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5/21/2017

Important statistics for strategy execution


Course Coordinator: Dr. Zahid Riaz.
65% of organizations have an agreed-upon strategy.
14% of employees understand the organizations strategy.
Strategy implementation: Less than 10% of all organizations successfully execute the strategy.
Organizing for action,
evaluation and control.

Why does the growth stall? Why does the growth stall?
For nearly five decades, Wal-Marts everyday low prices and A research study by Matthew Olson, Derek van Bever,
low cost position had enabled it to rapidly grow to dominate and Seth Verry attempts to provide an answer.
North Americas retailing landscape.
By 2006, however, its U.S. division generated only 1.9% After analyzing, the experiences of 500 successful
growth in its same-store sales. companies over a 50-year period, they found that 87% of
By 2007, Target, Costco, Kroger, Safeway, Walgreens, CVS, and the firms had suffered one or more serious declines in
Best Buy were all growing faster than Wal-Mart. sales and profits.
At about the same time, Microsoft, whose software had
grown to dominate personal computers worldwide, saw its This included a diverse set of corporations, such as Levi
revenue growth slow to just 8% in 2005. Strauss, 3M, Apple, Bank One, Caterpillar, Daimler-Benz,
The companys stock price had been flat since 2002, an ToysRUs, and Volvo.
indication that investors no longer perceived Microsoft as a
growth company.
What had happened to these two successful companies?
Was this an isolated phenomenon? What could be done, if
anything, to reinvigorate these giants?

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Why does the growth stall? Why does the growth stall?
After years of prolonged growth in sales and profits, revenue growth at According to Olson, van Bever, and Verry, these stall points occurred
each of these firms suddenly stopped and even turned negative!
primarily because of a poor choice in strategy or organizational
Olson, van Bever, and Verry called these long-term reversals in company
growth stall points. design.
On average, corporations lost 74% of their market capitalization in the
decade surrounding a growth stall.
Even though the CEO and other members of top management were
The root causes fell into four categories.
typically replaced, only 46% of the firms were able to return to moderate
or high growth within the decade.
When slow growth was allowed to persist for more than 10 years, the delay
was usually fatal.
Only 7% of this group was able to return to moderate or high growth.

Four root causes Four root causes


1. Premium position backfires: This happens to a firm that has 2. Innovation management breaks down: Management processes for
developed a premium position in the market, but is unable to updating existing products and creating new ones falter and
respond effectively to new, low-cost competitors or a shift in become systemic inefficiencies.
customer valuation of product features. Management teams go 3. Core business abandoned: Management fails to exploit growth
through a process of disdain, denial, and rationalization that opportunities in existing core businesses and instead engages in
precedes the fall. growth initiatives in areas remote from existing customers,
products, and distribution channels.

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Four root causes What is strategy implementation?


4. Talent and capabilities run short: Strategies are not executed The sum total of all activities and choices required for the
execution of a strategic plan.
properly because of a lack of managers and staff with the skills and It is the process by which objectives, strategies, and policies are
capabilities needed for strategy implementation. Often supported put into action through the development of programs, budgets,
by promote-from-within policies, top management has a narrow and procedures.
experience base, which too often replicates the skill set of past top Although implementation is usually considered after strategy has
been formulated, implementation is a key part of strategic
managers. management.
Strategy formulation and strategy implementation should be
considered as two sides of the same coin.
You need to ask/answer following important questions?
Who are the people to carry out the strategic plan?
What must be done to align company operations in the intended
direction?
How is everyone going to work together to do what is needed?

Strategy execution/implementation goes


The secrets to successful strategy execution
beyond
A brilliant strategy may put you on the competitive map. Though structural change has its place in execution, it produces only
But only solid execution keeps you there. short-term gains.
Unfortunately, most companies struggle with implementation.
Thats because they over rely on structural changes, such as For example, one company reduced its management layers as part of
reorganization, to execute their strategy. a strategy to address disappointing performance.
So there is no role of structural changes in strategy execution???
Costs plummeted initially, but the layers soon crept back in.

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Prescription versus research Prescription versus research


Over the period of five years, Neilson, Martin and Powers have Employees at three out of every five rated their organization
weak at execution that is, when asked if they agreed with
invited many thousands of employees (about 25% of whom came the statement Important strategic and operational decisions
from executive ranks) to complete an online assessment of their are quickly translated into action, the majority answered
organizations capabilities, a process that has generated a database of no.
125,000 profiles representing more than 1,000 companies,
government agencies, and not-for-profits in over 50 countries. Execution is the result of thousands of decisions made every
day by employees acting according to the information they
have and their own self-interest.
In their work helping more than 250 companies learn to
execute more effectively, they have identified four
fundamental building blocks executives can use to influence
those actions.
What are those building blocks for strategy execution?

What can be powerful than structural


Clarifying decision rights
change?
Research by Neilson, Martin, and Powers shows that execution Ensure that everyone in your company knows which
exemplars focus their efforts on two levers far more powerful than decisions and actions they are responsible for.
structural change.
Clarifying decision rights for instance, specifying who owns each Example: In one global consumer-goods company,
decision and who must provide input. decisions made by divisional and geographic leaders were
Ensuring information flows where its needed such as promoting overridden by corporate functional leaders who
managers laterally so they build networks needed for the cross-unit controlled resource allocations. Decisions stalled.
collaboration critical to a new strategy. Overhead costs mounted as divisions added staff to
First, tackle decision rights and information flows and only then alter create bulletproof cases for challenging corporate
organizational structures and realign incentives to support those decisions. To support a new strategy hinging on sharper
moves. customer focus, the CEO designated accountability for
profits unambiguously to the divisions.

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Clarifying decision rights Information flow


Make sure important information about the competitive
Encourage higher-level managers to delegate operational decisions. environment flows quickly to corporate headquarters.
That way, the top team can identify patterns and promulgate
best practices throughout the company.
Example: At one global charitable organization, country-level
managers inability to delegate led to decision paralysis. So the
leadership team encouraged country managers to delegate standard Example: At one insurance company, accurate information
operational tasks. This freed these managers to focus on developing about projects viability was censored as it moved up the
hierarchy. To improve information flow to senior levels of
the strategies needed to fulfill the organizations mission. management, the company took steps to create a more open,
informal culture. Top executives began mingling with unit
leaders during management meetings and held regular
brown-bag lunches where people discussed the companys
most pressing issues.

Information flow Information flow


Help field and line employees understand how their day-to-
Facilitate information flow across organizational day choices affect your companys bottom line.
boundaries.
Example: To better manage relationships with large, Example: At a financial services firm, salespeople routinely
cross-product customers, a business to business company crafted customized one-off deals with clients that cost the
needed its units to talk with one another. It charged its company more than it made in revenues. Sales didnt
understand the cost and complexity implications of these
newly created customer-focused marketing group with transactions. Management addressed the information
encouraging cross-company communication. The group misalignment by adopting a smart customization approach
issued regular reports showing performance against to sales. For customized deals, it established standardized
targets (by product and geography) and supplied root- back-office processes (such as risk assessment). It also
cause analyses of performance gaps. Quarterly developed analytical support tools to arm salespeople with
accurate information on the cost implications of their
performance-management meetings further fostered the proposed transactions. Profitability improved.
trust required for collaboration.

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Prescription versus research


Research shows that enterprises fail at execution because
they go straight to structural reorganization and neglect
the most powerful drivers of effectivenessdecision
rights and information flow.

Prescription versus research


Execution is a tricky business
Execution is a notorious and perennial challenge.
Even at the companies that are best at it -what we call resilient
organizations.
Just two-thirds of employees agree that important strategic and
operational decisions are quickly translated into action.
As long as companies continue to attack their execution problems
primarily or solely with structural or motivational initiatives, they will
continue to fail.

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Execution is a tricky business


They may enjoy short-term results, but they will inevitably slip back
into old habits because they wont have addressed the root causes of Strategy execution/implementation is
failure. complemented with evaluation and
Such failures can almost always be fixed by ensuring that people truly control
understand what they are responsible for and who makes which
decisions and then giving them the information they need to fulfil
their responsibilities.
With these two building blocks in place, structural and motivational
elements will follow.

What is evaluation and control? Primary measures of corporate performance


Evaluation and control ensures that a company is achieving what it Return on Investment (ROI)
set out to accomplish by comparing performance with desired results
and taking corrective action as needed.
Earnings per share (EPS)

Return on equity (ROE)

Operating cash flow versus free cash flow

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Operating cash flow versus free cash flow


The amount of money generated by a company before the cost of financing
and taxes, is a broad measure of a companys funds.
This is the companys net income plus depreciation, depletion,
amortization, interest expense, and income tax expense.
Some takeover specialists look at a much narrower free cash flow.
The amount of money a new owner can take out of the firm without
harming the business.
This is net income plus depreciation, depletion, and amortization less
capital expenditures and dividends.
The free cash flow ratio is very useful in evaluating the stability of an
entrepreneurial venture.

Stakeholder scorecard
Each stakeholder has its own set of criteria to determine how well the
corporation is performing.
These criteria typically deal with the direct and indirect impacts of
corporate activities on stakeholder interests.
Top management should establish one or more stakeholder measures
for each stakeholder category so that it can keep track of stakeholder
concerns.

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Measuring performance Economic value added


Roberto Goizueta, past-CEO of Coca-Cola, explained, We raise capital to
Shareholder value: The present value of the anticipated make concentrate, and sell it at an operating profit. Then we pay the cost
future streams of cash flows from the business plus the of that capital. Shareholders pocket the difference.
value of the company if liquidated Managers can improve their companys or business units EVA by: (1)
earning more profit without using more capital, (2) using less capital, and
(3) investing capital in high-return projects.
Economic Value Added (EVA): It measures the
Studies have found that companies using EVA outperform their median
difference between the pre-strategy and post-strategy competitor by an average of 8.43% of total return annually.
values for the business EVA does, however, have some limitations.
EVA = After tax income Total annual cost of capital For one thing, it does not control for size differences across plants or
divisions.
As with ROI managers can manipulate the numbers.
As with ROI, EVA is an after-the-fact measure and cannot be used like a
steering control.
Although proponents of EVA argue that EVA (unlike Return on
Investment, Equity, or Sales) has a strong relationship to stock price,
other studies do not support this contention.

What is the alternative? Balanced scorecard approach


What is balanced scorecard?
It combines financial measures that tell results of actions already taken This approach is especially useful given that research indicates that
with operational measures on customer satisfaction, internal processes non-financial assets explain 50% to 80% of a firms value.
and the corporations innovation and improvement activities. The balanced scorecard combines financial measures that tell the
Why do budgets often bear little direct relations to a company's long results of actions already taken with operational measures on
term strategic objectives? customer satisfaction, internal processes, and the corporations
A balanced scorecard augments traditional financial measures with innovation and improvement activities the drivers of future
benchmarks for performance in three key nonfinancial areas. financial performance.
A companys relationship with its customers Thus steering controls are combined with output controls.
Its key internal business processes In the balanced scorecard, management develops goals or
Its learning and growth. objectives in each of four areas:
It does not only provide a broader perspective regarding companys 1. Financial: How do we appear to shareholders?
health and activities but it also provide a powerful organizing framework. 2. Customer: How do customers view us?
This framework ensures the alignment of firm activities with its strategy. 3. Internal business perspective: What must we excel at?
Some entities may use more or less than four perspectives depending on 4. Innovation and learning: Can we continue to improve and create
their unique situations. value

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Balanced scorecard approach

Using balanced scorecard to build strategic


management system

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Linking measures with four perspectives

Why do companies use balanced scorecard


An example
approach?
A bank had articulated its strategy as providing superior service to Companies are using the scorecard to:
targeted customers. But the process of choosing operational
measures for the four areas of the scorecard made executives realize Clarify and update strategy;
that they first needed to reconcile divergent views of who the Communicate strategy throughout the company;
targeted customers were and what constituted superior service. Align unit and individual goals with the strategy;
Link strategic objectives to long-term targets and annual budgets;
Identify and align strategic initiatives; and
Conduct periodic performance reviews to learn about and improve
strategy.
More importantly, it aligns management processes and focuses the entire
organization on implementing long-term strategy.

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Strategy implementation and balanced


Use of balanced scorecard approach
A survey by Bain & Company reported that 50% of Fortune
scorecard approach
1,000 companies in North America and about 40% in Europe At National Insurance, the scorecard provided the CEO and his
use a version of the balanced scorecard.
Another survey reported that the balanced scorecard is used managers with a central framework around which they could redesign
by over half of Fortunes Global 1000 companies. each piece of the companys management system.
A study of the Fortune 500 firms in the U.S. and the Post 300 And because of the cause-and-effect linkages inherent in the
firms in Canada revealed the most popular non-financial
measures to be customer satisfaction, customer service, scorecard framework, changes in one component of the system
product quality, market share, productivity, service quality, reinforced earlier changes made elsewhere.
and core competencies.
New product development, corporate culture, and market
growth were not far behind.
DuPonts Engineering Polymers Division uses the balanced
scorecard to align employees, business units, and shared
services around a common strategy involving productivity
improvements and revenue growth.

Strategy implementation and balanced


scorecard approach
The balanced scorecard provides a framework for managing
the implementation of strategy while also allowing the
strategy itself to evolve in response to changes in the
companys competitive, market, and technological
environments.
More importantly, corporate experience with the balanced
scorecard reveals that a firm should tailor the system to suit
its situation, not just adopt it as a cookbook approach.
When the balanced scorecard complements corporate
strategy and its implementation, it improves performance.
Using the method in a mechanistic fashion without any link
to strategy hinders performance and may even decrease it.

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