N ove m b e r – D e ce m b e r 20 08 | Vo l u m e 1 0 , N u m b e r 6
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S O U R C E INSIDE THIS ISSUE
What Is Your Strategy Management Philosophy?
Case File..............................7
By David P. Norton
Every profession has its approaches, or “schools of thought.” The profession of strategy management is no exception, claims David Norton, who believes business leaders should do more to educate themselves about the different schools of thought—and select the one that is right for their organization. The Balanced Scorecard, in its evolution from performance measurement to performance and strategy management system, has become such a school of thought, with some considerable advantages over other leading schools. If you’ve ever seen a glacier up close, you’ve undoubtedly observed the action caused by the melting on the glacier’s face. Every day, numerous slabs “calve,” or break off and drop to the ground or water below. A glacier is so large that the impact of a single calf is minor. But collectively, the impact of this process is significant. Every guide invariably points out a landmark miles away, noting that “less than 15 years ago, the face of the glacier was over there.” So while the daily changes to the landscape are incremental and seemingly imperceptible, over a matter of 15 years, the cumulative change can be dramatic. What does this have to do with strategy management? Well, it has been slightly more than 15 years since Bob Kaplan and I introduced the Balanced Scorecard. Through our research and writings, we have studied countless companies that have used the Balanced Scorecard approach to manage strategy execution. Frequently, the results have been powerful, even transformational, creating an impact analogous to that of the calving glacier. But it’s important for leaders to examine the steps they have taken to understand the real implications of the experience and the approach. It’s important to question how well your approach supports your underlying philosophy of value creation—and ultimately, your long-term performance. With the publication of The Execution Premium, our fifth book on the Balanced Scorecard, I’d like to step back and examine the BSC’s evolution from measurement to management system—and how it compares with other economic models and performance management approaches. I’d also like to share some observations from our years of research about the requirements of a 21st-century performance management system. Surveys confirm that business leaders recognize the primary importance of strategy execution. Yet we find a glaring lack of awareness about leading performance management systems—their capabilities and their shortcomings. At many organizations, management approaches have been adopted organically, rather than systematically, and often alongside other methodologies and programs—and not always in a top-down, integrated fashion. The management approach may not support the organization’s underlying performance management philosophy, if one exists at all. A consciously chosen philosophy and performance management approach is vital to a coherent strategy management system and to achieving Continued on next page
Information Services with Value-Adding Impact: Lockheed Martin’s EIS Group It’s what every internal service organization seeks. With a new enterprise strategy in place, Lockheed Martin’s IT organization wanted to recast itself as strategic partner. Its mission: to provide complete customer solutions to its internal customers and help the corporation win big IT contracts among external customers. A textbook adoption of SFO principles and extraordinary creativity (and award-winning marketing) helped EIS engineer BSC Hall of Fame–level success.
Performance Management ........10 How to Write Performance Analysis That Truly Enhances Decision Making Sure, a picture tells a thousand words. But effective performance analysis demands more than charts and graphs with captions that restate the obvious. Context, insight, actionable recommendations— these are what managers need to make sound decisions. Asking the right questions—“What happened?” “Why?” and “What to do about it?” is all it takes to create qualitative analysis that makes performance reporting worth its weight in gold.
Management Synergies ..............14 Finding—and Firing Up— Your Next Growth Engine The greatest successes don’t last forever. And adjacencies can’t fuel continued success indefinitely. Business guru Chris Zook, best known for his book Profit from the Core, discusses redefining your core. When to do it is one thing; how is quite another. Zook offers inspiring examples from such success stories as DeBeers, PetSmart, and Marvel Comics. Kaplan and Norton’s New Blog Harvard Business Online and Palladium Group are pleased to announce the debut of Robert Kaplan and David Norton’s blog. The two take turns ruminating on today’s pressing performance management issues, provoking your thinking and soliciting your views and experiences. Discover what’s on their mind— and join the conversation—at www.executionpremium.org.
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sustainable performance success. But not all philosophies or approaches are created equal. The Balanced Scorecard as Management System The BSC was originally designed to solve a performance measurement problem. Up until the 1990s, most organizations relied excessively, if not exclusively, on financial measures such as profitability and ROI to manage themselves. Because financial measures are lag indicators, these organizations tended to make short-term decisions to impact financials at the expense of long-term decisions that could create future value. The BSC represented a measurement framework that could balance the long-term factors that create value (lead indicators) with the short-term factors that record value (lag indicators). Today it has become the dominant framework for measuring organizational performance. Studies conducted between 2002 and 2006 showed that 50% of organizations used some kind of scorecarding system. Of that group, 62% used a Balanced Scorecard, while 13% used a Quality Management framework (encompassing a variety of methodologies such as Total Quality Management [TQM], Six Sigma, and Lean Manufacturing). Three percent used a Shareholder Value framework.1 Many people still believe the BSC is just a measurement technique. Our readers well know, however, that the term “Balanced Scorecard” means far more; it is a fullfledged performance management system. Even the latest primer on the BSC, Balanced Scorecard Strategy for Dummies, recognizes that, while measurement is a key aspect of the BSC, the system is really “a means to setting and achieving the strategic goals and objectives for your organization.”2
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The Balanced Scorecard as School of Thought Virtually every profession has its schools of thought—groups of people who share a point of view about its ideals and how to accomplish them. In architecture, Walter Gropius led the Bauhaus School of design; Frank Lloyd Wright created the Prairie School. Each school has its design philosophy to help the architect make design choices (for example, the “form follows function” philosophy of the Prairie School), as well as a design approach, which encompasses the different methodologies supporting that philosophy.3 Likewise, performance management has its own schools of thought. TQM,4 one of today’s leading approaches, is “centered on quality, based on the participation of all [an organization’s] members, and aiming at longterm success through customer satisfaction and benefits to all members of the organization and to society.” 5 Shareholder Value is based on the philosophy that shareholders’ money should be used to earn a higher return than shareholders could earn by investing in other assets having the same amount of risk.6 We define the Balanced Scorecard as a framework for implementing strategy that translates an organization’s strategy into a set of objectives and measures and aligns the organization to them through its planning and control processes. As shown in Figure 1, each performance management school of thought has three building blocks (tiers). First is an economic model on which the approach is built. TQM’s economic model views the role of quality in improving customer satisfaction as the source of value creation. Shareholder Value emphasizes the return on investments relative to
Balanced Scorecard Report 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, Harvard Business Publishing Executive Editor Randall H. Russell VP/Research Director, Palladium Group, Inc. Editor Janice Koch Balanced Scorecard Collaborative/Palladium Group, Inc. Circulation Manager Bruce Rhodes Newsletters, Harvard Business Publishing 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. Email:
[email protected] Copyright © 2008 by Harvard Business Publishing Corporation. 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 Publishing is a not-for-profit, wholly owned subsidiary of Harvard University. The mission of Harvard Business 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 link strategy and operations to achieve an execution premium. Palladium’s expertise in strategy, finance, and IT— delivered through consulting, education, training, and technology implementation services—helps more than 500 clients clarify strategy, drive performance, and optimize data. Palladium has offices throughout North America, Europe, the Middle East, Latin America, Africa, and the Asia-Pacific region. Palladium’s Balanced Scorecard Hall of Fame for Executing Strategy™ recognizes organizations that have achieved an outstanding execution premium. To learn more, visit www.thepalladiumgroup.com, or call 781.259.3737.
Explore the many resources available on the Balanced Scorecard and executing strategy at BSC Online. Join today— membership is free. For details, visit www.thepalladiumgroup.com/bsconline. Sign up for the electronic version of BSR—available only to subscribers— at www.bsronline.org/ereg.
November–December 2008
Figure 1. A Performance Management System Is Built Upon a Foundation of Economic Assumptions and a Management Philosophy
BUILDING BLOCKS
PERFORMANCE MANAGEMENT SCHOOLS OF THOUGHT Total Quality Management
Shareholder Value
Balanced Scorecard
I. An Economic Model of Value Creation
Improved quality improves customer satisfaction, which in turn benefits all organization members
Make only investments that exceed the investors’ equivalent risk-adjusted rate of return
Value is created by developing the intangible assets that improve business processes and that satisfy customer needs—which in turn create shareholder value
II. A Philosophy of Management
A bottom-up process where all individuals are responsible for improving quality in their own sphere of influence
Value is created through control of investments
A top-down process led by senior executives that clarifies and communicates the strategy and requires each part of the organization and each person to align to the strategy
Quality circles using statistical tools are empowered to challenge the status quo of operational performance
Capital allocation and initiative portfolio management tools monitor the implementation of projects
The governance process is redefined so that planning, resource allocation, and performance reviews are linked to the strategy, using BSC tools
III. An Integrated Management System
The three leading performance management schools of thought shown here are based on dramatically different models of value creation and philosophies. Their management systems, likewise, differ significantly in such areas as direction (top-down, bottom-up), scope, and degree of prescriptiveness.
the cost of capital. The BSC uses a strategy map to define value drivers. Second, each school has a unique philosophy of management—or a set of values by which the organization should be managed. TQM follows a bottom-up process in which all individuals are responsible for improving quality in their sphere of influence. Shareholder Value views the capital allocation process as the management framework. And the BSC relies on a topdown cascading process to ensure organization alignment. Finally, the philosophy and the economic model are embedded into a management system that allows the performance approach to be executed. TQM uses approaches like quality circles, supported by methodologies like Pareto charts, to improve performance. Shareholder Value taps into the organization’s finance system for capital allocation and initiative portfolio management. The BSC restructures the traditional double-loop planning and control process with a link to strategy as its framework for creating alignment. Each performance management school of thought has a comprehensive and cohesive body of knowledge that is internally con-
sistent. This knowledge provides the language, methodologies, and processes needed to educate professionals, identify best practices, and implement improvements (whether in the strategy itself, or in processes or methodologies). Let’s compare the leading schools of thought within this three-tier framework. Tier I: An Economic Model (Model of Value Creation) Whether it’s investments whose return exceeds the cost of capital (as with Shareholder Value) or quality improvement initiatives that increase customer satisfaction (TQM), the economic model defines what is meant by performance and provides the focal point of the management system. As shown in Figure 2 (next page), the BSC economic model has two distinctive components: a descriptive framework—the strategy map 7—establishes the organization’s vision and stakeholder objectives and depicts the causal relationships among business processes, human capital, and information technology (IT), showing how these can be harnessed to satisfy customer needs to create shareholder value. A measurement framework, the
Balanced Scorecard,8 balances four performance dimensions or perspectives—financial, customer, process, and learning and growth—that are linked by the cause-and-effect logic of the strategy map. First, organizations define objectives within each perspective; then they create supporting measures; next, they identify targets and performance gaps. These gaps are closed by executing strategic initiatives, thus creating value. These two components provide a framework to describe how value is created through an organization’s strategy. Tier II: A Philosophy of Management The performance management approach will ultimately become a system of plans and activities to govern organizational action. Should the process be top-down or bottom-up? Should it work within or across functional silos? Should it be transparent or known only to top management? Collectively, the answers to these and many other such questions embody the philosophy of the approach. The management philosophy of the BSC (Figure 2, Tier II),
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described in The Strategy Focused Organization (SFO) 9 consists of five principles Bob Kaplan and I identified: Mobilize Change Through Executive Leadership, Translate the Strategy into Operational Terms, Align the Organization to the Strategy, Motivate to Make Strategy Everyone’s Job, and Govern to Make Strategy a Continual Process. These principles define a set of beliefs and values that guide the design of the many details of the management system. For example, we believe that “strategy is everyone’s job.” In organizations dominated by knowledge workers who interface directly with customers, suppliers, and partners, low-ranking employees are best positioned to execute the strategy. This statement of philosophy means that the management system must make the strategy transparent, ensuring that everyone understands it, personalizes it, and is incentivized to execute it. Tier III: An Integrated Management System The values provided by the SFO principles must be translated into management processes that help govern the organization. To
“Motivate,” Public Service Electric and Gas (a BSC Hall of Fame winner) introduced an incentive compensation program tied to the BSC for its thousands of union employees. To help “Govern,” life sciences company Millipore converted its budget to a BSCdriven quarterly rolling forecast. But this translation isn’t always easy. Even leaders who have embraced these principles and successfully executed strategy have generally been unable to sustain their breakthrough performance. Why? Because they lacked a formal governance process. Thus, the economic model and the philosophy must be translated into an integrated management system—a set of processes, such as planning, budgeting, and strategy reviews, that are understood and adhered to by all members of the organization. As we argue in Alignment,10 the fundamental source of value added an organization achieves is proportional to the degree of alignment between the organization’s parts and its strategic priorities. In short, alignment is a process that should be formalized and managed. In The Execution Premium,11 we recommend adopting a six-stage,
closed-loop management system that codifies a perpetual process for strategy development, strategic planning, alignment, linking to operations, performance reviews, strategy testing, and adapting. This system is based on our research, which indicates that 70% of organizations with a formal management system for strategy execution outperform their peers.12 The creation of a formal, integrated management system (Figure 2, Tier III) is the final step in this journey toward a new way of managing. The Balanced Scorecard as Integrating Platform Strategy is holistic; organizations are siloed. This contradiction creates the fundamental barrier to building an effective strategy management system. Shareholder Value, while clearly based on an economic model and a philosophy, does not provide a holistic methodology for managing strategy. TQM is a bottom-up framework. Some TQM programs exist discretely within a functional area or department (e.g., manufacturing), while others are organization-wide but focus on specific processes such as supply chains.
Figure 2. The Balanced Scorecard Performance Management School of Thought 2 Plan the Strategy
The Execution Premium
AN INTEGRATED MANAGEMENT SYSTEM (TIER III)
3 Align the Organization
1 Develop the Strategy
Strategic Plan
6 Test and Adapt
Alignment
Operating Plan
5 Monitor and Learn
4 Plan Operations Execution Process Initiative
MOBILIZE: Mobilize Change Through Executive Leadership The StrategyFocused Organization
A PHILOSOPHY OF MANAGEMENT (TIER II)
TRANSLATE: Translate the Strategy into Operational Terms ALIGN: Align the Organization to the Strategy MOTIVATE: Motivate to Make Strategy Everyone’s Job GOVERN: Govern to Make Strategy a Continual Process
ECONOMIC MODEL OF VALUE CREATION (TIER I)
The Balanced Scorecard
• Four measurement perspectives balance lag and lead indicators • Measures and targets define performance gaps • Strategic initiatives close gaps • Cause-effect relationships
Strategy is… • A hypothesis of value creation • Multiple complimentary themes • A customer value proposition • Alignment of business processes • Readiness of intangible assets
Strategy Maps
= Kaplan and Norton book
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The BSC creates a common, holistic framework that applies throughout the six stages of management. The concepts defining its economic model, philosophy of management, and integrated management system are described in Kaplan and Norton’s five books, published from 1996 (The Balanced Scorecard) to 2008 (The Execution Premium).
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Despite its proven capabilities and the dramatic breakthroughs many organizations have achieved with TQM, it does not provide a blueprint for enterprisewide strategy management. The BSC, a top-down approach linking all performance perspectives causally is, we contend, the only true integrative performance management system. To illustrate, let’s look at the challenges faced by an organization implementing a new customer relationship management (CRM) program. The program will require a new technology (the IT plan), new training and incentives for users (the HR plan), new approaches to customer acquisition and account development (the sales plan), additional capital investment (the finance plan), and so on. To successfully implement this strategic program, the work of many departments must be integrated and synchronized. The typical planning and control system is designed to support organizational hierarchies and is fragmented into functional silos, not to provide the necessary integration. The BSC provides a solution. Its economic model, built around strategy maps and strategic themes, creates a common, holistic framework that applies throughout the six stages of management. The strategic themes, introduced during strategy development, provide a mechanism for cross-functional management, which is essential for keeping strategy holistic. The CRM implementation, for example, might fall within two themes: one for new customer acquisition and one for account growth. Quantitative targets and gaps would be established for each. In the strategic planning process, each strategic theme is translated into a set of discrete objectives and measures. A portfolio of strategic initiatives, drawn from across the organization, along with its investment budget (strategic expenditures, or “StratEx”)
creates a cross-organizational plan that can be managed outside silo boundaries.
strategy management system. The BSC provides a platform that allows these programs to be routinely integrated into the holistic strategy framework, where their effectiveness is actually enhanced.
This top-down approach provides the basis for aligning the organization. Strategic themes provide a way to keep the strategy holistic, and as the strateThe strategy map and BSC help create a gy is cascaded common architecture that integrates the from the top, various functional systems without the each department or area is asked need to destroy them or reconfigure the to define how organizational structure. it will fulfill (or affect) the strategic themes. In the CRM example, all employees New Structures, are asked how they will help a New Imperative acquire new customers or grow Like the discipline of TQM, existing accounts. This is not an activity confined to one silo, such strategy management through the Balanced Scorecard approach as sales. The strategic themes and has emerged as a professional plans provide the logic of the discipline with a unique body of cross-functional strategy. knowledge, set of organizational The strategy map and BSC help requirements, and set of specialists create a common architecture who can execute the approach. that integrates the various funcIts body of knowledge is charactional systems without the need terized not so much by the comto destroy them or reconfigure plexity of its analytics, but by the the organizational structure. The complexity of its organizational BSC becomes a platform for intescope. Strategy is holistic, requiring grating the diverse functional a cross-functional management management systems, just as system. Yet historically, there has an operating system does to intebeen no natural home for crossgrate diverse software applications. functional management in organiWithin this top-down organizing zations. New organizational framework, many other approaches structures have emerged to fill and methodologies can be used this gap: in concert. LG.Philips (now • The Office of Strategy ManageLG.Display) integrated a blue ment (OSM): the team (virtual ocean strategy 13 program into the or actual) responsible for customer perspective of its strategy designing, maintaining, and map, Bank of Tokyo-Mitsubishi operating the strategy manageintegrated a major risk management process ment program into the process layer of its strategy map, and Thai • The Chief Strategy Officer Carbon Black created a strategic (CSO): the leader of the OSM, theme for its sophisticated Six who is also a member of the Sigma program. In many organisenior management team zations, these programs would • The Strategy Council: a subset function independently in differof the senior management ent parts of the organization. team, which is responsible for Though valuable, their effectiveoverseeing strategy developness would be diminished because ment and execution they were not focused on the strategic priorities or linked to the 5
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• Theme Teams: groups of managers based on strategic themes who are responsible for extending strategy execution cross-functionally throughout the operational levels of the organization Each of these structures allows the organization to deal with cross-functional issues raised by strategy that fall beyond the purview of the conventional silos. The OSM, which Bob Kaplan and I introduced in 2004, has been adopted by hundreds of organizations to build and run their closed-loop strategy management system.14 It is also charged with integrating strategy into traditional siloed processes such as budgeting, HR planning, IT planning, and sales planning. Most important, the OSM is responsible for providing leadership for the new performance management process; in particular, educating senior management about this “new way” of managing. Already OSMs have had a dramatic impact on performance, helping accelerate successful strategy execution—and make strategy management a sustainable competitive advantage. Does Your System Produce Results? Ultimately, the mark of a performance management approach is the degree to which it produces results. Various surveys report that only 10% to 15% of organizations successfully execute their strategies, a total that includes users of performance management systems. It takes time for any organization to introduce a new way of managing, as well as to introduce the changes required by the strategy. But the results are clear. The Balanced Scorecard strategy management system has helped create successful strategy-focused organizations. More than 100 organizations from every industry and every corner of the world
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have been inducted into the Balanced Scorecard Hall of Fame. This distinction requires more than the world-class application of the BSC management system; each winner must prove that it has successfully executed its strategy over a sustained period— and has achieved breakthrough results. Infosys, the Indian outsourcer and 2007 BSC Hall of Fame winner, competes in the same markets as IBM and Accenture. Over a four-year period, it tripled revenue and earnings per share. Such financial results are common among Hall of Fame organizations. But these organizations also experience breakthrough results across all areas of performance: in process improvements and efficiencies, customer satisfaction, employee motivation— these and other areas garner these organizations recognition as “best company to work for” and “best managed” in their market. The BSC’s top-down view—and more important, its uniquely holistic, integrative ability— enables successful users to achieve dramatic, sustainable results and an execution premium. When asked to describe his experience with the BSC, Peter Aldridge, CEO of Hall of Fame winner HSBC Rail, replied, “We came looking for measures and found a new way to manage.” 15 Performance management has arguably never been more important. Strategies are more complex and intangible. Competitive pressures have intensified, driven by an increasingly global marketplace and compressed business cycles. It takes more than just a philosophy or methodology to manage performance; it takes a holistic system—something most organizations lack. So in taking the first step on your strategy management journey, I ask you, “What is your philosophy of strategy management?” The answer to that question might
help you, as it helped the 100 Hall of Fame winners and the hundreds of other high-performing BSC organizations, to achieve your execution premium. I 1. R. Lawson, T. Hatch, and D. Desroches, Scorecard Best Practices (Wiley Publishing, 2008). 2. C. Hannabarger, R. Buchman, and P. Economy, Balanced Scorecard Strategy for Dummies (Wiley Publishing, 2007), 10. 3. For more discussion of the architectural analogy see I. Holm, Ideas and Beliefs in Architecture and Industrial Design, Oslo School of Architecture (2006). 4. TQM, which emerged from Japan in the 1970s and ’80s, is based chiefly on the work of W. Edwards Deming, Joseph Juran, Philip Crosby, and Kaoru Ishikawa (referred to as “The Big Four”). Armand Feigenbaum, onetime director of manufacturing operations at GE, is also credited with the concept, which is described in his book Quality Control: Principles, Practice, and Administration (McGraw-Hill, 1951). 5. ISO 8402: 1994. 6. A. Rappaport, Creating Shareholder Value (New York Free Press, 1986). 7. R.S. Kaplan, D.P. Norton, Strategy Maps (Harvard Business School Press, 2003). The concept of the strategy map followed that of the BSC measurement system; it is an intrinsic element of the BSC system. 8. Kaplan and Norton, The Balanced Scorecard (Harvard Business School Press, 1996). 9. Kaplan and Norton, The Strategy-Focused Organization (Harvard Business School Press, 2000). 10. Kaplan and Norton, Alignment (Harvard Business School Press, 2006). 11. Kaplan and Norton, The Execution Premium (Harvard Business Press, 2008). 12. Survey of BSCol online membership, March 2006. 13. A strategy that seeks a special market position where competitors are irrelevant; see W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy (Harvard Business School Press, 2004). 14. R.S. Kaplan and D.P. Norton, “Strategic Management: An Emerging Profession,” BSR May–June 2004 (Reprint #B0405A); and “The Office of Strategy Management,” Harvard Business Review (October 2005). 15. Peter Aldridge, speaking at Palladium Group’s Balanced Scorecard European Summit, London, June 2008.
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The stories of how BSC Hall of Fame winners achieved across-theboard breakthrough results with a holistic performance management system appear in our BSC Hall of Fame Report, which has been published annually since 2004. Visit www.executionpremium.org and search “Hall of Fame Report.” Reprint #B0811A
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November–December 2008
Information Services with Value-Adding Impact: Lockheed Martin’s EIS Group By Lauren Keller Johnson, Contributing Writer
The information services organization within the United States’ largest defense contractor transforms itself from a cost center to a value-adding strategic partner. Lockheed Martin Corporation (abbreviated here as LMC) became the United States’ largest defense contractor in 1995, after Lockheed and Martin Marietta merged. Headquartered in Bethesda, Md., LMC researches, designs, manufactures, integrates, and maintains advanced technology systems, products, and services for its customers. The U.S. Department of Defense is one of its largest customers, along with the Department of Homeland Security and NASA. LMC’s worldwide clientele includes commercial companies in the aeronautics, maritime, and security industries.
service-level agreements with the corporation’s operating divisions. EIS also directly serves LMC external customers.
With about 140,000 employees spread throughout four major divisions worldwide—Aeronautics, Electronic Systems, Information Systems and Global Services, and Space Systems—LMC recorded $41.9 billion in sales in 2007, with an order backlog of $76.7 billion.
From Cost Center to Strategic Partner
EIS: The Epicenter Lockheed Martin’s Enterprise Information Systems (EIS) organization is responsible for shaping and supporting information technology strategic initiatives throughout LMC. Its approximately 4,000 employees work at dozens of LMC locations around the United States and abroad in six departments, including Computing and Network Services, Systems Design and Integration, Account Management Services, Information Technology Solutions, Operations, and Customer Service and Support. The organization’s budget is entirely self-funded, derived from
As Joseph Cleveland, LMC’s chief information officer and president of EIS, puts it: “At Lockheed Martin, IT is vital to everything we do— from avionics in our fighter aircraft and phase array antennae in ground stations to information security in all our services and intelligence communities. The IT work performed by EIS for both internal and external LMC customers is thus critical to our continued success.”
EIS’s role at LMC has evolved considerably. In the 12 years following the merger, the IT organization focused on supporting the integration of the two companies. Its work entailed consolidating a daunting array of IT systems (including 75 databases and 25 email systems) into one. Once consolidation was complete, EIS needed to define a new mission for providing value to LMC. To address this challenge, EIS decided to transform itself from cost center to value-adding strategic partner. That meant formulating and executing a strategy that supported LMC’s vision: “Powered by innovation, guided by integrity, we help our customers achieve their most challenging goals.” It also meant addressing LMC business unit leaders’ concerns that the company’s IT units had been
operating in stovepipes and silos since the merger. In 2004, EIS Vice President of Operations Ed Meehan, inspired by Kaplan and Norton’s 2001 book The Strategy-Focused Organization, recommended that EIS use the Balanced Scorecard to facilitate this transformation. Joseph Cleveland agreed. Executives at EIS knew that they wanted to adopt a “complete customer solutions” strategy rather than one focused on product or cost leadership. Executing this strategy would enable EIS to become the supplier of choice for internal IT services at LMC as well as help the corporation win large IT-related contracts by providing even better value to external LMC customers. “Selling” the Strategy Pamela Santiago, a senior manager in EIS’s strategic planning group, was given the task of assembling a team to map the organization’s new strategy and to help facilitate adoption of the scorecard methodology. To ensure alignment with LMC’s strategy, the team persuaded other operating divisions at LMC to design their own strategy maps, even though they were not Balanced Scorecard users. By the end of 2004, EIS had constructed a map that reflected its overall customer solutions strategy as well as the LMC divisions’ strategic priorities. The map’s overarching theme centered on implementing an integrated “net centric” strategy across multiple disciplines at LMC (See Figure 1). (“Net centric” derives from LMC’s expectation that its technology will be at the center of how the military organizes and fights in the Information Age. Various systems and sensors will need to be linked to exponentially increase the military benefit of those systems that otherwise operate independently.)
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Figure 1. The EIS Strategy Map Our Mission
Value (Financial) Perspective
Serve the national interest and increase shareholder value Magnify the power of Lockheed Martin through IT
Customer (Partner) Perspective
Leverage investments
“Enable successful and profitable program execution”
Business and technology leaders say:
to Internal Business Process Perspective
Deliver results
Perform with excellence
Build effective relationships
Shape the future Understand the business strategies to ensure IT alignment
and Workforce (Learning & Growth) Perspective
Respect others, do what’s right
Our Values
Energize the team
Model personal excellence, integrity, and accountability
Promote a culture of collaboration, creative thinking, knowledge sharing, and innovation
Our Vision
Powered by innovation, guided by integrity, we help our customers achieve their most challenging goals.
This map (which, owing to space constraints, shows only selected objectives) succinctly illustrates EIS’s value propositions and cause-and-effect relationships. Another version of the map, distributed throughout the corporation, highlights various enterprise initiatives and links them to EIS themes and objectives.
The initial scorecard report and its cascade to EIS’s departments and support services came in the spring of 2005. This cascade wasn’t easy. According to Santiago, EIS executives embraced the BSC approach. However, managers in the organization who had seen numerous corporate initiatives come and go over the years resisted; some ignored emails about the subject. To make the importance of strategy execution resonate with the entire workforce, the scorecard team worked with the communications department to launch a marketing campaign—branding the scorecard effort as SFO (Strategy-Focused Organization)
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and relentlessly reciting the mantra “Got strategy?” (a play on the famous “Got milk?” ad campaign of the California Milk Processor Board). The team used a variety of media, such as posters, pens with spring-loaded pullouts showing abridged strategy maps, and newsletter articles, to get the message across. For example, one article in an issue of the internal newsletter Inside EIS explained how “Lean IT” (process improvement) initiatives guided by Six Sigma Green Belts and Black Belts across EIS generated savings of $58 million—which was nearly $20 million over target and almost $10 million over the stretch goal. The article pointed out how these successes supported
the internal process scorecard objective “Manage, optimize, and communicate costs clearly.” In addition, the eight-member core team led the effort to train all EIS employees on the scorecard methodology. And members didn’t hesitate to leverage technology to get the message out. For instance, lessons learned from other exemplars of strategy execution, such as the U.S. Army, were shared with employees via webcast. And the organization created an internal portal called Passport, where employees can view strategy maps, quarterly strategy reviews, and other information about strategy from their desktops.
November–December 2008
This marketing campaign proved so effective that it won the National League of Communication Professionals’ Magellan award. And an SFO training method called Strategy Connections, developed and patented by EIS, won the Image Award from the Florida Public Relations Association. Demonstrating SFO Excellence Since dedicating itself to strategy execution, EIS has proved an exemplar of several SFO principles and practices. Throughout the effort to develop EIS’s strategy execution system, top executives have provided ongoing support (SFO Principle #1, Mobilize Change Through Executive Leadership). Meehan created videos to promote the new strategy, for example. And Cleveland, recognizing the need for mechanisms to sustain managers’ and employees’ interest in EIS’s scorecard rollout, formed a BSC Center of Excellence—effectively an Office of Strategy Management. The center schedules strategy assessments every quarter. During these assessments, EIS’s executive team reviews operational performance data (such as recruiting and retention and service delivery metrics) and strategic performance data (progress on strategic initiatives). Members define action plans for addressing any performance shortfalls and communicate the plans to all employees. EIS excels at rationalizing strategic initiatives, a key practice within SFO Principle #2, Translate the Strategy into Operational Terms. One tool it uses to this end is a customized version of the organization’s strategy map that depicts brief descriptions of EIS’s major strategic initiatives, each pointing to the objective it supports. This chart enables all employees working on initiatives to see where and how they contribute to EIS’s strategy, why the various initiatives are needed, and how they
all fit together to help execute the strategy. EIS’s strategic initiatives are managed and prioritized by LMC’s IT executive leadership team, which consists of the EIS executive leadership team and the CIOs of LMC’s business areas. This helps to ensure alignment between EIS’s strategy and the corporation’s overall strategic objectives. To align the EIS workforce behind the organization’s strategy, EIS prints LMC’s vision on every strategy map it creates. Managers and rank-and-file employees throughout EIS can therefore readily see the overarching purpose of EIS’s strategy. (SFO Principle #3: Align the Organization to the Strategy.) Governing to Make Strategy a Continual Process (SFO Principle #5) includes linking process improvement to strategy. To that end, EIS launched “Creative Central”—an idea submission and repository system—to support the key processes of innovation and creative thinking that appear on EIS’s strategy map. Many of the more than 1,400 ideas solicited thus far from company employees have been implemented. This suggestion program is being adopted by other business units as a best practice, which helps EIS to achieve another of its strategic objectives: leveraging investments. EIS takes additional steps to enable best practice sharing throughout LMC. Specifically, the BSC Center of Excellence team consults to other groups in LMC that have launched scorecard programs but have encountered difficulties. Whether these groups are business units, lines of business, functions, or teams, they’ve received valuable insights from the center on how to make strategy execution a core competency. To date, a number of entities throughout LMC, including Mission Services,
Aeronautics, and Information Systems and Global Services, now use the scorecard methodology. EIS also continues to tweak its strategy map to reflect new IT strategic priorities within LMC. For example, in 2006, when LMC CEO Robert Stevens rolled out the Full Spectrum Leadership program (which stresses the importance of ethics, accountability, and appreciation of diverse opinions), EIS folded elements of the program into its strategy map and scorecard. Achieving the Execution Premium EIS’s attention to strategy execution has begun producing important results that demonstrate the organization’s value-adding prowess. For example, in 2006, EIS’s internal customers rated the strength of cross-SBU alignment a 4.1 out of a possible 5. In 2005, that number was only 3.2. The organization has also reduced the number of nonessential products and services by 15% and the number of nonessential IT initiatives by 5%. And EIS estimates it has contributed to the 10% increase in IT-related contracts won by LMC’s business units by providing proposal support and demonstrating its skills and capabilities to meet goals and objectives through repeatable and proven world-class methodologies. Says Cleveland: “When we piloted the SFO methodology, we could not have known how positive the outcome would be. Since embracing the methodology and successfully executing to strategy, EIS has been adding significant new value for the corporation.” I This Case File is based on materials provided by Lockheed Martin EIS as part of the application process for the BSC Hall of Fame Award, which the organization won in the fall of 2007.
Reprint #B0811B
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P E R F O R M A N C E
M A N A G E M E N T
Balanced Scorecard Report
How to Write Performance Analysis That Truly Enhances Decision Making By David McMillan, Consultant; with Barnaby Donlon, Principal, Palladium Group, Inc.
“You can’t manage what you can’t measure.” What performance management adherent doesn’t know that mantra? But just presenting measurement data doesn’t give decision makers enough information to manage with. Sadly, most qualitative analysis in performance reporting falls short. Business leaders depend on performance reporting to tell them what’s going on at the front lines. Effective qualitative analysis contextualizes and interprets performance data to give managers a solid basis for sound decision making. In the aftermath of the 2003 space shuttle Columbia disaster, which took the lives of seven astronauts, investigators initially focused on a small piece of foam insulation that broke off the ship during launch. But later, as they peered deeper into the organizational and technical questions, it became clear that NASA’s risk-assessment and decision-making processes were sufficiently flawed to compromise the safety of the mission. Though human life is rarely at stake when leadership teams meet to review their scorecard results, they often suffer from a problem similar to NASA’s: faulty analysis, compounded by a less-thanobjective (often politically driven) decision-making process. The consequences of flawed analysis— the resulting decisions—may not literally be a life-or-death matter, but they very well might spell life or death for an initiative, product, or even an organization. In our work with dozens of organizations, we’ve observed that analysis is often the weak or missing link in the performance reporting chain. As data collection gets easier, many businesses mistakenly believe that more frequently available or betterquality data equals better decision making. Wrong. Without contextu-
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alizing and interpreting performance data, organizations undermine the potential effectiveness of the reporting process—in effect, making decisions with blinders on. Most organizations generate reports that simply display raw data values for their performance measures, perhaps including the color-coded traffic lights that indicate the level of success in achieving targeted performance. What commentary is provided typically reiterates the data displayed in the graph, with little explanation or context-setting. The whole point of qualitative analysis is to contextualize and interpret performance facts and figures to provide a basis for sound decision making and action. In reporting the quantity of widgets manufactured in Q2, say, you would show the same period’s output last year. Depicting yearover-year performance is a nobrainer in indicating performance against targeted objectives. But suppose one piece of equipment was offline for eight days in May, causing a slight dip in production. Most likely that information was not known by all decision makers. But without it, they could make a false interpretation. Sound qualitative analysis, on the other hand, would qualify the result by citing
this circumstance, even suggesting that adding a shift temporarily could recover the lost output. Managers depend on performance reporting to monitor operations and progress toward goals. Senior managers, removed from the front lines—whether the customer interface, the assembly line, or the supplier relationship—depend on performance reporting to show them what they can’t see firsthand. Effective qualitative analysis puts the information into perspective, helping decision makers identify trends, looming problems, improvements, potential risks, or shortfalls—enabling them to assess their options and take action promptly. Luckily, it doesn’t take special expertise to compose insightful, actionable analysis. By following a simple “reporter’s” approach (asking “what?” “why?” and “what next?”), organizations can convert data into information, information into insight, and insight into actionable recommendations— recommendations that will help decision makers keep performance, and strategy, on track. What Happened? To write effective analysis, you need accurate data, and enough of it to get a sense of a trend, and of whether that trend is normal or abnormal. If seasonality matters, you may need to adjust for it by reporting year-over-year results; comparing April this year with April of last year will yield a clearer picture than comparing April to March. In reality, it’s not always possible to have the luxury of several years of historical data. But whether you have one or 10 years’ worth, you can still create insightful analysis. Graph the measure and target data values so they can be easily compared, and it will be obvious whether performance results were favorable or unfavorable. Some
November–December 2008
targets may be expressed as a range, by necessity or at the manager’s discretion. A single target, however, is preferable for comparison. With a range, it’s more difficult to discern whether the performance was favorable or unfavorable—and to gain management’s attention to focus on improvements. Effective visual representation takes practice, and amateur graphic designers can easily and unwittingly create misleading graphics. So take the time to create a graph that clearly communicates your message, starting with the title. The x-axis should show the time series, so that a trend will be visible, and the y-axis should display the units of measurement along a clearly marked scale. And be sure to select the right chart type. A stacked bar chart is much more useful than a pie chart since it can show both a breakdown and a trend. Avoid including too many variables. This will make the graph too complicated and confusing—or worse, obscure the pertinent message. The commentary that accompanies your charts should ground the audience in the topic by stating up front, clearly and concisely, exactly what the reader should be seeing when looking at the graphic. This will ensure no
misreading or misinterpretation. For the chart shown in Figure 1 you might say “Our revenue from repeat customers has been decreasing steadily over the past year, despite a target of mild revenue growth.” With this single sentence, you communicate the trend in performance compared to a target value over time. From this introduction it will be easy to transition to the more substantive discussion of performance in the context of the internal and external environment, risks, and opportunities that helps generate insights. The past may not always be prologue, but analyzing what happened can provide clues to future performance. How does performance compare to last quarter’s? Last year’s at this time? Is the trendline rising or falling? What’s the outlook? Written commentary should complement and expand on the illustrated data. Aim for high-value, highimpact content—and brevity. Some experts believe that analysis should address only the measure in question. Others (myself included) believe that it should address the entire objective. The scope of a business objective often extends beyond the performance that can be tracked by its associated measures. For example, for the objective “Build
Figure 1. Revenue from Repeat Customer Sales
(in U.S. millions)
$5.5 $5.0 $4.5 $4.0 $3.5 $3.0 Q1 ‘08
Q2 ‘08
Q3 ‘08
Actual
Q4 ‘08
Q1 ‘09 Q2 ‘09 Q3 ‘09 Q4 ‘09
Target
Note that targets are shown for the upcoming four quarters.We discourage organizations from reporting target data values for the first time when they report actual performance data. It’s important to present a forward-looking view of where the organization expects to take performance.
customer loyalty” (the objective encompassing our Figure 1 measure) you may want to know the long-term potential of smaller customers because it has implications for your marketing strategy. No metric underlies it, so it’s harder to analyze, but additional research may support your speculation. Therein lies the value of contextualizing. Why Did It Happen? Identifying the causes of performance is the heart of valuable analysis—it’s the critical information that enables substantive, worthwhile discussion and action. Without getting a plausible explanation about the data, a decision maker is like a carpenter with a hammer but no nails. Yet determining those causes can be challenging. It involves studying both the internal environment (e.g., activities and changes within the organization) as well as the external environment (e.g., events, competitors’ moves, and trends in the industry and broader business environment). To illustrate, let’s look at our objective, “Build customer loyalty,” and its component measure, “revenue from repeat customer sales.” A decline in sales last quarter could be the result of a number of factors, internal or external. What do the measure’s supporting drivers tell you about the reasons for the performance? Figure 2 (next page) shows a simplified driver model for this measure. Two primary drivers, “customer purchase intent” and “product value,” break down further into quantifiable drivers. An uptick in repeat customer sales, for example, might be caused by a new technology need (perhaps triggered by a new regulation). It might be driven by heightened buying power from major customers in key segments, something that an industry survey on
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Balanced Scorecard Report
Figure 2. Driver Model for “Revenue from Repeat Customer Sales”
Loyalty
Customer purchase intent
Buying power
Technology need
Revenue from repeat customers
Functionality Product value Pricing
A driver tree offers a logical, systematic approach to analyzing the factors driving performance—information that’s crucial to the “why?” portion of the qualitative analysis.
customer spending trends might indicate. Customer loyalty could also be a factor, which customer satisfaction surveys would reveal. Product value breaks down into two component drivers: functionality and pricing, both of which could be examined through thirdparty surveys, product reviews, or customer satisfaction surveys. While driver models are useful in performance analysis, you needn’t develop detailed driver trees for every measure. But you do need to identify the most significant causes of performance because over time they will prove to be useful guideposts for gathering supporting information—and for raising questions that might help those who use the analysis. What internal changes might be affecting performance? Examine the internal factors first; these are the most knowable and most controllable in terms of making improvements. Business drivers related to the measure may reflect specific challenges, such as declining employee morale, budget cuts, the fact that a key account person left, or that the company’s marketing budget
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was slashed across product lines. Initiatives and other projects are also constantly altering the landscape of performance. When in doubt, consult subject matter experts within your organization (including functional area managers) for their insights. You can also refer to internal communications (such as memos and operational reports) for additional clues that might explain performance. What external factors are at play? A competitor may have gained traction by releasing a new product addressing the same solution. That may explain a dip in sales. Maybe your product just received a great review in an industry magazine, which would augur improved sales next quarter. Product growth is not necessarily a zero-sum game; perhaps the market space is growing, allowing for continued growth for you and your competitors. Having a clearer idea of the most likely factors is essential before any action, remedial or otherwise, can be taken. To understand external forces— competition, overall market trends, and other factors—and
their impact on performance, seek resources such as industry publications, customer feedback, general market trend reports, and news reports. Understanding the impact of the external environment will also lead to a better understanding of the risks and opportunities your organization faces; for example, “Despite positive performance this past quarter, we may see a dent in North American sales in the next quarter owing to the cancellation of a major national conference that has served as an important sales and marketing opportunity.” Once again, tap your subject matter experts; they can help prioritize the reference sources to consult. A marketing person could help identify key surveys that might shed light on repeat customer sales trends. An R&D person would know which industry publications or blogs would provide reliable information about new ancillary products. It is not always possible to know unequivocally why a measure performs one way versus another. The point of analysis, however, isn’t to seek the one answer—it’s to provide informed hypotheses that will aid in discussion. Don’t try to represent hypotheses as fact; rather, state them as possible explanations for performance and justify them appropriately. What Are We Going to Do About It? Good performance analysis should inspire appropriate action. So be prepared to offer suggestions about how best to improve performance or perpetuate success. This requires not just an understanding of the current situation and performance gaps, but also of risks and opportunities. Building on this knowledge involves identifying options and weighing them based on relative constraints, costs, and benefits as you develop the most viable recommendation.
November–December 2008
Recommendations can take many forms, from a minor follow-up task to a major initiative designed to close a performance gap—or to just maintaining the status quo.
until [date] because we wanted to incorporate the added functionality that you, our customers, recently requested.” Here, you’ve converted risk into opportunity.
Suppose a survey of your online customers revealed a 10% drop in satisfaction in the shopping experience in the past quarter. Digging deeper, you discover two likely reasons: slow site navigation (noted by 42% of the “unsatisfieds”) and a confusing checkout process (cited by 38% of the “unsatisfieds”). You might recommend that the web design team brainstorm to devise improvements and that marketing and tech conduct a focus group to identify opportunities for improvement in both problem areas. Include a proposed timeline to ensure decisions are followed through: “Both the brainstorming session and the focus group should be held within the next six weeks.”
All recommendations should be action-focused. Recommending further analysis is not wise. For one thing, it’s not an action. In addition, it not only delays decision making, but shows that you didn’t do your job the first time. And remember that recommendations are not meant to carry authority or finality. We’ve known performance analysts who felt they had no right to make recommendations—or whose managers expressed discomfort over allowing them to make any. One in particular decided the senior management team should simply come up with recommendations during review meetings. Our response: “How much more productive might your meetings be if the analysts provided a springboard to help stimulate your thinking and decision making—and to use your limited time more efficiently?”
The analysis should communicate the risks, both internal and external, to future performance, as well as what the organization is doing to mitigate those risks. It’s equally important to discuss current or future opportunities and what the organization is doing—or could do—to take advantage of them. Example: noting that a competitor with a strong customer base is owned by a man who is looking to sell his company or retire. A common external risk for retailers, especially in a difficult economy, is customer price sensitivity, where customers place value above brand. To mitigate that risk, the analysis might recommend creating special offers for repeat customers. Consider a software producer that must, for manufacturing reasons, delay the release of its latest update (an internal risk). The analysis might propose that the sales division issue a communication to repeat customers along these lines: “We have postponed our release
Cultural Resistance and Due Diligence In some corporate cultures, communicating bad news is verboten. Yet although no manager wants bad news, failure without warning is far worse. It’s not easy, but every organization must strive to encourage candor— objective assessment, based on relevant facts, and done not as finger-pointing but in the spirit of common cause. Reality checks, through good analysis, enable proactive decision making that can mitigate or arrest failure— or yield important improvement. Develop a network of information sources, both internal and external, to provide the important information that colors and shapes performance data. Don’t go overboard, but gather a good crosssection from reliable sources to
help you establish cause and effect. And since performance measures are tracked frequently, the analysis models you develop can be reused every reporting cycle. An Element of Competitive Advantage Measurements must be more than a “nice to know” commodity if performance reporting is to have value. A combination of clearly represented graphical data and qualitative analysis that provides context, plausible explanations, outlooks, and recommendations will foster the discussion needed to drive strategic performance— helping assess progress and drive healthy decision making. It’s a critical element of your business intelligence—and competitive advantage. I T O
L E A R N
M O R E
For more on performance reporting, see “The How-to’s of BSC Reporting,” Parts I and II, BSR July–August 2003 (Reprint #B0307E) and BSR November– December 2003 (Reprint #0311E), respectively. Many other relevant articles on performance review and reporting have appeared in BSR. Consult the BSR Index, available free via download at www.execution premium.org. Boost your visual design skills with Say It With Charts: The Executive’s Guide to Visual Communication, by Gene Zelazny, Director of Visual Communications at McKinsey & Company. Or consider Envisioning Information or The Visual Display of Quantitative Information, by Edward R. Tufte. Tufte, a statistician and political scientist, taught courses at Yale in statistical evidence, information design, and interface design. Reprint #B0811C
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M A N A G E M E N T
S Y N E R G I E S
Balanced Scorecard Report
Finding—and Firing Up— Your Next Growth Engine By Chris Zook, Partner and head of the Global Strategy practice, Bain & Company Article adapted by Lauren Keller Johnson, Contributing Writer
Chris Zook’s ten-year study of core competitive advantage yielded the best-selling Profit from the Core (2001), along with Beyond the Core (2004), and Unstoppable (2007), all from Harvard Business School Press. This article focuses on redefining the core to create your organization’s next growth engine. It is adapted from Zook’s keynote address at the November 2007 Balanced Scorecard Collaborative/ Palladium Group North American Summit. Nothing lasts forever. No matter how successful a company becomes, it will inevitably reach a point where its core—the set of capabilities and other assets that have given it a competitive advantage—begins eroding. This erosion may be triggered by any one of numerous changes in the business environment, such as new competitors, new technologies, and shifts in customer tastes.
running and using it to project itself into other sports. The company’s core capabilities included pairing innovative design with new materials to create highperformance footwear, adroitly managing marquee sports figures in its marketing efforts, developing a super-fast supply chain in Asia, and building a powerful brand. By applying this same set of capabilities, it expanded its core into other sports, such To survive, companies need to as golf, soccer, and volleyball— reinvent their strategy. Some augmenting its athletic shoes expand their core by moving with successful new products such as equipment and apparel. The odds of succeeding through adjacencies But the odds are going to get more modest as the business of succeeding through adjacenworld grows ever more competitive. For that cies are going reason, companies must be able to redefine to get more their core. modest as the business world grows ever more into what I call “adjacencies”— competitive. For that reason, comnew businesses, customer segpanies must be able to redefine ments, distribution channels, their core: reinventing parts or geographies, products, services, even all of their business model or value-chain links related to to create an entirely new engine their core. The key to succeeding for sustained growth. Redefining with adjacent moves is to apply a company’s core isn’t easy; execthe company’s distinctive capabili- utives have to be able to look ties in a repeatable way to the at their current core from a whole new areas you’re expanding into. new perspective. It’s a bit like asking fish to imagine land! Yet Nike did this by taking the formula some firms have pulled it off. that had made it successful with
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Take DeBeers, the diamond company. Founded in 1888 in South Africa, DeBeers mined and sold 90% of the world’s diamonds for the next century. It achieved absolute control over its customers by controlling supply. Once a year, buyers would travel to London, and DeBeers would present them with boxes of diamonds and tell them the price. The message was: Take it or leave it. But in the late 1990s, all that began to change. New competitors in Canada, Russia, and South America emerged, and a flood of new luxury goods other than diamonds began attracting consumers’ attention— and dollars. By 1999, DeBeers’ market value had dwindled to just $1 billion, down from $5 billion in 1995. The company’s market share plummeted from 90% to 45%. Over five long and difficult years, DeBeers managed to redefine its core. For example, it gave up its supply- and price-focused strategy and adopted a strategy focused sharply on fueling demand. It built retail stores and adopted new technologies (such as projecting a diamond’s unique “fire-burst” signature on a wall) to inflame consumers’ passion for diamonds. And it beefed up its marketing and sales muscles, wielding its considerable brand power in ways it never needed to before. The effort paid off: By 2007, the company’s valuation had soared to about $15 billion. Redefining a company’s core is even harder than expanding through adjacency moves, because executives must answer a number of tough questions. Two particularly difficult questions are: “How do I know when it’s time to redefine my core?” and “What should I build my redefined core on?”
November–December 2008
Knowing When It’s Time to Redefine Your Core You know it’s time to redefine your core when you see one or more of three symptoms indicating that your core is approaching a limit. The first symptom is: Your current growth formula no longer seems relevant. For instance, perhaps you’ve already expanded into a number of adjacencies, but your company’s growth is stalling anyway. Telecom operators are facing this challenge now. They’ve historically fueled growth by expanding into new geographies, switching customers from wired telecom services to wireless, and getting more people to use mobile rather than (or in addition to) fixed-line phones. But those markets are now saturated, and operators are struggling to find a new and more effective business model that will drive new growth.
A radical new business model is threatening to replace your model. Newspapers are experiencing this threat, as readers (especially young people) are increasingly getting their news from the Web. When news is free, fast, and fresh, why buy bulky newspapers?
or were acquired. New players that hadn’t even started out in the photography industry, such as SanDisk, began making most of the money. Selecting a Basis for Your Redefined Core It’s one thing to recognize that the time has come to redefine your company’s core. It’s another thing
The third symptom is: Your industry’s profit pool is shrinking or a new set of players is claiming most of the pool. A It’s one thing to recognize that the time has good example come to redefine your company’s core. It’s of this is what another thing entirely to figure out what will happened in the photography constitute your new core—what the redefined industry. In 1995, core will be based on. film manufacturers claimed the lion’s share of entirely to figure out what will operating profit in this industry. But 10 years later, after the advent constitute your new core—what the redefined core will be based of digital photography, memory on. When a company’s previous manufacturers had moved into growth engine starts to sputter, that position. A lot of the bigA second symptom indicating executives often make all-tooname players saw their returns it’s time to redefine your core is: common missteps. They might shrivel up; some went bankrupt orchestrate brainstorming sessions to search for new, uncontested Figure 1. How Some Companies Have Redefined Their Core market spaces to enter. They may attempt to diversify away from their core by pursuing a reputedly HIDDEN ASSET REDEFINITION OF CORE COMPANY “hot” new market. Some make “big bang” acquisitions. Others Customers From supply to demand focus DeBeers do nothing, hoping they’ll be Customers From audio equipment to Harman International the last one clinging to the palm automotive “infotainment” leader tree when all the sand on their Customers From financial supermarket to American Express island has been washed away leading credit-card issuer by the hurricane. From analytical instruments to life sciences solutions
Underdeveloped growth platforms
Marvel Comics
From comic books to movies and branded products
Underdeveloped growth platforms
GUS Home Shopping
From home shopping to logistics-driven retailer
Underdeveloped growth platforms
Apple
From Macs to iPod-led music and content distributor
Underutilized capabilities
Novozymes
From commodity enzyme producer to niche “biotech” enzyme designer
Underutilized capabilities
Tesco
From local grocer to logisticsdriven retailer
Underutilized capabilities
Applera
Our research shows that these moves have scant probability of success. So how do you sweeten the odds of successful redefinition? By using your existing—but hidden—assets to reinvent your business model. Such assets can take several shapes (see Figure 1). Access to customers is one. For instance, Harman International moved from audioequipment leader to automotive “infotainment” leader by leveraging
Hidden assets—the key to redefining your core—come in three major forms: access to the right customers, an underdeveloped growth platform, or underutilized capabilities.
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Balanced Scorecard Report
Hidden assets can also include underdeveloped growth platforms. Marvel Comics is a great example. When comic-book reading declined, Marvel faced bankruptcy and in 1996 was acquired by a group of private investors. They took Marvel’s 5,000 characters and 30,000 stories and repurposed them into movies, TV programs, and DVDs—which are being snapped up by people who remember and love the characters and stories. Through savvy licensing, Marvel’s operating margin went from –25% in 2000 to +44% in 2005. Its movie business now accounts for more than 50% of its $513 million in revenues and for much of its $125 million in profits. Its stock price soared from about $1.00 in late 1998 to almost $8.00 in mid-2007.
Finally, hidden assets can take the form of underutilized capabilities. Consider PetSmart, the pet-food and -equipment retailer. As pet foods and hard goods (toys, bedding) became commoditized, PetSmart set out to redefine its core. It noticed that some of its best managers were helping shoppers by referring them to service providers such as groomers, trainers, veterinarians, and kennels. Executives paired this observation with the realization that in the United States, people now spend more on their pets than they do on their kids, and that most of that spending is for services, not products. So the company started offering services such as on-site veterinarians and luxury kenneling accommodations, including a treat cart, $15 “belly rubs,” and constant playing of pet-related TV shows. PetSmart customers now shell out roughly $500 to $600 each per year on these services, nearly triple what they spent for food and hard goods.
Are you securing your execution premium? Find out how in the new book by Kaplan and Norton. Building on their groundbreaking work, Drs. Robert S. Kaplan and David P. Norton, present a multistage management system that will help you lock in successful, ongoing strategy execution by linking operations and strategy management throughout the enterprise. Learn how to win an execution premium—the multiple, measurable benefits that come from building and operationalizing your strategy the right way. To learn more about The Execution Premium, visit www.execution premium.org. There, you’ll also find Kaplan and Norton’s new blog, along with information about their other books and articles, our other publications, conferences, strategy management toolkits, and BSC Online community membership.
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• Managing Strategy with External Partners: Robert Kaplan and colleagues examine how companies are advancing strategic partnerships—such as with suppliers and customers—with “allliance” and “relationship” scorecards • Tesco CEO Sir Terry Leahy on thinking global, acting local in successful strategy execution • The strategic (and human capital) transformation at Hindustan Petroleum, India’s leading oil company • Professor Mark Frigo on Aligning Strategy and Performance Measures with Risk Management: Practices from High-Performance Companies • How do sophisticated strategy-focused organizations share best practices? Research findings from Palladium’s Office of Strategy Management workshops • The Art of Change Management: Key behavioral issues every executive should anticipate
Hidden Assets, Buried Treasure Hidden assets are the capabilities and other “strategy dividends” that your company acquired when it was at its best. Such assets become hidden for several reasons: Perhaps (like DeBeers’ brand) you didn’t need a particular asset during the company’s earlier years. Or maybe the assets are diffused throughout your organization, and nobody “owns” them. Maybe they’re capabilities that become infinitely more valuable when combined with new technologies (as happened at Apple with its development of the iPod). Regardless of what has caused your company’s core assets to be hidden, make uncovering them your top priority. They’re the buried treasure that will most enable you to redefine your core before it’s too late. I Reprint #B0811D
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Product #B08110
its access to customers with a penchant for high-end consumer electronics. This access was facilitated by Harman’s ownership of Becker, a firm that made automotive radios for high-end cars such as BMWs and Porsches.
