Modern Competitive Strategy 3 rd Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

Chapter 6 Strategy Execution 6-2

What Is Strategy Execution? Strategy execution Building the resources and capabilities that lead to competitive advantage through critical value and cost drivers Not the same as strategic planning A relatively simple business with a valuable protected resource may not need planning—but it must execute. 6-3

Characteristics of Resources Resources: Observable Tradable Contribute to the firm’s market position by improving value or lowering cost, or both. Produce an economic advantage if difficult to imitate or neutralize. Examples: Patents Natural resources Brand Distribution network Proprietary process Geographic location 6-4

Characteristics of a Capability Cannot be readily observed Not tradable separately from whole unit Contributes to higher value, lower cost or both Developed by people through coordinated action Less stable than a resource Developed independently of resources Can derive its strategic value from its use in support of the firm’s resources 6-5

Linking Resources and Capabilities Capabilities contribute to performance by supporting resources A firm’s expertise in exploiting a resource strongly influences how much it is worth to the company Resource Complementarity Complementarity between the asset being auctioned and the existing resources of the bidding firms determines the least amount each will bid 6-6

Makadok’s Model for Relating Resources and Capabilities How can a firm become more profitable than competitors after bidding for a resource? Have stronger complementarities between the resources of the firm and the resource being auctioned Higher complementarity allows the firm to raise its bid Develop a better forecast of economic returns to the resource after it is acquired (resource picking) Bid depends on forecast Have stronger capabilities that increase the returns to the target’s resource Raises the firm’s bid 6-7

Building Capabilities Capabilities are produced by specific activities and policies Two frameworks for mapping activities and policies are: Value chain framework Activity system framework 6-8

Figure 5.1 Porter’s Value Chain 6-9

Activity Systems Interconnected components of a firm that contribute to its market position Policies Programs Value chain activities Product characteristics Key resources Firm’s structure and culture 6-10

Figure 5.2 Vanguard’s Activity System at the Beginning of

Vanguard Activity System Core elements: The fund family’s mutual structure (not stock) Direct distribution (no brokers) Focus on conservatively managed funds (low risk) Low transaction and account maintenance cost Candid communication (strong culture) Focus on long-term performance High-quality service (higher retention rates) Supporting elements 6-12

Figure 5.3 The Elements of Strategy Execution 6-13

Organizational Dimensions of Strategy Execution Complementarity and consistency among the firm’s resources, tasks and policies in support of a firm’s market position Control and coordination systems for the design and execution of tasks Compensation and incentive systems Culture and learning behavior 6-14

Complementarity and Consistency Complementary resources or capabilities Produce a more effective outcome together than independently Example: Stores and catalogue operations for internet retailing Consistency (fit) Resources or capabilities are jointly aligned with the requirements of the firm’s market position Example: The alignment of Vanguard’s activity system with its low cost position 6-15

Control and Coordination Systems Coordination mechanisms Standardized procedures Joint planning Liaison personnel Task forces with members from multiple activities Teams that institutionalize the task forces Hierarchical referral up the chain of command 6-16

Types of Hierarchical Structure Figure

Benefits of a Functional Structure Lower costs Reduced overhead Standardized procedures within functions Continuous process innovation within functions Power over suppliers through increased scale in purchasing Increased expertise within functions that may result in value to the customer Specific technology development Skills in sales and marketing research Quality improvements in operations, logistics and service 6-18

Benefits of a Geography-based Structure Increased focus on the characteristics of geographical regions Unique local competitors Unique local suppliers Unique local customer preferences 6-19

Benefits of a Customer-Based Organization Increases focus on unique characteristics of customer segments Unique marketing requirements Example: Knowledge of customer industry Unique customer preferences Example: Products tied to unique practices in each segment 6-20

Matrix Organization Organized on two or more dimensions: Function and geography, function and customer Managers report to both functional and geographical executives who report to president Avoids problems of putting one dimension over another in the hierarchy: Dimensions are roughly equal in importance Can be hard to manage because of conflicting demands of different dimensions 6-21

Incentive Systems Incentive compensation systems contribute to strategy execution Goals Measure outcomes for tasks that affect the firm’s market position Goal setting and rewards Set appropriate targets for each outcome Reward managers for achieving targets 6-22

Problems Inherent in Incentive Systems Controllability Occurs when managers are unable to identify how much of the firm’s performance is due to skill, effort or luck Alignment Occurs when crucial tasks that contribute to performance are not measurable, leading to overweighting of tasks that can be measured Interdependency Occurs when performance depends on the effort of a team and it is hard to identify individual contributions 6-23

Dilemmas of Noise and Distortion Noise = measurement error Controllability and interdependency increase noise that lowers the ability of management to measure its current progress in achieving important results Distortion = misalignment of measurement Distortion is increased through the improper weighting of tasks There is an inevitable tradeoff between these dilemmas 6-24

Piece-Rate Piece-rate pay Pay related to the quantity of output of a person over a period of time Piece-rate systems are appropriate when there is: Employees control the pace of production Performance standards are perceived as fair Group members preferences are similar Cooperation and innovation are rewarded Lower bound on quality is explicit 6-25

Culture and Learning Culture Can be seen as the development and maintenance of focal points for decision making Learning Single loop learning occurs within the constraints of a problem Double loop learning raises questions about the task parameters Effective strategy execution requires know-how and involvement in both types of problem solving 6-26

Target market position -Desired value drivers -Desired cost drivers Target market position -Desired value drivers -Desired cost drivers Capability planning -Product -Process Capability planning -Product -Process Desired operational capabilities Design of activities and tasks Design organizational dimensions of execution -Control and coordination -Compensation and incentives -Complementarity and consistency -Culture Design organizational dimensions of execution -Control and coordination -Compensation and incentives -Complementarity and consistency -Culture Actual execution Identify -Knowledge gaps -Cooperation problems -Coordination problems Identify -Knowledge gaps -Cooperation problems -Coordination problems Single loop learning: -Problem solve Double loop learning: -Discover new processes, practices and policies Single loop learning: -Problem solve Double loop learning: -Discover new processes, practices and policies Capability Planning and Learning Revise target Revise planning 6-27