We Have a Strategy…Now What?

In a recent Blog posting (A Simple Strategy), I outlined a simple but effective process for creating a Strategy Map for an organization. Many organizations use different processes to create a strategy and that is a good thing. However, simply creating a strategy is not enough; the strategy must be successfully executed as well. A new strategy does not permeate an organization by osmosis! There are two key steps to implementing strategy: first, create a prioritized list of strategic projects and second, plan and execute each project. Here are some tips on how to do that.

Create a list of prioritized projects: There are many ways to create a prioritized list. When working with a client, I prefer to use a brainstorming technique to start. First, the organization’s planning group reviews the Core Competencies, along with their related Value Drivers, Must Haves, Must Do’s and Metrics (see A Simple Strategy). The group should be made up of people from different areas and levels of the organization in order to get a comprehensive perspective.

Next, the group lists up as many ideas for strategic projects as possible, with no discussion or judgments made. Once the group has finished with furnishing new ideas, discussions begin. Often, as the discussion takes place, a consensus will form around the projects that seem to be of the highest priority. If no clear consensus emerges, the group may use a weighted vote to get a better idea of priorities.

In the end, the group must have a list of clearly prioritized projects, each project having its own priority level. You cannot have 2 projects with the same priority, as it leads to much confusion and conflict over resources. Once the list is complete, strategic project planning may begin.

Strategic Project Planning: Project Planning should normally be done by the entire project team, if possible. However, creating a Project Charter answering key questions about the project may be done by the project manager and a smaller group. It is possible that this work can be done effectively by the same group that created the prioritized list of strategic projects. The key questions fall into five areas: Organization and Authority, Strategic Alignment, Deliverables, Metrics and Project Impact (For a copy of the Strategic Project Charter Checklist, click here).

Organization and Authority: Who is the project manager and what is the project Manager’s authority? Who does the project manager consult if a decision is not within his/her authority?

Strategic Alignment: Who are the stakeholders? How does the project align with the organizations Core Competencies and Value Drivers?

Deliverables: What is the work to be done? How will it be done?

Metrics: What is success? How will the Value Driver Metrics be applied to measure success?

Project Impact: What resources are required to execute the project? How will the project impact company resources and operations?

My next posting will be a Case Study on Strategy and Execution from one of my clients.

Business Agility

Once a company has the processes in place to drive their strategy to the lowest level of the organization, they must also have a way to acknowledge and react to changes in the business environment that can change strategy. In addition to defining the Business Action Framework, Michael Hugos has done groundbreaking work on Business Agility. The truly agile business is ready to respond quickly to whatever circumstances the economy throws at them. Hugos avers that if a business has the three basic systems of business agility: Awareness, Balance and Agility, that business will be able to focus and respond successfully to whatever the marketplace brings forth.

According to Hugos, there are three basic systems that form “loops” within a business that are the basis for agile operations. As mentioned above, those loops are Awareness, Balance and Agility. The important concept here is that the three loops are interconnected, each one providing feedback to the other loops, without which the system would not work.

The first loop, Awareness, places a strategic focus on the marketplace right now, gathering information about what is happening with customers, clients and the marketplace in general. The information in the Awareness loop may come from outward looking systems, such as market research. However, inputs can also be found in business systems such as ERP and CRM. Data mining or Business Intelligence software can be helpful.

Information gathered by the Awareness loop becomes input for the Balance loop that has two purposes. First, the balance loop reviews all processes to standardize as much as possible. In particular, business agility relies on standard processes that can be automated to as great a degree as possible, allowing energy to be focused on the non-standard.

The second purpose of the Balance loop is to identify inputs from the Awareness loop that are non-standard. Any input that does not fit into an existing process is considered non-standard. The non-standard is what represents opportunity for the agile business.

The third loop, Agility, receives input from the Balance loop and performs analysis to understand emerging opportunities and threats. In particular, the Balance loop plays a key role in the ongoing implementation of strategy. When an opportunity or threat is identified, the Agility loop actively addresses what is different, and creates new processes to put in place to take advantage of change.

In addition, the Balance loop also plays a crucial role in the ongoing, incremental revision of strategy to meet the challenges that emerge. Strategy should not be a “once a year” activity. A vibrant, successful strategy must be transformed constantly if the business is to remain truly agile.

This week’s post is basedon an excerpt from the second edition of my book, Project Management Accounting.

Competitive Advantage: Are You Focused on What is Important?

Competitive advantage is what all businesses are seeking: it allows your business to charge higher prices for your products and services or to get more customers. Everyone is seeking competitive advantage in their market.

Gaining and maintaining competitive advantage requires that your business be focused on the proper things; that is simple, but not always easy. There are really only two areas of business focus in order to establish competitive advantage: first, you must be competitive in your industry and secondly your business must differentiate itself from the competition. Sounds like a contradiction to me! Let’s take a closer look at each.

In order to be competitive in your industry your business must do “industry basics” well. For example, if you are Starbucks, you can have the nicest storefront possible, with great music and a cool ambiance. But, if your coffee is not at the right temperature, or tastes bad, you will not be able to compete in your market. For a coffee shop, temperature and taste are basics and the company must focus on them in the right way.

In what might seem to be contradictory, it is also true that you should not exceed your industry basics in the name of competition. That practice can be costly and self-defeating. Take the example of a distribution company that competes in a market where 5 day delivery of goods is the standard and customers do not expect more. If a company were to spend time and money on next day delivery, they would be wasting money creating differentiation that their customers don’t want. Doing so puts the focus in the wrong place and could actually hurt the business.

In many cases, businesses do not always focus on the right places to understand industry basics. For example, a business’ financial results, in comparison with the industry median for that result is often a good place to see where your business stands in your industry.

A software development company might look at their software production cost (Cost of Sales); they may not be competing on price, but if their production costs are significantly higher than others in the market, they will have a hard time competing. Proper focus here will keep them competitive in their industry.

Differentiation, on the other hand, is not about industry basics. It is about how your business can do something differently to distinguish itself in the industry. Of course, what you do differently must also be something that your market wants!

Let’s look at distribution again. Supposing that the company that tried to differentiate with quick delivery took some time to talk to their customers that are retail operations. Perhaps they might discover that their customers spend time breaking down the goods they receive from the distribution company into smaller lots for reshipping. The distribution company might be able to save their customers time and effort by packaging their goods in such a way that the customers would have minimal repackaging to do.

At times, it might be possible to turn an industry standard on it’s’ head in order to gain competitive advantage. Prior to Starbucks, most of the coffee industry was centered on fast food coffee chains such as donut shops. Fast was the operating word. Starbucks created a product that included not just upgraded coffee, but an entire experience.

The company wanted people to stay longer, not leave quickly. Starbucks achieved tremendous success with that strategy; only recently have they made moves that have harmed them (but that’s the topic of another Blog).

The name of the game in competitive advantage is to stay focused on the right things for your industry!

A Simple Strategy

Whether your company is a Fortune or a $50 million operation, in order to be successful, you must operate from a simple strategy. Now, let’s not confuse the word simple with easy; at times simple is very difficult to achieve. Yet, if a strategy is not simple enough that every employee of a company can not only understand the strategy, but knows how the strategy guides their day to day activities, it will be difficult.

According to Dr. Chuck Bamford the end result of strategy development need not be more complex than a one page map containing five key elements: Value Drivers, descriptions of Stakeholder Experience, Critical Success Factors, Must Do’s and Metrics. The map also includes a Mission Statement based on the strategy elements. In this article, I would like to give a brief illustration of each element.

To illustrate I will use the example of a well known company, Starbucks. Although Starbuck’s performance has not been stellar the last couple of years, no one can deny that in building the Starbuck’s brand the company succeeded brilliantly. Starbuck’s Mission Statement is, “To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time”. What follows is my own decomposition of their Mission Statement to illustrate the strategy elements.

Value Driver

A Value Driver is a short statement that expresses how a company will create value for their client. The statement is based on the resource capabilities that the company possesses and utilizes for their client. A possible Value Driver that could serve as one piece of the foundation of Starbuck’s Mission Statement might be, “Feeling at home”.

Stakeholder Experience

The Stakeholder Experience consists of a series of statements that represents the stakeholders’ view of the value driver in action. The statements are what the company hopes to hear from their stakeholder to confirm that the value driver is correct, and also if the company is executing on the value driver. Some examples of statements that Starbuck’s might seek are: “At my Starbuck’s, they know what I want before I ask” and “The Starbuck’s staff are like my friends”.

Critical Success Factors

Critical Success Factors are the first crucial link between strategy and operations; the company must get the factors right in order for the Stakeholder Experience to happen. Critical Success Factors for the Stakeholder Experience described above might be, “Staff Knowledgeable about products”, “Staff Knowledgeable about customers” and “Staff well trained on drinks, able to engage customer”.

We should note, at this point, that when a strategy map is developed for a company, the first three elements that we have outlined above are the same for every employee of the company, from the CEO on down. In contrast, the next two elements may change for different functions within the company.

Must Do’s

Must Do’s are the activities that each function within a company must perform in order to create the Stakeholder Experience. These could vary depending on the function. For example, in order to have employees who are able to prepare drinks quickly and correctly, the training department must create effective training programs.

In order to motivate employees, Human Resources must hire the right kind of people and put in place a structure that will motivate. At Starbuck’s “baristas” must be outgoing and friendly and know their clients well. Starbuck’s also has different levels of certification; have you ever noticed the different color aprons on Starbuck’s employees?

Metrics

The final element, Metrics, does not change for different functions within the company. The collected metrics are studied to see how well the company is performing and give the company the ability to change operations quickly if performance is not where it should be. For example, metrics that could support the “Feeling at Home” Value driver might be to conduct a count in different Starbuck’s that determined how many customers came through in a period of time, and of those customers, how often did the employees know what the customer wanted before they even ordered.

A simple strategy is clear, easy to understand and creates direct links between operations and strategy. If you would like more information on creating strategy, I highly recommend Dr. Chuck Bamford’s book, A Small Business Approach that was published in 2010.

Strategy, Finance and Project Management

I have heard it said on many occasions, “But we don’t do any projects!” Of course, the company executive who has said this really means it. And, in a certain sense, he is correct. His company more than likely does no client projects. The reality is that if the company has a strategy, and renews that strategy periodically, then the company has projects. The fundamentally projects are about change, any change. And the reality is that without proper project management that links together strategy and finance, many attempts at renewing strategy are futile.

Proper project initiation and planning asks a series of fundamental questions that set a performance baseline that can be integrated into pro forma financial statements. Once integrated, the pro forma statements enable a company to review a range of possible financial outcomes in order to decide whether or not the project meets the company’s criteria for being undertaken. The baseline also permits the company to make intelligent decisions at markers along the way, called Phase Gates, as to whether or not the project should continue.

Here are questions that will help a company get the project right the first time around:

What is the project; what will it deliver? Fundamental question – often ignored. This is like taking off on a trip without ever determining where you are going. Now, the answer to the question may not be readily apparent when it is first asked. The company may have an idea of the business objective that they want delivered by the project, without understanding exactly how it will be accomplished. A crucial part of planning is determining, in more detail, what the end objective will be?

Who are the stakeholders? As with the first question, this one is frequently unanswered, in particular with strategic projects. As I mentioned in a previous blog posting, A Simple Strategy, identifying each of strategic stakeholder and what their stake is can be the difference between success and failure. Stakeholders can be both internal and external to the company, but most often it is employee stakeholders that are missed.

What is success and how is it defined? You would think that this is a question that would never be missed. Not so! When defining success for a strategy project, each area of the company needs to have their particular element define, and how that element is linked to success measures. The link needs to be concrete and measurable.

What is the work, who will do it and how much is there to do? Defining the actual work to be done to a level of detail that guides competent team members is foundational. This work will lead to the creation of a project schedule, cash flow statement and budget. Of course, the previous questions set the stage for these last three, whose answers become the baseline mentioned above.

Once all of the information about schedule, budget and cash flow are integrated into forward looking pro forma financial statements, the company has information for good decision making.

Project Management as a Strategic Financial Model

There are many companies out there whose approach to project management is “Fire, Aim, Ready!” However, even for those companies that practice one of the project management methodologies, the financial implications are overlooked. Most people view project management as a way of getting things done but do not understand what project management can add to their financial strategy.

In the second edition of my book, Project Management Accounting, there is a case study about a recycling company that decides to increase market share by upgrading their plant and equipment. Due to poor planning and execution, the upgrade project had a seriously negative effect on the company’s financial results: Return on Equity was reduced by 9 percentage points, Return on Capital by 4.5 percentage points, and Net Profit Margin by 2 percentage points. In addition to not planning, the company made no link between the project financials and company financials. It was only in hindsight that those connections were made. Proper planning and linkage could have changed not just the project results, but the company’s results.

The project management methodology that I have used with success comes from the Project Management Institute (PMI). PMI’s methodology contains 5 phases: Initiation, Planning, Execution, Control and Closing. We will take up the first 4 phases with a short description of how each phase builds up a reliable financial model that not only predicts and verifies project financial outcomes, but can be linked to financial outcomes at a strategic level.

Initiation: the objective of the first phase of this methodology is to understand who the project owner and stakeholders are, as well as to define the objectives and deliverables of the project. Without specific deliverables as the guideline of project scope, the project will be subject to scope creep. When a project’s scope creeps, so does project cost. Initiation is the first line of defense for project and company financial performance.

Planning: The second phase of the PMI project management methodology is the phase most often skipped. People are anxious to get going on a project, hence the prevalence of the “Fire, Aim, Ready!” school of projects. Planning is meant to take the deliverables and answer the questions, “What is the work to be done and in what sequence must the work be done?” Deliverables are broken down into discreet work packages or tasks, quantifying both the effort and materials needed for the each.

The tasks are then sequenced to understand how interdependencies between the tasks come into play. The quantifying and sequencing of tasks builds the foundation of a project schedule and budget. Finally, risk analysis will help to qualify what risks the project may encounter and quantify how those risks could affect project schedule and budget.

At this point, the first encounter between the project and company finances should occur. Pro forma worksheets should be created to model how the project budget and outcomes may affect the future financial picture of the company. Those models should be linked to the company’s pro forma Income and Expense statements, Balance Sheets and Cash Flow statements. Risk management can guide “what if” scenarios to see under what circumstances the project might be cancelled or revised if not going as planned. In addition, questions about how the project may be financed, (debt or equity, for example) can be taken up. Financial analyses of the project such as Internal Rate of Return and Net Present Value can help to determine if the return on the project meets the returns that the company requires.

Execution and Control: These two phases of the project management methodology run in parallel; during execution the planned work is carried out while control monitors how well the project is adhering to the plan. Formulas for Earned Value and Estimate to Completion, among others, will show whether the project is on time and budget. The most important financial factor here is to determine how actual results may be affecting company finances. The information generated about project execution can be entered into the pro forma financial models to predict the effect on company financials. For example, if a project is running 15% over budget, the project numbers can be run through the company financials to see the real effect.

In particular for small companies, where capital may be difficult to come by these days, understanding how your projects will affect financial performance is a key to success.

The Keys to Executing Strategy

In a previously published Blog, I described a Strategy Map as originally conceived by Dr. Chuck Bamford (A Simple Strategy). The Map is an effective tool to create a company wide strategy that is simple to comprehend and applies to all levels and employees of the company. Problem is, having a strategy and executing a strategy are distinct processes. Of course, without a Strategy Map to guide the way, it would be like the old saying, “If you don’t know where you are going, that is likely where you will end up!”

However, the history of many companies is littered with strategies that have seemed both wonderful and doable that never amounted to anything at all. Why is that? Well, I believe that there are two reasons: First, most companies don’t take the next step in, that is, creating an action plan that takes into account how the strategy is being executed in various areas of the company and secondly, that most companies execute strategy from the top down, rather than from the bottom up.

To summarize, the components of a simple strategy are as follows:

• Value Driver: a short statement of how the company creates value.
• Stakeholder Experience: statements of the stakeholders view of the value driver in action
• Critical Success Factors: what the company needs to have in place in order to create the
stakeholder experience
• Must Do’s: the activities that each function within the company must perform in order to
create the Stakeholder experience
• Metrics: measurements that are taken to show that the company is performing according
to the strategy.

As mentioned in the previous Blog posting, The Value Driver, Stakeholder Experience and Critical Success Factors remain the same for each area within the company, where as the Must Do’s and some of the Metrics might change for each area. The original Strategy Map is elaborated by a group representing all functions and all levels of the company. Once completed, the Map is customized by each area of the company to fit how they will support the overall strategy.

Here is an example of how to solve the first problem mentioned above: a small manufacturing company had created their base strategy map, and was then customizing the map for each area of the company. One of the company’s Value Drivers was “short lead times”. In reviewing the Critical Success Factors and Must Do’s for “short lead time”, a production team realized that one factor keeping them from performing up to snuff was the quality of information received from the client. Quite often, the data passed on from the sales team was either incomplete or incorrect. It would take several “go-arounds” to correct the data.

Together, the Sales Team and the Production Team arrived at a solution to the problem, to train the sales team to increase their understanding of the data and the proper method of collecting it. The must do for sales then became to collect the data as accurately as possible with minimal input from the production team. A metric was created that reflected how often it took more than one “go-around” to get the data correct. Thus, the sales team and the production team created a “cross-functional” Value Driver that both teams would work on to improve performance.

As for the second problem, top down as opposed to bottom up, that same company delayed the development of management and support functions Strategy Maps until after sales and production had finished theirs. Only then did management and the support functions create Strategy Maps with the understanding that their objective was to identify and execute Must Do’s that specifically supported those of the production team and sales areas. Thus, the execution of Strategy flowed from the bottom up rather than the top down.