Instilling a corporate culture that promotes good strategy execution

tho75109_ch11_322-345.indd 322 12/13/18 03:14 PM

chapter 11

Managing Internal Operations Actions That Promote Good Strategy Execution

©Roy Scott/Ikon Images/Getty Images

Learning Objectives

This chapter will help you

LO 11-1 Explain why resource allocation should always be based on strategic priorities.

LO 11-2 Explain how well-designed policies and procedures can facilitate good strategy execution.

LO 11-3 Explain how process management tools drive continuous improvement in the performance of value chain activities.

LO 11-4 Describe the role of information systems and operating systems in enabling company personnel to carry out their strategic roles proficiently.

LO 11-5 Explain how and why the use of well-designed incentives can be management’s single most powerful tool for promoting adept strategy execution.

Final PDF to printer

tho75109_ch11_322-345.indd 323 12/13/18 03:14 PM

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

Steve Jobs—Cofounder of Apple, Inc.

Processes underpin business capabilities, and capabilities underpin strategy execution.

Pearl Zhu

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

Robert Bosch—Founder of engineering company Robert Bosch

GmbH

• Instituting policies and procedures that facilitate good strategy execution.

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

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

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

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

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

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

Final PDF to printer

324 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho75109_ch11_322-345.indd 324 12/13/18 03:14 PM

ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT

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

A company’s ability to marshal the resources needed to support new strate- gic initiatives has a major impact on the strategy execution process. Too little funding and an insufficiency of other types of resources slow progress and impede the efforts of organizational units to execute their pieces of the strate- gic plan competently. Too much funding of particular organizational units and value chain activities wastes organizational resources and reduces financial

performance. Both of these scenarios argue for managers to become deeply involved in reviewing budget proposals and directing the proper kinds and amounts of resources to strategy-critical organizational units.

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

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

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

A company’s strategic priori- ties must drive how capital allocations are made and the size of each unit’s oper- ating budgets.

• LO 11-1 Explain why resource allocation should always be based on strategic priorities.

Final PDF to printer

CHAPTER 11 Managing Internal Operations 325

tho75109_ch11_322-345.indd 325 12/13/18 03:14 PM

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

INSTITUTING POLICIES AND PROCEDURES THAT FACILITATE STRATEGY EXECUTION A company’s policies and procedures can either support or hinder good strategy execu- tion. Anytime a company moves to put new strategy elements in place or improve its strategy execution capabilities, some changes in work practices are usually needed. Managers are thus well advised to carefully consider whether existing policies and pro- cedures fully support such changes and to revise or discard those that do not.

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

1. By providing top-down guidance regarding how things need to be done. Policies and procedures provide company personnel with a set of guidelines for how to perform organizational activities, conduct various aspects of operations, solve problems as they arise, and accomplish particular tasks. In essence, they rep- resent a store of organizational or managerial knowledge about efficient and effective ways of doing things—a set of well-honed routines for running the com- pany. They clarify uncertainty about how to proceed in executing strategy and align the actions and behavior of company personnel with the requirements for good strategy execution. Moreover, they place limits on ineffective independent action. When they are well matched with the requirements of the strategy implementation plan, they channel the efforts of individuals along a path that supports the plan. When existing ways of doing things pose a barrier to strategy execution initiatives, actions and behaviors have to be changed. Under these conditions, the managerial role is to establish and enforce new policies and operating practices that are more conducive to executing the strategy appropriately. Policies are a particularly useful way to counteract tendencies for some people to resist change. People generally refrain from violating company policy or going against recommended practices and procedures without gaining clearance or having strong justification.

2. By helping ensure consistency in how execution-critical activities are performed. Policies and procedures serve to standardize the way that activities are performed. This can be important for ensuring the quality and reliability of the strategy execution process. It helps align and coordinate the strategy execution efforts of individuals and groups throughout the organization—a feature that is particularly beneficial

• LO 11-2 Explain how well- designed policies and procedures can facilitate good strategy execution.

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

Final PDF to printer

326 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho75109_ch11_322-345.indd 326 12/13/18 03:14 PM

when there are geographically scattered operating units. For example, eliminating significant differences in the operating practices of different plants, sales regions, or customer service centers or in the individual outlets in a chain operation helps a company deliver consistent product quality and service to customers. Good strat- egy execution nearly always entails an ability to replicate product quality and the caliber of customer service at every location where the company does business— anything less blurs the company’s image and lowers customer satisfaction.

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

To ensure consistency in product quality and service behavior patterns, McDonald’s policy manual spells out detailed procedures that personnel in each McDonald’s unit are expected to observe. For example, “Cooks must turn, never flip, hamburgers. If they haven’t been purchased, Big Macs must be discarded in 10 minutes after being cooked

FIGURE 11.1 How Policies and Procedures Facilitate Good Strategy Execution

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

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

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

Place limits on independent action and help overcome resistance to change

Help enforce consistency in how strategy-critical activities are performed

Improve the quality and reliability of strategy execution

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

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

Well-Conceived Policies

and Procedures

Final PDF to printer

CHAPTER 11 Managing Internal Operations 327

tho75109_ch11_322-345.indd 327 12/13/18 03:14 PM

and French fries in 7 minutes. Cashiers must make eye contact with and smile at every customer.” Retail chain stores and other organizational chains (e.g., hotels, hospitals, child care centers) similarly rely on detailed policies and procedures to ensure consis- tency in their operations and reliable service to their customers. Video game developer Valve Corporation prides itself on a lack of rigid policies and procedures; its 37-page handbook for new employees details how things get done in such an environment—an ironic tribute to the fact that all types of companies need policies.

One of the big policy-making issues concerns what activities need to be strictly prescribed and what activities ought to allow room for independent action on the part of personnel. Few companies need thick policy manuals to prescribe exactly how daily operations are to be conducted. Too much policy can be as obstructive as wrong policy and as confusing as no policy. There is wisdom in a middle approach: Prescribe enough policies to give organization members clear direction and to place reasonable boundaries on their actions; then empower them to act within these boundaries in pursuit of company goals. Allowing company personnel to act with some degree of freedom is especially appropriate when individual creativity and initiative are more essential to good strategy execution than are standardization and strict con- formity. Instituting policies that facilitate strategy execution can therefore mean policies more policies, fewer policies, or different policies. It can mean policies that require things be done according to a precisely defined standard or policies that give employees substantial leeway to do activities the way they think best.

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

• LO 11-3 Explain how process management tools drive continuous improvement in the performance of value chain activities.

Company managers can significantly advance the cause of competent strategy execu- tion by using business process management tools to drive continuous improvement in how internal operations are conducted. Process management tools are used to model, control, measure, and optimize a variety of organizational activities that may span departments, functions, value chain systems, employees, customers, suppliers, and other partners in support of company goals. They also provide corrective feedback, allowing managers to change and improve company operations in an ongoing manner.

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

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

EMPLOYING BUSINESS PROCESS MANAGEMENT TOOLS

Final PDF to printer

328 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho75109_ch11_322-345.indd 328 12/13/18 03:14 PM

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

To address the suboptimal performance problems that can arise from this type of situation, a company can reengineer the work effort, pulling the pieces of an activ- ity out of different departments and creating a cross-functional work group or single department (often called a process department) to take charge of the whole process. The use of cross-functional teams has been popularized by the practice of business process reengineering, which involves radically redesigning and streamlining the workflow (typically enabled by cutting-edge use of online technology and infor- mation systems), with the goal of achieving quantum gains in performance of the activity.1

The reengineering of value chain activities has been undertaken at many compa- nies in many industries all over the world, with excellent results being achieved at some firms.2 Hallmark reengineered its process for developing new greeting cards, creating teams of mixed-occupation personnel (artists, writers, lithographers, merchandisers, and administrators) to work on a single holiday or greeting card theme. The reengi- neered process speeded development times for new lines of greeting cards by up to 24 months, reduced costs, and increased customer satisfaction.3 In the order-processing section of General Electric’s circuit breaker division, elapsed time from order receipt to delivery was cut from three weeks to three days by consolidating six production units into one, reducing a variety of former inventory and handling steps, automating the design system to replace a human custom-design process, and cutting the organi- zational layers between managers and workers from three to one. Productivity rose 20 percent in one year, and unit manufacturing costs dropped 30 percent. In the health care industry, business process reengineering is being used to lower health care costs and improve patient outcomes in a variety of ways. South Africa is attempting to reen- gineer its primary health care system, which is in need of significant reform. Similar initiatives are ongoing in India. In the United States, exemplary health care providers, such Mayo Clinic, are using reengineering tools on a continuous basis to achieve out- comes such as fewer hospitalizations, improved patient–physician interactions, and the delivery of lower cost health care.

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

Total Quality Management Programs Total quality management (TQM) is a management approach that emphasizes continuous improvement in all phases of operations, 100 percent accuracy in performing tasks, involvement and empow- erment of employees at all levels, team-based work design, benchmarking, and total customer satisfaction.4 While TQM concentrates on producing quality goods and fully satisfying customer expectations, it achieves its biggest successes when it is extended to employee efforts in all departments—human resources, billing, accounting, and information systems—that may lack pressing, customer-driven incentives to improve. It involves reforming the corporate culture and shifting to a continuous-improvement business philosophy that permeates every facet of the

CORE CONCEPT Business process reengi- neering involves radically redesigning and streamlin- ing how an activity is per- formed, with the intent of achieving quantum improve- ments in performance.

CORE CONCEPT Total quality management (TQM) entails creating a total quality culture, involv- ing managers and employ- ees at all levels, bent on continuously improving the performance of every value chain activity.

Final PDF to printer

CHAPTER 11 Managing Internal Operations 329

tho75109_ch11_322-345.indd 329 12/13/18 03:14 PM

organization.5 TQM aims at instilling enthusiasm and commitment to doing things right from the top to the bottom of the organization. Management’s job is to kindle an organizationwide search for ways to improve that involves all company personnel exercising initiative and using their ingenuity. TQM doctrine preaches that there’s no such thing as “good enough” and that everyone has a responsibility to participate in continuous improvement. TQM is thus a race without a finish. Success comes from making little steps forward each day, a process that the Japanese call kaizen.

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

Six Sigma Quality Control Programs Six Sigma programs offer another way to drive continuous improvement in quality and strategy execution. This approach entails the use of advanced statistical methods to identify and remove the causes of defects (errors) and undesirable variability in performing an activity or business process. When performance of an activity or process reaches “Six Sigma quality,” there are no more than 3.4 defects per million iterations (equal to 99.9997 percent accuracy).6

There are two important types of Six Sigma programs. The Six Sigma process of define, measure, analyze, improve, and control (DMAIC, pronounced “de-may-ic”) is an improvement system for existing processes falling below specification and needing incremental improvement. The Six Sigma process of define, measure, analyze, design, and verify (DMADV, pronounced “de-mad-vee”) is used to develop new processes or products at Six Sigma quality levels. DMADV is sometimes referred to as Design for Six Sigma, or DFSS. Both Six Sigma programs are overseen by personnel who have completed Six Sigma “master black belt” training, and they are executed by personnel who have earned Six Sigma “green belts” and Six Sigma “black belts.” According to the Six Sigma Academy, personnel with black belts can save companies approximately $230,000 per project and can complete four to six projects a year.7

The statistical thinking underlying Six Sigma is based on the following three prin- ciples: (1) All work is a process, (2) all processes have variability, and (3) all processes create data that explain variability.8 Six Sigma’s DMAIC process is a particularly good vehicle for improving performance when there are wide variations in how well an activ- ity is performed. For instance, airlines striving to improve the on-time performance of their flights have more to gain from actions to curtail the number of flights that are late by more than 30 minutes than from actions to reduce the number of flights that are late by less than 5 minutes. Six Sigma quality control programs are of particular interest for large companies, which are better able to shoulder the cost of the large investment required in employee training, organizational infrastructure, and consult- ing services. For example, to realize a cost savings of $4.4 billion from rolling out its Six Sigma program, GE had to invest $1.6 billion and suffer losses from the program during its first year.9

Since the programs were first introduced, thousands of companies and nonprofit organizations around the world have used Six Sigma to promote operating excel- lence. For companies at the forefront of this movement, such as Motorola, General Electric (GE), Ford, and Honeywell (Allied Signal), the cost savings as a percent- age of revenue varied from 1.2 to 4.5 percent, according to data analysis conducted by iSixSigma (an organization that provides free articles, tools, and resources

CORE CONCEPT Six Sigma programs utilize advanced statistical meth- ods to improve quality by reducing defects and vari- ability in the performance of business processes.

Final PDF to printer

330 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho75109_ch11_322-345.indd 330 12/13/18 03:14 PM

concerning Six Sigma). More recently, there has been a resurgence of interest in Six Sigma practices, with companies such as Siemens, Coca-Cola, Ocean Spray, GEICO, and Merrill Lynch turning to Six Sigma as a vehicle to improve their bottom lines. In the first five years of its adoption, Six Sigma at Bank of America helped the bank reap about $2 billion in revenue gains and cost savings; the bank holds an annual “Best of Six Sigma Expo” to celebrate the teams and the projects with the greatest contribution to the company’s bottom line. GE, one of the most successful compa- nies implementing Six Sigma training and pursuing Six Sigma perfection across the company’s entire operations, estimated benefits of some $10 billion during the first five years of implementation—its Lighting division, for example, cut invoice defects and disputes by 98 percent.10

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

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

Despite its potential benefits, Six Sigma is not without its problems. There is evi- dence, for example, that Six Sigma techniques can stifle innovation and creativity. The essence of Six Sigma is to reduce variability in processes, but creative processes, by nature, include quite a bit of variability. In many instances, breakthrough innova- tions occur only after thousands of ideas have been abandoned and promising ideas have gone through multiple iterations and extensive prototyping. Alphabet Executive Chairman of the Board Eric Schmidt has declared that applying Six Sigma measure- ment and control principles to creative activities at Google would choke off innovation altogether.11

A blended approach to Six Sigma implementation that is gaining in popularity pursues incremental improvements in operating efficiency, while R&D and other processes that allow the company to develop new ways of offering value to custom- ers are given freer rein. Managers of these ambidextrous organizations are adept at employing continuous improvement in operating processes but allowing R&D to operate under a set of rules that allows for exploration and the development of breakthrough innovations. However, the two distinctly different approaches to man- aging employees must be carried out by tightly integrated senior managers to ensure that the separate and diversely oriented units operate with a common purpose. Ciba Vision, now part of eye care multinational Alcon, dramatically reduced operating

expenses through the use of continuous-improvement programs, while simultaneously and harmoniously developing a new series of contact lens products that have allowed its revenues to increase by 300 percent over a 10-year period.12 An enterprise that sys- tematically and wisely applies Six Sigma methods to its value chain, activity by activity, can make major strides in improving the proficiency with which its strategy is executed without sacrificing innovation. As is the case with TQM, obtaining managerial com- mitment, establishing a quality culture, and fully involving employees are all of critical importance to the successful implementation of Six Sigma quality programs.13

CORE CONCEPT Ambidextrous organizations are adept at employing continuous improvement in operating processes while allow- ing R&D and other areas engaged in development of new ideas freer rein.

Final PDF to printer

331

tho75109_ch11_322-345.indd 331 12/13/18 03:14 PM

ILLUSTRATION CAPSULE 11.1

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

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

adherence to the eight Hospital Quality Alliance (HQA) indicators of quality care for AMI patients was tracked. As a result of the program, CAMC improved its compli- ance with HQA-recommended treatment for AMI from 50 to 95 percent. Harvard researchers identified CAMC as one of the top-performing hospitals reporting com- parable data.

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

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

Charleston Area Medical Center’s Six Sigma Program

©ERproductions Ltd/Blend Images LLC

Note: Developed with Robin A. Daley.

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

The Difference between Business Process Reengineering and Continuous-Improvement Programs Like Six Sigma and TQM Whereas business process reengineering aims at quantum gains on the order of 30 to 50 percent or more, total quality programs like TQM and Six Sigma stress ongoing incremental progress, striving for inch-by-inch gains again and again in a never-ending stream. The two approaches to improved performance of value chain activities and operating excellence are not mutually exclusive; it makes sense to use them in tan- dem. Reengineering can be used first to produce a good basic design that yields

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

Final PDF to printer

332 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho75109_ch11_322-345.indd 332 12/13/18 03:14 PM

quick, dramatic improvements in performing a business process. TQM or Six Sigma programs can then be used as a follow-on to reengineering and/or best-practice imple- mentation to deliver incremental improvements over a longer period of time.

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

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

To get the most from initiatives to execute strategy more proficiently, managers must have a clear idea of what specific outcomes really matter. Is it high on-time deliv- ery, lower overall costs, fewer customer complaints, shorter cycle times, a higher per- centage of revenues coming from recently introduced products, or something else? Benchmarking best-in-industry and best-in-world performance of targeted value chain activities provides a realistic basis for setting internal performance milestones and longer-range targets. Once initiatives to improve operations are linked to the company’s strategic priorities, then comes the managerial task of building a total quality culture that is genuinely committed to achieving the performance outcomes that strategic suc- cess requires.14

Managers can take the following action steps to realize full value from TQM, reen- gineering, or Six Sigma initiatives and promote a culture of operating excellence:15

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

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

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

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

d. Recognizing and rewarding individual and team efforts to improve quality reg- ularly and systematically.

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

3. Empowering employees so that authority for delivering great service or improving products is in the hands of those who do the job rather than their managers: improv- ing quality has to be seen as part of everyone’s job.

Final PDF to printer

CHAPTER 11 Managing Internal Operations 333

tho75109_ch11_322-345.indd 333 12/13/18 03:14 PM

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

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

In sum, initiatives to improve operations, like business process reengineering, TQM, and Six Sigma techniques all need to be seen and used as part of a bigger- picture effort to execute strategy proficiently. Used properly, all of these tools are capable of improving the proficiency with which an organization performs its value chain activities. Not only do improvements from such initiatives add up over time and strengthen organizational capabilities, but they also help build a culture of operating excellence. All this lays the groundwork for gaining a competitive advan- tage.16 While it is relatively easy for rivals to also implement process management tools, it is much more difficult and time-consuming for them to instill a deeply ingrained culture of operating excellence (as occurs when such techniques are reli- giously employed and top management exhibits lasting commitment to operational excellence throughout the organization).

The purpose of using busi- ness process management tools, such as business pro- cess reengineering, TQM, and Six Sigma programs is to improve the performance of strategy-critical activities and thereby enhance strat- egy execution.

Company strategies can’t be executed well without a number of internal systems for business operations. American Airlines, Delta, Ryanair, Lufthansa, and other success- ful airlines cannot hope to provide passenger-pleasing service without a user-friendly online reservation system, an accurate and speedy baggage-handling system, and a strict aircraft maintenance program that minimizes problems requiring at-the-gate service that delays departures. FedEx has internal communication systems that allow it to coordinate its over 100,000 vehicles in handling a daily average of 12.1 million shipments to more than 220 countries and territories. Its leading-edge flight opera- tions systems allow a single controller to direct as many as 200 of FedEx’s 659 aircraft simultaneously, overriding their flight plans should weather problems or other special circumstances arise. FedEx also has created a series of e-business tools for customers that allow them to ship and track packages online, create address books, review ship- ping history, generate custom reports, simplify customer billing, reduce internal ware- housing and inventory management costs, purchase goods and services from suppliers, and respond to their own quickly changing customer demands. All of FedEx’s systems support the company’s strategy of providing businesses and individuals with a broad array of package delivery services and enhancing its competitiveness against United Parcel Service, DHL, and the U.S. Postal Service.