the cycle time for new models by outsourcing the production of many parts and
components to independent suppliers. They then work closely with the suppliers
to swiftly incorporate new technology and to better integrate individual parts and
components to form engine cooling systems, transmission systems, electrical sys-
tems, and so on.

∙ Partnerships with outside vendors can add to a company’s arsenal of capabilities
and contribute to better strategy execution. Outsourcing activities to vendors with
first-rate capabilities can enable a firm to concentrate on strengthening its own
complementary capabilities internally; the result will be a more powerful package
of organizational capabilities that the firm can draw upon to deliver more value
to customers and attain competitive success. Soft-drink and beer manufacturers

Wisely choosing which
activities to perform
internally and which to
outsource can lead to
several strategy-executing
advantages—lower costs,
heightened strategic focus,
less internal bureaucracy,
speedier decision making,
and a better arsenal of
organizational capabilities.

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cultivate their relationships with their bottlers and distributors to strengthen access
to local markets and build loyalty, support, and commitment for corporate market-
ing programs, without which their own sales and growth would be weakened.
Similarly, fast-food enterprises like Wendy’s and Burger King find it essential to
work hand in hand with franchisees on outlet cleanliness, consistency of product
quality, in-store ambience, courtesy and friendliness of store personnel, and other
aspects of store operations. Unless franchisees continuously deliver sufficient cus-
tomer satisfaction to attract repeat business, a fast-food chain’s sales and competi-
tive standing will quickly suffer. Companies like Boeing, Aerospatiale, Verizon
Communications, and Dell have learned that their central R&D groups cannot
begin to match the innovative capabilities of a well-managed network of supply
chain partners.

However, as emphasized in Chapter 6, a company must guard against going
overboard on outsourcing and becoming overly dependent on outside suppliers.
A company cannot be the master of its own destiny unless it maintains expertise and

ILLUSTRATION
CAPSULE 10.3

Innovation and design are core competencies for Apple
and the drivers behind the creation of winning products
such as the iPod, iPhone, and iPad. In consequence, all
activities directly related to new product development
and product design are performed internally. For example,
Apple’s Industrial Design Group is responsible for creat-
ing the look and feel of all Apple products—from the Mac-
Book Air to the iPhone, and beyond to future products.

Producing a continuing stream of great new prod-
ucts and product versions is key to the success of

Apple’s strategy. But executing this strategy takes more
than innovation and design capabilities. Manufacturing
flexibility and speed are imperative in the production
of Apple products to ensure that the latest ideas are
reflected in the products and that the company meets
the high demand for its products— especially around
launch.

For these capabilities, Apple turns to outsourcing,
as do the majority of its competitors in the consumer
electronics space. Apple outsources the manufacturing
of products like its iPhone to Asia, where contract manu-
facturing organizations (CMOs) create value through
their vast scale, high flexibility, and low cost. Perhaps
no company better epitomizes the Asian CMO value
proposition than Foxconn, a company that assembles
not only for Apple but for Hewlett-Packard, Motorola,
Amazon.com, and Samsung as well. Foxconn’s scale is
incredible, with its largest facility (Foxconn City in Shen-
zhen, China) employing over 450,000 workers. Such
scale offers companies a significant degree of flexibil-
ity, as Foxconn has the ability to hire 3,000 employees
on practically a moment’s notice. Apple, more so than
its competitors, is able to capture CMO value creation
by leveraging its immense sales volume and strong cash
position to receive preferred treatment.

Which Value Chain Activities Does
Apple Outsource and Why?

© Qilai Shen/Bloomberg via Getty Images

Note: Developed with Margaret W. Macauley.

Sources: Company website; Charles Duhigg and Keith Bradsher, “How the U.S. Lost Out on iPhone Work,” The New York Times,
January 21, 2012, www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?pagewanted=all&_r=0
(accessed March 5, 2012).

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resource depth in performing those value chain activities that underpin its long-term
competitive success.17 Thus, with the exception of parts/components supply, the most
frequently outsourced activities are those deemed to be strategically less important—
like handling customer inquiries and requests for technical support, doing the payroll,
administering employee benefit programs, providing corporate security, maintaining
fleet vehicles, operating the company’s website, conducting employee training, and
performing an assortment of information and data processing functions.

Aligning the Firm’s Organizational
Structure with Its Strategy

The design of the firm’s organizational structure is a critical aspect of the strategy
execution process. The organizational structure comprises the formal and informal
arrangement of tasks, responsibilities, and lines of authority and communication
by which the firm is administered.18 It specifies the linkages among parts of the
organization, the reporting relationships, the direction of information flows, and
the decision-making processes. It is a key factor in strategy implementation since
it exerts a strong influence on how well managers can coordinate and control the
complex set of activities involved.19

A well-designed organizational structure is one in which the various parts
(e.g., decision-making rights, communication patterns) are aligned with one another
and also matched to the requirements of the strategy. With the right structure in
place, managers can orchestrate the various aspects of the implementation process

with an even hand and a light touch. Without a supportive structure, strategy execution
is more likely to become bogged down by administrative confusion, political maneu-
vering, and bureaucratic waste.

Good organizational design may even contribute to the firm’s ability to create value
for customers and realize a profit. By enabling lower bureaucratic costs and facilitating
operational efficiency, it can lower a firm’s operating costs. By facilitating the coordina-
tion of activities within the firm, it can improve the capability-building process, leading
to greater differentiation and/or lower costs. Moreover, by improving the speed with
which information is communicated and activities are coordinated, it can enable the
firm to beat rivals to the market and profit from a period of unrivaled advantage.

Making Strategy-Critical Activities the Main Building Blocks
of the Organizational Structure In any business, some activities in the
value chain are always more critical to successful strategy execution than others. For
instance, ski apparel companies like Sport Obermeyer, Arc’teryx, and Spyder must be
good at styling and design, low-cost manufacturing, distribution (convincing an attrac-
tively large number of dealers to stock and promote the company’s brand), and market-
ing and advertising (building a brand image that generates buzz among ski enthusiasts).
For discount stockbrokers, like Scottrade and TD Ameritrade, the strategy-critical activi-
ties are fast access to information, accurate order execution, efficient record keeping and
transaction processing, and full-featured customer service. With respect to such core
value chain activities, it is important for management to build its organizational structure
around proficient performance of these activities, making them the centerpieces or main
building blocks in the enterprise’s organizational structure.

The rationale is compelling: If activities crucial to strategic success are to have the
resources, decision-making influence, and organizational impact they need, they must

CORE CONCEPT

A firm’s organizational
structure comprises
the formal and informal
arrangement of tasks,
responsibilities, lines of
authority, and reporting
relationships by which the
firm is administered.

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be centerpieces in the enterprise’s organizational scheme. Making them the focus of
structuring efforts will also facilitate their coordination and promote good internal fit—
an essential attribute of a winning strategy, as summarized in Chapter 1 and elaborated
in Chapter 4. To the extent that implementing a new strategy entails new or altered key
activities or capabilities, different organizational arrangements may be required.

Matching Type of Organizational Structure to Strategy
Execution Requirements Organizational structures can be classified into
a limited number of standard types. Which type makes the most sense for a given
firm depends largely on the firm’s size and business makeup, but not so much on
the specifics of its strategy. As firms grow and their needs for structure evolve, their
structural form is likely to evolve from one type to another. The four basic types are
the simple structure, the functional structure, the multidivisional structure, and the
matrix structure, as described next.
1. Simple Structure A simple structure is one in which a central executive
(often the owner-manager) handles all major decisions and oversees the operations
of the organization with the help of a small staff.20 Simple structures are also known
as line-and-staff structures, since a central administrative staff supervises line
employees who conduct the operations of the firm, or flat structures, since there are
few levels of hierarchy. The simple structure is characterized by limited task spe-
cialization; few rules; informal relationships; minimal use of training, planning, and
liaison devices; and a lack of sophisticated support systems. It has all the advantages
of simplicity, including low administrative costs, ease of coordination, flexibility,
quick decision making, adaptability, and responsiveness to change. Its informality
and lack of rules may foster creativity and heightened individual responsibility.

Simple organizational structures are typically employed by small firms and
entrepreneurial startups. The simple structure is the most common type of orga-
nizational structure since small firms are the most prevalent type of business. As
an organization grows, however, this structural form becomes inadequate to the
demands that come with size and complexity. In response, growing firms tend to
alter their organizational structure from a simple structure to a functional structure.

2. Functional Structure A functional structure is one that is organized along
functional lines, where a function represents a major component of the firm’s value
chain, such as R&D, engineering and design, manufacturing, sales and marketing,
logistics, and customer service. Each functional unit is supervised by functional
line managers who report to the chief executive officer and a corporate staff. This
arrangement allows functional managers to focus on their area of responsibility,
leaving it to the CEO and headquarters to provide direction and ensure that the
activities of the functional managers are coordinated and integrated. Functional
structures are also known as departmental structures, since the functional units are
commonly called departments, and unitary structures or U-forms, since a single
unit is responsible for each function.

In large organizations, functional structures lighten the load on top manage-
ment, in comparison to simple structures, and enable more efficient use of manage-
rial resources. Their primary advantage, however, is greater task specialization,
which promotes learning, enables the realization of scale economies, and offers
productivity advantages not otherwise available. Their chief disadvantage is that
the departmental boundaries can inhibit the flow of information and limit the
opportunities for cross-functional cooperation and coordination.

CORE CONCEPT

A simple structure consists
of a central executive (often
the owner-manager) who
handles all major decisions
and oversees all operations
with the help of a small
staff. Simple structures are
also called line-and-staff
structures or flat structures.

CORE CONCEPT

A functional structure is
organized into functional
departments, with
departmental managers
who report to the CEO
and small corporate staff.
Functional structures are
also called departmental
structures and unitary
structures or U-forms.

The primary advantage of
a functional structure is
greater task specialization,
which promotes learning,
enables the realization of
scale economies, and offers
productivity advantages not
otherwise available.

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It is generally agreed that a functional structure is the best organizational arrange-
ment when a company is in just one particular business (irrespective of which of the
five generic competitive strategies it opts to pursue). For instance, a technical instru-
ments manufacturer may be organized around research and development, engineering,
supply chain management, assembly, quality control, marketing, and technical ser-
vices. A discount retailer, such as Dollar General or Kmart, may organize around such
functional units as purchasing, warehousing, distribution logistics, store operations,
advertising, merchandising and promotion, and customer service. Functional structures
can also be appropriate for firms with high-volume production, products that are closely
related, and a limited degree of vertical integration. For example, General Motors now
manages all of its brands (Cadillac, GMC, Chevrolet, Buick, etc.) under a common func-
tional structure designed to promote technical transfer and capture economies of scale.

As firms continue to grow, they often become more diversified and complex, plac-
ing a greater burden on top management. At some point, the centralized control that
characterizes the functional structure becomes a liability, and the advantages of func-
tional specialization begin to break down. To resolve these problems and address a
growing need for coordination across functions, firms generally turn to the multidivi-
sional structure.

3. Multidivisional Structure A multidivisional structure is a decentralized structure
consisting of a set of operating divisions organized along market, customer, product, or
geographic lines, along with a central corporate headquarters, which monitors divisional
activities, allocates resources, performs assorted support functions, and exercises overall
control. Since each division is essentially a business (often called a single business unit
or SBU), the divisions typically operate as independent profit centers (i.e., with profit
and loss responsibility) and are organized internally along functional lines. Division
managers oversee day-to-day operations and the development of business-level strategy,
while corporate executives attend to overall performance and corporate strategy, the ele-
ments of which were described in Chapter 8. Multidivisional structures are also called
divisional structures or M-forms, in contrast with U-form (functional) structures.

Multidivisional structures are common among companies pursuing some form
of diversification strategy or international strategy, with operations in a number of
businesses or countries. When the strategy is one of unrelated diversification, as in
a conglomerate, the divisions generally represent businesses in separate industries.
When the strategy is based on related diversification, the divisions may be organized
according to industries, customer groups, product lines, geographic regions, or tech-
nologies. In this arrangement, the decision about where to draw the divisional lines
depends foremost on the nature of the relatedness and the strategy-critical building
blocks, in terms of which businesses have key value chain activities in common. For
example, a company selling closely related products to business customers as well as
two types of end consumers—online buyers and in-store buyers—may organize its
divisions according to customer groups since the value chains involved in serving the
three groups differ. Another company may organize by product line due to commonal-
ities in product development and production within each product line. Multidivisional
structures are also common among vertically integrated firms. There the major build-
ing blocks are often divisional units performing one or more of the major processing
steps along the value chain (e.g., raw-material production, components manufacture,
assembly, wholesale distribution, retail store operations).

Multidivisional structures offer significant advantages over functional structures in
terms of facilitating the management of a complex and diverse set of operations.21 Put-
ting business-level strategy in the hands of division managers while leaving corporate

CORE CONCEPT

A multidivisional
structure is a decentralized
structure consisting of a
set of operating divisions
organized along business,
product, customer group,
or geographic lines
and a central corporate
headquarters that allocates
resources, provides support
functions, and monitors
divisional activities.
Multidivisional structures
are also called divisional
structures or M-forms.

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strategy to top executives reduces the potential for information overload and improves
the quality of decision making in each domain. This also minimizes the costs of coor-
dinating division-wide activities while enhancing top management’s ability to con-
trol a diverse and complex operation. Moreover, multidivisional structures can help
align individual incentives with the goals of the corporation and spur productivity by
encouraging competition for resources among the different divisions.

But a multidivisional structure can also present some problems to a company pur-
suing related diversification, because having independent business units—each run-
ning its own business in its own way—inhibits cross-business collaboration and the
capture of cross-business synergies, which are critical for the success of a related
diversification strategy, as Chapter 8 explains. To solve this type of problem, firms
turn to more complex structures, such as the matrix structure.

4. Matrix Structure A matrix structure is a combination structure in which
the organization is organized along two or more dimensions at once (e.g., busi-
ness, geographic area, value chain function) for the purpose of enhancing cross-unit
communication, collaboration, and coordination. In essence, it overlays one type of
structure onto another type. Matrix structures are managed through multiple report-
ing relationships, so a middle manager may report to several bosses. For instance,
in a matrix structure based on product line, region, and function, a sales manager
for plastic containers in Georgia might report to the manager of the plastics divi-
sion, the head of the southeast sales region, and the head of marketing.

Matrix organizational structures have evolved from the complex, over-
formalized structures that were popular in the 1960s, 70s, and 80s but often pro-
duced inefficient, unwieldy bureaucracies. The modern incarnation of the matrix
structure is generally a more flexible arrangement, with a single primary reporting
relationship that can be overlaid with a temporary secondary reporting relationship
as need arises. For example, a software company that is organized into functional
departments (software design, quality control, customer relations) may assign employ-
ees from those departments to different projects on a temporary basis, so an employee
reports to a project manager as well as to his or her primary boss (the functional
department head) for the duration of a project.

Matrix structures are also called composite structures or combination structures.
They are often used for project-based, process-based, or team-based management.
Such approaches are common in businesses involving projects of limited duration,
such as consulting, architecture, and engineering services. The type of close cross-unit
collaboration that a flexible matrix structure supports is also needed to build com-
petitive capabilities in strategically important activities, such as speeding new prod-
ucts to market, that involve employees scattered across several organizational units.22
Capabilities-based matrix structures that combine process departments (like new
product development) with more traditional functional departments provide a solution.

An advantage of matrix structures is that they facilitate the sharing of plant and
equipment, specialized knowledge, and other key resources. Thus, they lower costs by
enabling the realization of economies of scope. They also have the advantage of flex-
ibility in form and may allow for better oversight since supervision is provided from
more than one perspective. A disadvantage is that they add another layer of manage-
ment, thereby increasing bureaucratic costs and possibly decreasing response time to
new situations.23 In addition, there is a potential for confusion among employees due
to dual reporting relationships and divided loyalties. While there is some controversy
over the utility of matrix structures, the modern approach to matrix structures does
much to minimize their disadvantages.24

CORE CONCEPT

A matrix structure is a
combination structure
that overlays one type of
structure onto another
type, with multiple
reporting relationships.
It is used to foster cross-
unit collaboration. Matrix
structures are also called
composite structures or
combination structures.

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Determining How Much Authority to Delegate
Under any organizational structure, there is room for considerable variation in how
much authority top-level executives retain and how much is delegated to down-the-
line managers and employees. In executing strategy and conducting daily operations,
companies must decide how much authority to delegate to the managers of each orga-
nizational unit—especially the heads of divisions, functional departments, plants, and
other operating units—and how much decision-making latitude to give individual
employees in performing their jobs. The two extremes are to centralize decision mak-
ing at the top or to decentralize decision making by giving managers and employees
at all levels considerable decision-making latitude in their areas of responsibility. As
shown in Table 10.1, the two approaches are based on sharply different underlying
principles and beliefs, with each having its pros and cons.

Centralized Decision Making: Pros and Cons In a highly central-
ized organizational structure, top executives retain authority for most strategic and

LO 5

The pros and cons
of centralized and
decentralized
decision making in
implementing the
chosen strategy.

Centralized Organizational Structures Decentralized Organizational Structures

Basic tenets

• Decisions on most matters of importance should be
in the hands of top-level managers who have the
experience, expertise, and judgment to decide what is
the best course of action.

• Lower-level personnel have neither the knowledge,
time, nor inclination to properly manage the tasks they
are performing.

• Strong control from the top is a more effective means
for coordinating company actions.

Basic tenets

• Decision-making authority should be put in the hands
of the people closest to, and most familiar with, the
situation.

• Those with decision-making authority should be
trained to exercise good judgment.

• A company that draws on the combined intellectual
capital of all its employees can outperform a
command-and-control company.

Chief advantages

• Fixes accountability through tight control from the top.

• Eliminates potential for conflicting goals and actions
on the part of lower-level managers.

• Facilitates quick decision making and strong
leadership under crisis situations.

Chief advantages

• Encourages company employees to exercise initiative
and act responsibly.

• Promotes greater motivation and involvement in the
business on the part of more company personnel.

• Spurs new ideas and creative thinking.

• Allows for fast response to market change.

• Entails fewer layers of management.

Primary disadvantages

• Lengthens response times by those closest to the
market conditions because they must seek approval for
their actions.

• Does not encourage responsibility among lower-level
managers and rank-and-file employees.

• Discourages lower-level managers and rank-and-file
employees from exercising any initiative.

Primary disadvantages

• May result in higher-level managers being unaware of
actions taken by empowered personnel under their
supervision.

• Can lead to inconsistent or conflicting approaches by
different managers and employees.

• Can impair cross-unit collaboration.

TABLE 10.1 Advantages and Disadvantages of Centralized versus Decentralized
Decision Making

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operating decisions and keep a tight rein on business unit heads, department heads,
and the managers of key operating units. Comparatively little discretionary authority
is granted to frontline supervisors and rank-and-file employees. The command-and-
control paradigm of centralized decision making is based on the underlying assump-
tions that frontline personnel have neither the time nor the inclination to direct and
properly control the work they are performing and that they lack the knowledge and
judgment to make wise decisions about how best to do it—hence the need for pre-
scribed policies and procedures for a wide range of activities, close supervision, and
tight control by top executives. The thesis underlying centralized structures is that
strict enforcement of detailed procedures backed by rigorous managerial oversight is
the most reliable way to keep the daily execution of strategy on track.

One advantage of a centralized structure, with tight control by the manager in
charge, is that it is easy to know who is accountable when things do not go well. This
structure can also reduce the potential for conflicting decisions and actions among
lower-level managers who may have differing perspectives and ideas about how to
tackle certain tasks or resolve particular issues. For example, a manager in charge of
an engineering department may be more interested in pursuing a new technology than
is a marketing manager who doubts that customers will value the technology as highly.
Another advantage of a command-and-control structure is that it can facilitate strong
leadership from the top in a crisis situation that affects the organization as a whole and
can enable a more uniform and swift response.

But there are some serious disadvantages as well. Hierarchical command-and-
control structures do not encourage responsibility and initiative on the part of lower-
level managers and employees. They can make a large organization with a complex
structure sluggish in responding to changing market conditions because of the time it
takes for the review-and-approval process to run up all the layers of the management
bureaucracy. Furthermore, to work well, centralized decision making requires top-
level managers to gather and process whatever information is relevant to the decision.
When the relevant knowledge resides at lower organizational levels (or is technical,
detailed, or hard to express in words), it is difficult and time-consuming to get all the
facts in front of a high-level executive located far from the scene of the action—full
understanding of the situation cannot be readily copied from one mind to another.
Hence, centralized decision making is often impractical—the larger the company and
the more scattered its operations, the more that decision-making authority must be
delegated to managers closer to the scene of the action.

Decentralized Decision Making: Pros and Cons In a highly
decentralized organization, decision-making authority is pushed down to the low-
est organizational level capable of making timely, informed, competent decisions.
The objective is to put adequate decision-making authority in the hands of the
people closest to and most familiar with the situation and train them to weigh all
the factors and exercise good judgment. At Starbucks, for example, employees are
encouraged to exercise initiative in promoting customer satisfaction—there’s the
oft-repeated story of a store employee who, when the computerized cash register
system went offline, offered free coffee to waiting customers, thereby avoiding
customer displeasure and damage to Starbucks’s reputation.25

The case for empowering down-the-line managers and employees to make deci-
sions related to daily operations and strategy execution is based on the belief that a
company that draws on the combined intellectual capital of all its employees can out-
perform a command-and-control company.26 The challenge in a decentralized system

The ultimate goal of
decentralized decision
making is to put authority
in the hands of those
persons closest to and most
knowledgeable about the
situation.

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is maintaining adequate control. With decentralized decision making, top manage-
ment maintains control by placing limits on the authority granted to company person-
nel, installing companywide strategic control systems, holding people accountable for
their decisions, instituting compensation incentives that reward people for doing their
jobs well, and creating a corporate culture where there’s strong peer pressure on indi-
viduals to act responsibly.27

Decentralized organizational structures have much to recommend them. Delegat-
ing authority to subordinate managers and rank-and-file employees encourages them
to take responsibility and exercise initiative. It shortens organizational response times
to market changes and spurs new ideas, creative thinking, innovation, and greater
involvement on the part of all company personnel. At TJX Companies Inc., parent
company of T.J.Maxx, Marshalls, and five other fashion and home decor retail store
chains, buyers are encouraged to be intelligent risk takers in deciding what items to
purchase for TJX stores—there’s the story of a buyer for a seasonal product category
who cut her own budget to have dollars allocated to other categories where sales were
expected to be stronger. In worker-empowered structures, jobs can be defined more
broadly, several tasks can be integrated into a single job, and people can direct their
own work. Fewer managers are needed because deciding how to do things becomes
part of each person’s or team’s job. Further, today’s online communication systems
and smartphones make it easy and relatively inexpensive for people at all organiza-
tional levels to have direct access to data, other employees, managers, suppliers, and
customers. They can access information quickly (via the Internet or company net-
work), readily check with superiors or whomever else as needed, and take responsible
action. Typically, there are genuine gains in morale and productivity when people are
provided with the tools and information they need to operate in a self-directed way.

But decentralization also has some disadvantages. Top managers lose an element
of control over what goes on and may thus be unaware of actions being taken by per-
sonnel under their supervision. Such lack of control can be problematic in the event
that empowered employees make decisions that conflict with those of others or that
serve their unit’s interests at the expense of other parts of the company. Moreover,
because decentralization gives organizational units the authority to act independently,
there is risk of too little collaboration and coordination between different units.

Many companies have concluded that the advantages of decentralization outweigh
the disadvantages. Over the past several decades, there’s been a decided shift from
centralized, hierarchical structures to flatter, more decentralized structures that stress
employee empowerment. This shift reflects a strong and growing consensus that
authoritarian, hierarchical organizational structures are not well suited to implement-
ing and executing strategies in an era when extensive information and instant com-
munication are the norm and when a big fraction of the organization’s most valuable
assets consists of intellectual capital that resides in its employees’ capabilities.

Capturing Cross-Business Strategic Fit in a Decentralized
Structure Diversified companies striving to capture the benefits of synergy
between separate businesses must beware of giving business unit heads full rein
to operate independently. Cross-business strategic fit typically must be captured
either by enforcing close cross-business collaboration or by centralizing the perfor-
mance of functions requiring close coordination at the corporate level.28 For exam-
ple, if businesses with overlapping process and product technologies have their
own independent R&D departments—each pursuing its own priorities, projects,
and strategic agendas—it’s hard for the corporate parent to prevent duplication of

Efforts to decentralize
decision making and give
company personnel some
leeway in conducting
operations must be
tempered with the need to
maintain adequate control
and cross-unit coordination.

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effort, capture either economies of scale or economies of scope, or encourage more
collaborative R&D efforts. Where cross-business strategic fit with respect to R&D
is important, one solution is to centralize the R&D function and have a coordinated
corporate R&D effort that serves the interests of both the individual businesses and
the company as a whole. Likewise, centralizing the related activities of separate busi-
nesses makes sense when there are opportunities to share a common sales force, use
common distribution channels, rely on a common field service organization, use com-
mon e-commerce systems, and so on. Another structural solution to realizing the ben-
efits of strategic fit is to create business groups consisting of those business units with
common strategic-fit opportunities

Facilitating Collaboration with
External Partners and Strategic Allies
Organizational mechanisms—whether formal or informal—are also required to
ensure effective working relationships with each major outside constituency involved
in strategy execution. Strategic alliances, outsourcing arrangements, joint ventures,
and cooperative partnerships can contribute little of value without active manage-
ment of the relationship. Unless top management sees that constructive organizational
bridge building with external partners occurs and that productive working relation-
ships emerge, the potential value of cooperative relationships is lost and the company’s
power to execute its strategy is weakened. For example, if close working relationships
with suppliers are crucial, then supply chain management must enter into consider-
ations of how to create an effective organizational structure. If distributor, dealer, or
franchisee relationships are important, then someone must be assigned the task of
nurturing the relationships with such forward-channel allies.

Building organizational bridges with external partners and strategic allies can be
accomplished by appointing “relationship managers” with responsibility for making
particular strategic partnerships generate the intended benefits. Relationship managers
have many roles and functions: getting the right people together, promoting good rap-
port, facilitating the flow of information, nurturing interpersonal communication and
cooperation, and ensuring effective coordination.29 Multiple cross-organization ties
have to be established and kept open to ensure proper communication and coordi-
nation. There has to be enough information sharing to make the relationship work
and periodic frank discussions of conflicts, trouble spots, and changing situations.

Organizing and managing a network structure provides a mechanism for
encouraging more effective collaboration and cooperation among external partners.
A network structure is the arrangement linking a number of independent orga-
nizations involved in some common undertaking. A well-managed network struc-
ture typically includes one firm in a more central role, with the responsibility of
ensuring that the right partners are included and the activities across the network
are coordinated. The high-end Italian motorcycle company Ducati operates in this
manner, assembling its motorcycles from parts obtained from a handpicked inte-
grated network of parts suppliers.

Further Perspectives on Structuring the Work Effort
All organizational designs have their strategy-related strengths and weaknesses. To do
a good job of matching structure to strategy, strategy implementers first have to pick
a basic organizational design and modify it as needed to fit the company’s particular

CORE CONCEPT

A network structure is a
configuration composed of
a number of independent
organizations engaged in
some common undertaking,
with one firm typically
taking on a more central
role.

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KEY POINTS

1. Executing strategy is an action-oriented, operations-driven activity revolving
around the management of people, business processes, and organizational struc-
ture. In devising an action agenda for executing strategy, managers should start
by conducting a probing assessment of what the organization must do differently
to carry out the strategy successfully. They should then consider precisely how to
make the necessary internal changes.

2. Good strategy execution requires a team effort. All managers have strategy-
executing responsibility in their areas of authority, and all employees are active
participants in the strategy execution process.

3. Ten managerial tasks are part of every company effort to execute strategy:
(1) staffing the organization with the right people, (2) developing the resources
and building the necessary organizational capabilities, (3) creating a supportive
organizational structure, (4) allocating sufficient resources (budgetary and other-
wise), (5) instituting supportive policies and procedures, (6) adopting processes
for continuous improvement, (7) installing systems that enable proficient com-
pany operations, (8) tying incentives to the achievement of desired targets, (9)
instilling the right corporate culture, and (10) exercising internal leadership to
propel strategy execution forward.

4. The two best signs of good strategy execution are that a company is meeting or
beating its performance targets and is performing value chain activities in a man-
ner that is conducive to companywide operating excellence. Shortfalls in perfor-
mance signal weak strategy, weak execution, or both.

5. Building an organization capable of good strategy execution entails three types of
actions: (1) staffing the organization—assembling a talented management team
and recruiting and retaining employees with the needed experience, technical skills,

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business lineup. They must then (1) supplement the design with appropriate coordinat-
ing mechanisms (cross-functional task forces, special project teams, self-contained
work teams, etc.) and (2) institute whatever networking and communications arrange-
ments are necessary to support effective execution of the firm’s strategy. Some com-
panies may avoid setting up “ideal” organizational arrangements because they do not
want to disturb existing reporting relationships or because they need to accommodate
other situational idiosyncrasies, yet they must still work toward the goal of building a
competitively capable organization.

What can be said unequivocally is that building a capable organization entails a
process of consciously knitting together the efforts of individuals and groups. Orga-
nizational capabilities emerge from establishing and nurturing cooperative working
relationships among people and groups to perform activities in a more efficient, value-
creating fashion. While an appropriate organizational structure can facilitate this,
organization building is a task in which senior management must be deeply involved.
Indeed, effectively managing both internal organizational processes and external col-
laboration to create and develop competitively valuable organizational capabilities
remains a top challenge for senior executives in today’s companies.

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and intellectual capital; (2) acquiring, developing, and strengthening strategy- sup-
portive resources and capabilities—accumulating the required resources, develop-
ing proficiencies in performing strategy-critical value chain activities, and updating
the company’s capabilities to match changing market conditions and customer
expectations; and (3) structuring the organization and work effort—instituting
organizational arrangements that facilitate good strategy execution, deciding how
much decision-making authority to delegate, and managing external relationships.

6. Building core competencies and competitive capabilities is a time-consuming,
managerially challenging exercise that can be approached in three ways: (1) devel-
oping capabilities internally, (2) acquiring capabilities through mergers and acqui-
sitions, and (3) accessing capabilities via collaborative partnerships.

7. In building capabilities internally, the first step is to develop the ability to do
something, through experimenting, actively searching for alternative solutions,
and learning by trial and error. As experience grows and company personnel learn
how to perform the activities consistently well and at an acceptable cost, the abil-
ity evolves into a tried-and-true capability. The process can be accelerated by
making learning a more deliberate endeavor and providing the incentives that will
motivate company personnel to achieve the desired ends.

8. As firms get better at executing their strategies, they develop capabilities in the
domain of strategy execution. Superior strategy execution capabilities allow com-
panies to get the most from their organizational resources and capabilities. But
excellence in strategy execution can also be a more direct source of competitive
advantage, since more efficient and effective strategy execution can lower costs
and permit firms to deliver more value to customers. Because they are socially
complex capabilities, superior strategy execution capabilities are hard to imitate
and have no good substitutes. As such, they can be an important source of sus-
tainable competitive advantage. Anytime rivals can readily duplicate successful
strategies, making it impossible to out-strategize rivals, the chief way to achieve
lasting competitive advantage is to out-execute them.

9. Structuring the organization and organizing the work effort in a strategy-
supportive fashion has four aspects: (1) deciding which value chain activities to
perform internally and which ones to outsource, (2) aligning the firm’s organiza-
tional structure with its strategy, (3) deciding how much authority to centralize at
the top and how much to delegate to down-the-line managers and employees, and
(4) facilitating the necessary collaboration and coordination with external partners
and strategic allies.

10. To align the firm’s organizational structure with its strategy, it is important to
make strategy-critical activities the main building blocks. There are four basic
types of organizational structures: the simple structure, the functional structure,
the multidivisional structure, and the matrix structure. Which is most appropriate
depends on the firm’s size, complexity, and strategy.

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ASSURANCE OF LEARNING EXERCISES

1. The foundation of Nike’s global sports apparel dominance lies in the company’s
continual ability to outcompete rivals by aligning its superior design, innovation,
and marketing capabilities with outsourced manufacturing. Such a strategy neces-
sitates a complex marriage of innovative product designs with fresh marketing
techniques and a global chain of suppliers and manufacturers. Explore Nike’s most
recent strategic management changes (news.nike.com/leadership). How well do
these changes reflect the company’s focus on innovative design and marketing strat-
egies? Has the company’s relentless focus on apparel innovation affected its supply
chain management? Do these changes—or Nike’s strategy, more broadly—reflect
the company’s ubiquitous Swoosh logo and “Just Do It” slogan? Visit Nike’s corpo-
rate website for more in-depth information: nikeinc.com/pages/about-nike-inc.

2. Search online to read about Jeff Bezos’s management of his new executives. Spe-
cifically, explore Amazon.com’s “S-Team” meetings (management.fortune.cnn.
com/2012/11/16/jeff-bezos-amazon/). Why does Bezos begin meetings of senior
executives with 30 minutes of silent reading? How does this focus the group? Why
does Bezos insist new ideas must be written and presented in memo form? How
does this reflect the founder’s insistence on clear, concise, and innovative think-
ing in his company? And does this exercise work as a de facto crash course for
new Amazon executives? Explain why this small but crucial management strategy
reflects Bezos’s overriding goal of cohesive and clear idea presentation.

3. Review Facebook’s Careers page (www.Facebook.com/careers/). The page
emphasizes Facebook’s core values and explains how potential employees
could fit that mold. Bold and decisive thinking and a commitment to transpar-
ency and social connectivity drive the page and the company as a whole. Then
research Facebook’s internal management training programs, called “employee
boot camps,” using a search engine like Google or Bing. How do these programs
integrate the traits and stated goals on the Careers page into specific and tan-
gible construction of employee capabilities? Boot camps are open to all Facebook
employees, not just engineers. How does this internal training prepare Facebook
employees of all types to “move fast and break things”?

4. Review Valve Corporation’s company handbook online: www.valvesoftware.com/
company/Valve_Handbook_LowRes.pdf. Specifically, focus on Valve’s corporate
structure. Valve has hundreds of employees but no managers or bosses at all. Valve’s
gaming success hinges on innovative and completely original experiences like Portal
and Half-Life. Does it seem that Valve’s corporate structure uniquely promotes this
type of gaming innovation? Why or why not? How would you characterize Valve’s
organizational structure? Is it completely unique, or could it be characterized as a
multidivisional, matrix, or functional structure? Explain your answer.

5. Johnson & Johnson, a multinational health care company responsible for man-
ufacturing medical, pharmaceutical, and consumer goods, has been a leader in
promoting a decentralized management structure. Perform an Internet search to
gain some background information on the company’s products, value chain activi-
ties, and leadership. How does Johnson & Johnson exemplify (or not exemplify)
a decentralized management strategy? Describe the advantages and disadvantages
of a decentralized system of management in the case of Johnson & Johnson. Why
was it established in the first place? Has it been an effective means of decision
making for the company?

LO 1

LO 2

LO 2, LO 3

LO 4

LO 5

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EXERCISE FOR SIMULATION PARTICIPANTS

1. How would you describe the organization of your company’s top-management
team? Is some decision making decentralized and delegated to individual manag-
ers? If so, explain how the decentralization works. Or are decisions made more by
consensus, with all co-managers having input? What do you see as the advantages
and disadvantages of the decision-making approach your company is employing?

2. What specific actions have you and your co-managers taken to develop core com-
petencies or competitive capabilities that can contribute to good strategy execu-
tion and potential competitive advantage? If no actions have been taken, explain
your rationale for doing nothing.

3. What value chain activities are most crucial to good execution of your company’s
strategy? Does your company have the ability to outsource any value chain activities?
If so, have you and your co-managers opted to engage in outsourcing? Why or why not?

LO 5

LO 3

LO 1, LO 4

ENDNOTES
981–996; M. Zollo and S. Winter, “Deliberate
Learning and the Evolution of Dynamic Capa-
bilities,” Organization Science 13, no. 3 (May–
June 2002), pp. 339–351.
14 Robert H. Hayes, Gary P. Pisano, and David
M. Upton, Strategic Operations: Competing
through Capabilities (New York: Free Press, 1996);
Jonas Ridderstrale, “Cashing In on Corporate
Competencies,” Business Strategy Review 14,
no. 1 (Spring 2003), pp. 27–38; Danny Miller,
Russell Eisenstat, and Nathaniel Foote, “Strategy
from the Inside Out: Building Capability-Creating
Organizations,” California Management
Review 44, no. 3 (Spring 2002), pp. 37–55.
15 S. Karim and W. Mitchell, “Path-Dependent and
Path-Breaking Change: Reconfiguring Business
Resources Following Acquisitions in the US
Medical Sector, 1978–1995,” Strategic Manage-
ment Journal 21, no. 10–11 (October–November
2000), pp. 1061–1082; L. Capron, P. Dussauge,
and W. Mitchell, “Resource Redeployment Fol-
lowing Horizontal Acquisitions in Europe and
North America, 1988–1992,” Strategic Manage-
ment Journal 19, no. 7 (July 1998), pp. 631–662.
16 J. B. Quinn, Intelligent Enterprise (New York:
Free Press, 1992).
17 Gary P. Pisano and Willy C. Shih, “Restoring
American Competitiveness,” Harvard Business
Review 87, no. 7–8 (July–August 2009), pp. 114–125.
18 A. Chandler, Strategy and Structure (Cam-
bridge, MA: MIT Press, 1962).
19 E. Olsen, S. Slater, and G. Hult, “The Impor-
tance of Structure and Process to Strategy
Implementation,” Business Horizons 48, no. 1
(2005), pp. 47–54; H. Barkema, J. Baum, and
E. Mannix, “Management Challenges in a New
Time,” Academy of Management Journal 45,
no. 5 (October 2002), pp. 916–930.
21 H. Mintzberg, The Structuring of Organiza-
tions (Englewood Cliffs, NJ: Prentice Hall,

1 Donald Sull, Rebecca Homkes, and Charles
Sull, “Why Strategy Execution Unravels—and
What to Do About It,” Harvard Business Review
93, no. 3 (March 2015), p. 60.
2 Steven W. Floyd and Bill Wooldridge, “Manag-
ing Strategic Consensus: The Foundation of
Effective Implementation,” Academy of Manage-
ment Executive 6, no. 4 (November 1992), p. 27.
3 Jack Welch with Suzy Welch, Winning (New
York: HarperBusiness, 2005).
4 Larry Bossidy and Ram Charan, Execution:
The Discipline of Getting Things Done (New
York: Crown Business, 2002).
5 Christopher A. Bartlett and Sumantra
Ghoshal, “Building Competitive Advantage
through People,” MIT Sloan Management
Review 43, no. 2 (Winter 2002), pp. 34–41.
6 Justin Menkes, “Hiring for Smarts,” Harvard
Business Review 83, no. 11 (November 2005),
pp. 100–109; Justin Menkes, Executive Intel-
ligence (New York: HarperCollins, 2005).
7 Menkes, Executive Intelligence, pp. 68, 76.
8 Jim Collins, Good to Great (New York: Harp-
erBusiness, 2001).
9 John Byrne, “The Search for the Young and
Gifted,” Businessweek, October 4, 1999, p. 108.
10 C. Helfat and M. Peteraf, “The Dynamic
Resource-Based View: Capability Lifecycles,”
Strategic Management Journal 24, no. 10
(October 2003), pp. 997–1010.
11 G. Hamel and C. K. Prahalad, “Strategy as
Stretch and Leverage,” Harvard Business
Review 71, no. 2 (March–April 1993), pp. 75–84.
12 G. Dosi, R. Nelson, and S. Winter (eds.), The
Nature and Dynamics of Organizational Capa-
bilities (Oxford, England: Oxford University
Press, 2001).
13 S. Winter, “The Satisficing Principle in Capa-
bility Learning,” Strategic Management Journal
21, no. 10–11 (October–November 2000), pp.

1979); C. Levicki, The Interactive Strategy
Workout, 2nd ed. (London: Prentice Hall, 1999).
22 O. Williamson, Market and Hierarchies
(New York: Free Press, 1975); R. M. Burton and
B. Obel, “A Computer Simulation Test of the
M-Form Hypothesis,” Administrative Science
Quarterly 25 (1980), pp. 457–476.
23 J. Baum and S. Wally, “Strategic Decision
Speed and Firm Performance,” Strategic Man-
agement Journal 24 (2003), pp. 1107–1129.
24 C. Bartlett and S. Ghoshal, “Matrix Manage-
ment: Not a Structure, a Frame of Mind,” Harvard
Business Review, July–August 1990, pp. 138–145.
25 M. Goold and A. Campbell, “Structured Net-
works: Towards the Well Designed Matrix,” Long
Range Planning 36, no. 5 (2003), pp. 427–439.
26 Iain Somerville and John Edward Mroz, “New
Competencies for a New World,” in Frances
Hesselbein, Marshall Goldsmith, and Richard
Beckard (eds.), The Organization of the Future
(San Francisco: Jossey-Bass, 1997), p. 70.
26 Stanley E. Fawcett, Gary K. Rhoads, and
Phillip Burnah, “People as the Bridge to Com-
petitiveness: Benchmarking the ‘ABCs’ of an
Empowered Workforce,” Benchmarking: An
International Journal 11, no. 4 (2004),
pp. 346–360.
27 Robert Simons, “Control in an Age of
Empowerment,” Harvard Business Review 73
(March–April 1995), pp. 80–88.
28 Jeanne M. Liedtka, “Collaboration across
Lines of Business for Competitive Advantage,”
Academy of Management Executive 10, no. 2
(May 1996), pp. 20–34.
29 Rosabeth Moss Kanter, “Collaborative Advan-
tage: The Art of the Alliance,” Harvard Business
Review 72, no. 4 (July–August 1994), pp. 96–108.

319

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CHAPTER 11

Managing Internal
Operations
Actions That
Promote Good
Strategy Execution

Learning Objectives

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 Why resource allocation should always be based on strategic priorities.

LO 2 How well-designed policies and procedures can facilitate good strategy execution.

LO 3 How best practices and process management tools drive continuous improvement in
the performance of value chain activities and promote superior strategy execution.

LO 4 The role of information and operating systems in enabling company personnel to carry
out their strategic roles proficiently.

LO 5 How and why the use of well-designed incentives and rewards can be management’s
single most powerful tool for promoting adept strategy execution.

© Jonathan McHugh/Alamy Stock Photo

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Apple is a very disciplined company, and we have
great processes. But that’s not what it’s about. Process
makes you more efficient.

Steve Jobs—Cofounder of Apple, Inc.

Motivation is the art of getting people to do what you
want them to do because they want to do it.

Dwight D. Eisenhower—Thirty-fourth president of the

United States

I don’t pay good wages because I have a lot of money;
I have a lot of money because I pay good wages.

Robert Bosch—Founder of engineering company Robert

Bosch GmbH

LO 1

Why resource
allocation should
always be based on
strategic priorities.

In Chapter 10, we emphasized that proficient strat-
egy execution begins with three types of manage-
rial actions: staffing the organization with the right
people; acquiring, developing, and strengthening
the firm’s resources and capabilities; and structur-
ing the organization in a manner supportive of the
strategy execution effort.

In this chapter, we discuss five additional mana-
gerial actions that advance the cause of good strat-
egy execution:

• Allocating ample resources to execution-critical
value chain activities.

• Instituting policies and procedures that facilitate
good strategy execution.

• Employing process management tools to drive
continuous improvement in how value chain
activities are performed.

• Installing information and operating systems that
enable company personnel to carry out their
strategic roles proficiently.

• Using rewards and incentives to promote better
strategy execution and the achievement of stra-
tegic and financial targets.

Early in the strategy implementation process, managers must determine what resources
(in terms of funding, people, and so on) will be required and how they should be dis-
tributed across the company’s various organizational units. This includes carefully
screening requests for more people and new facilities and equipment, approving those
that will contribute to the strategy execution effort, and turning down those that don’t.
Should internal cash flows prove insufficient to fund the planned strategic initiatives,
then management must raise additional funds through borrowing or selling additional
shares of stock to investors.

ALLOCATING RESOURCES TO THE STRATEGY
EXECUTION EFFORT

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A company’s ability to marshal the resources needed to support new strategic ini-
tiatives has a major impact on the strategy execution process. Too little funding and an
insufficiency of other types of resources slow progress and impede the efforts of orga-
nizational units to execute their pieces of the strategic plan competently. Too much
funding of particular organizational units and value chain activities wastes organiza-
tional resources and reduces financial performance. Both of these scenarios argue for
managers to become deeply involved in reviewing budget proposals and directing the

proper kinds and amounts of resources to strategy-critical organizational units.
A change in strategy nearly always calls for budget reallocations and resource

shifting. Previously important units with a lesser role in the new strategy may need
downsizing. Units that now have a bigger strategic role may need more people, new
equipment, additional facilities, and above-average increases in their operating budgets.
Implementing new strategy initiatives requires managers to take an active and some-
times forceful role in shifting resources, not only to better support activities now having
a higher priority but also to capture opportunities to operate more cost-effectively. This
requires putting enough resources behind new strategic initiatives to fuel their success
and making the tough decisions to kill projects and activities that are no longer justified.

Google’s strong support of R&D activities helped it grow to a $527 billion giant
in just 18 years. In 2013, however, Google decided to kill its 20 percent time policy,
which allowed its staff to work on side projects of their choice one day a week. While
this side project program gave rise to many innovations, such as Gmail and AdSense
(a big contributor to Google’s revenues), it also meant that fewer resources were avail-
able for projects that were deemed closer to the core of Google’s mission. In the years
since Google killed the 20 percent policy, the company has consistently topped For-
tune, Forbes, and Fast Company magazines’ “most innovative companies” lists for
ideas such as Google Glass, self-driving automobiles, and Chromebooks.

Visible actions to reallocate operating funds and move people into new organi-
zational units signal a determined commitment to strategic change. Such actions can
catalyze the implementation process and give it credibility. Microsoft has made a
practice of regularly shifting hundreds of programmers to new high-priority program-
ming initiatives within a matter of weeks or even days. Fast-moving developments in
many markets are prompting companies to abandon traditional annual budgeting and
resource allocation cycles in favor of resource allocation processes supportive of more
rapid adjustments in strategy. In response to rapid technological change in the com-
munications industry, AT&T has prioritized investments and acquisitions that have
allowed it to offer its enterprise customers faster, more flexible networks and provide
innovative new customer services, such as its Sponsored Data plan.

Merely fine-tuning the execution of a company’s existing strategy seldom requires
big shifts of resources from one area to another. In contrast, new strategic initiatives gen-
erally require not only big shifts in resources but a larger allocation of resources to the
effort as well. However, there are times when strategy changes or new execution initia-
tives need to be made without adding to total company expenses. In such circumstances,
managers have to work their way through the existing budget line by line and activity by
activity, looking for ways to trim costs and shift resources to activities that are higher-
priority in the strategy execution effort. In the event that a company needs to make sig-
nificant cost cuts during the course of launching new strategic initiatives, managers must
be especially creative in finding ways to do more with less. Indeed, it is common for
strategy changes and the drive for good strategy execution to be aimed at achieving
considerably higher levels of operating efficiency and, at the same time, making sure the
most important value chain activities are performed as effectively as possible.

A company’s strategic
priorities must drive how
capital allocations are made
and the size of each unit’s
operating budgets.

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A company’s policies and procedures can either support or hinder good strategy exe-
cution. Anytime a company moves to put new strategy elements in place or improve
its strategy execution capabilities, some changes in work practices are usually needed.
Managers are thus well advised to carefully consider whether existing policies and
procedures fully support such changes and to revise or discard those that do not.

As shown in Figure 11.1, well-conceived policies and operating procedures facili-
tate strategy execution in three ways:

1. By providing top-down guidance regarding how things need to be done. Poli-
cies and procedures provide company personnel with a set of guidelines for how
to perform organizational activities, conduct various aspects of operations,
solve problems as they arise, and accomplish particular tasks. In essence, they
represent a store of organizational or managerial knowledge about efficient
and effective ways of doing things—a set of well-honed routines for running
the company. They clarify uncertainty about how to proceed in executing
strategy and align the actions and behavior of company personnel with the

LO 2

How well-designed
policies and
procedures can
facilitate good
strategy execution.

A company’s policies and
procedures provide a set
of well-honed routines for
running the company and
executing the strategy.

INSTITUTING POLICIES AND PROCEDURES
THAT FACILITATE STRATEGY EXECUTION

FIGURE 11.1 How Policies and Procedures Facilitate Good Strategy Execution

Provide top-down guidance about how certain
things need to be done

Channel individual and group e�orts along a
strategy-supportive path

Align the actions and behavior of company
personnel with the requirements for good
strategy execution

Place limits on independent action and help
overcome resistance to change

Help enforce consistency in how strategy-critical
activities are performed

Improve the quality and reliability of
strategy execution

Help coordinate the strategy execution e�orts
of individuals and groups throughout the
organization

Promote the creation of a work climate that
facilitates good strategy execution

Well-Conceived
Policies

and
Procedures

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requirements for good strategy execution. Moreover, they place limits on ineffec-
tive independent action. When they are well matched with the requirements of the
strategy implementation plan, they channel the efforts of individuals along a path
that supports the plan. When existing ways of doing things pose a barrier to strat-
egy execution initiatives, actions and behaviors have to be changed. Under these
conditions, the managerial role is to establish and enforce new policies and oper-
ating practices that are more conducive to executing the strategy appropriately.
Policies are a particularly useful way to counteract tendencies for some people to
resist change. People generally refrain from violating company policy or going
against recommended practices and procedures without gaining clearance or hav-
ing strong justification.

2. By helping ensure consistency in how execution-critical activities are per-
formed. Policies and procedures serve to standardize the way that activities are
performed. This can be important for ensuring the quality and reliability of the
strategy execution process. It helps align and coordinate the strategy execution
efforts of individuals and groups throughout the organization—a feature that is
particularly beneficial when there are geographically scattered operating units.
For example, eliminating significant differences in the operating practices of dif-
ferent plants, sales regions, or customer service centers or in the individual outlets
in a chain operation helps a company deliver consistent product quality and ser-
vice to customers. Good strategy execution nearly always entails an ability to rep-
licate product quality and the caliber of customer service at every location where
the company does business—anything less blurs the company’s image and lowers
customer satisfaction.

3. By promoting the creation of a work climate that facilitates good strategy execu-
tion. A company’s policies and procedures help set the tone of a company’s work
climate and contribute to a common understanding of “how we do things around
here.” Because abandoning old policies and procedures in favor of new ones
invariably alters the internal work climate, managers can use the policy-changing
process as a powerful lever for changing the corporate culture in ways that better
support new strategic initiatives. The trick here, obviously, is to come up with new
policies or procedures that catch the immediate attention of company personnel
and prompt them to quickly shift their actions and behaviors in the desired ways.

To ensure consistency in product quality and service behavior patterns,
McDonald’s policy manual spells out detailed procedures that personnel in each
McDonald’s unit are expected to observe. For example, “Cooks must turn, never
flip, hamburgers. If they haven’t been purchased, Big Macs must be discarded in
10 minutes after being cooked and French fries in 7 minutes. Cashiers must make
eye contact with and smile at every customer.” Retail chain stores and other organi-
zational chains (e.g., hotels, hospitals, child care centers) similarly rely on detailed
policies and procedures to ensure consistency in their operations and reliable service
to their customers. Video game developer Valve Corporation prides itself on a lack
of rigid policies and procedures; its 37-page handbook for new employees details
how things get done in such an environment—an ironic tribute to the fact that all
types of companies need policies.

One of the big policy-making issues concerns what activities need to be strictly
prescribed and what activities ought to allow room for independent action on the part
of personnel. Few companies need thick policy manuals to prescribe exactly how daily
operations are to be conducted. Too much policy can be as obstructive as wrong policy

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and as confusing as no policy. There is wisdom in a middle approach: Prescribe
enough policies to give organization members clear direction and to place reason-
able boundaries on their actions; then empower them to act within these bound-
aries in pursuit of company goals. Allowing company personnel to act with some
degree of freedom is especially appropriate when individual creativity and initia-
tive are more essential to good strategy execution than are standardization and
strict conformity. Instituting policies that facilitate strategy execution can therefore
mean policies more policies, fewer policies, or different policies. It can mean poli-
cies that require things be done according to a precisely defined standard or poli-
cies that give employees substantial leeway to do activities the way they think best.

There is wisdom in a
middle-ground approach:
Prescribe enough policies
to give organization
members clear direction
and to place reasonable
boundaries on their actions;
then empower them to act
within these boundaries in
pursuit of company goals.

LO 3

How best practices
and process
management tools
drive continuous
improvement in the
performance of value
chain activities and
promote superior
strategy execution.

ADOPTING BEST PRACTICES AND EMPLOYING
PROCESS MANAGEMENT TOOLS
Company managers can significantly advance the cause of competent strategy exe-
cution by adopting best practices and using process management tools to drive con-
tinuous improvement in how internal operations are conducted. One of the most
widely used methods for gauging how well a company is executing its strategy
entails benchmarking the company’s performance of particular activities and busi-
ness processes against “best-in-industry” and “best-in-world” performers.1 It can
also be useful to look at “best-in-company” performers of an activity if a company
has a number of different organizational units performing much the same function at
different locations. Identifying, analyzing, and understanding how top- performing
companies or organizational units conduct particular value chain activities and busi-
ness processes provide useful yardsticks for judging the effectiveness and efficiency
of internal operations and setting performance standards for organizational units to
meet or beat.

How the Process of Identifying and
Incorporating Best Practices Works
As discussed in Chapter 4, benchmarking is the backbone of the process of identify-
ing, studying, and implementing best practices. The role of benchmarking is to look
outward to find best practices and then to develop the data for measuring how well a
company’s own performance of an activity stacks up against the best-practice stan-
dard. However, benchmarking is more complicated than simply identifying which
companies are the best performers of an activity and then trying to imitate their
approaches—especially if these companies are in other industries. Normally, the best
practices of other organizations must be adapted to fit the specific circumstances of a
company’s own business, strategy, and operating requirements. Since each organiza-
tion is unique, the telling part of any best-practice initiative is how well the company
puts its own version of the best practice into place and makes it work. Indeed, a best
practice remains little more than another company’s interesting success story unless
company personnel buy into the task of translating what can be learned from other
companies into real action and results. The agents of change must be frontline employ-
ees who are convinced of the need to abandon the old ways of doing things and switch
to a best-practice mindset.

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As shown in Figure 11.2, to the extent that a company is able to successfully
adapt a best practice pioneered elsewhere to fit its circumstances, it is likely to
improve its performance of the activity, perhaps dramatically—an outcome that
promotes better strategy execution. It follows that a company can make giant
strides toward excellent strategy execution by adopting a best-practice mindset and
successfully implementing the use of best practices across more of its value chain
activities. The more that organizational units use best practices in performing
their work, the closer a company moves toward performing its value chain activi-

ties more effectively and efficiently. This is what operational excellence is all about.
Employing best practices to improve internal operations and strategy execution has
powerful appeal—legions of companies across the world are now making concerted
efforts to employ best practices in performing many value chain activities, and they
regularly benchmark their performance of these activities against best-in-industry or
best-in-world performers.

Business Process Reengineering, Total Quality
Management, and Six Sigma Quality Programs:
Tools for Promoting Operating Excellence
Three other powerful management tools for promoting operating excellence and bet-
ter strategy execution are business process reengineering, total quality management
(TQM) programs, and Six Sigma quality control programs. Each of these merits dis-
cussion since many companies around the world use these tools to help execute strate-
gies tied to cost reduction, defect-free manufacture, superior product quality, superior
customer service, and total customer satisfaction.

Business Process Reengineering Companies searching for ways to
improve their operations have sometimes discovered that the execution of strategy-
critical activities is hampered by a disconnected organizational arrangement whereby
pieces of an activity are performed in several different functional departments, with
no one manager or group being accountable for optimal performance of the entire

Wide-scale use of best
practices across a
company’s entire value
chain promotes operating
excellence and good
strategy execution.

FIGURE 11.2 From Benchmarking and Best-Practice Implementation
to Operational Excellence in Strategy Execution

Engage in
benchmarking to
identify the best

practice for
performing an

activity

Continue to
benchmark
company

performance
of the activity

against
best-in-industry
or best-in-world

performers

Adapt the best
practice to fit

the company’s
situation; then
implement it
(and further
improve it
over time)

Move closer
to operating
excellence in
performing
the activity

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activity. This can easily occur in such inherently cross-functional activities as cus-
tomer service (which can involve personnel in order filling, warehousing and shipping,
invoicing, accounts receivable, after-sale repair, and technical support), particularly
for companies with a functional organizational structure.

To address the suboptimal performance problems that can arise from this type
of situation, a company can reengineer the work effort, pulling the pieces of an
activity out of different departments and creating a cross-functional work group or
single department (often called a process department) to take charge of the whole
process. The use of cross-functional teams has been popularized by the practice of
business process reengineering, which involves radically redesigning and stream-
lining the workflow (typically enabled by cutting-edge use of online technology
and information systems), with the goal of achieving quantum gains in performance
of the activity.2

The reengineering of value chain activities has been undertaken at many com-
panies in many industries all over the world, with excellent results being achieved
at some firms.3 Hallmark reengineered its process for developing new greeting
cards, creating teams of mixed-occupation personnel (artists, writers, lithographers,
merchandisers, and administrators) to work on a single holiday or greeting card theme.
The reengineered process speeded development times for new lines of greeting cards
by up to 24 months, was more cost-efficient, and increased customer satisfaction.4
In the order-processing section of General Electric’s circuit breaker division, elapsed
time from order receipt to delivery was cut from three weeks to three days by consoli-
dating six production units into one, reducing a variety of former inventory and han-
dling steps, automating the design system to replace a human custom-design process,
and cutting the organizational layers between managers and workers from three to
one. Productivity rose 20 percent in one year, and unit manufacturing costs dropped
30 percent. Northwest Water, a British utility, used process reengineering to eliminate
45 work depots that served as home bases to crews who installed and repaired water
and sewage lines and equipment. Under the reengineered arrangement, crews worked
directly from their vehicles, receiving assignments and reporting work completion
from computer terminals in their trucks. Crew members became contractors to North-
west Water rather than employees, a move that not only eliminated the need for the
work depots but also allowed Northwest Water to eliminate a big percentage of the
bureaucratic personnel and supervisory organization that managed the crews.5

While business process reengineering has been criticized as an excuse for down-
sizing, it has nonetheless proved itself a useful tool for streamlining a company’s work
effort and moving closer to operational excellence. It has also inspired more techno-
logically based approaches to integrating and streamlining business processes, such
as enterprise resource planning, a software-based system implemented with the help
of consulting companies such as SAP (the leading provider of business software).

Total Quality Management Programs Total quality management
(TQM) is a management approach 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.6 While TQM concentrates on producing quality
goods and fully satisfying customer expectations, it achieves its biggest successes
when it is extended to employee efforts in all departments—human resources, bill-
ing, accounting, and information systems—that may lack pressing, customer-driven
incentives to improve. It involves reforming the corporate culture and shifting to

CORE CONCEPT

Business process
reengineering involves
radically redesigning
and streamlining how an
activity is performed, with
the intent of achieving
quantum improvements in
performance.

CORE CONCEPT

Total quality management
(TQM) entails creating
a total quality culture,
involving managers and
employees at all levels, bent
on continuously improving
the performance of every
value chain activity.

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a continuous-improvement business philosophy that permeates every facet of the
organization.7 TQM aims at instilling enthusiasm and commitment to doing things
right from the top to the bottom of the organization. Management’s job is to kindle
an organizationwide search for ways to improve that involves all company personnel
exercising initiative and using their ingenuity. TQM doctrine preaches that there’s no
such thing as “good enough” and that everyone has a responsibility to participate in
continuous improvement. TQM is thus a race without a finish. Success comes from
making little steps forward each day, a process that the Japanese call kaizen.

TQM takes a fairly long time to show significant results—very little benefit
emerges within the first six months. The long-term payoff of TQM, if it comes,
depends heavily on management’s success in implanting a culture within which
the TQM philosophy and practices can thrive. But it is a management tool that has
attracted numerous users and advocates over several decades, and it can deliver good
results when used properly.

Six Sigma Quality Control Programs Six Sigma programs offer
another way to drive continuous improvement in quality and strategy execution.
This approach entails the use of advanced statistical methods to identify and remove
the causes of defects (errors) and undesirable variability in performing an activ-
ity or business process. When performance of an activity or process reaches “Six
Sigma quality,” there are no more than 3.4 defects per million iterations (equal to
99.9997 percent accuracy).8

There are two important types of Six Sigma programs. The Six Sigma process
of define, measure, analyze, improve, and control (DMAIC, pronounced “de-may-
ic”) is an improvement system for existing processes falling below specification and
needing incremental improvement. The Six Sigma process of define, measure, ana-

lyze, design, and verify (DMADV, pronounced “de-mad-vee”) is used to develop new
processes or products at Six Sigma quality levels. DMADV is sometimes referred to as
Design for Six Sigma, or DFSS. Both Six Sigma programs are overseen by personnel
who have completed Six Sigma “master black belt” training, and they are executed
by personnel who have earned Six Sigma “green belts” and Six Sigma “black belts.”
According to the Six Sigma Academy, personnel with black belts can save companies
approximately $230,000 per project and can complete four to six projects a year.9

The statistical thinking underlying Six Sigma is based on the following three prin-
ciples: (1) All work is a process, (2) all processes have variability, and (3) all processes
create data that explain variability.10 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. For instance, airlines striving to improve the on-time perfor-
mance of their flights have more to gain from actions to curtail the number of flights
that are late by more than 30 minutes than from actions to reduce the number of flights
that are late by less than 5 minutes. Six Sigma quality control programs are of particu-
lar interest for large companies, which are better able to shoulder the cost of the large
investment required in employee training, organizational infrastructure, and consult-
ing services. For example, to realize a cost savings of $4.4 billion from rolling out its
Six Sigma program, GE had to invest $1.6 billion and suffer losses from the program
during its first year.11

Since the programs were first introduced, thousands of companies and nonprofit
organizations around the world have used Six Sigma to promote operating excellence.
For companies at the forefront of this movement, such as Motorola, General Electric
(GE), Ford, and Honeywell (Allied Signal), the cost savings as a percentage of revenue

CORE CONCEPT

Six Sigma programs
utilize advanced statistical
methods to improve
quality by reducing defects
and variability in the
performance of business
processes.

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varied from 1.2 to 4.5 percent, according to data analysis conducted by iSixSigma (an
organization that provides free articles, tools, and resources concerning Six Sigma).
More recently, there has been a resurgence of interest in Six Sigma practices, with
companies such as Siemens, Coca-Cola, Ocean Spray, GEICO, and Merrill Lynch
turning to Six Sigma as a vehicle to improve their bottom lines. In the first five years
of its adoption, Six Sigma at Bank of America helped the bank reap about $2 billion
in revenue gains and cost savings; the bank holds an annual “Best of Six Sigma Expo”
to celebrate the teams and the projects with the greatest contribution to the company’s
bottom line. GE, one of the most successful companies implementing Six Sigma train-
ing and pursuing Six Sigma perfection across the company’s entire operations, esti-
mated benefits of some $10 billion during the first five years of implementation—its
Lighting division, for example, cut invoice defects and disputes by 98 percent.12

Six Sigma has also been used to improve processes in health care. Froedtert Hospi-
tal in Milwaukee, Wisconsin, used Six Sigma to improve the accuracy of administer-
ing the proper drug doses to patients. DMAIC analysis of the three-stage process by
which prescriptions were written by doctors, filled by the hospital pharmacy, and then
administered to patients by nurses revealed that most mistakes came from misreading
the doctors’ handwriting. The hospital implemented a program requiring doctors to
enter the prescription on the hospital’s computers, which slashed the number of errors
dramatically. In recent years, Pfizer embarked on 85 Six Sigma projects to streamline
its R&D process and lower the cost of delivering medicines to patients in its pharma-
ceutical sciences division.

Illustration Capsule 11.1 describes Charleston Area Medical Center’s use of Six
Sigma as a health care provider coping with the current challenges facing this industry.

Despite its potential benefits, Six Sigma is not without its problems. There is evi-
dence, for example, that Six Sigma techniques can stifle innovation and creativity.
The essence of Six Sigma is to reduce variability in processes, but creative processes,
by nature, include quite a bit of variability. In many instances, breakthrough innova-
tions occur only after thousands of ideas have been abandoned and promising ideas
have gone through multiple iterations and extensive prototyping. Google’s chair, Eric
Schmidt, has declared that applying Six Sigma measurement and control principles to
creative activities at Google would choke off innovation altogether.13

A blended approach to Six Sigma implementation that is gaining in popularity
pursues incremental improvements in operating efficiency, while R&D and other
processes that allow the company to develop new ways of offering value to custom-
ers are given freer rein. Managers of these ambidextrous organizations are adept
at employing continuous improvement in operating processes but allowing R&D
to operate under a set of rules that allows for exploration and the development of
breakthrough innovations. However, the two distinctly different approaches to man-
aging employees must be carried out by tightly integrated senior managers to ensure
that the separate and diversely oriented units operate with a common purpose. Ciba
Vision, now part of eye care multinational Alcon, dramatically reduced operating
expenses through the use of continuous-improvement programs, while simultane-
ously and harmoniously developing a new series of contact lens products that have
allowed its revenues to increase by 300 percent over a 10-year period.14 An enterprise
that systematically and wisely applies Six Sigma methods to its value chain, activity by
activity, can make major strides in improving the proficiency with which its strategy is
executed without sacrificing innovation. As is the case with TQM, obtaining manage-
rial commitment, establishing a quality culture, and fully involving employees are all of
critical importance to the successful implementation of Six Sigma quality programs.15

Ambidextrous
organizations are adept
at employing continuous
improvement in operating
processes but allowing
R&D to operate under a
set of rules that allows
for exploration and
the development of
breakthrough innovations.

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The Difference between Business Process Reengineering and
Continuous-Improvement Programs Like Six Sigma and TQM
Whereas business process reengineering aims at quantum gains on the order of
30 to 50 percent or more, total quality programs like TQM and Six Sigma stress
ongoing 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
sense to use them in tandem. Reengineering can be used first to produce a good

ILLUSTRATION
CAPSULE 11.1

Established in 1972, Charleston Area Medical Center
(CAMC) is West Virginia’s largest health care provider
in terms of beds, admissions, and revenues. In 2000,
CAMC implemented a Six Sigma program to examine
quality problems and standardize care processes. Per-
formance improvement was important to CAMC’s man-
agement for a variety of strategic reasons, including
competitive positioning and cost control.

The United States has been evolving toward a pay-
for-performance structure, which rewards hospitals
for providing quality care. CAMC has utilized its Six
Sigma program to take advantage of these changes in
the health care environment. For example, to improve
its performance in acute myocardial infarction (AMI),
CAMC applied a Six Sigma DMAIC (define-measure-
analyze-improve-control) approach. Nursing staff mem-
bers were educated on AMI care processes, performance

targets were posted in nursing units, and adherence to
the eight Hospital Quality Alliance (HQA) indicators of
quality care for AMI patients was tracked. As a result of
the program, CAMC improved its compliance with HQA-
recommended treatment for AMI from 50 to 95 percent.
Harvard researchers identified CAMC as one of the top-
performing hospitals reporting comparable data.

Controlling cost has also been an important aspect
of CAMC’s performance improvement initiatives due to
local regulations. West Virginia is one of two states where
medical services rates are set by state regulators. This
forces CAMC to limit expenditures because the hospi-
tal cannot raise prices. CAMC first applied Six Sigma in
an effort to control costs by managing the supply chain
more effectively. The effort created a one-time $150,000
savings by working with vendors to remove outdated
inventory. As a result of continuous improvement, a 2015
report stated that CAMC had achieved supply chain
management savings of $12 million in the past four years.

Since CAMC introduced Six Sigma, over 100 qual-
ity improvement projects have been initiated. A key
to CAMC’s success has been instilling a continuous
improvement mindset into the organization’s culture.
Dale Wood, chief quality officer at CAMC, stated: “If
you have people at the top who completely support
and want these changes to occur, you can still fall flat on
your face. . . . You need a group of networkers who can
carry change across an organization.” Due to CAMC’s
performance improvement culture, the hospital ranks
high nationally in ratings for quality of care and patient
safety, as reported on the Centers for Medicare and
Medicaid Services (CMS) website.

Charleston Area Medical
Center’s Six Sigma Program

© ERproductions Ltd/Blend Images LLC

Note: Developed with Robin A. Daley

Sources: CAMC website; Martha Hostetter, “Case Study: Improving Performance at Charleston Area Medical Center,” The Commonwealth
Fund, November–December 2007, www.commonwealthfund.org/publications/newsletters/quality-matters/2007/november-december/
case-study-improving-performance-at-charleston-area-medical-center (accessed January 2016); J. C. Simmons, “Using Six Sigma to Make
a Difference in Health Care Quality,” The Quality Letter, April 2002.

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

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basic design that yields quick, dramatic improvements in performing a business pro-
cess. TQM or Six Sigma programs can then be used as a follow-on to reengineer-
ing and/or best-practice implementation to deliver incremental improvements over a
longer period of time.

Capturing the Benefits of Initiatives
to Improve Operations
The biggest beneficiaries of benchmarking and best-practice initiatives, reengineer-
ing, TQM, and Six Sigma are companies that view such programs not as ends in
themselves but as tools for implementing company strategy more effectively. The least
rewarding payoffs occur when company managers seize on the programs as novel
ideas that might be worth a try. In most such instances, they result in strategy-blind
efforts to simply manage better.

There’s an important lesson here. Business process management tools all need to
be linked to a company’s strategic priorities to contribute effectively to improving the
strategy’s execution. Only strategy can point to which value chain activities matter
and what performance targets make the most sense. Without a strategic framework,
managers lack the context in which to fix things that really matter to business unit
performance and competitive success.

To get the most from initiatives to execute strategy more proficiently, managers must
have a clear idea of what specific outcomes really matter. Is it high on-time delivery,
lower overall costs, fewer customer complaints, shorter cycle times, a higher percentage
of revenues coming from recently introduced products, or something else? Benchmark-
ing best-in-industry and best-in-world performance of targeted value chain activities
provides a realistic basis for setting internal performance milestones and longer-range
targets. Once initiatives to improve operations are linked to the company’s strategic pri-
orities, then comes the managerial task of building a total quality culture that is genu-
inely committed to achieving the performance outcomes that strategic success requires.16

Managers can take the following action steps to realize full value from TQM or
Six Sigma initiatives and promote a culture of operating excellence:17

1. Demonstrating visible, unequivocal, and unyielding commitment to total quality
and continuous improvement, including specifying measurable objectives for
increasing quality and making continual progress.

2. Nudging people toward quality-supportive behaviors by:
a. Screening job applicants rigorously and hiring only those with attitudes and

aptitudes that are right for quality-based performance.
b. Providing quality training for employees.
c. Using teams and team-building exercises to reinforce and nurture individual

effort. (The creation of a quality culture is facilitated when teams become
more cross-functional, multitask-oriented, and increasingly self-managed.)

d. Recognizing and rewarding individual and team efforts to improve quality
regularly and systematically.

e. Stressing prevention (doing it right the first time), not correction (instituting
ways to undo or overcome mistakes).

3. Empowering employees so that authority for delivering great service or improving
products is in the hands of the doers rather than the overseers—improving quality
has to be seen as part of everyone’s job.

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4. Using online systems to provide all relevant parties with the latest best practices,
thereby speeding the diffusion and adoption of best practices throughout the orga-
nization. Online systems can also allow company personnel to exchange data and
opinions about how to upgrade the prevailing best-in-company practices.

5. Emphasizing that performance can and must be improved, because competitors are
not resting on their laurels and customers are always looking for something better.

In sum, benchmarking, the adoption of best practices, business process reen-
gineering, TQM, and Six Sigma techniques all need to be seen and used as part
of a bigger-picture effort to execute strategy proficiently. Used properly, all of
these tools are capable of improving the proficiency with which an organization
performs its value chain activities. Not only do improvements from such initia-
tives add up over time and strengthen organizational capabilities, but they also help
build a culture of operating excellence. All this lays the groundwork for gaining
a competitive advantage.18 While it is relatively easy for rivals to also implement
process management tools, it is much more difficult and time-consuming for them
to instill a deeply ingrained culture of operating excellence (as occurs when such
techniques are religiously employed and top management exhibits lasting commit-
ment to operational excellence throughout the organization).

The purpose of using
benchmarking, best
practices, business process
reengineering, TQM, and
Six Sigma programs is to
improve the performance
of strategy-critical activities
and thereby enhance
strategy execution.

LO 4

The role of
information and
operating systems
in enabling company
personnel to carry out
their strategic roles
proficiently.

INSTALLING INFORMATION AND OPERATING SYSTEMS
Company strategies can’t be executed well without a number of internal systems for
business operations. Qantas Airways, JetBlue, Ryanair, British Airways, and other
successful airlines cannot hope to provide passenger-pleasing service without a user-
friendly online reservation system, an accurate and speedy baggage-handling sys-
tem, and a strict aircraft maintenance program that minimizes problems requiring
at-the-gate service that delay departures. FedEx has internal communication systems
that allow it to coordinate its over 100,000 vehicles in handling a daily average of
10.5 million shipments to more than 220 countries and territories. Its leading-edge
flight operations systems allow a single controller to direct as many as 200 of FedEx’s
650 aircraft simultaneously, overriding their flight plans should weather problems or
other special circumstances arise. FedEx also has created a series of e-business tools
for customers that allow them to ship and track packages online, create address books,
review shipping history, generate custom reports, simplify customer billing, reduce
internal warehousing and inventory management costs, purchase goods and services
from suppliers, and respond to their own quickly changing customer demands. All of
FedEx’s systems support the company’s strategy of providing businesses and individu-
als with a broad array of package delivery services and enhancing its competitiveness
against United Parcel Service, DHL, and the U.S. Postal Service.

Amazon.com ships customer orders of books, CDs, and myriad other items from a
global network of more than 120 warehouses in locations including the United States,
China, and Germany. The warehouses are so technologically sophisticated that they
require about as many lines of code to run as Amazon’s website does. Using complex
picking algorithms, computers initiate the order-picking process by sending signals to
workers’ wireless receivers, telling them which items to pick off the shelves in which
order. Computers also generate data on mix-boxed items, chute backup times, line
speed, worker productivity, and shipping weights on orders. Systems are upgraded
regularly, and productivity improvements are aggressively pursued. Two new things
that Amazon is trying out are drone delivery and a crowdsourcing app called On My

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Way that would allow drivers to deliver part-time for Amazon in the same way that
Uber drivers provide rides for people.

Otis Elevator, the world’s largest manufacturer of elevators, with more than
2.5 million elevators and escalators installed worldwide, has a 24/7 remote electronic
monitoring system that can detect when an elevator or escalator installed on a cus-
tomer’s site has any of 325 problems.19 If the monitoring system detects a problem, it
analyzes and diagnoses the cause and location, then makes the service call to an Otis
mechanic at the nearest location, and helps the mechanic (who is equipped with a
web-enabled cell phone) identify the component causing the problem. The company’s
maintenance system helps keep outage times under three hours—the elevators are
often back in service before people even realize there was a problem. All trouble-call
data are relayed to design and manufacturing personnel, allowing them to quickly alter
design specifications or manufacturing procedures when needed to correct recurring
problems. All customers have online access to performance data on each of their Otis
elevators and escalators.

Well-conceived state-of-the-art operating systems not only enable better strategy exe-
cution but also strengthen organizational capabilities—enough at times to provide a com-
petitive edge over rivals. For example, a company with a differentiation strategy based
on superior quality has added capability if it has systems for training personnel in quality
techniques, tracking product quality at each production step, and ensuring that all goods
shipped meet quality standards. If these quality control systems are better than those
employed by rivals, they provide the company with a competitive advantage. Similarly, a
company striving to be a low-cost provider is competitively stronger if it has an unrivaled
benchmarking system that identifies opportunities to implement best practices and drive
costs out of the business faster than rivals. Fast-growing companies get an important
assist from having capabilities in place to recruit and train new employees in large num-
bers and from investing in infrastructure that gives them the capability to handle rapid
growth as it occurs, rather than having to scramble to catch up to customer demand.

Instituting Adequate Information Systems,
Performance Tracking, and Controls
Accurate and timely information about daily operations is essential if managers are to
gauge how well the strategy execution process is proceeding. Companies everywhere
are capitalizing on today’s technology to install real-time data-generating capability.
Most retail companies now have automated online systems that generate daily sales
reports for each store and maintain up-to-the-minute inventory and sales records on
each item. Manufacturing plants typically generate daily production reports and track
labor productivity on every shift. Transportation companies have elaborate informa-
tion systems to provide real-time arrival information for buses and trains that is auto-
matically sent to digital message signs and platform audio address systems.

Siemens Healthcare, one of the largest suppliers to the health care industry, uses a
cloud-based business activity monitoring (BAM) system to continuously monitor and
improve the company’s processes across more than 190 countries. Customer satisfac-
tion is one of Siemens’s most important business objectives, so the reliability of its
order management and services is crucial. Caesars Entertainment, owner of casinos
and hotels, uses a sophisticated customer relationship database that records detailed
information about its customers’ gambling habits. When a member of Caesars’s Total
Rewards program calls to make a reservation, the representative can review previous
spending, including average bet size, to offer an upgrade or complimentary stay at Cae-
sars Palace or one of the company’s other properties. At Uber, the popular ridesharing

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service, there are systems for locating vehicles near a customer and real-time demand
monitoring to price fares during high-demand periods.

Information systems need to cover five broad areas: (1) customer data, (2) opera-
tions data, (3) employee data, (4) supplier and/or strategic partner data, and (5) finan-
cial performance data. All key strategic performance indicators must be tracked and
reported in real time whenever possible. Real-time information systems permit com-
pany managers to stay on top of implementation initiatives and daily operations and to
intervene if things seem to be drifting off course. Tracking key performance indica-
tors, gathering information from operating personnel, quickly identifying and diag-
nosing problems, and taking corrective actions are all integral pieces of the process of
managing strategy execution and overseeing operations.

Statistical information gives managers a feel for the numbers, briefings and meet-
ings provide a feel for the latest developments and emerging issues, and personal
contacts add a feel for the people dimension. All are good barometers of how well
things are going and what operating aspects need management attention. Managers
must identify problem areas and deviations from plans before they can take action to
get the organization back on course, by either improving the approaches to strategy
execution or fine-tuning the strategy. Jeff Bezos, Amazon.com’s CEO, is an ardent
proponent of managing by the numbers. As he puts it, “Math-based decisions always
trump opinion and judgment. The trouble with most corporations is that they make

judgment-based decisions when data-based decisions could be made.”20

Monitoring Employee Performance Information systems also provide
managers with a means for monitoring the performance of empowered workers to see
that they are acting within the specified limits.21 Leaving empowered employees to
their own devices in meeting performance standards without appropriate checks and
balances can expose an organization to excessive risk.22 Instances abound of employ-
ees’ decisions or behavior going awry, sometimes costing a company huge sums or
producing lawsuits and reputation-damaging publicity.

Scrutinizing daily and weekly operating statistics is one of the ways in which manag-
ers can monitor the results that flow from the actions of subordinates without resorting
to constant over-the-shoulder supervision; if the operating results look good, then it is
reasonable to assume that empowerment is working. But close monitoring of operating
performance is only one of the control tools at management’s disposal. Another valuable
lever of control in companies that rely on empowered employees, especially in those that
use self-managed work groups or other such teams, is peer-based control. Because peer
evaluation is such a powerful control device, companies organized into teams can remove
some layers of the management hierarchy and rely on strong peer pressure to keep team
members operating between the white lines. This is especially true when a company has
the information systems capability to monitor team performance daily or in real time.

Having state-of-the-
art operating systems,
information systems, and
real-time data is integral to
superior strategy execution
and operating excellence.

USING REWARDS AND INCENTIVES TO PROMOTE
BETTER STRATEGY EXECUTION

It is essential that company personnel be enthusiastically committed to executing
strategy successfully and achieving performance targets. Enlisting such commit-
ment typically requires use of an assortment of motivational techniques and rewards.
Indeed, an effectively designed reward structure is the single most powerful tool

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management has for mobilizing employee commitment to successful strategy execu-
tion. But incentives and rewards do more than just strengthen the resolve of company
personnel to succeed—they also focus employees’ attention on the accomplishment
of specific strategy execution objectives. Not only do they spur the efforts of indi-
viduals to achieve those aims, but they also help coordinate the activities of individ-
uals throughout the organization by aligning their personal motives with the goals of
the organization. In this manner, reward systems serve as an indirect type of control
mechanism that conserves on the more costly control mechanism of supervisory
oversight.

To win employees’ sustained, energetic commitment to the strategy execu-
tion process, management must be resourceful in designing and using motivational
incentives—both monetary and nonmonetary. The more a manager understands what
motivates subordinates and the more he or she relies on motivational incentives as
a tool for achieving the targeted strategic and financial results, the greater will be
employees’ commitment to good day-in, day-out strategy execution and the achieve-
ment of performance targets.23

Incentives and Motivational Practices
That Facilitate Good Strategy Execution
Financial incentives generally head the list of motivating tools for gaining whole-
hearted employee commitment to good strategy execution and focusing attention
on strategic priorities. Generous financial rewards always catch employees’ atten-
tion and produce high-powered incentives for individuals to exert their best efforts.
A company’s package of monetary rewards typically includes some combination
of base-pay increases, performance bonuses, profit-sharing plans, stock awards,
company contributions to employee 401(k) or retirement plans, and piecework
incentives (in the case of production workers). But most successful companies and
managers also make extensive use of nonmonetary incentives. Some of the most
important nonmonetary approaches companies can use to enhance employee moti-
vation include the following:24

∙ Providing attractive perks and fringe benefits. The various options include
coverage of health insurance premiums, wellness programs, college tuition
reimbursement, generous paid vacation time, onsite child care, onsite fitness
centers and massage services, opportunities for getaways at company-owned
recreational facilities, personal concierge services, subsidized cafeterias and
free lunches, casual dress every day, personal travel services, paid sabbaticals,
maternity and paternity leaves, paid leaves to care for ill family members, tele-
commuting, compressed workweeks (four 10-hour days instead of five 8-hour
days), flextime (variable work schedules that accommodate individual needs),
college scholarships for children, and relocation services.

∙ Giving awards and public recognition to high performers and showcasing com-
pany successes. Many companies hold award ceremonies to honor top-performing
individuals, teams, and organizational units and to celebrate important company
milestones and achievements. Others make a special point of recognizing the
outstanding accomplishments of individuals, teams, and organizational units at
informal company gatherings or in the company newsletter. Such actions foster a
positive esprit de corps within the organization and may also act to spur healthy
competition among units and teams within the company.

LO 5

How and why the
use of well-designed
incentives and
rewards can be
management’s single
most powerful tool
for promoting adept
strategy execution.

A properly designed
reward structure is
management’s single most
powerful tool for mobilizing
employee commitment
to successful strategy
execution and aligning
efforts throughout the
organization with strategic
priorities.

CORE CONCEPT

Financial rewards provide
high-powered incentives
when rewards are tied
to specific outcome
objectives.

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∙ Relying on promotion from within whenever possible. This practice helps bind
workers to their employer, and employers to their workers. Moreover, it provides
strong incentives for good performance. Promoting from within also helps ensure
that people in positions of responsibility have knowledge specific to the business,
technology, and operations they are managing.

∙ Inviting and acting on ideas and suggestions from employees. Many companies find
that their best ideas for nuts-and-bolts operating improvements come from the sug-
gestions of employees. Moreover, research indicates that giving decision-making
power to down-the-line employees increases their motivation and satisfaction as
well as their productivity. The use of self-managed teams has much the same effect.

∙ Creating a work atmosphere in which there is genuine caring and mutual respect
among workers and between management and employees. A “family” work envi-
ronment where people are on a first-name basis and there is strong camaraderie
promotes teamwork and cross-unit collaboration.

∙ Stating the strategic vision in inspirational terms that make employees feel they
are a part of something worthwhile in a larger social sense. There’s strong moti-
vating power associated with giving people a chance to be part of something excit-
ing and personally satisfying. Jobs with a noble purpose tend to inspire employees
to give their all. As described in Chapter 9, this not only increases productivity but
reduces turnover and lowers costs for staff recruitment and training as well.

∙ Sharing information with employees about financial performance, strategy, opera-
tional measures, market conditions, and competitors’ actions. Broad disclosure and
prompt communication send the message that managers trust their workers and
regard them as valued partners in the enterprise. Keeping employees in the dark
denies them information useful to performing their jobs, prevents them from being
intellectually engaged, saps their motivation, and detracts from performance.

∙ Providing an appealing working environment. An appealing workplace environ-
ment can have decidedly positive effects on employee morale and productivity.
Providing a comfortable work environment, designed with ergonomics in mind,
is particularly important when workers are expected to spend long hours at work.
But some companies go beyond the mundane to design exceptionally attractive
work settings. Google management built the company’s Googleplex headquarters
campus to be “a dream workplace” and a showcase for environmentally correct
building design and construction. Employees have access to dozens of cafés with
healthy foods, break rooms with snacks and drinks, multiple fitness centers, heated
swimming pools, ping-pong and pool tables, sand volleyball courts, and commu-
nity bicycles and scooters to go from building to building. Apple and Facebook
also have dramatic and futuristic headquarters projects underway.

For specific examples of the motivational tactics employed by several prominent
companies (many of which appear on Fortune’s list of the 100 best companies to work
for in America), see Illustration Capsule 11.2.

Striking the Right Balance between
Rewards and Punishment
While most approaches to motivation, compensation, and people management
accentuate the positive, companies also make it clear that lackadaisical or indiffer-
ent effort and subpar performance can result in negative consequences. At General

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Electric, McKinsey & Company, several global public accounting firms, and other
companies that look for and expect top-notch individual performance, there’s an
“up-or-out” policy—managers and professionals whose performance is not good
enough to warrant promotion are first denied bonuses and stock awards and eventu-
ally weeded out. At most companies, senior executives and key personnel in under-
performing units are pressured to raise performance to acceptable levels and keep it
there or risk being replaced.

ILLUSTRATION
CAPSULE 11.2

Companies design a variety of motivational and reward
practices to create a work environment that energizes
employees and promotes better strategy execution.
Other benefits of a successful recognition system
include high job satisfaction, high retention rates, and
increased output. Here’s a sampling of what some of
the best companies to work for in America are doing to
motivate their employees:

• Software developer SAS prioritizes work–life balance
and mental health for its workforce of almost 7,000. The
onsite health center it hosts for families of all employees
maintains a staff of 53 medical and support personnel,
including nurses, registered dietitians, lab technicians,
and clinical psychologists. The sprawling headquarters
also has a Frisbee golf course, indoor swimming pool,
and walking and biking trails decorated with sculptures
from the company’s 4,000-item art collection. With
such an environment, it should come as no surprise that
95 percent of employees report looking forward to
heading to the office every day.

• Salesforce.com, a global cloud-computing company
based in San Francisco, has been listed by Forbes maga-
zine as the most innovative company in America. With
its workforce more than tripling from 5,000 employees
in 2012, Salesforce.com has worked hard to integrate
new hires into existing teams. The company’s recogni-
tion programs include rewards for achievement both in
the office and in the larger community. For example, in
2013, top sellers were awarded two-week trips to Bhutan
for their dedication and results.

• DPR Construction is one of the nation’s top-50 general
contractors, serving clients like Facebook, Pixar, and
Genentech. The company fosters teamwork and equal-
ity across levels with features like open-office floor

plans, business cards with no titles, and a bonus plan for
employees. DPR also prioritizes safety for its employees.
In 1999, a craftsperson who reached 30,000 consecutive
safe work hours was rewarded with a new Ford F-150
truck. Management created a new safety award in his
name that includes a plaque, a $2,000 trip, a 40-hour
week off with pay, and a safety jacket with hours printed
on it. In 2016, twenty-eight craftspeople received this
generous award for their dedication to safety.

• Hilcorp, an oil and gas exploration company, made head-
lines in 2011 for its shocking generosity. After reach-
ing its five-year goal to double in size, the company
gave every employee a $50,000 dream car voucher
(or $35,000 in cash). Building on this success, Hilcorp
announced an incentive program that promised to
award every employee $100,000 in 2015 if certain goals
are met. Hilcorp met its targets in April 2015 and distrib-
uted checks to its employees in June of that same year.

How the Best Companies to Work
for Motivate and Reward Employees

Note: Developed with Meghan L. Cooney.

Sources: “100 Best Companies to Work For, 2014,” Fortune, money.cnn.com/magazines/fortune/best-companies/ (accessed February 15,
2014); company profiles, GreatRated!, us.greatrated.com/sas (accessed February 24, 2014).

© Ingvar Björk/Alamy Stock Photo

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As a general rule, it is unwise to take off the pressure for good performance or play
down the adverse consequences of shortfalls in performance. There is scant evidence
that a no-pressure, no-adverse-consequences work environment leads to superior strat-
egy execution or operating excellence. As the CEO of a major bank put it, “There’s
a deliberate policy here to create a level of anxiety. Winners usually play like they’re
one touchdown behind.”25 A number of companies deliberately give employees heavy
workloads and tight deadlines to test their mettle—personnel are pushed hard to achieve
“stretch” objectives and are expected to put in long hours (nights and weekends if need
be). 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.

However, if an organization’s motivational approaches and reward structure induce
too much stress, internal competitiveness, job insecurity, and fear of unpleasant con-
sequences, the impact on workforce morale and strategy execution can be counter-
productive. 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 coerced by orders and
threats (implicit or explicit), people tend to respond with more enthusiasm, dedication,
creativity, and initiative.26

Linking Rewards to Achieving
the Right Outcomes
To create a strategy-supportive system of rewards and incentives, a company must
reward people for accomplishing results, not for just dutifully performing assigned
tasks. Showing up for work and performing assignments do not, by themselves, guar-
antee results. To make the work environment results-oriented, managers need to
focus jobholders’ attention and energy on what to achieve as opposed to what to do.27
Employee productivity among employees at Best Buy’s corporate headquarters rose by
35 percent after the company began to focus on the results of each employee’s work

rather than on employees’ willingness to come to work early and stay late.
Ideally, every organizational unit, every manager, every team or work group,

and every employee should be held accountable for achieving outcomes that con-
tribute to good strategy execution and business performance. If the company’s
strategy is to be a low-cost provider, the incentive system must reward actions and
achievements that result in lower costs. If the company has a differentiation strat-
egy focused on delivering superior quality and service, the incentive system must
reward such outcomes as Six Sigma defect rates, infrequent customer complaints,
speedy order processing and delivery, and high levels of customer satisfaction. If a
company’s growth is predicated on a strategy of new product innovation, incentives
should be tied to such metrics as the percentages of revenues and profits coming
from newly introduced products.

Incentive compensation for top executives is typically tied to such financial
measures as revenue and earnings growth, stock price performance, return on
investment, and creditworthiness or to strategic measures such as market share
growth. However, incentives for department heads, teams, and individual workers
tend to be tied to performance outcomes more closely related to their specific area
of responsibility. For instance, in manufacturing, it makes sense to tie incentive
compensation to such outcomes as unit manufacturing costs, on-time production

Incentives must be based
on accomplishing the right
results, not on dutifully
performing assigned tasks.

The key to creating
a reward system that
promotes good strategy
execution is to make
measures of good business
performance and good
strategy execution the
dominating basis for
designing incentives,
evaluating individual and
group efforts, and handing
out rewards.

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and shipping, defect rates, the number and extent of work stoppages due to equip-
ment breakdowns, and so on. In sales and marketing, incentives tend to be based on
achieving dollar sales or unit volume targets, market share, sales penetration of each
target customer group, the fate of newly introduced products, the frequency of cus-
tomer complaints, the number of new accounts acquired, and measures of customer
satisfaction. 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 the specific results needed to
keep strategy execution on track.

Illustration Capsule 11.3 provides a vivid example of how one company has
designed incentives linked directly to outcomes reflecting good execution.

Additional Guidelines for Designing Incentive Compensation
Systems It is not enough to link incentives to the right kinds of results—
performance outcomes that signal that the company’s strategy and its execution are on
track. For a company’s reward system to truly motivate organization members, inspire
their best efforts, and sustain high levels of productivity, it is also important to observe
the following additional guidelines in designing and administering the reward system:

∙ Make the performance payoff a major, not minor, piece of the total compensa-
tion package. Performance bonuses must be at least 10 to 12 percent of base
salary to have much impact. Incentives that amount to 20 percent or more of
total compensation are big attention-getters, likely to really drive individual or
team efforts. Incentives amounting to less than 5 percent of total compensation
have a comparatively weak motivational impact. Moreover, the payoff for high-
performing individuals and teams must be meaningfully greater than the payoff
for average performers, and the payoff for average performers meaningfully big-
ger than that for below-average performers.

∙ Have incentives that extend to all managers and all workers, not just top manage-
ment. It is a gross miscalculation to expect that lower-level managers and employ-
ees will work their hardest to hit performance targets if only a senior executives
qualify for lucrative rewards.

∙ Administer the reward system with scrupulous objectivity and fairness. If perfor-
mance standards are set unrealistically high or if individual and group perfor-
mance evaluations are not accurate and well documented, dissatisfaction with the
system will overcome any positive benefits.

∙ Ensure that the performance targets set for each individual or team involve out-
comes that the individual or team can personally affect. The role of incentives is
to enhance individual commitment and channel behavior in beneficial directions.
This role is not well served when the performance measures by which company
personnel are judged are outside their arena of influence.

∙ Keep the time between achieving the performance target and receiving the reward
as short as possible. Nucor, a leading producer of steel products, has achieved
high labor productivity by paying its workers weekly bonuses based on prior-week
production levels. Annual bonus payouts work best for higher-level managers and
for situations where the outcome target relates to overall company profitability.

∙ Avoid rewarding effort rather than results. While it is tempting to reward people
who have tried hard, gone the extra mile, and yet fallen short of achieving perfor-
mance targets because of circumstances beyond their control, it is ill advised to

The first principle in
designing an effective
incentive compensation
system is to tie rewards
to performance outcomes
directly linked to good
strategy execution and the
achievement of financial
and strategic objectives.

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do so. The problem with making exceptions for unknowable, uncontrollable, or
unforeseeable circumstances is that once “good excuses” start to creep into justi-
fying rewards for subpar results, the door opens to all kinds of reasons why actual
performance has failed to match targeted performance. A “no excuses” standard is
more evenhanded, easier to administer, and more conducive to creating a results-
oriented work climate.

For an organization’s incentive system to work well, the details of the reward struc-
ture must be communicated and explained. Everybody needs to understand how his

ILLUSTRATION
CAPSULE 11.3

The strategy at Nucor Corporation, one of the three
largest steel producers in the United States, is to be
the low-cost producer of steel products. Because labor
costs are a significant fraction of total cost in the steel
business, successful implementation of Nucor’s low-cost
leadership strategy entails achieving lower labor costs
per ton of steel than competitors’ costs. Nucor manage-
ment uses an incentive system to promote high worker
productivity and drive labor costs per ton below those
of rivals. Each plant’s workforce is organized into pro-
duction teams (each assigned to perform particular
functions), and weekly production targets are estab-
lished for each team. Base-pay scales are set at levels
comparable to wages for similar manufacturing jobs in
the local areas where Nucor has plants, but workers can
earn a 1 percent bonus for each 1 percent that their out-
put exceeds target levels. If a production team exceeds
its weekly production target by 10 percent, team mem-
bers receive a 10 percent bonus in their next paycheck;
if a team exceeds its quota by 20 percent, team mem-
bers earn a 20 percent bonus. Bonuses, paid every two
weeks, are based on the prior two weeks’ actual produc-
tion levels measured against the targets.

Nucor’s piece-rate incentive plan has produced
impressive results. The production teams put forth
exceptional effort; it is not uncommon for most teams to
beat their weekly production targets by 20 to 50 percent.
When added to employees’ base pay, the bonuses earned
by Nucor workers make Nucor’s workforce among the
highest paid in the U.S. steel industry. From a manage-
ment perspective, the incentive system has resulted in
Nucor having labor productivity levels 10 to 20 percent
above the average of the unionized workforces at several
of its largest rivals, which in turn has given Nucor a sig-
nificant labor cost advantage over most rivals.

After years of record-setting profits, Nucor struggled
in the economic downturn of 2008–2010, along with the
manufacturers and builders who buy its steel. But while
bonuses have dwindled, Nucor showed remarkable loy-
alty to its production workers, avoiding layoffs by having
employees get ahead on maintenance, perform work for-
merly done by contractors, and search for cost savings.
Morale at the company remained high, and Nucor’s CEO
at the time, Daniel DiMicco, was inducted into Industry-
Week magazine’s Manufacturing Hall of Fame because
of his no-layoff policies. As industry growth has resumed,
Nucor has retained a well-trained workforce, more com-
mitted than ever to achieving the kind of productivity
for which Nucor is justifiably famous. DiMicco had good
reason to expect Nucor to be “first out of the box” follow-
ing the crisis, and although he has since stepped aside,
the company’s culture of making its employees think like
owners has not changed.

Nucor Corporation: Tying Incentives
Directly to Strategy Execution

© Buena Vista Images/Stone/Getty Images

Sources: Company website (accessed March 2012); N. Byrnes, “Pain, but No Layoffs at Nucor,” BusinessWeek, March 26, 2009; J. McGregor,
“Nucor’s CEO Is Stepping Aside, but Its Culture Likely Won’t,” The Washington Post Online, November 20, 2012 (accessed April 3, 2014).

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or her incentive compensation is calculated and how individual and group per-
formance targets contribute to organizational performance targets. The pressure
to achieve the targeted financial and strategic performance objectives and con-
tinuously improve on strategy execution should be unrelenting. People at all levels
must be held accountable for carrying out their assigned parts of the strategic plan,
and they must understand that their rewards are based on the caliber of results
achieved. But with the pressure to perform should come meaningful rewards. With-
out an attractive payoff, the system breaks down, and managers are left with the
less workable options of issuing orders, trying to enforce compliance, and depend-
ing on the goodwill of employees.

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.

KEY POINTS

1. Implementing a new or different strategy calls for managers to identify the
resource requirements of each new strategic initiative and then consider whether
the current pattern of resource allocation and the budgets of the various subunits
are suitable.

2. Company policies and procedures facilitate strategy execution when they are
designed to fit the strategy and its objectives. Anytime a company alters its strat-
egy, managers should review existing policies and operating procedures and
replace those that are out of sync. Well-conceived policies and procedures aid
the task of strategy execution by (1) providing top-down guidance to company
personnel regarding how things need to be done and what the limits are on inde-
pendent actions; (2) enforcing consistency in the performance of strategy-critical
activities, thereby improving the quality of the strategy execution effort and coor-
dinating the efforts of company personnel, however widely dispersed; and (3) pro-
moting the creation of a work climate conducive to good strategy execution.

3. Competent strategy execution entails visible unyielding managerial commitment
to best practices and continuous improvement. Benchmarking, best-practice adop-
tion, business process reengineering, total quality management (TQM), and Six
Sigma programs are important process management tools for promoting better
strategy execution.

4. Company strategies can’t be implemented or executed well without well- conceived
internal systems to support daily operations. Real-time information systems and
control systems further aid the cause of good strategy execution. In some cases,
state-of-the-art operating and information systems strengthen a company’s strat-
egy execution capabilities enough to provide a competitive edge over rivals.

5. Strategy-supportive motivational practices and reward systems are powerful man-
agement tools for gaining employee commitment and focusing their attention
on the strategy execution goals. The key to creating a reward system that pro-
motes good strategy execution is to make measures of good business performance
and good strategy execution the dominating basis for designing incentives, eval-
uating individual and group efforts, and handing out rewards. Positive motiva-
tional practices generally work better than negative ones, but there is a place for
both. While financial rewards provide high-powered incentives, nonmonetary

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incentives are also important. For an incentive compensation system to work well,
(1) the performance payoff should be a major percentage of the compensation
package, (2) the use of incentives should extend to all managers and workers,
(3) the system should be administered with objectivity and fairness, (4) each
individual’s performance targets should involve outcomes the person can person-
ally affect, (5) rewards should promptly follow the achievement of performance
targets, and (6) rewards should be given for results and not just effort.

ASSURANCE OF LEARNING EXERCISES

1. Implementing a new or different strategy calls for new resource allocations. Using
your university’s access to LexisNexis or EBSCO, search for recent articles that
discuss how a company has revised its pattern of resource allocation and divi-
sional budgets to support new strategic initiatives.

2. Policies and procedures facilitate strategy execution when they are designed
to fit the company’s strategy and objectives. Using your university’s access to
LexisNexis or EBSCO, search for recent articles that discuss how a company has
revised its policies and procedures to provide better top-down guidance to com-
pany personnel on how to conduct their daily activities and responsibilities.

3. Illustration Capsule 11.1 discusses Charleston Area Medical Center’s use of Six
Sigma practices. List three tangible benefits provided by the program. Explain
why a commitment to quality control is particularly important in the hospital
industry. How can the use of a Six Sigma program help medical providers survive
and thrive in the current industry climate?

4. Read some of the recent Six Sigma articles posted at www.isixsigma.com. Pre-
pare a one-page report to your instructor detailing how Six Sigma is being used
in two companies and what benefits the companies are reaping as a result. Fur-
ther, discuss two to three criticisms of, or potential difficulties with, Six Sigma
implementation.

5. Company strategies can’t be executed well without a number of support systems
to carry on business operations. Using your university’s access to LexisNexis
or EBSCO, search for recent articles that discuss how a company has used real-
time information systems and control systems to aid the cause of good strategy
execution.

6. Illustration Capsule 11.2 provides a sampling of motivational tactics employed
by several prominent companies (many of which appear on Fortune’s list of
the 100 best companies to work for in America). Discuss how rewards at SAS,
Salesforce.com, DPR Construction, and Hilcorp aid in the strategy execution
efforts of each company.

LO 1

LO 2

LO 3

LO 3

LO 4

LO 5

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EXERCISE FOR SIMULATION PARTICIPANTS

1. Have you and your co-managers allocated ample resources to strategy-critical
areas? If so, explain how these investments have contributed to good strategy exe-
cution and improved company performance.

2. What actions, if any, is your company taking to pursue continuous improvement in
how it performs certain value chain activities?

3. Are benchmarking data available in the simulation exercise in which you are par-
ticipating? If so, do you and your co-managers regularly study the benchmarking
data to see how well your company is doing? Do you consider the benchmarking
information provided to be valuable? Why or why not? Cite three recent instances
in which your examination of the benchmarking statistics has caused you and your
co-managers to take corrective actions to boost company performance.

4. What hard evidence can you cite that indicates your company’s management team
is doing a better or worse job of achieving operating excellence and executing
strategy than are the management teams at rival companies?

5. Are you and your co-managers consciously trying to achieve operating excel-
lence? Explain how you are doing this and how you will track the progress you are
making.

6. Does your company have opportunities to use incentive compensation techniques?
If so, explain your company’s approach to incentive compensation. Is there any
hard evidence you can cite that indicates your company’s use of incentive com-
pensation techniques has worked? For example, have your company’s compensa-
tion incentives actually increased productivity? Can you cite evidence indicating
that the productivity gains have resulted in lower labor costs? If the productivity
gains have not translated into lower labor costs, is it fair to say that your com-
pany’s use of incentive compensation is a failure?

LO 1

LO 2, LO 3,
LO 4
LO 3

LO 3

LO 2, LO 3,
LO 4

LO 5

ENDNOTES
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16 Milan Ambroé, “Total Quality System as a
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