On Management

Segmentation is the Key to Customer Psychology

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:59:00 +0000

Truly Make the Customer the CRM Design Point

Ms. Liz Roche
Managing Partner, Customers Incorporated (US)

This article is exclusively written for GCCRM.

Product placement! Lifestyle marketing! Integrated promotions! It seems that everywhere you look these days some marketer is trying to get you to buy a product by appealing to your psyche rather than explicitly advertising it. As technology continues to pervade our daily lives, the lines between sales, marketing, advertising and entertainment are rapidly blurring. The big payback for marketers is to get into your head and influence your behavior by augmenting traditional marketing and advertising with an appeal to your psyche.

But here's the rub: all customers are not created equal and as such it's not so easy to understand what actually drives purchasing behavior. Indeed Business Week recently ran a cover story on the psychology of the male consumer (Business Week, 09/04/06, Revealed! Secrets of the Male Shopper). But certainly not all consumers are men. And not all consumers purchase all products. And even if you have a handle on who purchases your product, not all customers are equally valuable (profitable + strategically important). As such, the key to effecting behavior via customer psychology is rock solid customer segmentation.

Customer segmentation is the key to making the customer the CRM design point, leveraging CRM effectiveness (doing better things), as opposed to simply implementing operational technology (e.g., sales automation) that largely addresses efficiency (doing things better). At its most basic level, segmentation involves classifying customers with similar characteristics into groups (called "segments") and then dealing with the segments instead of individual customers (especially important in organizations with large customer bases, where individual customer scrutiny would be virtually impossible). The key reason for segmentation is the development of informed, segment-specific customer lifecycle treatments as well as a better understanding of which industries and markets should be served and which should be lowest priority going forward. Most important, segmentation guides future interaction with customers, based on the organization's deeper understanding of each segment's (and, by inference, each customer's) profitability, behavior, industry context, and lifetime value. Companies also use segmentation to prioritize new product development efforts, develop customized marketing programs, choose specific product features, establish appropriate service options, design an optimal distribution strategy, and determine appropriate product pricing.

Customer segmentation begins with the identification and collection of pertinent data elements (classification variables) and assumes that IT and marketing professionals will work closely together in data gathering strategies:

. Financial: Revenue generated from the customer (transactions), cost to acquire and retain the customer, customer's credit worthiness, resulting profit from the customer, and interactions (cost to serve).

. Demographic: Describing customers in terms of their personal characteristics, such as age, sex, income, ethnicity, marital status, education, and occupation.

. Geographic: Describing customers in terms of their physical location, such as city, state, ZIP code, Census tract, county, region, and metropolitan/suburban/rural location.

. Psychographic: Describing customers in terms of personality traits, such as attitudes, lifestyle, aversion to risk, and TV programs watched.

. Behavioral: Emphasizes what customers have purchased and can suggest what other products they may be interested in; this includes brand loyalty, usage level, benefits sought, and distribution channels used.

This data is then used to generate customer segments, with additional qualification based on the current and future financial contribution each customer represents to the company. Further refinement of these initial customer segments must be planned for.

When customer segments have been developed, a CRM treatment (customer pattern) can then be developed to ultimately create exit barriers and gain channel efficiencies along the way. However, there is a "chicken or the egg" information conundrum: most organizations do not have enough information to profile their customers, though designing around the customer requires information to create customer patterns. This can be a vicious circle - and avoiding this conundrum means that even without perfect information, organizations must start somewhere and use that as an opportunity to collect information along the way, updating the segment/ treatments iteratively.

What Is the Right Number of Segments to Have?

There is no definitive answer. Experience, intuition, statistical results, and common sense all must be applied to decide on the number of segments to retain. If there are numerous very small segments, the segmentation criteria may need adjustment. Too many segments can lead to the development of too many different (i.e., expensive) marketing programs for small, very similar markets. However, several rules of thumb can be used to determine the appropriate number of segments. Segments must be:

. Large enough: The majority of segments must be large enough to be economically feasible to support marketing and product design efforts.

. Relevant: The segments must be relevant to the company's products/services.

. Reachable: Segments must be reachable through one or more marketing mix variables (price, promotion, features, and distribution).

. Differentiable: Clearly defined differences among customer segments must exist to make some segments more desirable than others.

Although determining a segmentation strategy is very much a business issue, technologies can be brought to bear to make this task somewhat easier:

. Data mining/behavior modeling: Predictive analysis technologies built into campaign management tools can help marketers move from declarative segmentation (segmenting based on database fields) to predictive segmentation (segmenting based on mathematical algorithms), enabling more "creative" segmentation.

. Optimization: Technologies providing nonlinear, constraint-based optimization enable mathematical calculation of best customer/segment, best offer, and best campaign.

As we have seen, organizations must understand customer psychology to truly make the customer the CRM design point. This notion is enabled by creating value-based customer segments and applying appropriately "sized" CRM life-cycle treatments.

source: http://www.greaterchinacrm.org:8080

The Role of Segmentation in Creating Marketing Advantage

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:52:00 +0000

Linda More is now a business and technology journalist

In the real world there is no such thing as an average customer - each customer is an individual capable of adding their own value to a business relationship. Customer segmentation is the powerful marketing technique that divides a group of all customers into smaller subgroups that share a number of common properties in their relationship with the business.

Understand Customers to Keep Them

Segmentation is the first step towards customer understanding, which allows organisations to build healthy relationships with their customers. "Money is made by keeping customers, and the whole idea of segmenting customers in order to build customer relationships is to turn it into a mutually satisfying relationship," says Ovum analyst David Bradshaw.


	There is no such thing as the average customer Customer segmentation is the first step to building a healthy customer relationship Correct segmentation can increase revenue, decrease costs and increase customer satisfaction Difficulties occur when companies segment according to their own desired outcomes ('the wish-list') rather than the customers' Both tactical and strategic segmentation strategies need to be employed for best results Medium-sized organisations with fewer resources should use CRM tools to enable customer segmentation

To build these relationships profitably depends on treating different customers appropriately in order to align their individual needs with the most appealing product or service offering a business has. The challenge for the mid-market sector is to stop viewing their customers as one entity and to start communicating with them as individuals and according to their distinct preferences.

"There is only one place that businesses make money - from active customers. Today, despite the tools at hand, mass marketing is still the primary method of customer communication," states Clive Humby, chairman of customer management consultants, Dunnhumby.

If you do it right, the benefits of segmentation are threefold – increased revenue, decreased costs and increased customer satisfaction, according to Ian Charlesworth, senior analyst at Ovum.

Painting the Customer Picture

The shopping and buying habits of highly profitable, high-revenue customers are different, as are the products they choose to purchase. A significant part of the value of performing customer segmentation is in providing a common language that the entire business can use to talk about its customers. However, there is a downside if you get it wrong, as Charlesworth explains, saying: “If you target or segment customers in a way that is inappropriate, you can alienate them. What you are really doing is putting your customers into labelled buckets based on your judgement of where they should fit. What happens if they don’t see themselves as belonging in that particular bucket?”

These difficulties in segmentation sometimes occur because companies often segment customers based on their own desired outcomes rather than those of their customers.

Painting the Customer Picture

These difficulties in segmentation sometimes occur because companies often segment customers based on their own desired outcomes rather than those of their customers.

Tactical or Strategic Segmentation

Often segments are chosen on the basis of available data. For example, an organisation that has a lot of transactional data may opt for behavioural segmentation based on levels of spend, frequency of purchase or apparent loyalty. Another company with a wealth of customer preferences may choose to segment its customers based on the attitudes they display and the reasons why they choose to make their purchase

In order to segment customers in a way that serves the business the marketing needs of the organisation must be aligned to the most appropriate segmentation approach. “Organisations need to see value from segmentation and to do this they must understand the reasons why they are segmenting customers,” states Charlesworth. “To produce real value segmentation activity must be aligned with the business strategy and vision.”

According to Gartner analyst Gareth Herschel segmentation schemes tend to alternate between extremely granular tactical schemes, which can result in thousands of segments and very strategic segmentation with less than 15 segments.

Tactical segmentation serves to address the immediate short-term issues of the business, such as deciding which customers get preferential customer service, additional mail shots or to drive business using a special offer. With the wealth of CRM (customer relationship management) tools available today, tactical segmentation is easily performed in-house using existing customer data.

Strategic segmentation is used to answer the big questions that the business has about market position and branding, competition and to identify new opportunities. It is used to pinpoint the type of customers a business wants to encourage, what image or brand is needed to attract them, how much they are willing to pay and what type of products they will need. Usually an outside specialist consultancy is called in to help with this process and the determination of the segments.

“Organisations require both tactical and strategic segmentation,” says Herschel. “They serve very different purposes and a big mistake that organisations make is to only operate in one dimension or the other.”

Conclusion

Segmentation is an effective part of a broader marketing strategy and should eventually include both tactical and strategic elements. The secret is to make a start using your existing data and tools and then keep refining your segmentation strategy focusing on the benefits that those segments really care about.

“Medium-sized organisation have the same needs as large ones – but with a lot fewer resources to address them with,” says Bradshaw, “so they need to use their CRM tools to maximum effect.”

Sources

Interview: Gareth Herschel, GartnerGartner Presentation – ‘Creating and Using Customer Segments to Balance Needs and Value’

Interview: Ian Charlesworth, Ovum

Interview: David Bradaw, Ovum

Interview: Clive Humby, Dunnhumby

Interview: Martin Hayward, Dunnhumby

Interview: Professor Adrian Payne, Cranfield University

source: http://www.microsoft.com/uk

CRM, As You Like It

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:33:00 +0000

Customer segmentation software helps companies build their business by identifying valuable customers so they can assign the appropriate resources.

Russ Banham, CFO.com

May 01, 2003

"Know thyself," wrote William Shakespeare half a millennium ago. Shakespeare recognized that we all have elusive wants, feelings, and frustrations that set each of us apart from everyone else. So when Dallas Teachers Credit Union wanted to grow its assets two years ago, it adapted a lesson from the Bard. Rather than manage its database with "neither rhyme nor reason," the DTCU invested in customer segmentation software to really know its customers — all 150,000 of them.

By creating 150,000 distinct customer profiles, the DTCU was able to determine customers' individual banking needs. Each customer was profiled, based on more than 100 different data points — things like age, level of schooling, annual income, type of home, and location. All customers also were "householded" to reveal who else in the nest might need one of the bank's services, such as a checking account, an IRA, a credit card, or a mortgage. Only then was targeted marketing material delivered to individual customers. The upshot: the DTCU increased its assets by more than $500 million in the last 18 months — to $1.45 billion — making it the fastest-growing credit union in the nation.

After rolling together its own internal customer data with an array of external demographic information provided by Acxiom, the DTCU ran it through sophisticated modeling algorithms created by IBM Global Services. This rigorous process enabled the credit union to "rank order" each of its myriad services by customer — that is, to identity which individuals had the greatest inclination to use each service. "The customer segmentation strategy took the guesswork out of cross-selling," says Patricia Korioth, senior vice president and CFO.

"Instead of sending marketing material to all our [150,000] members and getting a single-digit response rate, we'll now send out 15,000 pieces of mail and get a 10 percent response rate," adds Korioth. "The strategy gave us the confidence to re-charter as a community bank." Now called the Credit Union of Texas, the bank has expanded its potential customer base — it's no longer just for teachers only.

"We've even used the data to determine where our new branches should be located," says Jerry Thompson, the bank's chief information officer. "Internal surveys indicated our customers like to bank at a facility within a 10-minute drive. The internal data pinpointed where our most profitable customers resided, and the demographics indicated others of similar banking needs. Up went the branch."

Customer segmentation strategies using CRM software are almost a matter of course in the financial services industry, which retains an enormous amount of internal transactional and personal data on customers and customer behavior, enabling relatively easy segmentation for purposes of marketing and customer service. In recent years retailers have been discerning their customers' buying preferences by scanning their credit cards or frequent-shopper cards, and even by using radio frequency identification (RFID) technology to pick them out through their cell phones and other devices as they enter a store.

(Thereby hangs a tale: It's been reported that at least one retailer has explored the possibility of embedding RFID chips in its clothing, so salespeople could easily identify repeat visitors on arrival and give priority service to these more loyal — and hence more valuable — customers. Though it's not nearly as intrusive as the iris-scanning shopping-mall come-ons of Minority Report, privacy concerns seem to have put such initiatives on hold.)

Customer segmentation can offer both revenue-building and expense-lowering benefits. Top-line revenues can be increased through more-targeted cross-selling, as well as through superior service that builds customer loyalty. Bottom-line expenses can be pared by relegating lower-margin customers to less expensive self-service options — or perhaps even by steering those customers to another service provider altogether. Self-service is considered the most important CRM initiative by 62 percent of Global 3500 firms interviewed recently by research firm Forrester.

Yet while success stories like the Credit Union of Texas are legion, analysts warn that customer segmentation strategies are hardly risk-free. That same Forrester study noted that 41 percent of interviewees found no return on their investments in Web-based and interactive voice response (IVR) self-service. "It's a sticky thing," says Jill Griffin, president of The Griffin Group, an Austin, Texas-based consulting firm specializing in customer loyalty issues.

One sticking point, explains Griffin, is that a customer who is initially categorized as low-end — and then provided low-end service — will be less likely to stay with the provider when his or her material wealth increases. "The Internet has changed customer perceptions of corporate responsiveness," says Griffin. "People now expect instantaneous conclusions. If they're required to endure interactive voice response systems that lead nowhere or Web sites that are so labyrinthine that they get lost, their loyalty to your company breaks down."

Others agree. "You need to be careful when you introduce new customer service options that you don't completely cut off traditional familiar communications channels," says Karen Smith, research director at Aberdeen Group, a Boston-based consultancy. "Think about the poor fellow standing on line at the bank for a half-hour who watches someone come in and get preferential, immediate service. If he hits the lottery next week, he may decide he wants service elsewhere."

A Little Something for Everyone
To segment customers fairly as well as profitably, Stockholm, Sweden-based Nordea Bank sought a customer-segmentation strategy that would allow it to reduce its call-center staff and associated expenses without lowering customer service. The key was a system that ensures each customer is assisted by a service representative with the appropriate skills.

For example, Nordea wanted its high-end customers to be transferred to representatives who had been trained to provide high-touch customer service — and to make a very persuasive cross-selling pitch at the conclusion of the interaction. Low-end customers would be routed to reps trained in the bank's online service system, to encourage those callers to use the Web for service issues in the future. That channel "is critical to our success," says Martin Karlsson, Nordea business IT manager, "since it is more cost-efficient, and also very convenient for customers."

Nordea Bank implemented customer segmentation software provided by Daly City, California-based Genesys two years ago. In Nordea's 14 contact centers across Sweden, Finland, and Denmark, the bank has increased the time spent talking to customers by 24 percent, yet it has increased its number of employees by only 15 percent. "We use the interactions to provide added value for the customers and for the bank, which means simultaneously advising on and selling products that would benefit the customer," says Karlsson. "It's very useful to match customer segments to specially trained and qualified agents. A call from a customer that is more profitable to the business deserves more high-level attention and service."

Brian Bingham, manager of customer care research at research firm IDC in Framingham, Massachusetts, puts it even more strongly. "Losing a high-end customer can have a profoundly negative effect on a company's profitability," says Bingham. "If they have urgent needs requiring satisfaction immediately, and they're forced to go through the same channels as low-end customers, they will become dissatisfied. There's an old expression, 'it's significantly more expensive to acquire a new customer than to retain an existing one.' "

Many CRM analysts recommend a value-based segmentation model similar to the one in place at the Credit Union of Texas. "You want to create a target list for a sales campaign based on the attributes of the customer," says Steven Bonadio, senior analyst at Meta Group in Stamford, Connecticut. "Knowing the customer is everything. You want to understand who they are and what is their relative value to the enterprise, not just here and now but into the future. Then you tailor the appropriate level of service or customer experience."

But Smith from Aberdeen warns that "appropriate customer experience" should not, in the case of low-end customers, translate into inferior service. "It goes back to the primary question — is the segmentation strategy predicated on serving the customer better, or just corporate interests and the bottom line?" she says. "When you say you're improving customer experience, are you really? Technology is not a panacea; it must be managed."

Even among high-end customers, continues Smith, "there are cases where a husband and wife each have checking accounts at a bank, and even though the wife is the actual breadwinner, she's kept on the phone punching digits because the husband is perceived as the decision maker in the gold bracket." Adds Smith: "That's why it's incumbent to household the entire family — you don't want to distance one member. I've seen five-member families each barraged with the same marketing material in the mail on the same day. Talk about a 'customer experience.' "

The Pared-Down Approach
Fireman's Fund Insurance in Novato, California, evaded many of these concerns in its customer segmentation strategy. The solution: Keep it focused on sales and marketing, and not on service. The insurer uses data warehousing software provided by IBM Global Services and data analytical tools from Cary, North Carolina-based SAS to identify the best customers in each of its markets. "Knowing who our best customers are on a niche basis, and then householding them, lets us know how best to service their insurance needs," says Michael DeVoe, Fireman's Fund senior director of customer research and strategies.

Adds DeVoe: "We discern the number of insurance policies in a particular household and then, using internal data and external demographic data, we create a 'life-stage segmentation.' As these customers age or move into larger homes, we know the products best-suited to cross-sell them, or the loss-control advice they may need."

Segmentation strategies give insurers an opportunity "to do something with all this customer information we have," continues DeVoe. "Historically, it's been very cumbersome to get our hands around this data because, like other large financial services companies, we tend to be structured along silos and have legacy systems that are not integrated. We've got three Ph.D.'s here now who are highly analytical people who do nothing but integrate all this data using the various tools. It's a minor investment for something that is generating millions in profit, simply by tailoring marketing to customers individually."

Or as the Bard wrote in another context, "Suit the word to the action, and the action to the word."Publish

Russ Banham is a contributing editor at CFO.com.

source: http://www.cfo.com/

Customer Segmentation: Think Beyond What You Can See

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:29:00 +0000

Article published in DM Direct Special Report
August 17, 2004 Issue

By Shailendra Kumar

The key to business success in today's competitive world is managing customer relationships. Customer segmentation is the first step toward this customer understanding, which allows organizations to build healthy relationship with their customers.

Know thy Customers

Due to the relentless competitive pressure currently being experienced in the financial services, retailing and telecommunications sectors today, a critical issue for business is to establish customer intimacy to maintain better customer relationship.

To build these relationships profitably certainly depends on treating different customers differently. Any organization must understand the customer history and its value to the business, both today, in the past and the future, so that all interactions with the customers are appropriate and lead to the relationship being profitably developed over the period of time. Customer segmentation is the key to this level of understanding.

Customer Segmentation

Customer segmentation is a powerful technique which divides a group of all customers into smaller subgroups that share a number of properties in their relationship with the business. It is obvious that these subgroups should be given very different treatment.

A simple customer segmentation can be produced easily with the analysts exploring the data and applying their understanding of the business. Typically the process begins with a business problem in mind and attempts to determine which measures of a customer are important to that specific business problem and how the chosen measures can be used to segment the data. This is a highly iterative and experimental process, with the analysts constantly increasing their insight into the behavior of the customers. For example, an analyst may want to segment the customer base, geo-demographically and then subsegment any one region by the amount of revenue generated by that region.

Segmentation is now an essential part of the marketing activities of most of the organizations, influencing key strategic decisions. Segments makes analysts think beyond what is there to see.

Practical Issues

There are a number of practical difficulties for analysts to implement the process of segmentation. By its very nature, this type of work needs to be carried out by a business, not a technology expert. A user-friendly, easy-to-use business tool may provide more specific support to help an analyst construct queries and experiment with different approaches to segmentation.

The complexity of the ever-increasing number of queries makes it difficult to track customers in a segment over time. As the customers' data changes, they may no longer fall inside the criteria of the original query for that segment - which makes any form of "then and now" analysis very difficult. For example, the analyst may want to track the response of a segment of customers who have been targeted with a direct marketing campaign or follow the changing composition of a particular segment over time.

In fact, a marketing analyst may have neither the time nor inclination to write his/her own queries. The tasks involved in retrieving customer records from the database and building queries for segmentation are often left to IT specialists, based on the analyst's specification of whom should be in each segment. Not only does this increase the time needed to produce the segmentation model but effectively precludes the analyst from iteratively refining the model. Time constraints will not allow for many cycles and the analyst will lose his/her train of thought while waiting for models to be produced by IT support. Thus, it is suggested that it should be left to the analyst to access their own record set from the customer database and do the segmentation as per their requirement.

Another practical issue is the dirty data which does not allow the IT specialists to give data access to the marketing analysts. A tool which can segment customers and even handle dirty data is the effective need of the hour.

Business Benefits

A very significant part of the value of performing customer segmentation is in providing a common language that the entire business can use to talk about its customers. Indeed, segmentation is an excellent example of the way in which data can be turned into information and then into actionable knowledge. This information is relevant even to the most senior managers where a monthly board report, for example, could include the performance of the product by customer segment over a period of time. Customers can then be tracked as they move from one segment to another, as their relationship with the business matures or, perhaps, begins to go sour.

Customers in one segment with a similar geo-demographic profile to those in another higher value segment can be encouraged to migrate to the higher value segment. Market research can be carried out by segment to determine not just what the customers are doing, but also why they are doing it. New and prospective customers can be matched with known customers based on geo-demographic information in order to include them in an existing segment and understand their likely future behavior.

Today, the need is to provide marketing analysts with a business tool which is quick, can handle large amount of data and can help them do segmentation in simple English language on the customer base along with their transactions. This will make analysts more creative and innovative to follow their "train of thought" and allow them to take those decisions which they wanted to take today and not tomorrow.

source: http://www.dmreview.com/

Customer Segmentation

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:28:00 +0000

Customer segmentation is essential to successful database marketing. Segments are groups of customers with similar interests in your products or services which you have created based on their behavior, demographics and lifestyle. Your messages to customers in each segment should reflect these differing interests if you want to find a receptive audience.

The goal of customer segmentation is to develop database marketing action programs that lead to measurable increases in retention, cross sales, up sales and referrals.

An ideal segment is one which:

Has definable characteristics in terms of behavior and demographics.
Is large enough in terms of potential sales to justify a custom marketing strategy with appropriate rewards and budget.
Has members who can be motivated by cost-effective rewards to modify their behavior in ways that are profitable for your company.
Makes efficient use of available data to support segment definition and marketing efforts.
Can be measured in performance, with control groups
Justifies an organization devoted to it. There should be someone definite in your company who “owns” each segment.

One clothing retailer developed segments by asking the following questions:

Who are my best customers?
What percent of sales do they generate?
How big is their clothing budget and the chain's share of their wallet?
What are their demographic characteristics?
When and what do they buy in our category?
Who buys full price versus only items on sale?
When and what do they buy from the competition?

They went through four steps to create the segments:

Determine the behavior that drives each segment
Identify naturally occurring clusters of customers with a unique buying pattern
Enhance these clusters with lifestyle data and demographics
Conduct an in-depth survey of each cluster for competitive information and fashion attitudes

The chain ended up with nine customer segments. The bottom three segments had 52% of the customers and 10% of the sales. The chain allocated only 5% of the marketing budget to these three segments. The top three had 14% of the customers but 55% of the sales. These received 60% of the marketing budget. Result: increased retention and increased sales from the top segments compared to controls.

Arthur Middleton Hughes is Vice President / Solutions Architect of KnowledgeBase Marketing. He is the author of Strategic Database Marketing 3^rd Edition. (McGraw-Hill 2006).

source: http://www2.kbm1.com/

Tips for Successful Customer Segmentation

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 18:00:00 +0000

Start with the basics.

By Alice Dragoon

October 01, 2005 — CIO —

1. Put each customer in only one segment. Otherwise, customers can get bombarded with multiple, uncoordinated offers.

2. Be channel-neutral. Customers should get the same offers no matter which channel they use. So custom product recommendations should be available to all customer-facing employees and delivered to customers who go online.

3. Give customer-facing employees specific, action-oriented intelligence. Don’t give them data that’s open to interpretation. Tell them exactly which offer is most appropriate for each customer.

4. At the outset of customer segmentation, give the sales force only the best leads to ensure a very high success rate. Once the sales force sees the value of segment-driven sales recommendations, you can expand the lead list to include more customers, giving a "propensity to buy" score for each so that reps understand what level of receptivity to expect.

5. Give a senior manager P&L responsibility for each segment.

6. Put senior management in charge of driving segmentation. As RBC Financial Group Vice Chairman and CIO Martin Lippert notes, companies may miss part of the customer perspective if only a single line of business is pushing segmentation. Also, segmentation is less prone to budgetary constraints if it’s funded by the enterprise instead of by a single group.

7. Start small, then evolve. First divide customers into a few coarse segments, then gradually break them into smaller, more precise subsegments. But don’t wait until you’ve got it all perfect. Just begin.

source: http://www.cio.com/

Customer Segmentation Done Right

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 17:53:00 +0000

October 01, 2005 — CIO — If banks could choose their customers the way kids choose sides on the playground, customers in the 18-to-35 age bracket would be picked last. With their relatively small incomes, low account balances and large student loan debts, young customers aren’t exactly the sort over whom the average bank salivates.

At RBC Royal Bank, however, executives recognized that some of those impecunious young customers might eventually turn into wealthy, profitable customers. So RBC analysts pored through the bank’s data on its young customers looking for subsegments with a strong potential for rapid income growth. Their analysis identified medical school and dental school students and interns as a group with a high potential to turn into profitable customers. So in 2004 the bank put together a program to address the financial needs of credit-strapped young medical professionals, including help with student loans, loans for medical equipment for new practices and initial mortgages for their first offices. Within a year, RBC’s market share among customers in this subsegment has shot up from 2 percent to 18 percent, and the revenue per client is now 3.7 times that of the average customer. Martin Lippert, vice chairman and CIO at RBC Financial Group, says the bank’s willingness to help these young professionals get started will likely be rewarded with a lower attrition rate down the road.

"We may have customers we’re not making money on, but we look at that as more our problem than the customer’s," Lippert says. "Our opportunity lies in finding what the needs of the customer might be so we can offer them additional products and get them to a point where we’re making some return."

While lots of companies claim they’re customer-centric, RBC is one of just a handful of organizations that segment customers based on customer needs, not their own. And by focusing its operations on addressing those needs, RBC has grown its market capitalization from $18 billion almost six years ago to close to $50 billion today.

So far, few companies are as sophisticated at segmenting customers as RBC. Many don’t do any customer segmentation at all, and those that do typically don’t reap much value from the exercise because they segment on the wrong criteria. Precise, needs-based customer segmentation is time-consuming and difficult, and very much in its infancy. But it’s worth doing because it enables cost-effective targeting of customers with product and service offerings that match their needs. That kind of precise targeting obviates spending a bundle on largely ineffective mass mailings—and alienating customers with irrelevant offers. It’s the quintessential win-win: Customers get what they want and subsequently buy more; companies waste less money and increase sales and profits

"The more you’re able to do for the customer, the more likely she is to pay attention to the next offer," says Martha Rogers, coauthor of Return on Customer and cofounder of Peppers & Rogers Group. Yet "companies are not doing nearly so much as they can."

The Wrong Way to Segment Customers

Many segmentation efforts today are an exercise in futility because companies are basing their segments on inappropriate criteria, says Larry Selden, coauthor of Angel Customers & Demon Customers and professor emeritus of finance and economics at Columbia Business School. As a result, organizations often wind up with segments that drain resources, instead of with segments that lead to more effective ways of running the business or meeting customers’ needs. For convenience, companies that are organized along product lines often segment customers by the products they buy. This approach, however, risks alienating customers in two ways: Customers who happen to be in more than one segment get bombarded with multiple uncoordinated offers. And big spenders in one product category who start buying in a second category are justifiably miffed when they’re treated as strangers.

Segmenting by demographics is also quite common, but it’s generally not useful unless customer needs happen to align neatly with demographic characteristics. Lego customers’ needs, for example, do tend to shift with age. Preschoolers, after all, play very differently from kids who are between 5 and 14 years old (what Lego calls the in-school segment). And the 30,000-plus adult fans of Legos tend to be hobbyists with a completely different mind-set altogether. Yet considering age alone isn’t sufficient; Lego also looks at what users do with their bricks. In-school kids who focus on building when they play will likely want plain bricks, but those who focus on role-playing usually gravitate toward themed sets. Cases in which demographics alone are an indicator of a common need are generally rare.

A lot of companies segment customers by revenue, intuitively assuming that revenue is a good indicator of profit. But, Selden argues, that’s hardly ever the case. He maintains that an effective segmentation strategy should begin with a profitability analysis, divvying customers into 10 deciles ranging from most to least profitable. When he segmented one major retailer’s customers by revenue, some that had the largest revenue generated among the lowest gross profits. And to get a true picture of profitability, banks need to think about the amount of capital they must allocate to high-risk customers.

t’s not a given that all or even most customers within a certain profitability decile are necessarily alike. Even so, understanding which customers are profitable and which aren’t is a good starting point. The trick is to delve into each profitability segment to look for hints of possible subsegments, that is, customers whose behavior patterns or other shared characteristics suggest they might have common unmet needs. Once RBC identified the shared unmet needs of young medical professionals, it was able to put together targeted offers to meet those needs and increase the profitability of that subsegment. "The goal for segmentation is to put customers in homogeneous groups based on common needs and wants that you can act on with a common solution," says Selden. "So who are all the people you can go at with a common offer that will make you a boatload of money?"

The Royal Bank Way

Determining your customers’ needs is not a onetime exercise. Although this means you can never be done with the process of needs identification, the good news is that you don’t have to be perfect on the first go-round. Effective segmentation is an exercise in fine-tuning. For instance, RBC started back in 1992 with just three customer segments: high, medium or lower profitability. Over time, RBC’s segmentation process has become much more sophisticated. Today the bank has more than 80 customer models in its data warehouse, and each month it scores all of its eligible customers on all relevant strategic and tactical models. (Someone who already has a line of credit at RBC, for example, would not be scored against a model that predicts the likelihood of acquiring a line of credit. And customers who have opted out of having RBC use their information for promotional purposes aren’t scored at all.) Strategic models—including profitability, life stage, potential, defection risk, client commitment or loyalty and overall risk—help the bank home in on customers’ needs and priorities. Tactical models—such as propensity to buy, the likelihood of a customer canceling a product or service, and the degree to which a customer uses the products he’s acquired—are used to identify revenue opportunities and generate lead lists for employees who deal directly with customers. Scoring customers monthly on the 80-plus models is helping RBC generate more than 13 million targeted leads each month. Roughly 6 million leads are used by salespeople to reach out to customers. The other 7 million are called "sales opportunities" to be used when the customer initiates contact with RBC. That means customer service reps and branch employees have targeted product pitches to offer customers after they’ve handled the customer request.

The three most critical models that drive RBC’s business are profit potential, current profitability and life stage, says Ga¿ne Lefebvre, vice president of client knowledge and insights at RBC Financial Group. "If you have these three things, you can fundamentally manage your business very well," she says. "Those are the ones we’ve been using as a proof of concept since as early as 1996." RBC’s method of projecting potential for each customer is so proprietary that Lefebvre won’t even discuss it, aside from saying that it is not simply a lifetime value calculation. (See "The Lifetime Value Equation," Page 79.) "Profitability is extraordinarily important and it’s where you want to start," says Lefebvre. "But it’s not very informative for understanding client needs." For that, RBC relies heavily on its life-stage model. Using this model (supplemented by focus groups, surveys and third-party research) divides individual clients into five strategic life-stage segments:

1. Youth: These clients are younger than 18.

2. Getting Started: These clients, generally between 18 and 35, are going through first experiences: graduation, first credit card, first car, first loan, marriage, first child.

3. Builders: These clients, usually between 35 and 50, are in their peak earning years. Typically they borrow more than they invest, as they build families and careers. With many expenses, their primary goal is to manage their debt load effectively.

4. Accumulators: Typically between 50 and 60, these clients are worried about saving for retirement and investing wisely. They want to know if they’ve saved enough to retire, if they’ll have to change their lifestyle when they retire and if they’ll need to work to supplement their retirement income.

5. Preservers: The primary needs of these clients, who are usually older than 60, are to maximize retirement income and maintain the lifestyle they desire. They typically manage multiple income sources and are starting to do estate planning.

Lefebvre and her team overlay these life-stage segments with other strategic models such as profitability, potential, client credit risk and client vulnerability (risk of leaving the organization) onto the bank’s objectives: retaining profitable customers, growing customers with potential, managing and controlling customers with higher credit risk profiles and optimizing the costs of less profitable customers. By doing so, they can identify opportunities to make a difference in the market, she says. Once the bank has identified a high-potential opportunity, it models the opportunity to see how much it might grow the business. Then RBC fine-tunes and validates the offer with 100 to 200 customers in focus groups or client interviews. If the offering is complex or demands significant investments of bank resources, RBC will often verify the results through further qualitative research or a pilot, testing different offers and creative among thousands of customers before rolling out the optimal version on a larger scale.

Targeting the Snowbirds

Once you’ve identified a group of customers who appear to have common needs, you have to determine if you can profitably offer a value proposition to meet those needs. It’s all about finding the ideal middle ground between segments of one (it would be too expensive to address customers’ needs individually) and segments that are so large and heterogeneous that you can’t tailor offerings to customers’ needs. Sometimes it’s not worth subsegmenting your customers. (Selden observes that Wal-Mart essentially has one segment of 200 million, based on the assumption that everyone just wants low prices, period.)

"Normally, companies start with a relatively small number of segments, which are fairly coarse," says Selden. "But if you have 40 million customers and five segments with 8 million customers per segment, the chances of those being highly homogeneous are very limited." The goal, then, should be to evolve those segments into more precise subsegments that allow you to deliver more targeted value propositions.

"Subsegmenting," Selden says, "is where the gold is."

Defining a useful subsegment generally involves doing a deep dive into the most profitable end of the segment to tease out distinct behavior patterns. On delving deeper into RBC’s preservers segment, Lippert says, RBC noticed a subsegment of people who spent a lot of time out of the country in certain months. Many of these were snowbirds escaping to Florida to avoid the harsh Canadian winters. Because RBC has branches in the United States, the bank quickly realized that snowbirds represented a sweet spot of untapped potential for the bank.

To address these customers’ unmet needs, RBC put together a "snowbird package" that included travel health insurance, easy access to Canadian funds, online consolidated account review, real-time transfers, the ability to leverage a Canadian credit history to secure mortgages in the United States and a toll-free number for cross-border banking questions. RBC also began introducing customers in the snowbird subsegment to personal bankers in the United States, making it clear that the institution knows its customers and understands the importance of their business.

Catering to snowbirds has resulted in a higher than average number of products per client in that subsegment. And for RBC, that translated to a 250 percent increase in net income per client before taxes. Equally stunning is the 45 percent decrease in the defection rate among the snowbirds. Because acquiring a new customer costs RBC a projected five to 10 times more than holding on to an existing customer, Lippert says that a reduction in the defection rate adds significantly to bank’s overall P&L. The package has been so successful that the bank now offers a similar RBC Access USA package to other groups of customers, such as students and executives, who spend a lot of time in the United States.

Although the snowbird subsegment turned out to be highly profitable, unearthing other subsegments may reveal that they are financial drains on the institution. When RBC uncovers unprofitable behavior patterns, it looks for ways to more efficiently address those customers’ needs. For example, the least profitable group within the preservers segment turned out to contain a number of Canadian retirees whose fixed incomes plummeted in value when interest rates fell and stock returns diminished. Because of the poor return on their investments, they were highly dissatisfied—as well as frustrated with the limited advice offered by financial institutions. Although unprofitable, they were valuable customers who carried twice as many products and services as the average preserver. It turned out they were keeping large balances in short-term guaranteed investment certificates (GICs, the Canadian equivalent of a certificate of deposit) that they were rolling over instead of cashing in. And because they were good at negotiating higher rates when they rolled over their GICs, they were that much more unprofitable for RBC. So the bank developed a group of cash-flow model portfolios to offer these customers. The portfolios, which typically include mutual funds as well as GICs and vary by level of risk and expected return on investment, deliver a better return as well as tax breaks. The customers are happy because they make more money and get to keep more of what they’ve invested. And within two years, RBC has generated 21,000 new retirement-income plans and achieved a net growth of $1 billion in account balances.

The Value of All That Slicing and Dicing

Companies that get the most from their segmentation strategies don’t just pay lip service to the importance of segmentation, they organize their operations around addressing customer needs. At RBC, a senior manager with P&L responsibility manages each segment. In addition, RBC offers very specific, actionable data to customer-facing employees.

"Different people can interpret data in a different manner," says Lefebvre. "We didn’t want to provide data that anyone would have to interpret. So we give them something very specific, such as ’For this client, offer a preapproved line of credit,’ or ’Call this client about a registered investment [Canadian 401(k) equivalent].’" So whether a customer dials in to the call center, visits a branch or talks to a manager, she will be given the same offer because the employee who interacts with her will be prompted by the CRM system to do so. "Delivering data on a real-time basis to reps when they are engaging the client has a tremendous lift," says Lippert. "Some organizations are pushing home equity lines this month, credit cards next month. Our folks are asking clients about particular products that we have intelligence are the ones that those clients are likely to purchase."

By segmenting its customers to offer them targeted, relevant offers, RBC’s personal and commercial division reached its goal of increasing revenue by $1 billion. Since October 2003, client defection has also decreased from 8.4 percent to 6.2 percent, while the number of high-value clients has increased from 17.1 percent to 19.1 percent of the client base today. RBC also boasts a return on equity of nearly 25 percent.

"We have a culture that recognizes that what’s in the information vault is as critical to us as what’s in the money vault," says Lippert. "It’s important to understand that [segmentation is] not typically a year-one, year-two payback kind of investment. It’s something that gets better with time and gets better with the organization’s ability to understand the data."

Lefebvre says that companies just starting down the customer segmentation path should view it as an evolutionary process and just jump in and begin. "Don’t wait for everything to be perfect," she says, "and don’t wait for the next piece of data before you do things. Often you can improve the business successfully in a rudimentary way. Ten years ago we were not as granular.

"Segmentation," she says, "is a journey."

Practice Customer Segmentation for More Targeted Marketing Campaigns

noreply@blogger.com (Guntur Tri Hariyanto) — Fri, 27 Apr 2007 17:51:00 +0000

Customer segmentation, also referred to as market segmentation, is the practice of segmenting customers into groups of individuals with common characteristics. By gaining a better overall understanding of customers, then grouping them into categories, companies are able to better optimize marketing programs and allocate marketing dollars more effectively. For example, you wouldn’t want to advertise beach balls to customers living in the North Pole, but you might offer a specialized promotion to your “best” customers (e.g., those who spend over a certain amount per year).

For online store owners, a baseline segmentation analysis can be accomplished using data points that have already been collected from existing customer registrations, order checkout information, and other sources.

Their can be two approaches to segmentation. The first approach, traditional segmentation, organizes customers by key variables such as demographics. The second approach, value-based segmentation, looks at customer needs as well as the costs of establishing and maintaining customer relationships. A brief introduction to each approach is provided below.

Traditional segmentation

Traditional approaches to customer segmentation group customers based on a number of variables that include:

· geographic variables, such as region of the world or country, country size, or climate

· demographic variables, such as age, gender, sexual orientation, family size, income, occupation, education, socioeconomic status, religion, nationality/race, and others

· psychographic variables, such as personality life-style, values, and attitudes

· behavioral variables, such as benefit sought, product usage rates, brand loyalty, product end use, readiness-to-buy stage, decision making unit, and others

Value-based segmentation

Today, the most successful companies practicing segmentation carefully consider overall customer needs and segment customers based on those needs and overall business value. While this strategy is less scientific than the traditional approach, companies that have been successful at assessing groups of consumers both in terms of the revenue they generate and the costs of establishing and maintaining relationships have been reaping great rewards.
Software and solutions

Tools used to assist with segmentation analysis can range from multi-million dollar customer relationship management (CRM) software implementations to smaller software packages that can be used to important and analyze data from spreadsheets.

For the online store owner, the practice of web analytics can be a useful resource for profiling and segmenting your customer base.

source: http://www.goecart.com/

SOA and the Core Competency Model: A Business Perspective for Realizing Competitive Advantages

noreply@blogger.com (Guntur Tri Hariyanto) — Tue, 24 Apr 2007 15:31:00 +0000

by William Murray

Published: March 1, 2007 (SOA Magazine Issue V: March 2007, Copyright © 2007)

Abstract: How does the application of SOA translate into a competitive advantage for organizations? The ability to clearly and concisely respond to this question is a prerequisite to any investment in SOA. The core competency model provides a strategic framework from which a corporation can develop an SOA business strategy based on improved business focus and enhanced ability to leverage market-based economies of scale. Four key business concepts that underpin the strategic framework are presented in this article, along with a discussion of how SOA, coupled with business process outsourcing (BPO), provide a strategic opportunity for corporations to drive and leverage the emergence of the service-oriented market.

Introduction: A Business View of IT

While many IT professionals are quick to extol the strategic value of IT, the business world views things quite differently. Two notable publications (“IT Doesn’t Matter” [REF-1] and “The End of Corporate Computing” [REF-2]) revealed that most data centers operate at less than 35% capacity, and the average desktop capacity utilization is less than 5%. Further, many of the same IT-related functions and associated costs are replicated across IT-dependent organizations.

What this all boils down to is an acknowledgement of the fact that, on their own, the boxes, wires, operating systems, application software, and the facilities and people required to care and feed them, do not generally provide a strategic advantage. This is a prevailing business perspective, and one that is actually correct.

Traditional hardware and software alone are not enough to make an organization competitive. That is not to say they are unimportant. On the contrary, as any IT-dependent organization will tell you, they are critical. But critical is not strategic.

As a result, if you want a business audience to understand the strategic value of SOA, it is advisable to leave these issues out of the discussion. And while only the most myopic view of IT would limit its potential contribution to hardware and software components, it is nonetheless incumbent upon IT professionals to fill the void between “IT doesn’t matter” and “IT is of strategic value” with something meaningful. This is why the business of IT (and the business of SOA in particular) is so crucial. In this article, I hope to help fill this void by discussing SOA from a corporate strategy perspective.

SOA-Related Business Concepts

Understanding fundamental business concepts is a prerequisite to any meaningful discussion of the potential impact of service-oriented architectures on business strategy and organizational design. Let’s therefore summarize some key concepts associated with SOA:

1.	Corporations typically internalize core activities and externalize non-core activities. There are two reasons for this. First, quality and efficiency tend to increase as an organization optimizes around a set of core competencies (business focus). Secondly, variable cost structures tend to be less expensive than fixed cost structures (economies of scale).
2.	Market exchanges incur transaction costs. The costs associated with common exchanges (such as sourcing, negotiating, monitoring, dispute arbitration, and exit) offset partially or wholly the potential benefits of improved business focus and economies of scale.
3.	Market and product efficiencies reduce transaction costs. These efficiencies enhance the ability of corporations to externalize non-core activities, thereby improving business focus and cost advantages through economies of scale.
4.	The digital market has improved market efficiencies largely through the application of information technology. Product commoditization (the standardization of products and product interfaces) and efforts to enhance interoperability improve product efficiencies.

With these concepts, we can now probe deeper into the impact of service-orientation on business strategy and organizational design in terms of enhancing the ability of corporations to focus on core activities and the externalization of non-core activities.

We should be mindful that the core competency model is only one form of corporate strategy, albeit widely in use, and certainly not the only way service-orientation can deliver significant competitive advantage. Nevertheless, the ability to discuss service-oriented architecture in these terms is a significant leap forward in pursuit of bridging the gap between IT and business.

Organizational Processes

The corporation, at some level of abstraction, is a collection of inputs, processes and outputs, as illustrated in Figure 1. The core competency model has primarily focused on inputs and outputs. Consider the increasing prevalence of extended value chains in the manufacturing sector, for example.

Figure 1: A simplified view of the corporation responding to inputs by providing outputs.

These value chains link the inputs and outputs of numerous corporations, each of which performs a highly specialized function. Collectively, these functions transform raw materials to consumer products. This shift from vertical integration (where a corporation internalizes the majority of functions required to develop, produce, and deliver a product to consumer markets) to horizontal integration (where a collection of corporations specialize within an extended value-chain) has been enabled by, and reflects improvements in, market and product efficiencies.

Without these improvements, the transaction costs associated with market exchanges would outweigh the benefits of increased business focus and economies of scale. As such, the degree of horizontal integration evident in a given market is a measure of market and product efficiencies. What is being exchanged between corporations at least in the case of the manufacturing sector are inputs and outputs. The majority of internal processes remain deeply embedded within each corporation and are replicated across the value chain.

Apart from production processes directly associated with inputs and outputs, a corporation is also composed of numerous information intensive processes. These would include (but are not limited to) front-office activities (sales, marketing, customer relationship management), as well as back office activities (material, finance, human resource, procurement, and logistics management). The management attention and cost associated with caring, feeding, and coordinating these considerations is significant.

As a result, there is an opportunity to improve business focus and benefit from economies of scale by externalizing many of these “non value-adding processes.” Why then do the majority of these processes remain embedded within the corporation? One possible explanation is that the service sector in general is relatively young in comparison with the manufacturing sector.

More to the point however is the fact that the manufacturing sector has been heavily influenced by the application of engineering principles whereas the services sector has not. These principles are embedded in product design and production processes in the form of product and interface standards and modularization conventions. This has resulted in a significant degree of commoditization of inputs and outputs that, coupled with improved market efficiencies, has driven the shift to horizontally integrated manufacturing markets.

Service process and service product designs are, for the most part, developed by functional experts within the administrative services domain. Not surprisingly, the concepts of interoperability, interchangeability, modularity, decomposition, i.e. an engineered approach to service process and product design are not the primary interest of these functional-oriented communities. The resulting variation (and fragmentation of) service delivery processes makes it difficult for service products to be combined or decomposed (Figure 2).

Figure 2: Non-core internal business processes.

For example:

•	They often implement numerous functions across the organization in a web of activity that is not easily discerned or decoupled.
•	They tend to produce numerous “process tentacles” in order to accommodate unique process exceptions.

In short, as standardization and interoperability are rarely among the process-level design objectives there is a lack of commoditization across administrative services and, as a result, transaction costs related to market exchanges remain high.

The point is, if we apply the logic behind the statement “IT doesn’t matter” broadly across the full spectrum of internal services, it becomes abundantly clear that there are many services, (in addition to the subset of IT-related services discussed earlier) which while critical, are not a source of competitive advantage.

IT-related services however, often tend to attract more attention because they seem to be less embedded or tightly coupled with the business of the organization (in large part due to the application of engineering principles and convergence towards best practices in the industry). This is often construed as being indicative of their declining importance to the business. But the degree of "embeddedness," or “tightness of coupling” may have more to do with the way the underlying business processes are designed than the relative strategic value of the service.

Value Streams

Business process reengineering attempted to address process efficiency by leveraging accumulated technological capability within the emerging digital corporation. The objective was to produce cost/quality advantages through horizontal integration and streamlining of internal business functions to create efficient, client-focused value streams within the organization. The scope of the exercise however was intra-organizational and the boundaries of the organization were largely unaffected.

Reengineering efforts tended to produce tightly coupled processes that became increasingly hard-wired with the implementation of custom enterprise resource planning and management systems. The development of commercial ERP systems did little to change this, as the degree of customization and the instance variations that resulted across organizations were considerable. While in many cases cost/quality advantages have been achieved through process reengineering efforts and the implementation of ERP systems, the net effect has been a set of hard-wired, deeply embedded, tightly coupled business processes. Arguably, these processes were rarely directly connected to any value-adding core competency of the organization.

Figure 3: A market-centric view of SOA and BPO.

More recently, similar efforts have been focused on front-office activities with the introduction of customer relationship management systems. This time around, the focus has been on client-facing business processes. The net effect again is a tendency toward tightly coupled internal business process logic. While many client-facing processes may be too important to externalize even if they are not directly related to the value-adding core competency of the corporation, the prevalence of for example third-party call centers suggests that “many” does not mean “all”.

It may appear as though this attempt to strategically position SOA in terms of improving business focus and leveraging market economies is beginning to sound like a lot of techno-garble for business process outsourcing (BPO). There is some truth to that in so much as the benefits delivered through BPO are much the same as those commonly ascribed to SOA. The overlap is in fact a good thing, as both BPO and SOA (keeping in mind that we are only discussing SOA from a core competency perspective this time around) are based on the same fundamental value proposition – competitive advantage through improved focus and economies of scale. The difference is that BPO is supply-side focused and SOA is demand-side focused; however, each represents a complementary part of the same equation, as illustrated in Figure 3.

Despite a compelling value proposition, BPO market growth has been roughly 10% per year for the last 3 years. Adjusting for general growth in the economy, real growth in the BPO market has been in the high single digit range. Given that BPO and SOA are considered complementary, this rate of growth, while reasonable, is hardly representative of the disruptive shift in thinking often attributed to SOA.

The problem is that BPO is a case of market supply anticipating demand. While the benefits of BPO are very compelling, for the reasons we have discussed, they are quickly offset by the transaction costs associated with the market exchange. SOA promises to address this by commoditizing the demand side, thereby driving down the transaction costs.

The Unavoidable Shift to Service-Orientation

In the first article [REF-3] of this series, I stated that the emergence of the digital market is precipitating a shift in mindset from business processes to business services as the fundamental building block of the corporation. The shift towards service orientation in IT is evident in the many case studies on the implementation of service-oriented technology and applications within IT enterprises.

These studies often result in the extension of select object-oriented principles beyond traditional application boundaries. The scope of the exercise has largely remained intra-organizational, albeit with the potential for eventually leveraging the external application services. These efforts are certainly worthwhile, but it is only when the scope of the exercise is expanded beyond the boundaries of the enterprise that the implications of service-orientation from a business architecture perspective become clear.

While SOA initiatives are important in so much as they deliver benefits related to improved reuse of existing technology assets, they must be firmly rooted within an overarching market-centric business strategy. If they are not, we can expect significant variation between SOA implementations and a lack of attention directed toward the commoditization of internal business processes necessary to leverage the external service-oriented market.

Organizations that recognize the opportunity of the digital market and develop market-centric business strategies will both drive and leverage the emergence of the service-oriented market. Those that hurry toward service-oriented technology in the absence of such a strategy may be trading short-term gain for longer-term pain. A lack of alignment with market standards will constrain their ability to compete within and/or leverage the emerging service-oriented market.

Our discussion so far firmly positions SOA in the corporate strategy domain - a perspective that tends to resonate with a business audience. Below is a summary of the key points:

The corporation is a set of inputs, processes, and outputs.

In the manufacturing sector, many inputs and outputs have been commoditized (high product efficiency) through the application of engineering principles. This has resulted in a horizontally integrated market of specialized corporations performing value-added functions along a value-chain from raw materials to consumer product. The resulting market structure enhances the ability of corporations to focus on core business and leverage market economies.

In the information services sector, inputs and outputs have not been commoditized to the same degree (low product efficiency), because service process and service product design do not typically ascribe to engineering principles. This translates into vertically integrated market structures with diffused business focus and limited economies of scale.

Both the manufacturing and service sectors have information-intensive processes that remain locked within the corporation. Though arguably not part of the core business, these processes represent significant operational cost and management distraction.

BPO and SOA are complementary disciplines that collectively enable the same fundamental value proposition: improved business focus and economies of scale. SOA promises to commoditize internal services that, coupled with BPO, drive the growth of the service-oriented market.

Service-oriented architectures implemented in the absence of an overarching market-oriented business strategy and target business architecture run the risk of limiting the opportunities to leverage the emerging service-oriented market. This can inhibit the realization of competitive advantages through improved business focus and economies of scale.

Conclusion

The core competency model is but one form of business strategy and organizational design to which SOA can deliver strategic value. At the opposite end of the spectrum are differentiation-based strategies, which are in some sense the antithesis of the core-competency model. These strategies will be discussed in the next installment of this series.

Understanding the Core Competency Model

For those of you new to the core competency model, here’s an example. Consider two fictional corporations: Acme Belt Company and ABC Belt Company. Both companies manufacture belts for sale in the consumer market. The Acme production processes include the construction of the belt, its buckle, and its final assembly as a market-ready
product.

ABC, on the other hand, purchases the belt and the buckle from Beaver Belt Supplies and Smith Buckle Manufacturing respectively, and then performs the final assembly for a market-ready product.

The cost structures and the unit costs for ACME and ABC are as follows:

In the example above the fixed cost structure of the ACME Belt Company results in a higher per unit cost than the variable cost structure of the ABC Belt Company. The difference in unit cost is a source of competitive advantage for ABC. Why is ABC able to purchase belts and buckles at a cost that is lower than ACME can produce them for? The answer lies within the cost structures of Beaver Belt Supplies and Smith Buckle
Manufacturing:

Because both Beaver and Smith corporations produce belts and buckles for multiple customers in belt and belt-related industries, they have much higher unit sales. Accordingly, the per unit cost of production is lower (economies of scale). As a result, they are able to sell the belts and buckles to ABC Belt Company for a price of $3.00 realizing a per unit profit of $1.00. ABC is able to leverage the market-based economies of scale by externalizing the belt and buckle manufacturing, and focusing instead strictly on assembly. They now enjoy a significant cost advantage over ACME belt supply.

Equally important however, are the benefits that accrue from their ability to optimize internal processes around product assembly. For example, because ABC has implemented a just-in-time inventory system with Beaver and Smith, their turn-around time on customer orders is days instead of weeks. For ACME to achieve the same level of operational efficiency they would have to stockpile excess inventory of manufactured belts and buckles, incurring additional inventory carrying costs, thereby increasing per unit costs.

The example of ACME and ABC demonstrate the relative competitive advantage of the core competency model related to improved business focus and leveraging of market-based economies of scale.

References

[REF-1] “IT Doesn’t Matter”, Nicholas G. Carr, Harvard Business Review, May 2003

[REF-2] “The End of Corporate Computing”, MIT Sloan Management Review, 2005

[REF-3] “Implications of SOA on Business Strategy and Organizational Design”, William Murray, The SOA Magazine, January 2007

Innovation: Core Competency for the 21st Century

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 14:56:00 +0000

by Robert B. Tucker

Despite the growing recognition that innovation is the only sustainable source of growth, competitive advantage, and new wealth, an Arthur D. Little survey of 669 global company executives found fewer than 25 percent of the companies believe innovation performance is where it needs to be if they are to be successful in the competitive marketplace. Having tried an endless array of alternatives, company leaders are now accepting enterprisewide innovation as a key operational discipline, just as in the past they adopted the disciplines of quality, planning, and management.

Of course, innovation is not a new discipline in most organizations. But the old ways, even those that may have worked in the '80s and '90s, are no longer adequate. Firms across the board are engaged in exciting experiments to reinvent the way they create the future, because "business as usual" hasn't produced the desired results.

Given the torrid pace of technological and global change, the commoditization of product lines and industries, and convergence of strategies, companies are literally having to reinvent how they accomplish the all-important task of "inventing the future." Having examined numerous companies and their innovation approaches for a forthcoming book, I believe that, winning firms will embrace the following four essential principles of managing innovation in the new century.

Principle No.1 - A company's approach to innovation must be comprehensive. One day in l977, an engineer at Canon put a hot soldering iron a little too close to an ink-filled syringe. The heat boiled a tiny amount of ink in the needle, expanding it into a gas, which pushed ink out the tip of the needle. The result of this accident was Canon's breakthrough bubble jet printing technology.

At Pfizer Pharmaceuticals, scientists attempting to produce a drug that would stimulate receptors in the human heart ended up stimulating receptors elsewhere in the human anatomy, giving rise to the impotence wonderdrug Viagra . NutraSweet, the artificial sweetener, was discovered when a research chemist working on an ulcer treatment, licked his finger to pick up a piece of paper and noticed the astonishingly sweet taste.

While spending millions and even billions of dollars annually on research, most companies innovation successes come about primarily by accident. And while serendipity will always play a role in innovation, most companies approach their innovation process in a piecemeal, haphazard fashion that is anything but comprehensive. This can backfire, as Gillette discovered.

Gillette powered through the previous decade largely on the strength of a breakthrough product: Sensor. Introduced in l990, the new shaving system kept imitators at bay with no fewer than 29 patents and men from Jakarta to Peoria to Paris raved about the closeness of the shave. Despite selling at a hefty price premium, Sensor outsold its nearest rival ten to one. Wisely wasting no time after Sensor's launch, Gillette began development of Sensor's offspring, Mach3, which was introduced in l998.

But Mach3, while a hit in North America, did not have the same impact on revenue growth or stock price for Gillette. The super-premium product sold poorly in financially depressed Asian countries, growth stalled, and suddenly Gillette was being mentioned as a takeover target. Formerly laudatory Wall Street analysts began focusing on Gillette's heretofore hidden weaknesses: ... inertia, inefficiency, mismanaged inventories and receivables, a Golbergian corporate structure cobbled together over years of acquisitions, it underperforming divisions.

The lesson of Gillette's sudden reversal of fortune is this: while breakthroughs like Sensor are beneficial, innovation must be promulgated in every area of the firm. Today, the practice of innovation is generally similar to how companies approached quality in the early 1980s. In those days, quality was a department - products were inspected before they were shipped. Now, quality is the responsibility of everyone in the organization. It has become systematized: "It's the way we do business around here." Today innovation is still confined to a few departments - primarily R&D or marketing. New ideas are almost always directed from the top down, rather than emerging from the bottom up, from suppliers, or from customers. But we are rapidly entering an era in which innovation, by necessity, must become everyone's responsibility.

To produce ongoing results, a small but growing number of firms are making innovation as much a responsibility of purchasing, operations, and human resources, as it is for new product development or marketing. It is not just a term to drop into the company's advertising and marketing, it must be part of the DNA of the organization. This deep commitment to innovation as a core competency doesn't preclude a company from purchasing smaller start-ups as part of its growth strategy. B&D (buy and develop) is quickly taking its place alongside R&D (research and develop) as part of company's comprehensive approach. But growth through acquisition is no substitute for a deep-seated commitment to home grown innovation, if those acquisitions are to bear fruit.

The only thing that separates you from your competitors are the skills, knowledge, commitment, and innovative abilities of your people. To win the competitive game, every company must strive to provide customers with a value proposition that is noticeably superior to the one you offered yesterday. To win, companies must respond to newly emerging customer needs with well designed products and services and business models that anticipate these needs. They must employ new technologies that reduce their cost of doing business, and allow for greater speed and customization.

For these reasons, innovation cannot be confined to one or two departments or farmed out to an elite group of star performers. Instead, it must permeate the entire company, and it must encompass new products, new services, new processes, new strategies, new business models, and the pursuit of new markets. It must be comprehensive.

Principle No.2 - Innovation must include an organized, systematic, and continual search for new opportunities. Back in the early 90s, AT&T's top brass allowed a small unit of its mammoth planning department to call itself the Opportunity Discovery Department, or ODD for short. This band of maverick thinkers gave itself the truly odd task of shaking up the giant company's thinking. One day in l995, members of the unit donned sandwich boards outside an important meeting which read: "what if long distance were free?"

While the question was dismissed as "ridiculous and irrelevant" at the time, today AT&T's long distance revenue is declining so rapidly that the company may sell off its long distance business in order to pursue faster-growing parts of its portfolio. Moral: today's seemingly irrelevant question could quickly become tomorrow's threat - or opportunity.

What methods do you and your company employ to detect changes that could spell doom - if appropriate action isn't taken, or boom, if they are. At firms that make innovation a core competence, specific systems and practices are in place that promote a deeper understanding of social, demographic and technological change. Delphi Thermal Systems, the Westport, N.Y. division of Delphi Automotive, has a Futures Council. Eastman Chemical in Kingsport, Tenn., has formed a think tanks to track the trends and ask searching questions such as: What do these developments mean to us? How might we take advantage of them? What threats are on the horizon that we must respond to now if we are to turn this change into an opportunity?

While such questions are traditionally the purview of senior management, the pace of change today requires broader participation. Forming opportunity-spotting teams allows people from all functional areas and all areas of the company to self-select for participation.

Beyond merely amassing data, such teams can be helpful in discovering hidden opportunities, and in "assaulting assumptions" that might preclude exploration from traditional departments. Creativity is valued in such teams, and is allowed to flow freely. Successful innovation means more than just hatching ideas. It means being able to move on those novel solutions and champion them into specific results that create tangible customer value, improve processes, and build new opportunities. Creativity and passion are required at the inception and during each phase along the way to deal with bureaucracy and inertia. From the smallest improvement to the "bet the company" mega-product, ideas depend on people's commitment to bringing them to fruition.

Futures councils or "opportunity SWAT teams" as they are sometimes called, won't guarantee you'll be a first mover on any trend. They won't guarantee you'll spot discontinuities. What they will do is provide an early warning system for imagination and innovation and creativity and dreaming to become a part of the fabric of the organization where none existed before. The trick then is to keep the momentum going, to sustain the enthusiasm.

Principle No.3 - Organizations must involve everyone in the innovation process. Today, the vast majority of organizations don't pay their people to innovate. In fact, they don't even expect them to think! Nearly two thirds of 641 managers and hourly workers surveyed by consultant Kepner-Tregoe of Princeton, New Jersey, said their companies don't use even half their brainpower. More than 70 percent compared their organizations to a "slow moving truck" blaming the condition on a failure to involve employees in decisions and a lack of training or rewards. Many jobs have actually been designed to eliminate the thinking component altogether, and not just entry level jobs either. Then, in the midst of a crisis, employees are asked to suddenly be creative, to "think outside the box," and management is underwhelmed by the results.

In the innovation economy, this dormant creativity must be tapped. Unleashing people's ability to solve problems and create opportunities becomes paramount to survival. Teaching people how to "work the system" in an organization, and to champion their ideas toward implemented solutions is quickly becoming the real work of forward-looking training departments.

A few companies have known this all along. Akio Morita, the founding chairman of Sony, believed that a company would never rise to its potential if all the thinking was left to management. "Everybody in the company must contribute," Morita wrote in his book, Made in Japan, "and for the lower-level employees their contribution must be more than just manual labor. We insist that all of our employees contribute their minds."

Beyond a seldom-used suggestion system for cost-saving ideas, most companies have no organized method for stimulating or harvesting the good ideas of their most valuable resource, their people. Not so at companies that are architected for continuous, all-enterprise innovation. Some of Dana Corporation's plants receive 3.5 ideas per month, per employee, with a 75 percent implementation rate. At Disney, a thrice-yearly Gong Show, where anyone in the company can pitch a new concept, is the forum where the company's retail format was first proposed by an employee. At London-based Virgin Group, a flight attendant who didn't like how she was treated in planning her own wedding, that led Alisa Petchey to pitch the idea through the company's Speak Up Program.

Not all ideas that people come up with will be useful. Many will be redundant, self-serving, and absolutely useless. But not to have an organized method for harvesting ideas is tantamount to erecting a billboard at the entrance to your company announcing, "If we had wanted your ideas, we would have asked for them."

Principle No.4 - A company must work constantly on improving its climate for innovation. The word culture is generally used to describe a company's values, traditions, priorities, and paradigms. A company's culture may be centered on spreading its service ethic, "going the extra mile for the customer," or its fierce commitment to quality, or engendering loyalty to "the company way," while its climate may stifle innovation by fostering too much loyalty and an unwillingness to make a mistake or take a risk.

To gauge the climate in your firm ask yourself these questions: What happens to creative, out-of-the-box mavericks in your company? What happens when someone fails? How many people say to employees, "We want you to take risks, and we want innovative ideas bubbling forth. And, by the way, we also want you to make your numbers, and we don't want any embarrassing failures." Unfortunately, only the latter half of that message gets communicated. The first half falls on deaf ears.

There are at least three possible responses to a "failure." You can: a) cover up the failure and refuse to acknowledge it. You can, b) acknowledge the failure, assign blame, or c) you can acknowledge the failure, make every effort to learn from it, and share the learning broadly. Innovative companies are above all, learning organizations. They realize that the degree of learning is directly related to the degree of open acknowledgement of the failed effort, and what happens to those associated with the "failure" says everything about who ventures forth in the future.

Unleashing an innovative climate has little to do with sending employees to rah-rah creativity seminars. It has more to do with how "innovative activity" is looked upon by management - the emphasis it is given, the role it takes in the organization's collective conscience, and people's views of what behaviors management genuinely expects.

Climate is the "feeling in the air" that you get when you visit a company. That climate is created by practices, procedures, and rewards. If the climate is favorable for innovation, you will sense that everyone is eager for the organization's advancement - to reach a milestone that has never been met; in other words advancing toward a specific stretch goal, whether it's a new product, a new business model, or opening a new market. The organization is in a state of becoming, rather than a state of being. It is creating the future rather than managing the past.

The organization with a favorable climate for innovation is one that provides the context for people to collaborate in groups, teams, divisions, and departments without boundaries or fear. And since innovation is really a process of problem-solving, this informal networking can't be limited only to internal sources. A team of researchers at Rensselaer Polytechnic Institute (RPI) in Troy, N.Y., conducted extensive field interviews with the teams involved in such breakthrough projects as GE's digital X-ray, Texas Instrument's digital light projector, GM's hybrid vehicle, IBM's silicon-germanium devices, and DuPont's biodegradable polymer. The research found that informal networks were critical in all 11 of the breakthrough projects. The networks were not confined to the R&D community, but operated between R&D and the business units, and between R&D and outside constituents: customers, suppliers and governmental agencies. These contacts helped give early validation to the idea's potential and generate political and financial support. They also helped to provide access to scarce resources, friendly customers, and government funding.

The new century promises to bring more change, more complexity and more competition. The expectations of customers and Wall Street will continue to rise. But companies that pay attention to strengthening this core competency have nothing to fear - and everything to gain.

Robert Tucker is president of The Innovation Resource, an innovation consulting firm based in Santa Barbara, Calif. (www.innovationresource.com). A frequent keynote speaker at conferences, he is the author of Driving Growth Through Innovation: How Leading Firms Are Transforming Their Futures.

source: http://www.innovationresource.com/

Core competency

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 14:33:00 +0000

A core competency is something that a firm can do well and that meets the following three conditions specified by Hamel and Prahalad (1990):

It provides customer benefits
It is hard for competitors to imitate
It can be leveraged widely to many products and markets.

A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture such as employee dedication. Modern business theories suggest that most activities that are not part of a company's core competency should be outsourced.

If a core competency yields a long term advantage to the company, it is said to be a sustainable competitive advantage.

Development of the Concept

The concept of core competencies was developed in the management field. C.K. Prahalad and Gary Hamel introduced the concept in a 1990 Harvard Business Review article. They wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." As an example they gave Honda's expertise in engines. Honda was able to exploit this core competency to develop a variety of quality products from lawn mowers and snow blowers to trucks and automobiles. To take an example from the automotive industry, it has been claimed that Volvo’s core competency is safety. This however is perhaps the end result of their competency in terms of customer benefit. Their core competency might be more about their ability to source and design high protection components, or to research and respond to market demands concerning safety.

Ever since Prahalad and Hamel introduced the term in the 1990’s many researchers have tried to highlight and further illuminate the meaning of core competency. According to D. Leonard-Barton, "Capabilities are considered core if they differentiate a company strategically." On the other hand Galunic and Rodan (1998) argue that "a core competency differentiates not only between firms but also inside a firm it differentiates amongst several competencies. In other words, a core competency guides a firm recombining its competencies in response to demands from the environment."

Individual versus Core Competencies

It is important to distinguish between individual competencies or capabilities and core competencies. Individual capabilities stand alone and are generally considered in isolation. Gallon, Stillman, and Coates (1995) made it explicit that core competencies are more than the traits of individuals. They defined core competencies as "aggregates of capabilities, where synergy is created that has sustainable value and broad applicability." That synergy needs to be sustained in the face of potential competition and, as in the case of engines, must not be specific to one product or market. So according to this definition, core competencies are harmonized, intentional constructions.

Coyne, Hall, and Clifford (1997) proposed that "a core competence is a combination of complementary skills and knowledge bases embedded in a group or team that results in the ability to execute one or more critical processes to a world class standard." Two ideas are especially important here. The skills or knowledge must be complementary, and taken together they should make it possible to provide a superior product."

For example, Black and Decker's core technological competencies pertain to 200 to 600 W electric motors, and this motor is their core product. All of their end products are modifications of this basic technology (with the exception of their work benches, flash lights, battery charging systems, toaster ovens, and coffee percolators).

They produce products for three markets:

the home workshop market: In the home workshop market, small electric motors are used to produce drills, circular saws, sanders, routers, rotary tools, polishers, and drivers
the home cleaning and maintenance market: In the home cleaning and maintenance market, small electric motors are used to produce dust busters, etc.
the kitchen appliance market: In the kitchen appliance market, small electric motors are used to produce can openers, food processors, blenders, bread makers, and fans.

Characteristics of Core Competencies

There are three tests for Core Competencies

Potential access to a wide variety of markets - the core competency must be capable of developing new products and services
A core competency must make a significant contribution to the perceived benefits of the end product.
Core Competencies should be difficult for competitors to imitate. In many industries, such competencies are likely to be unique

References

Coyne, Kevin P.; Hall, Stephen J. D.; Clifford, Patricia Gorman (1997) "Is your core competence A MIRAGE?", McKinsey Quarterly, 1997 Issue 1, p40-54, 15p, 1c; (AN 9707212358)
Gary Hamel and C. K. Prahalad, (1990) "The Core Competence of the Corporation", Harvard Business Review, vol. 68, no. 3, May-June 1990, pp 79-93.
Galunic, D.C. and Rodan, S. (1998). "Resource recombinations in the firm: knowledge structures and the potential for Schumpeterian innovation". Strategic Management Journal vol 19. p. 1193-1201.
Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading Multinational Companies", California Management Review, vol 40, no. 4, pp. 117-132.

source: http://en.wikipedia.org/

strategy - core competencies

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 13:48:00 +0000

Introduction

Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage.

The Work of Hamel and Prahalad

The main ideas about Core Competencies where developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a best-selling book - Competing for the Future. Their central idea is that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth.

n the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible - indeed, they'll have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel 1990

These areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products.

For example, for a manufacturer of electronic equipment, key areas of expertise could be in the design of the electronic components and circuits. For a ceramics manufacturer, they could be the routines and processes at the heart of the production process. For a software company the key skills may be in the overall simplicity and utility of the program for users or alternatively in the high quality of software code writing they have achieved.

Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.

Identifying Core Competencies

Prahalad and Hamel suggest three factors to help identify core competencies in any business:

What does the Core Competence Achieve?	Comments / Examples
*Provides potential access to a wide variety of markets*	The key core competencies here are those that enable the creation of new products and services. Example: Why has Saga established such a strong leadership in supplying financial services (e.g. insurance) and holidays to the older generation? Core Competencies that enable Saga to enter apparently different markets: - Clear distinctive brand proposition that focuses solely on a closely-defined customer group - Leading direct marketing skills - database management; direct-mailing campaigns; call centre sales conversion - Skills in customer relationship management
*Makes a significant contribution to the perceived customer benefits of the end product*	Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for? Example: Why have Tesco been so successful in capturing leadership of the market for online grocery shopping? Core competencies that mean customers value the Tesco.com experience so highly: - Designing and implementing supply systems that effectively link existing shops with the Tesco.com web site - Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient - Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling)
*Difficult for competitors to imitate*	A core competence should be "competitively unique": In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as "core", a competence should be something that other competitors wish they had within their own business. Example:Why does Dell have such a strong position in the personal computer market? Core competencies that are difficult for the competition to imitate: - Online customer "bespoking" of each computer built - Minimisation of working capital in the production process - High manufacturing and distribution quality - reliable products at competitive prices

A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence, as it will not differentiate the business from any other similar businesses. For example, a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However it is possible to develop such a process into a core competence with suitable investment in equipment and training.

It follows from the concept of Core Competencies that resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.

source: http://tutor2u.net/

Benchmarking - Uncovering Best Practices and Learning from Others

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 13:48:00 +0000

By: Dave Trimble

"Competitor and customer benchmarks may be the most underused motivators in the management's administrative tool kit"
—Hamel and Prahalad, Competing for the Future

Overview

Have you ever asked yourself these questions:

"How are we doing?"

"Are we tracking the right measures?"

"How do we compare with others?"

"Are we making progress fast enough?"

"Are we using the best practices?"

Benchmarks and benchmarking can provide you with facts to answer these questions. They can provide you with data to show you what can be achieved. Perhaps more important, benchmarking can tell you how you can achieve the same type of results! In short, benchmarking gives you the external references and the best practices on which to base your evaluations and to design your work processes.

This tutorial provides an overview of how to implement benchmarking in your organization specifically, what you need to do and how to go about it. The tutorial starts with an introduction and some definitions and then gives a high level view of a benchmarking process, from both a results and a process focus.

Benchmarking: What is it?

"... benchmarking ...[is] ...'the process of identifying, understanding, and adapting outstanding practices and processes from organizations anywhere in the world to help your organization improve its performance.'"
—American Productivity & Quality Center

"... benchmarking ...[is]... an on-going outreach activity; the goal of the outreach is identification of best operating practices that, when implemented, produce superior performance."
—Bogan and English, Benchmarking for Best Practices

Benchmark refers to a measure of best practice performance. Benchmarking refers to the search for the best practices that yields the benchmark performance, with emphasis on how you can apply the process to achieve superior results.

All process improvement efforts require a sound methodology and implementation, and benchmarking is no different. You need to:

Set objectives and define the scope of your efforts
Gain support from your organization
Select a benchmarking approach
Identify benchmarking partners
Gather information (research, surveys, benchmarking visits)
Distill the learning
Select ideas to implement
Pilot
Implement

The Code of Conduct

Benchmarking can be fraught with potential problems, ranging from simple misunderstandings to serious legal problems. To minimize the likelihood of these types of difficulties, we strongly recommend that teams follow the simple Code-of-Conduct scripted by the International Benchmarking Clearinghouse.

Legality

Don’t enter into discussions or act in any way that could be construed as illegal, either for you or your partner. Potential illegal activities include, for example, such simple actions as discussing costs or prices, if that discussion could lead to allegations of price fixing or market rigging. The process of how you arrive at prices may be acceptable, while discussion of actual costs and prices may not.

Exchange

Don’t ask questions of your benchmarking partner that you are not willing to answer yourself ¾ to the same level of detail. It helps to fully disclose your level of expectations with regard to the exchange early on in your discussion.

Confidentiality

Treat the information you receive from your partners with the same degree of care that you would for information that is proprietary to your organization. Many organizations may not even want you to disclose that you have had such discussions with them. In this regard, you may want to consider entering a non-disclosure agreement with your benchmarking partner; consult your legal staff.

Use of Information

Don’t use the benchmarking information you receive from a partner for any purpose other than that to which you have agreed.

Contact

Don’t go beyond the mutually agreed-on procedures that govern whom you will interact with in your partner’s organization. Comply with their wishes and culture.

Preparation

Be prepared for your meetings and exchanges. Doing so increases your efficiency and effectiveness, and that of your partners as well. It promotes an air of professionalism.

Completion

Don’t make commitments you can’t or don’t keep. Complete your work to everyone’s satisfaction, including that of your partner.

Understanding

Benchmarking’s Golden Rule: treat your partner and their information the way you’d like them to treat you and yours.

Types of Benchmarking

There are essentially three types of benchmarking: strategic, data-based, and process-based benchmarking. They differ depending on the type of information you are trying to gather. Strategic Benchmarking looks at the strategies companies use to compete. Benchmarking to improve improvements in business process performance generally focuses on uncovering how well other companies perform in comparison with you and others, and how they achieve this performance. This is the focus of Data-based and Process-based Benchmarking.

Sources of Information

Isn't really useful and important information proprietary (private)? Not always.

First, there's tons of information out there in the public domain, some because, by law, it has to be disclosed and others, by choice, because of a company's desire for publicity. Second, people are proud of the good things they are doing and are usually quite willing to talk about them in some context, whether it's a technical paper, a panel discussion, or in sales information to vendors and customers. And third, you're not the only person who has a problem that needs to be solved. Exchanging information in a benchmarking partnership allows each of you to gain what you need for the price of sharing what you already have.

Who can you get data from? Look at getting information from other divisions, competitors, other companies with divisions that perform the same functions that you are, and vendors, an often over-looked source, as well as from more traditional information sources of "secondary data" such as libraries and data bases.

For example, you could go from the secondary-data analysis directly to several telephone interviews. You could stop there, or proceed to a teleconference and then a site visit, go directly to a site visit, if that's deemed appropriate.

Note the relationship and the flexibility that results with a multi-faceted approach (benchmarking is not just visiting others; it's not industrial tourism). It's gathering information about best practices by any and all appropriate means and applying it to help achieve superior performance.

A Benchmarking Process

Now that we have the basic objectives and the definitions, we need a process to achieve the objectives; such a process provides the means for achieving the ends outlined by our objectives.

Defining and Planning the Project

You need to define the project in precise terms and develop a complete, yet simple, project plan. Start with a preliminary plan and build it over time to the appropriate level of preciseness. Such a plan should include a way to measure your success. A project like benchmarking is like (and should probably be managed like) any other project you undertake. Be sure to include in your project plan items such as project objectives, scope, approach, timeline, and budget.

Understanding Where You Are

In order to utilize information about how others are doing, you need to first understand how you are doing or, at least, how you would like to be doing. This requires that you have performance measures or Metrics, so that you can judge how you are doing.

Given these measures, you can use them to help organize your project and to select your benchmarking partners. You can use these measures to guide your search for secondary data, to help generate your preliminary questionnaire, and to conduct a preliminary survey to narrow the field in your search for potential partners.

Understanding Where You Can Be

Based your preliminary studies, you need to select potential partners, ascertain their willingness to participate, and develop your final questionnaire. The questions should help you focus on the specifics of what you want to learn.

To get the most out of an exercise like this you have to have the "right" people participate, both from your team, as well as those of your partners. The right people means the best combination of technical and people skills so that you can both elicit and understand the information you are gathering.

Once you have your team, you can proceed to schedule and conduct the information exchanges with the several partners you've identified.

Two points to remember:

Benchmarking is a search for how, as well as how much. To replicate results in your organization you need to understand how they have been achieved by others, and
Benchmarking need not require you to visit others. You can achieve the results in many ways, depending on the time and resources available to you. The following chart outlines several alternatives for conducting exchanges. As more time and resources are available and as the need increases, you can elect to use the more sophisticated and time-consuming processes.

It is through these processes that you gather the data to determine where you can be.

And the next question is, "How soon can I expect to see some results?" The following table gives some ideas of time frame, based on our experience.

How Soon You Need Results	Benchmarking Alternatives
Within a week	Reading library research Surfing the web Telephone interviews
One to two weeks	Research by a professional librarian Hire a consultant
Three to six weeks	Rapid Benchmarking* Traditional site visit (2 or 3 sites only)
Two or more months	Traditional benchmarking

Identifying Lessons Learned

Now that you know how others are doing, you can use the data to understand how you can improve. The most straight-forward way is to assess where there are gaps between your performance and that of your benchmarking partners. Further, you can use these assessments to identify best practices, in particular ones you'd like your organization to adopt.

Applying the Lessons Learned

You are ready to begin implementing what you've learned. This is the "next step."

This is where the rubber hits the road. You've learned what others are doing and how they are doing it. You need to ensure that all relevant staff in you reorganization is aware of and can make use of what you've learned. Your report and your presentations may in fact be one of the most important activities in your project.

Summary

We've defined benchmarking and provided an overview of a process that you can follow. The process allows you to understand where you are and where you can be, and then provides a view of how you can identify the lessons learned in your study. These are the best practices. They are what you can form the basis for improving your process for moving it to where it needs to be.

source: http://www.isixsigma.com/

strategy - benchmarking

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 13:30:00 +0000

Definition

Benchmarking is the process of identifying "best practice" in relation to both products (including) and the processes by which those products are created and delivered. The search for "best practice" can taker place both inside a particular industry, and also in other industries (for example - are there lessons to be learned from other industries?).

The objective of benchmarking is to understand and evaluate the current position of a business or organisation in relation to "best practice" and to identify areas and means of performance improvement.

The Benchmarking Process

Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organisation or in key areas of the business environment.

Application of benchmarking involves four key steps:

(1) Understand in detail existing business processes

(2) Analyse the business processes of others

(3) Compare own business performance with that of others analysed

(4) Implement the steps necessary to close the performance gap

Benchmarking should not be considered a one-off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of ever-improving best practice.

Types of Benchmarking

There are a number of different types of benchmarking, as summarised below:

ype	Description	Most Appropriate for the Following Purposes
Strategic Benchmarking	Where businesses need to improve overall performance by examining the long-term strategies and general approaches that have enabled high-performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Changes resulting from this type of benchmarking may be difficult to implement and take a long time to materialise	- Re-aligning business strategies that have become inappropriate
Performance or Competitive Benchmarking	Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality.	_ Assessing relative level of performance in key areas or activities in comparison with others in the same sector and finding ways of closing gaps in performance
Process Benchmarking	Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organisations that perform similar work or deliver similar services. Process benchmarking invariably involves producing process maps to facilitate comparison and analysis. This type of benchmarking often results in short term benefits.	- Achieving improvements in key processes to obtain quick benefits
Functional Benchmarking	Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements.	- Improving activities or services for which counterparts do not exist.
Internal Benchmarking	involves benchmarking businesses or operations from within the same organisation (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is easier; standardised data is often readily available; and, usually less time and resources are needed. There may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organisation. However, real innovation may be lacking and best in class performance is more likely to be found through external benchmarking.	- Several business units within the same organisation exemplify good practice and management want to spread this expertise quickly, throughout the organisation
External Benchmarking	involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge". This type of benchmarking can take up significant time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations.	- Where examples of good practices can be found in other organisations and there is a lack of good practices within internal business units
International Benchmarking	Best practitioners are identified and analysed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalisation and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences	- Where the aim is to achieve world class status or simply because there are insufficient"national" businesses against which to benchmark.

source: http://www.tutor2u.net/

How Does YOUR Call Center Stack Up?

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 13:25:00 +0000

How world-class call centers use benchmarking to continuously improve their performance.

By Jeff Rumburg, MetricNet

Benchmarking is a well-established tool for measuring and managing call center performance. Effective benchmarking enables you to quantify the performance of your call center, compare your call center to others in your industry, identify performance gaps, and define the actions necessary to close the gaps.

The power of benchmarking is that it enables a company's call center to save enormous amounts of time and energy by building upon the know-how of its peers, competitors and world-class companies. Call centers that are focused exclusively on their internal operations tend to make progress at an evolutionary pace. But benchmarking forces an organization to look externally -- at the competition. By studying the competition, and selectively adopting practices from the best-of-the-best, call centers that successfully employ benchmarking are able to improve their performance at a revolutionary pace.

In this article, MetricNet, a leading source of online benchmarks and a pioneer in call center benchmarking, provides a working definition of benchmarking, defines a proven methodology for achieving world-class performance through benchmarking, and discusses the key success factors for effective benchmarking.

The Origins of Benchmarking

In 1989 Xerox Corporation won the Malcolm Baldrige National Quality Award. The Baldrige Award is the most prestigious recognition of quality bestowed upon an American company, and for Xerox it represented the culmination of a long struggle back to preeminence in the worldwide copier business.

Although Xerox dominated the copier market until the mid-1970s, by 1980 the company had been so devastated by foreign competition that its very survival was threatened. Xerox's fall was so quick, and so decisive, that most believed the company would not survive the 1980s. The company did survive, of course, but few people are aware of the crucial role that benchmarking played in Xerox's return to preeminence.

In fact, benchmarking was the linchpin of Xerox's success in the 1980s and beyond. During a decade when most American companies were under attack for the poor quality of their goods and services and when most companies lost market share to their foreign rivals, Xerox actually tripled its market share, improved the quality of its products as much as one hundredfold, and reduced its production costs by more than fifty percent.

Nothing so starkly illustrates the power of benchmarking as the renewal of Xerox Corporation. Although few companies today are as bad off as Xerox was in 1979, and few markets are as competitive as the copier business was in the 1970s, benchmarking is not just a tool for the "down-and-out." It has been applied with equal effectiveness in successful companies and in companies that are struggling. It has helped companies realize dramatic gains in industries as disparate as chemicals and banking, and in functions as far reaching as R&D and customer service. The complete story of Xerox's rebirth through benchmarking is chronicled by Robert Camp in his book, Benchmarking: The Search for Industry Best Practices That Lead to Superior Performance.

Since Xerox pioneered the formal methodology of benchmarking in the 1980s, the concept has been adopted by corporations worldwide. And with good reason: Applied properly, benchmarking has the potential to completely transform an organization and accelerate along the path to world-class performance.

Benchmarking Defined

Benchmarking is the art of improving your performance by observing, studying, and internalizing the practices of your strongest competitors. The concept is not new. It has been around since the time Neanderthals tried to emulate the more successful Cro-Magnon by fabricating hunting tools from stone. But the rigorous discipline of benchmarking is new. Since the early 1980s, the practice of benchmarking has grown explosively, fueled by high-visibility success stories like the Xerox turnaround, and the meteoric rise of General Electric whose market value increased by more than $400 billion under the stewardship of Jack Welch and the aid of benchmarking.

Benchmarking is a common sense process that most people engage in every day without realizing it. At work, we monitor the performance of our peers, compare our own career progress and modify our behavior based upon what's working for those around us. Likewise on the golf course, we study the grip, swing, and stance of the best player on the course for clues on how to improve our own game. In fact, any time we observe and learn from someone who is more accomplished than ourselves, we perform a rudimentary form of benchmarking.

Any function within a company can benefit from benchmarking. It is not unique to manufacturing, R&D, sales, or any other activity. In fact, some of the greatest benchmarking success stories come from the ranks of the call center industry, where many companies have built a formidable service-based competitive advantage through the continuous practice of benchmarking.

What Cost? What Benefit?

As in any business undertaking, it is important to ask what benefit one might expect to gain from benchmarking the call center, and what the costs of benchmarking will be. Historically, due to a relative dearth of benchmarking data, the cost of performing a call center benchmark was quite high. It was not uncommon for a company to pay $100,000 or more for a comprehensive call center benchmark. Fortunately, through the creation of large-scale benchmarking databases, companies like MetricNet have reduced this cost by an order of magnitude, and a high quality call center benchmark can now be had for under $10,000. The removal of this financial constraint puts benchmarking within the reach of virtually any call center. Now, the biggest cost in benchmarking is no longer the price paid to an outside benchmarking firm, but rather the cost of the internal resources required to conduct the benchmark. The time and effort required for successful benchmarking is not insignificant; it can run into the hundreds of hours if not properly managed. As will be discussed in more detail below, the most resource-intensive step in the process is data collection. It is critical to factor this "cost" into any benchmarking effort, as failure to do so will almost certainly doom any benchmarking project from the outset.

The question of benefits is a more difficult one to answer since the payoff from benchmarking won't be known until the benchmark has been completed. However, what we can say is that the benefits of call center benchmarking come in two forms: lower costs, and higher quality levels. In one recent call center benchmark completed by MetricNet, an energy utility learned how to reduce their call handle time by 25 seconds, increase the number of agent-less calls by 8% through greater IVR usage and improved their agent utilization by 4% through improved workforce scheduling. In combination, these findings reduced the cost per call from $6.44 to $5.11. At 1.2 million calls per year, these relatively easy-to-implement actions saved the company $1.6 million annually. All for an investment of less than $10,000!

In addition to cost savings, many call centers that perform benchmarking are also looking for ways to improve their quality of service. This can be measured in numerous ways, including improved service levels, quicker handle times and improved resolution rates. But the ultimate judge of quality is the customer, and any improvement in service levels must result in higher levels of customer satisfaction to be of any value.

Figure 1 below illustrates two of the benefits of benchmarking. Performed correctly, benchmarking can simultaneously reduce costs while improving the overall quality of customer service.

The Benchmarking Approach

Although benchmarking is a rigorous, analytical process, it is relatively straightforward. The basic approach is illustrated in Figure 2 below.

More specifically, there are seven steps in the benchmarking process, including:

1. Select the area to be benchmarked. Since we are talking about benchmarking the call center, this step is a foregone conclusion.

2. Identify key performance metrics to benchmark and compare. The metrics for call center benchmarking fall into seven categories: cost metrics, which include cost per call; productivity metrics, which include agent utilization; service level metrics, which include the percent of calls answered within 30 seconds; quality metrics, which include customer satisfaction; call handling metrics which include call handle time; agent metrics, which include annual turnover; and finally salary metrics, which includes average salaries for key positions in the call center. Although not a comprehensive listing, these are some of the key metrics that should be included in any call center benchmark.

3. Select the benchmarking peer group. This is critical for ensuring a fair, apples-to-apples comparison of data. Typically, but not always, the benchmarking peer group will be composed of other companies in your industry. In the case of the call center, a lot can be learned by benchmarking companies from outside your immediate industry, so it is not uncommon to see multiple industries represented in a call center benchmark.

4 and 5. Collect the peer group data, and collect your own call center data. Thorough and accurate data collection is the cornerstone of successful benchmarking. This is also the most time consuming step in benchmarking. It is therefore critical to rigorously define each metric, and ensure that all call centers in the benchmark interpret the data collection questionnaire in the same way. As Illustrated in Figures 3 and 4 below, this step gets to the heart of benchmarking, and enables you to identify the performance gaps in your own call center.

6. Develop Strategies for Improved Performance. Without an action plan to improve performance, benchmarking is a pointless exercise. Ironically, this is one of the simplest steps in the benchmarking process, but it adds the most value.

7. Implement and Monitor Results. Once the strategies for improved performance have been identified, you are in a position to implement your action plan. Additionally, as illustrated in Figure 5 below, the results of your benchmark can be imported into a simple scorecard that allows you to track and trend your performance over time. This is where the payoff comes, so don't shortchange this step!

Key Success Factors for Effective Benchmarking

Over the past eighteen years, the principals of MetricNet have conducted several thousand benchmarks, including hundreds in the call center industry. During this time, we have learned a number of important lessons that might be helpful for any call center wishing to improve its performance through benchmarking. These include:

The widespread practice of benchmarking. As a proven management tool, benchmarking is now employed by most corporations worldwide. However, the practice of benchmarking is not nearly as widespread among call centers. Perhaps this is because many companies view the call center as a "support function", where no competitive advantage can be gained. Or perhaps it is because many call centers today are so busy focusing on fighting fires and mere survival, that they have no time to position themselves for world-class leadership tomorrow. The reality, however, is that many companies have built a sustainable competitive advantage in their call centers by improving customer loyalty and retention through benchmarking. Tomorrow's requirements for survival -- and leadership -- demand benchmarking today!
Prerequisites for successful benchmarking. A number of factors go into a successful benchmarking project, but the two most important are 1) internal management support, and 2) adequate resources to get the job done. The importance of management support should be self-evident, but too many call centers embark upon benchmarking without understanding the level of resources required to get the job done. As previously mentioned, a handful of industry experts offer a quality call center benchmark for under $10,000, but even with outside assistance, a significant internal time commitment must be made to ensure the success of your benchmark. Between planning and managing a benchmarking project, collecting the data, working with an outside consultant, and developing a workable action plan, you can expect to spend at least a hundred hours on your call center benchmark. And this does not include the implementation of your action plan, which can add substantially to the total.
Call center managers often grapple with fear issues when considering benchmarking. Indeed, benchmarking can be confusing, intimidating and stressful if approached incorrectly. Outsourcing or downsizing decisions tied to poor performance, the significant resources required of a benchmarking effort, and the lack of actionable results are major concerns. At the beginning of the benchmarking process, organizations must address such concerns by involving all affected parties, clearly communicating the goals and benefits of benchmarking, setting realistic expectations of the results, and establishing a rigorous approach to managing the benchmarking process.
The importance of acting on your findings. Sadly, many call centers that perform benchmarking fail during the implementation stage because they simply do not act upon the findings of their benchmark. This problem is easily remedied by ensuring -- ahead of time -- that you have adequate management support and resources to implement the actions dictated by your benchmark.
Success stories from the industry. Over the years, we have witnessed literally hundreds of benchmarking success stories. These span the gambit, from call centers that are already world-class, yet still manage to continuously improve their performance through benchmarking, to global enterprises that have literally redefined their industries by building a service-based competitive advantage in their call center. You too can achieve this level of success by taking the initiative to benchmark your call center!

Conclusion

Benchmarking is a proven, analytical process that has helped literally thousands of call centers dramatically improve their performance. The benefits achieved from benchmarking are directly proportional to the time and effort invested in the process. Although it is no panacea, call centers that engage in benchmarking on an ongoing basis eventually achieve world-class levels of performance by continuously reducing their costs, while simultaneously improving the quality of services offered to their callers.

It is a given that people, process and technology are in constant flux. Businesses will become increasingly competitive, technology will become more ubiquitous and usable, and the inexorable rise in customer expectations will make continuous quality improvement a necessity. All of this makes benchmarking an imperative because it marks the path to world-class performance for your call center.

"In a visionary company, [continuous improvement] is an institutionalized habit -- a disciplined way of life -- ingrained into the fabric of the organization and reinforced by tangible mechanisms that create discontent with the status quo," stated J. Collins and J. Porras in Built To Last. The world-class call centers of tomorrow are the visionaries of today; they stimulate change to constantly deliver value.

That is the essence of benchmarking. It is not just a comparative exercise. Benchmarking involves comparing your performance to others and asking, "How did they achieve a higher level of customer satisfaction? How did they get to a lower cost per call? How did they drive customer loyalty by virtue of the call center portal?" That is what we are after here. Inasmuch as the call center has historically been viewed as a "non-core" activity, the field is wide open for forward thinking call center managers to take the initiative and build a service-based competitive advantage through benchmarking!

source: http://www.callcentermagazine.com/

Benchmarking

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 12:38:00 +0000

Benchmarking (also "best practice benchmarking" or "process benchmarking") is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This then allows organizations to develop plans on how to adopt such best practice, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to challenge their practices.

A process similar to benchmarking is also used in technical product testing and in land surveying. See the article benchmark for these applications.

Advantages of benchmarking

Benchmarking is a powerful management tool because it overcomes "paradigm blindness." Paradigm Blindness can be summed up as the mode of thinking, "The way we do it is the best because this is the way we've always done it." Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness. It helps crack through resistance to change by demonstrating other methods of solving problems than the one currently employed, and demonstrating that they work, because they are being used by others.

Competitive benchmarking

Some authors call benchmarking "best practices benchmarking" or "process benchmarking". This is to distinguish it from what they call "competitive benchmarking". Competitive benchmarking is used in competitor analysis. When researching your direct competitors you also research the best company in the industry (even if it serves a different location).

ADVANTAGE OF THE BENCHMARKING FOR A COMPANY:

1. A better understanding of the waits(expectations) of the customer because it is: based on the reality of the market estimated in a objectivist way

2. A better economic planning of the purposes and the objectives to achieve in the company because they are: centred on what takes place outside controlled and mastered.

3. A better increase of the productivity: resolution of the real problems Understanding of the processes and what they produce "

4. Better current practices Search for the change Many decisions practices of break

5. A better competitiveness thanks to: a solid knowledge of the competition a strong implication of the staff new ideas on practices and tried techniques

Benchmarking has consequences which are beyond the process itself: it reforms all the levels of the company.; modifies the process of manufacture of the product leads(drives) ; also reforms the hierarchical organization of the company, the product itself, and the state of mind of the employees.

Collaborative benchmarking

Benchmarking, originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (eg subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association.

Procedure

Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, reengineering analysis, process mapping, quality control variance reports, or financial ratio analysis.
Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.
Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

Cost of benchmarking

Benchmarking is a moderately expensive process, but most organizations find that it more than pays for itself. The three main types of costs are:

Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labour time.
Time costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
Benchmarking database costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

source: http://en.wikipedia.org/

Creating Value through Strategic Supply Management

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 05:07:00 +0000

John Blascovich is a vice president in A.T. Kearney's New York office.

Larry Kohn is a vice president in A.T. Kearney's Chicago office.

Bill Markham is a principal in A.T. Kearney's Chicago office.

Tom Slaight is a vice president in A.T. Kearney's New York office.

2004 Assessment of Excellence in Procurement

When are cutting costs and improving quality not enough? CEOs from around the world say that the time has come to do more. According to A.T. Kearney’s 2004 Assessment of Excellence in Procurement, senior executives expect procurement to go well beyond its traditional role. Rather than focusing solely on cost reduction, they see procurement’s greatest challenge as capturing value from the supply market. This view represents a huge advance in understanding procurement’s potential: In 1999, 28 percent of supply management organizations had goals in the area of value creation, but by 2004 that figure increased to 66 percent.

Supply management’s move into prominence is a phenomenon that crosses national boundaries and industry lines, as the range of study participants attests: North America accounts for 28 percent of the study’s 307 participants; Europe, 45 percent; Asia Pacific, 16 percent; and Latin America, 11 percent. The respondents represent the process, service and manufacturing sectors. Despite the study’s breadth, the emphasis on value creation does not differ significantly across these groups.

Top supply management practitioners are indeed delivering measurable value. The study leaders outperformed the pack in generating savings and driving them to the bottom line (see figure 1). In three of four procurement categories—direct materials, capital expenditures and services—leaders’ savings percentages were more than twice those of followers. Only in the indirect-materials category was the gap narrower. In addition, the net income margins of leading companies have consistently exceeded their industry margins since 1999.

It was not easy to achieve leadership ranking in the 2004 survey. Nearly all leaders and most followers recognize that the key to their business strategy is value creation, which goes beyond the traditional elements of supply management (see figure 2). If mastering the elements of the familiar House of Purchasing and Supply® framework is like perfecting basic sports skills, then creating value through procurement is like crafting a unique game plan for each opponent. Procurement leaders and coaches alike size up their own situation, analyze the strengths and weaknesses of the opposition and call the plays accordingly. Then they must execute perfectly in order to capture a winning position.

Leaders in the 2004 study are creating value and gaining competitive advantage from supply markets by focusing on four areas, as shown in figure 2:

Innovation and growth
Value chain optimization
Advanced cost management
Risk management and supply continuity

Customer demands for a constant stream of new products and features as well as increased competition have put innovation at the top of the must-do list. Optimizing the value chain is essential for companies that are investing in core competencies and need to find other best-in-class capabilities from external partners. Firms that have embedded basic sourcing approaches are moving to more advanced cost management concepts to capture every possible opportunity to add value. As their supply chains extend into unfamiliar or distant markets, companies are recognizing and managing supply-continuity risks.

While all of these value-creation approaches are powerful, not all are suitable for every spend category. For example, some service categories might not incur supply risks, yet shortfalls in key materials and components can pose significant financial and operational risks. Companies with a large spend on indirect materials would look to advanced cost-management techniques. If highly engineered subassemblies are critical, procurement professionals would explore innovation, advanced cost-management and risk-management solutions.

Like all teams, supply management teams need an organizational structure that allows them to perform at their peak. To select the most appropriate model, supply management organizations must balance the benefits of central coordination against the need for local responsiveness. This study confirms the recent trend toward center-led models, in which most strategic decisions are coordinated centrally while transactional activities tend to be decentralized and executed by users or suppliers.

Finally, underlying these approaches and the organization’s ability to act, are the required IT systems and tools, processes, measurement techniques and human resources. Many of the more advanced value-creation techniques require equally advanced information and knowledge-management tools to succeed. In addition, implementing more sophisticated approaches requires clear and formal processes, well-defined metrics and ongoing monitoring and evaluation. And nothing is more crucial to delivering on the supply market’s potential to create value than the right set of skilled and motivated employees to identify and act on the opportunities.

Enlisting Suppliers in the Race to Innovate
How would a chief procurement officer (CPO) describe utopia? It would probably include creative suppliers enthusiastically bringing innovations to their attention. At BMW, as a real example of our CPO’s dream, a top supplier proposed adding optic-fiber-enabled light rings to the headlights as a distinguishing feature. Drivers on the German autobahn or elsewhere would see the distinctive lights of a high-performance BMW approaching from behind and know to move aside and let it pass. BMW and the supplier jointly developed the idea—and the contract ensures exclusive rights for the automaker. As a result of this collaboration, BMW gained access to new technologies, increased its brand awareness and reduced its time to market.

Opportunities like this do not appear on corporate doorsteps by accident. Leaders in the study foster innovation by involving suppliers early in the new product or service development process (see figure 3). Yet even the most forward-thinking respondents may be missing innovation opportunities. Only one-quarter of study leaders bring their suppliers into the initial concept stage, with just 6 percent of followers doing the same. Even at the launch stage—the culmination of new product development—only 34 percent of followers, versus 78 percent of leaders, report full participation by key suppliers, leaving great room for improvement.

Leaders expect their suppliers to innovate. Indeed, at consumer products giant Procter & Gamble (P&G), 50 percent of development in its global baby care business unit is expected to come from suppliers. Leaders frequently use “potential to innovate” as a key criterion for selecting suppliers, and track and evaluate contributions to innovation as part of the supplier development process. Along with assisting in new product development, suppliers can also help to improve processes, quality and responsiveness. For their part, suppliers gain new business, additional growth opportunities and an enhanced image as an innovator.

Some supplier-led innovations connect dramatically with the needs of both customers and end consumers, raising the question: “Why didn’t we do this before?” One such smash hit was the two-by-six can Fridge Vendor®, developed by Alcoa and Riverwood (now Graphic Packaging International). The idea grew from Alcoa research into how people cool canned beverages at home, and emerged from brainstorming sessions that included Riverwood package designers and engineers. The team then presented mock-ups to beverage makers. Coca-Cola followed through, renamed the carton the Fridge Pack, and took it to the market, where it has been credited with increasing canned-soda sales by 10 percent. Consumers ask for the Fridge Pack by name, prompting additional applications. Coca-Cola tweaked the carton design for use with Dasani bottled water, and Miller Brewing has now adopted the concept for beer.

The Fridge Pack created a ripple of other innovations as well. The new shape was difficult to palletize using existing equipment, so bottling plant engineers worked with equipment vendors to alter the palletizer and conveying mechanisms. The Fridge Pack’s success also motivated manufacturers of the ubiquitous plastic ring carrier to produce variations with handles and easy-open features.

From their experience in using the supply base as a source of innovation, leaders share some important recommendations and caveats. They suggest creating a picture of likely supply needs in two, five and 10 years, and then mapping the capabilities that suppliers need today in order to deliver in the future. Using this map, companies can deliberately select suppliers that offer the potential for innovation in key areas.

At the same time, however, companies must realize that involving suppliers early in the game can put intellectual property at risk. True innovators set the stage for success in both personal and legal terms: They build strong, trust-based relationships backed up by ironclad agreements. Furthermore, knowing that innovation is a living process, they challenge and refresh their supplier capabilities map every six to 12 months to keep it current and reflect strategic changes.

Doing Only What We Do Best: Leveraging Value Chain Partners
Strategic differentiators. Core competencies. Noncore activities. Some might classify these terms as mere buzzwords, but tremendous benefits can hinge on how a company defines these expressions. The benefits come from value chain optimization, which involves determining what processes and activities are truly essential to the company’s strategy and then using partners to provide the rest.

At Southwest Airlines, which owns nearly three-quarters of its fleet, high maintenance costs raised the question of who should perform these activities. But cost was not the only consideration in reaching a decision about outsourcing. Airline maintenance falls into two categories: Line maintenance is key to turning around flights quickly, whereas heavy maintenance is critical to maximizing the life span of owned assets. For Southwest, control of flight turnaround time was unquestionably a core necessity. Its solution was to perform all line maintenance in house, which improved turnaround time by 20 percent. Outsourcing heavy maintenance led to savings of more than 30 percent on engine maintenance, more than 18 percent on component repairs and 15 percent on repairs for “rotable” components (those that are fixed and restocked, rather than consumed).

Even as companies become expert strategic outsourcers, most of them have still not captured the full potential of outsourcing. A companion study shows that 89 percent of companies outsource to reduce operating costs, 81 percent to enable a focus on the core business and 60 percent to access a supplier’s technology.¹ In contrast, far fewer companies focus on growth through outsourcing. Only 46 percent outsource to accelerate time to market, 38 percent to grow revenue and 22 percent to gain access to new markets.

Leaders invest time and effort not only to leverage their partners for the right reasons, but also to make the partnerships work. Study leaders pull significantly ahead in managing supplier and partner relationships. They are more than twice as likely as followers to set and track project goals and milestones, use cross-functional teams from both companies, and establish formal supplier-development roles.

Leaders segment their suppliers across all organizational units and geographic regions and use this segmentation when crafting their strategies. Suppliers are commonly segmented into four groups. With strategic suppliers, leaders build long-term relationships that aim to increase the competitiveness of both parties. Collaborative supplier relationships are mid to long term, and focus on continuous improvement of joint processes. With the remaining two categories, there is less emphasis on relationships. These categories are transactional (shorter term, focused primarily on achieving supplier performance against basic requirements) and opportunistic (ad hoc, with no expectation of future business by either party).

By explicitly segmenting their suppliers, leaders can easily see which suppliers offer the greatest potential value, and allocate management attention and resources accordingly. Leaders seek improvement ideas from top suppliers—both on the cost-reduction side and the innovation side. They regularly review, discuss and reset goals for key suppliers’ performance. Many companies also hold supplier events such as recognition dinners to build important relationships, but only in addition to, not instead of, systematic reviews.

Several years ago, a major Latin American consumer goods company implemented a new supplier relationship management program aimed at improving service levels and time to market for new products. After performing a supplier categorization initiative, the company now has more than 100 key suppliers of packaging and ingredients working on multifunctional teams that collaborate on R&D, procurement and supply chain processes. The company improved its service levels by roughly 20 percent across the region while cutting time to market by nearly one-third.

What do leaders advise when working to optimize the value chain? A reexamination of which activities are truly core to the business and its customers. It is easy to overestimate what is core, particularly when tradition or faulty assumptions discount the capabilities available from today’s supply markets. Leaders also point out the risks of outsourcing: building a longer supply chain, losing control of intellectual property and creating a competitor. Before making a major decision, evaluate the technological and operational capabilities of current and potential value chain partners, then build a business case that assesses and mitigates risks and recommends what, how much and how fast to outsource.

Advanced Cost-Management Techniques Attack Total Cost of Ownership
You pursue global sourcing like a pit bull. You consolidate volume. You evaluate best prices and quality for thousands of items and services. What’s left? The answer is a whole menu of advanced cost-management techniques that tap into cost issues beyond purchase price. These techniques increase the value of external purchases by better matching purchases to needs and reducing the total cost of ownership.

For example, a lighting-products manufacturer’s business model led it to generate as many as 160 new stock keeping units (SKUs) per day—60,000 new product codes and 26,000 parts per year. Managing this complexity was draining scarce engineering, documentation and testing resources. To find a solution, a procurement-led team focused on both above-the-skin elements such as selecting product features and functions and below-the-skin components that didn’t influence customer’s buying decisions. After putting a product complexity-reduction model in place, the company reduced product codes by 25 percent, parts by 41 percent and overall costs by 10 percent, for an annual saving of US$16 million.

Solutions like these are more complex and require greater collaboration for success than traditional sourcing (see figure 4). Internal collaboration was essential to solving this manufacturer’s problem, and procurement played a major role in spearheading the effort. Procurement alone could not mandate design changes, but it could lead the way.

In addition to complexity reduction, other advanced cost-management techniques include:

Tiered sourcing: combining company and tier-one supplier volumes so that the supplier negotiates more favorable contracts with its own suppliers
Mega-supplier strategies: offsetting a supplier’s advantage in a non-negotiable category by bundling other categories in the negotiation
Supplier tiering: restructuring the value chain by bundling or unbundling activities at various value-added stages (for example, transferring management responsibility for second-and third-tier suppliers to the first-tier supplier)
Value-based sourcing: using supplier capabilities to generate other kinds of value such as shorter time to market or innovation
Design to cost: revising specifications to avoid costs, for example, by eliminating over-specifications or optimizing subsystem designs
Collaborative cost reduction: generating and implementing cost-reduction ideas (and sharing the risks and benefits) with suppliers
Best shoring: finding competitive suppliers in cost-advantaged countries along each step of the value chain
Demand management: rationalizing requirements, controlling approvals and reducing or eliminating non-essential purchases in certain (primarily indirect and select direct) categories

The survey revealed a sizeable gap between leaders’ and followers’ use of advanced techniques. More than three-quarters of the leaders systematically rationalize specifications, while more than one-third of followers do so. The same proportions of respondents work collaboratively to reduce costs. More than half of the leaders undertake tiered sourcing, which demands an understanding of their suppliers’ suppliers, but only about a quarter of the followers do so. These gaps may hinge on being “systematic.” Leaders are far more rigorous in applying these techniques to all categories where they make sense, while followers tend to use them in a more off-the-cuff manner.

When using advanced techniques, it is particularly important to ensure that savings are realized, not just identified. All of the leaders have IT systems that track and report results achieved versus benefits identified, as opposed to 60 percent of followers. And 94 percent of leaders (65 percent of followers) make the profit effect transparent and auditable. These tracking processes must cut across numerous internal borders, so cross-functional coordination and cooperation are essential at this stage as well.

Advanced techniques can affect a surprising range of functions at both the buying and supplying firms, as a large European telecom-equipment company found. It had outsourced a significant amount of manufacturing to one of its largest suppliers, and then found that the new relationship overwhelmed its existing interfaces. Customer service issues surfaced, orders were late, and fluctuating demand created problems. When the companies invested in joint-process improvements, on-time performance rose from 70 percent to 97 percent, lead times were reduced by 60 percent and orders were confirmed in hours rather than days. Achieving these results, however, demanded cooperation across departments in both firms to e-enable the process, jointly identify and implement improvements and link factory operations to product strategy.

These examples highlight the need for sustained commitment and involvement to make change happen. Advanced techniques that make use of skills and resources normally dedicated to other functions may threaten organizational fiefdoms, so senior-level sponsorship is essential to avoid turf wars. Proponents of change may have to challenge long-held assumptions of product requirements or specifications, the value gained from purchases, or procurement’s mandate in the overall company. Internal policies outside procurement’s traditional scope may need to be questioned and revised.

Companies that have relationships built on trust will have an advantage. Indeed, P&G promotes face-to-face relationships with key suppliers and recognizes the importance of personal chemistry in creating trust. The company defines trust in the context of supplier relationship management as “the belief that those on whom we depend will consistently meet our expectations.” P&G is certainly not alone in defining its expectations of suppliers rigorously and thoroughly, but its emphasis on the personal element is relatively rare.

How Much Risk Is Too Much?
Disruptions to “business as usual” happen all the time. A major supplier goes out of business. Dockworkers strike. An earthquake destroys an overseas call center. A supplier’s employee steals a trade secret. Most companies in the study recognize risk management as a strategic issue, but leaders are more likely to have—and to have tested—contingency plans to provide protection from supply disruptions. When lightning struck a Philips microchip plant supplying two mobile phone manufacturers, Ericsson lost US$400 million in sales because of its single-source policy.

Even unanticipated market shifts can disrupt business. In the past two years, a spike in steel demand from China, coupled with supplier consolidation and production capacity constraints, caused a doubling in steel prices and shortages that forced some automakers to cut back production.

A recent study found a shift in the numbers and types of risks that have come to the forefront.² Traditional risks stemming from regulation and legal decisions, country financial changes, currency and interest rate volatility and political or social disturbances remain important but less so than in previous years. Emerging risks of governance issues, intellectual-property theft, terror and other security threats have moved from secondary status to the top of business leaders’ agendas.

The American Express Bank learned the value of thinking strategically about business continuity on the morning of September 11, 2001. Teams from Amex Bank, its IT operations and its technical-support partner, Electronic Data Systems (EDS), all located at 7 World Trade Center, had just minutes to evacuate their building after the hijacked planes struck the towers next door. Leaving behind 100 servers that handled front-end customer processing, the teams relocated across the Hudson. They headed to a backup operations site in New Jersey, first created as insurance against Y2K glitches. Drawing on a well-designed recovery plan, business recovery specialists helped Amex Bank load backup data tapes and resume operations within hours. By the end of the day, Amex had processed 19,000 transactions totaling US$14.3 billion, roughly 70 percent of the transactions its customers entered that day. Since then, business continuity has captured executive attention throughout the world.

Procurement must take the lead to place supply continuity at the heart of the corporate risk-management strategy. It should first define the strategic commodities or functions that merit well-developed risk management plans. The next step is to prioritize supply locations, routes and suppliers along a number of dimensions, ensuring that there are multiple suppliers or a single supplier with multiple locations. Procurement should also demand that key suppliers create contingency plans of their own to stabilize the entire supply chain. With this information, the company can conduct scenario-based analysis and develop supply risk-management strategies, ideally as part of a larger enterprise risk-management effort. To keep on top of risks, companies need to identify and monitor supply-related key risk indicators, such as the percentage of purchases in key categories that have a single source, originate in potentially unstable countries, or pass through vulnerable transportation bottlenecks.

Supply Management Organizations Gain More Visibility, Responsibility
The supply management function is rapidly evolving. Just two years ago, leading procurement organizations spent half their time on strategic activities and the other half on tactical activities such as transactions, supplier payment support and general contract administration. In 2004, however, leaders reported spending two-thirds of their time at the strategic level. This strategic focus places leaders roughly two years ahead of the followers and, not surprisingly, the new focus has helped to elevate the stature and influence of supply management within the leaders’ organizations.

Indeed, 89 percent of leaders agree that their supply management organization has comparable standing to finance, marketing and sales, against 61 percent of followers. Likewise, 89 percent of leaders, compared to 58 percent of followers, are involved in setting company strategy rather than simply executing it. And 100 percent of leaders, versus 63 percent of followers, say that senior procurement people are on the executive management team of the company.

Supply management organizations are driving company-wide adoption of common policies, approaches and practices. Both leaders and followers are increasingly doing so from a center-led organizational model, which may take several different forms:

Central organization that handles all purchases with a single upward reporting structure
Mixture of a centralized and decentralized organization with responsibilities split by function or category
Decentralized organization, with a centralized coordinating function (for example, a network of “lead buyers” that report organizationally to different geographic regions or business units, yet manage their categories on behalf of the company as a whole)

Despite their differences, all of these models set policy centrally and execute it locally. For example, all leaders and 80 percent of followers have company-wide category management. Particularly for direct materials, leaders are setting sourcing strategies, establishing supplier-management processes and sharing best practices at the corporate level. Center-led procurement of indirect materials is less common, but growing. Decentralizing and automating transactional activities allows the central organization to focus on strategic issues, policy coordination and goal-setting initiatives. Our study participants from Latin America, half of which represent large multinationals that are headquartered elsewhere, bear out the dominance of the center-led procurement model.

With a wide range of organizational models for supply management, the choice of a model typically depends on how the company as a whole is organized. Although there is no single best-practice model to emulate, the organization structure should embed these principles:

Emphasize strategic activities rather than transactional executions
Manage key categories through cross-enterprise coordination
Exchange learning and best practices among procurement professionals
Speak to the supplier community with a single voice

The study confirms that supply management organizations have elevated their stature and are recognized as strategic contributors. Many are adopting the appropriate model and are poised to carry out the right activities at the right levels. But to deliver on the full value-creation promise, supply management organizations also need the right capabilities, which stem from IT systems and tools, formal and consistent processes and measurement, and a broad set of human resources skills.

T Advances Turn Vision into Reality
It goes without saying that advanced value-creation techniques require advanced tools for managing information. Yet many things can go wrong between IT vision and IT reality. Companies may make large IT investments without confirming that new tools and systems can integrate smoothly with existing ones. If cross-functional workflows are to become a reality, procurement systems for direct materials must integrate, for example, with those in product lifecycle management. Companies may also under-invest in training employees to use the tools. Or they may fail to ensure data standardization and quality, leading to analyses of questionable value.

Leaders are taking a holistic view, applying tools broadly across their spend base to provide better visibility and control in line with their approaches to value creation (see figure 5). They are empowering electronic collaboration communities, yet building a single repository for all product information within the extended enterprise. To this end, leaders demand easy-to-use tools that will integrate with other company systems. Often, the choice of technology provider is the deciding factor between success and failure. Choosing suppliers that deliver solid user training and support, understand both the business issues and the analytics involved, and make user-friendliness a high priority is nearly as important as the technology itself.

For leading companies, key IT systems support the approaches to value creation from beginning to end. The first step is to standardize spend hierarchies globally across all divisions and consolidate data from all systems—including accounts payable (AP), general ledger and electronic data interchange systems—into a single format. The data then can be analyzed and manipulated to support procurement goals.

Beyond this, leaders are broadening the reach of IT systems to support product life-cycle management, integrated requisition-to-pay, electronic sourcing and closed-loop spend management approaches. These advanced IT systems embed best practices for cross-functional teams, build and manage a repository of knowledge and integrate with workflows from other teams to deliver more value to the company.

GlaxoSmithKline (GSK), for example, combines best-of-breed systems, enterprise-wide tools and custom applications to create a powerful engine for savings. Its modules track contracts and compliance, monitor supplier performance, develop rigorous spend analytics, and field an e-enabled negotiation suite. Through this global program, GSK manages 90 percent of its addressable spend through a combination of requests for information (RFIs), bids and auctions—all carried out using e-tools. These tools have provided a big payoff—the company found that traditional sourcing yields 8 percent savings but when supported by e-sealed-bid and e-auction technologies they realize 18 percent to 26 percent. GSK makes such widespread use of these tools that it has a “command center” auction room for hosting auction and bidding events, which also provides a dramatic venue to demonstrate procurement technology to senior executives.

Another example highlights the behind-the-scenes work that is essential to success. A U.S. telecommunications giant was not happy with its high rate of maverick buying, low compliance with spend procedures, limited spend transparency and an inconsistent procure-to-pay process. Accordingly, it developed a consistent, streamlined and digitized requisition-to-pay process, which was centralized and integrated with accounts payable. The company strictly enforced new purchasing policies and went through the painstaking effort of standardizing item and supplier codes across the enterprise. After implementation, compliance rose to 98 percent. The system captures 96 percent of spend and provides unparalleled transparency. The technology allowed the telecom company to centralize and integrate AP, reducing headcount by 65 percent. Most important, the system provided the necessary base for moving toward advanced techniques that require detailed analyses and easy access to accurate data.

To obtain such dramatic improvements, companies must invest in the enabling technologies and take care of the details. While the sums are far from trivial, one participant reports that investments in procurement systems are the best investments his company makes.

Processes and Measurement: If It’s Not Measured, Did It Even Happen?
Like the proverbial tree falling in the forest that no one hears, an initiative may deliver results but if no one measures them, they may essentially disappear. The benefits actually delivered by a value-creation approach depend on three things: executing the approach thoroughly, choosing appropriate metrics, and accurately measuring and tracking performance on those metrics.

Follower companies tend to encounter common pitfalls. They apply inconsistent or informal processes and policies across their geographic regions, organizational units, categories or suppliers. And, they are measured too narrowly—usually against metrics dealing only with annual cost savings. Such metrics do not reduce the total cost of ownership or encourage innovation from supply markets.

Leaders, on the other hand, formalize supply management processes and apply them systematically across the enterprise. For example, leaders take well-defined steps to develop outsourcing strategies, from monitoring supply market changes and identifying candidates for outsourcing, through to negotiating with chosen suppliers and tracking performance. Less than half of the followers take consistent steps early in the process.

Leaders also use broader and more appropriate performance metrics for the procurement organization and its employees. For example, there is a large leader-follower gap in the use of innovation as a performance metric, with 83 percent of leaders and only 31 percent of followers measuring suppliers’ contributions to innovation goals. In addition, leaders build bridges to other functional areas by aligning and agreeing on shared metrics where it makes sense.

How can a company improve its processes and metrics? It is important not to formalize existing processes without first evaluating them against internal and external best practices. Some category management processes may need significant reengineering to capture value beyond sourcing. Once defined, best practices can be formalized, embedded into enabling IT tools and linked to appropriate metrics for tracking. The overall set of procurement metrics should focus on more than just annual percentage cost savings, and instead cover all sources of value from procurement. These metrics should also tie directly to individual goals and incentives.

Supply Management as a Stepping-Stone: Attracting and Retaining the Right People
Is supply management leadership a precursor to company leadership? It was at specialty chemicals producer Hercules, following a successful turnaround. Craig Rogerson served as corporate vice president of global procurement (and president of two business units) before being named acting president and COO in October 2003, and president and CEO in December 2003. Procurement also led to the top at Chrysler in the late 1990s. Thomas Stallkamp joined Chrysler in 1980 as a general purchasing agent, rose to head worldwide purchasing operations in 1996, became president of Chrysler in 1997 and vice chairman of DaimlerChrysler in 1999. Before he left in 2000, his collaborative approach to supply management had made Chrysler the world’s most profitable automaker.

Stories like these will become more common. All of the studies’ leaders encourage key employees to be involved in procurement as part of their career development; 64 percent of followers do the same.

One consumer products company is exceptionally committed to developing supply management talent. It has established a purchasing university to build skills in stewardship, strategy development, relationship management and execution. After mastering 13 separate disciplines, employees must demonstrate their proficiency by delivering results. The company offers ample opportunities to do so, since supply management gets involved at the early stages of product development and shares supplier decision-making with R&D. Procurement increasingly uses advanced sourcing techniques and technologies. Not surprisingly, supply management has elevated its standing within the organization and earned the right to continue working on the company’s most strategic issues.

Even without setting up a specialized university, leaders encourage skill development. They rotate staff through supply management and provide training across a broad range of topics. In our study, 89 percent of leaders offered skills training in both project management and finance and accounting for procurement staff, versus 64 percent and 52 percent, respectively, among followers. The largest gap between leaders and followers is in training for operational improvement techniques such as Six Sigma: 94 percent against 38 percent. Among the leaders, training in supply management topics is also offered.

Leaders also report that supply management veterans often move to head other units, seeding the organization with procurement allies. Some respondents suggest regular rotation of supply management staff and even CPOs, proposing a three- to five-year maximum for procurement tours as people rotate through the organization. One company reported that its last four CPOs are now running business units within the corporation. Furthermore, supply management executives who lead outsourcing initiatives gain valuable experience and enhance their ability to assume other C-level positions.

If supply management requires capable people with diverse backgrounds, where do companies find this talent? To begin, recruiting appears to be degree independent. For example, Rogerson of Hercules holds a degree in chemical engineering, while former Chrysler leader Stallkamp has degrees in industrial management and economics. HR cannot recruit fully formed procurement whizzes from business schools, even though professors will network with business to nudge the best students in their direction. Instead, recruiters look for people from various disciplines with a track record of success in areas such as problem resolution. Or they will look for veterans of other firms’ procurement and supply chain programs.

Study participants report that retaining their best people is a growing challenge. One participant says he aims to keep the function fresh and leading edge, so people want to stay. Another approach is to tailor recruitment and training strategies for people at different points in their careers—one program for undergraduates and a separate program for those with five to seven years’ experience.

Delivering on the Promise
The supply management function has matured and broadened far beyond what we imagined when we first studied procurement excellence in 1992. Yet one theme has remained constant: the need to transcend the functional silo. In 1992, the study found that coordination and integration with other functions was becoming increasingly important to better understand business needs. By 1996, leading organizations were shifting to team-based approaches that included sourcing councils and cross-functional supplier development teams. In our latest study, we have concluded that procurement must be a catalyst in leading multi-functional (and multi-company) teams to meet executives’ expectations.

When discussing the future, study participants agree that supply management must continue bridging internal boundaries to increase its influence. Similarly, supply management must continue bridging boundaries between companies to work jointly with suppliers and other alliance partners. By combining its increasingly sophisticated procurement skills with greater outreach to other functions and partners, the supply management organization can deliver on its truly vast potential.

Sidebar: About the Study

The 2004 Assessment of Excellence in Procurement is the fifth research study in a series that began in 1992. Developed by a global team, the study elicited responses from procurement and supply chain executives from leading companies around the world. The initial 238 companies, with average revenues of nearly US$10 billion in 2003, formed the benchmarking study group. To date, 307 organizations have completed the survey, contributed to the database, and benchmarked their performance.

Process industries account for 119 participants, with 65 companies in chemicals; oil and gas; pulp and paper; metals and glass processing; and mining. The remaining 54 participants produce non-durable consumer goods such as food and nutrition, pharmaceuticals and household and cosmetics products.

The services sector accounts for 103 participants, with 49 firms representing telecom, transportation and utilities; and 54 firms in media and entertainment, finance, professional services and retail.

Manufacturing firms round out the sample with 85 participants; 54 are mass manufacturers (automotive, high-tech and components and systems) and 31 are project-oriented firms (engineering, heavy machinery, construction and aerospace).

Participants completed a detailed online survey (more than 600 elements), which the study team aggregated into 25 leadership practices and then into eight dimensions of procurement excellence. Company scores are based on performance. The 18 leaders are from the initial benchmark sample of 238 companies; they rank among the top 10 percent in overall scores and attained world-class performance in at least three of the eight dimensions.

In addition to the online survey, 63 CEOs and senior executives completed a shorter survey; these were used to compare the perceptions of procurement and supply chain executives with senior management’s expectations and perspectives.

Sidebar: Measuring Up and Moving Ahead

By this time, most readers have been mentally comparing their organizations’ practices to those of the leaders. To make the evaluation easier, this leadership value-creation checklist provides a quick self-assessment and key to interpreting your score.

Editor’s Note: As this paper went to press, 307 companies have participated in the survey with others still entering their data into the online questionnaire. The initial 238 companies that completed the questionnaire form the benchmarking group that is discussed throughout this publication.

As procurement’s role changes and expectations for value creation grow, the industry is frequently replacing the term “procurement” with the broader term “supply management.” In line with this shift, we will use both terms interchangeably.

¹ “Outsourcing Strategically for Sustainable Competitive Advantage,” joint study by CAPS Research and A.T. Kearney, 2005.
² “Foreign Direct Investment Confidence Index, 2004.”

source: http://www.atkearney.com/

Supply Management Takes A Strategic Set Up

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 04:58:00 +0000

Bill Markham is a principal in A.T. Kearney's Chicago office.

Findings from A.T. Kearney’s Assessment of Excellence in Procurement (AEP) Study

More than ever, CEOs expect their supply management organizations to deliver value beyond traditional cost cutting. But what kinds of value and how will the organizations deliver it? To find out, we surveyed supply management executives from 275 leading companies in Europe, North America, Asia Pacific and Latin America. The following highlights what executives see as the next wave of value creation from supply management:

Getting More from Suppliers
What innovation has caught your eye recently? The light rings around BMW headlights? The 12-can Fridge Pack for Coca-Cola soft drinks and Miller beer? Both of these ideas were conceived by suppliers and brought to market through joint development. Leaders are not just receptive to suppliers with new ideas, they expect supplier innovation and involve key suppliers in the earliest stages of new product development (see figure).

Taking Cost Management to the Next Level
Leaders pursue global sourcing like a pit bull. They consolidate volume and evaluate best prices for hundreds of items. What’s left? The leaders use a complete arsenal of advanced cost-management strategies that address multilayered problems. Some examples:

Tiered sourcing combines volume purchases with tier 1 suppliers to negotiate more favorable contracts.
Mega-supplier strategies offset a supplier’s advantage in a non-negotiable category by bundling other categories in the negotiation.
Design-to-cost strategies involve revising specifications to avoid costs through techniques such as standardizing components.
Collaborative cost reduction generates and implements cost-reduction ideas with suppliers.
Demand management involves implementing indirect procurement policies to rationalize requirements, control approvals and reduce or eliminate nonessential purchases.

Managing Supply Risk
The leaders in our study know supply risk is a strategic issue. They identify potential weak spots in supply lines and plan for alternative sources and supply routes. They choose suppliers to avoid exposing the company to embarrassment or liability. They also anticipate possible intellectual property risks from offshoring or outsourcing decisions.

Still Room for Improvement
Among these leading companies, supply management is recognized as a strategic contributor. But executives see room for improvement. Bridging boundaries within and across companies remains a constant challenge. Continued attention is needed to further develop staff skills and capabilities, IT tools, processes and measurement techniques that will enable supply management organizations to deliver even more value in the years ahead.

source: http://www.atkearney.com/

The 7 Principles of Supply Chain Management

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 04:10:00 +0000

By David L. Anderson, Frank F. Britt, and Donavon J. Favre

Supply Chain Management Review

April 1, 2007

The most requested article in the 10-year history of Supply Chain Management Review was one that appeared in our very first issue in the spring of 1997. Written by experts from the respected Logistics practice of Andersen Consulting (now Accenture), “The Seven Principles of Supply Chain Management,” layed out a clear and compelling case for excellence in supply chain management. The insights provided here remain remarkably fresh ten years later.
The most requested article in the 10-year history of Supply Chain Management Review was one that appeared in our very first issue in the spring of 1997. Written by experts from the respected Logistics practice of Andersen Consulting (now Accenture), “The Seven Principles of Supply Chain Management,” layed out a clear and compelling case for excellence in supply chain management. The insights provided here remain remarkably fresh ten years later.

Managers increasingly find themselves assigned the role of the rope in a very real tug of war—pulled one way by customers' mounting demands and the opposite way by the company's need for growth and profitability. Many have discovered that they can keep the rope from snapping and, in fact, achieve profitable growth by treating supply chain management as a strategic variable.

These savvy managers recognize two important things:

They think about the supply chain as a whole—all the links involved in managing the flow of products, services, and information from their suppliers' suppliers to their customers' customers (that is, channel customers, such as distributors and retailers).
They pursue tangible outcomes—focused on revenue growth, asset utilization, and cost.

Rejecting the traditional view of a company and its component parts as distinct functional entities, these managers realize that the real measure of success is how well activities coordinate across the supply chain to create value for customers, while increasing the profitability of every link in the chain.

Our analysis of initiatives to improve supply chain management by more than 100 manufacturers, distributors, and retailers shows many making great progress, while others fail dismally. The successful initiatives that have contributed to profitable growth share several themes. They are typically broad efforts, combining both strategic and tactical change. They also reflect a holistic approach, viewing the supply chain from end to end and orchestrating efforts so that the whole improvement achieved—in revenue, costs, and asset utilization—is greater than the sum of its parts.

Unsuccessful efforts likewise have a consistent profile. They tend to be functionally defined and narrowly focused, and they lack sustaining infrastructure. Uncoordinated change activity erupts in every department and function and puts the company in grave danger of “dying the death of a thousand initiatives.” The source of failure is seldom management's difficulty identifying what needs fixing. The issue is determining how to develop and execute a supply chain transformation plan that can move multiple, complex operating entities (both internal and external) in the same direction.

To help managers decide how to proceed, we revisited the supply chain initiatives undertaken by the most successful manufacturers and distilled from their experience seven fundamental principles of supply chain management.

Principle 1: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.

Segmentation has traditionally grouped customers by industry, product, or trade channel and then taken a one-size-fits-all approach to serving them, averaging costs and profitability within and across segments. The typical result, as one manager admits: “We don't fully understand the relative value customers place on our service offerings.”

But segmenting customers by their particular needs equips a company to develop a portfolio of services tailored to various segments. Surveys, interviews, and industry research have been the traditional tools for defining key segmentation criteria.

Viewed from the classic perspective, this needs-based segmentation may produce some odd couples. For the manufacturer in Exhibit 1, “innovators” include an industrial distributor (Grainger), a do-it-yourself retailer (Home Depot), and a mass merchant (Wal-Mart).

Research also can establish the services valued by all customers versus those valued only by certain segments. Then the company should apply a disciplined, cross-functional process to develop a menu of supply chain programs and create segment-specific service packages that combine basic services for everyone with the services from the menu that will have the greatest appeal to particular segments. This does not mean tailoring for the sake of tailoring. The goal is to find the degree of segmentation and variation needed to maximize profitability.

All the segments in Exhibit 1, for example, value consistent delivery. But those in the lower left quadrant have little interest in the advanced supply chain management programs, such as customized packaging and advance shipment notification, that appeal greatly to those in the upper right quadrant.

Of course, customer needs and preferences do not tell the whole story. The service packages must turn a profit, and many companies lack adequate financial understanding of their customers' and their own costs to gauge likely profitability. “We don't know which customers are most profitable to serve, which will generate the highest long-term profitability, or which we are most likely to retain,” confessed a leading industrial manufacturer. This knowledge is essential to correctly matching accounts with service packages—which translates into revenues enhanced through some combination of increases in volume and/or price.

Only by understanding their costs at the activity level and using that understanding to strengthen fiscal control can companies profitably deliver value to customers. One “successful” food manufacturer aggressively marketed vendor-managed inventory to all customer segments and boosted sales. But subsequent activity-based cost analysis found that one segment actually lost nine cents a case on an operating margin basis.

Most companies have a significant untapped opportunity to better align their investment in a particular customer relationship with the return that customer generates. To do so, companies must analyze the profitability of segments, plus the costs and benefits of alternate service packages, to ensure a reasonable return on their investment and the most profitable allocation of resources. To strike and sustain the appropriate balance between service and profitability, most companies will need to set priorities—sequencing the rollout of tailored programs to capitalize on existing capabilities and maximize customer impact.
Principle 2: Customize the logistics network to the service requirements and profitability of customer segments.
Companies have traditionally taken a monolithic approach to logistics network design in organizing their inventory, warehouse, and transportation activities to meet a single standard. For some, the logistics network has been designed to meet the average service requirements of all customers; for others, to satisfy the toughest requirements of a single customer segment.

Neither approach can achieve superior asset utilization or accommodate the segment-specific logistics necessary for excellent supply chain management. In many industries, especially such commodity industries as fine paper, tailoring distribution assets to meet individual logistics requirements is a greater source of differentiation for a manufacturer than the actual products, which are largely undifferentiated.

One paper company found radically different customer service demands in two key segments—large publishers with long lead times and small regional printers needing delivery within 24 hours. To serve both segments well and achieve profitable growth, the manufacturer designed a multi-level logistics network with three full-stocking distribution centers and 46 quick-response cross-docks, stocking only fast-moving items, located near the regional printers.

Return on assets and revenues improved substantially thanks to the new inventory deployment strategy, supported by outsourcing of management of the quick response centers and the transportation activities.

This example highlights several key characteristics of segment-specific services. The logistics network probably will be more complex, involving alliances with third-party logistics providers, and will certainly have to be more flexible than the traditional network. As a result, fundamental changes in the mission, number, location, and ownership structure of warehouses are typically necessary. Finally, the network will require more robust logistics planning enabled by “real-time” decision-support tools that can handle flow-through distribution and more time-sensitive approaches to managing transportation.
Principle 3: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.

Forecasting has historically proceeded silo by silo, with multiple departments independently creating forecasts for the same products—all using their own assumptions, measures, and level of detail. Many consult the marketplace only informally, and few involve their major suppliers in the process. The functional orientation of many companies has just made things worse, allowing sales forecasts to envision growing demand while manufacturing second-guesses how much product the market actually wants.

Such independent, self-centered forecasting is incompatible with excellent supply chain management, as one manufacturer of photographic imaging found. This manufacturer nicknamed the warehouse “the accordion” because it had to cope with a production operation that stuck to a stable schedule, while the revenue-focused sales force routinely triggered cyclical demand by offering deep discounts at the end of each quarter. The manufacturer realized the need to implement a cross-functional planning process, supported by demand planning software.

Initial results were dismaying. Sales volume dropped sharply, as excess inventory had to be consumed by the marketplace. But today, the company enjoys lower inventory and warehousing costs and much greater ability to maintain price levels and limit discounting. Like all the best sales and operations planning (S&OP), this process recognizes the needs and objectives of each functional group but bases final operational decisions on overall profit potential.

Excellent supply chain management, in fact, calls for S&OP that transcends company boundaries to involve every link of the supply chain (from the supplier's supplier to the customer's customer) in developing forecasts collaboratively and then maintaining the required capacity across the operations. Channel-wide S&OP can detect early warning signals of demand lurking in customer promotions, ordering patterns, and restocking algorithms and takes into account vendor and carrier capabilities, capacity, and constraints.

Exhibit 2 illustrates the difference that cross supply chain planning has made for one manufacturer of laboratory products. As shown on the left of this exhibit, uneven distributor demand unsynchronized with actual end-user demand made real inventory needs impossible to predict and forced high inventory levels that still failed to prevent out-of-stocks. Distributors began sharing information on actual (and fairly stable) end-user demand with the manufacturer, and the manufacturer began managing inventory for the distributors. This coordination of manufacturing scheduling and inventory deployment decisions paid off handsomely, improving fill rates, asset turns, and cost metrics for all concerned.
Principle 4: Differentiate product closer to the customer and speed conversion across the supply chain.

Manufacturers have traditionally based production goals on projections of the demand for finished goods and have stockpiled inventory to offset forecasting errors. These manufacturers tend to view lead times in the system as fixed, with only a finite window of time in which to convert materials into products that meet customer requirements.

While even such traditionalists can make progress in cutting costs through set-up reduction, cellular manufacturing, and just-in-time techniques, great potential remains in less traditional strategies such as mass customization. For example, manufacturers striving to meet individual customer needs efficiently through strategies such as mass customization are discovering the value of postponement. They are delaying product differentiation to the last possible moment and thus overcoming the problem described by one manager of a health and beauty care products warehouse: “With the proliferation of packaging requirements from major retailers, our number of SKUs (stock keeping units) has exploded. We have situations daily where we backorder one retailer, like Wal-Mart, on an item that is identical to an in-stock item, except for its packaging. Sometimes we even tear boxes apart and repackage by hand!”

he hardware manufacturer in Exhibit 3 solved this problem by determining the point at which a standard bracket turned into multiple SKUs. This point came when the bracket had to be packaged 16 ways to meet particular customer requirements. The manufacturer further concluded that overall demand for these brackets is relatively stable and easy to forecast, while demand for the 16 SKUs is much more volatile. The solution: make brackets in the factory but package them at the distribution center, within the customer order cycle. This strategy improved asset utilization by cutting inventory levels by more than 50 percent.

Realizing that time really is money, many manufacturers are questioning the conventional wisdom that lead times in the supply chain are fixed. They are strengthening their ability to react to market signals by compressing lead times along the supply chain, speeding the conversion from raw materials to finished products tailored to customer requirements. This approach enhances their flexibility to make product configuration decisions much closer to the moment demand occurs.

The key to just-in-time product differentiation is to locate the leverage point in the manufacturing process where the product is unalterably configured to meet a single requirement and to assess options, such a postponement, modularized design, or modification of manufacturing processes, that can increase flexibility. In addition, manufacturers must challenge cycle times: Can the leverage point be pushed closer to actual demand to maximize the manufacturer's flexibility in responding to emerging customer demand?
Principle 5: Manage sources of supply strategically to reduce the total cost of owning materials and services.
Determined to pay as low a price as possible for materials, manufacturers have not traditionally cultivated warm relationships with suppliers. In the words of one general manager: “The best approach to supply is to have as many players as possible fighting for their piece of the pie—that's when you get the best pricing.”

Excellent supply chain management requires a more enlightened mindset—recognizing, as a more progressive manufacturer did: “Our supplier's costs are in effect our costs. If we force our supplier to provide 90 days of consigned material when 30 days are sufficient, the cost of that inventory will find its way back into the supplier's price to us since it increases his cost structure.” While manufacturers should place high demands on suppliers, they should also realize that partners must share the goal of reducing costs across the supply chain in order to lower prices in the marketplace and enhance margins. The logical extension of this thinking is gain-sharing arrangements to reward everyone who contributes to the greater profitability.

Some companies are not yet ready for such progressive thinking because they lack the fundamental prerequisite. That is, a sound knowledge of all their commodity costs, not only for direct materials but also for maintenance, repair, and operating supplies, plus the dollars spent on utilities, travel, temps, and virtually everything else. This fact-based knowledge is the essential foundation for determining the best way of acquiring every kind of material and service the company buys.

With their marketplace position and industry structure in mind, manufacturers can then consider how to approach suppliers—soliciting short-term competitive bids, entering into long-term contracts and strategic supplier relationships, outsourcing, or integrating vertically. Excellent supply chain management calls for creativity and flexibility.
Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services, and information.

To sustain reengineered business processes (that at last abandon the functional orientation of the past), many progressive companies have been replacing inflexible, poorly integrated systems with enterprise-wide systems. Yet too many of these companies will find themselves victims of the powerful new transactional systems they put in place. Unfortunately, many leading-edge information systems can capture reams of data but cannot easily translate it into actionable intelligence that can enhance real-world operations. As one logistics manager with a brand-new system said: “I've got three feet of reports with every detail imaginable, but it doesn't tell me how to run my business.”

his manager needs to build an information technology system that integrates capabilities of three essential kinds. (See Exhibit 4.)
Despite making huge investments in technology, few companies are acquiring this full complement of capabilities. Today's enterprisewide systems remain enterprise-bound, unable to share across the supply chain the information that channel partners must have to achieve mutual success.

Ironically, the information that most companies require most urgently to enhance supply chain management resides outside of their own systems, and few companies are adequately connected to obtain the necessary information. Electronic connectivity creates opportunities to change the supply chain fundamentally—from slashing transaction costs through electronic handling of orders, invoices, and payments to shrinking inventories through vendor-managed inventory programs.
Principle 7: Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently.
To answer the question, “How are we doing?” most companies look inward and apply any number of functionally oriented measures. But excellent supply chain managers take a broader view, adopting measures that apply to every link in the supply chain and include both service and financial metrics.
First, they measure service in terms of the perfect order—the order that arrives when promised, complete, priced and billed correctly, and undamaged. The perfect order not only spans the supply chain, as a progressive performance measurement should, but also view performance from the proper perspective, that of the customer.

Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account, especially a key account. For many, this amounts to a revelation, since traditional cost measures rely on corporate accounting systems that allocate overhead evenly across accounts. Such measures do not differentiate, for example, an account that requires a multi-functional account team, small daily shipments, or special packaging. Traditional accounting tends to mask the real costs of the supply chain—focusing on cost type rather than the cost of activities and ignoring the degree of control anyone has (or lacks) over the cost drivers.

Deriving maximum benefit from activity-based costing requires sophisticated information technology, specifically a data warehouse. Because the general ledger organizes data according to a chart of accounts, it obscures the information needed for activity-based costing. By maintaining data in discrete units, the warehouse provides ready access to this information.

To facilitate channel-spanning performance measurement, many companies are developing common report cards. These report cards help keep partners working toward the same goals by building deep understanding of what each company brings to the partnership and showing how to leverage their complementary assets and skills to the alliance's greatest advantage. The willingness to ignore traditional company boundaries in pursuit of such synergies often marks the first step toward a “pay-for-performance” environment.

Translating Principles into Practice

Companies that have achieved excellence in supply chain management tend to approach implementation of the guiding principles with three precepts in mind:

Orchestrate improvement efforts

The complexity of the supply chain can make it difficult to envision the whole, from end to end. But successful supply chain managers realize the need to invest time and effort up front in developing this total perspective and using it to inform a blueprint for change that maps linkages among initiatives and a well-thought-out implementation sequence. This blueprint also must coordinate the change initiatives with ongoing day-to-day operations and must cross company boundaries.

The blueprint requires rigorous assessment of the entire supply chain—from supplier relationships to internal operations to the marketplace, including customers, competitors, and the industry as a whole. Current practices must be ruthlessly weighed against best practices to determine the size of the gap to close. Thorough cost/benefit analysis lays the essential foundation for prioritizing and sequencing initiatives, establishing capital and people requirements, and getting a complete financial picture of the company's supply chain—before, during, and after implementation.

critical step in the process is setting explicit outcome targets for revenue growth, asset utilization, and cost reduction. (See Exhibit 5.) While traditional goals for costs and assets, especially goals for working capital, remain essential to success, revenue growth targets may ultimately be even more important. Initiatives intended only to cut costs and improve asset utilization have limited success structuring sustainable win-win relationships among trading partners. Emphasizing revenue growth can significantly increase the odds that a supply chain strategy will create, rather than destroy, value.

Remember that Rome wasn't built in a day

As this list of tasks may suggest, significant enhancement of supply chain management is a massive undertaking with profound financial impact on both the balance sheet and the income statement. Because this effort will not pay off overnight, management must carefully balance its long-term promise against more immediate business needs.

Advance planning is again key. Before designing specific initiatives, successful companies typically develop a plan that specifies funding, leadership, and expected financial results. This plan helps to forestall conflicts over priorities and keeps management focused and committed to realizing the benefits.

Recognize the difficulty of change

Most corporate change programs do a much better job of designing new operating processes and technology tools than of fostering appropriate attitudes and behaviors in the people who are essential to making the change program work. People resist change, especially in companies with a history of “change-of-the-month” programs. People in any organization have trouble coping with the uncertainty of change, especially the real possibility that their skills will not fit the new environment.

Implementing the seven principles of supply chain management will mean significant change for most companies. The best prescription for ensuring success and minimizing resistance is extensive, visible participation and communication by senior executives. This means championing the cause and removing the managerial obstacles that typically present the greatest barriers to success, while linking change with overall business strategy.

Many progressive companies have realized that the traditionally fragmented responsibility for managing supply chain activities will no longer do. Some have even elevated supply chain management to a strategic position and established a senior executive position such as vice president-supply chain (or the equivalent) reporting directly to the COO or CEO. This role ignores traditional product, functional, and geographic boundaries that can interfere with delivering to customers what they want, when and where they want it.

Reaping the Rewards

The companies mentioned in this article are just a few of the many that have enhanced both customer satisfaction and profitability by strengthening management of the supply chain. While these companies have pursued various initiatives, all have realized the need to integrate activities across the supply chain. Doing so has improved asset utilization, reduced cost, and created price advantages that help attract and retain customers—and thus enhance revenue.

source: http://www.scmr.com/

Supply chain management

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 04:01:00 +0000

Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption. The term supply chain management was coined by consultant Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.

The definition one America professional association put forward is that Supply Chain Management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.

Supply chain event management (abbreviated as SCEM) is a consideration of all possible occurring events and factors that can cause a disruption in a supply chain. With SCEM possible scenarios can be created and solutions can be planned.

Some experts distinguish supply chain management and logistics, while others consider the terms to be interchangeable.

Supply chain management is also a category of software products.

Supply chain management problems

Supply chain management must address the following problems:

Distribution Network Configuration: Number and location of suppliers, production facilities, distribution centers, warehouses and customers.
Distribution Strategy: Centralized versus decentralized, direct shipment, Cross docking, pull or push strategies, third party logistics.
Information: Integrate systems and processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation etc.
Inventory Management: Quantity and location of inventory including raw materials, work-in-process and finished goods.

Supply chain execution is managing and coordinating the movement of materials information and funds across the supply chain. The flow is bi-directional.

Activities/functions

Supply chain management is a cross-functional approach to managing the movement of raw materials into an organization and the movement of finished goods out of the organization toward the end-consumer. As corporations strive to focus on core competencies and become more flexible, they have reduced their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other corporations that can perform the activities better or more cost effectively. The effect has been to increase the number of companies involved in satisfying consumer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and improving inventory velocity.

Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries. SCOR is a supply chain management model promoted by the Supply-Chain Management Council. Another model is the SCM Model proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical, and operational levels of activities.

Strategic

Strategic network optimization, including the number, location, and size of warehouses, distribution centers and facilities.
Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics.
Product design coordination, so that new and existing products can be optimally integrated into the supply chain, load management
Information Technology infrastructure, to support supply chain operations.
Where to make and what to make or buy decisions
Align overall organizational strategy with supply strategy

Tactical

Sourcing contracts and other purchasing decisions.
Production decisions, including contracting, locations, scheduling, and planning process definition.
Inventory decisions, including quantity, location, and quality of inventory.
Transportation strategy, including frequency, routes, and contracting.
Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise.
Milestone payments

Operational

Daily production and distribution planning, including all nodes in the supply chain.
Production scheduling for each manufacturing facility in the supply chain (minute by minute).
Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers.
Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers.
Inbound operations, including transportation from suppliers and receiving inventory.
Production operations, including the consumption of materials and flow of finished goods.
Outbound operations, including all fulfillment activities and transportation to customers.
Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities. distribution centers, and other customers.
Performance tracking of all activities.

Supply chain management

Organizations increasingly find that they must rely on effective supply chains, or networks, to successfully compete in the global market and networked economy.^[1] In Peter Drucker's (1998) management's new paradigms, this concept of business relationships extends beyond traditional enterprise boundaries and seeks to organize entire business processes throughout a value chain of multiple companies.

During the past decades, globalization, outsourcing and information technology have enabled many organizations such as Dell and Hewlett Packard, to successfully operate solid collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities (Scott, 1993). This inter-organizational supply network can be acknowledged as a new form of organization. However, with the complicated interactions among the players, the network structure fits neither "market" nor "hierarchy" categories (Powell, 1990). It is not clear what kind of performance impacts different supply network structures could have on firms, and little is known about the coordination conditions and trade-offs that may exist among the players. From a system's point of view, a complex network structure can be decomposed into individual component firms (Zhang and Dilts, 2004). Traditionally, companies in a supply network concentrate on the inputs and outputs of the processes, with little concern for the internal management working of other individual players. Therefore, the choice of internal management control structure is known to impact local firm performance (Mintzberg, 1979).

In the 21st century, there have been few changes in business environment that have contributed to the development of supply chain networks. First, as an outcome of globalization and proliferation of multi-national companies, joint ventures, strategic alliances and business partnerships were found to be significant success factors, following the earlier "Just-In-Time", "Lean Management" and "Agile Manufacturing" practices.^[2] Second, technological changes, particularly the dramatic fall in information communication costs, a paramount component of transaction costs, has led to changes in coordination among the members of the supply chain network (Coase, 1998).

Many researchers have recognized these kinds of supply network structure as a new organization form, using terms such as "Keiretsu", "Extended Enterprise", "Virtual Corporation", Global Production Network", and "Next Generation Manufacturing System".^[3] In general, such a structure can be defined as "a group of semi-independent organizations, each with their capabilities, which collaborate in ever-changing constellations to serve one or more markets in order to achieve some business goal specific to that collaboration" (Akkermans, 2001).

Supply chain business process integration

Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes. An example scenario: the purchasing department places orders as requirements become appropriate. Marketing, responding to customer demand, communicates with several distributors and retailers, and attempts to satisfy this demand. Shared information between supply chain partners can only be fully leveraged through process integration.

Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information. According to Lambert and Cooper (2000) operating an integrated supply chain requires continuous information flows, which in turn assist to achieve the best product flows. However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business. The key supply chain processes stated by Lambert (2004) are:

Customer relationship management
Customer service management
Demand management
Order fulfillment
Manufacturing flow management
Supplier relationship management
Product development and commercialization
Returns management

One could suggest other key critical supply business processes combining these processes stated by Lambert such as:

Customer service management
Procurement
Product development and commercialization
Manufacturing flow management/support
Physical distribution
Outsourcing/partnerships
Performance measurement

a) Customer service management process

Customer Relationship Management concerns the relationship between the organization and its customers. Customer service provides the source of customer information. It also provides the customer with real-time information on promising dates and product availability through interfaces with the company's production and distribution operations. Successful organizations use following steps to build customer relationships:

determine mutually satisfying goals between organization and customers
establish and maintain customer rapport
produce positive feelings in the organization and the customers

b) Procurement process

Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development is achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible requirements more rapidly. Activities related to obtaining products and materials from outside suppliers. This requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage and handling and quality assurance. Also, includes the responsibility to coordinate with suppliers in scheduling, supply continuity, hedging, and research to new sources or programmes.

c) Product development and commercialization

Here, customers and suppliers must be united into the product development process, thus to reduce time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched in ever shorter time-schedules to remain competitive. According to Lambert and Cooper (2000), managers of the product development and commercialization process must:

coordinate with customer relationship management to identify customer-articulated needs;
select materials and suppliers in conjunction with procurement, and
develop production technology in manufacturing flow to manufacture and integrate into the best supply chain flow for the product/market combination.

d) Manufacturing flow management process

The manufacturing process is produced and supplies products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes, and must accommodate mass customization. Orders are processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency of demand to customers. Activities related to planning, scheduling and supporting manufacturing operations, such as work-in-process storage, handling, transportation, and time phasing of components, inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement of physical distribution operations.

e) Physical distribution

This concerns movement of a finished product/service to customers. In physical distribution, the customer is the final destination of a marketing channel, and the availability of the product/service is a vital part of each channel participant's marketing effort. It is also through the physical distribution process that the time and space of customer service become an integral part of marketing, thus it links a marketing channel with its customers (e.g. links manufacturers, wholesalers, retailers).

f) Outsourcing/partnerships

This is not just outsourcing the procurement of materials and components, but also outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage and everything else it will outsource. This movement has been particularly evident in logistics where the provision of transport, warehousing and inventory control is increasingly subcontracted to specialists or logistics partners. Also, to manage and control this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

g) Performance measurement

Experts found a strong relationship from the largest arcs of supplier and customer integration to market share and profitability. By taking advantage of supplier capabilities and emphasizing a long-term supply chain perspective in customer relationships can be both correlated with firm performance. As logistics competency becomes a more critical factor in creating and maintaining competitive advantage, logistics measurement becomes increasingly important because the difference between profitable and unprofitable operations becomes more narrow. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive performance measurement realized improvements in overall productivity. According to experts internal measures are generally collected and analyzed by the firm including

Cost
Customer Service
Productivity measures
Asset measurement, and
Quality.

External performance measurement is examined through customer perception measures and "best practice" benchmarking, and includes 1) customer perception measurement, and 2) best practice benchmarking.

Components of supply chain management are 1. Standardisation 2. Postponement 3. Customisation

Supply chain management components integration

The management components of SCM

The SCM management components are the third element of the four-square circulation framework. The level of integration and management of a business process link is a function of the number and level, ranging from low to high, of components added to the link (Ellram and Cooper, 1990; Houlihan, 1985). Consequently, adding more management components or increasing the level of each component can increase the level of integration of the business process link. The literature on business process reengineering,^[4] buyer-supplier relationships,^[5] and SCM^[6] suggests various possible components that must receive managerial attention when managing supply relationships. Lambert and Cooper (2000) identified the following components which are:

Planning and control
Work structure
Organization structure
Product flow facility structure
Information flow facility structure
Management methods
Power and leadership structure
Risk and reward structure
Culture and attitude

However, a more careful examination of the existing literature^[7] will lead us to a more comprehensive structure of what should be the key critical supply chain components, the "branches" of the previous identified supply chain business processes, that is what kind of relationship the components may have that are related with suppliers and customers accordingly. Bowersox and Closs states that the emphasis on cooperation represents the synergism leading to the highest level of joint achievement (Bowersox and Closs, 1996). A primary level channel participant is a business that is willing to participate in the inventory ownership responsibility or assume other aspects financial risk, thus including primary level components (Bowersox and Closs, 1996). A secondary level participant (specialized), is a business that participates in channel relationships by performing essential services for primary participants, thus including secondary level components, which are supporting the primary ones. Also, third level channel participants and components may be included, that will support the primary level channel participants, and which are the fundamental branches of the secondary level components.

Consequently, Lambert and Cooper's framework of supply chain components, does not lead us to the conclusion about what are the primary or secondary (specialized) level supply chain components ( see Bowersox and Closs, 1996, p.g. 93), that is what supply chain components should be viewed as primary or secondary, and how should these components be structured in order to have a more comprehensive supply chain structure and to examine the supply chain as an integrative one (See above sections 2.1 and 3.1).

Baziotopoulos reviewed the literature to identify supply chain components.^{[8][9][10][11][12][13][14][15]} Based on this study, Baziotopoulos (2004) suggests the following supply chain components (Fig.8):

For customer service management: Includes the primary level component of customer relationship management, and secondary level components such as benchmarking and order fulfillment.
For product development and commercialization: Includes the primary level component of Product Data Management (PDM), and secondary level components such as market share, customer satisfaction, profit margins, and returns to stakeholders.
For physical distribution, Manufacturing support and Procurement: Includes the primary level component of enterprise resource planning (ERP), with secondary level components such as warehouse management, material management, manufacturing planning, personnel management, and postponement (order management).
For performance measurement: This includes the primary level component of logistics performance measurement, which is correlated with the information flow facility structure within the organization. Secondary level components may include four types of measurement such as: variation, direction, decision and policy measurements. More specifically, in accordance with these secondary level components total cost analysis (TCA), customer profitability analysis (CPA), and Asset management could be concerned as well. In general, information flow facility structure is regarded by two important requirements, which are a) planning and Coordination flows, and b)operational requirements.
For outsourcing: This includes the primary level component of management methods and the company's cutting-edge strategy and its vital strategic objectives that the company will identify and adopt for particular strategic initiatives in key the areas of technology information, operations, manufacturing capabilities, and logistics (secondary level components).

References

Kaushik K.D., & Cooper, M. (2000). Industrial Marketing Management. Volume29, Issue 1 , January 2000, Pages 65-83
Rolf G. Poluha, Application of the SCOR Model in Supply Chain Management. Youngstown, NY 2006, ISBN 1-934043-10-9.
Haag, S., Cummings, M., McCubbrey, D., Pinsonneault, A., & Donovan, R. (2006), Management Information Systems For the Information Age (3rd Canadian Ed.), Canada: McGraw Hill Ryerson ISBN 0-072-81947-2
Handfield and Bechtel, 2001; Prater et al., 2001; Kern and Willcocks, 2000; Bowersox and Closs, 1996; Christopher, 1992; Bowersox, 1989

Baziotopoulos, 2004
MacDuffie and Helper, 1997; Monden, 1993; Womack and Jones, 1996; Gunasekaran, 1999
Drucker, 1998; Tapscott, 1996; Dilts, 1999
Macneil ,1975; Williamson, 1974; Hewitt, 1994
Stevens, 1989; Ellram and Cooper, 1993; Ellram and Cooper, 1990; Houlihan, 1985
Cooper et al., 1997; Lambert et al.,1996; Turnbull, 1990
Zhang and Dilts, 2004 ;Vickery et al., 2003; Hemila, 2002; Christopher, 1998; Joyce et al., 1997; Bowersox and Closs, 1996; Williamson, 1991; Courtright et al., 1989; Hofstede, 1978
Stevens, 1989
Ellram and Cooper, 1993
Mills et al., 2004
Lewis and Talalayevsky, 2004
Hedberg and Olhager, 2002
Hemila, 2002
Vickery et.al., 2003
Yusuf et al., 2003

source: http://en.wikipedia.org/

Supply Chain Management

noreply@blogger.com (Guntur Tri Hariyanto) — Mon, 23 Apr 2007 03:54:00 +0000

A supply chain is a network that includes vendors of raw materials, plants that transform those materials into useful products, and distribution centers to get those products to customers.

Without any specific effort to coordinate the overall supply chain system, each organization in the network has its own agenda and operates independently from the others. However, such an unmanaged network results in inefficiencies. For example, a plant may have the goal of maximizing throughput in order to lower unit costs. If the end demand seen by the distribution system does not consume this throughput, there will be an accumulation of inventory. Clearly, there is much to be gained by managing the supply chain network to improve its performance and efficiency.

Decision Variables in Supply Chain Management

In managing the supply chain, the following are decision variables:

Location - of facilities and sourcing points
Production - what to produce in which facilities
Inventory - how much to order, when to order, safety stocks
Transportation - mode of transport, shipment size, routing, and scheduling

The Bullwhip Effect

A problem frequently observed in unmanaged supply chains is the bullwhip effect. This effect is an oscillation in the supply chain caused by demand variability. This problem must be addressed in order to avoid the poorer service and higher costs that stem from it.

Inventory Management

Variation in demand increases the challenge of maintaining inventory to avoid stockouts. There exist techniques for inventory management that optimize the performance for a given set of parameters.

Vendor Managed Inventory

An effective way to improve supply chain performance is for the vendor to determine the quantities that should be ordered by its downstream customers, rather than the other way around. This approach is known as Vendor Managed Inventory, abbreviated VMI. While its implementation faces practical challenges, it can be an effective method for reducing inventory and stock-outs.

Accurate Response

In the classical news vendor problem, one must decide the best order quantity that maximizes profits given that some money is lost if all of the units do not sell and given the fact that potential profits are lost if the units sell out. In some situations, a second order can be placed once the sales period begins. Such an opportunity helps one to better match supply and demand, since the first order can be a quantity equal to the expected demand minus a selected number of standard deviations ( 2, for example) below that mean. Of course, any minimum order quantities must be taken into account.

In many industries, the variance in demand is proportional to the variance in the forecasts for that demand. This relationship even exists in stock price forecasting. When this relationship holds, it can be used to estimate the mean demand and its variance, and these values can be used in optimization models.

For seasonal goods such as winter sportswear, which has a short selling season and long lead times, a firm can do several things to better match supply and demand:

· Additional events can be held before large trade fairs in order to secure orders further in advance.

· Supplier capacity can be reserved without specifying the exact product mix. This postponement of the final mix has benefits similar to those of postponing product customization until the distribution center.

· Common parts can be used in designs in order to pool some of the variation between individual demands.

Supply Chain Structure

The performance of a supply chain is measured in terms of profit, average product fill rate, response time, and capacity utilization.

Profit projections may improve if another parameter is relaxed, but one must consider the impact of all aspects of the relaxed parameter on profits. For example, if customers are lost because response time is too slow, then the profit projections may be artificially high.

Average fill rate can be improved by carrying more inventory in order to reduce stock-outs. The optimal balance must be achieved between inventory cost and lost profits due to stock-outs.

Response time often can be improved at the expense of higher overall costs. As with fill rate, the optimal trade-off should be found. If response time is sacrificed in order to achieve higher profits, sales forecasts may have to be modified if the elasticity of demand with respect to service is significant at the chosen service levels.

Capacity utilization should be high enough to reduce overhead sufficiently, but not so high that there is no room to grow or to handle fluctuations in demand. Problems often are encountered when capacity utilization exceeds 85%. Lower capacity utilization in effect buys an option for increased output in the future. Higher capacity utilization decreases downside risk since costs are reduced, but also limits the upside gain if future demand should outstrip supply.

Make-To-Order

To reduce inventory and increase flexibility, some firms have turned to make-to-order production systems. Some companies can reap great benefit from such a system. Make-to-stock is better for other companies, such as those whose customers are not willing to wait for the product.

Recommended Reading

Carliss Y. Baldwin, Jeffrey H. Dyer, and Donald V. Fites, Harvard Business Review on Managing the Value Chain

source: http://quickmba.com/

Strategic Planning in the University

noreply@blogger.com (Guntur Tri Hariyanto) — Sun, 22 Apr 2007 15:59:00 +0000

Kathleen A. Paris, Ph.D., Consultant

Office of Quality Improvement
University of Wisconsin-Madison

November, 2003
Copyright © 2003 University of Wisconsin System Board of Regents

What is Strategic Planning?

Strategic planning is a means of establishing major directions for the university, college/school or department. Through strategic planning, resources are concentrated in a limited number of major directions in order to maximize benefits to stakeholders--those we exist to serve and who are affected by the choices we make. In higher education, those stakeholders include students, employers of graduates, funding agencies, and society, as well as internal stakeholders such as faculty and staff. Strategic planning is a structured approach to anticipating the future and "exploiting the inevitable." The strategic plan should chart the broad course for the entire institution for the next five years. It is a process for ensuring that the budget dollars follow the plan rather than vice versa. Strategic planning is not just a plan for growth and expansion. A strategic plan can and often does guide retrenchment and reallocation.

McConkey (1981) said that the essence of strategy is differentiation. What makes this university or college or department different from any other? Educational institutions, like other service organizations, can differentiate themselves based on types of programs, delivery systems, student clientele, location, and the like. Similarly, a department or administrative unit involved in strategic planning will identify its unique niche in the larger university community and focus its resources on a limited number of strategic efforts, abandoning activities that could be, should be, or are being done by others.

Why Is Strategic Planning Essential?

Formalized strategic planning grew out of budget exercises in the America of the 1950s and spread rapidly. By the mid-1960s and throughout the 70s, strategic planning (in many forms) was occurring in most large corporations (Mintzberg, 1994). Even the federal government used a Planning-Programming-Budgeting System (PPBS) during this time.

Public and nonprofit organizations recognized the usefulness of strategy formulation during the 1980s, when the notion of marketing for public and non-profit organizations gained prominence. Most well-known models of public and nonprofit strategic planning have their roots in the Harvard policy model developed at the Harvard Business School (Bryson, 1988). The systematic analysis of strengths, weaknesses, opportunities and threats (SWOT) is a primary strength of the Harvard model and is a step in the strategic planning model used at UW-Madison (Figure 1.1). Given its thirty-some years of practice in this country, why is strategic planning essential now?

These are times of rapid change. Will Rogers said, "Even if you're on the right track, you'll get run over if you just sit there." No university or college or department can remain static for long. Neither can an institution survive for long with knee-jerk responses to change. Strategic planning should minimize crisis-mode decision-making.

Figure 1.1 Strategic Planning Model

These are times of social and cultural complexity. One small group at the top cannot know the needs of students, employers and other stakeholder without their input. It is also difficult for one small internal group to know all that is occurring in the external environment that will have an impact, positive or negative, on the university or college.

There are times of interdependence. Bryson (1988) provides three examples of formerly distinct arenas that are now very much interconnected: domestic and international: public, private and nonprofit; and educational and economic policies. The blurring of these distinctions means that although many organizations and institutions are involved, no one is fully in charge. This increased environmental ambiguity requires educational institutions and other public entities to think and act strategically as never before (Bryson, 1988).

Traditional financial resources for the support of higher education are not likely to increase. Cut-backs are the norm in educational financing. Yet demands for services continue to expand. Strategic planning gives the university, the college, the department, and the administrative unit the opportunity to chart its own course and to focus its own future. Jurinksi (1993) calls strategic planning an intellectual exercise. As such, the process is uniquely suited to higher education.

Keller (1983) speaks of conscious academic strategy as an appropriate response to turbulence.

...The dogma of colleges as amiable, anarchic, self-correcting collectives of scholars with a small contingent of dignified caretakers at the unavoidable business edge is crumbling. A new era of conscious academic strategy is being born. The modern college and university scene is one that is no longer so fiercely disdainful of sound economics and financial planning or so derisive of strategic management. Professors and campus administrators are now uniting to design plans, programs, priorities, and expenditures in order to insure their futures and to keep American higher education among the world's best. (pp. viii-ix)

Strategic v. Long-Range Planning

It is sometimes thought that strategic planning is just another buzz word for long-range planning. There are major differences between strategic planning and garden variety long-range planning. First, strategic planning is much more sensitive to the external environment than long-range planning. Traditionally, long-range planning was inwardly focused. The goals and objectives were formulated with minimal attention to the larger system in which the institution functioned.

Traditional long-range planning could be conducted with minimal involvement of stakeholders, those affected by the plan. Strategic planning, particularly the model in Figure 1.1 which has been used in a variety of departments, offices, and colleges on the UW-Madison campus, relies on information from internal and external stakeholders regarding their needs, expectations and requirements as the foundation for planning.

Related to the first difference is the fact that traditional long-range planning tends to maintain the status quo over time. Assuming that the future will be a linear extension of the present, planners typically spend little time attempting to reshape the organization. Strategic planning is much more likely to result in a deliberate shift in direction or refocusing of mission in light of changes, actual or anticipated.

Since long-range planning has generally been oriented to the status quo, visioning was not a critical component. Strategic plans, however, are developed around a vision of success or a vision of the desired future. This idealized word picture represents the best possible future for the institution. The plan helps the make this shared vision a reality.

Bryson (1988) points out another distinction. Long-range planning focuses more on specifying goals and objectives, while strategic planning is more focused on identifying and resolving issues. In fact, goals and objectives which are considered operational planning should not be developed before a college or university has completed its strategic planning.

Keller (1983) says that strategic planning places the fate of the institution above all else.

Strategic planning places the long-term vitality and excellence of the college or university first. It cares about traditions, faculty salaries, and programs in Greek, agriculture, and astrophysics. But it cares about institutional survival more, so that there will be places for scholars of Greek, agriculture, and astrophysics to teach and do their research. Scholars cannot easily hang their shingle out like physicians or architects.... Professors still need to unite as a universitas. (p. 151)

Benefits of Strategic Planning

Effective strategic planning can accrue many benefits to the organization. First, it enables the organization to be proactive and to actively shape its own destiny. Because the process requires attention to trends and external developments, an educational institution or department is less likely to be taken by surprise by a new problem or development.

Stakeholders--those affected by the organization--are involved in the planning process. Thus the institution or department receives valuable feedback both on successful efforts and on areas where improvements should be made.

Representatives from faculty, academic staff, and classified staff should be involved as each group brings a unique perspective to the process. This involvement throughout the process helps ensure that those who have major responsibilities to carry out the plan understand the plan and the reasons behind it. Being involved in the planning process can contribute greatly to employees' commitment to mutual goals and a sense of organizational unity.

Similarly, the active involvement of stakeholders in the planning process creates external advocacy for the organization. Employers, for example, are much more likely to support an educational initiative such as a new degree program or a revamped curriculum if they have a first-hand role in a well-designed planning process. Note that the term is "active involvement." External stakeholders have traditionally served in advisory capacities to the educational enterprise. Involvement in strategic planning is much more substantive than the advisory role. Their involvement essentially lays the groundwork for continuing support and participation by those stakeholders.

A major benefit of strategic planning in higher educational institutions is that it can lend stability to the organization in spite of increasingly frequent leadership changes. Simmons and Pohl (1994) found that from 1980 to 1994 at the University of Wisconsin-Madison, the average dean's tenure was five years. They further noted that the average length of leadership tenure was declining sharply with each year. Their observation was that

Strategic planning creates a broad decision-making group by actively involving middle and operational levels of management. By pushing decision-making down, a system for strategic planning can help the organization maintain a core purpose during times of changing leadership. (p. 2)

Simmons and Pohl (1994) also pointed out that a broadly-based participative strategic planning process can actually make the most of the frequent leadership changes by coupling a new leader's external perspective with a stable core internal group that is committed to mutual goals and a shared vision of a successful future.

The Dark Side of Strategic Planning

The dark side of strategic planning is not so very dark, but it is has some inherent hazards. Jurinski (1993) says that strategic planning efforts that fail typically do so because the organization underestimated the required amount of time, effort and money from the start. The process takes time. It is difficult for any organization or group to go through a strategic planning process in less than two concentrated days in addition to shorter preparatory sessions and later meeting(s) to revise plans based on feedback. Figure 1.1 shows the steps in a strategic planning model which has been used at the University of Wisconsin-Madison. From the day the decision is made to create a strategic plan, several months are generally required to complete the process. (Most of this time is lead time for scheduling the major planning session.) Some planning efforts occur over many months and even years. This long time line is generally not advisable or necessary. People become exhausted by the process and the effort loses momentum.

A good planning process costs money. Bringing people together requires places to meet, facilitators, meals and refreshments, travel costs, audiovisual rentals, and the like.

Strategic planning can be risky in that deliberate decisions are made to focus or refocus the organization. This means that "something has to go" or at the very least, "something has to change." One of the hallmarks of strategic planning is fresh, bold approaches that break through barriers. Ideally, these new strategies propel the organization to its vision. In the worst case scenario, poorly considered strategic decisions can be disastrous. One purpose of having a broadly representative group of internal and external stakeholders involved is to help avoid organizational decisions that would be viewed retrospectively as errors.

Elements of a Successful Strategic Planning Process

Five ingredients are essential for an effective strategic planning process--the right people, good data, preparation, a structured process, and adequate resources of time and dollars. Each of these five elements is revisited later.

People
Having the right people means that all the key stakeholders are represented in some way. Usually this is done through a representation system where each participant in the planning event is there representing a particular stakeholder group--students, business, faculty, classified staff, academic staff, affiliated agencies and the like. The responsibility of all participants is to take the preliminary planning results back to the group they represent to receive feedback. This feedback, both positive and negative, is then brought back to the group and used for revising the draft plans.
Data
One of the connections between strategic planning and continuous quality improvement is the reliance on data as the basis for decision-making. Data on stakeholder/customer needs and their evaluation of existing services are required for the planning process. The more hard data that are available to describe the current situation, the better the chances of a good plan. Strategic planning in the absence of reliable data can be dangerous. Yet, it is not unusual to find organizations planning for the future with little or no reliable information about the true state of affairs. Some organizations find, upon beginning a strategic planning process, that they must create a temporary plan while collecting crucial data on which to base subsequent strategic planning.
Preparation
Those who are planning the future of their department, school, college or institution should be adequately prepared for the task. It is unwise to plan without some notion of the many alternative directions and what others have found to be successful. It is common for an educational institution to invite futurists to speak to the planning team prior to the planning event. This helps loft people's thinking past the issues of today and later helps them create the vision of a desired future. Outstanding videotapes are available on change and paradigm shifts. Seeing and discussing these programs helps individuals to prepare to make the small and large changes that are inevitable with or without a strategic plan. Some planning groups have brief book reviews in which each member reports on the a current book that illuminates the organization's choices. Some groups visit other institutions to get ideas on what is working successfully elsewhere. Preparation that expands the group's perception of what is possible and desirable creates the most innovative and bold plans.
A Structured Planning Process
Most of us have attended at least one meeting where everyone talked but when it was all over, nothing had been accomplished. This common experience points out the need for a structured planning process. Structured means designated and sequenced activities such as brainstorming, small group work, listing, summarizing, prioritizing and the like. Structure requires a facilitator who is responsible for maintaining the process without having input into the content. A structured planning process makes it possible for everyone in attendance to participate fully, while discouraging domination by high-verbal, high-status group members.
The approach to strategic planning used by various departments and offices and at the University of Wisconsin-Madison represents a combination of the eight step strategic planning model for public and non-profit organizations created by Bryson (1988) and the Technology of Participation (ToP) approach developed by the Institute of Cultural Affairs, Chicago (Spencer, 1989). The ToP workshop methodology is used by Institute facilitators throughout the world for community development planning.
The model in Figure 1.1 reflects a belief in intellectual fusion--that is, that when people of good will come together to plan and when they are given a structure in which to work together, the results are far superior to what any individual in the group could generate alone. The structure of the process described here helps mitigate the "camel designed by a committee" phenomenon which occurs because of excessive compromise. In the model presented here, the group strives for consensus beginning with individuals, then small groups, then the group as a whole.
In consensus, members commit to supporting the results of the group's work even if they do not agree with every single point in the plan. This support is based on the individual belief that "Even though this is not my favorite choice, I will support it because I believe I had adequate opportunity to discuss my views and this choice is the best one for us at this time." A skilled facilitator will also help the group resist conglomerating too many ideas such that the original thinking of all of them are lost.
Individuals who were initially cool to a structured planning process often express satisfaction and sometimes delight at the end of the planning event, both for the intellectual stimulation and the tangible results.
Resources of Time and Dollars
The costs of a sound planning process and the time required for optimal planning were both discussed earlier. Both inadequate time and too much time are detrimental to the process.

The Role of the Leader in Strategic Planning

Planning has been one of the traditional "ings" of management. Some leaders initially experience discomfort at the idea of involving all levels of staff in planning. Some might view involving all levels of staff in planning as abrogating their responsibility. The leader's responsibility, however, is to ensure that a sound planning process occurs and that the budget follows the plan. Thus the leader's role is to create the structure for planning and to participate in the process fully. James Renier, Honeywell Corporation, commented on broad involvement in planning:

At some point you've go to loosen the reins, delegate. It's almost like being on a battlefield in a fog. It's too much to ask the commander to describe the terrain as if the fog wasn't there...we've got to be willing to listen and say, well, someone else has seen through part of the fog so we'd better listen carefully to that person.

Senge (1990) uses an ocean liner metaphor to discuss leadership in a learning organization. He suggests that the organizational leader is not the captain or navigator, but rather the designer of the ocean liner. Senge says that the leadership task is designing the learning processes whereby the people in the organization can deal productively with the critical issues and develop mastery in the learning disciplines. Senge says:

This is new work for most experienced managers, many of whom rose to the top because of their decision-making and problem-solving skills, not their skills in mentoring, coaching and helping others learn. (p.345)

Characterizing the implementation of a sound planning process as the leader's responsibility is consistent with the designer metaphor. Leaders, though they should participate actively, should not serve as facilitators for their own organizations' planning processes. Their ideas and/or style may inhibit full participation of the group. Similarly, it is seldom advisable for any planning facilitator to participate as a planning team member. The roles of facilitator and participant are generally not compatible and facilitation, of itself, requires one's full attention.

Relationship of Strategic Planning to Continuous Quality Improvement

Quality may be defined as meeting the needs and exceeding the expectations of stakeholders. It is difficult to imagine an organization dedicated to continuously improving its services or products that does not have a strategic plan. One of W. Edwards Deming's basic requirements for continuous quality improvement is constancy of purpose (Gabor, 1990). It is significant that virtually all strategic planning models begin with reviewing, refining or creating the mission statement based on stakeholders and their needs. The mission statement then becomes the foundation upon which all subsequent planning builds.

Strategic planning is a process of identifying some common directions for the department, division, school or college based on needs of the external and internal stakeholders. In a quality environment, all employees share some common understandings and commitments relative to what they wish to accomplish together for their stakeholders. This does not mean that entrepreneurial activity cannot take place, but it does mean that there is some minimal level of shared effort and some common directions. Greater collaboration can yield enormous benefits for the individuals in the department or organization.

Quality improvement processes tend to focus on the operational end of the planning model shown in Figure 1.1 and especially on those critical or core processes that are carried out almost on a daily basis. Quality tools are used to improve processes and subprocesses within the organization, whereas strategic planning serves to focus the efforts of the organization as a whole. Thus, an effective strategic planning process provides a framework within which quality tools and processes can be utilized (Gibson, 1994). Taken together, strategic planning and continuous quality improvement can dramatically improve the ability of the organization to meet the needs of its internal and external stakeholders.

Tying the Budget to the Plan

Budgets are basically links between financial resources and human behavior in order to accomplish policy objectives or in other words, budgets are a series of goals with price tags attached.

Aaron Wildavsky (1984)

A strategic plan is of limited value unless it is used in the budget exercise. It is not uncommon to find institutions whose planning processes have little or no relationship to budgeting processes. The reasons for this are complex and include factors such as the historical pattern of financial decision-making and the availability of accurate financial data throughout the organization. In some cases, organizations simply do not have a means to connect planning and budgeting very well. For those organizations who wish to focus their financial resources via a strategic planning process, this model provides a relatively uncomplicated structure and process for doing so. The example provided here shows how a department's planning and budgeting processes are linked. Figure 1.2 is a sample budgeting form, the Program Plans and Budget Requests form that would be completed by each program (or cost-center or subunit) within the department. Note that each program is required to complete a minimal amount of self-assessment and to have annual objectives. These objectives represent activities that help the department move in the strategic directions identified in the planning process.

This process amounts to a program budgeting approach. In program budgeting, instead of presenting budgetary requests in line-item form for supplies, maintenance, personnel, as is the case with traditional incremental budgeting, requests are made in terms of goals or end-products. Program budgeting is viewed as useful for relating ends to means and emphasizing the policy effects of the budget.

The budgeting process outlined here becomes a very public and intelligible activity in contrast to traditional line item budgeting which Wildavsky says de-emphasizes overt conflict among competing programs. A process that seeks to minimize overt conflict, he says, "encourages secret deliberations, non-partisanship, and the recruitment of personnel who feel comfortable in sidestepping policy decision most of the time" (p. 137).

Wildavsky (1984) makes the point that program budgeting brings to light more overt conflict. He says, "It is much easier to agree on a small addition or decrease than to compare the worth of one program [or goal] to that of all others" (p. 136). The planning model presented here helps mitigate the amount of budgetary conflict by creating, up-front, strategic directions and prioritized goals through a process in which everyone participates, either directly or indirectly.

A certain amount of the total budget can be set aside for opportunistic or entrepreneurial activities that do not necessarily align with the strategic plan. The discretionary budget is a relatively small percentage of the whole, as salaries comprise the majority of the budget in most higher education institutions. Currently, it is not unusual that the entire discretionary budget for a department is used for entrepreneurial activities, with little or no departmental focus.

Note that in the Program Plans and Budget Requests form in Figure 1.2, requests for positions, equipment, and materials over $500. are submitted as resources needed to accomplish objectives. It has been a practice at the University of Colorado at Boulder that no new positions are approved without a formal strategic plan which shows how the position will enhance effectiveness of the plan. Individual programs, majors, or other subunits submit their plans and budget requests using the form in Figure 1.2.

Figure 1.2 Program plans and budget requests

Figure 1.3 Department chair’s planning and budget priorities

Chair's Role

Figure 1.3 is the Department Chair's Planning and Budget Priorities form. This is the department chair's priority plan which includes requests for resources. Note that the proposed objectives are shown in relation to a strategic direction. Thus the chair (and/or appropriate committee) still makes budgetary decisions, however, the criteria for these decisions are known in advance and the financial decision-making process is made explicit.

In a school or college, departments would be asked to show how their proposed activities support the strategic directions of the school or college. The school or college would indicate which university themes or strategic directions are being addressed through the school or college's strategic directions and/or goals.

Self-Evaluation of Strategic Planning Process

Following are fourteen questions that those responsible for planning in a department, school, college, division, or higher educational institution as a whole can ask about the strategic and annual planning process. The more heartily these questions can be answered in the affirmative, the more effective the planning exercise is likely to be. These questions are also found in Figure 1.4.

Does the mission concisely state what will be done for whom?

A concise mission statement telling what the organization does for whom is the ideal beginning of a strategic plan. If this mission is not clear and agreed upon, the rest of the process will be unsatisfactory. A rambling mission statement is less effective than a finely pointed statement. The mission for the University of Wisconsin-Madison is interpreted as follows: to "create, integrate, transfer and apply knowledge."
Is the vision a descriptive statement of where and what the organization wants to be in the future?

The vision statement should be vivid enough that a stakeholder can discern the institution's intentions. For example, "being the best..." doesn't say enough. Such a statement does not provide us with information on what being the "best" would look like. A vision statement should paint a word picture of what the institution hopes to become. It should stretch the institution to change without being impossible.
Is there evidence that representatives of employees at all levels (faculty, academic staff, support staff, administration) participated in a meaningful way in strategic and annual planning?

Although every individual in an organization cannot usually participate in all phases of the planning process, everyone can participate in some phase of the process. The model presented here is a representative democracy model in which a group (the planning council) selected to represent the whole is charged with developing the strategic plan. It is the responsibility of all members of the planning council to communicate the preliminary results and seek feedback from the constituencies they represent, whether faculty, staff, administration, support staff or students In addition, results of staff surveys or other staff input can inform the situational analysis. In the annual planning and budgeting phase, all employees are involved in identifying goals, objectives, activities, and budgetary needs for their work group or unit for the coming year. All employees are involved in determining needed professional development based on the goals and objectives that are developed collaboratively.
Is there evidence that data on the needs of all the stakeholders but especially those from outside of the organization were sought and used in the planning process?

Like all quality-based processes, this planning model is dependent upon solid information. If information on stakeholders’ needs and satisfaction was not available when the current plan was being developed, the plan should include mechanisms for collecting such data within the current budget year.
Are goals prioritized annually?

It is usually difficult to permanently prioritize strategic directions and major goals since there may be a great deal of interactivity among them. It is useful, however, to prioritize strategic directions and/or goals on an annual basis, focusing first on the actions that tend to drive the others. The important thing is that each staff member is able to prioritize which activities are most critical to concentrate on in a given year.
Are limitations, barriers and weaknesses addressed in goals and objectives?

In the excitement of planning for the future, it is not difficult to forget about problems and barriers. Some of this "forgetting" is actually necessary in order to push past the present and into the future. However, it is important to reconsider the problems and barriers when developing strategic directions. The question groups ask themselves is, “What do we have in our favor (a strength or opportunity) that can help us get over, around or through this barrier?” It is not necessary to have a strategic direction for every barrier, however the best strategies attack several problems at once. Also, it is helpful to identify early in the process which barriers or problems are most harmful so that when strategic directions are identified, a check can be done to ensure that the most potent problems or barriers are addressed in the plan.
Is there evidence in strategic and operational plans that planners looked beyond immediate day-to-day concerns and into the future?

One of the things that distinguishes strategic planning from traditional long-range planning is the assumption that the future will not be a linear extension of the past. A good planning process anticipates probable future(s) by collecting information from internal and external sources. Some groups have a futurist come in to speak about future trends. Some groups have book reviews in advance of the planning event. Some take today's figures on enrollments and/or revenues and show how different future scenarios would affect the institution. The planning process itself should involve a structured, formal effort to anticipate future trends and the changing needs of stakeholders.
Does the plan show that choices have been made in terms of types of service or activities, delivery system, who will be served, geographic scope, processes used, and the like?

Strategic planning requires a willingness to focus resources. Thus it is unlikely that an organization would continue doing everything it had done in the past in the same way if the organization was serious about planning strategically.
Do measures of success test the underlying hypotheses about cause-and-effect relationships?

This question assumes that measures of success have been identified for goals and/or key activities. These measures of success should go beyond "process" measures such as “report completed” or "course redesigned" although these process measures are also important. Kaplan and Norton (1996) characterize strategy as a set of hypotheses about cause-and-effect relationships. Feedback (termed “measures of success” here) should be able to "test, validate, and modify the hypotheses imbedded in ...strategy" (p. 84). For example, the decision of an academic department to redesign a course or courses is based on the assumption that something will improve as a result. If no attempt is made to determine what changed as a result of the effort (Did students grasp key concepts as reflected in exam grades? Did a higher percentage satisfactorily complete? Could students demonstrate deeper levels of understanding and mastery?), the department has no way to know if its hypothesis was right and whether the work of redesigning was worth the effort. Even more importantly, if nothing is learned about the effects of the redesign beyond the fact that it was done, the faculty have no new information on which to base future decisions about course redesign.
Do annual plans show evidence of cooperation, collaboration and/or integration of resources?

Another of the anticipated results of strategic planning is that by taking the time to study and better understand the organization and the milieu in which it functions, people begin to see new possibilities for leveraging their resources with other groups' resources. Particularly in higher education where the decrease in public funding is affecting almost all departments and units in some way, there are savings to be gained by cooperating, collaborating or pooling resources. For example, it is a common scenario to have a similar course offered by two departments, each course with a low enrollment. A cooperative agreement for both departments to alternately offer the course (by semester or year) would free up faculty in one of the departments for research, teaching other courses, curriculum development, service or other activities. In another scenario, very small departments can share administrative staff and services. (Sharing administrative costs with other departments may be the only way some very small, specialized departments can remain in existence.) Campus administrative units can pool funds for activities such as professional development or printed informational literature. These opportunities seldom surface in day-to-day operations, but can become plainly possible through a planning process.
Are formal progress reports presented at least once during each year?

To ensure that progress is being made toward meeting the goals that move the organization in its strategic directions, it is essential that progress reports are presented to the organization at least once in a given fiscal year. Holding people accountable for specific activities helps ensure that the plan is not forgotten. In fact, check dates should be identified for each goal or major activity early in the planning process.
Is there a copy of the strategic plan (or a summary) in the hands of every full-time staff member?

Not only should employees have a piece of paper that outlines the mission, vision and strategic direction of their department, school/college/division or institutions, employees should be able to articulate the key themes. If the strategic plan cannot be generally understood by the people who make it a reality, it is not much of a plan.

Many institutions have taken the key elements of their strategic planning process and created a mission/vision/strategy brochure that can go out to all employees reinforcing the commitment to some common directions or goals. (Following a strategic planning process, one school district added the mission statement to its stationery and had the mission painted on the wall of the gymnasium as a reminder to everyone.)
When a major decision must be made, is the strategic plan consulted?

One of the major reasons for going through a planning process is to help focus the efforts of an organization. It would be counter-productive to make those decisions and then ignore them during times of crisis or stress. Since new opportunities and problems will continually present themselves, the plan should serve as a guide for dealing with them. If the plan doesn't offer guidance on which issues or needs to pursue or address and which should be left to others, something is lacking. Either the plan's power to inform decision-making has not be fully realized or the plan itself is too abstract to be useful or there were opportunities and problems that were not anticipated in the situational analysis and environmental scanning phases of the process.
Does the budget follow the plan?

As was suggested earlier, it is essential that the budget follow the plan. If there is no intention to align resources with the planning process or no feasible mechanism with which to do so, there is little point to engaging in the exercise. Internal and external constituents can become cynical and hostile if they have devoted their time and energy to a task that has no real impact on resource decisions.

Bryson (1988) provides good advice regarding the utility of planning, "It is strategic thinking and acting that are important, not strategic planning." He says that any strategic planning activity that gets in the way of strategic thought and action should be scrapped (p. 2).

Figure 1.4 Questions for self-evaluation of strategic plan process

References

Bryson, J. (1988). Strategic planning for public and nonprofit organizations. San Francisco: Jossey-Bass, Inc.

Gabor, A. (1990). The man who discovered quality. New York: Random House.

Gibson, J. (1994). Continuous improvement on a tradition of excellence: Lessons from the study tour on total quality in a university setting. Ottawa, Ontario: The Conference Board of Canada.

Jurinski, J. (1993). Strategic planning. Saranac Lake, NY: American Management Association.

Kaplan, R. and Norton, D. (January-February, 1996) Using the balanced scorecard as a strategic management system. Harvard Business Review. pp.75-85.

Keller, G. (1983). Academic strategy: The management revolution in American Higher Education. Baltimore: Johns Hopkins University Press.

McConkey, D. (1981). Strategic planning in nonprofit organizations. Business Quarterly (School of Business, University of Western Ontario). 46(2), 24-33.

Mintzberg, H. (1994). The rise and fall of strategic planning. New York: Macmillan, Inc.

Simmons & Pohl. (1994). Leveraging areas for strategic planning in a university setting. Unpublished manuscript, Office of Quality Improvement, University of Wisconsin- Madison.

Senge, P. M. (1990). The fifth discipline. New York: Doubleday.

Spencer, L. (1989) Winning through participation. Dubuque: Kendall-Hunt.

Wildavsky, A. (1984). The politics of the budgetary process. (4th ed.). Boston: Little, Brown

Strategy: Definitions and Meaning

noreply@blogger.com (Guntur Tri Hariyanto) — Sun, 22 Apr 2007 15:59:00 +0000

Abstract

The concept of strategy has been borrowed from the military and adapted for use in business. A review of what noted writers about business strategy have to say suggests that adopting the concept was easy because the adaptation required has been modest. In business, as in the military, strategy bridges the gap between policy and tactics. Together, strategy and tactics bridge the gap between ends and means. This paper reviews various definitions of strategy for the purpose of clarifying the concept and placing it in context. The author's aim is to make the concepts of policy, strategy, tactics, ends, and means more useful to those who concern themselves with these matters..

Some Language Basics

Strategy is a term that comes from the Greek strategia, meaning "generalship." In the military, strategy often refers to maneuvering troops into position before the enemy is actually engaged. In this sense, strategy refers to the deployment of troops. Once the enemy has been engaged, attention shifts to tactics. Here, the employment of troops is central. Substitute "resources" for troops and the transfer of the concept to the business world begins to take form.

Strategy also refers to the means by which policy is effected, accounting for Clauswitz’ famous statement that war is the continuation of political relations via other means. Given the centuries-old military origins of strategy, it seems sensible to begin our examination of strategy with the military view. For that, there is no better source than B. H. Liddell Hart.

Strategy According to B. H. Liddell Hart

In his book, Strategy [1], Liddell Hart examines wars and battles from the time of the ancient Greeks through World War II. He concludes that Clausewitz’ definition of strategy as "the art of the employment of battles as a means to gain the object of war" is seriously flawed in that this view of strategy intrudes upon policy and makes battle the only means of achieving strategic ends. Liddell Hart observes that Clausewitz later acknowledged these flaws and then points to what he views as a wiser definition of strategy set forth by Moltke: "the practical adaptation of the means placed at a general’s disposal to the attainment of the object in view." In Moltke's formulation, military strategy is clearly a means to political ends.

Concluding his review of wars, policy, strategy and tactics, Liddell Hart arrives at this short definition of strategy: "the art of distributing and applying military means to fulfil the ends of policy." Deleting the word "military" from Liddell Hart’s definition makes it easy to export the concept of strategy to the business world. That brings us to one of the people considered by many to be the father of strategic planning in the business world: George Steiner.

Strategy According to George Steiner

George Steiner, a professor of management and one of the founders of The California Management Review, is generally considered a key figure in the origins and development of strategic planning. His book, Strategic Planning [2], is close to being a bible on the subject. Yet, Steiner does not bother to define strategy except in the notes at the end of his book. There, he notes that strategy entered the management literature as a way of referring to what one did to counter a competitor’s actual or predicted moves. Steiner also points out in his notes that there is very little agreement as to the meaning of strategy in the business world. Some of the definitions in use to which Steiner pointed include the following:

Strategy is that which top management does that is of great importance to the organization.
Strategy refers to basic directional decisions, that is, to purposes and missions.
Strategy consists of the important actions necessary to realize these directions.
Strategy answers the question: What should the organization be doing?
Strategy answers the question: What are the ends we seek and how should we achieve them?

Steiner was writing in 1979, at roughly the mid-point of the rise of strategic planning. Perhaps the confusion surrounding strategy contributed to the demise of strategic planning in the late 1980s. The rise and subsequent fall of strategic planning brings us to Henry Mintzberg.

Strategy According to Henry Mintzberg

Henry Mintzberg, in his 1994 book, The Rise and Fall of Strategic Planning [3], points out that people use "strategy" in several different ways, the most common being these four:

Strategy is a plan, a "how," a means of getting from here to there.
Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.
Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets.
Strategy is perspective, that is, vision and direction.

Mintzberg argues that strategy emerges over time as intentions collide with and accommodate a changing reality. Thus, one might start with a perspective and conclude that it calls for a certain position, which is to be achieved by way of a carefully crafted plan, with the eventual outcome and strategy reflected in a pattern evident in decisions and actions over time. This pattern in decisions and actions defines what Mintzberg called "realized" or emergent strategy.

Mintzberg’s typology has support in the earlier writings of others concerned with strategy in the business world, most notably, Kenneth Andrews, a Harvard Business School professor and for many years editor of the Harvard Business Review.

Strategy According to Kenneth Andrews

Kenneth Andrews presents this lengthy definition of strategy in his book, The Concept of Corporate Strategy [4]:

"Corporate strategy is the pattern [italics added] of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities. (pp.18-19)."

Andrew’s definition obviously anticipates Mintzberg’s attention to pattern, plan, and perspective. Andrews also draws a distinction between "corporate strategy," which determines the businesses in which a company will compete, and "business strategy," which defines the basis of competition for a given business. Thus, he also anticipated "position" as a form of strategy. Strategy as the basis for competition brings us to another Harvard Business School professor, Michael Porter, the undisputed guru of competitive strategy.

Strategy According to Michael Porter

In a 1996 Harvard Business Review article [5] and in an earlier book [6], Porter argues that competitive strategy is "about being different." He adds, "It means deliberately choosing a different set of activities to deliver a unique mix of value." In short, Porter argues that strategy is about competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors. In his earlier book, Porter defines competitive strategy as "a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there." Thus, Porter seems to embrace strategy as both plan and position. (It should be noted that Porter writes about competitive strategy, not about strategy in general.)

Strategy According to Kepner-Tregoe

In Top Management Strategy [7], Benjamin Tregoe and John Zimmerman, of Kepner-Tregoe, Inc., define strategy as "the framework which guides those choices that determine the nature and direction of an organization." Ultimately, this boils down to selecting products (or services) to offer and the markets in which to offer them. Tregoe and Zimmerman urge executives to base these decisions on a single "driving force" of the business. Although there are nine possible driving forces, only one can serve as the basis for strategy for a given business. The nine possibilities are listed below:

Products offered	Production capability	Natural resources
Market needs	Method of sale	Size/growth
Technology	Method of distribution	Return/profit

It seems Tregoe and Zimmerman take the position that strategy is essentially a matter of perspective.

Strategy According to Michel Robert

Michel Robert takes a similar view of strategy in, Strategy Pure & Simple [8], where he argues that the real issues are "strategic management" and "thinking strategically." For Robert, this boils down to decisions pertaining to four factors:

Products and services	Market segments
Customers	Geographic areas

Like Tregoe and Zimmerman, Robert claims that decisions about which products and services to offer, the customers to be served, the market segments in which to operate, and the geographic areas of operations should be made on the basis of a single "driving force." Again, like Tregoe and Zimmerman, Robert claims that several possible driving forces exist but only one can be the basis for strategy. The 10 driving forces cited by Robert are:

Product-service	Sales-marketing method
User-customer	Distribution method
Market type	Natural resources
Production capacity-capability	Size/growth
Technology	Return/profit

Strategy According to Treacy and Wiersema

The notion of restricting the basis on which strategy might be formulated has been carried one step farther by Michael Treacy and Fred Wiersema, authors of The Discipline of Market Leaders [9]. In the Harvard Business Review article that presaged their book [10], Treacy and Wiersema assert that companies achieve leadership positions by narrowing, not broadening their business focus. Treacy and Wiersema identify three "value-disciplines" that can serve as the basis for strategy: operational excellence, customer intimacy, and product leadership. As with driving forces, only one of these value disciplines can serve as the basis for strategy. Treacy and Wiersema’s three value disciplines are briefly defined below:

Operational Excellence	Strategy is predicated on the production and delivery of products and services. The objective is to lead the industry in terms of price and convenience.
Customer Intimacy	Strategy is predicated on tailoring and shaping products and services to fit an increasingly fine definition of the customer. The objective is long-term customer loyalty and long-term customer profitability.
Product Leadership	Strategy is predicated on producing a continuous stream of state-of-the-art products and services. The objective is the quick commercialization of new ideas.

Each of the three value disciplines suggests different requirements. Operational Excellence implies world-class marketing, manufacturing, and distribution processes. Customer Intimacy suggests staying close to the customer and entails long-term relationships. Product Leadership clearly hinges on market-focused R&D as well as organizational nimbleness and agility.

What Is Strategy?

What, then, is strategy? Is it a plan? Does it refer to how we will obtain the ends we seek? Is it a position taken? Just as military forces might take the high ground prior to engaging the enemy, might a business take the position of low-cost provider? Or does strategy refer to perspective, to the view one takes of matters, and to the purposes, directions, decisions and actions stemming from this view? Lastly, does strategy refer to a pattern in our decisions and actions? For example, does repeatedly copying a competitor’s new product offerings signal a "me too" strategy? Just what is strategy?

Strategy is all these—it is perspective, position, plan, and pattern. Strategy is the bridge between policy or high-order goals on the one hand and tactics or concrete actions on the other. Strategy and tactics together straddle the gap between ends and means. In short, strategy is a term that refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provides general guidance for specific actions in pursuit of particular ends. Strategy is at once the course we chart, the journey we imagine and, at the same time, it is the course we steer, the trip we actually make. Even when we are embarking on a voyage of discovery, with no particular destination in mind, the voyage has a purpose, an outcome, an end to be kept in view.

Strategy, then, has no existence apart from the ends sought. It is a general framework that provides guidance for actions to be taken and, at the same time, is shaped by the actions taken. This means that the necessary precondition for formulating strategy is a clear and widespread understanding of the ends to be obtained. Without these ends in view, action is purely tactical and can quickly degenerate into nothing more than a flailing about.

When there are no "ends in view" for the organization writ large, strategies still exist and they are still operational, even highly effective, but for an individual or unit, not for the organization as a whole. The risks of not having a set of company-wide ends clearly in view include missed opportunities, fragmented and wasted effort, working at cross purposes, and internecine warfare. A comment from Lionel Urwick's classic Harvard Business Review article regarding the span of control is applicable here [11]:

"There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds."

For the leadership of an organization to remain unclear or to vacillate regarding ends, strategy, tactics and means is to not know their own minds. The accompanying loss of morale is enormous.

One possible outcome of such a state of affairs is the emergence of a new dominant coalition within the existing authority structure of the enterprise, one that will augment established authority in articulating the ends toward which the company will strive. Also possible is the weakening of authority and the eventual collapse of the formal organization. No amount of strategizing or strategic planning will compensate for the absence of a clear and widespread understanding of the ends sought.

The Practical Question: How?

How does one determine, articulate and communicate company-wide ends? How does one ensure understanding and obtain commitment to these ends? The quick answers are as follows:

The ends to be obtained are determined through discussions and debates regarding the company's future in light of its current situation. Even a SWOT analysis (an assessment of Strengths, Weaknesses, Opportunities and Threats) is conducted based on current perceptions.

The ends settled on are articulated in plain language, free from flowery words and political "spin." The risk of misdirection is too great to tolerate unfettered wordsmithing. Moreover, the ends are communicated regularly, repeatedly, through a variety of channels and avenues. There is no end to their communication.

Understanding is ensured via discussion, dialog and even debate, in a word, through conversations. These conversations are liberally sprinkled with examples, for instances, and what ifs. Initially, the CEO bears the burden of these conversations with staff. As more people come to understand and commit to the ends being sought, this communications burden can be shared with others. However, the CEO can never completely relinquish it. The CEO is the keeper of the vision and, periodically, must be seen reaffirming it.

Ultimately, the ends sought can be expressed via a scorecard or some other device for measuring and publicly reporting on company performance. Individual effort can then be assessed in light of these same ends. Suppose, for instance, that a company has these ends in mind: improved customer service and satisfaction, reduced costs, increased productivity, and increasing revenues from new products and services. It is a simple and undeniably relevant matter for managers to periodically ask the following questions of the employees reporting to them:

What have you done to improve customer service?
What have you done to improve customer satisfaction?
What have you done to reduce costs?
What have you done to increase productivity?
What have you done to increase revenues from new products and services?

The Decisions Are the Same

No matter which definition of strategy one uses, the decisions called for are the same. These decisions pertain to choices between and among products and services, customers and markets, distribution channels, technologies, pricing, and geographic operations, to name a few. What is required is a structured, disciplined, systematic way of making these decisions. Using the "driving forces" approach is one option. Choosing on the basis of "value disciplines" is another. Committing on the basis of "value-chain analysis" is yet a third. Using all three as a system of cross-checks is also a possibility.

Some Fundamental Questions

Regardless of the definition of strategy, or the many factors affecting the choice of corporate or competitive strategy, there are some fundamental questions to be asked and answered. These include the following:

Related to Mission & Vision	Who are we? What do we do? Why are we here? What kind of company are we? What kind of company do we want to become? What kind of company must we become?
Related to Corporate Strategy	What is the current strategy, implicit or explicit? What assumptions have to hold for the current strategy to be viable? What is happening in the larger, social and educational environments? What are our growth, size, and profitability goals? In which markets will we compete? In which businesses? In which geographic areas?
Related to Competitive Strategy	What is the current strategy, implicit or explicit? What assumptions have to hold for the current strategy to be viable? What is happening in the industry, with our competitors, and in general? What are our growth, size, and profitability goals? What products and services will we offer? To what customers or users? How will the selling/buying decisions be made? How will we distribute our products and services? What technologies will we employ? What capabilities and capacities will we require? Which ones are core? What will we make, what will we buy, and what will we acquire through alliance? What are our options? On what basis will we compete?

Some Concluding Remarks

Strategy has been borrowed from the military and adapted for business use. In truth, very little adaptation is required.
Strategy is about means. It is about the attainment of ends, not their specification. The specification of ends is a matter of stating those future conditions and circumstances toward which effort is to be devoted until such time as those ends are obtained.
Strategy is concerned with how you will achieve your aims, not with what those aims are or ought to be, or how they are established. If strategy has any meaning at all, it is only in relation to some aim or end in view.
Strategy is one element in a four-part structure. First are the ends to be obtained. Second are the strategies for obtaining them, the ways in which resources will be deployed. Third are tactics, the ways in which resources that have been deployed are actually used or employed. Fourth and last are the resources themselves, the means at our disposal. Thus it is that strategy and tactics bridge the gap between ends and means.
Establishing the aims or ends of an enterprise is a matter of policy and the root words there are both Greek: politeia and polites—the state and the people. Determining the ends of an enterprise is mainly a matter of governance not management and, conversely, achieving them is mostly a matter of management not governance.
Those who govern are responsible for seeing to it that the ends of the enterprise are clear to the people who people that enterprise and that these ends are legitimate, ethical and that they benefit the enterprise and its members.
Strategy is the joint province of those who govern and those who manage. Tactics belong to those who manage. Means or resources are jointly controlled. Those who govern and manage are jointly responsible for the deployment of resources. Those who manage are responsible for the employment of those resources—but always in the context of the ends sought and the strategy for their achievement.
Over time, the employment of resources yields actual results and these, in light of intended results, shape the future deployment of resources. Thus it is that "realized" strategy emerges from the pattern of actions and decisions. And thus it is that strategy is an adaptive, evolving view of what is required to obtain the ends in view.

This paper has taken a broad, multi-faceted look at the subject of strategy. Some readers might go away disappointed that no final, unambiguous definition of strategy has been provided. The quick response is that there is none, that strategy is a broad, ambiguous topic. We must all come to our own understanding, definition, and meaning. Helping the reader do so is the chief aim of this paper.

References

Strategy (1967). B. H. Liddell Hart. Basic Books.
Strategic Planning (1979). George Steiner. Free Press.
The Rise and Fall of Strategic Planning (1994). Henry Mintzberg. Basic Books.
The Concept of Corporate Strategy, 2^nd Edition (1980). Kenneth Andrews. Dow-Jones Irwin.
"What is Strategy?" Michael Porter. Harvard Business Review (Nov-Dec 1996).
Competitive Strategy (1986). Michael Porter. Harvard Business School Press.
Top Management Strategy (1980). Benjamin Tregoe and John Zimmerman. Simon and Schuster.
Strategy: Pure and Simple (1993). Michel Robert. McGraw-Hill.
The Discipline of Market Leaders (1994). Michael Treacy and Fred Wiersema. Addison-Wesley.
"Customer Intimacy and Other Value Disciplines." Michael Treacy and Fred Wiersema. Harvard Business Review (Jan-Feb 1993).
"The Span of Control." Lionel Urwick. Harvard Business Review (May-Jun 1956).

source: http://www.nickols.us/

STRATEGIC PLANNING EMPHASIS AND PLANNING SATISFACTION IN SMALL FIRMS: AN EMPIRICAL INVESTIGATION

noreply@blogger.com (Guntur Tri Hariyanto) — Sun, 22 Apr 2007 15:13:00 +0000

Javad Kargar

John A. Parnell
North Carolina Central University
Durham, NC

Published in Journal of Business Strategies 13, No. 1 (Spring 1996): 42-64.

Abstract

Most empirical studies examining strategic planning effectiveness have focused on its impact on financial performance. However, solid empirically-based conclusions concerning the usefulness of strategic planning have not yet emerged. The present study takes an alternative perspective, examining two dimensions of executive satisfaction with strategic planning. Results support a link between seven strategic planning characteristics and planning satisfaction among small firms.

Introduction

According to a recent Business Week (1992:60) special edition, "change can [no longer] be an occasional episode in the life of a corporation. Companies with rigid structures will be swept away. Corporate cultures that can adapt will survive and thrive..." Flexibility--as well as the related constructs of speed, adaptability, and change--has been touted as a key tenet of the "paradigm for the postmodern manager" (Byrne, 1992:62). To yield positive results, change and flexibility necessitate prior effective strategic planning. However, researchers have not yet conclusively determined why some planning efforts are more successful than others in meeting this challenge.

The present study examines the relationship between various facets of strategic planning and performance in small community banks. Drawing on the planning literature, this article suggests that planning-performance research on small firms can produce meaningful results.

Strategic Planning and Performance

Over the past decade, researchers have investigated the effects of formal strategic planning on financial performance in small firms. Many have concluded that there is no consistent association between the strategic planning process and performance (Cappel, 1990; Greenley, 1986; Leontiades & Tezel, 1980; Orpen, 1985; Robinson & Pearce, 1983). In response to studies highlighting the impact of strategic planning on firm performance (Karger & Malik, 1975; Rhyne, 1986; Sapp & Seiler, 1981; Welch, 1984), recent research has seen a greater emphasis on the strategic process rather than only on the strategy content that Hofer (1975) proposed in his early study.

Steiner (1979) provided a thorough conceptualization of strategic planning. According to Steiner, planning is an attitude and a process concerned with the future consequences of current decisions. Formal strategic planning links short, intermediate, and long-range plans. Strategic planning does not attempt to make future decisions or even forecast future events. It need not replace managerial intuition and judgment with massive, detailed sets of plans.

Steiner argued for the importance of strategic planning, providing keen insight into overcoming the barriers and biases associated with planning failures. However, research by Steiner and others is founded in the critical assumption that planning is important. But the debates rages on in the literature. The key question remains: Is there really a link between planning and performance?

The literature is inundated with the apparent advantages of planning, most notably its ability to improve the fit between the organization and its external environment (Godiwalla, Meinhart, & Warde, 1981). Others have argued that planning aids in the identification of future marketing threats and opportunities, elicits an objective view of managerial problems, creates a framework for internal communication, promotes forward thinking, and encourages a favorable attitude to change (Hausler, 1968; Loasby, 1967; Stern, 1966; Wilson, 1979). Further, there are intrinsic benefits that accrue as a result of the planning process, including the positive effects of planning on local employment and the economy (Greenley, 1986).

Langley (1988) also provided support for the benefits of planning, identifying four roles of formal strategic planning. In the public relations role, formal strategic planning is intended to impress or influence outsiders. The information role provides input for management decisions. The group therapy role is intended to increase organizational commitment through the involvement of people at all levels of the organization in strategic planning. Finally, the direction and control role is fulfilled when plans serve to guide future decisions and activities toward some consistent ends.

According to Roach and Allen (1983), the strategic planning process is the product of the best minds inside and outside the corporation. The process considers future implications of current decisions, adjusts plans to the emerging business environment, manages the business analytically, and links, directs, and controls complex enterprises through a practical, working management system. This process plays a vital role in firm performance (Roach & Allen, 1983).

Cartwright (1987) suggested that effective planning is not as rational and analytical as it has been portrayed in the literature. He argues for the lost art (rather than science) of planning. He contends that planning is both (1) a generic activity whose success determinants are partially independent of the area in which it is applied, and (2) an area where judgment, intuition, and creativity are still important.

Robinson and Pearce (1984) argued that formal strategic planning is a conceptual activity suited solely to larger firms and therefore has no effect on the financial performance of small firms. Wortman (1986) reviewed a set of small business planning-performance studies in the context of a broad survey of the methodologies employed in the small business literature. Wortman developed typologies but did not focus on the particular issue of the effect of formal strategic planning on small firm performance. However, he clearly addressed the need for continued refinement in planning-performance relationships and recommended the use of sophisticated statistical techniques for addressing such substantive research questions.

Greenley (1986) agreed with Robinson and Pearce and others to follow (Cartwright, 1987; Langley, 1988; Ramanujam & Venkatraman, 1987), but provided an alternative perspective, suggesting that there may not even be a positive relationship between planning and performance. Specifically, Greenley noted the face validity of the planning-performance linkage, but reports that existing empirical data has not yet substantiated the relationship.

Ramanujam and Venkatraman (1987) provided limited support for Greenley's contention. However, their empirical analysis of high and low performing firms elicited significant differences between the groups that relate to the planning process. Specifically, their research examined the quality of the planning. For example, high performing firms tend to commit resources to planning and promote line-staff cooperation substantially more than low performing firms. Low performers may plan; they just may not plan effectively.

Pearce, Freeman, and Robinson (1987) examined the perceived substantive contributions of each of eighteen existing studies, concluding that empirical support for the normative suggestions that all small firms should engage in formal strategic planning has been inconsistent and often contradictory. In a similar vein, Schwenk and Shrader (1993) recently meta-analyzed fourteen studies on formal strategic planning and performance in small firms. While they did not find that planning necessarily improves performance, they argued against the assertion that strategic planning is only appropriate for large firms. As such, they concluded that strategic planning promotes long-range thinking, reduces the focus on operational details, and provides a structured means for identifying and evaluating strategic alternatives. Since this was the first review that clearly demonstrated the planning-performance link across studies, it strengthened the case for recommending the use of strategic planning in all firms, regardless of size.

Sinha (1990) appears to have empirically established some kind of a planning-performance linkage. Sinha examined 1087 decisions made by 129 Fortune 500 firms between 1982 and 1986. He concluded that characteristics of the decisions accounted for 15 percent of the variance in data and therefore should be regarded as important determinants of the contribution planning makes to decision making. However, Sinha concedes that the quality of planning is critical to the relationship.

Planning and Strategic Change

There are three frequently cited reasons why top managers pursue changes in strategy (Parnell, 1994). First, a change in strategy may appear attractive is that desired performance levels are not being attained by the organization. In many cases, top managers may believe that a change in strategy will improve the ability of the business to generate revenues or profits, increase market share, and/or improve return on assets or investment. Many studies have concluded that declining profitability is the most common catalyst for strategic change (Boeker, 1989; Webb & Dawson, 1991).

Second, an environmental shift may necessitate strategic change to maintain alignment. Such shifts may result from changes in either the macroenvironment (e.g., new regulations, social forces, demographic changes, etc.) or the industry environment (e.g., new competitors, changes in competitor strategies, etc.). Changes in competition and technology necessitate a change in the knowledge base within the organization if it is to survive (Whipp, Rosenfeld, & Pettigrew, 1989). According to the population ecology perspective (Hannan & Freeman, 1977; Ulrich, 1987), the environment determines which organizations will survive and which ones will not. New firms better suited to the changing environment constantly replace existing ones. Competitors constantly struggle for existence by seeking to procure additional resources. As such, strategic change can be seen as a means to access additional resources and survive in a turbulent environment (Aldrich, McKelvey, & Ulrich, 1984).

Third, strategic change can enhance effective resource utilization (Barney, 1991; Lado, Boyd, & Wright, 1992). Proponents of the resource-based perspective have noted that competitive advantage often occurs from such organizational attributes as informational asymmetries (Barney, 1986b), culture (Barney, 1986a; Fiol, 1991), resource accumulation (Dierickx & Cool, 1989), and the minimization of transaction costs (Camerer & Vepsalainen, 1988). Hence, as organizational human and capital resources evolve, changes in strategy become necessary to fully utilize the resources available to the organization.

Resource shifts necessitating strategic change are more prevalent in some organizations than in others. Researchers have found that organizational performance, age, and length of tenure of the founding entrepreneur influence the degree to which a founding strategy endures and thus, the prospects for strategic change (Boeker, 1989). In fact, new CEOs are often recruited to attempt strategic changes upon entering the organization (Greiner & Bhambri, 1989).

Benefits and Costs of Strategic Change

There are three potential benefits of strategic change that are commonly cited in the literature. First, strategic change can enhance the strategy-environment fit. For example, Calingo (1989) found that the low cost leadership strategy was most successful in price sensitive markets, whereas the differentiation strategy was most successful when consumers perceived great differences among product offerings.

Second, strategic change can open new dimensions of competitive advantage previously untapped by competitors. These first mover advantages result from the willingness of an organization to enter a new market or develop a new product or service prior to the competition (Gannon, Smith & Grimm, 1992; Lieberman & Montgomery, 1988; Mascarenhas, 1992; Wernerfelt & Karnani, 1989).

Finally, strategic change can improve an organization's ability to adapt by forcing healthy changes within the business. The initial pain associated with change may be offset by the emergence of a lean, rejuvenated organization with a fresh focus on its goals and objectives. On the contrary, organizations that maintain strategic consistency over time may become stagnant, limiting the creativity and potential contributions of its members (Grimm & Smith, 1991; Wiersema & Bantel, 1992).

Regardless of the potential benefits, four potential costs that may be incurred as a result of strategic change have received considerable attention in the literature. First, strategic change increases perceived risks; a change in any key strategic, environmental, or organizational factor requires that the business develop a new "formula" for success suited to the change (Gaertner, 1989; Yoshihara, 1990). Second, change can disrupt the strategy-culture alignment (Green, 1988; Scholz, 1987; Schwartz & Davis, 1981). Although the organizational culture may be changed (Saffold, 1988; Schein, 1990) to reflect and support the change in strategy, the period of time required to do so is likely to take several years (Lorenz, 1988; Saffold, 1988; Schein, 1985; Scholes, 1991). Third, measures required to implement a change in strategy may necessitate the outlays of capital (Miles & Snow, 1978). Finally, strategic change may result in consumer confusion as they begin to alter their perceptions of the organization's products and services.

Even when strategic change results in a successful new product or service, there is no assurance that this success can be maintained. Indeed, competitors may distort consumer perceptions and reap the benefits of the initial strategic change. For example, many consumer goods companies implement an "imitation strategy" (Foxman, Muehling & Berger, 1990). As a result, many consumers purchase the imitation product thinking it is the original. If the consumer dislikes the product, this dissatisfaction can be transferred to the original. If the consumer likes the product, the consumer may realize that the product is an imitator and transfer the positive associations with the original product to that of the imitator. Either scenario can prove costly to the originator (Loken, Ross & Hinkle, 1986).

Constructs and Propositions

Empirical studies in small firms have generally employed a single dimension measures such as the presence or absence of planning or its degree of formality to explain variations in organizational performance. Such conceptualizations are inconsistent with the multidimensional view of planning systems that is being viewed as more important in the recent literature (e.g. Dyson & Foster, 1982; King, 1983; Kukalis, 1991; Lorange, 1979, 1980; Rhyne, 1987; Veliyath & Shortell, 1993).

Although many strategic planning system characteristics have been suggested in the literature, no consensus has yet emerged. For example, Ramanujam and Venkatraman (1987) proposed six dimensions of planning systems: use of techniques, attention to internal facets, attention to external facets, functional coverage, resources provided for planning, and resistance to planning. In another attempt to categorize strategic planning, Veliyath and Shortell (1993) identified five dimensions for strategic planning systems: planning implementation, market research competence, key personnel involvement, staff planning assistance, and innovativeness of strategies. Further, these studies focused on large firms. Thus, an expanded conceptualization of the notion of small-firm strategic planning is germane.

Following recent work (Ramanujam & Venkatraman, 1987; Veliyath & Shortell, 1993), the strategic planning system characteristics in the present study includes: (1) the degree of internal orientation of the system, (2) the degree of external orientation of the system, (3) the level of integration achieved within functional departments, (4) the extent of key personnel involvement in the planning process, and (5) the extent of use of analytical techniques in addressing strategic issues. These planning system attributes, in addition to being well-grounded in the existing literature (see Table 1), also appear to be problem areas in strategic planning within the banking industry.

Table 1
Characteristics of Strategic Planning Systems

Characteristic	Description	Supporting Literature
Internal Orientation	The extent of attention devoted to an organizations organization's recent history and current situation, past performance, and analysis of strengths and weaknesses	Camillus & Venkatraman (1984); Grant & King (1982); King & Clevland (1978); Lorange and Vancil (1977); Steiner (1979); Stevenson (1976)
External Orientation	Ability to obtain reliable and timely research information in order to learn about external environmental opportunities and threats.	Andrews (1971); McDaniel & Kolari (1987); Ramanjam et al. (1986); Snow & Hrebiniak (1980); Veliyath & Shortell (1993)
Functional Integration	The extent of coverage given to different functional areas with a view to integrating different functional requirements into a general management perspective.	Hitt, Ireland, & Palia (1982); Hitt, Ireland, & Stadler (1982); Lorange (1980); Snow & Hrebiniak (1980); Ramanujam et al. (1986); Ramanujam & Venkatraman (1987)
Key Personnel Involvement	The degree of involvement of top management, board members, line and staff managers in planning process.	Govindrajan (1986); Mowday et al. (1982); Ramanujam & Venkatraman (1987); Steers (1977); Veliyath & Shortell (1993)
Use of Analytical Techniques	The extent of reliance on appropriate planning techniques in order to solve ill-structured strategic problems.	Fredrickson (1984); Grant & King (1982); Hax & Majluf (1984); Ramanujam & Venkatraman (1987)
Creatively in Planning	The degree to which planning efforts emphasize new modes of thinking.	Cartwright (1987); Greenley (1986); Ramanujam et al. (1986); Roach & Allen (1983); Shank, Niblock & Sandal (1973)
Focus on Control	The degree of emphasis placed on planning as a means of organizational control.	Andrews (1971); Camillius (1975); King & Cleland (1978); Langley (1988)

Two Dimensions of Planning Satisfaction

Most researchers who have investigated small-firm strategic planning have used financial and marketing measures as indicators of performance. These performance measures are based on how a business has performed in the past, implicitly assuming that such success can be extrapolated into the future. However, financial superiority is only one element of organization performance. Perhaps more attention should be attached to an organization's ability to adapt to changes that are occurring and will occur in its environment. A realistic model of organization performance must reflect a highly complex paradigm and requires more than a single criterion (Brown & Laverick, 1994). As such, the present study adopts a broader perspective, examining satisfaction with planning.

Specifically, two dimensions are examined: satisfaction with the concrete and financial outcomes believed to be associated with the planning process, and satisfaction with the contribution of strategic planning efforts to overall organizational effectiveness. The first dimension follows the tradition of earlier studies that sought to examine the impact of planning on financial performance. Although performance objectives were included in the goal attainment dimension, there is a clear distinction between achieving performance goals and being a high-performance organization. The second dimension reflects a goal-centered approach to assessing organizational effectiveness (Cameron & Whetten, 1983; Ramanujam, Venkatraman & Camillus, 1986). The goal attainment measure is primarily concerned with the specific end results normally anticipated from a planning system. This view reflects King's (1983) suggested approach to the evaluation of planning and Steiner's (1979) notion of measurement against purpose.

Propositions

Almost all previous small-firm research has examined relationships between strategic planning and organization performance with unidimensional treatments. However, the issue becomes more complicated when both sets of variables are conceptualized in multidimensional terms, as some authors have recently argued (e.g. Ramanujam et al., 1986; Ramanujam & Venkatraman, 1987). Hence, a positive relationship between strategic planning and performance dimensions among small firms is expected. Specifically, the present study posits two propositions:

Increased emphasis placed on each of the seven planning characteristics will be positively associated with each of the two dimensions of planning satisfaction.

Top executives of firms that place the greatest emphasis on all seven planning characteristics will report the greatest satisfaction with planning along the two dimensions. Likewise, top executives of firms that place the least emphasis on all seven planning characteristics will report the lowest satisfaction with planning along the two dimensions.

Methodology, Analysis, and Findings

Sample

Sixty-nine U.S. commercial banks in the state of North Carolina were examined, representing the entire population with fewer than $500 million in total deposits. All 69 banks are considered small banks by banking industry standards (Robinson and Pearce, 1983).

Surveys were sent to the senior executives (presidents and/or CEOs) of all the 69 banks. To improve the response rate, the North Carolina Commissioner of Banks asked that each bank president and/or CEO cooperate by completing a questionnaire that would be sent to them. Forty-seven of the 69 banks completed and returned the research questionnaire for a response rate of 68 percent. Forty-one of these banks were chosen for further analysis to eliminate banks less than five years old as well as those that did not provide complete information. These criteria ensured that sample would not be biased toward banks with inadequately developed strategic planning systems, reducing the effective response rate to 59 percent.

North Carolina's small community banks provide an excellent opportunity to apply evaluation processes that are normally employed to study strategic planning in small businesses because they historically have had broad powers to engage in various businesses traditionally not associated with commercial lending (North Carolina Banking Commission, 1991). Challenges requiring strategic management by small community banks go beyond establishing new branches and typically include introducing new products/services, offering competitive personalized services, meeting the needs of small businesses, and altering racial lending patterns. The relative stability of the North Carolina commercial banks in an industry under turmoil also provided for a strong population from which to draw the sample. Further, there was only one bank failure each in 1991 and in 1993 in North Carolina.

Strategic Planning Characteristics

The specific strategic planning system characteristics are summarized in Table 2 and based on five-point Likert scales ranging from no emphasis (1) to great emphasis (5). Internal orientation was measured through the perceived degree of attention devoted to customer services, efficiency of operations process, attracting and retaining high-quality employees, and analysis of financial strengths and weaknesses. External orientation was measured by four items relating to the analysis of investment and deposits opportunities, competition and market analysis. Functional coverage was measured by Ramanujam and Venkatraman's (1987) four-item scale relating to the perceived degree of emphasis accorded to functional involvement, coordination, and integration in planning activity. Key personnel involvement was measured by the degree of CEO, board member, and line manager involvement in the strategic planning process. Creativity in planning is assessed by Ramanujam et al.'s nine-item scale addressing the firm's ability to anticipate surprises and crises, to adapt to unanticipated changes, and so forth. The control aspect was measured by Ramanujam et al.'s (1986) ten-item scale which addressed the degree of emphasis given to managerial motivation, upward and downward communication in the hierarchy, integration of operational areas, and the like. Finally, the use of planning techniques was measured by the degree of emphasis devoted to the application of financial models, portfolio analysis, and forecasting analysis techniques.

Table 2
Planning System Characteristics and their Factor Loadings^*

	Factor Loading
Internal Orientation (INTNLX 1: alpha = 0.79)
- Customer Services	0.57
- Efficiency of operating process	0.91
- Attracting and retaining high-quality employees	0.86
- Analysis of financial strengths and weakness	0.80
External orientation (EXTNLX1; alpha = 0.66)
- Analysis of investment opportunities	0.75
- Analysis of deposits opportunities	0.87
- Analysis of competition	0.73
- Performing market research	0.71
Functional coverage (FUNTNX1; alpha = 0.75)
- Marketing function	0.77
- Finance function	0.86
- Personnel function	0.77
- Operations function	0.72
Involvement of key personnel (RESRSX1; alpha = 0.51)
- Time spent by the CEO in strategic planning	0.93
- Involvement of line managers in strategic planning	0.54
- Involvement of board members in strategic planning	0.77
Use of planning techniques (TECHKX1; alpha = 0.63)
- Financial models	0.90
- Forecasting and trend analysis	0.86
- Portfolio analysis techniques	0.71
Creativity in Planning (CREATX1; alpha = 0.85)
- Ability to anticipate surprises, threats and crises	0.74
- Flexibility to adapt to unanticipated changes	0.70
- Value of a mechanism for identifying new business opportunities	0.53
- Role of identifying key problems	0.78
- Value as a basis for enhancing innovation	0.69
- Capacity to generate new ideas	0.68
- Formulating goals to be achieved in the bank's competitive environment	0.50
- Capacity to generate and evaluate a number of strategic alternatives	0.72
- Anticipating, avoiding, and removing barriers to strategy implementation	0.73
Focus on Control (CONTRX1; alpha = 0.94)
- Value as a tool for management control	0.66
- Ability to communicate top management's expectations down the line	0.81
- Value as a tool for managerial motivation	0.79
- Capacity to foster organizational learning	0.78
- Ability to communicate line management's concern to top management	0.84
- Value as a mechanism for integrating diverse functions and operations	0.60
- Monitoring & controlling the implementation of the bank's strategy	0.90
- Using multiple financial & non-financial control measures	0.83
- Using control techniques for monitoring performance	0.89
- Having control systems to revise current plans	0.83

^*All scales were (1-5) Likert scales: no emphasis (1) to great emphasis (5)

Strategic Planning Satisfaction

Planning satisfaction was measured via the two aforementioned dimensions, hereafter abbreviated as financial performance (FINANCE) and organizational effectiveness (ORGEFF). These dimensions were measured by an eight-item, two-factor scale (see Table 3) based on prior work by Ramanujam and Venkatraman (1987), including items addressing areas such as the prediction of future trends, improving short-term performance, improving long-term performance, evaluating alternatives, and enhancing management development. Respondents were asked to indicate their views via a 5-point scale, ranging from much deterioration (1) to much important (5), on eight criteria as a primary goal.

Table 3
Satisfaction with Planning and their Factor Loadings

Dependent Variables	FINANCE	ORGEFF
	Factor Loadings
Financial Performance Items:
Predictions of future trends	.73	.41
Enhancing management development	.59	.37
Improving short-term performance	.82	.18
Improving long-term performance	.84	.15
Direct impact on financial performance	.83	.36
Organizational Effectiveness Items:
Improving ability to evaluate alternatives	.15	.85
Improving ability to avoid mistakes	.27	.79
Improvement of budget process	.38	.68

^*All scales were (1-5) Likert scales: no emphasis to great emphasis

Factor loadings (see Tables 2 and 3) indicate that all the factors tapped characteristics measuring states of planning system and organization performance. Factor loadings in each scale were above 0.50 and eigenvalues for each factor were well above 1.0. Internal consistency of each scale was also assessed and judged strong using Cronbach's alpha (Cronbach, 1951; Van de Ven & Ferry, 1980). These assessments provide adequate support for the reliability of the measures employed. Factor scores were computed for each planning system characteristic and planning satisfaction dimension to serve as composite measures for hypothesis testing.

Table 4 presents correlations among the dimensions. Each planning system characteristic positively and significantly correlates with only FINANCE and ORGEFF (at the .05 percent level). These results are consistent with the conceptual literature from which dimensions were distilled. The presence of the expected bivariate relationships between the planning system characteristics and these two satisfaction dimensions is encouraging, but the main focus of this study is on the multivariate relationship between the planning characteristics and planning satisfaction. Having established the existence of appropriate measurement scales, proposition testing can be pursued.

Table 4
Descriptive Statistics and Correlations

  ________________________________________________________________________________________

Correlations:  EMPLOYES  INTNLX1  EXTNLX1   FUNTNX1  RESRSX1  TECHKX1  CREATX1  CONTRX1  FINANCE   ORGEFF

EMPLOYES    1.0000
           P=.  

INTNLX1      .0041    1.0000
           P=.490   P= . 

EXTNLX1     -.1873     .6147    1.0000
           P=.120   P= .000   P= .  

FUNTNX1     -.1630     .4739     .7994    1.0000
           P=.154   P= .001   P= .000   P= . 

RESRSX1      .0914     .4594     .3731     .4411    1.0000 
           P=.285   P= .001   P= .008   P= .002   P= .    

TECHKX1      .1252     .3292     .2641     .3041     .2812    1.0000
           P=.218   P= .018   P= .048   P= .027   P= .037   P= .   

CREATX1     -.2428     .5637     .5416     .4861     .4654     .5391    1.0000
           P=.063   P= .000   P= .000   P= .001   P= .001   P= .000   P= .     

CONTRX1     -.1430     .6026     .5054     .4061     .6053     .5296     .8590    1.0000 
           P=.186   P= .000   P= .000   P= .004   P= .000   P= .000   P= .000   P= .    

FINANCE     -.2057     .3478     .4393     .4872     .3529     .3952     .5863     .5768   1.0000 
           P=.099   P= .013   P= .002   P= .001   P= .012   P= .005   P= .000   P= .000  P= .

ORGEFF      -.0716     .3056     .3125     .2700     .3360     .2702     .5901     .6272    .0000 1.0000
           P=.328   P= .026   P= .023   P= .044   P= .016   P= .044   P= .000   P= .000  P= .500  P= .
______________________________________________________________________________________

The first proposition was strongly supported. Emphasis on each of the seven planning characteristics was positively associated with both satisfaction dimensions. Further, firm size (EMPLOYES) was not significantly associated with any of the seven characteristics.

The second proposition was partially supported. To examine which factors contributed to the greatest satisfaction in planning along both dimensions, the forty-one businesses were clustered on the seven planning emphases into three distinct groups (see Table 5). The purpose of the cluster analysis was to identify several groups of organizations, each of which would contain businesses with similar emphases on the seven planning characteristics. Although a variety of clustering methods could be applied, Ward's algorithm was selected because of its tendency to cluster cases into groups of similar sizes, an aspect critical for small populations (Barney & Hoskisson, 1990; Hair, Anderson & Tatham, 1987). The optimum solution contained three clusters of eight, eleven, and twenty-two businesses.

Table 5
Planning System Satisfaction Means for each Cluster

Variable	Cluster 1	Cluster 2	Cluster 3	Sig.
	Cluster Analysis
	(N=8, 19%)	(N=11, 27%)	(N=22, 54%)	Level
Employees	235.38	592.64	118.68	.178
INTNLX1	0.37	-0.32	0.02	.335
EXTNLX1	0.72	1.28	0.80	.035
FUNTNX1	0.87	-0.53	-0.05	.006
RESRSX1	0.43	-0.20	-0.06	.375
TECHKX1	0.38	-0.12	-0.08	.500
CREATX1	0.88	-0.47	-0.09	.009
CONTRX1	0.75	-0.46	-0.04	.028
FINANCE	0.73	-1.23	0.35	.000
ORGEFF	1.09	0.39	-0.59	.000

Firms in the first cluster placed the greatest emphasis on six of the seven planning characteristics and also reported the greatest satisfaction with planning along both dimensions. Firms in the second cluster placed the least emphasis on six of the seven characteristics, also reporting the least satisfaction with planning dimensions. Significant differences among the clusters were found in four of the seven emphases and both planning satisfaction dimensions. External emphasis did not associate with the other six planning characteristics, suggesting that heavy external emphasis may be more associated with planning that does not lead to satisfaction with the process.

Conclusions and Future Directions

Taken together, it seems evident that the relationship between planning and performance in small firms bears significantly on strategic management research and practice, and that strategy scholars should not abandon this line of inquiry altogether. The planning literature appears to suggest two key themes: First, planning should be an integral part of the strategic management process. The benefits of planning can outweigh the costs. And most critically, one's competitors will likely enjoy the benefits of planning. Therefore, to ignore planning is to relegate a source of competitive advantage to disadvantage.

The second theme is perhaps most critical. Effective planningnot just the process of planningappears to be positively associated with performance. In other words, organizations that plan effectively are more likely to achieve higher performance than those that do not. But the key here is effective planning; Ineffective planning appears to have no predictable or consistent association with performance. Going through the motions of planning provides no great insights or benefits; it may actually result in a depletion of resources and lower quality decisions. Thus, a strong emphasis placed on planning is only justified when it is also focused on effective planning.

Future research may address five areas appropriate to this study. First, a longitudinal research design may improve the reliability of strategy measures and examine the long-term (i.e., beyond five years) effects of strategic planning. Golden (1992) found that 58 percent of organizations he surveyed did not agree with the previously validated accounts of their organization's past strategies! Hence, retrospective accounts of strategy and planning emphases may not always be valid. A longitudinal design would eliminate the reliance on CEOs' perceptions of past strategy--a limitation of this exploratory study.

Second, future inquiries should expand the planning assessment process beyond the chief executive officer. Although a high response may be more difficult when complete anonymity is not assured, a more accurate depiction of planning activity may be gleaned from surveying several managers within each organization in addition to the CEO. Further, the validation of self-reported financial results with archival data would improve the validity of the study.

Third, additional industries may be examined. This study addressed only the banking industry. Additional investigations should include those industries experiencing major macroenvironmental changes. In such industries, one may actually find a greater value in strategic planning activities.

Fourth, the identification of important planning characteristics should provide an impetus to further efforts at reconceptualizing planning in more realistic terms than the unidimensional treatments common in the previous small-firm empirical research. Similarly, the results support such a multidimensional treatment, which argues against the use of narrow conceptualizations of planning effectiveness in future studies. In general, these findings suggest the need for future research to explore not only the degree of emphasis and perceived effectiveness of various strategic planning dimensions but also the reasons for these choices. Such research will help to provide a better understanding of why managers of small firms choose various strategic planning system approaches as well as how these approaches give rise to possible changes in organization strategy.

Finally, the present study involved a relatively small number of banks in the study. Future investigations into process and content dimensions unique to small firm strategic planning process could focus on larger industries.

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Strategic Planning Process: Steps in Developing Strategic Plans

noreply@blogger.com (Guntur Tri Hariyanto) — Sun, 22 Apr 2007 14:55:00 +0000

By Diane Schilder, Harvard Family Research Project

I. Strategic Planning Process Defined

Successful RBA efforts involve strategic planning, implementation, monitoring, and evaluation (which will ultimately provide data that will be used in future planning and implementation efforts). Strategic planning, an essential first step in the development of a results-based accountability system, is defined as the process of addressing the following questions:

Where are we?
What do we have to work with?
Where do we want to be?
How do we get there?

This process is undertaken by states, organizations, programs, and sub-programs.

The steps involved in developing a strategic plan are described below. Although this process appears systematic and rational, it is often iterative and evolves substantially over time. Further, it is subject to political pressure and will be modified accordingly. Some strategic planning efforts may not include all the steps described. The elements and process described in the next section should be modified depending on context.

II. Components of a Strategic Planning Process

The first step in the strategic planning process is to address the questions “Where are we?” and “What do we have to work with?” Examination of recent history and changing contexts (both internal and external) of the state, organization, program, or sub-program allows participants to assess current positions. Answering the question of what we have to work with involves consideration of strengths and weaknesses and determination of how to capitalize on strengths.

The next step in the process is answering “Where do we want to be?” As the articulated vision stems from the values of those involved in the process, it is essential that this step involve all of those who will have a stake in the achieving the vision. For agencies and programs, the vision is then translated into a mission statement: a broad, comprehensive statement of the purpose of the agency or program. States and communities may not have mission statements, as they may have multiple purposes. If unable to design mission statements that can encompass multiple divergent goals, planners should articulate several separate mission statements reflecting different goals.

The next step in the planning process is the articulation of goals. Desired long-range conditions of well-being for the state, community, agency, or program, goals indicate the intended future direction of the state, agency, or program. An example of a state goal is that all children and families be healthy by the year 2010.

After articulating the vision and determining goals, planners must address means of reaching their goals. This step involves articulating strategies for achieving results. Strategies should reflect the strengths and weaknesses of the entity engaged in the planning. For example, a very small office should recognize that its size could be both a weakness and a strength. The size would limit it to strategies that do not require large human resource commitments, but would allow it to use strategies requiring rapid dissemination of information throughout the organization. Recognition of relative strengths and weaknesses is helpful in identifying promising strategies.

RBA system development must include consideration of methods of goal measurement. Some strategic planning processes include this step; others leave this question to be addressed by a separate process. Addressing goal measurement involves articulation of objectives, indicators, and benchmarks. Objectives are the short-term conditions needed to achieve desired conditions of well-being for children, families, or communities in the long term. Indicators are quantifiable measures of progress; they provide numeric assessment of the desired conditions of well-being (see Indicators Tip Sheet for further details). Benchmarks are target levels of performance expressed in measurable terms and specified time frames, against which actual achievement is measured.

III. State Experiences With Strategic Planning: Lessons Learned

Many states have developed strategic plans to guide results-based accountability systems. Examination of numerous planning processes yielded the following lessons:

Successful efforts involve stakeholders and gain their support. Strategic plan development requires consideration and articulation of values and priorities; the plan should reflect views expressed by all those involved in the process. States that have successfully designed and adopted plans included all those interested in the strategic planning process. For example, processes have been developed to involve program managers, providers, legislators, and the public in the articulation of visions. Some states have held public meetings; others have coupled meetings of policymakers with public opinion polls asking about the core values of citizens. Inclusion of key stakeholders can take many months and requires that resources be devoted to the activity. However, it is essential to the success and sustainability of the effort.
Prioritizing goals is an essential step in developing a strategic plan for a RBA system. Strategic plans are not merely laundry lists of goals, but rather reflect the priorities of those participating in the planning process. The most useful plans are succinct and easily translated into useful measures. Inclusion of too many goals causes states, agencies, and programs to become overwhelmed with the details of data collection and reporting. Friedman (1996) recommends choosing a limited number of broad goals that reflect multiple objectives.
Successful public strategic planning processes address conflicting mandates and goals. State officials and managers of public programs are often faced with the need to negotiate between conflicting mandates and goals when articulating strategic plans. For example, job training legislation may include a program goal of placement of all trainees within one month of program completion. Another goal in the same legislation may be that trainees retain employment for at least one year. These goals may conflict: employment that is obtained quickly may not be the best match for the trainees, so they may be more likely to leave these jobs. In such cases, legislation may have been drafted with input from numerous representatives with conflicting views. As public managers develop strategic plans, they should recognize that programs may have conflicting mandates and be explicit about what the agency can and cannot do in light of the mandates.

IV: Additional Resources

General Documents on Strategic Planning

Council of Governors' Policy Advisors. The game plan: Governance with foresight. Washington, DC: Author.

Family Investment Trust. (1995). Missouri's direction for change: Achieving better results for children and families. St. Louis, MO: Author.

Friedman, M. (1996). A strategy map for results-based budgeting: Moving from theory to practice. Washington, DC: The Finance Project.

Indiana Family and Social Services Administration. (1994). Bringing the pieces together... Strategic action plan. Indianapolis, IN: Author.

Minnesota Planning. (1992). Minnesota Milestones: A report card for the future. St. Paul, MN: Author.

Stephens, S. A., Leiderman, S. A., Wolf, W. C., & McCarthy, P. T. (1994, October). Building capacity for system reform. Bala Cynwyd, PA: Center for Assessment and Policy Development.

source: http://www.gse.harvard.edu/hfrp/