Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
A formal, periodic strategic review meeting plays a critical role in the executive team strategic-learning process. Unfortunately, most management meetings focus on operational, not strategic issues. For example, the senior executive team of Kenyon Stores met monthly to review the performance of the previous month. The meetings were scheduled as close to the monthly closing as possible and generally took place on a Saturday morning to eliminate interruptions.
The agenda was organized by responsibility center. The controller handed out monthly reports at the meetings so no advance preparation was possible. The controller began the meeting with a review of financial performance, which was followed by presentations from the three merchandise managers
and the director of the retail stores’ division. Each manager reviewed the performance of his or her department. Sixty-five percent of the meeting time was spent in this one-way communication. The remaining 35% of the meeting was spent in group discussion, which all managers felt was clearly the most valuable part of the meeting. Of this interactive time, however, the greatest focus was on some short-range issues raised by the operational reports (e.g., how to ensure “freshness” in store layouts, or how buyers have to deliver better merchandise on a more timely basis). Only 10% of the meeting time focused on issues related to longer-term, strategic implications, such as creating a stronger organizational commitment to quality. Because the meeting was designed as a broad, balanced performance review, no nonfinancial item received more than five minutes of group discussion. The participants concluded the meeting by developing a list of seven follow-up items related to improving short-term performance.
Clearly this meeting was about operational or, at best, management, control issues. Its goal was to monitor performance relative to plan and to initiate short-term actions that would bring the organization back into compliance with the plan. By such criteria, the meeting could be considered a success. It fostered a team problem-solving atmosphere among the executive group. Much cross-functional education took place as managers from different parts of the organization and different functional expertise and responsibilities reviewed each other’s plans and outcomes. In addition, two-thirds of the meeting was devoted to nonfinancial topics. On the negative side, most of the meeting was listening; there was little team problem solving. The agenda was structured around functional departmental responsibilities, not around strategic issues that required a solution from more than one department.
Figure 11-5
The Use of Cross-Functional Teams to Facilitate Executive Problem Solving
The Echo Engineering Value Chain
*Identifies Team Leader
Most companies continue to operate like Kenyon Stores. Prior to adoption of the Balanced Scorecard as a management system, the quarterly meetings at the FMC Corporation between corporate executives and individual operating company management focused on analyzing the most recent period’s financial results. Dozens of managers from the operating company attended the meeting, most sitting around the perimeter of the room, in case they were needed to explain a variance in any of the 100+ line items on the quarterly financial statements. The discussion focused on past performance and on explanations for why financial objectives were not achieved.
To generalize, most organizations’ periodic reviews assess whether recent performance is consistent with the short-term operating plan specified in the annual budget. The meetings review monthly or quarterly financial and operating statistics, discussing short-term, tactical results and processes. Virtually no time is devoted to reflecting on whether the organization’s strategy is proceeding as expected; whether the competitive, market, and technological environment is still consistent with the strategic plan; and whether adequate resources are continuing to be committed to achieving the strategic plan. In our experience, the opportunity for strategic learning is missing in most organizations.
In contrast, by using the Balanced Scorecard as the cornerstone of its management system, FMC now has an entirely new process for its quarterly reviews. The change in focus is dramatic. Company presidents inform corporate executives, in advance, of any major deviation from the financial
plan. Typically, that issue is resolved before the meeting. The face-to-face meetings have only three people from corporate and three or four top people from the operating company. And the discussion at every meeting focuses on strategy—whether the company is achieving its near-term objectives, whether its long-term objectives are going to be realized, and whether any modification to the strategy seems warranted.
For strategic review meetings to be effective, they should be separated in both time and place from operational review meetings. Also, while monthly meetings are appropriate for operational reviews, strategic reviews seem better suited to a quarterly cycle. Strategic factors like market share, customer satisfaction, new product introduction, and employee capabilities may not change meaningfully from month to month. A quarterly review also allows for more reflection on trends, on the drivers of strategy, and the correlation with results. The quarterly strategic review meeting should focus on issues, not performance of functional departments, with a goal of refining the strategy and its implementation.
The identification of strategic issues that require further exploration and clarification closes the loop on the strategic learning process. Quarterly reviews become opportunities to learn about the validity of the strategy and how well it is being executed. For example, a strategy review meeting at Metro Bank revealed a significant increase in customer complaints about quality. Internal quality statistics, however, did not confirm this increase. A small cross-functional team was formed to analyze the problem and recommend a solution. In this way, the strategy was partially validated and partially refined. Typically, in the quarterly strategic review, executives modify the current strategy; they don’t introduce revolutionary new approaches.
Figure 11-6
Operational and Strategic Management Processes Are Separated but Related
In the continual learning approach, the one-way reporting of the numbers can be eliminated from the team meeting. Reports are put on the network to be reviewed at any individual’s convenience. The network permits ongoing dialogue about the numbers and their implications so that the shared time of the executive team can focus more heavily on issues and interpretation.
We can even envision a more formal process for using the evidence considered in the quarterly strategic review meeting to test, learn about, and update strategy. For example, suppose that at Metro Bank, executives at a quarterly meeting observe that growth in customer purchases of new banking products and services—a key measure in the customer perspective—is below expectations. With the cause-and-effect relationships specified in the Balanced Scorecard, managers would initially look back to see whether the enablers, the performance drivers, for this outcome measure had achieved their targets. Are the anticipated new products and services available to customers? Have employees been trained to market and sell these new products and services? Are information systems in place to enable employees to identify promising customer candidates for these new products and services and to provide information about the customers’ existing relations with the bank as well as their anticipated demand for the
new financial products? If one or more of the performance drivers have not achieved their targets, the failure to achieve targeted performance on an outcome measure (customer purchase of new products and services) can be attributed to poor implementation performance. Plans to correct these defects can be made in the upcoming period. This is a good example of single-loop learning. The managers observe deviations from the intended plan and initiate actions to bring the organization back to the planned strategic trajectory.
Figure 11-7
The Strategic Review Process of the Future