Dr. David P. Norton and Dr. Robert S. Kaplan are the recognized architects of the balanced scorecard, now recognized as an essential tool and management approach that aligns performance management initiatives with strategy. Since publishing The Balanced Scorecard in 1996, Norton and Kaplan have authored influential books including The Strategy Focused Organization (2000), Strategy Maps (2004) and last year's Alignment: Using the Balanced Scorecard to Create Corporate Synergies. As cofounder and cochairman of the research and consulting firm The Palladium Group, Norton focuses on helping companies with strategy execution, and in this interview with Intelligent Enterprise, he shares instructive examples and helpful how-to advice on doing just that.
Our top story this week is about tying operational performance management to corporate strategy. What's your view on how the two fit together?
What Bob Kaplan and I have focused on, as an outgrowth of the work we did on performance measurement and balanced scorecards, has been the process of executing strategy. Operational performance is about the transactional level of the business and managing the day-to-day activities and decision making associated with it. That's important, but what differentiates one company from the next? What differentiates the approach that Intel uses from the approach that Dell uses? The answer is strategy. If you have a strategy of being an innovator, like Intel, then certain kinds of processes are going to be important, such as rapid design and partnering with other organizations in order to be first to market with new products. If you are a Dell, your strategy is about having the lowest cost and the most convenient customer interface. So for Dell, different processes are important.
Alignment is about creating an approach and a framework that lets the organization define what's important and then cascade that and communicate that to the lower levels of the organization so everybody understands what the strategy is and how they fit in. If you don't link strategy management and operations management, then you're stuck in either a bottoms-up world, where you're focusing on operations and you don't really have control of whether it's impacting the strategy, or you come top down and focus only on strategy, but you can't make things happen. You've got to tie those two things together.
Is there a big gap between the two within most organizations?
Absolutely. There have been a number of studies on the success rate companies have in executing strategy, and they generally conclude that something like nine out of ten organizations that have strategies fail to execute them. That's even true when those strategies have been well-formulated at the top and they have buy in from senior management. That's a pretty foreboding statistic.
The term "scorecard" is used pretty liberally these days. How can you tell if you have a genuine scorecard?
There are a lot of scorecards out there, but when we use the term, we mean a set of objectives and measures that describe the strategy of the organization. The strategy is how you create value for your stakeholders, and the scorecard forces this discipline on you. You have to think, first of all, about your investors if you're in the private sector or your stockholders if you're in the public sector. Then you have to ask, "How do I please the shareholders? What do they want?" They want revenue growth and ROI. Then you look at the customer. If my customer wants the most innovative, leading-edge products, like Intel's customers, then I've got to design a process that will always keep me at the front, so I'll be the first with new products to market. If the process is about innovation, what about my people? Do they have the skills, technology and culture required?
So I have to create this logic that says, "If I want to satisfy my shareholders, I first have to satisfy customers." A strategy map captures that logic and defines a set of objectives for each of those. A balanced scorecard converts those objectives into measures and describes what your strategy is. It uses the language of measurement so that you can communicate precisely. When you say, "My customer will view me as the preferred provider," how would you know if you were the preferred provider? Measurement gives you a discipline to be clear about what these objectives are.
Your book Strategy Maps came out eight years after The Balanced Scorecard," so do strategy maps fill gaps you discovered in the balanced scorecard approach?
Yes, we reserve the right to learn. From day one, the idea was to get a set of measures that described the strategy. What we found was that it was hard work and it was all art and no science to sit down with the management team and try to get them to describe what their strategy was. We also observed, working over the years with a hundred or more companies, that there were certain common patterns. That led to what we now call the strategy map.
The strategy map is a kind of a structure to think about the strategy that ultimately you're going to convert to measures. Now, instead of it being 100 percent art, we can go into an organization with a template that says, "Here's a general map of how organizations [in your industry or country] typically think of this strategy."
Can you share any dos and don'ts or lessons learned on using balanced scorecards and strategy maps?
In the early uses of the balanced scorecard, there were these incredible success stories. The first five or six companies had what you would call miraculous performance. One of the earliest ones was Mobil Oil, which was last in the industry in profitability. When they started this process, they were trying to be all things to all people. They would have the best-located, cleanest, friendliest gas stations and they would always match the lowest price. Once they introduced this new way of managing, they knew they had to make the decision, are we going to be a low price competitor or are we going to compete on friendly customer service? They concluded it was the latter… and within two years they'd moved from last to first in profitability.
We began to see that there was this incredible power that you got from focusing your organization, particularly if it had not been focused before. There was all this low hanging fruit as a result of people going in different directions. For example, we worked with one bank that had four different studies going on in market segmentation. Ultimately these studies would have come back with four different recommendations. They shut down three of those studies just like that and saved a huge amount of money.
So focus was creating these marvelous results, but we found over the long haul that it was often a one time benefit… If you're going to make things happen on a sustainable basis, you've got to tie the strategy to specific operational processes.
Is there a good example of a company that has linked its strategy to operational performance?
Southwest Airlines has developed an approach that has made it the industry leader. They're leading on price, using a limited inventory of common airplanes and focusing on fast turnaround to reduce the number of planes required [and increase return on capital]. They had the strategy at the top, but the problem they had was how to get the organization aligned around it. The strategy itself would create the benefits by getting focused on one kind of airplane - a decision that can only be made at the top. But to ultimately execute the strategy on a permanent basis, they had to take this down to their employees.
Today the culture at Southwest is one of empowerment. People learn to make decisions and take actions on their own without having to ask permission. They started with a major program of educating their work force on what the strategy was, what the key measures in the strategy were and what those measures meant. What is return on investment? What is cost per seat mile? Most importantly, what can you, one of 20,000 employees, do about it? They moved from the strategy at the top to bringing this down to every employee in the organization, investing heavily in education and communication programs to create that kind of alignment. Every stewardess, gate agent and baggage handler understands the strategy and the role they play in it.
How rare is that sort of connection between corporate strategy and operational execution?
I go back to my statistic that nine out of ten organizations fail to execute on strategy. We've been giving an award for the last five years called "The Balanced Scorecard Hall of Fame." There are some 80 companies in the Hall of Fame, and we add about 10 or 15 a year. The companies now come from every corner of the globe. We inducted our first Chinese company last year, China Microelectronics. There are industrial companies from around the world. There are governmental agencies, like the City of Brisbane, Australia, and the City of Charlotte, North Carolina. Each one has a story to tell about how they devised a new strategy, changed the management system to use the balanced scorecard approach and achieved dramatic results.
You talk about performance management as a discipline and a management approach, but what's your advice to people who are looking to buy performance management technology?
My advice is "process first, technology second." What you're really doing is introducing a new way of managing. So the organization has to cope with that first. You've got to let the process changes settle in and then bring the technology in.
We've run into a lot of cases where companies would start with the technology, but it takes time to build a scorecard and a management initiative. They find that the technology puts more structure on them than they are ready for. They're still learning and they're going to make mistakes and they're going to want to be able to change things. The technology ultimately is something that you have to bring in. If you don't bring it in, it becomes a barrier, but you've got to match the progression of the technology.
A good case in point is Hilton Hotels. Hilton started a new performance management program around 1998 and they introduced the balanced scorecard. Everything was done on Excel spreadsheets. They had a simple measurement system, all hotels will have the same eight measures, and they rolled that out on Excel. Within two years they found the Excel spreadsheet did the job, but it didn't allow them to network and it didn't let them tie things together. So they threw out Excel and stepped up to more of an Internet based performance management system. That allowed them to share numbers and people would start looking for who was best. It created a kind of a second wave of benefits. Then that technology reached its natural limit and Hilton was trying now to integrate its budgeting with its human resource system. They couldn't do it with what they had, so they had to throw out that technology and then commit to this integrated CPM platform. So the technology evolved in these three steps, which matched their evolution as a company as opposed to starting immediately with the state-of-the-art option.
So many performance management initiatives seem to focus exclusively on planning and budgeting. What's your advice to those looking to move into operational performance management?
My advice would be that strategy is where the big results are. You can't get financial results unless you deal with the drivers of financial results, your customer, your processes and so forth. Strategy is a team sport. It's not the domain of the strategic planner, nor is it the domain of the CFO or the human resource executive. The thing that's different about strategy is that it requires you to integrate all parts of the business. And it requires an executive team that truly works as a team.
Let's say you are a bank and you're trying to create cross selling through customer partnerships. In order to do that, you're going to need a major training program, you've got to change the incentive compensation program, and you have to give them new technology. At the very least, you have three different parts of the organization that have to come together to develop this new approach. If you just made it a training program and didn't add technology to support them, it would fail. If you just made it a technology project with no training and no compensation program, it would fail. You've got to do all of these things.
My advice to any functional executive, and in particular to the CFO, would be to form the team and look at measurement as being balanced -- as representing all of the parts of the business, not just the financial measures.