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WISDOM FROM WHARTON Implementing Strategy

Formulating strategy is difficult enough. The more problematic task confronting the CEO, however, is the successful implementation of strategy.What’s involved in the implementation of strategy? A host of factors. AT&T, Johnson & Johnson, and Kodak focus on organizational structure in their efforts to meet strategic targets. All rely on strategic business units (SBUs) in an …

Formulating strategy is difficult enough. The more problematic task confronting the CEO, however, is the successful implementation of strategy.

What’s involved in the implementation of strategy? A host of factors. AT&T, Johnson & Johnson, and Kodak focus on organizational structure in their efforts to meet strategic targets. All rely on strategic business units (SBUs) in an attempt to identify markets, get close to customers, and increase accountability.

Incentive plans and management motivation techniques are the keys in other implementation plans. Companies like 3M, du Pont, and Firestone recognize the need to reward performance that fits with overall company strategy.

Other companies focus on coordination and control as critical implementation problems. GE uses teams for coordination and innovation efforts. Honda and Hewlett-Packard employ techniques to achieve effective coordination and reduce product development time. Brunswick and GE are trying to alter the impact of controls in the implementation process, for example, by wiping out unnecessary bureaucracy, redundant approval, and other obstacles in making the strategic plan work. General Motors is focusing on virtually all of the above measures.

The implementation of strategy is fraught with difficulty, even in the companies that do it well. To find out why, Prof. William Joyce of the Amos Tuck School of Business Administration at Dartmouth and this author have scrutinized the implementation efforts of many companies in different industries. We have attempted to build a model of implementation and are constantly updating and changing key elements of it.

The difficulty of implementing strategy is due to the (1) complexity of the process (number of variables and decisions involved); (2) problems in managing interdependence and shared decision making; (3) inability to set up adequate control and surveillance systems; and (4) vagaries arising from the human or social nature of organizations.

KEY IMPLEMENTATION ISSUES

To implement strategy successfully, attention must be paid to a number of issues or problems.

Strategy. Corporate, business, and functional strategies must be consistent. Business strategies, for example, cannot contradict corporate portfolio models or decisions; business strategies are important to the implementation of corporate plans. Similarly, functional strategies must meld with business plans. Emphasis on cost leadership in production may not fit easily with a business or marketing plan for product differentiation based on quality or service.

The characteristics and definition of strategy affect implementation. It is difficult to implement something that is vague, misunderstood, not easily communicated, or inappropriate for the market. Agreement among key decision makers is easier to reach when strategies and their underlying cause-effect relationships are clear. An understanding of both the process and content of strategy formulation is vital for successful results.

Structure. Choosing an appropriate organizational structure is often critical to successful strategy implementation. Organization, or reorganization, should not be something done to shake things up occasionally or show one’s influence. Structure has a role to play. Choose a inappropriate structure for the strategy at hand, and that role can be negative.

Functional structures, for example, are great for efficiencies derived from scale economies and learning curve effects. They also build pools of expertise that can become a distinctive competence of an organization. But functional organizations demand a great deal of lateral coordination, which can be costly and difficult to attain. They can shift attention away from external, market-related factors to internal, production- or volume-related decisions.

Consider the experience at Kodak. A large, growing, diversified company retained its functional organization for almost a century. The classic hierarchy was top heavy and made decision making slow and cumbersome at best. The solution? Colby Chandler, CEO, created a more responsive organization. Business units or SBUs were formed in four groups. The goal was to decentralize and get closer to customers. Autonomy at the SBU level resulted in better market focus and allowed divisions to adapt as they saw fit.

So-called vertical structures (e.g., SBUs, divisions) enable the organization to focus more easily on market, customers, products, or geographical areas. Divisions or SBUs designed around markets, with autonomy and a high degree of self-containment, can more easily and logically focus on the task at hand. But even here a caveat is in order. Extensive verticality and self-containment can lead to the loss of synergy or efficiency. One large company we studied was very proud of its project-oriented structure, with each project manager in charge of all resources necessary to complete the task and service the customer. Looking at the ratio of sales to level of capitalization, however, revealed the lowest figure in the industry. Quick response to the market, strategically and operationally, was virtually guaranteed by the decentralized structure. But the loss of efficiency and excessive duplication of assets was affecting margins adversely.

Coordination Requirements. While in many ways an offshoot of the previous discussion, the topic of coordination nonetheless deserves separate attention. Achieving coordination, especially the lateral variety, is central to, but often problematic for, strategy implementation efforts.

This problem is especially acute for the global competitor. The need to balance and coordinate a centralized product focus worldwide with a geographical, more decentralized focus by market often creates problems of decision making. Global companies like Procter & Gamble, Rohm & Haas, and CitiCorp are constantly trying to maintain this dual perspective. How does one balance the needs of a division aggressively marketing products worldwide with the conflicting needs of a country pursuing local strategies that don’t include all the product lines?

To balance and coordinate these disparate thrusts, organizations often resort to forms of global matrix organizations. But as we know, such structures are difficult to operate. Conflicts, divergent demands, and concerns with power often get in the way of effective coordination. Unity of direction and strategic thrust are difficult to achieve. Nonetheless, coordination is critical and operating structures like matrix and team forms must be employed because of the dictates and complexities of the strategies involved.

Incentives. Incentives are critical to strategy implementation efforts. Yet research has uncovered a continuing litany of problems in this area. Executives ignore the long term because of pressures for short-term profitability. Managers talk about quality, but quietly continue to reward volume. Servicing customers is a stated thrust of the company’s mission, but cost reduction efforts clearly take precedence over getting close to the market.

Or consider innovation. Companies say they want risk taking, but often make managers risk averse. One company that clearly stands behind its pro-innovation rhetoric is Johnson & Johnson. James Burke, CEO, believes that companies must make mistakes in order to grow. If managers aren’t making mistakes, they’re not taking risks. Incentives, Burke argues, must support risk taking and creativity. Don’t hope for innovation if what you’re rewarding is the status quo and safety in decision making.

The same spirit is beginning to show at AT&T. Robert Allen, chairman and CEO, has instituted many changes. Changes in structure have added new energy and ability to respond to customers. Incentives now reward performance much more than complacency or inaction.

Incentives at a company’s lower levels can also affect strategic outcomes. For example, a large manufacturer was attempting to highlight a new product, the result of a joint venture with a foreign company. Plans were carefully laid out for production, advertising, and distribution through the host company’s dealer organization. Despite the hoopla and stated importance of the new product, sales were dull at best. Why? Was poor performance due to strategic errors in product design, market segmentation or executive incentives? No. The simple fact was that sales commissions at the dealer level clearly favored other products. Salesmen, in effect, were pushing customers away from the new product because of a very simple desire to maximize returns on sales efforts. The company was hoping for one result while inadvertently rewarding another.

Controls. These examples serve to introduce the importance of control systems in the implementation of strategy. Controls include vital information about markets, customers, and performance. The control function represents feedback, grist for the mill that produced the strategic plan and its central assumptions about customer reaction and competitor retaliation. Controls represent the market surveillance or intelligence function so critical to organizational flexibility and adaptation.

Even careful planning cannot capture all the contingencies, external and internal, that can affect outcomes. To be flexible, then, to adapt to contingencies as they unfold, becomes a central goal of the implementation effort. Controls and the valid, timely information they provide become the key ingredients in adapting over time. Sound market surveillance also helps the company to avoid “surprises” that make stakeholders nervous.

One other aspect of control deserves a brief mention. As Chuck Knight, CEO of Emerson Electric, and others believe, “Whether it’s broke or not, fix it. Make it better.” In other words, controls don’t mean just feedback about bad performance. Following up on only poor performance creates a culture of risk aversion. The best way to avoid “breaking things” and incurring the wrath of those doing the “fixing” is to do nothing. This of course is dangerous and represents a culture opposed to change and innovation. Executives are well-advised to heed Knight, Johnson & Johnson’s Burke, GE’s Welch, and others who suggest that the role of controls is to make things better.

Culture and Politics. Assume again that you want your company to be innovative. Mission and strategy statements address invention, creativity, and new product development. Competitive analysis stresses the vital role of innovation to profitability within your company’s market segment or strategic group. In short, new ideas and innovations based on them are critical, and strategic plans duly note and foster the required creative thrust.

Like most strategic options, however, innovations must pass two major tests or stumbling blocks: technical feasibility and political acceptability. The former simply refers to the fact that the innovation is possible technically. It makes sense, has a market, and is achievable. The real problem is meeting the second test: political acceptability.

Innovations may involve changes and so may be resisted. New products or services may imply shifts in the distribution of power, influence, or resources, which can create friction and conflict. Innovations may suffer due to the NIH factor (“not invented here”), as other functions or groups simply don’t get as involved or excited as the innovating unit. This is related to the “what’s in it for us” syndrome, as perceived competition for scarce resources militates against cooperative efforts across functions or divisions. Superordinate company goals of innovation are often less salient than the more local, self-aggrandizing concerns of managers.

In brief, the implementation of strategy often encounters rough going because of deep-rooted cultural or political biases. At any point in time, a company likely has a number of strategic options that are technically possible and meet all financial requirements and other hurdles. Choice and success of strategy, however, often depend on factors that derive from the political or competitive nature of social systems. The CEO, of course, must be attuned to these potential political pitfalls.

SUCCESSFUL IMPLEMENTATION:

CONCERNS OF THE CEO

There are a number of areas with which a CEO should concern himself. Some of these involve active involvement and decision making, while others call for leadership by example or exhortation. All, however, are important for strategy implementation.

Encourage Sound Planning. Be involved in the corporate planning process. Emphasize both the process and content of strategy. The former recognizes the role of participation, buy-in, and political acceptability as key factors in the planning process. The latter emphasis is directed toward the validity and appropriateness of data gathered during the process. Concern here is with asking the right questions and encouraging staff to collect the right information in answering them.

The CEO must also encourage planning at the business or operating level. Personal concerns include interactions and communication between corporate and division, business, or SBU levels to ensure consistency of plans. Plans at the business level are critical for implementation of corporate strategy. Hence, the need for consistency and integration across level and type of strategic plan.

Carefully Consider the Role of Structure. Structure must support strategy. Competitive conditions, industry structure, and types of growth affect choice of organization. At the corporate level, portfolio diversification strategies must consider the relatedness of products, markets, technologies, and potential synergies across businesses or operating units. Diversifications and acquisitions raise thorny questions about independence of units that can only be resolved by corporate strategy. Creation of interdependence across units versus emphasis on self-containment and independence of businesses results in different benefits and costs, the trade-offs between which represent the domain of corporate planning and analysis.

Be sure to encourage analysis of strategy and organization at the business level. Be careful about imposing similar organizational structures across all divisions or businesses in the name of corporate consistency. Heterogeneous competitive conditions and industry forces may make such attempts at homogeneity of business structure extremely costly to the company.

Know What Incentives Support. Hoping for something to happen is not sufficient. Strategic plans and objectives must be integrated with operating goals and activities, and the resultant desired outcomes must be clearly supported by incentives. Strategy implementation often suffers because of the company’s own incentive system.

Guidelines for sound incentives include, but are not limited to, the following: Use measurable objectives. Performance outcomes must be unambiguous. Individuals at all organizational levels must know exactly what good performance is.

Link incentives and performance. The link between performance and reward should also be clear. Individuals must know what’s expected of them and what they can expect from the company.

Watch consistency. Motivating performance in one part of the company that negatively affects another part is a fairly common implementation problem. Similarly, hoping for a particular strategic outcome (quality) while rewarding potentially conflicting short-term performance (cost reduction, profitability) must also be avoided.

Encourage Market Surveillance. CEOs spend much more time on strategic planning than they do on strategic controls. The latter include information and intelligence systems that are critical to the planning effort. But good surveillance systems can cost a great deal and are difficult to set up due to uncertainty, market heterogeneity, task complexity, and the contingencies that are sure to arise with longer planning horizons. Consequently, surveillance or intelligence gathering is often shortchanged in the process of strategic management. This can be ‘a debilitating mistake, one that CEOs must be aware of and rectify in the implementation effort.

Exercise Leadership. If innovation is desired, support it with words and actions. Support desired outcomes by example and with scarce resources.

Take risks. If the CEO wishes to create a culture supporting greater risk taking, he must in turn take risks. Let managers make mistakes. Don’t react to all risk-related mistakes as if they were somehow due to the stupidity, carelessness, or personality flaws of those taking the risk.

Stand up for your people and your company’s actions. Support strategic goals, even when negative short-term blips in performance make analysts on “the street” a bit nervous. Create a vision that can lead and inspire others.

Above all, communicate. Strategy implementation is difficult enough. Don’t render it even more problematic by having one hand work at cross-purposes with the other. Collect information from lower levels. Explain successes and shortcomings. Finally, stay close to important stakeholders whose support of the strategic management process is vital.


Lawrence G. Hrebiniak is an associate professor of management at The Wharton School. His current research concerns strategy implementation, including the relationships among strategy, structure and performance.

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