The Balanced Scorecard: Translating Strategy Into Action (34 page)
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Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
C h a p t e r E l e v e nFeedback and the Strategic Learning Process
I
N PREVIOUS CHAPTERS
, we described:
- how a business strategy can be articulated as a set of hypotheses about cause-and-effect relationships among scorecard measures (
Chapter 7
), - how execution of the strategy is enhanced when human resources are committed to and aligned with the strategy (
Chapter 9
), and - how the organization’s strategic initiatives and financial and physical resources should all be linked to the strategy (
Chapter 10
).
These actions are consistent with a clear formulation of a strategy and its translation into action. One final element, however, must be added to have a complete strategic management system: a process of feedback, analysis, and reflection that tests and adapts the strategy to emerging conditions.
Many companies still retain the hierarchical planning and control systems designed for industrial age competition. Strategy is determined at the top as senior executives establish long-term objectives, policies, and resource
deployment.
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They then order lower-level managers and employees to act according to these plans. The executives and managers use a management control system to monitor the acquisition and use of resources in accordance with the strategic plan. And further down the organization, operational control systems monitor the short-term performance of specific operational processes and front-line employees.
This hierarchical approach to strategy formulation and implementation works fine when senior executives have a clear vision of organizational destination and the actions that must be taken to reach that destination. It is a single-loop feedback process in which the objective has already been determined and will not change. Departures from planned results do not cause people to question whether the planned results are still the desirable outcomes. Nor do they question whether the methods used to accomplish the planned objectives are still appropriate. Departures from the planned trajectory are treated as defects, with remedial actions launched to bring the organization back to the intended path.
The strategies for today’s information-age organizations, however, cannot be this linear or stable. Senior managers need feedback about more complicated strategies and more turbulent competitive environments. The planned strategy, though initiated with the best of intentions and with the best available information, may no longer be appropriate or valid for contemporary conditions.
Organizations need the capacity for double-loop learning, the learning that occurs when managers question their assumptions and reflect on whether the theory under which they were operating is still consistent with current evidence, observations, and experience.
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They need, on occasion, to be able to devise new strategies to capitalize on new opportunities, or to counter new threats that were not anticipated when the initial strategic plan was articulated. Frequently, ideas for seizing new opportunities come from managers further down in the organization. Mintzberg and Simons identify key aspects of this newer or emergent view of strategy:
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- Strategies are incremental and emerge over time
- Intended strategies can be superseded
- Strategy formulation and implementation are intertwined
- Strategic ideas can arise throughout the organization
- A strategy is a process
Many organizations today are reengineering several of their critical business processes. Their efforts tend to focus on improving operational processes, such as product development, customer service, and product delivery. They are also applying learning at the operational level, for individuals and teams.
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Improving existing operations to achieve prespecified strategic goals is a good example of single-loop learning. But companies are starting to use the Balanced Scorecard to extend their operational and management review processes into a strategic learning process, which extends single-loop operational learning to double-loop strategic learning at the management team and SBU level (see Figure 11-1).
An effective strategic learning process has three essential ingredients:
- a shared strategic framework that communicates the strategy and allows each participant to see how his or her activities contribute to achievement of the overall strategy;
- a feedback process that collects performance data about the strategy and allows the hypotheses about interrelationships among strategic objectives and initiatives to be tested; and
- a team problem-solving process that analyzes and learns from the performance data and then adapts the strategy to emerging conditions and issues.
Obviously, specifying such relationships is easier said than done. Initially, these impacts must be assessed subjectively and qualitatively. But just getting managers to think systematically about their strategy will be an improvement over the exclusive focus in most management review systems on operational-level processes. The following approaches have been used to promote strategic learning.
Instead of simply reporting information on each scorecard measure, on an independent, stand-alone basis, managers can help validate hypothesized cause-and-effect relationships by measuring the correlation between two or more measures. Correlations among these variables provide powerful confirmation of the business unit’s strategy. If hypothesized correlations are not found over time, the organization has evidence that the theory underlying its strategy is not working.
Figure 11-2
Echo Engineering—Linking Measures from the Four Perspectives
Source:
Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,”
Harvard Business Review
(January–February 1996): 83. Reprinted with permission.
That is where the scorecard requirement that all measures eventually link up to financial performance plays a critical and decisive role. Echo Engineering discovered a further correlation, an inverse correlation between customer satisfaction and the length of the accounts receivable cycle. The most satisfied customers paid their bills within 15 days, while dissatisfied customers often took up to 120 days to pay. The organization had discovered an entire sequence of linkages (as illustrated in Figure 11-2):
| Improved employee morale | → | Increased customer satisfaction |
| → | Lower accounts receivable | |
| → | Higher return-on-capital-employed. |
Thus, employee morale did not have to be justified as a noble and paternalistic corporate goal. It was a necessary ingredient for achieving superior financial returns in the future. The linkages in the scorecard demonstrated a “hard” benefit (higher return-on-capital-employed) from improvements in “soft” measures (employee morale and customer satisfaction). Analyses like these clearly focus thinking on the necessary performance drivers for the strategy to deliver higher financial returns.
As another example of correlations across the four scorecard perspectives, the service profit chain
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was developed after extensive research on the factors that drive highly successful service organizations, such as Progressive Corporation (insurance), Southwest Airlines, MCI, and Taco Bell. As shown in Figure 11-3, the service profit chain can be viewed as a generic Balanced Scorecard. It shows the explicit linkages between employee-based measures and internal and external service quality, with both employee and service quality (internal business process) measures driving improvements in customer satisfaction and customer loyalty. Satisfied and loyal customers, in turn, drive improved financial performance (revenue growth and profitability), which provides a feedback loop to further investments in employees and systems. Research on high-performing service companies has identified strong, often statistically significant, correlations between the elements in the service profit chain:
Figure 11-3
The Service Profit Chain
Operating Strategy and Service Delivery System
Source:
James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, and Leonard A. Schlesinger, “Putting the Service-Profit Chain to Work,”
Harvard Business Review
(March–April 1994): 166. Reprinted with permission.
| Employee satisfaction and capabilities | ↔ | Excellent internal processes |
| ↔ | Satisfied and loyal customers | |
| → | Higher financial performance. |
