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26 September 2016

KPI. Strategy. Fast start

The Balanced Scorecard (BSC) is one of the most recognized, proven in practice, and effective strategic management systems, which is used all over the world. KPIs or key performance indicators can be applied most effectively as part of this system. BSC was created by two famous Americans David Kaplan and David Norton and has been used for more than 20 years now.

Original and very interesting ideas, placed at the heart of the BSC, form a new value creation mechanism in the information society. The idea of Norton and Kaplan is that the main source of development of the modern company lies in its intangible assets such as skills and abilities of the personnel, information technology, information databases and organizational capital (e.g. corporate culture and organization philosophy or leadership). This is a secure foundation to build a steadily progressing company because it allows creating a unique value chain. In other words, it is a collection of vital strategic processes of the company, which together create a unique differentiated value proposition. All strategic business processes of a company must have value proposition as an output. Value proposition is the core of the modern strategy. If the company is able to provide its customers with a unique value proposition, it certainly will get financial benefits.

1-1-3

In the lower part of the Figure 1., you can see a new value creation mechanism. These are four main business areas that are closely interrelated.

The second idea, expressed by Norton and Kaplan, is that the company’s success depends on whether it focuses on developing a strategy. Without strategic management, the company is not able to adapt to the changing market conditions and beat the competition.

Following the classic chain, from mission to value and strategy (Fig. 1), you can identify main strategic objectives that need to be distributed among four components of the new value creation mechanism. The arrows in the figure show the distribution of the objectives. As a result, we get the first and a very important, perhaps, a unique tool – a strategy map.

2-3

An abstract idea gets a very specific shape. There are very clear strategic objectives, and each objective has its own sub- objectives that the company should achieve performing its activities.

The customer component keeps the core of the strategy – a company must deliver value to a customer. However, it´s hard to create a customer value in a real market. For this, you need another component (the “internal” or the “process” component). It will help formulate strategic objectives related to the processes, which create a value proposition.

Typically, strategy maps represent three types of processes:

  • Operational Processes – production, distribution, logistics;
  • Customer Management – customer relations;
  • Innovative Processes – creation of new goods and services.

There is the fourth group of specific business processes, it refers to regulatory and procedural processes, but it is more applicable to large companies, especially those that carry the risk of environmental pollution.

At the same time, the first three groups of processes are related to almost any business.

The internal component forms a unique value chain and transforms into a financial result.

There is also the fourth component – human capital, strategic capital, organizational capital.

3-3

A strategy map, when viewed as a whole, visualizes the company’s strategy and shows it in an understandable way. Before companies used to set out their strategy on multi-page documents, but only few people read them and often interpreted the documents in their own way.

In fact, a strategy map is a set of strategic objectives, located in four business components, which have cause-and-effect relations. Reaching one objective takes you to another. Starting from the roots, from the physical assets, we come to processes and create strategic processes. The processes provide the value proposition, which ultimately translates into financial results. In the early 90s, the success of such maps was phenomenal. Its simplicity and usefulness were much appreciated.

It’s impossible to manage a company by using an ideal strategy map, because it’s not clear to what extent the company meets the ideal image, at what point it currently is, and how soon it will come to the implementation of the strategy. How can a company achieve strategic objectives and implement the company’s strategy? There are a number of strategies that are made up of strategic themes. For example, if the company focuses on operational processes and carries out the strategy of the “best overall price”, it will create a special value. For the customer this value will be, in fact, the lowest cost in the segment, high quality, fast service, etc.

4

Strategic themes offer a choice of the company’s strategies. This process is very creative, it is a kind of art, and it all depends on your imagination and inspiration.

The basic technology, which allows you to turn the strategy map into practice, is the following:

“Objectives -KPIs -Tasks -Initiatives” Technology

  1.  Objectives comprise strategy.
  2. KPIs help to measure how effective a company is at achieving its goals.
  3. Tasks determine KPIs planned values.
  4. Strategic Initiatives are the means to achieve objectives.

There is a saying: “You can only manage what we can measure.” And it is true! That is why you need to measure how good you are at achieving your objectives. If you know the target, you can establish key performance indicator and then measure how close you are to achieving the strategic objectives. Your next task is to determine deadlines and the scope of work. The last link in this chain is a concept of strategic initiatives. It can be any event, which leads to an accomplishment of the tasks or strategic objectives.

There are a lot of objectives on a strategic map, that is why BSC is not as simple as it might seem, and it requires hard work but it brings a very good result. This basic technology should be used to implement the strategy in practice.

All case studies show that companies do not fail due to lack of a strategy, but because there is no way to implement these strategies.

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Another important technology is the ability to bring the strategy to the operational level, divide the corporate strategy into objectives, indicators, targets for different units and then convey it to employees.

It is necessary to distribute the responsibilities between departments and employees and clearly specify task of each person in order to meet a specific corporate standard of providing services. This means to create a corporate level strategy or use the decomposition technology and cascading. It is the second most important technology that covers the strategic scope of the organization as a whole and leads to the strategic results that each company strives to achieve. In the figure above the results are represented as four oval shapes.

Motivation and incentives are linked to the strategy. This may be a system of bonuses and rewards or something else. If you use all three technologies, there is a chance that the management system will work.

A strategy determines a set of key performance indicators.

Key performance indicators of the financial component

Strategic directions of the financial component Key performance indicators
Improve cost structure Income / staff, reduce costs, unit production cost (production units or transactions), the percentage of indirect costs in sales, the percentage of added value in sales
Use assets more efficiently The percentage of investments in sales, ROCE for the main categories of assets, assets utilization ratio, inventory turnover speed, the payback period, the share of research and development in sales
Increase revenue opportunity The percentage of revenue from new product sales, the percentage of revenue from new use of an existing product, the percentage of revenue from sales to new customers
Increase customer value The growth rate of sales in the market segment, the share of target customers, product and customer profitability, the percentage of unprofitable customers

Each objective has its own KPIs.

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Ultimately, all these factors improve the company’s market share. Other indicators may be used as well.

 

Key performance indicators of the customer component [2] 

Strategic directions of the customer component Key Performance Indicators
Characteristics of goods and services Percentage of returned goods; percentage of complaints; average price; delivery time; time required to make an order.
Image Customer perception according to polls: competent, trustworthy, self-respecting, pioneering.
Relationship Number of visits to key customers; responsiveness to a customer request; percentage of consumers who are satisfied with the way the company interacts with its customers.

 

The fourth component – training and development. There is an interesting concept – the status of personnel. You have to understand that intangible assets are the source of the company’s development, so it is important to know the status of the people, the status of staff.

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The status of personnel depends on employee satisfaction and loyalty.

A well-organized strategic management office can help achieve the effectiveness and make all the above factors work.

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Aleksey Trefilov
Aleksey
Trefilov
CEO