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BPSM: Module 6 Implementing Strategy 1 Business Policy & Strategic Management Module 6 Impl ementi ng Strategy N.R.Govi nda Sharma

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    BPSM: Module 6 ImplementingStrategy

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    Business Policy & Strategic ManagementModule 6

    Implementing Strategy

    N.R.Govinda Sharma

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    Crisis at Infosys Crisis at Infosys

    Infosys reported its worst ever quarterlyoperating margin of 23.6% which has fallen from31% in the December 2011 quarter

    FY14 guidance is anything but assuring. At the lower end of the 6-10% revenue guidance, the

    company expects the top line to grow at just over1.5% on an average every quarter in the currentfiscal.

    Source: Economic Times, 13 April 2013, http://articles.economictimes.indiatimes.com/2013-04-13/news/38511370_1_infosys-technologies-operating-margin-lodestone

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    Crisis at Infosys Growth and profitability at Infosys has reached such a

    low level that even an upstart company like Cognizantdisplaced it to the third place from its second place

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    FirmRevenues(FY 2012) Employees

    TCS $10.17 billion 254,076

    Cognizant Technology $7.05 billion 185,045

    Infosys $6.69 billion 153,761

    Wipro $ 5.73 billion 140,569

    HCL Technology $4.3 billion 85,335

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    Crisis at Infosys Why?

    Of the many reasons, one reason that is ofinterest to us now is that the post of ChiefOperating Officer (COO) was left unfilled andCEO was unable to manage both the tasks

    Shibulal was the COO prior to becoming the CEOand Managing Director

    On 21 August 2011, he took over his new role

    from Kris Gopalakrishnan and since then the postof COO is left unfilled

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    Crisis at Infosys Other reasons attributed are

    Low margin business of Lodestone, which would taketime to get the benefits of offshoring

    Under-utilisation of the employees (bench rate ofnearly 30% as on June 2012) (see Infosys, TCS, Wipro, iGate, UST Global devise newways to keep benched staff occupied, Economic Times, 20 July 2012, http://articles.economictimes.indiatimes.com/2012-07-20/news/32764704_1_bench-internal-projects-utilisation-rate)

    The wage hike

    From what Mr Nagarajan Srinivasan, Infosys, said on

    9 August 2013, the fundamentals of Infosys are goodand the drop is due to time lag in implementation to ahigher trajectory

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    Crisis at Infosys With NRN taking on the mantle of executive chairman

    again (01 June 2013), the market did react favourably The favourable reaction is due to the expectation that

    NRN will be able to galvanise the culture and thestructure of the organisation

    But one question remains

    Did Infosys break its promise by allowing Rohan Murthy to workat Infosys even as an adviser?

    Picture abhi baki hai, mere dost (Only time will let us know if these

    expectations are well-founded)

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    Relation between strategy,structure and culture

    As the story of Infy suggests, the profitability of

    an organisation is influenced by The Organisational structure and

    the culture

    As we know, strategy is all about increasingfirms competitive advantage

    So, managers choose an organisations

    structure and inculcate an organisational culturethat enable implementation of strategies thatlead to competitive advantage

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    Strategy implementation throughOrganisational Design

    Strategy implementation involves use of

    Organisational Design Organisational Design is the process of deciding how

    a company should create, use and combine

    organisational structure, control system and culture topursue a business model

    Which means the structure, control system and culture atCost Leader company like Walmart will be different as

    compared to a Differentiated company like Google as theirbusiness models will be different!

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    Implementing Strategy throughOrganisational Design

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    OrganisationalDesign

    Organisational

    Structure

    OrganisationalControl Systems

    OrganisationalCulture

    Coordinate andmotivateemployees

    To achieve superior:

    Efficiency Quality Innovation Responsiveness to customers

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    Organisational structure So, Organisational Design has three

    components, viz., Organisational Structure,Control Systems and Culture

    So, what is organisational structure?

    Organisational structure assigns employees to specific valuecreation tasks and roles and specifies how these roles andtasks are to be linked together in a way that increases

    Efficiency

    Quality

    Innovation and

    Responsiveness to customers

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    Control Systems Organisation structure provides a set of relations

    between members of the organisation but something else is additionally required to motivate theparticipants

    It is the control system which provides themanagers with

    A set of incentives to motivate employees

    Specific feedback on how well this system is workingto improve the building blocks of competitiveadvantage

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    Balance Score Card (BSC) Balance Score Card (BSC) is a strategic control system

    that goes beyond the conventional financial controlssuch as ROIC to measure and evaluate organisationalperformance (p 362 364 of text)

    While financials results indicate the results of decisions

    alreadytaken; the other measures balance this pictureby informing strategic managers how organisations hasin place building blocks that drive futureperformance

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    Case study on BSC Let us take up in the next class discussion of the case

    Using strategy maps (read p 399 403 of Concepts and cases in StrategicManagement A dynamic perspective by Carpenter, Sanders and Salwan) andbalanced score card: The case of Manpower Australia

    This is the last of the case and I insist on thoroughpreparation by the students

    May ask a few students to run the case completely

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    Orgnisational Culture Organisational culture is the collection of values,

    norms, beliefs and attitudes that are shared bypeople and groups in the organisation andinfluence the way they interact with each other

    and with stakeholders outside the organisation Open culture where employees feel free to interact

    with the highest manager

    or the Bureaucratic culture of levels and hierarchy

    Founding fathers have a strong influence on theculture of the organisation, as you can recollect fromInfosys story

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    Implementing Strategy throughOrganisational Design

    Organisational structure, control and culture

    shape peoples behaviours, values and attitudesand determine how they will implement anorganisations business model and strategy

    Conversely, top managers devise a plan toreorganise or change the companys structure,control system and culture to improve

    coordination and motivation, especially inchanged circumstances

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    Strategy, Tasks and Functions Tasks that an organisation pursues are a function of its

    strategy, companies choose structure to match theorganisational strategy

    Let us try to understand this by following the strategyand the corresponding tasks of Toyota Motors

    At the heart of Toyotas strategy in motor vehicles is tooutcompete rivals by manufacturing world-class qualityvehicles at lower prices and selling them at competitive

    prices When Toyota entered USA in 1980 and came up with its

    first car.

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    Toyota, 1983 Toyota Tercel wagon,

    1983-87, an ugly car

    Boxy hatchbacks aren'tinherently ugly, but when youadd in odd angles and arearmost window that lookslike it dropped out of a Lego

    kit, things start to go wrong It goes completely wrong when

    you circle around back andrealize some joker has slappedan ATM on the back of yourcar

    Source: Top ten ugly cars byCars.comStaff, Cars.com,http://www.cars.com/go/advice/Story.jsp?section=top&subject=more&story=top10ugly,downloaded on 7 August 2013

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    Toyota 2013 Toyota Lexus 2013 is

    a luxury sedan carvaluedbetween $72,885 -

    $120,805 is asculpted car! Source:

    http://buyersguide.caranddriver.co

    m/lexus/ls/price#featuresdownloaded on 7 August 2013

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    Toyota High Value Vehicle tomatch every customer

    From its ugly car in 1980 to a sculpted beauty in 2000s, Toyota hasmoved from being a

    Cost leader to

    Differentiator!

    Ploughing back its profit into improving the styling of its vehicles andcontinuously reducing its production cost (though not its prices!)

    See Strategy in Action 5.4, p 169 of text

    This has required building tasks and functions such as R&D, brandbuilding and positioning (Marketing) and production systems(famously known as Toyota Production Systems (TPS) comprising

    of JIT, Kaizen..) (See p 380, Illustration Capsule 11.2, Crafting and Executing Strategy by Thompson, Strickland, Gamble & Jain) Thus Toyota pursued functions and tasks suited to implement its

    strategy of moving from being a cost leader to a differentiator,perhaps simultaneously

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    Combining cost leaderleadership and differentiation

    Companies like Toyota combine both the aspects of cost

    leadership and differentiation

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    GoodOrganisational

    design

    Economies inBureaucratic costs

    Enhances value chainCompetencies andcapabilities

    Leading to low costStructure and ability toChoose low price option

    Leading to differentiationAdvantage and option ofCharging premium price

    This leads to competitiveAdvantage, profitability

    And superior return

    on investment

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    Functions and tasks After having understood task, it is advantageous

    to understand what it means by a function A functions is a collection of people who work

    together and perform the same type of task

    For example, R&D engineers and scientists at Toyotawould be carrying the task of researching anddeveloping better and more stylish cars, taking itthrough wind tunnels and hence belong the R&D

    function

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    Principle of organisational design Centralisation vs decentralisation

    Authority is centralised when authorities at the upperlevels of a company retain the authority to make themost important decisions

    It is decentralised when authority is vested inmanagers at the lower levels

    Decentralisation helps to reduce bureaucraticcosts and improve market response

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    Example of strategic decentralisation See Strategy in Action 12.2 on page 387 of text

    Case of decentralisation

    Union Pacific (UP), biggest rail freight carrier in the US,experience crisis in 1990 due to increased amount of freight tobe handled

    Delays led to increase in customer complaints

    Problem stemmed from UPs decision to centralise authority,regarding scheduling and routing, high in organisation to cut cost

    Now recognising that efficiency had to be balanced with cost,CEO took a decision that regional, and not top managers, will

    have authority to take operational decisions; they could alterscheduling and routing to accommodate customer requests evenif it raised costs

    So, the decision to centralise was reversed

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    Example of strategic centralisation If decentralisation is so effective, why

    dont all companies decentralise?!

    Case of centralisation See Strategy in Action 12.2 on page 387 of text

    Yahoo!, after the failed merger with Microsoft wasfacing intense competition and the CEO Carol Bartz

    recentralisedauthority She decided to recentralise functions such as product

    development and market, previously performed bydifferent units

    This would cut down cost

    She held town hall meetings with the employeesseeking what would you do if you were me? todecrease dissent and improve involvement amongstemployees

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    Different Organisational Structures A firm can choose different types organisation structure

    to suit its strategy Functional structure

    Activities are organised according to functions such asoperations, finance, marketing and R&D

    Product structure Organisation is based on products such as Mobile phones,

    multimedia smart phones, wireless phone networks etc., as inNokia

    Matrix structure Is a combination of Functional and Product Structure

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    Functional structure

    Functional structure works well in small organisation (SMEs)

    It fosters efficiency and cost saving as people with same skill worktogether and can learn the trade from each other

    But as firms grow, the functional structure tends to becomedysfunctional because each function focuses too narrowly and tendslose sight of other functions

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    Corporate Office

    Operations Marketing / Sales Finance R&D

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    Product structure

    For a company like Nokia, which offers many products as a strategy,product structure is most suitable

    The idea is to divide the companys growing product lines intomanageable subunits to reduce bureaucratic costs

    Thereby, needs of various consumer groups are best taken care ofwhile keeping the number of levels of hierarchy minimum (principle

    of minimum chain of command (p 384) 27

    CEO

    Finance Marketing Operations R&D

    Mobile phones Multimedia smart phones Wireless corporateinternet products

    Wireless phone networks

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    Matrix structure

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    President

    Functional

    Managers for

    Engineering Sales & Mkt Finance R & D Purchase

    Product A

    Product B

    Product C

    Product D

    Product

    Managersfor

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    Implementing cost leadership Now let us see how strategy implementation a cost

    leader company differs from differentiator A company pursuing cost leadership should reducecosts across all functions, for example,

    R&D

    Efforts will perhaps focus on product and process developmentrather than expensive new product innovation

    Marketing & Sales

    Introducing standard products that require little sales and marketing

    Production Standard products and production methods that require less

    resources

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    Implementing cost leadership Structure

    In cases of companies pursuing cost leadership, functionalstructure is most suitable with care being taken to selectintegrating mechanism that will reduce communication andmeasurement problems

    Control system

    Output control measures are more suited as they are the easiestand cheapest

    Culture

    Culture is based on values that emphasise on bottom line For example, Walmart insisting that cost of travel expense should not

    exceed 1% of purchase amount

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    Implementing Differentiation To make its product unique in the eyes of the customers, the

    company opting for differentiation strategy must design its structure,control and culture around the particular sourceof its competitive

    advantage So, products have to be customised for different groups of

    customers, rather than standardised as in the case of cost leader,

    The demands on communication, and measurement increase calling for

    a more sophisticated control systems such as Behavioural control system(*), rather than output control as in the case of cost leader,

    will be more appropriate

    (*) See page 392 of text, Intent of behavioural control is not to specify the goals but tostandardise the ways and means of reaching goals

    Developing a culture of sharing rather than competition will be thekey

    HP, Coca-Cola, Google exemplify companies adopting professionalculture

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    Implementing Differentiation This explains as to why more formal and sharing

    culture, rather than the culture that focuses onthe bottom line as in cost leader such asWalMart, exists in companies such as Google as

    the particular sourceof their competitiveadvantage is human resource

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    Summary of the module Strategy is action biased

    Strategy is as good as it is implemented

    Strategy is implemented through organisational design whichcomprises of developing

    Organisational structure

    Organisational control

    Organisational culture Effective organisational design increases profitability in two ways

    It economises bureaucratic cost (Principle of minimum chain ofcommand

    It enhances ability of a companys value creation functions to achievesuperior efficiency, quality, innovativeness, and customerresponsiveness

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    Summary of the module Centralisation and decentralisation is important issue in designing

    organisational structure Centralisation allows greater control and hence controls cost

    Decentralisation allows for better customer response and efficiency

    Strategic control provides for monitoring and incentive systemnecessary to make organisational structure work as intended andextends corporate governance to all levels of the organisation

    Main forms of control are Output control

    Behavioural control and personal control

    Culture is the set of shared values

    Cost leadership and differentiation each different type of structureand control systems Pressure to increase differentiation is to be balanced against the pressure to

    reduce cost

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    Summary of the module Different type of organisational structure are

    Functional Suitable for smaller orgnisations and helps reduce cost but tends to unsuitable

    as organisations grow

    Product Helps to cater to consumer groups based on product but helps group support

    activities to reduce cost Matrix

    Combines the benefits of product and functional organisational structure

    End of the module

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