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Linking Strategy to Operations

Effective execution requires doing the right things efficiently to achieve strategic and tactical goals. Organizations ensure alignment by identifying strategic goals such as sales, cash flow, operating income, sustainability, diversity, and other important goals represented as measurable targets (i.e., metrics), a ese are set by leadership consensus and based on the general business environment that is impacting the organization. Ideally, the goals set this year will be improvements from the previous year’s goals. A good overall operational measure of how well financial goals are met is a year-over-year productivity index, a ese concepts are

FIGURE 1.1

Strategic execution of business goals.

shown in Figure 1.1, in which the voice of the customer is integrated with the voice of the business through a return on equity (ROE) metric and eventually with the voice of the process through enabler initiatives and their operational metrics. Enabler initiatives are also described in Table 1.1.

Figure 1.1 shows the top-down planning process that ensures alignment throughout an organization. Top-down alignment ensures that projects created in the organization will improve financial as well as operational metrics, a is approach is critical for being able to measure overall organization performance according to the financial goals of sales cash flow, operating income, etc. a e project execution activities occur down at a process level and they are aligned to and integrated with the higher goals, a is s trategic flow-down m ethodology d emonstrates t he t ranslation о f strategy goals (e.g., financial, productivity) into initiatives and then into projects. It helps ensure linkage to operational strategy and execution to ensure the right things are done.

a e voice of the business identifies the shareholder value represented as a ROE target, a is metric measures the shareholder return on investment.

In n on-profit о rganizations, s imilar m etrics c an b e i nserted i n 1 ieu о f ROE. As an example, there is a social return on investment (SROI) metric. It measures the impact of a non-profit’s intervention on the community when money is invested into a s ocial program, a e output benefits included b etter h ealth a nd 1 onger 1 ife, 1 ess p ollution, e nabling s tudents and others. SROI measures benefits to investment needed to attain them. Non-profits a Iso u se i nvestment a nalyses for financial d riven p rocesses such as fund raising. In these scenarios, the question is, “How resources should be invested to generate additional donations?”

A ROE target is cascaded down into an organization using the strategic financial and operational metric goals. In Figure 1.1, the metrics just below the ROE target are sales, cash flow, and operating income. Other financial metrics can be related to these three. The year-over-year productivity target is the bridge from financial metrics to operational metrics. It measures the effectiveness of the total organizational resource allocation and use for increasing sales and cash flow while reducing operating income. The numerator is revenue minus adjustments for pricing exchange rates, and the denominator is total cost minus adjustments. Projects are created that increase sales while minimizing adjustments such as pricing concessions and decreasing operating costs of many types.

Productivity calculations are made at all organizational levels. A complete example will be discussed in Chapter 7. To improve productivity, it is necessary to deploy enabling initiatives such as Lean, Six Sigma, preventive maintenance programs, supply chain excellence, IT deployments, and others. Initiatives and their projects are aligned to improve productivity while balancing resource allocations between initiatives and their projects. Organizational teams have specific assigned goals that will increase total organizational productivity with minimal friction. Process improvement experts focus on areas and projects that have the highest productivity leverage. When projects are completed, lead time and expenses are reduced, and productivity is increased in a measurable way.

It is interesting that different organizational cultures, even within the same industry, sometimes approach strategic goal deployment and execution strategies differently, but the approaches work for them. One reason for this is because they leverage core competencies of different types and to varying degrees. As an example, the culture of a major financial services organization was consensus-based and employee-centric. Improvement projects needed to be executed based on consensus. In contrast, another major financial services organization had a more business- and execution-focused culture. Improvement projects were assigned without consensus and expected to be completed to schedule. Although there were differences in execution style between the organizations, both successfully deployed the Six Sigma initiative, closed projects, and realized benefits. The common factor was effective execution despite differing approaches for employee engagement. Execution is critical to compete successfully.

Not all organizations have an effective execution strategy. As a result, organizational productivity levels vary among similar companies. ROE is higher for organizations that have effectively linked strategies and execution with initiatives that help develop core competencies. Core competencies are highly competitive best practices in finance, marketing, sales, customer service, design, operations, supply chain other processes. These enable organizations to dominate their markets relative to competitors.

Interestingly, most organizations are successful through a few core competencies rather than being excellent in all areas. It is not unusual for an organization to be excellent in sales, marketing, and design but have inefficient production and supply chain processes. Other organizations may have good operations management, but overall organizational performance may be nonoptimal because the wrong products are marketed or products and processes are poorly designed. Few organizations are truly excellent for most core competencies. In contrast, industry leaders are usually those organizations having several core competencies that successfully link strategy to execution.

Although strategy may serve an organization well for a period, competitive environments change because of disruptive technology, laws and regulations, consumer preferences, and other factors. Competitors leave little room for poor strategic execution. As an example, one large international organization was well known for its superior new product development and marketing processes, and it dominated its market for twenty years through design breakthroughs. But, unknown to most people, it had one of the poorest supply chain systems in its industry. Customers complained about poor quality and delivery times. Its strategic focus was on being first to market with innovative designs, and the supporting processes suffered from a lack of investment. It is unwise to rely on only one or a few core competencies. Such organizations are not protected from global competitors. Effective execution is critical for survival. The best strategy for long-term survival is higher productivity and customer satisfaction. These depend on creating core competencies.

Another way to think about productivity is to consider how it is measured apart from an organization. At a macroeconomic level, a country’s standard of living is measured as per-capita productivity. Per-capita productivity is composed of labor, capital, and factor productivity components. Factor productivity is the efficient utilization of capital and labor. Countries have different levels of these components. In countries with a high standard of living, the labor and capital bases are large and factor productivity is also high. This implies labor and capital are efficiently utilized through experience, education, and advanced skills. Excessive regulations and laws, poor infrastructure, and other conditions will lower factor productivity by causing friction in the production of good and services. Other countries may have differing levels of these components. Developing countries may have many people but little capital (i.e., money and machines or little education and skills). Their per-capita productivity (or standard of living) will be low. In contrast, some countries may have high capital and labor bases but low factor productivity. They can produce much but cannot efficiently distribute it to improve per-capital productivity.

Factor productivity is a different way to think about an organization’s productivity. Initiatives help increase organizational factor productivity through projects that efficiently utilize capital and labor. Several years ago, smaller organizations were not usually competitive with larger competitors. They lagged in capital, labor, and factor productivity. Because of digitalization, however, smaller, and geographically dispersed organizations can now project their presence with little labor or capital but with higher efficiency, such as through software applications on the Internet. Higher productivity is gained because all three components—capital, labor, and factor productivity—are small relative to competitive organizations with expensive fixed assets.

Through digitalization and automation, the relative importance of capital and labor has been reduced because the competitive playing field between organizations of differing size is leveled by technology and innovative ways to conceptualize and produce products and services. As an example, many of these newer products and services are virtual and do not physically exist, although they are accessed using physical objects. Highly productive organizations will increasingly be less capital- and labor-dependent. This is true for products and services with high customer contact as well as back-office operations that are rapidly changing to automate work through RPA to reduce labor and capital utilization.

 
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