Expanding strategic throughput: a new perspective on closing the gap between strategy and results
RPM Systems Corporation
This paper explores defines (1) strategic portfolio management, (2) strategic throughput, and (3) strategic throughput assessment. The Boeing 787 and Airbus A380 programs are then analyzed within this context.
“Massive Change Portfolios”
According to Greg Balestrero, president and CEO of the Project Management Institute:
“There is a significant effort globally toward government-based stimulus plans. It is not a U.S. phenomenon, and not a matter of just cutting taxes or making loans safe. These stimulus plans are loaded with projects and for the most part, represent a critical portfolio of change.
Starting from the top, all of these government plans are massive change portfolios. The need for portfolio and program management in the public sector has never been greater. Unfortunately, federal governments are not known for their excellence in portfolio management, with the exception of maybe China, which is a centrally controlled economy.” (Balestrero, 2009)
We know that at some point a recovery will take hold and growth will resume. We also know that it is the decisions organizations make during the current difficult times that will largely determine their ability to thrive when growth resumes. Will these organizations “eat their seed corn” and have no crop for the recovery? Or, will they take the longer view and maintain new market and product investments during these difficult times? How will government stimulus plans be viewed in the longer term? Will they be viewed as effective in helping turn around struggling economies, or will they be viewed as engaging in wasteful spending? This paper offers a strategic portfolio management model for restoring public confidence and for decision making in preparation for the coming upturn in the global economy.
How will trust be restored? One of the answers is by embracing (1) traceability, (2) transparency, and (3) accountability. During the run-up to the current economic crisis, there was a lack of all three. Not too long ago it was the case that a local banker made a home loan to a person in the community and kept the mortgage— traceability. With “subprime mortgages wrapped in complex bonds and derivatives, pumped up with leverage, and then globalized to the far corners of the earth,” transparency was lost. Accountability was lost as profits were taken at every step of the bundling process. Everyone made money and passed along the risk—or so they thought.
Accountants report what has happened—often too late—as evidenced by the daily revelations of another bank seizure or failure or another company filing for bankruptcy. What does this have to do with portfolio, program, and project management, project management professional (PMP)sm and program management professional (PgMP)® credentials? Everything. The Project Management Institute (PMI)’ with 300,000 members, in 160 countries, with 240 local chapters, and with a globally accepted body of knowledge and lexicon and a rigorous code of ethics, is positioned to help restore trust through traceability, transparency, and accountability.
Exhibit 1 depicts how: (1) The Standard for Portfolio Management (PMI, 2008) is applied using a (2) strategic portfolio management model that (3) links strategy to frontline resources.]
Note. From The Standard for Portfolio Management (p. 9), by the Project Management Institute, 2008, Newtown Square, PA: Project Management Institute. Copyright 2008 by the Project Management Institute. Adapted with permission.
The triangle on the left is based on Figure 1.3 in The Portfolio Standard (this graphic is shown in more detail later in this paper). The square in the center shows the closed-loop strategic portfolio management process (again, expanded upon later in this paper). On the right, “Linking Strategy to Frontline Resources” depicts the flow of organizational strategy down to the actual resources performing the work—with traceability, transparency, and accountability. Strategic portfolio management is the key to linking strategy to frontline resources.
Linking Strategy to Frontline Resources
The strategic portfolio management layer in Exhibit 2 provides the link between C-level executives and portfolio management as described in The Standard for Portfolio Management (PMI, 2008). “C-level” executives are also referred to as the “C-suite” and also as CXOs, positions that include the CEO, COO, CFO, CIO, CTO, and the relatively new position of chief strategy officer, CSO. Another term referring to the C-level is the “executive leadership team,” or ELT. C-level, C-suite, CXO, and ELT are generally used interchangeably.
Strategic Portfolio Management encompasses everything that the organization undertakes, including venues such as: 1) research, 2) new product development, 3) human resources, 4) ongoing operations, 5) information technology, 6) facilities, 7) strategic alliances, 8) acquisitions, and 9) dividends and stock repurchases. Of course, these venues may vary widely between organizations whether they are publicly traded, privately held, nonprofit, or governmental.
The strategic portfolio management layer assures communication of the C-suite vision, mission, strategic plan, and strategic objectives throughout the organization. PMI standards, shown on the right of Exhibit 2, provide a common, worldwide methodology and lexicon.
Strategic Portfolio Management Formula
The Standard for Portfolio Management (PMI, 2008, Figure 1.4, p. 11) identifies four domains: (1) executive management, (2) portfolio management, (3) project and program management, and (4) operations management. Strategic portfolio management focuses on the first domain, executive management (Exhibit 3).
Note. From The Standard for Portfolio Management (p. 11), by the Project Management Institute, 2008, Newtown Square, PA: Project Management Institute. Copyright 2008 by the Project Management Institute. Adapted with permission.
Projects Aligned to Strategy and Executed to Plan
High-performing organizations (Exhibit 3) as measured in terms of their: A) financial success, B) customer satisfaction, and C) shareholder satisfaction, have significantly better performance than average performers. This performance is measured in terms of how well projects are aligned to strategy and how well they are executed. Execution is a function of working on the right projects, optimally allocating resources, and bringing in the projects on schedule and on budget.
Research has identified eight categories of best practices: (1) governance, (2) strategy management, (3) portfolio management, (4) program and project management, (5) organization structure, (6) information technology, (7) people management, and (8) corporate culture. These best practices were distilled from a survey conducted in November 2005 from a broad spectrum of 87 leading companies (Cabanis-Berwin & Pennypacker, 2006).
Another way of looking at this is that, on average, there is “throughput loss” of 44% in the metric “Strategy Executed to Plan” (Exhibit 4, far right).
Strategic Throughput and Throughput Loss
Exhibit 5 presents a view of strategic throughput and throughput loss that integrates measures shown in the prior exhibit.
The throughput model shown above, has as its foundation the formula derived from Figure 1.4 of The Standard for Portfolio Management (PMI, 2008, p. 11). That is, strategic throughput is a function of: (1) executive management, (2) portfolio management, (3) program and project management, and (4) operations management (strategic throughput = EM * PM * P&PM * OM).
Strategic Portfolio Management Model
The strategic portfolio management model shown in Exhibit 6 has been designed to communicate with C-level executives. Later in this paper, this model will be used as a basis for analyzing the Boeing 787 and Airbus A380 programs. The model has four components, which are, from right to left:
Component 1: Strategic Portfolio Objectives. Strategic portfolio objectives vary significantly between organizations. Those shown here are typical of a large global enterprise.
Component 2: Portfolio Venues. Strategic portfolios have venues through which strategic objectives are carried out. The venues shown in Exhibit 6 are only a partial list and will vary widely depending on the organization.
Component 3: Portfolio Management. At the core of the strategic portfolio management model is a closed-loop, near-real-time, portfolio management process based on PMI standards (Exhibit 6). There is a matrix located at each corner of this closed-loop square. Each matrix assures the traceability metrics from the overarching strategy to initiatives, to programs and projects, with the projects reporting on metrics traceable back to the originating strategy. This closed-loop process provides timely metrics to assure the executive leadership team that strategy is being executed to plan.
Component 4: Best Practices. Best practices are employed for aligning projects with corporate strategy to close the gap between strategy and results. Best practices are divided into eight categories (Cabanis-Berwin & Pennypacker, 2006) listed below.
Strategic Throughput Assessment
The PMI Global Congress 2006—North America paper, Best Practices for Aligning Projects to Corporate Strategy, was used as a basis for construction of the Strategic Throughput Assessment instrument (STA) described below (Cabanis-Brewin & Pennypacker, 2006). Exhibit 8 depicts the scoring for governance, one of the eight best practice categories. The shaded areas are calculated fields. Thus if the score in column A is 4 out a maximum of a possible 5, then the gap is -1 as shown in column B.
Exhibit 9 depicts the assessment for a bank where the largest gaps are in program and project management, organizational structure, and information technology.
Analysis of Boeing 787 and Airbus A380 Using the Strategic Portfolio Management Model
Both Boeing and Airbus made huge strategic portfolio bets on what the future of airline travel will look like. Both Boeing and Airbus placed these bets while taking into account all the other opportunities and demands in their strategic portfolios—and these strategic bets could not be more different. The outcomes of these decisions are reflected in the cumulative orders for each aircraft. As of March 16, 2009, Boeing had 878 firm orders plus commitments for an additional 88 787s for a total of 966 aircraft (Wikipedia, n.d.) The Airbus A380 had orders for 200 aircraft (Wikipedia, n.d.).
Analysis of the Airbus A380 Program
In Exhibit 10 shown above, governance is highlighted as the most likely cause of the A380 strategic throughput loss and the financial problems as explained in the following:
(1) Politically Driven Costs. It appears that the primary strategic driver of the Airbus A380 program was protection of jobs in Germany and France. Major fuselage sections are built in Germany and shipped to France, where they are assembled into a flyable aircraft, which is then flown back to Germany for installation of the interior systems. This arrangement has added significant cost to the program.
(2) Secondary Considerations. Return on investment, operational efficiency, and organizational effectiveness were all secondary to the political considerations associated with jobs in France and Germany.
(3) Break-even Point. The firm’s parent company, EADS, now says it needs to sell 420 A380s to break even, up from a previous estimate of 270 aircraft. But in a presentation to analysts and investors, EADS’s chief financial officer, Andreas Sperl stated that the planemaker still expected to sell more than 750 of its new planes over the life of the project (Airbus Hikes A380 Break-Even Mark, 2006). Orders for the A380 currently stand at 200. It is highly unlikely that the A380 will reach even the 420 aircraft required to break even. The losses on this program will continue to be significant, and will greatly diminish the ability of Airbus to invest in new product development and product improvement programs. The cost overrun on A380 has hurt investment in the A350, the Airbus direct competitor to the B787.
(4) Governance Issues. There were two breakdowns in governance at the highest levels of the Airbus/EADS organization. The first was in not requiring the German partner to use Catia 5 3-D CAD as adopted by the French. The Germans continued to use the prior generation 2D version of the software (Wong, 2006). The second governance issue involves insider stock trading. In April 2008, the French AMF said it would file insider-trading charges against EADS and Airbus executives for selling their stock prior to announcing a major A380 schedule slippage (Gauthier-Villars, 2008). This could be a major distraction for Airbus C-level executives (see noise and bandwidth discussed earlier). By comparison, use of the same Catia 5 3-D CAD software (rejected by the German A380 designers) was required by Boeing as a precondition of becoming a 787 partner.
Analysis of the Boeing 787 Program
The Boeing 787 strategic portfolio management model shown above in Exhibit 11 indicates a disconnect between programs and project and metrics. It is likely that Boeing did not have sufficient early visibility into the ramp-up of critical resources at the major partners. With proper metrics it should have been apparent within several months that critical resources were not coming online rapidly enough.
(1) Two Simultaneous Initiatives. Boeing undertook two massive change initiatives when the decision was made to proceed with the 787 program. The first was to design and manufacture an aircraft with a composite fuselage. The second was to farm out the detail engineering to their major partners. Boeing had historically done this engineering in-house, with the partners doing the manufacturing. Rather than bring the engineers to Seattle, Boeing was able to let them remain at the partner’s facility, close to the partner’s production line. This was facilitated by a 3-D, high-speed network called the Boeing Collaborative Environment (BCE).
(2) Outsourcing Problems. Boeing’s unprecedented plan to design and assemble a jet from components manufactured largely by other companies ran into multiple snags involving outsourcing problems with contractors in numerous countries (e.g., companies being unable to ramp-up the required engineering fast enough to support project milestone date).
(3) Machinist Union Strike. The 60-day strike in late 2008 will cause Boeing to seriously consider locating future production facilities in right-to-work states in the South. That said, should President Obama’s card-check initiative be passed into law, it is highly likely that large, nonunion manufacturers will be unionized. Card check does away with the secret ballot were the workers can vote their conscience without fear of retaliation. Under card check, workers are asked to sign a card saying that they want a union. There is no anonymity.
(4) Remaining Competitive. The 787 program may be Boeing’s safety valve, in the event that its union situation in the United States becomes untenable in terms of its ability to compete in the global marketplace. Airbus already has an A320 factory in China. With so much of the 787 designed and manufactured in other countries (wings in Japan, fuselage sections and horizontal stabilizer in Italy, landing gear in Canada, doors in France, flaps in Australia) it would be relatively easy for Boeing to assemble aircraft outside the United States.
(5) Schedule Slippages. Boeing rolled out the first 787 on 8 July 2007. As of this writing (19 March 2009), the aircraft has not had its first flight. It is 2 years late and it is doubtful that Boeing can complete the aggressive flight test schedule on time.
(6) The Future of the 787. Despite engineering and production setbacks, the 2-month machinists’ strike and multiple schedule slippages, the future for the 787 remains bright due to its fuel economy compared with that of the existing aircraft fleet. Production is sold out until 2014. Cancellations due to the 2008–2009 economic downturn should be filled long before the current production backlog is filled. The 787 competitor aircraft, the Airbus A350, is not a composite aircraft; rather, it is assembled using aluminum and composite panels to make a conventional fuselage. The A350 will be a second choice selection because line positions are unavailable for the Boeing 787. Additionally, the A350 program is likely to be hurt by the continuing cash drain of the A380 discussed earlier.
Strategic Portfolio Management Model. The strategic portfolio management model provides a framework for: (1) defining strategic portfolio objectives; (2) selecting portfolio venues, (3) implementing a PMI standards-based, closed-loop portfolio management system, and (4) applying best practices to expand strategic throughput while minimizing throughput loss.
Strategic Portfolio Management Link to the C-level. As the Project Management Institute has evolved since its founding in 1969, it has published a series of standards that have progressively included more aspects of project management, beginning with the Project Management Body of Knowledge (The PMBOK® Guide), The Standard for Program Management, and The Standard for Portfolio Management. The author suggests that the strategic portfolio management, as described in this paper, is the necessary link to bridge the current gap between the C-level and the practitioner-experts certified by PMI, the PMP® and PgMP® credential holders.
Strategic Throughput. Expanded strategic throughput translates directly to an improved bottom line. There is a direct correlation between the application of best practices and high performance as measured by the fact that: (1) the organization is financially successful, (2) the organization’s shareholders are satisfied, and (3) the organization’s customers are satisfied.
Final Note. The author’s opinions expressed in the paper are just that—opinions. If you, the reader, disagree or have additional information you would be willing to contribute, contact the author at [email protected].
Unabridged Version of this Paper. At the conclusion of the PMI Global Congress 2009—EMEA, the longer version of this paper will be available for download from www.rpmteam.com. The unabridged version includes five additional pages and contains 25 exhibits versus the 11 shown in this abridged version.
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© 2009, Stephen Garfein
Originally published as a part of 2009 PMI Global Congress Proceedings – Kuala Lumpur, Malaysia