how to effectively cascade strategic objectives...

How to effectively translate strategic objectives

Within a translated cascade of objectives, each level of objective has an objective definition (a statement) and a means of measuring it (a KPI or KPIs). Getting this linked pair in place involves an investigation of the objective:

1. What does the objective mean?
2. How would we know if we have achieved it?
3. How can we design a KPI (or KPIs) that best measures the level of performance and/or achievement?
4. What targets should we set for the KPI (s)?
5. Check: If we hit the targets in the KPI(s), would we have achieved the objective? If there is a way of hitting the targets without really achieving the objective, we need to go around the design loop again.

There is the need to effectively take a pairing of objective and KPI(s) and break it down into the next level of objectives. ‘Translation’ in the sense we use it here means creating a set of subsidiary objectives (measured by an associated KPI and a target) that together will drive the achievement of the target value in the KPI measuring the achievement of the higher objective.

How is that done effectively?

We have said before that KPIs are not all measuring the same kind of thing. Some are measuring outcomes that concern stakeholders; some are measuring outcomes of the business activities; some measure process outcomes; and some simply measure process variables. We need to revisit that discussion in more depth, because it turns out to be critical to the Translation process for objectives.

Stakeholder Outcomes are the objectives and measures that judge the value of the business. The stakeholders themselves may be shareholders and analysts in the case of private companies; regulators, audit offices and ultimately the government and their electorate in the case of public organizations. The Outcome measures concern relative worth and investment return. Return on Equity, Return on Net Assets, Income Yield and other indicative financial ratios are highlighted in the private sector; pseudo-measures of value such as ranking against comparable organizations (e.g. QS ranking system for universities) or other criteria set by government are common in public sector bodies. They are either subjective measures or measures taken from an aggregation of more than one business outcome (e.g. ‘Return on Net Assets’ compares the ratio of profit, a P&L outcome, to Net Assets, a balance sheet measure of investment level).

Business Outcomes are the externally visible measures of the organization’s operational outcomes. The Business Outcomes are the aggregate measures of the inputs and outputs (e.g. total sales, total number of customers served, raw material usage, orders or service requests received).

Process Outcomes, on the other hand, are the aggregated result of a single internal process. They do not have to be externally visible, though in some cases, they may be. Examples of process outcomes might be quantities such as ‘repair time on a fault’, ‘cycle time from customer request to fulfillment’ or ‘number of trainees finishing training’.

Process Variables are quantities that affect part of a single process. For example, ‘parts availability’ that affects the repair process, or ‘order entry time’ that affects the customer fulfillment process, or ‘utilization of trainers’ that affects the training process.

There is a hierarchy among these measures:

Stakeholder Outcomes are produced by the aggregation of Business Outcomes. Business Outcomes are the externally visible result of the combined outcomes of internal processes (Process Outcomes). The performance of internal processes are affected by the Process Variables.

You cannot directly change a Stakeholder Outcome. Stakeholder Outcomes only change when Business Outcomes change. A combination of processes and Process Outcomes has a bearing on the Business Outcomes. Although Business Outcomes may be affected by some random, seasonal or environmental factors, the only factors that the organization is in control of are the Process Outcomes and they can only be changed by changing the Process Variables.

This is the single most important truth upon which all understanding of Cause and Effect depends.

A consequence of this chain of cause and effect is that Process Variables change well before the effect is felt at the higher levels. It may be months or years before the result of actions taken at the process level show improvements in Stakeholder Outcomes. Stakeholder Outcomes are ‘lagging’ measures. They show the past; they don’t predict the future. As we go down the translated cascade, we start to find more ‘leading’ measures, ones which might predict future performance because they tell us how our processes are changing.

Think of it in terms of a football game. Whether you win or lose is a Stakeholder Outcome. You only know at the end of the game. The score at any time records the current Business Outcomes, but it doesn’t tell you if your defense is creaking, or if there is an opportunity in attack. Those are process oriented. Scoring a goal (or touchdown depending on your code of football) is the outcome of processes; changing the tactics and players on the field are the factors that the coach can affect (the process variables).

When we start to cascade objectives and KPIs, we see a gradual morphing of the KPI type from top to bottom:

KPI and Objective cascade

High-level objectives express a desire for Stakeholder Outcomes. These appear on the top-level scorecards. In fact, unless there is a particular corporate objective that targets one part of the organization, all the objectives and KPIs on the top-level scorecard will express a desire for Stakeholder Outcomes. Managing these outcomes is, after all, what the CEO gets paid for. As the objectives are translated down to the level of business units or strategic organizational groupings, the objectives start to be more about Business Outcomes, then about Process Outcomes, then finally about Process Variables.

However, it should be said that it is rarely as neat as we suggest in the figure above. Sometimes it takes more than four levels to translate down from Business Outcomes to Process Variables, and quite often a single scorecard will include a mix of types.

Critically, for the ‘Translate’ phase, this implies that not all translations will be of the same nature. In fact, there are potentially seven different types of translation in the cascade:

1. A Stakeholder Outcome into a subsidiary Stakeholder Outcome (or Outcomes). Example: share price as the parent objective, driven by objectives for financial ratios, brand recognition and value, process excellence measured by benchmark assessment;

2. A Stakeholder Outcome translating into a Business Outcome (or Outcomes). Example: a financial ratio, driven by objective targets for sales and profitability in each product division;

3. A Business Outcome translating into a subsidiary Business Outcome (or Outcomes). Example: sales targets in a Business Unit, driven by objective targets for growing revenues from a series of product groupings;

4. A Business Outcome translating into a Process Outcome (or Outcomes). Example: sales target for a product line, driven by objectives for improved order lead times and higher number of customers in the sales process;

5. A Process Outcome translating into a subsidiary Process Outcome (or Outcomes). Example: New customer acquisition targets, driven by objectives for generating higher numbers of new leads and improving the conversion percentage of leads into customers;

6. A Process Outcome translating into a Process Variable (or Variables). Example: conversion percentage of leads into customers, driven by objective targets for time to follow up initial contact, and number of subsequent contacts made with
the customer potential buyer/ key decision maker;

7. A Process Variable translating into a subsidiary Process Variable (or Variables), sometimes called ‘Process Factors’. Example: the number of contacts made with a potential customer, driven by objectives for identifying and interacting with buyers, technical experts and key decision makers within that organization.

Each of these seven types of translation requires a slightly different type of cause–effect analysis, and therefore a different type of definition and management. Organizations often find difficulty in completing the cascade past a certain level, and one of the reasons for this is that they fail to understand the changing nature of the translation they are attempting.

Paul Docherty
    Founder of i-nexus, the leader in cloud-based software for strategy execution. Respected thought leader, adviser and co-architect of the Strategy Execution 2.0 "Business System" that is rapidly becoming the de facto blueprint for how large organizations successfully deploy and execute their strategic objectives.

    1 Comment

    Dec 16, 2017 at 1:48 PM

    Excellent clearly written.

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