Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
The Balanced Scorecard: Translating Strategy Into Action (33 page)
An important element in the planning process is to identify the linkages of the strategic business unit to other SBUs in the corporation and to functional activities done at the corporate level. The linkage to other SBUs provides opportunities for mutually reinforcing action and sharing of best practices. These opportunities include developing and sharing knowledge about critical technologies and core competencies, coordinating marketing efforts to common customers, and sharing production and distribution resources where significant economies of scale or scope exist. One of the important corporate-level functions is to provide mechanisms whereby such opportunities for synergy across decentralized SBUs can be identified and exploited. The Balanced Scorecard provides such a mechanism.
For example, Figure 10-8 shows how Kenyon Stores used the scorecard to coordinate strategic planning and action for its individual operating companies. The corporate scorecard defined the common strategic priorities for all the operating companies. Each SBU then developed its own strategy and Balanced Scorecard, in which the corporate agenda was tailored to its specific circumstances. Kenyon’s centralized support functions could then build on the scorecards of the individual operating companies to develop their own strategic plans and initiatives that would service the objectives of individual SBUs and also achieve the economy-of-scale operations that justified a centralized resource. For example, the operating company SBUs all leased real estate in malls around the country. Since real estate was not a differentiator for each operating
company, the corporation established a central real estate department that developed expertise in identifying outstanding locations and in contracting with real estate developers and shopping-mall management groups. The real estate department deployed its considerable experience to the benefit and individual needs of each SBU.
The coordination process, facilitated by the information exchange via corporate, SBU, and support department Balanced Scorecards, enabled the real estate department to identify where leases could be transferred across operating company SBUs; for example, when one SBU was contracting stores in an area, another SBU was growing in the same area. While such coordination could, theoretically, have been done in the past, in practice, information sharing about the individual SBU strategies was not sufficiently detailed to accomplish such cross-SBU coordination. The explicit articulation of multiyear objectives and initiatives through the Balanced Scorecards enabled corporate support departments to deliver dramatically better service to the operating company SBUs.
Figure 10-8
Using the Balanced Scorecard to Manage Cross-Business Synergies
Other companies are also using their balanced scorecards to force their corporate-level functions to become more efficient and more customer focused. As discussed in
Chapter 8
, Larry Brady of FMC Corporation has queried his staff departments about their strategy. Are they being retained because they are lower cost than external suppliers of the service or relative to smaller groups that could be located within each operating company? Or are the groups retained at the corporate level because they offer unique or superior services that could not be obtained from outside suppliers, or from decentralized groups in the operating companies? If the centrally supplied service is not offering lower cost, unique products, or superior service, the theory for having a corporate-level group supplying this service evaporates.
Similarly, Pioneer Petroleum used a structured approach to achieve cross-functional integration. Pioneer knew that it had to break a historical culture of staff unit domination of the business. It realized that significant economies of scale resulted from the shared management and supply of certain issues like franchise development, advertising, environmental performance, and safety programs. The problem was that the staff groups had lost touch with the market and had become costly and inefficient. To reorient the business, Pioneer required each corporate group to develop a “service agreement” that defined the relationship between the group and its customers, the operating SBUs. The agreement detailed the service to be provided to the SBU, as well as its cost, response time, and level of quality. The service agreement was incorporated in a Balanced Scorecard for the corporate-level staff group.
The scorecard provides a common framework for organizing the planning process of corporate support departments. It enables these departments to understand the strategies of the entire corporation and the individual SBUs so that the support departments can develop and deliver better services that help the operating units and corporation achieve their strategic objectives.
Currently, most organizations have separate processes and separate organizational units for strategic planning and for operational budgeting. The strategic planning process—such as the process that defines long-range plans, targets, and strategic initiatives discussed so far in this chapter—operates on an annual cycle. In the middle of each fiscal year, senior executives go off-site, for several days, to engage in active discussion, facilitated by senior planning and development managers, and, occasionally, external consultants. The outcome from this exercise is a strategic plan for where the company expects (or hopes, or prays) to be in three, five, and ten years. Typically, these expectations are codified into documents that sit on executive bookshelves for the next 12 months.
Ongoing throughout the year is a separate budgeting process, run by the finance staff, to set financial targets for revenues, expenses, profits, and investments for the next fiscal year. This process culminates in month 10 or 11 of the year with an approved budget for the upcoming year. The budget consists almost entirely of financial numbers, typically bearing little relationship to the five-year targets in the now-hibernating strategic plan.
Which document gets discussed during the next year when business unit and corporate managers meet monthly and quarterly? Usually only the budget, as the periodic reviews focus on comparison of actual with budgeted results, line item by line item, with explanations demanded for large variances. When is the strategic plan discussed? Probably during the next off-site annual strategic planning meeting, when new three-, five-, and ten-year plans are formulated.
Strategic planning and operational budgeting processes are too important to be treated as independent processes. Strategic planning must be linked to operational budgeting if action is to be tied to vision. The targeting process described earlier in this chapter sets aspirations for what the business unit must achieve for breakthrough performance in the strategic measures in the four scorecard perspectives. Resources and initiatives are deployed to start the journey, to close the gap between current performance and the stretch targets to be achieved during the next three to five years. But managers cannot wait for three to five years to determine whether their strategy, their theory of the business, is valid. They need to continually test both the theory underlying the strategy and how the strategy is being implemented. A necessary condition for such testing is the formulation of specific short-term targets for the scorecard measures. These short-term
targets, or milestones, are the tangible expression of managers’ beliefs about the speed and impact of current programs and initiatives on strategic measures.
In effect, this process expands the traditional budgeting process to incorporate strategic as well as operational targets. Traditionally, the annual budgeting process establishes detailed short-term targets for financial measures, such as sales, operating expenses, gross margin, general and administrative expenses, operating margin, net profit, cash flow, and return on investment. It also establishes and authorizes spending levels for capital investments, research and development, and for marketing and promotional activities. Such detailed, short-term financial planning remains important, but the budgeting process should encompass, as well, expected short-term performance on the strategic objectives and measures of the other three scorecard perspectives. That is, as part of the integrated planning and budgeting process, executives should establish short-term targets for where they expect to be, monthly or quarterly, on the outcome and performance driver measures for customers and consumers, innovation, operational processes, as well as employees, systems, and organizational alignment. These milestones, for the upcoming year, establish the expectations for the short-term achievements along the long-term strategic path the organization has chosen.
If the target-setting process of the long-range plan is conducted appropriately, the short-term budgeting process simply involves translating the first year of a five-year plan into operational budgets for strategic objectives and measures in the four scorecard perspectives.
The processes described in this chapter—planning, targeting, aligning resource allocation and strategic initiatives, and budgeting—are critical if lofty and ambitious strategic objectives are to be translated into actions and reality. For many companies, the scorecard process emphasizes the early stage of the new management process: translating vision and strategy into objectives and measures that can be communicated to participants internal and external to the organization. Unless, however, real resources are directed toward achieving these objectives, the objectives will remain distant goals, not tangible targets to which the organization is committed. By establishing long-term targets for the strategic measures, by directing
strategic initiatives and significant resources toward achieving them, and by specifying short-term milestones along the strategic path, managers become committed to and accountable for achieving the organizational vision.
1
. S. Sherman, “Stretch Goals: The Dark Side of Asking for Miracles,”
Fortune
(November 13, 1995), 231–232.
2
. C. Y. Baldwin and K. B. Clark, “Capital-Budgeting Systems and Capabilities Investments in U.S. Companies after the Second World War,”
Business History Review
(Spring 1994): 73–109.
3
. Ibid.; and R. S. Kaplan, “Must CIM Be Justified by Faith Alone,”
Harvard Business Review
(March–April 1986): 87–97; R. L. Hayes and D. A. Garvin, “Managing as If Tomorrow Mattered,”
Harvard Business Review
(May–June 1982): 71–79.
4
. G. Donaldson,
Managing Corporate Wealth: The Operation of a Comprehensive Financial Goals System
(New York: Basic Books, 1984).