24 Operational Implementation
1. Learning Outcome
2. Introduction to Implementation of Strategy
3. Management Issues Central to Implementation of Strategy
4. Implementing Strategy through Organizational Structure
5. Implementing Strategy through Internal New Ventures
6. Implementing Strategy through Acquisitions
7. Implementing Strategy through Strategic Alliances
8. Summary
1. Learning Outcome:
After completing this module the students will be able to understand:
- Importance of Strategy Implementation
- Key issues involved in Strategy Implementation
- Implementation of Strategy making changes in Organizational Structure
- Implementation of Strategy using Internal New Ventures, Acquisitions and Strategic Alliances
2. Introduction:
Strategic management is the process of deciding the strategy after environmental scanning & analysis and then implementing, evaluating and controlling the strategy so formulated (Figure-1). Strategy formulation is an important phase of strategic management, but strategic management does not end until the strategy so
effectively. Success comes through effective implementation and evaluation but not only through effective formulation. A strategy, not precisely planned but implemented well, may achieve more than a perfect strategy which is never implemented (Figure-2).
Most of organizations invest a lot of time, money and efforts for formulating the strategy, considering the implementation secondary. Strategy formulation is an intellectual process and requires coordination among few individuals only whereas implementation is an operational process and involves coordination among large number of people. Figure-3 explains the comparison of strategy formulation and implementation in detail. It also needs special motivation and leadership skills. Concept and techniques to be used for deciding strategies in large or small organizations may be the same but implementing those strategy is going to be different depending upon the size of the organization. Implementing strategies may require the different types of actions to be taken by organization which may include adding new departments, hiring new employees, changing the pricing policies, changing the sales territories, transferring employees among different divisions, developing financial budgets, developing cost control mechanisms, changing product lines, building new facilities etc. Undertaking these types of activities cannot to be the same for different types and size of organizations. Therefore effective implementation of strategy is very essential to take the company from its present position to desired future state.
3. Management Issues central to Implementation of Strategy:
Strategy implementation affects all the functional and divisional areas of a business entity from top to bottom. Following are the some issues which need to be addressed for successful implementation of strategy:
Ø Involvement of divisional and functional managers in strategy formulation: During the Implementation phase, there is a shift of responsibility from strategists to divisional or functional managers, who are to play key role in implanting the strategy. Obstacles at this stage may arise if strategic decisions come to surprise of divisional and functional managers as they have not been involved in the strategy formulation activities. Managers and employees throughout an organization need to be involved in implementation and their role in implementation should build upon their prior role during the formulation stage.
Ø Establishing annual objectives: Setting the annual objectives is important for implementation as they establish the organizational,divisionaland departmental priorities (Figure-5). Objectives can be used as basis for deciding the resource allocation also. Considerable time and efforts should be devoted to ensure that annual objectives are well conceived, consistent with long term objectives and are supportive to strategies be implemented. Annual objectives are helpful in monitoring the progress towards achieving long term objective of the organization. Keeping in view the long term objectives of the organization, annual objectives for different divisions can be established. Further every division can have different annual objectives for different functional department also.
Ø Formulating different organizational policies: Policies helps the managers and employees in knowing that what is expected from them thereby increasing the likelihood that strategies will be implemented effectively. Strategic change does not take place automatically; rather some policies are required to solve the problem occurring on day to day basis. Policy can be defined as set of guidelines, methods, rules, procedures and practices established to support the organizational goal. Policies can be used as tools for implementing strategy. These policies define the limitations or the boundaries with in which each and every employee has to work.
For example some organization may be having policy to discourage
Ø Resource Allocation: Every organization has different resources which are to be deployed in order to achieve the desired goals. These resources can be financial resources, physical resources, human resources and technological resources. Resources should be allocated among different divisions and departments keeping in view the established annual objectives (Figure-7). If an
success than for resource allocation which is not consistent with annual objectives. The effectiveness of resource allocation lies in the resulting accomplishment of an organization’s objectives.
Ø Managing Conflict: Conflict can be defined as a disagreement between two or more parties on some issues (Figure-8). Interdependency of objectives and competition for limited resources generally lead to conflict in the organization.
Setting annual objectives may also lead to conflict some time. For example, a collection manager’s objective of reducing bad debts by 50% may lead to a conflict with objective of a sales manager to increase sales by 20%. Having conflict is very much natural in the organization so it becomes very important that how conflict is handled. Generally there are three approaches to handle conflict: Avoidance, Defusion, and Confrontation (Figure-9). Avoidance of conflict refers to ignoring the conflict assuming that it will be resolved automatically. Defusion refers to playing down differences between parties by compromising so that neither is a winner or loser, or resorting to majority rule or refereeing to higher authorities etc. Confrontation refers to exchanging the positions of parties to conflict
Ø Creating a Strategy Supportive Culture: Culture prevailing in an organization should be supportive to the strategic change. The aspects of existing culture those are incompatible to the strategies being implemented should be identified and changed accordingly. Generally the strategies are market driven and formulated keeping in mind the competitive forces; therefore changing culture according to strategy is effective rather than changing the strategy as per the culture prevailing in organization (Figure-10). Different techniques like recruitment, training, transfer, promotion, restructuring etc. can be used to alter the culture for strategic support.
4. Implementing Strategy through Organizational Structure:
Implementing a strategy often requires changes in the way an organization is structured. Generally the organizational structure dictates that how objectives and policies will be established and how the resources will be allocated. The structure should be designed to facilitate the strategic pursuit. There is no optimal structure for a given strategy or a type of organization. For example, consumer goods companies tend to organize themselves by divisional structure by product form of organization. Small firms tend to be functionally structured. Large firms tend to use strategic business unit or matrix structure. As organizations grow, their structures generally changes from simple to complex. The basic building blocks of the organizational structure are differentiation and integration. Differentiation is the way in which company allocates people and resources to organizational tasks and divides them into functions and divisions so as to create value. Whereas integration is the means by which company seeks coordinate people, functions and divisions to accomplish organizational tasks. In short, differentiation is the way company divides itself into part and integration is the way those parts are combined.
4.1 Vertical Differentiation: The vertical differentiation specifies the reporting relationship that link people, tasks and functions at all levels of a company. The management chooses the appropriate number of hierarchical levels and correct span of control for implementing its strategy effectively. It establishes the authority structure from top to bottom. The basic choice is to have a tall structure or a flat structure. The flat structure is one having lesser levels of hierarchy with wider span of control and tall structure is the one having many levels of hierarchy with narrow span of control. For example, average number of hierarchy levels in a company having 3000 employee is seven. If such an organization is having 9 levels would be called tall structured and having 5 levels would be called flat structured organization. Companies generally choose the number of levels they need on the basis of their strategy and functional tasks necessary to support the strategy. For example, companies following the strategy of differentiation based on quality and service would have flat structures, giving its employees wide discretion to satisfy customer’s demands without consulting the supervisors. Organizations needs to choose levels of hierarchy very carefully as tall structures may lead to problem in coordination, motivational problem, and information distortion. Tall structures generally involve so many middle managers which can also create problems in functioning of organization.
4.2 Horizontal Differentiation: Managing the strategy-structure relationship when number of hierarchical levels become too many is difficult and expensive. When firms grow and diversify, then it becomes difficult to operate having tall structures or decentralized structures. Horizontal differentiation is the solution for such situations. There are different forms of horizontal differentiation. First of all companies need to choose an appropriate form of horizontal differentiation that will suit best to the organizational tasks and activities to meet the objectives of company’s strategies. Following are the different forms of horizontal structures:
Ø Functional Structure: The most widely used structure is functional or centralized structure as this is the most simplest and least expensive amongst different form of horizontal structures. It arranges the people working in the organization on the basis of their common expertise and business function they perform such as marketing, finance, R&D and MIS etc. In this type of structure, people doing similar tasks are grouped together, so they can learn from expertise of each other. They can monitor each other and ensure that no one is shirking from his responsibility. This type of structure may have communication problem because different functional hierarchies evolve and functions grown more remote from each other. As a result, it becomes difficult to communicate across functions and coordinate their activities. Further, if number of products grows, a company may find it difficult to measure the contribution of one or few products to its overall profitability. Resulting to wrong decisions of dropping some products which are actually more profitable. Sometimes the combined effect of all these factors is that long-term strategic considerations are ignored because management is engaged in solving communication and coordination problem.
Ø Product Structure: In product structure, activities are grouped by product line. It is most effective structure for implementing strategies when specific products or services need special emphasis. It is widely used in organizations which deal in very few types of products or services. It allows strict control and attention to the product lines but may also require a more skilled management force and reduced top management control. Companies like General Motors, DuPont and Procter & Gamble use this type of structure to implement its strategies.
Ø Product Team Structure: In the product team structure, as in the product structure, tasks are divided along product lines to reduce costs and increase management’s ability to monitor and control manufacturing process. However, specialists are taken from the various support functions and assigned work on a product or project, where they are combined into cross- functional teams to serve the needs of the product. These teams are formed right in the beginning of the product development process so that any problem that arises can be handled at early stages only. Moreover, the use of cross-functional teams can speed innovation and responsiveness to customers, because when authority is decentralized to team level, decisions can be made more quickly.
Ø Geographic Structure: This type of structure is best suited when company have similar branch facilities located in widely dispersed areas. It allows local participation in decision making and improved coordination within a region. For example, a company may divide its manufacturing operations and establish manufacturing plants in different regions of the country, in order to be more responsive to the needs of customers of that region and to reduce transportation cost. A company like FedEx clearly needs a geographic structure to fulfill its corporate goal – next day delivery (Figure-12). Large organizations, such as Neiman Marcus and Wall-Mart etc. moved to a geographic structure soon after they started building stores across the country.
Ø Strategic Business Unit Structure: As the number, size and diversity of divisions in an organization increases, controlling and evaluating divisional operations becomes difficult. Increase in sale is often not accompanied by increase in profitability. In such a multidivisional companies, SBU structure is most suitable. SBU structure, also known as multidivisional structure, groups similar divisions into strategic business units and delegates authority and responsibility for each unit to a senior executive who reports directly to chief executive officer. It can facilitate strategy implementation by improving coordination between similar divisions and channeling accountability to distinct business unit. The cost of operating this type of structure is very high compared with the cost of a functional structure. Companies like GM and IBM are the examples of SBU structure. Size of the corporate staff is the major expense in these types of companies as thousands of managers remain on their corporate staff. Here again, however, higher operating costs are offset by a higher level of value creation, making a sense of using such type of structure. For example, General Motors operate the whole corporation through multidivisional structure, each car division is part of different product division based on the kind of car it makes, as this allows it to operate more efficiently. Each division is also able to adopt the structure that best suits it needs.
Ø Matrix Structure: It is the most complex of all the structures as it uses both vertical and horizontal flow of authority and communication. In matrix structure, functional managers work with project managers in temporary teams to develop new products. Once the project is completed, they move to new teams where they can apply their skills to develop string of new products. Day to day operations of a division are responsibility of divisional management which holds the operational responsibility. Corporate headquarter staff, which includes board of directors as well as top executives, is responsible for overseeing long-term plans and providing guidance for interdivisional projects. This staff holds strategic responsibility. Such a combination of self-contained divisions with a centralized corporate management represents a high level of both vertical and horizontal differentiation. These two innovations provide the additional control required to handle growth and diversification. It has advantage of enhanced corporate financial and strategic control. It helps in creating a stronger pursuit of internal efficiency. Despite of its high cost, matrix structures is adopted by more than 90% of all large US corporations.
5. Implementing Strategy through Internal New Ventures:
Internal new venture can be used to implement corporate level strategy when a company is having some specific resources and capabilities in its existing business that can be used to enter and compete in a new on taking the advantage of its software skills, entered in Xbox video gaming also. If company is planning to enter an emerging industry where no established competitor exists then it can use this strategy even without holding specific capabilities as it will not be having any competitive disadvantage.
This type of strategy is very popular but is having quite a high failure rate also. Generally it is suggested that large scale entry to a new business is pre-requisite for success. In long run it may bring greater returns but in short run it may involve significant development cost and substantial losses. That’s why companies follow a small scale entry which may lead to losses. Many new internal ventures are high technology operations. To be successful, science based innovations must be developed with market requirements in mind. Many internal ventures fail when organizations ignore the basic requirements of the market. A company can be blinded by the technological possibilities of a new product and fail to analyze market opportunities. Thus, a new venture may fail because of lack of commercialization or marketing a technology for which there is no demand. Another common mistake made by organizations is failure by management to establish the strategic context within which new venture project should be developed. It is necessary to be very clear about the strategic objectives of the venture and to understand exactly how it will help to establish a competitive advantage. For the successful internal ventures, company must follow a structured approach.it must first spell out its strategic objectives and then communicate it clearly to its R&D people. There must be close coordination between marketing and R&D to ensure that research project focuses on the market needs. Management need to monitor the progress of the project closely. During the first 4-5 years, the criteria for evaluation must be growth in the market share rather than profitability or cash flow. Cash flow or profitability may be given importance during the medium term only. Construction of efficient scale production facilities before demand has fully materialized, large marketing expenditures to build a market presence, brand loyalty, and commitment by management to accept initial losses can be helpful for making new ventures successful.
6. Implementing Strategy through acquisitions:
Acquisition refers to purchase of one company by the other. While implementing strategy, acquisitions may be used for two reasons – to strengthen company’s competitive position or to enter a new business. When a company does not enjoy the resources and capabilities to compete in a particular business, may acquire an incumbent company, at a reasonable price, which have those competences. Entering a new venture internally may be a slow process, thus companies may use acquisitions as an entry mode to move fast. A company can purchase a market leader in a strong cash position overnight, rather than spending years to build up a market leadership position through internal ventures. Internal new venture may be a risky affair as uncertainties remains associated with estimating future profitability, market share, and revenues etc. but in case of acquisitions, there remains no such uncertainties.
Acquisitions are preferred as entry mode when industry to be entered is well protected with barriers to entry. By acquiring an established organization, a company can avoid such entry barrier. But acquisitions may work in situation where incumbent company can be acquired at a cost less than the cost to enter the same industry through new venture. Though it is a popular mode of strategy implementation but there is ample evidence that many acquisitions failed. For example, a study by Mercer Management Consulting of 150 acquisitions worth more than $500 million concluded that 50% of these acquisitions ended up reducing shareholder value, often substantially, and another 33% generated only marginal returns. Only 17% of those acquisitions were found to be successful. It is found that companies often find difficult to integrate divergent corporate cultures after the acquisitions, which may prove to be the major reason of failure. Many times acquisitions failed because companies overestimate the potential economic benefits to be reaped from acquisition as they tend to be very expensive.
For a successful acquisition, target identification and pre-acquisition screening is an essential activity. Screening would begin with a detailed assessment of rationale for making the acquisition and with identification of an enterprise that would be an ideal one to acquire. Once the screening is through, bidding strategy should be formulated to pay the least for acquisition. Essential element for any such bidding strategy should be the timing. For example, Hanson PLC, one of the successful companies specializing in growth through acquisitions, always looked for a business which is suffering from short-term problems due to cyclical industry factors or from problems localized in one division. Such companies are typically undervalued by the stock market and can be acquired at reasonable payment.
7. Implementing Strategy through Strategic Alliances:
Strategic alliances can also be used to implement strategy. Strategic alliances refer to cooperative agreement between two or more companies to work together and share resources to achieve common business objective A joint venture is a formal type ofstrategic alliance in which two companies jointly create a new, separate company to enter a new business. It can be followed in a situation when a company looks at the advantage of establishing a new business in an growth industry, but due to the risks involved, is not willing on its own. In such a situation, company may decide to form some kind of strategic alliance with another company. Parties to alliance may be http://www.1000ventures.com/business_guide/strategic_alliances_ma actual or potential competitors, they may at different stages in an industry’s(Figure-value chain, or they may be in different businesses but have joint interest in working together. Strategic alliances may temporary or permanent.
For example, Motorola found it difficult to enter Japanese cellular market. It formed an alliance with Toshiba to build microprocessors (Figure-16). As part of the deal, Toshiba provided Motorola with marketing help including some of its best managers. This helped Motorola to win government approval to enter Japanese cellular market. Many companies enter in to strategic alliances to share the fixed costs and associated risks that arise from the development of new products or processes. These alliances may be seen as a way of bringing together complementary skills and assets that neither company could easily develop on its own. Biggest disadvantage of strategic alliance is access of alliance partner to valuable low-cost manufacturing knowledge and route to gain new technology and market access. The critics of alliances even say that more formal and extensive the alliance, greater the possibility that company may give away more than it gets in return. So in order to make alliance successful, partner selection and alliance structure should be decided carefully. The probability of opportunism by alliance partner can be reduced by establishing some contractual safeguards in the agreement and agreeing to swap valuable skills and technologies.
- Summary:
Successful strategy formulation needs to be followed by effective implementation as well. Discipline and hard work from motivated manager and employees is essential to successful implementation of strategy. Different management issues like annual objectives, resource allocation, framing policies, including strategists in implementation and strategy supportive culture are critical during implementation stage. Depending upon the size and nature of organization, other management issues can also be equally important in successful implementation. Companies need to monitor closely the organizational structure to achieve superior profitability through successful strategies. Depending upon the nature, strategies can be implemented through making changes in the organizational structure, through internal new ventures, acquisitions and strategic alliances.
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