In The Execution Premium (2008), Robert Kaplan and David Norton made a claim that has aged extremely well: most strategies do not fail because they were badly conceived. They fail in execution. The book lays out a six-stage closed-loop management system to fix that, coordinated by an Office of Strategy Management. Walk the six stages and one of them stands apart, because it is the only place where strategy stops being words and becomes money. That is Stage 4, Plan Operations, and it is exactly where real cost is indispensable and most often absent.
The six stages, walked once
The closed loop runs as follows. Stage 1, Develop the strategy, sets mission, values and the strategic agenda. Stage 2, Plan the strategy, builds the Balanced Scorecard and strategy maps, translating direction into objectives and measures. Stage 3, Align the organisation, cascades the strategy to business units, support units and employees so everyone is pulling the same way. Stage 4, Plan operations, turns strategy into the operating plan: resource allocation, capacity planning, process improvement priorities, and profitability planning. Stage 5, Monitor and learn, reviews operational and strategic performance. Stage 6, Test and adapt, asks whether the strategy itself still holds. Then the loop returns to Stage 1.
| Stage | What it does | Cost dependency |
|---|---|---|
| 1. Develop the strategy | Mission, values, strategic agenda | Low |
| 2. Plan the strategy | Balanced Scorecard, strategy maps | Indirect, via the financial perspective |
| 3. Align the organisation | Cascade to units and employees | Low |
| 4. Plan operations (the money stage) | Resource allocation, capacity, process improvement, profitability planning | High, this is where real cost is decisive |
| 5. Monitor and learn | Operational and strategic reviews | High, needs real margin to be honest |
| 6. Test and adapt | Is the strategy still right? | Medium, depends on Stage 5 data |
Why Stage 4 is where strategy meets money
The first three stages are mostly intellectual and organisational. They are about clarity, measurement and alignment. Stage 4 is where the abstractions hit a budget. Kaplan and Norton are explicit that Plan Operations covers process improvement, resource capacity planning and dynamic budgeting tied to the operating plan. Every one of those activities is a cost question disguised as a planning question. How much resource does this strategic initiative actually consume? Do we have the capacity, and what does the idle capacity cost while we wait? Which processes should we improve first, and what is the financial prize? Which products and customers will this plan make more or less profitable?
You cannot answer any of those honestly with allocated, averaged cost. And allocated, averaged cost is what most organisations bring to Stage 4. So the most consequential stage of the entire system, the one that turns strategy into an operating plan, gets executed on guesswork dressed as numbers.
How TDABC turns Stage 4 from guesswork into measurement
Time-Driven Activity-Based Costing, from Kaplan and Anderson (HBR 2004, book 2007), is the instrument Stage 4 was waiting for. It does four things Plan Operations needs and a conventional cost system cannot deliver.
- Resource allocation. TDABC’s capacity cost rate tells you the real cost of the resources a strategic initiative will consume, so allocation decisions rest on traced cost, not on a percentage of last year’s budget.
- Capacity planning. Because TDABC separates practical capacity from capacity used, it shows exactly how much room exists and what the unused capacity costs, the single most important and most ignored number in operational planning.
- Process improvement. TDABC prices each activity, so the improvement priorities at Stage 4 can be ranked by financial prize rather than by whichever process is loudest. This is the bridge to Lean and Six Sigma, where minutes saved only become profit when the freed capacity is removed or redeployed.
- Profitability planning. TDABC produces true margin by product, order and customer, so the plan can be steered toward the work that actually pays, drawing on the same engine as cost to serve.
Closing the loop into Stage 5
The Execution Premium is a closed loop, and a loop is only as honest as the data flowing round it. Stage 5, Monitor and Learn, is where the organisation reviews whether the plan is working. If the margin numbers feeding that review are allocations, the review congratulates or condemns the wrong initiatives. TDABC closes the loop with real margin: the same traced cost that informed Stage 4 now reports back at Stage 5 whether the operating plan actually moved profit. The Office of Strategy Management gets a feedback signal it can trust, and Stage 6 can ask whether the strategy still holds on the basis of fact rather than impression. Without real cost, the loop still turns, but it learns the wrong lessons.
The premium is in the execution, and the execution is in the cost
Kaplan and Norton called it the execution premium because the value is captured by the organisations that execute, not merely the ones that plan well. Stage 4 is the hinge of that execution, and Stage 4 runs on cost. A six-stage system built on averaged cost is a beautifully engineered loop turning on a soft bearing. Put TDABC at Stage 4 and feed it back into Stage 5 and the whole system measures what it claims to manage. This is the heart of our strategy execution and TDABC pillar, and it sits directly beside the case that a Balanced Scorecard without real cost is half a scorecard.
If your strategy looks sound on paper but stalls in execution, Stage 4 is usually where it leaks. Start with a free Profit Check, read how we work, or see the full picture in why your Balanced Scorecard fails without real cost. To scope a strategy-execution engagement, book a scoping call. The execution premium is real, and so is the cost data it depends on.