D9 - Planning

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chapter 11

Managing Internal Operations Actions That Promote Good Strategy Execution

©Roy Scott/Ikon Images/Getty Images

Learning Objectives

This chapter will help you

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

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

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

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

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

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

Steve Jobs—Cofounder of Apple, Inc.

Processes underpin business capabilities, and capabilities underpin strategy execution.

Pearl Zhu

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

Robert Bosch—Founder of engineering company Robert Bosch

GmbH

• Instituting policies and procedures that facilitate good strategy execution.

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

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

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

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

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

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

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ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FIGURE 11.1 How Policies and Procedures Facilitate Good Strategy Execution

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

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

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

Place limits on independent action and help overcome resistance to change

Help enforce consistency in how strategy-critical activities are performed

Improve the quality and reliability of strategy execution

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

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

Well-Conceived Policies

and Procedures

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

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

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

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

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

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

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

EMPLOYING BUSINESS PROCESS MANAGEMENT TOOLS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ILLUSTRATION CAPSULE 11.1

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

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

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

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

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

Charleston Area Medical Center’s Six Sigma Program

©ERproductions Ltd/Blend Images LLC

Note: Developed with Robin A. Daley.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Amazon.com ships customer orders from a global network of some 707 technolog- ically sophisticated order fulfillment and distribution centers. Using complex picking algorithms, 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. Computers also generate data on mix-boxed items, chute backup times, line speed, worker productivity, and shipping weights on orders. Systems are upgraded regularly, and productivity improvements are aggressively pursued. Amazon has been experi- menting with drone delivery in order to lower costs and speed package delivery; more

INSTALLING INFORMATION AND OPERATING SYSTEMS

• LO 11-4 Describe the role of information sys- tems and operating systems in enabling company personnel to carry out their strate- gic roles proficiently.

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recently it has begun marketing a pilot project called “Seller Flex” as part of its effort to develop its own delivery service.

Otis Elevator, the world’s largest manufacturer of elevators, with more than 2.6 million elevators and escalators installed worldwide, has a 24/7 remote electronic monitoring system that can detect when an elevator or escalator installed on a customer’s site has any of 325 problems. If the monitoring system detects a problem, it analyzes and diagno- ses the cause and location, then makes the service call to an Otis mechanic at the near- est location, and helps the mechanic (who is equipped with a web-enabled cell phone) identify the component causing the problem. The company’s maintenance system helps keep outage times under three hours—the elevators are often back in service before peo- ple even realize there was a problem. All trouble-call data are relayed to design and manufacturing personnel, allowing them to quickly alter design specifications or manu- facturing procedures when needed to correct recurring problems. All customers have online access to performance data on each of their Otis elevators and escalators.

Well-conceived state-of-the-art operating systems not only enable better strategy execution but also strengthen organizational capabilities—enough at times 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 bet- ter than those employed by rivals, they provide the company with a competitive advan- tage. Similarly, a company striving to be a low-cost provider is competitively stronger if it has an unrivaled benchmarking system that identifies opportunities to implement best-in-the-world 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 catch up to customer demand.

Instituting Adequate Information Systems, Performance Tracking, and Controls Accurate and timely information about daily operations is essential if managers are to gauge how well the strategy execution process is proceeding. Companies everywhere are capitalizing on today’s technology to install real-time data-generating capability. Most retail companies now have automated 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. Transportation companies have elaborate informa- tion systems to provide real-time arrival information for buses and trains that is auto- matically sent to digital message signs and platform audio address systems.

Siemens Healthcare, one of the largest suppliers to the health care industry, uses a cloud-based business activity monitoring (BAM) system to continuously monitor and improve the company’s processes across more than 190 countries. Customer satisfac- tion is one of Siemens’s most important business objectives, so the reliability of its order management and services is crucial. Caesars Entertainment, owner of casinos and hotels, uses a sophisticated customer relationship database that records detailed information about its customers’ gambling habits. When a member of Caesars’s Total Rewards program calls to make a reservation, the representative can review previous spending, including average bet size, to offer an upgrade or complimentary stay at

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Caesars Palace or one of the company’s other properties. At Uber, the popular ride- sharing service, there are systems for locating vehicles near a customer and real-time demand monitoring to price fares during high-demand periods.

Information systems need to cover five broad areas: (1) customer data, (2) opera- tions data, (3) employee data, (4) supplier and/or strategic partner data, and (5) finan- cial performance data. All key strategic performance indicators must be tracked and reported in real time whenever possible. Real-time information systems permit com- pany managers to stay on top of implementation initiatives and daily operations and to intervene if things seem to be drifting off course. Tracking key performance indica- tors, gathering information from operating personnel, quickly identifying and diagnos- ing problems, and taking corrective actions are all integral pieces of the process of managing strategy execution and overseeing operations.

Statistical information gives managers a feel for the numbers, briefings and meet- ings provide a feel for the latest developments and emerging issues, and personal contacts add a feel for the people dimension. All are good barometers of how well things are going and what operating aspects need management attention. Managers must identify problem areas and deviations from plans before they can take action to get the organization back on course by either improving the approaches to strat- egy execution or fine-tuning the strategy. Jeff Bezos, Amazon.com’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.”17

Monitoring Employee Performance Information systems also provide managers with a means for monitoring the performance of empowered workers to see that they are acting within the specified limits.18 Leaving empowered employees to their own devices in meeting performance standards without appropriate checks and balances can expose an organization to excessive risk.19 Instances abound of employees’ deci- sions or behavior going awry, sometimes costing a company huge sums or producing lawsuits and reputation-damaging publicity.

Scrutinizing daily and weekly operating statistics is one of the ways in which manag- ers can monitor the results that flow from the actions of subordinates without resorting to constant over-the-shoulder supervision; if the operating results look good, then it is reasonable to assume that empowerment is working. But close monitoring of operating performance is only one of the control tools at management’s disposal. Another valuable lever of control in companies that rely on empowered employees, especially in those that use self-managed work groups or other such teams, is peer-based control. Because peer evaluation is such a powerful control device, companies organized into teams can remove some layers of the management hierarchy and rely on strong peer pressure to keep team members operating between the white lines. This is especially true when a company has the information systems capability to monitor team performance daily or in real time.

USING REWARDS AND INCENTIVES TO PROMOTE BETTER STRATEGY EXECUTION It is essential that company personnel be enthusiastically committed to executing strategy successfully and achieving performance targets. Enlisting such commit- ment typically requires use of an assortment of motivational techniques and rewards.

Having state-of-the-art oper- ating systems, information systems, and real-time data is integral to superior strat- egy execution and operat- ing excellence.

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Indeed, an effectively designed incentive and reward structure is the single most powerful tool management has for mobilizing employee commitment to successful strategy execu- tion. But incentives and rewards do more than just strengthen the resolve of company personnel to succeed—they also focus employees’ attention on the accomplishment of specific strategy execution objectives. Not only do they spur the efforts of individu- als to achieve those aims, but they also help coordinate the activities of individuals throughout the organization by aligning their personal motives with the goals of the organization. In this manner, reward systems serve as an indirect type of control mechanism that conserves on the more costly control mechanism of supervisory oversight.

To win employees’ sustained, energetic commitment to the strategy execu- tion process, management must be resourceful in designing and using motivational incentives—both monetary and nonmonetary. The more a manager understands what motivates subordinates and the more he or she relies on motivational incentives as a tool for achieving the targeted strategic and financial results, the greater will be employ- ees’ commitment to good day-in, day-out strategy execution and the achievement of performance targets.20

Incentives and Motivational Practices That Facilitate Good Strategy Execution Financial incentives generally head the list of motivating tools for gaining whole- hearted employee commitment to good strategy execution and focusing attention on strategic priorities. Generous financial rewards always catch employees’ atten- tion and produce high-powered incentives 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 plans, stock awards, company contributions to employee 401(k) or retirement plans, and piecework incentives (in the case of production workers). But most successful companies and managers also make extensive use of nonmonetary incentives. Some of the most important nonmonetary approaches companies can use to enhance employee moti- vation include the following:21

• Providing attractive perks and fringe benefits. The various options include coverage of health insurance premiums, wellness programs, college tuition reimbursement, gen- erous paid vacation time, onsite child care, onsite fitness centers and massage ser- vices, opportunities for getaways at company-owned recreational facilities, personal concierge services, subsidized cafeterias and free lunches, casual dress every day, personal travel services, paid sabbaticals, 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), flextime (variable work schedules that accommo- date individual needs), college scholarships for children, and relocation services.

• Giving awards and public recognition to high performers and showcasing company successes. Many companies hold award ceremonies to honor top-performing indi- viduals, 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. 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.

• LO 11-5 Explain how and why the use of well- designed incentives can be management’s single most power- ful tool for promot- ing adept strategy execution.

A properly designed incentive and reward structure is management’s single most powerful tool for gaining employee commit- ment to successful strategy execution and excellent operating results.

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

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• Relying on promotion from within whenever possible. This practice helps bind work- ers to their employer, and employers to their workers. Moreover, it provides strong incentives for good performance. Promoting from within also helps ensure that people in positions of responsibility have knowledge specific to the business, tech- nology, and operations they are managing.

• Inviting and acting on ideas and suggestions from employees. Many companies find that their best ideas for nuts-and-bolts operating improvements come from the sug- gestions of employees. Moreover, research indicates that giving decision-making power to down-the-line employees increases their motivation and satisfaction as well as their productivity. The use of self-managed teams has much the same effect.

• Creating a work atmosphere in which there is genuine caring and mutual respect among workers and between management and employees. A “family” work environ- ment where people are on a first-name basis and there is strong camaraderie pro- motes teamwork and cross-unit collaboration.

• Stating the strategic vision in inspirational terms that make employees feel they are a part of 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 to give their all. As described in Chapter 9, this not only increases productivity but reduces turnover and lowers costs for staff recruitment and training as well.

• Sharing information with employees about financial performance, strategy, operational measures, market conditions, and competitors’ actions. Broad disclosure and prompt communication send the message that managers trust their workers and regard them as valued partners in the enterprise. Keeping employees in the dark denies them information useful to performing their jobs, prevents them from being intel- lectually engaged, saps their motivation, and detracts from performance.

• Providing an appealing working environment. An appealing workplace environment can have decidedly positive effects on employee morale and productivity. Providing a comfortable work environment, designed with ergonomics in mind, is particu- larly important when workers are expected to spend long hours at work. But some companies go beyond the mundane to design exceptionally attractive work settings. The workspaces and surrounding parklands of Apple’s new multibillion dollar campus headquarters were designed to inspire Apple’s people, foster innovative collaboration, while also benefiting the environment. Employees have access to a 100,000 square foot fitness center, two miles of walking and running paths, an orchard, meadow, and pond as well as community bicycles, electric golf carts, and commuter shuttles for getting around. Facebook and defense contractor Oshkosh Corporation also have dramatic headquarters projects underway.

For a specific example of the motivational tactics employed by one of the best companies to work for in America, see Illustration Capsule 11.2 on the supermarket chain, Wegmans.

Striking the Right Balance between Rewards and Punishment While most approaches to motivation, compensation, and people management accen- tuate the positive, companies also make it clear that lackadaisical or indifferent effort and subpar performance can result in negative consequences. At General Electric,

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McKinsey & Company, 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 war- rant 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 raise performance to acceptable levels and keep it there or risk being replaced.

As a general rule, it is unwise to take off the pressure for good performance or play down the adverse consequences of shortfalls in performance. There is scant evidence that a no-pressure, no-adverse-consequences work environment leads to superior strat- egy execution or operating excellence. As the CEO of a major bank put it, “There’s a

ILLUSTRATION CAPSULE 11.2

Companies use a variety of tools and strategies designed to motivate employees and engender superior strat- egy execution. In this respect, Wegmans Food Markets, Inc. serves as an exemplar. With approximately 48,000 employees spread across 96 stores across the Northeast and Mid-Atlantic, Wegmans stands out as an organization that delivers above average results in an industry known for its low margins, low wages, and challenging employee relationships. Guided by a philosophy of employees first, Wegmans employs an array of programs that enables the company to attract and retain the best people.

Since the creation of its broad benefits program for full-time employees in the 1950s, Wegmans has had

a strong benefits philosophy. Today, flexible or com- pressed schedules are common, and policies extend to same-sex partners. Regarding financial compensation, wages are above average for the grocery retail indus- try, which also has an added benefit of keeping its work- force nonunionized.

In addition to the traditional elements of compen- sation and benefits, Wegmans invests considerably in the training and education of its employees. Known for its strength in employee development, upwards of $50  million annually is spent on employee learning. Since 1984, the company has awarded nearly $110 million in tuition assistance, and over $50 million in scholarships.

Another crucial aspect of employee motivation is feeling heard. Employees see their ideas put into action through a series of programs designed to cap- ture and implement their ideas. Wegmans deploys a series of programs, including open-door days, team huddles, focus groups, and two-way Q&As with senior management.

With the recognition that employees are critical to delivering a great customer experience, Wegmans directs a considerable amount of resources to its biggest asset, its people. Its suite of programs and benefits, along with a policy of filling at least half of its open opportuni- ties internally, lead to one of the lowest turnover rates in its industry. They have also resulted in Wegmans placing among the top five firms on Fortune’s list of The 100 Best Companies to Work For, year after year.

How Wegmans Rewards and Motivates its Employees

©tarheel1776/Shutterstock

Note: Developed with Sadé M. Lawrence.

Sources: Company website; Boyle, M., The Wegmans Way, January 24, 2005, http://archive.fortune.com/magazines/fortune/ fortune_archive/2005/01/24/8234048/index.htm; “Great Place to Work,” Wegmans Food Markets, Inc. - Great Place to Work Reviews, February 14, 2018, http://reviews.greatplacetowork.com/wegmans-food-markets-inc.

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deliberate policy here to create a level of anxiety. Winners usually play like they’re one touchdown behind.”22 A number of companies deliberately give employees heavy work- loads and tight deadlines to test their mettle—personnel are pushed hard 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.

However, if an organization’s motivational approaches and reward structure induce too much stress, internal competitiveness, job insecurity, and fear of unpleasant con- sequences, the impact on workforce morale and strategy execution can be counter- productive. Evidence shows that managerial initiatives to improve strategy execution should incorporate more positive than negative motivational elements because when cooperation is positively enlisted and rewarded, rather than coerced by orders and threats (implicit or explicit), people tend to respond with more enthusiasm, dedication, creativity, and initiative.23

Linking Rewards to Achieving the Right Outcomes To create a strategy-supportive system of rewards and incentives, a company must reward people for accomplishing results, not for just dutifully performing assigned tasks. Showing up for work and performing assignments do not, by themselves, guaran- tee results. To make the work environment results-oriented, managers need to focus jobholders’ attention and energy on what to achieve as opposed to what to do.24 Employee productivity among employees at Best Buy’s corporate headquarters rose by 35 percent after the company began to focus on the results of each employee’s work rather than on employees’ willingness to come to work early and stay late.

Ideally, every organizational unit, every manager, every team or work group, and every employee should be held accountable for achieving outcomes that con- tribute to good strategy execution and business performance. If the company’s strategy is to be a low-cost leader, the incentive system must reward actions and achievements that result in lower costs. If the company has a differentiation strat- egy focused on delivering superior quality and service, the incentive system must reward such outcomes as Six Sigma defect rates, infrequent customer complaints, speedy order processing and delivery, and high levels of customer satisfaction. If a company’s growth is predicated on a strategy of new product innovation, incentives should be tied to such metrics as the percentages of revenues and profits coming from newly introduced products.

Incentive compensation for top executives is typically tied to such financial mea- sures as revenue and earnings growth, stock price performance, return on investment, and creditworthiness or to strategic measures such as market share growth. However, incentives for department heads, teams, and individual workers tend to be tied to per- formance outcomes more closely related to their specific area of responsibility. For instance, in manufacturing, it makes sense to tie incentive compensation to such out- comes as unit manufacturing costs, on-time production and shipping, defect rates, the number and extent of work stoppages due to equipment breakdowns, and so on. In sales and marketing, incentives tend to be based on achieving dollar sales or unit vol- ume targets, market share, sales penetration of each target customer group, the fate of newly introduced products, the frequency of customer complaints, the number of new

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

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accounts acquired, and measures of customer satisfaction. Which performance mea- sures to base incentive compensation on depends on the situation—the priority placed on various financial and strategic objectives, the requirements for strategic and com- petitive success, and the specific results needed to keep strategy execution on track.

Illustration Capsule 11.3 provides a vivid example of how one company has designed incentives linked directly to outcomes reflecting good execution.

Additional Guidelines for Designing Incentive Compensation Systems It is not enough to link incentives to the right kinds of results—performance out- comes that signal that the company’s strategy and its execution are on track. For a company’s reward system to truly motivate organization members, inspire their best efforts, and sustain high levels of productivity, it is also important to observe the following additional guidelines in designing and administering the reward system:

• Make the performance payoff a major, not minor, piece of the total compensation pack- age. Performance bonuses must be at least 10 to 12 percent of base salary to have much impact. Incentives that amount to 20 percent or more of total compensation are big attention-getters, likely to really drive individual or team efforts. Incentives amounting to less than 5 percent of total compensation have a comparatively weak motivational impact. Moreover, the payoff for high-performing individuals and teams must be meaningfully greater than the payoff for average performers, and the payoff for average performers meaningfully bigger than that for below-average performers.

• Have incentives that extend to all managers and all workers, not just top management. It is a gross miscalculation to expect that lower-level managers and employees will work their hardest to hit performance targets if only senior executives qualify for lucrative rewards.

• Administer the reward system with scrupulous objectivity and fairness. If performance standards are set unrealistically high or if individual and group performance evalu- ations are not accurate and well documented, dissatisfaction with the system will overcome any positive benefits.

• Ensure that the performance targets set for each individual or team involve outcomes that the individual or team can personally affect. The role of incentives is to enhance individual commitment and channel behavior in beneficial directions. This role is not well served when the performance measures by which company personnel are judged are outside their arena of influence.

• Keep the time between achieving the performance target and receiving the reward as short as possible. Nucor, a leading producer of steel products, has achieved high labor productivity by paying its workers weekly bonuses based on prior-week pro- duction levels. Annual bonus payouts work best for higher-level managers and for situations where the outcome target relates to overall company profitability.

• Avoid rewarding effort rather than results. While it is tempting to reward people who have tried hard, gone the extra mile, and yet fallen short of achieving performance targets because of circumstances beyond their control, it is ill advised to do so. The problem with making exceptions for unknowable, uncontrollable, or unforeseeable circumstances is that once “good excuses” start to creep into justifying rewards for subpar results, the door opens to all kinds of reasons why actual performance has failed to match targeted performance. A “no excuses” standard is more evenhanded, easier to administer, and more conducive to creating a results-oriented work climate.

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

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For an organization’s incentive system to work well, the details of the reward structure must be communicated and explained. Everybody needs to understand how his or her incentive compensation is calculated and how individual and group performance targets contribute to organizational performance targets. The pres- sure to achieve the targeted financial and strategic performance objectives and continuously improve on strategy execution should be unrelenting. People at all levels must be held accountable for carrying out their assigned parts of the strategic

ILLUSTRATION CAPSULE 11.3

The strategy at Nucor Corporation, the largest steel producers in the United States, is to be the low-cost producer of steel products. Because labor costs are a significant fraction of total cost in the steel business, successful implementation of Nucor’s low-cost leader- ship strategy entails achieving lower labor costs per ton of steel than competitors’ costs. Nucor management uses an incentive system to promote high worker pro- ductivity and drive labor costs per ton below those of rivals. Each plant’s workforce is organized into produc- tion teams (each assigned to perform particular func- tions), and weekly production targets are established for each team. Base-pay scales are set at levels compa- rable to wages for similar manufacturing jobs in the local areas where Nucor has plants, but workers can earn a 1 percent bonus for each 1 percent that their output exceeds target levels. If a production team exceeds its weekly production target by 10 percent, team mem- bers receive a 10 percent bonus in their next paycheck; if a team exceeds its quota by 20 percent, team mem- bers earn a 20 percent bonus. Bonuses, paid every two weeks, are based on the prior two weeks’ actual produc- tion levels measured against the targets.

Nucor’s piece-rate incentive plan has produced impressive results. The production teams put forth exceptional effort; it is not uncommon for most teams to beat their weekly production targets by 20 to 50 percent. When added to employees’ base pay, the bonuses earned by Nucor workers make Nucor’s workforce among the highest paid in the U.S. steel industry. From a manage- ment perspective, the incentive system has resulted in Nucor having labor productivity levels 10 to 20 percent above the average of the unionized workforces at several of its largest rivals, which in turn has given Nucor a sig- nificant labor cost advantage over most rivals.

After years of record-setting profits, Nucor strug- gled in the economic downturn of 2008–2010, along with the manufacturers and builders who buy its steel. But while bonuses dwindled, Nucor showed remark- able loyalty to its production workers, avoiding layoffs by having employees get ahead on maintenance, per- form work formerly done by contractors, and search for cost savings. Morale at the company remained high, and Nucor’s CEO at the time, Daniel DiMicco, was inducted into Industry-Week magazine’s Manufacturing Hall of Fame because of his no-layoff policies. As industry growth resumed, Nucor was in the position of having a well-trained workforce, more committed than ever to achieving the kind of productivity for which Nucor is justifiably famous. DiMicco had good reason to expect Nucor to be “first out of the box” following the crisis, and although he has since stepped aside, the company’s culture of making its employees think like owners has not changed.

Nucor Corporation: Tying Incentives Directly to Strategy Execution

©Glow Images

Sources: Company website (accessed March 2012); N. Byrnes, “Pain, but No Layoffs at Nucor,” BusinessWeek, March 26, 2009; J. McGregor, “Nucor’s CEO Is Stepping Aside, but Its Culture Likely Won’t,” The Washington Post Online, November 20, 2012 (accessed April 3, 2014).

The unwavering standard for judging whether indi- viduals, teams, and organi- zational units have done a good job must be whether they meet or beat perfor- mance targets that reflect good strategy execution.

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plan, and they must understand that their rewards are based on the caliber of results achieved. But with the pressure to perform should come meaningful rewards. Without an attractive payoff, the system breaks down, and managers are left with the less work- able options of issuing orders, trying to enforce compliance, and depending on the goodwill of employees.

KEY POINTS

1. Implementing a new or different strategy calls for managers to identify the resource requirements of each new strategic initiative and then consider whether the cur- rent pattern of resource allocation and the budgets of the various subunits are suitable.

2. Company policies and procedures facilitate strategy execution when they are designed to fit the strategy and its objectives. Anytime a company alters its strategy, managers should review existing policies and operating procedures and replace those that are out of sync. Well-conceived policies and procedures aid the task of strategy execution by (1) providing top-down guidance to com- pany personnel regarding how things need to be done and what the limits are on independent actions; (2) enforcing consistency in the performance of strategy- critical activities, thereby improving the quality of the strategy execution effort and coordinating the efforts of company personnel, however widely dispersed; and (3) promoting the creation of a work climate conducive to good strategy execution.

3. Competent strategy execution entails visible unyielding managerial commitment to continuous improvement. Business process management tools, such as reengi- neering, total quality management (TQM), and Six Sigma programs are important process management tools for promoting better strategy execution.

4. Company strategies can’t be implemented or executed well without well-conceived internal systems to support daily operations. Real-time information systems and control systems further aid the cause of good strategy execution. In some cases, state-of-the-art operating and information systems strengthen a compa- ny’s strategy execution capabilities enough to provide a competitive edge over rivals.

5. Strategy-supportive motivational practices and reward systems are powerful man- agement tools for gaining employee commitment and focusing their attention on the strategy execution goals. 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. While financial rewards pro- vide high-powered incentives, nonmonetary incentives are also important. For an incentive compensation system to work well, (1) the performance payoff should be a major percentage of the compensation package, (2) the use of incentives should extend to all managers and workers, (3) the system should be administered with objectivity and fairness, (4) each individual’s performance targets should involve outcomes the person can personally affect, (5) rewards should promptly follow the achievement of performance targets, and (6) rewards should be given for results and not just effort.

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ASSURANCE OF LEARNING EXERCISES

1. Implementing a new or different strategy calls for new resource allocations. Using your university’s library resources search for recent articles that discuss how a com- pany has revised its pattern of resource allocation and divisional budgets to sup- port new strategic initiatives.

2. Netflix avoids the use of formal policies and procedures to better empower its employees to maximize innovation and productivity. The company goes to great lengths to hire, reward, and tolerate only what it considers mature, “A” player employees. How does the company’s selection process affect its ability to operate without formal travel and expense policies, a fixed number of vacation days for employees, or a formal employee performance evaluation system?

3. Illustration Capsule 11.1 discusses Charleston Area Medical Center’s use of Six Sigma practices. List three tangible benefits provided by the program. Explain why a commitment to quality control is particularly important in the hospital industry. How can the use of a Six Sigma program help medical providers survive and thrive in the current industry climate?

4. Read some of the recent Six Sigma articles posted at www.isixsigma.com. Prepare a one-page report to your instructor detailing how Six Sigma is being used in two companies and what benefits the companies are reaping as a result. Further, discuss two to three criticisms of, or potential difficulties with, Six Sigma implementation.

5. Company strategies can’t be executed well without a number of support systems to carry on business operations. Using your university’s library resources, search for recent articles that discuss how a company has used real-time information systems and control systems to aid the cause of good strategy execution.

6. Illustration Capsule 11.2 provides a description of the motivational practices employed by Wegmans Food Markets, a supermarket chain that is routinely listed as among the top five companies to work for in the United States. Discuss how rewards and practices at Wegman’s aid in the company’s strategy execution efforts.

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EXERCISE FOR SIMULATION PARTICIPANTS

1. Have you and your co-managers allocated ample resources to strategy-critical areas? If so, explain how these investments have contributed to good strategy execution and improved company performance.

2. What actions, if any, is your company taking to pursue continuous improvement in how it performs certain value chain activities?

3. Are benchmarking data available in the simulation exercise in which you are par- ticipating? If so, do you and your co-managers regularly study the benchmarking data to see how well your company is doing? Do you consider the benchmarking information provided to be valuable? Why or why not? Cite three recent instances in which your examination of the benchmarking statistics has caused you and your co-managers to take corrective actions to improve operations and boost company performance.

4. What hard evidence can you cite that indicates your company’s management team is doing a better or worse job of achieving operating excellence and executing strat- egy than are the management teams at rival companies?

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ENDNOTES Companies Are Honing Their Performance (New York: McGraw-Hill, 2000); Joseph Gordon and M. Joseph Gordon, Jr., Six Sigma Quality for Business and Manufacture (New York: Elsevier, 2002); Godecke Wessel and Peter Burcher, “Six Sigma for Small and Medium- Sized Enterprises,” TQM Magazine 16, no. 4 (2004), pp. 264–272. 7 www.isixsigma.com (accessed November 4, 2002); www.villanovau.com/certificate- programs/six-sigma-training.aspx (accessed February 16, 2012). 8 Kennedy Smith, “Six Sigma for the Service Sector,” Quality Digest Magazine, May 2003; www.qualitydigest.com (accessed September 28, 2003). 9 www.isixsigma.com/implementation/-financial- analysis/six-sigma-costs-and-savings/ (accessed February 23, 2012). 10 Pande, Neuman, and Cavanagh, The Six Sigma Way, pp. 5–6. 11 “A Dark Art No More,” The Economist 385, no. 8550 (October 13, 2007), p. 10; Brian Hindo, “At 3M, a Struggle between Efficiency and Creativity,” Businessweek, June 11, 2007, pp. 8–16. 12 Charles A. O’Reilly and Michael L. Tushman, “The Ambidextrous Organization,” Harvard Business Review 82, no. 4 (April 2004), pp. 74–81. 13 Terry Nels Lee, Stanley E. Fawcett, and Jason Briscoe, “Benchmarking the Challenge to Quality Program Implementation,” Benchmarking: An International Journal 9, no. 4 (2002), pp. 374–387. 14 Milan Ambroé, “Total Quality System as a Product of the Empowered Corporate Culture,” TQM Magazine 16, no. 2 (2004), pp. 93–104; Nick A. Dayton, “The Demise of Total Quality Management,” TQM Magazine 15, no. 6 (2003), pp. 391–396. 15 Judy D. Olian and Sara L. Rynes, “Making Total Quality Work: Aligning Organizational Processes, Performance Measures, and Stakeholders,” Human Resource Management 30, no. 3 (Fall 1991), pp. 310–311; Paul S. Goodman and Eric D. Darr, “Exchanging Best Practices Information through Computer-Aided Systems,” Academy of Management Executive 10, no. 2 (May 1996), p. 7.

1 M. Hammer and J. Champy, Reengineering the Corporation: A Manifesto for Business Revolution (New York: HarperCollins, 1993). 2 James Brian Quinn, Intelligent Enterprise (New York: Free Press, 1992); Ann Majchrzak and Qianwei Wang, “Breaking the Functional Mind-Set in Process Organizations,” Harvard Business Review 74, no. 5 (September– October 1996), pp. 93–99; Stephen L. Walston, Lawton R. Burns, and John R. Kimberly, “Does Reengineering Really Work? An Examination of the Context and Outcomes of Hospital Reengineering Initiatives,” Health Services Research 34, no. 6 (February 2000), pp. 1363–1388; Allessio Ascari, Melinda Rock, and Soumitra Dutta, “Reengineering and Organizational Change: Lessons from a Comparative Analysis of Company Experiences,” European Management Journal 13, no. 1 (March 1995), pp. 1–13; Ronald J. Burke, “Process Reengineering: Who Embraces It and Why?” The TQM Magazine 16, no. 2 (2004), pp. 114–119. 3 www.answers.com (accessed July 8, 2009); “Reengineering: Beyond the Buzzword,” Businessweek, May 24, 1993, www.business- week.com (accessed July 8, 2009). 4 M. Walton, The Deming Management Method (New York: Pedigree, 1986); J. Juran, Juran on Quality by Design (New York: Free Press, 1992); Philip Crosby, Quality Is Free: The Act of Making Quality Certain (New York: McGraw-Hill, 1979); S. George, The Baldrige Quality System (New York: Wiley, 1992); Mark J. Zbaracki, “The Rhetoric and Reality of Total Quality Management,” Administrative Science Quarterly 43, no. 3 (September 1998), pp. 602–636. 5 Robert T. Amsden, Thomas W. Ferratt, and Davida M. Amsden, “TQM: Core Paradigm Changes,” Business Horizons 39, no. 6 (November–December 1996), pp. 6–14. 6 Peter S. Pande and Larry Holpp, What Is Six Sigma? (New York: McGraw-Hill, 2002); Jiju Antony, “Some Pros and Cons of Six Sigma: An Academic Perspective,” TQM Magazine 16, no. 4 (2004), pp. 303–306; Peter S. Pande, Robert P. Neuman, and Roland R. Cavanagh, The Six Sigma Way: How GE, Motorola and Other Top

16 Thomas C. Powell, “Total Quality Management as Competitive Advantage,” Strategic Management Journal 16 (1995), pp. 15–37; Richard M. Hodgetts, “Quality Lessons from America’s Baldrige Winners,” Business Horizons 37, no. 4 (July–August 1994), pp. 74–79; Richard Reed, David J. Lemak, and Joseph C. Montgomery, “Beyond Process: TQM Content and Firm Performance,” Academy of Management Review 21, no. 1 (January 1996), pp. 173–202. 17 Fred Vogelstein, “Winning the Amazon Way,” Fortune 147, no. 10 (May 26, 2003), pp. 60–69. 18 Robert Simons, “Control in an Age of Empowerment,” Harvard Business Review 73 (March–April 1995), pp. 80–88. 19 David C. Band and Gerald Scanlan, “Strategic Control through Core Competencies,” Long Range Planning 28, no. 2 (April 1995), pp. 102–114. 20 Stanley E. Fawcett, Gary K. Rhoads, and Phillip Burnah, “People as the Bridge to Competitiveness: Benchmarking the ‘ABCs’ of an Empowered Workforce,” Benchmarking: An International Journal 11, no. 4 (2004), pp. 346–360. 21 Jeffrey Pfeffer and John F. Veiga, “Putting People First for Organizational Success,” Academy of Management Executive 13, no. 2 (May 1999), pp. 37–45; Linda K. Stroh and Paula M. Caliguiri, “Increasing Global Competitiveness through Effective People Management,” Journal of World Business 33, no. 1 (Spring 1998), pp. 1–16; articles in Fortune on the 100 best companies to work for (various issues). 22 As quoted in John P. Kotter and James L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992), p. 91. 23 Clayton M. Christensen, Matt Marx, and Howard Stevenson, “The Tools of Cooperation and Change,” Harvard Business Review 84, no. 10 (October 2006), pp. 73–80. 24 Steven Kerr, “On the Folly of Rewarding A While Hoping for B,” Academy of Management Executive 9, no. 1 (February 1995), pp. 7–14; Doran Twer, “Linking Pay to Business Objectives,” Journal of Business Strategy 15, no. 4 (July–August 1994), pp. 15–18.

5. Are you and your co-managers consciously trying to achieve operating excellence? Explain how you are doing this and how you will track the progress you are making.

6. Does your company have opportunities to use incentive compensation techniques? If so, explain your company’s approach to incentive compensation. Is there any hard evidence you can cite that indicates your company’s use of incentive compen- sation techniques has worked? For example, have your company’s compensation incentives actually increased productivity? Can you cite evidence indicating that the productivity gains have resulted in lower labor costs? If the productivity gains have not translated into lower labor costs, is it fair to say that your company’s use of incentive compensation is a failure?

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