Modern Competitive Strategy

3rd Edition

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

Chapter 6

Strategy Execution

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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.

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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

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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

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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

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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 auctionedHigher 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 resourceRaises the firm’s bid

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Building Capabilities

Capabilities are produced by specific activities and policies

Two frameworks for mapping activities and policies are: Value chain framework Activity system framework

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Figure 5.1

Porter’s Value Chain

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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

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Figure 5.2

Vanguard’s Activity System at the Beginning of 1997

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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

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Figure 5.3

The Elements of Strategy Execution

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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

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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 positionExample: The alignment of Vanguard’s activity system with its

low cost position

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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

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Types of Hierarchical Structure

Figure 5.4

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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

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Benefits of a Geography-based Structure

Increased focus on the characteristics of geographical regions Unique local competitors Unique local suppliers Unique local customer preferences

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Benefits of aCustomer-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

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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

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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

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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

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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

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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

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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

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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

Desired operational capabilities

Design of activities and tasks

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 executionActual 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 targetRevise target

Revise planningRevise planning

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