PROCESS OF LINKING PERFORMANCE MANAGEMENT TO THE STRATEGIC PLAN

The mere presence of a strategic plan does not guarantee that this information will be used effectively as part of the performance management system. In fact, countless organizations spend thousands of hours creating strategic plans that lead to no tangible actions. Many organizations spend too much time and effort crafting their mission and vision statements without undertaking any concrete follow-up actions. The process then ends up being a huge waste of time and a source of frustration and long-lasting cynicism. For example, consider a recent study including more than 350 individuals in firms in India in the following eight sectors: textiles, staple fiber, chemicals, cement, insulators, aluminum, mining, and services. Examples of companies included in this study are Grasim Cement, Jayashree Textiles, Birla NGK Insulators, Essel Mining Industries, and INDAL (Indian Aluminum Industries). Results indicated that although there was a good strategic planning process in place in most firms, there was no clear relationship between firm-level and individual-level goals.2Thus, to ensure that strat- egy cascades down the organization and leads to concrete actions, a conscious effort must be made to link the strategic plan with individual performance.

Figure 3.1 provides a useful framework for understanding the relationship among an organization’s strategic plan, a unit’s strategic plan, job descriptions, and individual and team performance. The organization’s strategic plan includes a mission statement and a vision statement as well as goals and strategies that will allow for the fulfillment of the mission and vision. The strategies are created with the participation of managers at all

• Results • Behaviors

• Developmental Plan Individual and Team

Performance • Tasks • Knowledge • Skills • Abilities Job Description • Mission • Vision • Goals • Strategies

Unit’s Strategic Plan • Mission

• Vision • Goals • Strategies

Organization’s Strategic Plan

FIGURE 3.1 Link Among Organization and Unit Strategic Plans, Job Descriptions, and Individual and Team Performance

levels. The higher the level of involvement, the more likely it is that managers will see the resulting strategies favorably.3As soon as the organizational strategies have been defined, senior management proceeds to meet with department or unit managers, who in turn solicit input from all people within their units to create unit-level mission and vision state- ments, goals, and strategies. A critical issue is to ensure that each unit’s or department’s mission and vision statements, goals, and strategies are consistent with those at the orga- nizational level. Job descriptions are then revised to make sure they are consistent with unit and organizational priorities. Finally, the performance management system includes

Chapter 3 • Performance Management and Strategic Planning 63

results, behaviors, and developmental plans consistent with the organizational- and department-level priorities as well as the individual job descriptions.

Does the process of aligning organizational, unit, and individual priorities actually work in practice? Is this doable? The answer to these questions is “yes” and the benefits of doing so are widely documented. Performance management systems have a critical role in translating strategy into action.4In fact, a recent study including 338 organizations in 42 countries found that performance management is the third most important factor affecting the success of a strategic plan. This is particularly true for larger organizations and for organizations that operate in rapidly changing environments.

As a concrete example, consider the case of Key Bank USA, a financial services company with assets of $92 billion that provides investment management, retail and commercial banking, consumer finance, and investment banking products and services. Key Bank of Utah successfully developed a performance management system that is aligned with the strategic plan of the organization.5To do this, the bank first involved managers at all hierarchical levels to develop an organization mission statement. Next, it developed goals and strategies that would help achieve Key Bank’s mission. The mission statement, goals, and strategies at the organizational level served as the founda- tion for developing the strategies for individual departments and units. To develop these, senior managers met with each department manager to discuss the organization’s goals and strategies and to explain the importance of having similar items in place in each department. Subsequently, each of the departmental managers met with his or her employees to develop the department’s mission statement and goals. One important premise in this exercise was that each department’s mission statement and objectives had to be aligned with the corporate mission statement, goals, and strategies. After organizational and departmental goals and strategies were aligned, managers and employees reviewed individual job descriptions. Each job description was tailored so that individual job responsibilities were clear and contributed to meeting the depart- ment’s and the organization’s objectives. Involving employees in this process helped them to gain a clear understanding of how their performance affected the department and, in turn, the organization.

Finally, based on the key responsibilities identified, the performance manage- ment system included behaviors, results, and developmental plans. For example, each employee record included information on various responsibilities, standards expected, goals to be reached, and actions to be taken to improve performance in the future. A summary of the entire process implemented at Key Bank of Utah is shown in Figure 3.2.

What happened after Key Bank of Utah implemented this system? In general terms, Key Bank was able to enjoy several positive consequences of aligning corporate, depart- mental, and individual goals. After the implementation of its new performance manage- ment system, Key Bank found several meaningful benefits, including the following:

• Managers knew that employees were focused on meeting important goals. • Employees had more decision-making power.

• Lower-level managers had a better understanding of higher-level managers’ decisions.

• Communication increased and improved (among managers, between managers and employees, etc.).

• Individual Performance: Information on various responsibilities, standards expected, goals to be reached, and actions to be taken to improve performance in the future.

• Mission (Department Level): Increase the knowledge, management skills,

and decision-making abilities of our branch managers so that we will minimize losses and other operating expenses while maximizing the profitability of our branching systems.

• Mission statement: The mission of the corporation is to operate as a high- performing financial institution providing a wide range of profitable, competitive, and superior financial services in our market.

• Goals: To attract and retain an outstanding staff who are highly motivated and productive and who vigorously pursue revenue-generating and cost-reduction strategies.

• Strategy: Critically review our existing branches and departments to ensure that all branches are consistent in their goals, strategies, and profit objectives.

• Position Description for HR Manager : Administers a comprehensive human resources program in the division to ensure the expertise, effectiveness, motivation, and depth (including providing appropriate management succession) to the division’s staff members.

FIGURE 3.2 Summary of Alignment of Performance Management and Strategic Plan at Key Bank of Utah

In sum, to be most useful, organizations’ performance management systems must rely on their strategic plans. The behaviors, results, and developmental plans of all employees must be aligned with the vision, mission, goals, and strategies of the organization and unit. Organizations can expect greater returns from implementing a per- formance management system when such alignment is in place.

3.2.1 Strategic Planning

The development of an organization’s strategic plan requires a careful analysis of the organization’s competitive situation, the organization’s current position and destination, the development of the organization’s strategic goals, the design of a plan of action and implementation, and the allocation of resources (human, organizational, physical) that will increase the likelihood of achieving the stated goals.6

There are several steps that must be considered in the creation of a successful strategic plan. These include (1) the conduct of an environmental analysis (i.e., the iden- tification of the internal and external parameters of the environment in which the organization operates); (2) the creation of an organizational mission (i.e., statement of what the organization is all about); (3) the creation of an organizational vision (i.e., statement of where the organization intends to be in the long term, say, about 10 years); (4) setting goals (i.e., what the organization intends to do in the short term, say, one to three years); and (5) the creation of strategies that will allow the organization to fulfill its mission and vision and achieve its goals (i.e., descriptions of game plans or how-to procedures to reach the stated objectives). After each of these issues has been defined, organizational strategies are created so that the mission and vision are fulfilled and the stated goals are met.

The strategic planning process is not linear, however. For example, there may first be a rough draft of the organization’s mission and vision and then the conduct of an environmental analysis may follow to help define the mission and vision more clearly. In other words, the mission and vision may be drafted first and the environmental analysis may follow second. The important point is that there is a constant interplay among these issues: the vision and mission affect the type of environmental analysis to be conducted, and the results of an environmental analysis are used to revise the mission and vision. By necessity, we need to discuss them one by one; however, keep in mind that they affect and inform each other on an ongoing basis. Let’s begin with a discussion of environmental analysis.

3.2.1.1 ENVIRONMENTAL ANALYSIS The first step in conducting a strategic plan is to step back to take in the “big picture.” This is accomplished through what is called an environmental analysis. An environmental analysis identifies external and internal parameters with the purpose of understanding broad issues related to the industry where the organization operates so that decisions can be made against the backdrop of a broader context.7

An examination of the external environment includes a consideration of opportu- nities and threats. Opportunities are characteristics of the environment that can help the organization succeed. Examples of such opportunities might be markets not currently being served, untapped labor pools, and new technological advances. On the other hand, threats are characteristics of the external environment that can prevent the organization from being successful. Examples of such threats range from economic recession to the innovative products of competitors. For example, consider the case of Frontier, which is currently the second largest jet carrier at Denver International Airport with an average of 250 daily departures and arrivals. Frontier is an affordable-fare airline which provides service to 60 cities, 50 in the United States, 8 in Mexico, and 2 in Canada. Frontier commenced operations in July 1994 given two key opportunities in the external environment. First, a major

competing airline engaged in a dramatic downsizing of its Denver operations, leading to service gaps in various major markets that Frontier filled. Second, the city of Denver replaced the heavily congested Stapleton Airport with the much larger Denver International Airport.8In February 2004, United Airlines, the largest carrier operating out of Denver International Airport, made changes in the environment that may have had a direct impact on Frontier’s strategic plan: United Airlines launched its own low-fare affiliate. The new affiliate, Ted, is going toe-to-toe with Frontier. Peter McDonald, vice president for operations for United Airlines, reported that Ted’s cost per available seat mile is in the ballpark of Frontier’s 8.3 cents.9So, what had been an opportunity for Frontier may no longer remain one, given the launching of Ted.

The following is a nonexhaustive list of external factors that should be considered in any environmental analysis:

• Economic. For example, is there an economic recession on the horizon? Or, is the current economic recession likely to end in the near future? How would these economic trends affect our business?

• Political/legal. For example, how will political changes in domestic or inter- national markets we are planning on entering affect our entry strategy? • Social. For example, what is the impact of an aging workforce on our organization? • Technological. For example, what technological changes are anticipated in our

industry and how will these changes affect how we do business?

• Competitors. For example, how do the strategies and products of our competi- tors affect our own strategies and products? Can we anticipate our competitors’ next move?

• Customers. For example, what do our customers want now, and what will they want in the next five years or so? Can we anticipate such needs?

• Suppliers. For example, what is the relationship with our suppliers now and is it likely to change, and in what way, in the near future?

Although an examination of external trends is important for all types of organiza- tions, this issue is particularly important for multinational organizations because they are concerned with both domestic and international trends. In fact, monitoring the external environment is so important in the strategic planning of multinational organizations that a survey of U.S. multinational corporations showed that 89% of departments responsible for the assessment of the external environment report directly to a member of the board of directors.10

An examination of the internal environment includes a consideration of strengths and weaknesses. Strengths are internal characteristics that the organization can use to its advantage. For example, what are the organization’s assets and the staff’s key skills? At Frontier, several key executives from other airlines were recruited, an important strength that was considered before launching the airline in 1994. These executives created a senior management team with long-term experience in the Denver market.

Weaknesses are internal characteristics that are likely to hinder the success of the organization. These could include an obsolete organizational structure that does not allow for effective organization across units and creates the misalignment of organiza- tional-, unit-, and individual-level goals.

Chapter 3 • Performance Management and Strategic Planning 67

The following is a nonexhaustive list of internal issues that should be considered in any environmental analysis:

• Organizational structure. For example, is the current structure conducive to fast and effective communication?

• Organizational culture. Organizational culture includes the unwritten norms and values espoused by the members of the organization. For example, is the current organizational culture likely to encourage or hinder innovation and entre- preneurial behaviors on the part of middle-level managers?

• Politics. For example, are the various units competing for resources in such a way that any type of cross-unit collaboration is virtually impossible? Or, are units likely to be open and collaborative in cross-unit projects?

• Processes. For example, are the supply chains working properly? Can customers reach us when they need to and receive a satisfying response when they do? • Size. For example, is the organization too small or too large? Are we growing too

fast? Will we be able to manage growth (or downsizing) effectively?

Table 3.2 includes a summary list of internal and external trends to be consid- ered in conducting an environmental analysis. Think about your current employer (or last employer, if you are not currently employed). Take a look at Table 3.2. Where does your organization stand in regard to each of these important internal and external issues? Regarding the external issues, what are some of the opportuni- ties and threats? Regarding the internal issues, what are some of the strengths and weaknesses?

After external and internal issues have been considered, information is collected regarding opportunities, threats, strengths, and weaknesses. This informa- tion is used to conduct a gap analysis, which analyzes the external environment in relation to the internal environment. The pairing of external opportunities and threats with internal strengths and weaknesses leads to the following situations (ranked from most to least competitive):

1.Opportunity + Strength = Leverage. The best combination of external and internal