80. The Balanced Scorecard
The missing links between strategy development and strategy execution are communication and alignment. The Balanced Scorecard and Strategy Map are fabulous tools that will help you improve these two critical links. It will create and communicate a shared understanding of strategy, resulting in alignment. Alignment across multiple teams enables greater flexibility in creating and communicating new strategies based on changing market, competitive, and technological conditions.
A few years ago, Fortune Magazine published a shocking statistic that stated only ten percent of employees understand their company’s strategy.1 This is consistent with other findings. Research from Harvard professors Robert Kaplan and David Norton, creators of the Balanced Scorecard, reveals that 95 percent of employees are not aware of, or do not understand, their company’s strategy.2 Furthermore, their research also discovered that 85 percent of executives typically spend less than one hour per month discussing strategy. With statistics like this, it’s no surprise that most companies complain about their inability to execute strategy.
The Balanced Scorecard is a more meaningful and effective method for describing, measuring, and communicating strategy than traditional methods. In fact, it is so effective that nearly 70 percent of the Fortune 500 have adopted it. But you don’t have to work in a large company to reap the rewards from using the Balanced Scorecard. One of the advantages to small and mid-sized companies is that the process will be easier to manage. There are many benefits of the Balanced Scorecard. It will help you:
• Translate strategy into operational terms.
• Describe and measure both leading and lagging indicators.
• Describe and measure intangible assets.
• Uncover a flawed strategy or one that is missing critical elements.
• Facilitate budget decisions by focusing on holistically funding initiatives.
• Define time-based measures of the strategy.
• Illustrate a holistic view of the organization.
Balanced Scorecards have four distinct perspectives: Financial, Customer, Process, and Learning and Growth. Strategy Maps translate the strategy, objectives, initiatives, and measures into the four quadrants. Succinctly summarized it would answer the question:
What skills and knowledge do people need (learning and growth) to create and implement strategic processes (internal processes) that will create value for our customers (customer value), thereby achieving our financial goals (financial)? Answering each part of this question will link and align strategic initiatives and goals in each of these four areas.
Strategy maps can be developed around strategic “themes,” which are the three to four overarching goals for your business. For example, if a theme is to “increase customer loyalty,” then you would need to consider the knowledge and training that employees need to achieve the goals of this theme. It may include training to understand customer lifetime value (CLV), customer segmentation, and other factors. Processes to measure CLV, segmentation, customer profitability, and CRM would need to be established. In the customer sector, you would need to determine what customers value the most so they can be retained and identify the programs to nurture customer relationships. In the financial sector, you would create financial targets and objectives that are tied to increased profitability as a result of increasing customer loyalty.
For each theme that is developed, establish objectives, strategies, and programs. Work top-down and bottom-up to make sure each of the areas are aligned to achieve the stated objective (see Figure 80.1)
Figure 80.1 The Balanced Scorecard
Source: Adapted from “The Balanced Scorecard: Translating Strategy into Action,” Robert S. Kaplan and David P. Norton. Permission to reproduce granted by author.
The overall business strategy map is created first. The strategy map cascades to other stakeholder groups, such as divisions, business units, and/or teams, so they can align their objectives to the overall organization objectives (see Figure 80.2). This creates alignment of objectives across the entire company, and it also creates accountability and ownership as objectives cascade to the individual level.
Figure 80.2 Strategy map cascade
Source: “The Balanced Scorecard: Translating Strategy into Action,” Robert S. Kaplan and David P. Norton. Permission to reproduce granted by author.
The Balanced Scorecard translates strategy map objectives into strategic initiatives, measures, and targets. The strategic initiatives form the action plan that enables the targets to be achieved, and execution of the strategy is managed through execution of initiatives. On completion of strategy development, it cascades to teams and individuals where strategy is translated into individual performance metrics.
Table 80.1 summarizes how a low-cost airline might describe their objectives in the customer and internal process categories.3
Table 80.1 Translating Strategy into Action
As initiatives are executed, they are measured against the targeted performance measures. Over time, this process enables an organization to become more precise in predicting and measuring strategy execution.
As you can see in Figure 80.3, the Strategy Map and Balanced Scorecard follow a process that is aligned to the P•R•A•I•S•E Marketing Process. Mission, vision, and values create the context and foundation. This is followed by strategy, implementation, and measurement. The two processes implemented together will help you link planning, strategy, execution, and evaluation metrics to continuously improve results.
Figure 80.3 Balanced Scorecard and Strategy Map Process
Source: “The Balanced Scorecard: Translating Strategy into Action,” Robert S. Kaplan and David P. Norton. Permission to reproduce granted by author.
What Is Measured Improves
The ROI Optimizer, Balanced Scorecard, and Strategy Maps are tools you can implement to improve planning and execution. There are similar components in the processes:
• Visually translate strategy to operational terms by mapping it
• Align the organization and its activities to the strategy
• Link measures across the organization and demand chain
• Increased success of strategy execution
The Balanced Scorecard combined with the ROI Optimizer and other methodologies you have learned throughout the P•R•A•I•S•E Marketing Process will increase the effectiveness of strategy development, communication, and execution. The tools and processes are not difficult to use, but they do take discipline to develop and manage. Like your marketing plan, after they are complete, they are continuously updated as strategy is executed. If you like the concepts of the Balanced Scorecard and Strategy Maps, I suggest you read Kaplan and Norton’s books on these subjects. A complete listing of their books can be found at www.MarketSmarter.com.
A business can no longer govern by simple measures of revenue, profitability, and margin. You can’t manage what you can’t measure, and strategy must be measured differently now than it was in the past. Chapter 81, “The Art and Science of Execution,” focuses on how things get done.