Imagine you were able to maximize your opportunities, minimize your risks and achieve performance breakthroughs. You’re probably thinking – “that would be great, how do I do it?” Well it’s simple but this simplicity demands critical thinking and diligent effort. So if you’re interested, let’s find out how. Achieving this level of performance requires a deliberate strategy with a performance management and measurement system that enables you to scan the business horizon, focus your time, energy, knowledge, relationships and resources and execute courses of action that possess the highest pay-off, lowest costs and easiest implementation trajectory. You may wonder whether such a strategy formulation is worth your time and effort, especially if you’re in a quickly changing business environment. This issue came up in a discussion with leading business writer and consultant Seth Godin. We concluded that business strategy drives growth and prosperity for businesses, both large and small. Godin said that for example Howard Shultz, founder and head of Starbucks Coffee, could have decided to open and run only a few stores, but you better believe that to grow Starbucks like he has he had to have a business strategy.
So with that as introduction let’s go through a step-by-step process for developing a business strategy with a performance management and measurement system for your business. Let’s call it a “Grand Strategy” because it equates to a necessary precursor for all subordinate strategies and systems whether they be marketing, innovation or otherwise. There are 12 steps to this Grand Strategy process. The first 11 steps of this process are best developed as a living document with your top management team and a facilitator at an off-site meeting to avoid distractions. And step twelve, “Execute, Adjust, Execute” requires strong top management commitment, support and involvement.
Step One. Ask “what’s your ‘Theory of Business’?” As philosophers tell us, there is nothing as practical as good theory. Briefly answer these four questions to uncover yours.
What business are you in and where are you now?
- Where are you going?
- How will you get there?
- How will you know you’ve arrived?
Step Two. Create a clear expression of your intangible business resources. These intangibles form an intellectual and emotional grounding for your Grand Strategy. They drive your business and business relationships. Without them, you won’t be able to commit the time, energy and tangible resources that move your business forward. These intangibles are:
- Values – high level concepts that you pour your life into regardless of financial return because they define you and your business. Some examples are family well being, charity and goodwill toward others, honesty and integrity, and making a difference in the world.
- Beliefs – key principles that state your assumptions about the cause and effect relationships that drive you and your business. For example, if we provide excellent products and services that please our customers at a competitive price, we will be a profitable business.
- Attitudes – emotional orientations exhibited by you and your business toward others that affects how you view them and treat them, and in turn how they react to you and your business. Attitudes result in either positive or negative expressions such as “most people tend to be fair if treated fairly” or “most people will take advantage of you if you let them.”
- Capabilities – inherent knowledge and relationships that support getting work done for you and your business. For example, such things as patents, suppliers and customer data bases, production processes, sales force knowledge, knowledge about competitors, technological expertise and customer relationships fit here.
What are your Values, Beliefs, Attitudes and Capabilities? List them.
Step Three. Write a “Mission Statement.” This statement provides you with the articulation of your business purpose or reason for being. Answering the following four questions in a satisfying amount of detail provides compelling background information from which you can extract a hard hitting mission statement to move your business and Grand Strategy forward.
- Why are you in business?
- What does your business do and how does it do it?
- Who does your business, who supports it, who benefits from it and who, if anyone, suffers from it?
- How many different kinds of resources are involved in your business, how much do they costs and how much profit do you expect to make from them?
Answer these questions and notice the power of their focusing affect on your business. From your answers, develop a condensed and hard hitting Mission Statement.
Step Four. Perform an “Environmental Scan” by asking and answering the following questions:
- What industry are you in (retail, wholesale, finance, manufacturing, durable or non-durable goods and so on) and what are its trends?
- What is the economic situation (interest rates, costs of labor and materials, unemployment levels, consumer demand, inflation and prices) and how will it affect your business?
- Who are your competitors and potential competitors? What relevant advantages and disadvantages do they possess?
- Who are your suppliers and potential suppliers? What mutual interests do you share with them? What natural conflicts exist?
- Who are your customers and potential customers and who are their customers? What segments do they fall in?
- What are the demographics that impact your business – age groups, ethnics, economic status? What are their differences in terms of needs and preferences?
- What is the regulatory environment and how does it affect your business?
- What are the emerging technologies and how might they affect your business?
- Who are your stakeholders (employees, suppliers, customers, investors and community) and what are their expectations?
Answer these Environmental Scan questions in order to possess the necessary business intelligence and insight to proceed to the next step.
Step Five. After you complete your scan, then perform a SWOT Analysis. SWOT stands for “Strengths,” “Weaknesses,” “Opportunities” and “Threats.” Your Strengths and Weaknesses are internal. YourOpportunities and Threats are external.
The areas for you to explore under each SWOT Analysis category are:
Strengths or Weaknesses
- Customer Service
- Systems and Processes
- Cash Flow
- Employee Training
- Employee Loyalty
- Others?Opportunities or Threats
- Emerging Products and Services
- Technological Change
- New Markets
- Competitive Pressures
- Supplier Relationships
- Economic Conditions
Now, brainstorm to generate ideas under each category/area. Generate as many as ideas as possible. Using your best judgment, select the top six ideas in terms of relevance and importance for improving the performance and competitiveness of your business. Next, translate the top six selected ideas into goal statements. For this translation process, use the following format: action verb + (restated idea) in order to (object). For example, a goal statement would look like this: “Increase customer satisfaction in order to reduce customer losses and defections.”
Step Six. Determine your “Strategic Focus.” Business is becoming more and more competitive. Let’s call this phenomenon “Hyper-Competition.” From it we see the time lapse between finding a competitive edge and having it copied shrinking. Hyper-Competition demands that you differentiate. This differentiation starts with you selecting a Strategic Focus for your business. Otherwise your products and services become commoditized.
Strategic Focus breaks down into the following three disciplines:
- Customer Intimacy – emphasizes paying close attention to customers desires and providing them with total, not to be beaten service and solutions. Ritz Carlton Hotels and Nordstroms lead with this discipline.
- Product Leadership – emphasizes R&D and providing the best technology and quality available in products. Intel and Starbucks lead with this discipline.
- Operational Excellence – emphasizes efficient operations and costs controls to provide the lowest costs. Wal-Mart and Southwest Airlines lead with this discipline.
Picking one of these as your lead focus represents a smart thing to do. This imperative does not mean that you don’t try to do well in the other two. It means that you don’t try to do all three equally well. Trying to be all things for all customers puts you on a path to failure because customers will not behave in a way that profits your business. Business is just too hyper-competitive for you to succeed doing all three better than anyone else.
So now look at your: Theory of Business; Values, Beliefs, Attitudes and Capabilities; Mission Statement, Environmental Scan and SWOT Analysis, and then make a judgment call. Pick your Strategic Focus and lead with it.
Step Seven. Seek performance breakthroughs. You begin this process by selecting your Strategic Focusand limiting your goal statements to the top six. These top six goals represent your “Strategic Goals” for achieving performance breakthroughs.
If you look at the time you spend on your business, you find it can be broken down into three categories. These are:
- Administrative and Operations – the time you spend keeping the routine day to day business running
- Crisis – the time you spend solving unanticipated problems
- Breakthrough – the deliberate time you spend on creative efforts to improve performance
What happens is that the first two time categories grow to occupy all your time and they push out your breakthrough time. Maintaining a Strategic Focus combined with developing Strategic Goals to execute amounts to the only workable solution to this challenge. Now, incorporate this thinking into the succeeding steps of your Grand Strategy process.
Step Eight. Understand and apply “Cause and Effect Relationships.” Let’s discuss the dynamics of Cause and Effect Relationships among your Strategic Goals. There are four basic “Perspectives” that provide the framework for linking your goals in to your Grand Strategy. These Perspectives are:
- Human Capital – the people talent in your organization and the systems and process that directly enable them to be productive. A good way to look at the people part is that it’s what goes home at night.
- Structural Capital – the systems, structures and strategies that the organization owns and produces value with. It stays in the organization when you turn off the lights.
- Customer Capital – the relationship, level of satisfaction, reputation, potential for referrals and loyalty which your organization enjoys with its customers.
- Financial Performance – the level of economic return provided to you and your owners relative to investment. Performance under this perspective is also compared to alternative investments like T-Bills.
So imagine that you possess superior Human Capital by recruiting, training and retaining top talent and acquiring excellent people support systems. Given this superior Human Capital, might you not be able to improve and create superior Structural Capital? And with superior Human and Structural Capital, might you not be able to improve and create superior Customer Capital which in turn would improve and create superior Financial Performance? What we have described here equates to a virtuous cycle which enables you to make more money for you and your owners and at the same time invest more in your Human Capital. This virtuous cycle in turn starts succeeding rounds of improvement which should cause an upward spiral to higher and higher levels of performance. You will learn how to develop these Perspectivesand link them in the next step.
Step Nine. Develop a “Strategy Map.” Let’s start by looking at an example. A Harvard Business Reviewarticle, The Employee – Customer Profit Chain at Sears, Jan-Feb 1998, chronicled a transformation ofSears. Based on this article, an extraction of the Strategy Map for Sears follows:
“Be a compelling place to Work, Shop and Invest”
Financial Performance Goals – Increase Revenues and Profitability
(What would it take to accomplish these strategic goals? Their answer was to
increase customer satisfaction to cause increased revenues and profitability)
Customer Capital Goal – Increase Customer Satisfaction
- (What would it take to accomplish this Strategic Goal? Their answer was to create and maintain well stocked and attractive shelves and provide friendly and helpful service that causes increased customer satisfaction.)
- Structural Capital Goals – Create and Maintain Well Stocked and Attractive Shelves and Provide Friendly and Helpful Service
- (What would it take to accomplish these Strategic Goals? Their answer was to increase employee training and development in relevant areas. This would increase employee competence and satisfaction. And this in turn would make employees able and willing to create and maintain well stocked and attractive shelves and provide friendly and helpful service)
- Human Capital Goals – Increase Employee Training and Development in the Relevant Areas in order to cause an Increase in Employee Competence and Satisfaction.
- (What would it take to accomplish these Strategic Goals? The answer was top management belief in the complete series of Cause and Effect Relationships and top management commitment of the time and resources for successful accomplishment.)
Financial (Place Goals here)
Performance Example: Increase Revenue and Profits
Customer (Place Goals here)
Capital Example: Reduce Customer Losses and Defections
by Increasing Customer Satisfaction
Structural (Place Goals here)
Human (Place Goals here)
As proof of this Cause and Effect Relationship, Sears developed and validated a predictive model that showed that for each 5 percent increase in employee satisfaction a 1.3 percent increase in customer satisfaction resulted which in turn resulted in a .5 percent increase in revenue. And Sears realized a 4 percent increase in customer satisfaction in the 12 month period before the article was published and they were expecting revenues to increase by $200 million.
So how do you develop a Strategy Map? The answer – you take a clean sheet of paper and place yourMission Statement at the top. Lay out the four Perspectives underneath to form a Strategy Map framework. Next, use your best judgment and assign your top Strategic Goals to one of the four Strategy Map Perspectives (see example below).
Mission Statement: (Briefly state your Mission here)
Start with the Financial Perspective and work your way down in order to validate your Strategic Goals. You do this by asking for each goal “So what, who cares?” Using this question, you probably won’t get much change on the Financial Performance Strategic Goals because these drive the train. But take for example the above Strategy Map Strategic Goal under Customer Capital. It reads in part “Reduce Customer Losses and Defections.” You may find out that you don’t care about all these customer losses and defections. In fact, some of these customers may not be profitable so you indeed want to loss them. Suddenly, you find yourself restating this part of the goal to the more useful “Reduce Losses and Defections of Our Most Profitable Customers.” Do you see how the questions “So what, who cares?” helps you validate and refine your goals? It’s an extremely value tool.
Continuing in the Customer Capital Perspective, ask “Are there other goals (enabling goals) that should be developed and penned in to move the Customer Capital and Financial Performance Goals in the direction we want them to move?” If there are, then generate these enabling goals and draw in the cause and effect relationship between them and the other goals.
Next move to the Structural Capital Perspective and then the Human Capital Perspective and repeat the process. Often the Human Capital Perspective Goals don’t surface in your SWOT Analysis so they have to be generated as enabling goals to make your Strategy Map provide a viable basis to support your Grand Strategy.
Step Ten. Translate your Strategy Map goals into “Key Performance Measures” (KPMs) and perform a “Gap Analysis.” First, translate your goals into measurable terms. In some cases, a goal may already be stated in measurable terms. But you often have to break goals down and restate them in measurable terms. For example, the Structural Capital Goal of “Create and Maintain Well Stocked and Attractive Shelves” may be broken down and restated as the KPM “Mystery Shoppers Rating for Store Product Display and Appeal.”
Financial Performance Goals are usually stated in measurable terms so use these terms for your Financial Performance KPMs as appropriate. On Customer, Structural and Human Capital Goals, you usually have to restate them in KPM terms with a number, percentage or ranking. Some examples of KPMs follow:
Financial Perspective KPMs:
-Revenue – $xxx
-Profit – $xxx
-Cash Flow – $xxx
-Revenue per Employee – $xxx
-Return on Investment – x%
Customer Capital KPMs:
-Customer Retention – x%
-Customer Satisfaction – x%
Segment 1 – $xxx
Segment 2 – $xxx
Structural Capital KPMs:
-Ratio of Sales Persons to General and Administrative – x/y
-Time to Market for New Products – x months
-Inventory Turnover – 100% every x months
- -Mystery Shoppers Rating of Store Product Display and Appeal – Grade
- -Mystery Shoppers Rating of Employee Helpfulness – Grade
Human Capital KPMs:
-Employee Turnover – x% per period
-Average Days missed per Employee – x%
-Employee Satisfaction – x% Highly Satisfied, Satisfied and so on
-Number of Suggestions Submitted – xx
-Number of Suggestions Adopted – xx
-Number of Employees Fully Qualified for Their Position – xx
So translate all of your Strategy Map goals into KPMs.
Now you’re ready to perform your Gap Analysis. Start this process by determining where you are on each KPM. For the status on Financial KPMs, use your available financial numbers, but for the status onCustomer, Structural and Human Capital KPMs, you usually have to create estimated numbers, percentages or rankings. These initial estimates are okay because you want to put a stake in the ground. But you’ll also want to put in place a process to collect data and refine these KPMs as you move forward.
Next develop your desired “Targets” for each KPM. Again, this initially amounts to an estimating process based on your best judgment and level of ambition. You then break these Targets down into quarterly aiming points to begin to close the gaps. Again you’ll want to put in place a research, analysis and benchmarking process to collect data and refine these Targets as you move forward.
Step Eleven. Prepare a “Scorecard” to keep track and drive your Grand Strategy. Here’s a format with examples to illustrate how to prepare one.
Grand Strategy Scorecard
Perspective/ Quarterly Data Source/
Goals KPM Target Actual Status* Owner
Profitability ROI 12% 13% (+) CFO
Satisfaction Sat Rating 95% 94% (-) Customer Service
Create and Maintain Grade A- A- (0) Mystery
Well Stocked and Shopper
Increase Employee Sat Rating 90% 90% (0) Human
* (+) = ahead of target / (0) = on target / (-) = behind target
Once you have this Scorecard you have the centerpiece of your Grand Strategy. Now move on to implementation.
Step Twelve. Execute, Adjust, Execute. A Fortune Magazine study in June 1999 found that many CEOs were fired because they failed to execute their strategy. Things really have not changed much since then. As a friend, Mike Kipp, a consultant from Nashville, Tennessee, says “All organizations are perfectly designed to achieve the results they are getting.” Don’t confuse creating your Grand Strategy with taking action. Now the Grand Strategy process demands real work and organizational change. Otherwise improvement won’t occur and things might even get worse. Execution and appropriate adjustments are imperative or you’ve only done an academic exercise.
Finally, to keep your Grand Strategy and Scorecard up to date and on track, you form a small team of high performers. This team should be prepared to facilitate and help you with implementation across and down through the organization. In this way, you’ll get your total organization’s brainpower and energy behind your Grand Strategy. People tend to support what they help build. And with your strong leadership combined with openness to involvement and feedback, you’ll realize strategic goal linkage and alignment from the top to the bottom of your organization. And with this linkage and alignment, your Grand Strategywill move forward and achieve the breakthroughs you desire in marketing, innovation and performance improvement.
Grand Strategy Steps
- Step One. Answer “what’s your Theory of Business?”
- Step Two. Identify your Values, Beliefs, Attitudes and Capabilities.
- Step Three. Write your Mission Statement.
- Step Four. Perform an Environmental Scan.
- Step Five. Perform a SWOT Analysis.
- Step Six. Determine your Strategic Focus.
- Step Seven. Seek Performance Breakthroughs.
- Step Eight. Understand and Apply Cause and Effect Relationships.
- Step Nine. Develop a Strategy Map.
- Step Ten. Translate goals into KPMs and Perform Gap Analysis.
- Step Eleven. Prepare a Scorecard to track and drive Your Grand Strategy.
- Step Twelve. Execute, Adjust, Execute.
1 This conversation occurred at the Greater Washington Areas Society of Association Executives Great Ideas Conference in Washington, DC on March 21, 2003.
2 Treacy , Michael & Fred Wiersema, The Discipline of Market Leaders, Addison-Wesley, New York,
3 Rucci , Anthony J., etc., Harvard Business Review article, The Employee – Customer Profit Chain at Sears by, Jan-Feb 1998