Case study daimler chrysler merger

Strategic Management: An Organization Change Approach

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Implementation

( Chapter Seven (
Strategy Implementation:

An Organization Change Approach

Chapter Objectives
Introductory Case: Where Has Chrysler Gone? The Daimler Chrysler Merger

Strategy Implementation

What is Strategy Implementation?
Type 1 and Type 2 successes and failures

The irony of strategy implementation

Implementation as a Change/Intervention Process

Implementation as a Learning Process

Implementation As an Internal Alignment and External Adaptation

Process

Synthesis: The Strategy Implementation Process

Key Implementation Elements

Organizational Structures

Leadership

Organizational Culture

Perfect Fit: Matching Strategy, Structure, Culture, and Leadership

Summary

Key Terms and Concepts

Web sites

Discussion Questions

Exercises

Experiential Exercise

Endnotes

Chapter Objectives

1. To develop an understanding of strategy implementation as a change process that aligns the organization within and without the organizational learning.

2. To establish an appreciation of the ways in which firms can successfully and unsuccessfully implement a strategic plan.

3. To recognize and be familiar with the differing levels of strategy implementation

4. To acknowledge the importance of striving for perfect fit between the firm, strategy, and the organization.

Introductory Case: Where has Chrysler Gone? The Daimler Chrysler Merger

Lee Iacocca was the miracle man of Chrysler. Leaving Ford in 1978, President Iacocca first secured federal loan guarantees of $1.5 billion dollars and made Chrysler profitable by 1983 with the introduction of the K car. By 1988 another miracle was needed and of course Lee delivered. After acquiring American Motors Corporation (AMC) in 1987 (primarily for its Jeep brand), Lee staked the company and his reputation on four major products: the minivan, Jeep Grand Cherokee, the LH sedans, and the Ram full-size pickup trucks. When Iococca left the company at the end of 1992, the company was heading back into the black. From 1993-1997 (before the merger with Daimler), the firm posted an average 5% net profit (ahead of its U.S. rivals GM and Ford) and had increased sales revenues by approximately 25%.

Then came the merger. By the year 1998, Chrysler had started to hemorrhage money. It went through $5 billion dollars in cash and lost $1.8 billion dollars in the second half of 2000 while the value of DaimlerChrysler stock dropped from $ 84 billion in 1998 to $39 billion at the end of 2000. Chrysler, now a unit of DaimlerChrysler, struggled mightily since the 1998 merger of Daimler-Benz and Chrysler, though it showed a bit of life in 2002. Granted, it would be premature to use the word revival. Chrysler lost $1.9 billion in 2001 but it did eke out a profit in the first quarter of 2002 and said it would break even by the end of the year. In April of 2002 its sales stopped falling, and it halted its market-share free fall.

But what had happened? Was the merger to blame? What was it that changed that took a seemingly-well-run company, and created so many problems? As problems became apparent, Daimler Chrysler fired Robert Eaton (Lee Iacocca’s successor) along with nine other major executives. It then brought in Dieter Zetche, who felt that Chrysler had carried considerable baggage and needed reorganization. Zetsche brought in his own management team to replace the fired top level executives. He then proceeded to lead a turnaround based on drastic cuts in purchasing costs and a renewed focus on quality improvement. Chrysler pushed ahead with new products such as the redesigned Dodge Ram pickup and Jeep Liberty SUV that had already been in the works. These tactics seemed to have been quite successful since after an adjusted operating loss of 148 million euros in the second quarter of 2001. As a result, Chrysler made a profit of 788 million euros in the second quarter in 2002.

The 1999 merger of Chrysler Corporation and Daimler Benz involved the creation of a truly global corporation by combining two organizations of roughly the same size and in the same industry, but with two very diverse cultures. Chrysler, grounded in market driven American entrepreneurship and forged in the near bankruptcy of the 1980s, emphasized innovation and flexibility, within a highly focused business strategy. Daimler Benz, characterized by structured, hierarchical management, and German engineering excellence, emphasized luxury markets within a highly diversified corporate structure.

This lead to a major culture clash, one that could have been avoided with strategic implementation plans including cultural intervention, with slow assimilation of Chrysler and Daimler values across business units. What could have been strength through synergy (the merging of the best of the two cultures), became forced German efficiency. “The merged company's actions were tied to an onslaught of cultural misunderstandings, intercultural stereotyping, and misguided attempts to maintain intercultural correctness within and outside the organization. This created a xenophobic discourse blaming either side for financial problems.”

But from Chrysler’s old guard’s perspective, however, the real problem was that they had been sold out – Chrysler was no more. Daimler had created a myth about equal partners, and used their public relations department to sell it to the American public. With the marriage myth, the promotion of the idea of two equal partners, Daimler lead reporters and stock holders down the cultural differences scenario stated above and forget to get into the details of the deal itself. Kirk Kerkorian, the largest shareholder of the old Chrysler, has a suit pending against DaimlerChrysler, contending that it misrepresented the combination as a ''merger of equals'' when it really was a takeover. Lee A. Iacocca, the former Chrysler chairman, complained in the press about the company's failure to bring him back as a consultant. Some employees still have not accepted the merger and have posted their grievances and suggestions on a Web site called chryslertakeover.com. One of the topics on the site was the hope that Lee Iacocca would regain leadership of the company:

“After the expiration of a "gag" order, Lee Iacocca has indicated his desire to return Chrysler to profitability. "I'd give my right arm to do it...Chrysler was my life. I really feel bad where it is today." [Detroit news, 3/17/02] Employees can change the direction of this company. Chrysler could be split-off from Daimler with a combination of major shareholders, employee ownership (similar to most airlines) and new stock offering (IPO). We've already got a REAL turnaround expert on our side who'll take the job. Many of our German friends would also like to see the end of this "merger", and its disastrous effect on Daimler stock; they'd also love to show Schrempp the door.”

On February 4, 2003 DaimlerChrysler announced preliminary key figures for the Group's performance in the 2002 financial year including an operating profit of EUR 6.9 billion after an adjusted operating loss of EUR 1.3 billion in 2001. Despite difficult market conditions, DaimlerChrysler's operating profit was thus more than four times as high as in the prior year. The Board of Management proposed to the Supervisory Board to distribute a dividend of EUR 1.50 per share for 2002 (2001: EUR 1.00), a 50% increase. (Please note that as of February 10, 2003 that the chryslertakeover.com site had announced that it would be closing shortly.)

Strategy Implementation

Over the past seven chapters we have explored the strategy formulation process (Steps 1-4 of the Planning Process): surveying the internal and external environment, reconciling the firm’s mission, values, goals and objectives with the realities of the firm and its marketplace, and matching the firm’s resources and mission with the most viability market opportunities (See Figure 7.1 below).

The formulation of a good strategic plan is a formidable and challenging task since its fundamental duty is to create value for the customer. Value-creation, whether it take the form of low-cost, differentiation, or value-for money, is achieved primarily via strategy formulation through the marketing processes of the firm. A firm’s product/services, pricing, promotion, product distribution creates a marketing mix, which determines the firm’s relative position in the market re: its competitors and consumers’ perceptions (called market-driven strategy). Capabilities associated with strategy formulation therefore include market sensing, customer linking, channel bonding, technology monitoring, and new product/service/strategy development; activities associated with entrepreneurial characteristics of the firm.

Yet finding opportunities, reaching out to stakeholders, and developing strategic plans is not enough to ensure that a firm can capitalize on those opportunities, work with stakeholders, and put the plan into action – make the vision a reality. Firms must also possess the managerial and organizational competencies that support customer order fulfillment, product pricing, purchasing, financial management and cost control, technology development, manufacturing/ transformation processes, human resources management, and health and safety systems (just to name a few) that facilitate the implementation of the strategic plan.

Here is where we can dip into the entrepreneurship literature to help us better understand strategy implementation. Most entrepreneurs who are excellent at formulating winning plans fail to grow their businesses into large firms because demand for their products and services outstrip their firms’ support systems. They think big but act small because they do not invest in the infrastructures that support growth (people, skills, technology, culture, operating systems)

and cannot transition from an entrepreneurial to a professionally managed firm. They not only must talk-the-talk, they must also walk-the-walk and in short lack the executive skills obligatory to manage a large, complex firm. More specifically, although entrepreneurs are

Figure 7.1

The Strategic Planning Process

Step 5 – Implementation: Human Change Considerations

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excellent at dealing with and confronting changes in the marketplace, they tend to be weak at seeing and seeking value within their own organization, and also may have a difficult time with issues of employee trust, teaching, and personal integrity.

This last issue brings us back to the Daimler Chrysler case. The strategy behind the merger seemed a sound one; combine U.S. entrepreneurship with German engineering and obtain fun cars that performed well. The companies possessed complimentary product lines (Chrysler’s lower cost cars including Jeep, trucks and the very popular minivans with Mercedes Benz’s luxury quality vehicles) and occupied different market segments. One large company could achieve economies of scale and purchasing power that the two smaller firms could not. So why did it take this merger so long (four to five years) to make a profit after the merger took place?

The problem in this case dealt with how Daimler Chrysler implemented the new strategy. First, Daimler’s marriage to Chrysler was clearly a takeover and employees and stockholders resented being lied to. More specifically, Chrysler’s management and culture was of no value to Daimler and therefore both were jettisoned when the new company was formed. Top management’s unilateral actions led to high levels of employee resistance and therefore slowed down the change process (in structure, strategy, and operations). The Chrysler Division alone lost over $4 billion in the first two years after the merger leaving many observers wondering if the company would survive as a single entity. Only in the later half of 2002, and later in early 2003 has the Chrysler Division turned the corner and demonstrated profitability.

What is Strategy Implementation?

We define strategy implementation as those actions taken by a firm to put their strategic plans into place by either changing their mission, changing their environment, or changing their resources, capabilities and internal operations. The key term in the definition of strategy implementation is change -- can the firm make the necessary changes in order to move it into a better market position? Yin XE "Yin, Robert K." , Heald XE "Heald, Karen A." and Vogel XE "Vogel, Mary E." suggest that strategy implementation is dependent upon two factors: the inherent validity or strength of the plan developed to position the business (do our decisions make sense in light of the available information?) and the ability to produce the changes the plan requires (can we change ourselves or our market as required by the plan?).

Successful and Unsuccessful Implementation. Under the above definition of strategy implementation there are two types of successful implementation plans and two unsuccessful implementation plans as suggested in Table 7-1.

Table 7-1

Successful and Unsuccessful Implementation Plans

Required Changes Made

Required Changes Not Made

Valid Plan

Type 1 Success

Type 1 Failure

Invalid Plan

Type 2 Failure

Type 2 Success
Success Type 1 and Failure Type 1 are easy to understand. The firm develops a justifiable strategic plan and either can or cannot make the necessary changes within the organization or in the marketplace to enact the plan. If changes are made, they result in the better positioning of the firm, a more sustainable competitive advantage, and higher profitability. If the changes are not made, then the firm's competitive position would at best remain stable or perhaps deteriorate over time.

We can easily apply these definitions to the Daimler Chrysler case. Daimler’s strategy was to broaden the competitive scope of the firm by merging with Chrysler. Each entity brought to the merged organization differing target markets and differing expertise. The underlying premise is that the merged firm would have a broader set of capabilities derived through synergy and therefore be able to better serve the larger target market of Daimler Chrysler. The implementation failed in the short run since Daimler bungled the preparation of Chrysler’s employees for the merger, therefore causing massive losses in Chrysler’s operation. In the long run, however, the implementation of the merger strategy seems to have been successful given the firm’s profitability in early 2003.

Type 2 Successes and Failures are quite different from Type 1s. A Type 2 Failure refers to businesses having the change processes in place so as to institute an illogical plan. That is, the firm develops a very poor plan but makes the necessary changes in the environment or within the firm to implement the plan. A great example of a Type 2 Failure was when Coca Cola decided to change the taste of its leading product, Coke in 1984. Coke was losing market share to Pepsi Cola from the late 70s and into the early 80s and Coca Cola had conducted market research that showed that soft cola drinkers preferred the taste of Pepsi over Coke. They developed a new coke flavor which taste tested more favorably than either Pepsi or Coke and proceeded to advertise “New Coke” and dump the old Coke line.

The public’s reaction to Coca Cola’s move was immediate and strong. Major protests arose around the country - Coca Cola was tinkering with an American icon and received over 5000 letters a day objecting to the change. On July 11, 1985, Coca Cola bowed to public pressure and brought back its original formula as Coke Classic. So where did Coke’s thinking go wrong? Coca Cola assumed that Coke drinkers were loyal because they equated ‘better taste’ with sales; taste (a product feature) sold soft drinks. Coca Cola failed to understand the value of their own advertising in making the Coke brand part of American tradition and more importantly did not market test how the public would react to a change in Coke’s taste. In this example, Coca Cola had a horrific plan that they properly executed.

Type 2 Successes are quite fascinating in that success occurs when the firm develops an invalid plan and fails to implement it. We are sure that many businesses may have had Type 2 Successes but these are not the types of successes that businesses are bound to report, or to even be reported in many publications, since these firms would be admitting to a double failure. The real question with a Type 2 Success is how did the organization manage not to implement the invalid plan? This question brings us back to the heart of implementation - what are the conditions under which change will or will not be implemented?

Implementation as a Change/Intervention Process

The DaimlerChrysler case helps us define the first definition of strategy implementation, that of facilitating and supporting the change process. As we suggested in Chapter 1, it is human nature to resist change and any strategy that proposes a change to the operating systems of the firm will then encounter change barriers. For example, it should have been expected that workers at Chrysler would have opposed the changes in top management and would be resentful if anyone criticizing their way of doing things. But is resistance always to be expected?

Resistance to Change. At the individual level, employee resistance to change can be explained through the psychological and work forces acting on an employee. At the psychological level, an individual is comprised of a value system; a set of individual values (basic convictions of right and wrong) which tend to be both stable and enduring over time. These values are translated into attitudes (evaluative statements or judgments) that are comprised of cognitive (opinion or belief), affective (emotions/feelings), and behavioral (a bias towards acting a certain way) components. Several researchers in the field (i.e. Elbing XE "Elbing, Alvar" , Koolhaas XE "Koolhaas, Jan" , Festinger) have noted that individuals tend towards consistency between their values, attitudes and behaviors and will seek equilibrium when encountering information that challenges that balance.

For example, a person who has always believed in honesty being the best policy (value), and who hates politicians because he or she thinks that they have to lie and cheat (attitude), and therefore doesn’t vote (behavior), may have their belief system challenged if a highly regarded close friend runs for political office. This will create cognitive dissonance for the individual and he or she may seek equilibrium through the use of defense mechanisms (aggression, withdrawal, fixation, compromise, and denial), which oppose change or actually change his or her attitude and behaviors. The person may then change his or her belief (that not all politicians are bad), change behaviors (go and vote for his or her friend running for office) or may take a defensive position and go as far as withdrawing his or her friendship in order to protect his or her belief system.

A second component to consider is the relationship between the employee and his or her job. Much of the work of employees falls into the category of routine behavior in that there is a prescribed methodology for performing a task in a certain manner. The routinization of work life creates a comfort zone for the employee, that is, the job becomes a habit and is intertwined with other customary behaviors. Even in the cases of non-routine and specialized labor, the work becomes an ingrained part of an employee’s persona to a point where the employee may treat a change in working conditions as a threat to his or her self-identity.

At the group or social level, the group also has values, attitudes, beliefs and behaviors and is comprised of cultures and subcultures. Resistance to change is derived from conformity to group norms and values; informal pressures and sanctions imposed on the individual to fit into the organization’s social order. Any change that is proposed that is contrary to the group’s norms will be rejected by its members although at the individual level each member may see the change as valuable.

The organization’s systems and subsystems are also factors that may hinder change. Organizations are subject to what analysts call inertia, that is, firms will continue to operate in a similar manner (follow the same plan) unless they encounter forces that derail or challenge these processes. Lewin XE "Lewin, Kurt" developed the field of force field analysis in order to model the organizational forces that push for and against change and noted that organizations (as well as people) will take the path of least resistance (the path between the pushing and pulling forces) in reacting to these countervailing forces. See Figure 7.2 below.

Overcoming Resistance through Intervention. The ability of the firm to enact change at the individual level (overcome his or her resistance) is based upon the flexibility or maturity level of that individual (called employee readiness) coupled with the appropriate influences and rewards associated with the employee changing behavior. Barnard noted that for an employee to change, that he or she must understand the nature of the change requested, be mentally and physically able to comply with that change, and believe that the change is in his or her own best interest and in the interest of the firm.

Figure 7.2

Internal and External Forces for Change and

the Path of Least Resistance

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The organization must also deal with the employee’s tendency to act out of habit (routine behaviors protected with affiliated attitudes and values) and conforming to group norms while also addressing the firm’s tendency to follow old methods and utilize current systems (inertia) in solving new problems.

Hence, to overcome resistance to change, the firm must intervene in the day-to-day activities of employees, groups and the organization as a whole in an appropriate manner to reduce resistance to proposed changes and the newly formulated strategies. Such interventions are “sets of structured activities in which selected organizational units (target groups or individuals) … with the goals of organizational improvement and individual development.” Intervention techniques can include coaching and counseling, skills development, work redesign, structural and cultural changes, and sensitivity training. We will describe these further in detail in the next chapter.

However, one can make the decision to intervene into organizational activities without preparing the firm for change (see Figure 1.3 The Integration of Strategic Management and Organization Development). As we discussed in Chapter 1, the firm must actively take steps to prepare the organization for change prior to both the formulation and implementation of a strategic plan. The first step, unfreezing, requires that the firm determine the competencies, values, motivations, and attitudes of its employees and determine their readiness for change. If the employees are not ready for change, then the firm must invest time, energy and resources to provide a safety net for employees who may feel uneasy about the change, or worse cannot change. This readiness must include the employees’ understanding of the need for the firm to change its strategy and how it currently does business. This understanding requires that the firm be open and honest with employees about the current state of the organization’s situation (this usually includes financial data and the general state of the industry), sharing as much information as possible, and enlisting employees as active participants in the change.

The second step of overcoming resistance to change involves first performing a SWOT analysis and then the sharing of the findings and as much support data as possible. This also includes showing how the proposed changes developed from the SWOT analysis impact the firm, and that theses changes are both desirable and possible. The purpose then of the intervention techniques is to help move the firm from its current path to a new course of action and to allow employees to become part of the change process (be part of the solution and not the problem) as demonstrated in Figure 7.3 below.

Emphasis in the moving process is on empowering employees and sharing with them the new strategy and the allied vision of the firm. The final step, refreezing, requires asking whether the changes made by the firm occurred and did the expected results from those changes also take place. We will present and discuss the assessment and evaluation of the strategic plan in Chapter 9 and includes a determination as to whether the firm’s performance has changed as per set goals and objectives.

Figure 7.3

Organization Interventions: Resistance and Forces for Change

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Implementation as a Learning Process

The fundamental underpinnings to overcoming resistance and creating change is that in order for employees, groups, and systems to change, the firm must provide employees with adequate information to persuade them that change is warranted and required. The nature of any intervention is educational in nature, that is, managers need to create a learning environment by employing what is called an action research approach to strategic implementation and therein teach employees problem-solving skills.

As we suggested in Chapter 1, strategy implementation is double-loop learning. It is defined as organizations becoming expert at learning how to learn by developing and nurturing a community of learners. This viewpoint has two common elements: education as a social and socializing function as well as a shift in emphasis from telling to learning thereby changing the manager’s role from autocrat to coach and fellow learner. Firms need to create an egalitarian community of learners, where the employees and management share information, expertise and resources in order to solve common problems. Yet this begs the question as to what is the nature of learning.

Learning and Motivation. Central to the learning process is the motivation that drives the employee to learn. Considered a general motivator (unlearned but psychologically-based), curiosity and the drive for competency is considered a core component of human existence. Employees’ desires to learn may be driven by a combination of intrinsic motivators (personal satisfaction derived from achievement and self-recognition) and/or extrinsic motivators (learning leads to better performance which in turns leads to higher pay and bonuses).

Regardless of the particular motivator at work, for employees to want to learn they have to have an unmet desire or a specific need that they then translate into a certain set of actions or drives and directed them towards a goal which will satisfy that specific need. These drives are modified by the employee’s expectation of reaching the desired goal (by learning this will I achieve my objective?), the desirability of that goal, and the consequences or rewards associated with obtaining that goal (what do I get if I learn this?). This may be disheartening for employers who send employees to off-site training and educational programs without ensuring that some form of reward is in place for these actions, whether the rewards are intrinsic or extrinsic. Learning will not occur unless there is a clear connection for the employee between effort (working hard), performance (demonstrated learning) and outcomes (rewards).

Employee needs. Needs are unique to each learner. However, they can be categorized by the type of need that drives them. The most basic theory of human motivation which most business students are familiar with, Maslow XE "Maslow, Abraham H." ’s Hierarchy of Needs Theory, seems to be an appropriate vehicle for providing a general description for the differing types of needs of the learner.

In our discussion here of strategy implementation, we present Maslow XE "Maslow, Abraham H." ’s theory in a slightly modified fashion in that we see motivation as not necessarily a hierarchy (higher level needs versus lower level needs), where individuals must satisfy lower level needs in order to become motivated by higher level needs. Research evidence contradicts the hierarchical nature of human needs in that it indicates that multiple needs can exist simultaneously and that these needs may turn into motivational drives (actions taken to reduce a need) as stirred by situational factors. Rather, we envision needs as forming a series of concentric circles where the more external rings represent those needs that are satisfied through external stimuli or resources (i.e. bonuses, promotions) and the more internal rings represent those needs satisfied through personal growth and development. This approach to human needs fuses the concept of locus of control with needs theory, that is, that as individuals begin to view their lives from being controlled by externalities (forces they cannot control) to being controlled by themselves (internal locus), they are then moving from what Maslow would call lower level needs to higher level needs.

Planning, Learning and Organizational Competency. Strategic plans, and the firm, must provide for an environment where employees (based upon their individualized needs) can satisfy their needs and become responsible for their own self-development and learning. Various employees have diverse needs and differing loci of control and implementation plans must be flexible enough to accommodate those differences and employees’ ability to manage their own learning processes. Managers need to act as guides to assist employees become better learners and become more proactive in the learning process.

A firm’s vision and mission needs to clearly indicate the role that employee development and employee needs play in the formulation and implementation of the firm’s strategy. This includes addressing issues of employee empowerment, a focus on employee development and growth, and the sharing of information and ideas. Learning must consequently occur at the more macro, organizational level. As Wick XE "Wick, Calhoun W." and Leon XE "Leon, Lu Stanton" point out, the learning organization must have a leader with vision, a detailed, measurable strategic plan, rapid sharing of information, inventiveness, and the ability to take action.

Building a learning organization is also about acquiring knowledge from the external environment and bringing it into the organization to be used to adapt and make changes. This results in a circular process whereby information is constantly fed into organizational processes. The successful firm constantly has its organizational ear to the ground. Only by developing learning organizations that use the knowledge they acquire can organizations continue to adapt and respond to their changing environment.

Learning has been taken so seriously in the business sector that the Corporate University idea as an important strategic development platform has taken a firm hold with more than 1,600 corporate universities. For many companies, the move to a CU model is a direct reflection of the escalating intellectual challenge that they face not only in scientific innovation and technological development but in their overall business. Some CUs are much more radical in their approach, involving the introduction of more diverse dynamic management programs and explicit intellectual cultures across broad areas of their organization.

Implementation As an Internal Alignment and External Adaptation Process

The concept of organizational adaptation is based upon the fundamental tenets of systems theory and human evolution; firms (top management), like people, strive to survive by altering parts of the organization so as to better mesh with the marketplace. The central theme in most of the literature on strategy implementation until recently focused less on organizational change, intervention, or learning and far more on organizational adaptation and fit within the marketplace. The premise, which has been supported by research, is that the better the fit the better the organization’s performance.

The Micro Level. Adaptation occurs at differing levels of organizational analysis. At the micro or individual level, adaptation refers to the ability of employees to align their personal belief systems, attitudes and behaviors with the culture of the firm. Adaptation also refers to employees’ capabilities to perform their jobs effectively. Culture and task performance are viewed as intervening factors between the employee and the external environment with the leadership of the firm charged with the function of creating a culture and placing or training employees that can best service the needs of the market.

The Macro Level. The majority of the literature on adaptation or fit seems to deal with more macro issues of how well subsystems or the organization as a whole fits with the marketplace. Here the focus is on the relationship between the firm (including its subsystems), the firm’s strategy, and the external environment where the firm’s performance is a function of how well these factors are aligned.

Performance = Function (external environment : strategy : internal alignment)

Maximum Performance = (external environment = strategy = internal alignment)

The firm adapts to its situation either by changing the external environment, changing its strategy, or changing its internal alignment, or in some combination.

The macro level can be further broken down into two separate levels of analysis: one dealing with group and inter-group dynamics, the other dealing with structured organizational subsystems (such as structure, culture, mission, etc.). As we suggested earlier, individuals need to align themselves with the norms and values of the group in order to facilitate change. Groups must also align their internal processes (values, structure, leadership, interactions, tasks, sentiments) with the firm’s goals and objectives.

Team cohesiveness or internal social alignment is not necessarily a strong attribute and a compulsory condition for implementing change since groups are quite susceptible to the phenomenon known as "groupthink." Groupthink refers to situations where cohesive groups act superior, exclusive and feel invulnerable. The group shuts off divergent opinion through social and political pressure and ignores information and requests from outsiders, it purposefully misaligns itself with other groups and the organization. Groupthink can become a major impediment to strategy implementation if the group decides that a plan is not in the best interest of the group or its individual members.

The term inter-group changes refers to the alignment of reporting relations between various operating units within the firm. Implementing strategic plans at the inter-team level is dependent upon the ability of differing organizational units to adapt to one another. Brown suggested that in many cases, there is structural conflict due to task interdependence that requires the acclimatization of each group to the other group’s differing cultures, missions and values. For example, many sales departments do not work well with finance, production, and engineering departments since sales people are driven by a strong need for self-esteem and affiliation and tend to be both outgoing and charismatic while accountants, engineers, and production supervisors are driven more by achievement and tend to be more sedate and contemplative.

Brown also noted that, like cohesiveness, it is the level of conflict between these groups that will determine whether the outcomes of these interactions are productive or not. Too much conflict will result in poor decision-making and deterioration of future relations while too little conflict will result in either no decisions being made (or made by default) or decisions made on little information. Appropriate levels of conflict can lead to bargaining and problem solving.

Organizational subsystems are a set of tightly and/or loosely connected components that comprise the inner workings of the organization. They include the organization's hierarchical structure, strategy, task/technology and reward systems, shared values and culture, skills and distinctive competencies, leadership style, and staff (human resources), as suggested in Figure 7-4 below. Some of these subsystems may be tightly connected while others are loosely coupled and misaligned. Tightly connected subsystems reinforce the organization's operation and maintain a dynamic equilibrium while loosely connected subsystems produce organizational dissonance and disconnects. Here, implementation is a function of relative fit of the pieces in the subsystem. Notice that the center or nucleus of the firm’s subsystems is its core shared values. The effectiveness of a firm is dependent upon the relative alignment between the subsystems with the core values of the business.

For example, a firm which possesses core values of risk-taking and innovation (such as Chrysler Corporation) but hires top level staff with predominately risk-averse backgrounds (Daimler’s efficiency orientation) will find that these executives will either adapt more

Figure 7-4

Well Aligned Subsystems: The 7 S Framework

image4

entrepreneurial values (tighten the linkage through employee acclimatization and assimilation), try to change the firm’s value system (tighten linkage through a shift in the mission and vision of the firm), or leave the firm (linkage remain loose). The point here is that subsystems need to be linked in such a fashion so that a cause and effect chain develops based upon the relative strength of the linkages in the subsystems. This cause and effect phenomenon is critical in understanding strategy implementation and alignment at the subsystem level in the short run (i.e. why Daimler Chrysler’s merger was unsuccessful for the first few years).

However, it is possible that subsystems are so loosely coupled or completely disconnected so that a change in one subsystem has little or no impact on the other; adaptation does not occur. If Daimler Chrysler’s shift in values from being proactive and entrepreneurial to being more efficiency-driven in no way affected the employee compensation and reward system at the Chrysler Division, then employees (especially the sales staff) were still being rewarded for pushing product rather than making a better and more cost effective automobile. In Kerr XE "Kerr, Steven" ’s words, Daimler Chrysler would be “rewarding A while hoping for B” and therefore not properly implementing the firm’s strategic plan.

Alignment of the firm’s subsystems is also important for understanding the dynamics of the implementation of a strategic plan as a moderate run, perhaps six months to approximately three years. It is a mistake to expect that all subsystems would be perfectly aligned and that perfectly aligned systems would remain so. Internal misalignments are normally cause by either changes in the external environment (political, social, economic, technological, and competitive position) that impact subsystems or internal changes meant to implement strategy and/or realign subsystems.

Clearly in Chrysler’s situation, numerous subsystems (leadership style, shared values, staffing, strategy, and skills) were impacted by the change in the firm’s ownership structure and Chrysler’s shrinking competitive position. Fortunately, most misalignments will realign themselves through the path of least resistance. Again, going back to the Chrysler case, it took several years for Chrysler to turn around its profitability as well as for the employees to accept the new ownership arrangements. Deliberate realignments (what we have called interventions) require planning, resources, time and energy on the part of the top management and arguably could have made implementation of the merger more successful more quickly.

Strategy implementation and change in the long run (three years or more) is impacted by which of the subsystems acts as the driving force for the organization and the relative flexibility of each of the subsystems. A driving force is defined as the subsystem or subsystems that steer a firm and in many cases may be its core values. In the Chrysler case, the driving forces were the merger strategy and its change in structure.

The second factor determining the ability to adjust to market changes in the long run is the comparative flexibility of each of the subsystems. Chrysler’s core values (arguably a strength under the leadership of Lee Iaocca) were entrenched and inflexible and it was quite predictable that many employees would resist change in those values as reflected by Chrysler’s top leaders. Daimler’s intervention, so-to-speak, was to clean house of top management and bring in their own executives who possessed Daimler’s core values. This approach met great opposition resulting in the lag time between the actual physical merger and the change in corporate values.

The Ecological/Environmental Level. A third perspective of implementation as adaptation is best represented by the notion of collective fit where the firm has no choice but to implement strategies that are imposed by the marketplace, or at least their industry or market segment. Firms must adapt, perhaps through benchmarking, the best practices of the most successful competitors in their industry or strategic business grouping because to do otherwise would be inefficient and foolish. Following the leaders of the herd is the only safe recourse for survival and profitability.

A less extreme interpretation of this approach identifies stakeholders in the marketplace who control certain resources that the firm requires in order to properly operate and a dependency exists between the firm and these stakeholders. The strategy formulation process addresses these stakeholders through SWOT and industry analyses and may implementing strategies that alter the firm's reliance by creating greater interdependencies between the business and its key stakeholders. For example, the firm might absorb or form joint ventures with competitors, and create strategic alliances and network organizations. This version of adaptation at the ecological level requires that the affected internal and external stakeholders be included in the implementation process; that their interests be co-opted by assuming key roles in the firm’s change. This usually involves the development of roles, structures and mechanisms needed to coordinate the efforts of multiple organizations and the differing players who represent those organizations' interests.

Synthesis: The Strategy Implementation Process

Given these varying definitions of strategy implementation, one is left asking whether strategy implementation is worth trying to define beyond making strategy happen. Yet, from our perspective, we see the emergence from the literature on implementation theory a model that is not overly dissimilar to the unfreezing, moving, refreezing change model proposed by Kurt Lewin XE "Lewin, Kurt" and refined by Edgar Schein XE "Schein, Edgar" .

Strategy as Fit. We believe that the goal of strategy implementation is the execution of a strategic plan that produces a better fit between the firm, its internal processes, and its external environment. Adaptation or fit is then the goal of any strategic plan (assuming that a better fit produces greater organizational effectiveness and therein higher profits) with the understanding that the actions that the firm takes in implementing the strategic plan should better align the firm’s internal systems with its market. Fit is achieved by:

1. Matching the basic structure and management processes to the selected strategy.

2. Simplifying the operations (because of the fit) leading to pervasive comprehension that strengthens and maintains fit.

3. Simplicity - minimizes the need for coordinating mechanisms therefore freeing up resources (employee time, communication, and equipment).

Early fit is the discovery and articulation of a new organization form that like IBM, Hewlett-Packard, General Motors, and Carnegie Steel were able to sustain their competitive advantage because they adopted new organizational structures (functional, divisional, matrix, dynamic network) that best fit their related industry. Fit changes over time. All organizations may fall out of fit given changing market conditions, strategic shifts, or internal reorganization. For instance, when Volkswagen discontinued the Beetle line of cars, they accidentally misaligned their strategy with their marketplace. Barnes and Noble developed a web site for ordering their products and services (a new structure) to be more aligned with consumer demands for on-line ordering. (Amazon.com achieved an early fit).

How does the firm then strive for the goal of perfect fit? What is then the strategy implementation process? Fit can be achieved by the firm’s leadership:

1. learning about the organization’s situation

2. preparing the firm for change by sharing this information and educating employees and key stakeholders

3. empowering employees and key stakeholders thereby overcoming resistance by developing strategic plans with employee and key stakeholder input

4. using the strategic plan to intervene in the firm’s current operation and change its direction (if needed)

5. educating and empowering employees to change themselves, their groups, subsystems, the organization as a whole, and their relationships with key stakeholders

6. providing feedback to employees, groups, and stakeholders as to the progress being made in executing the plan.

The success of implementing a firm’s strategy is embedded in how well the firm first formulates the strategic plan as well as how the firm monitors and reacts to the plan as it unfolds over time (which we will develop in Chapter 9). The strategic management process then, although depicted as a linear, rational, step-wise model, has many overlapping functions and activities. Several authors, most prominently Henry Mintzberg XE "Mintzberg, Henry" , have noted that “the assumption in other texts is that strategy is formulated and then implemented … in reality, formulation and implementation are intertwined as complex interactive processes…”.

It could then in fact be argued that, like the subsystems in a firm, strategy formulation, implementation and control processes are far more organic in nature and are coupled (either loosely or tightly) within the firm. The more aligned and tightly coupled these processes are, the more successful firms will be in having an effective strategic management process. We have depicted in Figure 7.4A below the implementation process as bridging strategy formulation and control. Note that certain functions of the implementation process (learning, empowerment, overcoming resistance) must occur during strategy formulation, that the empowerment and evaluation and feedback, although considered part of the control phase of strategy, is critical to ensure proper strategy implementation.

Figure 7.4A

The Strategy Implementation Process
image5 education continue during the intervention and the change/realignment (and represent the heart of the implementation functions). Likewise,

Key Implementation Elements
When top management intervenes within a firm there are usually several organizational elements that the firm changes in order to align its internal processes and adapt to the environment. Besides strategy, which we have discussed at length in the seven previous chapters, firms usually modify their structure, culture, and leadership in order to create a fit with the marketplace. This prior comment in no way reduces the importance of the organization’s competencies (skills), its human resources (staff), and its compensation system (reward systems).

In Chapter 1 we explained the importance of developing a learning organization as a crucial component of strategic management. The learning organization is necessary for the organization to develop distinctive competencies and to share and process vital information. The firm must also pay particular attention to its human resource management practices to ensure: that there is enough staff to meet strategic objectives, that the staff has the required skills and abilities for performing current and future jobs, that the staff is properly compensated and that the compensation system reinforces desired behaviors, and that information is available to assess and evaluate employee performance. The human resource department can support the strategic management process through environmental scanning and competitive intelligence, assessing the feasibility of the plan, and providing the firm with lead time for dealing with labor shortages and surpluses through the use of temporary and contingent employees. The HRM function is explained in Chapter 4 within the discussion of the Functional Analysis of the firm.

Organizational Structure

Organizational structure is the formal framework by which job tasks are divided, grouped, and coordinated. The activities of organizational design are seen in the developing or changing the structure by manipulating six key elements: work specialization, departmentalization, chain of command, span of control, centralization and decentralization, and formalization. The managerial challenge is to design an organizational structure that facilitates effective and efficient work as employees strive to achieve organizational goals in light of the strategy of the firm. Structural differences among organizations arise from differences in four contingency variables: strategy, size, technology and uncertainty with the combination of these contingencies resulting in one of two generic organization designs - mechanistic or organic.

Mechanistic organizations are rigid, integrated, and tightly controlled. These efficiency machines create standardization through work specialization, have extensive departmentalization that creates the need for multiple layers of management with high formalization and narrow spans of control. Communication is mostly downward with little opportunity for participation in decision-making by low-level employees. Organic organizations are adaptive, differentiated, and flexible. While jobs are not standardized, there is division of labor. Employees, usually working in teams are empowered to handle diverse job-related problems. They require little direct supervision, minimizing the degree of formalization. Which generic design an organization adopts depends on the following contingency variables.

Size. While larger organizations tend to have more hierarchical structures, the relationship is not linear. Once an organization reaches a certain size, 2000 employees for instance, adding more workers will not drastically impact the structure. However, if the firm has 200 employees and adds 500, then design changes would be necessary.

Technology. Every organizational system uses some kind of technology to process its inputs into outputs. Woodward's work with manufacturing firms suggests that there is no one, best structure. In general, the more routine the technology, the more standardized the structure. However, whether manufacturing involves unit production (small batches of product such as tailor-made suits), mass production (large batch manufacturing such as automobiles) or process production (continuous process producers such as oil refineries), the most successful organizations achieve fit between technology and structure.
Environmental Uncertainty. Uncertainty defines the relative stability or predictability of the environment as it relates to the organization's ability to predict current and future events in the marketplace. The scarcer the resources and the more dynamic and complex the environment, the uncertainty is higher, and the greater the need to have adaptable organizational design. In stable environments with available resources, mechanistic designs are most effective.
Traditional Organizational Structures (Mechanistic). These structures represent the early forms of organization and are mostly associated with agrarian and industrial economies since they tend to create departments around formalized division of labor. Power and authority tend to be centralized in these organizations through a formal chain of command and a narrow span of control

Simple Structure. Entrepreneurial, small business, and agrarian firms usually adopt simple structures that are relatively 'flat' with an informal arrangement of employees. These have a wide span of control, and centralization of decision-making authority - the owner. Employees tend to be generalists and perform many of the tasks required in the firm’s operation. Its strength is in its flexibility, low expense, and accountability. Its weakness is its inability to remain effective as the organization grows. Decision-making can come to a standstill when a person has sole authority. It is also risky in that everything depends on that single individual. If anything happens to the entrepreneur or owner, the decision-making center and all information is lost. See Figure 7.5.
Figure 7.5

Simple Structure (Retail Store)

image6

As organizations grow, they need to add employees to meet the requirements of conducting business. As the number of employees increases, the structure tends to become more specialized, formalized, departmentalized, or increasingly, bureaucratic. These mechanistic style designs can take on one of two forms:
Functional structures group similar or related occupational specialties together. Economy is achieved through specialization with the firm capitalizing on its internal distinctive competencies. However, the organization risks losing sight of its overall interests as different departments pursue their own goals and accountability is solely at the top. Information flows up the chain of command while decisions flow top-down. Coordination between departments however is quite difficult and Bennis argued that since these structures have generalists managing specialists that their competitive advantages get lost in higher levels of administration. Note that if the CEO were to leave the firm, or be fired by the Board of Directors, that there is no logical replacement for the CEO since no other manager in the firm has a broad-based, multifunctional perspective. Under each Vice-President would be more specialized departments. For example, reporting to the V.P. of Marketing could be department heads for market research, product development, advertising and promotion, sales, and distribution. See Figure 7.6.

Figure 7.6

Departmentation by Function

image7

Divisional structures (also known as departmentalization by product, geography or product line) are made up of semi-autonomous units. Division managers create and implement strategic plans. However, a central headquarters typically acts as an overseer to coordinate and control the activities and provide support services between divisions. Divisional structures focus on results. A weakness, however, is the tendency to duplicate activities among divisions as well as for Divisions to offer competing products and services. For instance, General Motors has many divisions such as Chevrolet, Pontiac, Buick, Oldsmobile, Saturn, Hummer, and Cadillac. Each has its own design teams, advertising campaigns, human resource functions, and product lines. While design sets these automobiles apart and contributes to the products' success, human resource functions are not as differentiated. Furthermore, each Division may produce and sell vehicles that may or may not compete with other Division’s of GM. For example, Buick, Oldsmobile, and Cadillac sell luxury vehicles; GMC, Chevrolet and Hummer sell trucks/SUV’s; and Chevrolet, Pontiac, and Saturn sell small to mid-sized vehicles.

Reporting to the product, geographic or divisional managers would be the department heads in charge of the key functional aspects of the firm (personnel, operations, finance and marketing) who act in a similar manner to their counterparts in other Divisions. See Figure 7.7.

Figure 7.7

Departmentation by Product

image8

Contemporary Organizational Design (Organic). Bureaucracies are mechanistic designs that function most effectively in stable environments. Their cumbersome design makes it difficult for them to be responsive in dynamic environments where speed and flexibility often determine market performance. Current business forecasts indicate increasing trends in uncertainty resulting from globalization, hyper-competition, and resource scarcity. Thus, managers are redesigning their organizations to be more organic and capable of changing quickly as the environment demands.

Matrix structures. Matrix structures capture the advantages of bureaucracies while eliminating their disadvantages by assigning specialists from functional departments to work on one or more projects led by a project manager. By interlacing elements of function and product departmentalization, greater project coordination and flexibility are achieved. The exclusive feature of this structure is that employees in this structure have two bosses - their functional manager and their project or product manager. The major drawback to this structure is that it institutionalizes conflict. The two-boss manager is in the middle of a potential power struggle between the functional and product bosses. See Figure 7.8.

Figure 7.8

Matrix Structure

image9.wmf
Functional V.P.'s

Product Managers

Product A

Marketing

Product A

Operations

Product A

Finance

Product A

Personnel

President

Note that, as compared to the departmentalization by product, product managers are elevated to the same level as functional vice-presidents, however, in return for their higher status they must share authority over their subordinates with these vice-presidents.

Team-based structures and Strategic Business Units. This organizational design breaks the entire organization down into work teams and/or separate firms that perform all of the basic functions of the organization within their organizational unit. Normally called cross-functional work teams or self-contained units, the strengths of these groups lie in their ability to immediately react to the demands of the marketplace without having to refer key organizational decisions up a hierarchical chain. By allowing those closest to the problem to make critical decisions, the organization takes advantage of employee skills and expertise in a quick and reliable fashion. The downside to this structure is the greater need for information processing systems that allow for intra and inter-team planning and communications. Strategic business units (SBU’s) in particular make it easy to manage the firm from a portfolio perspective where one can add or delete businesses from the conglomerate since there is little shared operations and/or expertise between units. Each unit can be separately structured to meet the needs of the market. See Figure 7.9

Figure 7.9

A Conglomerate Structure: The Altria Group, Inc.

image10

* As of January 27, 2003 (http://www.philipmorris.com/)

Boundaryless organizations. Also known as network organizations, virtual corporations, or learning organizations, this design breaks the mold of traditional organizational design by assembling a set of loosely coupled organizations that possess complementary distinctive competencies. These organizations are assembled and reassembled to maximize the organization's ability to create as well as adapt to changing competitive conditions. The pooling of economic, technological, and human resources produces a synergy among network members and allows them to better compete in markets requiring expertise beyond each member's separate skill capacity.

Cross-functional teams within the organization are therefore replaced by a network broker organization that brings together specialist organizations that act as product designers, producers, marketing/ distributors, and suppliers. Members are deleted from and added to the network as needed, providing the network the flexibility needed to compete in volatile markets. Individual members also have the freedom to pursue interests outside of the network while remaining a member. See Figure 7.10.

Growth: Evolution and Revolution of Organizational Structures. An alternative approach to situational structuring (the environment and the strategy should determine the structure) is that approach posited by those who believe that organizations follow a clear pattern, a life cycle, in their expansion and development. The stage of

Figure 7.10

Network Organizations

image11

a firm’s growth is therefore the key contingency variable in determining its structure. Greiner XE "Greiner, Larry E." noted that organizations have evolutionary and revolutionary growth spurts (or cycles) based upon the age of the organization, its size, its evolutionary stage and the growth rate of the industry and therefore a firm’s structure evolves over time. Greiner developed a five phase model of organizational growth where evolutionary periods are characterized by a dominant management style and revolutionary periods denoted by a dominant management problem or crisis. The crisis points are directly related to the prior management style with the solution strategy being the next managerial style (organizational phase) followed by a new structure. Again, fit is attained through this model by firms adapting an organizational structure that best matches their growth phase.

Phase 1, creativity, signifies the birth of an organization with the focus on creating both a product and a market. The leadership of the company is focused upon technological and/or entrepreneurial ventures and perceives that their main task is making and selling of new products and services. A leadership crisis arises as the company grows in that the informal style of leadership is not capable of properly directing the new employees. A more formalized approach that emphasizes operating efficiency and financial controls is needed in order for the organization to survive its first growth spurt.

In phase 2, direction, a functional organizational structure replaces the more simple reporting arrangement with the key functional area managers (marketing, manufacturing, R&D, etc.) taking over responsibility and providing expert direction. Simultaneously, more formalized managerial systems are introduced (rules, policies, procedures) with incentives and work standards adopted by the company. A crisis of autonomy develops in that, as the company grows and the organization becomes more complex, lower level workers find that they lack the authority to make on-the-spot decisions although they have the expertise and knowledge in which to make an informed judgment. The centralized system developed in phase 2 cannot respond quickly enough to market demands and the organization stalls without another revolution.

Delegation earmarks phase 3 and denotes a more decentralized organizational structure (departmentalization by geography, division, or by product). Lower level managers are given greater responsibility and reward systems are developed to stimulate decision-making. These managers are able to respond more rapidly to market changes and therefore can develop new products which are more aligned with customer needs. As the company grows, however, higher level managers feel the company slipping away and find that regional/ product managers fail to see the big picture in terms of company operations.

Phase 4, brought upon by a control crisis by top management, is distinguished by greater top management coordination through formalized control systems. Decentralized units are merged into product groups and treated as profit centers in terms of allotting funds and human resources. Staff personnel are hired at the corporate level and manage technical functions including data processing and information systems. Day-to-day operations continue to be directed by field managers who must justify their actions to corporate staff managers. The propagation of these control systems, coupled with the increasing tension between corporate staff and field managers, leads to a red tape crisis. The organization has become overly complex and cumbersome where following procedures and rules becomes more important than problem solving.

Collaboration, phase 5, focuses on increasing interpersonal communications and team building. Cross-functional teams are created to solve problems while formal systems are simplified in order to allow for quicker response time. Real-time information is coupled with intensive training and development so that managers have the skills and the information support systems in which to test new management procedures. Greiner XE "Greiner, Larry E." hypothesizes that the next crisis would be psychological saturation where the intensity of team work and innovation negatively impacts employees mentally and physically.

Although not foreseen by Greiner XE "Greiner, Larry E." , networking and outsourcing seems to be the next phase of an organization's evolution where organizations no longer keep all of the organization's functions in-house. Network organizations are a set of loosely coupled organizations that possess complimentary distinctive competencies. It is hypothesized by the authors that the network structure would eventually lead to an identity crisis. The organization's mission and culture, the distinctive features of the organization, seem to take on secondary importance as the organization tries to accommodate new network members or assimilate into new network relationships. The organization becomes so embroiled in numerous network members' structures and cultures that the boundaries of the organization seem to disappear.

The following organizational phase would involve a redefinition of the organization to include a more externally based, stakeholder-driven approach through co-optation. Organizations seek to assimilate suppliers, consumers, competitors, regulators, labor unions, etc. so as to control resources (and therein costs) and/or develop in-house distinctive competencies.

Organizational Structure and Fit. Galbraith XE "Galbraith, Jay R." and Kazanjian XE "Robert K. Kazanjian" have proposed several guidelines for creating fit between strategy, structure and environment that seems to fit in well with the organizational life cycle approach.

a) Single-business and dominant-business companies should adopt a functional organizational structure especially in stable markets. This structure emphasizes specialization and operating efficiencies while centralizing control and decision-making.

b) Related diversified organizations, especially in stable environments, should employ a multidivisional form. Interrelated businesses should be grouped to take advantage of operational and competency synergy. Corporate control should be minimized where synergy exists and where diversity across business units is high.

c) Unrelated diversified businesses, whether in stable or unstable environments, should utilize a holding company (conglomerate) structure. Functions such as finance, accounting, planning, legal, etc. should be controlled at the corporate level where the staff acts to allocate capital and control corporate performance re: acquisitions and divestitures. Operational decisions are decentralized within the business unit.