Business Intelligence/Understand strategy

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Business Intelligence
Framing stage Understand strategy Clarify strategy
An ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.

—Lamb 1984

What is strategy?[edit]

Lamb offers an important definition of strategy. Strategy is also:Strategic management

Drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. It is the process of specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs.

— David 1989

This book focuses on strategic management. Strategy is an ongoing process that develops both long-term and short-term objectives at the strategic and operational levels, establishes and/or modifies the organizational hierarchy to manage operational processes, and determines the suitability, feasibility and acceptability of the strategy. An explicit way to represent the corporate strategy is using strategy diagrams. Strategy diagrams aid in all aspects of strategic management. They allow us to explicitly capture strategic and operational objectives. Cascading the strategy through the organizational hierarchy provides a means to align strategy with operations. Finally, using strategy diagrams makes it possible to evaluate the strategy by determining if it is being successfully implemented and if it is the correct strategy.

An effective BI system must aid in all aspects of strategic management, including the formulation, implementation and evaluation of strategy.

Strategic Management[edit]

For our purposes we will define strategic management as a combination of three main processes:

  1. Strategy formulation
  2. Strategy implementation
  3. Strategy evaluation

Strategy formulation[edit]

Strategy formulation requires examining where you are now, determining where you want to go, and then determining how to get there. This requires the following three processes: [1]

  • Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.
  • Concurrent with this assessment, objectives are set. These objectives should be parallel to a timeline; some are in the short-term and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives
  • These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.

Strategy implementation[edit]

The implementation process requires the establishment or modification of the organizational hierarchy so that the company can achieve its objectives. The following items constitute the strategic implementation process:[2]

  • Allocation and management of sufficient resources (financial, personnel, operational support, time, technology support)
  • Establishing a chain of command or some alternative structure (such as cross functional teams)
  • Assigning responsibility of specific tasks or processes to specific individuals or groups
  • It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.
  • When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes.

Strategy evaluation[edit]

Johnson and Scholes present a model in which strategic options are evaluated against three key success criteria:[3]

  • Suitability (would it work?) - Suitability deals with the overall rationale of the strategy. The key point to consider is whether the strategy would address the key strategic issues underlined by the organization's strategic position.
  • Feasibility (can it be made to work?) - Feasibility is concerned with the resources required to implement the strategy are available, can be developed or obtained. Resources include funding, people, time and information.
  • Acceptability (will they work it?) - Acceptability is concerned with the expectations of the identified stakeholders (mainly shareholders, employees and customers) with the expected performance outcomes, which can be return, risk and stakeholder reactions.

Framework approach and Strategy[edit]

Causal link maps identify the causal relationships between goals. The Activity, Chatterjee and Strategy maps can easily be translated into a causal link map. The map contains all the

Porter - Activity Map (1996)[edit]

Porter argues firms must achieve both operational and strategic effectiveness for superior performance. Operational effectiveness means performing similar activities better than rivals perform them by better utilizing inputs. Part, but not all of this, is efficiency. Companies achieve profitability over time through strategic positioning, meaning performing different activities from rivals' or performing similar activities in a different way.

Porter focus on strategy as unique activities is crucial. Firms must choose a set of activities to deliver a unique mix of value. These activities are linked and mutually reinforcing. Not only must companies choose the right activities but the essence of strategy is choosing to perform a set of activities different than rivals and are strong enough block any company that would seek the same market.

What does performing different activities than rivals achieve? Companies achieve profitability over time through strategic positioning, meaning performing different activities from rivals' or performing similar activities in a different way. They achieve differentiation, which arises from the choice of activities and how they are performed. A company can outperform rivals only if it can establish a difference that it can preserve

Specifically, to achieve profits companies can focus on two different types of activities. The first is for companies to provide goods or services with greater value, charge higher prices, thereby increasing revenue. The second type of activity aims to provide goods or services at a lower cost, reduce costs, thereby increasing profitability. Porter asserts that activities are the basic unit of competitive advantage. Competitive strategy is about being different. Companies must choose different sets of activities to deliver a unique mix of values.

An activity map shows how a company creates value in a competitive market (Morgan et al. 2007). The map shows which activities a company must align to generate value in the market. Activity maps identify the most critical activities needed to achieve strategic objectives and the investments necessary to support these activities. Creating the map requires focusing on the most important activities while putting less important actives to the side. The final map allows us to determine what projects, programs and activates are critical for a company to achieve its strategic objectives. The goal is to identify important activities so that it will be possible to develop ways to measure how well the company is performing these activities. An example of an activity map for Southwest Airlines appears below.

Southwest Activity Map

The dark blue circles denote higher-order strategic offerings. The light blue circles denote activities or investments tailored to deliver it.

Chatterjee Map[edit]

Sayan Chatterjee advances the subject of strategy maps by switching the focus to customer outcomes instead of customer needs. "Focusing on outcomes generates a different set of questions from a focus on needs (Morgan et al 2007 page 153)". To this end the Chatterjee Map there starts (from the top) with customer outcomes. Then the focus becomes the competitive objectives necessary to achieve the customer outcomes.

In essence, the Chatterjee Map rearranges the Activity Map to reflect customer outcomes. This provides a different set of objectives and capabilities compared to focusing on customer needs (Morgan et al. 2007).

The Chatterjee Map contains four swimming lanes:

Customer Outcomes
These generally correspond to the higher-order strategic offerings displayed in the Activity Map.
Competitive Objectives
Also called strategic outcomes are the means by which a company translates core objectives into customer outcomes.
Core Objectives
These are the leading indicators of strategic outcomes (Morgan et al. 2007). Data on lagging indicators, such as ROI, earnings per share, profit margin, etc., signals success for failure well after there is time to adjust operations. Excellence in strategic execution at the operational level will correspond to high measures on leading indicators, assuming that the Chatterjee Map is correct. Low measures on leading indicators could indicate a few problems, such as a problem with strategy-operations alignment, but always signals the need for management to take a closer look at the business.
Execution Capabilities
These are operational resources and activities necessary to execute the strategy. The execution capabilities align with the strategy. A lack of alignment will often surface first among the leading indicators. If unchecked it will in turn will have a ripple effect, propagating up to the customer outcomes.

Strategy Map[edit]

Strategy maps are a way of providing a macro view of an organization's strategy, and provide it with a language in which they can describe their strategy, prior to constructing metrics to evaluate performance against their strategies (see wikipedia article). Key Performance Indicators KPI ’s are financial and non-financial measures or metrics used to help an organization define and evaluate how successful it is, typically in terms of making progress towards its long-term organizational goals (see F. John Reh). The map must show the objectives and how objectives support other objectives.

Components of a strategy map:

Four Perspectives
Financial perspective: Shareholders (profit) versus subsidizers/financers (non profit).
External Customer perspective: The customer is concerned with:
Performance and Service
Internal (business) process perspective: Involves:
Operations management processes
Customer management processes
Innovation processes
Social and regulatory processes.
Learning and growth perspective: This involves developing the human, information and organizational capital.

All strategy diagrams identify important assumptions that drive the strategy. Strategy maps outline how objectives between different strategic themes and perspectives influence each other.

The purpose of a strategy map is to align the strategy with daily activities.

Causal Link Map[edit]

"The strategy map is a visual representation of the various cause-and-effect relationships that make up the strategy." [4]

There are two purposes of reports

  1. Confirming a Theory/Hypothesis regarding the business (i.e., confirm causal link)
    • Why did it happen?: X-->Y
    • How did it happen?: X1 -->Y2
  2. Running the business using Business Process Monitoring or prediction
    • What may happen?: Xf -->Yf
    • What happened?: X1 versus X2

This section focuses on reports designed to confirm theories or hypotheses. This is necessary in order to test the cause-and-effect relationships needed to confirm strategy. The causal link map explicitly identifies the cause-and-effect relationships between important business concepts. These relationships are important because they allow business leaders to make assumptions about the future performance of a company (Morgan et al. 2007).

Perhaps the most important unifying principle behind all the strategy diagrams is that each explicitly identifies causal links. First, remember that each strategy diagram is an explicit, tangible model designed to capture strategy. To capture strategy each diagram/model explicitly identifies important assumptions that drive the strategy. These assumptions are either a/an:

  1. Objective
  2. Activity
  3. Link between objectives or activities

However, without a means to achieve an objective, or a direction for activity, the company could not function effectively. So, the company links activities and objectives. For instance:

  • Quicker terminal turnaround (activity) translates into on-time delivery (objective)
  • Closing railroad crossings (activity) translates into fewer accidents (objective)
  • Minimizing maintenance costs (objective) translates into higher profits (objective)

Each of the bulleted items above is a causal link. The Activity Diagram, Chatterjee Map and Strategy Map all contain these types of links. In essence, each type of diagram assumes causal links. The difference between the diagrams is simply based on the perspective it brings to understanding the strategy. The activity diagram identifies important higher-order strategic offerings and the activities or investments necessary to execute. The Chatterjee Map "made a significant contribution to the subject of strategy maps by overlaying a subtle but crucial distinction between a focus on customer outcomes versus customer needs." Finally, Norton and Kaplan Strategy Maps offer a process, when combined with scorecards, with the ability to translate specific objectives into leading indicators that help determine if objectives are being met (Morgan et al. 2007). This helps the decision maker identify those initiatives that will allow the company to achieve its objectives.

Given that all strategy maps contains objectives, activities and links, it is possible to turn any strategy diagram into a causal link map. Therefore, the unifying principle behind strategy diagrams is that they can all be translated into causal link maps. The causal link map explicitly identifies the cause-and-effect relationships between important business concepts. Identifying these relationships is important because they not only allow business leaders to make assumptions about the future performance of a company but also provide them with the means to test these assumptions. A strategy map is only useful if its empirically testable assumptions are accurate. The section on scorecards will describe how to test these assumptions.