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Want to improve strategic execution?

Simons says levers


Norman T. Sheehan

Norman T. Sheehan is an any brilliant strategies fail due to poor execution. It is not sufficient to inform
Associate Professor at the
University of
Saskatchewan, Saskatoon,
M employees of the strategy and provide them with enough resources. To be
successful, managers need to provide guidance so that employees can make
decisions leading to implementation. This article outlines four execution levers that improve
Saskatchewan, Canada.
a firm’s strategic implementation capabilities when used in concert. The four levers work
together to align what the firm desires to achieve (its strategy) and what is actually done by
its employees (Simons, 2000) (see Figure 1). The levers are:
1. Diagnostic controls – key performance metrics based on the strategy. By adding targets
and rewarding their achievement, diagnostic controls become a powerful tool to
communicate strategy as well as motivate and hold employees accountable for their
actions. However, over-reliance on diagnostic controls may encourage dysfunctional
employee behaviour.
2. Boundary controls – guard against potentially deviant behaviour. Boundary Controls
clearly delineate which employee actions are not allowed.
3. Belief controls – appeal to employees’ emotional side while Diagnostic and Boundary
controls appeal to employees’ rational side. Getting employees to buy into what the
organization is trying to accomplish is a powerful, positive control tool.
4. Interactive controls – update the firm’s strategy in response to unforeseen environmental
disturbances. If companies are to win in the long term, they need to monitor and
proactively respond to threats and opportunities.

Diagnostic controls
Like doctors who run diagnostic tests to see if their patients are healthy, managers use
diagnostic controls to determine if their firms’ strategy implementation processes are
thriving (Simons, 2000). Measurement is a powerful tool because what gets measured
gets managed; and what gets managed, gets done (Anthony and Govindarajan, 2004). If
you want employees to implement the strategy, you need to measure the actions that lead
to its implementation (Kaplan and Norton, 1996). Managers can further reinforce this
dynamic by setting targets, outlining initiatives to reach them, paying bonuses when they
are reached, and following up when they are not. For example, Dow Chemical tracks
performance metrics in each of its 79 business units on a weekly basis and any shortfalls
are discussed each Monday morning. Dow believes that paying close attention to these
measures signals they are important and holds employees accountable (Mankins and
The author would like to thank Steele, 2005).
Ganesh Vaidyanathan and
Mark Klassen for their Managers can program their company for success (Simons, 2000) if they employ metrics
comments on earlier drafts of
this paper. that are:

PAGE 56 j JOURNAL OF BUSINESS STRATEGY j VOL. 27 NO. 6 2006, pp. 56-64, Q Emerald Group Publishing Limited, ISSN 0275-6668 DOI 10.1108/02756660610710364
Figure 1 Simons’ levers of controls

gy

B aligned with strategy – the metric supports a strategic objective;


B measurable – the metric can be quantified; and
B actionable – employees can influence the result.
Diagnostic controls are not only powerful tools; they also conserve management attention
because managers can focus their energies on investigating and correcting deviations to
the plan. However, there are several reasons diagnostic controls need to be used with care.
Just as the wrong diagnostic test can lead to prescribing the wrong cure, using the wrong
measures can have similarly disastrous effects on the firm. For example, General Mills
rewarded functional managers, such as purchasing and manufacturing managers, for
achieving cost cutting targets in their respective areas. In order to meet these aggressive
targets, the purchasing manager bought flimsy cardboard packaging which caused
manufacturing stoppages and increased cost. To avoid this, General Mills now uses a single
set of metrics for all functional areas (Gogoi, 2003). Measurement can also cause harm if the
metrics do not capture all salient aspects of performance. For example, in an effort to reduce
cost in the mid-1990s, Continental Airlines began to reward pilots based on their ability to
reduce fuel expenses. This appeared to be good idea, but it led to two unintended negative
side effects. To save fuel, some pilots refused to turn on the air conditioning, even if the
temperature inside the plane was unbearable. Perhaps worse, flying slower saved fuel but
caused many flights to arrive late, causing passengers to miss their connections.
Another problem area is having too few or too many measures. Managers need to balance
evidence from several metrics before acting. It is relatively easy to improve one measure by
neglecting other areas of performance. For example, managers may improve short-term
earnings by neglecting longer-term investments in training and research and development.
Too many measures are also an issue. Measures signal what is important, so firms reporting
300 measures may be sending conflicting signals to employees about what they should be
focusing on.
Even if the firm has the right number of the right measures, it may still experience unpleasant
side effects. Some employees may use undesirable or illegal means to achieve their targets
and bonuses, such as bribing suppliers, offering illegal discounts to some customers,
polluting the environment, obtaining proprietary secrets, or misrepresenting themselves to
stakeholders. For example, Sears’ Auto Repair shops changed their compensation system
in the early 1990s from fixed to incentive-based. In response, the auto technicians began to
undertake unnecessary repairs, and in a rush to complete the job often did not fix the

‘‘ Measurement is a powerful tool because what gets measured


gets managed; and what gets managed, gets done. ’’

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VOL. 27 NO. 6 2006 JOURNAL OF BUSINESS STRATEGY PAGE 57
‘‘ Managers need to balance evidence from several metrics
before acting. It is relatively easy to improve one measure by
neglecting other areas of performance. ’’

problem (Litzky et al., 2006). One way managers can guard against employees using
undesirable and/or illegal means to achieve their bonuses is to introduce boundary controls.

Boundary controls
Whether employees are chasing their bonus or acting maliciously, deviant employee
activities cost companies billions of dollars each year. To mitigate this risk and provide
stakeholders with assurance that the firm will behave responsibly, management needs to
clearly stake out the territory employees are allowed to operate in (Simons, 2000). The first
type of boundary control is an employee code of conduct that defines what behaviours may
place the firm in jeopardy and declares these off limits. Like the Ten Commandants,
boundary controls state the ‘‘thou shalt nots’’ such as bribing officials and accepting gifts
from suppliers. The more damage employees can cause through conscious or negligent
action, the more explicit and inclusive the boundary controls need to be.
In light of Enron and other corporate scandals, the New York Stock Exchange mandated that
NYSE listed firms have a code of business conduct and ethics. The NYSE recommends that
the code cover areas such as conflicts of interest, confidentiality, fair dealings with
stakeholders, compliance with local laws, personal use of company assets, protection for
whistle-blowers, accurate recordkeeping, etc. Unfortunately, codes of business conduct
and ethics do not provide a 100 percent protection against rogue employees. In reality, they
only provide a measure of protection if they are followed and enforced. In July 2000, Kenneth
Lay issued a revised Code of Ethics for Enron which explicitly outlined policies regarding
conflicts of interests and the penalties for violating the code. However, Enron’s code was not
effective in hindering their CFO, Andrew Fastow, and other managers from setting up and
profiting handsomely from various special purpose entities.
To heighten awareness and compliance, companies are undertaking the following initiatives
in connection with codes of ethics:
B Making the code visible in their annual reports, posting it to their website, and in their
offices.
B Sending the code to their suppliers, customers, and other key stakeholders.
B Providing training and then testing employees on their knowledge of the code. Integrity
Interactive, a software firm, will not allow employees to finish their training until they
achieve 100 percent on their ethics exam (Stone, 2004).
B Requiring that employees sign off on the code on a regular basis.
B Introducing a whistleblower hotline. Some firms have contracted with third parties, such
as accounting firms, to receive and investigate whistleblower claims.
B Establishing a senior management position solely responsible for compliance. As part of
their SEC settlement, Computer Associates hired Patrick Gnazzo to be their chief
compliance officer. Mr Gnazzo has a staff of 14, reports to the audit committee, and his
office can access anyone or any internal document in pursuit of its investigation. As of
April 2006, his office handled more than 100 cases and fired a significant number of
employees (Weber, 2006).
B Hiring an independent third party audit if employees have violated its code.
A second important boundary control is the firm’s mission statement. Mission statements
describe what customers the firm is targeting, what value they will provide to these

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customers, how they will create the value, and which geographical areas they will be serve.
A good mission statement sets clear boundaries around where managers should be
investing their time and company resources. For example, Microsoft has always stated they
are a software company and would never enter the hardware industry. Thus Microsoft is
signalling to employees that even if there are very profitable opportunities in the computer
hardware industry, employees should not use their time or Microsoft’s resources pursuing
these as it is contrary to their stated mission (Simons, 2000).
Given that it is impossible to have a formal set of rules to guide employees in every situation,
firms need a third lever, belief controls. To positively guide employee activity, managers not
only have to appeal to the minds of their employees, they also have to win their hearts.

Belief controls
Successful firms work hard to get employees to buy into what the organization is trying to
accomplish. Belief controls serve to inspire and keep employees ’’on message’’ while
undertaking their work; employees will do the right thing because they believe it is the right
thing to do. For this reason, firms formalize their beliefs as part of company credos,
statements of purpose, or core values and bring them to life by continually retelling stories of
exemplary acts, such as the FedEx person who had been given the wrong key. Rather than
renege on FedEx’s next day delivery promise he unbolted the drop box and brought it to the
station (Thompson et al., 2006). Another key tactic to maintain and build healthy beliefs is to
hire only those applicants who exhibit a strong fit with the company’s beliefs. Collins (2001)
argues that the most important job for senior management is to get the right people on the
bus and get the wrong people off the bus. In order to get the right people on the bus, one
software company used a unique applicant screening device. They asked potential
applicants to solve a software coding problem on-line. The CEO explained that ‘‘people who
really care take the test and love it. Other people say it’s hard. We don’t want those people’’
(Cardin, 1997, p. 56).
Perhaps the most important way to maintain beliefs is to have managers ‘‘talk the talk and
walk the walk’’. Employees tend to model themselves after senior management, which may
explain why Enron’s code was not an effective hindrance. While testifying at his trial, Kenneth
Lay, the former CEO of Enron, acknowledged he apparently had violated Enron’s code by
investing in a photo company which did a significant amount of business with Enron. In his
defence, he replied, ‘‘Rules are important, but you should not be a slave to rules, either’’
(Ahrens, 2006).
Recognizing and rewarding employees who exemplify the firm’s beliefs is another way to
reinforce their role and importance. One tip for diagnosing a firm’s beliefs is to look at who the
firm’s ‘‘stars’’ are. Are they considered stars because they live the firm’s beliefs? If not, the
firm needs to change its star system or its belief system.
While strong, healthy belief systems provide an implementation advantage, firms with strong
belief systems, like Sony, may struggle when they encounter discontinuous change. Sony
dominated the personal music player market in the 1980s and through most of the 1990s
with its Walkman. However, Apple’s iPod currently dominates the MP3 market with a 75
percent market share in the USA, while Sony’s newest MP3 Walkman, which was introduced
in spring 2006, is struggling to attain a 5 percent market share. If firms are to succeed in the
long term, managers need to monitor those strategic uncertainties which may invalidate the
very strategy they are implementing.

‘‘ The first type of boundary control is an employee code of


conduct that defines what behaviours may place the firm in
jeopardy and declares these off limits. ’’

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VOL. 27 NO. 6 2006 JOURNAL OF BUSINESS STRATEGY PAGE 59
‘‘ Employees tend to model themselves after senior
management, which may explain why Enron’s code was not an
effective hindrance. ’’

Interactive controls
Of the Fortune 100 firms listed in 1978, only one-third still existed in 2003. As with dinosaurs,
the main reason for firms becoming extinct is failing to adapt to large environmental
changes. In a longitudinal study, Sheth and Sisodia (2005) found that there are six external
‘‘bullets’’ which can kill good companies: changes in regulation, decreased investor
support, stronger competition, shifts in technology, increased globalization, and altered
customer tastes. While these six deadly factors threaten companies, they also present
significant opportunities. If companies can proactively identify environmental shifts and
update their strategies, then they may profit. Digital music technology presented a clear
threat to Sony’s cassette and CD-based Walkman, but it also gave Sony an opportunity to
design and market an MP3 player. Interactive controls allow companies to dodge threats
and take advantage of any profitable opportunities that may appear.
Interactive controls involve monitoring a small set of measures which are highly responsive
to changes in one or more of the six deadly factors. Today, many managers have dashboard
systems which allow them to monitor their firm’s performance in real time. Steve Ellison,
Oracle’s CEO, uses his dashboard to religiously monitor sales activity at the end of the
quarter, the ratio of sales divided by customer service requests, and the number of hours
technicians spend on the phone solving customer requests (Ante, 2006). However,
measuring, frequently reporting, and closely monitoring key metrics is not enough. For true
interactive control, managers need to interact; there have to be regular face-to-face
meetings with managers at different levels to get their input on what may be driving the
changes, and this discussion should lead to new strategies (Simons, 2000). Zenon
Environmental developed an innovative water treatment process, but its success was
dependent on its ability to lower its water treatment cost below that of its rivals. To
accomplish this, Zenon’s chief operating officer made the cost per gallon of water treated the
focus of its interactive control system. Employees were made aware of the metric and in
regular meetings with management they discussed and debated tactics to reduce the cost.
The metric impacted all of Zenon’s activities, including how employees collaborated and
dealt with suppliers (Wahl, 2004). Zenon’s senior management team can claim success, as it
was acquired by GE in May 2006 at a 60 percent premium above its stock price.

Bringing it all together


Successfully implementing strategy requires that managers employ all four Levers. Dick
Brown’s tenure at EDS provides an example where, despite doing an excellent job with three
of the levers, he ultimately lost his job because the fourth lever was lacking. EDS was
languishing when its Board hired Brown as CEO in 1999. Brown spent his first months
reviewing EDS’ operations before deciding that while EDS’ strategy was sound, its execution
was poor. In order to fully realize its potential, he changed EDS’ beliefs, re-organized the
boundaries, and altered their measurement and incentive system:
B Belief controls – EDS’ new beliefs were customer service excellence, with employees
accountable for and committed to outstanding performance, collaboration instead of
competition between units (Bossidy and Charan, 2002).
B Boundary controls – EDS re-issued its code of conduct and required all employees to
sign off on a yearly basis.
B Diagnostic controls – Prior to Brown’s arrival, EDS only reported on a monthly basis.
Brown felt this was unsatisfactory and began to monitor customer satisfaction and other

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key financial metrics on a daily basis. At monthly meetings, the CFO read aloud each
division’s numbers so everyone knew who was making their targets and who was not.
EDS’ managers quickly learned to be proactive as Brown frequently called out the weaker
performers. Brown revised the incentive system to reward collaboration between units
and made the performance-pay link very explicit.
Implementing the changes brought Brown great success; in the period from 1999-2001,
EDS had ten quarters of double digit year-over-year earnings per share growth and the stock
price increased by 62 percent. At the December 2001 Board meeting, each director got up
and personally congratulated Brown on his ability to deliver such phenomenal performance.
As a measure of its gratitude, the board also granted him a large bonus, making his total
2001 take home pay $55 million. In light of his success at EDS, Bossidy and Charan made
Brown a poster child for their best selling book, Execution: The Discipline of Getting Things
Done.
Unfortunately, Brown’s success was short-lived. Despite industry warnings of an impending
downturn in early 2002, Brown remained optimistic, stating ‘‘We’re the fastest horse on a
muddy track’’ (Park, 2003). In August 2002, Brown toured six cities, repeatedly telling
analysts that EDS would hit its third-quarter targets. However, in September 2002 EDS
issued a profit warning and the stock fell to 20 percent of its high. Brown blamed sluggish
markets, saying no one could have forecast the downturn (Dotcom Scoop, 2003). Belatedly,
Brown took action to improve EDS’ interactive capabilities, but it was too little, too late. By
March, 2003 EDS’ Board had lost confidence in Brown and he was let go. Brown’s demise
provides a lesson for all managers. In times of momentous change such as the period
following September 11, 2001, it is critical that firms have well-functioning interactive
controls if they are to safely weather the storm.
Firms that lack one of the other three levers will also struggle. Firms that have a
well-functioning belief, diagnostic, and interactive controls will have employees that are
motivated to succeed, know what they need to do, and have a good sense of what is coming.
However, if the firm lacks boundary controls, employees, in their desire to contribute, may
place the organization in jeopardy. WestJet successfully imitated Southwest Airline’s
strategy to become the second largest airline in Canada in just ten years. They have similar
beliefs to Southwest; they see themselves as underdogs, employees are treated very well,
the emphasis is on fun, and the firm is egalitarian. For example, the CEO of WestJet does not
have an assigned parking place and can often be found helping at the gate or cleaning the
plane after the passengers have departed. However, in the desire to beat its chief rival,
WestJet’s employees were apparently accessing a rival’s confidential web site to obtain
proprietary flight load information. The rival sued WestJet for $200 million, stating that
WestJet used the information to plan its flight schedule. In March 2006, WestJet issued a
Business Code of Ethics which forbids ‘‘corporate espionage actions, such as using
listening devices, gaining access to buildings by subterfuge, buying information from
competitors’ employees, hacking employee computer systems, and the like’’ (Jang, 2006).
Firms lacking a diagnostic system will also suffer. With strong belief and boundary controls,
but poor diagnostic controls, employees will be motivated to achieve, understand the
boundaries, but will not know what to do. Employees have a multitude of tasks and decisions
every day. Diagnostic controls send a clear message about what is important. Textron uses
its measurement process to signal priorities, which are based on its strategic plan. Each
priority area includes a measure, a target, and initiatives to improve the measure. Senior
management follows up on managers’ progress regularly. Lewis Campbell, Textron’s CEO,

‘‘ Belief controls serve to inspire and keep employees ‘on


message’ ’’

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‘‘ With strong belief and boundary controls, but poor diagnostic
controls, employees will be motivated to achieve, understand
the boundaries, but will not know what to do. ’’

states that the key objective of their diagnostic system is: ‘‘Everyone needs to know: ‘If I have
only one hour to work, here’s what I’m going to focus on.’’’ (Mankins and Steele, 2005, p. 7).
Firms that lack strong belief controls may struggle to inspire their employees. Even though
the firm may have strong boundary, diagnostic and interactive controls, it will lack energy
and in the longer term it may become difficult to hire and retain good people. An even more
threatening issue is firms that have competing beliefs, such as firms that consider
themselves marketing and manufacturing firms. These firms will struggle as employees
receive and send conflicting signals as to what the firm is attempting to achieve.
Not only do managers have to use all four Levers, they need to reinforce each other. Jeffrey
Immelt started his tenure as CEO of GE with a much stronger hand than Dick Brown. Immelt’s
main challenge was filling Jack Welch’s larger-than-life shoes. Immelt’s diagnosis was that
while GE had been very successful in the past, what made it successful would not keep it
there. His prescription for continued success was to change how GE achieved growth. In the
past, GE grew through deal-making and relentless cost cutting. Immelt aimed to achieve
growth through the introduction of new products and services to current and new customers.
He used the levers to effect his change in strategic direction and was ultimately successful
as changes in one area were reinforced in the other three (Brady, 2005):
B Belief controls – under Welch, Six Sigma was considered critical to GE’s success;
employees were awarded ‘‘belts’’ to signify their contribution to improving quality.
Employees rarely spent more than two years at a posting and mistakes were rarely
tolerated. Immelt changed GE’s beliefs to encourage risk taking and innovation; making
mistakes was tolerated. Immelt leaves managers in the same industry for a longer period
so they can gain industry knowledge and insights.
B Boundary controls – to reinforce the changes in beliefs, Immelt changed GE’s mission by
divesting holdings in staid industries like insurance and appliances and bought into high
growth industries like bioscience, cable, and film entertainment.
B Diagnostic controls – under Welch, the primary metrics were growth in the bottom-line
and share price. To support his changes, Immelt altered GE’s incentive system to
measure and reward improvements in customer service, cash flows, and revenue growth.
In particular, managers were rewarded if they came up with three innovative ideas each
year. The ideas needed to be in a new business area, either in terms of customers
targeted, geographical or value creation technology, and be able to generate at least
$100 million of growth.
B Interactive controls – under Welch, GE’s key interactive process was the ‘‘C Session’’
meetings where he personally evaluated managerial talent and signed off on promotions.
Welch felt his key job as CEO was to match best talent with the most promising
opportunities (Magretta, 2002). Under Immelt, the new interactive system is the
‘‘Commercial Council’’; executives meet monthly to debate and evaluate which innovation
ideas will enable GE to hit its growth targets.

Reaping the benefits


To encourage employees to make decisions leading to the successful implementation of
strategy, managers must achieve four related objectives (Simons, 2000):

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1. persuade employees to buy into the firm’s belief system;
2. define activities that may place their firm in jeopardy and declare these off-limits to
employees;
3. communicate strategy to employees by developing metrics, setting targets, and aligning
incentives; and
4. become personally involved in decisions relating to strategic threats and opportunities in
Keywords: order to shape the firm’s direction.
Management strategy, Achieving success across all four levers is a challenging task for managers. However, it
Business excellence, warrants their full attention as the penalty for failing can be large – firms may suffer from
Performance measures, underperformance, a loss of reputation due to employee misconduct, or even worse,
Control systems extinction. While not an easy task, the benefits far exceed the managerial effort required.

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Further reading
Simmons, A. (2002), The Story Factor: Inspiration, Influence, and Persuasion through the Art of
Storytelling, Perseus Publishing, Cambridge, MA.

About the author


Norman T. Sheehan, is an Associate Professor at the University of Saskatchewan. He holds a
PhD in strategy granted jointly by the Norwegian School of Management BI and
Copenhagen Business School. His research and teaching interests include strategy for
differing value creation logics, management control and execution, and management of
knowledge intensive firms. He can be contacted at: sheehan@commerce.usask.ca

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