Balanced Scorecard Evolution

A Dynamic Approach to Strategy Execution

Paul R. Niven

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118939000
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

The best plan is useless without effective execution

The future of business has become so unpredictable that your five-year plan may be irrelevant next week. To succeed in the modern market, you must constantly assess your progress and adapt on the fly. Agility, flexibility, continual learning, and adaptation are the new rules of business success. A differentiating strategy is crucial, but it will only lead to competitive advantage if you execute it flawlessly. You'll succeed only if you have the right insight for strategic planning and the agility to execute your plan.

Balanced Scorecard Evolution: A Dynamic Approach to Strategy Execution provides the latest theory and practice from strategic planning, change management, and strategy execution to ensure your business is flexible, future ready, and primed for exceptional execution. Author Paul R. Niven guides you through the new principles of The Balanced Scorecard and shows you how to apply them to your planning and strategy execution endeavors.

• Read case studies that illustrate the theory and practice of strategic agility and execution
• Learn how to create the objectives, measures, targets, and strategic initiatives that can make your plan a reality
• Use the latest change management techniques to boost strategy execution success
• Gain the knowledge and tools you need to face your challenges head-on
• Motivate your employees to change behaviors toward plan accommodation

Making a plan isn't enough. You must actually take steps to implement your plan, and this requires excellent leadership skills. Change can be hard, and your organization may be resistant. Balanced Scorecard Evolution: A Dynamic Approach to Strategy Execution provides everything you need to make things happen.

CHAPTER 1
What Exactly Is a Balanced Scorecard?

ORIGINS, AND A BRIEF HISTORY, OF THE BALANCED SCORECARD

Although its conceptual roots run deep, through work conducted by management thinkers and practitioners from Peter Drucker to Abraham Maslow, including French accounting scholars who developed a similar approach in the 1930s, the Balanced Scorecard as we know it today was invented by two men, Robert Kaplan and David Norton.

The world was introduced to the concept in a 1992 Harvard Business Review article, “The Balanced Scorecard—Measures that Drive Performance.”¹ That article was based on a research project conducted by Norton's consulting firm, which studied performance measurement in companies whose value creation was highly dependent on intangible assets.² As strident advocates for the power of measurement to drive focus and accountability, Kaplan and Norton were convinced that if organizations were to derive the maximum value from their investments in intangible assets, those same intangibles had to be integrated into their measurement systems. At the time, virtually all organizations were measuring financial results, and many were also collecting data on generic customer metrics, such as satisfaction and market share, along with measures of quality and efficiency. With the inclusion of measures tracking intangible assets such as employee skills and engagement, it appeared that management could now confidently cover their measurement bases.

A significant problem existed, however. Many companies that collected data from these diverse areas failed to link the measures together in a meaningful and coherent pattern, instead choosing to select an ad hoc group that simply represented different aspects of the firm's operations. Despite their efforts, most received few benefits. In fact, some early adopters of quality metrics, for example, actually saw their share prices fall dramatically. Kaplan and Norton provided two immediate and profound enhancements. First, they codified the collection of metrics, calling it a Balanced Scorecard and provided a succinct taxonomy that ensured consistency in application. Rather than simply collecting measures that spanned a firm's operations, Kaplan and Norton created the four-perspective framework of:

1. Financial
2. Customer
3. Internal processes
4. Learning and growth

Organizations now possessed a vocabulary for balanced measurement that was previously absent. The measures chosen to populate each perspective were not selected at random but, in Kaplan and Norton's second major contribution, directly translated from the organization's strategy, which endowed them with context for discussion, analysis, and learning. Now, instead of relying on generic financial and nonfinancial indicators, companies could analyze their unique strategic path and create performance measures that would clearly indicate whether or not they were in fact executing their chosen strategy. This seemingly simple, and in hindsight obvious, pronouncement was the breakthrough that was to set the Balanced Scorecard on an astonishing trajectory of acceptance and success. Executives the world over had lamented the difficulty of executing strategy but, with the Balanced Scorecard, Kaplan and Norton put strategy at the center of the firm's orbit by embedding it directly into the measurement process.

Not all was perfect in Balanced Scorecard land, however. Some early adopters struggled with the selection of appropriate performance measures, and received scant benefits from their investment in the Scorecard system. Key to their frustration was finding context for the selection of measures that would gauge strategy execution, and this quickly led to another milestone innovation on the Balanced Scorecard's path—the introduction of strategic objectives. Organizations began prefacing their discussion of measures with that of objectives, concise statements of what they had to do well in each of the four perspectives to execute successfully. So, rather than beginning the process by asking, “What measures are best for us?” they started by asking what they needed to do well in each perspective, and strategy maps were born.

Fast-forward 20 years, several books from Kaplan and Norton, myself, and others, and tens of thousands of successful implementations later, and we find that the Balanced Scorecard is one of the world's most popular management frameworks.³

The model's ascendance has not been confined to private sector firms, as both government and nonprofit organizations have steadily migrated to the Balanced Scorecard in order to improve focus, more effectively allocate scarce resources, and, of course, execute strategy. So widely accepted and effective has the Scorecard been that the Harvard Business Review hailed it as one of the 75 most influential ideas of the twentieth century. Amid all this acclaim, however, challenges inevitably arise, and the Balanced Scorecard faces an interesting one. In reaching such delirious heights of success it has become synonymous with measurement in the minds of many, regardless of how much (or little) knowledge they actually possess regarding the framework itself. Therefore, many misconceptions, often dangerous and irresponsible, exist and can sometimes derail success. Beginning with the next section of this chapter, and continuing throughout the book, we'll thoughtfully explore the terrain that is the Balanced Scorecard, tackling the misconceptions, exposing the myths, and, most importantly, ensuring you possess the know-how necessary to build an authentic Balanced Scorecard that can transform your business.

BALANCED SCORECARD PERSPECTIVES

You may be wondering why the section following the origins of the Scorecard is not, “What is a Balanced Scorecard?” Before I outline the model it's important to understand the four distinct, yet related, perspectives of performance that bring it to life—Financial, Customer, Internal Process, and Learning and Growth—as they form the scaffolding upon which the entire Balanced Scorecard is constructed.

The etymology of the word perspective is from the Latin perspectus: “to look through” or “see clearly,” which is precisely what we aim to do with a Balanced Scorecard—examine the strategy, making it clearer through the lens of different viewpoints, and therefore more amenable to execution. Any strategy, to be effective, must contain descriptions of financial aspirations, markets served, processes to be conquered, and the people who will steadily and skillfully guide the ship to success. Thus, when assessing our progress it makes little sense to focus on just one aspect of the strategy when in fact, as Leonardo da Vinci reminds us, “Everything is connected to everything else.”⁴ To compose an accurate picture of strategy execution it must be painted in the full palette of perspectives that comprise it. Therefore when developing a Balanced Scorecard we use the following four:

1. Financial
2. Customer
3. Internal processes
4. Learning and growth

When building a Balanced Scorecard, or later when it is up and running, you may slip and casually remark on the four quadrants or four areas, or even the four buckets. As colloquial and seemingly inconsequential as this slip of the tongue appears, I believe it has serious ramifications. Take, for example, the word quadrant: the Oxford dictionary begins its definition by describing it as a quarter of a circle's circumference. The word reflects the number four, and in that sense it is almost limiting to the flexible approach inherent in the Scorecard—you may wish to have five perspectives or only three. The Balanced Scorecard views performance from many points of view and I encourage you to be disciplined in your use of this term. Now let's take a brief tour of those four perspectives, beginning with customer.

Customer Perspective

The customer perspective of the Balanced Scorecard must answer three questions:

1. Who are our target customers?
2. What do they expect or demand of us as an organization?
3. What is our value proposition in serving them?

Sounds simple enough, but each of these questions offers many challenges to organizations. Most organizations will state that they do in fact have a target customer audience, yet their actions reveal an all-things-to-all-customers strategy. As strategy guru Michael Porter has taught, this lack of focus will prevent an organization from differentiating itself from competitors.

Determining customer expectations or demands is often the least problematic of the three questions. Most organizations today, regardless of size or location, have many channels to view customer interactions and gather feedback. Chief among them are social media (Facebook, Twitter, and so on), which often provide customers a place to scream, especially when companies fall short of expectations.

Clearly articulating the firm's value proposition is perhaps the most challenging, and vital, of the three tasks in this perspective. Virtually all organizations will choose one of three disciplines, as articulated by Treacy and Wiersema in their book The Discipline of Market Leaders:⁵

1. Operational Excellence: Organizations pursuing operational excellence focus on low price, convenience, and often no frills. Walmart provides a great representation of an operationally excellent company.
2. Product Leadership: Product leaders push the envelope of their firm's products. Constantly innovating, they strive to simply offer the best product in the market. Apple is an example of a product leader in the field of electronics.
3. Customer Intimacy: Doing whatever it takes to provide solutions for customer needs helps define the customer-intimate company. They don't seek one-time transactions but instead focus on long-term relationship building through their deep knowledge of customer needs. In the retail industry Nordstrom epitomizes the customer-intimate organization.

I've cited the work of Treacy and Wiersema; however, these ideas have been with us for many years, and have been advocated under different labels by a number of scholars and practitioners. For example, the idea of low cost has been explained as: cost leadership (Porter), operational excellence (Treacy and Wiersema), exploitation (March), and defender (Miles and Snow). Differentiation goes by many names as well: product differentiation (Porter), product leadership/customer intimacy (Treacy and Wiersema), exploration (March), and prospector/analyzer (Miles and Snow). Regardless of the labels applied, the value-proposition concept represents the essence of strategic choice, and, as such, must be clearly represented in your Balanced Scorecard.

Internal Process Perspective

In the i...