Companies often manage strategy in fits and starts. Though executives
may formulate an excellent strategy, it easily fades from memory as
the organization tackles day-to-day operations issues, doing what HBS
professor Robert S. Kaplan calls "fighting fires."
A new book by Kaplan and David P. Norton aims to make strategy a
continual process. The Execution Premium: Linking Strategy to
Operations for Competitive Advantage shows managers how to weave
organizational principles into a more effective management system that
respects the differences between strategy and operations yet
integrates them in a powerful way. Kaplan and Norton introduced the
Balanced Scorecard, a performance measurement system, in 1992. The
Execution Premium is their fifth book as coauthors.
Kaplan recently explained the ideas behind The Execution Premium and
how they bridge the common divide between strategy and operations.
Martha Lagace: What particular issues around execution need to be
better addressed in business?
Robert Kaplan: There are two key issues. First is leadership. Without
strong visionary leadership, no strategy will be executed effectively.
The second key issue is to recognize that strategy and operations (or
tactics) are both important but they are different. The normal course
of events is for companies to focus on day-to-day operations and
short-term problem solving. Management meetings focus on fighting
fires and fixing problems. Often little time and few resources get
committed to strategic issues.
We don't advocate abandoning an intense focus on operations and their
improvement. But we do advocate planning strategy, not just describing
it as important. The senior management team needs to have regular,
probably monthly, meetings that focus only on strategy. We describe in
the book the different roles, frequencies, participants, and agendas
for operational review meetings and strategy review meetings. We open
the book with a great quote often but perhaps inaccurately attributed
to Sun Tzu in The Art of War: "Strategy without tactics is the long
road to victory; tactics without strategy is the noise before defeat."
This quote highlights the importance of integrating strategy and
operations, a central theme in our strategy execution system.
Q: What are typical challenges and pitfalls when linking strategy with
operations? Why is a formal strategy execution system valuable?
A: One challenge or pitfall is that few companies align their
operational improvement activities to strategic priorities. Many
companies today are practicing Total Quality Management, Six Sigma, or
other continuous improvement activities. But these are done across the
organization with no sense of priorities or impact from process
improvements. Consequently, much effort does not show up in tangible
results. Companies need a formal process for using strategic
objectives to set priorities for where operational improvements can
have the largest impact on strategy execution. We note that quality
and process improvement programs are like teaching people how to fish.
Strategy maps and scorecards teach people where to fish.
Another pitfall occurs when budgeting and financial planning are done
separately from strategic planning. We advocate that the operational
plan and budget be driven from the revenue targets in the strategic
plan. In The Execution Premium, we describe how a time-driven
activity-based cost model provides the previously missing link between
the revenue growth targets in a strategic plan and the authorization
for spending to supply the quantities of resource capacity that are
necessary to fulfill the sales and production needs of the strategic
plan. Without this coupling, operational plans either provide too
little or too much capacity for the strategic plan.
A third challenge is that most management meetings get consumed with
discussions about short-term operational and tactical issues. It is
important to meet to discuss and solve operational problems. But
companies err when they devote all their time together for
fire-fighting and coping with near-term issues. The formal strategy
execution system schedules strategy review meetings at a different
time from operational review meetings. In that way, each meeting has
its own frequency, agenda, information system, and participation, as
best meets the goals for that meeting.
Q: Given the proliferation of tools, how should management choose the
right one to formulate strategy and improve operations?
A: We don't have a preferred position on strategy formulation
methodologies. We have seen each approach lead to success in different
circumstances. If, for example, the company has low capital
utilization, then some use of a value-based management approach would
help to define a financial strategy. If the company does not have a
distinctive brand or market presence, a focus on identifying an
attractive customer segment, such as through Harvard University
professor Michael Porter's positioning framework, W. Chan Kim and
Renee Mauborgne's Blue Ocean approach, or C. K. Prahalad and V.
Ramaswany's customer co-creation process might prove most relevant.
If the company has distinctive capabilities in important business
processes— operations management, customer data mining, or product
features and innovation—that are superior to or not possessed by
competitors, then the resource-based view and identification of core
competencies are effective frameworks for strategy formulation. If the
company has a great human capital base, with skilled, experienced, and
highly motivated employees, then striving to create a learning
organization and encouraging emergent strategies to be proposed can
identify promising new strategic approaches.
While we are agnostic with respect to which strategy methodology a
company uses to arrive at its strategy, we do believe that creating a
strategy map and scorecard for that strategy is the logical and proven
next step for putting the strategy into action. That is why we have
placed strategy analysis and formulation as Stage 1 of our management
system, with planning and translating the strategy as Stage 2.
We take the same position with the various operational improvement
methodologies. We don't want to be caught debating the relative merits
and shortcomings of TQM, Six Sigma, lean management, and
reengineering. We do believe, however, that these methodologies are
most effectively applied to the strategic processes identified in a
company's strategy map and scorecard. That is why we place planning
operations in Stage 4 of the management system, downstream from the
Stage 2 processes of translating and planning the strategy. You can't
focus on the critical processes for improvement until they have been
identified in the strategic planning and translation stage.
Q: What is an Office of Strategy Management, and why is it necessary
in a company?
A: The OSM is analogous to a military general's chief of staff. The
general is responsible and accountable for developing the strategy to
win wars and battles. But a general almost always has a
chief-of-staff, often several ranks junior, who leverages the
general's time and attention. The chief-of-staff does not create
strategy or operational tactics and has no authority or accountability
for its execution. A chief-of-staff schedules the general's meetings,
ensures that the appropriate people show up at the meeting, attends
and takes notes at the meeting, and follows up after the meeting to
ensure that the actions decided upon are carried out. The
chief-of-staff leverages the general's time by making sure that all
the information, people, and follow-up are in place for the general's
strategy and tactics to be effectively executed. We recommend that a
similar, but expanded, set of tasks be carried out by a small cadre of
professionals to orchestrate the various strategy management processes
for the executive team.
The Office of Strategy Management has multiple roles and
responsibilities. First, as an architect, the OSM designs and embeds
any missing strategy and operational management processes into the
six-stage strategy execution system. The OSM ensures that all the
planning, execution, and feedback processes are in place, and that
they are linked together in a closed loop system.
The OSM also serves as the process owner for several strategy and
operational management processes, such as those to develop the
strategy, translate the strategy, and orchestrate the senior
management strategy review meetings. Many of these processes are new
to the organization. Since they cross existing business and functional
organizational lines, it is natural for the OSM to be their owner.
Assigning responsibilities for their execution to the OSM fills a gap
in management practice without infringing on the current
responsibilities of any existing department or function.
Finally, the OSM is the integrator of many existing activities. This
aspect is challenging because organizational and functional units
already have primary responsibility for processes such as budgeting,
communications, human resources planning and performance management,
IT planning, initiative management, and best practice sharing. The OSM
must work with the existing owners of these processes to ensure they
become aligned to the strategy.
Q: What is the role of leadership in sound execution?
A: While not an explicit part of any of the six strategy execution
stages (described below), executive leadership pervades every stage of
the management system. Throughout The Execution Premium, we describe
organizations that have successfully implemented their strategies.
They operate in varied regions and industries, including
manufacturing, financial services, consumer services, nonprofit,
educational, and public sector. Their strategies differ; some produce
low-cost commodity products and services, others deliver complete
solutions to their customer, and still others innovate with
high-technology products. About the only common element all these
diverse successful strategy implementers have in common is exceptional
and visionary leadership. In every example, the unit's CEO led the
case for change and understood the importance of communicating the
vision and strategy to every employee. Without such strong leadership
at the top, even the comprehensive management system we introduce in
this book cannot deliver breakthrough performance.
In fact, leadership is so important to the strategy management system
that we make a rather bold claim that leadership is both necessary and
sufficient for successful strategy execution. The necessary condition
comes from our experience with the more than one hundred enterprises
around the world who have become members of the Balanced Scorecard
Hall of Fame. In every instance, the CEO of the organizational unit
implementing the new strategy management system led the processes to
develop the strategy and oversee its implementation. No organization
reporting success with the strategy management system had an unengaged
or passive leader.
For Stage 1, the CEO leads the change agenda and drives it from the
top to reinforce the mission, values and vision. Leadership sets the
ambitious vision and stretch targets. In Stage 2, the executive leader
validates the strategy map as an expression of the strategy
articulated in Stage 1 and challenges the organization with stretch
targets that take all employees outside their comfort zones. In Stage
3, leadership drives alignment of organizational units and is
essential for communicating vision, values, and strategy to all
employees. Leadership, in Stage 4, supports the cross-organizational
unit process improvements. In Stage 5, the leader's openness and skill
in running the strategy management review meeting determines its
effectiveness for fine-tuning the strategy throughout the year. And in
Stage 6 the leader must allow even a well-formulated and executed
strategy to be challenged in light of new external circumstances, data
collected about the performance of the existing strategy, and new
suggestions from employees throughout the organization. Being willing
to welcome and subject existing business strategies to fact-based
challenges is one of the hallmarks of effective leadership.
Our sufficiency claim, however, is even bolder. The management
processes we describe in The Execution Premium give an effective
leader a framework for effective strategy execution. None of the six
stages in the management system is simple or brief. But collectively,
the management processes in the six stages provide leaders with a
comprehensive, proven system for managing the development, planning,
implementation, review, and adaptation of their strategies.
We believe that our 18 years of observation and work with enterprises
in all sectors and regions of the world has led to an emerging science
of strategy execution. Each of the six stages in the strategy
management system is doable, especially when guided by a senior
strategy management office. The one component we cannot provide a
blueprint for is visionary and effective leadership. That is why we
have come to believe that executive leadership is now both necessary
and sufficient for successful strategy implementation.
Q: You have written four other books touching on the Balanced
Scorecard (BSC). How has your thinking and your work with this
innovation evolved along the way?
A: Our thinking has really evolved from performance measurement, the
focus of our first Harvard Business Review article and the first half
of the original Balanced Scorecard book, to using the BSC as the
cornerstone of a comprehensive management system to help enterprises
execute their strategies. We learned early that the BSC was much more
than just a better performance measurement system; it can become the
basis for a new strategy management system.
Our second book, The Strategy-Focused Organization, identified the
five principles we saw successful companies using with the BSC for
strategy management: Mobilize, Translate, Align, Motivate, and Govern.
In the next three books, including our most recent book, The Execution
Premium, we went into more depth in these principles. Strategy Maps
focused on principle #2, translate. We described and illustrated how
strategy maps and scorecards could be customized to many different
strategies. The fourth book, Alignment, described principle #3, how to
create and capture corporate synergies through vertical and horizontal
alignment of business and support units. The fourth book also
contained material on principle #4, aligning and motivating employees
for strategy execution in their business or support units.
Our most recent book started out as an in-depth articulation of
principle #5, governing to make strategy a continual process." But
along the way, my coauthor Dave Norton and I realized that this book
was really a synthesis of all our prior work. It encapsulates the
latest development in the other four strategy-focused organization
principles and integrates them into a comprehensive closed-loop
management system that links strategy and operations. Beyond
integrating all our prior work, the new book also integrates a wide
range of other proven management tools, including mission and vision
statements, strategy formulation, target-setting, dynamic budgeting
and resource allocation, process improvement, quality methodologies
(Six Sigma, lean management, catchball), dashboards, the learning
organization, analytics, and emergent strategies.
Q: What's next for you?
A: I have recently become sensitive to a gap in our strategy map/BSC
framework by not paying sufficient attention to enterprise risk
management (ERM). Obviously, many large financial institutions,
despite having risk management departments, have suffered massive
losses from failure to understand the risks they took on. All
companies, not just financial ones, need to have better methods to
assess and monitor their risks. Quantifying financial, operating,
technological, and strategic risk is far from trivial, and much needs
to be learned to make enterprise risk management more effective. Risk
management also requires effective systems for internal control,
management control, and governance.
ERM objectives and metrics could certainly have a home in the
financial BSC perspective for increasing and sustain shareholder
value, along with the traditional objectives of revenue growth and
productivity improvements. And companies should have objectives in the
process perspective to manage and mitigate the risks associated with
their strategies. I am persuaded that embedding risk management
objectives in strategy maps and scorecards should be a high priority
for where increases in knowledge and professional expertise could add
substantial value to an organization. And reviews of a company's risk
position should be part of the monthly strategy review meetings. I
plan to spend some time in the next few years exploring this issue and
hoping to make some progress.
