Entrepreneur Success Series
Resource Note # 11
In last edition of SATTVA we discussed frameworks and process of strategy formulation. While strategy formulation involves analysis and planning, implementation is all about action. In an article in Harvard Business Review, Donald Sull, Rebecca Homkes and Charles Sull cite a survey of more than 400 global CEOs which reported that executional excellence was number one challenge facing corporate leaders in Asia, Europe and the United States, heading a list of 80 issues, including innovation, geopolitical instability, and the top line growth. Studies have found that two-thirds to three-quarters of large organisations struggle to implement strategies.
Yang Li, Sun Guohui, Martin J. Eppler define strategy implementation as a “dynamic, iterative and complex process, which is comprised of a series of decisions and activities by managers and employees – affected by a number of interrelated internal and external factors – to turn strategic plans into reality in order to achieve strategic objectives.”
For effective implementation of strategies we present a holistic framework developed by researcher Fevzi Okumus. All factors governing strategy implementation can be classified into four categories: content, context, process and outcome.
Exhibit 1: Okumus’s Strategy Implementation Framework
(Source: Adapted from Okumus, F. (2003). ‘A framework to implement strategies in organisations.’ Management Decision, 41(9), p.876)
For the sake of better understanding we discuss the aforementioned four factors in following sequence: Content, Process, Context (Internal followed by External) and Outcome.
Managers need to be well conversant not only with content of strategy that is to be implemented, but they also need to understand that the process of strategy formulation itself can affect strategy implementation stage. Good execution cannot overcome the shortcomings of a bad strategy or a poor strategic planning effort.
The kind of strategy that is developed and the actual process of strategy formulation influence its implementation. Companies can think of inviting input on strategy from customers, employees, suppliers, and others who possess valuable perspectives on the company’s direction. Some ﬁrms even ask key customers to participate in a strategy formulation panel. When lower level players help plan strategy, they develop a sense of ownership of the implementation process.
Process is the means by which a strategy is activated. According to Professor Azar Kazmi activation of strategies can be depicted in the form of a pyramid as shown in Exhibit 2.
Exhibit 2: Strategy Activation Pyramid
(Source: Kazmi, A. (2015). Strategic Management & Business Policy. 3rdedi., New Delhi: McGraw Hill, p. 319)
In addition to this, the organisations need to put in place appropriate control mechanisms. We first discuss the operational plans, resource allocation and then the control mechanisms.
2.1 Operational Plans
Strategies lead to several plans. For instance, if a company is following ‘market penetration strategy’, plans of the company may include setting up an additional plant to manufacture the same products. On the other hand if the strategy is ‘diversification’ the plan may include designing new products.
Plans result in different kinds of programmes. For example, a research & development programme for the new product. Programmes lead to formulation of projects. A programme is like a portfolio of projects. A project is highly specific programme for which time schedule and costs are predetermined. A research & development programme may consist of a market survey project.
Finally organisations need an administrative mechanism of policies, procedures, rules and regulations to implements plans, programmes and projects. Policies are guidelines to action. Clearly laid down policies reduce operations time, avoid misunderstanding and minimise conflicts. For example, a company may have a policy like ‘our company will accept all defective products from customers without asking questions.’ Policies, especially the compensation policies need to be in tune with the business strategies pursued. Compensation policies of firms pursuing cost leadership strategy should reward and incentivise cost reduction. Barney & Hesterly cite example of Walmart, where a major problem used to be stealing (called shrinkage). Walmart developed a compensation scheme that took half the cost savings created by reduced shrinkage and shared it with employees in the form of bonus. This helped Walmart in reducing shrinkage significantly. On the other hand compensation policies of firms using differentiation strategy need to promote experimentation and offer rewards for risk taking, and follow non-punishment policy for failures.
Procedures are the sequential steps described in detail. For instance, to implement ‘no questions asked’ policy, the sales department needs to know the procedure to determine, whether the product is defective, how the product will be returned, and what steps will be taken to replace the product or return the payment. Rules and regulations are the prescribed modes to deal with a situation. For instance, in ‘no questions asked’ policy should the sales supervisor insist on a sales receipt to accept the product back?
2.2 Resource Allocation
Resource allocation deals with procurement, commitment and distribution of financial, human and informational resource to strategic tasks for the achievement of organisational objectives. Resource allocation requires setting priorities among competing plans, programmes and projects. Due to scarcity of resources, managers need to make ‘trade-offs’ in the process of resource allocation. This at times requires hard choices to be made. For example, there may be a high demand for well qualified competent IT professionals to put to work on several projects. But the number of such professionals may be limited.
Sull et al. observe that in volatile markets, the allotment of funds, people, and managerial attention is not a onetime decision; it requires on-going adjustment, a kind of agility. They cite a study by McKinsey, which found that firms that actively reallocated capital expenditures across business units achieved an average shareholder return 30% higher than the average return of companies that were slow to shift funds. In their own research Sull et al found that fewer than one-third of managers believe that their organizations reallocate funds to the right places quickly enough to be effective. Only 20% of managers say their organizations do a good job of shifting people across units to support strategic priorities. The rest report that their companies rarely shift peopleacross units (47%) or else make shifts in ways that disrupt other units (33%).
2.3 Control Mechanism
Organisations need to exercise two types of controls as suggested by Professor Kazmi.
2.3.1 Strategic Control
The questions that need to answered are: Are the assumptions made during strategy formulation proving to be correct? Is the strategy guiding the organisation towards intended objectives? Is there a need to change course and reformulate strategy?
There are four basic types of strategic controls.
- Premise Control. This helps managers to continuously monitor the key assumptions related to external and internal environment and decide need for change.
- Implementation Control. The managers need to continuously monitor progress on all these fronts and see if there is any need to change the resource allocation among projects, programmes & plans.
- Strategic Surveillance. This involves monitoring broad range of events inside and outside the organisation that can thwart strategy implementation.
- Special Alert Control. This requires a trigger mechanism and rapid response to unforeseen events. It calls for competencies to manage crisis or to have contingency plans in place.
2.3.2 Operational Control
Here the questions that become relevant are: Is the organisation performing as planned? Are timelines being adhered to? Are the resources being utilised properly? What needs to be done to ensure proper utilisation of resources and attainment of objectives?
While strategic control involves monitoring Critical Success Factors (CSF) necessary for effective implementation of strategy; the operational control deals with Key Performance Indicators (KPI) for the organisation as a whole and also various functional areas. Like policies, the control systems need to be tailored to the type of business strategies pursued. A cost leadership strategy calls for tight cost control systems with quantitative cost goals, close supervision of labour, material, inventory & other cost components and frequent & detailed cost control reports. According to Barney & Hesterly organisations (ex. Walmart) employ informal management control systems in addition to the formal ones. For instance, Walmart’s regional Vice Presidents used to travel every week from Monday to Thursday, meet all day Friday, attend a company wide meeting on Saturday morning, and then have late Saturday & Sunday off, just in time to strat travelling again on Monday. This schedule is reported to have enabled Walmart to reduce costs by 2 percentage of sales by not opening regional offices.
As seen in Exhibit 1, the two arrows, one each from external and internal context, indicate that an organisation may formulate strategy to capture opportunities or counter threats emanating from external environment and at times developments in the internal environment may also call for formulation of new strategy. Like strategy formulation, strategy implementation is influenced by forces in internal as well as external environment, especially the uncertainty in external environment. The managers need to not only choose implementation tactics based on the context, at times they also need to shape the context.
3.1 Internal Context
Success in implementing strategies is affected by various factors linked to internal context of an organisation such as functional competencies, decision-making participation & influence, inter-functional conflict & coordination, autonomy granted to strategic business units (SBU), sharing programs & synergies across SBUs, control & reward systems affect. Several research studies highlight these aspects.
In a study by Chimhanzi & Morganit it was found that firms devoting attention to the alignment of marketing and human resources are able to realize significantly greater successes in their strategy implementation. Specifically, these findings imply that marketing managers should seek to improve the relationship with their HR colleagues by emphasizing joint reward systems and written communication.
In order to streamline thinking about internal context, an organisation can focus attention on four specific aspects: organisational structure, organisational culture, leadership and people.
3.1.1 Organisational Structure
The steps followed in organisation design are as follows.
- Identification of key activities necessary to be performed to implement the strategy.
- Grouping of activities that are similar in nature and need a common set of skills.
- Choice of structure that could accommodate the different group of activities.
- Creation of teams, departments, divisions etc to which groups of activities can be assigned.
- Establishing interrelationship between various teams, departments, divisions etc to facilitate coordination and cooperation
3.1.2 Organisational Culture
The culture of the organization refers to the dominant values, beliefs and norms which develop over time and become relatively long lasting features of organization life. Culture may get built by default or by design that is through thoughtful choices based on values and core beliefs. As shown in Exhibit 3, in order to implement strategies, managers need to make conscious efforts to build right type of culture.
Sull et al suggest that a culture that supports strategy implementation must recognize and reward agility, teamwork, and ambition besides past performance. However, in their research Sull et al. found that half the managers surveyed believe that their careers would suffer if they pursued but failed at novel opportunities or innovations. Fewer than one-third of managers say they can have open and honest discussions about the most difficult issues, while one-third say that many important issues are considered taboo.
Exhibit 3: Organisational Culture
(Source: Larson, E. W & Gray, C. F. (2011). Project Management: The Managerial Process. McGraw Hill)
Leadership is crucial in using process factors and also in creating conducive internal context to facilitate implementation of strategies and create change. Managers need to clearly communicate the strategy content, build consensus, elicit commitment from all those involved in implementation and ensure coordination across departments and organisations. In order to do so managers can deploy different implementation tactics.
The content of effective communications includes clearly explaining what new responsibilities, tasks, and duties need to be performed by the affected employees. It also includes the ‘why’ behind changed job activities, and more fundamentally the reasons why the new strategic decision was. Managers need to make sure that they use language, metaphors, symbols or data in such a way that it leads to uniformly understood meaning. It has been reported that organizations where employees have easy access to management through open and supportive communication climates tend to outperform those with more restrictive communication environments.
Sull et al report alarming statistics regarding communication from their research. They found that just over half of all top team members say they have a clear sense of how major priorities and initiatives fit together. Fewer than one-third of senior executives’ direct reports clearly understand the connections between corporate priorities, and only 16% frontline supervisors and team leaders understand it. Two major reasons for poor communication are too many priorities or things being communicated and frequent change in messages coming from top. Sull et al found that middle managers are four times more likely to cite a large number of corporate priorities and strategic initiatives as an obstacle in clear communication than a lack of clarity in communication.
(B) Consensus & Commitment
Strategic consensus can be defined as the agreement among top, middle, and operating-level managers on the fundamental priorities of the organization. According to Floyd and Wooldridge consensus, has four levels: strong consensus, blind devotion, informed scepticism and weak consensus. Strong consensus exists when managers have both, a common understanding of, and a common commitment to their strategy. If, however, managers are committed to something, but do not share an understanding what that “something” is (they are well-intentioned but ill-informed) blind devotion is the likely result. If, by contrast, managers share an understanding of their strategy, but are not really committed to it, they are well informed yet unwilling to act. This is called informed scepticism. When neither shared understanding nor commitment is high, weak consensus is the likely result.
Obtaining employee commitment and involvement can promote successful strategy implementation. According to Guth and MacMillan the level of effort that an individual manager will apply to the implementation of a particular strategy depends on perceived ability, perceived probability of success, and perceived consistency between personal goals and the strategic change goals. If managers do not think the strategy is the right one, or do not feel that they or their organisation have the requisite skills to implement it, then they are likely to sabotage its implementation. Managers who believe their self-interest is being compromised can redirect a strategy, delay its implementation, reduce the quality of its implementation, or sabotage the effort by subversive behaviors such as verbal arguments, objecting memos, coalition formation, the deliberate creation of barriers to implementation, and even sabotage. Passive intervention can take the form of giving a strategy a low priority or taking too much time implementing strategic decisions, both of which can result in unnecessary delays and inhibit the implementation effort.
For better alignment between organizational and individual interest, it is necessary that strategy formulators maintain a close contact with managers and workers involved in strategy implementation. Sull et al observe that “distributed leaders”, not senior executives, represent “management” to most employees, partners, and customers. Their day-to-day actions, particularly how they handle difficult decisions and what behaviors they tolerate, go a long way toward supporting or undermining the corporate culture. In their research Sull et al found that as assessed by their direct reports, more than 90% of middle managers live up to the organization’s values all or most of the time. They do an especially good job of reinforcing performance, with nearly nine in 10 consistently holding team members accountable for results.
Sull et al observe that managers typically equate strategy implementation with alignment; they do recognize the importance of coordination when questioned about it directly. In their research Sull et al found that 30% managers cite failure to coordinate across units as the single greatest challenge to executing their company’s strategy. Managers also say they are three times more likely to miss performance commitments because of insufficient support from other units than because of their own teams’ failure to deliver.
Whereas companies have effective processes for cascading goals downward in the organization, their systems for managing horizontal performance commitments are not as strong. Sull et al report that only 9% of managers say they can rely on colleagues in other functions and units all the time, and just half say they can rely on them most of the time. Commitments from these colleagues are typically not much more reliable than promises made by external partners, such as distributors and suppliers. When managers cannot rely on colleagues in other functions and units, they compensate with a host of dysfunctional behaviors that undermine execution: They duplicate effort, let promises to customers slip, delay their deliverables, or pass up attractive opportunities. The failure to coordinate also leads to conflicts between functions and units, and these are handled badly two times out of three—resolved after a significant delay (38% of the time), resolved quickly but poorly (14%), or simply left to fester (12%).
(D) Implementation Tactics
Implementation tactics capture the steps used to elicit support, cooperation, or acquiescence needed to ensure compliance. According to Nutt there are four types of implementation tactics used by managers in making planned changes: intervention, participation, persuasion, and edict. Intervention refers to strategy adjustments during the implementation stage by introducing new norms and practices. Intervention tactics are strategy adjustments during the implementation process by introducing new norms and practices. Participation tactics involves formulating strategic goals and delegating a task force that develops and suggests consistent implementation options. Persuasion consists of the tactic of using the involved parties to convince employees about the decided course of actions. Persuasion tactics uses consultants or technical staff for development of ideas, and involved them in the process of convincing the employees about the decided course of action. The main mechanism for implementation in the edicts tactics is the issuing of directives. Edict tactics relies on power and is characterized by the absence of participation.
A research based on 91 case studies by Nutt found a 100 percent success rate when key executives used an intervention tactic, but observed this tactic in less than 20 percent of the cases. Both the persuasion and participation tactics had 75 percent success rates; persuasion had 42 percent frequency of use, and participation the lowest, 17 percent. Implementation by edict had a 43 percent success rate and a 23 percent frequency of use. Managers need to pick up right tactics based on situational constraints, such as a manager’s freedom to act and need for consultation.
In the context of strategy implementation people comprise top management, middle management, lower management and non-management. Effectiveness of strategy implementation is affected by the skills, attitudes, capabilities, experiences and other characteristics of people. For instance, in a study by Gupta and Govindarajan it was found that the greater the marketing and sales experience of middle managers, the greater their willingness to take risk, and the greater their tolerance for ambiguity. These personal factors contribute to the implementation effectiveness in the case of a ‘build’ strategy but hamper it in the case of a ‘harvest’ strategy for SBUs. In another research Govindarajan found that greater R&D experience on the part of the SBU general manager contribute to implementation effectiveness in the case of a differentiation strategy followed by an SBUs, but hamper it for a low-cost strategy SBUs. On the other hand general managers who have manufacturing experience contribute to performance in the case of low-cost SBUs, but hamper performance for differentiation-strategy SBUs.
3.2 External environmental uncertainty
The external uncertainty affects not only the formulation of strategy but also its implementation. Managers need to factor in the impact of environmental uncertainty and make appropriate course correction as shown in Exhibit 4.
Exhibit 4: Environmental Uncertainty and Strategy Implementation
(Source: DELTA M Management R&D Lab adapted from Okumus, Op. cit)
Following questions can help managers in aligning their implementation efforts to the environmental uncertainty.
- Are our control mechanisms picking up right signals from external environment? Do we need change in it?
- Do we need to change the organisation structure?
- Is there a problem in alignment between implementation and organisational culture?
- Do we need to change the leadership style and which specific facets?
- Do we need to change our plans, programmes & projects?
- Is there a need for change in policies, procedures & rules?
- Do we need to change resource allocation?
- Do we need to change our strategy?
A strategy can have both intended and unintended outcomes. Intended outcome of strategy are often measured in financial terms. But operational and management control systems that are built around financial measures and targets, often bear little relation to the company’s progress in achieving long-term strategic objectives. That is why in last few years, a more holistic measure called as ‘Balanced Scorecard’ has become popular.
Exhibit 5: Balanced Score Card
(Source: Kaplan, R. S. and Norton, D. P. (Jan.-Feb. 1996).‘Using the Balanced Scorecard as a Strategic Management System.’ Harvard Business Review, p. 76)
The balanced score card, developed by Robert S. Kaplan and David P. Norton supplements traditional financial measures with criteria that measure performance from three additional perspectives – those of customers, internal business processes, and learning and growth. Scorecard displays measures of progress from all four scorecard perspectives and also targets for each of them. Managers then identify actions that will drive targets, the measures they will apply to those drivers from the four perspectives, and establish the short-term milestones that will mark their progress along the strategic paths they have selected.
Kaplan & Norton cite example of a Style Company (not its real name) whose CEO articulated a goal which seemed impossible to many. The goal was ‘to double revenues in five years.’ The forecasts built into the organization’s existing strategic plan fell $1 billion short of this objective. The managers, after considering various scenarios, agreed to specific increases in five different performance drivers: the number of new stores opened, the number of new customers attracted into new and existing stores, the percentage of shoppers in each store converted into actual purchasers, the portion of existing customers retained, and average sales per customer. By helping to define the key drivers of revenue growth and by committing to targets for each of them, the managers eventually grew comfortable with the CEO’s ambitious goal.
Idea of Balanced Score Card is based on four key management processes that link long-term strategic objectives with short-term actions. These processes are shown in Exhibit 6.
Exhibit 6: Enabling Processes
(Source: Kaplan and Norton, op.cit, p. 77)
Balanced scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth. The scorecard links a company’s long-term strategy with its short term actions and hence it has also been used as a complete strategic management system in itself.
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