Needed: A New Approach to Managing Strategy
The single most important skill in any business is the ability to translate strategy into action. This is increasingly difficult in larger or more complex organizations, where the distance between those who formulate the strategy and those who carry it out is significant. With size and complexity comes the necessity for communicating strategic intent and for providing a management framework that aligns the capabilities of the business with the requirements of the competitive marketplace. The challenges to successfully implementing strategy have never been so formidable.
A Fortune magazine article, based on a survey of management consultants, reported that less than 10% of strategies are successfully implemented. Tom Peters referred to that figure as "wildly inflated," 1 suggesting that formulating strategy is not a valuable activity if it can’t be translated into action. This is the reason behind the general decline of strategic planning over the past two decades. 2 What’s needed is not more planning, but a way to translate strategy directly into action.
Strategy has never been more important. As the economy moves rapidly away from the "Industrial Age" to the "Information Age," which is characterized by global and knowledge-based competition, every organization must rethink the fundamental assumptions on which it competes. As the global economy becomes more tightly connected, each business must build its own feedback systems to effectively monitor its own activity and to achieve its own strategic objectives.
Every organization must develop a new vision on how it will compete in the emerging networked economy. And every organization must translate this vision into actions that will transform them into Information Age competitors. In other words, if organizations are to survive this economic transition, they must learn to successfully implement strategy. They must learn to beat the 90% failure rates experienced by their peers. They must make Strategic Enterprise Management (SEM) a core competency of their organizations.
This white paper describes an integrated management approach that enables complex businesses to effectively harness their capabilities and to achieve their strategic objectives. The combination of a Balanced Scorecard approach to translating strategy into action, along with enterprise-wide connectivity provided by SAP, constitutes a competitive breakthrough for executives intent on achieving their strategic vision.
SAP Strategic Enterprise Management provides the concepts and tools you need for setting your strategic direction and achieving the benefits of your strategic vision. This paper will familiarize you with the Balanced Scorecard approach to developing and sharing the story of your strategy, which is an essential element to aligning enterprise resources with your strategy. It provides an overview of the components of Strategic Enterprise Management and concludes with a summary of the process and technology necessary to make it happen.
Why Is It So Difficult to Implement Strategy?
Strategy guru Michael Porter describes the foundation of strategy as the "activities" in which an organization elects to excel.
"Ultimately, all differences between companies in cost and price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services …differentiation arises from both the choice of activities and how they are performed." 3
If the foundation of strategy is, as Porter maintains, the "selection and execution of hundreds of activities," then strategy cannot be limited to a few people at the top of an organization. Strategy must be understood and executed by everyone. The organization must be aligned around its strategy. "performance management systems" are designed to create organization alignment. Herein lies one of the major causes of poor strategic management.
MOST PERFORMANCE MANAGEMENT SYSTEMS ARE DESIGNED AROUND THE ANNUAL BUDGET AND OPERATING PLAN. THEY PROMOTE SHORT-TERM, INCREMENTAL, TACTICAL BEHAVIOR.
In their survey of 200 major companies, the consulting firm Renaissance Worldwide and CFO Magazine found that several barriers are built into the typical performance management system. 4
Visions Are Not Actionable. Vision is not translated into operational terms that provide useful guides to action. Only 40% of middle management and less than 5% of line employees clearly understand the vision of their organizations.
Goals and Rewards Are Not Linked to Strategy. Goals and incentives are linked to annual financial performance rather than long-term strategy. Only 50% of executives, 20% of middle management, and less than 10% of line employees have goals and compensation linked to strategy.
Resource Allocation Is Not Linked to Strategy. Capital allocation and discretionary program funding are based on short-term budgets and financial criteria, not long-term strategy. Only 43% of organizations have a strong linkage between their long-range strategy and their annual budget.
Feedback Is Tactical, Not Strategic. The feedback and review process concentrates on the control of short-term operating performance instead of long-term strategic performance. Forty-five percent of management teams spend no time at their monthly management meetings making strategic decisions. Eighty-five percent of management teams spend less than one hour per month.
This profile paints a clear picture of the typical performance management System used to align activities within an organization today. It is a system designed to influence short-term, operational, tactical behavior. While this is a necessary part of management, it is not enough.
YOU CANNOT MANAGE STRATEGY WITH A SYSTEM DESIGNED FOR TACTICS.
The Balanced Scorecard: A New Approach to Implementing Strategy
A new approach to implementing strategy has emerged. The Balanced Scorecard, developed by Harvard Business School professor, Robert Kaplan, and management consultant, David Norton, was first introduced in a 1992 Harvard Business Review article. 5 The idea has spread rapidly. A recent survey conducted by Bain & Company indicates that approximately 50% of companies now use "Balanced Scorecards" to help manage their organizations. 6
The Balanced Scorecard (BSC) is a technique to translate an organization’s strategy into terms that can be understood, communicated, and acted upon. A BSC uses the language of measurement to more clearly define the meaning of strategic concepts like quality, customer satisfaction, and growth. Once a scorecard that accurately describes the strategy has been developed, it then serves as the organizing framework for the management system. As summarized in Figure 1, such a scorecard puts strategy at the center of the management process. In effect, the Balanced Scorecard becomes the "operating system" for a new Strategic Management Process.
Source: The Balanced Scorecard Collaborative, Inc.
Figure 1: The Balanced Scorecard Changes The Premise Upon Which
The Management System Is Based
Organizations that were early adopters of the Balanced Scorecard have shown impressive results to date. Consider the following case studies:
Mobil Oil . In 1992, Mobil Oil’s US Marketing & Refining division was performing poorly. It was last in the industry in profitability, producing large negative cash flows and an ROI that was unacceptable. In the opinion of the new management team, Mobil had lost touch with its market. Its large national organization had caused it to become inwardly focused, bureaucratic, and inefficient; in other words, it had become a set of functional silos. A new strategy was developed to decentralize the organization into 18 market-facing business units with P&L accountability.
These business units were supported by fourteen shared service groups. The challenge, as Mobil began to implement this strategy, was to hold these 32 units together as it attempted to adopt a broad range of new approaches and shared cultural values.
The Balanced Scorecard was introduced in 1993 to manage the roll-out of this strategy. The results were rapid and dramatic. By 1995, Mobil had moved from last place to first place in industry profitability. Mobil has maintained this #1 position for four consecutive years (1995-1998). The negative cash flows have been dramatically reversed, and Mobil’s ROI leads all competitors. The Balanced Scorecard played a central role in this success.
"We now see a higher degree of alignment in the organization. The Scorecard has served as an irreplaceable agenda for discussion. 7
Robert McCool, EVP, Mobil Oil
Cigna Property & Casualty Insurance . In 1993, the Property & Casualty Division of Cigna lost nearly $275 million. Although this poor performance was due in part to a few major catastrophes, most lines of business were marginal. In the opinion of the new management team brought in to turn the situation around, Cigna had lost control of the underwriting process—the process by which risks were evaluated and priced. The management team believed that Cigna was pursuing an obsolete "generalist" strategy, trying to be all things to all people; therefore, a new strategy was developed. Cigna would be a "specialist," focusing on niches where it had comparative advantage. The division would make underwriting an asset instead of a liability. If the strategy succeeded, Cigna would become a "top quartile" performer. The strategy was rolled out to 20 business units in 1993. The Balanced Scorecard was used as the core management process.
Again the results were rapid and dramatic. Within two years, Cigna had returned to profitability. This performance has been sustained for four consecutive years. In 1998, the company’s performance placed it in the top quartile of its industry. At the end of 1998, the parent company spun off the Property & Casualty Division for a price of $3.45 billion. The Balanced Scorecard was an important part of this success story.
"CIGNA has used the Balanced Scorecard to manage its transformation from a generalist company to a top-quartile specialist. 8
Gerald Isom, President, CIGNA Property & Casualty
Brown & Root Energy Services (Rockwater Division). Rockwater, located in Aberdeen, Scotland, is an undersea construction company whose clients are major offshore oil and gas producers. Rockwater was formed in 1989 by merging two previously independent construction companies—one British, one Dutch. In 1992, the company was still struggling to assimilate this merger. The vision of the combined company was not yet clear or had yet to be accepted across the organization, and the company was losing money. The division president introduced the Balanced Scorecard to his management team in 1993 to help clarify and gain consensus for the strategy. The scorecard design process accomplished that, helping to identify different views of the customer value proposition and build agreement on the approach for moving forward. Once designed, the scorecard was linked to the programs for managing the business. By 1996, Rockwater was first in its niche in both growth and profitability.
"The Balanced Scorecard helped us improve our communication and increase our profitability. "9
Norman Chambers, Managing Director
Brown & Root Energy Services
Chemical Retail Bank (now Chase Manhattan Bank). In 1992, the Retail Division of Chemical Bank enjoyed a 30% market share in the New York metropolitan area. Chemical was still struggling to assimilate a recent merger, as well as attempting to introduce more integrated financial services and greater use of electronic banking to its customers. Implementation of this new strategy was being hindered by the proliferation of new ideas and investment initiatives. There was no way to prioritize. The Balanced Scorecard was introduced in 1993 to more clearly define the strategic priorities and provide a structure to link strategy and budgeting. By 1996, the results of the new strategy were becoming apparent. In the space of three years, profitability had increased by a factor of 20.
"The Balanced Scorecard has become an integral part of our change management process. The Scorecard has allowed us to look beyond financial measures and concentrate on factors that create economic value. "10
Michael Hegarty, Vice Chairman, Chemical Bank
The experience of these four organizations illustrates the power of the Balanced Scorecard approach. The fact that these executive teams successfully executed their strategies (when 90% of their colleagues could not) is impressive enough. But the speed with which the results were achieved spotlights the potential that exists for every organization. The rapid strategic benefits realized by these companies show us that the capabilities to achieve success were already present in these organizations. People had the skills and knowledge needed to execute these strategies. What they lacked was focus, alignment, and understanding of where the organization was trying to go. The Balanced Scorecard eliminated these barriers. It provided the understanding, focus, and alignment that unlocked these assets—assets which, although hidden, existed all along. It unlocked and focused the strategic skills and knowledge of the organization.
Each of these four organizations, and many others like them, orchestrated a complex process of change over an extended period of time. However, the essence of their approaches can be distilled into two basic steps:
Create Strategic Focus – The Balanced Scorecard . Create a Balanced Scorecard to help clarify, consolidate, and gain consensus around the strategy of the organization.
Translate Strategy to Action – Strategic Enterprise Management (SEM ). Link the Balanced Scorecard to all facets of the management process to ensure that change is focused on the strategy.
The lessons learned in these successful companies can now be applied to the development of a management system available to all. They are the foundation for SAP’s approach to Strategic Enterprise Management.
