As Gary Coking rightly state is Corporate Performance Management related to the execution of a company’s execution. The strategy formulation is therefore not a part of CPM. A CPM solution therefore must support the execution of the strategy. However, many obstacles exist with regards to that process. What are the main obstacles to executing strategy in general? According to a reader survey performed by HBR ( page 75, july-august 2010 ) these obstacles are:
– making it meaningful to frontliners
– translating strategy to execution
– aligning jobs to strategy
– poor communication of strategy
– lack of accountability or follow through
– inability to measure impact
– too focused on short term results
– lack of time and resources
– lack of clear and decisive leadership
– leadership actions inconsistent with strategy
– silos or units with competing agendas
– resistance to change
In general four major issues related to strategy execution stand out:
– biggest execution challenge is making strategy meaningful to frontline workers
– a lot of people can’t even tell you the company’s strategy
– strategy still comes mainly from the top
– people involved in its development are the most likely to buy in
The rise of the Balance Scorecard is one answer to the failure of strategic execution. The BSC was meant to align the Corporate Strategy to the Execution, using Critical Success Factors and Measurements. The Basic Foundation is built in the Strategy Maps, in which Critical Success Factors are meant to be identified and correlated with each other based on cause-effect relationships.
However, it appears that, despite Kaplan and Norton’s positive statements, the Balanced Scorecard can not easily be cascaded to the lower regions within a company. It remains too much a corporate execution tool instead of a business strategy execution tool.
What could be the reason for this failure? Many authors have tried to answer this question, but I think it is rather simple. The BSC is not constraints based. This results in a too wide focus of Critical Success Factors. This increases the complexity of strategy executing significantly. People within the organization must pay attention to too many variables. Let us try to show this with the next example which comes from Eli Goldratt in his book “The Choice”:
When we compare the following two systems, which one is than the most complex?
Most people would say the System Two is the more complex system, since the prevailing definition for complexity is “the more data elements one has to provide in order to fully describe the system, the more complex the system is”.
However, is System Two indeed the more complex system? What if you want to explain, predict and control the systems behavior? This is even more important in times of changes imposed upon the system. Than you would like to know and understand the impact of those changes on the system. For that, one must understand the cause-effect relationships within the system. For you, the definition of complexity is therefore “the more degrees of freedom the system has, the more complex it is”. A degree of freedom is “a point or variable you have to touch/change in order to impact the whole system”. If you look at System Two one will see that it has one degree of freedom from which all other variables are governed through the cause-effect relationships. Which system do you now consider to be more complex?
The conclusion of this little brainstorming exercise is that systems and organizations can be both extremely complex and yet still be very simple to govern.
This conclusion removes the First Obstacle as defined by Eli Goldratt: “The perception that reality is complex”. A standard BSC includes many CSF’s, which according to this obstacle does not properly reflect the simple cause and effect relationships by which most systems and therefore companies are governed.
Most BSC’s have a more or less common structure:
– Financial Perspective
– Customer Perspective
– Internal Process Perspective
– Learning and Growth Perspective
The financial perspective, which is the top level within the BSC, describes the tangible outcomes of the strategy using familiar metrics such as return on investment, economic value added, operating profits, revenue per customer, and cost per unit produced. These outcomes or lagging indicators signal whether the strategy is working to deliver tangible results to shareholders.
The customer perspective includes customer outcome measures, such as satisfaction, retention, and growth, as well as metrics for the value proposition selected for targeted customer segments.
Together, the financial and customer perspectives describe what a company hopes to achieve.
Internal Process Perspective
This perspective identifies the critical few business processes that will satisfy the customer and financial objectives. Although companies perform many processes, only a few create the real differentiation for the strategy.
Learning and Growth Perspective
Within this perspective the jobs, systems and climate that support the value-creating processes are identified.
Although the BSC seem to be a very good tool for visualization of the strategy execution process it is not based on thoroughly determined cause and effect relationships. Assumptions are made with regards to the CSF’s and are loosely connected. However, this does not fully explain the failure of implementing the BSC.
Another magnitude reason is the second obstacle “the perception that conflicts are a given and that the best we can do is to seek compromises” Because of this perception the BSC’s comprises of CSF’s which do seem to conflict with each other. For example, in most companies, which have not implemented Lean Manufacturing or TOC, there is a conflict between production&sales management and profit&cash flow management. Production Management want to produce efficiently without efficiency loses or utilization loses, resulting in WIP and Inventory. Sales Management wants to ensure the capability to sell directly, resulting in Inventory. On the other hand strict controls must be placed upon the number and quantity of products in inventory to control the ROI and Cash Flow of the company. A company can produce and/or keep a lot of inventory to satisfy customer demands, but if not enough will be sold the company has serious problems with its cash flow. High inventory also means a huge capital commitment which reduces the cash flow, inventory turn-over and the ROI. Unless the company has solved this conflict, the result is always a compromise between Production (Cost) Management and Sales. For example, a maximum of inventory days. This compromise can not be anything else but being included in the BSC in the form of CSF’s.
Combining the first and second obstacle leads to Inherent Simplicity which states that “reality, any part of reality, is governed by very few elements, and that any existing conflict can be eliminated”.
Since compromises always mean that a lose-lose situation has been created within the company, the third obstacle “the tendency to blame others” is already appearing on the horizon. It will be only a matter of time before it really appears. After all, people tend to blame other people ( or companies or institutions ) when they are involved in conflicts that can not be solved in an acceptable manner. The biggest problem with blaming is that it will direct people and organizations in the wrong direction away from achieving the strategic goal. Another problem is also that “people, and companies, lower expectations when they use protective mechanisms to camouflage from themselves the big chronic problems; the problems that they already gave up on resolving”.
It appears now like if people can be bad. However, that is not the case. One of the main reasons for this potential behavior is that it is for most people very hard to accept harmony when the conflict is outside their comfort zone. A person’s comfort zone is the “zone where a person feels that he has sufficient knowledge of cause and effect”.
Therefore, as long as people and companies do not solve internal conflicts, keep making compromises, keep blaming each other and do not accept that harmony, “the quality of forming a pleasing and consistent whole”, exist in any relationship, and do not take into account people’s comfort zones, they will never achieve the strategic goal.
If we relate these four obstacles to the BSC implementations than it is quite obvious what is happening:
Obstacle 1 ( Perception that reality is complex ):
Too many CSF’s and not based on properly defined cause-and-effect relationships
Obstacle 2 ( Perception that conflicts are a given and that we must compromise )
Various CSF’s which conflict with each other or conflicting CSF’s have been removed
Obstacle 3 ( Tendency to blame others )
Conflicting CSF’s will be compromised in order to limit the tensions within the company
Obstacle 4 ( Perception that harmony is not possible )
Conflicting CSF’s will be removed or compromised which result in less acceptance of the BSC. CSF’s which are outside the persons/departments/business unit’s comfort zone will not be easily accepted or challenged
Overall conclusion is that the BSC is too complex, does not show the real few critical success factors for achieving the strategic goal and is not easily accepted within a company when it is not within the comfort zone of the people, departments and/or business units.
In my next blog we will discuss how we can relate the TOC principles to the BSC to increase the chance for a successful strategy execution.