09 Oct CFO Guide to Strategy Execution
The Airline Simulation
Shortly after college I found myself in a rapidly growing service organization on the fast track to management. Being in the professional world was a phenomenal new experience, so I was eager to soak up as much knowledge and experience as I possibly could. After a year or so, I had all the confidence in the world and felt like a business pro ready to take on the corporate world. One day, a former business professor called and asked me if I would be willing to put together an alumni group to compete against his students in the college’s business capstone course. Each semester, groups of students compete against each other in a business simulation where they ‘run’ an airline. Every week, the students make decisions about strategy, marketing, sales, finance, IT, etc. The group decisions are input and a stock price is derived based on their airline’s position in the industry, which is made up of the other groups’ airlines. This was the first semester that the professor decided to add an alumni group to up the ante and increase competition for the student groups. The airline with the highest stock price at the end of the semester wins. And, a stock price over $20 earns the group a spot on the famous “Wall of Fame” that is proudly displayed at the entrance to the Business Hall.
I was incredibly flattered to be asked to head up the inaugural alumni group and got right to work to find the best team. I was very serious about my responsibility to show the ‘young and inexperienced’ students how to run a business….after all, I had one whole year of real life experience under my belt. I got busy recruiting the best and the brightest among my co-workers. I was even able to recruit several members of management to join the team. I believed that we had a dream team full of experts in the critical functional areas. We were motivated to win and ready to get to work. Surely, we would be able to earn our place on the Wall of Fame.
A few weeks later, something really huge happened at the service organization. Our CEO called an unexpected meeting and announced that we were being acquired by a large public company. Our new parent company had big plans for our service organization, and we were all about to get very busy. We had already made a commitment to the college so, in spit of our time constraints, over next couple of weeks our alumni group spent some time together over a few lunches to discuss the project. Our vision was that our airline would have the highest stock price at the end of the semester. Beyond that, we didn’t really discuss how we were going to do it. As things got busier for each of us, we ended up working individually on the project making the decisions in our functional areas that each of us thought would result in the highest stock price. As it turns out, the decisions that we were making individually were working against each other. One of us started entering markets that catered to leisure travelers, while another launched an initiative that catered to to business travelers. Someone invested in purchasing more luxurious airplanes, while someone else slashed fares to attract the more price-conscious passengers. Our disjointed methodology caught up with us quickly, and at the end of the semester our stock price was exactly $0.81 (yes, that’s 81 cents), earning us the distinction of having the worst ending stock price of any group, EVER.
Almost 20 years later, I have learned more than I ever imagined I could from my experiences in the business world, and I’m certain that I have volumes yet to learn. I have worked with and studied companies who were able to articulate their vision, create a strategy, and execute the plan to achieve the vision and beyond. I have worked with others who fell flat, and yet others who never even got close to their goals. Thinking back, even to this day I can draw parallels to the real world and pull valuable lessons from my brief stint as team leader of the alumni airline simulation group.
Lesson 1: Vision is not synonymous with strategy.
A company’s vision lays out what it would like to achieve. Vision statements should be aspirational and reflect the company’s values and culture. But you can’t stop there. You must also create a strategy that tells everyone how the company plans to get where it wants to go. There are low-price leaders (Walmart), those with service as their differentiator (Zappos), and others who value luxury (Jaguar). It is important to spend the time to figure out how the company will differentiate itself in the marketplace. This decision will chart the path for what strategic goals the company will set. In our airline simulation, we could have succeeded as a leisure airline, and we could have also succeeded catering to business travelers. What didn’t work was NOT making that decision up front. In the absence of a strategy to guide our path to success, team members were making decisions that, in the end, undermined the well-intentioned decisions of the other team members.
Lesson 2: A company’s vision, whether short or long term, should NOT be tied to financial results.
All companies need both strategic goals and financial goals. There is no doubt that financial goals are important. Making money is what allows a company to continue to operate and grow. Depending on where the company is in its life cycle, it may need to generate cash to reinvest in the company, to pay off debt, to launch a new product, to satisfy investors, etc. However, if the vision is solely tied to financial goals, when resources inevitably become strained, focusing on the financial goals can inadvertently cause leaders to make decisions that sacrifice the long term success of the company for the sake of achieving shorter term financial goals. Our airline simulation stock price wasn’t a straight nose dive. Though our trend line went south, we did have temporary spikes along the way. There were weeks when the price would start to slip, and because we defined our vision in terms of financial results, we made those decisions that would trigger an immediate increase in the stock price. Ultimately, however, the upturns in price were all short term and didn’t result in sustainable success.
Lesson 3: External factors will cause disruptions. Be prepared.
All companies face circumstances that are outside of their control. There are possibilities of regulatory changes, changes in consumer behavior, new competition, and emerging technologies, just to name a few. That doesn’t mean that companies can just bury their head in the sand and ignore the possibility of the unexpected. Risks require responses, and responses require decisions to be made. Most of us, from the front line to the C-suite, are knowledge workers, those who “think for a living”. There was a time when most workers weren’t required to make decisions about the work that they were doing. Today, however, many of the repetitive tasks that didn’t require, and actually discouraged, independent judgement have been replaced by automation. In 1957, Peter Drucker predicted that the most valuable asset of the 21st century institution would be knowledge workers and their productivity. Today, we expect employees to make the best decisions to move the company in the right direction. Arming employees and leaders with a strategic plan that provides a framework in which to make the right decisions is the best tool to have available when the unexpected becomes a reality. I have no doubt that our airline simulation would have ended differently had the unexpected outside event, and resulting time constraints, not have occurred at all. But, that was out of our control. It also could have turned out very differently if we had a strategy map in place that facilitated more systematic and timely decision-making, thus mitigating the impact of the event.
Applying the Lessons Learned in the Real World
Our airline simulation team was ambitious, motivated and capable. Yet, all the drive and ability in the world won’t lead to sustainable success without a clear vision and business strategy that is continuously communicated across the organization. In other words, everyone needs to know:
- Where the company is going.
- How it is going to get there.
There are different ways to create and manage a company’s strategy. One way is to implement a Balanced Scorecard, which is a strategic planning and management system. The Balanced Scorecard was created by Drs. Robert Kaplan and David Norton in the 1990’s, though its roots go back many years. It began as a way to have a more balanced view of organization performance, by looking at both non-financial and financial measures. The concept eventually grew into a much larger strategic planning and management system that views success from multiple perspectives across the organization. The Balanced Scorecard provides much more than just a method for documenting the strategy, it provides a framework for executing it.
A strategy starts with a vision. A vision statements is inspirational, memorable, concise, clear, and easy to communicate. It should paint a picture of the future the company wants to create. A vision statement should also incorporate the company’s values and be ambitious, yet attainable. One way to get started creating a vision statement is to create a vision board. This exercise incorporates brainstorming, but with visuals, to get the creative juices flowing. Ask questions like:
- Who does the company help?
- Why does your company do what it does?
- What problem does your product or service solve?
- How do you want to make the world a better place with your product or service?
Get input from customers and employees. Then, seek feedback from family, friends, and anyone else who will listen and provide genuine feedback. In the end, the vision statement should ignite passion in leaders, employees, customers, and stakeholders.
Here are some real-life examples of great vision statements:
Google: To provide access to the world’s information in one click.”
Amazon: Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they may want to buy online.
Zappos: One day, 30% of all retail transactions in the US will be online. People will buy from the company with the best service and the best selection. Zappos.com will be that online store.
Make-A-Wish: Our vision is that people everywhere will share the power of a wish.
NPR: NPR, with its network of independent member stations, is America’s pre-eminent news institution.
In our airline simulation, had we created a vision statement, it may have read something like this:
In a Balanced Scorecard, objectives are key areas in which the company must focus in order to get where it wants to go. The company can take a look at where it is now, and where it wants to go and identify those areas in which it must focus to get from here to there. Identifying objectives requires that leaders take a hard look at the organization and identify strengths that it can capitalize on as well as weaknesses that must be overcome. A good place to start is with a SWOT analysis. Objectives should be grouped into various perspectives, and objectives should be aligned with the other perspectives. Typically, the perspectives are:
- Internal Process
- Employee (Learning & Growth)
Starting with the foundation, the employee perspective, ask yourself “How will we continue to learn and grow?” For example, we could have named the following employee perspective objectives in our airline simulation:
- Promote a culture of learning
- Increase employee engagement
- Continuous communication
Internal Process Perspective
From the employee perspective, we move up to the internal process perspective. Here, ask yourself “At which processes must we excel in order to succeed?”. Think of the activities and processes from end to end. Examples of objectives in the internal process perspective are:
- Improve on-time departures
- Increase airplane utilization
- Improve baggage handling accuracy
- Increase percentage of direct routes
For this perspective, ask the question “What does our success look like from our customer’s perspective.” Perhaps, the answer to that is that the customers are consistently able to use travel time to increase productivity or that the customer perceives the value as greater than the price. From those answers, you can pull the following objectives:
- Increase passenger access to productivity tools
- Increase value delivered to customer
Finally, when you reach the financial perspective, ask “What does financial success look like to our shareholders?”. Depending on where the business is in its lifecycle, financial goals may be different. For example, companies in a startup or heavy growth phase usually need funds to reinvest, so the financial goals may be largely related to retaining cash. Other companies who have reached maturity may be more concerned with return for investors. Financial objectives might include:
- Reduce expenses
- Increase Net Income
The visual representation of the objectives grouped by perspective is a strategy map. Collectively, the objectives tell the story of the company’s strategy and let everyone know how the company plans to achieve the vision. In general, improving objectives in the employee perspective enables improvement in objectives in the internal process perspective, which then leads to better performance in the customer and financial perspective objectives.
Measures are key performance indicators that tell the company whether the objectives are moving in the right direction. Measures can be leading indicators or lagging indicators. Lagging indicators are the KPIs that follow an event and report on a past event. For example, net income is a lagging indicator that reports financial results for a prior period. Leading indicators, on the other hand, are KPIs that predict future events. These are measures like employee engagement. Higher levels of employee engagement drive improvements in operational results across the rest of the organization. Measures in the financial perspective will most likely be entirely lagging indicators. As you move down through the scorecard to the employee perspective, the measures will consist primarily of leading indicators.
Finally, initiatives are the projects or activities that are implemented to move the objectives forward. It is with this step that strategy is truly translated to action. Giving people projects or tasks that are associated with objectives that directly lead to the vision allows people to see how their efforts contribute to the company’s success in achieving it’s vision.
It has been said that a failure is a success if you learn from it. I have definitely learned from my airline simulation experience and many, many others along the way. One such lesson is that a team of engaged employees is a critical success factor that can drive sustainable success, but they must have a framework in which to make decisions. The Balanced Scorecard strategic planning and management system is one way in which companies can communicate the vision and story of the strategy in the form on a strategy map. A Balanced Scorecard can take many months to implement and requires commitment from those at the top. Leaders should have an open mind and be ready to embark on an exercise of organizational self-discovery. Once successfully implemented, however, the Balanced Scorecard can serve as a much needed pathway to success in achieving the company’s vision.