management process

Management of the organization is mainly responsible for performance. Management needs to identify new opportunities for performance and operationalize these through strategy, execution and monitoring. Important in this respect will be the critical evaluation of risk.

risk coso

A big, compelling vision and a clearly defined strategy

A clear vision is important for all stakeholders to get a sense of purpose and direction, where to go to. The overall aim is to create a drive, a sense of common purpose, most of all it should energize all involved in creating a future desired state. In practice, forming a compelling vision, stimulating all involved proves difficult; some organizations do not go beyond a formalized, documented vision statement, that by itself will not create the energy needed. What is a needed in a performance driven organization is a compelling, energetic vision of what the company should be over a longer period of time. All (performance) related actions will need to be linked to this vision, turning the vision into important beacon.

Knowing where to go is one thing, getting there is a different matter

In order to reach the envisioned future state it is important to have a clearly defined strategy. In practice, setting a clear and operational strategy does prove difficult.

Many organizations now make reference to business models as a means to describe and operationalize strategies. What these efforts mainly show is a lack of understanding of what makes a good strategy; i.e. a strategy that clearly aims for the envisioned state AND at the same time can be made operational.

In many organizations that I have worked for attempts to clearly define strategy and business model concepts have not resulted in improved results. Main issues that I have encountered (and are also mentioned in a great article by Joan Magretta "Why business models matter" (Harvard Business Review)are:

  1. Strategy and business models are not centered around the one and only "profit center": the customer
  2. They do not take into account the competition (both current AND future)
  3. The business model has a weak logic
  4. The business model financials are missing or do not add up

High performance organizations do make use of existing strategy concepts, and demonstrate mastering the concepts. High performance organizations have a customer centric strategy, a full understanding of their current and future competition and have a sound business model (both logical and financial).

For further reading on competitive strategy I recommend reading Richard d'Aveni's book "Strategic supremacy", on business models you could read Slywotzky & Morrisson "The Profit Zone".

Turning the strategy into action: the major challenge in performance management

For many companies defining (writing down) a strategy appears to be an end-state. "We have defined our strategy, now let's go back to our daily business". In performance focused organizations it is then when the hard work starts. How will we actually reach our strategic objectives? How do we execute?

The importance of this is also recognized by experts such as Michael Porter and Michael Hammer (see Kaplan & Norton: "The execution premium"). Both state that a visionary strategy that is NOT linked (aligned) with excellent operational and governance processes cannot be implemented successfully. Conversely, excellent processes may lower costs and improve quality, but without a strategy's vision and guidance a company is not likely to enjoy sustainable success. In both cases exceptional performance will be a matter of luck. In my opinion this partly explains the failure of many Operational excellence programs (together with a poor implementation of these initiatives).

In their book "Execution, the discipline of getting things done" Bossidy and Charan try to identify why it is that so many organizations fail to successfully execute their strategy. They claim that senior management/business leaders feel that execution is a lower level exercise; execution is not as sexy as strategy. Management fails to view execution as an integral part to strategy, as the major job of a business leader, and they fail to embed it as a core element of an organization's culture.

"Strategy execution should not be taken lightly. Shaping a broad picture into a set of executable actions is analytical, and is a huge intellectual, emotional, and creative challenge"

Next to having three building blocks in place (leadership behavior, cultural change framework, and having the right people in the right place) senior management needs to ensure that for proper execution three core processes are implemented (see also "organization"):

  1. The people process: making the link with strategy and operations. This process aims at evaluating individuals, providing a framework to identify and develop leadership for the tasks ahead and filling the succession pipeline. Successful performance organizations are forward looking, focusing whether the individual can the handle the jobs of tomorrow. Many companies are still backward looking in this respect.
  2. The strategy process: making the link with people and operations. This process focuses on the how. Do you really have the right people and processes in place to execute? High performance organizations focus as much on the "how" as on the "what".
  3. The operations process: making the link with strategy and people. A clear operations plan will break down the path in getting to the desired state. In high performance organizations this plan is a clear road map. Don't confuse this road map with a budget. A budget does not tell you how to get there, it only states the resources that you are allowed to consume to get there.

High performance organizations have a clear management system in place aligning and cascading objectives, from strategic to operational, across functional areas and aligning key initiatives in operational improvement to strategic objectives set. Tools available to support such a system are strategy maps and balanced scorecards.

If you can't measure it, you can't manage it

Most of you know this old saying, contributed to THE management thinker of the 20st century, Peter Drucker, and made famous again in the first articles on the Balanced scorecard in the mid 1990's. This old saying still stands today.

Measuring progress towards your performance targets is common place in almost all organizations. However, implementing a good performance measurement system is not so easy. Most organizations refer to their unsupportive or outdated information systems, that provide them with tons of data but no relevant information. Granted, adequate IT systems are important, but are not the only success factor.

Furthermore, high performance organizations make use of best-in-class performance management tools, like VBM, ABC/M, BBSC, Real options. What sets them apart from less performing organizations is the way they use these tools. In most organizations some people will turn to some latest fad, stating they need it and need to implement this. Often, these initiatives fail. The main reason for this is the fact that people do not fully grasp the concept and do not really analyze how it will help the organization. In high performance organizations new methods are first understood, then selected based on the contribution and then tailored and implemented.

What high performance organizations have in place, next to adequately supporting IT systems, are first of all clearly defined and relevant (key) performance indicators. Even today I see a large number of companies struggle with clearly defining the relevant indicator set to monitor strategy execution. In most of those organizations performance indicators are defined by finance, hence resulting in a bunch of finance metrics that are backward looking and not aligned with specific strategic objectives. Furthermore, management is swamped by tardy, low quality information and most of the time management settles for second best, not fully aligned indicators since these can be generated with relative ease.

In addition, high performance organizations practice what is called "Fact based management" and "business analytics" (see Davenport: "Competing on analytics"). In conclusion high performance organizations have a well-designed, well balanced measurement system in place that supports business analysis and helps management in monitoring and aligning operations with the strategy or in adjusting the strategy.

High performance organizations master to incorporate and align the key metrics within their strategy review process. A properly conducted review process is less focused on the past and should be focused on how the market will develop, what competitors will be doing, how well equipped competitors are in strengthening market position, how well equipped the own organization is(staff, processes, cost structure, technology..), are the plans focused and realistic). In many organizations time spent on strategy review is mostly based on the information present; hence 80% of all time is spent looking backward.

Focus on opportunities and risk

In order to gain a competitive advantage and reaping the performance benefits, management needs to have an outward focus, actively searching for new opportunities and ways to realize the potential. Opportunity management is a really difficult management task. It is made difficult by the fact that there is a lot of distraction by problems within the organizations. In today's (complex) organizations a number of things is going wrong due to, amongst others, inadequately responding to outside changes, inadequate capabilities of employees and faulty IT systems. This results in management needing to spend a lot of its time in initiating and monitoring corrective actions. These actions will solve yesterday's problems, but will hinder the timely identification and realization of opportunities needed for survival. (see P. Drucker "Managing for results").

Opportunities can be classified in "additive", "complementary" and "breakthrough" opportunities.

  • Additive opportunities fully exploit already existing resources. They do not change the character of the business. An example is extending a current business line into a new market. These opportunities should rarely be treated as high-priority, risk should be small as are the returns.
  • Complementary opportunities will change the structure of the business. It offers something new which, when combined with the present business, results in a new total larger than the sum of its parts. A complementary opportunity will require at least one core competence/area of excellence that can be leveraged. This type of opportunity always carries considerable risks.
  • Breakthrough opportunities change the fundamental economic characteristics and capacity of the business. Such a breakthrough requires great effort. It requires first-class (human) resources and some major investment in R&D. This opportunity typically creates the future of the business and the risk associated with this type of opportunity is always great.

What will help to propel the search for new opportunities and will also assist in making clear the case for change is to internalize a healthy "Dissatisfaction with the status-quo". What is meant by this is that past achievements are celebrated briefly, followed by the resetting of sights towards the future and the need to do even better. This is something HPO's master. Companies that lose their performance edge are usually trapped by one of the following pathologies (J-F Manzoni):

  • Arrogance- management and other staff members display the belief that "It is impossible to do things better than that we currently are doing".
  • Ignorance- reflected in the widespread belief that "It is conceivable that other people might be able to do things better,, but we really do not know how to do so. We are genuinely doing as well as we can."
  • Denial- characterized by the defensiveness at the individual and collective level and expressed by managers as "We know there are opportunities for improvement, but discussing them is not easy and tackling them explicitly feels impossible".

Management of organizations aiming for high performance should be aware of these pitfalls, will need to learn how to recognize them and then act to prevent them from occurring or amend the situation upon occurrence.

Taking on opportunities will result in taking on risk. Risks too can be classified. In essence there are four types of risk:

  • The risk one must accept; the risk inherent to the business one is operating in
  • The risk one can afford to take
  • The risk one cannot afford to take
  • The risk one cannot afford NOT to take

In a high performance organization management is capable of organizing opportunity management by minimizing efforts on resolving yesterday's problems and creating a healthy dissatisfaction with the status-quo. Management will chase opportunities only when risks have been properly identified and evaluated.