Long-term goals and detailed, short-term budgets, with nothing to link the two together. Does this organization sound familiar? Whatever the answer, most business professionals understand that achieving a long-term goal requires a series of logical, achievable, sequential steps. Organizations cannot rely on chance or luck.
Yet the steps that lead from where a business is today to where it wants to be – its objectives – often are missing. If an organization is not getting its goals, it simply means that it has a strategic gap and there might be some loopholes in the framing or execution of the strategic plans.
Table of Content
- 1 Types of Strategic Gaps
- 1.1 Management-induced Gaps
- 1.2 Process-induced Gaps
- 1.3 Technology System-induced Gaps
Types of Strategic Gaps
The following paragraphs will discuss different types of strategic gaps.
Management can cause a gap between strategy and execution through both action and inaction. Four main ways management causes this gap include failure to secure support for the plan, failure to communicate the strategy, failure to adhere to the plan, and failure to adapt to significant changes.
Failure to Secure Plan Support
The senior management team must develop a strategic plan with objectives, goals, strategies, and tactics that everyone supports. If people do not accept and support the plan, they are unlikely to put in the right amount of effort to make it succeed. Their allocation of resources may be counterproductive to implementing strategic initiatives, while their management time is diverted into seeking out factors that will justify their position. This misplaced time and effort will lead to a gap, which could prevent the execution of the plan.
To achieve buy-in, management must create a corporate culture and a set of values that support the vision and guide employees’ decisions and behavior. Employees must have the opportunity to provide feedback regarding their ability to implement strategy. Not listening to their views, not addressing – and resolving – conflicts and major differences of opinion, and not building a learning culture – one that tracks and learns from its successes, failures, and mistakes – will result in strategies that are unrealistic and cannot be implemented. This situation leads to a strategy gap.
Failure to Communicate the Strategy
Operational managers and their employees are typically the people within an organization who implement a strategy. They need to know how the strategy affects them. Yet according to research by Kaplan and Norton, creators of the Balanced Scorecard, “less than 5 percent of the typical workforce understands their organization’s strategy.” Without a clear idea of what the strategy, vision, and direction of the organization are, they are unlikely to act in ways that will result in the effective implementation of the corporate plan.
Communication of strategy is vital in all management processes. When budgeting, employees need to see the tactical plans and related targets that affect them so they can modify their behavior accordingly. During the year, they need to assess how well they are carrying out those tactics and the progress they are making toward strategic goals.
When forecasting, employees need to know when their activities are unlikely to achieve their KPIs and, hence, their strategic goals so they can act early to bring the tactical plan back on target. Technology has a role to play in facilitating this communication. Failure to effectively communicate strategy and how well or poorly it is being implemented will result in a strategy gap.
Failure to Adhere to the Plan
As the year progresses, many organizations make decisions reactively rather than strategically. Often the cause is the reporting of results based on a purely financial view of the organization, such as on the chart of accounts by cost center, rather than by a strategic and tactical view. As a result, operational managers focus on financial variances that do not relate to the specific strategic initiatives outlined in the plan. To put things back on track, the accounts become the target of any decision rather than the agreed-on action plans, which may have long been forgotten.
Test this for yourself. In your current reporting pack, how many of the reports tie actual and forecast results back to the strategies outlined in the strategic plan? The reports may monitor the goals, but how many of them monitor KPIs by tactic? Without this link, organizations are likely to act and react in ways that are divorced from the strategic plan, which results in a strategy gap.
Failure to Adapt to Significant Changes
The reality of today’s business environment is that it continually changes. Strategic plans are built on a set of assumptions, such as market growth, production capability, and competitor actions. If these assumptions change, it is unlikely that the plan will still hold.
Following the attacks of September 11, 2001, for example, most organizations found themselves in an economy that was substantially different from the one that existed when they planned earlier in the year. Continuing to follow a plan when the basic assumptions on which it was founded have changed makes no sense. Unless plans are modified to reflect changes to these assumptions, the result will be a strategy gap.
The traditional processes an organization uses to implement and monitor strategy are the second set of strategy gap causes. Once a strategic plan has been researched and created, what happens next? How is the plan translated into action? How are the organization’s assets allocated to the various strategic initiatives? How is progress monitored and the success or failure of tactics measured?
For most organizations, the key tool used to implement the strategy is the annual budget, while the processes of actual reporting and forecasting are used to monitor achievement. But how these processes are approached can lead to a strategy gap.
Lack of Strategic Focus
The objective of any process will determine what gets measured, by whom, and how far in the future. It may seem obvious that the budget should support the implementation of the strategy. After all, the purpose of this tool is to control how resources are allocated, which in turn affects what an organization accomplishes.
It also may seem obvious that one of the roles of reporting would be to monitor strategic progress. Unfortunately, there is very little evidence to support that these processes achieve this. Instead of being focused on long-term business health, traditional planning, and budgeting are internally driven and focused on current-year profits.
In a survey conducted by Comshare, Incorporated, participants said that there is typically a gap between the strategic plan and the budget created to support it. The budget tends to be financially focused with an emphasis on the chart of accounts by cost center, while the strategic plan tends to be behaviourally focused on strategies and tactics.
The result is that budget holders, operational managers, and senior executives are often unaware of how strategic initiatives affect the operating plan or whether resources have even been allocated. Without this linkage, the budget becomes a pure numbers exercise, allowing the strategy gap to emerge. As a result, the budgeting and planning processes become barriers to strategy deployment.
The same is also true when it comes to reporting actual results and forecasting future performance. For many organizations, reporting of actuals takes the form of a simple income and expense statement by department, based on the chart of accounts. The reason reporting takes this form is mainly that the general ledger holds income and expense items, and these systems are used to generate the reports.
However, strategic plans, which are typically action-based and measure activity, do not fit easily within the rigid account and cost center structure of a general ledger, and so the focus is lost. As a result, there is no direction or logical connection in the budgeting and reporting processes for budget holders to adapt their behavior to achieve strategic goals.
For most organizations, budgeting is an annual process that follows the strategic plan, and it is a process that just takes too long. Hackett Best Practices reports that a typical organization takes over four months to complete a budget cycle. Organizations with an annual budget must try to predict events that are 16 months away, which is unrealistic and leads to a strategy gap. According to Hackett, in today’s fast-paced business environment, planning should be treated as a continuous exercise in operational decision-making, resource allocation, and performance management.
Yet nearly half of the organizations treat planning and budgeting as a strictly fiscal and annual exercise that leaves them unprepared to deal with sudden change. Similarly, Hackett found that 74 percent of organizations wait until the end of the month to issue reports. Doing so delays the opportunity to deal with important emerging trends, which could be vital to the effective implementation of the strategy.
Interestingly, most organizations have the data; it is their processes and tools that let them down. What is required is a planning, budgeting, and reporting process that is triggered by change, not by the date on a calendar.
An organization’s financial results are the outcome of its strategy implementation or lack of strategy implementation. Although some financial measures, such as investments and expenses, will be used in implementing a tactical plan, many of the measures will be nonfinancial. Indeed, the long-term viability of an organization may well rest on the success of nonfinancial measures such as product reliability, customer satisfaction, organizational learning, and the efficiency of internal processes.
The adoption of methodologies like the Balanced Scorecard can ensure that organizations achieve the correct balance of measures that will be needed to achieve corporate objectives. The general ledger by itself will not be able to supply all the data required. As already mentioned, the chart of accounts is a transactional view of an organization. The reliance on this view cannot support the planning and monitoring of strategy and will lead to a strategy gap.
Consider an organization that sets and achieves a revenue budget that reflects a growth of 10 percent year on year. Is this achievement a good result? Is it a good result if the general ledger confirms that the goal was achieved while staying within the cost budget? What if the goal was built on the assumption that the market was due to grow at 5 percent, when, in fact, it grew at 15 percent? In this case, market share was lost rather than gained.
In most organizations today, reports compare the performance of the organization with the budget, not with competitors and the market.
Strategy is nearly always based on a combined internal and external view that includes market and competitor assumptions.
To ensure that strategy is being implemented, actual reporting needs to compare performance by strategic initiative and to check that any external assumptions made while planning still hold. Without this strategic external view, decisions will be based on a view of performance that is too narrowly focused, and the strategy gap will develop.
Lack of Realistic Forecasting
Although business conditions can change rapidly, many surprises that affect organizational performance can be predicted using available data and technologies. By predicting future performance from plans based on the current and perceived business environment, contingencies drawn up in advance can be selected or corrections to the existing plan can be made to avoid or exploit the impact of any variances.
The ability to recognize and exploit changing business conditions is the driving force behind rolling forecasts—which also deliver the benefit of reducing or eliminating the annual budget process. According to Hackett’s Best Practices research, however, only 23 percent of organizations make use of this proven best practice.
When forecasting, many organizations once again focus solely on financial results, such as how much revenue will be generated and what the associated costs will be. As with planning, effective forecasting requires modifying and developing plans to achieve strategic goals. In some circumstances, such as when assumptions have changed, strategic goals may have to be reset. Forecasting involves two steps:
- Predicting the likely future performance based on current knowledge.
- Evaluating or selecting alternative plans to change the predicted outcome.
To predict future performance, the natural life cycle of an organization’s products and services should be taken into account. This consideration must take place bottom up; that is, each product and service must be analyzed individually.
Once a forecast has been generated, it can be used as the basis for “what if” analysis, the process of evaluating alternative scenarios. The aim is to evaluate what changes are required to the tactical plan to achieve the strategic goals. As with budgeting, this evaluation needs to be done by strategic initiative. The result will be the predicted income statement.
Two other factors that can contribute to the strategy gap are more attributable to organizational behavior than to the processes themselves; nevertheless, they need to be taken into account when designing a solution. The first factor is a lack of accountability and commitment to the budgeting process. Budgeting is often a game in which budget holders inflate costs and suppress revenues because they expect senior management to demand reduced costs and increased revenues during a second budget pass.
In addition, when a budget is handed down to budget holders without giving them a chance for input, budget holders feel free to miss their targets. After all, it was not their budget. This game-playing produces unrealistic budgets, an absence of accountability, and a lack of commitment to the final plan. The result will be the strategy gap.
The second factor is wrongly focused incentive plans. Budget holders and management often are paid on their ability to meet or beat the budget. This fact will affect their decisions when it comes to planning and reporting their performance and does little to help with the implementation of the strategy. In some cases, it will actively work against the implementation of the strategy. Hackett found that when management motivation was linked to strategy rather than to the annual plan, budgeting cycles were reduced and managers were less afraid of taking risks.
Technology System-induced Gaps
The third area that causes the strategy gap involves the traditional systems used to support the planning, budgeting, forecasting, and reporting processes. Issues include fragmented systems and misplaced dependence on Enterprise Resource Planning (ERP).
In most organizations, planning, budgeting, forecasting, and reporting are treated as separate, disconnected processes and supported by different technology solutions. These processes are all part of the much larger process of strategy implementation. The following analogy illustrates why this separation does not make sense. The journey that a business takes over time is like traveling down a road.
The road curves and changes direction, and its exact route often is hidden from view. In the same way, business direction continually varies because of changing customer requirements, competitors’ actions, or other occurrences in the business environment.
On this journey, the business objective rests on the horizon. This objective, based on current circumstances and assumptions, is the planned destination for the organization. It serves as a beacon, guiding the organization’s actions and decisions. The journey is divided into several shorter segments, each of which the organization will arrive at over time, allowing the organization to gauge its progress. To reach the point on the horizon, the traveler outlines a route.
This plan identifies the main roads to be traveled and the major cities the traveler will pass through en route to the final destination. In the same way, strategic plans outline the route an organization will travel to reach its objective. The journey may take months or years to complete. The key roads are analogous to the strategic plan’s tactics that must be performed to achieve the objective. Cities are analogous to key performance indicators that will tell the organization if the tactics have been completed and if it is on target for success.
Continuing, the traveler may plan in greater detail the portions of the journey to be attempted shortly. The plan may include the names of townships, descriptions of landmarks, and locations of road junctions. These are vital indicators. Without them, the traveler may go in the wrong direction without realizing it until much later. The budget is like that detailed plan outlining the organization’s immediate route. It is very much linked to the strategic plan but contains far more detail.
With the budget, the business assigns money, people, and assets to the initiatives that will keep the organization on course to reach its objective. Monitoring progress relative to the detailed plan is a vital activity because it shows the organization whether it is on target. Past performance is of interest, but it does little to help the business navigate the road ahead.
On the journey, organizations will come up against unexpected diversions, such as construction (activities that are not yet implemented), accidents (activities that are harming performance), and heavy traffic (intense competition for the same customers).
These diversions will cause delays and can even lead to dead ends unless the organization can avoid them. Similarly, organizations may come across new roads (new business opportunities) that were not on the map when the journey started. They may discover that taking advantage of these roads can enable them to reach their destination sooner than anticipated.
Finally, like directional signs and mile markers, the forecast tells an organization whether it is heading in the intended direction and where it will end up unless it takes immediate action. The enterprise must monitor its position and make adjustments constantly. Occasionally it may need to make a major detour – sometimes even heading in what seems to be the wrong direction – to achieve its final objective.
By taking note of the signs – the projected forecasts – and using judgment based on experience, business leaders can make intelligent adjustments to the plan. These adjustments will not be just a once-a-year activity. They may become necessary at any time to keep on track toward the intended destination.
Strategic planning, budgeting, forecasting, and monitoring actual are all part of the same process—moving an organization toward its objective. Together, they are essential components in the implementation and execution of strategy. When performed in isolation, however, they provide little value.
Quite often, managers are asked to budget using systems that do not allow them to see the strategic plan or latest forecast. It is like asking someone to drive down the road with only partial sight, no map, and no idea of the final destination. To drive performance, the company needs to see the whole travel plan: objective, strategic plan, forecast, actuals, and budget. These elements are all part of the same process.
This journey, or the performance management process, is continuous. Markets and competitors do not remain motionless to accommodate an organization’s annual planning process. Traveling down this road smoothly and staying on course, like driving a car, requires regular, small adjustments.
Unfortunately, the traditional systems that support planning, budgeting, forecasting, and reporting are inflexible. Each component is isolated from the others. In addition, often each piece of the process is supported by a different technology than the others, causing integration problems.
For example, the strategic plan may be presented as a text document; the budget may be prepared in a spreadsheet; actual results may be reported in the general ledger; and analyses may be performed using an Online Analytical Processing (OLAP) tool. These systems are completely disjointed, manually intensive, and error-prone. As a result, they help create the strategy gap.
In addition, these systems tend to suffer from other problems that also create gaps:
- Difficult to change: Most existing management systems do not allow changes to be made easily. Altering structures, accounts, and basic assumptions so that management can quickly see the impact of change is complex and time-consuming. Sadly, most systems are nothing short of glorified adding machines – and they do not even do this very well.
- Reporting problems: Systems tend to report from one perspective – usually accounts down the page, and time and version across the page, with each page representing a cost center. Viewing data by product, turnover, geography, or any other business perspective – such as strategy and tactic – is extremely difficult.
In addition, many systems require a great deal of effort to disseminate actuals, the latest forecast, and strategy information throughout the organization. These difficulties prevent the detailed analysis of budgets, forecasts, and actual results in context and can result in the approval of unrealistic plans.
- File management issue: Many organizations still rely on spreadsheets for preparing budgets and reporting results. While spreadsheets are great personal productivity tools, they are a nightmare when used as a corporate planning and reporting system.
In addition to flexibility and reporting problems already discussed, spreadsheets and many other file-based systems also incur version control and other problems because multiple files have to be maintained, relinked, and then redistributed. Apart from the time and error-prone nature of this task, you can never be sure that users are now using the right version.
Misplaced Dependence on Enterprise Resource Planning
A second system-induced gap can be caused by the reliance some organizations have placed on their Enterprise Resource Planning (ERP) systems to implement a strategy. At first glance, such reliance seems logical.
Before ERP, the processes that made up the supply chain – order entry, inventory management, billing, accounts receivable, and others – were separate functions supported by multiple stand-alone systems, often running on multiple technologies. Each part of the process could be owned by a different department or operating unit.
The problems these systems generated are similar to those encountered with today’s planning, budgeting, and reporting systems:
- Expensive in terms of both time (maintenance) and money (hardware and software, personnel). The software had to be maintained on individual desktops. Information Technology (IT) staff had to learn multiple technologies. If the system had been created in-house by a person who then left the company, the organization had a big problem.
- Data integrity and version control issues. Changes in one system were not automatically reflected in other systems, data often had to be rekeyed, and data were shared by transferring files. Many departments multiplied by many files equaled trouble. Organizations could never be certain that the information they were basing decisions on was accurate and up to date.
- Organizations could not easily see what was happening across the enterprise, making it difficult to implement corporate strategy, measure its success, and make informed decisions. Enterprise resource planning was hailed as the solution because it integrated the supply chain processes and supporting systems. The ERP systems increased the efficiency and speed of these operations.
Because ERP systems appear to hold most of the actual data in a centralized database, organizations today are looking to these systems to solve their planning, budgeting, and reporting problems. Many organizations are also trying to leverage their huge investments in ERP implementations to get a return. Given that, many ERP vendors are now offering “integrated” planning, budgeting, and reporting applications on top of ERP, this initially seems an attractive solution.
The problem, however, is that ERP is the wrong vehicle for implementing strategic plans just as a farm tractor is the wrong vehicle for taking a family on vacation. Gartner, the Stamford, Connecticut-based research firm, reports that “[a]lthough ERP systems have largely addressed the needs of transactional users, they have not been able to address the needs of strategic and operational users.”
The main reasons given are the complexity of these systems for users and their closed architectures, which make it difficult to integrate non-ERP data. All enterprise resource planning systems are focused on transactions, not on strategy. This very issue is the reason why today’s traditional planning, budgeting, forecasting, and reporting systems fail.
Implementing a strategic plan requires the dissemination of goals, objectives, strategies, and tactics. Planners must be able to evaluate the impact of economic drivers, forecast trends, and predict the impact of competitors. Senior management needs the ability to analyze alternative operating structures, investments, and divestments. Implementing strategy is about management effectiveness. The two are different and require different tools and processes.