The Balanced Scorecard: Translating Strategy Into Action (31 page)
Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
1
. Jay W. Lorsch, “Empowering the Board,”
Harvard Business Review
(January–February 1995): 107, 115–116.
2
. Skandia calls its system of describing human, structural, and customer capital the
Skandia Navigator
, because it is used as “an instrument to help us navigate into the future and thereby stimulate renewal and development.”
C h a p t e r T e nTargets, Resource Allocation, Initiatives, and Budgets
M
ANAGERS SHOULD USE
their Balanced Scorecard to implement an integrated strategy and budgeting process. The organizational, team, and individual employee processes, described in
Chapter 9
, align human resources to the business unit’s strategy. But this is not sufficient. The business must also align its financial and physical resources to the strategy. Long-run capital budgets, strategic initiatives, and annual discretionary expenses must all be directed to achieving ambitious targets for the objectives and measures on the business’ scorecard.
We have found that four steps are needed to use the scorecard in an integrated long-range strategic planning and operational budgeting process (see Figure 10-1):
- Set stretch targets. Managers should set ambitious targets for measures that all employees can accept and buy into. The cause-and-effect interrelationships in the scorecard help identify the critical drivers that will allow breakthrough performance on important outcome measures, particularly financial and customer ones.
- Identify and rationalize strategic initiatives. The gaps between the ambitious targets set for scorecard measures and the current performance on those measures enable managers to set priorities for capital investments and action programs intended to close the gaps. Managers eliminate or de-emphasize initiatives that will not have a major impact on one or more scorecard objectives.
- Identify critical cross-business initiatives. Managers identify the initiatives that will deliver benefits (synergies) to the strategic objectives of other business units or the corporate parent.
- Link to annual resource allocation and budgets. Managers link the three-to five-year strategic plan to discretionary expenses and budgeted performance (milestones) for the upcoming year. These milestones enable them to track the business unit’s trajectory along its strategic journey.
Figure 10-1
A Different Management System—Planning and Target Setting
The Balanced Scorecard is most effective when it is used to drive organizational change. To communicate the need for change, managers should establish targets for the measures, three to five years out, that, if achieved, will transform the company. The targets should represent a discontinuity in business unit performance. For example, if the business unit were a public company, target achievement should lead to a doubling or more of the stock price. Typical financial targets have included doubling the return on invested capital, or a 150% increase in sales during the next five years. An electronics company set a financial target to increase sales at a rate nearly double the expected growth rate of its existing customers.
While most executives are not shy about setting stretch financial targets, the credibility of the targets is frequently questioned by those who must achieve them. Steve Kerr, described as the “chief learning officer” at General Electric, explains why many companies have difficulties with stretch targets: “It’s popular today for companies to ask their people to double sales or increase speed-to-market threefold. But then they don’t provide their people with the knowledge, tools, and means to meet such ambitious goals.”
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The problem with most stretch-targeting exercises is that they are fragmented approaches that attempt to establish ambitious objectives for isolated issues or measures. Best-in-class benchmarking typifies this approach: make a concerted effort to study the performance of other organizations along a particular dimension, define those organizations’ level of performance as a target, and develop a program to achieve that performance. While conceptually appealing, even if the organization achieves its ambitious objectives for isolated business processes, benchmarking may not lead to the desired breakthrough in future financial performance.
The Balanced Scorecard has proven to be a powerful tool to gain acceptance for aggressive targets because it stresses the linkages for achieving outstanding performance in related measures, not just improving performance in isolated measures. Consider the target-setting process used by the executive team of a high-tech engineering firm just after completing its first Balanced Scorecard. The CEO asked his team to develop an aggressive set of targets that, if achieved, “would make us proud and make our sister divisions envious.” At an off-site workshop, the team split into four subgroups, one for each perspective of the scorecard. The customer/business development group, led by the vice president of marketing, proposed aggressive targets for new customer acquisition, average size of sale, and customer retention. The group concurred on the targets because of their newly formulated strategy for building customer partnerships. The service delivery group, headed by the vice president of operations, developed stretch targets for on-time, on-spec performance, reductions in rework, and higher quality and safety. The targets assumed the implementation of a dramatically improved project management process. The learning and growth group, led by the vice president of human resources, developed aggressive targets, based on employee-driven innovations, for cost reduction and customer-partnering initiatives. The staff innovations were expected to flow from greatly expanded employee empowerment that, in turn, would be driven by improved skill development and more open communications. The financial group, however, led by the chief financial officer, was not as aggressive. This group felt that profitability could be increased, but only by about 20%. The CFO resisted higher targets, because he did not want to commit his peers to stretch performance that they would have to deliver on. He felt that it was better to set low targets and hit them than to set high expectations and miss them.
After all the subgroup presentations at a plenary session, the CEO declared that the modest targets proposed by the financial group were unacceptable.
The members of the other groups concurred with the CEO. Their opinions were well expressed by the vice president of operations: “If we are able to achieve the targets that we set for marketing, for innovation, and for customer service, the profitability will follow—and the increase will be enormous. We are committed to making these things happen. I will personally commit to doubling our profits.” The executive team, in concert, agreed to a stretch target on profitability that would make the firm the industry leader. If the target had been set in isolation, no such consensus would have occurred. But every member of the executive team could now see that the drivers for future financial performance were in place and had the commitment of the entire executive team. The team unanimously concluded that breakthrough financial performance would result from these efforts.
The inclusion of performance drivers and lead indicators on the scorecard enables managers to identify the operational factors, such as strategic investments, market research, innovative products and services, reskilled employees, and enhanced information systems, that must be created if the ambitious financial targets are to be achieved. In our experience, operating executives often agree on stretch targets even beyond those requested by senior management, if they can be sure of having the investment, resources, and time to execute a long-term plan.
CEOs can motivate stretch targets for Balanced Scorecard measures by creating a performance gap in critical high-level financial objectives. For example, Figure 10-2 shows how one division of Kenyon Stores used the logic of the scorecard to become comfortable with what initially seemed an “impossible” target: double revenues during the next five years. Current plans were considerably short of this goal, creating a revenue gap of $1 billion. At first, the operating managers of the retail chain thought that closing this gap could not be done. But the CEO led the management team through scenario planning, based on the underlying cause-and-effect performance model (see
Chapter 7
) embedded in the Balanced Scorecard. This scenario-planning approach enabled the team to propose and test the feasibility of different strategies before agreeing to a final set of targets. The team systematically decomposed the revenue growth target into the increase required in:
- number of new stores,
- number of new customers attracted into each store,
- percentage of shoppers in each store converted into actual purchasers,
- retention of existing customers, and
- average sales per customer.
Figure 10-2
Setting Stretch Targets Based on Cause and Effect at Kenyon Stores