The Balanced Scorecard: Translating Strategy Into Action (25 page)
Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
Strategies are typically defined for an organizational unit, referred to as a strategic business unit. Metro Bank, for example, was just one operating unit in a major bank-holding company which also contained, among other SBUs, a credit card operation, a wholesale bank, a commercial bank, and an investment bank.
Some companies are focused in a single narrowly defined industry so that an SBU strategy coincides with the corporate strategy. Indeed, some of the early applications of the Balanced Scorecard were for companies in particular niches of the semiconductor industry, like Advanced Micro Devices and Analog Devices. These companies developed scorecards that also
served as corporate scorecards (the term used at Analog Devices). Most SBUs, however, like Metro Bank, are members of a broader corporate or divisional portfolio. This raises the natural question about the relationship between a corporate-level scorecard and a divisional or SBU scorecard.
The theory of having a corporation consisting of several different SBUs is that synergies among the SBUs enable the corporate entity to be more valuable than the sum of its SBU parts. The theory of corporate-level strategy is an active research topic.
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The theory attempts to identify how a corporate headquarters and a corporate strategy (as opposed to a business unit strategy) can create synergies among its operating units. At one extreme, a company like the FMC Corporation consists of more than two dozen independent operating companies, ranging from a company that mines gold, a defense contractor that builds armored personnel carriers, several industrial chemical companies, an airport equipment supplier, a lithium division, and divisions that build food and agricultural machinery. With such unrelated diversification, the corporate value-added role has typically consisted of corporate-level managers using the private information they can obtain from their operating units to assign capital and people among those units. Prior to introduction of the Balanced Scorecard at FMC, operating companies were held responsible for delivering consistent and superior financial performance, as measured by annual return-on-capital-employed. As long as targeted ROCE was achieved, corporate-level managers did not probe too deeply into how the financial results were produced.
The introduction of the Balanced Scorecard at FMC has provided a new corporate-level role, that of monitoring and evaluating the strategy of each operating company. The Balanced Scorecard allows a more intense dialogue not only about short-term financial results but also about whether the foundation for growth and future financial performance has been established. The corporate role for a diversified company, like FMC, however, probably remains best measured by the overall financial performance of the company. The strategies, objectives, and measures of the individual operating companies are likely so diverse that they cannot easily be aggregated into a corporate-level scorecard on perspectives other than the financial one.
At the other extreme, the various SBUs of a corporation may have strong interactions among them. They may share common customers. For example, Johnson & Johnson has more than 150 operating companies worldwide, but its companies are all in the health care field and share common customers, all
of whom deliver health care products and services: hospitals, health-care delivery organizations, physicians, drug stores, supermarkets, and general retailers. Other company SBUs may share common technologies; for example, Hamel and Prahalad illustrated how Honda uses its superb capabilities in engine design and manufacture to produce superior products in different market segments: motorcycles, automobiles, power lawnmowers, and power generators.
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NEC uses capabilities in microelectronics and miniaturization to be a leader in televisions, computers, and telecommunications. Other corporations may centralize certain key functions, such as purchasing, finance, or information technology, to achieve economies of scale that enable the centralized departments to deliver their services better than what could be achieved by independent departments operating within individual SBUs.
In each circumstance, a corporate scorecard should reflect the corporate-level strategy. It should articulate the theory of the corporation—the rationale for having several or many SBUs operating within the corporate structure, rather than having each SBU operating as an independent entity, with its own governance structure and independent source of financing. As with business unit strategy, the Balanced Scorecard does not define or originate the corporate-level strategy. Rather a corporate Balanced Scorecard should articulate, make operational, and help gain clarity and consensus as to what the corporate-level strategy is.
The development of corporate-level scorecards is still in its early development stages. To date, we have seen how a corporate scorecard can clarify two elements of a corporate-level strategy:
- Corporate Themes: values, beliefs, and themes that reflect the corporate identity and must be shared by all SBUs (e.g., safety at DuPont or innovation at 3M).
- Corporate Role: actions mandated at the corporate level that create synergies at the SBU level (e.g., cross-sell customers across SBUs, share common technologies, or centralize a shared service).
We can illustrate the use of corporate themes and roles with Kenyon Stores. Kenyon consisted of 10 niche retailers, each with sales ranging from $500 million to $2 billion, and each with its own image and targeted customer
markets. The CEO of Kenyon developed a strategic agenda of 10 items that would be the elements of the strategies for each retail division. The items were distributed across the four perspectives of the Balanced Scorecard, as shown below:
1. Aggressive growth
2. Maintain overall margins
3. Customer loyalty
4. Complete product-line offering
5. Build the brand
6. Fashion leader
7. Quality product
8. Superior shopping experience
9. Strategic skills
10. Personal growth
For each item on the corporate strategic agenda, the corporate executive team defined an associated guiding principle and a corporate-level measurement. For example, the aggressive growth item’s guiding principle was stated as:
Each SBU should seek aggressive growth, measured relative to its market situation.
And the corporate-level measure was sales growth, measured on a year-to-year basis. The corporate strategic agenda item number 5, build the brand, the first objective for the internal-business-process perspective, was defined as:
And this objective was measured on the corporate scorecard by percentage of SBUs that have achieved a dominant brand in their market segment.
The corporate scorecard served as a template for each SBU to define its own strategy and scorecards (see Figure 8-1). For example, consider the corporate financial objectives of aggressive revenue growth while maintaining overall margins. The corporate role was to allocate an overall growth target across its portfolio of retail businesses. This enabled the corporation to set more ambitious targets for those SBUs with considerable growth potential, and somewhat more modest targets for the SBUs in a mature and saturated market segment. Within the broad corporate objectives of growth and margins, individual SBUs could identify their own method for achieving the corporate goal. For example, SBU A, a high-growth business, translated its growth objective into new store sales while mature SBU B looked for increases in sales per store. For the corporate theme focused on brand dominance, high-growth SBU A measured its performance by whether it achieved a high percentage of revenues from designated, key strategic merchandise items. Mature SBU B measured brand dominance by whether it maintained a leading market share in its retailing niche.
Figure 8-1
The Corporate Scorecard Defines the Framework within Which Business Units Develop Their Scorecards
As another example, top executives of Hoechst Celanese developed five core principles to guide employees’ actions throughout the organization:
- Customer-driven priorities, to be measured by customer satisfaction.
- Continuous process improvement, to achieve processes that are effective, efficient, and flexible to meet customer needs, and incremental and breakthrough products.
- Values-based leadership, so that everyone understands how they fit into the vision, mission, strategy, goals, objectives, and action plans; and where decisions and actions are based on values and long-term commitments.
- Empowered people working together, in which decisions are made at the right level, accountability is accepted and welcomed, and there is commitment and ownership from everyone involved, leading to improved performance and productivity.
- Excellent performance, as measured by customer satisfaction; preferred employer; environmental protection, safety, and health; and superior financial performance.
Such corporate-level themes could be translated into specific operational measures for each SBU in the corporation. The corporation would assign
specific financial measures and targets for each SBU, but leave it up to the individual SBU to develop its own strategy to deliver the financial objective, consistent with the corporate themes. Each SBU was expected to measure customer satisfaction, employee empowerment and capabilities, and process capabilities, but the measures would be customized to their individual circumstances: market conditions, market strategy, and key innovation and operating processes.
Achieving explicit synergies among related SBUs within a corporation has often been more rhetoric than reality. A specific example where such synergies are a fundamental component of the theory of the corporate form is the joint venture or strategic alliance between otherwise independent organizations. Joint ventures, while increasingly a part of the business landscape, have proven to be an operational challenge for many companies. Observers have noted that a prime obstacle is the difficulty of defining the goals that both parties have for the venture. The Balanced Scorecard has been used to define the shared agenda and measures of performance on which a joint venture would operate.
Consider the case of Oiltech, a joint venture of several companies in the oil-field services industry. The industry is highly fragmented, with many small players working at different points in the industry value chain (e.g., engineering, construction, logistics, and service companies all competing to support the same oil field). The Oiltech joint venture brought several of these companies together with the goal of improving productivity by eliminating the inefficiencies, duplications, and confusion that existed at the interfaces of their companies. The theory was that by combining efforts, Oiltech could provide a unified and integrated, even turnkey, perspective to customers (large, multinational oil and gas companies), and thereby provide benefits that could not be achieved by having each company operating independently.
The benefits to customers for working with multiple companies within the Oiltech joint venture was measured by one customer objective: reduce the cost per barrel at the wellhead. This was an excellent outcome measure because it described an objective desired by the customer and it clearly communicated the measure by which the joint venture’s success could be evaluated. Oiltech’s executives started by defining an industry cost curve (see Figure 8-2) that showed how each independent business (or function) contributed to the ultimate customer cost. The goal would be to obtain operating synergies that would lower the cost curve downward. The specific measure used for this objective was the $ per barrel life-cycle cost. The life-cycle per barrel cost was measured relative to that achievable by independent companies that worked without a joint-venture relationship among them.
With this clear customer-based objective for the joint venture, the executives derived performance drivers for internal processes that were expected to achieve this objective. They focused on the high-level behavior changes needed to execute the strategy; namely, working together in cross-business teams with the goal of achieving cost efficiencies. The measure—identified cost reductions resulting from cross-business initiatives—helped focus the previously separate companies on their customer-driven goals for teamwork and cost reduction. Another internal measure, related to the create market objective, was the sales volume from contracts incorporating new service capabilities. The new service capabilities could include innovative financing mechanisms, project management techniques, and one-stop supply of integrated services for both operating expense businesses (OPEX) and capital expense businesses (CAPEX). The learning and growth perspective supported these initiatives by introducing measures that rewarded teaming relationships, enhancement of cross-functional skills, and alignment of incentives for performing systems integration work.
Figure 8-2
Strategic Objective: “Reduce the Life-Cycle Cost for the Customer by Integrating the Industry Value Chain”
