Strategy, Business Execution, and Performance Measures. (Strategic Management)
Frigo, Mark L., Strategic Finance
In our first column, we described two pillars of strategic management--business strategy and business execution--as parallel and interrelated processes that are both necessary for an organization to achieve superior financial performance. This month's column discusses some recent findings from an IMA survey on performance measurement and the implications not only for business execution but for business strategy.
Over the last several years, the IMA has conducted an annual survey on performance measurement systems, practices, and trends. The results of these surveys and extensive follow-up interviews have been reported in the Cost Management Update (IMA) and the Balanced Scorecard Report (Harvard Business School Press). Each year the survey looks at how performance measurement systems, a core process in business execution, have been changing to meet new business challenges.
This year's survey focused on the effectiveness of performance measures in communicating and supporting strategy, supporting innovation, and measuring key intangible assets, including human capital and information capital.
In looking at the survey results, we see a separation between performance measures and strategy. There are gaps in the effectiveness of performance measures to communicate strategy to employees and to support strategic initiatives, including innovation, We see a need to improve performance measures for the intangibles that drive most of the value creation in today's economy. At the same time, there are tremendous improvements in performance measurement systems as organizations focus on initiatives like the Balanced Scorecard.
Why are performance measures changing? Change has been pervasive as organizations try to find ways to measure performance that are more clearly linked to business strategy. According to the 2001 IMA performance measurement survey, 80% of respondents reported making changes in their performance measurement system within the last three years. These changes include some major overhauls and new performance measurement systems, including Balanced Scorecard or Value-Based Management initiatives.
Why are organizations making these changes? As they examine their performance measures and learn how to better execute new business strategies, they are logically led to re-examine business strategy. What they need is a way to examine and refine their business strategy to ensure that they are executing the "right strategy."
Strategy that will truly create financial value is highly synchronized and unique to each company. At the same time, performance measures need to be closely articulated with strategy. "Every strategy requires a different set of performance measures," says Michael E. Porter, Harvard Business School professor and thought leader on strategy.
How well do performance measures support and communicate strategy? This is key for strategy execution. Performance measures that are linked closely with strategy can provide the right incentives and communicate strategy throughout the organization. When asked about the effectiveness of performance measurement systems in "communicating strategy to employees' more than half the respondents rated their system as poor or less than adequate, and less than 10% considered their performance measurement system excellent in communicating strategy. When asked how effectively their existing performance measurement system supports strategic business objectives and initiatives, almost one-third rated their system as poor or less than adequate.
What are the implications for business execution and business strategy? Clearly, for many organizations, the top priority should be better business execution tools in the form of better performance measurement systems. But let's not forget about strategy. A business strategy designed with execution in mind is one that can be more easily communicated and supported through performance measures. …