Students

Chapter 8

Chapter Outlines

Implementation: Adaptation and Learning

A perfect strategy can be conceived and planned, but until it is put into action it is ultimately useless. This is where implementation plays a vital role for strategists; it is the physical process following the formulated strategy. This chapter examines the various nuances behind implementation, and explains how effective implementation can bring a strategy to fruition.

Billions Served

McDonalds' Homepage
McDonalds' History
Interactive timeline of McDonalds over the years

What Entrepreneurs can Learn from McDonalds
Michael Gerber reveals the secrets to McDonalds' success over the years

McDonalds is a great example of a firm that has had long term success due to good strategy and good strategy implementation. Despite being over 50 years old, McDonalds has continued to grow and adapt to its competitive environment, and has continued to demonstrate great potential for growth and profits. McDonalds has endured fierce competition, as well as some controversy over the years, but it has maintained its competitive advantage by remaining connected to its customer base. Customers and their satisfaction are the driving forces of competitive advantage, and McDonalds has always been able to attract customers and to keep those customers satisfied.

Implementation

The Process of Strategy Development and Implementation
Clayton M. Christensen and Tara Donovan's article documents strategy from the developmental stages to an end product

The Secret to Strategic Implementation
Virtual Strategist video guide to strategic implementation

Ryanair Strategy
Ryanair's strategy as explained on their own website

The McKinsey 7-S model Framework
Mindtool's detailed explanation of the 7-S model

Implementation is the structure created by and around the strategic plan. It is the sum of the infrastructure and actions that bring the strategy to life. Too often students, consultants, and managers overlook implementation, but it is an essential aspect of strategy. No strategy can be effective without solid implementation. Indeed, even the best strategies and plans will typically need to be changed or adapted, once the process of implementation begins. So implementation is also a process by which new strategy is created.

The concept of a strategy needing to fit its environment is applicable here as well. Just as strategy must fit the environment, so must it also fit the organization. In essence, the organization must be structured in accordance with needs and demands of the strategy. Thus, a strategy that works in one firm may be poorly fit to another. Ryanair's success in the European airline market is a direct result of its infrastructure fitting its strategy. However, that strategy would be less successful if adopted by other airlines, with different structures.

The McKinsey 7-S model depicts seven facets of an organization that are likely to affect performance. These seven facets are all connected, and good performance results when all seven work together. These facets are strategy, systems, skills, style, staff, structure, and shared values. While some will dismiss the model as overly simplistic, it is still a powerful tool for guiding strategic management. Indeed, conducting a full, detailed 7-S analysis can often be tedious, but the benefits can be well worth the effort. Constantly adjusting different aspects of the model within a business can help maintain growth and good performance.

Short Term Fit, Long Term Flexibility

Path Dependence
Stan J. Liebowitz and Stephen E. Margolis examine the theory of path dependence and its ramifications in the business world

Prospect Theory
Website containing various resources and articles concerning prospect theory

Camping on Seesaws
Bo L. T. Hedberg, Paul C. Nystrom, and William H. Starbuck's publication outlines their theories on balancing short and long term strategy with the use of Hedberg's six mechanisms

Even with tight fit among the facets in the 7-S model, there is no guarantee of long term success. This is because of the paradox of success born from the difficulty of balancing short and long term strategy. Resources invested in the short term could have greater long term costs, and long term strategies may require short term sacrifices; balancing the two is made especially difficult by an unpredictable environment. Complicating things is the principle of path dependence; once a strategy is chosen, it determines structure and practice, but if structure and practice are set, they determine future strategy, and so on. This can be a trap that managers can fall into quickly; by following the status quo, they could actually be setting themselves up for disaster in a changing environment. Because of this, firms that are older and more established in their ways suffer the curse of incumbency; they become inflexible relative to new firms and so become vulnerable to new competition. This principle is reinforced by something known as prospect theory. Prospect theory explains that gains and losses are seen differently by individual firms based on their unique reference points. A firm used to high profits is disappointed by modest profits, but a firm that has suffered poor performance is very pleased with modest performance. This effects what is seen as a worthwhile strategy by the firm. A firm with high profits will not be willing to invest a large amount of resources in a strategic change that only increases performance slightly, while to the poorly performing firm, this may be a key strategy in turning things around.

Hedberg, Nystrom and Starbuck offer advice on avoiding this paradox and on balancing short and long term investments. They conclude that investment in the short term should only be made as is necessary to maintain success and secure competitive advantage, but nothing over or beyond that is healthy in the longer term. Any other resources should be invested adaptation and learning. This helps firms avoid stagnation. Hedberg's six mechanisms: minimal consensus, minimal contentment, minimal affluence, minimal faith, minimal consistency, and minimal rationality (see chapter Three), also help to avoid stagnation.

Adaptation and Learning

Implementation then has two major facets: insure the creation of value in the present, and enable the sort of learning and adaptation necessary for the creation of value into the future. Without learning and adaptation, a presently successful firm will not be able to sustain that success when faced with the need for change. These aspects are often seen as too academic for managers to worry over, but in reality they are vital aspects of implementation, and the strategic process. It is through the implementation process that a firm gathers information to feed back into the strategic process.

Concluding Thoughts and Caveats

Understanding Dynamic Capabilities
Sidney G. Winter explains dynamic capabilities and their vital role for firms

The Promise and Peril of Real Options
Aswath Damodaran examines the pros and cons of real options for businesses

  • Because a competitive advantage produces value for its firm, competitive advantages themselves have a value. The harder they are to imitate or substitute, the more valuable they are. However, this can lead to managers getting caught up in the pursuit of a perfect resource to give them a highly valued, sustainable competitive advantage. However, managers should focus instead on where to go next when current advantages cease to be valuable. The ability of firms to move from advantage to advantage over time represents their dynamic capabilities. These are the firms' abilities in adapting to an ever changing environment. The focus then for managers should not be on the development of the perfect resource, but on developing dynamic capabilities.
  • Some firms may purchase an option on the future, such as a patent on technology still under development, with the hope that it will provide some form of value in the future while giving the firm time to evaluate and lean on the market. The potential value of these options actually represents real value for the firm. These are known as real options. The real options approach allows firms to invest modestly in many different areas and decide after further education which to discontinue and which to pursue fully.
  • NPV (Net Present Value) analysis is a powerful tool for managers in identifying the best ways to allocate resources. However, there is a subtle and inherit flaw in this approach. By discounting future opportunities, in relation to current opportunity costs, a firm biases itself against risky investments. This can support the tendency for managers to fall into the trap of simply reinforcing the status quo, which can breed stagnation.
  • Ultimately every firm should be viewed as a means to an end, not an end unto itself. Firms simply serve a purpose and that purpose is to create value, for the customers, the owners, and the other stakeholders. By focusing on value creation, for customers first and then for the other stakeholders, a firm strengthens its competitive advantage and makes itself more valuable. However, a firm that rests in its own accomplishments is doomed ultimately to failure.
Summary

Implementation is the physical application and conduct of strategy. Without proper implementation, a strategy is worthless. However, without firm structures and resources that are properly fit to the strategy, implementation cannot succeed. In addition to carrying out strategy, it is through the process of implementation that firms can gather valuable information from the front lines to filter back into the ongoing strategic process.

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Key Terms

Curse of incumbency

The term used to describe a group of factors affecting large and established firms. Because of things like size, bureaucracy, and established practices, such firms can be rather inflexible and slow in responding to pressure or seizing emerging opportunities.

Filtering

A cognitive process by which individuals organize and attend to information from the environment. Because no one can gather and interpret all the available information, they attend selectively to particular issues, filtering out what is thought to be irrelevant and internalizing that which is thought to be significant.

Framing

Involves the categorization of complex issues under simple and discrete labels for the purpose of easing communication and decision making. Two common examples of frames used by managers are opportunity and threat.

Inertia

In organizations refers to the tendency for established strategies, practices, and routines to be repeated over and again, such that forces for change are mitigated and the organization continues, reliably, to move in the same direction and to function in much the same way.

Path dependence

Analogous to the simple principle that history matters to the present. More formally, though, it suggests that current decisions and economic conditions are at least partly constrained and affected by the sequence of decisions and events that preceded them.

Problemistic searching

The tendency for people to look for solutions only once problems have been identified, rather than searching continuously for opportunities to improve.

Prospect theory

Developed by Kahneman and Tversky (1979), prospect theory deals with decision making under conditions of uncertainty or risk. Its basic premise is that the starting condition, or reference point, of a decision maker influences the valuation of the potential outcomes.

Satisficing

A common occurrence in decision making and is the tendency to accept adequate solutions, rather than to continue searching for solutions that could in fact be optimal.

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