How can policies and procedures facilitate good strategy execution

Design A Plan To Implement A Business Strategy Throughout An Organization

MT460-5: Design a plan to implement a business strategy throughout an organization.

Designing and developing a business report has become an essential skill for professionals to master. In this Assignment, your business report will contain a company analysis of resources to aid in the implementation and execution of strategy. Your research, organization, planning, and critical thinking abilities will be critical in the development of your business report and execution of the Assignment requirements.

Strategists must master the art and science of decision-making.

complete this Assignment, by analyze Case Study #3 Amazon’s Retail Revolution Business Boomers analyze and develop your business report:

Step 1: Explore the templates within MS Word that can be used to develop your Assignment (search for business report templates). You may choose to design your own business report without a template if you wish. Additional business report templates can be found in the supplemental resources spreadsheet to aid you in the design elements of this project. Use desktop publishing skills to professionally design your business report.

Step 2: Provide a brief synopsis of the company from your chosen case study or your employer (if approved by your professor). Include the company name, industry sector, products, target market, and any other pertinent background information.

Step 3: Identify and explain at least three of the company’s strategic priorities as indicated in business documentation. If none exist, you must create them by analyzing the business situation and using strategic management and leadership abilities.

Write a broad statement of what is to be accomplished in relation to each identified strategic priority. Be specific.

Indicate how the accomplishment of each strategic initiative is monitored and measured.

Identify by job title, the people that are accountable for the success of the strategic priorities that provide direction for the work that needs to be done, and who monitors progress and how progress is monitored.

Step 4: Analyze and explain the allocation of resources (financial, labor, capital assets, time, supplies, etc.) within the company based on strategic priorities. Conduct research on the company to learn more about the allocation of resources as necessary.

Using the 5-W’s and 1-H analysis technique, explain the proper allocation of resources that will help the company reach the identified strategic priorities.

Explain how successful resource allocation is measured to ensure progress is being made. State specific performance and time measurements to determine success.

Identify by job title, the people that are accountable for the success of the allocation of resources that provide direction for the work that needs to be done, and who monitors progress and how progress is monitored.

Step 5: Analyze and explain the value chain activities of the company.

Identify and explain the best practices and process management tools that drive continuous improvement in the performance of value chain activities.

Explain how the company value chain activities help reach the identified strategic priorities.

Indicate how the achievements of value chain activities is monitored and measured.

Identify by job title, the people accountable for the success of the value chain activities that provide direction for the work that needs to be done, and who monitors progress and how progress is monitored.

Step 6: Analyze information and operating systems that enable company personnel to carry out their strategic roles proficiently. Conduct research to identify and make recommendations on information and operating systems that may improve the company’s execution of strategy.

Explain how your recommendations improve efficiencies to reach the identified strategic priorities.

Indicate how the effectiveness and efficiencies of information and operating systems are monitored and measured.

Identify by job title, the people accountable for the success of the information and operating systems that provide direction for the work that needs to be done, and who monitors progress and how progress is monitored.

Step 7: The goal of this implementation plan is to demonstrate your ability to apply effective managerial leadership in achieving superior strategy execution. Aspects of the culture of a company can be fragile and must be monitored at all times to ensure alignment with strategic priorities.

Analyze and explain the key features of the company’s corporate culture.

Analyze and explain the role of the company’s core values and ethical standards in building its culture and why they are important to reaching the identified strategic priorities.

Analyze and explain how the company’s culture drives proficient strategy execution.

Identify explain the use of incentives and rewards that encourage superior performance in reaching the identified strategic priorities.

Indicate how the effectiveness of the company culture is monitored and measured.

Identify by job title, the people accountable for the success of the company culture that will provide direction for the work that needs to be done, and who monitors progress and how progress is monitored.

Step 8: Meet the following format requirements in this Assignment:

Use as many concepts from Chapters 10, 11, and 12 in your textbook to complete this Assignment as possible.

Use a minimum of three academic research resources (including your textbook) to substantiate your thoughts, ideas, opinions, etc.

Outline your business report with headings and subheadings to ensure you include all required topics, and to control the flow of ideas for your reader.

You are the professional and will need to determine how long the business report should be to meet the requirements of this Assignment. You are capable of making such decisions at this level of your degree program. Take the initiative to be the problem solver and strategic decision-maker.

Your business report should be professionally designed using desktop publishing skills.

Building an Organization Capable of Good Strategy Execution People, Capabilities, and Structure © ImageZoo/Alamy Stock Photo 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. page 291 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 incentives 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 conditions and the company’s resources and capabilities, executing strategy is primarily operations-driven, revolving around the management of people, business processes, and organizational structure. Successful 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 outcomes. 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 managerial 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 managers 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 Instituting 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 managerial 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 managerial 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 page 292integrate 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 several years. And executing the strategy with real proficiency 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 officer 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 institute whatever new operating practices are needed in the various operating units to achieve proficient strategy execution. Middle and lower-level managers must ensure that frontline employees perform strategy-critical value chain activities proficiently and produce operating results that allow companywide 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 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. Implementing 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 particular 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. 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. LO 1 What managers must do to execute strategy successfully. 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): Staffing the organization with managers and employees capable of executing the strategy well. Developing the resources and organizational capabilities required for successful strategy execution. Creating a strategy-supportive organizational structure. page 293Allocating sufficient resources (budgetary and otherwise) to the strategy execution effort. Instituting policies and procedures that facilitate strategy execution. Adopting best practices and business processes to drive continuous improvement in strategy execution activities. Installing information and operating systems that enable company personnel to carry out their strategic roles proficiently. Tying rewards and incentives directly to the achievement of strategic and financial targets. Instilling a corporate culture that promotes good strategy execution. Exercising strong leadership to drive the execution process forward and attain companywide operating excellence as rapidly as feasible. When strategies fail, it is often because of poor execution. Strategy execution is therefore a critical managerial endeavor. 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. 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 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 communicating the case for change, building consensus for how to proceed, installing strong managers to move the process forward in key organizational units, directing 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 successful 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 progressing, and deciding how hard and how fast to push the process along. Whether the organization is large or small and whether strategy implementation involves sweeping 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 company personnel in strategy-critical areas to step up to the plate and produce the desired results. page 294 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 performing 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 supportive of the strategy execution process. Chapter 11 concerns the tasks of allocating 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 (highlighted in purple). FIGURE 10.1 The 10 Basic Tasks of the Strategy Execution Process page 295 BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGY EXECUTION: THREE KEY ACTIONS 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: FIGURE 10.2 Building an Organization Capable of Proficient Strategy Execution: Three Key Actions Staffing the organization—putting together a strong management team, and recruiting and retaining employees with the needed experience, technical skills, and intellectual capital. Acquiring, developing, and strengthening the resources and capabilities required for good strategy execution—accumulating the required resources, developing page 296proficiencies in performing strategy-critical value chain activities, and updating the company’s capabilities to match changing market conditions and customer expectations. 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, upgrading, 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. STAFFING THE ORGANIZATION LO 2 Why hiring, training, and retaining the right people constitute a key component of the strategy execution process. No company can hope to perform the activities required for successful strategy execution 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 people, and accomplished in delivering good results.6 The task of implementing challenging 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 managerial ineptness. Weak executives are serious impediments to getting optimal results because they are unable to differentiate between ideas that have merit and those that page 297are 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 company 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 better 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. 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. The overriding aim in building a management team should be to assemble a critical 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 limited) 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 developing 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. 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. page 298 © Mathias Beinling/Alamy Stock Photo Hiring, retaining, and cultivating talent are critical activities at Deloitte, the world’s largest professional services firm. By offering robust learning and development programs, 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 successful 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 competencies and experience required. Deloitte’s transparency on career paths, coupled with its in-depth performance management process, helps employees clearly understand their performance. This serves as a motivational tool for top performers, often leading to career acceleration. Formal training programs. Like other leading organizations, Deloitte has a program to ensure that recent college graduates are equipped with the necessary training and tools for succeeding on the job. Yet Deloitte’s commitment 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 simulation that replicates true business situations employees would face as they transition to new stages of career development. In addition, Deloitte institutes mandatory 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 development. For example, the Global Fellows program helps top performers work with senior leaders in the organization to focus on the realities of delivering client service 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 generation of leaders, Deloitte has implemented formal mentorship 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. 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 programmers 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 leading global accounting firms screen candidates not only on the basis of their accounting page 299expertise 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, imaginative, 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, cultivating, 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. 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. 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: 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 environment and culture. Providing employees with training programs that continue throughout their careers. Offering promising employees challenging, interesting, and skill-stretching assignments. Rotating people through jobs that span functional and geographic boundaries. Providing people with opportunities to gain experience in a variety of international settings is increasingly considered an essential part of career development in multinational companies. Making the work environment stimulating and engaging so that employees will consider the company a great place to work. 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 environment in which employees are made to feel that their views and suggestions count. 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. Coaching average performers to improve their skills and capabilities, while weeding out underperformers. page 300 DEVELOPING AND BUILDING CRITICAL RESOURCES AND CAPABILITIES LO 3 That good strategy execution requires continuously building and upgrading the organization’s resources and capabilities. 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 capabilities 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 capabilities it needs. But getting the strategy execution process underway requires acquiring 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 managers may have to acquire new resources, significantly broaden or deepen certain capabilities, or even add entirely new competencies in order to put the strategic initiatives 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 exercise. 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. 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. With deliberate effort, well-orchestrated organizational actions and continued 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 capabilities 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, spanning a variety of departments and locations. For instance, the capability of speeding new products to market involves the collaborative efforts of personnel in R&D, page 301engineering and design, purchasing, production, marketing, and distribution. Similarly, 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 process 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 A company’s capabilities must be continually refreshed and renewed to remain aligned with changing customer expectations, altered competitive conditions, and new strategic initiatives. As experience grows and company personnel learn how to perform the activities 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 incentives 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 company’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 customers 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 generally take one of two forms: either strengthening the company’s base of skills, knowledge, 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 page 302 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 capabilities.15 An acquisition aimed at building a stronger portfolio of resources and capabilities 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. Capabilities involve tacit knowledge and complex routines that cannot be transferred readily 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 company 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 technology 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: 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. 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 collaborative 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. page 303Engage in a collaborative partnership for the purpose of learning how the partner 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 consequence, 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 strategically 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 knowledge and expertise. Successful strategy implementers see to it that the training function 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 companies 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 employees, 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 certification of one kind or another. A number of companies offer online training courses that are available to employees around the clock. Increasingly, companies are expecting 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 contribute 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 effective strategy execution can lower costs and permit firms to deliver more value to customers. 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 products 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. 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 sustained 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 strategies. In such cases, the only way for firms to achieve lasting competitive advantage 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. page 304 © Andrey Rudakov/Bloomberg via Getty Images 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 competitive advantage is in strategy execution. Every step of Zara’s value chain execution is geared toward putting fashionable clothes in stores quickly, realizing high turnover, 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 responsiveness to market needs, thereby outweighing the additional 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 percent, meaning that up to half of the merchandise to hit stores is designed and manufactured during the season. 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 turnaround 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 purchase 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 expensive 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. 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). page 305 MATCHING ORGANIZATIONAL STRUCTURE TO THE STRATEGY LO 4 What issues to consider in establishing a strategy-supportive organizational structure and organizing the work effort. 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 activities. Moreover, every firm’s organizational chart is partly a product of its particular 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 common to all companies. These are summarized in Figure 10.3 and discussed in the following sections. FIGURE 10.3 Structuring the Work Effort to Promote Successful Strategy Execution A company’s organizational structure should be matched to the particular requirements of implementing the firm’s strategy. 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 page 306of 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 farmers 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: 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. The company improves its chances for outclassing rivals in the performance of strategy-critical activities and turning a competence into a distinctive competence. 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 operation, 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 internal decision making, and shorten the time it takes to respond to changing market 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 capability. 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 systems, 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 page 307cultivate their relationships with their bottlers and distributors to strengthen access to local markets and build loyalty, support, and commitment for corporate marketing 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 customer satisfaction to attract repeat business, a fast-food chain’s sales and competitive 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. © Qilai Shen/Bloomberg via Getty Images 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 creating the look and feel of all Apple products—from the MacBook Air to the iPhone, and beyond to future products. Producing a continuing stream of great new products 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 manufacturing 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 Shenzhen, China) employing over 450,000 workers. Such scale offers companies a significant degree of flexibility, 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. 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). 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 page 308resource 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 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. 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 maneuvering, 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 coordination 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 attractively large number of dealers to stock and promote the company’s brand), and marketing and advertising (building a brand image that generates buzz among ski enthusiasts). For discount stockbrokers, like Scottrade and TD Ameritrade, the strategy-critical activities 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 page 309be 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 specialization; 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. 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. Simple organizational structures are typically employed by small firms and entrepreneurial startups. The simple structure is the most common type of organizational 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. 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. In large organizations, functional structures lighten the load on top management, in comparison to simple structures, and enable more efficient use of managerial 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. 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. page 310 It is generally agreed that a functional structure is the best organizational arrangement 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 instruments manufacturer may be organized around research and development, engineering, supply chain management, assembly, quality control, marketing, and technical services. 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 functional structure designed to promote technical transfer and capture economies of scale. As firms continue to grow, they often become more diversified and complex, placing a greater burden on top management. At some point, the centralized control that characterizes the functional structure becomes a liability, and the advantages of functional specialization begin to break down. To resolve these problems and address a growing need for coordination across functions, firms generally turn to the multidivisional 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 elements of which were described in Chapter 8. Multidivisional structures are also called divisional structures or M-forms, in contrast with U-form (functional) structures. 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. 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 technologies. 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 commonalities in product development and production within each product line. Multidivisional structures are also common among vertically integrated firms. There the major building 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 Putting business-level strategy in the hands of division managers while leaving corporate page 311strategy 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 coordinating division-wide activities while enhancing top management’s ability to control 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 pursuing related diversification, because having independent business units—each running 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., business, 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 reporting 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 division, the head of the southeast sales region, and the head of marketing. 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. Matrix organizational structures have evolved from the complex, over-formalized structures that were popular in the 1960s, 70s, and 80s but often produced 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 employees 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 competitive capabilities in strategically important activities, such as speeding new products 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 flexibility 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 management, 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 page 312 Determining How Much Authority to Delegate LO 5 The pros and cons of centralized and decentralized decision making in implementing the chosen strategy. 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 organizational 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 making 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. TABLE 10.1 Advantages and Disadvantages of Centralized versus Decentralized Decision Making Centralized Organizational Structures ecentralized Organizational Structures Basic tenets 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. 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 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. 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 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. 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. Centralized Decision Making: Pros and Cons  In a highly centralized organizational structure, top executives retain authority for most strategic and operating decisions and keep a page 313tight 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 assumptions 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 prescribed 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 lowest 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