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The new New Economy Analyst
Report – December 28, 2002
Juergen Daum’s new New
Economy Best Practice service
©2002 Juergen Daum. All rights reserved.
Approaching the next level of shareholder value management –
the art of corporate performance management (part 2)
News categories: Enterprise and business
strategy, Finance and accounting,
Performance management and controlling, investor relations
- Building Block
#1 of the new performance and value management system: The Tableau de Bord
- The Corporate Performance Management Process
-
Management of
operational value creation processes
- Product Lifecycle Management
-
Operations
management processes
-
Support management
processes
- Consequences for the management
structure/organization of the enterprise
- Building Block #3 of the new
performance and value management system: Effective teamwork at the top
-
Summary
The shareholder value movement, which has its roots in
the 1980s, when institutional investors were starting to exert pressure on
corporate executives to deliver better shareholder value and corporate raiders
forced them to take care, that their company is not undervalued, is approaching
a crossroad today. The extensive focus of investors and financial analysts on
quarterly earnings and the resulting “earnings game” has led to severe
exaggerations and resulted in an under-attention of both investors and managers
on the business fundamentals of enterprises. This is reinforced through the
actual scandals, where companies have inflated their earnings figures,
resulting in a severe damage of reputation and in a general mistrust in
corporations, their auditors and in financial analysts.
Therefore
the attitude of both investors and managers has dramatically changed during the
last 18 months. Senior executives, chief financial officers and investors are
increasingly believing, that shareholder value is primarily created from
internally generated growth, through new products or services, from improved
customer relations, from entering successfully new markets, and from cost,
resource, and capital efficiencies – rather than from mergers and acquisitions.
But many executives do not understand, how their business units create value
and they do not know much about the business economics of their business
system. But only when management fully understands the internal logic of the
business system of their company, positive financial results can follow. Only
then corporate executives and business managers are able to manage for
sustaining financial performance – exactly what investors and financial
analysts expect today from management.
The
first building block of a new improved corporate performance management system,
as it was introduced in part one of this
article series, represents a measures system, that reflects the
individual business economics of the enterprise. It has to enable managers, to
learn, how they can improve total factor productivity of the enterprise, which
is driving fundamentally shareholder value by optimizing both the single factors
and processes such as in product development, sales, or supply chain management
and by optimizing the combination of all factors. A conceptual framework for
such a measures system, that I have described and developed in my book
is the Tableau de BordTM.
Building Block #1 of the new performance and value management system: The Tableau de BordTM
The
task of the Tableau de Bord is to provide managers with actual information
about the status of all value adding processes. For this, it has to reflect the
value creation system of the company, that is its business model. It should,
for example, provide a complete picture of the product innovation process, from
the discovery to the development phase and finally to the commercialization
phase. If this is done comprehensively, management not only receives
information on the efficiency of product development (project progress vs.
resource usage) but also on its effectiveness (development of possible future
market shares and revenues). This, for example, enables the enterprise to
continuously optimize its product development portfolio, so that it can
minimize the risks and costs and can make better use of available market
opportunities.
The
same applies to customer relationship management, in which significant value is
either created or destroyed in enterprises today. Not only does the management
require information on (short-term) sales and profitability, but more
importantly, also on the development of the long-term customer value (customer
lifetime value). This is the only way to identify the potential in the existing
customer base and in new market segments as a means of optimizing the customer
portfolio and creating a long-term, profitable customer base that can be used
for marketing future products.
This
also includes information on the efficiency of supply chain management. As a
process secondary to the customer-related business processes, value is created
in supply chain management from delivery liability, flexibility (for example,
being able to quickly reconfigure the supply chain network when customer demand
is changing), and efficiency (low costs, low capital tie-up). In addition,
other indicators should be able to report on the status and the productivity of
the most important enterprise resources, for example, human capital,
information technology, intellectual property and financial capital.
As
well as providing this operational information (aimed at the operational value
creation system of the enterprise), the new performance management system
should always be able to report on information about the overall performance
(profit & loss, sales revenues, ROI, EVA) and the status of the
implementation of the currently valid enterprise strategy. So the Tableau de
Bord, a collection of all relevant key figures, reports both on the status of
all the relevant operational value adding processes and on the implementation
of the enterprise strategy and the current overall performance. Using a Tableau
de Bord, management can thus gain insight into the overall situation and
quickly make decisions accordingly.
Figure
1 of part 1 of this article series pictures the framework of the “Tableau
de Board” developed by Juergen Daum, which is based on the French concept with
the same name. It provides information on the overall performance of the
enterprise (through its Balanced Scorecard view) and of the status of the most
important value adding processes (through different KPI-based “cockpits”) in an
integrated way.
But
having the right management information available (such as through a Tableau de
Bord based performance measurement system) is only one part of what is needed.
This is because management knowledge is being created through information and
through communication, that is through a good measurement system and
through effective dialogs in the management team and between corporate
executives and business managers.
Building Block #2 of the new performance and value management system: Management dialogs which are organized through integrated strategic and operational management processes
The
highly dynamic environment for companies will continue to increase. Today’s
knowledge and service-oriented economy results in a dominating role for soft
success factors, for intangible assets, and thus increases not only the
dynamics on the macro level but also creates new challenges for companies
internally: Company activities become more complex and internal dynamics also
increase. Compared with companies 30, 40, or even 50 years ago, the task of
today’s companies is no longer only to produce and sell products. Nowadays,
companies must no longer compete successfully in a seller’s market but in a
buyer’s market. To be successful and remain so, they must keep bringing new
products onto the market in shorter time intervals, form systematic long-term
workable and profitable relationships with customers and business partners,
constantly develop the company’s human capital, and keep the good employees,
and not least satisfy the more demanding investors with good financial results.
Therefore, today they have to do very different things at the same time:
Develop the right products (in the long-term), form good relationships with
customers, employees, and business partners (medium-term), and operate
profitably (short-term). This increases the “trade-offs” in the business system
and results in the increased need for regular internal reconciliations. At the
same time, change dynamics are increasing in the environment and force
companies to balance their activities in shorter intervals with external
developments. The traditional corporate management instruments budgeting and
monthly budget/actual comparison prove to be too inflexible and have therefore
long since had their day as the only basis of the management system.
Instead,
companies need management systems that permit quick and efficient exchange of
knowledge between individual managers to ensure a fast, appropriate and
coordinated reactions to changes in the environment. These management system’s
task is to institutionalize decisions through management processes on strategy
adjustments, but also on adjustments of operational enterprise activities and
resource allocation. This should enable the enterprise to continually control
and optimize its short and long-term success in a dynamically changing
enterprise environment.
These
management processes include a
strategic management process that establishes continuous, strategic dialog
throughout the company and thus ensures that the company remains a nose ahead
of external developments that could harm its competitive position and its
already available value creation potential. Companies must also have a process
for performance management that optimizes the exploitation of existing assets
in order to achieve short term income goals. Both processes need to be linked
with each other to enable management to manage for growth and for short term
results at the same time. The key for it is an integrated strategy and
corporate performance management process, of which the basis is not any more a
fixed budget but a dynamic forecasting process.
Budgets
and forecasts are tools for resource allocation. But resource allocation needs
to be consistent with strategy and prevailing business conditions. And that
means, that budgeting and rolling forecasting has to be integrated into the
strategy management process. Because a strategy is always first a hypothesis of
management about how a company can create competitive advantage and value, a
strategy has to be adapted continuously as soon as new information about the
“reality” is available or as soon as the “reality” is changing. For this a
feedback system is required, which can deliver this information and knowledge
on a regular basis. An important element of such a feedback system is a Tableau
de Board, which provides the relevant measures, and the forecasting process,
which makes sure that the Tableau de Bord can present not only actuals but also
forecast, that is information about the possible future development of these
important measures. The latter will then trigger strategic and operative
adaptation and corresponding coordinated action of the organization. In order
to ensure that this happens in an organized way and continuously, enterprises
have to implement in addition to the appropriate performance measurement system
the necessary management processes.
Strategy Management
The
strategy must show how the enterprise wants to create value for its stakeholders,
and with which assets it wants to do this and how it will combine them to a
unique value recipe. This requires the use of a strategic management system,
which makes both this strategy transparent and therefore manageable and makes
it a continuous process rather than a one off, and establishes a continuous
strategic dialog in the enterprise (see interview with David
Norton). In the highly dynamic market environment of today, unique competitive
positions in the market can only be retained or even expanded if the enterprise
is always one step ahead in this kind of external development, and has already
adapted its own strategy before a change occurs.
The
task of strategy management therefore is to establish a strategic feedback
loop, which enables for an organized adaptation of strategy. The objective of
this management processes is to make strategies executable within an
organization by breaking them down in a structured way in specific detailed
targets and responsibilities and by monitoring strategy execution
systematically. Variations from targets are leading to corrected plans during
the strategic planning process, a subprocess of strategy management. Here,
methods such as scenario
planning are used (for identifying and managing long-term strategic risks),
real option valuation
(for managing larger project and investment risks), and system thinking (for
identifying growth restrictions in the system). The strategy management process
can also be called the strategic change management process of the enterprise.
Figure
2: Integrated strategy and corporate performance management processes
It starts with the strategic planning process, as a sub process for strategy management. The strategic planning process ends with a decision, if the actual strategy will remain unchanged or if it will be changed and continues with the core strategy management process (see figure 2):
1. The
strategic planning process starts with stakeholder oriented market research:
Staff of the strategic planning or strategic controlling department is
analyzing the expectations of major stakeholders (for example investors) and
actual or developing opportunities in product markets which are related to the
company’s core competencies.
2. Then
the actual status of the company’s core competencies is evaluated and analyzed
3. The
results of both steps are presented in a strategy-brainstorming meeting of the
management team, to which internal and external experts of the areas of
discussion may have been invited. The outcome of this meeting will be 3-4
proposals for new or adapted strategic scenarios.
4. Strategy
planning staff will further investigate the selected strategic scenarios and
will collect additional data and information. Based on these scenarios,
different strategy proposals will be modeled. These models will reflect the
dynamics and dependencies of the different value drivers and risk factors in
each scenario / strategy. This may be done using a systems dynamics model.
The different models will be finalized together with the management team
members. They will add their opinion about these strategies in general and
their estimation about the dependencies between the different value drivers and
risk factors.
5. Then
these models are used to run simulations in order to come to a quantitative
valuation of the different strategies and scenarios. This is again done
together with the management team that is fine-tuning during the simulation
sessions its opinion on the likelihood of certain assumptions (for example on
currency exchange rate changes, on certain price developments or on the
possible speed of reaction of competitor) in order to end up finally with
agreed strategies and scenarios. Each strategy, including the actual one, the so-called
base case, will be valued, for example using the discounted cash flow model.
The outcome will then be compared with stakeholder expectations identified in
phase 1.
6.
Management will then decide
in a strategy evaluation meeting, whether to leave the existing strategy
unchanged, choose a modified version or a totally new strategy (that is one of
the other proposed strategies). The
remaining scenarios and corresponding strategies are kept for future strategic
planning meetings, that can directly start to work with them, if it turns out,
that another scenario than the one which has been actually chosen, will come to
pass.
As
soon as the management team has decided for a new or adapted strategy, it has
to make sure, that the organization is able to execute on it. Therefore, the
strategy has to be broken down into concrete and precise objectives:
7. First,
for the new strategy the related market/product segments will be defined (the
“strategy matrix”), in which the company wants to operate. The strategy is then
broken down into detailed strategic objectives, related to major stakeholder
views, resources, processes and innovation areas. For each of these objectives
a responsible person is named. In addition, the management team will decide,
which major initiatives or projects have to be started in order to support the
changes required by the strategic objectives. Also, it has to agree which the
consequences of the new strategy are for the configuration of the value
creation system of the company and which its inherent risks are, that should be
reported on the risk status report.
8. Then
the organizational structure and management responsibility structure has to be
checked, if it needs to be adapted for example to a new market/product segment
structure. The newly defined market/product segment structure, the strategic
objectives, as well as a new organizational and management responsibility
structure, has now to be communicated to all employees as well as to other
major stakeholders.
9. Financial,
human and possible other resources have to be allocated by management to the
various management responsibility areas, and to initiatives and projects which
are assigned to the defined strategic objectives and agreed priorities.
Previous budgets and operative plans need to be changed in order to assure,
that resource allocation and operative activities are in line with strategy.
Every major investment project, such as specific product developments, will be
reexamined and it will be decided, if the company will continue to invest, or
if it will discontinue, or even increase these investments.
10. After
that, strategic objectives are further broken down in personnel targets for all
managers and employees, who are playing a role in achieving these strategic
objectives. This will include also the
definition of boni and incentives for personal target achievement, over
achievement, and under achievement.
11. Based
on regular actuals and forecasts for the measures of the Tableau de Bord,
mainly of the Balanced Scorecard view, and of the risk status report,
management will be informed about the performance of the organization in
implementing the new strategy and about changes of the status of major risk
factors in the business system.
12. Continuous
communication between managers, employees, and controllers in person, via phone
or via the Intranet/E-Mail is taking place on the performance and risks
reported. For example managers and employees are able to monitor their own
performance (related to their personal targets) through a personal scorecard and
they can add comments and ratings to it, which their superiors or colleagues
can see and to which they can react with own comments. The intention of this
dialog across the organization is to come up with opinions about the actual
situation and stimulate possible reactions, which find a broad support.
13. The
management team is coming together now to a strategy review meeting to discuss
possible actions and reactions, make related decisions, and to agree on the
information policy versus investors and other stakeholders.
14. Stakeholders
are informed about the company’s strategic performance through a supplement
report based on a Tableau de Bord scheme, about the actual risks through the
risk status report, and about the actions considered by management to react. This
may happen through flash reports posted on the companies website (a web based
stakeholder portal), through E-Mails, Faxes, and mailings.
15. Feedback
from stakeholder about the company’s strategic performance and about the
actions considered by management is collected and documented and is forming the
basis - besides management and employee’s own opinion – for the evaluation of
the actual strategy (phase 6). A new strategic planning cycle is starting.
The Corporate Performance Management Process
The
task of the Corporate Performance Management process is to control short-term
total performance of the enterprise (typically the one of the actual fiscal
year or quarter) by reacting tactically to changes in the business environment
within the limits of the defined strategy in order to reach externally
communicated annual targets. This is achieved by adapting activities and
resource utilization in the different value creation processes of the company.
This has to happen in a coordinated and in the most effective way. Therefore a
Corporate Performance Management process is needed which helps an organization
to manage and coordinate tactical adaptation of plans and resource allocation
across different operational processes and functions. The Corporate Performance
Management process will trigger changes in operative management processes and
the priorities for them, such as in product development or CRM. The cycle time
of the entire process is 1-3 months, with the top management team and its staff
in charge. The phases of the process can be described as follows:
1. Actual
total performance and performance of operations and of the different
operational processes is measured and presented using the views of the Tableau
de Bord (performance of the past reporting period). The top team but also every
responsible operational manager/ management team now analyzes the enterprise
performance.
2. In
the next step forecasts are produced for every area. Every manager responsible
for one of the underlying value creation processes is now in charge to deliver
an estimation of the performance of his responsibility area for the next 12-18
months or for the remaining months of the fiscal year based on the measures of
the Tableau de Bord. Then a detailed risk and opportunity analysis follows, by
comparing the actual forecast with the last forecast (see figure 3). The
results of this analysis are the basis for proposals made by each operational
manager for possible adapting and optimizing measures and activities in their
area of responsibility. They are running now simulations with the help of
analytic software applications in order to analyze the effects of their
proposed changes on the future performance of their own area but also on
general / total performance. The result will be reported on the Tableau de
Bord. The Tableau the Bord will then show for each measure three values:
actual, forecast without adapting activities, and forecast taking into
consideration the consequences of proposed adapting activities. If at the end
of the actual Corporate Performance Management cycle a new Strategy Management
cycle is starting, the outcome of the risk and opportunity analysis of the
forecasting phase will be also used to update the risk measures of the
corporate risk status report. This may include also an adjustment of the risk
measures itself, when the forecast analysis reveals new types of risks and
additional risk measures have to be added. This is, by the way, a good method
to keep the risk status report up-to-date and relevant.
3. Based
on these new forecasts (and based on a strategy modification, in case
management has just finished the strategy management process) and based on the
forecast risk analysis, management redefines priorities for the operative
processes and decides on the adaptation measures and activities proposed from
operational managers. The objective is
to meet the annual/quarterly performance targets communicated to investors and
stakeholders under the constraints of the actual strategy. So for example
management could decide, that developers have to support for two months sales
in introducing a new product to the customer base (for example by providing
consultancy), instead of continuing with work on the next product version. The
reason could be to meet annual sales targets, which may be at risk through
competitor action or a late product release, and which may threaten the success
of the overall strategy. Here the management team needs to consider and balance
priorities within the operational value creation system of the company: Does it
give priority to sales or to product development in a certain segment under a
specific constellation? To support such a decision, dynamic simulation models
(“systems dynamics”)
might be used again.
4. These changes in the allocation of operative resources may then require changes to operative plans and budgets as well. The revision of operational plans happens in phase four. To communicate clearly that the related operational budgets are not fixed but might become subject to changes as the year passes by, they may be called “rolling budgets” in contrast to just “budget “ – a name which usually implies that it is fixed over the fiscal year. But a rolling budget is something different than a rolling forecast. A rolling budget is a regularly adapted (internal) resource utilization plan. A rolling forecast is a regularly adapted forecast from a market perspective.
Figure
3: Forecast / forecast comparison used to analyze changes
Management of operational value creation processes
The
operational processes of the business execution system drive total or general
enterprise performance. But these operational processes and activities have to
be aligned with enterprise strategy and some coordination between them is
required. Therefore, a company has not only to properly manage each operational
process separately and has to optimize it constantly in order to remain
successful; it also has to integrate each operational process with its strategy
and corporate performance management process.
These two “general management” processes will trigger changes in
operative management processes continuously but in a coordinated way in order
to optimize the total results and performance of the enterprise, like it has
been described above (see figure 4). Only this way a larger organization is
able to achieve positive and sustaining total results.
The
operational management processes of an enterprise today typically include a
management process that helps to manage and to optimize product and market
development and the product portfolio of the company (called product lifecycle
management). They also include supply chain management, customer relationship
management, and management of basis resources.
Figure 4: The two general management processes of a company are triggering changes in operational processes in order to optimize total enterprise performance
Product Lifecycle Management
Product
lifecycle management (PLM) is related usually to a specific market/product
segment that has been defined by the strategy management process as a company’s
core business. It helps to manage the portfolio of existing, new, and future
products of such a segment (and of the corresponding development projects)
within the constraints defined my management and on the basis of the strategic
resource allocations made. A product lifecycle management process, which also
includes business development and market development activities for newly
developed products, may consist of the following phases (see figure 5):
1. The
product lifecycle management process usually starts with product related market
research for the product/market segments in consideration. Statistical
information will be collected, such as demand forecasts, forecasts for a
company’s market share and for those of competitors, forecasts for price
developments etc. But also qualitative information about market and technology
trends, development of customer behavior, about so called lead customers -
innovate and leading users of possible new products-, and information from user
communities will be gathered and analyzed. The result of this first phase will
be one or several product idea(s).
2. Now
technological research will start with the objective to assess and test the
technical feasibility of a possible new product. This includes also a first
rough commercial analysis in order to check, if a possible new development
project will make sense at all, taking into account estimated costs and the
estimated market potential for the final product. On the basis of this
information the responsible managers will then decide, if they will continue
with prototyping or if they will abandon the new product idea – at least for
the moment.
3. In
the following phase technical feasibility will be tested through the creation
of a working prototype and the commercial and market potential will be verified
through tests with lead customers.
4. If
this is producing a positive result, a complete business plan will be set up,
which will include all necessary expenditures (investments in product and
market development, for maintenance and continuous improvement of the released
product etc.) and probable revenues and income from the new product over its
lifetime. Depending on the outcome of the valuation of this data and its
comparison with industry benchmarks and/or economic targets defined by top
management, the investment for the development project may be released or the
project will be abandoned. If high development risks are involved, real option valuation
techniques might be used here.
5. If
the result of phase 4 was a “go decision”, then the new product will be
developed and the company will apply for the related patents.
6. Before
the development phase is finished, market and business development activities
are starting. This includes for example the acquisition of marketing and sales
alliance partners, the final pricing decision, planning for a possible (re)
configuration of the supply chain, planning of marketing campaigns, which have
to support the market launch of the new product, and the training of sales
people. That means, latest in this phase, there should start a reconciliation
with the operations management processes in order to prepare production and
sales for the new product.
7. Then the new product will go into final testing with (pilot) customers in order to make final adjustments and improvements to the product for a successful market introduction. As soon as the product has been released, continuously product related customer feedback will be collected through customer service and through structured feedback for example through user groups or alliance partners in order to continuously improve the product and to collect input for new product ideas, which may lead to a new product development cycle.
When
the new product is on the market, the task of market research is, to collect
market information that allows the company to decide, as soon as new
information becomes available, if it should continue to invest in the product.
The continuous evaluation of a product’s business plan that provides a view on
the profitability of a product across its entire life cycle, as well as the
analysis of the entire product portfolio of all products including the new ones
and products still under development, are forming the foundation for these
product investment decisions and are the precondition for sustaining success in
product development and for a profitable product portfolio. For this, product
business plans and data about the entire product portfolio need to be regularly
updated and adapted to new market developments. Only this way a company is able
to discontinue systematically the right products in order to enable it to
release the necessary resources it needs to leverage new market opportunities
through new development projects. With such a process in place, a company is
able to continuously reduce total risks and increase returns on resources
employed in its product innovation chain.
Figure 5: Operational management processes of a company’s business execution system
Operations management processes
Management
processes related to operations are integrated into the overall management
system through integration points which link them with the strategy and
corporate performance management processes (see figure 4) and through
integration points which links them with the PLM process (from product
development to supply chain management configuration, and from market/business
development to customer related marketing activities). Operations management
processes, that is supply chain management and customer relationship
management, have three tasks:
-
Coordinate operational tasks and processes
-
Optimize operational tasks and processes
- Identify value creating opportunities and initiate reconfiguration of operational processes accordingly (process innovation)
For
these tasks, managers rely mainly on detailed supply chain and customer
relationship management information, which is timely provided through the
related KPI-based cockpits. For the coordination tasks these monitors are used
continuously on a tactical level. To optimize processes and identify new
value-creating opportunities, managers and their staff should reserve some
additional time each month to analyze information about the operational
processes in a systematic way from a more strategic perspective (SCM or CRM
review meetings). For this, they use analytic tools and software applications,
which enable them to efficiently and easily identify opportunities to optimize
existing processes or to recognize new value creating opportunities that can be
leveraged by reconfiguring processes (such in SCM) or by initiating certain
activities (such as a marketing campaign in CRM).
Support management processes
Management
processes that manage activities related to basis resources are integrated into
the overall management system by strategy, that is by strategic objectives
related to these basis resources, and by planning and forecasting processes
from which the demand and requirements of operational processes for short an
long term availability and quality of specific resources are resulting. The
major task of the support management processes, that is of management process
that manage activities related to basis resources, is to manage the efficiency
of their operational processes and activities, and the effectiveness of the
function as a whole.
For
managing effectiveness, the responsible manager has to continuously reconcile
strategic objectives of the company and operational objectives of other
operations with his department’s own activities. So these managers have to be
well informed not only about their own function, but also about the performance
status and forecast of other functions in the enterprise that can lead to
increased or decreased resource demands, which will affect workload and
activities in their department. So while these functions that manage basis
resources are ‘”only” support functions, they have to be informed about the
status of actual total enterprise performance, about the one of each value
creation process of the company, as well as about all related forecasts.
Therefore these managers have to monitor always the entire Tableau de Bord and
they have to continually communicate with their manager colleagues who are
responsible for the other processes in the company. The management process for
a support function therefore has to include the following two tasks:
► Monitoring regularly (monthly) the efficiency and effectiveness of the operational processes related to the function; adaptation of these processes if required.
► Monitoring at least in the same frequency the development of the resource demands and requirements of the other functions of the company; reconciling these demands with available and/or planned resource levels and triggering of resource acquisition and development activities, when forecasts will show, that available or planned resources will not be able to meet demand in the future
Consequences for the management structure/organization of the enterprise
Businesses usually engage
in the three above described broad operational activities: product development
(PLM), manufacturing/supply chain management (SCM), and selling/customer
relationship management (CRM). During the past 30 years, large corporations
bundled and managed these activities as one business unit in an effort to
standardize practices, reduce hand-offs, and manage the business as one
organization. Conventional wisdom was that managing the enterprise as a single business
unit was efficient and provided the greatest control over the underlying
processes. This thinking has now been challenged.
During the popular
reengineering craze of the last decade, management began to see how the
economics of these activities conflicted. Bundling and managing the three
fundamental business activities as one process inevitably forces management to
make decisions that compromise the ability of each activity to maximize
performance. The result: Trade-offs and compromises for investment and resource
allocations have to be made. Technology investments made in the absence of a
long-term business and economic vision can leave a segment of the company
over-capitalized and committed to an inflexible or less competitive capacity
structure. This creates a need to funnel additional funds into the same
business unit in order to regain a competitive position, resulting in a higher
overhead base to absorb while denying other segments of needed
investment.
The diverse roles and
scope of each activity can’t be optimized simultaneously. They’re just too
different. And the focus, success factors, and techniques to grow the business
are different for each activity. So are the necessary skills and missions. The
solution: Manage the enterprise as three distinct activities or business units
to optimize the particular activity each performs. This creates specialist
operations within a larger framework that can lead to enormous advantages over
integrated companies.
PLM, SCM and CRM should
therefore be run as different operational business units. As independent
business units they will coordinate their activities with each other based on
market like interactions. They will be aligned with corporate and the SBU
strategy through clearly defined interaction points in the strategy management
process as described above. Trade-offs from a corporate performance management
point of view will be management within the corporate performance management
process which will serve as the main coordinator from a performance management
perspective for all three operational units. The result from an organizational
point of view will be, that a company will be structured into strategic
management areas/SBUs for each relevant product group / market segment
combination (which represents the level
on wich strategy and corporate performance management is executed), each
subdivided into business units for PLM, CRM and SCM (the level of operational
management). Because the target is not any more to maximize profit but to
maximize value for the new business units (that is short term performance and
growth capabilities for the future), these units might be better called value
centers instead of profit centers. As the value creation and operational
business models of companies are changing, so do their internal management
structures and units: they change from profit centers to value centers that are
oriented towards the most important value creation activities of the enterprise
(see figure 6).
Figure
6: Changing the management organization structure – from generic profit centers
to activity specific value centers
Building Block #3 of the new performance and value management system: Effective teamwork at the top
In such as scenario and
in such a more complex business organization that reflect the economic reality
of today, it becomes obvious that, despite the believe of the popular business
press, no single person can make a difference any more and will be able to
manage such a large complex business organization alone. Even heroic CEOs as
former General Electric’s Jack Welsh emphasize the power of team leadership in
action. He once said: “We’ve developed an incredibly talented team of people
running our major businesses, and, perhaps more important, there’s a healthy
sense of collegiality, mutual trust, and respect for performance that pervades
this organization.”
In addition to a well
designed performance measurement system (“Tableau de Bord”) and to well
organized management processes, the way how the top team (responsible for strategy
and corporate performance management) and the different operational management
teams (reponsible for CRM, PLM, SCM and resource acquisition and development)
can work together, has become a major success factor for enterprises today.
Long term success depends on the whole leadership team, for it has a broader
and deeper reach into the organization than the CEO does. Similar with the
operational management teams: their respective discipline requires in most
cases so much expertise, competencies and skills, that optimal management
decision making requires a team of managers with different perspectives and
experiences. Managerial decision taking, even in the operational day-to-day
life of a company, has very often become too complex. So it makes no sense to
put the future at risks by putting a major decision in the hands of only one
person. A team based approach might be much more effective. But the performance
of these management teams has a multiplier effect: a poorly performing team
breeds competing agendas and turf politics; a high-performing one,
organizational coherence and focus.
What does it take for a
management team to become a top performing team that can work effectively
together instead of being at best just a collection of strong individuals?
Concepts for building effective management teams and that help them to work
together in an effective way will be the topic of one of the next articles of
the new New Economy Analyst.
Summary
The
attitude of both investors and managers has dramatically changed during the
last 18 months. Senior executives, chief financial officers and investors are
increasingly believing, that shareholder value is primarily created from
internally generated growth, through new products or services, from improved
customer relations, from entering successfully new markets, and from cost,
resource, and capital efficiencies – rather than from mergers and acquisitions.
If managers understand the business economics of their companies better and are
thus able to optimize them, financial results and shareholder value will
follow. The basic economics of the business / of the company have to be the
basis for managerial decision making and they have to drive the financials –
not vice versa.
This requires the use of a suitable management system and supportive performance management instruments. The key is the availability of the corresponding objective information on the process and market status of the enterprise activities, based on a Tableau de Bord that provides an overview on the performance of all relevant business process of an enterprise in a systematic way, and the existence of management processes that enabl