The strategic role of a company's reward system is to

CHAPTER 11 Managing Internal Operations: Actions That Promote Good Strategy Execution

LEARNING OBJECTIVES

THIS CHAPTER WILL HELP YOU UNDERSTAND:

Why resource allocation should always be based on strategic priorities

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

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

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

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

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PROMOTING GOOD STRATEGY EXECUTION

Allocating ample resources to execution-critical value chain activities

Instituting policies and procedures that facilitate good strategy execution

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

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

Using rewards and incentives to promote better strategy execution and the achievement of strategic and financial targets

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ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT

Possible adverse resource allocation outcomes

Too little funding that slows progress and impedes the efforts of organizational units to execute their pieces of the strategic plan proficiently

Too much funding that wastes organizational resources and reduces financial performance

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STRATEGIC MANAGEMENT PRINCIPLE (1 of 14)

The funding requirements of good strategy execution must drive how capital allocations are made and the size of each unit’s operating budget. Underfunding organizational units and activities pivotal to the strategy impedes successful strategy implementation.

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STRATEGY-DRIVEN BUDGETING: ALLOCATING RESOURCES

Screen resource requests carefully

Approve only those that contribute to strategy execution

Provide the level of resources necessary for the success of strategic initiatives

Shift resources to higher-priority activities where new execution initiatives are needed

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Strategic Management Principle (2 of 14)

A company’s operating budget must be both strategy-driven (in order to amply fund the performance of key value chain activities) and lean (in order to operate as cost-effectively as possible).

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INSTITUTING POLICIES AND PROCEDURES THAT FACILITATE STRATEGY EXECUTION

Policies and operating procedures facilitate strategy execution by:

Providing top-down guidance regarding how things need to be done

Helping ensure consistency in how execution-critical activities are performed

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

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Strategic Management Principle (3 of 14)

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

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Strategic Management Principle (4 of 14)

Well-conceived policies and procedures aid strategy execution; out-of-sync ones hinder effective execution.

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.

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FIGURE 11.1 How Policies and Procedures Facilitate Good Strategy Execution

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ADOPTING BEST PRACTICES AND EMPLOYING PROCESS MANAGEMENT TOOLS

Managing for Continuous Improvement

Best practices

Benchmarking

Process reengineering

Total quality management (TQM)

Six Sigma quality programs

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Core Concept (1 of 5)

A best practice is a method of performing an activity that consistently delivers superior results compared to other approaches.

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Strategic Management Principle (5 of 14)

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

The more that organizational units use best practices in performing their work, the closer a company comes to achieving effective and efficient strategy execution.

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

The more that organizational units use best practices in performing their work, the closer a company moves toward performing its value chain activities as effectively and efficiently as possible.

This is what excellent strategy execution is all about.

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BUSINESS PROCESS REENGINEERING, TOTAL QUALITY MANAGEMENT, AND SIX SIGMA QUALITY PROGRAMS: TOOLS FOR PROMOTING OPERATING EXCELLENCE

Business process reengineering:

Involves radically redesigning and streamlining work effort, flows and processes to achieve dramatic improvements in performance

Uses cross-functional teams, cutting-edge technology and information systems to reset and refocus the organization’s strategy

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CORE CONCEPT (2 of 5)

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

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ACHIEVING CONTINUOUS IMPROVEMENT

Total Quality Management (TQM ):

Entails creating a total quality culture, involving managers and employees at all levels, bent on continuously improving the performance of every task and value chain activity.

Is a long-term race without a finish in which success comes slowly in small steps forward (kaizen)

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CORE CONCEPT (3 of 5)

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

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A STATISTICAL APPROACH TO ACHIEVING CONTINUOUS IMPROVEMENT

Six Sigma quality control programs:

Utilize statistical methods to improve quality by reducing defects and variability in business processes

Six Sigma principles

All work is a process

All processes have variability

All processes create data that explain variability

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Core Concept (4 of 5)

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

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SIX SIGMA AND NEW PROJECTS: DMADV

Define What are our project goals and customer requirements?
Measure How do we measure and determine both our goals and the needs of our customers?
Analyze What existing process options do we have for meeting customer needs?
Design Should we use an old or new process to meet customer needs and specifications?
Verify How will we verify design performance and our ability to meet customer needs?
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EXISTING PROCESSES AND SIX SIGMA: DMAIC

Define Define what constitutes a defect or variation
Measure Collect data to find out why, how, and how often this defect occurs
Analyze Determine when, why, and where the defect is occurring
Improve Implement best practice to eliminate defect or variation
Control Implement training, monitoring and controls to sustain the improvement
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Charleston Area Medical Center’s Six Sigma Program

How does CAMC’s Six Sigma program support its attempt to control costs and improve its competitive position?

Why is Six Sigma a necessity for achieving continuous improvement and operating excellence?

How does the Six Sigma process change an organization’s culture?

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Strategic Management Principle (6 of 14)

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

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THE DIFFERENCE BETWEEN BUSINESS PROCESS REENGINEERING AND CONTINUOUS IMPROVEMENT

Top-notch Strategy Execution and Operating Excellence

Continuous Improvement (TQM, Six Sigma)

Business Process Reengineering

Aims at one-time quantum improvement

Aims at ongoing incremental improvements

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Strategic Management Principle (7 of 14)

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

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CAPTURING THE BENEFITS OF INITIATIVES TO IMPROVE OPERATIONS

Empowering all employees to improve quality

Emphasizing the necessity for improved performance

Committing to total quality and continuous improvement

Fostering quality-supportive behaviors

Using online systems to speed the adoption of best practices

Action Steps to Realize the Value of TQM and Six Sigma Initiatives

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FOSTERING QUALITY-SUPPORTIVE BEHAVIORS

Screening job applicants rigorously and hiring only those with attitudes and aptitudes that are right for quality-based performance

Providing quality training for employees

Using teams and team-building exercises to reinforce and nurture individual effort

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

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

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STRATEGIC MANAGEMENT PRINCIPLE (8 of 14)

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

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INSTALLING INFORMATION AND OPERATING SYSTEMS

Benefits of information technologies

Enable better strategy execution through data-based decisions

Strengthen organizational capabilities

Allow for real-time tracking of implementation initiatives and daily operations

Provide monitoring of empowered employee performance (electronic scorecards)

Build closer relationships with customers

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INSTITUTING ADEQUATE INFORMATION SYSTEMS PERFORMANCE TRACKING AND CONTROLS

Employee data

Financial performance data

Customer data

Operations data

Supplier/partner/ collaborative ally data

Key Strategic Performance Indicators Tracked by Information Systems

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Strategic Management Principle (9 of 14)

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

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USING REWARDS AND INCENTIVES TO PROMOTE BETTER STRATEGY EXECUTION

Techniques for winning sustained, energetic commitment of employees to the strategy execution process

Providing incentives and engaging in motivational practices that facilitate good strategy execution

Striking the right balance between rewards and punishment for individual performance

Linking employee rewards to strategically relevant organizational performance outcomes

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Strategic Management Principle (10 of 14)

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

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Core Concept (5 of 5)

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

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NONMONETARY APPROACHES TO ENHANCING MOTIVATION

Provide attractive perks and fringe benefits

Give awards and other forms of public recognition

Rely on promotion from within whenever possible

Invite and act on ideas and suggestions

Create a work atmosphere of caring and mutual respect

State the strategic vision in inspirational terms

Share the firm’s critical information with employees

Provide a comfortable working environment

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STRIKING THE RIGHT BALANCE BETWEEN REWARDS AND PUNISHMENT

The firm’s motivational approaches and reward structure

Punishment

Rewards

Commitment-generating incentives and rewards

Adverse employment consequences

Performance

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HOW THE BEST COMPANIES TO WORK FOR MOTIVATE AND REWARD EMPLOYEES

The times they are changing: Why are companies finding it increasingly necessary to motivate and reward workers to achieve higher levels of performance?

As businesses continue to globalize, how will companies have to adapt their reward and incentive systems?

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Strategic Management Principle (11 of 14)

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

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LINKING REWARDS TO STRATEGICALLY RELEVANT PERFORMANCE OUTCOMES

Focus on and reward results, not effort

Create a results-oriented work environment that focuses on what to achieve, not what to do

Set strategically-relevant, specific, and measurable stretch performance goals that are difficult but achievable

Link the performance goals of each individual in an organizational unit to the unit’s goals

Reward and recognize as success superior performance in accomplishing the goals

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STRATEGIC MANAGEMENT PRINCIPLE (12 of 14)

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

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Strategic Management Principle (13 of 14)

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

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GUIDELINES FOR DESIGNING EFFECTIVE INCENTIVE COMPENSATION SYSTEMS

Make financial incentives a major, not minor, piece of the total compensation package

Have incentives that extend to all managers and all workers, not just top management

Administer the reward system with scrupulous objectivity and fairness

Ensure that the performance targets set for each individual or team involve outcomes that the individual or team can personally affect

Keep the time between achieving performance target and receiving the reward as short as possible

Avoid rewarding effort rather than results

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Nucor Corporation: Tying Incentives Directly to Strategy Execution

Tying incentives directly to strategy execution works when management has chosen the right strategy; what happens when the choice of strategy turns out to be seriously wrong?

What happens to employee morale and loyalty when a low-cost leadership firm achieves higher productivity at both its lower and higher wage locations and then needs to expand its production output? (productivity ≠ profitability).

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Strategic Management Principle (14 of 14)

The unwavering standard for judging whether individuals, teams, and organizational units have done a good job must be whether they meet or beat performance targets that reflect good strategy execution.

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Appendix 1 Figure 11.1 How Policies and Procedures Facilitate Good Strategy Execution

Well-conceived policies and procedures:

Provide top-down guidance about how certain things need to be done (such as by channeling individual and group efforts along a strategy-supportive path, by aligning the actions and behavior of company personnel with the requirements for good strategy execution, and by placing limits on independent action and help overcome resistance to change)

Help enforce consistency in how strategy-critical activities are performed (such as by improving the quality and reliability of strategy execution and by helping coordinate the strategy execution efforts of individuals and groups throughout the organization)

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

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Appendix 2 Adopting Best Practices and Employing Process Management Tools

Benchmarking, process reengineering, Six Sigma quality programs, total quality management (TQM) and best practices are all ways for managing for continuous improvement.

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Appendix 3 Figure 11.2 From Benchmarking and Best-Practice Implementation to Operating Excellence in Strategy Execution

The four steps necessary to go from benchmarking and best-practice implementation to operating excellence are:

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

The more that organizational units use best practices in performing their work, the closer a company moves toward performing its value chain activities as effectively and efficiently as possible.

This is what excellent strategy execution is all about.

Return to slide

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Appendix 4 The Difference Between Business Process Reengineering and Continuous Improvement

Both business process reengineering (which aims at one-time quantum improvement) and continuous improvement (for example, TQM and Six Sigma, which aim at ongoing incremental improvements) can lead to top-notch strategy execution and operating excellence.

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Appendix 5 Capturing the Benefits of Initiatives to Improve Operations

Five action steps that can be taken to realize the value of TQM and Six Sigma Initiatives are:

Committing to total quality and continuous improvement

Fostering quality-supportive behaviors

Empowering all employees to improve quality

Using online systems to speed the adoption of best practices

Emphasizing the necessity for improved performance

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Appendix 6 Instituting Adequate Information Systems Performance Tracking, and Controls

Key strategic performance indicators tracked by information systems are: customer data, operations data, employee data, supplier/partner/collaborative ally data, and financial performance data.

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Appendix 7 Using Rewards and Incentives to Promote Better Strategy Execution

Three techniques for winning sustained, energetic commitment of employees to the strategy execution process are:

Providing incentives and engaging in motivational practices that facilitate good strategy execution

Striking the right balance between rewards and punishment for individual performance

Linking employee rewards to strategically relevant organizational performance outcomes

Return to slide

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Appendix 8 Striking the Right Balance Between Rewards and Punishment

Two motivational approaches a firm can take toward affecting employee performance are rewards (consisting of commitment-generating incentives and rewards) or punishment (which consists of adverse employment consequences).