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Relationship between strategy, risk, performance, sustainability

Background

The relationship between Strategy, Risk, Performance and Sustainability

Businesses exist to create benefits for their stakeholders, and the corporate vision or mission statement defines the scope and extent of those benefits.

However, vision alone does not create business benefits, and many organisations use projects as the change vehicle to deliver the capability that leads to the required benefits.

If sustainable benefits are to be created for stakeholders in any business, it is imperative for those charged with governance to understand that strategy, risk management, performance management and sustainability have to be viewed as inseparable parts of a single unit, which should be managed as such.

Definition of terms

For us to appreciate the relationship between these functions, we discuss what each of them entails:

a) Strategy is defined as the direction and scope of an organisation over the long-term.

In other words, strategy is about:

* Where is the business trying to get to in the long-term (direction)?
* Which markets should a business compete in, and what kinds of activities are involved in such markets (markets; scope)?
* How can the business perform better than the competition in those markets (advantage)?
* What resources (skills, assets, finance, relationships, technical competence, (facilities) are required in order to be able to compete (resources)?
* What external, environmental factors affect the businesses' ability to compete (environment)?
* What are the values and expectations of those who have power in and around the business (stakeholders)?

b) Sustainability is the capacity to endure. In ecology, the word describes how biological systems remain diverse and productive over time. Long-lived and healthy wetlands and forests are examples of sustainable biological systems. For humans, sustainability is the potential for long-term maintenance of well-being, which has environmental, economic, and social dimensions.

The Three Spheres of Sustainability

c) Risk can be defined as the quantifiable likelihood of loss or less-than-expected returns. Examples include currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk.

d) Performance in business is defined as the accomplishment of a given task measured against preset standards of accuracy, completeness, cost, and speed.

Relationship analysis and discussion

Strategy vs performance:

A strategy defines the direction that the company should take, ie, the long-term goals. In order to achieve the long-term goals, certain short-term performance objectives are established and these drive the day-to-day operations of the business.

The question is whether the successful accomplishment of tasks that are meant to drive a business will result in the attainment of the long-term goal.

Performance alone will of course not result in the organisation achieving its strategy, but it is the key to value creation in any business and is thus indispensible, and it is imperative that performance management be part of any strategic discussion.

Performance management components:

Performance management has four main components and these have been discussed below:

* Performance standards - establishment of organisational or system performance standards, targets and goals and relevant indicators to improve public health practice.
* Performance measures - application and use of performance indicators and measures.
* Reporting of progress - documentation and reporting of progress in meeting standards and targets and sharing of such information through feedback.
* Quality improvement - establishment of a program or process to manage change and achieve quality improvement in public health policies, programs or infrastructure based on performance standards, measurements and reports.

The diagram illustrates the four components of performance management

* A performance management system is the continuous use of all the four practices discussed earlier so that they are integrated into the organisation's core operations.

Performance management is the essential process that enables leaders and employees to set priorities in alignment with the organisation's mission, and subsequently maximise individual, team and organisational performance. Alignment within the organisation, from executive level management, to functional groups, to work teams, all the way to the individual contributor, is facilitated with a performance management process.

The process is also a tool that enables employees to know exactly where they stand and what they need to focus on to improve their own performance and to grow within the company. This can only occur when leaders and employees work together to define each individual's purpose, core responsibilities, results-based goals, measures, and stretch targets against which performance can be monitored.

But it is not enough simply to monitor progress against established objectives. Progress must be communicated by the leader to the employee and support must be provided in the form of coaching and counselling to improve performance on an ongoing basis.

In an organisation without a performance management process, leaders often base their performance reviews on annual meetings in which judgment or opinion form the basis of the discussion, rather than actual results based on performance.

The review and feedback sessions throughout the performance management process enable leaders to base their performance reviews on results because of the clarity of goals and measures that have been set. Feedback sessions, whether about productive or non-productive performance, are important opportunities for communication and improvement.

A performance management process enables leaders, teams and employees to perform more effectively, thus improving the performance and business results of the organisation as a whole.

To be continued...


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