The Balanced Scorecard: Translating Strategy Into Action (39 page)
Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
As companies attempt to implement new strategies—building relationships, developing new fashions or technologies, and accessing new customers and consumers—managers must continually take risks and experiment so that they can learn and grow. Executives must encourage this innovative behavior by managing the second integration issue—linkage to personal objectives and rewards. As long as personal incentives and rewards are tied to short-term performance measures, especially financial ones, management thinking will remain risk-averse and short-term. Senior executives will find it difficult to keep focused and committed to building long-term capabilities and relationships.
Clearly, incentive compensation motivates performance. But, as discussed in
Chapter 9
, the organization may wish to get some experience in managing with the Balanced Scorecard before explicitly tying compensation to it. Unless, however, reward and punishment are eventually tied, implicitly or explicitly, to the balanced set of objectives, measures, and targets on corporate and business scorecards, the organization will not be able to use the Balanced Scorecard as the central organizing framework for its management systems. In its early implementation, Kenyon Stores used the Balanced Scorecard to stimulate SBU strategy formulation and review but did not shift its formal incentive compensation to scorecard measures. After a year of experience with the scorecard, Kenyon began to link executive incentive compensation to the Balanced Scorecard.
The final component of Kenyon’s management system—feedback and strategic learning—uses the two-level review process described in
Chapter 11
. This process links monthly operational reviews—where managers compare short-term performance with targets established in the annual budget—and quarterly strategic reviews that examine longer-term trends in scorecard measures to assess whether and how well the strategy is working.
By integrating various management processes centered on the Balanced Scorecard into its management calendar, Kenyon Stores’ corporate-and SBU-level managers shifted their focus from tactics to strategy, and were now able to effectively translate their strategies into actions.
Managers in a variety of manufacturing and service organizations have attempted to build scorecards for their business units. Not all the experiences have been successful. Several executives have commented, “It’s not as simple as it seems.” Our analysis of their experiences reveals several ways in which scorecard projects can indeed fail. These factors include defects in the structure and choices of measures for the scorecard, and organizational defects in the process of developing the scorecard and in how it is used.
Many senior executives feel that they already have a Balanced Scorecard because they supplement financial measures with nonfinancial ones, like customer satisfaction and market share. But these nonfinancial measures exhibit many of the defects of traditional financial measures they are meant to complement. They are lagging measures, reporting how well an organization’s
strategy worked in the past period. Also, they are generic, in that all companies are trying to improve along these dimensions. The measures are good for keeping score, but not good for communicating to employees what they must excel at to win future competitive games. They do not provide specific enough guidance for the future, nor are they a sound basis for resource allocation, strategic initiatives, and linkage to annual budgets and discretionary spending.
Fortunately, these structural defects are relatively easy to remedy.
Chapter 7
described how to build scorecards that reflect unique strategies, targeted customers, and critical internal processes. The scorecards derived from specific strategies will have a balanced set of measures, both outcomes and performance drivers, lagging and leading indicators, and with all the measures eventually linked to achieving excellent long-run financial performance.
Other problems arise not from defects within the scorecard itself, but from the process used to implement the concept. Our worst fears are realized when we receive a phone call that begins:
Hello, this is John Smith. I’m an assistant controller [or manager of quality] at Acme Industries and am serving as chairman of a task force to improve performance measurement at the company. We’ve done an extensive literature survey and are attracted to your Balanced Scorecard approach. We are doing a benchmarking study and would like to come to talk with you about what the best performance measures should be for our scorecard and the types of measures that have proven most successful in other companies.
We usually respond to such calls by expressing appreciation for their interest in the Balanced Scorecard, but suggesting that the proposed meeting is unlikely to be successful for either party. When asked to explain our reticence, we point out several problems. First, the scorecard development process should not be delegated to a middle-management task force. For the Balanced Scorecard to be effective, it must reflect the strategic vision of the senior executive group. Merely slapping performance measures on existing processes may drive local improvement but is unlikely to lead to breakthrough performance for the entire organization. In addition, if senior executives are not leading the process, they will be unlikely to use the scorecard in the important management processes described in
Part Two
of this book. The senior executives will continue to conduct operational reviews that emphasize meeting short-term financial targets, thereby bypassing and undermining the fundamental rationale for developing a scorecard in the first place.
Most important, a Balanced Scorecard should not be created by emulating the best measures used by the best companies. If, as we have argued, the best scorecards are derived from strategies designed for breakthrough performance, measures chosen by even excellent companies for their own strategies are unlikely to be appropriate for other organizations that face different competitive environments, with different customers and market segments, and in which different technologies and capabilities may be decisive. When people tell us, “It’s not as simple as it seems,” they are referring to the hard, intensive work required to formulate a scorecard appropriate for their organization and to make that scorecard an integral part of their management processes. There are few shortcuts in developing a viable scorecard.
The other extreme, however, can also be detrimental to effective deployment of the scorecard. Some organizations work too intensively and too long in searching for the perfect scorecard. When information is not available for several critical measures, they attempt to install reliable information systems to produce the desired data. This decision leads to significant delays in the introduction of the scorecard, destroying whatever momentum and enthusiasm had been established for the concept. Balanced Scorecards are not immutable. They are dynamic and should be continually reviewed, assessed, and updated to reflect new competitive, market, and technological conditions. By delaying introduction of the scorecard, companies lose the opportunity to gain feedback on the measures for which information is available, and, even more important, to get practice and insight in using the scorecard as a core management system. Our advice, when we find organizations delaying because they are not sure whether they have selected the right measures, or because data are not available for some of the measures, is “Just do it.” Start the learning process of how to manage with a balanced set of performance drivers and outcome indicators.
Introducing a new management system centered on the Balanced Scorecard must overcome the organizational inertia that tends to envelop and absorb
virtually any change program. Two types of change agents are required for effective implementation of the new system. First, an organization needs transitional leaders, the managers who facilitate the building of the scorecard and who help embed it as a new management system. Second, the organization needs to designate a manager to operate the strategic management system on an ongoing recurring basis. An additional difficulty of embedding the Balanced Scorecard as a strategic management system (yet another entry on the “It’s not as simple as it seems” list) is that the responsibilities of both the transitional leaders and the manager of the ongoing system do not fall within traditional organizational boxes.
