Last week we considered the use of strategic metrics in the Balanced Scorecard (BSc), specifically whether these metrics would add value to an operational conversation. We concluded that bringing a strategic perspective (though not necessarily the metrics) during operational conversations could provide the right context for operational decisions. One reason for the benefit is that participants in the discussion would need to actively interpret strategy and thereby improve their understanding of it.
The discussion assumed that there is a difference between a strategic conversation and an operational conversation. Clearly the former has a longer horizon and changes take place more slowly, but can one really look at some aspect of planning or of a plan and unambiguously label it as either strategic or operational?
Let’s take an example that would be familiar to most of us. The level of working capital is unusually high and we know that this is because we have a much higher level of inventory of spare parts than normal. There are of course several ways of approaching this problem, so let’s lay out a few and see if we can identify any as more strategic than the others.
As we have seen in previous posts, frameworks are good for structuring discussions, so let’s use the BSc to structure this discussion. The task is to come up with an initiative that would bring inventory levels down by a certain percentage. Perhaps we can come up with an initiative that would fit naturally into each of four bands or quadrants of the BSc.
The first band looks at financial performance. Since there is a cost associated with inventory holding, reducing this cost would directly improve financial performance. An initiative appropriate for this band might be a reduction of inventory across the board by ten percent. I am not suggesting this is a great idea, but it isn’t that uncommon!
The second band focuses on customer outcomes. Since we don’t want our customers’ operations to be affected, we could identify stock levels for individual items or groups of items that can be reduced without significantly affecting stock-outs. This would affect only parts critical to the customers’ operations.
The third band has to do with business processes. We could improve the speed with which we perform inventory related activities, a bit like a river flowing faster. The amount of water flowing through would remain the same, but the water level would go down. Similarly, the effect of speeding up processes would be that the same number of items would flow through the pipeline, but the average time an item stays in inventory would become shorter, thus reducing overall inventory. This would affect all items and might have a significant impact on inventory levels.
The fourth band has to do with intangibles, such as skills. We could set up training for employees associated with the inventory pipeline to improve their inventory management skills. We could then ask them to look for creative ways to bring down inventory levels while still maintaining or improving customer service levels. It is hard to predict what the outcome might be of a group of employees acting on such a mandate, but it is quite likely they will come up with ideas that might not occur to us. It is also possible that the group comes up with ideas in other areas once they find their recommendations are useful and valued by the rest of the organisation.
Let’s compare the four initiatives. The example, though possibly naïve in parts, provides one clear insight. As we move down the bands of the BSc from financial to intangible assets, the initiatives become complicated and then complex, they are likely to take longer to show results and are more likely to have a broader impact. One could say that the initiatives become more strategic as one moves down the BSc, and that makes perfect sense.
It might be better to think about strategic and operational topics as falling at certain points of a continuum, with the operational, short term, limited-scope perspective at one end and the strategic, long-term, broad-scope perspective at the other. There isn’t a point in this range where we can say everything to one side is strategic and everything on the other side is operational. All one can possibly say is that a view at one point on this spectrum is more strategic than a view at another point.
Let me know what you think…
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