The Balanced Scorecard: Translating Strategy Into Action (41 page)
Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
1
. This is an example of the “missing measurement” program, described in
Chapter 10
.
2
. For discussion of defensive reasoning—how to recognize it and overcome it—see C. Argyris and D. Schön, “Defensive Reasoning and the Theoretical Framework That Explains It,”
Part II
,
Organizational Learning II: Theory, Method, and Practice
(Reading, Mass.: Addison-Wesley, 1996), 75–107.
3
. Robert Simons,
Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal
(Boston: Harvard Business School Press, 1995), 11.
A p p e n d i xBuilding a Balanced Scorecard
C
ONSTRUCTING AN ORGANIZATION’S
first Balanced Scorecard can be accomplished by a systematic process that builds consensus and clarity about how to translate a unit’s mission and strategy into operational objectives and measures. The project requires an architect who can frame and facilitate the process, and collect relevant background information for constructing the scorecard. But the scorecard should represent the collective wisdom and energies of the senior executive team of the business unit. Unless this team is fully engaged in the process, a successful outcome is unlikely. Without the active sponsorship and participation of the senior executives, a scorecard project should not be initiated. It will surely fail without leadership and commitment at the top.
We are aware of two instances where an excellent scorecard was built by a very senior staff executive without actively engaging the senior management team in the process. In one company, the scorecard was developed by the chief financial officer, and in the other by the senior vice president of business development. In both companies, the executive was a member of the most senior executive team, an active, contributing participant in all senior executive strategy-setting and management meetings. Because of their high-level involvement with corporate strategy, both individuals produced scorecards that accurately captured the strategy, customer focus, and critical internal processes of their companies. Their scorecards were accepted as accurate representations of the organizations’ critical objectives and measures. But in both instances, the scorecard ultimately did not drive
change or become an integral part of the companies’ management processes. We believe this disappointing outcome occurred because of the lack of senior executive involvement in the process and a lack of consensus about the role for the Balanced Scorecard. The scorecard project was likely viewed, in both organizations, as a staff-led initiative to improve a measurement system, not to make fundamental changes in the way the organization viewed or managed itself.
ESTABLISH OBJECTIVES FOR THE BALANCED SCORECARD PROGRAM
The first step for building a successful Balanced Scorecard is to gain consensus and support among senior management on why the scorecard is being developed. Many managers find the conceptual appeal of a Balanced Scorecard to be obvious. They see the shortcomings of limited financial measurement and need little prompting to develop a more balanced approach. The conceptual appeal of the scorecard, however, is not a sufficient reason to embark on such a program. When the process is launched, the senior executive team should identify and agree on the principal purposes for the project. The program objectives will help to:
- guide the construction of objectives and measures for the scorecard,
- gain commitment among the project participants, and
- clarify the framework for implementation and management processes that must follow the construction of the initial scorecard.
We illustrate here, with actual examples, some of the many initial reasons for developing a Balanced Scorecard.
Obtain Clarity and Consensus About Strategy
Chem-Pro, a manufacturer of polymer-based industrial products, had recently reorganized to become more customer-focused. Its traditional functional organization had been replaced by one designed around lines-of-business (LOB) and business processes. In addition, senior management had also identified four critical business processes that it must improve
and excel at: order generation, product management, order fulfillment, and production. Each of the five lines-of-business had different requirements for the four processes. For example, the consumer group distributed large numbers of standardized products through retail channels, while the precision group worked with the engineers of a small number of very large customers to define the product specifications for new chemicals. Obviously, each of the four critical business processes had to be customized to the different needs of each LOB.
The Balanced Scorecard for Chem-Pro began by defining a standard corporate template that clarified the strategic priorities for all the LOBs in the new organization. Each line-of-business then developed its particular strategy, consistent with corporate priorities. At that stage, the LOB scorecards were communicated to the new managers of the four business processes so that they could develop programs that would meet the specific objectives of the individual LOBs. The sequential process of:
- defining objectives and measures at the corporate level,
- linking corporate objectives to individual LOB objectives and measures, and
- linking LOB objectives and measures to critical business processes
enabled Chem-Pro to introduce a complex organizational change—from functional specialization to customer-based line-of-businesses and customer-focused business processes—in a manner that gained acceptance, buy-in, and involvement by everyone.
Achieve Focus
Metro Bank initiated its Balanced Scorecard to achieve focus. Metro was the surviving entity of a merger of two highly competitive banks in the same region. The agendas of the two parents had never been fully rationalized into a common vision. At the same time, without having achieved a synthesis or consensus on an operating style and strategy for the new Metro Bank, managers had launched a major transformation program in order to be more innovative and to create a bank tailored for the twenty-first century. Unfortunately, the transformation program had gone wild, leaving the bank
with more than 70 different action programs, each competing for management time and resources.
The CEO of the bank saw the Balanced Scorecard as a way to bring the organization together. By clarifying the strategic objectives and identifying the critical few drivers, Metro was able to create consensus and teamwork among all the senior executives, regardless of which bank they came from or which functional organization they represented. Further, the scorecard created a vehicle to set priorities, to consolidate and to integrate the many change programs currently under way. The result was a much more manageable set of strategic initiatives, all focused on achieving specific objectives of acknowledged strategic importance.
Decentralization and Leadership Development
The CEO of Pioneer Petroleum wanted to decentralize and disperse the power currently invested in a highly centralized functional organization. He created 14 new strategic business units whose mission was to be intensely customer-focused, and to reduce and eventually eliminate all unnecessary (non-value-added) costs. The leaders of the new SBUs, however, had all grown up in the old, centralized Pioneer culture, where they had learned to carry out orders. They had no experience in formulating their own strategies and managing the process by which these strategies would be implemented. Pioneer’s CEO was concerned that the new SBU heads did not have enough executive experience to implement the new decentralization strategy.
The CEO engaged the senior management team in a scorecard process to facilitate the development of executive leadership among the 14 SBU heads. The team developed a corporate template that defined the strategic priorities. This template became the corporate Balanced Scorecard. Each SBU head then used the corporate scorecard as the starting point to formulate the unique SBU-level strategy. The SBU executive teams began with an off-site session to clarify the mission, vision, and values of their new organizations. The session continued by developing an SBU Balanced Scorecard that could be reviewed at the corporate level. The development of the scorecards brought the executives of the 14 new businesses together to begin working as a team. The articulation of the shared vision for the SBU proved to be the perfect vehicle for the team-building and strategy development processes. The corporate template was helpful in guiding their
thinking and in reducing the risk associated with independently developing an SBU strategy for the first time. The creativity and energies of the SBU executive team could be focused along the dimensions defined in the corporate strategy.
The corporate review was also valuable in ensuring, before implementation, that the SBU strategies were acceptable to corporate. The entire process gave the CEO an opportunity to develop new skills among the SBU executives about how to formulate and manage business unit strategies. Although leadership development is an ongoing process, Pioneer’s CEO used the preparation of corporate and SBU Balanced Scorecards as an effective first step.
Strategic Intervention
Kenyon Stores, unlike Pioneer Petroleum, was already decentralized. Its market-based SBUs specialized in fashion apparel for different customer segments. Each pursued its own strategy for fashion, targeting markets, and sourcing goods. Kenyon’s CEO was convinced, however, that the highly decentralized approach led to lost opportunities for higher growth and increased profitability. The decentralized approach was ideal when the organization was smaller and its mission was to be close to trends and fashion requirements for targeted customer segments. But each SBU was approaching the size that the corporation itself had been only five years earlier. This scale dramatically changed the strategic agenda, requiring an SBU president to become more of a strategist and less of a merchant. The CEO saw the Balanced Scorecard as a way to get personally involved with the SBU presidents, helping them develop as business heads and assisting them in developing strategies for future growth.
Kenyon’s CEO used the Balanced Scorecard to create a corporate strategic agenda. Along with the SBU presidents, he defined 10 issues (see
Chapters 8
and
12
) for which each SBU had to establish its own specific objectives and mechanisms for achievement in their individual Balanced Scorecards.
The corporate and SBU executive teams launched the annual long-range planning process around discussion of how each SBU would deliver on these 10 issues. This dialogue enabled the SBU presidents to build their long-range plans around the scorecard framework. The 10 issues provided a mechanism for integrating the SBU strategies into the corporate agenda. The process engaged the CEO in shaping the strategy of the organization
instead of just reviewing results after the fact. More important, the process gave the CEO a vehicle to work with the previously autonomous SBU presidents. He used the process to help educate, stretch, and stimulate them.
In summary, the initial impetus for constructing a Balanced Scorecard can arise from the need to:
- clarify and gain consensus about vision and strategy,
- build a management team,
- communicate the strategy,
- link reward to achieving strategic objectives,
- set strategic targets,
- align resources and strategic initiatives,
- sustain investment in intellectual and intangible assets, or
- provide a foundation for strategic learning.
The selection of the objectives for the scorecard project at the outset is not to constrain the subsequent uses of the scorecard. In general, as described in
Chapter 12
, we have seen the role of the scorecard grow and expand through the implementation process. But the initial set of objectives will serve to motivate and communicate why the organization is going through the exercise, and will help sustain the program if interest and commitment should decline.
