Paper 3: Strategic Management

Module: 24, Operational Implementation

Principal Investigator Prof. S P Bansal

Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Paper Coordinator
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Shashi Kapoor
Content Writer University Business School
Panjab University Regional Centre, Ludhiana, Punjab
 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.
Figure-1
A strategy cannot serve any (Source - http://www.managementstudyguide.com/environmental-scanning.htm)
purpose if it is not implemented

1
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
Good Poor

Implementation Good Success Roulette

Strategy

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)

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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:

Annual
Objectives

Involvement
of Strategists Policies

Keys issues in
Implementation

Supportive
Resource
Culture
Allocation

Managing
Conflict

Figure-4

 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 Figure-4
and
departmental priorities (Figure-5).
Objectives can be used as basis for
deciding the resource allocation also.
Considerable time and efforts should be Figure-5
devoted to ensure that annual objectives (Source - http://www.balancedscorecard.org/BSC-
Basics/About-the-Balanced-Scorecard)
are well conceived, consistent with long

3
 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 Figure-6
(Source -
it calls the “10 Foot Rule”, whereby https://www.slideshare.net/RahulChoudhary139/wal
mart-case-study-kotler)
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
Figure-7 management approach for decision
(Source -https://www.slideshare.net/grawitch/Workplace- making then resource allocation in
Practices-Resource-Allocation)
such organization is often based on
political or personal factors. There can be nothing harmful to an organizational

4
 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 Figure-8
(Source -
to a conflict with objective of a sales manager to https://frontlinemanagementexperts.w
increase sales by 20%. Having conflict is very ordpress.com/2016/02/19/managing-
conflict-in-the-workplace/)
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
Aproaches to of view of other
Handle Conflict party or arranging a
meeting wherein
both the parties can
explain their side to
Aviodance Defusion Confrontation
find the solution for
conflict.
Figure-9

 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.

5
 Figure-10
(Source-https://www.slideshare.net/tobiasdahlberg1/culture-eats-strategy-for-breakfast-by-
tobias-dahlberg/36-Copyright_2015_Wonder_Group_wonderagencycomSTRATEGY)

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

6
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.

7
 


Organizational Structure



 Horizontal Structure
Vertical Structure





Functional Product Product
Geographic SBU Matrix
Team

Structure Structure Structure
Structure Structure Structure



 Figure-11


 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.

8
 Figure-12
(Source - http://www.fedex.com/in/about/corporatestructure.html)

 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,

9
 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
Figure-13
Microsoft also started with (Source-https://www.slideshare.net/anicalena/strategic-management-business-
software business but later presentation-slides)

10
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.

Through Organizational
Implementing

Strucure
Strategy

Through Internal
Ventures

Through Acquisitions

Through Strategic
Alliances

Figure-14
Methods for Implementing Strategy

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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.

12
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 Figure-15 (Source-
company. Parties to alliance may be http://www.1000ventures.com/business_guide/strategic_alliances_ma
actual or potential competitors, they in.html)
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
Figure-16 partner can be reduced by establishing some
(Source- contractual safeguards in the agreement and
https://www.slideshare.net/mohamedzmohamed2/strategic-
alliance-40663452) agreeing to swap valuable skills and
technologies.

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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.

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