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Source : SAP
Operational Excellence: The New Lever for Profitability and Competitive Advantage
Operational Excellence is also known as :
Operational Excellence,
Focus on Operational Excellence,
Operational Excellence Philosophy of Leadership,
Operational Excellence Definition,
Culture of Operational Excellence,
Operational Excellence Tools,
Operational Excellence Lean Enterprise,
Operational Excellence Section,
Overview Page for Operational Excellence,
Operational Excellence Using Lean,
Measure and Improve IT Performance,
Operational Excellence Using Lean Six Sigma,
Operational Excellence Means,
Optimising Operational Costs,
Operational Excellence Solutions,
Incentives and Operational Excellence,
Practical Opex Programs,
Operational Excellence Starts with Policies,
Operational Excellence Free Manufacturing Intelligence,
Successful Operational Excellence,
Innovation with Operational Excellence,
Striving for Operational Excellence,
Commitment to Operational Excellence,
Best Practices for Operational Excellence,
Operational Excellence in Accounts Payable,
Achieve Operational Excellence,
Operational Excellence Project Leadership,
Capture Operational Excellence,
Operational Excellence Enabling.
Foreword
We are pleased to welcome this important study on linking operational excellence to
strategy execution. The work integrates the strategy execution expertise of Palladium with
the technology-enabled operational discipline of SAP. The study shows how operational
excellence is a critical and necessary component for successful strategy implementation.
The survey of 101 enterprises reinforces the conceptual framework introduced in the
study: companies that build and align their operational capabilities for strategic advantage earn
a distinct execution premium in their business performance. The paper provides
valuable evidence about the benefits of achieving aligned operational excellence.
Introduction
Better. Faster. Cheaper. Every organization is grappling with these concepts today as
economic uncertainty spreads around the globe. Instead of pursuing ambitious expansion
plans, many organizations are focusing their efforts on short-term results. They are trying
to identify what can be trimmed or eliminated in their operations to protect their profit
margin or simply survive in the global marketplace
But the current economy also offers a unique opportunity for businesses to transform
their operations into an instrument of strategic competitive advantage. We observe that
leading organizations are redoubling their efforts to find new ways to execute with greater
efficiency and effectiveness to achieve operational excellence without sacrificing the value
their customers expect
In the fall of 2008, prompted by emergent new thinking on business network transformations,
innovative management processes, and powerful, next-generation technology, Palladium
Group embarked on a multistage research project. Our goal: to explore operational excellence
with a fresh eye, repositioning the concept within the new context of linking strategy and
operations. We initiated this research to show chief operating officers and key senior
executives how to respond quickly to the near-term pressure to reduce costs without losing
their ability to take advantage of future growth opportunities. As our research confirmed,
cost efficiencies are the main source of profitability for companies, while improving the
customer experience is the primary source of revenue growth. Certainly, achieving shortterm
survival is essential. But establishing a foundation for repeating these kinds of operational
successes, while preserving the ability to pursue longer-term strategic objectives, is
key to sustaining superior operational performance and competitiveness
In this paper we provide a brief overview of a six-stage model for building an operational
strategy management system as described by Drs. Kaplan & Norton in their new book
The Execution Premium. You will learn how the strategy management system extends into
operational management and decision making by leveraging three key components: people,
processes, and technology.
Our research also involved surveying 101 organizations representing a wide range of
industries in order to explore the relationship between their management practices and
the performance results they have achieved. Among our most important findings: IT, if
aligned well with strategy, plays a very significant role in determining the ultimate chance of
execution success. Integrated, end-to-end software solutions, together with operations
governed by robust strategy management systems, constitute a proven method by which
organizations and their entire business networks can achieve the Execution Premium
As Jeffrey Liker has shown in his book The Toyota Way, "Toyota has turned operational
excellence into a strategic weapon." It is our hope that, by absorbing the insights from this
white paper, you will have a much clearer understanding as to how you can quickly enable
your organization to achieve operational excellence and reach new levels of profitability
and competitive advantage now.
Linking Strategy And Operations
Survey after survey shows that business leaders are increasingly recognizing the paramount
importance of strategy execution. According to the Conference Board's 2007 CEO
Challenge, "execution excellence" has surpassed profit and top-line growth as a focus for
CEOs around the world. This recognition comes in the wake of numerous other studies
over the past two decades demonstrating the widespread failure of organizations to execute
strategy, from the two seminal Fortune articles that revealed that 90% of organizations
failed to execute strategy,1 to Profit from the Core author Chris Zook's finding that only
12% of companies successfully execute their strategy.2 The public sector suffers the same
failure rates, according to a recent Barron's survey that found that only 15% of federal
government programs executed their strategies as intended.
But those who don't merely recognize the importance of strategy execution, but act on
it, get results. A 2006 Palladium Group survey of 143 organizations showed that of the
more than half the respondents that were using a formal strategy execution management
process, nearly 75% were outperforming their peer group. Among those without such a
formal process, 75% were underperforming, or at most, matching the average performance
of their peers.
Executing strategy depends on a number of factors, perhaps most important, its effective
integration with operations. As Balanced Scorecard creators Robert Kaplan and David
Norton noted.
A visionary strategy that is not linked to excellent operational and governance
processes cannot be implemented. Conversely, operational excellence may lower
costs, improve quality, and reduce process and lead times; but without a strategy's
vision and guidance, a company is not likely to enjoy sustainable success from its
operational improvements alone...
Companies generally fail at implementing a strategy or managing operations
because they lack an overarching management system to integrate and align
these two vital processes.
Alignment between all the moving parts is crucial from sharing a common understanding
of the strategy and its goals to relying on an integrated model to design, measure, and
monitor performance of day-to-day activities and strategic initiatives alike. Alignment
of people, processes, and technology helps the organization optimize resources, opportunities,
and performance. It enables the whole to create value that exceeds the sum of
its parts
All three components must be well established, and well connected, in order to
achieve the following:
- Ensure alignment between strategy and operations through the use of "strategic themes"
- Transform existing processes (or introduce missing processes) by selecting the appropriate process transformation tools
- Engage operational excellence "theme" teams
- Optimize strategic decision making
Most experts concur: alignment is vital to successful, sustainable strategy execution.
Alignment requires having a management process that integrates activities across traditional
functional lines, along with information systems that enable and promote alignment. It
depends on transparency.
This suggests that organizations today need a broader definition of operational excellence,
one that takes into account operations' integral tie to strategy, one that considers strategy
management itself as a process warranting performance excellence. And because we
know that high-performing organizations review, refresh, and adapt strategy continuously,
as the environment changes whether, for example, due to internal innovation or a
shifting competitive landscape so must operations have a built-in capacity for ongoing
improvement.
The Evolution Of Operational Excellence
Traditionally, operational excellence has meant optimizing business processes, generally
production and manufacturing. Its purpose has been to satisfy customer demand, improve
quality, or boost productivity and efficiency. Over the past few
decades, it has evolved to include not just process improvement
(through quality programs, Lean Manufacturing, or Six Sigma,
for example), but also process automation (IT), or outright process
redesign or reengineering à la Michael Hammer the wholesale
top-down deconstruction and reconstruction of a process to
streamline and optimize it to best serve customer needs.
Certainly, operational excellence applies not only to manufacturing
but equally to service-based businesses,many of which have adopted
the rigorous disciplines of Six Sigma. It is also important in shared
services and other internal partnerships.With the rise of the
extended enterprise businesses and their networks of interdependent
alliances it also applies to integrating with partners.
Where these alliances include outsourcing relationships, the risks
as well as the increasingly higher-level and higher-value processes
involved demand attention to, and new requirements for, process
management and operational excellence.
What Is Operational Excellence And Why
Is It So Critical Today?
Operational excellence is, and has always been, about reaching the
height of operational efficiency doing things better, faster, and
cheaper. No organization can afford inefficiency and waste, particularly
in periods of belt-tightening. The tightly run, highly efficient
organization can undercut competitors and win market share.
Moreover, the ability to respond and adapt to rapidly changing
market conditions becomes a matter of survival.
Operating processes produce
and deliver goods and services
to customers. For a period in
the late twentieth century, many
scholars and companies believed
that managing operations was the
most critical component of any
organization's strategy. Inspired by
the remarkable results achieved
by Japanese manufacturers in transportation,
electronics, and optical
industries, most companies placed
a high priority on redesigning,
reengineering, and continuously
improving their critical operating
processes.
Companies' efforts to achieve
operational excellence were largely
successful. Many enjoyed dramatic
improvements in the quality, cost,
and responsiveness of manufacturing
and service delivery processes.
R. S. Kaplan, D. P. Norton,
chapter 3, "Operations
Management Processes,"
in Strategy Maps: Converting
Intangible Assets into Tangible
Outcomes (Harvard Business
School Press, 2004)
But today, operational excellence means much more and its
implications are more far-reaching.While not a strategy in and
of itself, operational excellence has enormous implications for strategy management
and execution.Whether your strategy entails being the low-total-cost provider, being
a product or service leader, or focusing more on customer intimacy, operational excellence
as a supporting strategic theme is not just a foundation for survival (in good times or bad)
it's a key lever for improving profitability and competitive advantage.
Often strategy management and operations management occur at different levels of the
organization, with little interaction and, in some cases, no interdependence. Operations,
quality, and engineering executives must recognize their link to strategy. Perhaps more
important, senior executives must begin to acknowledge the role of process management
in strategy execution that operational excellence is inextricably tied to strategy excellence.
And management itself must be viewed as a process (or set of processes) unto itself, one
that often requires new processes and that encompasses the broad definition of operational
excellence.
Like innovation, operational excellence need no longer be confined to a discrete role in
product development or manufacturing. It can touch every organizational function and
process. Instead of a siloed approach pursuing efficiencies within
discrete areas (e.g., manufacturing, sales, procurement) organizations
can adopt an end-to-end approach that links business
processes, not merely functional areas, and that does so seamlessly.
In other words, organizations can unify all their operations for
example, manufacturing, procurement, and after-sales service
to run them as one. This end-to-end approach both requires and
provides complete visibility throughout the process chain, which,
in turn, promotes greater efficiency than could be achieved independently
by silos. In fact, the 2008 Economist Intelligence Unit
survey "Sustained Growth through Operational Excellence" reported
that 45% of responding senior executives chose "end-to-end visibility"
into operations as the most important contributor to operational
excellence. For example, organizations that close the loop in
integrating the sourcing and procurement processes can maximize
savings in four important ways: by being able to quickly identify
savings opportunities, source the best supply base, optimize the
value of the contract, and sustain the achieved savings. By instituting
efficiencies in its entire procurement cycle, a major chemicals
specialty manufacturer cut annual costs by nearly $6 million and increased on-time
payments by more than 87%.
The Three Components of
Operational Excellence
As we see it, operational excellence
involves three factors. First, it means
having the strategy management capability
to identify and focus on the "right
things" those that will provide differentiated
value to your customers. Second,
it involves being excellent in executing
that strategy consistently doing these
right things better, faster, and cheaper.
Finally and perhaps most important
it involves having the ability to ensure
continuous improvement over the long
term. For that is how operational excellence
enables organizations to sustain
operational performance and ongoing
competitive advantage.
But operational excellence is not just about managing day-to-day operations with efficiency.
Operational excellence is a way to foster continuous improvement. Achieving this benefit
level, however, requires a fact-based understanding of operational performance.To address
today's challenges and capitalize on tomorrow's opportunities, the COO and key operations
executives must be able to define, monitor, and adjust actions aligned with the operational
strategy and objectives (through, for example, the use of metrics and key performance
indicators, or KPIs) and, when necessary, change the organization's processes and
performance objectives.
And here again, IT plays a central, strategic role.
Integrated applications such as enterprise resource planning (ERP), supply chain management,
and customer relationship management systems coupled with performance
management systems and advanced business intelligence systems and analytics, have
triggered greater advances in operational excellence. Successful businesses go beyond
delivering functional efficiency by bringing together all these applications to unify operations
and ensure tight linkage between strategy and execution. This dynamic IT architecture
helps to seamlessly link end-to-end business processes together, creating a holistic
view of operations. By ensuring complete visibility across the value chain, it also allows
organizations to achieve extraordinary results. Not only does this transparency improve
coordination and efficiencies, but it also enables real-time information flow, feedback,
and adjustments. The net result: a closed-loop approach to strategy and execution that
enhances collaboration, improves the quality of decision making and heightens performance.
A leading petrochemical company provides a perfect example. By streamlining its
end-to-end operational processes with integrated software, the company was able to vault
into the top ten position in its industry just three years after it was founded.This worldclass
company enhanced its competitiveness and realized extraordinary bottom-line results,
including eliminating more than $7 million in direct operating costs within a few months.
Today, integrated software delivered through open, service-enabled business process platforms
enables companies to transcend corporate and national boundaries to manage entire
business networks of customers, partners, and suppliers.These platforms can help create
further competitive differentiation by allowing companies to reuse software capabilities,
rapidly develop new processes, integrate with their partners, and drive cross-enterprise
operational performance.
There's clearly no one formula for operational excellence.How your organization embraces
it whether as a top-to-bottom, pan-organizational,"meta" process, or as an approach that
resides within prescribed internal processes depends on the nature of your business,
your organizational structure, and the processes you employ. Likewise, the benefits can be
multidimensional, extending beyond cost savings to enhanced customer service, predictable
compliance, indeed to enhanced overall (enterprise-wide) operational performance.
Key Obstacles To Achieving Operational Excellence
In many enterprises, operational silos, which have evolved organically as the organization
has grown, represent the greatest single obstacle to allowing a holistic view of operations
across processes and throughout the enterprise and thus to achieving operational excellence.
Silos affect manufacturing and service businesses alike. The resulting poor visibility
applies not just to the lack of visibility of operational activities across the value chain,
but to the lack of visibility of the strategy as well as of performance.Without visibility,
the organization cannot react quickly to change. Long-term planning is impaired.Among
the many critical impacts of this inability is missed on-time delivery targets.
Inefficiencies in execution represent another obstacle.These include time-consuming manual
and paper-based tasks (and the high number of errors that can result from non-automated
processes), redundant steps, and the inability to duplicate efficiency globally. The result is
costlier operations that erode margins.
Compliance and risk management are another problem area that can impede operational
excellence. Some companies lack internal and/or external controls.Others may unknowingly
be committing violations, or suffering from product quality or safety issues. This can
lead to complaints, regulatory investigations, and high added cost from warranty claims,
penalties, and even lawsuits.
Finally, a reactive and tactical operational culture, along with resource constraints, impairs
operational excellence. Companies focus on day-to-day operations to the exclusion of the
long-term, strategic view. They take a reactive, rather than proactive, approach to improvement
and innovation. These attitudes and ways are often exacerbated by the lack of tools,
resources, or skills. The result: a lack of competitiveness that translates into weaker performance
against industry peers.
Linking Strategy And Operations:
How The Execution Premium Model Can Help
Organizations Achieve Operational Excellence
Kaplan and Norton's new architecture for a comprehensive and integrated management
system explicitly links strategy formulation and planning with operational execution. In
doing so, it helps organizations map all of the places where operational excellence should
reside.6 This architecture consists of a six-stage system (see Figure 1).
Stage 1: Develop the Strategy. The organization clarifies its mission, vision, and values;
articulates key issues and challenges; and identifies ways in which it can best compete.
Stage 2: Translate the Strategy. The organization describes its strategy (through a strategy
map); develops strategic objectives, measures, targets and initiatives, as well as budgets
that guide action and resource allocation. It also creates cross-functional strategic "theme
teams" to lead strategy execution.
Stage 3: Align the Organization with the Strategy. Here, the organization aligns all business
units, aligns support units with business unit and corporate strategies, and aligns and
motivates employees to help execute the strategy.
Stage 4: Link Strategy and Operations (Plan and Execute Operations).This stage is ground
zero for linking long-term strategy with day-to-day operations. It includes creating an
operational process model, linking strategy and operations through
the use of a sales and operational planning process (matching
demand and supply), budgeting to align strategic initiatives with
operational processes, and identifying the most critical business
process improvements. It also entails establishing the right IT
platform to support the management of strategic processes and
reporting and review capabilities leveraging strategic dashboards
and KPIs along with operational dashboards and KPIs. This white
paper focuses primarily on this stage of the model, since it is here
that the so-called "rubber" (the strategy) meets the "road" (operations)
and, thus, where operational excellence opportunities arise.
Stage 5: Monitor and Learn ("Is the strategy in place and
working?"). The organization ensures operational processes are
under control; confirms that the strategy is being implemented;
monitors and learns from strategic performance feedback; and
ensures continuous improvement.
Stage 6: Test and Adapt the Strategy ("Do the fundamental strategic
assumptions remain valid?"). This involves running profitability
analytics to identify sources and size of profit contribution; testing
the causal model of the strategy; and identifying and recommending
strategic alternatives.
Key Definitions
A strategy is how an organization creates
sustainable value for its shareholders (or,
as with a nonprofit, for its stakeholders and
constituents). A strategy map provides a
one-page visual representation of all the
organization's strategic dimensions and
assumptions. It depicts the cause-andeffect
relationships among the major performance
dimensions (perspectives)
financial, customer, internal process, and
learning and growth and their component
objectives. (See Fig. 3, p. 11.) The
strategy map shows the key elements of
the strategy as strategic themes clusters
of related objectives and processes
that constitute the major components
of the strategy (e.g., "operational excellence,"
or "new products/ services").
(See Fig. 2, p. 11.) Themes are used to
identify and combine the appropriate
functions and business processes and
provide a mechanism for supporting the
cross-enterprise, boundaryless approach
necessary for successful strategy execution.
Theme teams are teams of managers
from all of the various functions touched
by a given strategic theme; under the
guidance of a theme owner, each theme
team is responsible for managing its particular
part of the organizational strategy.
So an operational excellence theme
team would be made up of managers
from each area of the organization that
plays a part in the objectives tied to
operational excellence from manufacturing
or product/service development
to customer service or HR.
A Process Model: A Prerequisite For
Process Management
To manage processes, the organization must have a process
model.With a process view of its "universe" (encompassing itself,
its customers, and its suppliers), the organization can determine
whether instituting change to a given process or subprocess
involves implementing a quality program or other improvement
initiative, or reengineering the process altogether.
Which model an organization uses is necessarily determined by
the nature of its business and its strategy. Different schools of
thought prevail, from the more traditional or mechanical view
(emphasizing the core processes, those focused on creating and
delivering the products/services) to those encompassing all processes including
management, support, and ancillary processes such as overseeing regulatory compliance.
The process-based view, first espoused by Michael Porter (with his value chain)7 and
reengineering guru Michael Hammer, identifies primary activities (such as inbound logistics,
operations, marketing and sales) and support activities (such as procurement,HR
management, and technology development).More recently, the American Productivity
and Quality Center (APQC), a leading organization dedicated to process improvement
and benchmarking, developed its Process Classification Framework, a generic enterprise
process model that identifies a whole taxonomy of operating, management, and support
processes.
Four Mechanisms For Linking Strategy To Operations
To link strategy and operations, organizations need the following four key mechanisms:
an overarching framework (the strategy big picture and conception of how it all will
work), a process model with measures of success (KPIs), an integrated management
process (governance approach), and an integrated information system that provides
visibility and alignment.
1. An Integrating Framework: A common framework that allows for the integrated
design of the strategy/operations management system.The strategy map, with its strategic
themes, is a useful framework because it describes the strategy and its components in a
cause-and-effect manner, depicting the component themes across the functional areas
implicated.
2. A Linked Process/Measure Model: An integrated model of the organization's
operational processes (including specific activities demanded by the strategy), along
with the relevant measures and targets. The Balanced Scorecard can be used to link
strategic objectives and measures to the operational KPIs. This provides the mechanism
for joining strategic scorecards with operational dashboards. Initiatives represent the
activities that are used to introduce new processes or transform existing ones.
3. An Integrated Management Process: A mechanism that facilitates the integration
of activities across traditional organizational silos, such as theme teams (governors) of
the cross-functional strategic themes.
4. An Integrated Information System: Information systems designed to provide topto-
bottom and end-to-end alignment by strategic theme and process and thus visibility
throughout the value chain. These integrated systems can help to align all operations
to drive efficiency and effectiveness across the operational continuum and to facilitate
decision-making by providing the right insights in the right business context.
Making the Connection: Examples
Figure 2 provides an example of operational excellence (OPX) as a strategic theme for an airline,
tracing how that theme translates into strategic objectives within each strategy map perspective. In the
financial perspective, putting more customers on fewer planes will
drive operational efficiency and increase profitability. That can be
achieved by attracting customers that value low prices and on-time
arrivals (customer perspective). Offering these benefits requires an
internal process focus on fast ground turnaround. And to achieve
that, the company must align its ground crew, by educating and
compensating them according to how they contribute to the company's
success, and through an employee stockholder program that
gives them an investment in that success.
Let's look at how this strategic theme unfolded in the internal
process perspective, using a leading low-cost U.S. airline as an example.
When a number of major airlines faced bankruptcy, this airline
was able to maintain a profit. How? The airline simplified seat assignment,
operated logistics at a lower cost, instituted quicker flight turnaround
times, and lowered maintenance costs by operating one airplane
model. These operational improvements not only contributed
to positioning the company among the leading low-cost, low-price
airlines, but also helped the company free up resources to invest
directly in customer relationships a key component of its strategy.
Figure 3 shows a strategy map for an organization whose corporate strategy has a "Productivity" (or
"low total cost") component, expressed as "Deliver a combination of quality, price and ease of purchase
that no one else can match." This strategy comprises several operational excellence component
objectives that permeate all of the strategy map's perspectives. (Note that the map shown does not
reflect all the themes and objectives
that comprise the enterprise strategy,
and the operational excellence components
are shaded.) In the financial
perspective, for example, the objectives
"Industry cost leader" and"
Maximize use of existing assets"
represent the operational excellence
goals of the Productivity strategy.
These are supported by the customer
objectives "Low total cost," "Perfect
quality," and "Speedy, timely purchase"
(i.e., cheaper, better, faster). These
customer objectives are, in turn,
supported by four strategic objectives
in the internal process perspective:
"Develop supplier relations,"
"Produce products and services,"
"Distribute to customers," and
"Manage risk." In the figure, we have
highlighted the five measures within
the "Produce products and services"
objective, which represent the core
(although not the only) operational
excellence goals for a manufacturer
or service provider. For a retailer like
Walmart or Costco, or a manufacturer like Toyota, the "Develop supplier relations" objectives may
represent the critical operational excellence objectives and the source of competitive advantage.
Operational Excellence: Our Research Hypotheses
Our new expanded definition of operational excellence, and of the role of linking
strategy to operations, is based on several hypotheses:
- The role of the strategy map, created by Kaplan and Norton as part of the
Balanced Scorecard management system, in helping achieve higher levels of
understanding and commitment among management team members through
its depiction of operational excellence objectives.
- The importance of aligning strategy and execution to achieve operational
excellence objectives.
- The need to align all operations, processes, and systems to achieve
organizational excellence.
- The role of cross-functional strategic "theme teams" in managing operational
excellence objectives, improving operational performance, and ultimately in
achieving strategic goals.
- The importance of standardized, integrated, and networked technology in
reporting and managing performance to enhance decision making.
Survey Pool and Methodology
Nearly 200 respondents completed our survey. Acceptance criteria were applied to derive 101
qualified respondents (representing the same number of organizations), two-thirds of which were from
outside the United States. The study pool encompassed a wide range of organization sizes from
those with $10 million in annual revenue or budget to those with more than $5 billion. Likewise, it
also represented a wide range of industries. Transportation/energy/utilities comprised 23% of the
sample; industrial goods/materials, 21%; and IT/telecom, 13%. The remaining 43% of organizations
were spread among six other industry categories representing manufacturing and services, as well as
government and nonprofit organizations. Approximately one-third of the respondents have been using
the Balanced Scorecard management method for more than three years, while another third have
been using it for fewer than three years. The remaining third are not Balanced Scorecard users.
Outcome categories. To understand the relative importance of specific management approaches,
we established a measure of the outcomes that have been achieved through their use. In this
study, we examined four "outcome categories":
- Breakthrough Results, meaning the organization is realizing top-line benefits, growth in
customers, increases in profitability, and so forth.
- Operational Results, which entails accomplishing operational improvements, such as being
able to do things better, faster, or cheaper, or to improve the customer experience.
- Organizational Benefits includes achieving such "softer" internal benefits as improved understanding
and consensus on the strategy and improvements in internal communication.
- No Benefits means none of the aforementioned benefits have been realized.
With these outcome measures in hand, we were able to measure the relationship between the
relative strength of a particular management capability and its contribution to strategic outcomes.
To test our hypotheses, in mid-2008 we conducted an online survey of organizations
that can be described as either generally interested in the Balanced Scorecard (i.e., those
thinking about getting started) or those that are already somewhere along the road to a
full-scale implementation.While ours is clearly a self-selected sample, we consider it
representative of the general population of organizations since 61% of the respondents are
already using a Balanced Scorecard as a management tool.This percentage approximates
the global penetration rates reported by others (other broad-based surveys show 60% to
65% usage rates).
Correlating The Model And Performance
Excellence: Survey Findings
In this section, we present the survey findings on all four components of the general
model presented earlier: (1) the general strategy management framework, featuring strategy
maps and scorecards (Integrating Framework); (2) the link to operational processes
in particular, processes that are identified by the strategy (Linked Process/Measure
Model); (3) the role of theme teams in orchestrating the cross-functional and crossprocess
coordination required by the strategy (Integrated Management Process); and
(4) the role of technology in managing performance by enabling measurement, reporting
(of both strategic and operational performance), analysis, and improved decision making
(Integrated Information System).
1. An Integrating Framework
The start of this research project coincided with the release of Kaplan and Norton's latest
book, The Execution Premium, which describes the six-stage Execution Premium (XP)
model presented earlier in this paper.We used a series of survey questions to assess the
impact of the model on the outcomes achieved by organizations that have implemented
(or are implementing) it in varying degrees. Figure 4 presents the findings of the outcomes
in the 101 organizations surveyed. The graphic presents a profile of the organizations and
how they fall into one of the four outcome categories, arrayed by their level of conformance
to the Kaplan and Norton XP model; respondents ranked their proficiency at each stage
of the model on a five-point scale, where 5 = "We're best practice at this" to 1 = "We are
very poor at this."The pattern in the data clearly indicates that those organizations that
conform most closely to the general model have a much greater chance of achieving breakthrough
results, thus confirming the power of the XP model.
Our purpose here is not to defend the use of the BSC; indeed, there is ample confirmation
of its effectiveness. Instead our purpose is to show how it works particularly within
the context of the XP management model so that other organizations can better take
advantage of this management tool.
As Figure 4 shows, three of the six XP stages are especially
relevant to our current investigation. Translate the Strategy, Stage 2,
entails using strategy maps and scorecards to
describe and measure the strategy, identifying action programs
(initiatives) required by
the strategy, funding these action programs, and leading their
successful execution. Organizations that are using or have begun to use
these tools are in a better position
to execute their strategy and, in turn, achieve better results. Both
the Breakthrough Results
and Operational Results groups report significantly better performance
than the other
two outcome groups.
Stage 4 of the XP model, Link Strategy and Operations, represents the intersection of
planning and operational execution. A high score in this stage indicates that an organization
is able to develop and leverage an operational process model of the business, identify the
business process improvements most critical for execution, link the strategy with operating
plans and budgets, and establish the IT requirements that will enable this integrated
approach to function effectively. By "function effectively," we also mean generating feedback
in the system to allow for continuous improvement in all affected areas.We will explore
this fourth stage in the next section.
The sixth stage, Test and Adapt, is where IT enablement is most important in terms of
helping an organization address the most critical question of all: whether the strategy
is the right one the most effective one for achieving the organization's mission and
vision.Here, again, we find that most organizations achieving Breakthrough Results report
higher levels of conformance to the XP model.However, even this group's scores are the
lowest when compared to its scores in the other five stages. That's not surprising, though.
Typically, organizations that do well in testing and adapting their strategy have been
actively implementing this strategy management approach for three or more years. It takes
time for an organization to mature to the point of effectively taking advantage of each of
the six XP stages.Moreover, the IT requirements in terms of tools and skillsets are high
once an organization approaches Stage 6. You need professionals with capabilities in such
tasks as profitability analysis, causal modeling, identifying alternative strategy scenarios,
and recommending alternatives based on the feedback evidence.Many organizations lack
expertise in these areas and are still too limited in their IT capabilities to be proficient
at this stage.
The Drivers of Operational Excellence
Before exploring how respondents view operational excellence in driving strategic success,
let's look at how they defined "breakthrough" results.Twenty-seven percent of respondents
indicated they have achieved such results; for these high-performing organizations,
"breakthrough" means they have delivered significant positive benefits to the customers
buying their products/services (71% of respondents); they have significantly increased
revenue (60%); or they have increased the number of customers (52%). Again, respondents
were allowed to check more than one response category when more than a single outcome
was achieved.
So how do organizations evaluate their strategic success? We explored this question in
two ways. First, we asked what measures of performance respondents use to gauge success.
They were allowed to check all measures that apply. The two main gauges were revenue
growth (cited by more than 74% of the respondents) and profit (mentioned by 66% of
the respondents).Various measures of return, such as ROI and ROA, were cited nearly
50% of the time. Less frequently used measures of success included EBITDA (29.7%),
Return on Sales (21%), and EVA (17%).
Second, we examined the various forms of operational excellence that organizations are
pursuing. In other words, we sought to understand the operational drivers of success.
We allowed respondents to report as many as four different types of operational excellence
improvements: cost, speed, customer experience, and quality.More than 40% cited
improvements in customer experience as the primary driver of revenue growth in fact,
improved customer experience was the predominant form of operational excellence reported.
Cost efficiency was reported as the primary driver of increased profitability (reported
37% of the time).The respondents view the various drivers of success differently, depending
on the specific measure of success they are working toward. Reducing cost is also the
most frequently cited driver of overall measures of return (e.g., ROI, ROA) and EBITDA.
As we begin to peer into the operational processes that ultimately provide the "lift" necessary
to achieve strategic outcomes, it is important to understand these drivers of success.
2. A Linked Process/Measure Model
Earlier, we observed that managing strategic initiatives provides the critical linkage between
strategy and operations. This activity is part of the XP, found in Stage 2, Translating the
Strategy with strategy maps and scorecards, and Stage 4, Planning and Executing Operations.
Of all the governance activities involving initiatives funding the initiatives, managing
the initiative portfolio, and aligning the initiatives with strategy, the last has the greatest
impact on achieving strategic success. But if initiatives must be aligned to be effective, a
mechanism for understanding the process model of the organization must be in place.
Simply put, in order to align initiatives with processes, the organization needs a process
model as a reference, so that strategic initiative investments (including changes to existing
processes or the introduction of new processes) can be directed appropriately.
Figure 5 illustrates that the likelihood of achieving breakthrough results is a function of
two factors: key process management capability (ranked on a scale of 1 to 5) and length
of BSC use. There is no question that managing key processes competently through such
approaches as quality management, Lean Manufacturing or Lean Six Sigma, and continuous
improvement techniques delivers benefits. But for organizations that rated their key process
management capabilities a "3" ( "OK") or above absent the use of a BSC the odds of
success were limited: no better than one in five.However, when the BSC is added to the
mix, the likelihood of success more than doubles, to 50%. In this case, the duration of use
is not a differentiator, so we can conclude that the combination of an "OK" or better ranking
in key process management, combined with BSC usage, markedly improves outcomes.
In other words, optimizing operational performance true operational excellence
requires a strong link between strategy and operations management.
Now that we know that strategy management, when combined with key process management,
yields a markedly higher payoff, the next question is:Which processes receive
the most attention in terms of strategy and/or operational management? Figure 6 shows
where organizations have made investments in creating scorecards to manage the strategy
or dashboards to manage operations, or where they have done both (or neither). The
number-one area in which we find both approaches is in managing financial resources (used
by 22% of respondents).This is also one of two areas where dashboards are most frequently
used. The other area popular for dashboard use alone is in marketing and sales. For the
delivery of products and services (i.e., where processes are used to create product and
service offerings) the frequency with which each management approach is used is nearly
identical. The next (fourth) process in the list is developing a vision and strategy. Not
surprisingly, the scorecard is used for this process by 43% of organizations. Only 9% of
organizations use a dashboard to manage this process, and both approaches are used 13%
of the time.The next three processes, in descending order of usage, are managing customer
service, managing IT, and developing and managing human capital. Since the combined
use of scorecards and dashboards is present in only a relatively small percentage of all
processes, it seems reasonable to argue that this is a major area of opportunity for organizations
that want to improve their chances of achieving breakthrough results.Without
access to management tools such as strategy scorecards and information management
platforms such as operational dashboards, organizations tend to manage operational
processes the old-fashioned way: by fiat, gut feel, or "the way we do things around here!"
3. An Integrated Management Process
It almost goes without saying that to achieve significant strategic results, an organization
needs strong leadership. Unless your organization happens to be lucky enough to be an
early entrant in an emerging rapid-growth sector where excess profits are easily available,
you are more than likely struggling just to stay even. Given the current global market
turbulence and increasing risks at every turn, the task is even harder. Thus, leadership is
correctly seen as being critical to survival. The same is true when looking for reasons why
performance management programs succeed or fail.Why is it that anywhere from 25%
to 63% of the major processes in organizations are not managed with either a scorecard,
dashboard, or both? Certainly the difficulty in instituting such systems helps explain this
management deficit.Moreover, the discipline of measurement-based performance management
is still in its early years.While quality management has been applied to many
operational processes over the past several decades, strategy management is still relatively
new and the discipline of applying an integrated approach to strategy and operations
performance management can be considered in its infancy.
Nonetheless, new approaches for effective strategy execution continue to emerge, showing
the way forward for those seeking competitive advantage. One such approach is the use of
theme teams (described earlier) to manage strategy across traditional organizational lines,
such as processes or functions. Our research focuses on one strategic theme operational
excellence, arguably the most common theme, expecially in a down market.
Strategic themes require strong executive-level leadership to secure adequate resources
and ensure continued visibility, action, and review. Typically, one or two members of the
executive team are assigned to each theme as theme "owners" those responsible for overseeing
execution of their individual theme. The original idea of the theme team needs to
be expanded when we begin to formalize the linkage between strategy and operations.
Theme teams that will be accountable for linking strategy and operations require broader
representation from across the organization. Specifically, members of the operational
management team should be added to the theme team in the interest of achieving strategic
objectives driven by specific processes that link to the strategy map.
In our survey sample, 7% of the respondents indicate that they are using the theme
team approach as their primary method for strategy management, and indicate notable
results are already being achieved results we would characterize as either delivering
Organizational Results or Operational Benefits. But the presence of such a management
approach is not yet statistically associated with achieving Breakthrough Results. Even
those achieving Breakthrough Results indicate that, at best, they consider themselves
merely "OK" in theme team management. This suggests that there is ample room for
improvement in terms of leveraging this practice, especially in the context of fully
integrating strategy management with operations management.
4. An Integrated Information System
IT enablement is the remaining critical component of the execution foundation.When
we look at the worlds of strategy management and operations management from the
perspective of IT, we see two very different developmental histories. The path to strategy
management via the use of the Balanced Scorecard is characterized by face-to-face discussion
between executives to achieve consensus on the organization's mission, vision, and strategic
objectives. Early on in the development life cycle of organizations implementing this
management system, technology use is generally limited to desktop productivity tools,
such as spreadsheets and presentation applications. Enabling an executive team to get
its collective head around a set of strategic objectives doesn't require much in the way of
technology at least not in the beginning. Certainly, more technology-centric companies
may rely on their information platforms to help inform their strategy development
discussions.However, implementing a strategic measurement system even one that
requires only a modest set of 20 or so strategic measures is where the challenge of
integrating the management process with the data arises.Many organizations that began
with rudimentary tools, and that achieved early success, often find themselves bumping
up against the limits of their technology choices. Their reliance on spreadsheets begins
to test the patience and bandwidth of the team members responsible for capturing, reporting,
and analyzing the data. The challenge of relying on inadequate technology grows exponentially
for a large and/or complex organization.When such organizations enter their
second year of Balanced Scorecard implementation, they often discover that the technology
choices that got them to where they are will not get them to the next level of performance.
They require more robust tools at each point from core, traditional transactional (e.g.,
ERP) systems all the way to specialty performance management systems to automate
more of the management and reporting processes and enable them to spend more time
on value-adding activities, rather than on merely managing the data. To get there, they
also need an IT governance program to ensure the needed data is being collected, to
ensure data accuracy and process integrity, and to establish common formats based on
corporate standards. And they need the right IT competencies and tools.
The evolutionary cycle of an organization's management of operations, on the other hand,
is typically quite different from its strategy management evolution. Large-scale ERP systems
have been in place in many organizations for quite some time. These implementations
often followed major reengineering efforts.Thus, operational and information management
systems and their associated analytical applications are prominent features in the world
of operations. It is fair to say that, in most organizations, the level of maturity of operations
management far exceeds that of strategy management.And yet it is the connection between
these two worlds that makes all the difference in terms of executing strategy and achieving
Breakthrough Results.
We began to explore the connections between strategy and operations from an IT
perspective by examining the primary technology solutions used to capture and report
performance metrics that link to the strategy.While research has repeatedly shown that
length of BSC use correlates with the likelihood of achieving increased shareholder
returns8 we wanted to see what relationship, if any, exists between the tools used and
improvements in results. Figure 7 shows the distribution of tool usage by major category:
desktop productivity tools, packaged software (e.g., SAP Business Suite software) and
specialty packaged performance management software (e.g., Business Objects enterprise
performance management software), and independently developed custom applications.
Respondents were allowed to record all tools that are in use. The data show that desktop
tools are ubiquitous (Excel, for example, has a 97% penetration rate) and that other tools
are relied on less frequently to capture and report performance data.
The real story lies in observing which tools the more advanced organizations rely on.
Figure 8 shows the results that organizations expect to achieve over the next three years.
More than 90% of the survey respondents expect their organization's performance over
the next three years to be either consistent with current performance levels (27 respondents)
or to improve (66 respondents). Only eight of the study participants expect their
organization's performance over the next three years to drop below current levels. Figure 8
also shows the data for the "stable" performance group and the "improving" performance
group broken down by software category.Here, we see that while custom software use
grows somewhat (from 19% to 23%), the big story lies in packaged and specialty packaged
performance management software. Reliance on packaged software increases from 22% to
nearly 50% of all organizations that expect to see their business performance improving
over the next three years. The desktop tool category fades considerably (from 59% to 29%)
for those anticipating performance improvements over the next three years.
While the choice of software tools can facilitate improved performance, it is important
to understand the pathway to organizational transformation that these tools enable.We
asked two questions about improvements in communication and improvements in
alignment to gain a better understanding of this pathway.While all automated tools
can be used to communicate the strategy and cascade the strategy (and align the organization),
it turns out that organizations using packaged software seem to be somewhat better
at achieving both of these organizational outcomes. Those relying on packaged software,
rather than desktop solutions or custom applications, report improvements in communication
53% of the time compared to a 46% for those relying on custom solutions. Likewise,
when it comes to organizational alignment, those relying on packaged solutions report
success 69% of the time compared to a 64% level of achievement for those relying on
custom solutions.While these differences are not huge, they are nonetheless notable
and help shed light on this expressed preference for packaged tools for those who anticipate
performance improvements in the coming years.
Clearly, alternatives to the desktop solution are more attractive. Beyond efficiency and
scalability, systems need the capacity to gather data from multiple sources, linking dashboards
and strategy performance systems across the enterprise. The resulting end-to-end
visibility across the value chain not only enhances data analysis, but helps support and
accelerate decision making and planning. This is where operational excellence translates
into competitive advantage. But the benefits even accrue in a local way: in a leading pharmaceutical's
R&D group, enhanced visibility of performance metrics enables individual
project work streams to conduct their own analysis and implement localized process
improvements.
A final point concerning the role of IT. One of the important drivers of ongoing strategic
success is how well an organization leverages its decision analytics in the last two stages
of the XP model (Monitor and Learn and Test and Adapt).To help us understand the role
of decision analytics in achieving strategic success, we developed a composite score of an
organization's ability to perform decision analytics based on data access, organizational
maturity, use of analytics, scenario analysis capabilities, and several other dimensions.
The results of this analysis are presented in Figure 9.Here, we believe, is the most striking
finding of our entire study. The use of decision analytics alone does little to improve the
chances of strategic success for an organization (less than 20% report Breakthrough
Results).However, when decision analytics is paired with BSC use, the odds of success
rise dramatically to a 57% chance of Breakthrough Results (when BSC usage is fewer
than three years) and to 77% when the BSC has been in use for more than three years.
Interestingly, the three greatest contributors to the decision analytics composite score were
(1) organizational maturity, (2) the organization's commitment to utilizing analytics for
making business decisions, and (3) IT's responsiveness to changes within the business
and how well it supports the information needs required to make decisions. These last
two items both relating to the impact of analytics on improved decision making
yielded the highest ratings for Breakthrough Results organizations!
This compelling finding parallels our earlier observation concerning the role of key
process management.Having a middling-to-strong capability in either key process
management or decision analytics doesn't do much to improve an organization's chance
of strategic success. Think of these as silver bullets that can only travel so far. But when
these are paired with a solid strategy management approach based on the BSC your
chances of success improve many times over.
By creating an operationally driven IT architecture based on integrated, end-to-end
software solutions, organizations can transcend silos to unify operations and create
transparency across the enterprise. This end-to-end visibility can help augment the
traditional notions of operational excellence greater automation, standardization,
integrated controls for compliance, to name a few to create new sources of value.Whether
the results are improved customer service and satisfaction, cost reductions, quicker access
to critical information that informs decision making, or continuous improvement that
enables best-practice innovation today's IT-enabled operational excellence has more
enterprise wide impact than ever before.
A Strategic Imperative: Turning Operational
Excellence Into Sustainable Success
As more organizations recognize the primacy of formal strategy management, embrace
the notion of optimizing the strategy-operations connection, and begin to take advantage
of powerful new technologies that provide end-to-end linkage of organizational processes,
operational excellence takes on new meaning. As a way of supporting strategy execution,
operational excellence is an important lever in boosting profitability and sustaining competitive
advantage. But on a fundamental level, we cannot lose sight of the role operational
excellence plays in helping organizations and their entire business networks weather
volatile markets. In today's uncertain economic environment, as organizations seek to shore
up their defenses and strengths, trimming costs and driving greater efficiencies assume
new importance. Operational excellence is not only a lever to a promising future, but it
can represent a lifeline in a turbulent present.
Certainly, combining all three factors a strategy management framework, solid key-processmanagement
capability, and strong IT enablement based on integrated, end-to-end software
solutions that link strategy to operations is the best recommendation we can make to
those organizations that want to turn operational excellence into sustainable success.
About this Project
Besides conducting the survey and producing this white paper, we also conducted in-depth
interviews of several selected organizations that reflect diverse industries, approaches, and
developmental stages. Through case studies (to be published separately), we will describe
how these organizations are striving for and achieving operational excellence through
their management discipline.
About Palladium Group
Palladium Group, Inc. is the global leader in helping organizations execute their strategies
by making better decisions. Its expertise in strategy, risk, corporate performance management,
and business intelligence helps clients achieve an execution premium. Palladium's
services include consulting, conferences, communities, training, and technology. Palladium
Balanced Scorecard Hall of Fame for Executing Strategy&8482; recognizes organizations
that have achieved an outstanding execution premium. For more information, visit
www.thepalladiumgroup.com or call 781-259-3737.