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Part I
Strategic Performance with Balanced Scorecards
In This Part
- Chapter 1: Accelerating Strategic Performance
- Chapter 2: Developing Your Strategic Foundation
- Chapter 3: Preparing to Build Your Balanced Scorecard
- Chapter 4: Step-by-Step to Building Your Strategy Map
- Chapter 5: Step-by-Step from Strategy to Action
- Chapter 6: Step-by-Step to Selecting Metrics and Setting Targets
- Chapter 7: Step-by-Step to Developing Your Implementation Plan
- Chapter 8: Step-by-Step to Rollout and Strategic Reviews
Chapter 1
Accelerating Strategic Performance
The essence of strategy is choosing what not to do.
âMichael Porter
The rate of change in the business world is accelerating. To get aheadâin fact, just to keep upâorganizations of all types must accelerate their strategic performance.
They have to work with better performance, more precise focus, and better strategic alignment. For this to happen, all parts of the organization must clearly understand and be firmly aligned with strategic goals.
In the last two decades, a strategic management system has been developed that enables organizations to achieve the clarity and alignment necessary to accelerate strategic performance. That system is the Balanced Scorecard.
Managing with a 500-Year-Old System
Until recently, organizations have used the same accounting system to track assets and value production that was used 500 years ago in Venice, Italy. In 1494, Fra Luca Pacioli, Franciscan monk and friend of Leonardo da Vinci, wrote Everything about Arithmetic, Geometry, and Proportions (see Figure 1-1). It was the first best-selling business book to come off of Gutenbergâs printing press.
start figure end figure What made his book a best-seller throughout Europe was that it contained detailed instructions on how the merchants of Venice kept their accounts using double-entry accounting. The book included sections on
- Modern accounting cycles
- Double-entry accounting
- Journals and ledgers
- Assets, liabilities, capital, income, and expenses
- Closing
- Trial balances
The book blazed through the halls of commerce in Europe because, for the first time, it gave business people a way to value their tangible assets and measure how they were producing value. But what is surprising is that we still use the same accounting system used by the merchants of Venice 500 years ago.
The Failure of Modern Management Systems
Research by Margaret Blair of the Brookings Institute into the market value of corporations listed in the Compustat database shows that the market value of U.S. corporations has shifted significantly from tangible to intangible assets. As shown in Table 1-1, in the ten years from 1982 to 1992, the contribution of intangible assets to market value rose from 32 percent to 68 percent. Subsequent studies from multiple sources estimate that since 1998, intangible assetsâ contribution to corporate value is approximately 85 percent.1
Table 1-1: The Growth of Intangible Asset Contribution to Corporate Value
| 1982 | 32% | 68% |
| 1992 | 68% | 32% |
| 1998 | 85% | 15% |
More recent research reflected in the Ocean Tomo 300 Patent Index shows that 80 percent of the market value of companies in the United Statesâ Standard & Poorâs 500 Index is due to intangible assets for the period from 2005 to 2010.
How can intangible assets such as people, processes, patents, and data be monitored and managed effectively using a 500-year-old system designed for use with tangible assets?
Ram Charan, international consultant and coauthor of Execution,2 wrote an article in Fortune magazine titled âWhy CEOs Fail.â In writing about highly experienced, well-known CEOs who lead their companies into failure, he said, âIn the majority of casesâwe estimate 70 percentâthe real problem isnât the high-concept boners the boffins love to talk about. Itâs bad execution.â3
Charan goes on to write that most CEOs are hard-working, experienced, brilliant people. His research found one problem common to all the failures:
So executives and managers face two serious problems. First, the source of value production has switched from tangible assets that can be monitored with current accounting systems to intangible assets that are difficult to manage. Second, most corporations fail at executing their strategy.
A Modern Strategic Management System
In 1992 Harvard professor Robert Kaplan and consultant David Norton published the article âThe Balanced ScorecardâMeasures that Drive Performanceâ in the Harvard Business Review.4 The ideas in this article sowed the seeds of a strategic management system to translate strategy into action, to monitor strategic execution, and to align organizations around strategy.
Initial attempts to use the Balanced Scorecard seemed to either propel organizations to success or burden them with administrative overhead and dismal results. The difference between failure and success was often in the selection of metrics used to measure strategic execution. In 2000, Kaplan and Norton published another article in the Harvard Business Review titled âHaving Trouble with Your Strategy? Then Map It.â5 This article outlined how to build a visual map that shows the objectives and causal links necessary to execute a strategy. These causal links enabled executives to identify the key metrics that drive success. These two ideas, the Strategy Map and the Balanced Scorecard, combined with more recent developments, have built a strategic management system that is an important part of modern business management.
The Strategy Map represents how an organization will execute its strategy. The Strategy Map shows the objectives needed to execute the strategy and the causal links between objectives. The Strategy Map is a tool for clear communication and helps identify the âcritical fewâ metrics to monitor strategic execution. You can learn more about Strategy Maps in Chapter 4.
The Balanced Scorecard is part of a system that translates strategy into action. The Balanced Scorecard gives a balanced view in four perspectives of how well an organization is driving execution and how successful the results are. The four perspectives in the Balanced Scorecard and Strategy Map give executives a more balanced view of their organizations. They go beyond financial measures to include finance, customer and marketplace, internal operations, and learning and growth. These categories include people, culture, intellectual property, and IT infrastructure.
The Strategy Map and Balanced Scorecard can take one to three years to fully implement in an organization, but the results can be impressive. A Balanced Scorecard helps you do the following:
- Clarify strategy. The discussions and thought that go into developing the Strategy Map bring clarity and understanding to the executive team in terms of the strategy and interplay between departmental silos. The graphical Strategy Map pinpoints for employees how they contribute to strategic success.
- Translate strategy into action and execute it. The Strategy Map, combined with an Action Plan and Implementation Plan, give everyone a clear road map showing how the strategy will be translated into action. The Balanced Scorecard is used to stay on track and to monitor execution.
- Align business units around the strategy. Most organizations develop âsilos,â functional departments or divisions that are more concerned with their own success than they are with achieving success for the entire organization. But developing the Strategy Map and Action Plan requires that the walls between silos come down. Focusing on Strategic Themes that cross functional boundaries forces departments to work together, breaking down silos even more.
- Communicate the strategy to all levels. The process of cascading the Balanced Scorecard through the organization gives each level the opportunity to contribute to organizational success. It allows executives to communicate with functional managers about how to achieve strategic goals. It allows functional managers to provide feedback to executives about capability and capacity.
- Monitor and manage strategic execution. Research has shown that most executive staff members spend less than 10 percent of their time monitoring strategy and execution. Instead of leading through strategy, executive staff members often become embroiled in operational performance, something better left to managers. Using the Balanced Scorecard as an agenda gives executive meetings a central focus on strategic leadership.
Why Use a Balanced Scorecard?
Building a Strategy Map and Balanced Scorecard for an organization follows much the same process as taking a trip to a specific location. To take a trip you need to do the following:
- Select a destination.
- Agree on the type of trip.
- Agree on the route.
- Map the route.
- Plan time and resources.
- Travel.
- Stay on course.
Leading a business in our high-speed world isnât that different from flying a jet. Imagine boarding a small jet, pausing at the entry, and asking the pilot a few questions:
