Finding the Strategy Gaps

To get from where your business is to where it wants to go, you have to mind the missing steps.

By Michael Coveney, Dennis Ganster, Brian Hartlen, Dave King

MOST BUSINESS professionals understand that achieving a long-term goal requires a series of logical, achievable, sequential steps. Yet the steps that lead from where a business is today to where it wants to be — its objectives — often are missing.

The "strategy gap," as this group of missing steps is called, is real and exists within most organizations. Often unseen, the gap is a threat to the future performance — and even survival — of an organization and is guaranteed to impact the efficiency and effectiveness of senior executives and their management team.The failure of organizations to manage the transition from where they are to where they want to be is one of the most critical management challenges facing senior executives today.

One area that causes the strategy gap involves the traditional systems used to support the planning, budgeting, forecasting, and reporting processes. Issues include fragmented systems and misplaced dependence on enterprise resource planning (ERP).

Fragmented Systems
In most organizations, planning, budgeting, forecasting and reporting are treated as separate, disconnected processes and supported by different technology solutions. In fact, these processes are all part of the much larger process of strategy implementation. The following analogy illustrates why this separation does not make sense.

The journey that a business takes over time is like traveling down a road. The road curves and changes direction, and its exact route often is hidden from view. In the same way, business direction continually varies because of changing customer requirements, competitors' actions, or other occurrences in the business environment. On this journey, the business objective rests on the horizon. This objective, based on current circumstances and assumptions, is the planned destination for the organization. It serves as a beacon, guiding the organization's actions and decisions.

The journey is divided into a number of shorter segments, each of which the organization will arrive at over time, allowing the organization to gauge its progress. To reach the point on the horizon, the traveler outlines a route. This plan identifies the main roads to be traveled and the major cities the traveler will pass through en route to the final destination.

In the same way, strategic plans outline the route an organization will travel to reach its objective. The journey may take months or years to complete. The key roads are analogous to the strategic plan's tactics that must be performed to achieve the objective. Cities are analogous to key performance indicators that will tell the organization if the tactics have been completed and if it is on target for success.

Continuing, the traveler may plan in greater detail the portions of the journey to be attempted in the near future. The plan may include the names of townships, descriptions of landmarks, and locations of road junctions. These are vital indicators. Without them, the traveler may go in the wrong direction without realizing it until much later.

The budget is like that detailed plan outlining the organization's immediate route. It is very much linked to the strategic plan but contains far more detail. With the budget, the business assigns money, people and assets to the initiatives that will keep the organization on course to reach its objective.

Monitoring progress relative to the detailed plan is a vital activity because it shows the organization whether it is on target. Past performance is of interest, but it actually does little to help the business navigate the road ahead. On the journey, organizations will come up against unexpected diversions, such as construction (activities that are not yet implemented), accidents (activities that are having an adverse impact on performance) and heavy traffic (intense competition for the same customers).

These diversions will cause delays and can even lead to dead ends unless the organization can avoid them. Similarly, organizations may come across new roads (new business opportunities) that were not on the map when the journey started. They may discover that taking advantage of these roads can enable them to reach their destination sooner than anticipated.
Finally, like directional signs and mile markers, the forecast tells an organization whether it is heading in the intended direction and where it will end up unless it takes immediate action. The enterprise must monitor position and make adjustments constantly. Occasionally it may need to make a major detour — sometimes even heading in what seems to be the wrong direction — to achieve its final objective.

By taking note of the signs — the projected forecasts — and using judgment based on experience, business leaders can make intelligent adjustments to the plan. These adjustments will not be just a once-a-year activity. They may become necessary at any time to keep on track toward the intended destination.

Strategic planning, budgeting, forecasting and monitoring actuals are all part of the same process — moving an organization toward its objective. Together, they are essential components in the implementation and execution of strategy. When performed in isolation, however, they provide little value.

Quite often, managers are asked to budget using systems that do not allow them to see the strategic plan or latest forecast. It is like asking someone to drive down the road with only partial sight, no map, and no idea of the final destination. To drive performance, the company needs to see the whole travel plan: objective, strategic plan, forecast, actuals and budget. These elements are all part of the same process.

This journey, or performance management process, is continuous. Markets and competitors do not remain motionless to accommodate an organization's annual planning process. Traveling down this road smoothly and staying on course, like driving a car, requires regular, small adjustments.

Unfortunately, the traditional systems that support planning, budgeting, forecasting and reporting are inflexible. Each component is isolated from the others. In addition, often each piece of the process is supported by a different technology than the others, causing integration problems.

For example, the strategic plan may be presented as a text document; the budget may be prepared in a spreadsheet; actual results may be reported in the general ledger and analyses may be performed using an online analytical processing (OLAP) tool. These systems are completely disjointed, manually intensive and error-prone. As a result, they help create the strategy gap.

In addition, these systems tend to suffer from other problems that also create gaps:

• Difficult to change. Most existing management systems do not allow changes to be made easily. Altering structures, accounts and basic assumptions so that management can quickly see the impact of change is complex and time consuming. Sadly, most systems are nothing short of glorified adding machines — and they do not even do this very well.
• Reporting problems. Systems tend to report from one perspective — usually accounts down the page, and time and version across the page, with each page representing a cost center. Viewing data by product, turnover, geography or any other business perspective — such as strategy and tactic — is extremely difficult. In addition, many systems require a great deal of effort to disseminate actuals, the latest forecast and strategy information throughout the organization. These difficulties prevent the detailed analysis of budgets, forecasts and actual results in context and can result in the approval of unrealistic plans.
• File management issues. Many organizations still rely on spreadsheets for preparing budgets and reporting results. While spreadsheets are great personal productivity tools, they are a nightmare when used as a corporate planning and reporting system. In addition to flexibility and reporting problems already discussed, spreadsheets and many other file-based systems also incur version control and other problems because multiple files have to be maintained, relinked and then redistributed. Apart from the time and error-prone nature of this task, you can never be sure that users are now using the right version.

Misplaced Dependence on Enterprise Resource Planning
Another system-induced gap can be caused by the reliance some organizations have placed on their ERP systems to implement strategy. At first glance, such reliance seems logical. Before ERP, the processes that made up the supply chain — order entry, inventory management, billing, accounts receivable and others — were separate functions supported by multiple stand-alone systems, often running on multiple technologies. Each part of the process could be owned by a different department or operating unit.

The problems these systems generated are similar to those encountered with today's planning, budgeting and reporting systems:

• Expensive in terms of both time (maintenance) and money (hardware and software, personnel). Software had to be maintained on individual desktops. Information technology (IT) staff had to learn multiple technologies. If the system had been created inhouse by a person who then left the company, the organization had a big problem.
  
• Data integrity and version control issues. Changes in one system were not automatically reflected in other systems, data often had to be rekeyed and data were shared by transferring files. Many departments multiplied by many files equaled trouble. Organizations could never be certain that the information they were basing decisions on was accurate and up to date.
  
• Organizations could not easily see what was happening across the enterprise, making it difficult to implement corporate strategy, measure its success and make informed decisions.
  Enterprise resource planning was hailed as the solution because it integrated the supply chain processes and supporting systems. The ERP systems increased the efficiency and speed of these operations.

Because ERP systems appear to hold most of the actual data in a centralized database, companies today are looking to these systems to solve their planning, budgeting and reporting problems. Many organizations are also trying to leverage their huge investments in ERP implementations to get a return.

Given that many ERP vendors are now offering "integrated" planning, budgeting and reporting applications on top of ERP, this initially seems an attractive solution. The problem, however, is that ERP is the wrong vehicle for implementing strategic plans just as a farm tractor is the wrong vehicle for taking a family on vacation.

Gartner, the Stamford, Conn.-based research firm, reports that "[a]lthough ERP systems have largely addressed the needs of transactional users, they have not been able to address the needs of strategic and operational users."

The main reasons given are the complexity of these systems for users and their closed architectures, which make it difficult to integrate non-ERP data. All enterprise resource planning systems are focused on transactions, not on strategy. This very issue is the reason why today's traditional planning, budgeting, forecasting and reporting systems fail.

Implementing a strategic plan requires the dissemination of goals, objectives, strategies and tactics. Planners must be able to evaluate the impact of economic drivers, forecast trends and predict the impact of competitors. Senior management needs the ability to analyze alternative operating structures, investments and divestments.

Enterprise resource planning was not designed to deliver these capabilities. It is focused on operational efficiency. Implementing strategy is about management effectiveness. The two are different and require different tools and processes.

Excerpt from The Strategy Gap: Leveraging Technology to Execute Winning Strategies. Copyright 2003 by Michael Coveney, Dennis Ganster, Brian Hartlen, Dave King; All Rights Reserved.

Fuente: CIO.com