Astrategic planning system should provide answers to two basic questions: what to do and how to do it. The first question refers to selection of a strategy; the second, to organizational arrangements. An organization must have not only a winning strategy to pursue but also a matching structure to facilitate its implementation. The emphasis in the preceding articles has been on strategy formulation. This article is devoted to building a viable organizational structure to administer the strategy. As we enter the next century, principles of strategic analysis and planning have been fully integrated into corporate decision making at all levels. Yet, although these precepts now enjoy global acceptance, the need to translate strategic guidelines into long-term results and adapt them to rapidly changing market conditions continues to rank among the major challenges confronting today’s companies. Essentially, there are three aspects of implementation that, if properly organized, can lead to superior corporate performance and competitive advantage: organization planning, management systems, and executive reward programs.

Fitting these aspects to the underlying strategy requires strategic reorganization. There is no magic formula to ensure successful reorganization and, generally, no “perfect” prototype to follow. Reorganization is a delicate process that above all requires a finely tuned management sense. The discussion in this article focuses on five dimensions: (a) the creation of market-responsive organizations, (b) the role of systems in implementing strategy, (c) executive reward systems, (d) leadership style (i.e., the establishment of an internal environment conducive to strategy implementation), and (e) the measurement of strategic performance (i.e., the development of a network of control and communication to monitor and evaluate progress in achieving strategic goals). In addition, the impact of strategic planning on marketing organization is studied.

THE TRADITIONAL ORGANIZATION

Corporations have traditionally been organized with a strong emphasis on pursuing and achieving established objectives. Such organizations adapt well to growing internal complexities and provide adequate incentive mechanisms and systems of accountability to support objectives. However, they fail to provide a congenial environment for strategic planning. For example, one of the organizational capabilities needed for strategic planning is that of modifying, or redefining, the objectives themselves so that the corporation is prepared to meet future competition. The traditional organizational structure, based on “command and control” principles, resists change, which is why a new type of structure is needed for strategic planning:

The forces shaping organization today are dramatically different from those facing Frederick Taylor and Alfred Sloan. End-use markets are fragmenting, requiring faster and more targeted responses. Advances in the ability to capture, manipulate, and transmit information electronically make it possible to distribute decision making (“command”) without losing “control.” Gone is the abundant, primarily male, bluecollar workforce. Workers today are better educated, in short supply, and demanding greater participation and variety in their jobs. Individually all these changes are dramatic; collectively they shape a new era in organization and strategy. Strategies are increasingly shifting from cost- and volumebased sources of competitive advantage to those focusing on increased value to the customer. Competitive strength is derived from the skills, speed, specificity, and service levels provided to customers. The Command and Control organization is under strain. Indeed, many businesses are finding that C&C principles now result in competitive disadvantage.

CREATING MARKET-RESPONSIVE ORGANIZATIONS

As markets and technologies change more and more rapidly, organizations must respond quickly and frequently to strategic moves if they are to sustain competitive advantage. Although corporations have learned to make changes in strategy quickly, their organizations may lack parallel market responsiveness. One major reason for this failure is the conflict between scale economics, which is geared to the expansion and aggregation of resources, and the economics of vertical integration, which links differentiated functions and resources for maximum efficiency in responding to market changes. The opposing pressures fueling this conflict are both subtle and complex. On one side of the equation are all the forces contributing to the need to reap maximum scale advantage. On the other side of the equation, the accelerated pace of change environmental, competitive, and technological drives corporations toward increased flexibility, high levels of internal integration, and smaller operating units.

Although scale advantage has traditionally held high ground, evidence is mounting that highly integrated organizations can increase productive capacity through the efficient coordination of functions and resources while remaining highly adaptive and market sensitive. Such organizations respond to the strategic need for change more quickly, smoothly, and successfully than centralized, largeunit organizations oriented toward scale aggregation. Management has basically three options for resolving the conflict between scale and integration. First, a company can choose to centralize its functions in order to achieve scale at the expense of market responsiveness. Second, it can opt for market responsiveness over scale; that is, it can emphasize small, independent units. Third, it can adopt another, more difficult approach, exploiting the strengths associated with both large and small organizational units to achieve benefits of scale and market responsiveness simultaneously. The key to sustainable competitive advantage lies in successful pursuit of the third alternative. Exploiting the benefits of both large and small organizational structures involves creating market-responsive units within a framework of shared resources.

Such units can combine the strengths of a small company (lean, entrepreneurial management; sharp focus on the business; immediacy of the relationship with the customer; dedication to growth; and action-oriented viewpoint) with those of the large company (extensive financial information and resources; availability of multiple technologies; recognition as an established business; people with diverse skills to draw on; and an intimate knowledge of markets and functions). The creation of such units demands that planners determine, as precisely as possible, in what form and to what degree resources must be integrated to ensure the level of market responsiveness dictated by their business strategy. This process can be successful only when it is undertaken in the context of a rigorous analytical framework that links strategy to organization.

Procedure for Creating a Market- Responsive Organization  To create a market-responsive organization, management can use a three-phase process: (a) determine corporate strategic boundaries, (b) balance the demands of scale and market responsiveness, and (c) organize for strategic effectiveness.

Determine Corporate Strategic Boundaries. How successfully a corporation aligns its structure with its strategic objectives depends on its success in making a number of key decisions: determining the stage of the value-added process at which it will compete, identifying those activities in which it has a competitive edge, selecting the functions it should execute internally, and developing a plan of action for integrating those functions most productively. These decisions determine how resources should be allocated and how external and internal boundaries should be drawn. They define the company’s business its products, services, customers, and markets and determine both long- and short-term strategic potential. How well the company exploits its assets and the degree to which each division’s performance supports strategic objectives determine how close it will come to achieving that potential.

How strategic boundary setting reflects the trade-offs between scale and integration becomes clearer when one considers the case of an assembler facing a typical make-or-buy decision for components. As long as the components manufacturer is able to produce common components for several customers, the assembler among them, the components manufacturer enjoys scale advantage. As the products ordered by the assembler become more specialized in response to market demands or increased competitive pressures, however, the benefits the components manufacturer gains from scale begin to decline. At the same time, the cost of integrating operations with those of the assembler increases as technical specifications become more complex and as manufacturing operations become more interdependent. To continue their relationship and sustain their respective advantages, the components manufacturer and the assembler are required to make additional investments: the components manufacturer in capital equipment outlays and product design; the assembler in negotiating terms, research and development planning, quality control, and related areas.

As a result, a substantial “disruption cost” is incurred if the components manufacturer and the assembler decide to end their business relationship. Both parties attempt to guard against this potential loss through longer-term contracts, whether explicit or implicit. As interdependence increases, prices and contract negotiations become cumbersome and unresponsive. At some point, the economies of scale may decline enough and the integration costs climb high enough that the assembler finds it more cost effective to produce components internally to bring that particular function inside the assembler’s corporate boundaries.

In this classic make-or-buy example, economic trade-offs between scale and integration costs are direct and relatively clear-cut. As we move from simple makeor- buy decisions to issues of full-scale vertical integration, the economic impact can be far more subtle and far-reaching. Scale advantage is not expressed solely in terms of lower unit manufacturing costs but may also flow from the critical mass of skills gained or from the transferability of new product or process technologies. Valuable integration benefits, on the other hand, may be gained from the willingness to undertake more profitable research and development investments because vertical integration ensures a “market” in downstream operations.