Mastering the Management System - HBR

Mastering the Management System - from HBR

Successful strategy execution has two basic rules: understand the management cycle that links strategy and operations, and know what tools to apply at each stage of the cycle.

by Robert S. Kaplan and David P. Norton

Not long after its successful IPO, the Conner Corporation (not its real name) began to lose its way. The company’s senior executives continued their practice of holding monthly one-day management meetings, but their focus drifted.

The meetings’ agenda called for a discussion of operational issues in the morning and strategic issues in the afternoon. But with the company under pressure to meet quarterly targets, operational items had started to crowd strategy out of the agenda. Inevitably, the review of actual monthly and forecast quarterly financial performance revealed revenues to be lower, and expenses to be higher, than targeted. The worried managers spent hours discussing how to close the gap through pricing initiatives, capacity downsizing, SG&A staff cuts, and sales campaigns. One executive noted, “We have no time for strategy. If we miss our quarterly numbers, we might cease to exist. For us, the long term is the short term.”

Like Conner, all too many companies—including some well-established public corporations—have learned how Gresham’s Law applies to their management meetings: Discussions about bad operations inevitably drive out discussions about good strategy implementation. When companies fall into this trap, they soon find themselves limping along, making or closely missing their numbers each quarter but never examining how to modify their strategy to generate better growth opportunities or how to break the pattern of short-term financial shortfalls. Analysts, investors, and board members start to question the imagination and commitment of the companies’ management.

In our experience, however, breakdowns in a company’s management system, not managers’ lack of ability or effort, are what cause a company’s underperformance. By management system, we’re referring to the integrated set of processes and tools that a company uses to develop its strategy, translate it into operational actions, and monitor and improve the effectiveness of both. The failure to balance the tensions between strategy and operations is pervasive: Various studies done in the past 25 years indicate that 60% to 80% of companies fall short of the success predicted from their new strategies.

By creating a closed-loop management system, companies can avoid such shortfalls. (See the exhibit “How the Closed-Loop Management System Links Strategy and Operations.”) The loop comprises five stages, beginning with strategy development, which involves applying tools, processes, and concepts such as mission, vision, and value statements; SWOT analysis; shareholder value management; competitive positioning; and core competencies to formulate a strategy statement. That statement is then translated into specific objectives and initiatives, using other tools and processes, including strategy maps and balanced scorecards. Strategy implementation, in turn, links strategy to operations with a third set of tools and processes, including quality and process management, reengineering, process dashboards, rolling forecasts, activity-based costing, resource capacity planning, and dynamic budgeting. As implementation progresses, managers continually review internal operational data and external data on competitors and the business environment. Finally, managers periodically assess the strategy, updating it when they learn that the assumptions underlying it are obsolete or faulty, which starts another loop around the system.
Sidebar IconHow the Closed-Loop Management System Links Strategy and Operations

A system such as this must be handled carefully. Often the breakdown occurs right at the beginning, with companies formulating grand strategies that they then fail to translate into goals and targets that their middle and lower managers understand and strive to achieve. Even when companies do formalize their strategic objectives, many still struggle because they do not link these objectives to tools that support the operational improvement processes that ultimately must deliver on the strategy’s objectives. Or, like Conner, they decide to mix discussions of operations and strategy at the same meeting, causing a breakdown in the strategic-learning feedback loop.

In the following pages we draw upon our extensive research and experience advising companies, as well as nonprofit and public sector entities, to describe the design and implementation of a system for strategic planning, operational execution, and feedback and learning. We present a range of tools that managers can apply at the different stages, most developed by other management experts and some of our own design. (See “A Management System Tool Kit” for further reading on the tools discussed.) We will show how these can all be integrated in a system that links the management of strategy and operations.
Sidebar IconA Management System Tool Kit
Stage 1: Develop the Strategy

The management cycle begins with articulating the company’s strategy. This usually takes place at an annual offsite meeting during which the management team either incrementally improves an existing strategy or, on occasion, introduces an entirely new one. (Our experience suggests that strategies generally have three to five years of useful life.) Developing an entirely new strategy may take two sets of meetings, each lasting two to three days. At the first, executives should reexamine the company’s fundamental business assumptions and its competitive environment. After some homework and research, the executives will hold the second set of meetings and decide on the new strategy. Typically, the CEO, other corporate officers, heads of business and regional units, and senior functional staff attend these strategy sessions. The agenda should explore the following questions: