Balanced Scorecard -
The Office of Strategy Management - Sun and Planets Spirituality AYINRIN
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Most companies have ambitious plans for growth. Few ever realize them. In their book Profit from the Core,
Chris Zook and James Allen report that between 1988 and 1998, seven out
of eight companies in a global sample of 1,854 large corporations
failed to achieve profitable growth. That is, these companies were
unable to deliver 5.5% annual real growth in revenues and earnings while
earning their cost of capital (a rather modest hurdle). Yet 90% of the
companies in the study had developed detailed strategic plans with much
higher targets.
Why
is there such a persistent gap between ambition and performance? The
gap arises, we believe, from a disconnect in most companies between
strategy formulation and strategy execution. Our research reveals that,
on average, 95% of a company’s employees are unaware of, or do not
understand, its strategy. If the employees who are closest to customers
and who operate processes that create value are unaware of the strategy,
they surely cannot help the organization implement it effectively.
It
doesn’t have to be like this. For the past 15 years, we have studied
companies that have achieved performance breakthroughs by adopting the
Balanced Scorecard and its associated tools to help them better
communicate strategy to their employees and to guide and monitor the
execution of that strategy. (For background on the Balanced Scorecard,
see our book The Strategy-Focused Organization, Harvard Business School Press, 2000.)
Some
companies, of course, have achieved better and longer-lasting
improvements than others. The organizations that have managed to sustain
their strategy focus have typically established a new unit at the
corporate level to oversee all strategy related activities, an office of strategy management (OSM), as we call it.
This
might appear to be nothing more than a new name for the familiar
strategic planning unit. But the two are quite different. The typical
planning function facilitates the annual strategic planning process but
takes little or no leadership role in seeing that the strategy gets
executed. The companies we studied, however, recognize that effective
strategy execution requires communicating corporate strategy; ensuring
that enterprise-level plans are translated into the plans of the various
units and departments; executing strategic initiatives to deliver on
the grand plan; and aligning employees’ competency development plans,
and their personal goals and incentives, with strategic objectives.
What’s more, they recognize that the company’s strategy must be tested
and adapted to stay abreast of the changing competition. The OSM becomes
the central point for coordinating all these tasks. It does not do all
the work, but it facilitates the processes so that strategy execution
gets accomplished in an integrated fashion across the enterprise.
In
the following pages, we will describe how the concept of the office of
strategy management came into being and how it has helped companies
align key management processes to strategy. Although the companies we
have studied use the Balanced Scorecard as the framework for their
strategy management systems, we believe that the lessons we draw are
also applicable to companies that do not use the Balanced Scorecard.
Strategy Management: The New Support Function
The
exhibit “The Old Strategy Calendar” depicts the strategy management
schedule at a typical large company. The process starts about midway
through the fiscal year, when the CEO and the executive team get
together to clarify their strategic vision and update the strategy.
Sometime afterward, similar processes take place at the business and
functional units, led by unit heads and other senior executives. Toward
the end of the third quarter, the finance function takes the baton,
finalizing corporate and unit budgets. At the end of the year, the HR
function conducts employees’ annual performance reviews and orchestrates
the setting of professional goals and development programs. Throughout
the year, meanwhile, different teams and units have engaged in
performance reviews, corporate communication, and knowledge sharing.
The Old Strategy Calendar
The
problem with this approach is that the activities are carried out
largely in isolation and without guidance from the enterprise strategy.
This partition of responsibilities creates the gulf between an
organization’s strategy and its processes, systems, and people. Surveys
that we conducted of HR and IT managers reveal that the strategies of
fully 67% of those organizations are not aligned with business unit and
corporate strategies; nor do HR and IT departmental plans support
corporate or business-unit strategic initiatives. Budgeting is similarly
disconnected: Some 60% of organizations do not link their financial
budgets to strategic priorities. Incentives aren’t aligned, either: The
compensation packages of 70% of middle managers and more than 90% of
frontline employees have no link to the success or failure of strategy
implementation. Periodic management meetings, corporate communication,
and knowledge management are similarly not focused on strategy
execution.
What
can companies do to change this state of affairs? The experience of the
Chrysler Group first suggested to us that the answer lies in bringing
all strategy-related activities into a single functional unit. After a
string of innovative successes in the early 1990s, Chrysler had hit a
dry spell. Performance problems were exacerbated by an economic
downturn, rising costs, and encroaching imports, and by 2000, the
company was staring at a projected deficit of more than $5 billion for
the coming year. At this point, the parent company, DaimlerChrysler,
appointed a new CEO, Dieter Zetsche, who introduced the Balanced
Scorecard as part of a major change in strategy. The project was
spearheaded by Bill Russo, vice president of business strategy, whose
unit worked with Chrysler’s executive team to translate the company’s
new strategy into a Balanced Scorecard. Russo’s unit also served as
trainer and consultant to help Chrysler’s business and support units
create local scorecards that were aligned with corporate objectives and
customized to local operations. Once the design phase had been completed
and scorecards had been cascaded throughout the company, the strategy
group maintained responsibility for the data collection and reporting
processes for the scorecards.
Up
to this point, Chrysler’s Balanced Scorecard project had followed a
traditional course. Where Chrysler broke new ground was in the roles
assumed by the strategy group. The group took the lead in preparing
scorecard-related materials to communicate the strategy to the more than
90,000 employees. Russo began to brief Zetsche before each management
meeting about issues that had been revealed through the scorecard
reporting and that required management attention and action. In his
capacity as a member of the executive team, Russo followed up after each
meeting to make sure that the required items were communicated and
acted upon. As a result of this proactive involvement in agenda setting
and follow-up, the responsibilities of the business strategy function
expanded to incorporate many new cross-enterprise strategy execution
processes. Thus was born Chrysler’s Office of Strategy Management—a unit
currently employing some 13 full-time people who not only manage the
company’s strategy but also assist the business units in developing new
products. Chrysler’s new approach to strategy execution appears to have
paid off handsomely. In 2004, despite a weak domestic automobile market,
Chrysler successfully launched a series of exciting new cars and
generated $1.2 billion in earnings.
The
U.S. Army’s Balanced Scorecard project produced an office of strategy
management in much the same way. A central project team at the Pentagon
headquarters, under the leadership of the Army chief of staff, developed
the initial scorecard, which the Army called the Strategic Readiness
System (SRS). The project team also selected the software to be used for
scorecard reporting and established systems and processes so that the
scorecard would be regularly populated with valid, timely data. In the
next phase, the team helped to cascade scorecards to 13 major
subcommands and subsequently to more than 300 subsidiary commands
throughout the world. The centralized project team provided training,
consulting, software, and online support for the dispersed project
teams. The central team also reviewed the scorecards produced by local
project teams to ensure that their goals were aligned with those
articulated on the chief of staff’s scorecard.
The
Army’s project team, like its counterpart at Chrysler, soon took on
more than the traditional roles of scorecard custodian and consultant.
It established and took ownership of a strategy communication program.
The Army team created a Web site that was accessible from around the
world in both classified and unclassified versions, developed an online
portal and library containing information about the SRS, wrote articles
about the initiative, published a bimonthly newsletter, conducted an
annual conference, led periodic conference calls with SRS leaders at
each command level, and conducted scorecard training, both in person and
on the Web. This extensive communication process was critical for
educating soldiers and civilian employees and gaining their support for
the new strategy. And the Army project team, much as Chrysler’s did,
began to facilitate the monthly discussions at headquarters about the
readiness status of units around the world. Once again, an ad hoc
project team had turned into a sustainable part of the organization’s
structure (the team and the SRS survived the appointment of a new chief
of staff in June 2004).
A
unit with responsibility for the implementation of strategy becomes a
convenient focal point for ideas that percolate up through the
organization.
The
creation of a central office for strategy execution may appear to risk
reinforcing top-down decision making and inhibiting local initiative,
but it does just the opposite. A unit with responsibility for the
implementation of strategy becomes a convenient focal point for ideas
that percolate up through the organization. These emerging ideas can
then be put on the agendas of quarterly and annual strategy reviews,
with the best concepts being adopted and embedded in enterprise and
business unit strategies. The OSM is a facilitating organization, not a
dictating one.
What Good OSMs Do
Most
of the organizations we have studied follow the path Chrysler and the
Army took: The Balanced Scorecard project team incrementally and
organically assumes more and more responsibilities on its own
initiative. But that’s not the only way to institute an OSM. From these
cases, we have learned what functions an effective OSM must perform and
how an OSM must relate to other functions within the organization. As a
consequence, a few organizations we advise have recently opted to make
the creation of an OSM an early and integral part of their scorecard
initiatives. Canadian Blood Services, the main provider of blood
services in Canada with an annual budget of Can$900 million, more than
4,000 employees, and 17,000 volunteers, is an excellent example of an
organization that created an OSM at the beginning
of its journey to becoming more strategy focused. (See the sidebar “How
to Wield Influence and Stay Informed,” by CEO Graham Sher.)
How to Wield Influence and Stay Informed
What
should people designing an OSM bear in mind as they embark on the
project? Through research into Balanced Scorecard best practices, we’ve
identified the activities that should be directly managed by or
coordinated with an OSM. Some of these activities—specifically those
involved in creating and managing the scorecard, aligning the
organization, and setting the agenda for monthly strategy reviews—are
the natural turf of an OSM. They did not exist prior to the introduction
of the Balanced Scorecard, so they can be given to a new unit without
infringing on the current responsibilities of any other department. But
many other activities—strategic planning, budget supervision, or HR
training, for instance—are already the territory of other units. In
these cases, the company needs to be explicit about the allocation of
responsibilities between the OSM and other functional units. We have
identified the following basic OSM tasks:
Create and manage the scorecard.
As
the owner of the scorecard process, the OSM must ensure that any
changes made at the annual strategy-planning meeting get translated into
the company’s strategy map and Balanced Scorecard. Once the executive
team has approved the objectives and measures for the subsequent year,
the OSM coaches the team in selecting performance targets on the
scorecard measures and identifying the strategic initiatives required to
achieve them. As guardian of the scorecard, the OSM also standardizes
the terminology and measurement definitions across the organization,
selects and manages the scorecard reporting system, and ensures the
integrity of the scorecard data. The OSM need not be the primary data
collector for the scorecard, but it should oversee the processes by
which data are collected, reported, and validated. Finally, the OSM
serves as the central scorecard resource, consulting with units on their
scorecard development projects and conducting training and education.
Align the organization.
A
company can execute its strategy well only if it aligns the strategies
of its business units, support functions, and external partners with its
broad enterprise strategy. Alignment creates focus and coordination
across even the most complex organizations, making it easier to identify
and realize synergies. At present, few companies actively manage the
process of alignment; in many cases, unit strategies have only
rhetorical links with corporate strategy. The OSMs we’ve studied help
the entire enterprise to have a consistent view of strategy and to
systematically manage organizational alignment. The OSM oversees the
process of developing scorecards and cascading them through the levels
of the organization. It defines the synergies to be created through
cross-business behavior at lower organization levels and ensures that
individual business unit and support unit strategies and scorecards are
linked to each other and to the corporate strategy.
Review strategy.
For
all their professed commitment to strategy, senior managers spend
remarkably little time reviewing it. Our research suggests that 85% of
executive leadership teams spend less than one hour per month discussing
their unit’s strategy, with 50% spending no time at all. Companies that
manage strategy well behave differently. Top managers usually meet once
a month for four to eight hours. This meeting provides the opportunity
to review performance and to make adjustments to the strategy and its
execution. The underlying hypotheses of the company’s strategy can be
tested and new actions initiated. Managing this meeting is a core
function of the OSM. It briefs the CEO in advance about the strategic
issues identified in the most recent scorecard so that the agenda can
focus on strategy review and learning, rather than just a short-term
financial performance review and crisis management. The OSM then
monitors the meeting to determine action plans and follows up to ensure
that the plans are carried out. Since the board of directors also plays
an important role in reviewing and guiding strategy, the OSM helps the
chief financial officer prepare the board packet and agenda for board
meetings.
Develop strategy.
Typically,
strategy formulation is the responsibility of the existing strategic
planning unit. The unit performs external and internal competitive
analysis, conducts scenario planning, organizes and runs an annual
strategy meeting, and coaches the executive team on strategic options.
But developing strategy should not be a onetime annual event. After all,
performance measures, such as those supplied by the Balanced Scorecard,
provide continual evidence about the validity of the assumptions
underlying a company’s strategy. Those assumptions can be discussed
periodically by the executive team, which can update the strategy if
appropriate. And strategy development should not be done only by senior
managers. The OSM or strategic planning unit can act as a filter for new
ideas that come from within the organization. We’ve found that most
planning units adapt fairly quickly to the continual strategy
development process we observe at scorecard-driven companies. The
additional processes represent a natural extension of, and complement
to, their traditional work. Problems arise when a scorecard project is
managed by a group from outside planning (such as HR, quality, or an ad
hoc team). As the scorecard acquires strategic importance, conflicts
over strategy development can arise between the planning unit and the
scorecard team. If this occurs, top management should quickly merge the
two groups.
Communicate strategy.
Effective
communication to employees about strategy, targets, and initiatives is
vital if employees are to contribute to the strategy. Canon U.S.A., a
scorecard user, describes its internal communication process as
“democratizing strategy,” and it actively promotes understanding of the
company’s strategy and the scorecard in all business units and support
functions. Strategy communication, therefore, is a natural turf for an
OSM. But as with strategy planning, internal communication is sometimes
another unit’s existing responsibility. In these situations, the OSM has
tended to take an editorial role, reviewing the messages to see that
they communicate the strategy correctly. In cases where the corporate
communications group has little knowledge of or focus on strategy, such
as at Chrysler and the U.S. Army, the OSM takes on primary
responsibility for communicating both the scorecard and strategy to
employees. In either situation, the OSM should always take the lead in
crafting strategy messages delivered by the CEO, because one of the most
effective communication channels is having each employee hear about
strategy directly from the CEO. Finally, as part of its communication
responsibilities, the OSM must cooperate with HR to ensure that
education about the scorecard and its role is included in employee
training programs.
Manage strategic initiatives.
Strategic
initiatives—such as a TQM program or the implementation of CRM
software—are discretionary programs that help companies accomplish
strategic objectives. The executive team typically identifies these
initiatives as part of its annual planning process, although new
initiatives may arise throughout the year. Ideally, the entire portfolio
of such initiatives should be assessed and reprioritized several times
annually. The screening, selection, and management of strategic
initiatives are what drive change in the company and produce results.
Our experience suggests that such initiatives should be managed
separately from routine operations. Typically, they are managed by the
units most closely associated with them (a CRM project, for instance, is
best managed by customer service) or by an ad hoc team drawn from the
functions or units affected. Responsibility for managing initiatives
that already have a natural home should remain with the associated unit
or function. The OSM intervenes only when an initiative falls behind
schedule, is over budget, or is not delivering expected results. But the
OSM should manage initiatives that cross unit and functional lines—it
can thus make sure that they get the resources and attention they need.
In all cases, the OSM retains responsibility for monitoring the progress
of strategic initiatives and reporting on them to top management.
Integrate strategic priorities with other support functions.
Existing
functional departments retain prime responsibility for three other key
processes necessary for successful strategy implementation: planning and
budgeting, human resource alignment, and knowledge management. These
processes are critical for effective strategy execution, and the OSM
should play a consultative and integrative role with the respective
functional departments.
Planning and Budgeting.
At
most corporations, the various functional departments are responsible
for planning how the corporation will allocate resources over the year.
The finance department oversees budgeting and the allocation of cash to
the units and cross-functional initiatives; IT makes recommendations
about investments in databases, infrastructure, and application
programs; and HR makes plans for hiring, training, and leadership
development. For a strategy to be effective, all the functional plans
must be aligned with the strategy. The budgets prepared by the finance
department, for example, should reflect those established in the
strategic planning process and should incorporate funding and personnel
resources for cross-functional strategic initiatives. To ensure this
alignment, the OSM must work closely with all these functional units.
Human Resource Alignment.
No
strategy can be effective unless the people who have to carry it out
are motivated and trained to do so. Motivation and training is, of
course, the natural domain of HR, which typically carries out annual
performance reviews and personal goal setting and manages employee
incentive and competency development programs. It is the responsibility
of the OSM to ensure that HR performs these activities in a manner
consistent with corporate and business unit strategic objectives. The
goal is to make strategy everyone’s job.
Knowledge Management.
Finally,
the OSM needs to ensure that knowledge management focuses on sharing
the best practices most critical for the strategy. If managers use the
wrong benchmarks, the company’s strategy will fall short of its
potential. At some companies, learning and knowledge sharing are already
the responsibility of a chief knowledge or learning officer; in those
cases, the OSM needs to coordinate with that person’s office. But if
such a function does not already exist, the OSM must take the lead in
transferring ideas and best practices throughout the organization.
The New Strategy Calendar
The
exhibit “The New Strategy Calendar” illustrates the activities that a
properly constituted OSM will be engaged in during the year. The
strategy cycle launches at the beginning of the second quarter, when the
OSM starts to plan strategy and update the enterprise scorecard. After
the enterprise strategy meeting, the OSM starts the process of aligning
the organization with the enterprise goals. Before the end of the third
quarter, it will be coordinating with finance to bring unit-level plans
and budgets in line with strategy, and by the beginning of the fourth
quarter, it will be working with HR on aligning the competency
development and incentives of employees with scorecard objectives. While
these calendar-driven processes are going on, the unit continually
engages in control and learning: reviewing and communicating strategy,
managing initiatives, and sharing best practices.
Positioning and Staffing the OSM
Executing
strategy usually involves making changes that only a CEO can empower,
and the OSM will be most effective when it has direct access to the CEO.
Barbara Possin, the director of strategic alignment at St. Mary’s
Duluth Clinic, told us she was able to overcome resistance to her
initiatives because managers knew she had a direct reporting line to the
company’s chief operating and chief executive officers. An OSM buried
deep in the finance or planning department may find it difficult to
command similar respect and attention from senior executives for
strategy management priorities.
The
simplest solution, therefore, is to place the OSM on a par with major
functions, such as finance and marketing, that report directly to the
CEO. The OSM serves, in effect, as the CEO’s chief of staff. But if the
OSM has originated within a powerful function, such a positioning may
not be feasible. In that case, the OSM will usually report to the chief
of the function in which it is nested—such as the CFO or vice president
of strategic planning—but with occasional direct access to the CEO. At
the Mexican insurance company Grupo Nacional Provincial (GNP), for
example, the OSM reports both to the chief executive and to the chief
financial officer. The OSM sets the agenda for a weekly meeting with the
CEO and CFO and for a broader weekly meeting with the six top company
executives. The office of strategy management at GNP also has a matrixed
relationship with 20 Balanced Scorecard managers in the two major
business units and nine support units and with the owners of the major
strategic initiatives. The relationship enables the OSM to coordinate
the strategic planning done in the business and support units.
It’s
simplest to place the office of strategy management on a par with
functions that report directly to the CEO. the office serves, in effect,
as the CEO’s chief of staff.
The
OSM may be an important functional unit, but it doesn’t have to be
large; it is certainly not our goal to encourage companies to build a
new bureaucracy. Although Chrysler employs 13 full-time people in its
OSM, reflecting the unit’s involvement in product development, our
experience suggests that firms with sales of $500 million to $5 billion
and 1,000 to 10,000 employees can get by with fewer than ten people. In
principle, as the exhibit on this page shows, a fully functioning OSM
should not need more than six to eight full-time-equivalent positions to
cope with its activities.
We
have observed that establishing an OSM does not usually involve hiring
expensive new talent. The OSM is typically staffed with people who led
the Balanced Scorecard project—they often come from the planning and
finance functions, but some come from other staff groups such as
quality, HR, and IT. Several organizations we studied have reported that
the people assigned to their OSMs do not constitute a net increase in
the organization’s head count. In many cases, the evolution of a
well-functioning OSM actually helps reduce overall head count, thanks to
the OSM’s role in streamlining and focusing management processes and
helping managers eliminate layers of staff engaged in data gathering and
reporting. The OSM, however, should be assessed by the value it creates
through successful strategy execution, not by whether it can reduce
head count.• • •
Many
organizations have achieved dramatic performance improvements by
sustaining a focus on implementation of strategy. We have captured and
codified a body of knowledge from these successful organizations that
provides the foundation for an emerging professional function focusing
on the management of strategy. An office of strategy management that is
positioned at the level of other senior corporate staff offices and has
responsibility for managing and coordinating all the key strategy
management processes can help companies realize the benefits from this
body of knowledge.
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