The Balanced Scorecard: Translating Strategy Into Action (42 page)
Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
THE PLAYERS
Once agreement on the objectives and future role for the Balanced Scorecard has been reached, the organization should select the person who will serve as the architect, or project leader, for the scorecard. The architect will own and maintain the framework, philosophy, and methodology for designing and developing the scorecard. Of course, any good architect requires a client, which in this case is the senior management team. As in any building project, the client must be totally engaged in the development process, since the client will assume ultimate ownership of the scorecard and will lead the management processes associated with using it.
The architect guides the process, oversees the scheduling of meetings and interviews, ensures that adequate documentation, background readings, and market and competitive information are available to the project
team, and, in general, serves to keep the process on track and on schedule. The architect, over the course of facilitating the construction of the initial scorecard, must manage both a cognitive, analytic process—translating soft, general statements about strategy and intent into explicit, measurable objectives—and an interpersonal, even emotional, process of team building and conflict resolution.
The architect, in our experience, has been a senior staff manager in the organization. We have seen people from a broad range of backgrounds managing and facilitating the development process of a Balanced Scorecard in their firms:
- Vice president of strategic planning or business development
- Vice president of quality management
1 - Vice president of finance, or divisional controller
2
Some organizations have used outside consultants to assist the internal architect for the scorecard development process.
BUILDING A BALANCED SCORECARD: THE PROCESS
Each organization is unique and may wish to follow its own path for building a Balanced Scorecard. We can describe, however, a typical and systematic development plan that we have used to create scorecards in dozens of organizations. If executed properly, the four-step process will encourage commitment to the scorecard among senior and mid-level managers and produce a “good” Balanced Scorecard that will help these managers achieve their program objectives.
Define the Measurement Architecture
T
ASK
1. S
ELECT THE
A
PPROPRIATE
O
RGANIZATIONAL
U
NIT
The architect must, in consultation with the senior executive team, define the business unit for which a top-level scorecard is appropriate. Most corporations are sufficiently diverse that constructing a corporate-level scorecard may be a difficult first task. The initial scorecard process works best in a strategic business unit, ideally one that conducts activities across an entire value chain: innovation, operations, marketing, selling, and service. Such an SBU would have its own products and customers, marketing and
distribution channels, and production facilities. It should be one where it is relatively easy to construct summary financial performance measures, without the complications (and arguments) related to cost allocations and transfer prices of products and services from or to other organizational units.
Figure A-1 shows a typical structure for a hierarchically organized multinational company. The natural setting for a Balanced Scorecard is at level III of such an organization.
If the organizational unit is defined too narrowly (say, within an SBU at level III of Figure A-1), it may be difficult to define a coherent, self-contained strategy. For example, a scorecard for a single functional department or for a single initiative may have too narrow a scope. A set of key performance indicators would likely be sufficient for such a narrow purpose. But Balanced Scorecards have been developed for complex support functions, joint ventures, and not-for-profits. The relevant question is whether the proposed organizational unit has (or should have) a strategy to accomplish its mission. If yes, the unit is a valid candidate for a Balanced Scorecard.
In one application, we worked with a large gas and chemical company. The operating units of the company included:
- a regulated, monopoly-provider of natural gas to local customers
- an unregulated, competitive supplier of natural gas to national customers
- a basic chemicals company
- a gas services consulting company
Figure A-1
Define and Clarify the Business Unit
T
ASK
2. I
DENTIFY
SBU/C
ORPORATE
L
INKAGES
Once the SBU has been defined and selected, the architect should learn about the relationship of the SBU to other SBUs and to the divisional and corporate organization. The architect conducts interviews with key senior divisional and corporate executives to learn about:
- Financial objectives for the SBU (growth, profitability, cash flow, harvest)
3 - Overriding corporate themes (environment, safety, employee policies, community relations, quality, price competitiveness, innovation)
- Linkages to other SBUs (common customers, core competencies, opportunities for integrated approaches to customers, internal supplier/customer relationships)
This knowledge is vital to guide the development process so that the SBU does not develop objectives and measures that optimize the SBU at the expense of other SBUs or the entire corporation. The identification of SBU/ corporate linkages makes visible both constraints and opportunities that might not be apparent if the SBU were considered as a completely independent organizational unit.
Build Consensus around Strategic Objectives
T
ASK
3. C
ONDUCT
F
IRST
R
OUND OF
I
NTERVIEWS
The architect prepares background material on the Balanced Scorecard as well as internal documents on the company’s and SBU’s vision, mission,
and strategy. This material is supplied to each senior manager in the business unit—typically between 6 and 12 executives. The architect should also acquire information on the industry and competitive environment of the SBU, including significant trends in market size and growth, competitors and competitor offerings, customer preferences, and technological developments.
After the senior executives have had an opportunity to review the material, the architect conducts interviews of approximately 90 minutes each with the senior managers. During these interviews, the architect obtains their input on the company’s strategic objectives and tentative proposals for Balanced Scorecard measures across the four perspectives. While we, for simplicity, will refer to the architect as a single person, in fact, the interview process and subsequent synthesis of information is best done by a group of two or three individuals. The architect, as the leader of the team, will typically conduct the actual interview, asking questions and probing after responses. One person may concentrate on the actual objectives and measures specified by the executive; another attempts to capture quotes that serve to flesh out and give more meaning and context to the objectives and measures. The interviews can be free flowing and unstructured, but the interview process, as well as the aggregation of information supplied by the executives, will be facilitated if the architect uses a common set of questions and offers a common set of potential responses.
The interviews accomplish several important objectives, some obvious, others less so. The explicit objectives are to introduce the concept of the Balanced Scorecard to senior managers, to respond to questions they have about the concept, and to get their initial input about the organization’s strategy, and how this translates into objectives and measures for the scorecard. The implicit objectives include beginning the process of having top management think about translating strategy and objectives into tangible, operational measures, learning about the concerns that key individuals may have about developing and implementing the scorecard, and identifying potential conflicts among the key participants either in their views of the strategy and objectives or at a personal or interfunctional level.
T
ASK
4. S
YNTHESIS
S
ESSION
After all the interviews have been conducted, the architect and other members of the design team meet to discuss the responses in the interviews,
highlight issues, and develop a tentative list of objectives and measures that will provide the basis for the first meeting of the top management team. The team members can also discuss their impressions about the personal and organizational resistance to the Balanced Scorecard and to the change in management processes that will follow the introduction of the scorecard.
The output of the synthesis session should be a listing and ranking of objectives in the four perspectives. Each perspective and objective within the perspective will be accompanied by anonymous quotes from the executives that explain and support the objectives, and that identify issues for the executive team to resolve. The team should attempt to determine whether the tentative list of prioritized objectives represents the business unit’s strategy, and whether the objectives across the four perspectives appear to be linked in cause-and-effect relationships. These observations can serve as discussion questions during the executive workshop to follow.
T
ASK
5. E
XECUTIVE
W
ORKSHOP
: F
IRST
R
OUND
The architect schedules and conducts a meeting with the top management team to begin the process of gaining consensus on the scorecard. During the workshop, the architect facilitates a group debate on the mission and strategy statements until a consensus is reached. The group then moves from the mission and strategy statement to answer the question, “If I succeed with my vision and strategy, how will my performance differ for shareholders, for customers, for internal business processes, and for my ability to grow and improve?” Each perspective is addressed sequentially.
The architect shows the proposed objectives, their rankings, and associated quotes from the interviews. The architect can show videotapes of interviews with shareholder and customer representatives to add an external perspective to the deliberations. Usually, the group will be deliberating on far more than four or five measures for each perspective. Each objective should be discussed in its own right, not compared to other candidates, so that its specific relevance, strengths, and weaknesses can be fully explored. At this time, narrowing the choices is not critical, though straw votes can be taken to see whether some of the proposed measures are viewed as low priority by the group.
After all the candidate objectives for a perspective have been introduced and discussed, the group votes on the top three to four candidates. This
can be done in a variety of ways: written ballots, show of hands, or giving each person three green dots and asking him or her to place a dot next to each objective considered the most important. For the highest-ranked objectives, the architect and the team will draft a one-sentence or one-paragraph description. If time permits, the architect can ask the group to brainstorm on measures for the objectives.
The executive team should be divided into four subgroups, each responsible for one of the perspectives. One executive from each subgroup is chosen to lead the subgroup for the next stage of the process. In addition to the senior executives, representatives from the next levels of management and key functional managers should be included in the four-to six-person subgroups to broaden the base of deliberations and consensus.
By the end of the workshop, the executive team will have identified three to four strategic objectives for each perspective, a detailed descriptive statement for each objective, and a list of potential measures for each objective. After the meeting, the architect prepares and distributes a post-workshop document that summarizes the accomplishments, and lists the composition and leader of the four subgroups.
Select and Design Measures
T
ASK
6. S
UBGROUP
M
EETINGS
The architect works with the individual subgroups for several meetings. During these meetings, the subgroup attempts to accomplish four principal objectives:
- Refine the wording of the strategic objectives in line with the intentions expressed in the first executive workshop.
- For each objective, identify the measure or measures that best capture and communicate the intention of the objective.
- For each proposed measure, identify the sources of the necessary information and the actions that may be required to make this information accessible.
- For each perspective, identify the key linkages among the measures within the perspective, as well as between this perspective and the other scorecard perspectives. Attempt to identify how each measure influences the other.
In facilitating these meetings, a skilled architect draws upon the underlying frameworks for the four perspectives discussed in
Part One
, as well as the linkages between measures, both within and across perspectives, that describe the cause-and-effect relationships underlying the strategy.
T
HE
A
RT OF
S
ELECTING AND
D
ESIGNING
M
EASURES
The essential objective in selecting specific measures for a scorecard is to identify the measure that best communicates the meaning of a strategy. Since every strategy is unique, every scorecard should be unique and contain several unique measures. As we discussed in
Chapter 7
, however, certain core outcome measures appear repeatedly on scorecards. We have identified these as:
Core Financial Measures
- Return-on-investment/economic value-added
- Profitability
- Revenue growth/mix
- Cost reduction productivity
Core Customer Measures
- Market share
- Customer acquisition
- Customer retention
- Customer profitability
- Customer satisfaction
Core Learning and Growth Measures
- Employee satisfaction
- Employee retention
- Employee productivity
While most scorecards will draw heavily from the core outcome measures, the art of defining measures for a scorecard rests with the performance drivers. These are the measures that make things happen, that enable the core outcome measures to be achieved. The discussion of objectives and
measures in
Chapters 3
through
7
(including the appendices to
Chapters 4
and
5
) should help the architect and the subgroup team devise performance driver measures in the four perspectives that will communicate, implement, and monitor the business unit’s unique strategy.
The final output from the subgroups should be, for each perspective:
- A list of the objectives for the perspective, accompanied by a detailed description of each objective;
- A description of the measures for each objective;
- An illustration of how each measure can be quantified and displayed; and
- A graphic model of how the measures are linked within the perspective and to measures or objectives in other perspectives.
When these outputs have been accomplished, the architect can schedule the second executive workshop.
T
ASK
7. E
XECUTIVE
W
ORKSHOP
: S
ECOND
R
OUND
A second workshop, involving the senior management team, their direct subordinates, and a larger number of middle managers, debates the organization’s vision, strategy statements, and the tentative objectives and measures for the scorecard. The output from the subgroups should be presented by executives in the subgroups, not by the architect or external or internal consultants to the subgroup. The presentations help build ownership for the objectives and measures, as well as for the entire scorecard-development process. The participants, either in a plenary session or in working groups, comment on the proposed measures, and start developing an implementation plan. A good focus for this second workshop is to be able, at the end, to sketch out a brochure to communicate the scorecard intentions and contents to all employees of the business unit. A secondary objective would be to encourage participants to formulate stretch objectives for each of the proposed measures, including targeted rates of improvement. Depending on the type of measure under consideration and the organization’s philosophy about target setting, a variety of approaches can be employed—from benchmarking to rates of change—for specifying targets to be achieved by the next three to five years.
