Studying this chapter should provide you with the knowledge to:
- Describe how the 7 S model can be used to determine the level of alignment within a company and between the company and its environment.
- Evaluate a strategic change effort and explain the underlying reasons why the effort succeeded or failed.
- Discuss how creating effective line-of-sight measures can assist managers in the strategy implementation process.
Google’s stock has always been a high flyer. Since the company went public in the summer of 2004 until the close of 2016, its shares generated a total return of 1,440%, a 23.4% compound annual growth rate.1 Even for a company with such strong share price appreciation, the gains surrounding the announcement on July 16, 2015, of Google’s second quarter earnings stand out. During the next two trading days, Google’s shares rose a little more than 20%, a gain not seen since the earliest days of Google as a public com- pany. On that July day, Google announced solid, but not spectacu- lar, revenue growth of 11% (year over year), and earnings of $6.99
per share, which topped expectations of $6.75.2 Investors liked top line and bottom line growth, but what lit a fire under the shares was buried in the mid-section of the income statement: Google’s newfound ability to control costs.3 Cost control had never been a high priority at Google; however, with its search business maturing, a system that kept costs in line would only become more valuable. The person behind that system was new CFO Ruth Porat.
Porat, the daughter of a Stanford physics professor and a psycholo- gist, had been taught to aim high her entire life. Her academic pedi- gree lists degrees from Stanford, Wharton, and the London School of Economics. She went to work for Morgan Stanley and rose to become the CFO in 2010, where she would earn the moniker “the most powerful woman on Wall Street.”
What did Porat bring to Google? First, a wealth of experience in helping tech companies deal with the financial world, based on her experiences as the lead banker on the IPOs of tech startups Amazon, eBay, Netscape, and Priceline. Second, a deep knowledge of accounting, finance, and investor relations—and how to drive finan- cial change—in a large company environment. Third, she brought the cachet of a seasoned Wall Street veteran, including a stint advis- ing the US Treasury department during the financial crisis.4
In hiring Porat, Google CEO Larry Page outlined her role: “We’re tremendously fortunate to have found such a creative, experienced, and operationally strong executive. I look forward
to learning from Ruth as we continue to innovate in our core— from search and ads, to Android, Chrome, and YouTube—as well as invest in a thoughtful, disciplined way in our next generation of big bets.”5 Google had become two businesses: a revenue- and
profit-producing search business and a set of revenue- and profit- consuming businesses, including projects such as a self-driving car and wearable “Google glasses” that would allow users a unique Internet experience. Google executives hoped that Porat could help the company balance the need for fiscal discipline in the core while investing prudently in new and exciting product categories.
Less than a month after issuing its earnings report, Google restructured the company. Announced as “G is for Google,” Google unveiled a new corporate parent, Alphabet, that would act as an umbrella for all of Google’s varied businesses, from Android to the X lab, home of many moonshot products.6 Each unit of Alphabet would report its own financial performance,
which pleased investors hungry for more transparency in the company’s investment strategy. Investors drove up Google’s shares another 4% on the day of the announcement. Alphabet aimed to improve performance in another way: By separating business units that had different strategic imperatives, Alphabet hoped to create strategic ambidexterity across business units.7 Mature businesses, such as Search and YouTube, would need to focus on current business performance and had to be managed by a different set of rules than the “big bets” about which Page spoke. Revenues and costs mattered in the core, but the logic of potential and investment would determine which of the big bets paid off in future growth.
Google’s activities during the spring and summer of 2015, and investors’ positive reaction, highlight the reality that how a company delivers its unique value—our third fundamental question of strategy—contributes to its ability to earn superior returns. From July to December 2015, Google (Alphabet) shares appreciated 44%, but the company introduced no new products of note, nor did it acquire another company that fueled growth. The company created shareholder value by acquiring the human capital it needed to manage in the rapidly changing world of technology, and because it aligned its organization and processes with the emerging demands of its strategy. Put simply, Google’s executive team focused on strategy implementation, which proved to be just as valuable as strategy for- mulation. A primary objective of this chapter is to introduce you to three important skills strategists must possess if they hope to implement strategies: forging alignment between the key elements of the organization and its strategy, leading effective change to accom- plish that alignment, and creating measurement systems to refine the strategy and ensure its implementation.
At one level, implementation is about action, or execution. The successful execution of a strategy requires a process that translates broad strategic objectives into clearly definable, everyday actions that make the strategy real, and then creates systems where people take those actions. Executive Larry Bossidy learned how to execute strategy working for General Electric’s CEO Jack Welch. Bossidy ran GE’s capital division and guided that business through a flurry of acquisitions. He then went on to successfully run Allied Signal and eventually Honeywell. Bossidy was known for his ability to execute. His recipe for execution—outlined in his book The Discipline of Getting Things Done—involves four steps: (1) create a set of clear goals for people to follow; (2) find ways to accurately measure performance; (3) hold people accountable for their performance; and (4) richly reward those who perform well.8
Ruth Porat came to Google with a clear objective for change: help Google, now Alphabet, control costs in a world where search became a mature business and to provide greater transparency to Wall Street. The way she executed on those goals, at least in the early stages, centered around the firm’s accounting and financial reporting systems—the essence of mea- surable performance in any organization. With clear budget targets and rules for managing the different business units that make up Alphabet, Porat and other executives could hold individual managers accountable for business performance. Finally, Google had always rewarded high performers, and Porat’s own compensation package proved that Alphabet would continue to reward those who executed well.9
Many strategies fail because people in organizations just don’t execute well. The strategy doesn’t translate into a clear set of measurable goals and, for whatever reason, people either don’t have to answer for their actions or receive no rewards, or punishments, for excellent, or poor, performance.
Alignment: The 7 S Model
Execution matters, but as you saw in the opening case, effective implementation requires forg- ing alignment among the external environment, the strategy, and the internal elements of the firm. Most strategy researchers focus on strategy formulation, what you’ve spent most of this course learning about. Little attention typically gets paid to implementation, as it seems to be a matter of execution.10 Implementation is as much a matter of alignment as it is of execution. Alignment means that the important elements of the organization are in the proper relation- ship with each other—which means they fit well together and reinforce each other. In an aligned organization all the elements support the strategy. This raises the question: which elements?
A strategist can answer this question in many different ways. The authors’ experience with the 7 S model of organizational alignment leads us to recommend this model. Introduced by consultants at McKinsey and Company in the early 1980s, the model provides a broad yet suc- cinct way to capture the key strategic elements of an organization.11 The model identifies seven important organizational elements that must be aligned in order to ensure effective implemen- tation of the firm’s strategy. The seven Ss are strategy, structure, systems, staffing, skills, style, and shared values.12 Figure 12.1 displays each S.
Strategy is the plan, process, and related activities that create and sustain a competitive advantage for a firm in its target markets. Strategy represents the most important S. The ulti- mate goal of any organization is excellent performance, whether it is a business, government, or not-for-profit. Strategy enables an organization to perform well by guiding resource alloca- tion decisions that result in competitive advantage. Google’s original strategy focused on creat- ing software to facilitate Internet searches, and moved into related applications such as Google Maps and Gmail. Google’s strategy shifted over time to include hardware as well as software with investments in activities and products such as a self-driving vehicle.
Structure answers two critical questions for an organization: Who does what? Who reports to whom? Structure divides labor and tasks within the organization into separate units and, by doing so, defines the reporting or authority structure of the firm. This is important because it assigns accountability for particular tasks and allows for the measurement of performance by a particular organizational unit. Managers can use structure to help align goals, skills, and envi- ronmental needs.13
If you want to understand an organization’s structure, look at its organization chart. The horizontal boxes that run across the page describe the division of labor. For example, a company might have vice presidents for geographic regions, with functional managers for
alignment A condition where organizational elements fit together and reinforce each other.
strategy The plan or process that creates and sustains a competitive advantage for a firm.
structure The set of organizational arrangements that divide labor and tasks. Structure also defines reporting or authority relationships.
FIGURE 12.1 The 7 S Model
Strategy in Practice
How to Use the 7 S Model to looking at how other companies have solved these prob- lems. There is no need for an executive team to reinvent the
The 7 S model represents a tool that can guide effective strategy wheel in terms of compensation, for example. Benchmarking
implementation for the organization as a whole, as well as for its other companies, or divisions within their own company, pro- divisions, groups, or departments. To use this tool most effectively, vides a starting point from which companies can customize follow these five steps: their own solutions.
- Identify the current state of the organization and misalignments. 4. Understand how the proposed change affects other elements Appendix A at the end of the book provides a list of resources in the model. How will changes in one S affect others? For that consultants and managers can use to understand the example, moving a sales force from pure commission to a current 7 S model. For managers, interviews and surveys will salary structure represents a huge change in what motivates be powerful tools. Consultants or other outsiders will rely on the staff.22 How will the company attract and retain a sales force a mix of interviews and other sources. The goal is to create an to fit the new pay scheme? What new skills will existing sales- “as it is today” picture of the 7 Ss in the company. people need to learn? Where will the new system conflict with
- Rank order misalignments based on the importance of mis- shared values? It’s rarely the change of compensation alone
alignment with strategy. When step one is done well, man- that dooms the program, it’s the pushback from the other Ss.
agers will see a number of misalignments, both within the 7 Ss 5. Adjust plans accordingly. After managers see the effort to cre- themselves and between the different elements in the model. ate realignment within the entire model, they need to adjust It’s easy to get frustrated or feel overwhelmed! Managers their plans. In the previous example, changing the compensa- need to ask, “Which misalignments keep us from reaching our tion system may need to follow skill training for the existing strategic goals? Which ones dissipate rather than build com- sales force. Work on new hiring and retention plans may need petitive advantages?” This question will cull the list of mis- to happen at the same time, and the new system may precede alignments down to the few that really need to be changed. and signal a change in shared values. In any case, managers
- Develop plans to create alignment. While some of the misalign- come to understand that piecemeal changes rarely create
ments will be company specific (particularly those that involve alignment; a more complex and sophisticated approach is the soft square), managers and consultants should be open usually necessary.
each of those regions. This regional structure presumes that the important differences in the firm’s market depend on geography and the strategy is best served by tailoring operations to each region.
Alternatively, a company may organize by function and have a vice president of marketing, vice president of operations, vice president of finance and accounting, and so on. The next level down might include titles such as director of marketing or western regional director. With the formation of Alphabet, a holding company, Google moved from a functional structure to one that created separate business units that were focused on particular technologies or product markets. The restructuring offered better transparency about operating performance, but it also increased focus on the demands of each market.
Companies may also want to structure using one of two Ms: a matrix structure or an M-form corporation. In a matrix structure, firms give significant decision-making authority, and the responsibility for profits and losses, to two managers. The most common matrix structure shares responsibility between a functional manager (e.g., marketing or sales) and product managers (e.g., laptop computers). The matrix builds on the assumption that both strong functional expertise and nuanced product knowledge play vital roles in creating competitive advantage. The matrix makes life more complicated for managers and employees, but the structure hopes to create more value by combining expertise in decision making.
The M-form is a corporate-level structure, and it builds on the idea of a corporate par- ent and business unit children. M-form stands for multidivisional form. In this structure, each division is a separate business, and includes all the functions needed to run that business. Managers of M-form organizations can structure their business units in different ways; some may be functional, others product, and still others a matrix. The M-form creates substantial
redundancy across the corporation (think of 20 separate accounting groups). The advantage of the M-form lies in accountability. Because managers of an M-form run their own business, their successes and their failures can be traced back to their decisions. No one can claim that “corporate made me do it,” or use other excuses.
The systems category describes key processes that span a firm’s organizational structure. Systems play two important roles: They coordinate and control work of the different units within the organization.14 Information systems such as inventory control allow sales people in the field to know which products are in stock, and which products are overstocked. At the same time, the inventory control system lets the manufacturing division plan its production schedule based on those same stock levels. Finally, information about which products are selling will help the accounting and finance department create accurate profit and loss reports, and they’ll help the firm’s managers decide which products and services to add or drop from the firm’s offerings. Part of Google’s logic in bringing Ruth Porat in from Morgan Stanley lay in her knowledge about how to create and implement sophisticated financial control systems.
Staffing refers to the human resource management processes in the organization: recruitment, hiring, training, deployment, performance measurement, promotion, and compensation. Some companies recruit only at elite universities, while others target public universities, job fairs, or websites such as Monster.com. Each model has its own advantages and drawbacks, depending on the skills and personality types companies want to attract. Companies such as Marriott require managers to engage in training every year, but other hotel chains expect peo- ple to learn on the job. Finally, some companies promote from within, while others tend to hire from the outside.
Ruth Porat represented a very high-profile outside hire for Google. She lacked skills and knowledge in the technology sector, but she brought a unique set of valuable skills that Google needed to continue to grow profitably.
Skills refer to the abilities of individuals within the firm, as well as how the firm has com- bined those individual talents to build capabilities (processes), to create a competitive advantage. The relationship between skills and staffing is shown as companies either hire people who have the skills they need or develop workers in-house through training. Google, for example, considers itself primarily a software company, and if you want to get hired you’d better have outstanding software engineering skills. In fact, Google screens 20,000 software engineers each year through a software-programming tournament called Google Code Jam.16
Software engineers compete with each other in a timed software-coding tournament, and the top 50 get job offers at Google. Apple also wants employees with strong software engineering skills. However, because Apple creates hardware products, it also values design skills because the company believes design is critical to its competitive advantage. In running its retail business, Apple had to look far beyond its traditional skill sets to find the right executive. The company hired Angela Ahrendts to run its retail operation. Ahrendts had been the CEO of fashion firm Burberry and had very few of Apple’s traditional skills in hardware, software, or technology.17 Skills, such as staffing, involve long-term investments by firms to make sure they have the right employees who will help the company gain com- petitive advantage.
systems Mechanisms, policies, or processes that coordinate and control the work of the different units of the organization.
staffing The processes in the organization for recruiting, hiring, training, and deploying human capital.
skills The abilities of individuals, groups, or organizations to perform tasks.
Ethics and Strategy
Creating an Ethical Climate and Culture Through change. McNerney chose an interesting place to begin the cultural
the 7 S Model change: He relied on his personal style and what he referred to as “tone at the top.”
James McNerney became CEO of Boeing, one of the world’s largest Rather than holding the annual executive retreat at a posh aerospace companies in July 2005, capping a long and successful resort, McNerney held a shorter retreat at a modest hotel. McNerney executive career that began after he received his MBA from Harvard spoke directly and forcefully about the ethics lapses, and he Business School in 1975. His career included stints at Procter & encouraged managers throughout the company to do the same. Gamble and McKinsey and Company, 19 years at General Electric, The culture of secrecy had to be changed. McNerney chided leaders and a term as chairman and CEO of 3M. McNerney came to Boeing for a culture and environment where “‘management had gotten as the company was trying to emerge from three major ethics crises. carried away with itself,’ that too many executives had become In March of 2005, Boeing fired then CEO Henry Stonecipher for used to ‘hiding in the bureaucracy,’ that the company had failed having an illicit affair with a female Boeing executive.18 Stonecipher to ‘develop the best leadership.’”19 Before Boeing could solve the had become CEO to replace Phillip Condit, who had his own check- problems, the company had to admit that problems existed and ered career as Boeing’s CEO. Troubles at the top weren’t the only determine the extent of unethical behavior. McNerney used his problems Boeing faced. After its acquisition of McDonnell Douglas, position and personal style to model the open communication and
Boeing began to compete more fiercely, and less ethically, for huge concern for ethics he expected throughout the company.
defense contracts. Boeing’s former Chief Financial Officer Michael Style mattered, but McNerney used other elements of the Sears and Manager Darleen Druyun were fired from the company 7 S model as well. The company also changed its structure. for ethics violations on an $18 billion fighter jet contract; Sears Boeing raised the profile of compliance officers and set up an ethics served prison time for his crimes. That scandal followed revelations hotline so that employees could report violations without fear of that a Boeing employee stole and inappropriately disclosed more management reprisal. The company required ethics training for than 25,000 pages of confidential documents belonging to compet- employees, which meant changes in its staffing protocols and itor Lockheed Martin. skill development programs. Importantly, McNerney changed the McNerney saw his first and most important job as building an compensation system for Boeing’s managers; it now paid to make ethical culture at Boeing, and he had his work cut out for him. With the ethical choice. Managers would now receive part of their annual more than 150,000 employees, global operations, and infighting bonus based on compliance with ethics standards and for living, between divisions resulting from Boeing’s acquisition of McDonnell teaching, and displaying the core Boeing values of candor, open-
Douglas, Boeing was a large, bureaucratic behemoth resistant to ness, business performance, and ethical conduct.
style The interpersonal relationships and patterns of interaction that organizational members consider appropriate and legitimate.
shared values The priorities, values, and virtues that members of the organization see as important.
superordinate goals High- level, abstract goals that all stakeholders agree on to guide organizational action.
Style refers to the interpersonal relationships between people in the organization and, along with shared values, comprises the culture of the organization. Style generally falls into one of two categories: formal or informal. In most German companies, for example, people usually dress up for work and refer to each other as Mr. or Ms., and respect each other’s work environ- ment by keeping office doors closed. Many Silicon Valley start-ups, by contrast, find people showing up to work in shorts, T-shirts, and flip-flops, call each other by first names or nick- names, and work in large, open spaces to maximize interactions. We suspect that Ruth Porat experienced classic “culture shock” when she moved from the buttoned-down style of New York’s Morgan Stanley to the casual style of Silicon Valley.
Shared values refer to the priorities, values, and virtues that members of the organization see as important. Some people use the term superordinate goals, a set of high-level goals that all stakeholders agree on, to capture the same thing as shared values. For example, Nordstrom strives to create shared values by focusing on respect for the individual and extraordinary cus- tomer service. One way that Nordstrom works to create these shared values is by sharing sto- ries with its associates and managers that provide examples of the behavior they want to encourage—such as the story of an employee accepting a customer’s returned tires when Nordstrom doesn’t even sell tires. The shared values of respect for the individual and extraordi- nary customer service are both values and overarching goals for the company and representa- tive of the organizational aspect of the culture.
Strategy in Practice
How to Develop a Mission Statement most loved by our customers). A good mission focuses on only one
or two goals for each important stakeholder group.
A strong mission statement begins with the answers to three ques- What values and principles guide us? Here’s where a mission tions that leaders ask: really connects with shared values, and where a mission helps What business are we in? Defining the business means more an organization talk about the foundational layer of its Company than identifying the industry the firm competes in, or the products/ Diamond. Consultant Patrick Lencioni talks about three types services it sells. It begins by listing the primary stakeholder groups of values every company has. Every company has two to three the firm cares about (customers, employees, investors, etc.), and core values that everyone believes, such as the value of customer then asking what specific stakeholder needs are met by the com- connection, exciting innovation, or disciplined investing and cost pany. In other words, what job is to be done for that stakeholder? control. Companies also have aspirational values, or what they Finally, leaders articulate how that job is done, whether it is through want to be in the future. Aspirational values may include building a products, services, after-sales support, brand, or some other busi- better community or society, or providing development opportuni- ness asset or activity. ties for employees. Finally, every company has permission-to-play What do we want to achieve? The answer to this question values, things like honest interactions, respect, punctuality, or hard should not be too focused, such as “our mission is to grow earnings work. People without these values don’t stick around long, whether
per share by 15% each year.” That goal works fine for a year, but they be investors, employees, suppliers, or even customers.21 might not be sustainable over time. A better goal might be “we work The answers to these three questions provide the basic inputs to create sustained growth in shareholder value.” Good mission from which a mission statement, or a vision and values statement, statements may focus on outcomes (e.g., market share, growth), will be written. The exact wording will be unique to each company, processes (innovation, quality, speed, etc.), or a particular feeling but including this foundational content helps a mission statement they hope to evoke (such as premiere brand, best place to work, become a sustainable, living document for the organization.
The 7 S model deals with ethical values as well as other business priorities. Our Ethics and Strategy feature describes how one leader, James McNerney of Boeing, used the 7 S model to realign the ethical values at his company.
Many companies choose to make their shared values explicit in a mission statement, or a statement of vision and values. These documents have been maligned by critics, and a mission statement can be a waste of time if organizational leaders do not live by the mission or values. When done well, however, a mission statement provides a long-term, high-level guide to corporate action. As leaders learn to “walk the talk” of their mission, vision, and values, these documents become powerful summaries of the company’s shared values and superordi- nate goals. Surveys indicate that more than half of executives used the mission development process in 2015 as a core element of strategy development.20 Our Strategy in Practice feature describes how a company (or an individual) can develop a mission statement.
If you look back to Figure 12.1, you’ll notice that strategy, structure, and systems form a triangle, and that style, shared values, staffing, and skills form a soft square. This is no accident. Strategy, structure, and systems constitute the hard triangle of the model. The hard triangle represents a set of “hard” levers that managers can quickly pull to create alignment, or realign- ment. Hard doesn’t refer to difficulty, but, rather, tangibility. Structure appears on paper, strategy in a formal plan or document, and systems in policy manuals, computer programs, or equipment.
The other four represent the soft square, the elements that are often difficult to codify, such as style, or that take a long time to influence and change, such as shared values. Strate- gists can change structure in a day, strategy in a week, or systems in a quarter. That doesn’t mean the organization practices the new strategy, works well in the new structure, or actually uses the new systems. How well those changes actually work depends on what happens in the soft Ss. Changing the organization’s skill set can take several months. Changing the style or shared values may take decades. See the Strategy in Practice for a discussion about how man- agers can use the 7 S model to implement change.
Figures 12.2 and 12.3 illustrate the concept of creating alignment. Notice that each figure has two Ss in addition to the 7 Ss of the core model: Stakeholders and Situation. Stakeholders
hard triangle The elements of strategy, structure, and systems in the 7 S model. The hard triangle represents a set of “hard” levers that managers can quickly pull to create alignment or realignment.
soft square The elements of style, staffing, skills, and shared values. Soft square elements are often difficult to codify and usually take a long time to influence
FIGURE 12.2 Misalignment
FIGURE 12.3 Alignment
are those individuals and groups who affect, and are affected by, the firm and its activities. When stakeholder needs or preferences change, the firm may find itself out of alignment. The Situation describes the market and industry environment, social and technological trends, government regulations, or any other element outside the firm where change will affect align- ment. It is important to remember that a firm may have solid internal alignment, and yet be out of alignment with the situation or stakeholders. When the organization finds itself out of align- ment, it must change something in order to get back to alignment. That involves the second important process of implementation: strategic change.
In this section, we’ll explain how managers effectively lead strategic change to move their organizations forward. We’ll also discuss how the tools of strategic change apply to individuals, since the most important firm we all manage is one called “Me, Inc.” Managers who can’t lead change, in their own or their organization’s lives, find it difficult to thrive, and even survive, in a world of turbulent change.
The first time an entrepreneur sets a strategy to create unique value for customers in a particular market, she aligns the organization with that strategy. At every other point in a company’s history, a change in strategy requires realigning the organization with the new direction. Realigning strategy entails changing the other six Ss, and that’s not an easy thing to do. Recent evidence puts the failure rate for organizational change at 60 percent to 70 percent,
and that percentage has not changed for several decades.23 Change seems to be even harder for individuals. One study found that, out of a group of people who had experienced coronary artery bypass surgery to save their lives, 90 percent failed to change their lifestyle to avoid a repeat of the trauma.24 Part of the problem is that individuals and leaders don’t realize that change is a process with three distinct phases.
The Three Phases of Change
Most of us think of change as the need to start doing something new, whether that’s eating healthier or, in the case of an organization, focusing on a new market segment, such as Google’s Project X. What most don’t realize, however, is that effective change requires moving through three stages of a well-defined process. We must first stop the activity, or set of activities, we want to change, then adopt new behaviors, and finally ingrain those new behaviors into our routines. Pioneering social psychologist Kurt Lewin used ice as a metaphor for change, and his three-step model of change is outlined in Figure 12.4.25
Unfreezing Unfreezing begins the change process as individuals and groups within the organization recognize and publicly admit that the current situation is not working. Unfreezing entails moving away from certain actions, policies, or strategies before adopting anything new. When individuals, groups, or companies make a “stop doing” list, they have begun the process of unfreezing.26 The process of unfreezing provides the fundamental motivation for change.
Changing The change process is how a company adapts to its environment and learns new behaviors, and is the most difficult part of the process. Most individuals resist change because of our innate desire to be good at what we do. Change means that we’ll adopt new behaviors we’re not good at, and very few people enjoy that feeling. In addition, few organiza- tions encourage or reward their people to leave a zone of competence and try new behaviors. Successful change efforts must overcome these barriers. Change means moving from one set of behaviors and activities to another.
Refreezing Have you ever gone on a diet? For longer than a couple of weeks? Well, com- panies are like people in that they can adopt almost any new behavior for a short period of time. To make change permanent, individuals and companies have to do the hard work of aligning the rest of their activities to support the change. They have to refreeze around the new activity set. Successful companies embed the desired changes in hiring and training decisions, reward and compensation systems, and the shared values of the company’s culture. Refreezing allows organizations to maintain the progress they made through change.
The three phases of change provide a broad overview of the process, but real-world strat- egists want to know how they can unfreeze their organization, encourage productive change,
unfreezing The first step in organizational change. It begins when leaders recognize and publicly admit that the current situation is not producing acceptable or adequate results.
change process The middle step in organizational change that a company engages in to adapt to its environment and learn new behaviors.
refreeze The last phase of organizational change. This step involves formalizing and
institutionalizing new behaviors, methods, processes, or routines.
• Make a public admission that current state isn’t working
• Make a clear break with past actions or processes
• Develop new behaviors
• Engage in trial-and- error process
• Creating alignment
• Embed new behaviors in training, compensation, culture
FIGURE 12.4 Three Key Phases of Change
and then refreeze the gains and move ahead. Each of the three larger phases of change contains discrete elements that help managers lead their organizations and people through the difficult process of change. Eight discrete tasks must be accomplished for change to succeed.
The Eight Steps to Successful Change
Strategic changes, such as implementing a major shift in strategy, don’t happen overnight. In fact, these changes can take many years, and even up to a decade to successfully implement.27 The eight key tasks are:
- Generate a sense of urgency
- Build a guiding coalition
- Create a vision
- Communicate the vision
- Empower individuals to act
- Garner short-term wins
- Consolidate gains and move on for more change
- Institutionalize the change
guiding coalition A group of influential people from all levels in the organization that support and lead the change effort.
Generate Urgency People and organizations won’t change without a reason. In fact, organizations have been designed to ensure stability and that the same regular processes will happen over and over again. Those processes and activities eventually fail to work effec- tively, usually because they fail to align with changes in the market or operating environment. Managers must work to help their teams and organizations see the need for change. That means looking at larger environmental trends, spending time with customers, suppliers, employees, or stakeholders to gather data, and then creating a compelling case that will help people see, understand, and also feel the need to change. Our Strategy in Practice feature describes a com- pelling story of generating urgency.
Build a Coalition Effective change requires that many people see and feel the urgency, and those with the power to change the organization grasp the sense of urgency and actively work to create change. Managers tasked with leading change need to create a guiding coalition, a group of influential people from all levels in the organization who work to lead the change
Strategy in Practice
Work Gloves Create Change28 [We] put them in our boardroom one day. Then we invited all the division presidents to come visit the room.
A middle-level manager at a large, multiplant company had been What they saw was a large, expensive table, normally clean
assigned to cut costs by consolidating the company’s purchasing or with few papers, now stacked high with gloves. Each process. The manager identified several areas where costs could be of our executives stared at this display for a minute. Then reduced by about $1 billion, but no one took his analysis seriously. each said something like, “We really buy all these different To get the attention of the key decision makers in the organization, kinds of gloves?” “Well, as a matter of fact we do.” . . . It’s a this manager identified a single product—work gloves—that he rare event when these people don’t have anything to say. thought would highlight the purchasing problem. But that day, they just stood with their mouths open.29
The manager discovered that the company was purchasing
more than 400 different brands of work gloves. One plant would pay Needless to say, the manager received a mandate from top
$5 for a pair of gloves and another plant would pay $17 for the same management to move ahead with his changes to purchasing. He pair of gloves, but a different brand or from a different supplier. To had created urgency so that decision makers could see, feel, and make his case of wasteful purchasing, the manager bought 424 dif- understand the real impact of the problem. Once they saw and felt ferent pairs of gloves, and tagged each pair with the price each fac- the need for change, top managers lent their energy and support to tory paid for it. He reported what happened next: the change effort.
effort. Some members come from top management, but most will not. All members have power within their own work groups, either as formal managers or directors, or informally having earned the respect, admiration, and ears of their peers.30
Create a Vision A meaningful vision is a clear statement of where the organization wants to go, and what life will be like when the change has been successful. Urgency helps prepare people to move, and the coalition provides examples to follow. However, without a clear vision of where they are going, people are either unable to move or they move in many different direc- tions all at once.
Perhaps the best example of a clear and compelling vision came from President John F. Kennedy in response to the urgency generated when the Soviet Union placed a man in orbit in the spring of 1961. Kennedy created this vision:
I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the Earth. No single
space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish.31
The first three tasks—generating an urgency, building a coalition, and creating a vision— help the organization unfreeze. A sense of urgency and the development of a coalition signal an unmistakable admission that past actions won’t work in the future. A vision creates a clear break with the past and is an exciting call to move forward. When done well, these first steps usually take 6 to 18 months for managers to work through.32 The next three tasks—communicating the vision, empowering action, and garnering short-term wins—help organizational members alter their behaviors and work patterns and create the change.
Communicate the Vision How do most companies communicate their vision? Many managers don’t communicate that vision clearly enough or often enough. They might commu- nicate through a memo or a post on the company’s intranet site. If the change is considered central to a larger group within the organization, they might create a video and distribute it throughout the company.
How did Kennedy’s stirring vision get communicated? First, his speech was recorded on video and played over and over again on the nightly news programs. Kennedy used every emerging technology and platform to share his vision. The administration made sure the text of his speech was picked up and reprinted by hundreds of newspapers. Simply put, Kennedy’s vision took hold because it was communicated through a variety of channels, and repeated over and over again. Managers who successfully lead change overcommunicate their vision. They keep repeating the message even after they are sure most people have heard it.33
Empower Action A paradox exists in most organizations, from business firms to univer- sity classrooms. Leaders and managers want creative behavior and new solutions, but many organizational cultures and systems punish creative behavior or new solutions that don’t work. For example, many performance reviews reward successful actions by employees, but fail to reward innovations and experimentation that doesn’t succeed.34
Empowering people to act certainly means giving them authority to try new practices, but it also means giving them the knowledge and resources they need to engage in new practices. Empowerment also means providing a safety net for people should they fail, and a system in place to learn from those failures. For example, Google has built in a number of mechanisms to promote innovation, including Google cafes where employees can meet to share ideas, direct email access to company leaders, and its policy of allowing engineers to spend 20 percent of their work week on projects that interest them.35
Garner Short-Term Wins Many people inside the organization may be supportive or even excited about the change, but they may be unwilling to commit their own time, energy, and resources until they see evidence that the change will produce positive results. Wise man- agers begin with projects that require the least change and have a high probability of success.
vision A clear statement of desired outcomes and endpoints for organizational change.
empowerment A grant of authority, formal or informal, that allows organizational members to try new practices. Empowerment includes giving members the knowledge and resources they need to engage in new practices successfully. It also includes a safety net for people should they fail.
institutionalize When an organizational element or practice becomes so essential that its value is taken for granted.
The manager in our previous Strategy in Practice feature began by solving a small problem, consolidating the purchase of work gloves. Work gloves alone wouldn’t save the company more than $1 billion, but solving the work gloves problem would show those waiting to commit to the change that their efforts would likely succeed. Short-term wins create both credibility and momentum that encourages key organizational members to get off the fence and work to make the change successful.36
The three tasks that accomplish the bulk of the change, communicating the vision, empowering action, and creating short-term wins, can take one to two years.37 Managers can begin communicating early and often, and employees can be easily empowered; however, fol- lowing through to make communication and empowerment effective tools of change requires sustained effort. Short-term wins should come quickly because they are, after all, short term. The task of pressing ahead, tackling the tough challenges, and reaping the real rewards of change takes patient and persistent effort.
Consolidate Gains and Press On Many organizations would stop after solving the work gloves problem because they might mistakenly believe that solving the surface symptoms of a problem is the same as solving the root cause. The clever manager might be honored at a company dinner and given a nice bonus, and people would assume the change effort was complete. What would remain would be the tough, hidden, and unglamorous purchasing prob- lems that would really save the company a great deal of money. If a company stops after cre- ating a few high-profile wins and fails to press ahead to work on the deeply rooted behaviors, policies, and practices that must change for a true realignment to occur, much of the value of the change effort will have been wasted. This is the least glamorous and longest task of suc- cessful change, but the one that truly prepares the organization to refreeze. The challenging projects help the organization embed the change deeply in its operating routines and represent an important part of making change stick, or refreezing.
Institutionalize Change To institutionalize something is to make it so essential that it is taken for granted and becomes part of the central values of the culture.38 Managers institutionalize changes primarily through three of the 7 Ss: systems, staffing, and shared values. Change becomes permanent when the routines of sales methods, accounting proce- dures, or operating processes embody the new set of behaviors and activities. Compensation systems that reward the new behaviors further ingrain the notion that the change represents “the new way things are done around here.” In terms of staffing, change becomes institution- alized as the firm looks for, hires, and retrains a new type of employee. Recruiting and ongoing training reinforce changes as a new generation of employees sets the standard for behavior.
Finally, strategic changes always alter the shared values of the organization.39 Google’s hiring of Ruth Porat represented a shift in shared values as well as style and skills. Porat brought a set of “corporate America” values to Google about the importance of understanding and communicating with the public how each business unit was performing. Porat will also help make cost control a new shared value at the Silicon Valley giant. Institutionalizing the change takes the longest of all the stages and can take an additional four to seven years before the old ways are forgotten. The bottom line for managers is that successful strategic change takes substantial and sustained energy, commitment, and attention. Managers should keep in mind that others in the organization need the time, resources, and energy to go through their own change. Change takes time because people have to learn new skills and ways of acting, but also new mindsets and ways of seeing the world.40
Figure 12.5 summarizes effective strategic change. You can see how the eight tasks relate to the three phases of change, and how long each phase may take. Strategic change takes a long time and a dedicated effort by strategic managers who are trying to enact change while dealing with day-to-day issues of running their firms. How do they maintain a focus on the overall change project? One way is to set up solid measurement systems to assess the degree to which efforts help the firm align its internal resources around its strategy.41 Setting up robust and effective measurement systems will be the final topic we consider in this chapter.
The Silent Phase (Unfreezing)
The Active Phase (Change)
FIGURE 12.5 Summarizing the Change Process
Completion (Refreezing) 4-7 years
Given that strategic change and realignment takes such a long time to successfully imple- ment, strategic managers need a way to effectively measure their organization’s progress. In fact, measurement represents a general need for assessing whether any strategy, new or exist- ing, works. As you learned in Chapter 3, strategies often depend on the complex combination of a firm’s underlying values, its resource base, capabilities, and the actions and activities of large numbers of individuals and groups. Those complex internal interactions all take place in markets and industry contexts characterized by constant, sometimes radical, change. Effective measurement becomes an essential element of solid strategy implementation.
Individual employees, managers, and the executives who run the firm face a challenge that measurement helps overcome. That challenge arises because members of an organization have limited perspective.42 Employees and managers see clearly those activities and elements of the environment with which they most closely interact. Salespeople can see the organization from a customer’s perspective but have a hard time accepting the perspective of manufac- turing managers or research scientists. All people see things that are further away less clearly, both in terms of distance but also organizational level, and time horizon. Similarly, it’s easier for employees or managers to see what needs to be done to improve short-term performance, but they rarely have the perspective, or incentive, to act in ways that further the long-term interests of the firm. An effective measurement system helps everyone, from top management to front-line employees, understand how their daily work contributes to strategic success. The principle of line of sight helps managers create measurement systems to overcome the limited perspectives of individual organizational members.
Line of Sight
Put yourselves in the shoes of the following division manager. It’s 9:15 a.m. on Monday morn- ing. You arrived late at your office, delayed by a nasty freeway accident. Your 9:30 a.m. meet- ing is a critical new product design decision meeting. The company’s development team and supplier partners have cleared their busy schedules to help you make the final decision on an important new product. Before you head into the meeting, you quickly check your messages. You received one text from a high-level, important employee expressing deep dissatisfaction over his bonus. He’s threatening to quit on the spot unless he meets with you this morning.
As you scroll down your text messages, you see that your division’s largest customer texted two hours earlier, very angry about a delayed critical shipment. As you open your office door, the director of operations informs you that a power outage last night has left a large quantity of perishable product beginning to spoil. Moving the product will require your direct intervention to find/arrange a suitable costly cold-storage facility. The question is NOT what should you do, for you should do all of them. The relevant question is, what do you do first?
principle of line of sight The notion that individual members in an organization should be able to connect their daily work and tasks to the overall strategic goals of the organization.
The idea behind line of sight is to answer those questions quickly and effectively. Each of these demands in our fictitious case is urgent—if you don’t act immediately, you’ll lose out on the design project, the skill of an important employee, a valuable customer, or profit since product spoiled. If you have a very clear idea of the company’s overall strategy, and understand your role in furthering that strategy, you would have the tools to help decide which of the many urgent tasks is the most important. If the company strategy revolves around some vague notion of creating shareholder value or increasing earnings, then you have little direction. If, however, the strategy is clear and explicit about creating value through low cost, a customer-centric differentiation, or bold product innovation, then you have more guidance and you can make a better decision.
Line of sight links day-to-day organizational behaviors and decisions to their impact on the overall strategy.43 For example, if the company’s strategy relies on relentless low-cost pro- duction and control, then you should postpone the meeting, leave the customer and employee in limbo, and spend time preserving the product. In contrast, a clearly customer-centric focus tells you to call the customer first. Finally, you can see that a clear strategy of winning through innovation means the design meeting will take place as scheduled or the employee will be con- tacted if he contributes important innovation skills to the team.
The line of sight principle recognizes that grand strategies don’t just happen, they come to fruition only as individual managers and employees make decisions about how to allocate the valuable resources they control.44 The ability to formulate a clear and direct strategy, our goal throughout this book, provides the point of reference to establish line of sight. The next step in creating a line of sight involves translating the overall strategy into a set of specific objectives for divisions or large work groups. Line of sight tells manufacturing managers whether quality comes before costs. With a clear line of sight, marketing and sales staff know which customers to focus on, how deeply to discount prices to win deals, and what levels of personal attention and service each account should receive. Line of sight helps human resource professionals design compensation systems to encourage and reward those behaviors that actually create strategic value. Our final Strategy in Practice feature outlines the steps individuals and managers can use to develop line of sight systems and create measures to know when they are effectively implementing strategy.
Strategy in Practice
Creating Line of Sight Measures Step 3: At the work group level, what specific activities do we perform that use and strengthen these resources? A large
Turning the principle of line of sight into useful measures requires part of the daily work in most organizations keeps the
individuals and managers to determine which of their actions con- doors open, pays bills, and makes sales, but does little tribute to realizing a strategy and which activities to do first. To cre- to develop and enhance strategic capabilities. The key ate a clear line of sight, move sequentially through the following for work groups, as for higher levels, is to sort through steps. As you can see, these steps build on the company diamond the daily activity set and sort activities that really need introduced in Chapter 3. to come first. Work group tasks can then be subdivided
Step 1: Begin with the end in mind. What’s most important? This is into individual tasks. Individuals should be able to see the the time to list the abstract and broad goals and objectives chain that connects their personal work with the compa- the company cares about. Is it the creation of shareholder ny’s strategy.
value? Cutting-edge innovation? World-class customer ser- Step 4: Determine which single measure captures the way the
vice, or a great place to work? Answers to these questions work should be done. Take a call center as an example. can be found in the company’s mission statement. Many call centers are seen as cost centers for providing
Step 2: Identify the tangible strategy that reaches that objective. For customer support and help lines. A common metric most example, does the company intend to create shareholder employees understand is to get the customer off the line as
value through a premium price (the top line of the income quickly as possible so they can handle the greatest number
statement), or through cost leadership (the mid-section of calls per shift. This works well if the strategy is cost lead- and balance sheet)? Each of those larger strategic positions ership, but not if the strategy is differentiation and a key requires a company to align and combine its resources to resource is brand.
achieve meaningful differentiation or low cost. For division Getting customers off the phone quickly does little to build
or functional managers, which resources and capabilities brand, and may harm it as customers see the company as uninter- are under my direct control? How does my division or func- ested in after-sales support. If brand matters, then the line of sight tion help the company implement its strategy? This estab- measure is the number of problems resolved, and the number of lishes the line of sight for this level of the organization. satisfied customers per shift.
Strategy and Your Career
How to Use Line of Sight to Advance Your Career Once you have identified the three or four critical activities,
make sure these get attention every day you are at work. You will
The main idea behind the line of sight concept is to create a find yourself on the road to improved performance and you’ll be strong link between an individual’s behavior and organizational more valuable to your organization. They’ll pay you more, promote goals. You can use line of sight to help you find and advance in you, and work to keep you employed.
your first posting, as well as to manage your long-term career. As you think about your career, use the Personal Diamond The line of sight principle, along with the Personal Diamond you model to identify your personal competitive advantages, and the developed in Chapter 3, can contribute to your personal competi- resources and capabilities you have, or ones you need to develop, tive advantage. in order to grow and sustain that competitive advantage. Make a As you look for jobs, and when you land that first position, list of the key personal activities you need to engage in to deepen make a line of sight map that connects you with the company. your own resource-base. This will probably include your work tasks, When most people begin working, they are overwhelmed with the but it may suggest other projects or jobs you ought to consider day-to-day work they have been assigned to do. It’s easy to lose within your current organization to enhance your skills. This list focus on which tasks are most important and focus on those tasks will almost certainly include activities that occur outside of work, that are most urgent. A line of sight map will help you avoid this or outside your current organization. This may be spending time problem and be more productive. You should identify the com- learning spreadsheet or data analytics skills, or it may involve vol-
pany’s competitive advantages and key resources (a Company Dia- unteering at a local non-profit.
mond will prove quite helpful here). Then ask, what activities in my When you identify these activities, make a plan to engage division (and eventually work group) contribute to that competitive in them every week, month, or quarter. These activities, when advantage? Which activities build and strengthen resources and engaged in consistently over time, will strengthen your personal capabilities? The next step is easy: What activities should you focus resources and capabilities in ways that are most important to you. on to contribute to competitive advantage, or to deepen the firm’s As time passes, you’ll find yourself qualified for your “dream jobs,” resources and capabilities? the ones that allow you to leverage your strengths and grow.
Measurement marks the last of the three primary tools of strategy implementation. Measurement systems such as the balanced scorecard45 can serve as an early warning sign for misalignments among the 7 Ss or between the firm and its environment. Figure 12.6 shows you the elements of a balanced scorecard a firm can use. Measurement can help managers monitor progress toward strategic objectives and also help them manage the process of change and realignment. Tools such as line of sight help managers decide where, when, and how much to allocate resources to different activities. The most important resource they allocate will be their own time.
balanced scorecard A tool that measures four broad areas of organizational performance: financial results, customer goals, internal business processes, and learning and growth.
FIGURE 12.6 Elements of a Balanced Scorecard
Source: Adapted from R. S. Kaplan and D. P. Norton, The Balanced Scorecard (Cambridge: HBS Press, 1996).
• This chapter introduced you to the challenges of implementing strategy, or moving it from a grand design to a set of day-to-day activities that actually create competitive advantage. Sometimes implementation is simply a matter of execution. There are four steps to consider when execution is the issue:
- Create a set of clear goals for people to follow
- Find ways to accurately measure performance
- Hold people accountable for their performance
- Reward those who perform well
• Effective implementation relies on three key processes: the ability to forge alignment among the different elements of the organiza- tion, the capacity to lead strategic change over a long period of time, and the creation of a set of measures and assessments that monitor performance and help suggest changes.
• The 7 S model provides a powerful way to think about how organiza- tions can create alignment. The 7 Ss are:
- Strategy—the organization’s plan for creating competitive advantage.
- Structure—the set of organizational arrangements that divide labor and tasks. Structure also defines reporting or authority relationships.
- Systems—mechanisms, policies, or processes that coordinate and control work of the different units of the organization.
- Staffing—the human resource management processes in the organization for recruiting, hiring, training, and deploying human capital.
- Skills—the abilities of individuals, groups, or organizations to per- form tasks.
- Style—the interpersonal relationships and patterns of inter- action that organizational members consider appropriate and legitimate.
- Shared values—the priorities, values, and virtues that members of the organization see as important.
• At a high level, organizational change involves three phases:
- Unfreezing—when leaders recognize and publicly admit that the current situation is not producing acceptable or adequate results.
- Change—the middle step in organizational change that a company engages in to adapt to its environment and learn new behaviors.
- Refreezing—this step involves formalizing and institutionalizing new behaviors, methods, processes, or routines.
• When implementing change, managers should use principles such as line of sight and measurement tools such as the balanced scorecard to help individuals understand their role in the change process.
balanced scorecard 229
change process 223
guiding coalition 224
hard triangle 221
principle of line of sight 227 refreeze 223
shared values 220
soft square 221
superordinate goals 220
- When using the 7 S model to create alignment, why do managers need to make sure all the Ss align with the organization’s strategy? What problems follow misalignment?
- What tools do managers have to realign the hard triangle? The soft square?
- Is it true that the “soft stuff is the hard stuff” in creating alignment? Why or why not?
- If change projects seem to stall and fail to progress, which of the eight steps of successful change have not received enough attention?
- What does it mean to institutionalize change? How long will this pro- cess take? Why?
- Define line of sight. List three examples from your own career or educational experience where the principle of line of sight helped you make a better decision.
Exercise 1: Applying the 7 S framework.
- Select a company you would like to work for. Using the 7 S model and the framework provided in this chapter as a template, audit that company. Describe each S for the company and determine the degrees of alignment among the Ss. Make suggestions as to how the company can improve its level of alignment.
Exercise 2: Understanding change.
- Think about two change efforts you have been a part of, one that succeeded and one that did not. What did success mean? Use
the three-step model of change and the eight key tasks of change management to identify key differences between the successful and failed efforts. What lessons would help you initiate and guide change in your career?
Exercise 3: Personalizing your line of sight.
- Create your own line of sight measure. Are you doing the most important things to move your strategy forward? Which activities con- tribute most, and what measures tell you how you are doing on those activities? Use the eight tasks of change management to help you iden- tify a plan to improve your effectiveness.
1Data about Google (and Alphabet) share prices available at https://www.google.com/finance/historical?q=NASDAQ:GOOG, accessed March 1, 2017.
2A. Bylund, “Why Google, Inc. Stock Soared 22% in July,” Motley Fool, August 5, 2015, https://www.fool.com/investing/general/2015/08
/05/why-google-inc-stock-soared-22-in-july.aspx, accessed February 27, 2017.
4Information about Ruth Porat taken from Jillian D’Onfro, “The Incred- ible Rise of Ruth Porat, CFO at One of the Most Valuable Companies in the World,” Business Insider, August 17, 2016, http://www.businessinsider
-in-1957-1, accessed March 1, 2017, and Maggie McGrath, “Google Lures CFO Ruth Porat from Morgan Stanley,” Forbes, March 24, 2015, https://www.forbes.com/sites/maggiemcgrath/2015/03/24/google
-poaches-ruth-porat-from-morgan-stanley/#3c360fcd56e7, accessed March 1, 2017.
5McGrath, op cit.
6H. Kelley, “Meet Google Alphabet—Google’s New Parent Company,” CNNTech, August 11, 2015, http://money.cnn.com/2015/08/10/technology
/alphabet-google/, accessed March 1, 2017.
7M. Reeves, “Google Couldn’t Survive with One Strategy,” Harvard Business Review, August 18, 2015, https://hbr.org/2015/08/google
-couldnt-survive-with-one-strategy, accessed March 1, 2017.
8L. Bossidy, R. Charan, and C. Burck, Execution: The Discipline of Getting Things Done (New York: Crown Business, 2002).
9M. J. Moore and B. Womack, “Google to Pay New CFO Ruth Porat More Than $70 Million,” Bloomberg Technology, March 26, 2015, https:// www.bloomberg.com/news/articles/2015-03-26/google-agrees
-to-pay-new-cfo-ruth-porat-70-million-by-2016, accessed March 7, 2017.
10C. H. Noble, “The Eclectic Roots of Strategy Implementation Research,”
Journal of Business Research 45 (2) (June 1999): 119–134.
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