Strategic direction setting is a major role of the executive team, whose members must answer the question, "Where we do we want to go?" Then it becomes the job of the rest of the organization to help determine the best path for executing the strategy. That is, managers and employee teams must help executives answer the question, "How are we going to get there?"
Which of these two answers is more important for long-term organizational survival? Is it the first one about strategic direction or the second one about strategy execution? The consensus I hear is that answering the first question correctly is far more critical. Most people believe that good organizational processes and effectiveness will never overcome the adverse effects of a poor strategy. Therefore, strategy formulation by the executives (often aided by consultants) is vital for organizational survival.
A Gathering Storm that Some Companies May Not Survive
A gathering storm appears to be headed for executives of organizations in the developed economies of Western Europe, the U.S. and Canada. At some risk of oversimplification, strategy is all about shrewd investing and about differentiating products and services to attain a competitive edge. Determining where to spend money to yield financial returns above the cost of capital is a perennial challenge. However, a more difficult challenge facing today's executives is the speed at which competitors are now evaluating and even replicating the differentiated products and services of their industry's innovators - and then possibly upping the ante by offering their own additional differentiation.
This gathering storm involves the rate at which companies invest and how they organize to manage their human talent and technology. Some companies appear to be "hitting a wall" in both areas. There is evidence that companies are underinvesting in their own business. A recent New York Times editorial noted that although American businesses are sitting on historically large hoards of cash, they have reverted to paying higher dividends and are buying up their own company shares "in record quantities."1 The editorial refers to a Standard & Poor's estimate that in 2005, the 500 companies in its S&P flagship index would top their 2004 record in dividend payments and stock share repurchases. Short-term thinking can jeopardize prospects for becoming - or remaining - a long-term global competitor.
It is becoming increasingly difficult both to select high-return investments and to identify differentiating tactics to sustain competitiveness. The surviving competitors must break through the wall. To maintain the momentum necessary to invest wisely and continuously differentiate, managers and employee teams must have access to business intelligence. Increasingly, it is intangible assets such as employee skills and information rather than tangible assets such as equipment that generate acceptable financial returns to shareholders.
However, changes in the workforce in developed economies also are part of the gathering storm.
"Toto, I've a feeling we're not in Kansas anymore."
A recent McKinsey research paper reports some eye-opening observations about the distribution of jobs in developed economies of the G8 nations.2 For example, in the United States approximately 80 percent of nonagricultural jobs involve interactions (e.g., order-taking, scheduling, planning, exchanging ideas, decision-making, etc.). The remaining 20 percent of nonfarm workers occupy jobs that were prevalent in the Industrial Revolution at the turn of the 20th century. These workers extract raw materials and make and assemble products. This shift in the composition of the U.S. workforce reflects the outsourcing of jobs to lower-wage developing countries, such as China and India, that will continue into the future. Therefore, understanding interaction jobs is important.
One surprise is that of the interaction jobs, companies are hiring fewer people for less-complex, lower-paying jobs (e.g., processing routine transactions) and more people for complex, higher-paying jobs (e.g., exercising judgment). Less-complex jobs, such as clerical positions that involve routine and repetitive interactions, can either be automated, shifted to customer self-service (e.g., banks' automated teller kiosks), or outsourced to lower-wage developing countries. In contrast, more complex jobs, which economists refer to as "tacit knowledge" jobs, require high levels of judgment and an ability to discern ambiguities, both of which are usually acquired through experience and wisdom.
Evidence of this shift toward tacit knowledge jobs can be seen by examining the emerging roles in any company's organization chart. The business process re-engineering (BPR) movement certainly resulted in "de-layering," with removal of supervisors, but supervisors have been replaced by perpetual project teams, process coordinators and analysts. To paraphrase the late actress Judy Garland, speaking as Dorothy to her dog Toto in The Wizard of Oz, we are no longer in a familiar place. This shift toward jobs that require complex interactions has dramatic implications for how companies will compete and the agility with which they can differentiate to sustain an ongoing competitive edge.
However, some companies are not shifting their mix rapidly enough toward more complex tacit knowledge jobs. This slows their rate of productivity improvement, customer service level improvements and new customer acquisition.
Executive teams that underinvest company assets in their own business and that fail to recognize the need for knowledge workers seem to be suffering from mental gridlock. My belief is that pursuing performance management (PM) can rescue these companies.
The Adoption of Performance Management
Performance management is the integration of multiple managerial methodologies (e.g., customer relationship management, Six Sigma, balanced scorecard, activity-based management, etc.) that are typically implemented independently. But there are three important common threads that weave throughout the integrated methodologies of PM:
- Predictive analysis - As forecasting accuracy increases, uncertainty of the future decreases. This leads to increased trust in decisions and more firm commitments to see those decisions through. For example, in supply chain management, better forecasts of demand might enable suppliers to carry lower inventory levels and achieve higher throughput.
- Impact analysis - As organizations become more complex, internal conflict and tension, which are natural in organizational human dynamics, grow. Decision-makers know there are always trade-offs among customer service levels, resource requirements, quality levels and profits. They know that some decisions they make may help their group but adversely affect others in their organization; however, they do not know who is affected or how severely. For example, better coordination may be needed between marketing and operations when sales campaigns require temporary build-ups in product inventory.
- Action-ready communications - Because the technologies that support the methodologies of PM are Web-enabled, knowledge interaction employees can react immediately to unexpected outcomes. They can discuss corrective actions with co-workers by email rather than waiting for command-and-control supervisory instructions from managers at higher levels. For example, if a workgroup is falling short of a target for a key performance indicator (KPI) in their balanced scorecard, individuals from other workgroups may know what is causing the problem and send an email describing a remedy.
The technologies from the software providers of performance management systems all offer enablers that support these three common threads to some degree. The leading software provides robust statistical forecasting, what-if scenario analysis (that provides causal models describing how non-financial factors affect financial results), and performance measurement dashboards with alert messages and communications imbedded within the technologies.
Companies that are hitting the wall - by not investing or spending prudently or adequately and by not developing differentiating tactics - will find their survival is at risk. In contrast, those businesses that empower their tacit knowledge employees by providing them with business intelligence from information technologies will break through those walls and provide hope that shareholder wealth will increase, not decrease.
- "Always the Season for Reinvestment," editorial. The New York Times, December 12, 2005; p A28.
- Johnson, Bradford C., James M. Manyika, and Roger P. Roberts. "The next revolution in interactions" The McKinsey Quarterly, 2005 Number 4.