Managing a business can be challenging, especially as it grows and becomes more complex. With the responsibility of delegating and relying on reports to stay informed, business owners and managers often face questions such as: how to transform with standardization, how to keep track of everything and ensure relevant and timely actions and knowing when to trust their intuition.
Addressing these questions is crucial for business success. In this article, we will explore four elements of an effective management system: the Plan-Do-Check-Act (PDCA) cycle, key performance indicators (KPIs), objectives and key results (OKRs), and communication and ownership. By understanding and implementing these elements, businesses can better navigate the challenges of growth and achieve long-term success.
The Plan-Do-Check-Act (PDCA) cycle
The PDCA cycle, also known as the Deming cycle, is a management methodology used to continuously improve processes and achieve better results. The four steps of the cycle are:
- Plan: set goals and develop a plan for improvement;
- Do: implement the plan and collect data to track progress;
- Check: analyze the data and evaluate the results against the goals; and
- Act: adjust the plan and continue the cycle.
The PDCA cycle provides a structured approach to problem-solving and continuous improvement. By following the cycle, managers can identify problems, develop solutions, implement them, and measure the results. This helps ensure resources are used effectively, and makes sure the organization is always moving forward. The cycle is relevant to both operational processes and strategic planning because it can be applied at both levels. At the operational level, it can be used to improve specific processes, such as manufacturing or customer service. At the strategic level, it can be used to set goals and develop plans to achieve them.
Several problems can also be solved thanks the PDCA cycle as it helps to identify and address them before they become serious issues. It also ensures that resources are being used effectively and efficiently, and promotes a culture of continuous improvement which is essential for long-term success.
As the saying goes, "hope is not a good strategy". The PDCA cycle provides a structured approach to problem-solving that is based on data and evidence, rather than hope or intuition. By following the cycle, managers can make informed decisions and take actions that are more likely to succeed.
It is worth noting that the PDCA cycle is widely used in quality management systems, such as ISO 9001. It is also closely related to other continuous improvement methodologies, such as Six Sigma and Lean Manufacturing. Finally, the Agile sprint cycle can be viewed as an example of PDCA, where a capacity and scope plan is set, executed, evaluated, and optimized. By understanding and applying the cycle, managers can improve both the efficiency and effectiveness of their organizations.
Key Performance Indicators (KPIs)
KPIs are measurable values that track progress towards specific business goals. They are used to evaluate performance and identify areas that require improvement. Some examples of this include revenue growth, customer satisfaction, and employee turnover rate. KPIs provide a clear picture of how your business is performing. Without clear KPIs, managers rely on intuition to guide their decisions, which can lead to unexpected outcomes. By setting and tracking them, managers can make informed decisions and take actions that are more likely to lead to success.
KPIs should be reviewed regularly to ensure that they are still relevant and to identify areas that require adjustment. Learning to use them and applying the PDCA cycle consistently, improves the predictability and accuracy of your business plan.
Performance measures can be classified into two types: leading and lagging indicators. Lagging indicators reflect the strategic ambition, but they are reactive in nature and are used to assess past performance. Leading indicators, however, are used to predict future performance and are proactive in nature. Both leading and lagging indicators are important to monitor in order to achieve organizational goals.
To ensure the selected and monitored KPIs measure contribution to your organization’s strategy and goals, they should be broken down into a cascade of strategic, tactical, and operational goals. This way, overall organizational goals are translated into specific and measurable goals at different levels of the organization, thus having a mixture of both leading and lagging KPIs. By aligning KPIs with organizational strategy and goals, organizations can ensure that they are measuring the right things and taking the right actions to achieve success.
Objectives and Key Results (OKRs)
Companies such as Google, LinkedIn, Microsoft, and Netflix execute their strategy using OKRs. While KPIs answer the question: ‘where are we?’, focusing on status, OKRs focus on action. The business selects a number of objectives such as ‘what do we want to achieve?’, and breaks each of them down into key results addressing ‘how will we achieve the objective?’
The ‘objectives’ part of OKRs is the big goal that you want to achieve. This could be increasing customer satisfaction or launching a new product. Objectives should be significant, concrete, action-oriented, and inspirational, unlike KPIs that are often qualitative in nature.
The ‘key results’ part of OKRs is how you measure progress towards achieving that goal. These are specific and measurable targets that are set to help you know if you are on track to achieve your objective. For example, if your objective is to increase customer satisfaction, your key results could be to improve customer ratings on surveys by 10% or reduce customer complaints by 20%. Key results should be SMART goals, which and can coincide with a KPI. Key results are focused on transformation, and therefore temporary in nature. Once an initial key result is attained, it is replaced with a new key result.
Just like KPIs, OKRs can be cascaded and a strategic ‘key result’ can be broken down into smaller key results. For example, improve delivery accuracy (OTIF) to 94% or conduct three in-depth customer perception interviews and report key improvement points.
If KPIs are the gauges and numbers on the car dashboard, OKRs are the navigation system providing a destination (the objective) and a set of metrics (the key results), to help you stay on track and measure progress along the way. Passing important road junctions and milestones is the equivalent of achieving key results. After passing all key results, the objective is achieved. Similar to a GPS system recalculating a route, OKRs allow organizations to adjust their approach and priorities based on real-time data and feedback.
Using both KPIs and OKRs can provide a comprehensive approach to measuring performance and progress towards achieving business goals. KPIs can help monitor ongoing operations and ensure that the business is meeting its objectives, while OKRs can help drive change and improvement, and provide a sense of purpose and direction for employees. Together, they provide a well-rounded approach to managing performance and driving success.
Communication and ownership
Setting good OKRs and KPIs requires alignment and buy-in from all levels of the organization. Each goal should have a single mandated and enabled owner. Therefore, it is important to involve all stakeholders in the goal setting process, communicate the rationale behind each objective, key result, or KPI, and regularly review and adjust the goals and plan based on progress and feedback.
In larger organizations, having a good flow of information is critical. Managers from different levels should have aligned planning cycles. This allows a stream of information regarding the performance of leading operational goals, and the possibility to predict the outcome of lagging strategic goals. Management meetings enables organizations to identify risks and opportunities early, with a clear escalation path to higher-level decision makers.
By following these best practices, managers can improve performance, increase employee engagement, and drive organizational success. Effective management requires commitment and leadership from managers and may require a shift in organizational culture and mindset. However, the benefits of an effective management system make it worth the effort.
In this article, we have discussed the four elements of an effective management system that can help businesses navigate the challenges of growth and achieve long-term success. These elements include the PDCA cycle, KPIs, OKRs, and communication and ownership. The PDCA cycle helps managers identify problems, develop solutions, and measure results, promoting a culture of continuous improvement. KPIs provide a clear picture of business performance and should be reviewed regularly to ensure they remain relevant. OKRs focus on actions to achieve objectives and break down big goals into key results. And lastly, a good flow of communication and having management take ownership is critical to improving performance and increasing employee engagement. By aligning KPIs with organizational goals and applying these elements consistently, businesses can improve predictability and accuracy and achieve success in the long-term.
Author: Han Van Der Ven