Strategy

Improvement Plans Need Improvement: Study

When it comes to performance improvement, companies' performance-improvement plans need improvement.
Lisa YoonNovember 15, 2004

When it comes to performance improvement, there’s a significant disconnect between intentions and execution.

That’s the finding of a new study, “Strategic Execution: Achieving Operational Excellence,” conducted by the Economist Intelligence Unit and sponsored by Celerant Consulting. Forty-five of 276 executives from a range of industries reported that improvement initiatives performed below plan. And less than one-third reported above-plan results. (The Economist Intelligence Unit is a sister organization of CFO.com.)

“Even though most companies know what they must do,” said Bill Jeffery, president of Celerant’s Americas group, “the difficulty in achieving operational excellence remains the most significant barrier to making the improvements necessary to fulfill strategic objectives.”

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In the study, almost half the respondents – including 60 percent of large-company executives – cited improving operational efficiency as critical to achieving their strategic objectives. Those objectives included boosting customer satisfaction, which was cited by 61 percent of respondents as their top objective. Increasing shareholder value was cited by 49 percent of survey participants.

The ways companies set out to improve performance vary by industry and company. They include information-technology outsourcing, business- process optimization, lean manufacturing, process automation, supply-chain rationalization, IT implementation, corporate organizational realignment, and Six Sigma.

Companies also use a variety of techniques to gauge the success of improvement plans. Steering committees (43 percent) and balanced scorecards (41 percent) are the most commonly used. But measures such as earnings before interest expenses, taxation and amortization (EBITDA), return on investment (ROI), return on invested capital (ROIC), economic value added (EVA), and earnings per share are also popular.

Interestingly, the preferred measures seem to vary by industry and company size. For instance, while almost two-thirds of respondents overall in the chemicals, manufacturing, and retail industries rely on ROI, only 57 percent of small companies in those industries emphasize it. By contrast, 75 percent of the large companies in the same industries emphasize ROI.

What keeps companies from realizing their improvement objectives? The study found at least three reasons. One is simple ineffectiveness: 34 percent of the respondents believe their companies’ current performance-management systems and processes are effective. Then there’s a failure of measurement. Only about a third said their companies completely measure strategic-initiative performance using timely and accurate operating data. Finally, 56 percent of survey participants said they lack the right amount of operating data to make effective decisions about operating performance.

Almost every respondent agreed that communication with front-line employees is key to making initiatives work. Unfortunately, such communication was also cited by many as the hardest task to master.