Capstone Project

MGMT 790

Diagnosis, Formulation, and Implementation of Strategic Change

The objectives of this final stage of our strategic management ‘project’ are:

· Identify the primary underlying cause of the most important performance issue that needs to be corrected (i.e. root cause analysis and prioritization)

· Identify the most appropriate change to make to remedy that causal factor and improve performance (i.e. selection and specification of a solution)

· Outline the important steps, considerations, and expectations of implementing that change (i.e. how to execute that solution and to what outcomes)

Step 1 – clarify the performance outcome target

Our aim is always to achieve, sustain, and improve competitive advantage. Recall that is defined as long-term, superior performance. What this basically means is we are seeking the one best way we can improve long-term performance in a way that is most sustainable. That means a strategic change, not just a quick tactical move like cutting costs or have a sales promotion.

So, narrow the scope of what ‘improve performance’ as a target means. That is, use your performance assessment work to conclude if the most important improvement to target is improved value creation (growth rate) or value capture (profitability). Which dimension of performance most needs attention? Keep it simple here…just pick one of these two targets. Do not try to solve anything yet!

Write a short statement that states your conclusion.

Example statements for Step 1:

· XYZ’s revenue growth rate is declining and is below industry average. To improve strategic performance, their ability to create value must be improved.

· XYZ’s growth is acceptable but their profitability is below industry average. Specifically, their operating efficiency is inferior as indicated by their below average Operating Margin over the last three years. Their ability to capture value, specifically in operating profitability, is the primary area to focus on toward improving long-term performance.

Step 2 – Summarize the variables in the strategic alignment model

Recall the fundamental model of strategic alignment in which performance is largely a function of the quality of overall alignment.

PERFORMANCE

STRATEGY

RES & CAPs

EXTERNAL

As you have already learned, a thorough analysis of each of the three aspects of alignment results in a set of primary conclusions. You’ve learned to prioritize the firm’s strengths/most valuable resources and capabilities, to specify the strategic choices that describe their competitive strategy, and to identify the key success factors and most significant change issues that shape the firm’s competitive environment. Now, get all those conclusions organized for analyzing cause-effect issues. Create an ‘all-in-one-place’ summary of your prior analysis steps. Summarize your conclusions from the previous templates about the firm’s internal strengths, their key strategic choices, and the key success factors in their external environment.

A hypothetical example :

Most valuable Res/Caps	Competitive Strategy	Industry Key Success Factors
CEO Leadership	Product Focus =	Differentiate from substitutes
Top engineers in industry	Target Customers =	Create switching costs
Well respected brands	Geographic Scope =	Deliver exceptional service
Well trained service staff	Value Proposition =	Multi-channel retailing
Proprietary supply chain IT	Business Model =	Must be able to adjust capacity
…..	(fill in to define each element for the firm)	Must become experts with social media customer contact

(There is no defined number of items to put in each column, just summarize your prior conclusions.)

Step 3 – Analyze the quality of the firm’s strategic choices

Think of this as “Strategy-Environment (S-E) alignment”. The questions here - Does the firm’s competitive strategy align with the competitive demands of the competitive environment? Can they achieve and sustain competitive advantage with the current choices?

Effective competitive strategy needs to align with the realities of the external environment. So, examine the two right columns to determine how well the set of strategic choices align with the key success factors. Here you are assessing the quality of their strategy, broken down into the clear and most critical component parts of their approach, with respect to the most critical requirements of the environment. List all the relationships that you deem not well aligned – remember to think ahead over the next 3-5 years based on your Drivers of Change. A complementary way to approach this is to ask the question: What changes to the current strategy would improve the alignment of strategy to key success factors and major changes coming in the next few years? Your statements on the misalignments should clearly specify what aspect of strategy is not well aligned with what specific KSF or DOC. That is, think of this step as identifying how specific variables are not aligned as they should be.

Examples (not related to the table above):

· XYZ’s value proposition of trendy, fashionable designs does not fit well with the key success factor of durable, long-lasting products.

· XYZ’s market focus on households with high levels of discretionary income does not fit well with the trend of declining household incomes.

· XYZ’s product focus on a broad range of quality, styles, and price points does not align well with the KSF for producers to significantly differentiate their products.

DON’T :

· …get sidetracked and bring up anything about resources and capabilities here

· …address tactical issues – focus on strategic choices/intentions

· …address outcomes/performance issues

· …try to solve the problem; don’t say what they should do here…stay focused on identifying misalignments only.

You might identify several strategic misalignments. If so, describe and define them all.

*You might also find that the strategy is okay and that nothing should change. If so, just recheck your thinking and keep in mind how things might change over the next 3-5 years. Still, it is okay and sometime appropriate to conclude that there are no changes needed to the firm’s current strategy. Outstanding firms may be in such a position – a great competitive strategy, clear preparation and adaptation toward major drivers of change…and probably strong performance. If this is the case (it won’t be for cases in this course), then your target for improving performance lies inside the firm – next.

If you identify more than one S-E misalignment, evaluate if there is one that seems to stand out. That is, if you could only change ONE of the identified misalignments, which one – if resolved – do you believe would have the greatest positive impact on competitive advantage? This kind of prioritization is an essential aspect of good strategic management. What should we do first! Where do we get the greatest improvement and/or ‘bang for the buck (or effort)? In reality, plans are usually developed to address multiple issue somewhat as a set, but for this CLASS – I need to your focus down and make an argument for the ONE strategic variable (one of your misalignment statements) that you think most explains why their strategy is not working as well as it should. Next, take that misalignment statement and describe the remedy. Following the examples above:

· XYZ needs to change their value proposition to focus on offering durable, long-lasting product designs and functional performance

· XYZ needs to broaden their market focus to include more budget-conscious households

· XYZ needs to narrow the range of their product line and build a differentiated brand presence.

The end result of this stage of one statement like the above examples that specifies what change to the firm’s competitive strategy is most vital to improving S-E alignment in a way that will improve the aspect of performance you specified in Step 1 as most critical. It is important that you be sure you are staying on the same, coherent track such that your diagnosis and formulations clearly and directly ties back through your analysis.

Step 4 – Analyze the appropriateness of the firm’s resources and capabilities

Strategic choices are just words…the firm must have a set of resources and capabilities that will enable them to execute a well-aligned strategy in a way to achieve competitive advantage. In Step 3, you either confirmed that the firm’s competitive strategy is good or you identified the most significant thin that needs to change, and how, to describe a revised competitive strategy. In this step, you now evaluate if the firm has the necessary internal abilities to exploit that competitive strategy. We can think of this as “ Resources/Capabilities – Strategy (R/C – S) alignment”.

So, examine the two left columns of the table you made in step 2 (*and revise the middle column based on any change conclusion from Step 3*). Think about each aspect of their strategy and what resources and capabilities would be required for that aspect to be executed effectively. For example, if the value proposition is to be a leading-edge fashion brand the firm better show a strength in design resources and/or capabilities! Identify any resources or capabilities that are missing or weak – i.e. ask and answer the question: What changes to resources and capabilities would significantly improve the firm’s ability to execute their strategy and achieve competitive advantage? Write statements that specify all such resource/capability misalignments. As in step 3, be clear about the variables (items from your summary table from step 2) you are talking about and what relationships between res/caps and elements of competitive strategy are not aligned.

Example statements:

· XYZ does not have adequate forecasting capabilities to effectively manage inventory and deliver on their value proposition of reliable supply.

· XYZ has poor capabilities to recruit and train entrepreneurs to excel in their franchise business model.

· XYZ does not have the human resources who know how to effectively select and enter foreign markets and thus they are not prepared to pursue their strategy of being a global firm.

DON’T:

· …link and align resources and capabilities with key success factors – that is inappropriate; strategic choices must always be the central link between res/cap and the external environment.

· …just say do something faster or better or more effectively; specify the resource or capability that must be added, not the outcome that should be sought.

Whereas it is acceptable to conclude a firm’s strategy is all fine, there is never a case in which internal strengths and sources of competitive advantage cannot be improved. Why is this the case? Strategy is just a set of choices, but resources and capabilities involve human knowledge and behaviors, complex processes, trade-offs caused by limited time or funds, continual decisions about prioritizing investment choices, etc. In other words, no firm is ever perfect! There is always room for improving the quality of resources/capabilities to execute a strategy. As a result, it is NEVER appropriate to conclude that there is nothing to change to improve a firm’s long-term performance. If the firm has outstanding performance, a great strategy, and all the internal factors to execute for powerful competitive advantage, then changes should be made to increase the security of those competitive advantages and to find new ways to exploit then to further increase superior performance. In summary – you always must repair strategic alignment or secure and exploit it if it is already set to deliver superior performance for the next several years.

You may as before identify more than one R/C- S misalignments. If so, work to prioritize them based on their impact on performance. That is, which one – if you repaired it for full alignment – would have the greatest impact on executing the competitive strategy and then result in the greatest improvement to performance? (And remember again – you identified a specific target area of performance back in Step 1, so stay true to that aim).

Step 5 – Prioritize to select the ONE misalignment that best explains the performance issue.

At this point, you have a list of misalignments (work to describe at least three areas of weakness in alignment). These are the weakest spots in the firm’s strategic alignment model. If a firm is doing poorly, you might have several. If they are doing well, you may need to emphasize longer-term threats the firm needs to adjust for in advance to secure and extend their superior performance.

Consider you misalignment statements and ask this simple question - “Which of these, if resolved, will have the most positive effect on improving strategic alignment, creating sustainable competitive advantage, and improving the firm’s performance in the area of (creating or capturing – whichever you earlier specified) value? Work to make a strong logical argument for your selection of ONE misalignment to address.

…… * STATUS CHECK:

By this point you have DIAGNOSED the most critical underlying misalignment issue that should be changed, added/acquired, or significantly altered in order to improve performance as much as possible. If you identified a change to competitive strategy, you probably also must include what must change in the firm’s set of resources and capabilities, too. Why? – it is unlikely a firm has a strength or maybe even relevant resources/capabilities in an area that is currently not relevant to their strategy. So, if you identify a necessary change to competitive strategy in step 3, there is likely a necessary change to resources and capabilities from step 4 that must also occur. So, you have essentially one of three types of conclusions to this point:

· Identification of the one aspect of competitive strategy that should be changed… and that’s all because the firm has the resources and capabilities to execute that revised strategy; or

· Identification of the one aspect of competitive strategy that should be changed AND identification of the corresponding change(s) in resources/capabilities necessary to enable the firm to execute the new strategy; or

· Conclusion that although the firm’s competitive strategy is well-aligned, developing, acquiring, or significantly enhancing one resource or capability will significantly improve their ability to execute that strategy and improve performance.

Next, we have to get more specific about HOW to enact this recommended change.

Step 5 – What is the ‘best’ way to make this change?

Consider all the different ways (TACTICAL actions, directions, methods…) the firm could use to accomplish what you recommended in step 5. Let’s call this your action recommendation. Brainstorm, be creative, but be realistic. Above all, though stay focused on remedying the exact same misalignment issue. Be focused on solving that one, specific problem.

Just as a simple example, let’s say you identify that a women’s fashion retailing firm needs to alter their strategy by expanding their Product Focus to include men’s clothing. How might they do this? Here are a few ways…

· Create their own proprietary line of menswear

· Negotiate to carry a leading name brand men’s apparel

· Do a mix of proprietary and name brands

· Buy an existing menswear retailer

· Partner with a menswear firm to operate a ‘store within the store’ concept

· Take on the menswear product lines from their existing vendors

Now evaluate the list of possible directions to achieve the change. Recall that it is preferable to formulate strategy based on existing strengths/current sources of competitive advantage. Revisit your earlier analysis of what the firm already does well and consider how your alternative proposals either build on those strengths or will require the creation of all new sources of competitive advantage. There are other factors to consider, too.

Consider, at minimum, these criteria when evaluating alternatives:

· Does this alternative exploit an existing strength? Or, does it require fixing a weakness or adding all new resources/capabilities?

· How much time will it take to implement?

· How much funding will it take?

· How complex is the path? (the most complex, the riskier it is to stay on course)

· How disruptive will this be to ongoing operations? (Remember that you can’t stop business to implement change…you have to “fly the plane AND change the engines” simultaneously)

You can evaluate each relevant alternative action recommendation with these criteria subjectively and ‘in your head’ or you might try using a rate-rank method similar to how you evaluated resources/capabilities. Or…you might get creative with some other analytical method. Regardless, you will want to arrive at your final recommendation with an argument as to how the specific change you propose appears to offers the most attractive way forward to address the key issue you identified.

The alternative you select becomes your base recommendation for a strategic change.

Your final recommendation statement should be structured something like this (study how this brings in and ties together all the various variables and rationale factors into one statement).

“Jeans Co needs to adjust their business model to add e-commerce retailing alongside their brick-and-mortar stores. This will better align them with the key success factors and trends related to retailing technology and the shopping preferences of their target customers. Because they need to quickly improve performance and because they have no experience of knowledge about e-commerce retailing, I recommend the firm seek to acquire an entrepreneurial on-line apparel retailer to acquire and integrate those capabilities.”

DON’T:

· …mix in multiple strategic changes – focus on ONE change to strategic elements or on one specific resource or capability. Watch out for an ‘and’ that wants to sneak into your recommendation!

· …recommend more analysis or hiring a consultant or forming a group to study the topic – your job is to recommend the solution, not to delegate it

· …be ambiguous with suggestions to ‘improve technology’ or ‘be more effective’…get specific and clear about what your say needs to be changed.

Step 6 – Planning for the implementation of the recommended change

Now let’s consider Kotter’s principles of leading change . (Read and study the article before proceeding). Think through each of these principles (that is, how to avoid the primary errors Kotter describes) and identify key aspects of leading and managing the change you believe will make a significant difference to the quality, speed, and end result of the implementation process. Note that the level of urgency is a foundational contextual variable that can change everything, so get a good grasp on how urgent the need is to get things changed (for example: is the firm in a crisis situation, longer slower decline, or doing well and needing to keep it up?). Define the clear direction and vision of the end results, that is, what should we expect by doing this?

A key step is identifying and removing obstacles. Never forget that you cannot stop the day-to-day operations to make a change….you have to ‘change the engines while still flying the plane’. So, think about the capacity of the organization and particular departments or people to change (do they need training or new tools, for example). Are people experienced in making changes or have things been the same for 20 years…if the latter you might need to include coaching and support for change. If the firm has been and is still successful, it may take some real work to overcome the belief that ‘don’t’ fix what isn’t broken’.

It is also helpful to think about managerial ‘levers’ – those specific tools and variables that managers can change that can have major influence of transitioning people to a new strategy and new priorities. Some issues are difficult to do anything about, but others can directly be influenced by management. For example:

· Structure: create, eliminate, consolidate, re-arrange departments and business units. That can send clear signals about new realities and direction

· Budget allocations – very clear signals about what investments are most important

· Culture – a big topic (we don’t have time to cover it well) but oftentimes a strategic change will only stick if the underlying culture also is adjusted.

· Incentives – rewards/recognition alter behavior!

· Communications – as Kotter says: over-communicate. Followers need to know where the leader is taking them and how they are doing. Be transparent and honest about the issues and outcomes

· Leadership style – as in most cases, an open, employee-engaged style works best in a change scenario; people are more likely to change if they have a role in choosing and defining how vs. just being told to change. If bad decisions are made – admit and change. Hold people accountable, too. Be willing to experiment.

· Create specific short-term goals that can become easy short-term successes in the change process. Celebrate these to gain momentum.

A good implementation outline should not only specify and argue the change needed it should also describe the expected outcome (and better yet, compare that to the outcome if nothing is changed!). This is where a forecast of the expected performance improvement is valuable. Then address the most relevant principles that should guide the design and leadership of the implementation plan (such as from Kotter’s principles). For a project management type approach, the final recommended implementation plan might also include a Gantt chart or similar timeline of key steps and their sequencing.

Recall that competitive strategy is just a set of choices…a set of ‘words’…. and the correct resources and capabilities are required to effectively execute that strategy. The plan to implement a strategic change is the same (it is a strategy for achieving the change!). So, the diagnosis and formulation of what needs to change can be spot on, but if the leadership and execution of the implementation (i.e. resources and capabilities) are not adequate, the change effort will come up short. Always remember that execution is what matters most. A mediocre plan flawlessly executed is often better in the long run than a brilliant plan only moderately well executed.