Great execution requires great executable strategy

The starting point of any effective strategy execution is a sound corporate strategy that is executable and has a compelling value proposition that clearly defines and focuses the organisation on delivering value to its customers (and stakeholders). Failure to execute customer-driven strategies, no matter how challenging such strategies may be, is likely to result in the eventual demise of the organisation.

Describe the corporate strategy as a high-level objective, advantage, and scope. These are decisions affecting what business the organisation will compete in and how it will effectively allocate resources among those businesses.

An executable strategy is a narrative that tells us:

A comprehensive story of aspirations.
How value is created.
How the change will unfold.
What steps will be taken and why.
How those steps lead one to another.

Assumptions are made during the corporate planning process. They are conditions that exist and may translate into risks if they do not hold true. At the root of every failed strategy is a set of assumptions about the future that eventually proved false.

Use ‘what-if’ scenario planning to evaluate and test management’s ‘view of the future’ by articulating different future conditions or events, their likely consequences, and how the organisation can respond to or benefit from them.

The corporate strategy for Budget Air is ‘to remain the most profitable airline (high-level goal) by offering the speed of airline travel at the price, frequency and reliability of cars, buses and trains (advantage) to price-sensitive travellers who value convenient flights (scope)’.

Goals and performance indicators (measures and targets)

Goals and performance indicators should evolve as the organisation matures.

Strategy execution must be supported:

Strategy-focused goals that seek to answer the question: What is the corporate strategy trying to achieve?
Goal-focused performance indicators that seek to answer the question: How to monitor and measure performance success or failure against the goal?
Strategy execution plan that contains actions, milestones, and governance required to successfully execute the strategy.

Performance indicators should demonstrate the following properties:

Relevance — Logical and clear relationship to a goal.
Quantifiable — Numbers are best because they can be used for trends and are less open to misinterpretation than text-based qualitative indicators.
Verifiable — Experts or professionals working independently should agree on the choice of a particular performance indicator.
Accountability — One person with authority is accountable for the level of performance. Joint accountabilities should be avoided.
Actionable — There is a structure in place to regularly monitor and review the data and action taken. Comparable data is best so that benchmarking is possible.

In choosing performance indicators, it is important to check that:

They are measurable.
Their use is efficient in terms of demands on time, effort, and resources.
The measuring process or surveillance encourages or facilitates desirable behaviour and does not motivate undesirable behaviour (e.g., fabrication of data).
Those involved understand the process and expected benefits and have the opportunity to give input to set the targets.
The results are captured and performance analysed and reported in a form that will facilitate learning and improvement across the organisation.

Use a mixture of lead and lag performance measures:

Lead — Measures that drive or lead performance. They normally measure intermediate processes and activities (e.g., personal goals alignment, revenue mix, strategic job coverage).
Lag — Measures that focus on results at the end of a time period. They normally characterise historical performance (e.g., return on investment, employee satisfaction, revenue per employee).

Categorise and customise numerical performance targets into:

Baseline targets — This is the minimum level of performance for earning bonuses or incentive payments. For anything below this target, make no discretionary performance payments.
Stretch targets — Achieving beyond this performance target will earn the employee an exceptional performance bonus. It is the level of performance that maximises (or stretches) individual potential to the reasonable point of possibly not achieving it in the short-term.
Average targets — Mid-point between the baseline and stretch performance targets.

The expected level of performance for the organisation is usually set between the baseline and stretch performance targets.

Different corporate strategies create exposures to different levels (and types) of risk. A risk appetite statement specifies the strategic boundaries for acceptable performance variability and loss exposure when executing the strategy.

Defining performance targets that matter

The board (or oversight body) and management must set:

Reasonable, achievable, and executable performance targets based on the desired return or outcome.
The optimal level of risk (and control) that each business unit within the organisation is willing to accept in pursuit of its own business objectives.

They must consider and approve the organisation’s risk appetite when evaluating strategic alternatives, setting related corporate strategy and objectives, and developing mechanisms to manage related risks (and controls). Indiscriminate objective setting and aggressive performance targets can motivate negative risk-taking behaviour.

Use the same measure as a performance target and a risk target where appropriate. This approach allows for clear and simple communication of the level of variation that management is willing to accept to achieve the objective.

Select the appropriate performance indicators to enable the organisation to track progress and performance toward the achievement of corporate strategy and objectives, mitigation of risk, and compliance with internal controls, policies, and regulations. They are the primary means for communicating performance results across the organisation and providing a combination of leading and lagging performance measures that result in a more balanced mix of forward-looking performance targets.

Selecting the wrong or inappropriate performance measures and targets will drive the wrong, negative, or opportunistic behaviours that can result in unintended consequences and poor performance.

Limit the number of performance measures and targets to five or less for each goal. This helps the organisation to prioritise and focus based on the 80/20 Pareto Principle. That is why the term ‘key performance indicator’ is used rather than just ‘performance indicator’.

Four categories commonly used performance indicators are:

Customer satisfaction.
Internal process quality.
Employee satisfaction.
Financial performance.

Logically linking cause and effect performance measures

A common way to choose and use key performance indicators is to apply a management framework such as the balanced scorecard and strategy map. The balanced scorecard has four cause and effect perspectives of financial, the customer (or stakeholder), internal processes, and learning and growth.

Structure performance scorecards around four cause and effect perspectives:

Financial — Defines the chain of logic by which intangible assets (e.g., people, information) are transformed into tangible value (e.g., revenues, projects). Answers the question: How do we look to our shareholders/stakeholders?
Customer — Clarifies the conditions that will create real value for the customer or stakeholder. Answers the question: How do customers/stakeholders see us?
Internal processes — Define the core processes that will transform intangible assets into the tangible customer, financial outcomes, and value. Answers the question: What must we excel at?
Learning and growth — Defines the intangible assets that must be aligned and integrated to create tangible value. Answers the question: How can we continue to improve, create value, and innovate?

A balanced scorecard implementation can result in the following transformations: (Upadhyay and Palo, 2013)

Enhanced role clarity — Employees developed an enhanced understanding of their job deliverables and accountabilities, and they appreciated their individual contribution in the bigger context of organisational objectives.
Enhanced self-esteem — Employees felt individually significant, responsible, and valued by the organisation and they started taking pride in doing their job.
Empowerment, initiative, and enthusiasm — Employees started taking initiatives to diagnose problems, analyse root cause, and resolve problems.
Ownership and accountability — They took an active interest in team activities and took upon themselves to meet performance targets.
Creativity and innovative ideas — Employees started coming up with innovative ideas to resolve problems and improve processes and performance.
Enhanced supervisor involvement — Supervisors took an active interest and reviewed daily performance, where issues were taken up, brainstormed, and resolved.
Resource availability — Team leaders devoted necessary resources for employees to continue working on their initiatives and achieve their objectives.
Enhanced focus on competency development — Competency gaps were identified in the context of strategic objectives and necessary training and development were provided.
Enhanced vigour — With clarity on objectives, everyone seemed to have the energy and enthusiasm to work on their objectives and perform well.
Enhanced communication and information sharing — Communication and information sharing enhanced significantly.
Team cohesiveness — Interpersonal relationships improved significantly, conflicts were reduced, and collaborative efforts were visible.
Enhanced focus on performance — Employees became more focused and performance-oriented as they needed to show progress and achievement of objectives.
Objective assessment of performance — Scorecard reviews ensured objective assessment of performance against targets where the team assigns individual performance ratings and individual employees got a sense of just and fair treatment.
Performance linked incentives and rewards — The organisation could link productivity incentives to performance ratings of employees.
Public recognition — Teams received accolades as they pro-actively resolve problems and achieve their strategic objectives.

A well-designed performance scorecard that is balanced can provide a chain of logical cause and effect relationship, represented by a strategy map. For example, learning and growth lead to better business processes that result in higher customer loyalty and satisfaction and thus higher revenues from satisfied customers. Although there are no set formats for balanced scorecards, they vary from organisation-to-organisation and sector-to-sector.

“A strategy map provides a uniform and consistent way to describe that strategy, so that objectives and measures can be established and managed.” It is “customised to the organisation’s particular strategy, describes how intangible assets drive performance enhancements to the organisation’s internal processes that have the maximum leverage for delivering value to customer, shareholders, and communities.” (Kaplan and Norton, 2004)

Rucci et al. (1998) mapped the relationship between investments in improving Sears’ retail store employee attitudes and the market valuation of Sears. Their findings can be summarised as follows:

A compelling place to work leads to a compelling place to shop, which leads to a compelling place to invest.
Within their model, a 5-unit increase in employee attitude led to a 1.3-unit increase in customer impression and to a 0.5% increase in revenue growth.
Their empirical data showed that a 4% increase in employee satisfaction prompted a 4% increase in customer satisfaction, yielding a $200 million increase in revenue and a $0.25 billion increase in market value.

However, if the performance relationship between cause and effect is unknown (i.e., there is no visible causality) or that the relationship can only be established in hindsight, then the organisation:

Must start innovating through systematic safe-to-fail experimentations.
Consider the outcomes of these experiments.
Respond appropriately by implementing the known relationship between cause and effect for improved performance and effective strategy execution.

Budget Air has developed a strategy map based on Kaplan and Norton’s balanced scorecard management tool. The percentages in the strategy map denote the best-in-class weighting or prioritisation of each balanced scorecard perspective.

Figure below shows Budget Air’s strategy map and balance scorecard.

Focus on systems and processes (apart from organisational culture)

As “workers are responsible for only 15 percent of the problems, the system for the other 85 percentage” (Walton, 1988), organisations should spend more time, effort, and resources in managing and improving systems and internal processes, as indicated in Budget Air’s strategy map.

Budget Air’s strategy map has a 35% focus and prioritisation on managing and improving internal processes.