Aligning Business and Support Units to Enterprise Strategy
Aligning Business and Support Units to Enterprise Strategy Dr. Robert S. Kaplan Baker Foundation Professor Harvard Business School Chairman, Professional Practice Committee The Palladium Group/Balanced Scorecard Collaborative May 15 -17, 2007 Las Vegas, NV Balanced Scorecard Collaborative/Palladium • 55 Old Bedford Road • Lincoln, MA 01773 • Tel: 781. 259. 3737 • Fax: 781. 259. 3389 • bscol. com
The Balanced Scorecard Model of Value Creation Private Sector Organizations Financial Perspective "If we succeed, how will we look to our shareholders? ” Customer Perspective "To achieve our vision, how must we look to our customers? ” Process Perspective "To satisfy our customers and shareholders, at which processes must we excel? ” Learning & Growth “How do we align our intangible assets to improve critical processes? ” Non Profit and Public Sector Organizations Mission (Customer) Perspective “How do we have a social impact with our citizens/constituents? ” Support Perspective “How do we attract resources and authorization for our mission? ” Process (Operational Capacity) “To have a social impact and to attract resources and support, at which processes must we excel? ” Learning & Growth “How do we align our intangible assets to improve critical processes? ” Financial “How should we manage and allocate our resources for maximum social impact? ” 2 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
Most organisations do not know how to execute strategy. Less than 10% of strategies effectively formulated are effectively executed. - Fortune Magazine Only 15% of the 794 programs reviewed in Fiscal 2005 were rated effective. - Barron’s Between 1988 and 1998, only 13% of companies were able to deliver 5. 5% annual real earnings growth and deliver returns that covered their cost of capital. - Chris Zook, Profit From the Core Companies on average realize only 60% of the financial performance their strategies promise. . . more than one-third of executives surveyed placed the figure at less than 50%. - Harvard Business Review 3 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
According to a recently completed Monitor study, strategy execution is the single most important issue to the executive suite. "Using a 1 -5 scale, please rate the level of interest / concern you have in the following business issues at present. ” All Positions n = 354 Executing the strategy Market trends Forecasting & reporting effectiveness IT capabilities Product innovation / time to market Regulatory, Customer Growing Product / service compliance, and risk service the top line fulfillment management Source: Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level and 56% are from companies with revenue greater than $1 billion ITO / BPO HR Investor relations SCM 4 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
Organizations with a formal strategy execution process in place are dramatically outperforming organizations without formal processes. Yes Do you have a formal strategy execution process in place? No (54%) (46%) …. We have breakthrough results …we are performing better than our peer group Sub-Total 12% 58% 70% 7% 20% 27% …performing at the same level as our peer group. …performing at a lower level than our peer group …not performing at a sustainable level 18% 9% 3% 30% 27% 16% Sub-Total 30% 73% Describe your organization’s current performance. Winners Losers Source: BSCol Research (Survey of 143 performance management professionals, drawn from BSCol On-Line Community, March 2006) 5 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
Balanced Scorecard Hall of Fame for Executing Strategy By Industry 2000 – 2006 6 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
The typical benefits from successfully executing strategy are dramatic. Hall of Fame Company Descriptions Commercial Vehicle Business Unit • Successful merger of 2 mega-banks • Net business profit increased 117% • Moody’s / S&P credit rating from A 2 /BBB to A 1/A • Revenues from $1. 8 B to $9. 8 B • Number one in market share (22%) • Customer satisfaction awards (4 years) (2 years) CGISS S M • Wireless data revenue up 74% M • Fortune – Most admired innovator A • Forbes – One of 26 best managed T U R I T Y (4 years) • Turned $100 M loss to $100 M profit • 55% target market share • 40% revenue growth (3 years) • • Industry leading margins Customer loyalty up Cost per room down Industry leading stock growth Royal Canadian Mounted Police • Stakeholder satisfaction rose 9% to 16% China Resources Microelectronics • Inventory turnover from 1. 4 to 3. 7 • Saved $20 million in one year on protective policing • Viewed as model organization by funding (4 years) organizations • Operating profit grew 70% • Output per employee grew 65% (3 years) • Return on assets from 16% to 137% • Market share = 2 X nearest competitor • World class call centers (3 years) Coffee Growers of Columbia • Exports doubled in value • Debt down 36% • Growers’ price yield increases from 84% to 93% (3 years) 7 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
Strategy-Focused (Hall of Fame) Organizations Use Five Strategy Execution Principles I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP II. TRANSLATE STRATEGY TO OPERATIONAL TERMS V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB 8 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
Strategy Maps and Balanced Scorecards Translate Strategy into Action I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP II. TRANSLATE STRATEGY TO OPERATIONAL TERMS 2. 1 Strategy translated in strategy map 2. 2 Strategy described in Balanced Scorecard 2. 3 Targets identified for all measures 2. 4 Strategic initiatives rationalized 2. 5 Executives accountable for initiatives V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB 9 © 2007 Balanced Scorecard Collaborative and Robert S. Kapl
The strategy map aligns processes and intangible assets to deliver value to customers and shareholders. Productivity Strategy Growth Strategy Long-Term Shareholder Value Financial Perspective Improve Cost Structure Increase Asset Utilization Expand Revenue Opportunities Enhance Customer Value Proposition Customer Perspective Price Quality Availability Selection Functionality Service Product / Service Attributes Operations Management Processes Process Perspective Supply Produce Distribute Manage Risk Partnership Relationship Customer Management Processes Select Customers Acquire New Customers Retain Existing Customers Grow Business with Customers Brand Image Regulatory & Social Processes Innovation Processes Identify New Opportunities Select the R&D Portfolio Design and Develop Launch Environment Safety & Health Employment Community Human Capital Learning & Growth Perspective Information Capital Organization Capital Culture Leadership Alignment Teamwork © 2007 Balanced Scorecard Collaborative and Robert S. 10 Kapl
University of Leeds Strategy Map: 070426_Strategy-Execution_Irish. Mgt_Inst_Norton_PRINT © 2007 Balanced Scorecard Collaborative and Robert S. 11 Kapl 15
Strategy-Focused Organization Use a Best Practices Framework I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP II. TRANSLATE STRATEGY TO OPERATIONAL TERMS III. ALIGN THE ORGANIZATION TO THE STRATEGY 3. 1 Corporate contribution to strategy defined 3. 2 Enterprise scorecard guides business units 3. 3 Enterprise scorecard guides support units 3. 4 Scorecards align suppliers and/or customers 3. 5 Scorecard reports to board and/or shareholders V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB © 2007 Balanced Scorecard Collaborative and Robert S. 12 Kapl
3. Alignment: Cascade & Integrate Objectives Throughout the Organization © 2007 Balanced Scorecard Collaborative and Robert S. 13 Kapl
University of Leeds Cascades its University Strategy Map Out to Each Academic Unit Defined set of University Measures Develop key University Targets Develop Faculty Measures Develop key Faculty Targets © 2007 Balanced Scorecard Collaborative and Robert S. 14 Kapl
Senior executives, business unit managers, and the CIO struggle with managing the IT resource. The three essential questions: The CEO and CFO ask: What is the return from our investment in Information Technology? Business managers ask: Why can’t you run IT more like a business (and focus on me, your customer)? The CIO asks: How can IT meet the growing needs of its customers (the business units) given the constraints placed on its resources? © 2007 Balanced Scorecard Collaborative and Robert S. 15 Kapl
Strategic Support Services Form the Bridge Between Enterprise and Functional Strategy HR IT 1 FIN 2 Enterprise Strategy Strategic Support Service Portfolio (Strategy Map) Strategic HR Service Portfolio • Strategic Competency Development • Organization and Leadership development • Performance Management Process Strategic Information Capital Portfolio • Technology Infrastructure • Transaction Processing Applications • Analytic and Decision Support Applications Strategic Financial Service Portfolio • Transactions, Controls & Processing • External Compliance & Communication • Planning and Decision Support Services © 2007 Balanced Scorecard Collaborative and Robert S. 16 Kapl
Magnify the Power of Aerospac e Inc. Through IT to Realize the Real. Time Net -Centric Strategy that Focuse d Actions Aerospace Inc. Enterprise Information Systems Strategy Serve the National Interest and Increase Shareholder Value Improve margins – V 1 “Guarantee secure, reliable, high-quality solutions” – C 1 Business and Technology Leaders say: “Show me the value” – C 2 “Deliver on commitments to enable my Mission Success” – C 3 Our Diverse, Empower ed Workforce “Understand my unique business and customer” – C 4 “Innovate with me to win business and keep it sold” – C 5 Run the Business Earn Trusted Partnerships Advance the Business Continuously improve solutions, performance, and responsiveness – P 8 Anticipate, influence, and deliver on expectations – P 11 Transform AI through effective collaboration, net-centric capabilities, and innovative solutions – P 13 Build the next generation infrastructure and business systems – P 6 Drive process improvement through innovative information access – P 7 Understand manage unit costs – P 5 executes Grow revenue – V 3 Leverage investments – V 2 Drive standardization and consolidation – P 1 Strengthen communication, interactions, and relationships – P 10 Accelerate horizontal integration – P 12 Aggressively pursue knowledge of business strategies – P 9 Achieve Operational Excellence Through Disciplined Performance Effectively select and leverage suppliers – P 2 Attract, develop, and retain a talented, energized, strategy-focused workforce – W 1 Excel at program management and system engineering – P 3 Live our values and demonstrate SPIRIT – W 2 Optimize portfolios of assets, initiatives, and service offerings – P 4 Promote creative thinking and innovative solutions – W 3 © 2007 Balanced Scorecard Collaborative and Robert S. 17 Kapl
Strategy-Focused Organizations Use a Best Practices Framework I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP II. TRANSLATE STRATEGY TO OPERATIONAL TERMS V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB 4. 1 Strategic awareness created 4. 2 Personal goals aligned 4. 3 Personal incentives aligned 4. 4 Competency development aligned © 2007 Balanced Scorecard Collaborative and Robert S. 18 Kapl
Motivate to Make Strategy Everyone’s Job Create Strategic awareness : “Communicate seven times seven different ways” — Personal relevance (WIIFM) brings the strategy to life — Sustained communication uses different channels to get the message across • • Leadership meetings CEO random visits to employees Dear Colleague Quarterly Letter in Mellon News Learning lunches & informal discussions Intranet Working groups facilitated by HR Staff briefings Source: Presented by Jack Klinck, Vice Chairman, Mellon Europe at BSCol European Summit, June 2005 © 2007 Balanced Scorecard Collaborative and Robert S. 19 Kapl
You can’t tell them just once. “Communicate Seven Times, Seven Ways” Posters Portal & Website Publications Rolling Status Training © Lockheed Martin Enterprise Information Services © 2007 Balanced Scorecard Collaborative and Robert S. 20 Kapl
Alignment: “Put Yourself On The Map” © Lockheed Martin Enterprise Information Services © 2007 Balanced Scorecard Collaborative and Robert S. 21 Kapl
Making Strategy a Continual Process: The role for scorecards and dashboards I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP II. TRANSLATE STRATEGY TO OPERATIONAL TERMS V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY A. RESOURCE MANAGEMENT 5. 1 Budget is driven by strategy 5. 2 Planning linked to strategy 5. 3 Portfolio of strategic initiatives aligned to themes B. KEY PROCESS MANAGEMENT 5. 4 Process improvement aligned to strategy 5. 5 Best practice sharing in place IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB C. LEARNING & CONTROL 5. 6 Strategy reviewed and adapted on a regular basis 5. 7 Data and analytics guide strategy © 2007 Balanced Scorecard Collaborative and Robert S. 22 Kapl
How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY 2. STRATEGY TRANSLATION a. Define strategic objectives and themes b. Select measures and targets c. Select strategic initiatives OPERATIONAL d. 3. Align the organization PLANNING a. Improve key processes b. Develop sales forecast c. Plan resource capacity d. Prepare budgets DEVELOPMENT a. Define mission, vision, and values b. Conduct strategic analysis c. Formulate strategy Strategic Plan. Strat. Ex 5. STRATEGY TESTING AND ADAPTING a. Conduct profitability analysis b. Conduct strategy correlation analysis c. Examine emerging strategies Balanced Scorecard Strategy Map 4. MONITORING AND LEARNING b. Hold strategy reviews Operating Plan P&L’s Op. Ex/Cap. Ex Dashboards a. Hold operations reviews EXECUTION Results Process Initiative
Linking Process Management to BSC Strategic Processes Strategy Map §To achieve this strategic process objective, how must we improve? © 2007 Balanced Scorecard Collaborative and Robert S. 24 Kapl
Linking a Balanced Scorecard R&D strategic objective to critical success factors and metrics. 18. BE AGILE AND EFFECTIVE ON THE DEVELOPMENT OF CUSTOMERORIENTED SOLUTIONS Strategic Objective and Metrics Critical Success Factors # of Protected Ideas NEW PRODUCTS PLAN AND STRATEGY DEVELOPMENT ESTABLISH PRIORITIES AND PROTECT NEW PRODUCT IDEAS l HAVE AN IN-DEPTH UNDERSTANDING ABOUT OUR MARKETS AND THEIR TARGETSEGMENTS BE CONTINUOUSLY INNOVATIVE ON OUR PRODUCT LINES Business Processes Metrics l IDEA TESTING RDEI - R&D Effectiveness Index Time-to-Market HAVE A CONTINUOUS MONITORING PROCESS RELATED TO OUR PRODUCTS PERFORMANCE # of Cocreated Proposals PROPOSALS DEVELOPME NT % Performance. Controlled Products SCHEDULING, BUDGETING AND PRIORITIES ESTABLISHIN G SALES AND NEW PRODUCTS DEVELOPMEN T EVALUATION © 2007 Balanced Scorecard Collaborative and Robert S. 25 Kapl
Dashboards articulate the critical link between strategy management and operations management MOVE MODEL MA P THEME linked to PROCESS supports THEME PROCESS linked to METRICS improve PROCESS § Identify operational processes key to executing strategy and manage those processes using analytical models rather than instincts § Analytical models identify drivers to the process and display these drivers on a dashboard accessible to managers that can make an impact § Drivers include not only financial (lagging) metrics, but operational, environmental, demographic, and other situational leading indicators § Models will be updated with actual results and the cause-and-effect correlations will be improved § Dashboards tailored based on the user and the ability to “drill-down” from a © 2007 Balanced Scorecard Collaborative strategic objective to a low-level operational metric maintained across the and Robert S. 26 Kapl
With advances in technology, next-generation dashboards can now fulfill the role of full-fledged performance management tools Advanced visualization methods, with ability to represent large, complex data sets, makes information “actionable” Alignment to strategy – focused on processes that are key to overall strategy execution Pre-defined navigation paths to facilitate analysis and improve user experience, improved audit trails and data Ability to display data from multiple sources, mix of quantitative and qualitative information © 2007 Balanced Scorecard Collaborative and Robert S. 27 Kapl
How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY 2. STRATEGY TRANSLATION a. Define strategic objectives and themes b. Select measures and targets c. Select strategic initiatives OPERATIONAL d. 3. Align the organization PLANNING a. Improve key processes b. Develop sales forecast c. Plan resource capacity d. Prepare budgets DEVELOPMENT a. Define mission, vision, and values b. Conduct strategic analysis c. Formulate strategy Strategic Plan Strat. Ex . 5. STRATEGY TESTING AND ADAPTING a. Conduct profitability analysis b. Conduct strategy correlation analysis c. Examine emerging strategies BSC Strategy Map 4. MONITORING AND LEARNING b. Hold strategy reviews Operating Plan P&L’s Op. Ex/Cap. Ex Dashboards a. Hold operation s reviews EXECUTION Results Process Initiative
Companies use strategy scorecards and operational dashboards to inform their different management meetings. § Operational Review Meetings: Role for KPI Dashboards — Frequent (daily, twice weekly, weekly) — Departmental and functional personnel — Identify and solve operational problems (late deliveries, equipment downtime, supplier problems) — Promote continuous improvement (better, faster, cheaper) § Strategy Review Meetings: Role for Balanced Scorecard and Time-Driven ABC Reports — — Monthly Management team; cross functional, multiple business units Discuss and solve problems with strategy implementation Manage product and customer profitability © 2007 Balanced Scorecard Collaborative and Robert S. 29 Kapl
The leadership team uses the BSC to review performance, test strategic hypotheses and make informed decisions Use of a BSC Report in Strategy Review Meetings 1 Identify Performance Issues: Focus on the performance of objectives NOT measures. I 03 Identify Adverse Trends 2 3 Support trends 5 K 01 Develop Quality Tracking Program 4 K 01 Develop Quality Tracking Program Develop program to track all incident root causes identified during reviews and perform trend analysis IO 3 Identify Adverse Trends Application needs to be selected within next 60 days to stay on schedule Analyze Objective Performance: What are the measures telling us? Are the measures driving change and adding focus? What are the root causes of what’s occurring? What are the expectations for the future? And, are current initiatives sufficient to close the performance gap? Are initiative on track to deliver expected value? If not, why and what can be done to remedy issues? What action steps – including additional or different initiatives - are required to improve performance going forward? Objective: Discussion/Update: 6 Recommendations/Required Actions: Person(s) Responsible: Action Item Detail: 7 1. 2. 3. Due Date: Priority (A, B, C): Take Action: Discuss and agree on how to remedy issues. Assign accountability to ensure decisions are implemented. ILLUSTRATIVE © 2007 Balanced Scorecard Collaborative and Robert S. 30 Kapl
How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY 2. STRATEGY TRANSLATION a. Define strategic objectives and themes b. Select measures and targets c. Select strategic initiatives OPERATIONAL d. 3. Align the organization PLANNING a. Improve key processes b. Develop sales forecast c. Plan resource capacity d. Prepare budgets DEVELOPMENT a. Define mission, vision, and values b. Conduct strategic analysis c. Formulate strategy Strategic Plan. Strat. Ex 5. STRATEGY TESTING AND ADAPTING a. Conduct profitability analysis b. Conduct strategy correlation analysis c. Examine emerging strategies Balanced Scorecard Strategy Map 4. MONITORING AND LEARNING b. Hold strategy reviews Operating Plan P&L’s Op. Ex/Cap. Ex Dashboards a. Hold operations reviews EXECUTION Results Process Initiative
Software Role in Strategy Management Application software should support the Balanced Scorecard approach to creating a Strategy-Focused Organization: § clearly communicate strategy and measures across the organization § display linkages among objectives, measures, and initiatives § capture and analyzing performance data across the organization § provide relevant information on results in a clear, concise and useful manner A systematic selection approach supports unlocking the full potential of the Balanced Scorecard management system © 2007 Balanced Scorecard Collaborative and Robert S. 32 Kapl
Illustrative The Objectives and Measures shown are for illustration purposes only. © 2007 Balanced Scorecard Collaborative and Robert S. 33 Kapl
What Are Some of the Benefits from Automated BSC Solutions? “You don’t have to wait for the next meeting to be informed. Management meetings focus only on the real issues…. We expect to save $5 mm a year from administration costs alone by replacing spreadsheet managed Balanced Scorecards with [an automated application]. ” Peter Geelen, CIO Philips Corporate Control “Instant communication…. Easy to understand view of the data…. Saves 20 – 40 hours of labor per month preparing charts…. Saves management time reviewing results. ” Ben Patterson, Unisys Corporation “[The integration of an automated BSC application has increased the] visibility that we are experiencing around the intangibles, the knowledge, the idea generation and helping that differentiate what we do. ” Michael Collins, World. Travel BTI Formally Mc. Cord Travel Management © 2007 Balanced Scorecard Collaborative and Robert S. 34 Kapl
Strategy-Focused Organizations Use a Best Practices Framework II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP 1. 1 Leaders drive strategy execution 1. 2 Executives make case for change 1. 3 Leaders reinforce strategic priorities 1. 4 Well articulated strategy exists 1. 5 Office of Strategy Management established V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB © 2007 Balanced Scorecard Collaborative and Robert S. 35 Kapl
Strategy Management: An Emerging Professional Group Managing Strategy OPS CSMO Managing Quality Managing Money CFO Executive Team • Black Belts • ISO Certified Managing Customers MKTG Held together by a shared view of the strategy • Accountants (CPAs) • Controllers CEO • Market Research • Brand Management Managing Technology • Engineers • Scientists CIO Managing People • Aligning and Developing CHCO Human Capital © 2007 Balanced Scorecard Collaborative and Robert S. 36 Kapl
The Office of Strategy Management facilitates nine strategy management processes throughout the year. Strategy Management Processes Q 1 Enterprise Strategic Planning Organization Planning and Alignment Q 2 Q 3 q CEO/Executive Team Modify the Corporate Scorecard / Strategy Map q BSC Project Team (OSM) Align the Organization • Corporate and business units aligned • Business and support units aligned • Board of Directors aligned Modify Business and Support Unit Scorecards Planning / Budgeting • Budgets • Finance • Plans • IT • Initiatives • HR Employee Alignment • Personal goals • Employee incentives • Personal development Employee Alignment Review Strategy and Operations q LOB Leaders q Support Unit Leaders q BSC Project Team (OSM) q q Chief Financial Officer Human Resources Officer Chief Information Officer Chief Operating Officer q Human Resources Officer q CEO/Executive Team/OSM Manage Strategic Initiatives q Program Office (OSM? ) Share Best Practices q Chief Knowledge Officer Communicate Strategy Coordinated By Q 4 Annual Update of Strategy • Clarify Vision • Adapt Corporate Strategy Financial & Resource Planning Managemen t Control & Learning Accountable Executives Annual Cycle q Corporate Communications O F F I C E O F S T R A T E G Y M A N A G E M E N T © 2007 Balanced Scorecard Collaborative and Robert S. 37 Kapl
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