Best Practices in Planning and Performance Management

Radically Rethinking Management for a Volatile World

David A. J. Axson

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470539798
• eBook ISBN: 9780470644416
• Edition: 3
• Topic: Business
• Subtopic: Contabilità gestionale
• Index: Business

A practical framework for effectively managing performance in today's complex, competitive and risky global markets

The Third Edition provides a complete framework for building best practice management processes for today's complex and uncertain world. Fully updated to reflect the events of the global economic crisis, this book provides further practical examples of companies that are successfully using the practices identified.

• Updated for the implications of the global economic crisis on management practices
• Completely rewritten section on "What it Takes To Be An Effective Manager In An Uncertain World
• Added examples and mini case studies throughout the book from companies such as Qualcomm, IBM, Dominos, Target, Toshiba and Facebook
• Establishes new benchmarks for performance management process and practice
• Fully updated to include recent events, new learnings, technologies and emerging best practices

This book includes serious rethinking of the way companies plan and manage performance-from the role of accounting to the skills needed to be an effective manager-including new technologies, techniques and real time management processes.

Part One

Why Performance Management Matters

Chapter 1

Traditional Management Processes Are Obsolete

Change is inevitable in a progressive country. Change is constant.

—Benjamin Disraeli

If anyone had any doubts that traditional management practices such as complex multiyear strategic plans, detailed annual budgets, quarterly forecasts, and monthly management reports were obsolete, they were blown away on September 15, 2008. Much as Netscape’s initial public offering on August 9, 1995, marked the dawn of the Internet age, Lehman Brothers’ bankruptcy filing put the final nail in the coffin of calendar-based, accounting-driven performance management. Managers must now operate in a world of unprecedented complexity, volatility, uncertainty, and risk. Static management processes based on historic data simply do not work anymore. The facts speak for themselves. How many strategies, plans, budgets, or forecasts that were crafted with such care in 2007 assumed that:

• Oil prices would rise from $45 a barrel to a peak of $147 before collapsing to $35?

• U.S. automotive sales would fall from an annualized rate of 16 million in 2007 to less than 10 million one year later?

• The Dow Jones index would lose 54 percent of its value, from 14,164 on October 9, 2007 to 6,547 on March 9, 2009?

• The $/£ exchange rate moved from $1.35 in March 2008 to $2.07 in January 2009 before falling back to $1.66 in July 2009?

• The H1N1 virus would move from a minor flu outbreak in northern Mexico to a global pandemic in six weeks?

We live in an uncertain world and it isn’t going to change anytime soon. Continued globalization and technological change, combined with the emergence of issues such as environmental sustainability and global terrorism, is changing forever the role of managers and, more important, the processes and tools needed to manage performance. Let’s explore some of the major forces of change in more detail.

BETTER-INFORMED CUSTOMERS

I was going to title this section “Smarter Customers”; however, more knowledge does not always equate with more wisdom. Notwithstanding this nuance, there is no doubt that customers have access to better information than ever before when considering a purchasing decision.

Easy access to multiple sources of information and advice, not all of them good, has created customers who feel more confident, knowledgeable, and empowered. The balance of power between suppliers and customers has shifted irrevocably. For example, more than 80 percent of prospective car buyers research their purchase online before entering the dealership: They compare product and pricing information, assess financing options, and check the value of their trade-in all before they ever step into the salesperson’s lair. The Internet has become the first stop for those seeking the best airfares or searching for a new job. Despite the wealth of new information available to customers, more information does not necessarily mean better decision making. In fact, the ease of accessing vast quantities of not-always-reliable information is likely to increase the frequency of speculative bubbles. Part of the exuberance that accompanied both the dot-com bubble and the housing bubble can be attributed to the incessant media and Internet coverage of the near-certain fortunes to be made. Organizations need to understand the implications of dealing with a better-informed if not necessarily smarter customer base.

The Illusion of Competence

An interesting phenomenon presents a conundrum as companies seek to get ever closer to their customers. I call this the “illusion of competence” and define it as the aura of misplaced confidence resulting from the assimilation of too much free information or advice of questionable quality. It manifests itself when people gain so much new knowledge that they mistakenly believe that they are now experts.

The Internet has given this phenomenon a powerful stimulus. Large amounts of information can be accessed easily. Examples include people who buy something on eBay for more than they would have paid at the local store and boast about the great deal they got, or those who plunged into managing their own investments, gave up their real jobs to become day traders, and boasted of having “got into Yahoo! at $106 or Ariba at $75.” These are probably the same individuals who started suing their online brokers when the market crashed in late 2000 or entered the Las Vegas real estate market in late 2005. Simply because customers can access millions of pages of free information and compare and contrast thousands of different products from the comfort of their armchairs does not guarantee that they will be transformed from suckers to seers.

Regardless of whether more information makes one smarter or just more confused, there is no doubt that it is changing business. Organizations have unparalleled access to data about customers, suppliers, employees, and competitors that can provide managers with greater knowledge in order to make better decisions. Purchasing managers are able to ascertain complete pricing information for any item before entering into negotiations with suppliers. A human resources manager can compare the salaries being offered for different positions to ensure that the organization remains competitive; of course, prospective employees can do the same. Throughout the organization, people have access to increasingly rich and varied information; those who can harness such intelligence can realize significant benefits, those that cannot will likely not survive.

CHANGING MARKET AND BUSINESS MODELS

For anyone seeking to understand today’s rapidly changing markets, a look back to the Industrial Revolution can be enlightening. The Industrial Revolution was founded on three significant changes:

1. A series of technological innovations broke the relationship between human energy and productive capacity. Prior to the Industrial Revolution, farmers could be only as productive as their own capacity to harvest their crops, and weavers were limited by the amount of wool they could weave.

2. Rapid advances in transportation allowed raw materials to be moved from their point of origin to a different location for manufacture into a finished product. It is no coincidence that the Industrial Revolution first took hold in Great Britain, the country with the largest and most efficient shipping fleet in the world at the time.

3. New and different operating models, such as factories, were developed to fully leverage the advances in technology.

In a relatively short time, the main underpinning of economic activity moved from the farm to the factory, and the population moved from the countryside to the town. This shift from a largely rural society to one based in urban areas was the defining social characteristic of the Industrial Revolution and was driven by the need to concentrate labor to exploit the productive capacity unleashed by the new innovations of powered machinery.

The dominant organizing factor was colocation of all aspects of the production process in a series of logical steps. Vertical integration reached its zenith with Henry Ford’s massive River Rouge plant just outside Detroit, Michigan. Set on 2,000 acres by the Rouge River, the plant, completed in 1927, was the largest single manufacturing complex in the United States. At its peak during World War II, it employed over 120,000 people. The plant was self-sufficient in all aspects of automobile production, from producing a continuous flow of iron ore and other raw materials to finished automobiles. The complex included dock facilities, blast furnaces, open-hearth steel mills, foundries, a rolling mill, metal stamping facilities, an engine plant, a glass manufacturing building, a tire plant, and a power house supplying steam and electricity. However, the dominance of vertically integrated businesses was already beginning to wane even as Ford constructed his industrial age masterpiece. Organizations found that the capital and skill set requirements needed to sustain excellence in all aspects of the process were too great. It was easier and cheaper to outsource much of the design and manufacturing process.

By the dawn of the computer age, the main elements of an integrated supply chain from raw material extraction to delivery of the finished product to the customer were well established. Unfortunately, one downside of this process was the creation of a series of cumbersome, bureaucratic paper-based processes to move the information needed to sustain the production process. Documentation of orders, shipping notices, invoices, and payments grew at a rapid rate, triggering the creation of paper factories alongside the real factories in most large corporations. The computer was perfectly placed to address this challenge by automating much of the basic accounting and transaction processing activities. As electronic communications improved, networks facilitating electronic data interchange (EDI) attacked the flow of paper between organizations. Emergence of Internet-based e-commerce made these capabilities easier and cheaper, fueling rapid adoption by almost all organizations.

While physical goods and services remain important, information-based services comprise an increasing share of the economy. In 1991, capital spending in the United States on information technology ($112 billion) exceeded spending for production technology ($107 billion) for the first time.

Beyond basic transaction-processing applications, organizations increasingly began to use the same technologies to share other information, such as design documents and contract information. With the arrival of e-mail and the Internet, no exchange of information was out of bounds. No longer were organizations required physically to colocate all their people or operations. The level of flexibility was such that a company like Boeing could relocate its corporate headquarters from Seattle to Chicago, occupying its new facility less than five months after making the initial announcement in 2001. Philip Condit, then the company’s chairman and chief executive, described the reason for moving as “to be in a location central to our operating units, customers and the financial community, but separate from our existing operations.”¹

Today, a call to a credit card company may be routed to a customer service agent in Des Moines, Dublin, or Delhi, and the computer systems may be running in Prague or Poona. Basic business rules are being redefined; new products and markets are being created. Who would have thought that eBay, essentially an automated flea market, could sustain a $30 billion market capitalization (up from $20 billion in 2002), Amazon $56 billion, and Google $170 billion (as of January 2010), or that General Motors, the largest company in the world for more than 30 years, would fall into bankruptcy? Such changes require ever more flexible performance management processes and demand new and different types of management information.

Technology is literally changing the physics of business. Barriers of geography and scale have been redefined. Booksellers do not need stores, telephone companies do not need networks, manufacturers do not need factories, and film companies do not need film studios. Amazon did not need to establish a physical retail presence to compete with traditional booksellers. E*Trade did not need thousands of highly trained and highly compensated brokers to shake up the retail securities industry. Established players, such as Barnes & Noble and Merrill Lynch, were forced to respond. It is quite likely that we will see similar disruptions occur as advances in biotechnology and energy conservation create new markets while making others obsolete over the next few years.

Technology has enabled new players to enter markets with new and differentiated service offerings that have had a major impact on the traditional players. Companies are creating new products and services and inventing new ways to interact with current and prospective customers. Nike has created a $20 billion business and a very powerful brand based almost exclusively around design and marketing. Others, such as Apple and Cisco, have developed very successful product businesses while owning little manufacturing capacity.

Changing Market Boundaries or Arbitraging Harry Potter

In the summer of 1999, the third book in the hugely successful Harry Potter series written by English author J. K. Rowling was published. The launch of Harry Potter and the Prisoner of Azkaban was scheduled to follow a fairly typical rollout plan. To manage the associated advertising and promotional campaigns, the publication dates in each...

Table of contents

• Title Page
• Copyright Page
• Dedication
• Preface to the First Edition
• Preface to the Third Edition
• Acknowledgments
• Introduction
• Part One - Why Performance Management Matters
• Part Two - Best Practices
• Part Three - Moving from Data to Decisions
• About the Author
• Index