Crafting the Strategic Management System

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This article presents a complete strategic management system that enables managers and executives to manage strategy formu-lation and implementation in an integrated way.

Crafting the Strategic Management System

Dr. Arnoud van der Maas [email protected] linkedin.com/in/avandermaas May 2014

Organizations need to continually adapt themselves to the current turbu-lent environment in order to be suc-cessful. This requires a continuous adaption of the strategy, structure and processes of the organization. Howev-er, survey after survey reveal that most strategic change initiatives fail. Many organizations have a fundamental dis-connect between the formulation of their strategy and the execution of that strategy into useful action. An im-portant reason for this that many or-ganizations lack an effective strategic management system with which they can realize their strategic and opera-tional objectives. The strategic man-agement system allows managers and executives to control their organiza-tions by managing strategic planning and execution in an integrated way. This article presents the five phases of the strategic management system that helps managers analyze, develop, trans-late, implement and monitor and adapt their strategies.

Integrating Strategic Planning and Execution More than 90 percent of organizations do not succeed in executing their strat-egies successfully (Kaplan & Norton, 2000). Many organizations have a fun-damental disconnect between the for-mulation and the execution of their strategy. Often an effective strategic management system is absent that al-lows managers and executives to man-age strategic planning and execution in an integrated way. Such organizations often do not succeed in translating their strategies into operational objectives, processes and activities. Strategy formu-lation and implementation are often treated separately instead of as an inte-grated system. As a result, most strate-gies fail in the execution phase. The im-plementation of a strategic management system allows managers and executive to align strategy formulation and imple-mentation. This way, organizations can successfully develop and implement

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their strategies. Strategic success re-quires an appropriate strategy but also requires that the strategy is implement-ed successfully (Hussey, 1996), and time-ly.

The Strategic Management System A strategic management system consists of a planning and control cycle that ena-bles organizations to achieve its strategy and objectives (see Figure). Planning refers strategic planning and thus to the formulation of the strategy, the transla-tion of that strategy into strategic objec-tives, the development of an implemen-tation plan with operational objectives, processes, and activities. Control refers to strategy execution, the monitoring of the progress of the execution and when required, the adjustment of the strategy or its execution. The strategic management system is a cycle that integrates the planning and execution of a strategy and consists of five stages: analyzing the external envi-ronment, the internal organization and current strategy; developing the mission, vision and strategy; translating the strat-egy into strategic initiatives, operational objectives, processes and activities; im-plementing the strategy and finally mon-itoring and adapting the strategy and its execution.

Stage 1: Make a Strategic Analysis The strategic management cycle begins with a strategic analysis of the external environment, internal organization and current strategy of the organization.

First, an external analysis is made of the macro-economic environment. Next, the industry and market in which the organization operates is analyzed. Lastly, an analysis is made of the competition. In the case of public or non-profit organ-izations, comparable organizations are benchmarked.

Secondly, an internal analysis is made of the organization structure and culture, primary processes and the overall per-formance of the organization. After this a SWOT analysis is made in which the threats and opportunities that emerged from the external analysis are related to the strengths and weaknesses of the internal analysis. Here the aim is to come up with a strategy that uses the internal strengths of the organization to play into external opportunities and mitigates internal weaknesses and external threats. Lastly, a strategy analysis is made of the performance of the current strategy of the organization. Stage 2: Develop the Strategy Strategy development starts with the formulation of the mission and strategic vision of the organization. The mission describes the reason of existence and identity the organization and more spe-cifically the customer needs the organi-zations aims to meet. The strategic vi-sion describes the goals and desired

middle to long-term future state of the organization. The strategic vision helps clarify the direction in which an organi-zation is to move (Kotter, 1995). The strategic vision needs to be clearly de-fined and well formulated (Hussey,

1 Make a

Strategic Analysis

2 Develop the

Strategy

3 Translate

the Strategy

4 Execute the

Strategy

5 Monitor & Adapt the Strategy

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STRATEGY SYSTEM

1 GOALS

2 STRATEGY

3

STRUCTURE

4

PROCESS

5

PEOPLE

6

CULTURE

7

SYSTEMS

1996). In addition, the strategic vision needs to be attractive and easy to com-municate toward organizational mem-bers, customers, shareholders, and other relevant stakeholders. An attractive and ambitious strategic vision can help to attract and unite organizational mem-bers and stimulate them to increase their effort (Trice & Beyer, 1991).

After formulating the strategic vision, top management needs to develop a strategy that is able to achieve it. A strategy describes the combination of the (long-term) goals for which an or-ganization is striving and the means by

which it is seeking to achieve these goals (Porter, 1980). A strategy serves as a roadmap to get where a company wants to go.

Based on Porter’s work, Treacy and Wiersema (1997) argue that organiza-tions must choose one of the following three generic strategies: operational excellence, customer intimacy and prod-uct leadership. The operational excel-lence strategy is about the production and delivery of products and services. The objective is to lead the industry in terms of price and convenience. The Customer intimacy strategy is based on delivering what specific customers want. The objective is long-term customer loyalty and customer profitability. A product leadership strategy is based on delivering the best products of services. It is about on producing a continuous stream of state-of-the-art products and

services. The objective is the quick commercialization of new ideas. Each strategy requires a different primary process, organization structure, organi-zation culture and competences of or-ganizational members.

A successful strategy is a system with seven integrated aspects: the goals of the organization, the strategy to achieve those goals, the primary process, struc-ture, culture and people that can deliver the strategy, a planning and a control system that monitors the achievement of the strategy and finally the people who are able to execute the strategy. This is

the Strategy System (see Figure). The strategy answers at least the follow-ing questions: ♦ What products or services are of-

fered by the organization? ♦ What customer needs are fulfilled

by the organization? ♦ Who are the customers or customer

groups (segmentation) that are served by the organization?

♦ With what key processes (primary process) does the organization dis-tinguish itself from competitors in the eyes of customers?

♦ What organization structure, cul-ture, and human resources are needed to implement the strategy?

The task of top management is to choose and work out a strategy that fits the current organization most and allows the organization to achieve it strategic vision and goals. During the strategy

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development process it is important to involve middle managers and key lower level employees in decision-making about the strategy and its execution. Research demonstrates that involving employees has many advantages: better quality of decisions, better understand-ing of the strategy, better organizational learning, higher commitment to the strategy and organization, higher job satisfaction, less resistance to change and better adaptability of the strategy. More practical, a strategy is a system with seven integrated aspects: the goals of the organization, the strategy to achieve those goals, the primary pro-cess, structure, culture and people that can deliver the strategy, a planning and a control system that monitors the achievement of the strategy and finally organizational members who are able to execute the strategy (see Figure).

The outcome of the strategy devel-opment process is a strategic plan that describes the long-term goals of the organization and way in which it aims to achieve these goals. The strategic plan contains the goals; strategic initiatives, primary process, organization structure, culture and human resources that are needed to achieve the strategic goals.

Stage 3: Translate the Strategy After the strategy is developed it needs to be translated into objectives that can be clearly communicated to organiza-tional members. Even the best strategy is worthless when managers cannot translate the strategy into operational reality. The strategy implementation plan specifies the processes, activities and operational objectives that are required to achieve the goals of the strategy. The strategic objectives need to be translat-ed into measurable operational imple-mentation sub-objectives (Reid, 1989) and linked to departmental and individu-al goals (Kaplan, 1995). In addition, pro-gress measurement points or ‘mile-stones’ need to be established (Owen, 1982). Measurable objectives provide an effective basis for management control of the implementation (ibid).

Without concrete objectives and milestones, it is impossible to measure the progress of the strategy implemen-tation. This makes managing and im-proving the strategy implementation impossible. Therefore, the implementa-tion plan needs to contain clear and

measurable objectives or targets. Clear and specific tasks need to be defined which are required to achieve these tar-gets. Everyone with strategy implemen-tation responsibilities needs to know what to do in order to implement the strategy and what concrete objectives they have to attain. Unclear objectives leave room for differential interpretation and discretion and may thus contribute to implementation failure (Barrett, 2004).

Next, performance indicators need to be developed for each strategic objec-tive. Without concrete performance indicators it is not possible to measure the progress of the strategy execution and to manage and improve it. These performance indicators are part of man-agement control systems or dashboards that measure the progress of (key) per-formance indicators. Budgeting is the last part of the strategy translation. Budgeting translates the strategic deci-sions into its financial consequences. A budget plans future income and spend-ing. A budget is drawn up for each fi-nancial year and contains information on the estimated value of sales and value of costs. During the year the actual per-formance of the organization is meas-ured against the budget. The annual budgeting process is often very elabo-rate in public organizations where the strategic objectives, performance indica-tors and budgets.

Stage 4: Execute the Strategy Strategy implementation starts with developing an operational implementa-tion plan. The implementation plan con-sists of annual plans for every organiza-tional unit and the organization as a whole. The implementation plan contains a forecast of the number of products or services the organization expects to deliver in the next year and the re-sources that are required to deliver the products or services.

The implementation plan describes the processes and activities that are needed to achieve the strategic goals. In addition, the implementation plan also describes the responsibilities for those processes and activities. Implementation can only be successful when there is a clear and shared understanding of who does what, when, at what cost (Allio, 2005). Not only should the necessary actions to implement the strategy be

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identified and planned, responsibility for these actions should be allocated as well (Owen, 1982). By allocating clear re-sponsibilities for the execution of the implementation activities, progress can be measured and controlled (Reid, 1989).

After developing the implementation plan the actual implementation of the strategic initiatives, process improve-ments and organization structure changes. Research has shown that this is the most difficult stage of the strategic management process as most strategies fail in the implementation phase. Even the best-made strategies are worthless if they cannot be successfully implement-ed (Schilit, 1987).

Stage 5: Monitor en adapt the Strategy Monitoring and adapting the strategy is the last phase in the strategic manage-ment cycle. This stage consists of moni-toring the progress of the realization of the strategic objectives and milestones of the strategic plan. When objectives or milestones are not being met the strate-gy or its execution must be adapted. In order to make these adjustments it is required to assign clear responsibilities for the achievement of those targets. When objectives are not being met, the person or persons responsible need to be held accountable.

As strategy implementation plans are destined to change, implementation teams need to regularly meet in well-structured, punctuated sessions to share information, reconfirm priorities (Allio, 2005) and make decisions. This way, management can make adjustments when needed and thus control the strat-egy implementation effort. To make these adjustments it is required to assign clear responsibilities for the achievement of those targets. When objectives are not being met, the person or persons responsible need to be held accountable.

Many organizations have accountability problems, which may be the result of a lack of planning, the absence of a func-tional management information system, or the existence of cultural values which do not encourage holding persons, es-pecially in high positions, accountable (Kiggundu, 1996).

When it is discovered that the assump-tions that underpin the strategy are no longer valid it must be decided whether

the strategy needs to be adapted or that a completely new strategy is needed. Three types of meetings are required to monitor and control the effectiveness of the strategy and its execution (Kaplan & Norton, 2008): ♦ In the monthly strategy review

meeting the progress of the strate-gy is discussed on a department level.

♦ In the weekly execution review meeting the progress of the execu-tion of the strategy is discussed on a team level.

♦ In the annual strategy evaluation meeting top management discusses the performance of the strategy is discussed and whether the strategy needs to be adapted or a new strategy needs to be developed.

… When managers and executives imple-ment the strategic management system within their organizations they have a complete strategy planning and control system that enables them to make a strategic analysis, develop a sound strategy, translate the strategy into clear strategic and operational objectives and activities, monitor the execution of the strategy and adapt the strategy or its execution when needed. This strategic management system allows managers and executives to manage strategy de-velopment en implementation in an inte-grated way, allow them to control their organization.

Dr. Arnoud van der Maas (a.vandermaas@ strategos.nl) is a consultant in strategy & finance to public and private organizations. Arnoud received a PhD in Strategic Man-agement from Rotterdam School of Man-agement, Erasmus University - one of the top 5 business schools in Europe. This arti-cle is based on this PhD thesis on strategy implementation in an international context, which can be found here.

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