The years between 1989 and 1999 were arguably the best ten years in economic history. Productivity increased, market values rose and unemployment fell to record lows. On the surface, it looked like the increase in market values would continue forever and people began talking about the "death of strategy." All types of organizations with little strategy other than being the "Amazon of local diaper delivery" were winning venture capital and market capitalization in the millions.
When you look beneath the surface, however, the story is a little different. While more than two-thirds of the companies surveyed by Chris Zook in his book Profit From the Core had growth targets of more than nine percent; less than 10 percent actually achieved these growth targets. In fact, only 13 percent of the organizations surveyed by Zook achieved shareholder returns greater than the cost of capital.
While this clearly indicates that the market returns in the 1990s were the result of "excessive exuberance" (to paraphrase Alan Greenspan), it also shows the dangers of companies abandoning strategy to focus instead on "first to market," "operational excellence," "customer relationship management" or other panaceas. While all of these are good ideas and worthy of implementation at an organization they are not strategies. They are tactics.
Strategy, to put it in its simplest form, is about difficult choices and trade-offs; it's about deliberately choosing to be different. When companies abandon strategy, they pay the price perhaps not in the short term, but definitely in the long term. Many of the companies that had no strategy in the 1990s are now gone, just a few years into the 21st century.
The Problem: Implementing Strategy
However, just having a strategy is not enough. Even an effectively developed strategy that reflects the hard choices an organization must make is completely worthless if it just sits on a shelf in an executive office. A study in Fortune magazine found that less than 10 percent of strategies effectively developed were effectively implemented. In another study, Fortune found that in more than seventy percent of the cases when CEOs fail, it's not the strategy, but the execution that went awry.
Many factors make it difficult to implement strategy today. The pace of change continues to accelerate, technology changes frequently and the workforce is more diverse and mobile than ever before. But the underlying reason it is difficult to implement strategy today is because business and business strategy are fundamentally different today than they were even ten years ago.
The industrial age has been replaced by the knowledge age, with transformational effects on the economy and the workplace:
The shift from tangible assets (property, plant and equipment) to intangible assets (brands, intellectual property, people) is hard to understate in the economy today. Much of the market valuation today is based on intangible assets (e.g., Microsoft's physical assets are minor compared with their brand and intellectual property).
While the business world continues to evolve, management systems have not kept up. Most management systems and measurement systems were designed to meet the needs of a stable, incrementally changing world; they do not meet the needs of today's dynamic economy.
Walk into almost any organization today, and they can show you their balance sheet and income statement. These tools have remained stable, basically unchanged over the past 100 years. They're good at measuring tangible assets (you can depreciate a piece of heavy equipment more than 10 years and the book value may be closely related to the market value), but they can't keep up with intangible assets. Where do you find the brand equity line?
The Solution: Balanced Scorecard
This is the problem that the balanced scorecard was designed to address. The balanced scorecard can be thought of as the "strategic chart of accounts" for an organization. It captures both the financial and the nonfinancial elements of a company's strategy and discusses the cause-and-effect relationships that drive business results. It allows, for the first time, an organization to look ahead using leading indicators instead of only looking back using lagging indicators. The balanced scorecard puts strategy the key driver of results today at the center of the management process.
The basic premise behind the balanced scorecard is quite simple: measurement motivates. Even if there are no incentives tied to the achievement of a particular goal, the simple measurement of it will make people pay attention. Measurement systems, however, are rarely tied to the strategy. They exist in a world of "last year + 10 percent" or "50 percent of industry benchmark."
Work that was done with a major telecommunications provider is a clear example of the mismatch that is often seen. At the start of the balanced scorecard initiative, the organization determined that being appreciably superior in customer service was one element of its customer-driven strategy. This strategy was developed before the balanced scorecard was introduced to the organization, and banners were hung in call centers throughout the country with slogans such as "Customers First" and "Service Matters"; however, customer service levels remained at the same abysmal levels.
Why? Because the call center employees were measured based on the number of calls that they could process in an hour. This measure drove them to hang up on difficult problems to handle simpler ones, driving customers crazy. After implementing the balanced scorecard, they changed their metric to "percent of problems handled with one call." This completely changed the atmosphere of the call center and allowed the employees to focus on solving problems increasing morale, customer satisfaction and eventually profits.
Early Adopters, Early Results
To really understand how the balanced scorecard has driven breakthrough results over the long term, it is instructive to look at the early adopters the organizations that began using the scorecard back in 1992 and 1993.
Cigna Property & Casualty was losing a million dollars per day in 1992. To fix this hemorrhaging of cash, they introduced a new strategy to reposition themselves as specialists, focusing on key underwriting niches. In 1993, they implemented the balanced scorecard to describe to their organization what it meant to be a specialist. Within two years, Cigna was profitable. Five years later, Cigna sold their property and casualty division for $3 billion. They went from negative shareholder value to positive $3 billion in five years.
Mobil's U.S. Marketing and Refining Division was dead last in their industry profitability in 1993. To address this "burning platform," they introduced a new strategy and divided their monolithic organization into 18 different business units. The balanced scorecard was used to convey the strategy to these new business units. Each business unit built its own balanced scorecard that was cascaded from the corporate balanced scorecard. Within two years, Mobil had moved from last in their industry to first. They maintained that position for five consecutive years.
Brown & Root, the European subsidiary of Rockwater, was responsible for developing and installing oil platforms in the North Sea. In 1992, they merged two companies. The companies didn't understand the basis for the merger. Management introduced the balanced scorecard to get them on the same page so that they had a common vision. They introduced a very innovative strategy for segmenting the market into two levels. Within three years, Brown & Root was first in its industry in both growth and profitability.
To recognize the incredible results that organizations have achieved with the balanced scorecard, the Balanced Scorecard Collaborative (BSCol) created the Balanced Scorecard Hall of Fame in 1999. Awarded to organizations that have achieved breakthrough results through the use of the balanced scorecard, the Hall of Fame includes notable companies such as CIGNA P&C, National Reconnaissance Office, Wells Fargo Bank, Mobil USM&R, Hilton Hotels, City of Charlotte and UPS.
The How: Strategy-Focused Organization
How did organizations such as CIGNA P&C (which was losing almost $1M per day, and Mobil USM&R which was #6 of 6 in industry profitability), turn their organizations around using the balanced scorecard?
Robert Kaplan and David Norton asked this very question in the research for their second book on the balanced scorecard, The Strategy-Focused Organization. With all of the executives that they interviewed, three concepts kept arising:
Strategy: They made strategy the central organization agenda.
- Focused: They created incredible focus on the strategy.
- Organization: They mobilized their employees to act in fundamentally different ways, guided by the strategy.
Strategy-focused organizations, therefore, were able to break free of the traditional measurement and management systems and build management systems based on strategy. They were able to succeed where so many others had failed because they understood the cause-and-effect linkages of the strategy, were able to see the leading indicators of strategic change and were able to motivate their organizations to focus on the strategy.
Five principles of successful organizations emerged from Kaplan and Norton's research on successful balanced scorecard users. These five principles describe the key elements of building an organization able to focus on strategy and deliver breakthrough results (see Figure 1). They are:
Mobilize change through executive leadership. Breakthrough results do not happen by accident. They are the result of a clear strategy, execution and leadership. To drive change, executives must develop a case for change and a vision and strategy for where they want to drive the organization. They must create accountability and ensure the entire executive team is aligned. Another critical step is to define the "road map" toward becoming a strategy-focused organization.
Figure 1: Strategy-Focused Organization Principles
Translate the strategy into operational terms. The balanced scorecard and strategy map (a one-page visual representation of the key objectives of the strategy outlined in a cause-and-effect diagram see Figure 2) take the corporate strategy and translate it into terms that the organization can understand and act upon. A critical part of this step in the process is determining the key objectives, measures, targets and initiatives to drive the strategy.
Figure 2: Strategy Map
Align the organization to the strategy. Once a balanced scorecard has been created at the top level of an organization, it can be cascaded to operating and support units. This allows each area of the organization to understand how they contribute to the strategy. Additionally, best-practice organizations have worked to develop external alignment with customers and partner balanced scorecards. Many boards are now working to roll out the balanced scorecard to understand the entire enterprise.
Make strategy everyone's job. While strategy may be formulated from the rear, it is executed at the front lines. Communication and education are, therefore, critical to executing strategy. Aligning incentives and personal objectives is also critical for success. Leading organizations are also developing personal balanced scorecards to further link the personal development process to the strategic management process.
Make strategy a continual process. One key feature of the balanced scorecard is that it allows strategy to happen continually, not just at an annual strategy review session. Monthly or quarterly management meetings become about the strategy as opposed to the operations. Linking in business intelligence systems, linking the balanced scorecard to planning and budgeting systems, and best practice and knowledge management systems are critical to developing an organization that continually reviews strategy.
Kaplan and Norton found that these principles were central to the strategic success of organizations such as the City of Charlotte, ABB Switzerland and many others. Recent studies by Balanced Scorecard Collaborative have supported these results those organizations that have implemented all five principles of the strategy-focused organization have a much greater chance of success.
Since its development in 1992 by Drs. Kaplan, professor at Harvard Business School and Norton, president of BSCol, the balanced scorecard has been implemented in thousands of corporations, organizations and government agencies worldwide.
The secret of the balanced scorecard and the reason it has gained such wide acceptance is quite simple: It lets organizations reach their full potential. The breakthrough results of the organizations in the Balanced Scorecard Hall of Fame were created not by new strategies, new people or new processes. Instead, the results were created by focusing the entire organization on the strategy and rewarding people for executing on the strategy.
The challenge of strategy execution is more relevant today than ever before. Organizations are facing uncertain equity markets, an accelerating pace of change and increased expectations for productivity and results. For many organizations, these increased demands only lead to greater chaos. However, for a select few companies, today's environment leads to great opportunity as strategy-focused organizations can focus on the key drivers of success and execute their strategies for results.
Figure 3: Accelerating Results: Balanced Scorecard Technology
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