Chapter 10 Building an Organization Capable of Good Strategy Execution 222

Strategy: Core Concepts and Analytical Approaches

Arthur A. Thompson, The University of Alabama 7th Edition, 2022-2023
An e-book marketed by McGraw-Hill Education

Chapter 10
Building an Organization
Capable of Good Strategy Execution
Strategies most often fail because they aren’t executed well.
—Larry Bossidy, former CEO Honeywell International, and Ram Charan, author and consultant

A second-rate strategy perfectly executed will beat a first-rate strategy poorly executed every time.
—Richard M. Kovacevich, former Chairman and CEO, Wells Fargo

Any strategy, however brilliant, needs to be implemented properly if it is to deliver the desired results.
—Costas Markides, professor

People are not your most important asset. The right people are.
—Jim Collins, professor and author

Organizing is what you do before you do something, so that when you do it, it is not all mixed up.
—A. A. Milne, author of Winnie the Pooh

O
nce managers have decided on a strategy, the emphasis turns to converting it into actions and good
results. Putting the strategy into place and getting the organization to execute it well require different
sets of managerial skills compared to crafting strategy. Whereas crafting strategy is largely an analysis-
driven activity focused on market conditions and the company’s resources and competitiveness, executing
strategy is primarily an operations-driven activity, revolving around the management of people, resources, day-
to-day operations, business processes, and needed organizational restructuring. Whereas successful strategy
making depends on business vision, solid industry and competitive analysis, and shrewd entrepreneurship,
successful strategy execution depends on doing a good job of working with and through others, building and
strengthening competitive capabilities, motivating and rewarding people in a strategy-supportive manner,
instituting policies and practices that will facilitate good strategy execution, and instilling a discipline of getting
things done. Executing strategy is an action-oriented, make-things-happen task that tests a manager’s ability
to direct organizational change, achieve improvements in day-to-day operations, create and nurture a strategy-
supportive culture, and meet or beat performance targets.

Experienced managers are well aware that it is a whole lot easier to develop a sound strategic plan than it is to
execute the plan and achieve targeted outcomes. A recent study of 400 CEOs in the United States, Europe, and
Asia found that executional excellence was the number one challenge facing their companies.1 According to one
executive, “It’s been rather easy for us to decide where we wanted to go. The hard part is to get the organization

222
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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 223

to act on the new priorities.”2 It takes adept managerial leadership to convincingly communicate a new strategy
and the reasons for it, overcome pockets of doubt and disagreement, secure the commitment and enthusiasm
of concerned parties, identify and build consensus on
all the hows of implementation and execution, and move Ideally, senior managers need to create a
forward to get all the pieces into place and deliver results. companywide crusade to implement and execute
Company personnel must understand—in their heads and the chosen strategy as fast and effectively as
hearts—why a new strategic direction is necessary and possible.
where the new strategy is taking them.3 Just because senior
managers announce a new strategy doesn’t mean that
organizational members will agree with it and move forward enthusiastically to implement it. Hence one of the
big leadership challenges for senior managers in implementing strategy is to communicate the case for strategic
and organizational change so clearly and persuasively to organizational members that a determined commitment
takes hold throughout the ranks to institute operating practices conducive to good daily strategy execution and
to meeting performance targets. Instituting change is, of course, easier when problems with an underperforming
strategy have become painfully obvious and/or the company’s performance has precipitated a financial crisis.
But what really makes executing strategy a tougher, more time-consuming management challenge than crafting
strategy is the wide array of managerial activities that must be attended to, the many ways to put new strategic
initiatives in place and keep their implementation moving forward, and the number of bedeviling issues that
always crop up and have to be resolved. It takes first-rate “managerial smarts” to zero in on what exactly needs
to be done and how to get good results in a timely manner. Excellent people-management skills and perseverance
are needed to get a variety of initiatives underway and integrate the efforts of many different work groups
into a smoothly functioning whole. Depending on how much consensus building and organizational change is
involved, the process of implementing strategy changes can take several months to several years. And executing
the strategy with real proficiency takes even longer.

Like crafting strategy, executing strategy is a job for a company’s whole management team, not just a few
senior managers. While the chief executive officer and the heads of major units (business divisions, functional
departments, and key operating units) are ultimately
responsible for seeing that strategy is executed successfully, CORE CONCEPT
the process typically affects every part of the firm—all value Good strategy execution requires a team
chain activities and all work groups. Top-level managers effort. All managers have strategy-executing
must rely on the active support and cooperation of middle responsibility in their areas of authority, and all
and lower managers to institute whatever new and different employees are active participants in the strategy
operating practices are needed in the various functional execution process.
areas and operating units to achieve proficient strategy
execution. Middle and lower-level managers must ensure
that frontline employees become proficient in performing strategy-critical value chain activities and produce
operating results that allow company performance targets to be met. Consequently, all company personnel are
actively involved in the strategy execution process in one way or another.

A FRAMEWORK FOR EXECUTING STRATEGY

The managerial approach to implementing and executing a strategy always has to be customized to fit the
particulars of a company’s situation. Making minor changes in an existing strategy differs from implementing
radical strategy changes. The hot buttons for successfully executing a low-cost provider strategy are different
from those in executing a high-end differentiation strategy. Implementing and executing a new strategy for a
struggling company in the midst of a financial crisis is a different job from improving strategy execution in a
company where the execution is already good. Moreover, some managers are more adept than others at using this
or that approach to achieve the desired kinds of organizational changes. Hence, there’s no definitive managerial
recipe for successful strategy execution that cuts across all company situations and all strategies or that works
for all managers. Rather, the “to-do list” that constitutes management’s agenda for implementing and executing
a given strategy always represents management’s judgment about how best to proceed in light of the prevailing
circumstances.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 224

The Principal Managerial Components of the Strategy

Execution Process
Despite the need to tailor a company’s strategy-executing approaches to the situation at hand, certain managerial
bases must be covered no matter what the circumstances. Eight managerial tasks crop up repeatedly in company
efforts to execute strategy (see Figure 10.1).
1. Staffing the organization and developing and/or strengthening the resources, capabilities, competencies,
and organizational structure to execute strategy successfully.
2. Allocating ample resources to those activities critical to successful strategy execution and the
achievement of financial and strategic objectives.
3. Ensuring that policies and procedures facilitate rather than impede strategy execution.
4. Adopting best practices and employing process management tools to drive continuous improvement in
how value chain activities are performed.
5. Installing information and operating systems that enable company personnel to better perform important
value chain activities and operate the business more proficiently.
6. Tying rewards and incentives directly to the achievement of strategic and financial performance targets.
7. Instilling and nurturing a corporate culture that promotes good strategy execution.
8. Exercising strong leadership to drive the execution process forward and attain companywide operating
excellence as rapidly as feasible.
How well managers perform these eight tasks has a decisive impact on whether the outcome is a spectacular
success, a colossal failure, or something in between.

FIGURE 10.1 The Eight Components of the Strategy Execution Process

Staffing the
organization and
developing the resources,
capabilities, competencies,
and organizational Allocating
Exercising strong structure to execute ample resources to
leadership to drive the the strategy those activities critical to
execution process forward successfully successful strategy execution
and attain companywide and the achievement of
operating excellence as financial and strategic
rapidly as feasible objectives

The Action
 genda For
A
Instilling a Implementing Ensuring that policies
c orporate culture and Executing and procedures
that promotes good facilitate rather than
Strategy
strategy execution impede strategy
• What to change execution
or improve?
• How to get it
done?

Tying rewards Adopting best practices

and incentives directly and employing process
to the achievement of management tools to drive
strategic and financial how value chain activities
Installing
performance targets are performed
information and operating
systems that enable company
personnel to better perform
important value chain activities
and operate the business
more proficiently

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 225

In devising an action agenda for implementing and executing strategy, the place for managers to start is with
a probing assessment of what the organization must do
differently and better to execute the strategy proficiently. When strategies fail, it is often because of poor
Each manager needs to ask the question, “What needs to be execution—needed actions are overlooked, lax
done in my area of responsibility to implement our part of oversight allows important details to slip through
the company’s chosen strategy, and what should I do to get the cracks, key implementation approaches turn
these things accomplished in a timely fashion?” It is then out to be ill chosen or mismanaged, or there is
incumbent on every manager to determine precisely how to
deficient motivation or slack effort on the part of
make the necessary internal changes. Successful strategy
company personnel to achieve the desired results.
implementers have a knack for diagnosing what their
organizations need to do to execute the chosen strategy well
and figuring out how to get these things done cost efficiently and with all deliberate speed. They are masters in
promoting results-oriented behaviors on the part of company personnel and following through on making the
right things happen to achieve the target outcomes.4

The role of the CEO and other senior executives in implementing and executing a company’s strategy differs
according to the size of the organization and the extent to which its operations are geographically scattered. In
small organizations, top-level managers can deal directly with frontline managers and employees, personally
orchestrating the action steps and implementation sequence, observing firsthand how implementation is
progressing, and deciding how hard and how fast to push the process along. But as an organization’s size
increases and/or its operating units become more geographically dispersed, senior executives increasingly come
to depend on the cooperation and implementing skills of managers in all the various operating units to undertake
needed changes and help move the whole organization along the road to successful strategy implementation and
execution. When large organizational size and widespread operations make it impractical for a CEO and other
members of the senior-executive team to personally direct all the different strategy-implementing activities,
observe firsthand how well things are going, and initiate on-the-scene corrective actions, the role of senior
executives in leading the process of implementing and executing a company’s strategy shifts more to one of
communicating the case for organizational change, providing guidance and general prescriptions for how to
proceed, establishing deadlines and measures of progress, making sure that capable managers are in place to
move the process forward in key organizational units, directing resources to the right places, and rewarding those
who achieve implementation milestones. In such instances, the speed with which the implementation/execution
process moves along and the degree of success that is achieved hinges on whether company personnel down
through the organization step up to the plate and produce the desired results.

Regardless of the organization’s size and whether imple­

men­tation involves sweeping or minor changes, effective CORE CONCEPT
leadership of the implementation/execution process requires The two best signs of good strategy execution
a keen grasp of what to do and how to do it in light of the are whether a company is meeting or beating its
organization’s circumstances. Management’s handling of performance targets and whether it has attained
the process of implementing and executing a company’s real proficiency in performing strategy-critical
strategy can be considered successful if the company meets value chain activities.
or beats its performance targets and learns to perform
strategy-critical value chain activities with real proficiency.
Ideally, a company’s approach to strategy execution aims at achieving operating excellence in all of its activities.5

What’s Covered in Chapters 10, 11, and 12 In the remainder of this chapter and the next two chapters, we
will discuss what is involved in performing the eight key managerial tasks (shown in Figure 10.1) that shape the
process of implementing and executing strategy. This chapter explores the tasks of staffing the organization and
developing the resources, competencies, capabilities, and organizational structure needed to execute the strategy
successfully. Chapter 11 concerns the tasks of allocating resources, instituting strategy-facilitating policies and
procedures, adopting best practices and striving for continuous operating improvements, installing information
and operating systems needed for good strategy execution, and tying rewards to the achievement of good results.
Chapter 12 deals with instilling and nurturing a corporate culture conducive to good strategy execution and
exercising the leadership needed to drive the execution process forward and move toward operating excellence.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 226

BUILDING AN ORGANIZATION CAPABLE OF GOOD

STRATEGY EXECUTION: THREE KEY ACTIONS
Proficient strategy execution depends heavily on competent personnel, better-than-adequate capabilities and
competencies, and effective internal organization. Building an execution-capable organization is thus always a
top priority. As shown in Figure 10.2, three types of organization-building actions are paramount:

l Staffingthe organization—putting together a strong management team, and recruiting and retaining
employees with the needed experience, technical skills, and intellectual capital.

l Acquiring, developing, and strengthening the resources and capabilities required for good strategy
execution—accumulating the required resources, developing competitively strong proficiencies in
performing strategy-critical value chain activities, and updating the company’s resources and capabilities
to match changing market conditions and customer expectations.

l Structuring the organization and work effort—organizing value chain activities and business processes,
establishing lines of authority and reporting relationships, and deciding how much decision-making
authority to push down to lower-level managers and frontline employees.

FIGURE 10.2 Building an Organization Capable of Successful Strategy Execution:

Three Key Actions

Staffing the Organization

• Putting together a strong management team
• Recruiting and retaining talented employees

A Well-Staffed
Acquiring, Developing, and Strengthening the
Resources and Capabilities Important to Company with
Good Strategy Execution the Resources,
• Building competitively strong proficiencies in Competencies,
performing strategy-critical value chain activities Capabilities,
• Updating the competitive value of the firm’s resources and
and capabilities as external conditions and the firm’s
strategy change Organizational
• Training and retraining company personnel as Structure
needed to maintain knowledge-based and skills- to Execute
based capabilities
Strategy
Successfully
Structuring the Organization and Work Effort
• Instituting organizational arrangements, lines of
authority, and reporting relationships that facilitate
good strategy execution
• Deciding how much decision-making authority to
delegate to lower-level managers and frontline
employees

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 227

STAFFING THE ORGANIZATION

No company can hope to perform the activities required for successful strategy execution without attracting and
retaining talented managers and employees with suitable skills and intellectual capital.

Putting Together a Strong Management Team

Assembling a capable management team is a cornerstone of the organization-building task.6 While different
strategies and company circumstances often call for different mixes of backgrounds, experiences, values, beliefs,
management styles, and know-how, the most important consideration is to fill key managerial slots with smart
people who are clear thinkers, good at figuring out what
needs to be done, skilled in managing people and getting CORE CONCEPT
things done, and accomplished in delivering good results.7 Putting together a talented management team
The task of implementing challenging strategic initiatives with the right mix of experiences, skills, and
must be assigned to executives who have the skills and abilities to get things done is one of the first
talents to handle them and who can be counted on to turn steps to take in launching the strategy execution
their decisions and actions into results that meet or beat the process.
established performance targets. It helps enormously when
a company’s top management team has several people who
are particularly good change agents—true believers who champion change, know how to trigger change and
keep change initiatives moving along, and love every second of the process.8 Without a smart, capable, results-
oriented management team, the implementation-execution process ends up being hampered by missed deadlines,
misdirected or wasteful efforts, and/or managerial ineptness.9 Weak executives are serious impediments to getting
optimal results because they are unable to differentiate between ideas and approaches that have merit and those
that are misguided—the caliber of work done under their supervision suffers.10 In contrast, managers with strong
strategy-implementing capabilities have a talent for asking tough incisive questions. They know enough about
the details of the business to be able to challenge and ensure the soundness of the approaches and decisions of
the people around them, and they can discern whether the resources people are asking for to put the strategy in
place make sense. They are good at getting things done through others, typically by making sure they have the
right people under them and that these people are put in the right jobs.11 They consistently follow through on
issues, monitor progress carefully, make adjustments when needed, and don’t let important details slip through
the cracks. In short, they understand how to drive organizational change, and they know how to motivate and
lead a company down the path to first-rate strategy execution.

Sometimes a company’s existing management team is up to the task. At other times, it may need to be strengthened
or expanded by promoting qualified people from within or by bringing in outsiders whose experiences, talents,
and leadership styles better suit the situation. In turnaround and rapid-growth situations, and in instances when
a company does not have insiders with the requisite know-how, filling key management slots from the outside
is a standard organization-building approach. In addition, it is important to ferret out and replace managers who
believe activities in their area of responsibility are already being done properly or who lack the creativity to find
ways to do things better and more cost efficiently.12

The overriding aim in building a management team should be to assemble a critical mass of talented managers
who can function as agents of change and further the cause of excellent strategy execution. Every manager’s
success is enhanced (or limited) by the quality of their managerial colleagues and the degree to which they
freely exchange ideas, debate ways to make operating improvements, and join forces to tackle issues and solve
problems.13 When a first-rate manager enjoys the help and support of other first-rate managers, it’s possible to
create a managerial whole that is greater than the sum of individual efforts—talented managers who work well
together as a team can produce organizational results that are dramatically better than what one or two star
managers acting individually can achieve. The chief lesson here is that a company needs to get the right executives
on the bus—and the wrong executives off the bus—before trying to drive the bus in the desired direction.14

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 228

Recruiting, Training, and Retaining Capable Employees

Assembling a capable management team is not enough. Staffing the organization with the right kinds of people
must extend to all kinds of company personnel in order for value chain activities to be performed competently.
The caliber of an organization’s people is always an essential ingredient of successful strategy execution—
knowledgeable, engaged employees are a company’s best
source of creative ideas for the nuts-and-bolts operating CORE CONCEPT
improvements that lead to operating excellence. Microsoft It is difficult for a company to competently execute
makes a point of hiring the brightest and most talented its strategy and achieve operating excellence
programmers it can find and motivating them with without recruiting and retaining a large band of
good monetary incentives and the challenge of working capable, engaged, high-achieving employees.
on cutting-edge software design projects. McKinsey
& Company, one of the world’s premier management
consulting firms, recruits only cream-of-the-crop MBAs at the nation’s top 10 business schools; such talent
is essential to McKinsey’s strategy of performing high-level consulting for the world’s top corporations. The
leading global accounting firms screen candidates not only on the basis of their accounting expertise but also on
whether they possess the people skills needed to relate well to clients and colleagues. Southwest Airlines goes
to considerable lengths to hire people who can have fun and be fun on the job. It uses special interviewing and
screening methods to gauge whether applicants for customer-contact jobs have outgoing personality traits that
match its strategy of creating a high-spirited, fun-loving, in-flight atmosphere for passengers. It is so selective
that only about three percent of the people who apply are offered jobs.

In instances where a talented and energetic workforce greatly aids good strategy execution, companies have
instituted a number of practices aimed at staffing jobs with the best people they can find and then retaining them:

l Spending considerable effort in screening and evaluating job applicants, selecting only those with suitable
skill sets, energy, initiative, judgment, and aptitudes for learning and adaptability to the company’s work
environment and culture.

l Putting employees through training programs that

continue throughout their careers. The best companies strive hard to make the
company’s entire workforce (managers and rank-
l Providing promising employees with challenging, and-file employees) a genuine resource strength.
interesting, and skill-stretching assignments.

l Rotating people through jobs that not only have great content but also span functional and geographic
boundaries. Providing people with opportunities to gain experience in a variety of international settings
is increasingly considered an essential part of career development in multinational or global companies.

l Encouraging employees to challenge existing ways of doing things, to be creative and innovative in
proposing better ways of operating, and to push their ideas for new products or businesses. Progressive
companies work hard at creating an environment in which ideas and suggestions bubble up from below
and employees are made to feel their views and suggestions count.

l Making the work environment stimulating and engaging so employees will consider the company a
great place to work.

l Striving to retain talented, high-performing employees via promotions, salary increases, performance
bonuses, stock options and equity ownership, comprehensive benefit packages, and other perks, such as
flexible work hours and onsite day care.

l Coaching average performers to improve their skills and capabilities, while weeding out underperformers
and benchwarmers.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 229

The Strategic Role of Employee Training Newly hired employees typically attend orientation and
training programs in the first days or weeks before beginning their first job assignment; the nature and extent of
this training varies with their qualifications, experience, and readiness for performing the duties associated with
their initial job assignment. Many companies have employees attend additional competence-building programs
in the ensuing months and years. They also reimburse employees for tuition and other expenses associated with
obtaining additional college education, attending professional development courses, and earning professional
certifications of one kind or another.

Employee training and retraining become strategically important when a company shifts to a strategy requiring
different skills, competitive capabilities, and operating practices. Training/retraining is also strategically important
in organizational efforts to build and enhance skills-based competencies and meld them into competitively
valuable capabilities and to implement newly discovered best practices in particular value chain activities. And
training is a key and continuous activity in businesses where technical know-how is changing so rapidly that
a company loses its ability to compete unless its skilled people have cutting-edge knowledge and expertise.
Successful strategy implementers see to it that the training function is both adequately funded and effective. If
better execution of the chosen strategy calls for new or better skills, deeper technological capability, greater use
of best practices, or building and using new capabilities, training efforts should be placed near the top of the
action agenda.

The strategic importance of training has not gone unnoticed. Roughly 8,000 companies across the world have
established internal “universities” to lead their training effort, facilitate continuous organizational learning,
make greater use of best practices in performing value chain activities, and upgrade their company’s knowledge
resources.15 Many companies have developed online training courses that are available to employees around the
clock. Increasingly, companies are expecting employees at all levels to take an active role in their own professional
development and assume responsibility for keeping their skills up to date and in sync with the company’s needs.
General Electric, AT&T, Deloitte, Accenture, Pilot Flying J, Walgreens, General Mills, Boeing, Disney, India’s
Tata Group, Saudi Telecom, UBS, Apple, McDonald’s, and General Motors are well-known for their internal
training “universities” and the strong emphasis placed on employee training.

DEVELOPING AND STRENGTHENING EXECUTION-

CRITICAL RESOURCES AND CAPABILITIES
High among the organization-building priorities in the strategy-executing process is the need to develop and
strengthen the company’s portfolio of resources and capabilities in order to proficiently perform all of the value
chain activities that are crucial to successful strategy execution and meeting or beating performance targets. As
explained in Chapter 4, a company’s ability to perform value chain activities in a manner that enables competitive
success in the marketplace depends on having the right resources and capabilities. In the course of crafting
strategy, managers may well have identified the strategy-critical resources and capabilities it needs. But getting
the strategy execution process underway requires acquiring and developing these resources and capabilities,
putting them into place, improving and upgrading their proficiency in performing value chain activities, and
then modifying these resources and capabilities as needed to keep them well-matched to evolving market and
competitive conditions.

If the strategy being implemented has important new elements, company managers may have to acquire new
resources, significantly broaden or deepen certain capabilities, or even develop entirely new capabilities in order
to put the new strategic initiatives in place and achieve real proficiency in performing the associated value chain
activities. But even when a company’s strategy has not changed materially, good strategy execution still involves
ongoing efforts to polish and upgrade the firm’s resources and capabilities, thereby moving the company’s
performance of value chain activities ever closer to a standard of operating excellence.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 230

Building competitively valuable resources and capabilities and keeping them finely honed is a time-consuming,
managerially challenging exercise. While some assist can be gotten from discovering how best-in-industry or
best-in-world companies perform a particular activity, trying to replicate and then improve on the capabilities
of others is easier said than done—for the same reasons that one is unlikely to ever become a really good golfer
just by studying what the world’s best professional golfers do. However, with carefully managed organizational
actions and ongoing practices, it is possible for a firm to overcome the difficulties and become proficient at
capability building.

The most common approaches to capability building include (1) developing and strengthening capabilities
internally, (2) acquiring needed capabilities through mergers and acquisitions, and (3) developing new capabilities
via collaborative partnerships.

Developing and Strengthening Capabilities Internally

Internal efforts to create or upgrade capabilities into core competencies and perhaps even distinctive competencies
is an evolutionary process that entails a series of deliberate and well-orchestrated organizational steps to achieve
mounting proficiency in performing an activity.16 The process has three stages:

Stage 1—This stage begins when managers set an objective of developing a particular capability and
organize activity around that objective.17 The first thing that has to be accomplished is to develop the ability
to do something, however imperfectly or inefficiently. This entails selecting people with the requisite skills
and experience, upgrading or expanding individual abilities as needed, and then molding the efforts and
work products of individuals and/or teams into a collaborative effort to create organizational ability. This
ability to do something can be the result of individuals and teams working collaboratively within a single
department or organizational unit and managed by the head of the organizational unit. Often, however,
developing a competitively valuable ability is a slow, complex process that entails coordinated efforts on
the part of multiple departments and cross-functional work groups performing their respective pieces of
the activity at different places in the firm’s value chain and perhaps at different geographic locations. For
instance, developing an ability to speed new products to market requires the collaborative efforts of personnel
in R&D, engineering and design, purchasing, production, marketing, and distribution. Similarly, the ability to
provide superior customer service entails a team effort among people in customer call centers (where orders
are taken and inquiries are answered), shipping and delivery, billing and accounts receivable, and after-sale
support. Efforts to develop a valuable ability that entails the collaboration of cross-functional groups and
multiple departments are best orchestrated by senior managers who not only appreciate the strategy-executing
significance of developing strong capabilities but also have the clout to enforce the necessary cooperation and
coordination among individuals, groups, and departments.

Initially gaining the ability to do something can prove time-consuming, and progress tends to be irregular,
coming in bursts with stalls of varying length in-between. The process entails experimenting with alternative
approaches, learning through trial and error, working with bundles of skills, know-how, resources, and at
some juncture forging the collaboration and coordination that results in the ability to perform the activity with
some degree of success. The process can be accelerated by making learning a more deliberate endeavor and
providing attractive incentives to motivate company personnel to achieve the desired ends.18

Stage 2—As experience grows and company personnel learn how to perform the activity consistently
well and at an acceptable cost, the ability evolves into a tried-and-true capability or proven competence.
Building greater proficiency to migrate from ability to capability or competence requires task repetition and
the resulting learning by doing of individuals and teams—as the saying goes, practice makes perfect.19 If the
capability or competence is a key part of executing the company’s strategy, then the capability qualifies as a
core competence and competitively valuable capability.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 231

Stage 3—The third stage involves an ongoing effort to polish, refine, and otherwise sharpen the performance
of a capability or competence, aiming not just for incremental improvements but, ultimately, for best-in-
industry or best-in-world proficiency. From an organization-wide perspective, a company should continuously
strive to strengthen all of its capabilities and competencies. But the ultimate capability-building goal is to
become proficient in performing at least one deliberately targeted strategy-critical and competitively valuable
activity better than rivals, so that a core competence evolves into a distinctive competence. Such high-level
proficiency transforms a competence into a competitively superior competence, thus providing a path to
competitive advantage.

Many companies are able to get through stages 1 and 2 in performing a competitively important value chain activity,
but comparatively few achieve sufficient proficiency to reach the ultimate stage 3 goal of performing even one,
much less two strategy-critical activities better than rivals so
that it has legitimate claim to having one or two distinctive CORE CONCEPT
competencies. The key to leveraging a core competence Building competencies and capabilities is a three-
into a distinctive competence (or a competitively valuable stage process that occurs over a period of months
capability into a competitively superior capability) is and years. It is not accomplished overnight.
concentrating more effort and talent than rivals on deepening
and strengthening the competence or capability to achieve the dominance needed for competitive advantage. This
does not necessarily mean spending more money than competitors on such activities, but it does mean consciously
focusing more talent on them and unleashing dedicated, indeed relentless, efforts to achieve best-in-industry, if not
best-in-world, status. The process can usually be accelerated by top-level managerial insistence that learning and
improvement occur and by providing incentives to motivate company personnel to go all out to reach higher levels
of proficiency. Toyota, en route to overtaking General Motors as the global leader in motor vehicles, aggressively
upgraded its capabilities in fuel-efficient engine technology and constantly finetuned its famed Toyota Production
System to further enhance its already proficient capabilities in manufacturing top quality vehicles at low costs.
Disney left no stone unturned in bringing the full force of its considerable organizational resources and talent to
bear on the task of transforming its core competence in operating theme parks into a distinctive competence.

Developing and Strengthening Capabilities via

Acquisition or Merger
Sometimes the best way for a company to upgrade its portfolio of resources and capabilities is by acquiring
(or merging with) another company with resources and capabilities that give it added competitive strength.20
An acquisition aimed at building a competitively stronger collection of resources and capabilities can be
every bit as valuable as an acquisition aimed at adding new products or services to the company’s lineup of
offerings to customers. The advantage of acquiring another company to obtain important technological expertise,
manufacturing or marketing know-how, or other desirable capabilities is primarily one of speed, since trying to
develop such expertise and competencies internally can, at best, take months or years of effort and, at worst,
come too late or never reach the desired level of expertise. Capabilities-motivated acquisitions are essential when
(1) a market opportunity can slip by faster than a needed capability can be created internally and (2) industry
conditions, technology, or competitors are moving at such a rapid clip that time is of the essence.

Accessing Needed Capabilities via Collaborative Partnerships

A third way of obtaining valuable resources, capabilities, and competencies is to form collaborative partnerships
with suppliers or other companies having the expertise or capabilities the company lacks internally. There are
three basic ways to obtain needed capabilities via collaboration with outsiders:

1. Outsource a capability-deficient function to a key supplier or another provider having the desired
expertise or capability. Outsourcing may be a good choice for firms that are too small and resource
constrained to execute all the parts of their strategy internally—small online retailers, for example,
often outsource inventory stocking and order fulfillment activities to outside vendors that specialize in

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 232

filling orders and handling packages and shipping functions for small enterprises. Outsourcing can also
be a good option when the function is not strategy critical, and it allows the firm to concentrate its full
energies on proficient performance of those activities central to its financial and competitive success.
However, outsourcing a strategy-critical activity is risky when it puts a firm’s long-term well-being in
the hands of outsiders or when maintaining tight internal control over the activity is important.

2. Work collaboratively with key suppliers to achieve such valuable and mutually beneficial capabilities
as just-in-time inventory management, speedy design and delivery of parts and components for new
products, and defect-free or more durable parts and components. In the past 15 years, close collaboration
with suppliers to achieve mutually beneficial outcomes has become a common approach to building
important supply chain capabilities.

3. Establish a collaborative partnership with a firm outside the industry having the desired capability the
company needs to build and develop for its own internal use. Such collaborative partnerships can be a
viable method when the two partners each have a capability the other partner can benefit from acquiring.
Such partnerships involve on-site visits and meetings with key personnel to learn each partner’s methods
of performing the capability-related activities—the collaborative outcome for each partner needs to be
to learn enough about how the partner does things to be able to internalize its methods (often with
modifications to better fit its circumstances), and thereby acquire the desired capability. In racing to
develop motor vehicles with self-driving capability, most all vehicle manufacturers are supplementing
their own internal efforts with collaborative partnerships with one or more of the growing numbers of
hardware and software firms operating in the driverless vehicle space—those developing self-driving
software (Alphabet’s Waymo, Cruise, Aurora Innovation, Tesla, Oxbotica, Zoox, Nodar), makers of the
two competing systems (radar, lidar) to spot road obstacles and read traffic signs and signals, computing
platforms (Nvidia, Qualcomm, Intel), and driverless car technology systems (Intel’s Mobileye subsidiary,
NavInfo, Apple, Microsoft, Volkswagen Group, Aptiv-Hyundai, Baidu, Voyage, Huawei Technologies).
Nike entered into a strategic partnership with Swiss company Bluesign Technologies for the purpose of
making two innovative Bluesign tools available to the hundreds of textile manufacturers supplying Nike
products; the two tools enable the textile manufacturers to access more than 30,000 materials produced
with chemicals that have undergone rigorous assessment for safe use in apparel products. Sometimes
the collaborative efforts involve common sharing of resources and capabilities or working together to
achieve a capability-related outcome beneficial to all the partners. For example, firms sometimes enter
into collaborative marketing arrangements whereby each partner is granted access to the other’s dealer
network for the purpose of expanding sales in geographic areas where they lack dealers.

Maximizing the Competitive Power of Capabilities and

Competencies: The Challenge of Dynamically Managing a
Company’s Resource Pool
Managers cannot relax just because a company happens to currently have a good set of competitively valuable
capabilities. Competencies and capabilities grow stale
unless they are refreshed, modified, or even phased CORE CONCEPT
out and replaced in order to stay abreast of ongoing A company’s capabilities and competencies
changes in customer needs and expectations, successfully must be continually refreshed and recalibrated
combat competitors’ newly launched offensives, keep to remain aligned with changing customer
the company’s resource/capability portfolio in step with expectations, ever-evolving competitive
changes in the company’s own strategy, and help secure conditions, and a company’s own strategic
a sustainable competitive edge over rivals based on initiatives to outcompete rivals.
having a competitively superior collection of resources
and capabilities. Indeed, the imperatives of keeping a company’s capabilities matched to ongoing changes in
both market conditions and its own circumstances, coupled with the normal capability-enhancing buildup of
experience and know-how over time, make it appropriate to view a company as a bundle of evolving resources
and capabilities.
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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 233

It is generally much easier and less time-consuming to update and remodel a company’s existing capabilities as
external conditions and company strategy change than it is to create them from scratch. Maintaining capabilities
in top form may simply require exercising them continually and keeping them fine-tuned. Similarly, augmenting
a capability may require less effort if it involves the recom­bination of well-established company capabilities and
draws on the skills and talents of people and groups who have experience working together and know how to tap
into existing company resources that can prove useful.

Successfully confronting the challenge of building a dynamically evolving set of capabilities and competencies
with maximum competitive power in the marketplace entails two managerial actions:

1. Making capability-building a companywide priority, where senior executives hold all operating-level
managers responsible and accountable for routinely pushing to improve the performance of value chain
activities, most especially those deemed critical to competitive success. When there are clear expectations
that overseeing the performance of value chain activities requires ongoing efforts to strengthen the
associated capabilities, then it becomes increasingly feasible for companies to become proficient at
capability-building. The added experience and know-how that comes from focused, ongoing managerial
efforts to strengthen a company’s resource-capability portfolio tends to make its management team
highly capable in dynamically managing the firm’s resources and capabilities in ways that keep them
updated and competitively valuable.

2. Apart from routinely refreshing and recalibrating existing resources and capabilities, what makes a big
difference is having a management team with the foresight to develop new or innovatively enhanced
resources and capabilities (or else the acumen to spot opportunities to do so). Being first to develop
and deploy a new resource or capability that is especially competitively valuable provides a clear path
to gaining a competitive advantage over rivals that may prove sustainable. Why? Because it is time-
consuming (and perhaps costly) for rivals to either copy the resource/capability or develop an offsetting
resource/capability.

The momentum that comes from astute and timely managerial efforts to create and maintain a competitively
formidable portfolio of resources and capabilities is often sufficient to keep a company’s sales and profit
performance humming—this alone constitutes a strong case for making ongoing efforts to strengthen a company’s
resource-capability portfolio a key element of a company’s approach to strategy execution.

Translating Resources and Capabilities into Competitive

Advantage
While competitively valuable resources and capabilities are plainly a major assist in executing strategy, they are
also the only avenue for securing a competitive edge over rivals in situations where it is relatively easy for rivals
to copy smart strategies. Any time rivals can readily duplicate the successful features of a company’s product
or quickly imitate its maneuvers in the marketplace to boost
sales, making it difficult or impossible to outstrategize rivals A superior capability to execute strategy better
and beat them in the marketplace with a superior strategy, than rivals is the only path to sustainable
the only dependable path to durable competitive advantage competitive advantage when rivals can readily
is to out-execute them (beat them by performing certain copy the successful features of a company’s
value chain activities in superior fashion). Out-executing product and its actions to attract customers.
copycat rivals requires developing a collection of resources
and capabilities that enables the company to perform certain
important value chain activities either with greater cost efficiency or with greater differentiating effectiveness.
Greater cost efficiency lays the foundation for delivering more value to customers via lower prices. Greater
differentiating effectiveness lays the foundation for delivering more value to customers via a more appealing
product offering. Either outcome results in competitive advantage. Superior strategy execution can also take

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 234

the form of faster internal ability to recognize and respond to changing buyer needs and expectations, thus
consistently beating rivals to the market with new products and services. A competitive advantage that stems
directly from the power of a company’s resources and
capabilities to competently execute a strategy aimed at When company managers deliberately strive to
lower costs, better differentiation, or quicker response to develop a portfolio of resources and capabilities
market change and new opportunities provides a durable that enable superior strategy execution, the door
basis for outcompeting rivals employing copycat strategies is open to creating a sustainable competitive
and is potentially sustainable over the long-term. Not only advantage over rivals.
will it take time for rivals to learn what the company is
doing to execute its strategy in superior fashion, but it will
also take more time, expense, and know-how for rivals to develop matching or offsetting strategy-executing
capabilities. In the meantime, the company can enjoy the added profits and performance afforded by its strategy-
execution advantage. And if the company does not complacently rest on its laurels and, instead, presses forward
to further improve its strategy-executing capabilities to achieve lower costs, better differentiation, or quick
market response, then rivals may never catch up.

STRUCTURING THE ORGANIZATION AND

WORK EFFORT
Other than creating organizational arrangements that are well-matched to the requirements of competently
executing the company’s strategy, there are few hard-and-fast rules for organizing the work effort. Every firm’s
organization chart is partly a product of its particular situation, reflecting prior organizational patterns, varying
internal circumstances, executive judgments about reporting relationships, and the politics of who gets which
assignments. Moreover, every strategy is grounded in its own set of key success factors and execution-critical
value chain activities. But some considerations in organizing the work effort to achieve good strategy execution
are common to all companies. These are summarized in Figure 10.3 and discussed in the following sections.

Deciding Which Value Chain Activities to Perform Internally

and Which to Outsource
Aside from the fact that an outsider, because of its expertise and specialized know-how, may be able to perform
certain value chain activities better or cheaper than a company can perform them internally (as discussed in
Chapter 6), outsourcing can also sometimes contribute to
better strategy execution. Outsourcing the performance CORE CONCEPT
of assorted administrative support functions and perhaps
Wisely choosing which activities to perform
even selected core or primary value chain activities to
internally and which to outsource can lead to
outside vendors enables a company to heighten its strategic
several strategy-executing advantages—lower
focus and concentrate its full energies on improving the
performance of those value chain activities at the core of costs, a heightened strategic focus, less internal
its strategy where it can create unique value. For example, bureaucracy, speedier decision making, and a
E. & J. Gallo Winery outsources 95 percent of its grape better arsenal of competencies and capabilities.
production, letting farmers take on the weather and other
grape-growing risks while it concentrates its full energies on wine production and sales.21 Broadcom, a global
leader in designing, developing, and supplying a broad range of semiconductor devices, outsources a majority
of its manufacturing and some of its corporate infrastructure functions, thus freeing company personnel to focus
their full energies on R&D, new product design, and marketing. Nike concentrates on design, marketing, and
distribution to retailers, while outsourcing virtually all production of its shoes and sporting apparel to contract
manufacturers.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 235

FIGURE 10.3 Structuring the Work Effort to Promote Successful Strategy Execution

Decide which value chain activities to perform internally

and which ones to outsource
An
Make internally performed strategy-critical activities  Organization
the main building blocks in the organization structure Structure 
Matched
Decide how much authority to centralize at the top and to the
how much to delegate to down-the-linemanagers and
employees Requirements
of
Provide for cross-unit coordination Successful
Strategy
Execution
Provide for necessary collaboration with suppliers
and strategic allies

Such heightened focus on performing strategy-critical activities can yield three important execution-related
benefits:

l The company improves its chances for outclassing rivals in the performance of strategy-critical activities
and turning a core competence into a distinctive competence. At the very least, the heightened focus on
performing a select few value chain activities serves to meaningfully strengthen the company’s existing
core competencies and promote more innovative performance of those activities—either of which could
lower costs or materially improve competitive capabilities.

l The streamlining of internal operations that flows from outsourcing often acts to decrease internal
bureaucracies, flatten the organization structure, speed internal decision making, and shorten the time
it takes to respond to changing market conditions.22

l Partnerships with outside vendors can add to a company’s arsenal of capabilities and contribute to
better strategy execution. Outsourcing activities to vendors with first-rate capabilities can become a
valuable resource strength, enabling a firm to concentrate on strengthening its own complementary
internal capabilities and assembling a more powerful package of overall capabilities that it can draw
upon to deliver greater customer value and achieve greater competitive success. Companies like Boeing,
Dell, and Apple have learned that they can better perform their new product R&D activities by closely
collaborating with supply chain partners who have strong capabilities to design and produce state-of-
the-art parts and components needed for the new products they have under development.

However, as emphasized in Chapter 6, a company must guard against going overboard on outsourcing and
becoming overly dependent on outside suppliers. A company cannot be the master of its own destiny unless it
maintains expertise and resource depth in performing those value chain activities that underpin its long-term
competitive success.23 Thus, with the exception of parts/components supply, the most frequently outsourced
activities are those deemed to be strategically less important—like handling customer inquiries and requests for
technical support, doing the payroll, administering employee benefit programs, providing corporate security,
maintaining fleet vehicles, operating the company’s website, conducting employee training, and performing
assorted information and data processing functions.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 236

Making Strategy-Critical Value Chain Activities the

Main Building Blocks of the Organization Structure
In any business, some activities in the value chain are always more critical to successful strategy execution than
others. For instance, the strategy-critical activities for discount stockbrokers like TD Ameritrade and Charles
Schwab are quick access to information, accurate and fast order execution, cost-efficient record keeping and
transaction processing, and full-featured customer service. A ski apparel company like Spyder or Arc’teryx must
be good at styling and design, marketing and distribution (convincing an attractively large number of retailers
to stock and promote the company’s brand and shipping retailers’ orders in timely fashion), and brand-building
advertising (to generate buzz among ski enthusiasts and spur sales).

Whenever proficient performance of certain value chain activities is execution critical, the best organizational
structure is one that makes the organizational units performing these activities the main building blocks in the
enterprise’s organizational scheme. The rationale is compelling: If organizational units that perform important
value chain activities are to have the resources, decision-making influence, and organizational visibility they need
to execute their piece of the strategy capably, they must be centerpieces in the enterprise’s organizational structure.
Making them the central building blocks puts them in close proximity to top-level management, facilitating the
ability of senior executives to monitor these activities closely and initiate corrective adjustments when needed.
Moreover, when a company is implementing a new or changed strategy that entails new or altered strategy-
critical value chain activities, resources, or capabilities, different primary building blocks and organizational
arrangements may be needed to facilitate proficient performance of the enterprises newly remodeled value chain
make-up.24

What Types of Organization Structures Fit Which Strategies? Organizational structures can be
classified into a limited number of standard types. Which type makes the most sense for a given firm depends
largely on its size and business makeup, but not so much on the specifics of its strategy.

It is generally agreed that some type of functional structure is the best organizational arrangement when a
company is in just one particular business (irrespective of which of the five competitive strategies it opts to
pursue). In such cases, the primary organizational building blocks are usually functional departments that
perform important business functions (such as R&D, engineering and design, production and operations, sales
and marketing, finance and accounting, and human resources), and process departments (where people in a
single work unit have responsibility for all the aspects of a certain process like supply chain management,
information processing and data analysis, new product development, customer service, quality control, or selling
direct to customers via the company’s website). For instance, a technical instruments manufacturer may be
organized around research and development, engineering, supply chain management, assembly, quality control,
marketing, technical services, and corporate administration. A discount retailer may organize around such
functions as purchasing, warehousing and distribution logistics, store operations, advertising, merchandising
and promotion, and corporate administrative services. Each functional and process unit is typically managed by
a department head who reports to the CEO and works collaboratively with other corporate-level administrators.
Typically, department heads have lead responsibility for developing their unit’s strategy and supervising the
performance of the associated value chain activities. The role of the CEO (and sometimes other corporate staff)
is to provide direction, allocate resources, and ensure that the strategies and operating activities of the functional
and process managers are coordinated and integrated. The chief disadvantage of functional/process-centered
organization is that department boundaries can inhibit cross-departmental information flows and collaboration,
forcing intervention from higher-level managers to achieve the desired coordination.

In single-business enterprises with operations in various countries around the world (or with geographically
scattered organizational units within a country), the basic building blocks may also include geographic
organizational units, each of which has profit/loss responsibility for its assigned geographic area. In vertically
integrated firms, the major building blocks are divisional units performing one or more of the major processing
steps along the value chain (raw materials production, components manufacture, assembly, wholesale distribution,
retail store operations)—each division in the value chain may operate as a profit center for performance
measurement purposes.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 237

The typical building blocks of a diversified company are its individual businesses, with each business unit
usually operating as an independent profit center and with corporate headquarters performing assorted parenting
and support functions for all the business units. Individual business units are generally organized internally along
functional and process lines. Business heads have primary responsibility for crafting and executing the strategies
for their business unit (with guidance and review by corporate executives), leaving corporate-level managers
with responsibility for corporate strategy and parenting activities.

The chief disadvantage of a multi-division business unit structure concerns companies pursuing related
diversification. Having independent business units—each pursuing its own strategy and operating agenda and
each responsible for its own profitability and performance—inhibits cross-business collaboration to capture cross-
business strategic fits that are essential to maximize the overall competitive success of a related diversification
strategy. To remedy this problem, corporate executives often create another organizational layer by putting those
individual businesses with common types of strategic fit into a “business group” and giving the heads of each
business group the authority to enforce the needed cross-business collaboration to capture strategic fit benefits.

Determining How Much Authority to Delegate

Under any organizational structure, there is room for considerable variation in how much authority top-level
executives retain and how much is delegated to down-the-line managers and employees. In executing the strategy
and conducting daily operations, companies must decide how much authority to delegate to the managers of each
organization unit—especially the heads of business subsidiaries, functional and process departments, and plants,
sales offices, distribution centers, and other operating units—and how much decision-making latitude to give
individual employees in performing their jobs. The two extremes are to centralize decision making at the top or
to decentralize decision making by giving managers and employees at all ranks considerable decision-making
latitude in their areas of responsibility. As shown in Table 10.1, the two approaches are based on sharply different
underlying principles and beliefs, with each having its pros and cons.

Centralized Decision Making: Pros and Cons In a highly-centralized organization structure, top
executives retain authority for most strategic and operating decisions and keep a tight rein on business unit
heads, department heads, and the managers of key operating units; comparatively little discretionary authority
is granted to frontline supervisors and rank-and-file employees. The command-and-control paradigm of
centralized decision making is based on the underlying assumptions that rank-and-file employees have neither the
temperament, managerial know-how, or judgement to direct and properly control the work they are performing
and thus can’t be counted on to make wise decisions about how best to do it—hence the need for prescribed
policies and procedures for a wide range of activities, close supervision, and tight control by top executives. The
thesis underlying authoritarian structures is that strict enforcement of detailed procedures backed by rigorous
managerial oversight is the most reliable way to keep the daily execution of strategy on track.

The big advantage of centralized decision making, with tight control by the manager in charge, is that it is
easy to know who is accountable when things do not go well. Other advantages include facilitating strong
leadership from the top in a crisis situation and reducing
the potential for conflicting decisions and actions among There are important disadvantages to having a
lower-level managers who may have differing perspectives small number of top-level managers micromanage
and ideas about how to tackle certain tasks or resolve the business either by personally making
particular issues. But there are some serious disadvantages decisions or by requiring lower-level subordinates
as well. Hierarchical command-and-control structures to gain approval before taking action.
do not encourage responsibility and initiative on the part
of lower-level managers and employees, and they make an organization sluggish in responding to changing
conditions because of the time it takes for the review/approval process to run up all the layers of the management
bureaucracy. Furthermore, to work well, centralized decision making requires top-level managers to gather
and process whatever information is relevant to the decision. When the relevant knowledge resides at lower

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 238

organizational levels (or is technical, detailed, or hard to express in words), it is difficult and time-consuming to
get all of the facts and nuances in front of a high-level executive located far from the scene of the action—full
understanding of the situation cannot be readily copied from one mind to another. Hence, centralized decision
making is often impractical—the larger the company and the more scattered its operations, the more that decision-
making authority must be delegated to managers closer to the scene of the action.

Decentralized Decision Making: Pros and Cons In a highly decentralized organization, decision-making
authority is pushed down to the lowest organizational level capable of making timely, informed, competent
decisions. The objective is to put adequate decision-making authority in the hands of the people closest to,
and most familiar with, the situation and train them to weigh all the factors and exercise good judgment. The
case for empowering down-the-line managers and employees to make decisions related to daily operations and
executing the strategy is based on the belief that a company that draws on the combined intellectual capital
of all its employees can outperform a command-and-control company.25 With decentralized decision making,
top management maintains control by placing limits on the authority that empowered personnel can exercise,
holding people accountable for their decisions, instituting compensation incentives that reward people for doing
their jobs in a manner that contributes to good company performance, and creating a corporate culture where
there is strong peer pressure on individuals to act responsibly.26

TABLE 10.1 Advantages and Disadvantages of Centralized vs. Decentralized

Decision Making

Centralized Organizational Structures Decentralized Organizational Structures

Basic Tenets Basic Tenets
• Decisions on most matters of importance should • Decision-making authority should be put in the hands
be pushed to managers up the line who have the of the people closest to, and most familiar with, the
experience, expertise, and judgment to decide what situation.
is the wisest or best course of action. • All people who are given decision-making authority
• Frontline employees have neither the temperament, should be trained to exercise good judgment and
managerial know-how, or judgment to direct and held accountable for their actions.
properly control the work they are performing • A company that draws on the combined intellectual
and, thus, cannot be counted upon to make wise capital of all its employees can outperform a
decisions about how to perform it. Hence, giving command-and-control company.
them the authority to decide “what to do” in
Chief Advantages
performing their assigned tasks is risky.
• Encourages company employees to exercise
Chief Advantages
initiative and act responsibly.
• Makes higher-level executives accountable for
• Promotes greater motivation and involvement in the
outcomes since they decide (or approve) what
business on the part of more company personnel.
actions to take.
• Spurs new ideas and creative thinking.
• Facilitates strong top management leadership in
crisis situations. • Allows fast response times.
• Reduces potential for conflicting actions and • Entails fewer layers of management.
decisions on the part of lower-level personnel. Primary Disadvantages
Primary Disadvantages • Top management lacks “full control”—higher-level
• Lengthens response times by those closest to managers may be unaware of actions taken by
the situation because they must go up the chain empowered personnel under their supervision.
of command and allow higher-level managers to • Puts the organization at risk if empowered
decide (or at least approve) what actions to take. employees at lower levels in the organization
• Does not encourage lower-level managers and rank- happen to make “bad” decisions.
and-file employees to exercise any initiative or take • Can impair cross-unit collaboration since empowered
on any responsibility. They are expected to wait to employees in different organizational units can
be told what to do. act independently and decide what to do and when
to do it.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 239

Decentralized organization structures have much to recommend them. Delegating greater authority to subordinate
managers and employees creates a more horizontal organization structure with fewer management layers. Whereas
in a centralized vertical structure managers and workers have to go up the ladder of authority for an answer, in a
decentralized horizontal structure they develop their own answers and action plans—making decisions in their
areas of responsibility and being accountable for results is an integral part of their job. Pushing decision-making
authority down to the heads of business units, departments, and operating units (plants, distribution centers,
regional and local offices) and then further on to work teams and individual employees shortens organizational
response times and spurs new ideas, creative thinking, innovation, and greater involvement on the part of
subordinate managers and employees. In worker-empowered structures, jobs can be defined more broadly, several
tasks can be integrated into a single job, and people can direct their own work. Fewer supervisory personnel are
needed because deciding how to do things becomes part of each person’s or team’s job. Further, today’s online
systems and smart phones make it easy and relatively inexpensive for people at all organizational levels to have
direct access to data, other employees, managers, suppliers, and customers. They can access information quickly
(via the Internet or company’s wireless network), readily check with superiors or whomever else as needed, and
take responsible action. Typically, there are genuine gains in morale and productivity when people are provided
with the tools and information they need to operate in a self-directed way.

But decentralization has some disadvantages. Top managers

lose an element of control over what goes on (since Efforts to decentralize decision making and
empowered subordinates have authority to act on their own) give company personnel some leeway in
and may thus be unaware of actions taken by personnel conducting operations must be tempered with
under their supervision. Such lack of control can put a the need to maintain adequate control and
company at risk in the event that empowered employees cross-unit coordination. Decentralization doesn’t
happen to make some unwise decisions. Moreover, because mean delegating authority in ways that allow
decentralization gives organizational units the authority to organization units and individuals to do their own
act independently, there is risk of too little collaboration and thing.
coordination between different organizational units.

Many companies have concluded that the advantages of decentralization outweigh the disadvantages. Over
the past several decades, there has been a decided shift from authoritarian multilayered hierarchical structures
to flatter, more decentralized structures that stress employee empowerment. This shift reflects a strong and
growing consensus that authoritarian, hierarchical organization structures are not well suited to implementing
and executing strategies in an era when extensive information and instant communication are the norm and
when a big fraction of the organization’s most valuable assets consists of intellectual capital that resides in its
employees’ knowledge and capabilities.

Capturing Strategic Fits in a Decentralized Structure Diversified companies striving to capture cross-
business strategic fits should refrain from giving business heads full rein to operate independently when cross-
business collaboration is essential to gain strategic fit benefits. Cross-business strategic fits should typically be
captured either by enforcing close cross-business collaboration or by centralizing performance of functions
having strategic fits at the corporate level.27 For example, if businesses with overlapping process and product
technologies have their own independent R&D departments—each pursuing its own priorities, projects, and
strategic agendas—it’s hard for the corporate parent to prevent duplication of effort, capture either economies
of scale or economies of scope, or broaden the company’s R&D efforts to embrace new technological paths,
product families, end-use applications, and customer groups. Where cross-business R&D fits exist for multiple
businesses and business unit heads stonewall voluntary collaborative actions to capture the benefits, one solution
is to combine their respective R&D activities into a single R&D unit that coordinates the R&D activities in
ways that (1) enable capture of the strategic fit benefits and (2) meet the needs of the individual business units.
A second and oft-used solution is to create business groups consisting of those business units where there are
common strategic fit opportunities to make more efficient use of overlapping technologies, share a common sales
force, use common distribution channels, and employ cross-business transfer of resources and capabilities. Here

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 240

it necessary to give the business group heads ample authority to mandate the needed collaborative cross-business
actions to capture strategic fit benefits and to block any stonewalling on the part of business unit heads to capture
the full benefits of existing cross-business strategic fits.

In the case of strategic fits that are common to all of a diversified company’s business units, the optimum
organizational arrangement may be to centralize each activity with cross-business strategic fit at the corporate
level and put the activity under the authority of a single executive charged with capturing the associated strategic
benefits on behalf of the company as a whole, while also accommodating the needs and interests of each business
unit. Centralizing the performance of administrative functions at the corporate level under the authority of a single
executive—so as to cost-efficiently perform administrative activities for all business units—is commonplace.

Providing for Internal Cross-Unit Coordination

Close cross-unit collaboration is usually needed to build core competencies and valuable capabilities in such
strategically important activities as speeding new products to market and providing superior customer service.
This is because these activities involve collaboration among the efforts of company personnel that work in
different departments or organizational units (and perhaps the employees of outside strategic partners or specialty
vendors). For example, being first-to-market with new products involves coordinating the efforts of personnel in
R&D (to develop a stream of new products with appealing attributes), design and engineering (to prepare a cost-
efficient design and set of specifications), purchasing (to arrange for the delivery of needed parts and components
from suppliers), manufacturing (to carry out all the production activities), and sales and marketing (to secure
orders, arrange for introductory advertising and the distribution of product information, and get the products on
retailers’ shelves). Achieving the simple strategic objective of filling customer orders accurately and promptly
involves personnel from sales (to win the order); finance (to check credit terms or approve special financing);
production (to produce the goods and replenish warehouse inventories as needed); warehousing and shipping (to
verify whether the items are in stock, pick the order from the warehouse, package it for shipping, and choose the
best carrier to deliver the goods).28

To achieve tight coordination when pieces of execution-critical tasks are performed in multiple organizational
units, company executives typically emphasize the necessity of cross-unit teamwork and cooperation and the
importance of frequent back-and-forth communication among key people in the various related organizational
units to resolve problems, avoid delays, and keep things moving along. The executives supervising the units
performing parts of the execution-critical task typically make it clear that the relevant department heads and
key personnel are all expected to work closely together and coordinate their actions. There are meetings to
discuss schedules and set deadlines, often ending with the verbal commitments of everyone involved to stick
close to the agreed-upon schedule, coordinate their activities, and meet the established deadlines. Gaining
such commitments is almost always imperative. Good execution requires that managers rely on colleagues in
other functional areas and organizational units for commitments to effectively collaborate and coordinate their
actions, and then they must hope that these other managers follow through and live up to their commitments.

Normally, the supervising executives follow up, check on progress, and, in many cases, visit the different units to
personally determine how well things are going and solicit
the views of many different people about what problems Getting managers of execution-critical activities
exist and what they think should be done to resolve them. to voluntarily but conscientiously live up to their
They seldom hesitate to intervene to make corrective promises and commitments to coordinate closely
adjustments and to reiterate their expectations of close with sister organizational unit turns out to be the
communication, effective collaboration, and teamwork to key factor in achieving good internal cross-unit
resolve issues, avoid delays, and achieve the needed degree coordination.
of cross-unit coordination. Such executive interventions,
together with added executive pressure on the managers of units where close collaboration and coordinated
action is lacking, may suffice. If it does, then all is well and good. But if such efforts fail, execution suffers, and
it becomes the responsibility of executives to determine the causes and take corrective action.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 241

In many instances, the chief cause of ineffective cross-unit coordination in building capabilities rests with
departmental-level managers and other key operating personnel who, for assorted reasons, don’t or won’t
spend the time and effort needed to partner with other organizational units in the capability-building process.
Indeed, in a recent study, managers reported that they were three times more likely to miss their performance
targets because of insufficient support from sister organizational units than from their own teams’ failure to
deliver.29 But it also has to be recognized that top-executive urging that departmental managers and their
staff voluntarily place high priority on coordinating their respective activities poses significant challenges in
achieving effective cross-unit coordination, even if senior executives threaten or actually decide to replace
managers who resist collaborative efforts or otherwise prove unreliable in effectively partnering with other
organizational units. This is especially true in decentralized organizational structures where department heads
are delegated a high degree of decision-making authority
in running their respective units and, thus, have a natural Getting managers of execution-critical activities to
tendency to place a lower priority on cooperating closely live up to their commitments to coordinate closely
with other organizational units than on ensuring that the with sister organizational unit is a key factor in
activities under their direct supervision are done well. The achieving good internal cross-unit coordination.
weakness of heavily depending on the largely voluntary
efforts and commitments of lower-level managers and key
personnel to build and strengthen important cross-unit competitive capabilities has prompted many companies
to supplement such efforts by forming cross-functional committees, project management teams, and centralized
project management offices to forge better cross-unit working relationships in developing capabilities that entail
the coordinated actions of multiple organizational units. These arrangements have proved helpful in a number of
organizations, but only about 20 percent of managers believe they work well most of the time—many managers
at the operating level express a need for more effective ways to manage cross-unit coordination that have teeth.30
A few companies have created incentive compensation systems where the payouts are tied to effective group
performance of cross-unit tasks.

Providing for Collaboration with External Partners and

Strategic Allies
Someone or some group must be authorized to collaborate as needed with each major outside constituency
involved in strategy execution. Forming alliances and cooperative relationships presents immediate opportunities
and opens the door to future possibilities, but nothing valuable is realized until the relationship grows, develops,
and blossoms. Unless top management sees that constructive organizational bridge-building with external
partners occurs and that productive working relationships
emerge, the value of partnerships and alliances is lost and the Organizational capabilities emerge from a process
company’s power to execute its strategy is weakened. For of consciously knitting together the efforts of
example, if distributor/dealer/franchisee relationships are different internal work groups and departments
important, someone must be assigned the task of nurturing with the efforts of external partners and strategic
the relationships with forward channel allies. If close
allies.
collaboration with key suppliers is crucial, then designated
people in the company’s supply chain organization
must be tasked with responsibility for (1) establishing routine communications with these key suppliers (via
telephone, e-mail, instant messaging, online teleconferencing, and face-to-face meetings), (2) making sure that
information flows freely both ways and in a timely manner, and (3) facilitating or personally coordinating all of
the company’s cooperative actions with these suppliers. Some companies have built organizational bridges with
external partners and strategic allies by appointing “relationship managers” with responsibility for getting the
right people together, promoting good rapport and information sharing, nurturing interpersonal cooperation and
communication, and ensuring effective coordination.31

Pervasive use of online systems, computers, and smart phones greatly facilitates collaboration, knocking down
many of the barriers to communication and coordination between different vertical ranks, between functions
and disciplines, between units in different geographic locations, and between a company and its suppliers,
distributors/dealers, strategic allies, and customers.

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 242

KEY POINTS
Executing strategy is an action-oriented, make-things-happen task that tests a manager’s ability to direct
organizational change, achieve continuous improvement in operations and business processes, create and nurture
a strategy-supportive culture, and consistently meet or beat performance targets.

Good strategy execution requires a team effort. All managers have strategy-executing responsibility in their areas
of authority, and all employees are active participants in the strategy execution process.

Eight managerial tasks crop up repeatedly in company efforts to execute strategy:

1. Staffing the organization and developing and/or strengthening the resources, capabilities, competencies,
and organizational structure to execute strategy successfully.

2. Allocating ample resources to those activities critical to successful strategy execution and the
achievement of financial and strategic objectives.

3. Ensuring that policies and procedures facilitate rather than impede strategy execution.

4. Adopting best practices and employing process management tools to drive continuous improvement in
how value chain activities are performed.

5. Installing information and operating systems that enable company personnel to better perform important
value chain activities and operate the business more proficiently.

6. Tying rewards and incentives directly to the achievement of strategic and financial performance targets.

7. Instilling and nurturing a corporate culture that promotes good strategy execution.

8. Exercising strong leadership to drive the execution process forward and attain companywide operating
excellence as rapidly as feasible.

The two best signs of good strategy execution are whether a company is meeting or beating its performance
targets and the proficiency with which it is able to perform strategy-critical value chain activities.

Building an organization capable of good strategy execution entails three types of organization-building actions:
(1) staffing the organization—assembling a talented, can-do management team, and recruiting and retaining
employees with the needed experience, technical skills, and intellectual capital; (2) acquiring, developing, and
strengthening the resources and capabilities important to good strategy execution—accumulating the necessary
resources, building competitively strong proficiencies in performing strategy-critical value chain activities,
and updating the company’s resources and capabilities to match changing market conditions and customer
expectations; and (3) structuring the organization and work effort—organizing value chain activities and
business processes and deciding how much decision-making authority to push down to lower-level managers
and frontline employees.

Sometimes a company already has some semblance of the needed resources and capabilities, in which case
managers can concentrate on strengthening and nurturing them to promote better strategy execution. More
usually, however, company managers have to acquire additional resources, significantly broaden or deepen
certain capabilities, or even add entirely new competencies or capabilities in order to put strategic initiatives in
place and execute all aspects of the strategy proficiently.

Building and developing capabilities internally is a time-consuming, managerially challenging exercise that
involves three stages: (1) developing the ability to do something, however imperfectly or inefficiently, by
selecting people with the requisite skills and experience, upgrading or expanding individual abilities as needed,
and then molding individuals’ efforts and work products into a collaborative group effort; (2) coordinating group

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 Chapter 10 • Building an Organization Capable of Good Strategy Execution 243

efforts to learn how to perform the activity consistently well and at an acceptable cost, thereby transforming
the ability into a tried-and-true competence or capability (a competence rises to the level of a core competence
if the activity involves a key element of the company’s strategy); and (3) continuing to polish and refine the
organization’s know-how and otherwise sharpen performance so it becomes better than rivals at performing the
activity, thus raising the core competence (or capability) to the rank of a distinctive competence (or competitively
superior capability) and opening an avenue to competitive advantage. Many companies manage to get through
stages 1 and 2 in performing a strategy-critical activity but comparatively few achieve sufficient proficiency in
performing strategy-critical activities to reach stage 3.

Sometimes the best way for a company to upgrade its portfolio of resources and capabilities is to forgo internal
efforts and, instead, acquire (or merge with) another company with resources and capabilities that give it added
competitive strength. Capabilities-motivated acquisitions are essential when (1) a market opportunity can slip by
faster than a needed capability can be created internally and (2) industry conditions, technology, or competitors
are moving at such a rapid clip that time is of the essence. A third way of accessing competitively valuable
resources and capabilities that the company lacks internally is to form collaborative partnerships with suppliers
or other companies that have the desired expertise or capabilities and use that partnership as a means of learning
the partner’s capability-building methods so it can adopt (or adapt) these methods to its own operations and put
the desired capability into place.

A company’s competencies and competitive capabilities must be continually refreshed and recalibrated to
remain aligned with changing customer expectations, ever-evolving competitive conditions, and a company’s
own strategic initiatives to outcompete rivals. Consequently, capability-building activities need to be a routine
and ongoing part of a company’s strategy execution effort.

Any time rivals can readily duplicate the successful features of a company’s product or quickly imitate its
maneuvers in the marketplace to attract more customers, making it difficult or impossible to out-strategize rivals
and beat them in the marketplace with a superior strategy, the only dependable path to durable competitive
advantage is to out-execute them (beat them by performing certain value chain activities in superior fashion).
Out-executing copycat rivals requires developing a collection of resources and capabilities that enables the
company to perform certain important value chain activities either with greater cost efficiency or with greater
differentiating effectiveness. Superior strategy execution can also take the form of faster internal ability to
recognize and respond to changing buyer needs and expectations, thus consistently beating rivals to the market
with new products and services.

Structuring the organization and organizing the work effort in a strategy-supportive fashion has five aspects:
(1) deciding which value chain activities to perform internally and which to outsource; (2) making internally
performed strategy-critical activities the main building blocks in the organization structure; (3) deciding how
much authority to centralize at the top and how much to delegate to down-the-line managers and employees; (4)
providing for internal cross-unit coordination and collaboration to build and strengthen internal competencies/
capabilities; and (5) providing for the necessary collaboration and coordination with external partners and
strategic allies.

Copyright © 2022 by Arthur A. Thompson. All rights reserved.

Reproduction and distribution of the contents are expressly prohibited without the author’s written permission.