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Introduction
A well-defined organizational strategy serves as the compass that guides your business towards success. It's the guiding star aligning every facet of your operations, from customer engagement to resource allocation. This then directs your business to deliver on its value proposition and outperform competitors.
The link that keeps all the little stars aligned is an effective performance management system. This requires alignment between your organizational level KPIs, your business units’ performance, and down to the employee level performance.
This blog post will explain how an effective performance management system aligns organizational strategy and cascades downwards to your business units and employee.
Defining your Organizational Strategy
A defined, integrated, and cohesive strategy, in addition to clearly defining you target customer, their buying criteria, and your value proposition, are pre-requisites for an optimized performance management system. We will not revisit what strategy is here, but with respect to yielding the expected benefits of an effective performance management system, it is all about alignment: aligning your KPIs with key drivers required to execute your strategy, aligning your operations, aligning your investment decisions, your mission, vision, and values, etc. It is all about alignment!
Target Customer and Value Proposition
Your value proposition is what sets your business apart in a crowded marketplace. It is your brand promise, it is what makes your business unique, and it is why your target customers buy from you instead of your competition. A value proposition is much more then a sentence explaining why your target buyer should buy from you; rather, it is how your business is configured to deliver on your value proposition. Operations, finance, IT, procurement, logistics, marketing, etc. It is the end-to-end experience and perceived value that your clients receive when they are engaging with your business.
Your business needs to be aligned and focused on its strategy to deliver on its value proposition. To explain this, we will simplify the concept of value proposition by categorizing them into 3 domains. It does not mean that you cannot have a combination of all 3 domains in your value proposition, it just means that there tends to be one of the 3 that is more dominant:
Customer Intimacy Model
The Customer Intimacy Model involves designing the entire organization to better understand and serve its target customers. The emphasis is on providing an exceptional customer experience with higher service levels, higher quality products, and higher levels of customization to create long-term business relationships. People, processes, and technology are customer oriented.
Characteristics
Considerations
Product Leadership Model
The Product Leadership Model requires an organization to continuously deliver a stream of innovative products to market. This requires the delivery process, from design to market, to be executed rapidly. Think of a company like Apple that can create a stream of new products, features and functionalities to their target customers.
Characteristics
Considerations
Operational Excellence Model
On Operational Excellence Model requires designing the entire organization (people, processes, technology) based on operational excellence by streamlining activities to drive customer value. This can be associated with a cost leadership strategy where the business competes on lower price and minimizing its costs. This is great for target customers that do not want any ‘thrills’ with their product, just minimal functionality to meet their needs.
Characteristics
Considerations
STRATEGIC LEVEL KEY PERFORMANCE INDICATORS (KPIs)
Once your corporate strategy and value proposition are defined, it's crucial to measure their effectiveness using strategic/corporate level KPIs. These metrics provide valuable insights into your progress towards achieving the business’s strategic objectives. Here are some examples of strategic-level KPIs for each of the three value proposition domains:
Customer Intimacy Model
Product Leadership Model
Operational Excellence Model
Cascading Effect: Mapping Business Unit Performance to Organizational Strategy
At the heart of the Cascading Effect lies the concept of alignment (it’s all about alignment!) – ensuring that every business unit's objectives, actions, and decisions are in sync with the overall strategy of the organization. This alignment ensures that the organization as a whole moves forward cohesively, maximizing efficiency and achieving its goals more effectively.
The way you configure your business to execute strategy and deliver on your value proposition is paramount to your success. This has a tremendous impact on how you structure your organization in terms of business units, and how performance is assessed for each business unit. The idea here is that your business units’ strategy is aligned with and mapped to the corporate strategy. The head of each business unit should develop KPIs for their unit that map into the strategic/corporate level KPIs. At the business unit level, the KPIs tend to be more detailed and operational in nature but will substantiate the results of the strategic/corporate level KPIs.
Let’s look at an example using a bank. The bank wants to retain 90% of it’s exiting clients. At the branch level (business unit level), you may want to get more granular with both leading and lagging KPIs that will substantiate the banks overall objective:
The bank knows that the more products a client has and that the more we are engaging with clients to better understand their needs throughout their lifecycle, the more likely the bank is to retain the customer. Notice how these indicators are too granular to be monitored at the corporate level, but at the business unit level, the manager can drill down and identify any corrective actions. If the above indicators are meeting their objectives, then the corporate level retention rate of 90% should also be met.
Responsibility Accounting: Business Unit Performance
The notion behind responsibility accounting is that managers should be accountable for items that are in their control. What gets measured gets managed, so the type of business unit will drive the performance management system. Again, these need to be structured in a way that is aligned with organizational strategy and delivering on the value proposition. There are 4 types of business unit classifications:
Investment Center
An Investment Center is a strategic business unit within an organization that has control over its investments, costs, and revenue generation. These units typically operate with a degree of autonomy and are responsible for making strategic decisions to allocate resources and investments wisely. Mapping the performance of Investment Centers to the organizational strategy involves ensuring that their investment decisions align with the organization's required capabilities and long-term objectives. This might include evaluating projects based on their potential for growth, profitability, and overall strategic fit.
Examples of Investment Centers:
Profit Center
Profit Centers are business units that have control over both their costs and revenues, and their primary goal is to generate profit. When mapping the performance of Profit Centers to the organizational strategy, the focus is on optimizing revenue generation while effectively managing costs. These units need to align their pricing strategies, product offerings, and operational efficiency with the overarching organizational goals to contribute positively to the bottom line. They are not responsible for investment decisions so they should not be scored on return on investment (ROI).
Examples of Profit Centers:
Note: Depending on the organization, the degree of decentralization, and their delegation of authority, these profit centers may be investment centers if they are also responsible for investment decision. This comes back to alignment: if they are applying a Customer Intimacy Model, maybe a decentralized approach is more appropriate by allowing the business units to make their own investment decisions. They are closer to their clients and have a deeper understanding of their markets, competition, and specific clientele.
Revenue Center
A Revenue Center primarily focuses on generating revenue for the organization. While it might not have direct control over costs, it plays a pivotal role in driving top-line growth. When mapping the performance of Revenue Centers to the organizational strategy, the emphasis is on aligning their sales and marketing efforts with the broader goals of the organization. This might involve targeting specific market segments, introducing new products or services, and exploring innovative revenue streams.
Examples of Revenue Centers:
Cost Center
Cost Centers are responsible for managing and controlling costs within an organization. While they might not generate revenue directly, their efficient cost management contributes to the overall profitability. When mapping the performance of Cost Centers to the organizational strategy, the objective is to align cost-saving measures with the organization's cost containment goals. This might include streamlining processes, adopting cost-effective technologies, and optimizing resource allocation.
Linking Employee Performance to Business Unit Performance and Organizational Strategy
Establishing a direct link between employee performance, business unit success, and the overarching organizational strategy is a cornerstone of effective performance management. This alignment ensures that every action, from the individual level to the business unit level, contributes to the realization of organizational goals.
Establishing a Clear Line of Sight
At the heart of connecting employee performance to business unit success and organizational strategy lies the establishment of a clear line of sight. Employees need to understand how their daily tasks and contributions fit into the bigger picture. When individuals can see the direct impact of their efforts on the success of their business unit and, by extension, the entire organization, they become more engaged and motivated. This clear line of sight provides a sense of purpose and direction, helping employees prioritize tasks that are aligned with strategic objectives.
Linking Employee Performance to Business Unit Performance
Aligning employee performance and business unit success is a two-way street. As we saw, business unit goals should be well-defined and cascaded down from the organizational strategy. At the same time, individual employee goals should be aligned with the objectives of their respective business units. This alignment ensures that the collective efforts of employees contribute to achieving the unit's goals, which in turn advances the broader organizational strategy. Performance objectives and KPIs play a crucial role in quantifying progress and providing a basis for continuous improvement. Regular feedback, coaching, and performance evaluations further strengthen the connection between individual contributions and business unit outcomes.
Compensation Systems for Organizational Alignment
An essential component of linking employee performance to organizational strategy is designing compensation systems that promote alignment. Compensation structures should be designed to reward not only individual performance but also the contributions that directly impact the success of the business unit and organizational objectives. This approach encourages employees to focus on tasks that drive results at both their immediate level and the broader business context. Variable pay components, such as performance-based bonuses and incentives, can be tied to business unit performance, creating a direct financial incentive for employees to contribute to the unit's success while advancing the organizational strategy.
CONCLUSION
Each decision you make resonates throughout the entire organization, from the customer touchpoints to the heart of your operations. The path to optimized performance management isn't a solitary journey; it's a collaborative journey where every department, every individual, plays a crucial role in delivering on your value proposition. As executives, your role as the maestro lies in ensuring that every note struck is in tune with the grand symphony of your organizational strategy. By embracing alignment as your guiding principle, you're not just driving performance – you're shaping the future of your organization and crafting a legacy of success that resonates far beyond the present moment.
