Balanced Scorecard Evolution E-Book

Paul R. Niven

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 652

Veröffentlichungsjahr: 2014

Beschreibung

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.

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Balanced Scorecard Evolution

A Dynamic Approach to Strategy Execution

PAUL R. NIVEN

Cover Design: Wiley Cover Image: © iStockphoto.com/Kalawin

Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Portions of this book are reproduced from two of the author's previous books, Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results, Second Edition and Balanced Scorecard Step by Step for Government and Nonprofit Agencies, Second Edition, both published by Wiley. The material is reproduced with permission of John Wiley & Sons, Inc.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Niven, Paul R.   Balanced scorecard evolution : a dynamic approach to strategy execution/Paul R. Niven.     pages cm.—(Wiley corporate F&A series)   Includes index.     ISBN 978-1-118-72631-0 (hardback); ISBN 978-1-118-93900-0 (ebk); ISBN 978-1-118-93901-7 (ebk)   1. Organizational effectiveness. 2. Strategic planning. 3. Organizational change. I. Title.     HD58.9.N579 2014     658.4′012—dc23

2014012280

Contents

Preface

Looking Back and Looking Ahead

How Is This Book Different?

Who Will Benefit from This Book?

How the Book Is Organized

Acknowledgments

Chapter 1 What Exactly Is a Balanced Scorecard?

Origins, and a Brief History, of the Balanced Scorecard

Balanced Scorecard Perspectives

What Is a Balanced Scorecard?

Telling the Story of Your Strategy through Cause and Effect

Key Balanced Scorecard Questions and Answers

Notes

Chapter 2 Just Like the Boy Scouts: Be Prepared

First Things First: Why Are You Developing a Balanced Scorecard?

Answering the Question: Why the Balanced Scorecard and Why Now?

Possible Reasons for Launching a Balanced Scorecard

Send Yourself a Postcard from the Future

Start with a Provocative Action

Overcoming Skepticism

Benefits of a Guiding Rationale

Where Do We Build the Balanced Scorecard?

Criteria for Choosing an Appropriate Organizational Unit

Executive Sponsorship: A Critical Element of Any Balanced Scorecard Program

Sponsorship Advice for Executives

Your Balanced Scorecard Team

Managing the Balanced Scorecard on an Ongoing Basis: The Office of Strategy Management

Functions of the Office of Strategy Management

Your Balanced Scorecard Development Plan

Be Fast, but Be Thoughtful in Your Approach

Developing a Communication Plan to Support Your Balanced Scorecard Initiative

Final Assessments to Make Before You Begin Building a Balanced Scorecard

Notes

Chapter 3 Balanced Scorecard Building Blocks: Mission, Vision, and Strategy

Mission

Vision

Vision Statements and the Balanced Scorecard

Strategy

Strategic Themes

Appendix 3A: An Introduction to the Roadmap Strategy Process

Notes

Chapter 4 Conduct Effective and Engaging Workshops

Before the Workshop

During the Workshop

The Role of Executives in Workshops

Notes

Chapter 5 Building Powerful Strategy Maps That Tell Your Strategic Story

What Is a Strategy Map?

Why You Need a Strategy Map

The Spectrum of Strategic Plans

Developing Strategy Map Objectives

Developing Objectives for Each of the Four Perspectives

Which Value Proposition Is Best?

Using Strategic Themes in the Development of a Strategy Map

Developing a Shared Understanding with Objective Statements

How Many Objectives on a Strategy Map?

Preface

Acknowledgments

WHEN PEOPLE ASK ME WHAT I enjoy about the consulting profession, I answer without hesitation, “The fun and convenient air travel.” Well, of course that's not really what I say. What I do love about my job is the fact that every time the phone rings with a prospective client, it could be anyone from any industry, in any part of the world, reaching out from the other end of the line. Since launching The Senalosa Group, I've had the pleasure of working with a broad array of organizations, including: prestigious companies in the Fortune 100 here in the United States, small nonprofits in the developing world, and government organizations on several continents. All have been kind enough to tell me (and later show me via Scorecard results) that I helped them in some way, and I'm gratified by that. But, as I quickly point out to them, it is I who should be expressing gratitude—for the opportunity to work with dedicated professionals who are as eager as I to expand the boundaries of Balanced Scorecard knowledge. Outlined below are some of the many people I've had the honor to work with and learn from; individuals whose lessons and insights extensively shaped this book.

From NOW Foods, my thanks to Beth Pecenka, Al Powers, El Richard, Jim Emme, Michael Lelah, Dan Richard, Don Wilbur, and Randy Kjell. Their commitment to excellence and integrity is truly inspiring. At Breg (right here in San Diego County) I'd like to thank CEO Brad Lee for his enthusiasm and drive. Working with the following individuals from Goodwill of Orange County (California) was one of the highlights of my consulting career. How I enjoyed our stimulating workshops! Many thanks to: Kim Seebach, Joan Dornbach, Dan Rogers, Corrine Allen, Phillip Runnels, Randy Taylor, Don Voska, Frank Talarico, and Noel Crabtree. At the Compliance and Enforcement department of the New Jersey Department of Environmental Protection, I'm deeply indebted to Knute Jensen, Maria Franco-Spera, Wolf Skacel, and William Davis for their sincere dedication to the ideals of the Balanced Scorecard. From AWAL IT Services, many thanks to Tariq M. Alghamdi for his hard work and commitment. Much gratitude to Nicole Suydam of the Second Harvest Food Bank in Irvine, California for creating such an inspiring environment. One of the most fun and passionate groups I've worked with over the past several years is the Scorecard team at Panasonic ECO Solutions North America. Thanks so much to Jim Doyle, Keith Hanak, Michael Rocha, Anthony Viola, Anthony Turiello, Larry Toscano, Darren Benike, Richard Ballard, Dan Kramer, Dan Silver, Mercedes Lindao, Jim Dunphy, Beth Allbright and Lourdes Rodriguez. I've been very fortunate to assist the dedicated and hardworking team at Kids Central in Ocala, Florida, and offer thanks to John Cooper, John Aitken, David Destefano, and Barbara Myshrall. Finally, many thanks to the following individuals from Cristal: Dr. Fadi Trabzuni, Dr. Edward Kossakowski, Dr. Malcolm Goodman, Dr. Steve Augustine, Dr. Robert McIntyre, Brian Pickett, Rene Jongen, Richard Gillette, Kerri Knepley, and the many others who participated in our stimulating workshops. It was a true pleasure to work with such an inquisitive, spirited, and committed group of people, all steadfastly dedicated to the principles of the Balanced Scorecard.

In addition to the clients noted above, I have benefited tremendously from my friendship and collaborations with the following people. Strategy execution author and consultant Sandy Richardson has been a great friend and supporter, and I thank her for many spirited conversations on Performance Management and beyond. Readers of my past books will notice an enormous upgrade in the quality of exhibits appearing in this text. That is due entirely to the creativity of Kim Schanz from Eyegate Design here in San Diego. Thanks very much for your patience, Kim, as I continued to add exhibit after exhibit to your inbox. To Boubacar Diallo of Plan International in West Africa, I salute you for your commitment to sharing Balanced Scorecard principles. Boubacar traveled all the way from Africa to Southern California to study Scorecard implementation practices with me. I'm happy to report a friendship bloomed during that visit. Maryam Hussain of Avanza Solutions has been an ardent supporter and kind enough to share my work to many readers in the Middle East region through the journal Techronicle. I've been very fortunate to enjoy a long and satisfying partnership with the software firm Corporater. Many thanks to Tor Inge Vasshus, Eric Peterson, and Madhavan Gopalarathnam for your help and support. Speaking of partners, it's been my great pleasure to work with Wael Zein and Fadi Makki of Addima and Bassam Samman of CMCS in promoting Balanced Scorecard use throughout the Middle East and Africa. Chris Richard of Emera (formerly of Balanced Scorecard Hall of Fame utility New Brunswick Power) was a terrific client to work with, and has become an even better friend. Chris and I have had many long conversations about the Balanced Scorecard and his insights contributed greatly to this book. Finally, and most importantly, I thank my wife Lois for her inexhaustible reserve of love and support.

CHAPTER 1What 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:

Financial

Customer

Internal processes

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:

Financial

Customer

Internal processes

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:

Who are our target customers?

What do they expect or demand of us as an organization?

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

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.

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.

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 internal process perspective of the Scorecard we identify the key processes at which the firm must excel in order to continue adding value for customers, and ultimately shareholders. Each of the customer disciplines outlined above will entail the efficient operation of specific internal processes in order to serve customers and fulfill a chosen value proposition. For example, a product-leading company like Apple may focus on processes that include research and innovation, while an operationally excellent company such as Walmart emphasizes supply chain operations. Finally, Nordstrom's customer-intimacy discipline will dictate a focus on processes such as customer knowledge and retention.

The primary challenge with this perspective is to limit the number of processes included to just the truly strategic that drive the chosen value proposition, fulfill customer demands, and ultimately stoke the economic engine. When prompted, even small companies could list dozens of processes necessary to operate effectively. However, upon close inspection and using strategy as the prism, it should become clear that while necessary, most of the processes are not vital to the execution of the chosen strategy, and therefore do not belong on the Balanced Scorecard, which, we must constantly remember, is a tool for executing strategy.

Learning and Growth Perspective

If you want to achieve ambitious results for internal processes, customers, and ultimately shareholders, where are these gains found? The learning and growth perspective of the Balanced Scorecard supplies the enablers—almost exclusively intangible in nature—of the other three perspectives. In essence, this perspective represents the foundation upon which this entire house of a Balanced Scorecard is built.

The learning and growth perspective is typically populated with three areas of capital: human, information, and organizational.6 No strategy, regardless of its seemingly unimpeachable brilliance, can be executed without people, and thus our first order of business in this perspective is to ensure our organization possesses the human capital, skills, competencies, and talents necessary for effective execution. In addition to people, all companies today, regardless of size, rely upon robust information technology systems for everything from transactional data processing to strategic decision-making support. We must ensure our investments in information technology are consistent with, and support, our unique strategy. Finally, it is imperative in the modern corporate world to ensure our organizations are capable of growth and change, which are absolute imperatives to enduring success. Under the umbrella of organizational capital we examine crucial components of success such as culture, teamwork, and knowledge sharing. These quintessentially intangible dimensions of performance must be transformed into tangible value should we hope to reap the rewards promised in our strategic plans.

Many organizations I've worked with struggle with the learning and growth perspective. It is normally the last perspective to be developed, and perhaps the teams are intellectually drained from their earlier efforts, or they simply consider this perspective soft stuff best delegated to the human resources group. No matter how valid the rationale seems, this perspective cannot be overlooked in the development process. As mentioned earlier, the learning and growth perspective provides the enablers for the rest of the Scorecard. Think of it as consisting of the roots of a tree that will ultimately lead through the trunk of internal processes to the branches of customer results, and finally to the leaves of financial returns.

Financial Perspective

Financial yardsticks are a critical component of the Balanced Scorecard, especially so in the for-profit world. This perspective tells us whether our strategy execution efforts—detailed extensively in the other perspectives—are leading to improved bottom-line results. We could focus all of our energy and capabilities on improving customer satisfaction, quality, on-time delivery, employee-skills development, or any number of things, but without an indication of their effect on the organization's financial returns they are of limited value. Think of the financial perspective as representing the end in mind of your strategic story; everything contained elsewhere in the Scorecard should be driving enhanced financial results.

We'll return to the four perspectives throughout the remainder of the book, most notably during the discussion of strategy map objectives and performance measures. Speaking of which, now is the time to see how those terms fit into the broader system that is the Balanced Scorecard (see Exhibit 1.1).

EXHIBIT 1.1 Balanced Scorecard Perspectives

Source: Adapted from material created by Robert S. Kaplan and David P. Norton.

WHAT IS A BALANCED SCORECARD?

My trusty Merriam-Webster Collegiate Dictionary defines the word system: “A regularly interacting or interdependent group of items forming a unified whole.” That is a wonderful way to think of the Balanced Scorecard, because it's not one single thing, but a number of elements that combine to create a powerful unified whole. The Balanced Scorecard system, which is designed to help any organization effectively execute their strategy, is comprised of four unifying elements:

Objectives

Measures

Targets

Strategic initiatives

Objectives are housed on a dynamic communication device known as a strategy map, while measures, targets, and initiatives reside on the Balanced Scorecard. Let's look at each to discover how they combine to create a system whose whole is immensely greater than the sum of its parts.

Objectives and Strategy Maps

Objectives are concise statements of what the organization must do well in each of the four perspectives of financial, customer, internal process, and learning and growth in order to execute its unique strategy. Many early adopters of the Balanced Scorecard used it primarily as a measurement system, translating their strategy into measures that populated each of the four perspectives of the system. However, some of these pioneers struggled with identifying the best measures to track strategic success. To assist in selecting better indicators they began prefacing the discussion of measures with “What they must do well” in each perspective. The answer to “What must we do well?” was known as an objective. For example, a customer-perspective objective could be “Provide differentiated solutions.” Objectives always begin with verbs and are intended to bridge strategy and measures.

As time went on organizations began to pay increasing attention to objectives, realizing it was imperative to understand what must be done well to execute the strategy in order to create context for robust performance measures. Experimentation flourished and many companies began creating graphical representations of the objectives spanning the four perspectives. These diagrams became known as strategy maps and have proven to be a revolutionary advance in the field of strategy communication and execution. Today we can define a strategy map as: “A one-page graphical representation of what the organization must do well (in each of the four perspectives) in order to successfully execute their strategy.” The strategy map, which is first and foremost a communication tool, translates your strategy into the vital objectives necessary to execute the plan. Whereas your strategic plan may be 50 to 100 pages or more (sadly, I've seen them with much more), the strategy map must be confined to one page in order to fulfill its chief responsibility of clearly communicating and articulating the strategy to employees and, if so desired, external stakeholders. Strategy maps almost always combine words (the objectives noting what we must do well) with images that are culturally resonant for the organization. This creative combination engages employees by bringing strategy, a subject considered by most to be dry and academic, to life by translating it into concrete actions and compelling images. The word map fits the document perfectly because, as we all know, a map guides us on a journey, providing the landmarks we must navigate to travel from our current location to our desired destination. In this context the current location is the un-executed strategy and the desired destination is the successful execution of that plan. We'll return to strategy maps in Chapter 5, where you'll discover how to create vibrant documents that translate your strategy with dazzling clarity and simplicity. An example strategy map is shown in Exhibit 1.2.

EXHIBIT 1.2 Example Strategy Map

Performance Measures and Targets

A key principle to keep in mind as you learn about, and work with, the Balanced Scorecard is that of translation. Every component of the Scorecard is translated from the organization's strategy, because that is the system's raison d'etre—strategy execution. We begin by translating the strategy into objectives on our strategy map, which communicates what we must do well in order to succeed. Strategy maps are outstanding devices for signaling to everyone in the organization what must be performed flawlessly in order to execute, but at the end of the day we need to know if we have in fact moved the needle on the objectives and progressed towards the execution of our strategy. Enter the performance measures: quantifiable standards used to evaluate and communicate performance against expected results. Those expected results take the form of targets that accompany each measure.

Do you remember that old song, Love and Marriage? Feel free to sing along: “Love and marriage, love and marriage, they go together like a horse and carriage . . . you can't have one without the other.” It's the same with these two vital links in the chain of strategic success—strategy maps and measures; one just won't do without the other. You may create the most inspirational and visually resplendent strategy map ever conceived in a corporate conference room, but without the accountability and focus afforded by accompanying performance measures, its value is specious at best. The map points to what you must do well, but unless you know whether you're actually doing well, whether you're winning or losing, it's just the product of yet another corporate exercise. On the flip side, while performance measures act as potent monitoring devices, without the benefit of a clear and compelling strategy map much of their contextual value is lost (this was the problem many early Scorecard adopters faced). We'll return to the vital concepts of measures and targets in Chapter 6.

Strategic Initiatives

To quickly recap, a fundamental aspiration of every organization, whether public, private, or nonprofit, is the execution of strategy to drive breakthrough performance. The Balanced Scorecard was conceived to ensure that strategy is translated into action through the interplay of objectives, measures, targets, and strategic initiatives. The objectives appear on a strategy map and are further translated into performance measures, which, in combination with targets, are used to gauge the achievement of those same objectives.

The last piece of the puzzle in using the Balanced Scorecard to execute your strategy is the development and prioritization of strategic initiatives that will help you achieve your targets. Strategic initiatives (often simply referred to as initiatives in the Scorecard vernacular) are the specific projects, activities, or programs you'll embark upon in order meet or exceed your performance targets. A strategic initiative could be anything from launching a career development program for employees to rolling out new financial software to creating an environmental plan. They are, of course, strategy specific, and the portfolio of strategic initiatives you assemble will depend entirely on the unique strategic path you pursue. You may ask, “I notice the examples you use all begin with verbs. Objectives are strategy specific and also start with verbs, so what's the difference between an objective and a strategic initiative?” The primary distinction between objectives and strategic initiatives is that the former are meant to be ongoing, while the latter have a clear beginning and end point. They are projects of a short-term (typically) duration that have been designed to assist an organization in correcting a performance deficit.

To illustrate the use of strategic initiatives, let's say you decide to pursue a customer-intimacy strategy and thus include the objective “Delight our customers” on the customer perspective of your strategy map. One of the accompanying measures you select may be customer loyalty. The reasoning is simple: if you are in fact delighting your customers, you would expect more of them to remain loyal to you. You establish a target and, with sky-high expectations, begin collecting data. After a couple of months the numbers are sobering; customer loyalty is flat and resting at a level far below the rate you anticipated. To close the gap in performance you may decide to establish a customer rewards program as a means to enhancing loyalty. The specific strategic initiative would be the “Development of a customer rewards program,” and would entail the allocation of resources, the creation of a detailed plan including key milestones, and an analysis highlighting the anticipated results. While the objective “Delight our customers” will most likely remain on your strategy map until you decide to make a strategic course change, the development of the loyalty program will have a defined beginning and end.

We'll dive much deeper into the world of strategic initiatives in Chapter 6.

This section began by noting the Balanced Scorecard constitutes a system: “A regularly interacting or interdependent group of items forming a unified whole.” I'll talk more about terminology later in the chapter, but for now it's important to recognize that when you hear the term Balanced Scorecard, it is a collective noun that encompasses objectives on a strategy map, and measures, targets, and strategic initiatives on a Scorecard. What all the elements of the Scorecard system have in common, what unites and unifies them, is the fact that all are derived from the organization's strategy.

The system that is the Balanced Scorecard serves three primary purposes (see Exhibit 1.3):

Communication:

strategy maps are designed to translate the organization's strategy into action via objectives stitched together through the four perspectives. Just as a map helps guide you through unfamiliar territory by highlighting landmarks on your journey, strategy maps communicate the organization's chosen direction in a simple and powerful manner, allowing all employees, and other stakeholders, to quickly grasp the organization's story of success.

Measurement:

The Scorecard was originally created to alleviate three measurement challenges plaguing modern companies: how to competently gauge the role of intangible assets, balance financial and nonfinancial indicators, and ultimately execute strategy. While strategy maps communicate the strategic destination, Scorecard measures (and associated targets) monitor the course, ensuring we stay on track.

Strategic Management:

In this capacity, the Balanced Scorecard can be used as the centerpiece of a broader management system, which links it to such crucial management processes as: budgeting (strategic resource allocation), compensation, board governance, and risk management. In the preface I wrote, “As these new management frameworks have proliferated, they have frequently crowded out, and overshadowed the Balanced Scorecard. These complex conceptual structures promise many benefits that practitioners are of course eager to reap. However, most organizations possess limited resources and thus spread those available means thinly across the entire spectrum of activities, failing to devote the effort necessary to create a robust Balanced Scorecard. The unfortunate product of this diffuse effort is a Scorecard that is unable to fulfill its responsibility as a vital tool in the execution of strategy.” In this book I focus on ensuring you build a Balanced Scorecard that will serve as a ready foundation should you choose to instill a broader management framework with it as the instrumental hub.

EXHIBIT 1.3 The Balanced Scorecard System

TELLING THE STORY OF YOUR STRATEGY THROUGH CAUSE AND EFFECT

We know the Balanced Scorecard is designed to execute strategy through translation into objectives, measures, targets, and strategic initiatives, but what is a strategy? That's an enormous and evolving question, well beyond the scope of this book; however, at its core we know strategy represents a hypothesis developed by its creators. Organizations carefully examine their operating environments, consider their unique place in that competitive arena, and look for areas of defensible advantage that form the core of their strategy. Hence the strategy is a hypothesis—a best guess and set of assumptions as to the appropriate course of action given their knowledge of information concerning the environment, resident competencies, competitive positions, and so on. What is needed is a method to document and test the assumptions inherent in the strategy, and the Balanced Scorecard does just that.

By translating the strategy through objectives appearing on the strategy map and measures chosen for the Scorecard, the Balanced Scorecard provides the necessary means to document and test strategic assumptions. Ideally, the objectives and measures chosen should link together in a chain of cause and effect relationships from the performance drivers in the learning and growth perspective all the way through to improved financial performance as reflected in the financial perspective. We are attempting to document the strategy through measurement, making the relationships between the measures explicit so they may be monitored, managed, and validated.

Here is a typical example of cause and effect: Your organization is pursuing a growth strategy. Your objective is “Grow revenue,” and therefore you measure revenue growth in the financial perspective of the Scorecard. You hypothesize that loyal customers providing repeat business will result in greater revenues, so you measure customer loyalty in the customer perspective. How will you achieve superior levels of customer loyalty? Now you ask yourself: At what internal processes must the organization excel in order to drive customer loyalty and ultimately increased revenue? You believe customer loyalty is driven by your ability to continuously innovate and bring new products to the market, and therefore decide to measure new product development cycle times in the internal process perspective. Finally, you're challenged to determine how you will improve cycle times. Investing in employee training on new product initiatives may eventually lower development cycle time and is thus measured under the learning and growth perspective of the Balanced Scorecard. This linkage of measures throughout the Balanced Scorecard is constructed with a series of if-then statements: if we increase training, then cycle times will lower. If cycle times lower, then loyalty will increase. If loyalty increases, then revenue will increase. When considering the linkage between measures, we should also attempt to document the timing and extent of the correlations. For example, do we expect customer loyalty to double in the first year as a result of our focus on lowering new product development cycle times? Explicitly stating the assumptions in our measurement architecture makes the Balanced Scorecard a formidable tool for strategic learning (see Exhibit 1.4).

EXHIBIT 1.4 Cause and Effect

Cause and Effect Linkages in Practice

There is little doubt that weaving cause and effect linkages through your strategy map and Scorecard will yield dividends in the form of enhanced strategic insight. However, perhaps surprisingly, relatively few organizations implement this practice with rigor. In one revealing study of performance measurement practices published in 2003, the authors discovered that of 157 companies surveyed, only 23 percent consistently built and verified causal models.7 This despite the fact that return on assets were 2.95 percent higher and return on equity 5.14 percent higher in those organizations using causal models.

As noted, the study referenced above was published in 2003, so in the intervening 10 years, have more organizations availed themselves of the benefits of cause and effect modeling? Columbia Business School finance professor Michael Mauboussin says the answer is no, and has proposed a method for increasing the percentages who do.8 He argues that two basic questions must be answered before deciding upon which measures to monitor:

What is your overarching objective? In business, quite frequently, it's the desire to increase shareholder value.

What factors or activities will help you achieve your objective?