Business Policy & Strategic Management Module 6

Implementing Strategy
N.R.Govinda Sharma

BPSM: Module 6 Implementing Strategy

Crisis at Infosys
Crisis at Infosys Infosys reported its worst ever quarterly operating margin of 23.6% which has fallen from 31% in the December 2011 quarter FY14 guidance is anything but assuring.
At the lower end of the 6-10% revenue guidance, the company expects the top line to grow at just over 1.5% on an average every quarter in the current fiscal.
Source: Economic Times, 13 April 2013, http://articles.economictimes.indiatimes.com/2013-0413/news/38511370_1_infosys-technologies-operating-margin-lodestone

BPSM: Module 6 Implementing Strategy

Crisis at Infosys
Growth and profitability at Infosys has reached such a low level that even an upstart company like Cognizant displaced it to the third place from its second place
Revenues (FY 2012) $10.17 billion $7.05 billion $6.69 billion $ 5.73 billion $4.3 billion
BPSM: Module 6 Implementing Strategy

Firm TCS Cognizant Technology Infosys Wipro HCL Technology

Employees 254,076 185,045 153,761 140,569 85,335

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Crisis at Infosys
Why? Of the many reasons, one reason that is of interest to us now is that the post of Chief Operating Officer (COO) was left unfilled and CEO was unable to manage both the tasks
Shibulal was the COO prior to becoming the CEO and Managing Director On 21 August 2011, he took over his new role from Kris Gopalakrishnan and since then the post of COO is left unfilled

BPSM: Module 6 Implementing Strategy

Crisis at Infosys
Other reasons attributed are Low margin business of Lodestone, which would take time to get the benefits of offshoring Under-utilisation of the employees (bench rate of nearly 30% as on June 2012) (see Infosys, TCS, Wipro, iGate, UST Global devise new
ways to keep benched staff occupied, Economic Times, 20 July 2012, http://articles.economictimes.indiatimes.com/2012-0720/news/32764704_1_bench-internal-projects-utilisation-rate)

The wage hike From what Mr Nagarajan Srinivasan, Infosys, said on 9 August 2013, the fundamentals of Infosys are good and the drop is due to time lag in implementation to a higher trajectory
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Crisis at Infosys
With NRN taking on the mantle of executive chairman again (01 June 2013), the market did react favourably The favourable reaction is due to the expectation that NRN will be able to galvanise the culture and the structure of the organisation But one question remains
Did Infosys break its promise by allowing Rohan Murthy to work at Infosys even as an adviser?
Picture abhi baki hai, mere dost (Only time will let us know if these expectations are well-founded)

BPSM: Module 6 Implementing Strategy

Relation between strategy, structure and culture

As the story of Infy suggests, the profitability of an organisation is influenced by
The Organisational structure and the culture

As we know, strategy is all about increasing firms competitive advantage So, managers choose an organisations structure and inculcate an organisational culture that enable implementation of strategies that lead to competitive advantage
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Strategy implementation through Organisational Design

Strategy implementation involves use of Organisational Design
Organisational Design is the process of deciding how a company should create, use and combine organisational structure, control system and culture to pursue a business model
Which means the structure, control system and culture at Cost Leader company like Walmart will be different as compared to a Differentiated company like Google as their business models will be different!

BPSM: Module 6 Implementing Strategy

Implementing Strategy through Organisational Design

Organisational Structure

Organisational Design

Organisational Control Systems

Coordinate and motivate employees

To achieve superior:
Efficiency Quality Innovation Responsiveness to customers

Organisational Culture

BPSM: Module 6 Implementing Strategy

Organisational structure
So, Organisational Design has three components, viz., Organisational Structure, Control Systems and Culture
So, what is organisational structure?
Organisational structure assigns employees to specific value creation tasks and roles and specifies how these roles and tasks are to be linked together in a way that increases
Efficiency Quality Innovation and Responsiveness to customers

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Control Systems
Organisation structure provides a set of relations between members of the organisation but some thing else is additionally required to motivate the participants It is the control system which provides the managers with
A set of incentives to motivate employees Specific feedback on how well this system is working to improve the building blocks of competitive advantage
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Balance Score Card (BSC)

Balance Score Card (BSC) is a strategic control system that goes beyond the conventional financial controls such as ROIC to measure and evaluate organisational performance (p 362 364 of text) While financials results indicate the results of decisions already taken; the other measures balance this picture by informing strategic managers how organisations has in place building blocks that drive future performance

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Case study on BSC

Let us take up in the next class discussion of the case Using strategy maps (read p 399 403 of Concepts and cases in Strategic Management A dynamic perspective by Carpenter, Sanders and Salwan) and balanced score card: The case of Manpower Australia This is the last of the case and I insist on thorough preparation by the students May ask a few students to run the case completely

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Orgnisational Culture
Organisational culture is the collection of values, norms, beliefs and attitudes that are shared by people and groups in the organisation and influence the way they interact with each other and with stakeholders outside the organisation
Open culture where employees feel free to interact with the highest manager or the Bureaucratic culture of levels and hierarchy Founding fathers have a strong influence on the culture of the organisation, as you can recollect from Infosys story
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Implementing Strategy through Organisational Design

Organisational structure, control and culture shape peoples behaviours, values and attitudes and determine how they will implement an organisations business model and strategy Conversely, top managers devise a plan to reorganise or change the companys structure, control system and culture to improve coordination and motivation, especially in changed circumstances
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Strategy, Tasks and Functions

Tasks that an organisation pursues are a function of its strategy, companies choose structure to match the organisational strategy Let us try to understand this by following the strategy and the corresponding tasks of Toyota Motors At the heart of Toyotas strategy in motor vehicles is to outcompete rivals by manufacturing world-class quality vehicles at lower prices and selling them at competitive prices When Toyota entered USA in 1980 and came up with its first car.
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Toyota, 1983
Toyota Tercel wagon, 1983-87, an ugly car
Boxy hatchbacks aren't inherently ugly, but when you add in odd angles and a rearmost window that looks like it dropped out of a Lego kit, things start to go wrong It goes completely wrong when you circle around back and realize some joker has slapped an ATM on the back of your car
Source: Top ten ugly cars by Cars.com Staff, Cars.com, http://www.cars.com/go/advice/Story.jsp?sectio n=top&subject=more&story=top10ugly, downloaded on 7 August 2013

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Toyota 2013
Toyota Lexus 2013 is a luxury sedan car valued between $72,885 $120,805 is a sculpted car!
Source: http://buyersguide.caranddriver.co m/lexus/ls/price#features downloaded on 7 August 2013

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Toyota High Value Vehicle to match every customer

From its ugly car in 1980 to a sculpted beauty in 2000s, Toyota has moved from being a
Cost leader to Differentiator!

Ploughing back its profit into improving the styling of its vehicles and continuously reducing its production cost (though not its prices!)
See Strategy in Action 5.4, p 169 of text

This has required building tasks and functions such as R&D, brand building and positioning (Marketing) and production systems (famously known as Toyota Production Systems (TPS) comprising of JIT, Kaizen..) (See p 380, Illustration Capsule 11.2, Crafting and Executing Strategy by Thompson, Strickland, Gamble & Jain) Thus Toyota pursued functions and tasks suited to implement its strategy of moving from being a cost leader to a differentiator, perhaps simultaneously
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Combining cost leader leadership and differentiation

Companies like Toyota combine both the aspects of cost leadership and differentiation
Good Organisational design Economies in Bureaucratic costs Enhances value chain Competencies and capabilities Leading to differentiation Advantage and option of Charging premium price This leads to competitive Advantage, profitability And superior return on investment

Leading to low cost Structure and ability to Choose low price option

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Functions and tasks

After having understood task, it is advantageous to understand what it means by a function
A functions is a collection of people who work together and perform the same type of task For example, R&D engineers and scientists at Toyota would be carrying the task of researching and developing better and more stylish cars, taking it through wind tunnels and hence belong the R&D function

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Principle of organisational design

Centralisation vs decentralisation
Authority is centralised when authorities at the upper levels of a company retain the authority to make the most important decisions It is decentralised when authority is vested in managers at the lower levels

Decentralisation helps to reduce bureaucratic costs and improve market response

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Example of strategic decentralisation

See Strategy in Action 12.2 on page 387 of text

Case of decentralisation
Union Pacific (UP), biggest rail freight carrier in the US, experience crisis in 1990 due to increased amount of freight to be handled Delays led to increase in customer complaints Problem stemmed from UPs decision to centralise authority, regarding scheduling and routing, high in organisation to cut cost Now recognising that efficiency had to be balanced with cost, CEO took a decision that regional, and not top managers, will have authority to take operational decisions; they could alter scheduling and routing to accommodate customer requests even if it raised costs So, the decision to centralise was reversed
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Example of strategic centralisation

If decentralisation is so effective, why dont all companies decentralise?!

Case of centralisation
See Strategy in Action 12.2 on page 387 of text

Yahoo!, after the failed merger with Microsoft was facing intense competition and the CEO Carol Bartz recentralised authority She decided to recentralise functions such as product development and market, previously performed by different units This would cut down cost She held town hall meetings with the employees seeking what would you do if you were me? to decrease dissent and improve involvement amongst employees
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Different Organisational Structures

A firm can choose different types organisation structure to suit its strategy Functional structure
Activities are organised according to functions such as operations, finance, marketing and R&D

Product structure
Organisation is based on products such as Mobile phones, multimedia smart phones, wireless phone networks etc., as in Nokia

Matrix structure
Is a combination of Functional and Product Structure
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Functional structure
Corporate Office

Operations

Marketing / Sales

Finance

R&D

Functional structure works well in small organisation (SMEs) It fosters efficiency and cost saving as people with same skill work together and can learn the trade from each other But as firms grow, the functional structure tends to become dysfunctional because each function focuses too narrowly and tends lose sight of other functions
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Product structure
CEO Finance Marketing Operations R&D

Mobile phones

Multimedia smart phones

Wireless corporate internet products

Wireless phone networks

For a company like Nokia, which offers many products as a strategy, product structure is most suitable The idea is to divide the companys growing product lines into manageable subunits to reduce bureaucratic costs Thereby, needs of various consumer groups are best taken care of while keeping the number of levels of hierarchy minimum (principle 27 of minimum chain of command (p 384)

Matrix structure
President
Functional Managers for Engineering Product A Product Managers for Sales & Mkt Finance R&D Purchase

Product B Product C Product D

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Implementing cost leadership

Now let us see how strategy implementation a cost leader company differs from differentiator A company pursuing cost leadership should reduce costs across all functions, for example,
R&D
Efforts will perhaps focus on product and process development rather than expensive new product innovation

Marketing & Sales

Introducing standard products that require little sales and marketing

Production
Standard products and production methods that require less resources
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Implementing cost leadership

Structure
In cases of companies pursuing cost leadership, functional structure is most suitable with care being taken to select integrating mechanism that will reduce communication and measurement problems

Control system
Output control measures are more suited as they are the easiest and cheapest

Culture
Culture is based on values that emphasise on bottom line
For example, Walmart insisting that cost of travel expense should not exceed 1% of purchase amount

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Implementing Differentiation
To make its product unique in the eyes of the customers, the company opting for differentiation strategy must design its structure, control and culture around the particular source of its competitive advantage So, products have to be customised for different groups of customers, rather than standardised as in the case of cost leader,
The demands on communication, and measurement increase calling for a more sophisticated control systems such as
Behavioural control system(*), rather than output control as in the case of cost leader, will be more appropriate (*) See page 392 of text, Intent of behavioural control is not to specify the goals but to standardise the ways and means of reaching goals

Developing a culture of sharing rather than competition will be the key HP, Coca-Cola, Google exemplify companies adopting professional culture
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Implementing Differentiation
This explains as to why more formal and sharing culture, rather than the culture that focuses on the bottom line as in cost leader such as WalMart, exists in companies such as Google as the particular source of their competitive advantage is human resource

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Summary of the module

Strategy is action biased
Strategy is as good as it is implemented

Strategy is implemented through organisational design which comprises of developing

Organisational structure Organisational control Organisational culture

Effective organisational design increases profitability in two ways

It economises bureaucratic cost (Principle of minimum chain of command It enhances ability of a companys value creation functions to achieve superior efficiency, quality, innovativeness, and customer responsiveness

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Summary of the module

Centralisation and decentralisation is important issue in designing organisational structure
Centralisation allows greater control and hence controls cost Decentralisation allows for better customer response and efficiency

Strategic control provides for monitoring and incentive system necessary to make organisational structure work as intended and extends corporate governance to all levels of the organisation Main forms of control are
Output control Behavioural control and personal control

Culture is the set of shared values Cost leadership and differentiation each different type of structure and control systems
Pressure to increase differentiation is to be balanced against the pressure to reduce cost
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Summary of the module

Different type of organisational structure are Functional
Suitable for smaller orgnisations and helps reduce cost but tends to unsuitable as organisations grow

Product
Helps to cater to consumer groups based on product but helps group support activities to reduce cost

Matrix
Combines the benefits of product and functional organisational structure

End of the module

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