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Part II of a two-part series on strategy development, excerpted from Kaplan and Norton’s forthcoming book, The Execution Premium, due out this June.
Formulating (and Revising) the Strategy
Best Practices........................6 Leveraging Information Assets to Execute Strategy
By Robert S. Kaplan and David P. Norton, with Edward A. Barrows Jr.
In Part I, Kaplan and Norton described the first set of steps in strategy development: crafting a mission, vision, and value statements; identifying strategic goals and critical issues; quantifying value gaps; and performing a battery of strategic analyses to define environmental factors, opportunities, and threats. Once completed, the organization reaches a new juncture: where the formal discipline of strategy development intersects with the art of strategy formulation. The literature on strategy development and formulation can be overwhelming, with its many approaches and different schools of thought. Some of the more prominent approaches include positioning (or “competitive advantage,” credited to Michael Porter), the resource-based view, core competencies, value-based management, profiting from the core, blue ocean strategy, emergent strategy, experience co-creation, and disruptive innovation. Complementing these strategic approaches are such operational improvement methodologies as total quality management, Six Sigma, ISO standards, lean manufacturing, and the learning organization. Supplementing both strategic and operational approaches are methodologies designed to minimize risk, including enterprise risk management, COSO (for financial institutions),1 and internal controls such as those required by Section 404 of the Sarbanes-Oxley Act. Our work on strategy execution is agnostic with respect to approaches, methodologies, and tools. We have seen many companies use different ones effectively to formulate their strategies. And whatever strategic, operational, and risk management priorities a company establishes during the strategy formulation process, any of them can be translated into a strategy map and made operational through a Balanced Scorecard. In fact, Figure 1 shows how many of these strategic, operational, and risk management approaches can be visualized on a strategy map. Starting at the top, most organizations will have some form of financial-portfolio approach to frame their corporate strategy. Portfolios profile the financial characteristics of each business unit to achieve the desired balance of growth, cash flow, and risk. Value-based management approaches, such as economic value added, focus intensively on selecting objectives consistent with long-term shareholder value creation. Enterprise risk management, including COSO and internal controls, focuses on reducing the financial, operating, technological, and market risks that can impair a company’s ability to execute its strategy. Typically, however, these financial-strategy and risk-management approaches do not account for customer value propositions, key business processes, or an investment in the intangible assets that are critical for sustained value creation. Continued on next page
When it comes to adding technology to support management processes, decision makers often overlook the most critical question: how prepared is the organization to implement the new solution? A mismatch between process maturity and technology maturity means the technology, no matter how robust, won’t deliver.This article offers preliminary insights on an important study under way by Palladium Group and Microsoft with an ultimate goal of helping organizations evaluate how they leverage information assets to execute strategy.
Executive Insight ..........................11 Moving from Performance Measurement to Strategy Management at Brigham and Women’s/Faulkner Hospitals Radical changes in its performance measurement approach and systems helped one of the world’s most prestigious medical centers (and a 2006 BSC Hall of Fame winner) achieve ambitious service and financial goals. Its president and CEO recounts the transformation.
Commentary ......................14 Strategy or Stakeholders: Which Comes First? Stakeholder theory is no way to build strategy, argues Robert Kaplan.This theory, bolstered by the corporate social responsibility movement, puts stakeholder considerations first, as a foundation for strategy. Clearly, an organization’s stakeholders may have conflicting interests, and some of those interests may also conflict with sound business management. As Kaplan notes, the interests of stakeholders who are strategically relevant are already accounted for in the strategy map. Strategy, he insists, must precede stakeholders, for philosophical as well as practical reasons.
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Stimulating Creative Strategies The most well-known strategy formulation approaches focus on customers. Porter’s competitive advantage framework emphasizes zeroing in on market and customer segments and deciding whether to win in the chosen segment using either a low-cost or differentiated strategy. Profit from the Core author and consultant Chris Zook argues that most successful companies build their business around core market niches in which they have expertise, credibility, and deep knowledge about customer preferences. He observes how organizations like Gartner and Bausch & Lomb performed poorly after diluting their focus by entering new niches, and subsequently regained their success only after returning to their original niches. Kim and Mauborgne’s blue ocean approach involves developing creative and sustainable new competitive positioning for a large customer base. Southwest Airlines, for example, created a new market segment by combining the low prices and
on-time departures that had led people to use buses for intercity travel with the speed of airlines. Southwest’s targeted customer base of price-sensitive travelers tolerates the lack of reserved seating, long queues to board planes, and absence of first-class options in return for low prices, convenient flights, and on-time arrivals. Through this innovative offering, the company changed the dynamics of its industry.
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Experience co-creation, developed by Prahalad and Ramaswany, also focuses on the customer value proposition, but with a twist: companies develop the value proposition jointly with their customers. John Deere Company’s Deer Trax system allows farmers to monitor the operation of their fleet of tractors and other vehicles. It also brings farmers together into various thematic communities to share knowledge and exchange experiences. Deere’s product/ service design is “co-created” with the customer, putting the farmer at the center of the process.
Circulation Manager Bruce Rhodes Newsletters, HBS Publishing
Figure 1. Leading Methodologies Used in Strategy Formulation
Portfolio-Based Approaches • BCG Growth/Share Matrix
• GE Matrix • Shareholder Value
Strategy Map Positioning/Niches
Customer Value Proposition • Blue Ocean • Experience Co-Creation • One-to-One Marketing
Financial Perspective
• Five Forces/Value Chain • Profit from the Core • Judo Strategy • Scenario Planning
Customer Perspective
Editorial Advisers Robert S. Kaplan Professor, Harvard Business School David P. Norton Director and Founder, Palladium Group, Inc. Publishers Robert L. Howie Jr. Managing Director, Palladium Group, Inc. Edward D. Crowley General Manager, Newsletters, HBS Publishing Executive Editor Randall H. Russell VP/Research Director, Palladium Group, Inc. Editor Janice Koch Palladium Group/Balanced Scorecard Collaborative
Design Robert B. Levers Levers Advertising & Design Letters and Reader Feedback Please send your comments and ideas to
[email protected]. Subscription Information To subscribe to Balanced Scorecard Report, call 800.668.6705. Outside the U.S., call 617.783.7474, or visit bsr.harvardbusinessonline.org. For group subscription rates, call the numbers above. Services, Permissions, and Back Issues Balanced Scorecard Report (ISSN 1526-145X) is published bimonthly. To resolve subscription service problems, please call 800.668.6705. Outside the U.S., call 617.783.7474. E-mail:
[email protected] Copyright © 2008 by Harvard Business School Publishing Corporation and Palladium Group, Inc. Quotation is not permitted. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher.To order back issues or reprints of articles, please call 800.668.6705. Outside the U.S., call 617.783.7474. Harvard Business School Publishing is a not-forprofit, wholly owned subsidiary of Harvard University. The mission of Harvard Business School Publishing is to improve the practice of management and its impact on a changing world. We collaborate to create products and services in the media that best serve our customers—individuals and organizations that believe in the power of ideas. Palladium Group, Inc. helps its clients achieve an execution premium by linking strategy and operations and enabling mission-critical links with timely, robust data. Balanced Scorecard Collaborative (BSCol) is Palladium’s education and training division. Our products and services in strategy, finance, and IT consulting, conferences, technology, training, research, publications, and communities are delivered globally from offices worldwide. BSCol also manages the Balanced Scorecard Hall of Fame for Executing Strategy™ program. To learn more, visit www.thepalladiumgroup.com, or call 781.259.3737.
Social Responsibility Innovation • Open Innovation • Futurization • Ideation • Core Competencies
Innovation
Customer Relationship
Operations Excellence
Social Responsibility
• Local Community • ISO 14001 • Sarbanes-Oxley 404
Learning & Growth Perspective
Productivity/Quality
Risk • COSO • Enterprise Risk Management
• Time-Driven Activity-Based Costing • Lean Manufacturing • Six Sigma • Reengineering
Most strategy formulation approaches focus on a particular performance dimension (e.g., financial, customer, internal process), as this strategy map representation shows. And the majority of approaches focus on customers.
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Yet another school of thought views strategy as a dynamic, competitive process. Scenario planning, first developed at Shell, is a widely used approach in which the organization creates responses to competitive and environmental developments. Companies such as LG.Philips LCD use “war game” simulations to identify likely competitor reactions to various strategies that they might introduce. Whatever the methodology used, the outcome of any strategy formulation approach is to develop a direction that differentiates the company’s market position and offering from its competitors so that it can create a sustainable competitive advantage that leads to superior financial performance (or, for nonprofits, demonstrably positive social impacts). The “creativity” of the strategy, then, becomes an important means to this end. Those involved in strategic planning can draw from the toolbox of methodologies illustrated in Figure 1 to develop their differentiating strategy. As executives become more knowledgeable about the range of strategy formulation tools available, they can use the approach that seems most appropriate to their company’s circumstances, culture, and competencies. The strategy map framework shown in Figure 1 may help guide the choice. If, for example, the company has low capital utilization, then a value-based management approach would help define a financial strategy. If the company lacks a distinctive brand or market presence, an approach that helps identify an attractive customer segment, such as positioning, the blue ocean approach, or experience co-creation, might prove most helpful. If the company has distinctive capabilities in important business processes—operations management, customer data mining, or innovation—that com-
petitors lack, then the resourcebased view and core competency approaches are effective. If the company has exceptional human capital, with skilled, experienced, and highly motivated employees, then creating a learning organization and encouraging employees to propose emergent strategies are useful ways to identify promising new strategies. Launching the Strategy Formulation Process Most organizations already have a strategy, which they typically review and fine-tune each year at a leadership offsite meeting. Ricoh Americas, for example, uses a systematic process for its annual strategy reviews. It conducts a major refresh of its strategy, called the Mid-Term Plan (MTP), every three years. In the two “off years,” the strategy review is done for course correction— fine-tuning and executing the formulated strategy—not for determining new strategic direction. Ricoh launched its 14th MTP in 2001, which called for developing a profitable new business and assimilating two major acquisitions. Chairman and CEO Kirk Yoshida emphasized the development of a new organizational culture. “We are creating a culture in our organization that is strategyfocused and aligns financial plans and compensation to the achievement of the strategy,” he said in an internal company newsletter. “We are making strategy everyone’s job.” In 2004, the company’s new chairman and CEO, Sam Ichioka, launched the 15th MTP. While reaffirming the foundations of the company’s existing mission, vision, and values, the new MTP shifted the organization’s focus to higher levels of growth. Executives updated the vision to “Becoming America’s #1 document solutions company,” which led to a stretch target for growth and its decomposition into four strategic themes, a process we described in Part I.
The fine-tuning Ricoh carries out in the two off years would be typical for companies that are delivering expected performance, not those experiencing major external or internal changes. Organizations tend to fine-tune the existing strategy until some trigger event causes them to search for a new strategy. Incremental changes in their strategy might be introduced, but the primary purpose of the annual review process is to reaffirm the established strategic direction— in other words, to execute, not develop, the strategy—communicate it to all employees, and align them to it. Undertaking Transformational Strategies But any strategy, good or bad, eventually runs its course. A company’s competitors observe its successful strategy and eventually adapt to counter the advantages created by the first mover. Competitors’ moves typically take three or more years to begin to affect a company’s performance. Our tentative conclusion from surveying dozens of companies is that the useful life of a new strategy is generally three to five years. During this time, incremental changes are usually sufficient (assuming the existing one is delivering successful performance). Only when the strategy has run its course or begins to fail, or the company experiences a major disruptive event, does it consider a new, transformational strategy. In other words, organizations require some kind of “trigger event” to initiate the search for a new and transformational strategy. At HSBC Rail, a unit within the global financial services firm HSBC Corporation, CEO Peter Aldridge proactively launched a major strategy review amid the company’s excellent financial performance. Aldridge could see
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storm clouds approaching from different directions: parent HSBC Corporation was demanding major improvements in capital utilization from its units; the UK Department of Transportation, a key HSBC Rail stakeholder, sought to greatly reduce the subsidy the state would provide to HSBC’s principal customers, the deregulated rail operating companies; and industry trends, such as the growth in passenger and freight traffic and environmental and climate concerns, threatened HSBC’s existing strategy. Rather than wait for the storm to hit, Aldridge took action. He launched a series of 10 workshops with middle and senior managers to prepare for a new strategy that would be more suitable for the new circumstances he anticipated. The workshops helped managers understand— and accept—the mission, vision, and values of the organization. The consensus the workshops achieved set the stage for formulating a new strategy and making it actionable through a strategy map and Balanced Scorecard. Triggers One common trigger is the burning platform of a failed strategy. We observed this happening in the 1990s when several companies adopted the Balanced Scorecard to help them implement a radically different strategy after experiencing financial distress. CIGNA Property and Casualty had the largest losses in the industry, including a combined ratio (expenses to premiums) of 140; Mobil U.S. Marketing and Refining, with a $500 million negative cash flow year, was the most unprofitable company in its industry; and AT&T Canada lost Can$ 350 million in one year. Under the pressure of a burning platform, an organization is highly motivated to seek a new strategy rather than
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continue to be immolated by a failed one. Another typical trigger for undertaking a transformational strategy is the appointment of a new leader, especially one from outside the organization. Clearly, new leaders are frequently brought in specifically to deal with a burning platform, but leadership change is common for many other reasons. In governmental organizations, leadership tenure is linked to the election cycle. Military appointments tend to be for three or four years. New leaders generally initiate a comprehensive review and sweeping analysis of the existing strategy, which often prompts a strategy overhaul. Technological change can also be a trigger, as many retail and financial institutions learned in the 1990s with the emergence of the Internet as a powerful new sales channel. Then, many companies talked about being “Amazon’d.” Wells Fargo saw the Internet as a catalyst for shifting its strategy from productivity enhancements and cost reduction in its traditional
brick-and-mortar retail outlets to revenue growth and customer relationships cultivated through online banking. The external trigger could be macroeconomic, such as a major increase in an input price (e.g., energy) or a foreign exchange revaluation. It could be a change in regulation, such as when new competition is allowed to enter a company’s existing market, or when a company is allowed to enter new markets and business segments that were previously proscribed. The trigger could also be a radical, unexpected move by an existing or new competitor, or a major unexpected event. Consider what the 9/11 terrorist attacks represented for the U.S. Federal Bureau of Investigation (FBI). The agency’s new leaders quickly saw the need for a completely new strategy—and for major changes in the organizational culture if the new strategy were to be successfully implemented. FBI Director Robert Mueller knew he would need to prepare all employees for the massive changes ahead. He relied on a widely used tool, the “from-
Figure 2. The FBI’s “From-To” Chart PAST
FUTURE
Domestic
Global
Law enforcement
National security and law enforcement
Case-driven Quantitative evaluation (case-based)
Threat-driven Qualitative evaluation (threat-based)
Contributor
Full partner
Tactical “Restrict; share what you must”
Strategic “Share; restrict what you must”
Ineffective communications
Effective, relevant, and timely communications
Operational silos
Integrated team approach
Ineffective and inefficient HR processes
Highly effective and efficient HR processes
Agents/support
Team of professionals
Antiquated and disparate IT systems
Mission-enhancing integrated IT systems; productivity tools
Applying developed S&T
Developing and applying optimal S&T
Budget drives strategy
Strategy drives budget
This widely used tool helps leaders communicate the desired future state of their organization to the entire workforce.
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to” chart, to describe the scale and scope of the transformation (see Figure 2). The senior management team develops the “from” in the “fromto” chart by examining the state of the enterprise today, especially the weaknesses exposed by a prior SWOT (strengths, weaknesses, opportunities, and threats) analysis. It then forecasts where the enterprise needs to be (the “to”) to carry out its future mission, informed by the threats and opportunities identified in the SWOT analysis. For example, Figure 2 shows that the FBI had to change from being a casedriven organization—one that reacts to crimes already committed —to becoming a threat-driven organization, one that attempts to prevent incidents such as terrorist attacks from occurring. Instead of being siloed and secretive, the FBI had to learn to share information and work collaboratively with other agencies to prevent incidents that could harm U.S. citizens. Internally, agents had to work outside of their traditional operational silos and become active participants in integrated teams. These guidelines, which emerged from extensive dialogue conducted throughout the organization, engaged all levels of the FBI to participate in setting goals for the new strategic direction, and contributed to a widespread understanding and support for the new strategy that would emerge. In summary, companies can introduce a new transformational strategy either on a regularly scheduled basis, as done by Ricoh every three years, or when the executive team recognizes that its existing strategy has run its course and a new approach is needed. For example, Andy Grove triggered Intel’s transformational strategy shift in the 1980s from producing memory chips to making microprocessors when
he asked his management team, “If we were starting the company today, would we be building capacity to produce commodity memory chips?” At organizations that don’t overhaul strategy according to a schedule, it’s essential that the tools and processes used to monitor the internal and external environment are reliable. A company we’ll call Horizon Real Estate learned this the hard way. Its strategy had been in place for five years. In each of the preceding four years, Horizon’s annual review resulted in minor changes to the existing strategy, which seemed to be working fine. But in year five, performance dipped and the executive team realized that its existing strategy needed rethinking. In advance of the next annual strategy meeting, managers made a major investment in time and analysis to understand the new competitive environment. This set the stage for a new and transformative strategy to be developed at the meeting. On one hand, the annual update process had worked, with a new strategy introduced to offset the decline in performance that surfaced the previous year. But as one senior officer stated, “I’m not happy with the planning process that we used a year ago. If we had done a better job with our environmental scan and been more disciplined in analyzing the data we had on hand at the prior annual strategy update meeting, we could have seen the problems coming a year earlier and dramatically improved our reaction time. The value of moving a year earlier in our business is enormous!”2 Refreshing via Strategic Theme Fine-tuning the existing strategy or overhauling it are not the only possibilities for strategic change. A strategy, after all, usually consists of several coexistent strategic themes. One theme may require dramatic revision while others
require little or no change. For example, Chase Bank, while assimilating major acquisitions in the 1990s, learned that its stated goal of “100% customer retention” was misguided; many customers, especially those with low asset balances, were unprofitable. So Chase changed the goal of its customer relationship strategic theme to “retaining assets” rather than “retaining customers,” striving to keep only profitable customers. Its strategic themes for corporate branding, operational excellence, and developing employee capabilities remained unchanged. There are many schools of thought and methodologies for strategy formulation. Whichever one an organization chooses, it should serve to create a strategic direction that will differentiate the organization in its market. The strategy map framework, which decomposes performance into perspectives and identifies strategic themes, can help an organization choose an approach or approaches that are most relevant to its goals, value gaps, or capabilities. Through regular strategy reviews, an organization can fine-tune its strategy, making incremental changes, and transform it when the strategy is either no longer relevant—or is failing outright. Whether major overhauls are performed on a regular schedule or on an as-needed basis, it’s critical that executives rely on the most accurate analytic tools and data available so they respond in a timely way to the triggers that warrant transformational change. Authors’ note: We would like to recognize the important efforts of Ed Barrows in developing this work. 1. COSO, the Committee of Sponsoring Organizations of the Treadway Commission, was established by five accounting and finance professional associations to create standards for internal controls. 2. Comments made at Palladium Group’s March 2007 conference, “Putting Your People Where Your Strategy Is: Creating a High-Performance Organization.”
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Leveraging Information Assets to Execute Strategy By Randall H.Russell,Vice President and Director of Research, Palladium Group, Inc.
What is the best approach to leveraging information assets to execute strategy? In many respects, this is the central question facing every organization that strives to make strategy execution a core competency. There’s no simple answer, given IT’s multifaceted role in supporting both strategy management and operational processes. A key factor: how well the organization’s technological sophistication matches the maturity of the strategy management processes it is designed to support. The Palladium research team, working with Microsoft Corporation, is investigating this vital question, to culminate in a Technology Maturity Model that will help organizations evaluate how they leverage information assets to execute strategy. Here we present highlights of our preliminary findings. Information technology (IT) matters. But it is strategically relevant only when aligned with management processes that can leverage the information it provides. Without that alignment, neither strategy management nor the technology is optimized. Management processes and technological capability must work in
tandem to deliver their full benefits. When considering when and how to add technology to support management processes, organizations must obviously ask, “What information will it provide?” “How will we use it?” and “Will decision making and performance improve, justifying the costs?” But these
questions aren’t enough, as the history of IT investment—with its false promises, misaligned investments, and avoidable disasters—attests. Decision makers often overlook the most crucial question: How prepared is the organization to implement the new IT solution—and align it properly with management processes? No matter how advanced a solution’s capabilities, if the organizational processes aren’t in place—if there’s a mismatch between process maturity and technology maturity— the technology will not deliver. The first generation of BSC adoptions taught us that introducing technology too early in the undertaking could divert the organization from establishing the foundation— the critical underlying strategy management processes. As early as 1999, Balanced Scorecard cocreator Robert Kaplan warned of the pitfall of mistaking the Balanced Scorecard for a systems project.1 Early in a BSC implementation, it’s more important, he argued, that the strategy management process be developed and
Figure 1. The Double-Loop Model of Strategy Execution Strategy planning • Strategy map/themes • Measures/targets • Strategic initiatives • Funding/StratEx
Strategy update Balanced scorecard
STRATEGY MANAGEMENT
Strategy reviews
Strategic plan & funding
Strategic (i.e., StratEx)
Initiative portfolio Operational
Operational planning and budgeting • Organizational alignment • Key process management • Operating plan/budget • Human capital management • IT management
Operating & financial plan Rolling forecast
OPERATIONS MANAGEMENT
Operations reviews
Execution
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Integrating strategy management processes with operations management processes enables strategic alignment. But it also poses significant IT challenges.
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embedded in the organization than that it be automated. Back then (the 1990s to the early 2000s), the available software tools couldn’t come close to matching the management decision-making processes they were designed to support. The first BSC support tools were simple spreadsheets that displayed summary performance information. Inputs were often developed manually and derived from multiple reporting systems, some automated, some manual. Even if the tools were capable of capturing performance commentary, their connection to the strategy management processes was weak or sporadic. The reporting frequency, the level of detail, and even the quality of the underlying data feeds had yet to reach an optimal level. Technology and reporting capabilities struggled to keep up with the management processes. Over time, though, technologies have caught up. The quality of performance data has improved, as has our understanding of the processes required to execute strategy effectively. We now know that the right tools, properly applied, can actually inform, enhance, and improve the quality of strategy management processes —from strategy development and revision, through strategy reporting and review, and back again to the next cycle of strategy revision. (See Figure 1.) Yet when to implement the new tools is an open question. Given the increasing sophistication of the latest technology tools, it’s arguably even easier to mistake the development of strategy management processes as a systems project. Compounding the issue: effective strategy management requires that strategy management processes be integrated with operations management processes. After all, it is only through operational processes that strategy is realized. While this double-loop model of strategy execution may
Figure 2. The Three Domains of Strategy Management
Strategy management • Mobilize • Translate • Align • Motivate • Govern
Strategy management solutions
Information Technology Key process management solutions
Resource management solutions
Key process management
Resource management
• Process management
• Finance
• Decision analytics
• Human resources • IT
IT holds two positions in the organization: in resource management, it provides key strategic resources, as do other functional areas; and in the center of the three sets of key strategy management processes, it provides solutions such as infrastructure and software.
clarify our understanding of the management terrain, it also reveals a layer of complexity few organizations are prepared to appreciate and effectively navigate. Even well-run organizations struggle to provide basic information to support business-as-usual operational processes. The information architecture in many organizations resembles a “spaghetti” chart. Managers lack accurate information about current performance, impeding their ability to gain insights on current performance—let alone to reliably forecast future performance. Many organizations can’t perform simple cause-and-effect analysis, let alone strategic analysis. Strategy testing and driver-based models represent the frontier in management science today. How do organizations make the leap?
To better comprehend this management challenge, the Palladium/ Microsoft research project focuses on three questions: 1. What is the right balance between management process maturity and technology maturity? 2. How do organizations effectively time the implementation of technology when they begin a scorecard program? 3. Does technology accelerate or hinder establishing strategy management capabilities? To help answer these questions, we turned to the Palladium Balanced Scorecard Hall of Fame for Executing Strategy. Its 100 member organizations—representing a diverse mix of industries, geographies, and sizes—are
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notable for their exemplary use of the BSC, their strategy management prowess, and the breakthrough results they have realized. We also used data from a 2007 online survey of more than 330 highly qualified BSC users who adhere to the SFO model. Our analysis shows that among both sets of BSC users, there is a direct correlation between adherence to SFO principles and the level of performance they achieved.2
it provides key strategic resources. So decision making about how to resource strategic investments (i.e., their type, amount, and sequencing) takes place here. IT also appears within the central triangle of strategy management, key process management, and resource management. This position refers to its role in providing solutions such as technology infrastructure, software applications, and end-user support.
How Does Strategy Execution Occur?
The double-loop model does indeed suggest that IT matters in strategy execution.
Strategy execution relies on the integration of three distinct sets of management—strategy management, resource management, and key process management— which, though managed separately, are integrated through specific activities and mechanisms such as target-setting, cross-functional initiatives, and cause-and-effect modeling. The IT solutions that support these management domains must match the sophistication of each management process. As Figure 2 (previous page) shows, integrating strategy management with operations management is achieved through resource management (the funding and resource decision processes). The key process management box represents those operational processes that have strategic impact and which receive specially earmarked strategic funding (“StratEx”). For example, fast turnaround times is a strategic objective for Southwest Airlines (since more time in the air equals greater revenues). Thus, a training program that makes cabin cleanup everyone’s job—pilots and attendants alike—to speed turnarounds would be just such an operational process. As Figure 2 shows, IT plays two broad roles in the organization. Its position in resource management represents its functional role. Like finance and human capital,
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And Strategy-Focused Organizations confirm this view. In our online survey,3 the 330-plus respondents rated a strategic information system—one that includes BSC reporting capabilities, and that guides decision making, assesses progress toward strategic objectives, and tests strategic hypotheses—as very important (3.75 out of a possible 5.0). However, they rated their own performance in this area as relatively poor (2.25). Thus, IT is an underdeveloped capability. Our in-depth 2007 survey of 24 Hall of Fame organizations— organizations acknowledged for their achievement in establishing robust strategy management processes—yielded similar results: they gave IT an even higher importance rating (about 4.25), but ranked their performance at 3.75. Even among the highest performers, a gap exists. IT’s Dual Role Exactly how and where does IT matter in strategy execution? Can we identify the pathways in which IT can be leveraged to enhance strategy execution and achieve breakthrough results? Since breakthrough performance organizations would yield the most valid insights about organizations’ progress in leveraging technology, we needed to distin-
guish levels of performance among the 24 Hall of Fame organizations, which are already performing at breakthrough levels. So for this current research, we created an aggregate SFO performance profile score. This score averages each organization’s ratings of its performance in each of the five SFO principles. First, does technology enhance the contribution of the three resource functions (finance, HR, and IT) to strategic outcomes within our survey group? Organizations that consider themselves more tightly integrated, in particular, in aligning planning with budgeting—some 37% of respondents—reported higher performance levels. The most tightly integrated ones use consistent financials and common frameworks, which, in large organizations, require a robust technology infrastructure. In HR, for example, the highestperforming organizations—those that have a centralized data system and whose HR professionals can easily generate reports and analysis to support decision making— represent 38% of respondents, the largest proportion. But the gap between them and the low performers is sizeable—nearly 1.0. Certain key (strategic) processes play an especially important role in executing strategy. To understand their enabling technologies, as well as the improvements technology could bring to these processes, we asked about the extent to which each organization had identified and documented strategic objectives associated with such key processes. More than 40%—the highest performers— have formally identified key processes that drive their market differentiation, and they review these processes frequently to seek improvements. Thirty percent indicated that “some key processes are documented [and tied to strategic objectives] within the
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main operational/functional areas in which they reside,” and the remaining 30% said their company informally acknowledges and supports key processes that drive its differentiation. The performance score difference between highest and lowest performers was measurable, at 0.42 on a five-point scale. Let’s look at technology in the form of decision-making tools. Decision analytics,4 along with other advanced techniques such as scenario planning, can improve the quality of decision making in strategy management and operational management processes. How widely are decision analytics used by Hall of Fame organizations to gain competitive advantage? About 10% of our survey group is just getting started with decision analytics; some 66% adopt analytics on an ad hoc basis, and 20% are applying analytics systematically. Among the latter, decision analytics is embedded in all key management decisions. Interestingly, this group’s SFO performance is significantly higher than that of the two other respondent groups. (This suggests that the use of decision analytics represents an important future direction for Strategy-Focused Organizations.) Where does analytics play the greatest role for these advanced users? Business planning is the most common use (cited by 66%); followed by customer satisfaction/ loyalty (57%), risk management (51%), product/service pricing (50%), and product/service profitability (50%). We then asked respondents about their organization’s ability to model alternate scenarios (i.e., run realtime what-if models, perform sensitivity analysis). The answers were evenly split among “some ability exists,” “some exists, but analysis falls short,” and “a strong ability exists, and analysis using these tools enables better decision making.” Those who have a robust analytic capability reported higher levels of performance.
IT Solutions How does the IT organization get its critical, strategy-enabling work done? All respondents noted that IT is included in enterprise strategy planning and execution. But 17% claimed IT is not considered a strategic partner; for 50%, it is considered a partner in “developing and executing specific systems infrastructure”; and 33% claim IT is aligned with the organizational strategy, is fully engaged in the strategic planning process, and is considered integral in the successful execution of organizational strategy. Those organizations whose IT organization is most aligned have achieved greater benefits—a 0.7 higher rating than the lowest-performing Hall of Fame organizations. We also asked how organizations manage data to support their reporting and analysis needs. Only 25% of respondents have a “single point of access to all source system data via an enterprise data warehouse.” This group has the most advanced SFO profile. About 66% reported that data resides in a “mix of independent and integrated data marts”—the same percentage that reports an ad hoc approach to using decision analytics. The rest (the least mature organizations) are extracting and manipulating data from multiple systems. Process Maturity vs. Technology Maturity In reviewing the success stories of the Hall of Fame members, it becomes clear that their SFO transformations generally consisted of three distinct stages. The first stage includes mobilization— in which the senior executive team, through its significant, visible sponsorship, rallies the organization to ensure long-lasting success—and strategy translation. Here, strategy maps and scorecards are developed and strategy is cascaded. The next stage
encompasses alignment and motivation: communicating strategy and developing the strategic initiatives portfolio. During this stage, technology begins to play a significant role in multiple contexts, including communications as well as performance reporting and initiative management processes. Organizations also begin linking operations management and operational reporting and review to strategy. The third stage— which corresponds to SFO Principle 5, Govern—is sustainment. A strategic governance system is established to embed strategy management in the organization’s management discipline. Budgeting is aligned with strategy development and review; the support functions—finance, HR, and IT—are each aligned with strategy and operations management; and IT investments are made at levels that ensure the optimal workings of the integrated double-loop process. This stage of transformation in effect represents the foundation for all future development of the strategic management system. As each stage of transformation is achieved, the requisite technology—infrastructure, data, and information—must be in place to facilitate progress and allow improvements in decision making that will advance the organization in pursuit of its strategic objectives. Thus, process maturity is sequential; certain competencies must be in place before others can be developed. For example, the corporate strategy map and scorecard must be in place before bona fide strategy review meetings can take place. Likewise, with technology maturity, before decision analytics can be widely used to support strategic decision making, certain data management rules and standards must be established to ensure data integrity and access.
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Two-thirds of the Hall of Fame respondents reported that their organizations leverage a reference architecture to meet their information needs.5 A formal technology selection team chooses the technology, reconciling a set of standards against the needs of the business. We believe it is only a matter of time until all organizations implement such a rigorous approach to managing their IT environment. Timing Is Everything When should organizations adopt new technology to support their evolving strategy management system? We asked survey participants to identify at what point they introduced BSC reporting and analysis tools. Half waited until their BSC program was under way, while 25% introduced specialized tools concurrent with the launch of their BSC program. Surprisingly, 20% have not yet invested in such tools, continuing to rely on off-the-shelf desktop tools such as Microsoft Excel and PowerPoint. The data suggest that those who waited benefited from that decision, supporting Robert Kaplan’s argument. Doing so enabled them to establish a common view of strategy, develop a standard nomenclature and measures, and align everyone through the strategy map. Yet while that choice may have been universally appropriate five to ten years ago (when many respondents’ BSC adoption took place), it is not at all clear that it remains so today, given developments in the technology marketplace. We’re now seeing tools that facilitate integration, improve organizations’ ability to leverage existing technology, and boost the quality of data input.6 A more apt question is: how quickly should you migrate to more sophisticated technologies that offer higher levels of integration and analysis?
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Among Hall of Fame organizations already tapping these nextgeneration tools, only 25% said their BSC system was integrated with other software technology solutions (such as ERP, CRM, or other planning and budgeting systems). But within this group, nearly two-thirds claimed their integrated solution provides increased efficiencies and better information to support integrated business planning and strategic decision making. Approximately half of the survey group indicated their organization plans to introduce analytics and a suite of tools and technologies organizationwide in the near future. Preliminary Insights The evidence is there: technology solutions deliver results when they enable existing human-based management processes. Relatively simple and familiar desktop productivity tools adequately support strategy reviews, initiative management, and basic communication requirements. But for alignmentstage processes and activities— once scorecards are cascaded and linked to key process management, and when analysis must begin—organizations need enabling tools that support dashboards and analytics for key processes, as well as offer web-based capability. When the integration of strategy and operations management processes takes root, more advanced tools are needed to support those processes. During the sustainment stage, organizations will require technology tools that provide integrated resource management (including driver-based planning and rolling budgets and forecasts), HR analytics, integrated strategy and analytics, knowledge management, simulation modeling, and scenario planning. As the available technologies become ever more robust and sophisticated, organizations and their technology vendors must be
ever more vigilant about matching technology maturity to process maturity. As the all-too-many war stories demonstrate, mistakes can be costly. 1. R.S. Kaplan, “Can Bad Things Happen to Good Scorecards?—Part II of Implementation Pitfalls,” BSR November–December 1999 (Reprint #B9911D). 2. These conclusions come from the two surveys used in this research thus far: the survey of more than 330 qualified BSC online community members, and a detailed online survey of 24 Hall of Fame members, also done in 2007. 3. See R. H. Russell, “Make It Breakthrough: Findings from the 2007 Global SFO Survey,” BSR November–December 2007 (Reprint #B0711A). 4. Decision analytics refers to the discipline and underlying software of leveraging analytics and performance modeling to link key operational processes and desired strategic outcomes. 5. A reference architecture is a proven template approach for the architecture of any system, whether a computing language or a technology infrastructure. In this context, it refers to the latter, with a predefined set of data management standards. 6. Indeed, the corporate performance management (CPM) technology market grew by more than 20%, to $1.5 billion, in 2006, according to the Gartner report, Gartner Magic Quadrant for CPM Suites 2007. Gartner defines CPM as including budgeting, planning, and forecasting; profitability modeling and optimization; dashboard and scorecard applications; financial consolidation; and financial, statutory, and management reporting.
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For more information about the ongoing survey and the Technology Maturity Model, please contact study author Randall Russell at
[email protected]. See “Aligning Support Functions,” by Robert S. Kaplan and David P. Norton, BSR January–February 2006 (Reprint #B0601A); also “Creating Strategic Alignment and Readiness for IT,” by David P. Norton, BSR September–October 2002 (Reprint #B0209A ); and “Leveraging the New IT Infrastructure for Strategic Agility,” an adaptation of a speech by Peter Weill, BSR September–October 2003 (Reprint #B0309D). See the new BSR Reader, The Strategy-Focused IT Organization, which contains seven of the most important articles BSR has published on IT and organizational alignment. It’s available at www.harvardbusinessonline.org. Reprint #B0803B
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March–April 2008
Moving from Performance Measurement to Strategy Management at Brigham and Women’s/Faulkner Hospitals By Gary L. Gottlieb, MD, President and CEO, Brigham and Women’s/ Faulkner Hospitals Adapted by Lauren Keller Johnson, Contributing Writer, from the presentation “Driving Balanced Performance in an Academic Medical Center” delivered by Dr. Gottlieb at the July 2007 Palladium Leadership Conference in Boston.
A Boston-area medical center and 2006 BSC Hall of Fame inductee uses the BSC to unify its performance data and present a “single source of truth” for continually improving service quality and operating margins. Brigham and Women’s Hospital, founded in 1980 from some of the country’s oldest and most esteemed medical centers, became Brigham and Women’s/ Faulkner Hospitals (BWF) in 1998 after the original organization merged with Faulkner, a Boston community hospital. BWF is also a teaching affiliate for Harvard Medical School, as well as home to one of the world’s leading biomedical research institutes, a research entity funded largely by the National Institutes of Health. With more than $400 million in funding for research and an expanded array of service offerings, we generate enormous volumes of data. In 2000, we started looking for a methodology that would help us reduce paperwork, provide a “single source of truth”—one source of reliable information on performance— and ensure that researchers and physicians had ready access to the information they needed to excel in their roles. We also wanted a mechanism for addressing serious problems plaguing the Boston healthcare scene, including nursing shortages and disparities in the quality of medical treatment across diverse populations in our community. For example, BWF sits at the
junction of some of the poorest as well as the most affluent neighborhoods in our area. We wanted to make sure that no matter which neighborhood a patient comes from, he or she receives top-quality care at BWF. The BSC promised to help us meet all these needs, and we adopted it officially in 2001. Measuring Performance in New Ways As the first stage in our BSC program, we wanted to lay the groundwork for measuring performance in a new, comprehensive way. In 2002, BWF finalized a four-year partnership with SAS to create an internal website that would serve as an automated performance reporting tool. Early the following year, we piloted the BSC by creating strategy maps and scorecards for three divisions in the organization: Surgery, Nursing Services, and Finance. The next phase, which unfolded from 2004 through 2007, saw the BSC extended to many of our remaining divisions. Our organization-wide strategy map, like those of other not-forprofit enterprises, places financial strategic objectives (revenue growth, operating margin, and expense control) at the bottom.
At the top stands our “Service Excellence and Growth” perspective, which includes the objectives “Patient satisfaction,” “Referring MD and community satisfaction,” and “Network development.” Next comes the “Quality and Efficiency of Care” perspective, comprising objectives such as “Quality outcomes,” “Patient and staff safety,” “Clinical innovation,” and “Operational efficiency.” Finally, there’s our “Commitment to People, Research, and Teaching” perspective, which contains the objectives “Staff satisfaction and development,” “Science, discovery, and translation,” and “Teaching excellence.” The unit-level scorecards’ strategic objectives all align with the highlevel picture. For example, the “Quality and Efficiency of Care” perspective on Nursing Services’ scorecard has three of the enterprise map’s objectives: “Quality outcomes” (with metrics such as “bloodstream infections per 1,000 patient days” and “pressure ulcers”), “Patient and staff safety” (including metrics like “back/ shoulder/knee injuries” and A T
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Brigham and Women’s/ Faulkner Hospitals Boston, MA • Founded in 1980 as Brigham and Women’s Hospital from four predecessors: Boston Lying-In Hospital (1832), Free Hospital for Women (1875), Peter Bent Brigham Hospital (1911), and Robert Breck Brigham Hospital (1914) • Merged with 130-bed Faulkner Hospital in 1998 • $2.3 billion enterprise • 8,300 births, 52,360 discharges, and 31,060 surgical procedures in 2006 • 900+ physicians; 747 beds • Adopted BSC in 2001 • Ranked 10th best hospital in 2007 in U.S. News & World Report’s America’s Best Hospitals annual survey.
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“blood/body fluid exposures”), and “Operational efficiency” (assessed by metrics such as “average length of stay”).
From Performance Measurement to Performance Management
Standardizing the way we measure performance and gathering data We also have a total of about on all our metrics in one place 400 individual-level scorecards, has enabled us to move from updated monthly, for physicians, merely measuring performance department chairs and chiefs, to managing it. That shift has in administration managers, and turn helped us to begin addressing faculty members. These individa major element of our mission: uals can go to the website and detecting and reducing disparities in health services across different patient populaMoving from measuring to managing perfortions. mance has enabled us to make some marked For example, we improvements. For example, ALOS in our began slicing medical-surgical units has decreased over data on a wide range of perfour consecutive years, even as the severity formance metrics of illnesses treated has increased. (such as inhospital mortality rates, patient satisfaction, average access their scorecards to review length of stay, and 14-day readmistheir performance. They can sion rates) by gender and race/ also compare their performance ethnicity. We can view actual with that of their peers (either performance data for these metrics blinded or unblinded, depending not only for BWF overall, but on leaders’ preference). For also for individual physicians example, the report comparing and divisions. patients’ satisfaction with cardiac All this has positioned us to notice surgeons lists current, year-to-date, patterns in performance shortfalls and previous year’s satisfaction on any metric or sets of metrics. ratings for each surgeon, as well And by noticing these patterns, as a number representing overall we can explore possible explanaperformance status. Physicians tions for the problem and, if interested in seeing the data that went into these ratings can access needed, develop solutions. For instance, if average length of stay reports from this same page in (ALOS) has increased, we’ll spot the system. the situation and dig deeper for A note about our target-setting: potential causes. In one case, we some targets are determined discovered that because we had externally; for instance, through a higher-than-typical number of our contracts with insurance patients awaiting heart transplants, providers, who use local or our ALOS was distorted. In another national benchmarks to stipulate instance, we found that the use targets. Others we set ourselves. of instruments during delivery in To illustrate, we’re approaching some obstetrics divisions dramatithe 90th percentile in patient cally increased episiotomy rates. satisfaction for 500-bed hospitals, By identifying patterns across but we’ve set a goal of reaching different divisions, we could that same percentile for hospitals teach new behaviors in an effort of all sizes. With other metrics, to decrease these rates. In yet such as mortality rates, there’s no another example, we learned that question about the target: it’s zero. the operating rooms having the
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most difficulty with on-time starts of procedures were overscheduling surgeons. We improved performance on this metric by adjusting surgeons’ schedules accordingly. Moving from measuring to managing performance has enabled us to make some marked improvements. For example, ALOS in our medical-surgical units has decreased over four consecutive years, even as the severity of illnesses treated has increased. And the average rate of episiotomies per month has decreased from 8.6% in 2006 to just 4% in 2007. Of course, we have to balance the quality of medical services with the health of our net operating margin. Without attention to margin, we’d soon run out of the financial resources we need to serve patients. Our new performance measurement approach revealed that while net operating margin for inpatient services overall was acceptable, performance on that same metric per discharge was lower in 2007 than it was in 2006 for a few select areas. When we investigated, we learned that this decrease in margin was concentrated in a small number of surgical procedures, including several that involved the introduction of new, high-cost technology or expensive implants. We’re currently exploring possible solutions to the problem. For instance, we could perform these procedures in new, more efficient ways that are just as effective but cost less money. Or we could negotiate with insurance companies for more appropriate reimbursement rates. From Performance Management to Strategy Management To take the next step—moving from performance management to strategy management—we’ve incorporated the review of scorecard objectives and performance
March–April 2008
into several leadership meetings. In addition, we regularly revisit and (if appropriate) revise our strategy maps, objectives, and metrics to reflect emerging priorities. Take the Patients First initiative, sponsored by the Massachusetts Hospital Association. Since 2007, this effort has called for medical centers to expand the public’s knowledge about how their hospitals measure up and to promote a work environment dedicated to patient safety. The initiative challenges hospitals to adopt practices such as publicly reporting performance on nationally recognized safety measures, surveying patients about their hospital stays, making staffing plans publicly available, and investing in more trained nurses and other caregivers. Patients First has involved our sharing such performance metrics as hours of nursing care per patient day, patient slips/falls with injuries, and decubitus ulcer rates on a state comparison website. To support
and align with this external strategic initiative, these same measures and many others that reflect the quality of nursing care can be tracked in our scorecard system by our nursing leaders at the hospital, service, floor, or cost center unit. Looking Ahead Though we’ve achieved some successes through the use of the BSC, there’s still a lot to do. If I envision our story as a book eventually consisting of 20 chapters, I’d have to say we’re only on chapter five or six at this point. We want to do better at measuring performance in real time rather than just monthly. We also want to expand our set of performance metrics to additional areas of medical treatment (such as anesthesia, dermatology, psychiatry, pathology, and radiology) as well as to our research and teaching organizations. For example, I’d like us to have measures for both the quantity and quality of research publica-
tions, and metrics to track improvement in the volume of research conducted per square foot. And we could strive to measure and enhance the number of hours committed to teaching. Finally, we need to work further toward the across-the-board reliability of our performance data. In many cases, data reliability is high. But other cases, we’re less confident. For instance, some data input and reporting systems at Faulkner Hospital have not yet been automated, making the reliability of those systems’ data more questionable. The good news is that our new way of measuring and managing performance has helped people throughout BWF see that they can play a direct role in supporting our mission and strategy. That alone has been an intangible incentive that has won their commitment to continual improvement. Reprint #B0803C
C O M I N G
Got Results? Your organization might have what it takes to be in the Palladium Balanced Scorecard Hall of Fame for Executing Strategy™ Applications for the 2008 BSC Hall of Fame are now being accepted. Does your organization exemplify the five key principles of the Strategy-Focused Organization? Has it achieved breakthrough performance over a sustained period of time? If so, consider applying to the BSC Hall of Fame for Executing Strategy. Admission to the BSC Hall of Fame has its privileges: prestige, publicity (through press releases and coverage in such publications as Balanced Scorecard Report and Harvard Business Review), and membership in an elite community of 100 organizations worldwide that represent a broad array of industries from both the private and public sectors. To learn more about the BSC Hall of Fame criteria and application process, and to download the 2008 application form, visit: www.thepalladiumgroup.com/halloffame .
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Linking Strategy and Operations: A step-by-step account of one BSC Hall of Fame company’s approach Guidelines for Initiative Review and Reporting Author Adrian Slywotzsky on turning strategic risks into growth opportunities The BSC as Strategy Formulation Tool: Using the BSC for Competitor Analysis Where Are They Now? Findings from an in-depth survey of past Hall of Fame winners’ current performance Using Experience Co-Creation to Shape Customer Strategy …and new Case Files on: Nemours (the leading children’s healthcare system) and Public Service Electric and Gas Company
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Balanced Scorecard Report
Strategy or Stakeholders: Which Comes First? By Robert S. Kaplan
How far should organizations go in abiding by stakeholders’ interests? According to stakeholder theory, strategy should take into account, if not be built around, stakeholder interests. Nonsense, argues Robert Kaplan. Such an approach is not only wrong-headed, it’s impracticable. Besides, companies can account for any stakeholder considerations they view as important through their Balanced Scorecard and strategy map—and hold performance to them, without compromising strategy or their ability to adjust it to changing conditions. Many critics of “American” capitalism, whether from Europe, Japan, or emerging markets, believe that U.S. corporations focus too narrowly on shareholder interests at the expense of other stakeholders. The critics usually identify these other corporate stakeholders —those who have a stake in the performance and behavior of companies—as employees, customers, suppliers, and, especially, communities and society in general, though some also include governmental agencies and political groups. The critics view U.S. corporations as operating under the philosophy expressed by notable (and Nobel Prize– winning) free market economist Milton Friedman, who stated: “The business of business is business,” and “The social responsibility of business is to increase its profits.” These critics want to hold business accountable to performance beyond what it delivers to shareholders. Some have argued that companies need to start with determining the preferences of all their stakeholders and then craft a strategy that meets the stakeholders’ expectations. In the 1980s, Professor Edgar Freeman formalized the arguments for a stakeholder theory of the firm.1 He and subsequent followers of this school of thought argued that companies need to consider and satisfy the interests of their vari-
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ous stakeholders as they conduct their business. This “stakeholder view” has been reinforced in recent years by the corporate social responsibility (CSR) movement, which advocates that organizations take responsibility for the impact of their activities on customers, employees, shareholders, communities, and the environment in all aspects of their operations. CSR proponents urge companies to expand their traditional financial reporting framework to take into account their environmental and social performance as well, an approach now referred to as “triple-bottomline” reporting.2 Some have viewed the Balanced Scorecard as a mechanism for implementing the stakeholder, rather than the shareholder, perspective and as a framework that can be adapted for triple-bottom-line reporting. Building on the stakeholder framework, some prominent management control scholars have criticized the Balanced Scorecard framework for putting financial performance for shareholders at the top of a (private-sector) strategy map, where it serves as the ultimate measure of the strategy’s success. These writers advocate that “performance measurement design starts with stakeholders.”3 Their stakeholder approach to performance measurement starts by defining objectives for what each stakeholder
group expects from the corporation and how each group contributes to the corporation’s success. Once stakeholder expectations or, even further, implicit and explicit contracts between the stakeholders and the corporation, are defined, the corporation then defines a strategy to meet these expectations and fulfill those contracts. Thus, while the Balanced Scorecard approach starts with a strategy for shareholder value creation, and then identifies the interrelationships and objectives for various stakeholders, the stakeholder approach starts with stakeholders and, in a second step, defines a strategy to meet shareholder expectations. The stakeholder scorecard would measure how well the company has performed for each of its various stakeholder groups, without ascribing any hierarchy to them. Strategy Precedes Stakeholders The great business historian Alfred Chandler taught us that strategy precedes structure. I strongly believe that strategy also precedes stakeholders. The stakeholder approach can essentially be viewed as a reaction to and rejection of the narrow shareholder-value-maximization view articulated in Friedman’s glib statements. In this spirit, the stakeholder approach has served to highlight the multiple relationships that companies need to nurture and preserve in order to drive long-term, sustainable value creation. But stakeholder theory confuses means and ends. It therefore ends up as a less powerful, less actionable, and ultimately less satisfying approach than the strategy map/Balanced Scorecard approach. David Norton and I, following the thinking of Chandler and strategy scholar Michael Porter, have advocated selecting a strategy first, and only subsequently working out the relationship with the other stakeholders, as needed by the strategy.
March–April 2008
I will illustrate the contrast between our point of view and that of stakeholder advocates with several examples. You Can’t Be All Things to All Customers First, consider the case of Mobil’s U.S. Marketing and Refining (USM&R), a well-documented Balanced Scorecard implementation.4 Mobil learned, through market research, that its customer base was heterogeneous. Some valued only low price and wanted Mobil to offer the cheapest prices, matching or beating the prices of discount stations and the other major gasoline companies. Other customers, however, were less price-sensitive and were willing to pay a premium, say up to $0.10–0.12 per gallon more, if they could have a superior buying experience—one including, for example, quick service, the ability to pay by credit card at the pump, clean restrooms, friendly and helpful employees, and a great convenience store. Stakeholder theory fails in this case. Which customers’ expectations should Mobil satisfy? It could not satisfy both customer groups. Having larger gasoline stations equipped with more pumps and self-pay mechanisms; having better-paid, better-trained, and more experienced employees; and having a full-service convenience store costs money. These costs would need to be covered by higher prices, thereby disappointing the price-sensitive customers. Conversely, if Mobil offered the lowest prices, it would not have been able to afford to invest in the larger stations with more self-service and self-pay pumps, the better-qualified employees, and the convenience store, thereby disappointing the customers desiring a great buying experience. Strategy is about choice. Companies cannot meet the expectations of every possible customer. Wal-Mart
meets the apparel needs of one strategy, not because someone customer segment, price-sensitive has identified them as a stakeclothing purchasers. Nordstrom holder class. Consider the example meets the needs of another segof a pharmaceutical company ment, those seeking complete in the early 1990s. Among its wardrobe solutions, with sales most important employees (what staff that know their style preferwe would now call a “strategic ences, sizes, and clothing budget. job family”) are the chemists High-end designer stores, such who perform research to identify as Armani and Ferragamo, meet new compounds for treating the expectations of a third segspecific diseases. The stakeholder ment, purchasers seeking product- approach would call for interleading fashion, fabric, and fit, viewing these key employees to who are willing to pay a great deal more to Within the BSC framework, employee satisfy their objectives always appear, but they are clothing preferthere because employees are necessary for ences. Similarly, achieving the strategy, not because someone customers of Southwest has identified them as a stakeholder class. Airlines have different expectations of performance than the learn their career expectations, business- and first-class customers and then developing a strategy who fly British Airways. Strategy that would satisfy and meet the determines which customer segexpectations of these employees. ments a company has decided to Later in the 1990s, however, serve and satisfy, and the value and continuing into this century, proposition that it will offer to pharmaceutical companies shifted win the loyalty of those customers. their strategies because of the Determining strategy must precede new capabilities that became defining measures of customer available from the scientific fields satisfaction and loyalty. Otherwise, of molecular biology and genetthe company would attempt to ics. With this new shift, molecular meet the expectations of all the biologists and geneticists became existing and potential customers it the new key employees; the could serve—an expensive, nonfate of pharmaceuticals’ formerly differentiated approach. Yet this is key employee stakeholder, PhD precisely what stakeholder theory chemists, became more tenuous, demands. especially if they did not acquire A similar situation occurs with dramatically new capabilities employees. In creating the and competencies to enable them Balanced Scorecard, Dave Norton to contribute to new approaches and I deliberately chose not to for drug development. Again, the label the fourth perspective the stakeholder view would lock a “employee” or “people” perspeccompany into maintaining relationtive; instead we chose a more ships with this soon-to-be-obsolete generic name, “learning and employee group, preventing the growth,” to signal that we were company from moving swiftly not taking a pure stakeholder enough to acquire entirely new approach. Within the BSC frameemployees to help implement work, employee objectives always the new strategy. appear (in the learning and I might add that on a recent growth perspective), but they visit to Japan, for the 2007 Asia are there because employees Pacific Balanced Scorecard are necessary for achieving the
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With respect to suppliers, stakeholder theorists also criticize the Balanced Scorecard for not having a separate perspective for this group—one of their five essential stakeholder groups in their worldview. But as with employees, suppliers show up on the scorecard (typically in the internal process perspective) when they are essential to the strategy. So companies such as Wal-Mart, Nike, and Toyota, for whom suppliers play a critical role in creating sustainable competitive advantage, would certainly feature supplier performance in their strategy maps. But consider a company like Mobil USM&R, whose main suppliers are petroleum exploration and production companies (which provide a commodity such as crude oil), and construction companies (which build refineries and pipelines). These suppliers provide essential products and services, but don’t provide any differentiation for or support of Mobil’s strategy. Similarly, a community bank with a customer intimacy strategy gets its raw material, money, from the U.S. Federal Reserve system. Suppliers are not a critical component of its strategy. Thus, Mobil USM&R and the community bank may choose not to feature suppliers on their scorecards because suppliers don’t contribute to their competitive differentiation and the sustainability of their strategies. Again, strategy precedes stakeholders—and, in these cases,
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may reveal that a stakeholder is not decisive for the strategy. When Stakeholders Are Key to Strategy When stakeholders are vitally important for the success of a company’s strategy, they should be included in the company’s strategy map and scorecard. The organization’s performance relative to society and communities does appear as internal process objectives when such performance contributes to the differentiation of the organization’s strategy.5 This practice matches that articulated by Michael Porter when he advocated that environmental and social performance be aligned to support the company strategy.6 Occasionally, we find companies in which the shareholders themselves choose an explicit stakeholder value approach rather than having shareholder value be the unifying paradigm for their strategy. That’s OK; that’s their choice. And it doesn’t mean that they have to abandon the Balanced Scorecard methodology and switch to the stakeholder view. They can use a strategy map and Balanced Scorecard to articulate their preference for simultaneously creating economic, environmental, and social value. This will help them balance and manage the tensions among those values. This is exactly the path taken by Amanco, a Latin American producer of water treatment solutions, whose founding shareholder believed deeply in triple-bottom-line performance.7 In summary, stakeholder theory may have been useful for articulating a broader company mission beyond the narrow, short-term shareholder-valuemaximizing model. To its credit, it has increased companies’ sensitivity about how the failure to incorporate stakeholder preferences and expectations
in their strategy can lead to an excessive focus on short-term financial results and even undermine long-term performance. The Balanced Scorecard, however, incorporates stakeholder interests endogenously, within a coherent strategy and value-creation framework, when outstanding performance in relation to those stakeholders is critical to the success of the strategy. The converse is not true for stakeholder theory. Stakeholder theory provides little guidance for companies when they wish to modify their strategy in way that adversely impacts an existing stakeholder. Because of the dynamics of competition, technology, regulation, and consumer preferences, companies at times need to shift their focus and priorities among multiple stakeholders. A strategy that is based on creating longterm shareholder value enables companies to be flexible in adapting to changing conditions, while still recognizing how the interests of all their stakeholders must be reflected in sustaining their valuecreating strategies. 1. R. E. Freeman, Strategic Management: A Stakeholder Approach (Pitman, 1984). 2. J. Elkington, “Towards the Sustainable Corporation: Win-Win-Win Business Strategies for Sustainable Development,” California Management Review (1994). 3. A. Neely, C. Adams, and M. Kennerly, The Performance Prism: The Scorecard for Measuring and Managing Stakeholder Relationships (Pearson Education, 2002); A. Atkinson, J. Waterhouse, and R. Wells, “A Stakeholder Approach to Strategic Performance Measurement,” Sloan Management Review (Spring 1997). 4. Mobil U.S. Marketing and Refining (A): Harvard Business School Case, by R. S. Kaplan ( June 26, 1997: 197120); also R. S. Kaplan and D. P. Norton,“Creating the Strategy-Focused Organization: The Mobil NAM&R Experience,” chapter 2 in The Strategy-Focused Organization (HBS Press, 2001). 5. R. S. Kaplan and D. P. Norton, “Regulatory and Social Processes,” chapter 6 in Strategy Maps (HBS Press, 2003). 6. M. E. Porter and Mark R. Kramer, “Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility,” Harvard Business Review (December 2006). 7. Amanco: Developing the Sustainability Scorecard: Harvard Business School Case, by R. S. Kaplan and R. Reisen ( January 25, 2007: 107038).
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Summit, several Japanese executives shared their version of stakeholder theory. They told me that in their companies, employees came first, not shareholders. I thought to myself (but did not respond) that this way of thinking has likely contributed to Japan’s struggle for the past two decades to adapt to the reality of lower-cost production from China and Southeast Asia.
