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Judge Business School Managing Performance in Turbulent Times

Professor Andy Neely Director, Cambridge Service Alliance

We live in a turbulent age…

“A time of turbulence is a dangerous time, but the greatest danger is a temptation to deny reality” - Peter Drucker

Economic turbulence

Terrorist turbulence

Political turbulence

Social turbulence

Technological turbulence

90% of executives say agility is critical to success today…

8 Turbulence and Performance Management Today

is new is the severity and persistence, a fact that business leaders must learn to cope with.

The Economist Intelligence Unit published a research report in 2009 entitled “Organisational Agility: How Businesses Can Survive and Thrive in Turbulent Times.”5 The report, sponsored by EMC Corporation, is based on interviews of just under 350 executives from around the world and makes four key fi ndings. The fi rst, and perhaps most important, is that 90 percent of executives believe that organiza-tional agility is critical to success in the today’s business environment. Agility, according to business leaders, comprises rapid decision mak-ing and execution. The second fi nding, related to the fi rst, is that leaders believe that their organizations are not fl exible enough to respond to today’s changes. Over one-quarter of the respondents felt their organizations were at a competitive disadvantage due to poor agility. The third fi nding reveals that more than 80 percent of the leaders polled claim their organizations have initiatives designed to improve agility, but one in three found these initiatives had failed to deliver results. Finally, technology was deemed to play a critical role in enabling organizational agility. Traits respondents identifi ed as those of an agile organization are listed in Figure 1.1.

We could continue, but it is safe to note that among popular—and credible—publications, there is a sense that the world is moving fast and organizations need to develop systems and structures to keep pace. But popular business thinking alone is insuffi cient to build the case; we also need to explore the available research evidence.

61

34

44

The ability to access the right information at the right time

A high-performance culture

Rapid decision making and execution

29

31

34

Decentralized or “flat” management reporting structure

Flexible management of teams and human resources

Accountabbility and credibility

9

17

22

Unified/flexible application infrastructure

Continual process improvement/Six Sigma

Lean operations

2Other

Figure 1.1 Traits of Agile BusinessesSource: Adapted from Economist Intelligence Survey 2009.

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Traits of agile organisations…

Source: “Organisational Agility: How Businesses Can survive and Thrive in Turbulent Times”, Economist Intelligence Unit, 2009 – survey of around 350 executives.

25% of respondents believed that their organisations were not flexible enough to respond to today’s changes.

… but major obstacles stand in the way

Source: “Organisational Agility: How Businesses Can survive and Thrive in Turbulent Times”, Economist Intelligence Unit, 2009 – survey of around 350 executives.

How do measurement frameworks help?

Balanced Scorecard

EFQM award

Economic profit

Intangible assets

Shareholder value added

Activity based management

Baldrige award

PSA targets

Enterprise performance management

Corporate performance management

Business intelligence

Beyond budgeting

Strategic performance management

League tables

Activity based costing

Performance pyramid

Performance Prism

Throughput accounting

Analytics

Activity based profitability

management

Progress with measurement…

Measurement frameworks

Deliver alignment

Translate strategy into

action

Enable strategy

challenge

Methodologies Measures selection

Measures design

Performance visualisation

Technologies Consistent data – one version of

the truth

Enabling people to focus on data

analysis not capture

Increasing integration and consolidation

A state of the art strategy execution system to be developed and fully implemented

A traditional strategic plan to be created

Significant change in a turbulent industry

Do these developments help?

Take too long to design and deploy – unless your world is stable

The time it takes for….

1 year 2 years 3 years

The problem with turbulence…

Turbulence refers to volatility or difficult-to-predict discontinuities in an environment.

Turbulence has multiple sources

Technology Factors

Product Factors

Demand Factors

Competitive Factors

Regulatory Factors

The impact of turbulence can be profound…

Take the Handleman Company

“Although Handleman Company cannot make any assurances, it believes that the distribution of home entertainment products will remain highly competitive and that customer service, sales to consumers and continual progress in operational efficiencies are the keys to growth and profitability in this competitive environment.” 2006 10K

2006 2009

On May 5, 2009, Handleman Company filed a Certificate of Dissolution with the Michigan Department of Energy, Labor and Economic Growth, Bureau of Commercial Services, Corporate Division. As a dissolved company, Handleman shall continue its corporate existence, but shall not conduct business, except for the purpose of winding up its affairs. 2009 8K

Revenue: $1.3 billion

2007 2008

“In recent years, music industry sales have declined at double digit rates as the industry was impacted by digital distribution, downloading and piracy. In addition, the Company’s gross margins were compressed because lower-margin promotional products became a greater proportion of annual sales. This level of continued erosion of CD music sales is expected to continue into the foreseeable future.” 2008 10K

Revenue: $494 million Revenue: nil

Case selection

Company Size Ownership Performance Number of measures

Arbor $45,000,000 Private Good-‐Growing 31 measures Aware $22,000,000 Public Poor-‐Declining 12 measures Cyveillance $10,000,000 Private Average-‐Flat 19 measures Ellacoya $24,000,000 Private Good-‐Growing 18 measures Enterasys $300,000,000 Private Poor-‐Declining 17 measures NetScout $270,000,000 Public Good-‐Growing 17 measures RSA Security $500,000,000 Public Good-‐Growing 31 measures

So how do firms in turbulent environments manage performance?

Principles for overcoming turbulence

Four key principles underpin this work…

In a turbulent word…

1.  Keep it simple…

2.  Recognise that every activity is NOT equal…

3.  Realise that faster is better…

4.  Deploy the best of the best…

Performance management for turbulent environments: PM4TE framework

Model Performance

Performance Management

Execution Management

Measure Progress

Manage Projects

Make Decisions

The performance management cycle

Model Performance


Model performance: activity map

Model performance: strategy map

Model performance: Deloitte value map

Model performance: success map

SUSTAINABLE PROFIT

GROWTH

Drive sales

revenue

Drive margin Sales to

balance of customers

Sales to allocated

customers

Gross profit from balance of customers

Gross profit from allocated

customers

Customer service

Customer retention

Service quality audit

First pick

availability

Achieve operating efficiency

Manage the cost

base

Debtor days with allocated

customers

Internal performance

audit

Branch productivity

Other controllable costs (£)

Excess stock

EMPLOYEE SATISFACTION

Staff turnover

Staff awareness of key ideas and

initiatives

Inter-‐branch co-‐operaSon

Bad and doubtful debts with allocated

customers

Number of active

customers

Development of B customers


Model Performance


Manage Projects

Manage projects: business cases

Project Name:

Project Description:

Date Submitted:

Project Owner:

Project Sponsor:

Linked Objective(s): Impact on Objective(s):

Basic Information

Strategic Information

Revenue Increase ($)

Cost Reduction ($)

Year 1 Year 2 Year 3 Year 4NPV: Time to Payback:Financial Information

Cost To Implement ($)

Year 1 Year 2MilestonesSummary Project Information

TBD

TBDTBD

TBDTBD

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Manage projects: sound practices

Manage Daily

Evaluate Weekly

Review Monthly

(Executive)

Influence Constantly

Manage projects: initiative alignment

Projects are the drivers of change in organisations

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ObjectivesPerspective

Financial

Economic value added

Be the lowest cost producer

Pick the winners globally

Customer

Create new market demand

Price performance

Partnering

Integrate and align resources

InternalSales and customer development

Focused technology development

Perfect manufacturing

People and change management

Learning& Growth

Strategic competencies

Individual and team performance

Customer sensitive culture

No initiativesfor the Financial

perspective

9 initiativesfor 1 objective

No initiativesfor this objective

2 initiativesserving noobjectives

Figure 4.3 Initiative Alignment MatrixSource: Robert S. Kaplan and David P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (Boston: Harvard Business School Press, 2008).

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Source: Robert S. Kaplan and David P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (Boston: Harvard Business School Press, 2008).


Model Performance


Measure Progress

Manage Projects

Measure progress: measures design 98 The Performance Management Core Process for Turbulent Times

performance measures, I thought it would be an activity of limited value. But by the time we were fi nished (three weeks later), it was one of the most useful things we’ve ever done at our company.” Why is this the case? There are several reasons.

First, fi lling out the template forces organizations to clarify (not just quantify) the thinking behind the measures—what the meas-ure is, what its purpose is, and what is supposed to happen given the results. Second, it provides the means to analyze the range and types of measures used in an organization. Although managers regu-larly lament that they do not have the measurement data they really need, they never challenge the data they have in any structured way. If they did, they would likely fi nd rafts of measures that have limited value. This would lead to stopping much of the perform-ance measurement currently underway. Lastly, it provides a basis for the managers to communicate the particulars of measurement to one another. In organizations today where roles and responsibilities are changing often, this type of documentation provides the basis for smooth transition in the area of performance management.

Performance Measurement Frameworks

In the late 1980s and early 1990s, individual measures, known as per-formance measurement frameworks, came into use in various organizations.

Table 5.1 Elements of Performance Measure

Elements or Attributes Description

Measure name A clear, self-explanatory title describing what the measure is

Measure purpose Defines why the measure is going to be used

Objective supported Explains which main objective the measure is supporting

Target level Defines the expected performance level for this measure. Can be broken into time periods

Formula Provides the calculation for the measure

Frequency Specifies how often measured data is to be collected and calculated

Source of data Identifies the system or source input for the measure data

Who acts on the data Identifi es an individual/department/area that acts on the results

Source: Adapted from Andy Neely, Huw Richards, John Mills, Ken Platts, and Mike Bourne, “Designing Performance Measures: A Structured Approach,” International Journal of Operations & Production Management 17, no. 11 (1997): 1131–1152.

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Source: Adapted from Andy Neely, Huw Richards, John Mills, Ken Platts, and Mike Bourne, “Designing Performance Measures: A Structured Approach,” International Journal of Operations & Production Management 17, no. 11 (1997): 1131–1152.


Model Performance


Measure Progress

Manage Projects

Make Decisions

Make decisions: The SCQ framework

SITUATION •  Where are you now vs. where you want to be? •  What makes the situation unsatisfactory? Why is there a need for change? COMPLICATION •  What is stopping you from getting to where you want to be? •  Consider the hurdles, constraints, and trade-offs QUESTION •  What is the one main question you need to answer?

o  The question should be analytical and action-oriented o  It should be a problem, not a symptom o  It should be more important and urgent than other questions o  Frame the question such that it is answerable with a ‘yes’ or ‘no’

Make decisions: issues tree

127 Is strategy part of theorganization’sdaily routine?

Is SMS the compellingvalue proposition?

Does the organizationhave the competence?

Is there a methodologyin use?

Are there consequencesfor noncompliance?

Is there sufficient timeto focus on strategy?

Does a value propositionexist?

Is the value propositioncredible?

Is there sufficient staff?

Is the staff capable?

Are enough positionsauthorized?

Are open positions filled?

Are the right people inpositions?

Are they properly trained?

Does a methodology exist?

Is the methodology beingfollowed?

Do consequences exist?

Are consequences enforced?

Are consequencesmeaningful?

Is the effort being prioritized?

Are there too manypriorities?

Are they allocated properly?

Y

YN

N

Y

N

N

N

NN

N

N

M

N

NN

N

Y

YY

N

35%

20%

15%

20%

10%

100%

Y

Is it being communicatedeffectively?

N

Figure 6.3 Issue Tree: Drivers behind the Failure to Make Strategy part of Daily Operations

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Model Performance


Measure Progress

Manage Projects

Make Decisions

Exploring the drivers of performance

Customer Satisfaction

Strategy

Antecedents


Measurement System


Consequences

Consequences of Customer Satisfaction

Customer Attitudes •  Willingness to

recommend •  Intentions to repurchase

Customer Behaviour •  Repeat orders •  Customer compliment •  Customer complaint •  +ve / -ve word of mouth

Financial Performance

The moments of truth

Calls answered < 20 seconds

Check-in service

Departure time

Meal rating Cabin crew attentiveness

Aircraft condition


Total short landed bags

UK Executive Club

So what really drives performance?

Cabin Crew Service

(+)


(+)

(+) Turnover

Willingness to recommend

Departure on Time

(-)

Meal Rating (+)

Check-in Service

(+)


Model Performance


Measure Progress

Manage Projects

Make Decisions

The execution management cycle

Model Performance



Measure Progress

Manage Projects

Make Decisions

The enabling foundations

Model Performance



Measure Progress

Manage Projects

Make Decisions

Strategic intelligence Strategic Intelligence 155

One tool that helps is the Strategy Map Analysis Table.7 An example can be seen in Figure 7.4.

This intelligence tool depicts three competitors in the low-cost segment of the commercial airline industry: AirTran, JetBlue, and Southwest. Key elements of performance, along with associated organizational objectives, are isolated and analyzed in a cross-tabular format. What this comparison enables managers to do is compare and contrast critical performance dimensions across organiza-tions using the structure of a well-known performance model, the Strategy Map. However, the same can be done using a Success Map or a fi nancial driver model. The power is in the practice of gather-ing strategic intelligence, organizing it in a comprehensible (and

Date: 1/31/05

Information Sources:New York Times,Wall Street JournalNielsen

Related Objectives & Initiatives:Impact the ability to “grow revenue and improve profi tability.”

Time To Impact:Starting now . . . will accelerate into 2006 and 2007

Chosen Response:Continue to manage the business as is.

Strategic Issue Name: Shift to digitized music

Current & Future Situation

Critical Data/Information:The New York Times and the Wall Street Journal have begun publishing data from behavioral scientists that describes the shift to portable digital media. Web sites are emerging that provide fi le sharing and downloading. A recent trade show showcased new technologies aimed at accelerating the shift to digitized music.

Trends and Extrapolations:The expectation of decline in the music segment of our business could extend from low single-digit to signifi cant double-digit decreases.

Impact & Response

Potential Impact:The advent of MP3 players and alternative delivery means have provided a viable alternative to physical distribution of music. It is possible that a rapid decline in music distribution will occur over the coming years that will unfavorably impact our business and, if severe enough, could force us into bankruptcy.

Possible Responses:There are three responses identifi ed at this time:1) Continue to manage business as is.2) Begin the development of a digital distribution organization.3) Identify a partner to help establish relationships with emerging

developers/distributors.

Figure 7.3 Strategic Issues TemplateSource: Adapted from E. Barrows, “Four Steps for Integrating Strategic Risk Management Into Your Strategy Review Process,” Balanced Scorecard Report 13, no. 2 (2011).

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Source: Adapted from E. Barrows, “Four Steps for Integrating Strategic Risk Management Into Your Strategy Review Process,” Balanced Scorecard Report 13, no. 2 (2011).

Continuous conversation

Continuous conversation is how managers convert strategic intelligence into awareness, collective understanding and ultimately unified action

172 Performance Management for Turbulent Times Model Enablers

effective conversation is the exception rather than the rule, there are a few rules we have found that, when applied, improve the qual-ity of the conversation and, not surprisingly, the quality of perform-ance management.

Principles of Effective Conversation

In our travels, we have identifi ed a few basic requirements to effec-tive conversation. We cannot claim ownership of these principles—we have merely identifi ed them and supplied them here to facilitate improvement in the quality of conversations used in the PM4TE process. While our focus is improved performance management, we have found that these principles contribute to the effectiveness of overall organizational performance, not just performance within the context of the PM4TE process. The principles are summarized in Table 8.1.

Know the Audience Before engaging in effective conversation, man-agers must make conscious efforts to understand their audience. Employees at all levels bring strong opinions, feelings, and biases to discussions. Failing to acknowledge these will almost guarantee a substandard dialog. Why might this be the case? Because in order to be open to infl uence, they must fi rst believe that their own con-cerns are being heard. In most customer service failures, what the customer really wants—even more than a resolution to the particu-lar problem—is the opportunity to have their frustrations and con-cerns heard and understood.

In organizations, employees are no different. They want to know their issues of greatest worry are heard and understood by

Table 8.1 Principles of Effective Conversation

Principle Description

Know the audience Understanding the motives, concerns, and viewpoints of the conversants

Ask questions Inquiring about performance issues and challenges for purposes of deepening understanding

Explore and challenge, don’t judge and criticize

Critiquing information in a way that encourages exploration as opposed to criticizing

Above all else, just listen Commit to learning through listening instead of talking

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Accelerated learning

Organizational alignment

The measures define the rules of the game!

Internal competition

Lack of trust between Branches

Inefficient use of resources –

delivering “out of area”

Putting “own customers” first

Engaged leadership

Dissatisfaction and discouragement are not caused by the absence of things but by the absence of vision. — Anonymous

The PM4TE framework: bringing it all together

Model Performance



Measure Progress

Manage Projects

Make Decisions

For further information…

Professor Andy Neely University of Cambridge Charles Babbage Road Cambridge Mobile +44 (0)7711 140198 E-mail [email protected] www.ifm.eng.cam.ac.uk/people/adn1000

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