Strategy-driven measures
The relationship between strategic planning and change was discussed in chapter 2. We encourage you to revisit that chapter to refresh your understanding of different approaches to strategic planning. Our purpose here is only to outline how strategic planning is linked to measures of change.
One approach by businesses to measuring change stems from what was called the ‘rational’ or ‘cookbook’ approach to strategic planning. A simplified version of this approach reduces strategic planning to four elements: vision, mission, strategy and implementation.7 The business’s vision (optimal potential position) determines its mission (a summary statement of product/market thrust for stakeholders), which governs its strategy (specific targets). Imple¬mentation activities are then derived from the strategy. This process entails making concrete decisions and allocating resources under real-world constraints. In the implementation process, the business sets targets for what it seeks to achieve. A simple diagram of this model of strategy is given in figure 9.1.
FIGURE 9.1: A simple model of rational strategic planning
How are measures of change developed in this model? They are derived from targets set in the implementation part of the planning process and they should coincide with an organisation's ‘core processes’ or critical success factors (CSFs) (the things that a business must get right to succeed).
In a market-driven organisation, CSFs usually concern the elements of customer value, such as cost, quality and timely delivery. Increasingly, however, these CSFs are supplemented by additional factors associated with good corporate citizenship, such as safety and environmental sustainability. A business ordinarily identifies only a handful of CSFs, if it is to concentrate effectively on them. An example is given in the case on the Norske Skog Boyer mill (end-of-book case 3, page 383). The mill developed six CSFs with its parent corporation in the mid-1990s, Fletcher Challenge:
• responsiveness
• resource management
• product management
• customer satisfaction
• environmental responsibility
• safety performance.
Selecting appropriate CSFs is a difficult process. There are usually many contenders, each backed by a determined lobby group within the organisation. Only a handful can be chosen, and these must be correct for the business as a whole, not for sectional interests.
Cascading from the CSFs are performance measures. These commonly are called key performance indicators (KPIs), although terminology varies. The Norske Skog Boyer mill had three kinds of measurable target. First were six mill-wide key result areas, which mostly related to cost, quality and delivery, or to ‘corporate citizenship objectives’ such as accidents and environmental incidents. The key result areas were:
• mill gate cash cost (total variable cost and fixed cash cost divided by production)
• working capital (money tied up in inventory to run the business)
• first-grade production (total accepted production classified as first grade)
• on time dispatch (percentage compliance with delivery schedules)
• environmental excursions (incidents in excess of regulated limits and licence conditions)
• accident moving frequency rate (actual accident rate against improvement target).
Because these measures applied to the mill as a whole, they did not directly reflect
performance in the various processes carried out in different parts of the operation (forest management, pulp mill, paper mill, finishing, customer relations, project engi¬neering, stores, product development and so on). Consequently, a second set of measures (also known as key result areas) was derived from the mill-wide key result areas for the 15 business units within the plant. One such subdivision is the Pulp and Services Business Unit, whose performance is measured on safety and environmental incidents, money tied in inventory, the cost of pulp ingredients, tear and tensile pulp quality, paper machine stoppages caused by pulp shortage, and other measures of cost, quality and delivery. Third, the business units comprised approximately 50 work teams that also had measures (called key performance indicators (KPIs)) that cascaded out of the business unit key result areas. Most teams had only a couple of KPIs; for example, the Process and Product Support Group was assessed on the number of ‘housekeeping’ and safety audits completed on time. Such indicators serve a dual purpose of monitoring and motivating performance at the work team level.
The discussion above shows how performance measures can be developed from a simple rational model of strategic planning, but limitations to this model are evident. We examine three of these limitations.
1. How do the many KPIs that cascade from strategy feed into a measure of ‘bottom-line’ financial performance? All the parts of the strategy may be on track, but is it making money? Value-based strategic management is one technique that enables the con¬version of disaggregated performance data into a single measure of shareholder value. Value-based management requires that ‘cost and value drivers’ (or CSFs) be deter¬mined for the operational parts of the organisation. Measures of these are developed in the form of KPIs, which are then converted into dollars. The model then incorpor¬ates financial data on working capital and asset performance to yield return-on- investment and return-on-equity figures. If properly executed, the model allows shopfloor employees to see how their performance helps determine shareholder value.
2. How can the strategic ‘big picture’ be drawn, pulling together various measures of stake¬holder-based interests? We observed above that measures of change reflecting divergent stakeholder interests can move in different directions. An increasingly popular solution to this problem is Kaplan and Norton’s balanced scorecard.8 We discussed this strategic approach to performance measurement at length in chapter 2. We encourage you to read that section again to renew your understanding of how strategy and measurement must balance four perspectives: the customer perspective, the internal perspective, the innovation and learning perspective and the financial perspective. By integrating these four perspectives, the balanced scorecard helps management understand the holistic nature of change and prevents a suboptimal focus on the needs of any single stake¬holder. The balanced scorecard approach to strategy and measurement lends itself to new applications. Later in this chapter, we discuss one such development: the HR scorecard, which is an adaptation of the balanced scorecard to the special problem of evaluating human resources management (HRM) activities. We also look at Kaplan and Norton’s recent ideas about using their scorecard to measure those 'intangibles’ such as skill and culture that are so important in making change programs succeed.
3. How appropriate for the management of ‘discontinuous change’ are the measures or KPIs likely to be derived from a rational strategic planning model? The foundation of the rational planning model lies in management’s capacity to envision the future — an assumption that must be discarded for discontinuous change (described in chapter 2). What are the implications for such measures as KPIs that cascade from CSFs, which are themselves governed by a rationally determined vision and strategy? The problem here is captured in what Stacey calls the ‘paradox of control’. Discon¬tinuous change requires flexible or opportunistic decision-making and control systems.9 What does this factor mean for the measurement of change? Perhaps the maintenance of organisational flexibility is a more important critical success factor, with its own measures or KPIs, than the conventional measures that cascade out of rational strategy.
Benchmarking
Benchmarking is a third approach used by managers to measure change. The American Productivity and Quality Center, a leading consulting and research organisation, defines the term as:
. . . the process of continuously comparing and measuring an organisation with business leaders anywhere in the world to gain information which will help the organ¬isation to take action to improve its performance.10
This definition endows benchmarking with two essential features. First, data are used to compare an organisation with others recognised as being ‘best practice'. Second, lessons are drawn from those best practice organisations to drive improved perfor¬mance. Benchmarking is thus relevant to organisational change as both a technique for measuring change (how is the organisation’s measured distance from best practice organisations trending over time?) and as a technique for learning how to change (what lessons can be learned from best practice organisations?).
As a formal technique for organisational improvement, benchmarking originated in the Xerox corporation in the United States in the early 1980s.11 Following Xerox’s success with the technique, in 1991 it was made a requirement of the prestigious Baldrige National Quality Awards in North America. From this springboard, it was swiftly adopted by a majority of the US Fortune 1000 firms as a mainstream business process.