Integrating Strategy Development and ExecutionI've written several posts dealing with the balanced scorecard, a concept developed by Robert Kaplan and David Norton.1 Kaplan and Norton have now embedded the balanced scorecard concept in a management system designed to ensure that strategy development and strategy execution are carried out in a coherent, integrated fashion.
Kaplan and Norton explain their thinking in "Mastering the Management System," published in the January 2008 issue of the Harvard Business Review. This article is a distillation of the authors' Execution Premium: Linking Strategy to Operations for Competitive Advantage, published last month by the Harvard Business School Press.
The Kaplan-Norton management system has five stages, forming a closed loop:2
- Developing the strategy.
- Translating of the strategy into objectives and initiatives, including process improvement initiatives. This stage includes developing a balanced scorecoard of performance metrics and targets for each objective.
- Creating an operational plan to accomplish the objectives and carry out the initiatives.
- Putting plans into action, monitoring their effectiveness, and extracting lessons from how the plans are playing out. This involves two types of meetings: Operational review meetings to review performance of departments and functions and to address any problems; and strategy review meetings to review the balanced scorecoard and the intiatives that are underway.
- Testing the strategy by analyzing cost, profitability and correlations between the strategy and actual performance. Management revisits the assumptions underlying its current strategy and determines if any adaptation of the strategy is needed, thereby closing the management system loop.
Kaplan responds to astute questions about the management system in an interview Harvard Business School published August 11. Of particular interest is his response to the question about what he will be looking at next:
I have recently become sensitive to a gap in our strategy map/BSC [balanced scorecard] 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. ...I will be watching to see what Kaplan and Norton come up with in the area of assessing and managing risk.
ERM objectives and metrics could certainly have a home in the financial BSC perspective for increasing and sustain[ing] 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.
1 Previous posts on use of balanced scorecards are here, here, here, here, and here.
2 If this topic is of interest, by all means read the entire article because it is full of tightly integrated detail spelling out how to handle each of the stages in the management system.