Budgeting / Pyramid of Purpose / PMS

WHY BUDGET DOES NOT 
COMMUNICATE STRATEGY WELL?

Most operating executives know that the annual budget making process - and its quarterly review process - is only partially effective in being a tool for people to understand what the strategy is and what is needed at operational level to achieve it. This happens because 

• Financial targets mentioned in the budget are more of "symptoms"  and not the "disease". Unless you discover and diagnose what the "disease" is, you will not know how to drive something.
• Financial budgets do not easily provide a method of self-assessment and self-correction. Ideally people should know - at the end of each day or even during each task / meeting - whether they contributed to the strategy and to the company.

As a result, in spite of having budgetary process, the employees do not know where the organization is going, how to make trade-offs, how to choose among options and how to behave in order to get there. This leaves employees frustrated and confused and in turn this affects customers and other stakeholders. Different people act differently and go in different directions. 

This post exposes you to 2 tools which you can use to create more alignment (all employees on the "same page"). The first is "Pyramid of Purpose" and the second is called "Performance Management System" ("PMS" to HR people)

HOW TO COMMUNICATE YOUR STRATEGY
THROUGH THE  PYRAMID OF PURPOSE  

While you will need a big document with appendices and tables for discussing strategy at a senior level, I suggest you use the pyramid of purpose to communicate the strategy down. In the pyramid form, it is easy to see the "big picture" and the relationships between different elements of the plan in a form that is easy to understand:  The purpose shown at the apex cascades from one level of strategy to the next. There are not many  hard and fast rules for building a Pyramid of Purpose except that the pyramid has to be tailored to the audience.

The pyramid answers why are we doing what we are doing, what do we need to do to fulfill our intended purpose, how exactly are we going to do what needs to be done and who (or what) is going to make sure it's done?

A hierarchy of questions emerges: In order to answer question 4, you need to answer question 3; to answer question 3, you need to answer question 2; and to answer question 2, you need to answer question 1. 

• Question 1 – "why" – refers to your organization's values, mission, and vision.
• Question 2 – "what" – covers objectives and goals.
• Question 3 – "how" – refers the actions needed to realize these goals.
• Question 4 – "who" – refers to the people, systems and tools which deliver these.

How to build your own Pyramid Of Purpose

FIRST STEP OF THE PYRAMID
VISION / MISSION

If your purpose is (A ) to communicate strategy to external audience (customers and stakeholders) use a "vision statement" (B) to communicate strategy to an internal audience, use both the vision and the mission statement. See the Appendix at the end of this post. Once you have described the "why", the next steps of building your pyramid must define the "what", then the "how" and finally the "who". And you need to do this in a way that clearly explains your strategy to your specific audience. 

EXPLAIN HOW THE AUDIENCE CAN ACT TO DELIVER THE VISION 

Explain how the team can head in the right direction? How everyone can work together towards the same objectives? How do these objectives reflect your vision? And how  your day-to-day activities can help achieve that vision? 

It's easy to focus so much on day-to-day activities that you lose track of your original business plan. Strategies become redundant or unnecessary, vision and mission statements lose relevance, tactics may not lead to the results you want-and you may not even realize that you've inadvertently changed direction. VMOST is an analysis framework that helps you avoid this trap by checking whether the five VMOST elements – Vision, Mission, Objectives, Strategies, and Tactics – are in alignment. The tool serves two purposes. First, it helps you re-connect to your business vision, and highlights any problem areas that you need to address. Second, it helps you create and evaluate plans for the future, so that you can make sure that they're aligned with your vision of that future.

VMOST Tool

1. Vision – This is your organization's purpose, in terms of its values or how it goes about doing business. It should inspire staff, and help customers understand why they would want to use the company's products or services.
2. Mission – This is also your organization's purpose, but expressed in terms of key measures that must be reached to achieve your vision.
3. Objectives – These are specific goals that you must meet to achieve the mission.
4. Strategy – This is the overall plan you'll follow to meet your objectives.
5. Tactics – These are specific sets of actions needed to execute your strategy.

Looking from the top down
you need alignment because a clear vision drives the mission – which, in turn, lets you set your objectives or goals to achieve that mission. You design strategies to meet your objectives, and you implement your strategies with specific tactics or activities.  

Looking from the bottom up
your tactical actions should fulfill your strategies, which help you meet your objectives, which help you accomplish your mission, which, in turn, helps you realize your company's overall vision.

How to Use VMOST in practice

To conduct a VMOST analysis, you need to determine whether all five VMOST elements are in alignment, both from a top-down and from a bottom-up perspective. Go through each step below to check how well the VMOST elements fit together in your situation.

• Step 1: Choose the scope of your analysis. Do you want to assess how well your whole organization's day-to-day activities contribute to its vision? Or do you just want to focus on your own contribution, or that of your team?
• Step 2: Collect the five sets of information for the scope you chose in Step 1:
• Vision statement.
• Mission statement.
• Key objectives.
• Strategy document.
• Tactics used to deliver that strategy.
• Step 3: Answer the following questions:
• Do the key measures in your mission statement fit the values described in your vision statement?
• If you achieve the objectives, will the measures in the mission statement reach the levels described in the mission statement?
• Does your organization's strategy support the achievement of the objectives?
• Will your tactics deliver the strategy?

If the answer to every question in Step 3 is yes, you can be reassured that you, your team, or your entire organization – depending on your scope from Step 1 – contributes to your overall vision through your day-to-day activities.

However, if you answered no to any of the questions in Step 3, you need to adjust or redefine one or more of the VMOST elements. For example, if the tactics will not deliver the strategy – and if no tactics you can identify will deliver the strategy – you'll need to reconsider everything else.

ALIGNING THE ORGANIZATION THROUGH A PERFOMANCE MANAGEMENT SYSTEM (PMS)

The challenge faced by many people in the organizations of today is that there is a strategic destination they're all supposed to reach but they don't always have a convenient device to help them reach their objective. Sometimes individuals, teams, and even whole departments can get so far off course that they seem not even to remember what the final destination was supposed to be! This is where it's useful to have a system to co-ordinate different parts of your organization and keep them on course. The  PMS system aligns all parts of an organization to accomplish an important objective.

PMS Process

1. Select a key objective.
2. Aligns implementation plans at all levels.
3. Implements, reviews, and improves the plan on an ongoing basis.

The process follows Deming's Plan-Do-Check-Act cycle and is a generic method for continuous improvement. Below, I show how various steps of PMS align with PDCA.

Step 1: (Plan) Define What You Want to Improve

This is most often a key strategic objective that needs a significant change in how things are done. 

Step 2: (Plan) Establish Sub-Goals to Achieve Your Objective

• What organizational (or team/functional/departmental) goals for the year are need to achieve this objective?
• What checkpoints are necessary to keep the goals on track?
• What controls can you put in place to ensure that the goals are successfully reached?
• How will you measure progress and evaluate success?

Record these, and use them as the basis for your review process.

Step 3: (Do) Communicate the Plan

• Communicate your plan throughout the organization.
• Ensure that all levels of the company understand your vision and goals.
• Have each department and team set its own goals to link directly to the objective and the sub-goals you've established.
• Make sure that managers in these departments and teams "ripple goals down" so that everybody knows their part in the plan, and is using the Hoshin process to manage the people who report to them.
• Assign clear responsibility for each item in the implementation plan.
• Make sure that you have agreement on all items within the plan with all of your reports, and make sure that this agreement has rippled down as well.

Step 4: (Check) Develop a System to Collect Information on Your Control Parameters, and Then use it to Manage Change

Are your key metrics being met? If not, why?

Create a review table that shows the:

• Goal.
• Goal owner(s).
• Time frame.
• Performance metrics.
• Targets.
• Actual results.

Then use this table to manage movement towards these goals on an ongoing basis.

This "check" step ensures that your plan is a living document. It doesn't just sit on a shelf to collect dust once it's finished. PMS planning is based on the idea that to reach your strategic goals, the company needs to be in a constant state of reflection and evaluation.

On your review table, note any differences between the target and actual performance. This information will be used for subsequent plans, because Hoshin planning builds in levels over time. The plan you create this year will be used as the basis for next year's plan.

Step 5: (Act) Analyze Results, and Take Corrective Action Where Needed

If there are any differences between expected and actual results, identify the sources of those differences. Discuss these, organize corrective action, and implement this action.

• What is going right?
• What is going wrong?
• Do the plans meet the realities of your business and the problems you face?
• Are measures appropriate?
• What can be done better, or differently, to reach your destination?

This stage of the process ensures a system of continuous improvement. To keep moving the company toward its vision, review the plans not just once a year, but on an ongoing basis to determine how daily work should be done. With this review (or act) step, you can ensure that plans continually evolve to take into account a changing environment.

Step 6: Repeat the Process as Needed

This process can be cycled over and over to maximize the quality of your efforts. It can also be used within your various business units, functions, and teams to ensure that their specific strategies have the same goal alignment and commitment to continuous improvement.

IMPORTANT

A tightly controlled approach like this only suits certain situations and certain industries. Use your best judgment when applying this tool to your own situation.  Peter Drucker's Management by Objectives (MBO) was very influential in developing PMS. The idea of various levels of organizational objectives, from management down to the workers, is a fundamental part of PMS.

Appendix : Vision and Mission
Normally each SBU should also have these two statements.

Both of these statements express the purpose of the company or SBU in different langages

1. Mission defines the purpose in terms of observable results to be achieved by the organization - lead by the CEO and his core team - typically over the next 3-5 years.
2. Vision defines the purpose in a language understood by the customers and other stakeholders and tells them who are our key stakeholders and what can they expect from the company. Many times this statement of why we exist is stated in timeless and inspirational terms.  

Brief Example : 
An entrepreneur explains his strategic plan to potential investors as a Pyramid 

1. Why: Vision / Mission : To delight and enthrall parents and children alike with beautiful, collectable, wooden toys and games, and in so doing, become the nation's leading retailer of high quality, wooden toys and games.
2. What: Objectives : Prove the concept by launching a pilot store and reaching profitability within 18 months.
3. How: Actions : Identify the pilot store location, Source good quality wooden toys and games, Design attractive store front and merchandising approach
4. Who: People : Responsible for location selection; Responsible for supplier identification and product sourcing; Responsible for selecting store designers and shop fitters;