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The Alignment-Focused Organization: Bridging the Gap between Strategy and Execution
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CONTENTS
- Executive Summary
- Understanding the Gap Between Strategy and Execution
- Overdependence on Financial Metrics
- Using Strategy Management Software to Systematize Strategic Alignment
- Aligning Initiatives, Metrics, People, and Tasks with Corporate Goals
- Clearly Communicating Strategies and Initiatives
- Using "Pathways"
- Using Goal Diagrams
- Using Incentives to Drive Employee Behavior
- Collaborating and Monitoring Progress
- Collaborating Throughout Execution
- Monitoring Progress
- Enabling Real-Time Reporting and Live Operational Reviews
- Measuring Performance
- Strategy Management Software as Part of a Complete Performance
- Management Solution
EXECUTIVE SUMMARY
Most companies have a well-defined
strategy that is intended to align the actions of all individuals, teams,
and business units to achieve corporate goals. But when it comes time to
execute, they can run into trouble ' especially during times of significant
business change. The reasons for this gap vary by organization, but
typically include the following:
- There may be insufficient executive
sponsorship for the strategies and associated initiatives, or an
organizational culture that doesn't embrace measurement ' leading to
insufficient performance monitoring and measurement systems.
- Strategy
is not communicated in a way that employees understand ' so they don't see
how the strategy affects them, exactly what actions must be taken when, and
how their actions impact others.
- It's unclear who is accountable for
ensuring execution of initiatives, projects, and tasks.
- Incentive
systems aren't linked to strategy, so individual goals are not aligned with
the company's goals. Consequences and rewards for employee choices are
inapt.
To close the gap between strategy and execution, companies need
to build strategic alignment across all levels of the business. This paper
discusses how businesses can implement these best practices using strategy
management software ' one of the cornerstones of effective performance
management ' to systematize these practices across a department or the
entire enterprise consistently. In short, the paper shows how to foster an
alignment-focused organization. It will also explore the value of deploying
strategy management software as part of a larger corporate performance
management solution that encompasses business planning and consolidation;
profitability management; and governance, risk, and compliance.
UNDERSTANDING THE GAP BETWEEN STRATEGY AND EXECUTION
Succeeding in today's competitive business environment requires constant innovation and
execution of new strategies. For example, to drive growth, companies may
modify business models, design new product and service offerings, acquire
new lines of business, or cultivate new channel strategies. To increase
efficiency, companies may focus on optimizing their supply chain,
automating processes, or outsourcing business processes.
However, most organizations ' even those with compelling strategies and streamlined
operations ' struggle to follow through on their strategic objectives. The
challenge is both profound and widespread, impacting businesses at both the
corporate and line of-business level. Various studies have found that very
few strategies, even those effectively formulated, are effectively executed.
In nearly every case, these studies show, failures are not for lack of a
well-defined strategy but due to the absence of a well-orchestrated
implementation plan bridging the gap to execution.
Implementation plans
should encompass the five best practices of strategic alignment:
- Define strategy and align initiatives, metrics, people, and tasks with
corporate goals
- Clearly communicate strategies and plans
- Use
incentives to drive employee behaviors needed to meet objectives
- Collaborate and monitor progress regularly to identify problems
- Measure performance using Key Performance Indicators (KPIs) so that issues
can be resolved early
These best practices are interdependent and, when
implemented together, enable companies to successfully bridge the gap
between strategy and execution.
OVERDEPENDENCE ON FINANCIAL
METRICS
It's not uncommon for companies to jump ahead to monitoring
progress (to identify problems) and measuring performance (to resolve issues
early) and forego the investment required, for example, to communicate
strategy across the business. They may invest in dashboard and scorecard
projects that help executives assess changes in financial numbers, only to
find out that these tools ' when used alone ' are not adequate to drive
consistent, focused execution by employees.
In most cases, a change in financial figures represents only one aspect of an organization's current
state. Assessments of value, growth, and change must also consider
intangible assets such as intellectual property, employee satisfaction, and
the quality of internal processes (such as the development process for a
software company). All of these factors can be potent forces driving the
performance of many organizations. Traditional financial measures can tell
executives whether or not their company is meeting or exceeding target
revenue, profit, and cost-cutting goals; but these metrics can't help
executives proactively drive strategic alignment needed to meet performance
objectives. In other words, financials have limited predictive power to
gauge future success.
For example, decaying employee morale, declining customer satisfaction, and diminishing product quality ' all
leading indicators of success or failure ' won't show up. Financial metrics
provide only an abstract view of organizational performance. Further,
they are beyond the grasp of the majority of employees, who can't use them
for guidance in making day-to-day decisions, determining priorities, and
allocating resources. Relying solely on financial data to direct execution
enterprise-wide means that the day-to-day decisions that truly drive
corporate performance are made without the critical context of strategic
objectives.
Using Strategy Management Software to Systematize
Strategic Alignment
Technology tools such as strategy management
software can play a lead role in helping companies implement
alignment-building best practices by doing the following:
- Drive
consistent communications across the business
- Support core processes with
automation and workflows
- Foster collaboration within and across
departments
- Provide insight into assets and resources
- Give employees
at all levels the information needed to take actions that further corporate
strategies
- Make it easy for executives and managers to monitor progress
toward goals, identify and head off problems, and measure outcomes based
on up-to-date data
ALIGNING INITIATIVES, METRICS, PEOPLE, AND TASKS
WITH CORPORATE GOALS
Typically, employees spend most of their time
and effort dedicated to projects. Individual projects serve to organize
people and resources toward accomplishing activities required to reach a
specific objective by a particular date. In other words, projects provide
the "how" and goals provide the "what."
The problem is that in most
organizations, there is no explicit link from individual project or
initiative to a broader company goal; nor is there clear accountability or
an audit trail. Most organizations have developed goals and objectives,
sometimes formalized into a strategic plan. Too often, however, only a
select few individuals truly understand those goals and their impact on
daily activities. Managers and employees are assigned to a project with no
real appreciation of the project's importance in the greater scheme of
things. Consequently, they tend to prioritize projects with the most
political capital or those that are furthest behind schedule.
To
manage corporate performance more effectively, organizations need to move
from defining and managing projects to first defining overall corporate
strategy and then aligning key initiatives to accomplish each goal. For
example, the goal might be to increase revenue by 5%, while the initiatives
involve increasing sales by 10% and opening five new stores. Strategy
definition must involve stakeholders across the organization, be
interactive, get updated frequently, and tie explicitly to organizational
operations ' down to which people are responsible for performing which
tasks. Otherwise, strategy documents are viewed as static, impenetrable
documents that no one is honestly committed to executing. And finally,
employees at all levels need better insight into the strategic relevance of
various projects to make informed choices about which projects should take
precedence over others.
Many organizations try to use Microsoft
Project, Excel, or even PowerPoint to define strategy and translate
initiatives into projects and tasks with associated metrics. But these
desktop tools were built for power users; they simply can't support
collaboration among stakeholders who need to participate in ongoing
discussions, work together on documents, and gain insight for swift
action. Instead, users need to understand interdependencies between
different teams and projects and their impacts on overall goals.
Strategy management software can transform written plans developed by
executives into living documents that can be used with employees to define,
discuss, share, and update goals. These documents can also include rich
contextual visualizations that drive greater understanding of strategic
objectives across your organization.
Managing Initiatives
Strategy management software can also enable effective initiative
management. It can help increase coordination of resources and enable
decision makers to prioritize based on importance, not just urgency. Most
importantly, effective strategy management software makes it easy to
explicitly link the process of managing initiatives to managing goals and
metrics ' for a complete view of performance relative to strategy execution.
Ideally, initiative visuals should show the high-level milestones
critical to their success, and interdependencies between these milestones
and associated tasks, as well as an indication of progress. This insight
facilitates collaboration, helps identify bottlenecks, and enables proactive
corrective action. For example, a marketing manager launching a new clothing
line for a fashion retailer could use the company's instituted product
launch process as a foundation for building the launch initiative, tailoring
it to the parameters of the launch at hand.
Launch program Internal
promotional materials Joe Lefort ' Apr. 1, 2005 and advertising 0 %
As illustrated in Figure 1, software that visualizes the
interrelationship between initiatives and strategic goals helps
organizations quickly identify what might be broken when problems occur.
The software should support analyses to help decision makers determine a
resolution. For example, if the fashion retailer finds that sales for the
new clothing line are disappointing, managers can perform a simple analysis
on the various milestones for each of the initiatives that can shed light on
the root cause of success or failure. The marketing manager may find
that low sales are caused by insufficient research prior to selection of the
new line, ill-timed promotions, or insufficient sales force training.
Understanding these issues helps the company create scalable, replicable
processes that provide a strong foundation for future execution.
CLEARLY COMMUNICATING
STRATEGIES AND INITIATIVES
Alignment-focused organizations also make
sure that all stakeholders ' employees, partners, customers, and the
financial community ' clearly understand the organization's key long-,
medium-, and short-term goals. Spelling out these goals visually as part of
stakeholder communications, and mapping their interdependencies, can go a
long way toward helping individuals understand how the organization plans to
achieve its vision. Even more importantly, this approach can help them see
how their own sphere of influence and activities contribute. For example,
the visual shows executives the two-year plan while helping others
better grasp the immediate plan (see Figure 2). Strong visualization
techniques can also be used for strategic planning by different groups, to
help gain executive support and buy-in from various stakeholders, and
monitor progress.
Using "Pathways"
Most organizations have a
grandiose long-term goal statement, or strategic vision, that declares what
the company is trying to accomplish ' but few employees have any idea what's
required to actually achieve it. Management needs to take these goal
statements to more granular levels of detail, and show people the
interdependencies.
"Pathways," which map and link successive waves of
goals and initiatives, can play a vital role by helping employees at all
levels visualize the interrelationship of their own activities with the
broader vision. And when budgets and resources are cut, these pathways help
managers focus their remaining resources on what's most important to
achieving a larger strategic objective. In essence, they make choices and
their consequences more visible for better-informed, more decisive action.
For example, imagine that an apparel retailer has the lofty ambition
of becoming one of the top three brands for women's clothing and accessories
in the United States by the year 2010. The company isn't going to get there
overnight; but with a road map, employees can see how they need to work
together to get there.
Figure 2: The Fashion Retailer's "Pathways"
As illustrated in Figure 2, executives of the fashion retailer define
their first pathway as creating a high-end, stylish brand recognized in
New York the most important market. Once successful in New York, they
expect to leverage the experience and apply it in other markets. This leads
to the second pathway ' a gradual expansion across the East Coast, which
represents a large percentage of the target market. Executives will then
shift focus to the third pathway, which involves nationwide expansion
and taking advantage of potential operational efficiencies.
These
pathways are fundamental to how the company will establish its operations.
For example, consider the following ripple effects in decision making:
- Rather than seek low-cost merchandising, the company will focus on
building relationships with premium clothing brands, which will support the
objective of becoming a high-end retailer.
- Because the target segment
prioritizes clothing selection over price, the company needs to be able to
replenish inventory quickly. So instead of cost driving inventory
management, availability becomes the central consideration.
- To
meet the high expectations of its discriminating customers, the company will
put a premium on hiring adequate numbers of professionally trained
salespeople ' with a pricing strategy to match.
- Since the first goal
focuses on establishing the brand in New York, the company will limit
initial advertising and PR efforts to local media only, while at the same
time taking into account the second pathway. Choosing communications firms
with a broader East Coast presence will help support these objectives.
Besides helping executives make forward-thinking decisions, pathways can
help focus resources properly. For example, the first order at hand is to
establish and build a high-end brand, which requires building relationships
and achieving momentum within the target market. Achieving operational
efficiencies, while important going forward, takes a back seat for now.
Using Goal Diagrams
Goal diagrams are an efficient way to outline
and communicate goals. They tell a story about how the various short- and
medium-term objectives will work together to accomplish the long-term
goal. The fashion retailer can use goal diagrams to map out a strategy for
achieving the first objective, as illustrated in Figure 3. At the same time,
the strategy should encompass plans for impacting tangible assets (such as
financial targets) and intangible assets (such as improving quality of
service or increasing customer satisfaction). This involves developing
initiatives for different "perspectives," such as customer, employee, and
partner perspectives. For example, initiatives relating to the customer
perspective might be, "Create perception as high-end, stylish brand," "Build
relationships with premium clothing brands," and "Obtain store property on
5th Avenue." Initiatives associated with the employee perspective may
include "Train employees to meet and greet customers in store" and "Provide
employee incentive to reinforce ‘meet and greet' behavior."
For goal
diagrams to be effective, it is important that the words accurately convey
the organization's intention in a way that is relevant and meaningful to
organizational stakeholders. One can imagine how organizations that don't
communicate their long- and short-term vision might become misaligned over
time. For example, if the fashion retailer approaches its third pathway with
a plan that fails to reflect "operational efficiencies" as a key focus,
brand building might continue to take precedence over consolidating
operations across various stores to reduce costs. At this stage of its
growth, the company's failure to build operational efficiencies would be
detrimental to its bottom line and long-term health, precluding national
expansion.
Strategy management software can automate the process of
creating pathways and goal diagrams and centralizing them so that
historical and up-to-date versions are accessible to all. In addition, the
software can facilitate communication by:
- Automatically distributing
updates to employees impacted by changes in goals and initiatives for which
they are responsible
- Enabling employees at all levels to collaborate on
the development of goals (for example, using the software for threaded
discussions to ask questions and review responses)
- Allowing users to import familiar custom diagrams that are already in
use and include them in plans and reports (see Figure 4)
Note too that strategy management
software can be linked to other performance management applications, such
as:
- Profitability management software ' for example, to better
understand the base-level business drivers, essential for defining the
right strategies
- Planning software ' so that plans created are in
alignment with overall corporate strategy
- Risk management software '
for example, to analyze the risks associated with various strategies, goals,
and initiatives and make risk-adjusted choices
USING INCENTIVES TO DRIVE EMPLOYEE BEHAVIOR
The
importance of designing proper incentives is a basic rule of thumb; but
companies often fail to get all employees personally invested in driving the
success of the business. As a result, they end up with an army of employees
operating with disparate agendas doing little to advance organizational
objectives. The root causes are twofold:
- Employee incentive
systems ' and thereby, their personal goals ' are not linked to
organizational strategy.
- Executives and line-of-business managers lack a
systematic way of communicating long-term goals and linking them to the
individual projects, tasks, and milestones .
Many companies have some type
of incentive plan such as a management by objectives (MBO) system that
rewards employees who meet a set of specific, predefined milestones and
creates consequences for those who don't. But in many cases, those
milestones are at odds with or disconnected from ' corporate strategic
initiatives.
Strategy management software can ensure that individual
goals are tied to overall corporate goals. For example, by requiring
specific linkages to current initiatives, organizations can ensure that
they are tied to corporate strategy. Ideally, it should be possible to
create linkages to any level of detail, including which employees are
responsible for which tasks and milestones. When strategy management
applications are integrated with compensation management software, companies
can quickly and easily determine MBO-driven incentive compensation by far
the most significant driver of employee behavior and motivation.
COLLABORATING AND MONITORING PROGRESS
The next step is to put
mechanisms in place to facilitate collaboration throughout execution (both
at departmental and employee levels) and to monitor progress on a regular
basis. In many cases, successful execution of an initiative requires that
different departments work together. For example, product development,
marketing, sales, and service should collaborate to create and roll out a
new product that is intended to increase revenue by a certain percentage.
Systematically monitoring progress makes it possible to alert stakeholders
to issues and problems, thereby enabling swift action, and to call attention
to bright spots and successes.
Collaborating Throughout Execution
Successful collaboration on interdependent projects and tasks
requires that everyone involved have visibility into progress at all times.
Every individual should be able to communicate regarding status, events, and
best practices. And all participants should be confident in the accuracy of
data shared in operational reviews, which enables them to put these reviews
to good use. Strategy management software can play an essential role by:
-
Providing visibility into progress
When strategy management software
is available to employees at all levels, they can report on progress down to
the task level in real time data that rolls up to enable reporting at
project, initiative, and strategic levels. Users can identify and address roadblocks quickly, and be inspired by the progress to stay focused on
the task.
-
Supporting discussion threads
Ideally, strategy
management software can support online discussion threads and other
collaborative communications that enable employees at all levels to
understand what's working and what's not, share best practices and lessons
learned, and more. Figure 5 shows an example of an online discussion
thread.
Figure 5: An Online Discussion Thread
-
Optimizing
operational reviews
Reports on performance are part of every organization's
operations ' from weekly status meetings to quarterly or annual reviews.
Regular, frequent operational reviews keep everyone informed, especially
when reports make sense and are based on reliable data. Strategy management
software can automate the preparation of reports for these reviews and
provide access to live data.
Monitoring Progress
But
effective collaboration depends on effective progress-monitoring mechanisms.
To implement progress monitoring, organizations first need to translate
their strategy into quantifiable measures ' including "soft" strategic
objectives. For example, "improving employee satisfaction," a seemingly
intangible objective, could be quantified by quarterly employee surveys
that measure employee satisfaction. Do the results meet targets defined by
management? Other soft objectives, such as "establish customer intimacy" or
"generate high-quality leads" can be quantified using similar techniques,
thereby providing an objective view of performance and enabling appropriate
action.
The next step is to associate each objective with KPIs, which should pass the following tests:
- Are they outcome-oriented
(meaning tied to an objective)?
- Are they target-based with at least one
defined time-sensitive target value?
- Can they be rated with explicit
thresholds that illustrate grade-level differences ' or gaps ' between the
actual value and the target?
Both leading and lagging indicators of performance can be incorporated in
measurements. Consider the value of monitoring leading indicators to the fashion
retailer. Since a key differentiator is the relationship employees build with individual
customers, the company invests heavily in training salespeople to
provide outstanding, personalized customer service. Thus, minimizing
employee turnover is critical. By tracking employee morale and satisfaction
through regular surveys, the company can head off potential morale issues '
the leading indicator ' before they negatively affect revenues ' the lagging
indicator.
Enabling Real-Time Reporting and Live Operational Reviews
For monitoring progress toward objectives, scorecards and dashboards
offer useful visual representations. Performance management solutions
deployed across the enterprise should support scorecard and dashboard
functionality and pull from a single, centralized source of reliable
operational and other data. This data consistency helps ensure that all
executives and line-of business managers trust the reported results.
Scorecards
Cascading scorecards provide a cohesive view of key
objectives across functional and business units. They integrate operational and financial information, resource allocation data, and more to present
a true account of overall progress toward overall goals. Intuitive alert
systems using familiar traffic-light icons help employees quickly understand
the current performance status, without requiring that they interpret the
numbers. For casual users who don't have the time to drill deep into
performance, scorecards are an effective means for gauging ongoing
performance.
Figure 6: The Fashion Retailer's Scorecard
The
fashion retailer might deploy scorecards at the corporate level for its
sales, marketing, and customer service organizations, as well as for
different stores. Tracking both leading and lagging indicators, these
scorecards give managers and employees a high-level, balanced overview of
performance against key objectives (see Figure 6). Even if lagging
indicators like revenue suggest that the company is doing well today,
leading indicators show that problems may lie ahead.
Dashboards
A dashboard is a visual display of the most important information needed
to achieve one or more objectives. Data is consolidated and arranged on a
single screen so the information can be monitored at a glance. Dashboards,
which visually communicate progress on multiple key metrics, are typically
more quantitative and when interactive, allow managers to drill down on
multiple metrics across different dimensions of performance. Executives
can use dashboards designed specifically to gauge the progress of a team or
a project.
Figure 7: The Fashion Retailer's Dashboard
In the
example shown in Figure 7, the company uses role-based dashboards for the
chief operating officer and VPs of sales, marketing, and customer service to
make it easy for them to monitor what's most important to them. In addition,
department-specific dashboards display data for use by sales, marketing,
service, and inventory management teams.
Live Operational Reviews
Strategy management software can support preparation for any type of
operational review by centralizing data, certifying its accuracy, and making
it available for instant publication. Ideally, companies also need to be
able to "go live" with their report to compare the most current data with
that presented in the review (see Figure 8). When all reports are based on a
single, trusted data source, participants can focus on problem solving
rather than concerns about data inaccuracy.
Figure 8: Example of
Support for Live Operational Reviews
MEASURING PERFORMANCE
Stakeholders can use scorecards, dashboards, and operational reviews to
identify problems ' but to determine the best corrective actions, they need
to drill down and conduct root cause analysis. Figure 9 shows examples of
root cause analysis, including weighting of metrics according to their
strategic priority.
The most effective software can also automatically
detect and communicate "below horizon" objectives, allowing companies to
manage exceptions and head off problems. For example, a company may appear
to be performing according to plan, but in reality is in danger of failing.
Sales targets for three product lines might be reported on individually as
"green," or on target; but if all three products are sold as a bundle, the
software can detect a problem and report this sales target as "red."
Strategy management software that supports these types of analyses
should address the needs of both casual and power users. Casual users need a
simple interface to review published reports and analyses to understand
problems more fully and identify issues. Power users need to slice and dice
performance information and drill down to much greater levels of detail '
activities traditionally done with spreadsheets. And both need to be able to manually input anecdotal information, data from surveys, ideas from
colleagues' heads, and other data points that can shed light on changing KPIs and problems, for example.
Figure 9: Flexible Analysis Options
to Identify Root Causes
The software also needs to support flexible data
capture and analysis, which requires more than just a business intelligence component and a spreadsheet. Business intelligence products are useful
for automating data capture and getting it into a data warehouse, but not
for adding anecdotal information. And using spreadsheets to perform the
frequent complex analyses and reporting required for effective strategy
management is simply not
scalable or efficient enough to be sustainable.
Strategy management solutions need to expand what should be included in the repository of performance-related information and provide built-in
analytics for both casual and power users.
For example, a strategy
management application for the fashion retailer supports flexible
data-capture methods and provides built-in analytics. Leveraging these
functions, executives can look at advertising costs versus brand recognition
data to understand the effectiveness of campaigns across different markets.
Ranking reports help decision makers measure revenues across different
stores and identify the top and bottom performers. And further analyses
provide insight into how they can impact future performance by managing
certain leading indicators. For instance, if customer satisfaction is
particularly low in a certain region, executives can look at leading
indicators such as employee training, product availability, and promotional
activity. Once the culprit is identified, the company can take proactive
steps to turn customer satisfaction around.
STRATEGY MANAGEMENT
SOFTWARE AS PART OF A COMPLETE PERFORMANCE MANAGEMENT SOLUTION
The
example of the fashion retailer illustrates how strategy management software
supports the five best practices of strategic alignment in the following
ways:
- Define: The company was able to define strategic goals, link
them to initiatives, and then manage initiatives and coordinate resources
based on their relative importance.
- Communicate: The company built
alignment by communicating what needs to be accomplished and how to
accomplish it ' not just as a topdown exercise, but by engaging employees at all levels. The software also improved communication by making it
easy to create pathways and goal diagrams and incorporate custom diagrams.
- Incent: Tools were in place for linking individual employee objectives
and MBOs to overall goals, enabling the company to design financial and
other incentives ' and consequences ' to motivate people in the right
direction.
- Collaborate and monitor: Built-in scorecards and dashboards
helped different groups of users within the organization work together more
effectively and monitor progress toward goals.
- Measure: Built-in
analytical functions, in the form of both published reports and detailed
drill-downs, enabled proactive problem identification and prompt resolution
of issues.
And when strategy management software is deployed as part of a comprehensive performance management solution, organizations can realize
even greater benefits. For example, SAP offers the SAP® Strategy Management
application, which supports and enables all of the best practices discussed
in this paper. When deployed in conjunction with other SAP solutions for
performance management, or with SAP solutions for governance, risk, and
compliance, SAP Strategy Management enables companies to gain greater
control over strategy execution and overall business performance. For
example:
- With the SAP Business Profitability Management application by Acorn, companies can identify key profitability and cost drivers,
determine the most profitable growth and revenue initiatives, and adjust
strategies accordingly.
- With the SAP Business Planning and Consolidation
application, organizations can align operational plans with strategic
goals. Organizations can use predictive analytics to assess what's happened
in the past and adjust plans accordingly to improve future performance and
manage risk.
- With the SAP GRC Risk Management application, executives
can take into consideration the real business risks associated with new
strategies before they are even approved for funding and execution.
These are just some of the ways that SAP Strategy Management can help
companies close the gap between strategy and execution. For more information
about SAP solutions for performance management, please visit
www.sap.com/usa/solutions/performancemanagement.
www.sap.com/contactsap
50 086 967 (07/11)
Printed in USA.