Not only do we have to think about the strategy, but we also have to monitor it. In this article we propose the use of cause-effect diagrams, also known as strategy maps.
Most of the company directors know how to positively identify the key objectives that make it possible to achieve the goals established in the company's vision. Because then many times we find ourselves in difficulties, that if we analyze with a spirit of self-criticism, we recognize as avoidable? The answer lies in the fact that we do not monitor, sustained over time, the fulfillment of the objectives that make the success of our strategy. We do not have an early warning that tells us in advance that we may see our goals unrealized if we do not correct these goals.
We are going to graph this situation with a classic example. In this case we will do an analysis of the strategy using the Dupont formula (see appendix 1):
Where
In this formula they are usually related:
Margin with commercial efficiency, asset turnover with operational efficiency, and leverage with financial efficiency.
We now graph this relationship using the visual paradigm of traffic lights.
This diagram tells us that ROE is assured, since the three objectives on which it depends are also assured. In general we can affirm that:
An objective is of assured compliance only if the sub-objectives that comprise it are also assured
This obvious truth is the foundation of efficient leadership and is the point at which many of us often fail.
We fail because we focus on meeting the goal and not ensuring it.
A goal is achievable with all the objectives assured or with some objectives compensating for others. This last case reveals to us that it is necessary that we work on the objectives not reached as planned or the need to re-plan.
In a strategy map we generally have a network of complex interdependencies where the different objectives can be subdivided into other sub-objectives and circular feedback in the style of virtuous (or vicious) circles can also be presented.
We present here an example of subgoals.
Here we see that operational efficiency is not assured since one of its objectives is unfulfilled. This forces us to immediately attack the problem of non-performing loans, which puts at risk business efficiency and, in turn, ROE. In case of not being able to lower the delinquency for any particular reason, we will be forced to re-plan our assumptions, for example, reformulating the goal of ROE, commercial efficiency and delinquency. Let's not forget that a good director must not only achieve a good performance, but must have foreseen this result as precisely as possible.
It is important to note that:
Each factor or goal is evaluated independently of the objectives that ensure it.
This means that the cause-effect map is not a simple mathematical formula that relates multiple objectives, but is a repository of the director's “instinctive” knowledge.
Let's graph it with an example.
In this case we see that the objective of low delinquency is not reached and neither is it assured. In the strategy map we see that the sub-objective of as customer is not insured. Let's explain what these subjective ones refer to. It is a contractor company for works to individuals. Customer compliance is an objective that measures how long it takes a customer to agree to a work after the foreman says he has finished. As a foreman is an objective that measures how long it takes a foreman to complete the work with respect to what was planned. In this case it happens that the client did not agree quickly and this made him not pay as agreed. After analyzing the cause of the delays, it was detected that the clients were not fully satisfied with the works carried out, not in the main aspects, but in some details of completion,and for this they did not pay, until they completed what they wanted. Fixed issue with a site completion supervisor and a small team of construction workers dedicated to completion details only.
The relational knowledge of the director has certain characteristics:
- The estimated “ weight ” of each subgoal. It is only an approximation. It is common to represent this weight as little, medium or a lot. The “ delay ” or delay of each sub-objective is also important to evaluate. It can be simplified by characterizing it as having an immediate, medium-term or long-term effect.
The " weight " characteristic gives us the order of priorities in solving problems.
The feature " delay " deserves special attention, is what transforms the strategy map in our "crystal ball". In the strategy map I can include subgoals that affect later goals later in time. If I don't correct them, I'm compromising future results.
In this segment of the strategic map we can see that an impact objective in the medium term is not being met. It is the objective of presenting new products to the market.
This will affect our commercial strategy in the medium term and is reflected in our strategy map for you to take immediate action.
Let us always remember that:
The strategy map must always be with the traffic lights green. Never stop paying attention and correcting any immediate or future warning signs.
The job of the strategist in the company is to think today what the client is going to demand tomorrow and have the means to deliver it. This is not possible in an environment where day-to-day life is absolutely prioritized. We always have to work hard to give ourselves time to think about future strategy. The current one we just have to control. In order to make it easier to find ourselves and transform the effective follow-up of the strategy into a pleasant routine, it is important to have the appropriate IT tools infrastructure and human resources aligned with the company's vision. Our software must clearly present the strategy map and must be able to obtain operational data from operating business systems. If a data source is not available, it must be created since:
The reality of the company is not limited to the available data.
In this first note we gave some examples using somewhat outdated but well known techniques such as the Dupont formula. In the next note we will introduce ourselves in the engine of every company of the information age that is human resources, how to measure its alignment, its adjustment to profiles, investment in training and retention.
As a final, I propose, as a fun and personal exercise to raise the objectives and relationships between them in a relationship. This could help us keep the flame going and avoid a few misunderstandings.
Bibliography
Kaplan, Robert and Norton, David, “Having trouble with your strategy? Then Map It ”, Harvard Business Review, September-October 2000
Dumrauf, Guillermo, “Corporate Finance”, Grupo Guía SA, 2003
Appendix 1: Dupont Formula
Definitions
Profit margin is defined as:
Margin = Net Profit / Sales
ROA (Return on Assets) or Return on Assets is defined as:
ROA = Net Income / Total Assets
ROE (Return on Equity) or return on Equity is defined as:
ROE = Net Income / Total Equity
Asset turnover is defined as:
Asset Turnover = Sales / Total Assets
Leverage multiplier is defined as:
Leverage Multiplier = Total Assets / Total Equity
Operations
Multiplying and dividing the ROA by Sales we have:
ROA = (Net Profit / Sales) x (Sales / Total Assets)
Replacing we have:
ROA = Margin x Capital Turnover (eq. 1)
Multiplying and dividing the ROE by the Total Assets we have:
ROE = (Net Income / Total Assets) x (Total Assets / Total Equity) (eq. 2)
Replacing we have:
ROE = ROA x Leverage Multiplier
Combining Eq. 1 and Eq. 2 we have left
ROE = Margin x Capital Turnover x Leverage Multiplier
Known as Dupont's Formula
