The creators of the Balanced Scorecard recently defined a holistic model for corporate management, from developing an appropriate strategy to ensuring that activities within operational functions are adequately supporting that strategy. Here are the basics of their model.
In order to survive, thrive, and create real value in increasingly competitive global markets, organizations are adopting increasingly complex strategies. And even when they choose the right and the most brilliant strategies, the battle is only half won — if that. As companies try to execute on more and more intricate strategies across larger, more complicated, and widely dispersed operations, they confront challenges of a magnitude well beyond their past experience.
It's not newsworthy to state that executing on corporate strategies is important, but these days it's becoming executives' top priority. In The Conference Board's list of the top 10 CEO challenges, “execution excellence” ranks number one worldwide. The survey of 354 executives — 49 percent of whom are C-level and 56 percent of whom work in companies with more than $1 billion in annual revenue — were asked how concerned they are about a dozen high-level corporate challenges. Respondents said execution is a bigger challenge for them than is risk management, staying on top of market trends, or even ensuring top-line growth. (See exhibit 1.)
Although strategy execution is clearly an issue of high importance, there is also ample evidence that organizations find it difficult to fully deliver on their strategic and operating plans. Bain & Company director Chris Zook, in the book “Profit From the Core: Growth Strategy in an Era of Turbulence,” notes the following startling statistic: In the decade between 1988 and 1998, only one out of every eight companies was able to deliver at least 5.5 percent real growth in revenues and earnings every year while covering its cost of capital.
Organizations' success at strategy execution, as exemplified by their results, remains low. This fact should not call into question managers' and executives' intelligence, energy, and capabilities. Rather, it highlights the difficulties inherent in converting organizational goals into real results. The transition from idea to reality — or, stated another way, the link between strategy and operations — is complex. Palladium engages in consulting and research work with clients around the globe, conducted in close partnership with founders Dave Norton and Robert Kaplan. Through more than a decade of this work, continuously trying to understand why successful organizations are able to execute and perform better than their peers, we have learned a few simple truths.
First, converting a strategy into results usually requires the coordination of disparate people and processes through activities including — but not limited to — strategy development, strategic and operational planning, budgeting, talent management, initiative management, forecasting, and technology. Presiding over each of these domains is a manager with deep expertise in his or her particular area, but with little natural inclination to coordinate across the domains. After all, the generator of operational forecasts might wonder, what is the relationship between forecasting and strategy development? Even the CEO often fails to understand the importance of linking strategy with operating processes. Says Gartner Inc. in “Using Corporate Performance Management To Deliver the CEO's Strategic Vision,” released this April: “The challenge is that too many CEOs see strategy as something ‘special’ or ‘unique’ that only they are equipped to understand and manage. This means they rarely apply a structured approach to the processes of creating, planning, and managing strategy, instead relying on informal approaches and spreadsheets.”
On top of people's failure to understand that strategy and operations truly need to be linked, the second truth Palladium has discovered over the years is that coordinating these disparate elements requires a performance management process that links strategy to operations and demands that all parts of the organization work in concert to deliver performance.
Treating Execution as a Process
Our thinking about these two truths is bolstered by the fascinating results of a survey Palladium conducted in 2006. Among organizations that said they did not use a systematic performance management process to link strategy with operations, only 27 percent reported that they were performing as well as, or better than, the average of their industry peer group. Conversely, among organizations that said they did have a process for linking strategy to operations, a full 70 percent claimed to perform as well as, or better than, their industry peers. The difference is stark, with a large gap between “winners” and “losers.” In their January 2008 Harvard Business Review article “Mastering the Management System,” Kaplan and Norton tackle this issue directly, describing an integrated process for linking strategy and operations, a process Harvard's editors refer to as the “unified field theory of management.”
The world's most popular business tool for translating strategy into operational reality is the Balanced Scorecard. However, Palladium's client work and our groundbreaking thought leadership from Kaplan and Norton have maintained for many years that the Balanced Scorecard alone is insufficient to deliver significant and repeatable performance improvements. Rather, it is in the adoption of an entire performance management system around the Balanced Scorecard where results materialize. Our most successful clients adopt a comprehensive new management process, of which the Balanced Scorecard is only a part.
Kaplan and Norton's new process for linking strategy with operations consists of a six-stage double-loop cycle of activities in the areas of both strategy management and operations management, as illustrated in exhibit 2. The integration of these activities can lead to masterful strategy execution, and can yield what we refer to as an “execution premium” — the performance results obtained through the solid execution of strategy. The January Harvard Business Review article was a precursor to Kaplan and Norton's latest book, “The Execution Premium: Linking Strategy to Operations for Competitive Advantage.”
Those of us who've spent the majority of our careers in the business of performance management are accustomed to models that explain how a company should be managed; they are rampant from both consultancies and software vendors. All have merits, but the six-stage cycle drawn out in exhibit 2 is distinctive from virtually every other model because it is not only conceptually compelling, but also proven in organizations across the globe. Real-world testing of the Execution Premium Process (XPP) indicates that it rarely fails to yield breakthrough results when implemented fully and systematically. From our years of research and consulting case history, Palladium has concluded that organizations with the leadership, appetite for change, and commitment necessary to build and sustain a rigorous performance management process like this one will dramatically increase the odds of their success.
What Is the Execution Premium Process?
The XPP consists of six major stages, which together function as part of a closed-loop management system. Rather than a framework, the XPP is a management process that any organization can adopt. It offers all of the characteristics typical of any management process, including multiple roles and responsibilities, the need to work across organizational boundaries, and an understanding that the process is only as strong as its weakest link.
Some readers may see the elements of the process, as diagrammed in exhibit 2, and conclude that this model has nothing to offer their organization, as they already perform each of its six stages. It is true that the stages in the process should be familiar. However, what most organizations lack are the connections between and integration among the six stages. The interaction between stages has a multiplier effect on an organization's ability to perform well. It is in the ability to view the process holistically that performance breakthroughs occur. The six stages of the process are as follows:
Develop the strategy
The first stage, naturally, encompasses the processes and tools that an organization uses to formulate and develop its strategy. Despite the plethora of strategy consulting firms and the prevalence of strategy management tools like the Balanced Scorecard, most people who work in this area (e.g., executives, consultants, strategy planners) will state firmly that few organizations are as skilled at developing strategy as they wish to be.
Companies that are good at developing strategy share several common characteristics: First, they are capable of clearly articulating, through a quantifiable vision, what they want to achieve over a multiyear time frame. Second, they take the time to generate, based on this vision, a description of their “value gap” to articulate precisely what about their business they will change to attain their desired results. (See exhibit 3.) A “value gap” discussion can help galvanize an organization around a specific and quantifiable strategic destination and articulate, at a high level, how to get there. Third, they engage in formal modeling of the business to identify the performance drivers that contribute most to results. Fourth, they thoroughly understand how the external and customer environment impacts performance, and they rigorously assess their internal capabilities. Finally, they have a clear understanding of the strategic issues that the organization faces; they encapsulate these in a compelling “strategic change agenda” that defines where the company is headed.
Translate the strategy
The second stage requires taking the big ideas contained in the strategy (i.e., the results of stage one) and housing them in an execution framework like the Balanced Scorecard. Best-practice organizations use this stage, at a minimum, as a chance to undertake the following activities: They formalize the cause-and-effect relationships among drivers and business outcomes using a rigorously developed strategy map. They decompose strategic objectives down to the process and activity level so that they can develop the small set of strategic measures required to monitor the performance of the strategy. They identify, select, and fund portfolios of initiatives designed to drive the strategy forward. They clearly assign accountability for driving performance against specific measures and strategic objectives. They develop a data-acquisition strategy in order to gather the metrics that emerge in this stage and prepare for the additional measures that they will develop in subsequent stages. And they develop and staff an office of strategy management, charging it with the responsibility for managing and coordinating the entire XPP.
Align the organization
The third stage of the XPP involves managing the ongoing alignment of the organization to its strategy. Stated another way, this stage requires the company to “export” throughout the organization the business priorities it identifies in stage two. This is a critical and complex undertaking that needs to work in two distinct but related ways.
First, any organization — whether or not it's adopting a new strategy — requires people to work as a team, accept change, and do what is needed to make the change stick. Leaders and employees must understand the organization's strategy and communicate it relentlessly. Incentive compensation and other rewards need to be aligned to the targets that define strategic success. This is the social side of alignment, the place where executives convince the organization to understand and support change.
Second is the technical side of alignment, in which senior managers must ensure that the diverse operational units of the business function smoothly together. This aspect of alignment requires an organization to align process improvement programs with strategy (e.g., through Six Sigma or Total Quality Management — TQM), as well as with performance metrics and targets. This is commonly referred to as “cascading”; it should combine balanced scorecards and operational dashboards with measures linked to the broader strategy of the organization.
Organizations that have completed the initial three phases of the XPP management process are well-situated to excel at the next — and largest — stage: planning operations. This is where the strategy becomes fully embedded into the organization's financial and operational planning and management processes. It is hard to overestimate the importance of this stage.
This article does not have space to do justice to every activity that is required to link operational planning with strategy, but successful organizations follow certain practices. They firmly “bake” the initiative management into the financial planning process so that, in effect, they ensure that strategic investments receive funding. They develop an integrated planning process that makes the transition from strategic planning to financial planning relatively seamless and coordinated. They use techniques such as rolling forecasts, driver models, and activity-based costing to increase cost transparency and to enable real-time resource allocation. And they fully leverage the value of the organization's business performance management and business intelligence tools to ensure that software underpins each stage of the Execution Premium Process.
Monitor and learn, then test and adapt
The final two stages of the XPP are closely related, and they follow naturally from the first four stages. An organization with a clear strategy linked to operations generates lots of performance data, which must then be processed, monitored, discussed, and analyzed. Companies adopting the Execution Premium Process take three major steps in the final two phases of strategy execution. First, they conduct formal, data-driven strategy review meetings at least quarterly. These meetings focus solely on examining the strategy and making decisions on issues that are core to the strategy. They must also include a review of the company's performance against key measures, along with a review of the status of strategic initiatives. Second, as a companion to the strategy review meetings, XPP companies conduct linked operational reviews throughout the organization. These meetings ensure that managers are engaging in robust discussions about operations and the alignment of operations with strategy. This is generally where linkages between balanced scorecards and operational dashboards pay dividends because organizations are able to review a wide range of performance data that spans both strategy and operations. Finally, the best companies are mature enough in their application of analytical techniques that they can determine the relationships among their metrics and understand the causes behind their performance data. Analytics technologies are important in improving organizations' understanding of underlying data, and in detecting the need for adjustments to the existing strategy.
At the conclusion of this stage of the XPP cycle, an organization is ready to re-embark on stage one, to revisit its strategy and make any necessary adjustments to improve the strategy's relevance and focus.
Starting the Journey
This has been a whirlwind tour through a substantive management process, one that relies on multiple management tools and is supported by the latest in performance management technology. However, readers can get a feel for the fundamentals of the Execution Premium Process, and how it can drive a solid connection between strategic planning and operational execution in a wide array of organizations. I noted earlier that nearly all organizations already engage in one or more of the XPP's stages. What many are missing is the integration of the stages, which is necessary to achieve a consistent level of maturity across each stage. Integration is not simple, and organizations that think it is are probably missing the point.
Our experience suggests that developing a robust Execution Premium Process is an enormous transformation effort; it must marry the application of leading-edge performance management tools with significant change management interventions. Many companies can find low-hanging fruit in terms of improving how performance is managed, but full maturity of the XPP can take several years. That doesn't mean it's not worth the effort. The benefits are clear and proven: enhanced performance and a competitive advantage.
Andrew Pateman is the vice president and practice leader of the strategy practice at the Palladium Group Inc. He specializes in developing and implementing enterprisewide strategy execution programs.