Januar y–Februar y 2010 | Volume 12, Number 1
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S O U R C E INSIDE THIS ISSUE
Building a PerformanceDirected Culture
Case File ..........................................7
By Howard Dresner, President, Dresner Advisory Services; and Member, Advisory Board, Palladium Execution Premium Community
It's startling when the father of business intelligence proclaims that a mature organizational culture is the prerequisite to successful transformation. Howard Dresner, former Gartner research fellow and chief strategy officer at Hyperion, addresses the culture imperative in his latest book, Profiles in Performance: Business Intelligence Journeys and the Roadmap for Change (Wiley, 2009). Here, Dresner presents his ideas on building a performance-directed culture, with an excerpted case study of Mueller, Inc., cultural exemplar and 2007 BSC Hall of Fame winner. My previous book The Performance Management Revolution (Wiley, 2007) was about the coming revolution in performance management and my belief in the ascendancy of a new management system for the global enterprise in the 21st century. Every business has a management system, but in my view, a modern management system consists of people, processes, and technologies aligned and optimized for performance. It empowers people to make decisions and to take action on their own. It defines processes for increasingly decentralized organizational structures and uses technology to support people and processes day to day while providing a platform for long-term business growth. Certainly I’m not alone in my thinking. To BSR readers, these requirements describe at a high level what Robert Kaplan and David Norton have formulated with their six-stage Execution Premium model—a system that integrates all the processes and tools needed to develop, operationalize, and continuously refine strategy. With my new book, Profiles in Performance, I intended to capture and present best practices for creating the management system I’ve just described. Along the way, I realized an important truth: that before an organization can succeed, it must first create a culture that values performance, transparency, and accountability. In other words, people trump processes and technology every time. Intuitively, we know this is true. We’ve all worked in organizations where a technology initiative was scrapped or stalled because an important group of people didn’t buy in: senior management offered lukewarm support, managers felt that they had not been consulted enough in the design of the system, or the system was so complex that end users could not use it. Of course, this does not mean that technology is not important. It is—but as an enabler of people, and not the other way around. These realizations prompted me to shift my focus to people and culture, and I began to look at organizations that have established—or have made enough progress that there is no turning back—what I call a performance-directed culture. Energized by this new focus, I also realized that before I could begin interviewing and identifying case study candidates, I needed a model that would provide a Continued on next page
How Lagasse, Inc., Uses the Strategy Map to Unlock Hidden Value in Supply Chain Relationships One year ago (in the January– February 2009 BSR), Robert Kaplan and colleagues wrote about two organizations’ innovative use of the strategy map to manage—and achieve alignment with—key external partners. Discover how a B2B wholesaler is using the strategy map to foster synergies—and find hidden value—in its supply chain relationships.
Tools & Techniques................10 One If by Land, Two If by Sea: Using Dashboards to Revolutionize Your Performance Management System Palladium Group’s Mark Lorence busts a few lingering myths and clarifies the distinctions between scorecards and dashboards, demonstrating how they integrate with and support each other in a performance management system.
Performance Management......14 Linking Marketing Plans to the Balanced Scorecard A great idea—but is your organization doing it? Strategy expert Ed Barrows and Malcolm McDonald, one of the world’s foremost authorities on marketing planning, explain how the strategy development process—and the strategy map itself—can serve as the foundation of your organization’s marketing planning process.
ONLINE RESOURCES Discuss these articles with leading practitioners online. Join the new Palladium Execution Premium Community™ (XPC), a global professional network for strategy and performance management practitioners like you. As a BSR subscriber, you are among the first to be invited into the XPC. Log on at www.thepalladiumgroup.com/xpc. See the performance culture maturity survey at XPC. Palladium and Howard Dresner (author of this issue’s On Balance, opposite) recently surveyed members of the XPC on their performance culture maturity. Explore the survey results, along with videos of Howard Dresner on the subject of performance culture.
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lens or filter through which I could assess these organizations’ cultures. Such was the genesis of the Performance Culture Maturity Model, which serves as the centerpiece of the book.
achievement on the maturity model is Chaos Reigns. At this level, fragmentation and disorganization prevail. Any organization at this level in most criteria is at serious risk of collapse.
The maturity model is the most comprehensive model of its kind that I am aware of. It helps us understand the path taken by specific organizations in their quest for better performance. It reveals an organization’s position along that path at specific points in time, something that is also valuable. If there is one thing I have learned in the course of my career, it’s that a performancedirected culture is a journey and not a destination.
The next level of achievement is Departmental Optimization. At this level, departments and functions are playing for themselves. Although the organization seems to function well enough to survive, cooperation and collaboration are virtually unheard of. Most organizations, it turns out, operate at this level—a fact that underscores our preference as humans to work in small groups, with people of similar backgrounds, outlooks, and goals. Anthropologists refer to these groups as “tribes.” If we look around, we can find them throughout modern society—think of gangs, alumni associations, or political parties. In business, for example, we can think of corporate departments and functions—e.g., IT, procurement, legal—as tribes of a sort. With similar backgrounds and experience, outlooks, and goals, people in these departments work together to protect their tribe from outside threats. For example, procurement people may believe it’s their goal to prevent managers from spending money (even though their efforts often cause allocation cuts that ultimately imperil value creation).
What Is a PerformanceDirected Culture? At the highest level, a performance-directed culture is one in which everyone is actively aligned with the organization’s mission; transparency and accountability are the norm, new insights are acted on in unison, and conflicts are resolved positively and effectively. The Performance Culture Maturity Model (see Figure 1) employs six criteria (shown here along the top row), with four levels of maturity that determine the degree of an organization’s progress. The four levels of maturity describe how mature an organization is in each of six performancedirected culture criteria. Even the least culturally mature organization would not be at the absolute lowest level in each category. Almost without exception, every enterprise will exhibit different levels of maturity across the six criteria. This is normal and is part of the process of assessing and improving an organization’s maturity. The Four Levels of Cultural Maturity The first (and lowest) level of
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By the time it reaches Level 3, Performance-Directed Culture Emerging, an organization has started to enjoy the benefits of working across departmental barriers and to focus on a common organizational mission. Crossfunctional sharing and cooperation occur but tend to be impromptu and opportunistic. Two or more functions, for example, may start to collaborate for mutual benefit. A virtuous cycle starts to emerge as the benefits of a performancedirected culture become obvious, with management providing the
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/Director of Research, Palladium Group, Inc. Editor Janice Koch 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
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[email protected] Copyright © 2010 by Harvard Business School 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., is the global leader in helping organizations execute their strategies by making better decisions. Our expertise in strategy, risk, corporate performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, conferences, communities, training, and technology. The Palladium Balanced Scorecard Hall of Fame for Executing Strategy™ recognizes organizations that have achieved an outstanding execution premium. For more information, visit www.thepalladiumgroup.com or call 781-259-3737.
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Figure 1. The Performance Culture Maturity Model™ Alignment with Mission
Transparency and Accountability
Action on Insights
Conflict Resolution
Common Trust in Data
Availability and Currency of Information
LEVEL 4 Actionable and Performance- embraced mission Directed supported, informed, and reinforced by Culture metrics Realized
General transparency and accountability accepted as cultural tenets
Closed-loop processes ensure timely, concerted action
Established and effective mechanisms for resolving conflicts
Data as truth. Common application of data, filters, rules, and semantics
Currency of metrics/data matches rhythm of business
LEVEL 3 PerformanceDirected Culture Emerging
Actionable mission supported by top-down metrics
Limited transparency and accountability: multiple functions collaborate
Ad hoc (informal) action on insights across functions
When identified, conflicts resolved on an impromptu basis
Common data: provincial views and semantics used to support specific positions
Enterprise availability, uneven currency of information
LEVEL 2 Departmental Optimization
Alignment with discrete functional goals, not enterprise mission
Fragmented transparency and accountability within discrete functions
Uncoordinated/ parochial action (sometimes at the expense of others)
Appearance of cooperation, “opportunistic reconciliation”
Conflicting, functional views of data cause confusion, disagreement
Availability and currency driven by departmental sources
LEVEL 1 Chaos Reigns
Mission not actionable, not communicated, and/or not understood
Arbitrary accountability, general opacity
Insights rarely leveraged
Conflicting, redundant, and competing efforts are the norm
Data and information generally unreliable and distrusted
Multiple, inconsistent data sources, conflicting semantics
The model identifies four levels of culture maturity and six performance-directed culture criteria. The criteria (column headings) fall into three categories: strategic, operational, or technical.
needed support and encouragement. At the level of PerformanceDirected Culture Realized, performance improvement has permeated the very fabric of an organization’s culture. Processes center around transparency and accountability. Individuals are rewarded for sharing, cooperating, and supporting the mission of the enterprise. The enterprise thinks, strategizes, plans, analyzes, and executes as a single organism. In the world of Abraham Maslow (the founder of humanistic psychology), this would be the equivalent of “self-actualization.” Six Performance-Directed Culture Criteria Each of the six performancedirected culture criteria falls into one of three categories: strategic, operational, or technical. In the strategic category are Alignment with Mission and Transparency and Accountability. Because they are strategic, these attributes must be initiated and cultivated—or, at the very least, recognized and actively supported
—by the seniormost managers, typically C-level executives. No other level of manager can raise the organization to the levels of a performance-directed culture for these two criteria. In addition, these attributes help elevate all other areas of achievement in a performance-directed culture. Without them, a true performancedirected culture is not attainable. In the operational category are Action on Insights and Conflict Resolution. Operational behaviors can be driven by everyone in an organization on a day-to-day basis; they cannot be readily controlled or directed by senior management. They represent every individual’s responsibility. Rank-and-file employees and other stakeholders determine how and when to execute on these criteria. Hence, success or failure is in these individuals’ hands. Because of their operational nature, Action on Insights and Conflict Resolution represent continuous processes; constant attention and diligence are required if an organization is to avoid regression to a previous stage.
In the technical category are Common Trust in Data and Availability and Currency of Information. These technical criteria are managed by business management in partnership with the IT function and/or other technical resources. Technology cannot instill a performance-directed culture; attitude is the driving force. Trust in data and its availability and currency are critical for creating a performance-directed culture and sustaining it long term on an enterprisewide scale. Certain aspects of technology are obviously important enablers. For example, data warehousing and business intelligence (BI) technologies are crucial tools; but they must be employed in alignment with the other performancedirected culture criteria: strategy and operations. The Performance Culture Maturity Model can serve as an excellent tool to assess and chart your organization’s progress toward becoming a performance-directed culture. A technique I used with the case study organizations profiled in the book (and other organizations since) was to have them pick three dates and plot them on the maturity model, with the midpoint representing the moment when significant and positive changes began to emerge, signaling the transformation to a performance-directed culture. The first date is some earlier date— before enlightenment—and the third date is where the firm is today. Not only was this approach useful to help better understand today’s strengths, weaknesses, accomplishments, and areas for improvement, but it also gave me an understanding of the chronology of key events, and the cause and effect relationships. (See Figure 2.) However, the model alone cannot help you move the needle and improve your chances of success. That’s where what I call the “four forces” come into play. 3
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Figure 2. Mueller, Inc.’s Self-Assessment of Its Performance Culture Maturity Level 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Performance Culture Maturity Level
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ness with fresh eyes and consider new approaches. One of the premier case study subjects from the book, Mueller, Inc., illustrates these points aptly. The Evolution of a PerformanceDirected Culture at Mueller, Inc.
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1 = Strategic development
= Operational development
= Technical development
Milestone Events 2000: ERP implementation begins, management structure redefined 2002: Strategy map completed 2003: ERP goes live, BSC created 2004: BSC cascaded to business and support units, BSC used in management meetings, automated reporting system implemented, Branch Target System created 2005: BSC linked to budgeting 2006: BSC linked to compensation and development plans; BI software suite implemented
Mueller’s CEO, CFO, CIO, and financial planning manager ranked the maturity level of the company’s performance culture at five points: 2000, 2002, 2004, 2006, and 2009 (although 2009 featured no major milestone events).
1.Visionary leadership. The organization’s seniormost leaders (CEO and other C-level executives) embrace a performancedirected culture (especially the attributes of transparency and accountability) as a pillar of the organization’s business strategy. In reality, only executives at this level can substantially direct, influence, or mandate organizational change. 2. Business advocacy. Silos begin to vanish, as formerly segregated groups and departments work cross-functionally and the organization begins acting as a single organism with a common purpose. 3. Data literacy. Leaders and employees alike value (and are fluent in) data use and information, and they come to depend on the insights data enable for decision making. 4. Organizational activism. The organization is populated with knowledgeable, focused, committed, passionate, and persistent individuals, who are either
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appointed by management or who are self-appointed activists. In addition to these four essential forces, I’ve consistently observed two other key factors for success— ironically, negative events that jolt the organization into positive change: setbacks and wake-up calls. These can be triggered by internal or external events. A setback is anything that disrupts existing plans, slows things down, costs more money, or creates strife. Setbacks are inevitable and need to be placed into the right context and met with the determination to overcome them. Setbacks in themselves are not considered useful events, except in the sense that they build character. Wake-up calls are events that often change mindsets and can be leveraged to accomplish important change— if recognized in time. Examples include a change in the organization’s market, a new competitor, a recession, or a terrorist attack. Wake-up calls create urgency for management to look at the busi-
Founded in the 1930s, Texas-based Mueller, Inc., manufactures and sells preengineered metal buildings and metal roofing products and services. Today, with 600 employees, 28 retail and distribution centers, and three manufacturing sites in the southwestern United States, Mueller earns revenues of $250 million a year and represents a huge chunk of the multibilliondollar steel building system industry. Originally a maker of metal cisterns for farmers and ranchers, the company made a significant leap forward when it began using secondary steel in the 1960s. By 1970, the company was generating $1 million in annual revenue. The company found further advantage in the secondary market for prepainted steel. By the early 1980s, Mueller’s annual revenues reached $32 million. Then, in 1984, the company was bought by Burly Corporation, a family-owned supplier of agricultural fence products. By the mid-1980s, prompted by intensifying global competition, the U.S. steel industry made significant quality and efficiency improvements, which caused the secondary steel market to dry up. President and CEO Bryan Davenport was forced to rethink strategy. Many companies falter—or worse —at such critical junctures. Mueller, however, overcame this and a series of major market and business challenges over the next 20 years. How? By retooling strategy, reorienting and reenergizing the workforce, adopting new technologies and business processes, embedding new cultural values, and implementing a new manage-
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ment system in the form of the BSC. At the center of this evolution was the visionary Davenport, whose leadership motivated and inspired employees to surmount— even embrace—these challenges. Inducted into the the BSC Hall of Fame for Executing Strategy in 2007, Mueller embodies not only the principles of the StrategyFocused Organization but also the characteristics of a performance-directed culture: a workforce aligned with its mission that emphasizes transparency and accountability, has the ability to act on insights, instituted mechanisms for resolving conflict, and invests in and trusts data as the objective record of the business’s realities. Its trajectory to performance culture maturity is particularly impressive, given the company’s late arrival to IT sophistication and its rural workforce of seasoned employees. A New Strategic Imperative At the critical juncture in the mid1980s, Davenport was committed to retaining the company’s focus on its end-user customers—primarily farmers, ranchers, and other rural do-it-yourself types. He knew the focus on the end-user customer represented Mueller’s competitive advantage over companies that dealt with contractors. To navigate the shift in its sheet metal production while holding on to the company’s core customer base, Davenport decided to transform Mueller’s value proposition from “lowest cost” to “total value.” This involved eliminating the shipment of incomplete orders (which translated into costly downtime for customers); opening retail and distribution centers closer to customers; and expanding product offerings, such as steel building kits. Repositioning the company’s value proposition proved to be a major cultural hurdle. Mueller had never before given its
employees a common mission. Davenport knew that to get everyone focused on a common mission, he would have to articulate it, communicate it frequently, and live it—and thus make all employees understand it and their roles in supporting it. Growth Tests Mueller By 1993, Mueller had successfully navigated the transition to primebased products, but growth had taken a toll, straining Mueller’s management structure, business processes, and systems. The twoman management team of Davenport and CFO John Jones made virtually all the decisions. Business processes were mostly manual and not scalable. Davenport decided that technology was the answer. Soon after buying the company’s first computer and financial software, Davenport brought in consultants to conduct a workshop for key managers on reengineering business processes. The workshop helped establish the foundation for a new management structure, with new responsibilities for company leaders. Davenport quelled apprehension by assuring his people that he would stand by their decisions. People were encouraged to work as a team to solve problems and seek opportunities. Throughout the 1990s, Mueller expanded its offerings and its customer base. By 1999, Mueller had 11 branch offices. But Davenport became concerned that Mueller’s computer and software systems were out of date and would not be able to support continued growth. Although manufacturing and distribution processes had been reengineered, the systems used to manage them were still largely manual. The company’s technology lagged in other areas as well; for example, there was no computer network. In October 2000, Mueller launched
a full-scale enterprise resource planning (ERP) implementation. Setbacks and Wake-up Calls The arduous ERP implementation—an enterprisewide effort that ultimately took three years, cost $10 million, and strained personnel more than once to the point of near-meltdown—was only one element in the perfect storm of external and internal challenges Mueller faced at the turn of the millennium. The steel crisis of 1999–2001, when more than 30 U.S. steel producers and processors went bankrupt as a result of excess global capacity, forced the company to add new overseas suppliers to its supply chain. China became a major consumer and then a major producer of steel—and raw material prices became volatile. Customer demographics changed and new competitors emerged, as did new approaches to meeting customer needs. Drought conditions in Mueller’s markets put severe financial pressure on customers. Mueller faced numerous internal challenges as well. The company needed to maintain good working relationships with, and ultimately partner with, contractors to sell effectively to new, less self-sufficient end users. It also needed to change its product mix and focus. Management accelerated expansion plans and opened new branch offices. And CFO Jones was set to retire in 2002. The turn of the millennium represented a major turning point for Mueller: formalizing performance management. In anticipation of Jones’s retirement, Mueller added two key people to its finance team: Phillip Arp, CFO-designate; and Mark Lack, manager of financial planning and analysis. Arp and Lack suggested adopting the Balanced Scorecard as a performance management
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tool to help Mueller adapt to a changing competitive landscape and the internal challenges posed by growth. First, the company refined its mission statement to “deliver[ing] the best total value to end users of metal building and residential metal roofing products, in the Central and Southwestern United States.” It created a strategy map (in 2002) and a Balanced Scorecard (2003), which it began cascading to business and support units in 2004. Benefits materialized almost immediately. Processes became more efficient; employees were eager to improve wherever they could. The ERP system, which went live in February 2003, helped enforce a management structure. “Because the system tied everything together, you had to do your job so others could do theirs,” Arp observed. The interconnectedness triggered new levels of cooperation and communication. The successful completion of the complex ERP implementation provided an immeasurable confidence boost. Now, says Davenport, “people are constantly trying to figure out how to apply [technology] in new areas to improve the business.” In 2005, the company tied the Balanced Scorecard to budgeting and, in 2006, linked it to compensation and development plans. Beyond ERP to BI Reporting and business analytics became Mueller’s next top technology priority. Davenport, a self-described “big believer in standardization” sought to adopt best practices throughout the company’s branches. So in 2004, Mueller created what it calls its Branch Target System, which aims to help optimize resource allocation throughout the system. Mueller branches are
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organized into three groups: young and underperforming branches (“calves”); midsized, medium performers (“heifers”); and top performers (“cows”). Branch managers are trained to use the Branch Target System to understand how they should be performing; their performance is then tracked against the system’s key financial metrics. Also in 2004, Mueller installed an automated reporting system, upgrading it to a comprehensive BI software suite in 2006. Mueller and the Performance Culture Maturity Model Though it’s clear that today Mueller has a performance-directed culture, its path has been evolutionary over the past 25 years. Through consistency and determination, Mueller rose to the level of Performance-Directed Culture Realized for alignment with mission, action on insights, common trust in data, and availability and currency of information. Figure 2 shows this evolution. Mueller executives ranked the company’s performance culture maturity level in its strategic, operational, and technical areas on five dates. The company has today achieved an overall Performance Culture Maturity Model level ranking of 3.7. With a well-established performance-directed culture and enabling technologies and solutions, Mueller has been able to readily take stock of its capabilities and, in a slowing economy, make key investments in preparation for the next stage of growth. For example, the company is taking advantage of the decline in real estate prices to buy land for future branch offices. Visionary Leadership For more than two decades, CEO Davenport has provided visionary and steady leadership,
insisting that, despite changes in almost everything else, Mueller’s mission stay the same. He has consistently communicated openly with employees, clarifying expectations and exhibiting fairness, empathy, and loyalty. His steadfastness in the face of obstacles and challenges has sustained their motivation, even in the most difficult of times. He has shown marketplace vision—recognizing emerging (and transformative) global trends in production and demand, and acting on them swiftly. He has embraced technology to expand and reinforce roles; established a new organizational structure to match growth and new management and performance systems and processes; implemented the BSC, the Branch Target System, and a manufacturing scorecard; and embraced transparency and accountability as cultural norms. He has consistently moved the organization forward. He has built a strategic management team as part of a performance-directed culture vision— with hands-on involvement. Clearly, the formula has worked. From a $32 million company operating in a single location in 1984, Mueller reached annual revenues of approximately $250 million in 2008, a compound annual growth rate of 12.5% over the preceding year (with a return on net assets of 26%), and a pretax profit of 18%. Most companies that engage in performance management initiatives do so only after a wake-up call of some sort. Mueller is an exception to this rule. Under Bryan Davenport’s leadership, Mueller has patiently and deliberately moved forward, investing heavily, enduring setbacks, but never wavering in its commitment to its core values, its mission, and the fervent ownership of performance improvement efforts. I Reprint #B1001A
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How Lagasse, Inc., Uses the Strategy Map to Unlock Hidden Value in Supply Chain Relationships
stand Superlative’s strategy. Superlative had identified its revenue goal, and Lagasse knew that it, in turn, would have to generate a certain amount of revenue for Superlative. The two sides focused on five key points:
By Janice Koch, Editor
1. Understanding each other’s strategy: What did each side want to accomplish in five years?
You’re a B2B wholesaler of commodity products. Your suppliers are major manufacturers with marketplace clout. Given the Internet and supply chain efficiency tools and processes, what’s to stop you from being disintermediated out of business? Seeing the potential of strategically aligning with key suppliers, Lagasse, Inc. supply chain executive Chris Adams used the BSC to find new sources of value for both sides. His new spin on cost to serve has catapulted Lagasse’s sales— and supplier and customer relationships—to new heights. Disintermediation: that’s precisely the possibility that haunted Chris Adams some seven years ago. Adams is vice president of value chain development at Lagasse, Inc., the leading U.S. wholesaler of janitorial, food service, and paper products. He was struggling to find a way to better manage inventory and, even more, to deliver greater value to suppliers and customers alike—accelerating the flow of goods through the supply chain and minimizing turnover and transportation costs, both upstream and downstream. The 9/11 terrorist attacks had been a wake-up call, disrupting supply flows and leaving some wholesalers with too much inventory on their hands for too long. Then in 2003 came his epiphany. After attending a Palladium Group Summit and devouring Kaplan and Norton’s books, Adams became a believer in the BSC concept. The powerful results that strategic alignment could bring within an organization made a deep impression on him. He began to wonder: What if you could strategically align with suppliers? If you mapped and shared your strategies, what hidden value could you uncover for your mutual benefit? What redundancies might you find in how each of you served the end customer?
What savings could be captured? Adams and key leaders—Steve Schultz, group president of Lagasse and sister company ORS Nasco; and Todd Shelton, president of Lagasse—floated the idea by a few key suppliers. One, a major multinational janitorial products company we’ll call Superlative, was worried about a shrinking bottom line—worried it would not be able to raise prices sufficiently to meet inflation, particularly skyrocketing freight costs. In fact, it anticipated a multimillion-dollar distribution shortfall over the next five years. Superlative had been directly serving customers with low purchase volumes at hundreds of locations, and this resulted in too many less-than-full freight loads and unnecessarily high shipping costs. Furthermore, some 80% of its slow-moving products were sold directly to these distributors— the kind of customers Lagasse also served. All this added up to excess overall supply chain inventory and inefficiencies —in every step of Superlative’s order fulfillment process. Superlative was the perfect candidate for Adams’s alignment idea. How Aligned Were the Two Companies?
2. Alignment: How could they ensure each company valued what the other brought to the relationship? 3. Collaboration: How could they make sure the two teams could work together as needed? 4. Joint metrics: How would they mutually define success? 5. Execution: How could they ensure that the new processes and initiatives identified would be carried out across the board (e.g., that the sales team would adhere to the new ways)? A T
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Lagasse, Inc. Deerfield, Illinois Founded in 1947 as a manufacturing business, Lagasse grew into a redistribution business over the decades. It was acquired in 1996 by United Stationers—a Fortune 500 company with sales of $5 billion (2008) and a leading U.S. wholesale distributor of business products, including technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. Revenues (2008): Approximately $1 billion in “jan-san” products Locations: 32 Suppliers: 300, including Kimberly Clark, Procter & Gamble, Rubbermaid, Johnson Wax, and Clorox Products: 8,000 stocked items (access to 20,000-plus); 12 key product categories Customers: B2B distributors and retailers Employees: 1,000-plus
To begin, Lagasse had to under-
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Lagasse shared its strategy map with Superlative and helped Superlative develop its own, drawing on the supplier’s highlevel supply chain, procurement, and financial metrics. It’s rare that a supplier will be open about its financial goals. Yet by comparing strategy maps—perspective by perspective, objective by objective —the companies began discovering opportunities for eliminating waste and reallocating savings. For example, to the supplier’s internal process goal “Invest in a new warehouse,” Lagasse could respond with, “No need for the new warehouse if we improve inventory turnover.” Lagasse used activity-based costing and other tools to calculate costs and pinpoint the gaps that, if filled, would yield new profits; to identify the most profitable customers for the supplier; and to identify which customers Superlative would be better off shifting to Lagasse to service. Lagasse also developed a tool to project financial performance with the supplier over a five-year horizon—and to track their progress toward those goals. Factors they examined included cash flow, cost-to-serve savings (i.e., the total savings in the entire cost-to-serve continuum for a given customer), and inventory value. Managing inventory is one of the most important activities in the supplier/wholesaler relationship. The supplier must be able to fulfill the wholesaler’s needs; in Lagasse’s case, with some suppliers this can amount to millions of dollars in product every day. But before long, the discussion ground opened up. At one meeting, Superlative and Lagasse executives were discussing bridging the inventory cost gap. “All of a sudden, it was like a dam had broken,” says Adams. “We started looking at other aspects of their business: their transportation
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model, their planning tools, their receivables, their web access, the way they managed contracts—a whole variety of things we felt we could collaborate on.” Suddenly, he says, “the savings went beyond the usual top-line, inventory, supply chain, sales-activity stuff.” This initial assessment affirmed to both sides that big opportunities lay before them. Superlative’s CFO, accounting head, and sales head convened with Lagasse’s leaders in an intensive two-day session to hammer out the details of their collaboration: evaluating their competencies; developing procedures, processes, and tools; prioritizing objectives; agreeing on measures; and finally, developing and implementing a plan. Creating a Joint Initiative Map With the strategies (and key objectives and initiatives) revealed by each side, it was now time to create what Lagasse calls a “joint initiative map”: essentially a spreadsheet-based Balanced Scorecard listing key objectives by perspective, along with a checklist of initiatives and tasks that link to these objectives. Led by Adams and his Superlative colleague, teams from every key area—from operations to sales—created a detailed plan to link to the joint initiative map. After about six months, the teams had a master plan. Next, Adams and his team developed several dashboards, including a joint supply chain dashboard that reflected demand patterns; a sales adjustments dashboard; and a complianceagainst-inbound-deliveries dashboard. Lagasse had access to some of Superlative’s forecasting, thanks to nondisclosure agreements the companies had signed that allowed such data sharing. Lagasse created monitoring tools that would quantify the impact of an aligned strategy in hard dollars. The tools show pre-
and post-program views—over a multiple-year time horizon—of such factors as cash flow, sales, inventory turnover, and savings. The companies also instituted regular business reviews to help them stay focused on the most important tasks, uphold their respective responsibilities, and refine specific measurements. They looked beyond supply chain performance to examine the spectrum of category management activities, from operations to financial planning and goal setting. After the initial discovery and planning processes, Lagasse conducted a trial with a small set of customers. Leaders observed how each customer responded to the changes, using key performance indicators developed jointly with Superlative. Customers saw improved service levels, increased inventory turnover, and an increase in sales due to fewer stockouts. Next came a regional trial. Once joint customers validated the approach, Lagasse returned to its supply chain teams to verify exactly how each one would execute. Finally, with everyone’s agreement, Lagasse and Superlative were ready for the final phase: commercialization. This first experiment had taken two years (2006–2007) from the initial meeting to commercialization. Initial Results Within six months, Lagasse and Superlative achieved an annualized distribution savings of more than $1 million. Almost another $1 million was saved through stack-and-layer ordering 1 at one plant alone. Lagasse accelerated inventory turnover, expanded revenue opportunities, and increased core profitability. Superlative enjoyed fewer, more lucrative transactions and enhanced forecasting (thanks to greater visibility into Lagasse’s operations and planning). It also minimized its overage, shortage, and damage
January–February 2010
rates. “We actually accelerated Superlative’s business plan,” Adams says. “In just over two years they were hitting their five-year numbers.” Now, many of Superlative’s manufacturing plants can see how Lagasse purchases product, and factor this into their manufacturing plans as they source raw materials and determine plant utilization. Because of enhanced coordinated planning, Lagasse can get new product into the marketplace the next day, whereas before it took two to three weeks. But the benefits didn’t end with the wholesaler/manufacturer relationship; they extended to both ends of the value chain. Distributors—Lagasse’s customers —enjoyed increased inventory turnover, big reductions in lead time, increases in on-time delivery, more warehouse space, a bigger product mix, fewer transactions, and greater cash flow—ultimately, greater ROI. Instead of the expected 15% to 30% attrition rate, customer attrition was only 5%. Why? Apart from the already cited benefits, Superlative’s customers achieved better working capital management. Many smaller, independent distributors were suffering as their clients delayed payment. With slower inventory turns, these distributors had difficulty paying Lagasse. “Now,” says Adams, “we’re seeing a complete transformation in the way these guys are managing their business.” Extending the Practice Such a glowing first effort almost makes the process sound painless. It wasn’t. “It’s a gritty exercise,” says Adams. Partners are asked to reveal proprietary information about goals, numbers, processes— and to trust each other in unprecedented ways. Lagasse has already engaged a handful of key suppliers in its alignment program, accelerating the development cycle to between six and twelve months. It is also
in different stages of program development with other suppliers. Every year the company reviews potential candidates. It’s not something to pursue with every major supplier, cautions Adams. Alignment isn’t always realistic. Some are initially open to the idea, but, as the discussion becomes serious, “we find they aren’t ready or don’t want to resource it properly or don’t feel they have the right competencies.” Some senior executives are resistant to exposing their organizations. Candidates must have strategic value and be in the top 20 suppliers in revenues or profits. “Their ability to service us is critically important.” That’s why taking time up front in the discovery process is crucial. With at least one supplier and several customers, Lagasse discovered that, instead of a long-term strategy, “all they had was a oneyear plan.” Today, for each aligned supplier, Lagasse conducts sensitivity analysis, looking at, for example, sales capture rates and EBIT contribution rates and then projecting results at staggered rates of resource allocation. With 25% of estimated program resources (e.g., analytic, sales), a given partnership might return $29 million in sales, but by increasing resources to 50% of the needed level, it could achieve $60 million; and at 100%, $119 million. Center of Excellence, Source of Competitive Advantage Lagasse’s supplier alignment has yielded another benefit: closer collaboration between its supply chain and strategic planning functions. Supply chain people now have more internal visibility. And whereas before, sales, operations, procurement, and transportation were siloed, now “we’re engaging each area’s leaders in the process,” Adams observes. “They now have a say in how these decisions will impact their business area.” People
are motivated to provide better information, because everyone has a stake in good data. Lagasse’s cost-to-serve program has become a center of excellence, and parent United Stationers has decided to establish a special cost-to-serve department for all its companies. “We definitely think of this as a competitive advantage,” says Adams. The results surely attest to this. Sales in United Stationers’ “jan-san” (janitorial/sanitary) category, of which its Lagasse unit represents the lion’s share, have grown from $700 million in 2005 to $1 billion in 2008—accounting for half of United’s sales growth in that same time period. In 2009, despite United’s net decline in corporate sales in Q2 and Q3, jan-san sales (which today represent 25% of corporate’s) rose 6% and 9%, respectively, over the preceding year. In fact, jan-san was the only category within United to experience sales growth, and Lagasse’s cost-to-serve initiatives are an important reason. Not surprisingly, more suppliers— and customers—are now approaching Lagasse about establishing cost-to-serve alignment. In the past, says Adams, the conversation would be, “What’s your price? Can you get it to me on time?” Now it’s, “How are we affecting our one-, two-, threeyear plan? Are there other opportunities for us to synergize?” Now, instead of worrying about disintermediation, says Adams, Lagasse has the insight and ability to help shape its partners’ futures. “They know where we want to be in five years, and we know where they want to be in that time, too. Strategy alignment has unleashed the power of effective collaboration.” And the promise of multimillion-dollar opportunities. I 1. Stack-and-layer ordering is a flexible way of purchasing that wholesalers can offer. For many reasons, manufacturers are often limited to offering a full pallet’s worth of product to a buyer.
Reprint #B1001B
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T E C H N I Q U E S
It takes more than a strategy map and BSC to gauge how well your organization is linking strategy and operations. Dashboards are a vital part of the management process. But they are not, contrary to popular belief, purely “operational.” Confused? Mark Lorence provides clear-cut, intelligible definitions of these two critical tools and shows how they work together in a well-oiled performance management system.
T O O L S
One If by Land, Two If by Sea: Using Dashboards to Revolutionize Your Performance Management System
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Balanced Scorecard Report
By Mark J. Lorence, Director, Palladium Group, Inc.
Evening, April 18, 1775. The lanterns were visible only for a few moments. Hanging in the belfry of Boston’s North Church, they flickered against the light of the rising moon until the nervous sexton—a friend of Paul Revere’s— extinguished them and retreated down the narrow stairs, anxious that his subterfuge remain undetected by the British soldiers gathering on nearby Boston Common. Paul Revere had two simple strategic objectives: warn John Hancock and Samuel Adams, who were staying about 10 miles away in Lexington, that the British army was on the move, and notify the townspeople in nearby Concord quickly enough for them to hide their ammunition stores. His strategy was straightforward: ride as fast as possible, using his prearranged communications system of sympathetic patriots to help spread the word. But to execute his strategy, Revere needed one critical piece of information: of the two possible ways to get from Boston to Lexington, which one would British General Gage’s troops choose? Would they take the longer route down the narrow strip of land known as the Boston Neck and cross the river at the Harvard Bridge? Or would they use longboats to move across the Charles River
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and continue marching straight on to Lexington? Once he had that information, Revere had to quickly communicate it to the small group of co-conspirators waiting to help him achieve his objectives. Although Revere may have lacked the tools and technologies available today, he nonetheless used a well-designed performance management system—including a clear strategy, measurable objectives, and a two-lantern “dashboard”—to launch his famous midnight ride. What lessons can we learn from this American hero? Dashboards vs. Scorecards: What’s the Difference? The term “dashboard”’ is often used interchangeably with the term “scorecard.” Though the two things share some similarities, they should be viewed as two different management tools. Each displays data needed to make decisions and improve performance. Each can be used in hardcopy form but is more powerful when implemented online, which allows for faster updating, richer visualization, and enhanced analysis of detailed data. And each can display a mix of financial and operational measures or key performance indicators (KPIs), allowing users to drill down to
underlying performance drivers. But scorecards and dashboards differ in several important ways: the methodology used to select the information they display, the users for whom the information is designed, the granularity of the information, and their timeliness. Scorecards are typically based on a formal methodology, such as the Balanced Scorecard or Six Sigma. These methodologies are prescriptive in nature and offer a framework and context for identifying the appropriate information. The Balanced Scorecard, for example, provides an integrated, holistic picture of your strategy that shows the intrinsic causal relationships between the four perspectives. Scorecards, and their high-level measures, are used by executives and managers to address broad questions about the organization’s strategy execution. Suppose your business involves the distribution of products to customers. The Balanced Scorecard methodology would guide you in identifying a strategic theme (e.g., Supply Chain Excellence), objectives within that theme (such as “Improve distribution efficiency” and “Improve distribution quality”), and associated measures (“warehouse throughput” and “percent of on-time deliveries”) to gauge progress against the theme’s objectives. Dashboards typically employ a user-centered1 methodology that aggregates data based on business problems, key functions, or critical business processes. Dashboards are often designed to address a single problem in isolation and evolve from simple online reports to elaborate visual displays of key metrics. A distribution dashboard might contain 20 to 25 different measures for warehouse efficiency and quality, measured daily and displayed in the form of tables with figures as well as graphs, charts, dials, or gauges. Dash-
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boards can display a large number of summary and detailed measures. Updated monthly, weekly, daily, or even hourly, they are used by employees throughout the organization. Their widespread use means that dashboards are often developed in “silos” and reflect information that requires action specific to a department, group, or individual. This information may be tightly linked to a higher-level strategy or may simply represent an important, but lower-level, set of operational metrics less directly related to overall corporate objectives. The distribution dashboard may contain an “on-time delivery” metric, measured daily and aggregated to a quarterly value for inclusion on the Balanced Scorecard. It may also contain low-level measures that require specific, often immediate, action. For example, the dashboard may receive a signal from a delivery truck’s GPS indicating that the truck is stuck in traffic and will arrive at the warehouse 20 minutes behind schedule. This delay would affect the “on-time delivery” measure but can be acted on immediately by dynamically adjusting the loading schedule and notifying the customer. Paul Revere’s “scorecard” had two objectives, described earlier, that couldn’t be measured until his ride was completed. And there were several lower-level “measures” about the British army that could have been relayed to the Minutemen. But only one was critical to the success of his plan—“By land, or by sea?” This essential information was “put on a dashboard” because it prompted a specific, immediate action that was ultimately part of a larger strategy. A good performance management system should include a mix of BSCs and dashboards. They should be designed and developed in tandem to ensure tight linkage
between your strategy (usually measured on a scorecard) and your operations (tracked on one or more dashboards). Designing Scorecards and Dashboards How do we design these tools— and determine what information gets displayed? It’s tempting to say, “Let scorecards represent strategic measures, and dashboards the tactical ones,” but this oversimplifies the matter. Although scorecards, especially well-designed Balanced Scorecards, contain strategic measures, all these measures (especially those in the internal process perspective) ultimately need to be acted on—and are thus, in fact, operational. Dashboards can also contain such strategic/operational measures along with their usual lowerlevel metrics. Yet even though all strategic measures are also operational, most operational measures are not strategic. It’s a misconception to think that somehow “strategic” is good and “operational” is bad. In reality, you need to “operate” on everything you measure; you’re simply selecting certain things and saying, “These are important to our strategy” and selecting other things and saying, “These are important to keeping the lights on.” How do you decide which information should go only on a dashboard? And how do you ensure that your dashboards are aligned with your scorecard? Two approaches can be used. The Top-Down Approach In the top-down approach, you start with a scorecard objective. Suppose you’re a grocery retailer and one of your customer objectives is to “Be known for having the freshest meat, seafood, and produce.” Your scorecard measure is “percent sales increase” for these categories, measured every quarter. Although that measure is
useful and will certainly indicate whether you’re achieving your strategy, it doesn’t provide timely information that can be acted on from day to day. This timely, actionable information can be obtained by deconstructing the objective into the underlying drivers that contribute to “fresh sales.” A useful technique for deconstructing an objective is to create an Ishikawa, or “fishbone,” diagram. A fishbone diagram organizes the underlying drivers of the objective into different categories and identifies measures associated with each of these drivers. Drivers can be external (i.e., beyond your organization’s direct control: “percent of customers not purchasing fresh categories”) as well as internal (“percent of advertising budget targeting fresh categories”). A deconstruction exercise may yield as many as 20 to 25 different measures for a particular objective. Select one or two summary measures to include on your scorecard, and save the rest to incorporate into a set of dashboards—say, a marketing dashboard, a merchandising dashboard, an HR dashboard, or even a “Fresh” dashboard if you want to isolate the measures and manage that aspect of your strategy exclusively (see Figure 1). This approach ensures a tight coupling of your strategy and your operations, because you’re starting with a strategic objective and deriving the underlying operational measures that support that objective. It facilitates the creation of your quarterly Balanced Scorecard, because the operational measures (updated frequently on your dashboard) can easily be rolled up to the quarterly values. And by prominently displaying the key measures on your dashboards, this approach helps operationalize your strategy. For example, the marketing team members will see the “percent of Fresh
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Balanced Scorecard Report
advertising budget” measure every time they look at their dashboards and will be able to manage that number on a daily basis rather than waiting for a quarterly review. So this approach has the added benefit of promoting proactive, rather than reactive, management. The Bottom-Up Approach The top-down approach is useful if you’re designing a performance management system from scratch. But what if you’re already using a scorecard and dashboards (or online reports)? The bottomup approach can help organize
existing information and improve the linkage between the two tools. Here, you start by cataloging the various reports used throughout your organization. Be sure to include financial as well as operational reports, and don’t forget those ad hoc reports that have made their way into general use. To make the design phase more manageable, consider “going deep” rather than “going wide.” Instead of attempting to design an enterprisewide dashboard environment, select a slice of your organization—a particular business unit or functional group,
Figure 1. How the Scorecard/Strategy Map and Dashboards Link Together in a Performance Management System
OBJECTIVE
“Be known for having the freshest meat, seafood, and produce.” MEASURES
Balanced Scorecard
1. Percent sales increase 2. Percent advertising budget for Fresh categories
DASHBOARD MEASURE
Marketing Dashboard Home Page
Ad Campaign Pages
Financial Pages
Percent advertising budget for Fresh categories
Customer Survey Pages
DETAILS:
• Weekly ad campaigns • Coupon promotions
Dashboard metrics link to the scorecard/strategy map measures and objectives. In this illustration, the marketing dashboard home page summarizes key marketing metrics. Drill-down pages provide additional detail on financials, ad campaign progress, and customer survey data.
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such as marketing—and design a set of tools to manage the performance for this group, from tactics to strategy. For example, collect all existing marketing reports and use the data as a starting point for developing marketing dashboards: one for the entire marketing department, and one for each of the areas within marketing (e.g., advertising, customer care, web analytics). Going deep forces you to link the tools at different levels and helps identify the technical infrastructure needed to fully automate the dashboards. Once you’ve collected all the reports, study the information they contain. Look for redundancies, overlaps, and discrepancies in how the information is presented. Often, data elements may be defined somewhat differently in different parts of the organization. To accurately roll up these data elements to summary-level measures, you should make sure that the definitions are consistent and their sources clearly defined. Returning to our distribution dashboard example of “on-time delivery,” we would establish a uniform definition of lateness: Does it simply depend on a notification from the truck’s GPS? Or does the truck have any arrivaltime latitude that would still allow for an on-time departure? And what happens if the truck leaves the warehouse late but still arrives at the customer location in an acceptable amount of time? These business rules may seem trivial, but it is critical that you understand them when selecting the metrics and KPIs for a dashboard. You want to ensure accuracy and uniformity in measuring performance. It’s also helpful to create a series of “use cases”—mini-scenarios describing exactly what data is available, how it’s used, and who uses it—to arrange existing data as well as identify missing components.2
January–February 2010
Use cases should be developed for common decision-making situations. In our marketing example, we would collect several reports for the marketing department: the monthly financial report, the weekly campaign reports, biannual data from customer surveys, annual third-party competitor analysis, and so on. Studying how this information is used in meetings will guide you in creating use cases. Is the information complete? Does the data in the reports answer the whole question, or is additional information needed? Is the data accurate, timely, and presented in a manner that highlights the important points? Who is involved in the decision-making process: meeting participants only, or others as well? Think of the use case as a narrative that answers the who, what, where, when, why, and how aspects of the dashboard. The resulting use cases can now be used to create a site map of your dashboard environment: a diagram similar to a navigation diagram for a large website that shows the logical arrangement of data. A common misperception about dashboards is that they must be limited to one page or one screen. Although dashboards are often depicted as single-screen solutions, actual dashboard applications—those that incorporate key metrics as well as detailed information underlying them— can contain dozens of individual screens. A dashboard “home page” contains the most important metrics, often displayed graphically, while “detail pages,” navigable from the home page via tabs or buttons, contain the detailed information—thus resembling the paper reports and spreadsheets they are replacing. A site map helps arrange the information into logical groupings, linked to the home page (which, in turn, can be linked to a higherlevel scorecard). Think of the site map for a large website like
amazon.com. There’s a home page for the entire site; subpages for categories such as books, music, and electronics; individual pages for each of the specific products; and a set of pages associated with checkout, payment, and shipping. Select your key metrics (such as “percent of Fresh advertising budget”), and put them on your dashboard’s home page. Ensure that they meet the criteria we’ve outlined—for example, that they’re displayed graphically, that the actions they are designed to prompt are unambiguous to users, that they’re based on standardized data definitions, that they are relevant to the daily operations of the groups that use the dashboards, and—of course—that they support the overall business strategy. Put the rest of the measures (e.g., “campaign effectiveness,” “customer survey results,” or “website hits”) on detail pages that are one click away from the home page, as shown in Figure 1. (Certain strategic measures, of course, such as “percent of Fresh advertising budget,” will show up on both the marketing dashboard and the corporate scorecard, linking the two tools even more tightly.) The bottom-up design approach allows you to use existing reports or dashboards to augment your performance management system. In practice, your dashboard design process will likely be a combination of the top-down and bottomup approaches, helping you ensure alignment to the strategic goals at all levels of your organization. It Takes Both Tools Paul Revere used his resources effectively to achieve his goals— from his intelligence gathering and communications networks to the tactics designed to keep his actions secret. He gleaned intelligence on British troop movements from the local boys who took care of the horses. His communi-
cation network included numerous doctors who, if stopped by British patrols in the middle of the night, could claim they were visiting a sick patient. And he even borrowed a neighbor’s petticoat to muffle the sound of his oars as he rowed across the harbor prior to commencing his ride. The “dashboard” in the North Church was an important part of Revere’s performance management system, but it wasn’t the only part. Similarly, dashboards can play an important role in helping you achieve your strategic goals. But you must design them properly, integrate them tightly with your strategic scorecards, and implement them carefully. When coupled with a solid strategy, an effective communications plan, and a sound initiative management process, dashboards can help you make a little history of your own. Editor’s note: In Part 2 of this article, Lorence will explore dashboard implementation, examining the major risks associated with it and illustrating leading practices for dealing with these risks. I 1. A user-centered methodology is a design philosophy and process in which the needs, wants, and limitations of end users of an interface are given extensive attention at each stage of the design process (source: Wikipedia). This approach is particularly important in dashboard design, given the iterative nature of the design process and the difficulty of establishing complete requirements at the front end of the process. 2. The term “use case” comes from software and systems engineering.
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M O R E
See the latest book by performance management expert Gary Cokins, Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (Wiley, 2009). Cokins’s blog is also worthwhile: http://blogs.sas.com/cokins. References to Paul Revere’s ride come from the acclaimed book by historian David Hackett Fischer, Paul Revere’s Ride (Oxford University Press, 1994). Reprint #B1001C
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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
Linking Marketing Plans to the Balanced Scorecard By Edward A. Barrows Jr., Lecturer, Babson and Boston colleges, and former Vice President, Palladium Group, Inc.; and Malcolm McDonald, Professor Emeritus of Marketing, Cranfield School of Management
Oddly, many users of the BSC have not taken advantage of its alignment capabilities to link the marketing process to organizational strategy. Here, strategy coach Ed Barrows teams up with Malcolm McDonald, one of the world’s preeminent authorities on marketing strategy, to demonstrate how to create a Balanced Scorecard–driven (and strategy-focused) marketing planning process. Over the past 15 years, the Balanced Scorecard has evolved from a simple performance management tool to an integrated, organization-wide management system. In this system, known as the Kaplan/Norton Execution Premium Process (XPP), the full range of management activities— from strategy development and operational planning to corporate governance—is sequenced into one comprehensive system. A critical element of any management system is marketing. As renowned management thinker Peter Drucker once noted, the purpose of any business can be encapsulated in two basic activities: innovation and marketing. Yet the Plan Operations stage of the six-step XPP model, which includes key process improvement, sales planning, resource capacity planning, and budgeting, does not explicitly mention the marketing process. It’s important to establish a link between the marketing process and strategy. Coupling the central tools of the management system— the strategy map and Balanced Scorecard—to the primary tool of the marketing planning process—the marketing plan— helps ensure that this essential business activity is aligned with organizational strategy. What Is Marketing? Many people understand marketing to be the strategic component
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of the sales process. A more fundamental definition of marketing is matching the company’s capabilities with the wants of its selected customers.1 Although conceptually straightforward, this is often difficult to accomplish in practice. Just ask the team that paved the way for the introduction of New Coke in 1985. Considered by many to be one of the worst marketing disasters of all time, the New Coke campaign not only left consumers feeling flat but it also forced the company to revert to its old Coke formula after spending millions of dollars on the failed effort. Clearly, it can be costly to develop and promote products or extend a brand, and there is no guarantee—regardless of the amount of money spent— that the messages a company communicates will be received, let alone that the product will be hailed for meeting customer desires. We believe a more formal, process-based definition of marketing is warranted, one that can be used to guide the marketing planning process itself. The marketing planning process consists of six steps: (1) defining the organization’s markets (segmentation); (2) quantifying the needs of each customer segment; (3) determining the value proposition for each segment; (4) developing marketing objectives and measures to communicate these value propositions to all employees who are involved in fulfilling them;
(5) implementing marketing initiatives to deliver on those objectives; and (6) monitoring the value delivered to customers through marketing plan performance reviews.2 By progressing through each of these six steps, an organization can establish a comprehensive marketing planning process, and ultimately a marketing plan, that is aligned with the strategy. (See Figure 1.) The obvious starting point in this process, then, is the strategy map. Defining Markets, Customer Segments, and Value Propositions (Steps 1–3) No effective marketing plan can be created in isolation; it must take its cue from the overall corporate or business unit strategy. Therefore, in the XPP model, the strategy map is the logical point of departure for creating a marketing planning process. The strategy formulation process highlighted in stage 1 of the XPP model (Develop the Strategy) identifies steps 1 through 3, but we’ll recap some of the pertinent activities here. As part of the strategy development process—or the entire strategic planning process, for that matter (from development to review)—markets need to be defined and targeted at a high level. Consider Crown Castle, a leading global provider of shared wireless communications and broadcast infrastructure. In 2001, the company decided to embark on a new strategy. Overall, its market was global, and the company broadly identified its market segments as wireless operators and broadcasters. (At the time, the industry was mature; the company did not anticipate new entrants and thus saw no need to segment any further.) Segmentation, of course, can be accomplished at varying levels to precisely target products or services. At a high level of
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Figure 1. The Marketing Planning Process: Steps and Outputs Strategy Mapping Period
1 STEPS
OUTPUTS
2
High-Level Market Assessment
3 Identify Customer Segments
Define Markets
Marketing Mapping Period
Customer Segmentation Analysis
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4 Determine the Value Proposition
Value Proposition/ Customer Objectives
Select Marketing Objectives
Ansoff Matrix Objective Development
6 Develop Marketing Initiatives
7P Initiative Development
Monitor Plan Performance
Tactical and Strategic Plan Reviews
The strategy mapping period (here, steps 1 through 3) is the natural starting point for the marketing planning process— and the optimal way to align marketing planning with strategy.
strategy making, demographics, socioeconomics, and the like can be useful. Real competitive advantage, however, comes only through needs-based segmentation at a lower level of granularity. Simply put, the better job an organization does in segmenting its market, the easier it is for it to craft a compelling value proposition to meet each segment’s specific needs. Once customer segments are identified, a value proposition is developed for each one. An organization’s overall value proposition—the centerpiece of its strategy—addresses the following eight factors: price, quality, availability, selection, functionality, service, partnership, and brand (image). These factors should appear in the customer perspective of the strategy map. In its strategy map, for example, Crown Castle’s customer perspective showed relationship, availability (i.e., speed to market), price, quality, and adherence to regulatory requirements. Using this approach to define the value proposition for each customer segment lends consistency and completeness to the strategy development process. Further, when articulated in the form of customer objectives, the value proposition provides a useful gauge with which both marketing and overall business performance can be evaluated. In other words, a sound strategy
development process will provide the necessary input for the marketing planning process. Developing Marketing Objectives and Measures, Creating Marketing Initiatives, and Reviewing Marketing Plan Performance (Steps 4–6) With strategic issues defined, the next step in the marketing planning process is developing marketing objectives. Marketing objectives identify what the organization sells (its products and services) and to whom it sells them (its markets and segments). As strategy map objectives do for the strategy, marketing plan objectives not only guide the development of measures to track performance, but they also help identify marketing strategies to achieve the plan. (For the sake of consistency with Balanced Scorecard terminology, we’ll refer to marketing strategies as “marketing initiatives.”) The Ansoff Product-Market Growth Matrix is a useful framework for developing marketing objectives. First conceived in the 1960s by strategic management expert Igor Ansoff, the matrix identifies the two dimensions that constitute all marketing— products and markets—and the two variables defining them— “new” or “existing.”3 The resulting four quadrants represent every possible permutation: market penetration (existing product/new
market), product development (new product/new market), market extension (existing product/ existing market), and diversification (new product/existing market). Organizations can populate this matrix to develop objectives, starting either with product or markets. Whether you have 1, 10, or 100 products, you can devise and analyze marketing objectives for every product and market based on this matrix. Ricoh Americas, the document imaging company, used the Ansoff matrix in 2005 in its Mid-Term Plan (strategic planning process phase) to help identify ways to drive growth. (See Figure 2, next page.) To add clarity, each of these four objectives can be broken into subobjectives. For instance, as a subobjective of “Provide consultative office productivity services,” Ricoh might note “identify industries most in need of consultative office productivity services.” Note that even though some dimensions can have more than one objective, not every dimension will necessarily have an objective. Each objective can be prioritized, as well, to help focus the marketing effort. Remember, the marketing planning process is not the same thing as cascading a strategy map to the marketing function. So there is no need to limit the number of objectives, as is the case with the strategy map. Nor is it necessary to create a strategy map for every marketing plan. A strategy map
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Balanced Scorecard Report
Marketing initiatives are oriented toward the traditional mix of
The final step in the marketing planning process is to conduct marketing plan performance reviews. Most organizations hold two types of reviews: tactical reviews and strategic reviews. The tactical review is ongoing, generally a weekly progress evaluation to ensure initiatives are on track. At the strategic review, a monthly meeting, initiative owners and marketing functional-area heads evaluate whether the marketing objectives are being met. Tying It All Together Like strategy, marketing plan development is a dynamic process built on the test-andadapt principles intrinsic to the Kaplan/Norton strategy execution system. Thus, the plan must be revisited and refreshed over time. Moreover, the marketing function and marketing planning operate most effectively when they use the same taxonomy. Yet many organizations, after completing their strategy map and Balanced Scorecard, still struggle with translating their strategic objectives
New
PRODUCTS Existing
New
Market Penetration
Product Development
Drive existing product sales through new dealers
Provide consultative office productivity services
Market Extension
Diversification
Sell more existing product through dealer channels
Fill gaps in the product line through key alliances
Ricoh used the matrix to identify ways to drive growth.
and measures into a meaningful, actionable set of marketing plan objectives and measures. These six steps, along with the specific techniques we’ve described, provide a simple yet powerful way to develop an effective marketing plan that links directly with the strategy. We propose that organizations take full advantage of the high-level marketing direction provided by the basic strategy development process—and use it as the starting point for their marketing planning process. A Balanced Scorecard–driven approach to marketing plan development can help you define a seamless, integrated set of marketing activities that will support and align with your business strategy as thoroughly as possible. I 1. Adapted from Malcolm McDonald, Marketing Plans: How to Prepare Them, How to Use Them (5th edition, Butterworth Heinemann, 2002). 2. Ibid. 3. The Ansoff matrix was introduced in Ansoff’s 1957 Harvard Business Review article “Strategies for Diversification.” 4. McDonald, Marketing Plans. 5. Ibid.
Professor Malcolm McDonald is one of the world’s leading authorities on marketing and marketing planning. Until recently, he was professor of marketing and deputy director, Cranfield School of Management. Author of more than 40 books and 100 articles, McDonald is a former marketing director of Canada Dry. Reprint #B1001D
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Marketers sometimes refer to their actions as strategies (or, in the BSC lexicon, initiatives). Marketing initiatives represent the company’s best opinion of how it can profitability apply its skills and resources to the marketplace.4 In other words, marketing initiatives, like any BSC initiative, are projects that advance the organization’s strategy—in this case, in the marketing area.
Every marketing initiative should be captured and tracked through an initiative template. Each template should specify the initiative name, its description, the objective(s) it supports, the measures of success it is intended to drive, and the Ps that it affects. It should also list the initiative milestones, the budget, a timetable, and accountabilities.
Figure 2. The Ansoff Matrix, with Sample Ricoh Objectives
MARKETS
After you’ve established objectives for the specific marketing plan, you must create performance measures. Given that the objectives are derived from product or service expansion, many of the measures will be financial. Those not directly related to financial performance may be measures that lend themselves to financial quantification—measuring, for example, volume increase or share growth. It’s important to remember that the purpose of marketing planning (the overall process as well marketing plans) is to orient the marketing activities and resources of the organization toward driving product sales and profitability. Certainly the organization may identify non-financial marketing objectives (such as brand development), but the primary purpose of the marketing plan is to drive quantifiable business performance. With that in mind, measures for the objectives in the Ricoh example might include “Percent market share of color copiers and multifunctional products” (for the objective “Drive existing product sales through new dealers”) and “Number of new alliance products offered” (for the objective “Fill gaps in the product line through key alliances”).
criteria known as the four Ps: product, price, place, and promotion (subsequently evolved to seven Ps with the addition of people, physical evidence, and process). Broadly speaking, marketing initiatives should stipulate such things as policies and procedures related to product and service offerings, pricing levels, advertising, sales promotion, customer service levels, and communication activities with customers.5
Existing
typically is created for the marketing function (thereby linking overall process with strategy), and not for the marketing plan itself.
