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Balanced Scorecard Report

the strategy execution source


november december 2010 : vol 12 no 6

Leading Change with the Strategy


Execution System
By Robert S. Kaplan
Traditionally, leadership and strategy execution have been studied
as two separate, yet parallel, disciplines. Generally, leadership
scholarship identifies principles, but not a means of integrating
also in this issue:
them into an overarching management approachof putting them
Advancing Strategyand
into action. Here, Robert Kaplan bridges the two literatures to
Postmerger Integration
see how they reinforce each other. Drawing on the work of the Through the Strategy Execution
preeminent leadership scholar John Kotter, Kaplan demonstrates Infrastructure at Merck & Co. . . . . . . . . . . . . . . . 7

how the six stages of the Kaplan/Norton strategy execution The Top Ten Attributes of
Effective Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . 11
system can help operationalize Kotters eight principles of change
managementand thus help embed both disciplines more firmly Five Pitfalls of Writing
Performance Analysis . . . . . . . . . . . . . . . . . . . . . 13
into the organizational culture.
Research shows that leadership is the single most important factor explaining
whether companies succeed in implementing the Kaplan/Norton strategy execution join us!
system. Without exception, the companies, nonprofits, and public sector enter- Register to join Kaplan & Nortons
prises that have won entry into the Palladium Hall of Fame for Executing Strategy Palladium Execution Premium Community
(XPC), the premier online destination for
benefited from visionary and committed leadership. Conversely, when investigating
strategy and performance management and
why apparently similar projects in other organizations failed to deliver impressive Balanced Scorecard practitioners, and receive
results, we find that the lack of effective leadership behind the project explains the free monthly BSC Online newsletter.
most of the shortfalls. Learn best practices, participate in peer
networking, learn about upcoming events,
We are not the only ones who extol the critical importance of leadership in driving and get practical know-how from thought
leaders and leading practitioners. Learn
change. For decades, leadership scholars have been studying the roots of effective
more and become a member at
leadership and the processes that leaders follow to implement change and achieve www.thepalladiumgroup.com/xpc.
results. In this article, I bridge the two separate literaturesleading change and
strategy executionto see how they mutually reinforce each other. get us (in print or electronically)
For more information about our
John Kotter, formerly of Harvard Business School, is one of the most influential publicationsBSR (back issues, reprints),
leadership scholars. He wrote a best-selling 1995 Harvard Business School Palladium Balanced Scorecard Hall of Fame
Reports, BSR Readers, and the latest from
Press book, Leading Change, and followed that with a popular version for mass
Kaplan and Norton and Palladium Group,
audiences, Our Iceberg Is Melting (St. Martins Press, 2006). His research, described visit www.strategyexecutions.com.
in these books, identifies an eight-step process for leading successful change
the latest bsr readers
(paraphrased here):
In addition to Kaplan and Norton on
1. Establish a sense of urgency. Strategy Management, check out our two
forthcoming Readers: The Execution Premium
2. Form a powerful guiding coalition. Reader (the best of our Hall of Fame
overviews from 20042010) and The Initiative
3. Create the vision for change and a strategy for achieving it. Management Reader, all available at
www.strategyexecutions.com.
continued on the following page
4. Communicate the vision and appear straitlaced and conservative to experts but are still unused to or uncom-
strategy. outsiders, but theyre not afraid to make fortable thinking like a senior general
bold commitments to BHAGs, Big Hairy manager with accountability for overall
5. Empower others to act on the vision
Audacious Goals.2 corporate results. Effective leaders
and strategy.
must help senior managers leave their
Several of the CEOs of Palladium Hall of
6. Produce short-term wins. comfort zone as subject-matter experts
Fame for Executing Strategy companies
and think about overall company direc-
7. Sustain the effort; produce still more understood well the importance of
tion and strategy.
change. getting the organization to recognize
current problems and of implementing When asked to do so, however, many
8. Institutionalize the new culture. change immediately. One recalled managers worry about what the change
Our focus is documenting how well starting meetings by writing the letters will mean to them and how will it affect
these general principles for leading L O W on a whiteboard. When his ex- their function or product line. They be-
successful change apply to the six-stage ecutive team inquired about the mean- come defensive, which manifests itself
strategy execution system that David ing of these letters, he replied, Look in resistance to change. Leaders must
Norton and I described in The Execu- out window, meaning, Compare our identify who will be the team players
tion Premium.1 What is striking is the results with the competition; were not for the new strategy and who may have
absence of any role for measurement as good as we think. Bill Catucci, who to be asked to consider other employ-
and management systems in the Kotter led two dramatic transformations of ment opportunities, because continued
model. But perhaps this is not surpris- underperforming organizations, claimed resistance and negativism can under-
ing. Kotter is a scholar of leadership and that at AT&T Canada, Our only core mine any change effort.
organizational behavior, and likely feels competency was losing money. We were
Most CEOs who have successfully imple-
that changing and aligning measure- good at this, losing C$1 million per day.
mented the Kaplan/Norton strategy
ment and management systems is out Despite dismal financial performance
execution system report to us that the
of scope for his teaching and consulting at both companies, when Catucci talked
process of building a strategy map and
assignments. We, however, can lever- individually with members of his senior
scorecard with their leadership team
age the measurement and management executive team, each said, My depart-
was the most useful benefit of the
processes in our strategy execution ment is performing fine. If theres a prob-
program. Although they extolled the ben-
framework to enhance the eight Kotter lem, it must be caused by someone else.
efits of having a map and a scorecard,
principles and make them more op- Catucci described how he overcame this
they felt the process of creating them
erational and effective for enterprise finger-pointing, blame-shifting culture:
helped forge a consensus among the
leaders. I told them that were all in the same
team members about the strategy and
boat, and if theres a hole on your side of
a commitment to helping the enterprise
Step 1. Establish a Sense of the boat, its not your problem to solve;
achieve it that had never before existed.
Urgency its our problem. Were going to succeed
You could take our scorecard and give
Kotters first step is for leaders to over- or sink together. Both of these lead-
it to a competitor and it wouldnt work,
come complacency with the status quo. ers, and many others, started their BSC
explained one CEO. You had to have
The beliefs reflected in several popular projects by convincing the organization
sweated through the hours and hours
management maxims must be over- that it either had a major performance
of work and effort that went behind
come to create the climate for change, problem or would soon have one, unless
the card to get the benefits from the
including the most destructive of all: If executives collectively crafted a new
measures. Its got to become part of
it aint broke, dont fix it. In a world of strategy for future success.
the companys belief system, almost
continuous change, global competition,
Step 2. Form a Powerful Guiding a religion. The active dialogue and
and dynamic technological disruption,
debate that take place over the 12-week
the maxim should be rephrased as, Coalition
period of developing a strategy map and
If it aint broke, it soon will be, or in Often, resistance to change comes from
scorecard are an essential part of the
the words used by legendary pitcher within the senior management team.
process of building clarity, consensus,
Satchel Paige to explain his life philoso- Some members are on the team because
and commitment to a new way of doing
phy, Dont look backsomeone may be they head a major corporate function,
business. The dialogue emphasizes that
gaining on you. Kotters observation is such as human resources (HR), finance,
the goal is to determine what is right,
not unique to him. In their best seller, or technology, or a major business or
not who is right, and that everyones
Built to Last, Jim Collins and Jerry Porras geographical unit. They view themselves
views can influence the final docu-
observed, Visionary companies may as technical, product-line, or regional
ments. Participants in the process recall

1 R. S. Kaplan and D. P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (HBS Press, 2008).

2 J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins Publishers, 2004).

2 b a l a n c e d s c o r e c a r d r e p o r t
and competitive threats, the FBI needed
a completely new strategy and major
changes in its organizational culture.
FBI Director Robert Mueller recognized
the need to prepare and educate all
employees about the massive changes
ahead. He prepared the strategic change
agenda shown in Figure 1 to describe the
scale and scope of the transformation.

The change agenda indicates that the


FBI would have to undergo a major shift
from being a case-driven organization
(reacting to crimes already committed)
to becoming a threat-driven organiza-
tion (attempting to prevent a terrorist in-
cident from occurring). Instead of being
secretive, agents now had to work out-
side of the traditional operational silos
and become contributors to integrated
teams. In even more of a discontinuity,
the FBI had to learn to share informa-
FIGURE 1: THE FBIS STRATEGIC CHANGE AGENDA tion and work collaboratively with other
FBI Director Robert Mueller created this strategic change agenda to educate federal and local agencies to prevent
employees about the transformational changes the agency needed to undergo
incidents that could harm U.S. citizens.
post-9/11.
These guidelines, which emerged from
all the objectives and measures that vision serves to mobilize the organiza- extensive dialogue throughout the or-
had been proposed but that were ulti- tion into action by defining a target that ganization, engaged all levels of the FBI
mately left off the map and scorecard, it cannot achieve through business- to participate in setting the goals for the
imbuing the final documents with even as-usual actions. This motivates the new strategic direction and contributed
more personal meaning. This difficult leadership team to select a strategy that to widespread understanding and sup-
process of debating and agreeing on the will enable it to achieve the vision. We port for the new strategy that followed.
strategy is a powerful mechanism for find that this step and step 2 in Kotters Director Mueller carried a laminated
building a guiding coalition at the top of framework are usually simultaneous, FBI strategic change agenda chart with
the enterprise. not sequential; defining the vision and him whenever he visited a field office.
selecting the strategy are an essential If agents expressed skepticism about
Step 3. Create the Vision for part of creating the guiding coalition for or resistance to the new initiatives and
Change and a Strategy for transformational change. structures, he reminded them, using the
Achieving It single-page summary, why change was
In our recent work, we have inserted
This principle is clearly already embed- necessary.
an additional step between crafting
ded as stage 1 of the Kaplan/Norton
the vision and developing the strategy: A strategic change agenda helps the
strategy execution system: Develop
creating a strategic agenda. Leaders leadership team articulate the cultural,
the Strategy. In this stage, we state
can use this management tool to link structural, and operating changes
that every enterprise should annually
the vision to the strategy. The strategic necessary to transition from the past to
review and reaffirm its mission state-
agenda compares the current status the future.
ment (the organizational purpose, why
of several organizational structures,
the organization exists) and its value
capabilities, and processes with what Step 4. Communicate the Vision
statements (the attitudes and behaviors
they need to become over the next three and Strategy
the organization insists on when dealing
to five years. While the selection of the vision and
with employees, customers, suppliers,
strategy is ultimately the responsibil-
and communities). The enterprise should Consider the challenges faced by the
ity of the leadership team, the strategy
craft a vision statement, which consists U.S. Federal Bureau of Investigation (FBI)
must be executed by all the organiza-
of a measurable stretch target (such as in the aftermath of the 9/11 terrorist
tions employees. One of the most pow-
a BHAG) and a date for achieving it. The attacks. To respond to its new challenges
erful benefits of the strategy map and

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 3
scorecard is their ability to make the internalize for themselves the goals of To facilitate even more local decision
strategy completely clear and action- the companys strategy. Employees making that cuts across organizational
able to every employee. We learned from continually ask two key questions about lines, companies also form theme teams
the early BSC-adopting executives the their organization: based on the thematic structure of
value they placed on communication. their strategy maps.4 Theme teams are
1. D
 oes my company have a strategy for
One CEO declared, You overcommuni- empowered to execute on boundary-
success?
cate the strategy; its like trying to hit a crossing initiatives.
nail into granite. The first few times you 2. H
 ow does my coming to work each
Stage 4 of the strategy execution
try, it glances off their consciousness. day play a role in my companys
system, Plan Operations, provides yet
Eventually, a little bit sinks in and then success?
another mechanism to empower front-
you have to keep pounding it in deeper
Employees want to work for a success- line and back-office employees to act on
and deeper. Communication specialists
ful, high-performing organization. A strategic priorities. In this stage, teams
have told us, You cant communicate
company that can clearly communicate drill each BSC process objective into a
it just once. You have to tell people
its mission, vision, and strategy to em- detailed process map. The process map
seven times and seven different ways,
ployees answers the first question well. typically identifies multiple opportuni-
throughout the year.
As employees learn about the key pro- ties for process redesign and process
But just communicating the words in cesses for delivering value to customers improvements that can be accomplished
the vision and strategy is never enough. and capital suppliers, they start to link by local teams. Once processes have
Employees hear the words, but they their daily activities to the accomplish- been properly designed and structured,
dont know the answer to the questions, ment of organizational objectives. They employees strive to achieve continuous
Whats in it for me? What am I supposed search for ways to do their job differ- improvements in these critical pro-
to do differently and better to help the ently and better to contribute to these cesses. Companies design dashboards
organization implement its strategy and objectives. In this way, all employees that provide continual motivation
achieve its vision? Words have ambigu- become empowered to act, leading to and feedback for ongoing operational
ous meanings, and different people the next Kotter principle. process enhancements. The high-level
interpret them differently. Balanced guidance from the strategy map and
Scorecard measures eliminate the am- Step 5. Empower Others to Act on scorecard ensures that all such local
biguity and provide a clear message and the Vision and Strategy process improvements are aligned with
targets for every employee. As another Middle managers and all employees the vision and strategy.
CEO remarked, I struggled with how to must feel that they can take actions that
merge two great companies with proud will contribute to successful strategy Step 6. Produce Short-Term Wins
histories and 12 different languages execution. Such empowerment may be A principal challenge for any change
and cultures. The scorecard gave us a difficult to establish in decentralized management program is sustaining mo-
common language about our strategic and diversified companies where differ- mentum during the journey. Although
directions and intent. We could develop ent business units and individuals are of- visionary leadership can generate
and communicate strategy so that it was ten unsure about how their local actions excitement and high motivation at the
clear for everyone. The president of a contribute to overall success. Compa- launch of the program, interest and en-
global hotel chain told how every single nies can now use linked strategy maps thusiasm can wane during the difficult
employee, from the hotel manager and scorecards to align all organization- months as the change gets under way
through housekeepers and dishwash- al units to achieve corporate synergies.3 but the destination (the target in the
ers, had become aligned to the strategy: Companies such as Infosys, Statoil, and vision statement) is still distant. Many
Team members now understand the HSBC Brasil have hundreds of strategy change efforts fail during this critical
strategy and align their objectives and maps and scorecards throughout the middle stage of the journey as managers
incentives to performance that will en- enterprise that help them achieve both and employees get discouraged by the
able us to achieve our strategic goals. vertical alignmentobjectives drawn distance still to be traversed.
from the corporate scorecardand hori-
Communication enables all employees Strategy maps and scorecards solve
zontal alignmentobjectives shared
to understand the strategy and how this problem. They define not only the
with other business units. The decentral-
they can contribute to its successful destination but also the road map to
ization of strategic objectives facilitates
execution. It unleashes the power- achieve it. Objectives and measures
local decision making and empowers de-
ful forces of what psychologists call in the internal process and the learn-
cision making throughout the enterprise
intrinsic motivation, in which people ing and growth perspectives provide
that is coherent and synergistic.

3 R. S. Kaplan and D. P. Norton, Alignment: Using the Balanced Scorecard to Create Corporate Synergies (Harvard Business Press, 2006).

4 R. S. Kaplan and C. Jackson, Managing by Strategic Themes, BSR SeptemberOctober 2007 (Reprint #B0709A).

4 b a l a n c e d s c o r e c a r d r e p o r t
near-term indicators of the progress the $130 million in five years. Managers motivation will require extrinsic motiva-
organization is making in improving the and employees were initially shocked tion to maintain and reward employees
capabilities required to realize break- by the audacity of this goal. But the efforts. Extrinsic motivation occurs
through performance for customers and theme-based strategy map and score- when managers set explicit targets
shareholders. The multiple perspectives card showed them a feasible path to this for employee performance and align
of the Balanced Scorecard automatically destination. The operational efficiency their incentives to reward the achieve-
provide a balance between the longer- theme had a target to reduce the cost ment of personal and organizational
term outcomes the strategy is striving to per customer by 25% over the five years, goals. In stage 3 of the Kaplan/Norton
achievefor customers and sharehold- with 80% of this improvement occurring strategy execution system, Align the
ersand the near-term improvements in the first two years. The customer man- Organization, employees discuss with
in processes, employee capabilities, and agement theme had a target to increase their supervisors and HR managers the
information technologies intended to annual revenue per customer, through limited set of personal objectives that
drive those outcomes. cross selling and increased balances they will attempt to achieve in the up-
and fees, by 50%. Eighty percent of this coming period. They must demonstrate
One immediate source of short-term
improvement would occur in years 2 to that achieving their personal objec-
wins is the initiative rationalization
4. And a customer acquisition theme had tives will contribute, in some way, to
process, which companies usually
a target of tripling the number of high- achieving business unit and company-
conduct in the third or fourth month of
value customers. Much work had to be wide strategic objectives. The forces of
their Balanced Scorecard implementa-
done in improving processes, developing extrinsic motivation are also unleashed
tion.5 Companies generally find that they
new products and services, and re- when employees have explicit incen-
can eliminate or consolidate at least
branding the bank before the customer tives, usually monetary but sometimes
25% of their existing initiatives without
growth could occur, so most of the also nonmonetary, that are awarded
affecting strategy execution. The savings
increase in customers was targeted for based on achieving personal, business
from eliminating nonstrategic initiatives
usually exceed the cost of the entire BSC
project, providing a near-term benefit Although intrinsic motivation can inspire employees to do their
from implementing the new strategy jobs differently and better, sustaining their motivation will require
execution system. extrinsic motivation on the part of the company.
Beyond the ability to rationalize initia-
tive spending and motivate and track years 3 to 5. Each themes targets phased unit, and corporate targets. The number
near-term process and learning and in over time and interacted with one 1 response from CEOs when asked what
growth performance, the multiple another (lower cost and higher revenues they would have done differently in
themes within the process perspective per customer, multiplied by many more implementing the strategy execution
provide a natural balance between customers) to exceed the ambitious five- system is linking variable pay to perfor-
short- and long-term performance. year profit improvement vision. mance sooner, because it
Companies can generally achieve signifi- created such a powerful motivational
As they plan their trajectory for achiev-
cant improvements in key operational force for employees.
ing the vision, companies assign short-
management processes within six to
term targets to improve operational In addition to sustaining momentum by
12 months. When the returns from op-
processes, middle-term targets to im- aligning personal goals and rewards to
erational improvements begin to slow,
prove customer management processes, strategic objectives, stages 5 and 6 of
improvements in customer manage-
and longer-term targets to improve the Kaplan/Norton strategy execution
ment processes (improving acquisition,
their innovation processes. In this way, system provide ongoing feedback for
loyalty, and growth) can play a more
managers and employees can track their learning and improvement opportuni-
dominant role, typically in months 12
progress and achievements all along the ties in strategy execution. Although all
to 24. Finally, innovation processes will
trajectory to success. They are not left in companies perform periodic operational
produce a new stream of products and
the dark about whether their strategy is reviews, a new feature introduced by
customers during months 18 to 30,
delivering on performance. the strategy execution system is a
providing the final boost to achieving
separate, usually monthly, strategy
the visionary stretch target. Step 7. Sustain the Effort; Produce
review meeting. At this meeting, the
For example, the leadership team of a Still More Change
leadership team reviews progress
retail banking unit of a large financial in- Although intrinsic motivation can and shortfalls in strategic objectives,
stitution established a vision to increase inspire employees to do their jobs reallocates resources among strategic
operating income from $20 million to differently and better, sustaining their initiatives, and implements midcourse

5 P. LaCasse and T. Manzione, Initiative Management: Putting Strategy into Action, BSR NovemberDecember 2007 (Reprint #B0711B).

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 5
changes in the strategic trajectory. Step 8. Institutionalize the needed to achieve the vision. Once the
Among the questions asked at this meet- New Culture vision and strategy have been selected,
ing are, Why are we falling short of the The final step in Kotters leading change leaders must align all employees to
target? What corrective actions should process is to ensure that a new culture them, communicating the direction and
we consider? Are strategic initiatives gets established to sustain the change. creating the coalitions committed to
on schedule and on budget? Where do The biggest change introduced by the achieving the strategic vision. And
we need to put more resources? Do we new Kaplan/Norton strategy execution leaders must continually use intrinsic
need a multifunctional, multibusiness system is that the enterprises core and extrinsic motivation to inspire
task force to address a problem? Much management system is centered on employees to stay the course and
as a racing ships captain adjusts course implementing strategy and not on remain focused on moving in the right
to compensate for changes in wind, achieving a budgets short-term financial direction. The new Kaplan/Norton
current, and competitors actions, the targets. Companies have been using the strategy execution system provides
strategy review meetings enable leaders budget as their central management leaders with a tool previously unavail-
to revisit the strategy at least monthly system for more than a century, and able for accomplishing their tasks: the
and react to new information, challeng- this practice has engendered a pervasive capability to create an entirely new
es, and opportunities. culture of short-term financial control. management system designed for and
It is indeed difficult to supplement and aligned to the journey toward achieving
The strategy review meetings stress
eventually replace the budget culture transformational change.
learning and improvement, not finger-
pointing or blaming. Using words rarely, with the innovation and learning re- Robert S. Kaplan, along with
quired for a strategy execution culture. David P. Norton, created the
if ever, used to describe the operational
Balanced Scorecard concept.
monthly variance analysis meetings We have found that to accomplish and
The Baker Foundation Profes-
conducted by the finance staff, several sustain a strategy-focused culture, com- sor at Harvard Business School,
managers have told us, These are the panies need a new organizational func- and Chairman of Professional
tion, which we call the Office of Strategy Practice at Palladium Group,
best meetings we have ever had. We are
he also codeveloped activity-
talking about important issues and de- Management (OSM). 7 The new OSM func-
based costing. Kaplan has
veloping action plans to address them. tion keeps the organization focused on authored or coauthored 14
They are fun and exciting. strategy execution by implementing the books (5 of them with Norton),
six-stage management system through- 20 Harvard Business Review
Even more change occurs during stage out the year. The OSM does not select articles (8 with Norton), more
6, Test and Adapt the Strategy, when than 130 papers, and dozens of
the strategy, nor is it responsible or articles for Balanced Scorecard
the organization reviews a years worth accountable for its successful implemen- Report.
of data on strategy implementation to tation. These remain the responsibili-
learn what has worked and where the ties of line management. But busy and To learn more
strategy may be flawed.6 By measuring easily distracted senior executives need See Leading Change, by John Kotter (Harvard
the strategy, the company can distin- the constant attention of a small staff
Business School Press, 1995); and Our Iceberg Is
Melting, also by Kotter (St. Martins Press, 2005).
guish between when it is implementing dedicated to ensuring that all the pro- For more on Kaplan and Nortons six-stage
a bad strategy well versus when it is cesses required for successful strategy strategy execution system, see Integrating
implementing a good strategy badly execution get performed on schedule Strategy Planning and Operational Execution:
an extremely important distinction that throughout the year. Establishing an
A Six-Stage System, by Kaplan and Norton, BSR
MayJune 2008 (Reprint #B0805A). Also, visit
has very different action implications OSM and having it dictate the rhythm www.hbr.org and click on the topic Leadership
for the leadership team. and pace of the strategy execution for seminal books and articles on the subject by
process are essential in establishing and the worlds foremost authorities.
Formulating the strategy execution
system as a continuous closed-loop sustaining a strategy-focused culture. Reprint #B1011A

system emphasizes that accomplishing


strategic change requires an integrated Putting Principles into Action
and embedded management system to Leading change is demanding. Leaders
sustain the change and provide multiple must establish direction by developing a
opportunities for learning, improve- vision of the future along with a
ment, and adaptation. strategy for producing the changes

6 D. Campbell, Putting Strategy Hypotheses to the Test with Cause-and-Effect Analysis, BSR SeptemberOctober 2002 (Reprint #B0209E).

7R
 . S. Kaplan and D. P. Norton, The Office of Strategy Management, Harvard Business Review, October 2005 (Product #R0510D). See also Chapter 10 in Kaplan
and Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (HBS Press, 2008); and Kaplan and Norton, The Office of
Strategy Management: Emerging Roles and Responsibilities, BSR JulyAugust 2008 (Reprint #B0807A).

6 b a l a n c e d s c o r e c a r d r e p o r t
CASE

Advancing Strategyand in ensuring that our five divisions and


eight support functions are aligned.

Postmerger Integration The map provides an easy and effec-


tive way to communicate our strategic
Through the Strategy Execution priorities to our thousands of employ-

Infrastructure at Merck & Co. ees throughout the world. And with
scorecards and dashboards already
By Tom Hall, Senior Director, and Patricia Jaar Watson, Manager, built, complemented by integration-
specific monitoring capabilities, we had
Strategy Realization Office, Merck & Co., Inc.
the tools and competencies in place to
In November 2009, pharmaceutical giants Merck and Schering- track integration progressand meld it
Plough merged to create a stronger, more diverse, and more truly with the overarching strategy manage-
ment process.
global company. To clarify strategic priorities and align activities
around key objectives, the new Merck leveraged the strategy map Greater Team Power
and Balanced Scorecard, already in use for five years at legacy One important factor in achieving inte-
Merck. Here, key players in the companys Strategy Realization gration success has been our SRO. The
Office (its OSM) discuss how this existing strategic infrastructure merger planning activities were over-
seen by the Integration Management
smoothed strategic alignment as well as the merger integration
Office (IMO). The SROs enterprisewide
process in many ways.
capability helped create the framework
Both Merck and Schering-Plough have companies to achieve long-term growth for implementing and monitoring the
a long and rich history of working to requires careful, purposeful integration. plans after Day 1 of the official merger,
improve peoples health and well-being, capitalizing on the capabilities of the
Merck has long known that a good
from discovering vitamin B1 and Program Realization Offices2 and other
strategy does not in itself guarantee
inventing the first measles vaccine to networks throughout the company. This
success. Legacy Merck established
creating the first statins for treating approach has yielded many benefits,
a solid strategy management founda-
high cholesterolwith many other not the least of which is helping to
tion in 2005, when it created a Strategy
innovations in between. Our scientists maintain a focus on the importance of
Realization Office (or SRO, our Office
have also developed many products to successful execution and realization of
of Strategy Management), and adopted
improve animal health, including the strategy.
the Balanced Scorecard methodology
vaccines and antibiotics.
to execute its Plan to Win strategy.1 Before the merger, IMO teams at
Headquartered in Whitehouse Station, It had a corporate strategy map and both companies began planning and
N.J., Merck operates in more than Balanced Scorecards for every division designing for the new organization.
140 countries and has a workforce of and function. Schering-Plough, though Tom helped lead integration planning
approximately 93,000. The second- not a BSC user, employed strategy from the Schering-Plough side and
largest pharmaceutical company in the management techniques, including a Vittorio Nisita was an integral member
world in terms of revenue, the company strategic road map, and its people were of the team on the Merck side. Tom
(known outside the United States and focused on the importance of culture was tapped to succeed Vittorio as
Canada as MSD) produces prescription and change programs in adding value. leader of the new Mercks SRO follow-
medicines, vaccines, biologic therapies, ing the merger close. The two worked
One factor that sets the Merck/
and consumer care and animal health together for two months at year-end
Schering-Plough merger apart from the
products. The Merck/Schering-Plough to smooth the transition. When the
many mergers in our industry is the
merger united two science-centered merger officially closed in November
methods by which we are managing
companies (combined 2009 sales: $46.9 2009, the SRO expanded from three to
the integration and achieving strategic
billion) with complementary product nine people, adding a new (integration)
alignment. Postmerger, the strategy
portfolios to create a powerful innova- delivery leader, a change director (who,
map and BSC have been, and continue
tion platform for the long term. But for example, would coordinate systems
to be, crucial in galvanizing the entire
joining together two science-centered implementation decisions across the
organization around the strategy and

1 See V. Nisita, Driving Transformational Change: Strategy Execution at Merck, BSR JulyAugust 2009 (Reprint #B0907C). Vittorio Nisita helped create Mercks
Strategy Realization Office in 2006 and was its leader from April 2008 through December 2009.

2P
 roject Realization Offices mirror the SRO and support key functions, certain key geographies, and key sites in managing work portfolios and addressing
intent, people, and delivery risks at the local level.

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 7
Years 3 8 strategy map elements. This is how we
identified all the organizational inter-
12 26 Months dependencies. We scrutinized every
breakthrough objective on each strategy map, asking
ourselves: What did it mean? What
Day 1 18 Months
accelerate were we measuring? These sessions
yielded the new 2010 company strategy
map and scorecard. (See Figure 2.) This
launch
painstaking process provided visibility
and created the transparency we saw as
essential for alignment.

Then, we held a joint meeting with


FIGURE 1: THE NEW MERCK ROAD MAP divisional and functional representa-
tives to present our findings from each
enterprise), and other personnel to Scorecards are critical to our alignment one-on-one meeting. This allowed the
monitor progress against merger objec- as a company. In a company of our size, representatives to see each areas priori-
tives (such as head count and value we use the Balanced Scorecard process ties and understand the organizational
capture). Some from Schering-Plough to cascade the strategic priorities and interdependenciesfor example, how
had had prior experience with mergers company scorecard to the divisions and Global Services Objective B supports
there. functions, and, ultimately, to individuals Researchs high-priority Objective A. In
as they develop their personal objec- addition to ensuring alignment, this
The IMO continued to lead integration
efforts, but as the integration planning tives. This ensures that everything we meeting helped ensure that resource al-
efforts became integration realization do, at every level, relates to our strategic location was in line with plans. We then
efforts, IMO governance transitioned priorities and is focused on driving the repeated this process at the EC level
to ongoing strategy execution. Divisions successful execution of Mercks strategy. one-on-ones with EC members followed
and functions carried out their respec- Our Executive Committee (EC) was by a joint team meeting. Naturally, we
tive key integration initiatives as part announced in August 2009 before did our best to streamline the time de-
of their broader business and strategic (and subject to) the merger close. That mands on top executives, but everyone
portfolios. November, immediately following the understood how important this collabo-
close, the SRO worked with the EC to ration was to achieving unity.
Aligning Around Strategic
flesh out the near-term mechanisms Each scorecard was thus rigorously
Priorities
to support the realization of road map tested (now an annual practice) for its
Recognizing the magnitude of our in-
objectives. For example, to ensure vertical alignment with the company
tegration, Merck devised a three-phase
strategy and scorecard alignment, we strategy map and scorecard, and its
road map to define our mission, vision,
introduced EC alignment sessions. These horizontal alignment with the other
and focus over the next three to eight
sessions were designed to establish a division and function scorecards.
years. (See Figure 1.) Phase 1, Launch (i.e.,
common understanding of key priorities
launching the new Merck), is focused
by defining objectives and performance Communicating the Strategy Map
on unifying the company and fostering
goals and by identifying organizational and Scorecard, from the Top Down
the culture that will set the foundation
interdependencies, risks, and measures In February, approximately 300 com-
for our strategy. Its goal: for Merck to
of success. We needed to updateand, pany leaders gathered for the first time
become a new company that retains
in the case of entirely new divisions following the merger as the leadership
the best in class of its legacy entities.
(such as Consumer Care), createBSCs. team to focus on Mercks immedi-
In phase 2, Accelerate, we will allocate
ate priorities. Our CEO, Richard Clark,
resources for our most promising Next, we partnered with members of the
opportunities and continue to seek op- presented the New Merck road map and
EC (each of whom is responsible for a
erational efficiencies. Well be creating the 2010 strategy map and corporate
division or function) and with their BSC
an environment that supports sustain- scorecard. Breakout sessions led by
representatives (senior-level managers
able short- and long-term growth. The each EC member followed to allow for
who coordinate and ensure strategy
work of these phases will position us discussion.
execution in their areas). First, we held
for phase 3, Breakthrough, in which we one-on-one meetings with these senior Within days, the CEO hosted a live
realize our vision of becoming the best managers to identify scorecard and webcast to introduce the 2010 strategy
healthcare company in the world.

8 b a l a n c e d s c o r e c a r d r e p o r t
map and company scorecard to the maximize shareholder value

financial
entire company. He also created a video Maximize pipeline value with
Grow earnings Grow revenue
efficient ROI
message. Division and function heads,
as EC leaders, also held meetings for become the most trusted industry leader in delivering value to customers, including patients

customer
their people about their areas BSC and Enhance Mercks standing with customers and other key stakeholders Engage customers, co-create solutions
how it aligns to the companys priori-
ties. Some were taped for a webcast

internal business drivers


sustain momentum become one company position for acceleration &
and available for later viewing by any breakthrough phases
Drive global performance of key products Integrate global operations and Maintain focus on global growth
employee. This chain of communication and stratgic geographies implement new models opportunities in human health, consumer
health, and animal health
drilled down from region to country to Deliver the late-stage pipeline and Develop longer-term strategies that
Achieve merger synergies
successfully launch new products transform and grow the business
site level, so that employees could learn
about the strategy and their role in it.
create a high-performance organization

people and
culture
Communications from our HR leader Build a sustainable culture characterized by customer focus,
courage and candor, and rapid, disciplined decision making
Build, engage, and retain diverse talent globally

emphasized the importance of creat-


ing individual performance objectives
FIGURE 2: 2010 STRATEGY MAP
aligned with the companys objectives
The 2010 strategy map reflects the priorities of the Launch phase.
as part of the global performance
management and employee develop-
ment system. Scorecards are part of Leveraging the Strategy Execution The Strategy Execution Network meets
determining our variable compensation Infrastructure to Support Large- regularly to ensure shared understand-
and unite employees around ensuring Scale Integration ing of the portfolio of workintegra-
company success. We believe that strategy is something tion team plans as well as companywide
launch
you do, not something you have. Suc- strategic initiatives. This practice gives
To promote enrollment (our term for
cessful execution necessitates commu- us all an enterprise view of what is
buy in) in the Balanced Scorecard
nication, teamwork, and collaboration planned, which helps in managing
methodologywhich was, after all,
across the organization. The SRO there- expectations, identifying interdepen-
new to roughly half the workforcewe
fore works with the EC on a continuous dencies, prioritizing our work, tracking
created a strategy website. The site
basis to develop, execute, and track progress, and assessing capacity.
features definitions, strategy maps, de-
Mercks long-term strategic plan at the At network meetings, each person
scriptions of objectives, and measures
for every BSC. To help people in differ- enterprise level. The SRO launched the spends five minutes debriefing the
ent areas understand the priorities of New Merck Strategy Execution Network, group on how his top project affects
each group, we show the weight of each a network of integration leaders, divi- the whole enterprise. From its start, the
measure. The site also provides regular sion and function Program Realization network has taken advantage of the
updates and archived articles and web- Office leads, and other team members standard tracking mechanisms (score-
casts from leadership. An online training who are added as needed. The networks cards, dashboards, integration KPIs)
session is also available to employees. role is to enhance coordination, ensure already in place.
clarity of strategic priorities, and act as
The SRO, HR, and our Global Communi- One of the risks associated with merger
our change agents for major strategic
cations group have made a concerted integration or any protracted change
initiatives. It ensures that interdepen-
effort to coordinate strategy, perfor- program is the loss of momentum in the
dencies and change impacts on the
mance management, and compensation business. In the Launch phase, we have
organizations are understood. It identi-
communications to emphasize the link emphasized maintaining momentum
fies issues that arise and agree upon
to our strategic priorities and scorecard. while preparing for the future. The BSC
the actions needed to address them.
We convene to study the timeline of plays an important role in fostering a
Ultimately, network members help drive
events for each group so that we can common vision throughout our global
successful execution at the local level.
support each one anothers messages. workforce. And the Strategy Execution
This cross-functional group aims to
For example, the HR leads notification
bring together the right people to cut Network also plays a role in dealing with
about midyear performance reviews
through obstacles to resolve compa- issues other than integration that could
includes a reminder to employees to
nywide strategy issues with maximum lead to loss of momentum.
study their areas BSC and to talk to their
manager if they feel their work is not efficiency.
aligned with the BSC.

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 9
Aligning Incentives with Strategic BSC must have culture and nonfinancial priorities while maintaining the
Priorities measures, along with a compliance and appropriate governance, performance
In legacy Mercks Annual Incentive Plan health, safety, and welfare modifier; the management, interdependency
(AIP), three componentsperformance latter promotes doing things the right management, and issue resolution. And
on the company BSC, performance on way, not just hitting the targets. We also overall, our strategy management
the division or function BSC, and the provide guidance to the divisions and system has facilitated enterprisewide
individuals performancewere added functions on how to set their targets. alignment by ensuring that employees
together to compute the individuals For example, with measures related to at every level remain focused on the key
bonus. Under this system, lackluster P&L, we work with Global Compensa- priorities even as the merger integration
company performance wouldnt prevent tion and Finance to determine how work continued. Finally, our system
an individual from receiving a respect- to set targets, so that the measures and infrastructure have enabled our
able bonus. Legacy Schering-Ploughs typical performance weighting doesnt integration management team leaders
bonus pool was based on two financial distort results but rather helps ensure to shift their focus back to business as
measures of company performance and fairness among groups. usual sooner and more seamlessly,
allocated to each business unit or geog- without the new Merck losing sight of
And again, the target-setting process is
raphy based on relative performance, our integration commitments and
used in conjunction with communica-
with individual performance determin- goalsand our road map.
tions from our HR leader emphasizing
ing the final incentive amount. the importance of creating individual Tom Hall heads the Strategy
performance objectives aligned with Realization Office within
The new Merck revised the AIP to reflect
Mercks Corporate Strategy
our total rewards philosophy by the companys objectives as part of the
Office. Among his respon-
ensuring it comports with shareholder global performance management and sibilities are managing the
interests and by promoting a pay-for- employee development system. company strategy map and
Balanced Scorecard processes.
performance culture. The funding for Finally, our targets are aligned with our
AIP awards is based on company and annual profit plan. The SRO reviews past Patricia Jaar Watson is
division or function performance as performance, resource allocation, stra- manager of the Strategy
measured by the BSCs. This pure- Realization Office. She is
tegic initiatives, projects, and time lines responsible for managing
scorecard approach enables us to bal- to ensure that the targets are ambitious and administering scorecard
ance short- and long-term goals while but achievable without creating undue processes.
also pulling nonfinancial levers, such or excessive risk taking. We also want
as culture and employee engagement, to be sure they make sense: are the re-
to achieve goals. Individual performance To learn more
sources there to achieve the target? The
The BSC system has enabled SMDC Health
plays a role in determining an employ- link to our annual incentive plan makes System to achieve alignment more readily with
ees actual AIP reward. A leadership it critical that all scorecards are held to its new acquisitions. See Breaking Down
behaviors modifier was adopted to the same standards. the Silos at SMDC Health System, BSR July
foster the desired cultureone based August 2009 (Reprint #B0907B). And though
not an example of merger alignment, Motivat-
on customer focus, rapid and disciplined Getting Strategy-Focusedand
ing Cross-Boundary Thinking and Acting at
decision making, and courage and Back to Business as UsualFast Ingersoll-Rand (BSR MarchApril 2005; Reprint
candor. Leaders who achieve desired Merger integration can be a disruptive #B0503B), describes how a global behemoth got
its disparate businesses aligned strategically.
results in ways contrary to these time for employees, and yet coming
standards lose performance points. together as one company and maintain- Reprint #B1011B
ing business momentum are crucial to
Setting Targets success. Our strategy management
Alignment of objectives to the strategy infrastructureour mechanisms,
is not sufficient if the measures and teams, processes, and toolshas been
their targets are not aligned to objec- instrumental to our continuing
tives. The SRO partners with the divi- progress on the integration and to our
sions and functionsincluding Global historic success with strategy execu-
Finance and Global HRand finally tion. By supporting line execution and
with the EC to develop target-setting realization of the overall strategy, the
principles and targets for all BSCs. SRO helped incorporate integration
Certain measures are mandatory: every priorities into our overall strategic

10 b a l a n c e d s c o r e c a r d r e p o r t
The Top Ten Attributes of incremental change strategy does. As
a result, they push the accelerator

Effective Leaders demanding more time, energy, visible


support, and hands-on leadership from
By Mark B. Hefner, Vice President, Palladium Group, Inc. their team membersto lead execu-
tion when the stakes (and the change
A sound strategy management process and visionary leadership: requirements) are high.
these are the two universal characteristics of the more than 140
4. Stay the course?
organizations that have won a place in the Palladium Balanced
Visionary leaders are unwavering in
Scorecard Hall of Fame for Executing Strategy over the past 10 years.
their focus on and commitment to the
But if leadership is a prerequisite of successful strategy execution, strategy. They fully expect to encounter
why do so many organizations leave it to chance? Although many resistance, if not outright opposition,
leaders are natural born, leadership can be cultivated. even from members of their own man-
agement team or the board. Rather than
In our many years of experience guiding are constantly monitored, tested, and capitulate or compromise, however, they
CEOs and business unit heads, weve revised as needed (as described in the take proactive steps to engage potential
identified and honed a list of top ten Kaplan/Norton six-stage strategy opponents and involve others to win
attributes of visionary and effective execution system). Strategy execution opponents support. They demonstrate,
leaders based on the traits of those inherently involves continuous change. publicly and privately, by word and by
who have successfully steered their There is no real steady state; it is a action, that nothing will diminish their
organizations through strategic trans- dynamic process. commitment to executing the strategy
formation and onward to measurable and achieving breakthrough results.
Visionary leaders also understand the
and sustainablebreakthrough results.
human dynamics of change and the 5. Put a premium on communicat-
How do you and your fellow executives importance of considering the variety ing to all stakeholders during the
measure up? Do your leaders and complexity of human responses to transition?
change. First and foremost, this calls Clearly, all stakeholders need to under-
1. View strategy execution as for demonstrating the need for change
their job? stand the strategy: what it is, why it
and creating a sense of urgency. For needs to be implemented now, and how
Sure, most CEOs know that strategy is example, leaders must make a compel- adopting it will lead the organization
part of their job. But how many limit ling case for changeto everyone in toward breakthrough results. They need
their involvement to a high-level role in the organization, and not only their to recognize that senior management
the strategy formulation process and direct reports. Visionary leaders are is committed to it. And they need to
then completely delegate its execution? adept at building commitment from the understand how they can contribute to
Effective leaders recognize the impor- top down. They know how to convey a successful strategy execution. Unfor-
tance of a hands-on approach. They are motivating, shared vision for the future tunately, many leaders are perfunctory
deeply involved not only in developing of the organization and are careful to about communications. It takes more
the strategy but also in executing it. ensure that the strategic intent is clear than a video and an email from the CEO
They consider it their job to actively and clearly understood throughout the to convince stakeholders of the CEOs
lead and manage throughout every step organization. They understand how to commitment. Effective leaders are ac-
of strategy executionday after day, lead people through difficult transi- tively and personally involved in talking
month after month, year after year. To tions, managing how change will affect to the spectrum of stakeholders, in vari-
them, its a daily responsibility. all stakeholdersnot only managers ous media, to gain their buy in. And they
and employees, but also customers,
2. Have a keen understanding of rally their team members and organiza-
suppliers, shareholders, and the board
the change process? tional resources (not just HR but also the
of directors. communications group) to help develop
No one would disagree that adopting
and implementing a new strategy is a and coordinate ongoing communica-
3. Know howand whento push
change program; but how many leaders tions. They understand the importance
the leadership accelerator?
view strategy execution as a constantly of seven times and seven waysof
Visionary leaders understand (and dont
evolving process? Visionary leaders repeating the message in different
just give lip service to the idea) that
understand that strategy execution, and formats and for different audiences
executing a transformational change
not only implementation, is fundamen- and of providing interactive, not merely
strategy takes substantially more
tally a change management endeavor. one-way, forums for communicating and
energy on the part of leaders than an
Performanceand assumptions discussing strategy.

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 11
6. Align, assign, and hold account- 8. Understand the true cost of 10. Welcome feedback and show
able direct reports to fulfill execution and allocateand theyre willing to change their
specific strategy execution roles? protectthe required resources? mindsand their behavior?
Visionary leaders are clear about what Visionary leaders assign the best, most Because of their commitment to execut-
they expect of their direct reports talented people within the organization ing strategy, visionary leaders value
and they do not hesitate to support to serve as change agents in executing feedback on their leadership and are
their expectations with reinforcement, strategy. They establish teams of such willing to modify it, if necessary. They
whether positive or negative. They insist agents to work with organizational encourage direct feedback and straight
that their direct reports do the same leaders to coordinate, integrate, and talk among and between all leaders
with their subordinates so that a clear facilitate strategy. Some of these change and change agents so that ineffective
message about roles, expectations, and agents are dedicated to this task full or dysfunctional leadership behaviors,
strategic intent is cascaded horizontally time (for example, Office of Strategy wherever they show up on the team,
and vertically throughout the organiza- Management personnel). Others con- get changed. They believe in learning
tion. In assigning responsibilities and tribute (in addition to their day jobs), continuously, and constantly hone their
setting expectations, they also invest as members of a strategic theme team leadership skills, as well as those of
in developing the leadership skills of or as part of an enterprise network (see others in the organization. They lead not
managers at all levels to prepare them Case, p. 7).1 They specifically allocate only with their intellect but also with
for their new roles in strategy execution. and guarantee the financial resources their heart.
They dedicate resources to preparing required for execution, often establish-
them for change, fostering teamwork, ing a separate strategic expenditures
The list may be daunting, which might
encouraging fresh thinking, and requir- (StratEx) line item in their budget and
explain why more organizations fail at
ing that they know the desired behav- financial reporting. These leaders
strategy execution than succeed. But
iors and results, which will be measured treat this allocation as an investment
these attributes are hardly genetic.
and rewarded. Effective leaders monitor with an expected return and not as
They involve establishing a point of
the performance of their subordinates an operating or capital expense.
view and, perhaps more important, a
against expectations and are willing to
9. Make timely, often difficult, set of practices that can be learned,
make tough decisions when, as inevita-
decisions based on fact, not on gut honed, and supported with a rigorous
bly happens, some leaders cannot live
instinct or political pressures? strategy execution system.
up to the new requirements.
Effective leaders develop a streamlined With 28 years of strategy
7. Adhere to a proven strategy governance process featuring regular execution experience, Mark B.
execution process? Hefner helps senior executive
management reviews and objective and
clients execute transforma-
Most executives know that succeed- candid reporting on strategy perfor- tional strategies. A member of
ing at strategy execution is against mance. They clarify decision rights (who Palladiums Strategy Execution
the odds; more organizations fail at decides what, who should influence de- Leadership team, he works
primarily within the financial
executing strategy than succeed. Vision- cisions, and who should be responsible
services, pharmaceuticals, and
ary leaders understand that shortcuts, and accountable) among the organiza- consumer products industries.
while attractive, do not yield competi- tions leaders and change agents. They
tive advantage or sustainable break- invest in developing business intelli- To learn more
through results. To boost their chances gence capabilities to provide factual in- See Leadership Development as the Key to
Organizational Change (and Success), a case
of success, these leaders adopt proven formation on key strategic performance study by Marcus Pitt, BSR SeptemberOctober
processes to execute strategyand indicators. They see to it that leaders 2009 (Reprint #B0909D).
enforce their consistent application and change agents make prompt, often Leadership and Change, a BSR Reader (2007),
throughout the organization. Leaders difficult, decisions based on that infor- features articles by John Kotter, Jay Conger,
also clearly understand that strategy mation. Although collaborative in their and Robert Kaplan and David Norton, along
with how-to articles from field practitioners.
execution is not a one-time event but own decision-making style, they know
(Product #1863).
rather an organizational capability that that ultimately they are accountable
can create competitive advantage. They for strategic decisions and expect full
Continue the dialogue
therefore integrate the strategy execu- support in those decisions, even from
Whats your opinion of this top ten list? Weigh
tion process and the requisite capabili- dissenting executives. in with Mark Hefner and 15 senior executives at
ties into the organizational culture. www.thepalladiumgroup.com/bsr/HefnerChange.

Reprint #B1011C

1R
 ead about yet another approach to such networks in Beyond the OSM: Strategy Execution Champions Help Foster Strategy Execution Capability, by Marina
Mier y Tern Cuevas and Maria Jos Ortega Moncada in BSR SeptemberOctober 2010 (Reprint #B1009C).

12 b a l a n c e d s c o r e c a r d r e p o r t
Five Pitfalls to Avoid When Writing Despite its value, though, most organi-
zations written performance analysis
Performance Analysis is not very good. Most analysis doesnt
explain the data, discuss its underlying
By David McMillan, Consultant, Palladium Group, Inc. causes and implications, or integrate it
into a broader discussion of strategic
Without measuring, you cant manage. Put another way, without performance and environmental trends.
useful performance analysis, you cant put to use all those My recent reading of strategy review
measurements your organization works so hard to gather. Written reports of a handful of Palladium Hall of
performance analysis is the foundation of the strategy review Fame organizations showed that even
process, and yet, observes David McMillan, it is generally not very exemplars of strategy execution some-
times fall short in their written perfor-
good. Here are the five biggest pitfalls to avoid.
mance analysis, thus missing valuable
The 1990s saw the rise of risk reporting components; consider banks overex- opportunities. Fortunately, this problem
by financial institutions, and with it the posure to mortgage-backed securities. can be remedied. Writing insightful,
growing popularity of a high-level risk That is something that neither VaR nor actionable performance analysis is a
indicator called value at risk (VaR). VaR any aggregate could possibly show. skill that can be learned.
is an aggregate measure that reflects Measures need context, as internal and Through our work guiding dozens of
the probability that a portfolio of assets external forces dont exert constant or organizations in strategy reporting,
will lose a specific value in a given equal impact. weve identified five common pitfalls in
time frame, assuming that markets are performance analysis. Avoid them, and
In the classic Balanced Scorecard (BSC)
normal and that there is no trading. youll be well on your way to producing
methodology, performance analysis
By the turn of the millennium, many performance analysis that can truly
happens at two levels: at the measure
financial firms had come to rely on VaR guide decision makers in making sound
level and at the objective level. Although
(among other risk measures). strategy management decisions.
this article addresses writing analysis
Then, in 2007, the subprime mortgage at the objective level (which certainly
crisis hit. Banks lost billions in write-
downs; some collapsed, others were Avoid these pitfalls, and youll be well on your way to producing
sold off or rescued through government
performance analysis that can truly guide decision makers in
funding. Did VaR fail as an indicator?
making sound strategy management decisions.
Not at all. Did banks put too much trust
in it? Perhaps. They also may not have
given sufficient attention to supporting incorporates insights on measures),
Pitfall #1: Focusing Only on the
analysis. many of the concepts presented here
Measure Data, Without Explaining
can also be applied to writing analysis
Im not suggesting that overconfidence or Interpreting
at the measure level.
in VaR was a cause of the crisis. Obvious- Often, performance analysis merely re-
ly, Im oversimplifying the role of a risk Written objective-level performance gurgitates what the data already show,
indicator in a financial crisis with deep analysisanalysis that describes or simply explains the components of
and complex causes. But I use this ex- the recent and past performance of a the corresponding measure(s). What
ample to make a point: measures alone business objective and projects future good does that do?
dont tell the story. Relying on them performanceis essential for turning
Consider the problem with drawing
exclusively in monitoring organizational measure data into valuable, actionable
inferences from jobs dataa key indica-
performance without analysiswithout information. Analysis also provides
tor of the nations economic health
qualification and contextcan lead to insight into the important aspects of a
without any explanation. Imagine that
serious misperceptions about perfor- business that are difficult to measure.
the next jobs report shows a gain of
mance, if not to disaster. Finally, written performance analysis
150,000 jobs. Does that number alone
examines the risks as well as the op-
Measures are limited by their scope and tell us that the economy is recovering?
portunities associated with a strategic
assumptions, and by the attributes of Or that job growth will be a steady
objective. Without such analysis, all
their underlying data. They need qualifi- trend? Now, lets drill down to the
the effort in monitoring strategy perfor-
cation. An aggregate, for instance, is not industry breakdown level. Suppose
mance is for naught.
always composed of equally weighted we see that nearly all new jobs for the

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 13
month came from the energy sector. Was
the increase triggered by the stimulus
Sometimes all the analysis in the world wont yield a definitive
plan? Why didnt other industries see an explanation for a performance result. Yet even when there is no
increase? We cant answer these ques- certain answer, it is always better to offer a hypothesis than to
tions based on the measures alone. If forgo explanation altogether.
we want to understand trends, market
or economic developments that might
It seems self-evident that qualitative Avoid relying on a single source, since
impair job growth, the extent to which
information is a critical element for un- an individual may have a particular
seasonality is affecting the dataany
derstanding what drives performance. bias (such as a personal agenda) or his
of the issues that form our expectations
Yet too often such information is absent experience may represent an anomaly.
and drive our decisionswe need to dig
from written analysis. Try to get input from multiple, varied
deeper for more contextual data that
sources with relevance to the objective.
might explain the performance. We need Many innovation-oriented companies
It may not always be feasible to talk to
to ask: use a BSC measure that monitors
multiple people, but it is a good idea,
progress in the stages of their R&D
1. What is the reason for the last especially when biases are likely or
efforts. Usually this measure tracks
periods measure performance? How hypothesis is involved.
only whether projects are on schedule.
do we explain any period-to-period
At some companies, the performance Getting accurate qualitative informa-
trends? Dont restate the obvious
report might go so far as to also note tion is a key reason for the performance
(e.g., sales are down 3% because ABC
the reason a particular major project analysis writer to confer with the
divisions sales fell 4% and XYZs 2%).
is behind schedule. However, it doesnt objective owner before starting to write
Look for information that will explain
answer the questions that company and after a draft has been completed.
why sales are down for each division.
leaders really need to know: What are Often weve seen this step overlooked,
Are both divisions suffering from the
the scheduling pressures that all the making the objective owner unprepared
same problem, or are their numbers
behind-schedule projects share? And at the next strategy review meeting
down for different reasons?
what general risks need to be better and causing her to stumble through her
2. What does the measures outcome tell mitigated? For example, for a toy presentation or discover errors in the
you about the performance of its cor- manufacturer, obtaining feedback analysis. For example, suppose the anal-
responding objective? Do the trends from focus groups of children may be ysis writer concludes that changes in
in measure performance correspond consistently taking a month or two productivity at a manufacturing facility
to the perceived trends in objective longer than anticipated. were caused by a suppliers inability to
performance (i.e., is this measure still deliver on time, when in fact the supply
For some objectives and measures, the
valid for the objective)? Are future plan called for scaling back production
only way to understand performance
expectations of the measures perfor- due to an inventory surplus.
is to talk with people throughout the
mance sufficient to achieve desired
organization whose activities or deci- Here again, though, the writer (usually
performance at the objective level?
sions are connected with the objective the objective coordinator) should not
Pitfall #2: Omitting Qualitative or measure at hand. Discussions with rely exclusively on the objective owners
Information colleagues will help get a full and opinion. Writers shouldnt feel obli-
accurate analysis of root causes and gated to trust the executive as the sole
Numbers are concrete and apparently
future expectations. If the objective source of information about possible
objective, and therefore they make
relates to the organizations efficiency causes underlying performance. Seek
people (analysts and their audiences)
in innovation, talk to the R&D project other views from appropriate sources
more comfortable and confident. But
leaders; theyll know what factors with relevant knowledge and access to
numbers dont tell the whole story. And
routinely lead to cost overruns. If the relevant information.
they can mislead, whether inadvertently
objective concerns customer service,
or not. (Think of all the ways statistics Pitfall #3: Avoiding Interpretation
talk to those who most often interact
can be presented to support any side of When the Data Are Ambiguous
with customers to find out why custom-
an argument.) Qualitative information
ers are complaining about the service Sometimes all the analysis in the world
can often reveal the reasons behind the
they receive. If the objective is about wont yield a definitive explanation for
numbers better than the deepest dive
workforce skills, seek out managers who a performance result. Yet even when
into the detailed data can.
direct employees so that you can learn there is no certain answer, it is always
how training can be improved. better to offer a hypothesis than to

14 b a l a n c e d s c o r e c a r d r e p o r t
forgo explanation altogether. For deci- tivities that are crucial to attaining the
Balanced Scorecard Report sion makers, there is little that is more ultimate desired outcome. Each strate-
A joint publication of Palladium
unsatisfying (or more irksome) than gic objective is achieved by successfully
Group, Inc., and Harvard Business
to ask why and be told, I have no managing its performance drivers. Be-
Publishing
idea. Offering a thoughtful educated cause its a given that there are specific
Editorial Advisers guess will at least get the conversation risks that can impede each performance
Robert S. Kaplan started. driver, why would such risks not be part
Professor, Harvard Business School
of the strategic conversation? 1
Some objectives do not naturally lend
David P. Norton
themselves to concrete explanations. When writing performance analysis, the
Director and Founder,
Palladium Group, Inc. For example, identifying why customer writer needs to consider not only the
loyalty has declined is generally quite key drivers of the objective and the set
Publishers difficult. Did your biggest competitor of actions that can lead to its success-
Robert L. Howie Jr.
roll out a new advertising campaign? ful execution, but also the major risks
Managing Director,
Did your company recently run a big that could affect each key driver. For
Palladium Group, Inc.
promotion or change its pricing? Or example, if your scorecard has the objec-
Joshua Macht
did Steve Jobs or Lady Gaga mention tive Increase the efficiency of our R&D
Group Publisher
Harvard Business Review Group
your product? There are many possible process, you might identify three main
reasons, and surveying a statistically drivers: (1) speed of market analysis,
Executive Editor significant sample of customers can be (2) quality of the idea pipeline, and (3)
Randall H. Russell too expensive. effectiveness of relationships with regu-
VP/Director of Research,
lators. For each of these drivers, there
Palladium Group, Inc. Even if the hypothesis isnt on target,
are undoubtedly risks that must be
it will promote speculation by leaders.
Editor monitored. For example, the propensity
And it couldand shouldinvite those
Janice Koch to track the same competitors all the
reading the analysis who are knowl-
Palladium Group, Inc. time might skew your market analysis.
edgeable about the situation to further
Copyright 2010 by Harvard Business A work environment that frowns on
School Publishing Corporation. Quotation elucidate performance. This can only
failure might stagnate idea generation.
is not permitted. help deepen understanding of organi-
Turnover of key employees might signifi-
Material may not be reproduced in whole zational performance. No matter what,
or in part in any form whatsoever without cantly weaken your organizations rela-
an informed hypothesis is always more
permission from the publisher. tionships with regulators. By identifying
actionable than no hypothesis at all.
Harvard Business Publishing is a not-for- these risks, you can now actively track
profit, wholly owned subsidiary of Harvard and mitigate them. The organizations
Pitfall #4: Avoiding Any Discussion
University. The mission of Harvard Business
Publishing is to improve the practice of of Risk successesor difficultiesin mitigating
management and its impact on a changing
No one likes to be the messenger of these risks can then add constructively
world. We collaborate to create products
and services in the media that best serve our bad news, but addressing risk openly to the analysis of the objective.
customersindividuals and organizations and accurately is the key to avoiding
that believe in the power of ideas. Pitfall #5: Focusing on Details at
unexpected declines in performance
Palladium Group, Inc., is the global leader in the Expense of the Bigger Picture
and greater risk.
helping organizations execute their strate- For any number of reasons, performance
gies. Our expertise in strategy management,
Today, many companies have a chief risk analysis writers often delve into one
performance management, and business
intelligence helps our clients achieve an officera peer of the chief strategy of- aspect of an objectives performance,
execution premium. Our services include ficer and chief financial officer. Yet even overlooking the objective-level view.
consulting, technology, conferences, com-
munities, and certification. The Palladium in our age of heightened risk awareness, This cant see the forest for the trees
Balanced Scorecard Hall of Fame for risk and strategy are still often viewed syndrome does not give decision makers
Executing Strategy recognizes organiza-
tions that have achieved an outstanding
as separate areasone involving all that the information they need. Imagine
execution premium. For more information, could go wrong, and the other all that an analyzing the economys health solely
visit www.thepalladiumgroup.com or call
organization hopes to achieve. In real- through the unemployment claims
781.259.3737.
ity, the two are inextricably linked. The numbers. Besides the fact that a drop
strategy represents a hypothesis of the in claims doesnt necessarily mean a
way the business operates and the ac- drop in the number of unemployed,

1R
 obert Kaplan articulates the need for managing risk and strategy in an integrated fashion in Risk
Management and the Strategy Execution System, BSR NovemberDecember 2009 (Reprint #B0911A).

n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6 15
there are many other indicators that, Executives should help create the right
in combination, provide a big picture, environment by showing they value Five prerequisites to good
such as job growth, trade data, sales of truth and transparency (and dont pun- performance analysis
existing homes, and consumer spending ish failure), by encouraging collabora- If you can answer yes to the follow-
and confidence. Or imagine analyzing tion and information sharing, and by ing questions, your organization is
monthly sales at ABC division solely appointing the right people for the task. well equipped to avoid the five major
on the basis of the number of sales The data geeks who own the measure pitfalls described in this article.
calls made. What about the impact of data play an important role in provid- 1. Are your performance analysis writers
sales personnel changes (reductions or ing input to the analysis process, but inquisitive? The most important question
reassignments)? Changes in the sales theyre probably not the best choice for on their minds must be Why? Answering
commission structure? Customer service writing analysis because they are less that question may sometimes be daunting,
but that should never deter a good writer.
issues? likely to have the skills or knowledge
Also, are they able to see the big picture?
necessary to cultivate sources and
Often performance analysis contains 2. Do the players involved in strategic
gather, integrate, and write up the nec-
abundant detail about one particular performance analysis and decision making
essary information with insight. share strong cross-functional relation-
performance driver and neglects the
ships? Since good performance analysis
other drivers of an objectives perfor- Performance analysis that offers
requires qualitative and anecdotal informa-
mance. In fact, it is common for perfor- context, fact-based explanations, and tion, no one individual (objective owner
mance analysis not to even indicate sound hypotheses about more ambigu- or coordinator) can possibly have all the
whether the objective is being achieved. ous performance results gives decision information needed to present a balanced,
substantive picture. Having a network
For example, analysis that goes into makers information and insight far
of strong relationships can make a big
depth about, say, the speed with which beyond what measures alone can difference for the writer in everything
one R&D project is progressing, does not indicate. Solid written performance from explaining risks common to all the
in any way answer the question, Is the analysis enables leaders to test the objectives drivers to offering plausible
hypotheses for an unexpectedly sharp
organization becoming more efficient hypothesis of the strategy theyve
change in performance.
at R&D in general? worked so diligently to implement
3. Do your writers understand the
and to adjust goals, targets, and
Writers must step back from all the business? Do they know the objectives
expectations for the future with performance drivers? Understanding, or at
quantitative and qualitative data
assurance. least being familiar with, the performance
they have collected and approach
drivers of the objective gives the perfor-
objective-level performance analysis David McMillan is a member
mance analysis writer a solid starting point
of Palladium Groups Strategy
by first drafting a summary statement for investigating the whys of performance.
practice. Currently he is advis-
about the objectives overall perfor- ing one of Palladiums Hall of
It also helps the writer validateor
mance. For example, In general, we Fame for Executing Strategy challengethe mental model of how the
organizations in developing business works.
have several indications that our R&D
a nationwide healthcare
process continues to gain efficiency. 4. Is your organization a learning organiza-
strategy.
tion? Good performance analysis requires
Or, using the color coding system as
an environment in which mistakes can
a point of reference, Overall, skills To learn more be admitted and learned from. If excuses
development was yellow in July because See D. McMillan, with B. Donlon, How to Write always disguise the reasons for relative and
Performance Analysis That Truly Enhances absolute failure, performance analysis
of a convergence of challenges that
Decision Making, BSR NovemberDecember
will miss the markand the organization
hit in Q2. 2008 (Reprint #B0811C).
will miss the opportunity to leverage
those lessons.
Create a Basis for Action
Avoiding these five pitfalls isnt all that Continue the dialogue 5. Are expectations and standards high?
Continue the discussion with David McMillan Do your leaders expect performance
difficult. It starts with being conscious on XPC at analysis to reveal insights? If leaders accept
about the result you want in your www.thepalladiumgroup.com/mcmillan anything less, they may as well just look at
performance reporting: a solid, substan- measures and not bother trying to manage
Reprint #B1011D
tive assessment of the big picture, and objectives.

answers to the why, not just to the


what, or, if answers are not easy to
come by, some plausible hypotheses.

Sign up for the electronic version of BSRavailable only to subscribersat www.bsronline.org/ereg.


Product #B10110