New strategies often entail budget reallocations because

241Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution 241

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education

Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021

241

chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution Processes underpin business capabilities, and capabilities underpin strategy execution. —Pearl Zhu

Winning companies know how to do their work better. —Michael Hammer and James Champy

Companies that make best practices a priority are thriving, thirsty, learning organizations. They believe that everyone should always be searching for a better way. Those kinds of companies are filled with energy and curiosity and a spirit of can-do. —Jack Welch, former CEO, General Electric

Motivation is the art of getting people to do what you want them to do because they want to do it. —Dwight D. Eisenhower—thirty-fourth President of the United States

Pay your people the least possible and you’ll get the same from them. —Malcolm Forbes, late Publisher of Forbes Magazine

In Chapter 10, we stressed that an important component of successful strategy execution involves managerial actions to develop and strengthen organizational capabilities and to structure the overall work effort in ways that promote coordinated, competent performance of execution-critical value chain activities. In this chapter, we discuss five additional managerial actions that advance the cause of good strategy execution:

n Allocating the needed financial and organizational resources to execution-critical value chain activities.

n Ensuring that policies and procedures facilitate good strategy execution.

n Adopting best practices and employing process management tools to drive continuous improvement in how value chain activities are performed.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 242

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

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

n Tying rewards and incentives directly to the achievement of strategic and financial performance targets.

Allocating Needed Resources to Execution-Critical Activities

Good strategy execution requires that top management be deeply involved in directing the proper kinds and amounts of resources to the enterprise’s various organization units and value chain activities. Plainly, organizational units must have the operating budgets and resources for executing their respective pieces of the strategy effectively and efficiently. Too little funding (stemming either from constrained financial resources or from sluggish management action to marshal the full force of the organization’s resources behind the drive for good strategy execution) slows progress and impedes the efforts of organizational units to competently execute their assigned strategy elements. Too much funding of particular organizational units and value chain activities wastes organizational resources and reduces financial performance.

Both changes in strategy and efforts to improve execution of an existing strategy typically entail budget reallocation and resource shifting. Previously important units with a lesser role in a new strategy may need downsizing. Units that now have a bigger strategy-critical role may need more people, new equipment, additional facilities, and above-average increases in their operating budgets, especially if they need to develop and strengthen competitively valuable capabilities or if they need more resources for other reasons. For example, 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 have prompted companies to abandon traditional annual budgeting and resource allocation cycles in favor of making resource reallocation adjustments on an as-needed basis to support newly made adjustments in strategy. However, when changes entail mere fine-tuning of an existing strategy or approach to execution, then very little, if any, resource reallocation may be needed.

Generally, though, implementing new strategy initiatives and/or launching important efforts to improve execution requires managers to consider shifting resources and to play an active role in screening requests for more people and new facilities or equipment, approving those with valuable benefits and, in the interest of operating cost efficiently, turning down requests that offer too little benefit relative to the cost. Should internal cash flows be insufficient to fund needed strategic initiatives or execution-related improvements, then management must consider raising the needed funds through borrowing or selling additional shares of stock to investors.

In the event that all strategy changes and/or new execution initiatives need to be made without adding to total expenses, 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 the savings to activities where more resources are needed. In the event that a company needs to make significant cost cuts during the course of launching new strategic initiatives or pushing for better strategy execution, managers must be especially creative in

CORE CONCEPT Good strategy execution requires steering the proper kinds and amounts of resources to the enterprise’s various organization units and strategy­critical value chain activities. Underfunding organizational units and activities pivotal to strategic success impedes the process of implementing and executing strategy.

A company’s expenditures for operations and capital improvements must be both strategy driven (to amply fund competent performance of strategy­critical value chain activities) and lean (to operate cost efficiently).

Visible actions to reallocate operating funds and increase/decrease the staffing of certain organi zational units give credibility to manage­ ment’s intent to institute internal change and signal company personnel to exhibit a sense of urgency in putting the new strategy elements into place and/or improving the performance of activities essential to better strategy execution.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 243

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

finding ways to do more with less and achieve significantly better levels of operating efficiency. Indeed, it is common for strategy changes and the drive for good strategy execution to aim at achieving considerably higher levels of operating efficiency, while at the same time making sure the most important value chain activities are competently performed.

Ensuring That Policies and Procedures Facilitate Strategy Execution

A company’s policies and procedures can either support or hinder good strategy execution. Anytime a company moves to put new strategy elements in place or improve its strategy execution capabilities, some changes in how the company does things and the actions/behavior of company personnel are usually called for. Managers are thus well advised to examine whether existing policies and procedures fully support such changes and to be proactive in abandoning or revising those that inhibit shifting to more desirable ways of performing particular tasks and value chain activities.

As shown in Figure 11.1, policies and operating procedures facilitate strategy execution in three ways:

n By providing top-down guidance regarding how certain things need to be done. Managerial actions to establish and enforce policies and operating practices place boundaries on individual behavior to avoid ineffective or unwanted actions and, instead, steer individuals and work groups to adopt work practices and operating approaches that are conducive to good strategy execution. Policies and procedures, thus, provide company personnel with prescribed guidelines and routines for performing certain tasks, conducting various aspects of company operations, and handling recurring issues and tasks. These prescriptions and guidelines clarify uncertainty about how to proceed, and they represent management’s best judgment about how to do things in ways that create strong alignment between the actions and behavior of company personnel and the kinds of actions/conduct that are conducive to successful strategy execution. When existing ways of doing things pose a barrier to executing strategic initiatives, these ways have to be changed. Instituting and enforcing new policies and procedures is often an effective means of overcoming the natural tendencies of 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.

n By helping enforce needed consistency in how execution-critical activities are performed in geographically scattered operating units. Policies and procedures serve to standardize the way activities are performed. Requiring geographically scattered organizational units to conform to the prescribed policies, procedures, and standardized ways of doing things is normally a highly desirable component of good strategy execution. Eliminating significant differences in the operating practices of different plants, sales regions, customer-service centers, or the individual outlets in a chain operation helps a company deliver consistent product quality and service to customers. Good strategy 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 impairs good execution, blurs the company’s image, and breeds customer dissatisfaction.

n By promoting the creation of a work climate that facilitates good strategy execution. A company’s policies and procedures help set the tone for its work climate and promote 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

CORE CONCEPT A company’s policies and procedures provide guidance for conducting particular aspects of the company’s business and a set of white lines and routines for steering employee behavior.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 244

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

lever for changing the corporate culture in ways that better support new strategic initiatives and/or new efforts to improve strategy execution. 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.

Figure 11.1 How Prescribed Policies and Procedures Facilitate Strategy Execution

Provide top-down guidance about how certain things need to be done • Channel individual and group efforts along a

strategy­supportive path • Help 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 standardization and consistency in how execution-critical activities are performed in geographically scattered organization units

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

Well- Conceived

Policies and

Procedures

In an attempt to steer “crew members” into stronger quality and service behavior patterns, McDonald’s policy manual spells out detailed procedures that personnel in each McDonald’s unit are expected to observe. For example, “Cooks must turn, never flip, hamburgers. If they haven’t been purchased, Big Macs must be discarded in 10 minutes after being cooked and French fries in 7 minutes. Cashiers must make eye contact with and smile at every customer.” Retail chain stores and other organizational chains (e.g., hotels, hospitals, childcare centers) similarly rely on detailed policies and procedures to ensure consis tency in their operations and reliable service to their customers. Nordstrom’s strategic objective is to make sure each customer has a pleasing shopping experience in its department stores and returns time and again. To get store personnel to dedicate themselves to outstanding customer service, Nordstrom has a policy of promoting only those people whose personnel records contain evidence of “heroic acts” to please customers—especially customers who may have made “unreasonable requests” that require special efforts.

One of the big policy-making issues concerns what activities need to be rigidly prescribed and what activities ought to allow room for independent action on the part of empowered personnel. Few companies need thick policy manuals to prescribe exactly how daily operations are to be conducted or how each particular activity is to be performed. Too much policy can be as obstructive as wrong policy or 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 however they think makes sense. Allowing company personnel to act anywhere between the “white lines” is especially appropriate when individual creativity and initiative are more essential to good strategy execution than standardization and strict conformity. Instituting strategy-facilitating policies can therefore mean more policies, fewer policies, or different policies. It can mean policies that require things to be done according to a precisely defined standard or policies that give employees some leeway to do things and resolve issues however they think best.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 245

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

Adopting Best Practices and Employing Process Management Tools to Improve Execution

Company managers can significantly advance the cause of competent strategy execution by pushing organization units and company personnel to identify and adopt the best practices for performing value chain activities and, further, by employing other process management tools to drive continuous improvement in how internal operations are conducted. One of the most widely used and effective tools for gauging how well a company is executing pieces of its strategy entails benchmarking the company’s performance of particular activities and business processes against “best-in-industry” and “best-in-world” performers.1 It can also be useful to look at “best-in-company” performers of an activity if a company has a number of organizational units performing much the same function at different locations. Identifying, analyzing, and understanding how top companies or work groups perform particular value chain activities and business processes provides useful yardsticks for judging the effectiveness and efficiency of internal operations and setting performance standards for organization units to meet or beat.

How the Process of Identifying and Incorporating Best Practices Works A best practice is a method of performing an activity or business process that yields superior results compared to other approaches.2 To qualify as a legitimate best practice, the method or technique must have been employed by at least one enterprise and shown to be unusually effective in lowering costs, improving quality or performance, shortening time requirements, enhancing safety, or achieving one or more other highly positive operating outcomes. A best practice can evolve over time as improvements are discovered.

Benchmarking is the backbone of the process of identifying, studying, and implementing best practices. The role of benchmarking is to look outward to find the best practice for performing an activity and then to develop the data for measuring how well a company’s own performance of that activity stacks up against the best-practice standard. However, benchmarking is more complicated than simply identifying which company or organization is the best performer of an activity and then trying to imitate its approach. Normally, the best practices other organizations use have to be adapted to fit the specific circumstances of a company’s own business and operating requirements; this is especially true when the company or organization using the best practice methodology is in a different industry. Since most companies believe “our work is different” or “we are unique,” the telling part of any best-practice initiative is how well the company puts its own version of the best practice into place, achieves performance outcomes comparable to the best-practice outcomes elsewhere, and strives to improve upon its best-practice version over time. Indeed, a best practice remains little more than another organization’s interesting success story unless a company’s personnel are willing to learn from outsiders, embrace new ways of doing things, and take pride in doing things in the best possible ways. In the United States, best practices methodology is being applied to the treatment of a wide variety of diseases and ailments; the use of best practices is now being mandated for Medicare patients, for people admitted to hospitals, and by many health insurers, resulting in shorter hospital stays, growing standardization of treatment methods, and a sharper focus on treatment outcomes. Best practices are also being used to keep people healthy and prevent the need for treatment rather than just being applied to curative medical practices.

CORE CONCEPT A best practice is a means of performing an activity or process that yields results consistently superior to other approaches.

Managerial efforts to identify and adopt best practices are a powerful tool for promoting operating excellence and better strategy execution.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 246

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

As shown in Figure 11.2, to the extent that a company is able to successfully adapt a best practice methodology pioneered elsewhere to fit its own circumstances, it is likely to improve its performance of the activity, perhaps dramatically—an outcome that promotes better strategy execution. It follows that a company can make giant strides toward good or even excellent strategy execution by adopting a best-practices mindset and successfully implementing the use of best practices across more and more of its value chain activities. The more that organizational units use best practices in performing their work, the closer a company moves toward performing its value chain activities more effectively and efficiently. This is what operational excellence is all about. Employing best practices to improve internal operations and strategy execution has powerful appeal—legions of companies across the world are now making concerted efforts to employ best practices in performing many value chain activities, and they regularly benchmark their performance of these activities against best-in industry or best-in-world performers.

Figure 11.2 From Benchmarking and Best-Practice Implementation to Operating Excellence

Engage in benchmarking

to identify the “best

practice” for performing an activity

Adapt the “best practice”

to fit the company’s

situation, then implement it (and further improve it over time)

Continue to benchmark company

performance of the activity

against “best-in- industry”

or “best-in- world”

performers

Move closer to operating excellence in performing the activity

Business Process Reengineering, TQM, and Six Sigma Quality Programs: Tools for Promoting Operating Excellence Three other process management tools for promoting operating excellence and better strategy execution are business process reengineering, total quality management (TQM) programs, and Six Sigma quality control techniques. Each of these merits discussion since many companies around the world use these tools to help execute strategies keyed 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 often hindered by disconnected organizational arrangements where pieces of an activity are performed in several different functional departments, with no one manager or group being accountable for optimal performance of the entire activity or business process. For example, delivering good customer service requires not only having a cadre of employees skilled in dealing with customers face-to-face but also receiving superb support from personnel in order filling, warehousing and shipping, invoicing, accounts receivable, after-sale repair, technical support, and customer call centers. As was discussed in Chapter 10, it is a challenging proposition to build or strengthen competitively valuable capabilities that involve an activity or process whose various pieces are typically performed by personnel in different organizational units.

Implementing use of best practices across a company’s entire value chain is a powerful way for managers to push a company along the path to operating excellence and good strategy execution.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 247

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

To detour the problems of effectively coordinating the various organizationally scattered pieces of a cross-unit capability or competence, a company can reengineer the work effort, pulling the pieces out of different functionally organized departments and creating a single work group, often called a process department, to take charge of the whole activity (or business process) and perform it in a better, cheaper, and more strategy-supportive fashion. Business process reengineering involves redesigning and streamlining the workflow and various work steps (often enabled by cutting-edge use of online technology and information systems), with the goal of achieving quantum gains in performance of the activity.3

Many companies in many industries all over the world have undertaken the reengineering of value chain activities, with some firms achieving excellent results.4 Hallmark reengineered its process for developing new greeting cards, creating teams of mixed-occupation personnel (artists, writers, lithographers, merchandisers, and administrators) to work on a single holiday or greeting card theme; the reengineered process speeded development times for new lines of greeting cards by up to 24 months, was more cost-efficient, and increased customer satisfaction.5 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 organizational layers between managers and workers from three to one. Productivity rose 20 percent in one year, and unit manufacturing costs dropped 30 percent. Northwest Water, a British utility, used process reengineering to eliminate 45 work depots that served as home bases to crews who installed and repaired water and sewage lines and equipment. Under the reengineered arrangement, crews worked directly from their vehicles, receiving assignments and reporting work completion from computer terminals in their trucks. Crew members became contractors to Northwest Water rather than employees, a move that not only eliminated the need for the work depots but also allowed Northwest Water to eliminate a big percentage of the bureaucratic personnel and supervisory organization that managed the crews.6 In the United States, well-known Mayo Clinic and other prominent health care providers are using reengineering tools on a continuous basis to achieve such out comes as fewer hospitalizations, improved patient-physician interactions, and the delivery of lower cost health care. A number of banks have used process reengineering to improve their procedures for opening new customer accounts.

Total Quality Management Programs Total quality management (TQM) is a management approach that emphasizes continuous improvement in all phases of operations, 100 percent accuracy in performing tasks, involvement and empowerment of employees at all levels, team-based work design, benchmarking, and total customer satisfaction.7 While TQM concentrates on the production of quality goods and fully satisfying customer expectations, it achieves its biggest successes when it is also extended to employee efforts in all departments— human resources, billing, R&D, engineering, accounting and records, and information systems—that may lack pressing, customer-driven incentives to improve. It involves reforming the corporate culture and shifting to a total quality/continuous improvement business philosophy that permeates every facet of the organization.8 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 organization-wide search for ways to improve that involves all company personnel exercising initiative and using their ingenuity. TQM doctrine preaches that there is 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.

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

CORE CONCEPT TQM entails creating a total quality culture bent on continuously improving the performance of every task and value chain activity.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 248

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

TQM takes a fairly long time to show significant results—little benefit emerges within the first six months. But it is a management tool that has attracted numerous users and advocates over several decades, and it can deliver good long-term results if top executives succeed in creating a culture and work climate where TQM philosophies and practices can thrive.

Six Sigma 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 variations in performing an activity or business process. When performance of an activity or process reaches “Six Sigma quality,” there are not more than 3.4 defects per million iterations (equal to 99.9997 percent accuracy).9 There are two important types of Six Sigma programs—one is for existing processes falling below specification and needing incremental improvement and the other is for developing new processes or products at Six Sigma quality levels. Both Six Sigma processes need to be overseen by personnel who have completed Six Sigma “master black belt” training and executed by personnel who have earned Six Sigma “green belts” and Six Sigma “black belts.”

The statistical thinking underlying Six Sigma is based on the following three principles: (1) All work is a process, (2) all processes have variability, and (3) all processes create data that explains variability.10 Six Sigma techniques have proven to be a good vehicle for improving the performance of an existing process when there are wide variations in how well the existing activity is performed and there are substantial benefits to be gained from greatly reducing the number of adversely high/low variations from the average.11 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 arrive early or fewer than 10 minutes late. Likewise, if FedEx has an average delivery time for its overnight package service operation that ranges from two hours earlier than promised (say, 10 a.m. the following day) to a high of eight hours later than promised, then FedEx can significantly improve its customer reputation for on-time delivery if it successfully uses Six Sigma techniques to curtail the number of late deliveries.

Since Six Sigma programs were first introduced in the mid-1990s, thousands of companies and nonprofit organizations around the world have used them to promote operating excellence. Companies at the forefront of this movement (including Motorola, General Electric, Honeywell, and Ford) were found to have achieved cost savings ranging between 1.2 and 4.5 percent of revenues.12 General Electric (GE), one of the most successful companies 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.13 The use of Six Sigma at Bank of America helped the bank reap about $2 billion in revenue gains and cost savings within the first five years. Pfizer undertook 85 Six Sigma projects to streamline its R&D process and lower the costs of delivering medicines to patients in its pharmaceutical services division. BMW combined use of “lean manufacturing” principles and Six Sigma to introduce robotic process automation for all assembly tasks that were repetitive and rules-based; tasks that were only performed manually were cut to just five percent of the total, huge gains in labor productivity were realized, and assembly defects were dramatically reduced. A Milwaukee hospital used Six Sigma to improve the accuracy of administering the proper drug doses to patients. Analysis of the process by which prescriptions were written by doctors, filled by the hospital pharmacy, and then administered to patients by nurses revealed that most mistakes came from misreading the doctor’s handwriting.14 The hospital implemented a program requiring doctors to enter the prescription on the hospital’s computers, which slashed the number of errors dramatically.

But use of Six Sigma is not without problems. Apart from the costs of employee training, organizational infrastructure, and consulting services, there is evidence that Six Sigma techniques can stifle innovation and creativity.15 Such creative processes as R&D and new product innovation involve outside-the-box brainstorming

CORE CONCEPT Six Sigma programs use advanced statistical methods to enable an activity or process to be performed with 99.9997 percent accuracy— fewer than 3.4 defects per million iterations.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 249

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

and trial-and-error experimentation. Countless ideas and approaches have to be explored, with many being discarded and those that appear promising going through multiple testing, revisions, and prototyping to identify what works best—as the head of a design and innovation consulting firm put it, “a lot of innovation is anti-Six Sigma.”16 Google’s former Chairman, Eric Schmidt, declared that applying Six Sigma measurement and control principles to creative activities at Google would choke off innovation altogether.17 Now, many Six Sigma users have backed away from applying Six Sigma procedures to activities where company personnel need free rein to be creative or explore breakthrough innovations. But it is not difficult to employ Six Sigma in some parts of an organization while avoiding its use entirely in such creative activities as new product development. Ciba Vision, a division of a global medical company specializing in eye care products, used Six Sigma techniques to achieve dramatically lower operating expenses while simultaneously developing a new series of contact lens products that boosted revenues by 300 percent over a 10-year period.18

An enterprise that systematically and wisely applies Six Sigma methods to repetitive and rules-based activities and processes can make major strides in improving the proficiency with which its strategy is executed without sacrificing innovation. The three biggest challenges encountered in successfully implementing Six Sigma quality programs, just as is the case with using TQM, are obtaining managerial commitment, establishing a quality culture, and fully involving employees.19

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

Capturing the Benefits of Initiatives to Improve Operations Benchmarking, the adoption of best practices, business process reengineering, TQM, and Six Sigma techniques all need to be seen and used as part of a big-picture effort to execute strategy proficiently and move toward operating excellence. 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, they also help build a culture of operating excellence. All this lays the groundwork for gaining a competitive advantage based on superior strategy execution.20 While it is relatively easy for rivals to also implement benchmarking, best practices, and continuous improvement programs, it is much more difficult and time-consuming for them to instill a deeply ingrained culture of operating excellence (as occurs when such techniques are religiously employed and top management exhibits strong commitment to operational excellence).

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

CORE CONCEPT The purpose of using benchmarking, best practices, business process reengineering, TQM, and Six Sigma programs is to improve the performance of all value chain activities, become ever more proficient in executing the company’s strategy, and create a work climate and culture where company personnel constantly strive for operating excellence.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 250

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

Installing Information and Operating Systems

Company strategies cannot be executed well without a number of internal systems for business operations. FedEx has internal communication systems that allow it to coordinate its 180,000 vehicles and 680 aircraft in handling a daily average of 15 million shipments to more than 220 countries and territories. Its leading-edge flight operations systems allow a single controller to direct as many as 200 of FedEx’s aircraft simultaneously, overriding their flight plans should weather or other special emergencies arise. Amazon. com ships customer orders from a global network of some 175 technologically sophisticated order fulfillment centers. Using complex algorithms, Amazon computers initiate the order-picking process by sending signals to workers’ wireless receivers, telling them which items to pick off the shelves in which order.21 Amazon’s computers also generate data on misboxed items, chute backup times, line speed, worker productivity, and shipping weights on orders. Amazon’s warehouse systems are upgraded regularly, and productivity improvements are aggressively pursued.

Otis Elevator, the world’s largest manufacturer of elevators with some 2+ million elevators, escalators, and moving walkways installed worldwide, has a 24/7 remote electronic monitoring system that can detect when an Otis device installed on a customer’s site has any of 325 problems.22 If the monitoring system detects a problem, it analyzes and diagnoses the cause and location, makes the service call to an Otis service technician at the nearest location, and helps the field technician (with the aid of smartphone apps) identify the component causing the problem. The company’s maintenance system helps keep outage times under three hours. All trouble-call data are relayed to design and manufacturing personnel, allowing them to quickly alter design specifications or manufacturing procedures when needed to correct recurring problems. All customers have online access to performance data on each elevator, escalator, and moving walkway.

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

Why Information Systems and Performance Tracking Matter Accurate and timely information about daily operations is essential if managers are to gauge how well the strategy execution process is proceeding. Information systems need to cover five broad areas: (1) customer data, (2) operations data, (3) employee data, (4) supplier/strategic partner data, and (5) financial performance data. All key strategic performance indicators must be tracked and reported in real time or at worst weekly in order for company managers to stay on top of implementation initiatives and daily operations, and to intervene when things drift off course. Tracking key performance indicators, gathering information from operating personnel, quickly identifying and diagnosing problems, and taking corrective actions are all integral pieces of the process of managing strategy execution on a day-to-day basis and overseeing operations.

CORE CONCEPT State­of­the­art operating systems and real­time data are integral to competent strategy execution and operating excellence. They can also be a basis for competitive advantage if they provide a firm with capabilities that rivals can’t match.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 251

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

Companies that rely on empowered customer-contact personnel to act promptly and creatively in pleasing customers have installed online information systems that make essential customer data accessible to such personnel with a few keystrokes, enabling them to respond more effectively to customer inquiries and deliver personalized customer service.

Many companies have installed real-time data-generating capability for a variety of operating functions. Most retail chains now have online systems that generate daily sales reports for each store and maintain up-to-the-minute inventory and sales records on each item. Manufacturing plants typically generate daily production reports and track labor productivity on every shift. To track and manage the quality of passenger service, airlines have information systems to monitor gate delays, on-time departures and arrivals, baggage handling times, lost baggage complaints, overbooked flights, and maintenance delays and failures. Uber has installed systems for real-time monitoring of driver locations (so that the nearest available driver can be directed to a customer’s location) and for real-time demand monitoring (that is used to automatically adjust fare prices upward as customer service requests escalate and downward as requests drop off).

The employee data section of a company’s information systems can provide a convenient means of monitoring employee productivity, labor costs, and other key work force indicators. In companies with many empowered employees and work teams, managers need data to determine whether the actions and decisions of empowered personnel are producing acceptable operating outcomes. Developing systems to monitor the actions of empowered personnel curtails the need for over-the-shoulder supervision and greatly reduces the risks of leaving empowered personnel to their own devices without appropriate checks and balances.23 So long as real-time, daily, and/or weekly statistics relating to the operating results of empowered personnel pass managerial scrutiny, then it is reasonable to assume that empowerment is working.

The statistical data provided by information systems gives managers a basis for judging how well things are going and what operating aspects need management attention. Managers must identify problem areas and deviations from expected norms before they can take action to get the organization back on course by either improving the approaches to strategy execution or fine-tuning the strategy. Jeff Bezos, Amazon’s CEO, is an ardent proponent of managing by the numbers. As he puts it, “Math-based decisions always trump opinion and judgment. The trouble with most corporations is that they make judgment-based decisions when data-based decisions could be made.”24

Tying Rewards and Incentives Directly to Achieving Good Performance Outcomes

It is essential that company personnel be motivated to exert their best efforts in striving to meet or beat the company’s strategic and financial performance targets and to also deliver operating results that reflect good strategy execution and progress toward operating excellence. Enlisting such organization commitment typically requires use of an assortment of motivational techniques and rewards—just explaining to employees why both the achievement of performance targets and good strategy execution are important to the organization’s well- being seldom commands people’s best efforts for long.25 Indeed, an effectively designed system of incentives and rewards is the single most powerful tool management has for mobilizing the best efforts of employees to meet or beat strategic and financial performance targets, proficiently execute the strategy, and produce operating results that demonstrate progress toward achieving operating excellence. But different incentives and rewards are needed for different situations—there is no one

CORE CONCEPT Having a state­of­the art information system that provides company personnel with quick access to the right kinds of real­time data is integral to topnotch strategy execution and operating excellence.

CORE CONCEPT A well designed reward structure is management’s single most powerful tool for mobilizing organiza­ tional commitment to successful strategy execution.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 252

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

best package of incentives and rewards that suits every situation or organization or that does the best job of spurring individual and group effort. The more understanding managers have about how to really motivate company personnel and the greater the reliance they place on using monetary and nonmonetary incentives as a tool for energizing organizational efforts and producing good results, the greater employees’ commitment to good day-in, day-out strategy execution and achieving the targeted performance outcomes.

Incentives and Motivational Practices That Promote Good Strategy Execution and the Achievement of Performance Targets Financial incentives generally head the list of motivational approaches for gaining wholehearted employee commitment to good strategy execution and focusing attention on achieving the targeted performance outcomes. Generous financial rewards always catch employees’ attention and produce high-powered motivation for individuals to exert their best efforts. A company’s package of monetary rewards typically includes some combination of base pay increases, performance bonuses, profit-sharing payouts, stock awards, company contributions to employee 401(k) or retirement plans, and piecework incentives (in the case of production workers). However, it is common for companies and managers to make extensive use of nonmonetary rewards. Some of the most important motivational practices and nonmonetary approaches organizations use to make their workplaces more appealing and spur strong employee commitment to the strategy execution process include:26

n Providing attractive perks and fringe benefits. The various options here include full coverage of health insurance premiums, college tuition reimbursement, generous paid vacation time, on-site child care at major facilities, on-site fitness facilities and massage therapists, opportunities for getaways at company- owned recreational facilities, personal concierge services, subsidized cafeterias and free lunches, casual dress every day, personal travel services, maternity and paternity leaves, paid leaves to care for ill family members, telecommuting, compressed workweeks (four 10-hour days instead of five 8-hour days), paid sabbaticals, flexible work schedules, college scholarships for children, and relocation services. At JM Family Enterprises, a Toyota distributor in Florida, employees get a great lease on new Toyotas and are flown to the Bahamas for cruises on the 172-foot company yacht, plus the company’s office facility has such amenities as a heated lap pool, a fitness center, a free nail salon, free prescriptions delivered by a “pharmacy concierge,” and professionally made take-home dinners.

n Relying on promotion from within whenever possible. This practice helps bind workers to their employer, and employers to their workers. Plus, it is an incentive for good performance. Promotion from within also helps ensure that people in positions of responsibility have knowledge specific to the business, technology, and operations they are managing.

n Inviting and acting on ideas and suggestions from employees. Many companies believe many good ideas for nuts-and-bolts operating improvements come from employees—they actively solicit employees’ ideas and suggestions and promptly act on those with merit. Moreover, research indicates that pushing decision-making down the line and empowering employees increases motivation and satisfaction, and boosts productivity. The use of self-managed teams has much the same effect. At W. L. Gore (the maker of GORE-TEX), employees get to choose what project/team they work on and each team member’s compensation is based on other team members’ rankings of his or her contribution to the enterprise.

n Giving awards and public recognition to high performers and showcasing company successes. Many companies hold award ceremonies to honor top-performing individuals, teams, and organizational units and to celebrate important company milestones and achievements. Others make a special point of recognizing the outstanding accomplishments of individuals, teams, and organizational units at informal company gatherings or in the company newsletter. Often, top-performing employees are rewarded with stimulating assignments and opportunities to transfer to attractive locations. Many managers are diligent in personally thanking and praising individuals and groups for their all-out efforts and exemplary

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution 253

Copyright © 2020 by Arthur A. Thompson. All rights reserved. Reproduction and distribution of the contents are expressly prohibited without the author’s written permission

performance in times of a company crisis, in meeting a tight deadline, in setting a company record, or achieving a significant outcome. Such actions foster a positive esprit de corps within the organization and may also act to spur healthy competition among units and teams within the company.

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

n Stating the strategic vision in inspirational terms that make employees feel they are a part of doing something worthwhile in a larger social sense. There’s strong motivating power associated with giving people a chance to be part of something exciting and personally satisfying. Jobs with a noble purpose tend to inspire employees. At most pharmaceutical companies, the noble purpose is helping sick people get well and restoring patients to full life. At Tesla, the noble purpose is helping transition the world away from gasoline-powered vehicles to battery-powered vehicles and help win the battle against human-induced climate change.

n Providing an appealing workplace environment. Attractive facilities with a number of employee- centered amenities usually have decidedly positive effects on employee morale and productivity. Google management built the company’s Googleplex headquarters campus to be “a dream workplace” and a showcase for environmentally correct building design and construction. Employees have access to dozens of cafés with healthy foods, break rooms with snacks and drinks, multiple fitness centers, heated swimming pools, ping-pong and pool tables, sand volleyball courts, and community bicycles and scooters to go from building to building. Apple and Facebook also have stunning facilities with multiple features to wow employees.

Decisions on salary increases, incentive compensation, promotions, key assignments, dismissals and layoffs, and the ways and means of awarding praise and recognition are potent attention-getting, commitment-generating devices. Such decisions seldom escape the closest employee scrutiny, saying more about what is expected and who is considered to be doing a good job than any other factor.

Striking the Right Balance between Rewards and Punishment While most approaches to motivation, compensation, and people management accentuate the positive, companies also make it clear that lackadaisical or indifferent effort and subpar performance can result in negative consequences. At GE, McKinsey & Company, leading investment banks like Goldman Sachs and JP Morgan, several global public accounting firms, and other companies that look for and expect top-notch individual performance, there’s an “up-or-out” policy—managers and professionals whose performance is not good enough to warrant promotion are first denied bonuses and stock awards and eventually weeded out. At most companies, senior executives and key personnel in underperforming units are pressured to boost performance to acceptable levels and keep it there or risk being replaced. It is not unusual for low-performing employees to be assigned to routine jobs or dead-end positions with little job security.

There is scant evidence that a no-pressure/no-adverse- consequences work environment leads to superior strategy execution or operating excellence. As the CEO of a major bank put it, “There’s a deliberate policy here to create a level of anxiety. Winners usually play like they’re one touchdown behind.”27 A number of companies deliberately give employees heavy workloads and tight deadlines—personnel are pushed to achieve “stretch” objectives and are expected to put in long hours (nights and weekends if need be). High-performing organizations nearly always have a cadre of ambitious people who relish the opportunity to climb the ladder of success, love a challenge, thrive in a performance-oriented environment, and find some competition and pressure useful to satisfy their own drives for personal recognition, accomplishment, and self- satisfaction.

As a general rule, it is unwise to take off the pressure for good individual and group performance or play down the adverse consequences of weak performance.