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Shashi Kapoor University Business School

Panjab University Regional Centre, Ludhiana, Punjab

Paper 3: Strategic Management

Module: 24, Operational Implementation

1

Items Description of Module

Subject Name Management

Paper Name Strategic Management

Module Title Operational Implementation

Module Id Module No.-24

Pre- Requisites Basic Knowledge Strategy

Objectives To study the Issues involved in operational implementation of strategy

Keywords Strategy, Management Issues, Organizational Structure, Acquisitions, Alliances

QUADRANT-I

Module-24 Operational Implementation

1. Learning Outcome

2. Introduction to Implementation of Strategy

3. Management Issues Central to Implementation of Strategy

4. Implementing Strategy through Organizational Structure

5. Implementing Strategy through Internal New Ventures

6. Implementing Strategy through Acquisitions

7. Implementing Strategy through Strategic Alliances

8. Summary

1. Learning Outcome:

After completing this module the students will be able to understand:

Importance of Strategy Implementation

Key issues involved in Strategy Implementation

Implementation of Strategy making changes in Organizational Structure

Implementation of Strategy using Internal New Ventures, Acquisitions and Strategic

Alliances

2. Introduction:

Strategic management is the process of deciding the strategy after environmental scanning &

analysis and then implementing, evaluating and controlling the strategy so formulated (Figure-1).

Strategy formulation is an important phase of strategic management, but strategic management does

not end until the strategy so

formulated is successfully

implemented. Translation of

strategic thoughts into strategic

action is also equally important.

A strategy cannot serve any

purpose if it is not implemented

Figure-1

(Source - http://www.managementstudyguide.com/environmental-scanning.htm)

2

effectively. Success comes through effective implementation and evaluation but not only through

effective formulation. A strategy, not precisely planned but implemented well, may achieve more

than a perfect strategy which is never implemented (Figure-2).

Strategy Formulation

Str

ateg

y

Imple

men

tati

on

Good Poor

Good Success Roulette

Poor Trouble Failure

Strategic Performance Matrix (Figure-2)

Most of organizations invest a lot of time, money and efforts for formulating the strategy,

considering the implementation secondary. Strategy formulation is an intellectual process and

requires coordination among few individuals only whereas implementation is an operational

process and involves coordination among large number of people. Figure-3 explains the comparison

of strategy formulation and implementation in detail. It also needs special motivation and leadership

skills. Concept and techniques to be used for deciding strategies in large or small organizations may

be the same but implementing those strategy is going to be different depending upon the size of the

organization. Implementing strategies may require the different types of actions to be taken by

organization which may include adding new departments, hiring new employees, changing the

pricing policies, changing the sales territories, transferring employees among different divisions,

developing financial budgets, developing cost control mechanisms, changing product lines, building

new facilities etc. Undertaking these types of activities cannot to be the same for different types and

size of organizations. Therefore effective implementation of strategy is very essential to take the

company from its present position to desired future state.

Figure-3

(Source - http://www.managementstudyguide.com/strategy-formulation-vs-implementation.htm)

3

3. Management Issues central to Implementation of Strategy:

Strategy implementation affects all the functional and divisional areas of a business entity from

top to bottom. Following are the some issues which need to be addressed for successful

implementation of strategy:

Involvement of divisional and functional managers in strategy formulation:

During the Implementation phase, there is a shift of responsibility from strategists to

divisional or functional managers, who are to play key role in implanting the strategy.

Obstacles at this stage may arise if strategic decisions come to surprise of divisional

and functional managers as they have not been involved in the strategy formulation

activities. Managers and employees throughout an organization need to be involved in

implementation and their role in implementation should build upon their prior role

during the formulation stage.

Establishing annual objectives: Setting

the annual objectives is important for

implementation as they establish the

organizational, divisional and

departmental priorities (Figure-5).

Objectives can be used as basis for

deciding the resource allocation also.

Considerable time and efforts should be

devoted to ensure that annual objectives

are well conceived, consistent with long

Figure-4

Figure-4

Keys issues in Implementation

Annual Objectives

Policies

Resource Allocation

Managing Conflict

Supportive Culture

Involvement of Strategists

Figure-5

(Source - http://www.balancedscorecard.org/BSC-

Basics/About-the-Balanced-Scorecard)

4

term objectives and are supportive to strategies be implemented. Annual objectives

are helpful in monitoring the progress towards achieving long term objective of the

organization. Keeping in view the long term objectives of the organization, annual

objectives for different divisions can be established. Further every division can have

different annual objectives for different functional department also.

Formulating different organizational policies: Policies helps the managers and

employees in knowing that what is expected from them thereby increasing the

likelihood that strategies will be implemented effectively. Strategic change does not

take place automatically; rather some policies are required to solve the problem

occurring on day to day basis. Policy can be defined as set of guidelines, methods,

rules, procedures and practices established to support the organizational goal. Policies

can be used as tools for implementing

strategy. These policies define the

limitations or the boundaries with in

which each and every employee has to

work. For example some organization

may be having policy to discourage

smoking at work place, a policy to work

in shifts, a policy to have one or more

supplier etc. Wal-Mart has a policy that

it calls the “10 Foot Rule”, whereby

customers can find assistance within 10

feet of anywhere in the store (Figure-6).

Resource Allocation: Every organization has different resources which are to be

deployed in order to achieve the

desired goals. These resources can

be financial resources, physical

resources, human resources and

technological resources. Resources

should be allocated among different

divisions and departments keeping

in view the established annual

objectives (Figure-7). If an

organization does not use strategic

management approach for decision

making then resource allocation in

such organization is often based on

political or personal factors. There can be nothing harmful to an organizational

Figure-6

(Source -

https://www.slideshare.net/RahulChoudhary139/wal

mart-case-study-kotler)

Figure-7

(Source -https://www.slideshare.net/grawitch/Workplace-

Practices-Resource-Allocation)

5

success than for resource allocation which is not consistent with annual objectives.

The effectiveness of resource allocation lies in the resulting accomplishment of an

organization’s objectives.

Managing Conflict: Conflict can be defined as a disagreement between two or more

parties on some issues (Figure-8). Interdependency

of objectives and competition for limited resources

generally lead to conflict in the organization.

Setting annual objectives may also lead to conflict

some time. For example, a collection manager’s

objective of reducing bad debts by 50% may lead

to a conflict with objective of a sales manager to

increase sales by 20%. Having conflict is very

much natural in the organization so it becomes

very important that how conflict is handled. Generally there are three approaches to

handle conflict: Avoidance, Defusion, and Confrontation (Figure-9). Avoidance of

conflict refers to ignoring the conflict assuming that it will be resolved automatically.

Defusion refers to playing down differences between parties by compromising so that

neither is a winner or loser, or resorting to majority rule or refereeing to higher

authorities etc. Confrontation refers to exchanging the positions of parties to conflict

so that they can

understand the point

of view of other

party or arranging a

meeting wherein

both the parties can

explain their side to

find the solution for

conflict.

Creating a Strategy Supportive Culture: Culture prevailing in an organization

should be supportive to the strategic change. The aspects of existing culture those are

incompatible to the strategies being implemented should be identified and changed

accordingly. Generally the strategies are market driven and formulated keeping in

mind the competitive forces; therefore changing culture according to strategy is

effective rather than changing the strategy as per the culture prevailing in

organization (Figure-10). Different techniques like recruitment, training, transfer,

promotion, restructuring etc. can be used to alter the culture for strategic support.

Figure-8

(Source -

https://frontlinemanagementexperts.w

ordpress.com/2016/02/19/managing-

conflict-in-the-workplace/)

Figure-9

Aproaches to Handle Conflict

Aviodance Defusion Confrontation

6

4. Implementing Strategy through Organizational Structure:

Implementing a strategy often requires changes in the way an organization is structured.

Generally the organizational structure dictates that how objectives and policies will be

established and how the resources will be allocated. The structure should be designed to facilitate

the strategic pursuit. There is no optimal structure for a given strategy or a type of organization.

For example, consumer goods companies tend to organize themselves by divisional structure by

product form of organization. Small firms tend to be functionally structured. Large firms tend to

use strategic business unit or matrix structure. As organizations grow, their structures generally

changes from simple to complex. The basic building blocks of the organizational structure are

differentiation and integration. Differentiation is the way in which company allocates people and

resources to organizational tasks and divides them into functions and divisions so as to create

value. Whereas integration is the means by which company seeks coordinate people, functions

and divisions to accomplish organizational tasks. In short, differentiation is the way company

divides itself into part and integration is the way those parts are combined.

4.1 Vertical Differentiation: The vertical differentiation specifies the reporting

relationship that link people, tasks and functions at all levels of a company. The

management chooses the appropriate number of hierarchical levels and correct span of

control for implementing its strategy effectively. It establishes the authority structure

from top to bottom. The basic choice is to have a tall structure or a flat structure. The flat

structure is one having lesser levels of hierarchy with wider span of control and tall

structure is the one having many levels of hierarchy with narrow span of control. For

example, average number of hierarchy levels in a company having 3000 employee is

seven. If such an organization is having 9 levels would be called tall structured and

having 5 levels would be called flat structured organization. Companies generally choose

the number of levels they need on the basis of their strategy and functional tasks

necessary to support the strategy. For example, companies following the strategy of

differentiation based on quality and service would have flat structures, giving its

employees wide discretion to satisfy customer’s demands without consulting the

Figure-10

(Source-https://www.slideshare.net/tobiasdahlberg1/culture-eats-strategy-for-breakfast-by-

tobias-dahlberg/36-Copyright_2015_Wonder_Group_wonderagencycomSTRATEGY)

7

supervisors. Organizations needs to choose levels of hierarchy very carefully as tall

structures may lead to problem in coordination, motivational problem, and information

distortion. Tall structures generally involve so many middle managers which can also

create problems in functioning of organization.

4.2 Horizontal Differentiation: Managing the strategy-structure relationship when

number of hierarchical levels become too many is difficult and expensive. When firms

grow and diversify, then it becomes difficult to operate having tall structures or

decentralized structures. Horizontal differentiation is the solution for such situations.

There are different forms of horizontal differentiation. First of all companies need to

choose an appropriate form of horizontal differentiation that will suit best to the

organizational tasks and activities to meet the objectives of company’s strategies.

Following are the different forms of horizontal structures:

Functional Structure: The most widely used structure is functional or

centralized structure as this is the most simplest and least expensive amongst

different form of horizontal structures. It arranges the people working in the

organization on the basis of their common expertise and business function they

perform such as marketing, finance, R&D and MIS etc. In this type of structure,

people doing similar tasks are grouped together, so they can learn from expertise

of each other. They can monitor each other and ensure that no one is shirking

from his responsibility. This type of structure may have communication problem

because different functional hierarchies evolve and functions grown more

remote from each other. As a result, it becomes difficult to communicate across

functions and coordinate their activities. Further, if number of products grows, a

company may find it difficult to measure the contribution of one or few products

to its overall profitability. Resulting to wrong decisions of dropping some

products which are actually more profitable. Sometimes the combined effect of

all these factors is that long-term strategic considerations are ignored because

management is engaged in solving communication and coordination problem.

Product Structure: In product structure, activities are grouped by product line.

It is most effective structure for implementing strategies when specific products

or services need special emphasis. It is widely used in organizations which deal

in very few types of products or services. It allows strict control and attention to

the product lines but may also require a more skilled management force and

reduced top management control. Companies like General Motors, DuPont and

Procter & Gamble use this type of structure to implement its strategies.

8

Product Team Structure: In the product team structure, as in the product

structure, tasks are divided along product lines to reduce costs and increase

management’s ability to monitor and control manufacturing process. However,

specialists are taken from the various support functions and assigned work on a

product or project, where they are combined into cross- functional teams to serve

the needs of the product. These teams are formed right in the beginning of the

product development process so that any problem that arises can be handled at

early stages only. Moreover, the use of cross-functional teams can speed

innovation and responsiveness to customers, because when authority is

decentralized to team level, decisions can be made more quickly.

Geographic Structure: This type of structure is best suited when company have

similar branch facilities located in widely dispersed areas. It allows local

participation in decision making and improved coordination within a region. For

example, a company may divide its manufacturing operations and establish

manufacturing plants in different regions of the country, in order to be more

responsive to the needs of customers of that region and to reduce transportation

cost. A company like FedEx clearly needs a geographic structure to fulfill its

corporate goal – next day delivery (Figure-12). Large organizations, such as

Neiman Marcus and Wall-Mart etc. moved to a geographic structure soon after

they started building stores across the country.

Figure-11

Organizational Structure

Horizontal Structure

Matrix Structure

SBU Structure

Geographic Structure

Product Team

Structure

Product Structure

Functional Structure

Vertical Structure

9

Strategic Business Unit Structure: As the number, size and diversity of

divisions in an organization increases, controlling and evaluating divisional

operations becomes difficult. Increase in sale is often not accompanied by

increase in profitability. In such a multidivisional companies, SBU structure is

most suitable. SBU structure, also known as multidivisional structure, groups

similar divisions into strategic business units and delegates authority and

responsibility for each unit to a senior executive who reports directly to chief

executive officer. It can facilitate strategy implementation by improving

coordination between similar divisions and channeling accountability to distinct

business unit. The cost of operating this type of structure is very high compared

with the cost of a functional structure. Companies like GM and IBM are the

examples of SBU structure. Size of the corporate staff is the major expense in

these types of companies as thousands of managers remain on their corporate

staff. Here again, however, higher operating costs are offset by a higher level of

value creation, making a sense of using such type of structure. For example,

Figure-12

(Source - http://www.fedex.com/in/about/corporatestructure.html)

10

General Motors operate the whole corporation through multidivisional structure,

each car division is part of different product division based on the kind of car it

makes, as this allows it to operate more efficiently. Each division is also able to

adopt the structure that best suits it needs.

Matrix Structure: It is the most complex of all the structures as it uses both

vertical and horizontal flow of authority and communication. In matrix structure,

functional managers work with project managers in temporary teams to develop

new products. Once the project is completed, they move to new teams where

they can apply their skills to develop string of new products. Day to day

operations of a division are responsibility of divisional management which holds

the operational responsibility. Corporate headquarter staff, which includes board

of directors as well as top executives, is responsible for overseeing long-term

plans and providing guidance for interdivisional projects. This staff holds

strategic responsibility. Such a combination of self-contained divisions with a

centralized corporate management represents a high level of both vertical and

horizontal differentiation. These two innovations provide the additional control

required to handle growth and diversification. It has advantage of enhanced

corporate financial and strategic control. It helps in creating a stronger pursuit of

internal efficiency. Despite of its high cost, matrix structures is adopted by more

than 90% of all large US corporations.

5. Implementing Strategy through Internal New Ventures:

Internal new venture can be used to implement corporate level strategy when a company is

having some specific resources and capabilities in its existing business that can be used to enter

and compete in a new

business. It may be called

internal diversification

process also (Figure-13).

For example, HP started

with dealing in test and

measurement equipments

and later in entered in

computer and printer

business through internal

ventures strategy. Similarly

Microsoft also started with

software business but later

Figure-13

(Source-https://www.slideshare.net/anicalena/strategic-management-business-

presentation-slides)

11

on taking the advantage of its software skills, entered in Xbox video gaming also. If company is

planning to enter an emerging industry where no established competitor exists then it can use this

strategy even without holding specific capabilities as it will not be having any competitive

disadvantage.

This type of strategy is very popular but is having quite a high failure rate also. Generally

it is suggested that large scale entry to a new business is pre-requisite for success. In long run it

may bring greater returns but in short run it may involve significant development cost and

substantial losses. That’s why companies follow a small scale entry which may lead to losses.

Many new internal ventures are high technology operations. To be successful, science based

innovations must be developed with market requirements in mind. Many internal ventures fail

when organizations ignore the basic requirements of the market. A company can be blinded by

the technological possibilities of a new product and fail to analyze market opportunities. Thus, a

new venture may fail because of lack of commercialization or marketing a technology for which

there is no demand. Another common mistake made by organizations is failure by management

to establish the strategic context within which new venture project should be developed. It is

necessary to be very clear about the strategic objectives of the venture and to understand exactly

how it will help to establish a competitive advantage. For the successful internal ventures,

company must follow a structured approach.it must first spell out its strategic objectives and then

communicate it clearly to its R&D people. There must be close coordination between marketing

and R&D to ensure that research project focuses on the market needs. Management need to

monitor the progress of the project closely. During the first 4-5 years, the criteria for evaluation

must be growth in the market share rather than profitability or cash flow. Cash flow or

profitability may be given importance during the medium term only. Construction of efficient

scale production facilities before demand has fully materialized, large marketing expenditures to

build a market presence, brand loyalty, and commitment by management to accept initial losses

can be helpful for making new ventures successful.

Figure-14

Methods for Implementing Strategy

Imp

lem

en

tin

g St

rate

gy

Through Organizational Strucure

Through Internal Ventures

Through Acquisitions

Through Strategic Alliances

12

6. Implementing Strategy through acquisitions:

Acquisition refers to purchase of one company by the other. While implementing strategy,

acquisitions may be used for two reasons – to strengthen company’s competitive position or to

enter a new business. When a company does not enjoy the resources and capabilities to compete

in a particular business, may acquire an incumbent company, at a reasonable price, which have

those competences. Entering a new venture internally may be a slow process, thus companies

may use acquisitions as an entry mode to move fast. A company can purchase a market leader in

a strong cash position overnight, rather than spending years to build up a market leadership

position through internal ventures. Internal new venture may be a risky affair as uncertainties

remains associated with estimating future profitability, market share, and revenues etc. but in

case of acquisitions, there remains no such uncertainties.

Acquisitions are preferred as entry mode when industry to be entered is well protected

with barriers to entry. By acquiring an established organization, a company can avoid such entry

barrier. But acquisitions may work in situation where incumbent company can be acquired at a

cost less than the cost to enter the same industry through new venture. Though it is a popular

mode of strategy implementation but there is ample evidence that many acquisitions failed. For

example, a study by Mercer Management Consulting of 150 acquisitions worth more than $500

million concluded that 50% of these acquisitions ended up reducing shareholder value, often

substantially, and another 33% generated only marginal returns. Only 17% of those acquisitions

were found to be successful. It is found that companies often find difficult to integrate divergent

corporate cultures after the acquisitions, which may prove to be the major reason of failure.

Many times acquisitions failed because companies overestimate the potential economic benefits

to be reaped from acquisition as they tend to be very expensive.

For a successful acquisition, target identification and pre-acquisition screening is an

essential activity. Screening would begin with a detailed assessment of rationale for making the

acquisition and with identification of an enterprise that would be an ideal one to acquire. Once

the screening is through, bidding strategy should be formulated to pay the least for acquisition.

Essential element for any such bidding strategy should be the timing. For example, Hanson PLC,

one of the successful companies specializing in growth through acquisitions, always looked for a

business which is suffering from short-term problems due to cyclical industry factors or from

problems localized in one division. Such companies are typically undervalued by the stock

market and can be acquired at reasonable payment.

13

7. Implementing Strategy through Strategic Alliances:

Strategic alliances can also be used to implement strategy. Strategic alliances refer to cooperative

agreement between two or more companies to work together and share resources to achieve

common business objective (Figure-

15). A joint venture is a formal type of

strategic alliance in which two

companies jointly create a new,

separate company to enter a new

business. It can be followed in a

situation when a company looks at the

advantage of establishing a new

business in an growth industry, but

due to the risks involved, is not

willing on its own. In such a situation,

company may decide to form some

kind of strategic alliance with another

company. Parties to alliance may be

actual or potential competitors, they

may at different stages in an industry’s

value chain, or they may be in different businesses but have joint interest in working together.

Strategic alliances may temporary or permanent.

For example, Motorola found it difficult to enter Japanese cellular market. It formed an alliance

with Toshiba to build microprocessors (Figure-16). As part of the deal, Toshiba provided

Motorola with marketing help including some of its best managers. This helped Motorola to win

government approval to enter Japanese cellular market. Many companies enter in to strategic

alliances to share the fixed costs and associated risks that arise from the development of new

products or processes. These alliances may be seen as a way of bringing together complementary

skills and assets that neither company could easily develop on its own. Biggest disadvantage of

strategic alliance is access of alliance partner to valuable low-cost manufacturing knowledge and

route to gain new technology and market

access. The critics of alliances even say that

more formal and extensive the alliance, greater

the possibility that company may give away

more than it gets in return. So in order to make

alliance successful, partner selection and

alliance structure should be decided carefully.

The probability of opportunism by alliance

partner can be reduced by establishing some

contractual safeguards in the agreement and

agreeing to swap valuable skills and

technologies.

Figure-16

(Source-

https://www.slideshare.net/mohamedzmohamed2/strategic-

alliance-40663452)

Figure-15 (Source-

http://www.1000ventures.com/business_guide/strategic_alliances_ma

in.html)

14

8. Summary:

Successful strategy formulation needs to be followed by effective implementation as well.

Discipline and hard work from motivated manager and employees is essential to successful

implementation of strategy. Different management issues like annual objectives, resource

allocation, framing policies, including strategists in implementation and strategy supportive

culture are critical during implementation stage. Depending upon the size and nature of

organization, other management issues can also be equally important in successful

implementation. Companies need to monitor closely the organizational structure to achieve

superior profitability through successful strategies. Depending upon the nature, strategies can be

implemented through making changes in the organizational structure, through internal new

ventures, acquisitions and strategic alliances.