Part V: Increase Profitability through Flexibility, Agility and Adaptability
How far into the future can you see, at least with respect to your company? 18 months? 1 year? 6 months? 3 months?
While traditional strategic planning prescribes envisioning a target 3 years in the future, personal experience in North America and Europe indicates even 2 years is unrealistic for all but the most stable organizations.
And this inability to predict is the point where so many companies abandon any formal strategy creation altogether. Why should a CEO and top executives frivolously waste their scarcest resource, time, to develop a strategy and put together a strategic plan that will be invalid in a matter of months? It’s a reasonable question.
Unfortunately, the logical conclusion leaves many companies with what might be called strategy by default. Whether or not an executive team formalizes a strategy, it has one. As discussed in Part III: Does Everyone Know What To Do? of this series, at the most basic level strategy is a hypothesis about what a company must accomplish to get from where it is today to where it wants to be in the future.
Two speculations are at the heart of strategy. Speculation about what a company must do and speculation about what the future will be. Strategy by default speculates that what a company is doing currently will be what is required to achieve sustainable, superior profits in the second speculation, an uncertain future.
From this perspective, the need to be ready to leap on a lucrative opportunity or pull back from a bad situation trumps everything else. The business press in recent years offers plenty of support for this approach. Titles which question if strategy is dead and referencing the speed of change in today’s market give credence to no plan being a plan.
To stay ahead of competitors in today’s volatile market, companies aim to be agile, flexible and adaptable. You need to be proactive to take advantage of opportunities as they arise as well as reactive to sudden, unexpected changes. Stay light on your feet, ready to mobilize. As Jack Welch, legendary GE CEO, observed, “An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” Essentially, companies must assess situations quickly, draw conclusions and act on the understanding, fast.
Traditional strategic planning is, from all indications, outdated at best if not obsolete. A static, stiff strategy which casts in concrete a conception of a company and the market in which it operates is destined to break.
Should a company focus on being light on its feet and ready to change? Yes. However, there is a very big “but.”
Strategy properly conceived and executed is the foundation of flexibility, agility and adaptability.
On the surface, it’s counterintuitive. A plan is something fixed. Every plan comes apart when it encounters the unpredictable changes of reality.
How can we craft a strategy which can adapt and change to unexpected circumstances?
Furthermore, how can the inability to monitor and test if a strategy is achieving profitable results be overcome? Usually any strategy is evaluated based on the financial results delivered. But by the time profit is made or not made, it’s far too late to affect the outcome. How can a company see the need to change before lower-than-expected profits are reported?
A Strategy Map, a graphic representation of cause-and-effect linkages of strategic objectives across four perspectives is examined in detail in Part III: Does Everyone Know What To Do?. Strategy Maps clearly detail the hypotheses of how a company anticipates being able to close the Value Gap and reach its Strategic Destination, concepts addressed in detail in Part II: How to De-Complicate Strategy.
Figure 1 below is an example of linked strategic objectives for a custom software company. Beginning in the Learning & Growth perspective, each objective makes possible objectives in the perspectives above it. For example, if all programmers attain the green belt Six Sigma level, the company will have the skills needed to further streamline production. By streamlining production, thus increasing efficiency, operating margin will increase and ultimately net profit. Streamlining will also deliver key differentiating aspects of the software, mainly accelerated design and delivery time and ease of implementation for clients. The company has hypothesized that these characteristics will help drive sales to new customers and additional sales to existing customers. (Note: Figure 1 does not include all objectives which comprise the company’s strategy map.)
Balanced Scorecard – Expanded Strategic Destination IT Company
Figure 1 Incomplete Strategy Map Example with Linked Strategic Objectives across Four Perspectives
Causally linked objectives work together as the major thrusts of the strategy called Strategic Themes. Themes explain the strategy at a higher conceptual level and describe how key processes (including operations, customers relationships, innovation and regulation) will be managed to achieve targeted financial results. Practically speaking, themes enable simple communication of the major changes the strategy will accomplish. Figure 2 demonstrates Strategic Themes for the same software company.
Balanced Scorecard – Expanded Strategic Destination IT with Themes
Figure 2 Strategic Themes
The expression of a company’s strategy through 3 to 5 Strategic Themes broken down in greater detail by 20 to 22 Strategic Objectives enables just the type of flexibility and adaptability required by today’s companies in volatile markets and a quickly changing economy. Themes or specific Strategic Objectives can be revised or replaced to compensate for internal or external situations. Alterations can rapidly be communicated throughout a company, Individual Objectives realigned and Initiatives, the steps a company executes to achieve Strategic Objectives, also reworked accordingly. A change maneuver which would be almost impossible with a traditional strategic plan can be swiftly executed.
So what signals a need to change strategy in time, before financial targets are missed? Poor profits confirm something went wrong, but by then no change can help.
- External changes, for better or worse, precipitated by competitors, the market or the economy
- Ineffective execution of the strategy
- An incorrect strategy, meaning incorrect hypotheses about causal relationships between strategic objectives
When strategy is effectively communicated through a Strategy Map, everyone understands what the company wants to achieve and how it intends to get there. Accordingly, anyone in the organization can spot changes in the external environment, whether with competitors, the market or the economy, which could impact the company. Everyone, from senior executives to front line employees, is able to gather intelligence and spot signs of possible opportunities, problems or obstacles.
To make strategy testable, it must be measurable, and not just financially. The truism frequently misattributed to Peter Drucker applies: “If you can’t measure it, you can’t manage it.” To accurately evaluate the effectiveness of the execution of a strategy or the strategy itself, it must be measured. Measures must be developed for all objectives in the strategy map and targets set to define success for each objective. Figure 3 provides an example of Strategic Measures for corresponding Strategic Objectives. A complete set of measures of all Strategic Objectives in a Strategy Map is called Balanced Scorecard, a concept originally developed in 1992 by Robert Kaplan and David Norton.
Balanced Scorecard – IT Strategic Objectives With Measures
Figure 3 Strategic Measures
Measurement balance is realized by:
- Financial measures being balanced by non-financial measures in the other three perspectives.
- A mix of Lag and Lead Indicators.
Lead Indicators measure the drivers which lead to desired outcomes measured by Lag Indicators. Companies have traditionally relied primarily on Lag Indicators, such as gross revenue, net profit, customer satisfaction, customer acquisition or customer retention. Lead Indicators from the Learning & Growth, Internal and Customer perspectives enable a company, if causal relationships are correct, to predict financial results before they occur.
Practically speaking, how does this make strategy testable? Take a look at Figures 4 and 5.
Balanced Scorecard – IT Strategic Objectives With Measures and Targets Red-Yellow
In Figure 4, the company is not reaching targets (yellow or red lights) on a majority of its objectives. The strategy is not being executed as intended and therefore isn’t on track to hit financial targets. The strategy might or might not be wrong. What is certain is that the execution is incorrect. Initiatives and individual scorecards must be adjusted. Here, objectives aren’t questioned, just how the company is working to achieve them.
Balanced Scorecard – IT Strategic Objectives With Measures and Targets Green
In Figure 5, the company is hitting targets (green lights) on a majority of its objectives. But financial results aren’t following. The strategy is wrong. The cause-and-effect relationships must be reconsidered. Objectives or Themes need to be altered or completely changed or the company won’t reach its Strategic Destination. At this stage, the company must question its underlying assumptions in the strategy. Here, the company will adapt objectives or, in the worst case, reformulate the strategy.
To summarize, to make strategy flexible, agile and adaptable to achieve sustainable bottom line growth:
- Define 3 to 5 Strategic Themes broken down into 20 to 22 Strategic Objectives, all represented graphically in a Strategy Map.
- Create Measures and Targets for each Strategic Objective, collectively known as a Balanced Scorecard.
- Regularly review Measures and Targets on the Balanced Scorecard to test both the execution of the strategy as well as the validity of the underlying hypotheses of the strategy.
- Adjust or change Strategic Themes or Objectives when necessary based on external or internal situations.
Not having strategy is still a strategy, just not an effective one. By following the above steps, a strategy can be constructed which focuses all the resources and efforts of a company while preventing it from being locked into an approach or course of action.
This series, Does Strategy Enhance Business Performance?, has presented practical steps to make strategy a tool for long-term, sustainable profits. Stay tuned for the next series on practical steps in Performance Management and Business Strategy for high performing companies.
Ed Breman is the founder of Accelerate Exceed and a strategic partner of Daszkal Bolton. Ed oversees Performance Management consulting services for businesses and is certified in the Balanced Scorecard methodology, a proprietary approach to management recognized as one of the most important and influential management ideas of the 20th century by the Harvard Business Review. Ed may be reached at Ed.Breman@ac-ex.com.