"It is important for a control system to be linked to an organisations strategy", discuss.
What I aim to achieve in this article is to demonstrate why I feel it is important for a control system to be linked to an organisations overall strategy. In doing so, I will analyse the question and seek to challenge, and justify my views on the subject. I will attempt to draw from my own experiences and examples as supporting evidence.
The question presupposes that an organisation should have an overall strategy in the first place. The role of a strategy in simple terms is a broad statement about the organisations goals, and direction. This function provides the what? The purpose of strategy planning describes the how? This is a plan of action and activities for attainment of those organisational goals. Dell computers for example wanted to do something different to its competitors. Their strategy was to sell directly to the end user, circumventing the middlemen.
In a dynamic environment strategy must be adaptive and appropriate to the organisations needs. To remain competitive, companies develop strategies that "focus on core competencies" develop synergy and create value for customers.
There are a number of different strategies an organisation could adopt. What is important is that they select one that fits comfortably within their culture. The final element is a control system, which make up Strategy, Planning and Control systems.
Control systems can be defined as "the process through which managers regulate activities to meet planned goals and standards". There are principally 3 types of control system. These can be used before, during or after an event.
Controls that focus on events before they occur are called Feed Forward control. The purpose of Feed Forward controls is to ensure input quality is of a standard to avoid future problems in the organisation. For example when manufacturing a product, there are check points to ensure that it is built to the right specification and quality, thus reducing rework, scrap.
A second type of control system is one that monitors activities ensuring that they are consistent with standards. An example of this is a final inspection of a manufactured component. This type of control is called Concurrent Control.
The third type of control system focuses on the organisations outputs. Feedback Control looks at the quality of an end product or service. This could be to monitor the amount of returns for a product, or complaints for a service performed. Besides product or service quality, it is necessary for an organisation to perform financially to ensure their survival; an example of this is monitoring budget targets.
A popular emerging control system is the Kaplan and Norton model. Also known as the balanced scorecard, it was first introduced in 1992. This type of control system concept provides a view of organisations overall performance by integrating financial measures with other key performance measures around customer satisfaction, internal business processes, organisational growth, learning and innovation.
It acts as an aid in creating a balance among various factors, which all form part of the organisations strategy for the future. It links short term operational control to long term vision and strategy by focussing on a few critical key performance measures in target areas forcing to control the daily operations which affect future development. The Kaplan and Norton model translates strategy into specific objectives and measures, to control and monitor progress; by selecting an appropriate mix of outcome measures (lagging indicators) and performance drivers (leading indicators).
The findings of a surveys conducted with US executives revealed that a mere 25% described their planning systems as effective. Amongst a number of reasons one stood out. There was a failure to link strategy to measures and associated tracking systems. A complaint from management was "they were never sure if they were on target to achieve their strategic goals". "There were no early warning systems to flag up deviations from the expected outcomes". This evidence supports the saying "if you can't measure something, you are not able to manage it". It went on to state that in the future organisations will focus resources on a limited set of "critical issues". Rather than controlling everything, what is important to the business needs to be measured.
From a financial perspective, control systems indicate whether an organisations strategy, implementation and execution are contributing to the bottom line. Any control system should have a mix of outcome measures and performance drivers. Without these you cannot tell if the goals are being achieved, or give an early indication that all is not well. In this article a further two statements came from another survey. Only 50% of executives, 20% of middle managers and less than 10% of employees have goals linked to strategy. Finally 43% of companies have a strong linkage between strategy and their annual budget (CFO Magazine). There is a common theme that in order to perform strategically, there has to be a relationship between the daily operations and an output in terms of how it is performing.
Control systems should be linked to financial objectives, but not guided by them. This is a significant point, although financial performance affects the survival of the organisation, its shouldn't be constrained by it. For example, a vehicle manufacturer's strategy was to maintain its market share in the high luxury vehicle segment. To achieve this they needed t introduce a replacement for their tired flagship model. One of the control systems in the vehicle project team was a short term financial measure. The project was not permitted to move forward in the project milestone planning, unless it maintained a specific Internal Rate of Return percentage (IRR) at each stage.
This control system was addressing a short term need, but was preventing the company from achieving its long term strategy (maintaining market share). The result was that the launch was delayed for the replacement model and in the meantime their competitors were enjoying a greater share of that market with their own new models. On reflection, was that IRR percentage so set in stone that the trade off to delay the launch was the right decision?
Another example was a client I was working with. They were a manufacturer and importer of plumbing fittings, selling goods throughout the UK as well as exporting to the Far East and Europe. Part of their strategy was to meet the Producer Responsibility Obligations (Packaging Waste) regulations. The obligation on companies in the UK to reduce and recycle waste produced across the life cycle of their product or service. As the company had grown significantly, they were now obliged to comply with the regulations.
The consequence on non compliance initially triggers a fine, however can lead to unlimited fines and custodial sentences. So what can they do meet this new goal? They need to develop strategic plans; ones that will ensure that they comply with the regulations. Several options were available to them, join an approved scheme (they take care of this for you), do it yourself (you have to record and provide all reasonable evidence), or review your supply chain and look for opportunities to reduce your obligations beneath the qualifying thresholds (through re-specification and re-design).
They chose to do it themselves, and now needed to look at how they were going to do it. We have already seen the types of control systems that exist. This will allow them to know if they are being effective. There has to be a balance of measures both quantities and qualitative to produce a well rounded picture. When looking at the characteristics of a control system, the purpose is to enable management to achieve strategic plans.
Regardless of the approach of using the different controls, any system needs to be tailored to meet the organisations needs. Simply adopting something that others do which does not fit correctly with your organisation will overburden and complicate its function. Specifically control systems must emphasise what is important to the organisation. It also needs to be forward looking, addressing where the organisation is going, not where it was. This suggests that linkage between the correct type of control system and the overall strategy is necessary to achieve this.
So what do they have to control? They are obliged to account for the tonnage of packaging that they receive from their imported products, packaging they purchase for packing/filling, and packaging that they export by material classification (wood, cardboard, steel etc). The output of this information allows them to obtain waste recovery notes to account for their recycling/ recovery obligations. What they also need to consider is the following specifics; is the control system compatible with the aims of the company? By this I mean will it actually achieve what it is supposed to do? Further questions could be is the system valid, and capable of measuring what you want (to include user friendliness)?
If you are not able to effectively monitor, you will not receive any early warning to indicate that you are off track. The consequence of this is that ultimately you will fail to achieve your objectives. A question you might like to ask yourself; is the cost of doing this greater than the consequence of not performing it? Costly and labour intensive processes put in place to capture information are of limited benefit and do not contribute to the long term goal.
Accuracy is also a feature. Relying too heavily on existing controls, for example feedback controls, creates a risk of being out of alignment with changing events. Internal goals and strategies need to be flexible and adapt when there is a shift in the environment. Timeliness is an important feature of the control system. Information needs to be provided in order that management can respond. Corrective action has no value if it is applied too late. The control systems should also support the overall strategy, by focussing on where change is needed and not merely a report. By highlighting the exceptions rather than the norms, each can be diagnosed and the appropriate and prompt remedial action taken.
In this article I have attempted to identify why it is important for a control system to be linked to an organisations overall strategy. In doing so I have defined that the purpose and role of strategy, the plan of action that describes the activities for attaining the organisations goals. Without a strategy, an organisation has no legitimacy or reason for existence. In order for an organisation to achieve it goals, they have to be broken down into segments. which broadly mean a strategic plan. They need to address not only the short term plans, but also the long term goals.
Several organisations that have come to the realisation that their strategies are failing in their execution of their strategic plans. The article by Fuller reveals through conducting surveys that many top executives put this down to a failing in linking their control systems to their strategy. What is not picked up here, but is of equal significance is that although the failing may be in part due to lack of linkage, it is evident that if inappropriate control systems are linked the result will still be ineffective.
According to one survey, six out of 10 respondents reported to be either overhauling or replacing their performance systems, on the basis that their existing measures might not be effective. As previously mentioned two main characteristics of an effective control system are ones that demonstrate flexibility and relate to the strategy therefore being relevant. In particular identifying the "critical few". Many organisations are guilty of measuring things that add no value to their business. If you are unsure if it adds value use the question of what you are measuring. So what? This will give you some clarify if it is really relevant or nice to have.
So does anyone benefit from linking control systems to their strategy? As mentioned earlier Dell has adopted this approach and is still a significant player in their sector. Honeywell is also noted for its ability to communicate measures throughout its organisation. They identified business drivers in their strategy. Then goals and measures were linked to them at every level, those being operational, tactical and strategic. This demonstrated the importance of alignment at every level.
To summarise, I feel that the cases discussed identify that organisations require both an overall strategy and control systems. In order for an organisation to achieve its goals, it is important that they control system is linked to its strategy. The selection of the appropriate control systems will flag up if an organisation is adrift of achieving its objectives. The measurements of the "critical few" are the areas which managers should focus on.
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