?????? ???? ???????? ?????? ???????????? ?????? ???????????? ???????? ???????????? ???? ????????????????

???????????????? ?????? ???????????????????????? ???????????? ????????????????????

(Originally published on August 29, 2023, in the Smart BoardRoom Strategies monthly publication, which addresses the challenges that a board of directors faces in a high uncertainty context. If you are a board member, if you aspire to be part of one, or have a managerial role related to the board, this publication is for you. ? Click here to subscribe.)

September arrives, the key moment for creating the budget and the annual plan. How do we start? Do we begin from scratch? It's customary to begin by evaluating the achievements and progress of the current year's plan, examining pending commitments, unmet goals, and new opportunities that have arisen. Intuitively, leaders usually have a clear sense of what they want to focus on, and together with their teams, they translate those ideas into projects, actions, and annual objectives. However, how aligned are these initiatives with the strategy? How do we ensure the coherence of projects, objectives, and goals throughout the organization to achieve the strategic aspiration?

??"The budget is more than just numbers. It is the clearest representation of our priorities." Jack Lew

Often, the Strategy is a reflection that takes place every 4 or 5 years and is seldom used in daily management. With luck, the board reviews it once a year to ensure that the organization is moving in the intended direction and toward its goals. It's common to encounter a lengthy document, difficult to synthesize, conceptualize, and translate into annual objectives and results. Therefore, the Strategy is rarely the starting point when creating the Budget and Plan for the following year.

?"There is no favorable wind for the ship that doesn't know where it is going." Seneca

However, it is essential to have a clear direction. The organization needs to stay connected with the vision and strategic objective, ensuring that its actions generate value and help the organization move towards achieving Competitive Advantage and the Winning Aspiration.

??The strategy represents the set of decisions the organization has made to win in the defined territory. Winning implies achieving a sustainable competitive advantage that creates differential value for customers and superior financial results for the organization. Strategy is at the core of decision-making and is directly related to leadership, innovation, governance, and continuous learning. Therefore, Strategy is a fundamental pillar when it comes to setting objectives. We propose the following process for setting annual objectives:??

1. Analysis of the current situation. Reflecting and drawing conclusions about where the organization is and where it expected to be, customers, competition, sector, environment….
2. Revisiting strategic decisions:Business Strategy, Management Strategy, and Sustainability StrategyCompetitive AdvantageCritical Success Factors
3. Review the Strategic Plan. What milestones and goals should be achieved this year?
4. Establish one or two global objectives for the organization for the upcoming year
5. Deploy objectives throughout the rest of the organization.

??"Long-range planning does not deal with the future decisions, but with the future of present decisions"- Peter Drucker

The role of leaders is not limited to designing, communicating, and deploying the strategy. They must ensure that different departments or areas incorporate it, are aligned, and work together to achieve the winning aspiration.?

In this process, the Board of Directors must ensure that it adheres to the "Nose In, Fingers Out" criterion, meaning that it remains informed but does not interfere. It's about maintaining a bifocal vision: The ability to perceive events on the horizon that could affect the company while also retaining the ability to focus on more immediate issues or urgent matters. It's a balance that typically only experienced directors are able to maintain.?

For the deployment of objectives throughout the organization, at Smart Jidoka, we use OKRs (Objectives & Key Results). It's a method that combines clarity, simplicity, ambition, and collaboration.

??Objectives represent the "WHAT," what we want to achieve.?

They describe a future state that aligns with the company's purpose and vision. They always represent the highest priorities and therefore compel focus.

They should be:?

• Meaningful: Aligned with purpose, vision, and top-priority strategies.
• Specific: Each objective precisely guides the team on where to direct their actions and what progress means for the company.
• Action-oriented: All objectives point toward a direction the organization must take.
• Inspiring: Creating an impact on the company, customers, and the environment, inspiring teams.

??The Key Results are the "HOW." We know we have accomplished the objective when all Key Results are achieved. They are linked to the Objectives; they work together as a whole. Each Objective will have between three and five Key Results. They should be:?

• Specific and time-bound. Reach "this point" by "this time."
• Ambitious yet realistic. Provide an appropriate level of tension to the organization.
• Measurable and verifiable. At the end of the cycle, there can be no doubt whether they have been fulfilled. They are often associated with a quantitative value.?

??We define three types of Key Results (KRs):?

• Inputs: An effort that leads to a desired outcome.
• Outputs: What the inputs (or other outputs) produce.
• Results: The desired outcome produced by inputs and outputs.

It is advisable to use Outcome Key Results mainly. Because they guide the team toward what is desired to be achieved rather than focusing solely on a specific indicator, it also allows harnessing people's creativity to accomplish it.

This avoids the "Surrogation" phenomenon. This phenomenon arises when the indicator used to measure progress toward the objective becomes the objective itself.

In 2010, Jongwoon Choi, Gary Hecht, and William Tayler wrote an article, Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation. Their work determined that business leaders develop indicator systems that translate strategy into performance measures to facilitate decision-making. These indicators are imperfect representations of intangible strategic objectives. However, leaders sometimes end up acting as if the measures were the primary interest. A phenomenon they called Surrogation or "substitution."

????They also concluded that the use of indicators for compensation purposes affects leaders' propensity to exhibit substitution. Therefore, they confirmed that there is a tendency for leaders to use indicators as substitutes for strategy and that such substitution can be detrimental to strategy implementation.?

??In summary, the success of the budget and annual plan lies in its direct alignment with the organization's overall strategy. Far from being a static document, the strategy must be an active guide for daily action. The efficient deployment of OKRs, avoiding 'substitution,' facilitates this purpose. Ultimately, strategy and its implementation are a journey of learning and adaptation, essential for achieving a competitive advantage.?

??How is your organization aligning its plans and budgets with the global strategy? What measures are you taking to ensure each action contributes to your competitive advantage?