Implementing Strategies

The strategic-management process does not end when the firm decides what strategy or strategies to pursue. There must be a translation of strategic thought into strategic action. This translation is much easier if managers and employees of the firm understand the business, feel a part of the company, and through involvement in strategy-formulation activities have become committed to helping the organization succeed. Without understanding and commitment, strategy-implementation efforts face major problems. Implementing strategy affects an organization from top to bottom; it affects all the
functional and divisional areas of a business.

Doing Great in a Weak Economy. How?

When most firms were struggling in 2008, Google increased its revenues and profits such that Fortune magazine in 2009 rated Google as their fourth “Most Admired Company in the World” in terms of their management and performance. Based in Mountain View, California, Google’s first quarter of 2009 revenues grew 6.2 percent to $5.51 billion, followed by $5.52 billion the second quarter. These results widened Google’s lead in overall searches and online advertising market share. Google owns both YouTube and DoubleClic.

Google in 2009 began selling books online. This related diversification strategy led Google to digitize
close to 10 million books by year’s end. Google cofounder Sergey Brin recently said, “Call me weird, but I think there are a lot of advantages to reading books online. Today’s monitors have great resolution and you don’t have to wait on the book to arrive once ordered.” Google does not charge people to use its search engine. Instead of charging what the market will bear as most firms do, Google charges as little as they can bear. Thus Google obtains networks of people, millions of people, which strengthens its competitive position.

Google’s founders, Larry Page and Sergey Brin, each have nearly 30 percent voting control of the firm and have established a golden rule that permeates Google’s internal culture. The rule is to “Don’t be evil,” and this operating policy encourages all employees to challenge all managers on decisions—to make sure the decisions are true to the firm’s mission. Another internal rule at Google is to “Give up control,” which means giving up control to outsiders to reap the benefits of their input.
This latter rule is done through beta launches of any new software, product, or service they do. Google’s philosophy is that “Low prices are good, but free is better” because they want every customer they can get. 

Google stock in July 2009 rose above $400 per share as the company prepares to launch its own operating system for computers, a direct assault on the business of software giant Microsoft. Google’s strategic plan is to attack Microsoft in nearly all of its businesses, including browsers, where Google has 1.8 percent market share versus Microsoft’s 66 percent, smartphone operating systems (Google 1.6% versus Microsoft 10%), office suites (Google 0.04% versus Microsoft 94%), and Web searches (Google 65% versus Microsoft 8%).

Google’s Chrome OS operating system will require users to be connected to the Internet, unlike Microsoft’s operating systems. CEO Eric Schmidt at Google has been on a mission for the last several years, according to analysts, to capture Microsoft’s market share. The Google strategy is accelerating a shift in the personal computer (PC) industry to become more like the cell phone industry whereby customers pay monthly service fees for use of hardware and software.

Google’s Chrome will be free to all computer makers such as Hewlett-Packard who historically have preinstalled Microsoft’s operating system for a fee to consumers. Microsoft released its new Microsoft Windows 2010 in the fall 2009 and believes that the learning curve for any consumer to switch away to Google’s operating system will not be worth the effort. Google.com is the most visited Web site in the world and even in 2009 offered its own online word processing, spreadsheet, and presentation programs free – called Google Docs. The Google strategy is a huge bet that online programs can eventually overtake and crush desktop software.

Due to its dominance in the Internet search and advertising business, Google is coming under increasing scrutiny from the U.S. Justice Department regarding possible antitrust infringement. The pending Microsoft/ Yahoo merger may negate that Google vulnerability. Google obtains about 95 percent of its revenues from online advertising.

[Source: Based on Jeff Jarvis, “How the Google Model Could Help Detroit,” Business Week (February 9, 2009): 33–36; Geoff Colvin, “The World’s Most Admired Companies,” Fortune (March 16, 2009): 76–86.]

The Nature of Strategy Implementation

The strategy-implementation stage of strategic management is revealed in below Figure. 

Successful strategy formulation does not guarantee successful strategy implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy formulation and implementation can be contrasted in the following ways:

• Strategy formulation is positioning forces before the action.
• Strategy implementation is managing forces during the action.
• Strategy formulation focuses on effectiveness.
• Strategy implementation focuses on efficiency.
• Strategy formulation is primarily an intellectual process.
• Strategy implementation is primarily an operational process.
• Strategy formulation requires good intuitive and analytical skills.
• Strategy implementation requires special motivation and leadership skills.
• Strategy formulation requires coordination among a few individuals.
• Strategy implementation requires coordination among many individuals.

Strategy-formulation concepts and tools do not differ greatly for small, large, for-profit, or nonprofit organizations. However, strategy implementation varies substantially among different types and sizes of organizations. Implementing strategies requires such actions as altering sales territories, adding new departments, closing facilities, hiring new employees, changing an organization’s pricing strategy, developing financial budgets, developing new employee benefits, establishing cost-control procedures, changing advertising strategies, building new facilities, training new employees, transferring managers among divisions, and building a better management information system. These types of activities obviously differ greatly between manufacturing, service, and governmental organizations.

In all but the smallest organizations, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional and functional managers. Implementation problems can arise because of this shift in responsibility, especially if strategy-formulation decisions come as a surprise to middle- and lower-level managers. Managers and employees are motivated more by perceived self-interests than by organizational interests, unless the two coincide. Therefore, it is essential that divisional and functional managers be involved as much as possible in strategy-formulation activities. Of equal importance, strategists should be involved as much as possible in strategy-implementation activities. 

As indicated in following Table, management issues central to strategy implementation include establishing annual objectives, devising policies, allocating resources, altering an existing organizational structure, restructuring and re-engineering, revising reward and incentive plans, minimizing resistance to change, matching managers with strategy, developing a strategy supportive culture, adapting production/operations processes, developing an effective human resources function, and, if necessary, downsizing. Management changes are necessarily more extensive when strategies to be implemented move a firm in a major new direction.

TABLE: Some Management Issues Central to Strategy Implementation
Establish annual objectives
Devise policies
Allocate resources
Alter an existing organizational structure
Restructure and reengineer
Revise reward and incentive plans
Minimize resistance to change
Match managers with strategy
Develop a strategy-supportive culture
Adapt production/operations processes
Develop an effective human resources function
Downsize and furlough as needed
Link performance and pay to strategies

Managers and employees throughout an organization should participate early and directly in strategy-implementation decisions. Their role in strategy implementation should build upon prior involvement in strategy-formulation activities. Strategists’ genuine personal commitment to implementation is a necessary and powerful motivational force for managers and employees. Too often, strategists are too busy to actively support strategy-implementation efforts, and their lack of interest can be detrimental to organizational success. The rationale for objectives and strategies should be understood and clearly communicated throughout an organization. Major competitors’ accomplishments, products, plans, actions, and performance should be apparent to all organizational members. Major external opportunities and threats should be clear, and managers’ and employees’ questions should be answered. Top-down flow of communication is essential for developing bottom-up support.

Firms need to develop a competitor focus at all hierarchical levels by gathering and widely distributing competitive intelligence; every employee should be able to benchmark her or his efforts against best-in-class competitors so that the challenge becomes personal. For example, Starbucks Corp. in 2009–2010 is instituting “lean production/operations” at its 11,000 U.S. stores. This system eliminates idle employee time and unnecessary employee motions, such as walking, reaching, and bending. Starbucks says 30 percent of employees’ time is motion and the company wants to reduce that. They say “motion and work are two different things.”

Porter's Five Forces

Definition

1. “Porter’s five forces model is an analysis tool that uses five forces to determine the profitability of an industry and shape a firm’s competitive strategy”^[1]
2. “It is a framework that classifies and analyzes the most important forces affecting the intensity of competition in an industry and its profitability level.”

   Understanding the tool

   Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are affecting an industry. The five forces identified are:
   
   
   These forces determine an industry structure and the level of competition in that industry. The stronger competitive forces in the industry are the less profitable it is. An industry with low barriers to enter, having few buyers and suppliers but many substitute products and competitors will be seen as very competitive and thus, not so attractive due to its low profitability.
   
   
    
   It is every strategist’s job to evaluate company’s competitive position in the industry and to identify what strengths or weakness can be exploited to strengthen that position. The tool is very useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a particular industry. Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when:
   

   • Low amount of capital is required to enter a market;
   • Existing companies can do little to retaliate;
   • Existing firms do not possess patents, trademarks or do not have established brand reputation;
   • There is no government regulation;
   • Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries);
   • There is low customer loyalty;
   • Products are nearly identical;
   • Economies of scale can be easily achieved.

   Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when:
   

   • There are few suppliers but many buyers;
   • Suppliers are large and threaten to forward integrate;
   • Few substitute raw materials exist;
   • Suppliers hold scarce resources;
   • Cost of switching raw materials is especially high.

   Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when:
   

   • Buying in large quantities or control many access points to the final customer;
   • Only few buyers exist;
   • Switching costs to other supplier are low;
   • They threaten to backward integrate;
   • There are many substitutes;
   • Buyers are price sensitive.

   Threat of substitutes. This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.
   Rivalry among existing competitors. This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:
   

   • There are many competitors;
   • Exit barriers are high;
   • Industry of growth is slow or negative;
   • Products are not differentiated and can be easily substituted;
   • Competitors are of equal size;
   • Low customer loyalty.

   Although, Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. Complements increase the demand of the primary product with which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes was created to complement iPod and added value for both products. As a result, both iTunes and iPod sales increased, increasing Apple’s profits.
   

   Using the tool

   We now understand that Porter’s five forces framework is used to analyze industry’s competitive forces and to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have identified the following steps:
   

   • Step 1. Gather the information on each of the five forces
   • Step 2. Analyze the results and display them on a diagram
   • Step 3. Formulate strategies based on the conclusions

   Step 1. Gather the information on each of the five forces. What managers should do during this step is to gather information about their industry and to check it against each of the factors (such as “number of competitors in the industry”) influencing the force. We have already identified the most important factors in the table below.
   

   Threat of new entry
   Amount of capital required Retaliation by existing companies Legal barriers (patents, copyrights, etc.) Brand reputation Product differentiation Access to suppliers and distributors Economies of scale Sunk costs Government regulation
   Supplier power
   Number of suppliers Suppliers’ size Ability to find substitute materials Materials scarcity Cost of switching to alternative materials Threat of integrating forward
   Buyer power
   Number of buyers Size of buyers Size of each order Buyers’ cost of switching suppliers There are many substitutes Price sensitivity Threat of integrating backward
   Threat of substitutes
   Number of substitutes Performance of substitutes Cost of changing
   Rivalry among existing competitors
   Number of competitors Cost of leaving an industry Industry growth rate and size Product differentiation Competitors’ size Customer loyalty Threat of horizontal integration Level of advertising expense

   Step 2. Analyze the results and display them on a diagram. After gathering all the information, you should analyze it and determine how each force is affecting an industry. For example, if there are many companies of equal size operating in the slow growth industry, it means that rivalry between existing companies is strong. Remember that five forces affect different industries differently so don’t use the same results of analysis for even similar industries!
   Step 3. Formulate strategies based on the conclusions. At this stage, managers should formulate firm’s strategies using the results of the analysis For example, if it is hard to achieve economies of scale in the market, the company should pursue cost leadership strategy. Product development strategy should be used if the current market growth is slow and the market is saturated.
   Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to formulate firm’s strategy, it has its limitations and requires further analysis to be done, such as SWOT, PEST or Value Chain analysis.
   

   Example

   This is Porter’s five forces analysis example for an automotive industry.
   
   

   Threat of new entry (very weak)

   Large amount of capital required High retaliation possible from existing companies, if new entrants would bring innovative products and ideas to the industry Few legal barriers protect existing companies from new entrants All automotive companies have established brand image and reputation Products are mainly differentiated by design and engineering quality New entrant could easily access suppliers and distributors A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is very hard to achieve economies of scale Governments often protect their home markets by introducing high import taxes

   Supplier power (weak)

   Large number of suppliers Some suppliers are large but the most of them are pretty small Companies use another type of material (use one metal instead of another) but only to some extent (plastic instead of metal) Materials widely accessible Suppliers do not pose any threat of forward integration

   Buyer power (strong)

   There are many buyers Most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation Buyers can easily choose alternative car brand Buyers are price sensitive and their decision is often based on how much does a vehicle cost Buyers do not threaten backward integration

   Threat of substitutes (weak)

   There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes Substitutes can rarely offer the same convenience Alternative types of transportation almost always cost less and sometimes are more environment friendly

   Competitive rivalry (very strong)

   Moderate number of competitors If a firm would decide to leave an industry it would incur huge losses, so most of the time it either bankrupts or stays in automotive industry for the lifetime Industry is very large but matured Size of competing firm’s vary but they usually compete for different consumer segments Customers are loyal to their brands There is moderate threat of being acquired by a competitor

Strategic Planning

Strategic planning is a defined, recognizable set of activities designed to achieve organizational objectives and goals. The techniques for strategic planning may vary but the substantive issues are essentially the same.

These include:

 Establishing and periodically confirming the organization’s mission and its corporate strategy.

 Setting strategic or enterprise-level financial and non-financial goals and objectives.

 Developing broad plan of action necessary to attain these goals and objectives, allocating resources on a basis consistent with strategic directions, and managing the various lines of business as an investment “portfolio”.

 Communicating the strategy at all levels , as well as developing action plans at lower levels that are supportive of those at the enterprise level.

 Monitoring results, measuring progress, and making such adjustments as are required to achieve the strategic intent specified in the strategic goals and objectives.

 Reassessing mission, strategy, strategic goals and objectives, and plans at all levels and, if required, revising any or all of them.

A great deal of strategic thinking must go into developing a strategic plan and, once developed, a great deal of strategic management is required to put the plan into action. Strategic planning is a useful tool, of help in managing the enterprise, especially if the strategy and strategic plans can be successfully deployed throughout the organization. Thinking and managing strategically are important aspects of senior managers’ responsibilities, too. To paraphrase an old saw, “The strategy wheel gets the executive grease.” This is as it should be. Senior management should focus on the strategic issues, on the important issues facing the business as a whole, including where it is headed and what it will or should become. Others can “mind the store.” became unstable, long range planning was used and then replaced by strategic planning and later by strategic management.

In mid 1930’s, according to the nature of business the planning was done through Adhoc policy making. As many businesses had just started operations and were mostly in a single product line, there arose a need for policy making. As companies grew they expanded their products and they catered to more customers and which in turn increased their geographical coverage. The expansion brought in complexity and lot of changes in the external environment. Hence there was a need to integrate functional areas. This integration was brought about by framing policies to guide managerial action.

Especially after II World War there was more complexity and significant changes in the environment. Competition increased with many companies entering into the market. Policy making and functional area integration was not sufficient for the complex needs of a business. As the organization became large and the layers of management increased alongwith were environment al uncertainties, basic financial planning and foreast based planning became insufficient. As the only focused on operational control.

Strategic planning develops increasing responsiveness to markets and competition by trying to think strategically, later Strategic management evolved which seeks a competitive advantage and a successful future by managing all resources. Thus the evolution of the strategic management includes a consideration of strategy implementation and evaluation and control, in addition to the emphasis on the strategic planning. General Electric, one of the pioneers of the strategic planning, led the transition from the strategic planning to strategic management during the 1980s. By the 1990s, most corporations around the world had also begun the conversion to strategic management.

A part of strategic management has now evolved to the point that its primary value is to help the organization operate successfully in dynamic, complex environment. To be competitive in dynamic environment, corporations have to become less bureaucratic and more flexible. In stable environments such as those that have existed in the past, a competitive strategy simply involved defining a competitive position and then defending it.

Organizations must develop strategic flexibility: the ability to shift from one dominant strategy to another. Strategic flexibility demands a long term commitment to the development and nurturing of critical resources. It also demands that the company become a learning organization It means an organization skilled at creating, acquiring, and transferring knowledge and at modifying its behaviour to reflect new knowledge and insights. Learning organizations avoid stability through continuous self-examinations and experimentations. People at all levels, not just top the management, need to be involved in strategic management: scanning the environment for critical information, suggesting changes to strategies and programs to take advantage of environmental

shifts, and working with others to continuously improve work methods, procedures and evaluation techniques. At Xerox, for example, all employees have been trained in small-group activities and problem solving techniques. They are expected to use the techniques at all meetings and at all levels. The evolution of Business policy to strategic management summaried below:

Strategic Planning Process

The strategic management process means defining the organization’s strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitors and then reassesses each strategy. A good strategic management process will help any organization to improve and to gain more profits. Every organization should know that performance of the management process is very important. There is a big difference between planning and performing. The organization will be successful only if it follows all the stages of the strategic management process. Strategic management process has following four steps

a) Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process,  management should evaluate it on a continuous basis and strive to improve it.

b) Strategy formulation is the process of deciding best course of action for  accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies.

c) Strategy implementation implies making the strategy work as intended or putting the organization’s chosen strategy into action. Strategy implementation includes designing the organization’s structure, distributing resources, developing decision making process, and managing human resources.

d) Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.

corporate culture, it can lead to group think. It can also cause an organization to define itself too narrowly.

Some of the other reasons of strategic management failure which act as its limitations are as follows:

• Inability to predict environmental reaction

• Failure to coordinate

• Failure to obtain senior management commitment

• Failure to obtain employee commitment

• Failure to follow the plan

• Poor communications

• Failure to understand the customer

• Over-estimation of resource competence

• Under-estimation of time requirements

• Failure to manage change