Strategy Formulation and Execution

Strategy Formulation and Execution (6)

Wednesday, 30 May 2018 11:50

Synchronized Strategy Execution

Written by Fernando Santiago

synchronized-strategy-execution-thumb

Synchronized Strategy Execution

March 27, 2016

 

Success in executing business strategy remains elusive.  Norton and Kaplan claim that nine out of ten companies fail to execute strategy. This is similar to the success rate, or should we say failure, of new ventures. However, here we are talking about organizations that have invested significant amounts of time from their higher-up echelons, paid small fortunes to consulting firms to come up with strategy documents that, at best, get translated for the lay person and disseminated throughout the organization. Office employees, shop floor workers and even managers receive this information by sitting in a meeting where the CEO talks on a screen about the strategy and how, this time, rest assured, it will happen. They may even receive a cue card or some kind of material to reinforce the spiel. After the meeting, most often than not, they return to their jobs and continue doing exactly the same thing they were doing before, exactly the same way. At the end very little happens and, the following year, the cycle repeats.

A solid strategy, a real one, exudes direction for execution.  It clearly defines what needs to be different to achieve organizational objectives, and how each department will contribute, what will be done differently and what will be done no more (always so hard…).  When executives produce this level of strategy, middle managers have something solid to work on, as they just have to acquire or deliver the capabilities that will allow the business to achieve their targets in business objectives, which in turn will be reflected in financial indicators (growth, increased profits, etc.).  This should be the norm, but it is the exception. But this is formulation, the relatively good link of the chain. God protects us.

In the majority of organizations that have a strategy formulation process, a step of translation is needed, mainly because formulation is poor. This is usually the responsibility of internal consultants or planning departments, who link financial projections to targets for KPI’s (key performance indicators) and identify the projects and/or operational activities that will generate the expected targets. And here is where this nice (really?) story breaks apart. Very few companies have the talent or the tools to run simulations that generate targets for KPI’s that could be sufficient to achieve financial projections. As an example, the organization estimates that in order to increase revenue by 5% annually, they need to increase the average number of line items per order. The current value of the KPI is 3.2, and this needs to increase. The question is by how much, and when.  Targets for KPI’s should be synchronized with targets for financial indicators. In most companies this exercise is just a guess. Modeling, when available, usually gives the final target for each operational result required to achieve the desired financial performance in the “to-be” or desired scenario. However, intermediate targets for KPI’s are no more than a guess. Someone may catch the idea that until we deliver some projects we cannot expect change, so the first year is usually flat or minimal change, but after that, it will just climb to wherever it needs to get, likely using a linear scale, which is almost never right.  In most cases there is no simulation, so even the final targets for the KPI’s are nothing but a guess.

The second part of the question formulated above, the “when” refers to how the KPIs will progress from their current measurement to the desired target.  Expected change in a KPI, besides external factors, is related to the completion of projects and operational initiatives identified as a result of planning; at least this is the way it should be done. Projects will likely deliver capabilities that will enable the business to do things they couldn’t do before, or do things differently. It is through the use of new capabilities that the KPI’s will get impacted, together with operational initiatives that are not necessarily projects (i.e. rationalization of distributors, adjust credit rules, etc.). Both projects and operational initiatives have one thing in common: they take time and have an end date, and it is only after the end day and usually with some lag, that effects can be measurable in the KPI.

Besides timing, each project or operational initiative will have a relative contribution. As an example:

  1. Project A has a contribution of 30%, Project B of 50% and Operational Initiative C, 20%.
  2. The delta between the current value of the KPI (3.2) and target value (5) is 1.8
  3. This delta is then prorated to the projects and initiatives, based on their relative contributions
  4. Considering expected delivery and lag to see results after delivery, the contribution in each year from each project or initiative can be calculated
  5. Adding the yearly increments from each contributor, the targets for the KPI can be calculated

synchronized-strategy-execution

Fig 1.

In this example:

  • There is only a minor improvement in the indicator or KPI in year x +1  (0.18)
  • In year x +2 the increment is more than three times the previous year increment (0.675)
  • In year x +3 the increment takes the KPI to the target, the increment starts to level, and is only 50% higher than the previous year (0.945)

This example clearly drives the point that targets for KPIs cannot be arbitrary and certainly not linear. However, this is just the plan, and projects get delayed and/or re-scheduled, and changes impact the ability of the business to achieve targets, creating a perception of failure that is not real, just the consequence of business decisions.  This is what, intuitively, has driven a wedge between operations and project delivery, as projects do not get to production quick enough to generate the expected business results.

From the financial perspective, investments in projects do not generate the expected impact on growth, revenue or cost reduction, creating yet another perception of failure that is perfectly explainable considering actual project delivery.

At this point in the discussion, the need to link project delivery to operational results (KPIs) and financial results should be evident. Current approaches to implement strategy execution, like Kaplan and Norton’s Balanced Scorecard, cover the concept of contributions, but do not reflect the “kronos” aspect, the timing of all these pieces, which are not random balls in the air, but synchronized gears in a machine with a logic that very few people in the organization understand. This clearly explains the frustration and lack of results in strategy execution, benefit realization management, portfolio management and all other approaches that try to manage these pieces as independent silos.

Synchronized Strategy Execution is, in essence simple: there is no “secret sauce”, no more logic than the one presented in Figure 1.  However, capturing the cause-effect relationships for a Strategic Business Unit between initiatives, capabilities, operational results and financial results, plus the relative contributions among all these elements, can appear like a daunting task. This simple but laborious mathematical problem can, and has been resolved with relatively simple modeling tools, and it is not an obstacle to the implementation of this approach.

When cause and effects relationships between projects and operational results have been defined and can be managed, benefits from projects are simply reflected, through relative contributions, on operational results. At this level, management of benefits does not represent an additional layer of work, as it is significantly simplified due to:

  • Reduction in the problem of double counting benefits from multiple projects, added to the impact of projects from previous portfolio years. It is frequent that the same benefits are claimed by different projects, year after year, and seldom realized or verified.
  • Estimation of benefits through contribution to financial results is relatively easy to calculate and easy to verify. Tracking operational results is part of the day to day operation, so no extra work is required, so it gets done.

Finally, the concept of consistency in results is the “icing on the cake” in this approach. Consistency in the results from the three “realms”: project delivery, operational results and financial results; provides valuable insight into the viability of the strategy. Common scenarios are:

  • Sunny day: projects are delivering as planned and operational results are meeting expected targets, while financial results also meet the expected targets. Life is good.
  • Cloudy day: project delivery is behind, and so are operational results. As a consequence, financial results are not getting the expected targets either. Not nice, but it makes sense. Corrective action is needed in portfolio management, maybe architecture, as well as in project delivery.
  • Confusing and expensive: projects are delivering as planned, but operational results are not reaching targets. This can mean two things:
  1. The model is missing something: operational results are impacted by other factors not considered in the analysis, which explain the variance between expected and actual measures.
  2. Projects are delivering on time, on budget and to requirements, but fitness for use (the second component of quality) is not there. In other words, the business is not getting the expected results from the capabilities delivered, achieving no impact on operational results.
  • Confusing and embarrassing: Projects are delivering as planned, operational results are being achieved as expected, but financial results are not there. This scenario could mean two things:
  1. External factors not considered in the cause-effect analysis, explain the financial results (i.e. changes in the environment, assumptions that did not materialize, etc.).
  2. The strategy is flawed and the plan, even when execution is successful, is not capable of achieving the expected financial results. This is probably the most difficult scenario to manage, particularly when it comes to communicating this to the “executive row”.

Synchronized Strategy Execution is a simple solution to three very complex problems: strategy execution, project selection/portfolio management and benefits realization management. As with any approach related to strategy, this cannot guarantee success, but it will get all the pieces done in a smart and effective way, providing executives with the information they need to manage strategy execution.

 

Fernando Santiago MBA PMP CSM

Managing Partner at P3M Solutions, a Canadian company that provides consulting, training and software applications in the area of strategy execution through portfolio and benefits management.

 stepup_to_the_plate

The recent Pulse of the Profession on Portfolio Management from PMI calls for elevating Portfolio Management to a strategic level. However, the term “execution of strategy” is not even mentioned in the report. PMI is saying many of the right things, but fails to make the connection: portfolio management should step up to the plate and become the natural owner of translation and execution of strategy.

Executives are accountable for formulation of strategy, but someone else needs to own translation and execution. Translation takes the strategy document and generates actionable, clear and measurable business outcomes or results and key capabilities that will allow the organization to achieve these outcomes. Of course, for this to happen, the strategy must be strong, not just a collection of tactics, goals and feel good statements.

Once translation has been done, execution starts with identifying all the initiatives required to deliver the capabilities and changes that will achieve the business objectives. This should be the foundation for defining a portfolio, from the top down, as opposed to the current practice of gathering proposals for projects and prioritizing them.

The practice of Portfolio Management so far has not helped companies with strategy translation and execution. According to Kaplan and Norton, creators of the Balanced Scorecard, nine out of ten companies fail to implement strategy. A most recent survey of over five thousand companies has this number as one out of three. It is still too high. Clearly, Portfolio Management has not fulfilled this role, and this explains why now corporations are looking at the concept of the Office of Strategy Management, or OSM, another creation of Kaplan and Norton.

The adoption of Top-down Portfolio Management can enable PMO’s and Portfolio Managers to step up to the plate and fulfil the role the OSM is starting to play. Starting with strategy, they can be a key player in the translation of the strategy and into execution through portfolios of initiatives defined from the top-down.  Tactical work still needs to be done to ensure delivery is successful, but strategy execution should be the main purpose of portfolio management.

 

Friday, 30 November 2012 14:47

Is your corporate strategy a wishion?

Written by Fernando Santiago

alladin_lamp

 

“Wishion” is not a typo. Most companies have Mission and Vision statements that are sound and well written. Sadly, when it comes to strategy, what they have is a “Wish-ion”: a document that defines what the company wishes to achieve, but not how it will get there. Almost every strategy document has the word growth in it; expense reduction and productivity improvement are also favourites. These are clearly goals that do not define a strategy on their own. To qualify as a strategy it should define what the company will do, or not do, or do differently, in order to achieve different results. Furthermore, it should define strong reasons why they think the strategy will work for them. If it doesn’t it is just a “Wish-ion”. You can put it in acrylic, it is harmless anyway; nothing will come out of it.

The term “Wishion” was coined almost twenty years ago when I was doing my MBA at Schulich in Toronto: a student mispronounced the word vision, and said “wishion”, and I found it really funny as I thought of the possibilities of this new term to define poor strategy.

It is surprising that after almost thirty years of building a body of knowledge in strategy management, with armies of MBA’s learning these principles and many of them working for consulting firms, so many companies get this wrong. When nine out of ten companies fail to implement strategy, a good part of the problem is that there is no real strategy to implement.

Formulation of strategy is just the first step in the process, so nobody should expect to have a list of projects or initiatives listed on the strategy document. This should be the result of the process of translating the strategy into actionable elements: programs and projects. But the strategy needs to have enough substance in order to be translated into actionable elements.

Let’s look at a simple example; Joe is the owner of a cafeteria that sells pretty good coffee for $1/cup. Joe is losing customers who prefer to spend $4 at a fancy option two blocks away. Joe is not giving up and decides to transform his business into a fancy coffee shop and use the “fair trade” banner to convince customers to pay him $4 for a cup too. For this he will capitalize on his personal contacts from years of volunteer experience building schools in Kenya and Guatemala, coincidentally countries that produce great coffee. Joe’s idea is that a percentage of the revenue will go to actual projects the shop will fund, with progress visible to customers. This way they will feel good, instead of feeling robbed. In addition, he will replace the traditional muffins and pastries he sells with exotic options that are lower in calories and offer some novelty. Joe expects customers to spend more time at the store too, so he will provide amenities like Wi-Fi and plugs for laptop users at every table and small booths for on-the-go meetings. Finally, he will also grind and sell coffee in bulk. With all these changes, he expects the customers not only to return, but also to stay longer at the store and spend more in every visit.

While simple, the example offers a well defined strategy that can be easily translated into three clear business outcomes: “average customer visits increased”, “average time at the store increased” and “average spend per visit increased”. Those are the key non-financial results that will be significantly different than today and, if achieved, will generate a difference in the financial results of the business.

Well defined business outcomes are a solid foundation to tackle the next set of key questions:

  • Why are the current levels of the business outcome where they are?
  • What do we need to do that we haven’t done before to get the outcome we expect?
  • What do we have to continue doing, but do differently?
  • What are they things we should do that we cannot do today?
  • What are the things we should stop doing?

The answers to most of the questions above are capabilities, either business or technical, that require initiatives to deliver them. And this is how your strategy translates into a portfolio of programs and projects. Instead of the traditional approach of coming up with lists of projects and assess their potential return and alignment to the strategy, this process translates the strategy into programs and projects, so alignment is no longer an issue and return is assessed based on their relative contribution to the overall results. This is top-down portfolio management.

In our example, Joe has already answered many of the questions above, but there are clearly other things Joe needs to do: he needs to learn how to buy coffee in bulk and import it, and then he needs to find suppliers and negotiate contracts, etc. All these are business capabilities Joe doesn’t have today. Joe also needs to select and buy equipment to make good espresso, and also install the Wi-fi and plugs. These are technical capabilities.

If there were other Joes in the same situation, their strategy document would probably read like this: “The central strategic trust is to increase revenue by regaining the preference of the patrons. We will achieve this as a result of superior customer service and differentiated products which, when combined, will create a unique experience for the customer and regain the position of the coffee shop of choice for the patrons in the area”. If the strategy at your company sounds like this, you may have a Wishion.

 

top-down1

Top-down represents to portfolio management what agile represented to project management. In the mid nineties, as projects in information technology became more volatile and less predictable, most of them were challenged, if not outright failures (see Chaos Report 1994). Agile came up with a simple solution to estimating and scheduling: don`t. Instead, it proposed relative estimating using t-shirt sizes (many purists screamed in horror) and a flexible backlog to manage a floating scope (now it was heart attacks too). Today, agile is a mainstream approach for software development and nobody challenges its validity.

Similarly, portfolio management today has failed miserably in helping organizations execute strategy (nine out of ten fail) and manage benefits from projects (20-40% investment in IT is wasted). The response has been more complicated optimization models that require levels of maturity that do not really exist in many organizations. Models are fed with business cases that are in many cases a guess or a make-the-numbers game, and the results are questionable. What companies need is not rocket science, but a simple way to translate the logic of the business and the strategy into a portfolio of programs and projects.

Top-down portfolio management represents this simple solution, translating business strategy into a Results Chain that captures the cause-effect relationships. Inflows are then estimated at the business level, by comparing the forecast as a result of the implementation of the strategy (every company should have this) to the status quo, if nothing is done. This generates a stream of inflows that is then propagated through the results chain based on relative contributions (yes, t-shirt sizes used here). Investments are also propagated, so return on investment can be assessed at any node.

If this sounds complicated, let me assure you it is not. This past spring I conducted a workshop at ProjectWorld in Toronto with 30 participants who, working in teams translated a strategy from a case study into a Results Chain, estimated inflows for the top-down business case, propagated inflows, estimated investments and propagated them, and assessed return at every node. All of this was done in one day, using EXCEL, POWERPOINT AND PEN AND PAPER ONLY. It is that intuitive, once you get it.

The kicker: top-down does not require a high level of PPM maturity in the organization, as only basic information is needed. What is required is a well defined strategy, and this could be the main constraint to its adoption. If your organization or one of your customers has a transformational strategy, try top-down and be among the first to join this new trend in portfolio management.

Of course, it is easier with a tool, which is why we developed BRMTool. The application supports not only planning, but also execution.

P3M is launching the SaaS version of BRMTool with a series of free webinars and a simulation webshop. For more information click on the link below.

http://p3mconsulting.ca/index.php/component/content/article/44-news-and-events/45-bmrtool-now-available

 

 

Zeus-god-of-the-gods-greek-mythology-300x225

Mount Olympus is for immortals. It is hard to get to the executive floor, and those who make it usually have huge egos. When it comes to strategy formulation, egos are one of the factors that help to explain why smart executives, assisted by equally smart consultants with solid methodology, fail to deliver true strategy. Too often, corporate strategy is a collection of tactics that address all the hot topics of the time, lacking unity and fit. Most important, the spark of inspiration and genius, which should abound among immortals, is hard to find in corporate strategy documents.

One top-level management consultant, who was hired to assess corporations in trouble, was asked about the difficulty of his job. He answered that it was not difficult: all he had to do was look for the super egos, and that pointed him to the source of the problems.

Strategy formulation is a process that involves consultants, either internal or external, who do the leg work, prepare the data, facilitate sessions and document decisions. These are mortals, and the interaction with Olympus creates a few difficult situations. The first occurs when the result of the SWOT, PEST, 5F and other analysis are presented to the executives. If these reports present relevant information that has not been considered in formulating the existing strategy, egos can get in the way. Zeus speaks: “Are you mere mortals, implying that I and other deities do not understand our industry, our business and our organization?, Are you implying that we have failed to read the signs in the sky? Of course we know all this, we’ve always had”. Groupthink kicks in and everyone agrees, “of course, we know all this, well presented though, nice charts, excellent work”. In some cases this may be true, but when we see so many corporations that fail to “read the signs in the sky”, we have to find an explanation, and egos could be the culprit.

What happens next? The groundwork has been done, and now is the time for the creative spark. The workshop is underway, the consultants have presented their findings, and now is the time when there is no method, no step-by-step recipe, to take all the relevant information and create a strategy. Inspiration is needed, but it doesn’t always happen. Once I heard someone say that you cannot find inspiration if you are always listening to yourself. At this point, everyone wants to move on from that awkward moment, so executives start pulling the projects and initiatives they wanted to push anyway. Consultants also need to keep the account and finish the workshop, so they play along. Groupthink kicks in again and at the end of the day they conclude the workshop with a list of disjointed initiatives they call strategy. Egos are safe and even fed once again, deities go back to Mount Olympus and the corporation ends up, once again, with no true strategy.

 

Saturday, 22 September 2012 06:23

The accountability dilemma

Written by Fernando Santiago

iStock_000004996421XSmall

 

“Everyone is accountable for corporate results” is a stock phrase that we hear too often these days.

The idea that every worker from his/her desk or workstation is accountable for corporate results is a false concept that has been cemented by scorecard models that link financial results to the work of departments, even individuals. Reality is very different.

There are two species in the corporate world. On one hand we have executives, who dwell in the upper levels and are accountable for defining corporate strategy. They are the ones that decide what to do, and what not to do based on, you would hope, an accurate reading of their industry and the economic and political environment. Strategy, if well defined, should clearly identify where the organization needs to get different results, and how different results will be achieved. Strategy is not always this clear, but this is the topic of a separate posting.

The other species, the mortals, are accountable for making sure that the changes defined from above are implemented. They do this through programs and projects, operational efficiencies and all kinds of initiatives. Success for the mortals, should be measured by the achievement of the targets for change set by the executives. If targets are met, this doesn’t necessarily mean that there is a party at Mount Olympus. The cause-effect relationship between the defined changes and the financial results of increase in revenue, reduction in costs and improvement in profits is, in essence, the strategy. If financials are good, this at least proves that the strategy was not wrong. Good financials could be a result of a favourable economy, a competitor going under or a booming market. Conversely, if the internal targets were met and the financials are not there, the accountability clearly falls on the executives. They are the ones who should be capable of reading the signs on the heavens, which is why they are paid as they are, and if they are good at what they do they are worth every penny.

In conclusion, accountability is not a continuum that goes from the top executives to the desk of everyone in the company. It has two defined sections that correspond to strategy formulation and strategy execution. The link between those sections are clear and measurable business outcomes.