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Chapter 3 Summary - book "Crafting and Executing Strategy"

Business Strategy (Clemson University)

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Chapter 3: Evaluating a Company’s External Environment

The Strategically Relevant Factors in the Company’s Macro-Environment

 Everyone company operates in a broad ‘marcro-eviroment” that comprises of 6
principals
o Political factors
o Economic conditions in the firms general environment (local, country,
regional, worldwide)
o Sociocultural forces
o Technological factors
o Environmental factors
o Legal/regulatory conditions
 Firm has no direct control
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 PESTEL analysis can be used to assess the strategic relevance of the six principal
components of the macro-environment: Political, Economic, Social, Technological,
Environmental, and Legal/Regulatory forces.

Assessing the Company’s Industry and Competitive Environment

 Five Forces Frame Work
o Most powerful and widely used tool for diagnosing the principal competitive
pressures in a market is the 5 forces framework
o Holds the competitive pressures on companies within an industry come from
5 sources
 Competition from rival sellers
 Rivalry increases when buyer demand is growing slowly or
declining. Rapidly expanding buyer demand produces enough
new business for all industry members to grow without
having to draw customers away from rival enterprises.
 Rivalry increases as it becomes less costly for buyers to switch
brands
 Rivalry increases as the products of rival sellers become less
strongly differentiated.
 Rivalry is more intense when there is excess supply or unused
production capacity, especially if the industry's product has
high fixed costs or high storage costs.
 Rivalry intensifies as the number of competitor’s increases
and they become more equal in size and capability.
 Rivalry is stronger when high exit barriers keep unprofitable
firms from leaving the industry.
 Competition from potential new entrants
 Competition from substitute products
 Supplier bargaining power
 Customer bargaining power

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o The Choice of Competitive Weapons

 May resort to marketing tactics such as special sales promotions,
heavy advertising, rebates, low-interest-rate financing to drum up
additional sales
 Rivals may race one another to differentiate their products by
offering better performance features or higher quality or improved
customer service or a wider product selection.
 Ex: discounting prices, offering coupons, advertising products,
innovating to improve, introducing new or improve features (fig. 3.2)
o Competitive Pressures Associated with the Threat of New Entrants
 New entrants threaten the position of rival firms since they usually
compete fiercely for market share and add to the production capacity
and number of rivals in the process
 Threat of new entry increases the competitive pressures in an
industry because firms lower prices and increase defensive actions in
an attempt to deter new entry when the threat of entry is high
 Threat depends
 The expected reaction of the incumbent firms to new entry
 Barriers to entry
o Competitive Pressures from Sellers of Substitute Products
 Companies in one industry are vulnerable to competitive pressure
from the actions of companies in a closely adjoining industry
whenever buyers view the products of the two industries as good
substitutes.
 Ex: Equal, Splenda, Sweet ‘N’ Low
o Competitive Pressures Stemming From Supplier Bargaining Power
 Whether the suppliers of industry members represent a weak or
strong competitive force depends on the degree to which suppliers
have sufficient bargaining power to influence the terms and
conditions of supply in their favor.
 Suppliers with strong bargaining power can erode industry
profitability by charging industry members higher prices, passing
costs on to them and limiting their opportunities to find better ideas
 Ex: Micscroft and Intel supply PC, known to charge PC makers
premium prices
o Competitieve Presues Stemming from Buyer Bargaing and Price Sentibiity
 Strong competitive pressues on industry members depends on
 The degree to which buyers have bargaining power
 The extent to which buyers are price sensitive
 Buyers with strong bargaiing power can limit industry profitability
by demanding price concesions, better payment terms or additional
features and services that icnerase the indtruy members’ costs
 Buyer sensitivity limits the profit potential of industry members by
restricting the ability of sellers to raise prices without losing revue
sales
 Buyer Bargaining Power is strong when:

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 Buyer demand is weak in relation to industry supply

 Industry goods are standardized or differentiation is weak.
 Buyers' costs of switching to competing brands or substitutes
are relatively low.
 Buyers are large and few in number relative to the number of
sellers.
 Buyers pose a credible threat of integrating backward into
the business of sellers.
 Buyers are well informed about sellers' products, prices, and
costs
 Buyer’s power is weak when:
 Buyer price sensitivity increases when buyers are earning low
profits or have low income
 Buyers are more price-sensitive if the product represents a
large fraction of their total purchases.
 The strongest of the 5 forces determines the extend of the downward pressure on an
indsutry’s profitability
o The most extreme case of a “competitively unattractive” industry occurs
when all five forces are producing strong competitive pressures: Rivalry
among sellers is vigorous, low entry barriers allow new rivals to gain a
market foothold, competition from substitutes is intense, and both suppliers
and buyers are able to exercise considerable leverage
o intense competitive pressures from just one of the five forces may suffice to
destroy the conditions for good profitability and prompt some companies to
exit the business.

Complementors and the Value Net

 Complementors are the producers of complementary products, which are
products that enhance the value of the focal firm's products when they are used
together.

Industry Dynamics and the Forces Driving Change

 Driving Forces are the major underlying causes of change in industry and
competitive conditions
 Driving forces analysis has 3 steps
o Identifying what the drives forces are
o Assessing whether the drivers of change are, on the whole, acting to make
the industry more or less attractive
o Determining what strategy changes are needed to prepare for the impact of
driving forces

 Identifying the Forces Driving Industry Change

o Changes in an industry’s long-term growth rate
o Increasing globalization
o Emerging new interest capabilities and applications

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o Shifts in buyer demographics

o Technological change and manufacturing process innovation
o Product innovation
o Entry or exit of major firms
o Diffusion of technical know-how across companies and countries
o Changes in cost and efficiency
o Reductions in uncertainty and business risk
o Regulatory influences and government policy changes
o Changing societal concerns, attitudes and lifestyles
 Most important part of driving forces analysis is to determine whether the collective
impact of the driving forces will increase or decrease market demand, make
competition more or less intense and lead to higher or lower industry profitability
 The real payoff of driving forces analysis is to help managers understand what
strategy changes are needed to prepare for the impacts of the driving forces

Strategic Group Analysis

 Strategic group mapping: a technique for displaying the different market or
competitive positions rival firms occupy in the industry
 Strategic Group: is a cluster of industry rivals that have similar competive
approaches and market positions
o Consists of those industry members with similar competitive approaches and
positions in the market:
 Having comparable product-line breadth
 Emphasizing the same distribution channels
 Depending on identical technological approaches
 Offering the same product attributes to buyers
 Offering similar services and technical assistance
o Typical Variables include
 Price/quality range (high, medium, low)
 Geographic coverage (local, regional, national, global)
 Product-line breadth (wide, narrow)
 Degree of service offered (no frills, limited, full)
 Distribution channels (retail, wholesale, Internet, multiple)
 Degree of vertical integration (none, partial, full)
 Degree of diversification into other industries (none, some,
considerable)
o Strategic group maps reveal which companies are close competitors and
which are distant competitors
o Some strategic groups are more favorable positioned than others because
they confront weaker competitive forces and/or because they are more
favorable impacted by industry driving forces

Key Success Factors

 KSFs: are the strategy elements, product and service attributes, operational
approaches, resources and competitive capabilities that are essential to surviving
and thriving in the industry

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o Vary from industry to industry, and over time within the same industry, and
in importance as drivers of change and competitive conditions change
o Derived from a SWOT analysis – today we looked at “OT” part (external
factors) - next chapter “SW” (internal factors) that provides a multiple
framework for determining competitive outlook
 Can be deduced by asking the same three questions
o On what basis do buyers of the industry’s product choose between the
competing brands of sellers?
o Given the nature of competitive rivalry prevailing in the marketplace, what
resources and competitive capabilities must a company have to be
competitively successful?
o What shortcomings are almost certain to put a company at a significant
competitive advantage?

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Chapter 4 Summary - book "Crafting and Executing Strategy"

Business Strategy (Clemson University)

StuDocu is not sponsored or endorsed by any college or university

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Chapter 4: Evaluating a Company’s Resources, Capabilities, and Competitiveness

Question1: How Well Is The Firm’s Present Strategy Working?

 The three best indicators of how well a company’s strategy is working are:
o Whether the company is achieving its stated financial and strategic
objectives
o Whether its financial performance is above the industry average
o Whether it is gaining customers and increasing its market share
 Specific indicators of how well a company’s strategy is working include:
o Trends in the company’s sales and earnings growth
o Trends in the company’s stock price
o The company’s overall financial strength
o Customer retention rate
o The rate at which new customers are acquired
o Evidence of improvement in internal processes
 Sluggish financial performance and second-rate market accomplishments almost
always single weak strategy, weak execution or both

Question 2: What are the firm’s most important resources and capabilities, and
will they give the firm a lasting competitive advantage over rival companies?
 A company’s resources and capabilities represent its competitive assets and are
determines of its competiveness and ability to succeed in the marketplace
 Competitive Assets
o Are the firm’s resources and capabilities
o Are the determinants of its competitiveness and ability to succeed in the
marketplace
o Are what a firm’s strategy depends on to develop sustainable competitive
advantage over its rivals
 Resource and Capabilities analysis provides mangers with a powerful tool for
sizing up company’s competitive assets and determining whether the can provide
the foundation necessary for competitive success
 A resources is a competitive asset that is owed or controlled by a company; a
capability or competence is the capacity of a firm to perform some internal activity
competently
 Capabilities are developed and enables through the deployment of a company’s
resources
o A Resource
 A productive input or competitive asset that is owned or controlled by
a firm (e.g., a fleet of oil tankers)
o A Capability
 The capacity of a firm to perform some activity proficiently (e.g.,
superior skills in marketing)
 Type of Resources
o Tangible
 Touched and quantified readily
 Physical resources: land

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 Financial: cash
 Technological: patents, copyrights
 Organizational: IT and communication systems
o Intangible
 Human assets and intellectual capital
 Brands, company image and reputational assets
 Relationships: alliances, joint ventures
 Company culture and incentive system
 Resources bundle: is linked and closely integrated set of competitive assets
centered around one or more cross functional capabilities
o Ex: Nike’s R&D, marketing research efforts, styling expertise
 Assessing the Competitive Power of a Company
o The VIRN tests for sustainable competitive advantage ask whether a
resource is:
 Valuable: must be directly relevant to the company’s strategy, making
the company a more effective competitor
 Rare: is this something rivals lack?
 Ex: Oreo Cookies brand strength
 Inimitable: is it hard to copy?
 Imitation is difficult for those that reflect high level of social
complexity (company culture, relationships) and casual
ambiguity, signifies the hard to distengle nature of the
complex
 Resources
 Nonsubsituable
o Dynamic capability: ongoing capacity of a company to modify its existing
resources and capabilities or create new ones
o A company requires a dynamically evolving portfolio of resources and
capabilities to sustain its competitiveness and help drive improvements in its
performance

Question 3: What are the Firm’s Strengths and Weaknesses in relation to the
market opportunities and external threats (SWOT)?
 SWOT Analysis
o Is a powerful tool for sizing up a firm’s:
 Internal Strengths
 Internal Weaknesses
 External/market Opportunities
 External Threats
o Identifying a company’s internal strengths
 A Competence: Is an activity that a firm has learned to perform
with proficiency—a capability
 A Core Competence: Is a proficiently performed internal activity
that is central to a firm’s strategy and competitiveness

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 A Distinctive Competence: Is a competitively valuable activity that

a firm performs better than its rivals—thus represents a
competitively superior internal strength
 Weaknesses
 Shortcoming that constitute competitive liabilities
 Inferior or unproven skills, expertise or intellectual capital
 Competitive deficiency
 Lack of competencies
 Lack of resources
 Lack of cash
 Excessive debt
 Poor branding
 Poor reputation
o Identifying a company’s market opportunities
 A company is well advised to pass on a particular market opportunity
unless it has or can acquire the resources and capabilities needed to
capture it
 Increasing buyer demand
 New geographic markets
 Product line expansion
 Technology breakthroughs
 Falling trade barriers
 Mergers, acquisitions, alliances
 The marketing opportunities most relevant to a company are those
that match up well with the company’s competitive assets, offer the
best prospects for growth and profitability and present the most
potential for competitive advantage
o Identifying the Threats
 Competition/rivalry
 Economic downturn
 Changing customer needs
 Rising energy costs
 Tightening credit conditions
 Changing social values
 What does SWOT Reveal?
o Drawing conclusions from the SWOT listings
about the firm’s overall situation.
o Translating these conclusions into
strategic actions by the firm that:
 Match its strategy to its internal strengths and
to market opportunities.
 Correct important weaknesses and defend it
against external threats.
o Making lists of a company’s strengths, weaknesses, opportunities and threats
is not enough; the payoff from SWOT analysis comes from the conclusions

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about a company’s situation and the implications got strategy improvement

that flow from the four lists
o Strengths should always serve as the basis of its strategy

Question 4: How do a firm’s value chain activities impact its cost structure and
customer value proposition?
 A company’s value chain indeifies the primary activities and related support
activities that create customer value
 The higher a company’s costs are above those of close rivals, the more competively
vulnerable the company becomes
 The greater the amount of customer value that a company can offer profitability
relative to close rivals, the less competviely vulnerable the company becomes
 Signs of a Firm’s Competitive Strength:
o Its prices and costs are in line with rivals
o Its customer-value proposition is competitive
and cost effective
o Its bundled capabilities are yielding
a sustainable competitive advantage

 Comparing the Value Chains of Rival Firms

o Value Chain Analysis
 Facilitates a comparison, activity-by-activity, of how effectively and
efficiently a firm delivers value to its customers, relative to its
competitors
o The Value Chain Analysis Process:
 Segregate the firm’s operations into different types of primary and
secondary activities to identify the major components of its internal cost
structure
 Use activity-based costing to evaluate the activities
 Do the same for significant competitors
 Benchmarking and Value Chain Activities
o Benchmarking:
 Involves improving a firm’s internal activities based on learning from
other firms’ “best practices”

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 Assesses whether the cost competitiveness and effectiveness of a firm’s

value chain activities are in line with its competitors’ activities
o Sources of Benchmarking Information
 Reports, trade groups, analysts and customers
 Visits to benchmark companies
 Data from consulting firms
o Best practice: a method of performing an activity or business process that
consistently delivers superior results compared to other approaches
o Benchmarking the costs of company activities against those of rivals provides
had evidence of whether a company is cost-competitive
 Ex: Xerox extended benchmarking to any company world class that does
activity relevant to Xerox

Question 5: Is the firm competitively stronger or weaker than key rivals?

 High weighted competitive strengths ratings signal a strong competitive position
and possession of competitive advantage; low ratings signal a weak position and
competitive disadvantage
 Assessing the firm’s overall competitive strength:
o How does the firm rank relative to competitors on each of the important
factors that determine market success?
o Does the firm have a net competitive advantage or disadvantage versus
major competitors?
 Competitive Strengths Assessment Process
o Step 1: Make a list of the industry’s key success factors and measures of
competitive strength or weakness (6 to 10 measures usually suffice).
o Step 2: Assign a weight to each competitive strength measure based on its
perceived importance.
o Step 3: Rate the firm and its rivals on each competitive strength measure and
multiply by each measure by its corresponding weight.
o Step 4: sum the weighted strength ratings on each factor to get an overall
measure
o Step 5: use the overall strength ratings to draw conclusions about the size
and extend of the company’s net competiveness advantage

Question 6: What Strategic issues and problems merit front-burner managerial

attention?
 Compiling a worry list of problems crates an agenda of strategic issues that merit
prompt managerial attention

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Chapter 5 Summary - book "Crafting and Executing Strategy"

Business Strategy (Clemson University)

StuDocu is not sponsored or endorsed by any college or university

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Chapter 5: The Five Generic Competitive Strategies

Why do strategies differ?

 A firm’s competitive strategy deals with efforts to position leverage strengths,
mitigate weaknesses, take advantage of opportunities, and overcome threats
 Key Factors that distinguish one strategy from another
o Is the firm’s market target broad or narrow?
o Is the competitive advantage pursued linked to low costs or product
differentiation?

Low-Cost Provider Strategies

 Low-cost provider’s basis for competitive advantage is lower overall costs than
competitors
 Successful low cost leaders who have the lowest industry costs, are exceptionally
good at finding ways to drive costs out of their businesses and still provide a
product or service that buyers find
 A cost driver is a factor that has a strong influence on a company’s cost
 Effective Low-Cost Approaches:
o Pursue cost-savings that are difficult imitate
o Avoid reducing product quality to unacceptable levels
 Competitive Advantages and Risks:
o Greater total profits and increased market share gained from
underpricing competitors
o Larger profit margins when selling products at prices comparable to and
competitive with rivals
o Low pricing does not attract enough new buyers
o Rival’s retaliatory price cutting set off a price war
 Major Avenues for Achieving Cost Advantage
o Low-Cost Advantage
 A firm’s cumulative costs across its overall value chain must be
lower than competitors’ cumulative costs

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o How to Gain a Low-cost Advantage:

 Perform value chain activities more cost-effectively than rivals
 Revamp the firm’s overall value chain to eliminate or bypass cost-
producing activities
 When a low-cost provider strategy works best
o Price competition among rival sellers is vigorous
o Identical products are available from many sellers
o There are few ways to differentiate industry products
o Most buyers use the product in the same ways
o Buyers incur low costs in switching among sellers
 The Keys to driving down company costs
o Capturing all available economies of scale
o Taking full advantage of experience and learning curve effects
o Operating faculties at all capacity
o Improving supply chain efficiency
o Substituting lower cost inputs wherever there is little or not sacrifice in
product quality or performance
o Using the company’s bargaining power via suppliers or others in the
value chain system
o Using online systems and sophisticated software to achieve operating
efficiencies
o Improving process design and employing advanced production
technology
o Bering alert to the cost advantages of outsourcing or vertical integration
o Motivating employees through incentives and company culture

Differentiation Strategies
 The essence of broad differentiation strategy is to offer unique precut attributes
that a wide range of buyers find appealing and worth paying for
 Effective Differentiation Approaches:
o Carefully study buyer needs and behaviors, values and willingness to pay for
a unique product or service
o Incorporate features that both appeal to buyers and create a sustainably
distinctive product offering
o Use higher prices to recoup differentiation costs
 Advantages of Differentiation:
o Command premium prices for the firm’s products
o Increased unit sales due to attractive differentiation
o Brand loyalty that bonds buyers to the firm’s products
 Value Driver: is a factor that can have a strong differentiating effect
 Keys Value Drivers to Creating a Differentiation Advantage
o Create product features and performance attributes that appeal to a wide
range of buyers
o Improve customer service or add extra services
o Invest in production related R&D activities

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oStrive for innovation and technological advances

oPursue continuous quality improvement
oIncrease marketing and brand building activities
oSeek out high quality inputs
oEmphasize human resource management activities that improve the skills,
expertise and knowledge of a company personnel
 When Differentiation Strategy Work Best
o Diversity of buyer needs and uses of the product are diverse
o There are many ways to differentiate the product or service that have value
to buyers
o Few rival firms are following a similar differentiation approach
o Technological change is fast-paced and competition revolves around rapidly
evolving product features
 Over-differentiating and overarching are fatal differentiation strategy mistakes

Focused (Or Market Niche) Strategies

 Focused Low-Cost Strategy: aims at securing a competitive advantage y serving
buyers in the target market niche at a lower cost and lower price that those of
rivals competitors
o Ex: producers of private-labeled brands for Walmart and Safeway
 A Focused Differentiation Strategy: offers superior products or serves designed to
appeal to the unique preference and needs of a narrow market
o Success of this depends on
 The existence of a buyer segment that is looking for special product
attributes or selling capabilities
 A firms ability to stand apart from rivals competing in the same
target market niche
o Ex: Rolls-Royce, Four Season Hotel
 When a focused or focus differentiation strategy is attractive
o The target market niche is big enough to be profitable and offers good
growth potential
o Industry leaders chose not to compete in the niche—focusers avoid
competing against strong competitors
o It is costly or difficult for multi-segment competitors to meet the specialized
needs of niche buyers
o The industry has many different niches and segments
o Rivals have little or no entry interest in the target segment

Best-Cost Provider Strategies

 Best cost provider strategies are a hybrid of lower-cost provider and differentiation
strategies that aim at providing more desirable attributes (quality, features,
performance, service) while beating rivals on price
o The target market is value conscious buyers- buyers who are looking for
appealing extras and functionality at a comparatively low price
 When a best-cost provider strategy works best

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o Product differentiation is the market norm

o There are a large number of value-conscious buyers who prefer midrange
products
o There is competitive space near the middle of the market for a competitor
with either a medium-quality product at a below-average price or a high-
quality product at an average or slightly higher price
o Economic conditions have caused more buyers to become value-conscious
 Risks
o Getting squeezed between the strategies of firms using low-cost and high end
differentiation strategies

The Contrasting Features of the Five Generic Competitive Strategies

 A company’s competitive strategy should be well matched to its internal situation
and predicated on leveraging its collection of competitively valuable resource and
capabilities
 Each Generic Strategy:
o Positions the firm differently in its market
o Establishes a central theme for how the firm intends to outcompete rivals
o Creates boundaries or guidelines for strategic change as market
circumstances unfold
o Entails different ways and means of maintaining the basic strategy
 Success competitive strategies are resource based
o A firm’s competitive strategy is most likely to succeed if it is predicated on
leveraging a competitively valuable collection of resources and capabilities
that match the strategy
o Sustaining a firm’s competitive advantage depends on its resources,
capabilities, and competences that are difficult for rivals to duplicate and
have no good substitutes

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Chapter 8 Summary - book "Crafting and Executing Strategy"

Business Strategy (Clemson University)

StuDocu is not sponsored or endorsed by any college or university

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Chapter 8: Corporate Strategy- Diversification and the Multi-business Company

When to consider diversifying

 It can expand into businesses whose technologies and products complement its
present business
 Its resources and capabilities can be used as valuable competitive assets in other
businesses
 Costs can be reduced by cross-business sharing or transfer of resources and
capabilities
 Transferring a strong brand name to the products of other businesses helps drive up
sales and profits of those businesses

Building Shareholder Value: The Ultimate Justification for Diversifying

 Business diversification stands little change of building shareholder value without
passing the following three Test of corporate Advantage
 The industry attractiveness test: the industry must be structurally attractive,
have resource requirements that match those of the parent company and offer good
prospects for growth, profitability and return on investment
 The cost of entry test: the cost of entering the target industry must not be so high
as to exceed the potential for good profitability. Catch 22- the more attractive an
industry’s prospects are for growth, the more expensive it can be to enter
 The better-off test: must offer potential for the company’s existing businesses and
the new business to perform better together under a single corporate umbrella than
they would perform operating as independent, stand alone businesses- an effect
known as synergy.
 Creating added value for shareholders via diversification requires building a
multibusiness company in which the whole is greater than the sum of its parts

Approaches to Diversifying the Business Line Up

 Acquisition of an Existing Business
o An acquisition premium or control premium, is the amount by which the
price offered exceeds the pre acquisition market value of the target company
o Quicker than trying to launce a new operation, but it also offers an effective
way to hurdle such entry barriers as acquiring technological know-how,
establishing supplier relationships, achieving scale of economies, building
brand awareness and securing adequate distribution
o Can be expensive
 Entering a new line of business through internal development
o Starting a new business subsidiary from scratch
o Corporate venturing is the process of developing new business operations. It
is also referred to as corporate entrepreneurship or instrapreneurship since
it requires entrepreneurial like qualities within a larger enterprise

Choosing the Diversification path: Related vs. Unrelated

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 Related businesses possess competitively valuable cross-business value chain and

resource commonalties
 Unrelated businesses have dissimilar value chains and resource requirements, with
no competitively important cross-business commonalities at the value chain level

Diversification into Related businesses

 Strategic fit exists whenever one or more activities constituting the value chains of
different businesses are sufficiently similar to present opportunities for cross-
business sharing or transferring of the resources and capabilities that enable these
activities
 Examples of this
o Transferring specialized expertise, technologically know-how or other
competitively valuable strategic assets from one business’s value chain to
another’s
o Sharing costs between businesses by combining their related value chain
activities into single operation
o Exploiting the common use of a well known brand name
o Sharing other resources that support correspond value chain activities
 Ex: Marvels characters shared with Disney
o Engaging in cross-business collaboration and knowledge sharing to create
new competitively valuable resource and capabilities
 Related diversification involves sharing or transferring specialized resources and
capabilities. Specialized resources and capabilities have very specific
applications and their use is limited to a restricted range of industry and business
types, in contrast to general resources and capabilities that can be widely
applied and can be deployed across a broad range of industry and business types.
 Identifying Cross-Business Strategic Fit Along the Value Chain
o Cross-business strategic fit can exits along the value chain- R&D, technology,
relationship with suppliers, sales and marketing
o Businesses with strategic fit can perform better together because of the
potential for transferring skills in procuring materials, sharing resources
and capabilities

Diversification into Unrelated Businesses

 Companies engage in unrelated diversification nearly always enter new businesses
by acquiring an established company rather than by forming a startup subsidiary
within their own corporate structures or participating in joint ventures
 Acquisition is deemed to have potential if it passes the industry-attractiveness and
cost of entry tests and if its has good prospects for attractive financial performance
 Corporate parenting refers to the role that a diversified corporation plays in
nurturing its component businesses through the provision of top management
expertise, disciplined control, financial resources, and other types of general
resources and capabilities such as long-term planning systems, business
development skills, management development processes, and incentive systems.

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 An umbrella brand is a corporate brand name that can be applied to a wide

assortment of business types. As such, it is a type of general resource that can be
leveraged in unrelated diversification.
 Restructuring refers to overhauling and streamlining the activities of a business—
combining plants with excess capacity, selling off underutilized assets, reducing
unnecessary expenses, and otherwise improving the productivity and profitability of
a company.
 A diversified company has a parenting advantage when it is more able than other
companies to boost the combined performance of its individual businesses through
high-level guidance, general oversight, and other corporate-level contributions.

Combination Related-Unrelated Diversification Strategies

 Dominant business enterprises- one major core business accounts for 50 to 80
percent of total revenues and a collection of small related or unrelated businesses
accounts for the remainder
 Narrowly diversified around a few related or unrelated businesses
 Broadly diversified around a wide ranging collection of related businesses,
unrelated businesses or a mixture of both
 Combination related-unrelated diversification strategies have particular appeal for
companies with a mix of valuable competitive assets, covering the spectrum from
general to specialized resources and capabilities

Evaluating the Strategy of a Diversified Company

 The procedure for evaluating the pluses and minuses of a diversified company's
strategy and deciding what actions to take to improve the company's performance
involves six steps:

o Assessing the attractiveness of the industries the company has diversified

into, both individually and as a group.

o Assessing the competitive strength of the company's business units and

drawing a nine-cell matrix to simultaneously portray industry
attractiveness and business unit competitive strength.

o Evaluating the extent of cross-business strategic fit along the value chains
of the company's various business units.

o Checking whether the firm's resources fit the requirements of its present
business lineup.

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o Ranking the performance prospects of the businesses from best to worst

and determining what the corporate parent's priorities should be in
allocating resources to its various businesses.

o Crafting new strategic moves to improve overall corporate performance

 Using a nine-cell matrix to sumulatounly portray indury attractiveness and

competitive strength

o The nine-cell attractiveness–strength matrix provides clear, strong logic for

why a diversified company needs to consider both industry attractiveness
and business strength in allocating resources and investment capital to its
different businesses. A good case can be made for concentrating resources in
those businesses that enjoy higher degrees of attractiveness and competitive
strength, being very selective in making investments in businesses with
intermediate positions on the grid, and withdrawing resources from
businesses that are lower in attractiveness and strength unless they offer
exceptional profit or cash flow potential.

o The greater the value of cross-business strategic fit in enhancing the

performance of a diversified company's businesses, the more competitively
powerful is the company's related diversification strategy.
 Checking for Resource Fit
o A company pursuing related diversification exhibits resource fit when its
businesses have matching specialized resource requirements along their
value chains; a company pursuing unrelated diversification has resource fit
when the parent company has adequate corporate resources (parenting and
general resources) to support its businesses' needs and add value.
o Financial Resource Fit
 State of the internal capital market
 Astrongi
nte
rnalcapit
almarketal
lowsadiver
sifie
dcompa nyt
oaddvalue
byshif
ti
ngcapi
talf
rombusine
ssuni
tsgener
ati
ngfr e
ecashflo
wtothose
nee
dingaddi
ti
onalcapi
talt
oexpa
nda ndre
ali
zethe i
rgr
owthpo t
ent
ia
l.
Using the portfolio approach: ensuring financial fit among a firm's
businesses is based on the fact that different businesses have different
cash flow and investment characteristics.
 Cash hogs need cash to develop
 Cash cows generate excess cash
 Star businesses are self-supporting
o Success sequence:
 Cash hog è Star è Cash cow
 Ranking Businesses Unites and Assigning a Priority for Resource Allocation

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o business subsidiaries with the brightest profit and growth prospects,

attractive positions in the nine-cell matrix, and solid strategic and resource
fit should receive top priority for allocation of corporate resources.
o Ranking Factors:
 Sales growth
 Profit growth
 Contribution to company earnings
 Return on capital invested in the business
 Cash flow
o Steer resources to business units with the brightest profit and growth
prospects and solid strategic and resource fit

 Options for Allocating a diversified company’s resources

Crafting New Strategic Moves to improve overall corporate performance

 Sticking closely with there existing business lineup and pursing the opportunities
these businesses present
 Broadening the company’s business cope by making new acquisitions in new
industries
 Divesting certain businesses and retrenching a narrower base of business
operations
 Restricting the company’s business lineup and putting a whole new face on the
company’s business makeup

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 Diversified companies need to divest low-performing businesses or businesses that

don't fit in order to concentrate on expanding existing businesses and entering new
ones where opportunities are more promising.

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Chapter 10 Summary - book "Crafting and Executing

Strategy"
Business Strategy (Clemson University)

StuDocu is not sponsored or endorsed by any college or university

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 lOMoARcPSD|8994855

Chapter 10: Building an Organization Capable of Good Strategy Execution

A Framework for Executing Strategy

 Like crafting strategy, executing strategy is a job for a company's whole
management team—not just a few senior managers. While the chief executive
officer and the heads of major units (business divisions, functional departments, and
key operating units) are ultimately responsible for seeing that strategy is executed
successfully, the process typically affects every part of the firm—all value chain
activities and all work groups.
 Goods tr
a t
e gye xecuti
onr equiresat e ame ffor
t.Allma na gersha v
estrategy-executin
g
respons ibilityint hei
ra r
e asofa uthor i
ty,a nda l
le mpl oye esa react
iv
epa rt
icipantsin
thes trategye xecut i
onpr oc ess.
 Key Success Factors
o Is operations-driven, involving management of both people and business
processes
o Is a job for the whole management team, not just a few senior managers
o Can take years longer to develop as a real proficiency for implementing
strategy
o Requires a determined commitment to change, action, and performance
 Committing to Executing a Strategy:
o Entails figuring out the specific techniques, actions, and behaviors necessary
for a smooth strategy-supportive operation
o Following through to get things done and deliver results.
o Making things happen (leadership) and making them happen right
(management)
 The Prinicpal Compnents of the Strategy Executon Process
o Staffing the organization with manager and employees capable of executing
the statregy well
o Developing resources and organization capbilties require dfor successful
strategy execution
o Creaing a strategy-supportive organizational structure
o Allocating suffiecnt resources to the strawgt exection effort
o Instiuting polcies and procedures that facilitate strastegy exedution
o Adoping best practices and business processes to drive conitous mprovement
in strategy eceton activities
o Installing infomraiton and oeorating system that enable company personnel
to carry out their strategic roles prfociently
o Tying rewards and icnetivies directly to ahceibement strategic and financial
targets
o Intilinga cirpotate culture that promotes good strategy
o Excresing the internal leasdership needed to propel strategy implementation

 Whenst
rat
egiesf
ail
,iti
sof
tenbe
caus
eofpoore
xec
uti
on.St
rat
egye
xec
uti
oni
sthe
ref
oreac
rit
ic
al
mana
ger
ialendea
vor.

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 In devising an action agenda for executing strategy, managers should start by

conducting a probing assessment of what the organization must do differently to
carry out the strategy successfully.

 Thetwobests
ignsofgoodst
rategye x
ecuti
onar
ewhet
heracompanyismee
ti
ngorbeat
ingit
s
per
for
ma nc
etarge
tsandwhetheritisperf
ormi
ngva
luecha
inact
ivi
ti
esinamanne
rth
atisconduc
ivet
o
companywi
deoperat
ingexc
elle
nc e.
 In big organizations with geographically scattered operating units, senior
executives' action agenda mostly involves communicating the case for change,
building consensus for how to proceed, installing strong managers to move the
process forward in key organizational units, directing resources to the right places,
establishing deadlines and measures of progress, rewarding those who achieve
implementation milestones, and personally leading the strategic change process

Building an Organization Capable of Good Strategy Execution: Three Key Actions

 Profiency strawtgy execton depednss on having inplan and organization capable of
the tasks demanded of it
o Staffing
o Developing
o Structuring: Create strategy-supportive organization capable of good
strategy execution
 Staffing the Organization: Assemble a strong management team and a cadre of
competent employees
o Planners who ask tough questions and figure out what needs to be done
o Implementers who can select, manage, and lead the right people
o Executors who turn decisions into actions that drive the changes that
produce sustainable competitive advantage
o Important to fill key managerial spots with smart people who are clear
thknigns, good at fiuring out what needs to e done, skilled n maaning people
and accmplosejd in deverling good results
o Putt
ingto
get
heratal
ent
edmana
gementt
eam wit
hther
ightmixofexper
ienc
es,skil
ls
,a nd
abil
it
iest
ogett
hin
gsdonei
soneoft
hefir
sts
tepst
otak
ei nl
aunchi
ngthestr
ate
gy -
executi
ng
proce
ss.
 Recruiting, Training and Retaining Capable Employees:
o Developing: Renew, upgrade, and revise resources and capabilities to match
chosen strategy
o Intensively screen and evaluate applicants to ensure selecting those who are
best-suited and best-fitted
o Provide training programs throughout employee careers
o Offer challenging, interesting, and skill-stretching assignments
o Rotating people through jobs that span functional and geographic
boundaries
o Make the work environment stimulating and engaging
so that the firm is considered a great place to work
o Encourage employees to propose creative ways of better operating, and to
push ideas for new products or businesses
o Use assorted financial incentives and perks to retain employees

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o Coach average performers to improve their skills and capabilities, while

weeding out underperformers
o In many industries, adding to a company’s talent are and building
intellectual capital are more important to a good strategy execution than
are additional investments in capital projects
o Southwest Airlines goes to considerable lengths to hire people who can have
fun and be fun on the job; it uses special interviewing and screening methods
to gauge whether applicants for customer-contact jobs have outgoing
personality traits that match its strategy of creating a high-spirited, fun-
loving in-flight atmosphere for passengers. Southwest Airlines is so selective
that only about 3 percent of the people who apply are offered jobs.
o The best companies make a point of recruiting and retaining talented
employees—the objective is to make the company's entire workforce
(managers and rank-and-file employees) a genuine competitive asset.

Developing and Building Critical Resources and Capabilities

 Buil
din
gnewc ompe te
nc iesa ndc apabilit
iesisamul t i
stagepr ocesst hatoc curso vera
per
iodofmont hsa ndy ears.Itisno tsome thingt ha tisa ccompl i
she do ve
rni ght
.
 Approaches to Build Building and Strengthening Capabilities
o Developing Capabilities Internally
 A company's capabilities must be continually refreshed and renewed
to remain aligned with changing customer expectations, altered
competitive conditions, and new strategic initiative
 Training Is Important In:
 Executing a strategy that requires different skills, competitive
capabilities, and operating methods
 Organizational efforts to build skills-based competencies
 Supplying technical know-how to employees when rapidly
changing technology puts a firm
in danger of losing its ability to compete
o Acquiring companies through mergers and acquisitions
 Speeds up the process of acquiring new capabilities
 Capabilities motivated acquisitions are essential
 When the company does not have the ability to create the
needed capability internally
 When the industry conditions, technology or competitors are
moving at such a rapid clip that time is of the essence
o Access capabilities via collaborative partnerships
 Outsource the function in which the company's capabilities are
deficient to a key supplier or another provider.
 Collaborate with a firm that has complementary resources and
capabilities in a joint venture, strategic alliance, or other type of
partnership established for the purpose of achieving a shared
strategic objective.

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 Engage in a collaborative partnership for the purpose of learning

how the partner does things, internalizing its methods and thereby
acquiring its capabilities.
o Faciltaing Collcatioon with external patterns and strategic alliances
 Creating a Network Structure: Using “relationship managers” to
build and maintain cooperative arrangements of value both parties
 Strategic alliances
 Outsoring arrangements
 Joint entures
 Cooperative partnerhsips
 Strategy Executon Capalbties and Competitive Advnatge
o Superiod Strategy Eectuon Cabalities
 Are difficult to imitate and socially complex process that take a long
time to develop
 Maximize organizational resources and competitive capabilities in
support of the business model
 Lower costs and permit firms to deliver more value to customers
 Enable a firm to react more quickly to market changes, beat
competitors to market with new products and services, and gain
uncontested
market dominance
o Superior strategy execution capabilities are the only source of sustainable
competitive advantage when strategies are easy for rivals to copy

Matching Organizational Structure to the Strategy

 Ac ompa ny '
sorg ani
z ati
ona lst
ruc t
ures houldbema t
c hedtot hepa rti
cula
rre q uir
eme
nts
ofimpl eme nt
ingt hefirm'ss t
rategy.
 Ensuring that Structure Follows Strategy By:
o Deciding which value chain activities to perform internally and which to
outsource
o Aligning the firm’s organizational structure with its strategy
o Determining how much authority to delegate
o Facilitating collaboration with external partners and strategic allies
 Alligning the Firm;s Oraniztilna Srucurre with its Strategy

o Wi selychoosin gwhi cha ctivit

iestope r
formi nte r
nall
yandwhi chtooutsource
canleadtos eve r
alstrat
egy -executi
n gadvantag es—lowercost
s,heighte
ne d
st
rat
egicfocus ,lessinternalbure a
uc rac
y,spee dierdeci
sionmaking,anda
bet
terarse
na lofor ganiza t
ionalc a
pa bil
iti
es.
o Afir m'sorga nizationals t
r ucturec ompr i
sest heformalandinfor
ma l
ar
rangeme ntoft asks,respons i
bili
ties,l
inesofa ut
horit
y,andr
e por
ting
re
lat
ionshipsb ywhi c
ht hefirmi sa dminist
ered .
 Matching Type of Organizatioal Strcuure to Stratgy Exection
o As i
mpl estruc turec onsistsofac entralexecutive(oft
entheowne r-
ma nager
)
whoha ndlesa llma j
orde cisionsando v
e r
seesa llopera
ti
onswi t
htheh elpofa

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sma l
ls t
a ff.Simpl es tructure sarea ls
oc alledl i
ne -and- staffs t
r uc t
ure sorflat
str
ucture s.
 Typically employed by smaller firms and startups
o Af unc ti
onals truc tur eisor g anizedint of unc t
iona lde pa rtme nt s,wi t
h
departme nt alma nag erswhor e
por ttot heCEOa nds ma llc orpor a t
es taff.
Functiona lstru ct
ure sa rea l
s oc all
edde par tme ntalstr ucture sa nduni t
ar y
str
ucture sorU- forms .
 I nl arg eorga nizations ,functiona ls t
ruc tureslight ent hel oa dont op
ma nag ement ,inc ompa risont os impl es tructures,a nde na blemor e
efficientus eofma na gerialresour c e
s.
 The i
rpr ima rya d vant age,howe ver,isgr eatert asks pe cialization,whi ch
pr omo t
eslea rning ,ena blesther eali
z at
ionofs calee conomi es,and
offe r
spr odu ctivitya d vantagesno to t
he rwi s
ea vailable.
 The i
rc hiefdi sadv anta geistha tthede pa rt
me nt albounda riesc aninhibi
t
theflo wofi nfor ma tiona ndl imi ttheoppor tuni t
iesf orc ross-func t
ional
coope rati
ona ndc oor dina t
ion.
o Amul tidivisionals tructur ei sade c entra l
izeds tructurec ons isti
n gofas etof
operati
n gd i
visionsor g anize da longbu siness,pr oduc t,cus t
ome rgroup,or
geographi cl i
ne sandac entr alcorpo ratehe adq ua rt
erst ha ta l
loc atesr esources
,
provi
de ss uppo r
tfunc ti
ons ,a ndmoni torsd ivisionala c t
ivities.Mul tidivisi
onal
str
ucture sa rea l
soc a l
leddi v isi
onals truc turesorM- forms .
 Multidivisional structures are common among companies pursuing
some form of diversification strategy or international strategy, with
operations in a number of businesses or countries
o Ama trixs t
r ucturei sac ombi nati
ons tructurest hato ve r
lay sonet ypeof
str
uctureont oa nothe rtype ,wi thmul t
ipl er epor t
ingr e l
ations hips .Itisu sedto
fost
erc ros s-
uni tcollabor ation.Ma tr
ixs t
r ucturesa rea lsoc a l
le dc ompos it
e
str
ucture sorc ombi nat i
ons tructures.
 They are often used for project-based, process-based, or team-based
management. Such approaches are common in businesses involving
projects of limited duration, such as consulting, architecture, and
engineering services.
 An advantage of matrix structures is that they facilitate the sharing
of plant and equipment, specialized knowledge, and other key
resources. Thus, they lower costs by enabling the realization of
economies of scope. They also have the advantage of flexibility in
form and may allow for better oversight since supervision is provided
from more than one perspective.
 A disadvantage is that they add another layer of management,
thereby increasing bureaucratic costs and possibly decreasing
response time to new situations

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 Determining How Much Authority to Delegate

o Centralized Decision Making: author retained by top management
o Decentralized Decision Making: author delegates to lower-level mangers
and employees
 Theul t
i mat
eg oalofde ce
nt r
ali
z eddeci
si
onma kingi
stoputa ut
horit
y
i
ntheha ndsofthos epe rsonsclosestt
oandmos tknowledgea bleabout
t
hesit
ua ti
on.
 Effor
tst
ode c
entr
aliz
edecisi
onmaki
ngandgi
vecompan
ype
rsonne
lsomele
ewayin
conduct
ingoper
ati
onsmu stbet
empe
redwit
hthenee
dtoma
inta
inadeq
uat
econt
rol
andcros
s-uni
tcoordi
nat
ion.

Further Perspectives on Structuring the Work Effort

 Matching Structure to Strategy
o Pick a basic organizational matches structure to strategy
o Supplement design with appropriate cording mechanism
o Institute collaborate networking and communication arrangements

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Chapter 11 Summary - book "Crafting and Executing

Strategy"
Business Strategy (Clemson University)

StuDocu is not sponsored or endorsed by any college or university

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 lOMoARcPSD|8994855

Chapter 11: Managing Internal Operations

Allocating Resources to the Strategy Execution Effort

 A company's ability to marshal the resources needed to support new strategic
initiatives has a major impact on the strategy execution process. Too little funding
and an insufficiency of other types of resources slow progress and impede the efforts

 The funding requirements of good strategy execution must drive how capital
allocations are made and the size of each unit's operating budget. Underfunding
organizational units and activities pivotal to the strategy impedes successful
strategy implementation.

 A company's operating budget must be strategy-driven (in order to amply fund the
performance of key value chain activities) and lean (in order to operate as cost-
effectively as possible)
 Allocating Resources to match strategy important
o Resources are always limited
o People always want more (Jim L experience)
 Possible Adverse Resource Allocation Outcomes:
o Too little funding may slows progress & impedes the efforts to execute pieces
of the strategic plan proficiently.
o Too much funding that wastes organizational resources and reduces
financial performance
 Screen resource requests carefully.
 Approve only those that contribute to strategy execution.
 Provide the level of resources necessary for the success of strategic initiatives.
 Shift resources to higher-priority activities where new execution initiatives are
needed.

Instituting Polices and Procedures that facilitate strategy execution

 Well-conceived polices and procedures
o Provides top down guidance about how certain things need to be done
 Channel individual and group efforts along a strategy-supportive
path
 Align the actions and behavior of company personnel with the
requirements for good strategy execution
 Place limits on independent action and help overcome resistance to
change
o Help enforce consistency in how strategy-critical activities are performed
 Improve the quality and reliability of strategy execution
 Help coordinate the strategy execution efforts of individuals and
groups throughout the organization
o Promote the creation of a work climate that facilitates a good strategy
execution

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 There is wisdom in a middle-ground approach: Prescribe enough policies to give

organization members clear direction and to place reasonable boundaries on their
actions; then empower them to act within these boundaries in pursuit of company
goals.

 Well-conceived policies and procedures aid strategy execution; out-of-sync ones

hinder effective execution.

 Prescribe enough policies to give organization members clear direction and to place
reasonable boundaries on their actions; then empower them to act within these
boundaries in pursuit of company goals.

Adopting Best Practices and Employing Process Management Tools

 Managing for Continuous Improvement
o Business process reengineering involves radically redesigning and
streamlining how an activity is performed, with the intent of achieving
quantum improvements in performance.
 Involves radically redesigning and streamlining work effort, flows
and processes to achieve dramatic improvements in performance.
 Often involves:
 cross-functional teams,
 cutting-edge technology
 information systems
 “All Hands On-Deck” attitude to think outside the box
 ex:
 Hallmark- Greeting card process- removed 24 mths
 GE- Circuit Breaker Division- Order to Ship from 3 wks to 3
days
 Champion- “Kaizen” events to reduce process flow
distance/time (Room for 2 new product lines)
 A best practice is a method of performing an activity that consistently
delivers superior results compared to other approaches.

 Total quality management (TQM) entails creating a total quality culture,

involving managers and employees at all levels, bent on continuously improving the
performance of every value chain activity.

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o While TQM concentrates on producing quality goods and fully satisfying

customer expectations, it achieves its biggest successes when it is extended to
employee efforts in all departments—human resources, billing, accounting,
and information systems—that may lack pressing, customer-driven
incentives to improve
o TQM takes a fairly long time to show significant results—very little benefit
emerges within the first six months.
o US Navy coined TQM in mid-1980’s using teachings of W. Edward Deming
o Creating a total quality culture bent on continuously improving the
performance of every task in value chain.
o Has mostly been replaced by ISO9000 and Six Sigma type programs.
 Six Sigma programs utilize advanced statistical methods to improve quality by
reducing defects and variability in the performance of business processes.
o Program aimed to reduce cost by eliminating waste
 Waste in the form of Defects, Variation & Non-Productive Activities
 Heavy use of DOE and statistics methods to reduce defects and
variation
 Developed at Motorola in 1986
 GE & Honeywell have been a big supporters
 Greenbelts, Yellowbelts, Blackbelts are typical certifications
 99.99966% statistically defect free product when +- 6 Standard
Deviations fall within specification limits
 Generally, more sigmas the better
 Criticism from some quality “experts”
o Existing Processes
 Define what onsite a defect of variation
 Measure- collect data to find out why how and how often this defect
occurs
 Analysis to determine when and why and where the defect is
occurring
 Improve- implement best practice to eliminate defect or variation
 Control- implement training, monitoring and controls to sustain the
improvement
o New Projects
 Define project goals and customer requirements
 Measure how to we measure and determine our goals and the needs
of our customers
 Analyze what exact process options do we have for meeting customer
needs
 Design-should we use old or new process
 Verify- how will we verify design performance and out ability to meet
customer needs
 The difference Between Business Process Reengineering and Continuous
Improvement

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o Business process reengineering aims at one-time quantum improvement,

while continuous-improvement programs like TQM and Six Sigma aim at
ongoing incremental improvements.

Installing Information and Operating Systems

 Benefits of Information Technologies
o Enable better strategy execution through data-based decisions
o Strengthen organizational capabilities
o Allow for real-time tracking of implementation initiatives and daily
operations
o Provide monitoring of empowered employee performance (electronic
scorecards)
o Build closer relationships with customers
o Ex: amazon, UPS, Airlines
 Instituting Adequate Information Systems, Performance Tracking and Controls

o Having state-of-the-art operating systems, information systems, and real-

time data is integral to superior strategy execution and operating excellence.
o Customer Data: many customers take order and feedback online
o Operations data: daily data at champion production
o Employee data: HR
o Suppliers/partner/collaborate ally data
o Financial performance data

Using Rewards and Incentives to Promote Better Strategy Execution

 A properly designed reward structure is management’s most powerful tool for
mobilizing organizational commitment to successful strategy execution and
aligning efforts throughout the organization with strategic priorities.
 Two Types of Rewards:
o Monetary
 Stock options pay increases, bonuses, profit sharing plans, 401K
matching, retirement plans
o Non-Monetary
 Cafes, snack bars, pool tables, bikes, gyms
 Nonmonetary approaches to enhancing motivation
o Provide attractive perks and fringe benefits.
o Give awards and other forms of public recognition.
o Rely on promotion from within whenever possible.
o Invite and act on ideas and suggestions.
o Create a work atmosphere of caring and mutual respect.
o State the strategic vision in inspirational terms.
o Share the firm’s critical information with employees.
o Provide a comfortable working environment.
 Monetary Rewards

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o Can provide high-powered incentives when rewards are tied to specific

outcome objectives.
o The first principle in designing an effective incentive compensation system is
to tie rewards to performance outcomes directly linked to good
strategy execution and the achievement of financial and strategic
objectives.
 Guidelines for Designing Effective Compensation System
o Make financial incentives a major, not minor, piece of the total compensation
package.
o Have incentives that extend to all managers and all workers, not just top
management.
o Administer the reward system with scrupulous objectivity and fairness.
o Keep the time between achieving targeted performance outcome and
payment of the reward as short as possible.
o Avoid rewarding effort rather than results.
 Linking Rewards to Strategically Relevant Performance Outcomes
o Focus on and reward results, not effort.
o Create a results-oriented work environment that focuses on what to achieve,
not what to do.
o Set strategically relevant, specific, and measurable stretch performance
goals.
o Link the performance goals of each individual in an organizational unit to
the unit’s goals.
o Reward and recognize as success superior performance in accomplishing the
goals.

o The key to creating a reward system that promotes good strategy execution
is to make measures of good business performance and good strategy
execution the dominating basis for designing incentives, evaluating
individual and group efforts, and handing out rewards.

o The first principle in designing an effective incentive compensation system is

to tie rewards to performance outcomes directly linked to good strategy
execution and the achievement of financial and strategic objectives.

o The key to creating a reward system that promotes good strategy execution
is to make measures of good business performance and good strategy
execution the dominating basis for designing incentives, evaluating
individual and group efforts, and handing out rewards.

o Incentives must be based on accomplishing the right results, not on dutifully

performing assigned tasks.
 Striking the Right Balance Between Rewards and Punishment
o General Electric, McKinsey & Company, several global public accounting
firms, and other companies that look for and expect top-notch individual
performance, there's an “up-or-out” policy—managers and professionals

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whose performance is not good enough to warrant promotion are first

denied bonuses and stock awards and eventually weeded out.
o Unwise to take off the pressure for good performance or play down the
adverse consequences of shortfalls in performance. There is little evidence
that n-pressure work environments leaders to superior strategy or operating
excellence
o “Play like you’re a touchdown down”

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