How to Transform Objectives into Results

Part 1 of a four-part series

Given a set of business objectives, can you identify the business metrics and diagnose the business situation outcomes needed to realize the objectives?

Each year executives communicate their strategic objectives to the rest of the company expecting that everyone in the company knows perfectly well how to achieve the objectives. But, are the objectives achieved?

Executive Strategic Dysfunction

Frequently, executive strategy is disconnected from a manager’s tactics and the worker’s execution. This month we are going to explore the common cause for this dysfunction and what we can do to improve the situation. Specifically, how to set business objectives, identify business metrics and diagnose business situation outcomes needed to realize the objectives.

Setting Business Objectives

What is so hard about setting a business objective? The president of the company wants company growth and more profit. There are only two ways to increase profit either increase sales or decrease costs. But the market is tight and competition is fierce so everyone agrees to tighten their belt and decrease costs by 10% this year. And what is the easiest way of cutting costs? Layoff people, close a plant, or reduce expenses by 10% across the board. But wait, that was the strategy last year and sales fell so no extra profit was realized.

So, perhaps we should increase sales by investing more on marketing, releasing a new product or hiring more sales people. But that will cost money. Ok, let’s increase each salesperson’s quota and cut costs.

What’s wrong with this situation?

The common perception is that increasing production or cutting costs is the way a company makes more money. But is it? Is investing more money and buying more assets (technology or people) the only way to make more money? A far more certain method is to focus on increasing productivity first. That is to increase the output from those assets before we increase or scale the assets of the organization.

In accounting terms, variable costs will rise with rising output but fixed costs, like operating expenses, will stay constant. The result is a marginal increase in profit contribution from each additional sale. The more you sell, without increasing fixed costs, the more profit you make. This is the real goal of process improvement. To leverage existing assets and increase the profit from those assets without spending any more money than you have to. So why don’t more businesses focus on productivity over production?

Improvement Opportunities

Finding opportunities for improvement is hard while the easiest way to cut costs is to lay off people. So what is so hard about process improvement? Improvement revolves around two basic measures: decreasing variation or increasing mean. And you must focus on decreasing variation before you increase mean. Let’s see why;

Process Variation Objectives

Process variation is a form of waste. Six Sigma is one methodology used to decrease variability and eliminate the wasted energy that a process produces. We usually see the buildup of inventory, scrap, or lead times as a result of process variation. So good objectives for companies with inventory, scrap, or long lead times are to:

• Reduce Inventory
• Reduce cycle time (or lead times)
• Reduce scrap

What Happens When We Decrease Variation?

One big benefit is that we free up capacity. Reducing scrap, cycle time and inventory frees up workers from producing materials that may end up as unsold inventory.

Process Mean Objectives

Process mean represents the process throughput. Our goal is to have the highest mean output with the lowest variation. This is a good objective for increasing sales and decreasing costs.

• Increase quality
• Increase sales and market share
• Reduce costs

What Happens If We Increase Mean First?

Then, you will also increase the waste that results from higher process variation. Now you see how the original objectives of increasing sales and decreasing costs, the ones that most companies start with, actually start us in the wrong direction. By focusing on mean items like sales and costs first, we bring along the waste associated with high process variation. Is it any wonder that the increase in profit that results is marginal at best, when we focus on mean objectives?

Why Do Companies Focus On Mean Objectives?

Mean objectives are big and costly, yet are easy to see. Think of building a new plant or hiring more employees. They take more time to see the actual results, if any, and are easy to hide behind. They are also more glamorous.

In contrast, variation objectives may be difficult to implement, but are usually pretty inexpensive. In fact, the results from variation objectives may not take long to see and the results are far more likely to occur. It’s just that the required actions to achieve them are not as obvious. For example, building a new plant or hiring new employees are more easily seen as a solution than working to reduce inventory.

We have discussed how the strategic dysfunction starts when we set business objectives. Next week, we will discuss what we can do to improve the situation by identifying business metrics and diagnosing business situation outcomes needed to realize the objectives.

Learn more on process design, implementation and continuous improvement with a How to Create Well-Defined Processes Class coming up June 16-17 in St. Louis, MO.

Part 1: How to Transform Objectives into Results?
Part 2: Identify Business Metrics and Business Situations to Drive Results
Part 3: How Much Time is Needed for Process Improvement
Part 4: How to Get Buy-in to Ensure Results

    Email     Print    RSS

Posted on Monday, May 9th, 2005 under Strategic Process Improvement

This work is licensed under a Creative Commons Attribution 3.0 United States License.