The History of the Balanced Scorecard (Part 4).
In this, the final part of the series, we describe the six stages and execution phase of the Execution Premium Process (XPP),as described in Drs. Kaplan in the final of their five books that charted the evolution of the Balanced Scorecard System. ?We also look at how the system has continued to evolve since ?The Execution Premium: Linking Strategy to Operations for Competitive Advantage was published in 2008.
The previous three article in this history can be found here:
Identified Shortcomings
Through their ingoing analysis of Balanced Scorecard System users, Drs Kaplan and Norton observed that most companies using the Balanced Scorecard were generally able to master three of the Strategy-Focused organizations principles ((see part 2 of this history): mobilize the executive team; translate the strategy into a Strategy Map, measures and targets; and align the different parts of the business through linked scorecards.
But most organizations struggled to develop the other two: making strategy everyone’s job (which means changing key human resources systems, such as performance management and incentives) and making strategy a continuous process (which required the redesign of various planning, budgeting and control systems). In those cases where the new strategy management approach was not fully embedded into existing organizational management systems, performance was hard to be sustained over time. There was a need to better integrate strategy management into the organization’s way of doing business.
In the Execution Premium book, the authors explain how to enhance the link between strategy and operations, through a six-stage process: The Execution Premium Process.
?The XPP: A Multidimensional Framework
The Execution Premium Process (XPP) can be defined as a multidimensional framework for describing, implementing and managing strategy at all levels of an organization, by effectively linking strategy to day-to-day operations. The XPP is a framework for implementing complex programs of change and for managing Strategy-Focused Organizations.
This powerful and comprehensive approach builds on the concepts presented in the previous books but adds important contributions:
We will now review each of the stages in turn.
Stage 1: Develop the Strategy
In this stage, executives develop the organization’s strategy. Four main questions need to be answered:
Based on the above inputs, the executive team builds a Strategic Change Agenda to describe current and desired performance within the four perspectives of the Balanced Scorecard System, an example is shown here.
For more on the Strategic Change Agenda see: https://www.dhirubhai.net/pulse/creating-strategic-change-agenda-james-creelman/
4.?How best can an organization achieve its vision??Strategy is formulated by identifying the targeted customers, the value proposition to satisfy their needs, the key processes to ensure full coverage of the value proposition, the key skills and competencies required to implement the strategy and the technology enablers.
Stage 2: Translate the Strategy
Translating the strategy involves defining strategic objectives, measures, and targets, strategic initiatives and their associated budgets.
While these elements have been introduced in earlier works, it is worth highlighting three new aspects explained this book:
·??????an enhanced concept of strategic themes (introduced in the Strategy Maps book, but more sophisticated and evolved here)
·??????detailed framework about identification and prioritization of strategic initiatives
·??????the STRATEX (Strategic Expenditure) concept (which protects investments in Strategic Initiatives from the annual budgeting process).
Three key questions are answered at this stage.
?How is the strategy described??This is achieved by developing the organization’s Strategy Map. Strategic objectives are grouped into Financial, Customer, Internal Process and Learning and Growth perspectives.
Strategic Themes are also used to help executives manage the complexity of having 15-25 objectives in a Strategy Map.?Kaplan and Norton state, “By building a Strategy Map around a collection of strategic themes, executives can separately plan and manage each of the key components of the strategy but still have them operate coherently. The themes, which operate across functions and across business units, also support the boundary less approach necessary for successful strategy execution.”
Common themes include customer relationship management, operational excellence and Innovation.?Themes can cover all four perspectives, or several therein. Often the themes are only found in the Internal Process perspective.
-?????????How is the plan measured??The overall value gap defined by the vision statement is decomposed to understand the required performance gap each objective must close over the strategy plan time horizon. For the objectives, measures are identified, and targets are set.
-????????What initiatives does the strategy need??Strategic initiatives are essential for closing the gaps between current performance and targeted desired performance.
If “themes, objectives, measures, and targets that represent?what?the organization wants to accomplish”, “strategic initiatives represent the?how”. Potential initiatives will be matched against the strategic objectives to ensure alignment and guarantee there is no major gap that is not addressed by a strategic initiative. A matrix to map candidate initiatives against the strategic objectives is often used for this purpose
In order to be able to select the few key initiatives out of a potentially large list of candidates, Kaplan and Norton propose to use some prioritization criteria, based on their strategic impact, complexity and risk.
-?????????How to fund the strategic initiatives??Initiatives are time-bounded projects, different from the business-as-usual activities and require specific funding to be executed. Very often strategic initiatives are comprehensive programs crosscutting different organizational functions.??Therefore, funding needs for the strategic initiatives should be separated and managed apart from regular OPEX and CAPEX budgets. Kaplan and Norton propose that a special budget category is created, called?STRATEX?to facilitate its management
-?????????Who will lead the execution of the strategy??The authors propose a new accountability structure for executing strategy through strategic themes. Executives are assigned to become theme owners, they are funded with STRATEX, and supported by theme teams drawn from across the organization. With this new kind of structure, “theme owners and teams provide accountability for and feedback on the execution of the strategy within each theme.”
Stage 3: Align the Organization
To ensure a successful strategy execution, all individual business and support units need to be aligned to the corporate strategy. At the individuals’ level, all employees have to understand the strategy and be motivated to support in the strategy implementation.’
The Strategy Map and the Balanced Scorecard provide a powerful reference for creating alignment across units and individuals. Two forms of alignment are required: vertical and horizontal
Top-down cascading - from corporate level down to units, departments, teams and even individuals-?creates vertical alignment.?
Horizontal alignment happens when units of a same organizational level consider and integrate their peers’ objectives in developing their own strategy maps or scorecards. This is the kind of alignment of the shared services units. This procedure enables each unit to define and execute a strategy that effectively support the strategies being implemented by business units.
This is explained fully in Kaplan and Norton’s 4th book,: Alignment: Using the Balanced Scorecard to Create Corporate Synergies (2006).
Stage 4: Plan Operations
In this fourth stage, we see the developing of strong relationships between strategy processes and operational processes, so that they become intrinsically linked.
Kaplan and Norton identify two main operational sub-processes which can be used to effectively create those linkages.
1.??????Alignment of Business Process Improvements to Strategy
Very often, organizations embark on huge process improvements efforts just for the for sake of improving, without a clear view of the strategic rationale of the initiative. Process improvements are of course legitimate and desirable, but considering the limited resources available in any organization, why not to concentrate efforts on those aspects with higher impact on the delivery of strategic results?
Kaplan and Norton propose that organizations leverage on the strategic objectives on their strategy maps and scorecards to enhance and align their process management programs.
Of course, there are many processes that are vital but not strategic (for instance, payroll payments is a typical example of vital but not strategic process) and they have to work at an acceptable quality level. But the strategic processes, identified in the Strategy Map, are those that produce greater benefits for the organization. Therefore organizations should excel at those processes, which should be the priority focus of improvement efforts
2.?????Connecting Operating Plans to Strategy
A key component of the operating plan is the financial plan. This stage is about ensuring that strategic measures and targets on the Balanced Scorecards are connected to the financial plan and budget for the year. It is not enough that strategic initiatives get the required funding, it is also essential that?the rest of?spending and resources are allocated with strategic criteria.
?Kaplan and Norton introduce an approach for linking the strategic plan to forecasts for spending on operating and capital resources. This process ensures that resource capacity, operational plans, and budgets reflect the direction and needs of the strategy.
The approach is made of five steps:
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1.??????Use driver-based revenue planning to obtain sales forecasts for future periods.
Here the connection to strategy should be made by considering the expected results of strategic initiatives and the growth targets for financial and customer metrics in the Balanced Scorecard, into the near-term revenues forecast revenues.
In order to drill down the overall growth and customer targets in the Balanced Scorecard into actionable inputs for the revenues forecast, the authors recommend the usage of?driver-based planning. Key measures in the Balanced Scorecard can be further decomposed into more specific factors or drivers that can then be used as key inputs of the revenue model for forecasting.
Kaplan and Norton also advocate for the use of dynamic rolling forecasts to overcome the issues of the traditional budgeting.
2.?????Translate the high-level sales forecasts into a detailed sales and operating plan.
3.?????Enter the sales and operating plan, as well as projected process efficiencies, into a TDABC (Time Driven Activity Based Costing) model that forecasts demand for resource capacity.
4.?????Derive dynamic forecasts (budgets) for operational and capital spending (OPEX and CAPEX).
5.?????Estimate pro forma financial profitability by product, customer, channel, and region.
Intermittent Stage: Execution
Between stages 4 and 5 is where “execution,” takes place and so is where initiatives are managed and where strategically critical process improvements takes place. Both play a part in strategy execution: initiatives typically drive breakthrough change (and are typically longer-term) while process improvements deliver more incremental change (more typically over the shorter-term).
Stage 5: Monitor and Learn
It is important to regularly monitor how well the organization is implementing the strategy and whether the strategic results are being achieved.?
Organizations conduct regular management meeting to track revenues, costs or quality performance. There is a strong temptation to use the existing meeting to also track the strategy implementation. What usually happens in these situations is that meetings get “invaded” by operational issues and discussions and strategy is never discussed.
Kaplan and Norton maintain that operational and strategy review meetings should be different and separated- different agendas, and maybe attendants- and explain their differences.
-?????????Operational review meetings?should focus on the question?“Are our operations under control?”?These meetings are to review short-term departmental, functional, and financial performance and respond to recently identified problems that need immediate attention. Operational review meetings can be weekly, bi-weekly or monthly. Their frequency will depend on the availability of new data about the operations or tactical urgencies.
-?????????Strategy review meetings?respond to the question “Are we executing our strategy well?”?In this meeting- normally held r quarterly (or more often in fast-moving markets) the management team reviews the measures and initiatives from the Balanced Scorecard, and assess their progress, barriers and risks associated with the successful implementation of the strategy. The reporting about the performance of the Balanced Scorecard measures and initiatives should be distributed to the attendants prior to the meeting. Therefore, the focus of the strategy review meeting should be on deciding actions to correct the cause and assigns responsibility for achieving the targeted performance.
To launch an effective strategy monitoring process, the following elements have to be considered:
-?????????Ownership. All strategic execution elements (strategic objectives, measures, initiatives) must have an owner assigned. The owner is the ultimate responsible for driving the implementation of his / her assigned objective, measure or initiative, and has to ensure a timely and quality tracking and analysis of the performance of the strategic element over time.
-?????????Strategy performance report.?Organizations must define the structure and templates to use to report on the performance of the strategic objectives, measures and strategic initiatives.
-?????????Reporting processes described and reporting calendar set. A detailed flow of information, and a reporting and strategic review meetings calendar has to be defined.?
Stage 6: Test and Adapt
Finally, organizations need to address a critical question as they progress in the implementation of their strategies, that answers the question: “Is our strategy working?”
A strategy is a set of hypothesis and assumptions about how the organization believes it can create sustainable value. As organizations progress in the execution of their strategies, they gather invaluable data and learnings to validate if hypotheses were right or require adjustments. Also, changes in the marketplace or new events or ideas proposed by employees need to be considered so to adapt the existing strategy.?
Kaplan and Norton consider this last stage as critical to ensure the long-term success of the organization’s strategy and propose that there are periodical test-and-adapt meetings.
Different tools and techniques can be used to support in this sixth stage. To name some of the best known: statistical correlations between measures in the Balanced Scorecard- based on actual data gathered in the strategic review reports; war gaming; scenario modelling, etc.
Office of Strategy Management (OSM)
Just as there are executives in charge of processes like quality management (quality director), budgeting (CFO) or employee performance management (CHR), Kaplan and Norton propose that there is a function which is the owner of the strategy execution system.?They call this the?Office of Strategy Management?(OSM).
According to the explained strategy execution framework (the XPP model), some of the existing processes run by different functions –performance management, communications, budgeting or process management- would have to be changed and coordinated in order to become better aligned to the strategy. The strategy execution framework also means creating additional processes - such as developing and cascading Strategy Maps and Balanced Scorecards across the organizations or reporting about strategy implementation- that need to have an owner.
The OSM occupies a previously missing link in strategy execution: runs several new strategy management processes and connects and aligns existing but fragmented processes. In a broad sense, its primary responsibility is the oversight and administration of strategy development and execution.
The Roles of the OSM
More specifically, the OSM plays three kinds of catalyst functions in designing, implementing and sustaining the Strategy Execution system
The OSM has three key roles: architect, process owner, integrator.
-?????????The OSM,?as architect, must design the overall framework so that all the strategy-related processes are integrated in a close-loop process, perfectly synchronised and compatible with one another. The OSM will need to ensure, for instance, that budgeting and employees performance management processes receive the right inputs, on a timely manner, from strategy planning processes. Also, the OSM will have to design the governance mechanisms (roles, forums, meetings etc.) required to continuously review strategy implementation.
-?????????The OSM as?process owner, the OSM takes primary responsibility for several of the new strategy execution processes, those related to stage 2 (plan the strategy), 3 (align the organization), 5 (review the strategy), and 6 (test and adapt the strategy), while incorporating the required responsibilities of stage 1 (strategy development process)
-?????????The OSM as?integrator, the OSM ensures that the existing processes related to strategy performed by other functions (finance, human resources, information technology, quality management or communication) are properly aligned to the strategy.
The Journey Continues
From measurement, through strategy-focused organizations to the integration of strategy and operations, Kaplan and Norton’s canon of work from 1992-2008 represents a complete and comprehensive body of work on strategy management (especially translation and execution).
Thousands of organizations have benefited from the Balanced Scorecard system and at various steps in its evolution, around 200 of which were inducted into the Balanced Scorecard Hall of Fame for Strategy Execution?; a much sought-after award reserved for organizations that have demonstrated breakthrough performance improvement using the Balanced Scorecard system. A rich library of best practices, from both the commercial and not-for-profit sectors is available for organizations setting out on their own scorecard journey or for experienced users who wish to learn from others so to build on their current successes.
But the Balanced Scorecard story is not over. Global thought leaders and practitioners will continue to evolve and refine the Balanced Scorecard concept and methodology to ensure continued relevance and value: indeed, back in 1990 Kaplan and Norton set out on a journey to reshape management and measurement systems for the knowledge as opposed to industrial eras. This journey continues as the knowledge era plays out to the backdrop of the complex socio-economic dynamics ushered in by the digital economy and globalization.
Precisely how the Balanced Scorecard concept will evolve is yet to be seen. But we have some pointers.
Analytics
Norton has spoken a great deal recently about the role that advanced data analytics will play in positioning the Strategy Map and Balanced Scorecard as an analytics framework, enabling much better insights into the hypotheses and assumptions that underpin the strategy. The promise of the Strategy Map is demonstrating cause-and-effect (or at strong correlations between enablers and outcomes) will be significantly enhanced.
To strengthen this ability, it is advised that the OSM integrates greater analytics capabilities into the office to deliver better decision-support to executives and others (and we are already seeing some organizations take this route and reaping the consequent rewards).
Networked Organizations
Moreover, the Balanced Scorecard system will be used more extensively as a vehicle for creating common focus and leveraging synergies among collaborative, network organizations that will often involve multiple organizations. Applying the Balanced Scorecard System to networks seeking to bring together commercial, governmental and other organizations in delivering economic and social value to communities across the world is one such example.
For more on using the Balanced Scorecard System within Networked Organizations see https://www.dhirubhai.net/pulse/power-networked-balanced-scorecards-james-creelman/
Parting Words
However the Balanced Scorecard further evolves, it is fair to say that the canon of work produced by Drs Kaplan and Norton has already made an immense contribution to the development of management theory, in particular the management and execution of strategy. Those that follow will stand on the shoulders of giants.
Ends
James Creelman is Director of the UK-based Cardinal Management Consulting, an Associate Director of Strategia Worldwide and the Strategy Management Practice Lead for Impact Consulting.
?He is available for advisory, training, or research support in Adaptive Strategy Management and can be contacted on +44 7933 575340 or?[email protected]
Recommendation
James Creelman has been a champion of the Balanced Scorecard since its early days and has contributed significantly to furthering awareness through his books and articles, consulting engagements, and training assignments. James has excellent writing skills; he is able to synthesize complex concepts and explain them simply."
Robert Kaplan
Working in PET Recycling. Mail contact: [email protected].
2 年Especially for this blog series from you, I am very grateful. I am working on a Plan (I call it Strategy, even when many claim there is only ONE strategy). To implement a Corporate Governamce "Strategy" for a new started venture, new in the whole Country. Anyway. With the right tools I know, that we can implement Accountable, Sustainable, and profitable Processes and Standards to control our Measurements and control our Risk Management. Because I do belive that every Risk is offering an oOpportunity, when we focus first on Team building and educating our Staff. And here I trust much more on Bottom up than on Top down. Which will be a Challenge, bcs. CG is supposed to be Top down. Thank you so much for your inspiring posts.
Strategy Management technician. 20,000+ smart followers. For an example of a strong nation, look where European cities are bombed every day by Dark Ages savages. Slava Ukraini! ????
2 年It's so awkward to see people using terms like Strategy Maps that have nothing to do with the causality-driven concept with that name, introduced by Drs. Kaplan and Norton in the '90s, or Alignment that means all sorts of things other than the concept and methodology of aligning the whole organization to the Strategy, described in detail in their 2006 book. I am also shocked by the laziness of those to boldly venture to publish their ideas on a certain subject, without endeavoring to read the essential reference literature on that subject. Like people talking about Strategy Execution or Strategy Implementation, without reading The Execution Premium. It beats me what goes through the heads of those guys.