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Do you want to take your company to the next level? Build a Strategy-Focused Organization

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Strategy has never been more important, but advantage comes only after strategy has been implemented. Tomorrow’s winners are building strategic focus today.

The mistaken belief that developing the right strategy will enable a company to rocket past its competitors. In reality, strategy is less than half the battle. In the majority of cases – we estimate 70% – the real problem isn’t [bad strategy]. . . it’s bad execution.

 

Why Is It So Difficult to Implement Strategy? Strategy has never been more important, but advantage  comes only after strategy has been implemented.  Tomorrow’s winners are building strategic focus today.

Strategy guru Michael Porter describes the foundation of strategy as the “activities” in which an organization elects to excel. If the foundation of strategy is, as Porter maintains, the “selection and execution of hundreds of activities,” then strategy cannot be limited to a few people at the top of an organization. Strategy must be understood and executed by everyone. The organization must be aligned around its strategy.

Performance management systems are designed to create organizational alignment. Herein lies one of the major causes of poor strategic management. Most performance management systems are designed around the annual budget and operating plan.

They promote short-term, incremental, tactical behavior. While this is a necessary part of management, it is not enough. You cannot manage strategy with a system designed for tactics. It is our belief that it is this need — the need for strategic enterprise management — that is driving the widespread adoption of Balanced Scorecards.

 

A New Approach to Implementing Strategy

The simple idea behind the Balanced Scorecard (BSC) is that an organization’s strategy must be translated into terms that can be understood and acted upon. A BSC uses the language of meas-urement to more clearly define the meaning of strategic concepts like quality, customer satisfaction, and growth. A scorecard that accurately describes the strategy can serve as the organizing framework for the management system.

Organizations that were early adopters of the Balanced Scorecard have shown impressive results to date. The fact that these executive teams successfully executed their strategies (when the majority of their colleagues could not) is impressive enough. But the speed with which the results were achieved spotlights the potential that exists for every organization. The capabilities to achieve success were already present in these organizations. People had the skills and knowledge needed to execute the strategies, but they lacked focus, alignment, and understanding of where the organization was trying to go. The BSC eliminated these barriers. 

Companies that successfully implement scorecards do so by reinventing every part of their management system to focus on strategy. This is a significant departure from traditional performance management programs that are linked to financial frameworks like budgets or nonfinancial frame-works like total quality. These successful organizations created a performance management program that put strategy at the center.

 

PRINCIPLE #1 Build an Executive Leadership Team to Mobilize Change.

A successful BSC program starts with the recognition that it’s not a “metrics” project, it’s a “change” project.

The single most important condition for success is the owner-ship and active involvement of the executive team. Strategy requires change from every part of the organization. If those at the top are not energetic leaders of the process, change will not take place and the opportunity will be missed.

  • Establish a Sense of Urgency.
  • Create the Leadership Team.
  • Develop the Vision and Strategy.

 

PRINCIPLE #2: Translate the Strategy into Operational Terms

Putting strategy at the center of the management system implies that strategy can be described so that it can be understood and acted upon. Unfortunately, there are no standards for strategy. If we are going to build management systems around strategies, we need a discipline for describing strategy that is both reliable and consistent.

The Balanced Scorecard provided that discipline for the successful organizations. In addition to building scorecards, the process helped executive teams to better understand and articulate their strategies. 

The foundation of the design is a strategy map which defines the “architecture” of the strategy. The description begins with the financial perspective of the shareholder (or appropriate key constituent in nonprofits). It defines the relevant long-term indicators of success (e.g., ROI, shareholder value) and divides it into long-term (growth) and short-term (productivity) components. The value proposition is used to describe the customer needs.

The Balanced Scorecard provided that discipline for the successful organizations. In addition to building scorecards, the process helped executive teams to better understand and articulate their strategies. 

The foundation of the design is a strategy map (shown on page 3) which defines the “architecture” of the strategy. The description begins with the financial perspective of the shareholder (or appropriate key constituent in nonprofits). It defines the relevant long-term indicators of success (e.g., ROI, shareholder value) and divides it into long-term (growth) and short-term (productivity) components. The value proposition is used to describe the customer needs.

 

PRINCIPLE #3: Link and Align the Organization Around Its Strategy

The BSC is a powerful tool to describe a business unit’s strategy. However, complex organizations are made up of many business units. Logically, each should have a different Balanced Scorecard to describe and manage its strategy. Business units are often combined to form larger organizations based on the belief that there are synergies to be achieved across the units. 

The linkages between business units should be made explicit so they can be actively managed. The figure on the left shows the linkages of a typical organization. Successful BSC users typically create a process where each business unit, support unit, and exter-nal partner has a BSC. The business units and the support units treat each other as “customers” or “suppliers,” as appropriate to their relationship. In this way, a linkage between each unit is achieved.

 

PRINCIPLE #4 : Make Strategy Everyone’s Job

It is estimated that approximately 50% of all work performed in industrialized countries today is knowledge work. Workforce knowl-edge represents an asset that we are just beginning to use effectively. 

In this structure, strategic information and decision making can no longer be limited to executives and senior managers. Knowledge workers make strategic choices every day. Successful BSC users took steps to ensure that everyone in the organization under-stood the strategy, was aligned with it, and was capable of executing it. Traditional human resource systems and processes played an essential role in enabling this transition.

  • Communication and Education to Create Awareness.
  • Personal Alignment. 
  • Incentive Compensation.

 

PRINCIPLE #5: Link Strategy and Budgeting

Why is it so difficult to align budgets with strategy? Most strategic initiatives don’t have a direct impact on financial results. Instead, they have second- or third-order effects. For example, a training program imparts skills that affect customer confidence and, in turn, broaden the relationship. This sequence ultimately leads to revenue. Unless this “hypothesis” of cause and effect is clearly defined, it must be taken on faith, something that most budget directors are unlikely to do. A strategic investment is a “cluster” of activities, not a simple line item. For this reason, most organizations must redefine their planning and budgeting process to reflect these structural features.

The Corporate Scorecard should provide a high-level template that defines common goals and themes to be adopted by all business units. For example, the corporate strategy might be to share customers more openly across business units. Goals such as “cross-selling” or “increasing share of wallet” might appear on the Corporate Scorecard. Each business unit would be expected to reflect these goals in its own strategies. Without corporate prompting, these joint activities typically don’t take place. The Corporate Scorecard is a way to ensure that these strategic linkages exist and are made effective.The linkages between business units should be made explicit so they can be actively managed. 

 

PRINCIPLE #6 : Make Strategy a Continuous Process

A strategy is a hypothesis about what the future will look like and how to get there. The strategic hypothesis must be tested continuously so that the course can be changed as required.

The successful BSC adopters used the tool to monitor organizational performance against the short-term targets for the scorecard’s financial and nonfinancial measures. They used the BSC to check whether initiatives were being implemented as planned. This process is similar to typical monthly operating reviews except that, instead of reviewing only financial performance, managers reviewed performance and took correc-tive actions for all the measures on the Balanced Scorecard. The process created strategic focus without ensuring that strategic learning also took place; more can be achieved.

Successful users went beyond using the BSC merely as a new approach to measurement. They used it to dis-cuss whether the strategy was working. 

 

Conclusion:

The Balanced Scorecard has enabled organizations to introduce a new governance and review process —one focused on strategy, not tactics.This is a management process attuned to the needs of the contemporary business system. The essential ingredient is a simple framework and tool that allows strategy to be clearly articulated. Without such a strategic framework, there can be no strategic management system. This system is the heart of the management system that the Strategy Focused Organization will use to build its future.