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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 them into an overarching management approach—of putting them into action. Here, Robert Kaplan bridges the two literatures to see how they reinforce each other. Drawing on the work of the preeminent leadership scholar John Kotter, Kaplan demonstrates how the six stages of the Kaplan/Norton strategy execution system can help operationalize Kotter’s eight principles of change management—and thus help embed both disciplines more firmly 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 system. Without exception, the companies, nonprofits, and public sector enterprises that have won entry into the Palladium Hall of Fame for Executing Strategy benefited from visionary and committed leadership. Conversely, when investigating why apparently similar projects in other organizations failed to deliver impressive results, we find that the lack of effective leadership behind the project explains most of the shortfalls. We are not the only ones who extol the critical importance of leadership in driving change. For decades, leadership scholars have been studying the roots of effective leadership and the processes that leaders follow to implement change and achieve results. In this article, I bridge the two separate literatures—leading change and strategy execution—to see how they mutually reinforce each other. John Kotter, formerly of Harvard Business School, is one of the most influential leadership scholars. He wrote a best-selling 1995 Harvard Business School Press book, Leading Change, and followed that with a popular version for mass audiences, Our Iceberg Is Melting (St. Martins Press, 2006). His research, described in these books, identifies an eight-step process for leading successful change (paraphrased here): 1. Establish a sense of urgency. 2. Form a powerful guiding coalition. 3. Create the vision for change and a strategy for achieving it. continued on the following page

also in this issue: Advancing Strategy—and Postmerger Integration— Through the Strategy Execution Infrastructure at Merck & Co. . . . . . . . . . . . . . . . 7 The Top Ten Attributes of Effective Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Five Pitfalls of Writing Performance Analysis . . . . . . . . . . . . . . . . . . . . . 13

join us! Register to join Kaplan & Norton’s Palladium Execution Premium Community (XPC), the premier online destination for strategy and performance management and Balanced Scorecard practitioners, and receive the free monthly BSC Online newsletter. Learn best practices, participate in peer networking, learn about upcoming events, and get practical know-how from thought leaders and leading practitioners. Learn more and become a member at www.thepalladiumgroup.com/xpc.

get us (in print or electronically) For more information about our publications—BSR (back issues, reprints), Palladium Balanced Scorecard Hall of Fame Reports, BSR Readers, and the latest from Kaplan and Norton and Palladium Group, visit www.strategyexecutions.com.

the latest bsr readers In addition to Kaplan and Norton on Strategy Management, check out our two forthcoming Readers: The Execution Premium Reader (the best of our Hall of Fame overviews from 2004–2010) and The Initiative Management Reader, all available at www.strategyexecutions.com.

4. Communicate the vision and strategy. 5. Empower others to act on the vision and strategy. 6. Produce short-term wins. 7. Sustain the effort; produce still more change. 8. Institutionalize the new culture. Our focus is documenting how well these general principles for leading successful change apply to the six-stage strategy execution system that David Norton and I described in The Execution Premium.1 What is striking is the absence of any role for measurement and management systems in the Kotter model. But perhaps this is not surprising. Kotter is a scholar of leadership and organizational behavior, and likely feels that changing and aligning measurement and management systems is “out of scope” for his teaching and consulting assignments. We, however, can leverage the measurement and management processes in our strategy execution framework to enhance the eight Kotter principles and make them more operational and effective for enterprise leaders.

Step 1. Establish a Sense of Urgency Kotter’s first step is for leaders to overcome complacency with the status quo. The beliefs reflected in several popular management maxims must be overcome to create the climate for change, including the most destructive of all: “If it ain’t broke, don’t fix it.” In a world of continuous change, global competition, and dynamic technological disruption, the maxim should be rephrased as, “If it ain’t broke, it soon will be,” or in the words used by legendary pitcher Satchel Paige to explain his life philosophy, “Don’t look back—someone may be gaining on you.” Kotter’s observation is not unique to him. In their best seller, Built to Last, Jim Collins and Jerry Porras observed, “Visionary companies may

appear straitlaced and conservative to outsiders, but they’re not afraid to make bold commitments to BHAGs, ‘Big Hairy Audacious Goals.’”2 Several of the CEOs of Palladium Hall of Fame for Executing Strategy companies understood well the importance of getting the organization to recognize current problems and of implementing change immediately. One recalled starting meetings by writing the letters “L O W” on a whiteboard. When his executive team inquired about the meaning of these letters, he replied, “Look out window,” meaning, “Compare our results with the competition; we’re not as good as we think.” Bill Catucci, who led two dramatic transformations of underperforming organizations, claimed that at AT&T Canada, “Our only core competency was losing money. We were good at this, losing C$1 million per day.” Despite dismal financial performance at both companies, when Catucci talked individually with members of his senior executive team, each said, “My department is performing fine. If there’s a problem, it must be caused by someone else.” Catucci described how he overcame this finger-pointing, blame-shifting culture: “I told them that we’re all in the same boat, and if there’s a hole on your side of the boat, it’s not your problem to solve; it’s our problem. We’re going to succeed or sink together.” Both of these leaders, and many others, started their BSC projects by convincing the organization that it either had a major performance problem or would soon have one, unless executives collectively crafted a new strategy for future success.

Step 2. Form a Powerful Guiding Coalition Often, resistance to change comes from within the senior management team. Some members are on the team because they head a major corporate function, such as human resources (HR), finance, or technology, or a major business or geographical unit. They view themselves as technical, product-line, or regional

experts but are still unused to or uncomfortable thinking like a senior general manager with accountability for overall corporate results. Effective leaders must help senior managers leave their comfort zone as subject-matter experts and think about overall company direction and strategy. When asked to do so, however, many managers worry about what the change will mean to them and how will it affect their function or product line. They become defensive, which manifests itself in resistance to change. Leaders must identify who will be the team players for the new strategy and who may have to be asked to consider other employment opportunities, because continued resistance and negativism can undermine any change effort. Most CEOs who have successfully implemented the Kaplan/Norton strategy execution system report to us that the process of building a strategy map and scorecard with their leadership team was the most useful benefit of the program. Although they extolled the benefits of having a map and a scorecard, they felt the process of creating them helped forge a consensus among the team members about the strategy and a commitment to helping the enterprise achieve it that had never before existed. “You could take our scorecard and give it to a competitor and it wouldn’t work,” explained one CEO. “You had to have sweated through the hours and hours of work and effort that went behind the card to get the benefits from the measures. It’s got to become part of the company’s belief system, almost a religion.” The active dialogue and debate that take place over the 12-week period of developing a strategy map and scorecard are an essential part of the process of building clarity, consensus, and commitment to a new way of doing business. The dialogue emphasizes that the goal is to determine what is right, not who is right, and that everyone’s views can influence the final documents. 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

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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 organization (attempting to prevent a terrorist incident from occurring). Instead of being secretive, agents now had to work outside of the traditional operational silos and become contributors to integrated teams. In even more of a discontinuity, the FBI had to learn to share information and work collaboratively with other federal and local agencies to prevent incidents that could harm U.S. citizens.

FIGURE 1: THE FBI’S STRATEGIC CHANGE AGENDA FBI Director Robert Mueller created this strategic change agenda to educate employees about the transformational changes the agency needed to undergo post-9/11.

all the objectives and measures that had been proposed but that were ultimately left off the map and scorecard, imbuing the final documents with even more personal meaning. This difficult process of debating and agreeing on the strategy is a powerful mechanism for building a guiding coalition at the top of the enterprise.

Step 3. Create the Vision for Change and a Strategy for Achieving It This principle is clearly already embedded as stage 1 of the Kaplan/Norton strategy execution system: Develop the Strategy. In this stage, we state that every enterprise should annually review and reaffirm its mission statement (the organizational purpose, why the organization exists) and its value statements (the attitudes and behaviors the organization insists on when dealing with employees, customers, suppliers, and communities). The enterprise should craft a vision statement, which consists of a measurable stretch target (such as a BHAG) and a date for achieving it. The

vision serves to mobilize the organization into action by defining a target that it cannot achieve through businessas-usual actions. This motivates the leadership team to select a strategy that will enable it to achieve the vision. We find that this step and step 2 in Kotter’s framework are usually simultaneous, not sequential; defining the vision and selecting the strategy are an essential part of creating the guiding coalition for transformational change. In our recent work, we have inserted an additional step between crafting the vision and developing the strategy: creating a strategic agenda. Leaders can use this management tool to link the vision to the strategy. The strategic agenda compares the current status of several organizational structures, capabilities, and processes with what they need to become over the next three to five years. Consider the challenges faced by the U.S. Federal Bureau of Investigation (FBI) in the aftermath of the 9/11 terrorist attacks. To respond to its new challenges

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These guidelines, which emerged from extensive dialogue throughout the organization, engaged all levels of the FBI to participate in setting the goals for the new strategic direction and contributed to widespread understanding and support for the new strategy that followed. Director Mueller carried a laminated FBI strategic change agenda chart with him whenever he visited a field office. If agents expressed skepticism about or resistance to the new initiatives and structures, he reminded them, using the single-page summary, why change was necessary. A strategic change agenda helps the leadership team articulate the cultural, structural, and operating changes necessary to transition from the past to the future.

Step 4. Communicate the Vision and Strategy While the selection of the vision and strategy is ultimately the responsibility of the leadership team, the strategy must be executed by all the organization’s employees. One of the most powerful benefits of the strategy map and

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scorecard is their ability to make the strategy completely clear and actionable to every employee. We learned from the early BSC-adopting executives the value they placed on communication. One CEO declared, “You overcommunicate the strategy; it’s like trying to hit a nail into granite. The first few times you try, it glances off their consciousness. Eventually, a little bit sinks in and then you have to keep pounding it in deeper and deeper.” Communication specialists have told us, “You can’t communicate it just once. You have to tell people seven times and seven different ways, throughout the year.” But just communicating the words in the vision and strategy is never enough. Employees hear the words, but they don’t know the answer to the questions, “What’s in it for me? What am I supposed to do differently and better to help the organization implement its strategy and achieve its vision?” Words have ambiguous meanings, and different people interpret them differently. Balanced Scorecard measures eliminate the ambiguity and provide a clear message and targets for every employee. As another CEO remarked, “I struggled with how to merge two great companies with proud histories and 12 different languages and cultures. The scorecard gave us a common language about our strategic directions and intent. We could develop and communicate strategy so that it was clear for everyone.” The president of a global hotel chain told how every single employee, from the hotel manager through housekeepers and dishwashers, had become aligned to the strategy: “Team members now understand the strategy and align their objectives and incentives to performance that will enable us to achieve our strategic goals.” Communication enables all employees to understand the strategy and how they can contribute to its successful execution. It unleashes the powerful forces of what psychologists call “intrinsic motivation,” in which people

internalize for themselves the goals of the company’s strategy. Employees continually ask two key questions about their organization: 1. D  oes my company have a strategy for success? 2. H  ow does my coming to work each day play a role in my company’s success? Employees want to work for a successful, high-performing organization. A company that can clearly communicate its mission, vision, and strategy to employees answers the first question well. As employees learn about the key processes for delivering value to customers and capital suppliers, they start to link their daily activities to the accomplishment of organizational objectives. They search for ways to do their job differently and better to contribute to these objectives. In this way, all employees become empowered to act, leading to the next Kotter principle.

Step 5. Empower Others to Act on the Vision and Strategy Middle managers and all employees must feel that they can take actions that will contribute to successful strategy execution. Such empowerment may be difficult to establish in decentralized and diversified companies where different business units and individuals are often unsure about how their local actions contribute to overall success. Companies can now use linked strategy maps and scorecards to align all organizational units to achieve corporate synergies.3 Companies such as Infosys, Statoil, and HSBC Brasil have hundreds of strategy maps and scorecards throughout the enterprise that help them achieve both vertical alignment—objectives drawn from the corporate scorecard—and horizontal alignment—objectives shared with other business units. The decentralization of strategic objectives facilitates local decision making and empowers decision making throughout the enterprise that is coherent and synergistic.

To facilitate even more local decision making that cuts across organizational lines, companies also form theme teams based on the thematic structure of their strategy maps.4 Theme teams are empowered to execute on boundarycrossing initiatives. Stage 4 of the strategy execution system, Plan Operations, provides yet another mechanism to empower frontline and back-office employees to act on strategic priorities. In this stage, teams drill each BSC process objective into a detailed process map. The process map typically identifies multiple opportunities for process redesign and process improvements that can be accomplished by local teams. Once processes have been properly designed and structured, employees strive to achieve continuous improvements in these critical processes. Companies design dashboards that provide continual motivation and feedback for ongoing operational process enhancements. The high-level guidance from the strategy map and scorecard ensures that all such local process improvements are aligned with the vision and strategy.

Step 6. Produce Short-Term Wins A principal challenge for any change management program is sustaining momentum during the journey. Although visionary leadership can generate excitement and high motivation at the launch of the program, interest and enthusiasm can wane during the difficult months as the change gets under way but the destination (the target in the vision statement) is still distant. Many change efforts fail during this critical middle stage of the journey as managers and employees get discouraged by the distance still to be traversed. Strategy maps and scorecards solve this problem. They define not only the destination but also the road map to achieve it. Objectives and measures in the internal process and the learning and growth perspectives provide

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 September–October 2007 (Reprint #B0709A). 4

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near-term indicators of the progress the organization is making in improving the capabilities required to realize breakthrough performance for customers and shareholders. The multiple perspectives of the Balanced Scorecard automatically provide a balance between the longerterm outcomes the strategy is striving to achieve—for customers and shareholders—and the near-term improvements in processes, employee capabilities, and information technologies intended to drive those outcomes. One immediate source of short-term wins is the initiative rationalization process, which companies usually conduct in the third or fourth month of their Balanced Scorecard implementation.5 Companies generally find that they can eliminate or consolidate at least 25% of their existing initiatives without affecting strategy execution. The savings from eliminating nonstrategic initiatives usually exceed the cost of the entire BSC project, providing a near-term benefit from implementing the new strategy execution system. Beyond the ability to rationalize initiative spending and motivate and track near-term process and learning and growth performance, the multiple themes within the process perspective provide a natural balance between short- and long-term performance. Companies can generally achieve significant improvements in key operational management processes within six to 12 months. When the returns from operational improvements begin to slow, improvements in customer management processes (improving acquisition, loyalty, and growth) can play a more dominant role, typically in months 12 to 24. Finally, innovation processes will produce a new stream of products and customers during months 18 to 30, providing the final boost to achieving the visionary stretch target. For example, the leadership team of a retail banking unit of a large financial institution established a vision to increase operating income from $20 million to

$130 million in five years. Managers and employees were initially shocked by the audacity of this goal. But the theme-based strategy map and scorecard showed them a feasible path to this destination. The operational efficiency theme had a target to reduce the cost per customer by 25% over the five years, with 80% of this improvement occurring in the first two years. The customer management theme had a target to increase annual revenue per customer, through cross selling and increased balances and fees, by 50%. Eighty percent of this improvement would occur in years 2 to 4. And a customer acquisition theme had a target of tripling the number of highvalue customers. Much work had to be done in improving processes, developing new products and services, and rebranding the bank before the customer growth could occur, so most of the increase in customers was targeted for

motivation will require extrinsic motivation to maintain and reward employees’ efforts. Extrinsic motivation occurs when managers set explicit targets for employee performance and align their incentives to reward the achievement of personal and organizational goals. In stage 3 of the Kaplan/Norton strategy execution system, Align the Organization, employees discuss with their supervisors and HR managers the limited set of personal objectives that they will attempt to achieve in the upcoming period. They must demonstrate that achieving their personal objectives will contribute, in some way, to achieving business unit and companywide strategic objectives. The forces of extrinsic motivation are also unleashed when employees have explicit incentives, usually monetary but sometimes also nonmonetary, that are awarded based on achieving personal, business

Although intrinsic motivation can inspire employees to do their jobs differently and better, sustaining their motivation will require extrinsic motivation on the part of the company. years 3 to 5. Each theme’s targets phased in over time and interacted with one another (lower cost and higher revenues per customer, multiplied by many more customers) to exceed the ambitious fiveyear profit improvement vision. As they plan their trajectory for achieving the vision, companies assign shortterm targets to improve operational processes, middle-term targets to improve customer management processes, and longer-term targets to improve their innovation processes. In this way, managers and employees can track their progress and achievements all along the trajectory to success. They are not left in the dark about whether their strategy is delivering on performance.

Step 7. Sustain the Effort; Produce Still More Change Although intrinsic motivation can inspire employees to do their jobs differently and better, sustaining their

unit, and corporate targets. The number 1 response from CEOs when asked what they would have done differently in implementing the strategy execution system is linking variable pay to performance sooner, because it created such a powerful motivational force for employees. In addition to sustaining momentum by aligning personal goals and rewards to strategic objectives, stages 5 and 6 of the Kaplan/Norton strategy execution system provide ongoing feedback for learning and improvement opportunities in strategy execution. Although all companies perform periodic operational reviews, a new feature introduced by the strategy execution system is a separate, usually monthly, strategy review meeting. At this meeting, the leadership team reviews progress and shortfalls in strategic objectives, reallocates resources among strategic initiatives, and implements midcourse

5 P. LaCasse and T. Manzione, “Initiative Management: Putting Strategy into Action,” BSR November–December 2007 (Reprint #B0711B).

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changes in the strategic trajectory. Among the questions asked at this meeting are, “Why are we falling short of the target? What corrective actions should we consider? Are strategic initiatives on schedule and on budget? Where do we need to put more resources? Do we need a multifunctional, multibusiness task force to address a problem?” Much as a racing ship’s captain adjusts course to compensate for changes in wind, current, and competitors’ actions, the strategy review meetings enable leaders to revisit the strategy at least monthly and react to new information, challenges, and opportunities. The strategy review meetings stress learning and improvement, not fingerpointing or blaming. Using words rarely, if ever, used to describe the operational monthly variance analysis meetings conducted by the finance staff, several managers have told us, “These are the best meetings we have ever had. We are talking about important issues and developing action plans to address them. They are fun and exciting.” Even more change occurs during stage 6, Test and Adapt the Strategy, when the organization reviews a year’s worth of data on strategy implementation to learn what has worked and where the strategy may be flawed.6 By measuring the strategy, the company can distinguish between when it is implementing a bad strategy well versus when it is implementing a good strategy badly— an extremely important distinction that has very different action implications for the leadership team. Formulating the strategy execution system as a continuous closed-loop system emphasizes that accomplishing strategic change requires an integrated and embedded management system to sustain the change and provide multiple opportunities for learning, improvement, and adaptation.

Step 8. Institutionalize the New Culture The final step in Kotter’s leading change process is to ensure that a new culture gets established to sustain the change. The biggest change introduced by the new Kaplan/Norton strategy execution system is that the enterprise’s core management system is centered on implementing strategy and not on achieving a budget’s short-term financial targets. Companies have been using the budget as their central management system for more than a century, and this practice has engendered a pervasive culture of short-term financial control. It is indeed difficult to supplement and eventually replace the budget culture with the innovation and learning required for a strategy execution culture. We have found that to accomplish and sustain a strategy-focused culture, companies need a new organizational function, which we call the Office of Strategy Management (OSM). 7 The new OSM function keeps the organization focused on strategy execution by implementing the six-stage management system throughout the year. The OSM does not select the strategy, nor is it responsible or accountable for its successful implementation. These remain the responsibilities of line management. But busy and easily distracted senior executives need the constant attention of a small staff dedicated to ensuring that all the processes required for successful strategy execution get performed on schedule throughout the year. Establishing an OSM and having it dictate the rhythm and pace of the strategy execution process are essential in establishing and sustaining a strategy-focused culture.

needed to achieve the vision. Once the vision and strategy have been selected, leaders must align all employees to them, communicating the direction and creating the coalitions committed to achieving the strategic vision. And leaders must continually use intrinsic and extrinsic motivation to inspire employees to stay the course and remain focused on moving in the right direction. The new Kaplan/Norton strategy execution system provides leaders with a tool previously unavailable for accomplishing their tasks: the capability to create an entirely new management system designed for and aligned to the journey toward achieving transformational change. Robert S. Kaplan, along with David P. Norton, created the Balanced Scorecard concept. The Baker Foundation Professor at Harvard Business School, and Chairman of Professional Practice at Palladium Group, he also codeveloped activitybased costing. Kaplan has authored or coauthored 14 books (5 of them with Norton), 20 Harvard Business Review articles (8 with Norton), more than 130 papers, and dozens of articles for Balanced Scorecard Report.

To learn more See Leading Change, by John Kotter (Harvard Business School Press, 1995); and Our Iceberg Is Melting, also by Kotter (St. Martins Press, 2005). For more on Kaplan and Norton’s six-stage strategy execution system, see “Integrating Strategy Planning and Operational Execution: A Six-Stage System,” by Kaplan and Norton, BSR May–June 2008 (Reprint #B0805A). Also, visit www.hbr.org and click on the topic “Leadership” for seminal books and articles on the subject by the world’s foremost authorities. Reprint #B1011A

Putting Principles into Action Leading change is demanding. Leaders must establish direction by developing a vision of the future along with a strategy for producing the changes

6 D. Campbell, “Putting Strategy Hypotheses to the Test with Cause-and-Effect Analysis,” BSR September–October 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 July–August 2008 (Reprint #B0807A). 6

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CASE

Advancing Strategy—and Postmerger Integration— Through the Strategy Execution Infrastructure at Merck & Co. By Tom Hall, Senior Director, and Patricia Jaar Watson, Manager, Strategy Realization Office, Merck & Co., Inc. In November 2009, pharmaceutical giants Merck and ScheringPlough merged to create a stronger, more diverse, and more truly global company. To clarify strategic priorities and align activities around key objectives, the new Merck leveraged the strategy map and Balanced Scorecard, already in use for five years at legacy Merck. Here, key players in the company’s Strategy Realization Office (its OSM) discuss how this existing strategic infrastructure smoothed strategic alignment as well as the merger integration process in many ways. Both Merck and Schering-Plough have a long and rich history of working to improve people’s health and well-being, from discovering vitamin B1 and inventing the first measles vaccine to creating the first statins for treating high cholesterol—with many other innovations in between. Our scientists have also developed many products to improve animal health, including vaccines and antibiotics. Headquartered in Whitehouse Station, N.J., Merck operates in more than 140 countries and has a workforce of approximately 93,000. The secondlargest pharmaceutical company in the world in terms of revenue, the company (known outside the United States and Canada as MSD) produces prescription medicines, vaccines, biologic therapies, and consumer care and animal health products. The Merck/Schering-Plough merger united two science-centered companies (combined 2009 sales: $46.9 billion) with complementary product portfolios to create a powerful innovation platform for the long term. But joining together two science-centered

companies to achieve long-term growth requires careful, purposeful integration. Merck has long known that a good strategy does not in itself guarantee success. Legacy Merck established a solid strategy management foundation in 2005, when it created a Strategy Realization Office (or SRO, our Office of Strategy Management), and adopted the Balanced Scorecard methodology to execute its Plan to Win strategy.1 It had a corporate strategy map and Balanced Scorecards for every division and function. Schering-Plough, though not a BSC user, employed strategy management techniques, including a strategic road map, and its people were focused on the importance of culture and change programs in adding value. One factor that sets the Merck/ Schering-Plough merger apart from the many mergers in our industry is the methods by which we are managing the integration and achieving strategic alignment. Postmerger, the strategy map and BSC have been, and continue to be, crucial in galvanizing the entire organization around the strategy and

in ensuring that our five divisions and eight support functions are aligned. The map provides an easy and effective way to communicate our strategic priorities to our thousands of employees throughout the world. And with scorecards and dashboards already built, complemented by integrationspecific monitoring capabilities, we had the tools and competencies in place to track integration progress—and meld it with the overarching strategy management process.

Greater Team Power One important factor in achieving integration success has been our SRO. The merger planning activities were overseen by the Integration Management Office (IMO). The SRO’s enterprisewide capability helped create the framework for implementing and monitoring the plans after Day 1 of the official merger, capitalizing on the capabilities of the Program Realization Offices2 and other networks throughout the company. This approach has yielded many benefits, not the least of which is helping to maintain a focus on the importance of successful execution and realization of the strategy. Before the merger, IMO teams at both companies began planning and designing for the new organization. Tom helped lead integration planning from the Schering-Plough side and Vittorio Nisita was an integral member of the team on the Merck side. Tom was tapped to succeed Vittorio as leader of the new Merck’s SRO following the merger close. The two worked together for two months at year-end to smooth the transition. When the merger officially closed in November 2009, the SRO expanded from three to nine people, adding a new (integration) delivery leader, a change director (who, for example, would coordinate systems implementation decisions across the

1 See V. Nisita, “Driving Transformational Change: Strategy Execution at Merck,” BSR July–August 2009 (Reprint #B0907C). Vittorio Nisita helped create Merck’s 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

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FIGURE 1: THE NEW MERCK ROAD MAP

enterprise), and other personnel to monitor progress against merger objectives (such as head count and value capture). Some from Schering-Plough had had prior experience with mergers there. The IMO continued to lead integration efforts, but as the integration planning efforts became integration realization efforts, IMO governance transitioned to ongoing strategy execution. Divisions and functions carried out their respective key integration initiatives as part of their broader business and strategic portfolios.

Aligning Around Strategic Priorities Recognizing the magnitude of our integration, Merck devised a three-phase road map to define our mission, vision, and focus over the next three to eight years. (See Figure 1.) Phase 1, Launch (i.e., launching the new Merck), is focused on unifying the company and fostering the culture that will set the foundation for our strategy. Its goal: for Merck to become a new company that retains the best in class of its legacy entities. In phase 2, Accelerate, we will allocate resources for our most promising opportunities and continue to seek operational efficiencies. We’ll be creating an environment that supports sustainable short- and long-term growth. The work of these phases will position us for phase 3, Breakthrough, in which we realize our vision of becoming the best healthcare company in the world.

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Scorecards are critical to our alignment as a company. In a company of our size, we use the Balanced Scorecard process to cascade the strategic priorities and company scorecard to the divisions and functions, and, ultimately, to individuals as they develop their personal objectives. This ensures that everything we do, at every level, relates to our strategic priorities and is focused on driving the successful execution of Merck’s strategy. Our Executive Committee (EC) was announced in August 2009 before (and subject to) the merger close. That November, immediately following the close, the SRO worked with the EC to flesh out the near-term mechanisms to support the realization of road map objectives. For example, to ensure strategy and scorecard alignment, we introduced EC alignment sessions. These sessions were designed to establish a common understanding of key priorities by defining objectives and performance goals and by identifying organizational interdependencies, risks, and measures of success. We needed to update—and, in the case of entirely new divisions (such as Consumer Care), create—BSCs. Next, we partnered with members of the EC (each of whom is responsible for a division or function) and with their BSC representatives (senior-level managers who coordinate and ensure strategy execution in their areas). First, we held one-on-one meetings with these senior managers to identify scorecard and

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strategy map elements. This is how we identified all the organizational interdependencies. We scrutinized every objective on each strategy map, asking ourselves: What did it mean? What were we measuring? These sessions yielded the new 2010 company strategy map and scorecard. (See Figure 2.) This painstaking process provided visibility and created the transparency we saw as essential for alignment. Then, we held a joint meeting with divisional and functional representatives to present our findings from each one-on-one meeting. This allowed the representatives to see each area’s priorities and understand the organizational interdependencies—for example, how Global Services’ Objective B supports Research’s high-priority Objective A. In addition to ensuring alignment, this meeting helped ensure that resource allocation was in line with plans. We then repeated this process at the EC level— one-on-ones with EC members followed by a joint team meeting. Naturally, we did our best to streamline the time demands on top executives, but everyone understood how important this collaboration was to achieving unity. Each scorecard was thus rigorously tested (now an annual practice) for its vertical alignment with the company strategy map and scorecard, and its horizontal alignment with the other division and function scorecards.

Communicating the Strategy Map and Scorecard, from the Top Down In February, approximately 300 company leaders gathered for the first time following the merger as the leadership team to focus on Merck’s immediate priorities. Our CEO, Richard Clark, presented the New Merck road map and the 2010 strategy map and corporate scorecard. Breakout sessions led by each EC member followed to allow for discussion. Within days, the CEO hosted a live webcast to introduce the 2010 strategy

Communications from our HR leader emphasized the importance of creating individual performance objectives aligned with the company’s objectives as part of the global performance management and employee development system. Scorecards are part of determining our variable compensation and unite employees around ensuring company success. To promote “enrollment” (our term for “buy in”) in the Balanced Scorecard methodology—which was, after all, new to roughly half the workforce—we created a strategy website. The site features definitions, strategy maps, descriptions of objectives, and measures for every BSC. To help people in different areas understand the priorities of each group, we show the weight of each measure. The site also provides regular updates and archived articles and webcasts from leadership. An online training session is also available to employees. The SRO, HR, and our Global Communications group have made a concerted effort to coordinate strategy, performance management, and compensation communications to emphasize the link to our strategic priorities and scorecard. We convene to study the timeline of events for each group so that we can support each one another’s messages. For example, the HR lead’s notification about midyear performance reviews includes a reminder to employees to study their area’s BSC and to talk to their manager if they feel their work is not aligned with the BSC.

financial customer internal business drivers people and culture

map and company scorecard to the entire company. He also created a video message. Division and function heads, as EC leaders, also held meetings for their people about their area’s BSC and how it aligns to the company’s priorities. Some were taped for a webcast and available for later viewing by any employee. This chain of communication drilled down from region to country to site level, so that employees could learn about the strategy and their role in it.

maximize shareholder value Maximize pipeline value with efficient ROI

Grow earnings

Grow revenue

become the most trusted industry leader in delivering value to customers, including patients Enhance Merck’s standing with customers and other key stakeholders

sustain momentum

Engage customers, co-create solutions

become one company

position for acceleration & breakthrough phases

Drive global performance of key products and stratgic geographies

Integrate global operations and implement new models

Maintain focus on global growth opportunities in human health, consumer health, and animal health

Deliver the late-stage pipeline and successfully launch new products

Achieve merger synergies

Develop longer-term strategies that transform and grow the business

create a high-performance organization Build a sustainable culture characterized by customer focus, courage and candor, and rapid, disciplined decision making

Build, engage, and retain diverse talent globally

FIGURE 2: 2010 STRATEGY MAP The 2010 strategy map reflects the priorities of the Launch phase.

Leveraging the Strategy Execution Infrastructure to Support LargeScale Integration

The Strategy Execution Network meets

We believe that strategy is something launch

tion team plans as well as companywide

regularly to ensure shared understanding of the portfolio of work—integra-

you do, not something you have. Suc-

strategic initiatives. This practice gives

cessful execution necessitates commu-

us all an enterprise view of what is

nication, teamwork, and collaboration

planned, which helps in managing

across the organization. The SRO there-

expectations, identifying interdepen-

fore works with the EC on a continuous

dencies, prioritizing our work, tracking

basis to develop, execute, and track

progress, and assessing capacity.

Merck’s long-term strategic plan at the

At network meetings, each person

enterprise level. The SRO launched the

spends five minutes debriefing the

New Merck Strategy Execution Network,

group on how his top project affects

a network of integration leaders, divi-

the whole enterprise. From its start, the

sion and function Program Realization

network has taken advantage of the

Office leads, and other team members

standard tracking mechanisms (score-

who are added as needed. The network’s

cards, dashboards, integration KPIs)

role is to enhance coordination, ensure

already in place.

clarity of strategic priorities, and act as our change agents for major strategic

One of the risks associated with merger

initiatives. It ensures that interdepen-

integration or any protracted change

dencies and change impacts on the

program is the loss of momentum in the

organizations are understood. It identi-

business. In the Launch phase, we have

fies issues that arise and agree upon

emphasized maintaining momentum

the actions needed to address them.

while preparing for the future. The BSC

Ultimately, network members help drive

plays an important role in fostering a

successful execution at the local level.

common vision throughout our global

This cross-functional group aims to

workforce. And the Strategy Execution

bring together the right people to cut

Network also plays a role in dealing with

through obstacles to resolve compa-

issues other than integration that could

nywide strategy issues with maximum

lead to loss of momentum.

efficiency.

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Aligning Incentives with Strategic Priorities In legacy Merck’s Annual Incentive Plan (AIP), three components—performance on the company BSC, performance on the division or function BSC, and the individual’s performance—were added together to compute the individual’s bonus. Under this system, lackluster company performance wouldn’t prevent an individual from receiving a respectable bonus. Legacy Schering-Plough’s bonus pool was based on two financial measures of company performance and allocated to each business unit or geography based on relative performance, with individual performance determining the final incentive amount. The new Merck revised the AIP to reflect our “total rewards” philosophy by ensuring it comports with shareholder interests and by promoting a pay-forperformance culture. The funding for AIP awards is based on company and division or function performance as measured by the BSCs. This purescorecard approach enables us to balance short- and long-term goals while also pulling nonfinancial levers, such as culture and employee engagement, to achieve goals. Individual performance plays a role in determining an employee’s actual AIP reward. A “leadership behaviors” modifier was adopted to foster the desired culture—one based on customer focus, rapid and disciplined decision making, and courage and candor. Leaders who achieve desired results in ways contrary to these standards lose performance points.

Setting Targets Alignment of objectives to the strategy is not sufficient if the measures and their targets are not aligned to objectives. The SRO partners with the divisions and functions—including Global Finance and Global HR—and finally with the EC to develop target-setting principles and targets for all BSCs. Certain measures are mandatory: every

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BSC must have culture and nonfinancial measures, along with a compliance and health, safety, and welfare modifier; the latter promotes doing things the right way, not just hitting the targets. We also provide guidance to the divisions and functions on how to set their targets. For example, with measures related to P&L, we work with Global Compensation and Finance to determine how to set targets, so that the measure’s typical performance weighting doesn’t distort results but rather helps ensure fairness among groups. And again, the target-setting process is used in conjunction with communications from our HR leader emphasizing the importance of creating individual performance objectives aligned with the company’s objectives as part of the global performance management and employee development system. Finally, our targets are aligned with our annual profit plan. The SRO reviews past performance, resource allocation, strategic initiatives, projects, and time lines to ensure that the targets are ambitious but achievable without creating undue or excessive risk taking. We also want to be sure they make sense: are the resources there to achieve the target? The link to our annual incentive plan makes it critical that all scorecards are held to the same standards.

Getting Strategy-Focused—and Back to Business as Usual—Fast Merger integration can be a disruptive time for employees, and yet coming together as one company and maintaining business momentum are crucial to success. Our strategy management infrastructure—our mechanisms, teams, processes, and tools—has been instrumental to our continuing progress on the integration and to our historic success with strategy execution. By supporting line execution and realization of the overall strategy, the SRO helped incorporate integration priorities into our overall strategic

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priorities while maintaining the appropriate governance, performance management, interdependency management, and issue resolution. And overall, our strategy management system has facilitated enterprisewide alignment by ensuring that employees at every level remain focused on the key priorities even as the merger integration work continued. Finally, our system and infrastructure have enabled our integration management team leaders to shift their focus back to business as usual sooner and more seamlessly, without the new Merck losing sight of our integration commitments and goals—and our road map. Tom Hall heads the Strategy Realization Office within Merck’s Corporate Strategy Office. Among his responsibilities are managing the company strategy map and Balanced Scorecard processes. Patricia Jaar Watson is manager of the Strategy Realization Office. She is responsible for managing and administering scorecard processes.

To learn more The BSC system has enabled SMDC Health System to achieve alignment more readily with its new acquisitions. See “Breaking Down the Silos at SMDC Health System,” BSR July– August 2009 (Reprint #B0907B). And though not an example of merger alignment, “Motivating Cross-Boundary Thinking and Acting at Ingersoll-Rand” (BSR March–April 2005; Reprint #B0503B), describes how a global behemoth got its disparate businesses aligned strategically. Reprint #B1011B

The Top Ten Attributes of Effective Leaders By Mark B. Hefner, Vice President, Palladium Group, Inc. A sound strategy management process and visionary leadership: these are the two universal characteristics of the more than 140 organizations that have won a place in the Palladium Balanced Scorecard Hall of Fame for Executing Strategy over the past 10 years. But if leadership is a prerequisite of successful strategy execution, why do so many organizations leave it to chance? Although many leaders are natural born, leadership can be cultivated. In our many years of experience guiding CEOs and business unit heads, we’ve identified and honed a list of top ten attributes of visionary and effective leaders based on the traits of those who have successfully steered their organizations through strategic transformation and onward to measurable— and sustainable—breakthrough results. How do you and your fellow executives measure up? Do your leaders…

1. View strategy execution as their job? Sure, most CEOs know that strategy is part of their job. But how many limit their involvement to a high-level role in the strategy formulation process and then completely delegate its execution? Effective leaders recognize the importance of a hands-on approach. They are deeply involved not only in developing the strategy but also in executing it. They consider it their job to actively lead and manage throughout every step of strategy execution—day after day, month after month, year after year. To them, it’s a daily responsibility.

2. Have a keen understanding of the change process? No one would disagree that adopting and implementing a new strategy is a change program; but how many leaders view strategy execution as a constantly evolving process? Visionary leaders understand that strategy execution, and not only implementation, is fundamentally a change management endeavor. Performance—and assumptions—

are constantly monitored, tested, and revised as needed (as described in the Kaplan/Norton six-stage strategy execution system). Strategy execution inherently involves continuous change. There is no real steady state; it is a dynamic process. Visionary leaders also understand the human dynamics of change and the importance of considering the variety and complexity of human responses to change. First and foremost, this calls for demonstrating the need for change and creating a sense of urgency. For example, leaders must make a compelling case for change—to everyone in the organization, and not only their direct reports. Visionary leaders are adept at building commitment from the top down. They know how to convey a motivating, shared vision for the future of the organization and are careful to ensure that the strategic intent is clear and clearly understood throughout the organization. They understand how to lead people through difficult transitions, managing how change will affect all stakeholders—not only managers and employees, but also customers, suppliers, shareholders, and the board of directors.

3. Know how—and when—to push the leadership “accelerator”? Visionary leaders understand (and don’t just give lip service to the idea) that executing a transformational change strategy takes substantially more energy on the part of leaders than an

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incremental change strategy does. As a result, they push the accelerator— demanding more time, energy, visible support, and hands-on leadership from their team members—to lead execution when the stakes (and the change requirements) are high.

4. Stay the course? Visionary leaders are unwavering in their focus on and commitment to the strategy. They fully expect to encounter resistance, if not outright opposition, even from members of their own management team or the board. Rather than capitulate or compromise, however, they take proactive steps to engage potential opponents and involve others to win opponents’ support. They demonstrate, publicly and privately, by word and by action, that nothing will diminish their commitment to executing the strategy and achieving breakthrough results.

5. Put a premium on communicating to all stakeholders during the transition? Clearly, all stakeholders need to understand the strategy: what it is, why it needs to be implemented now, and how adopting it will lead the organization toward breakthrough results. They need to recognize that senior management is committed to it. And they need to understand how they can contribute to successful strategy execution. Unfortunately, many leaders are perfunctory about communications. It takes more than a video and an email from the CEO to convince stakeholders of the CEO’s commitment. Effective leaders are actively and personally involved in talking to the spectrum of stakeholders, in various media, to gain their buy in. And they rally their team members and organizational resources (not just HR but also the communications group) to help develop and coordinate ongoing communications. They understand the importance of “seven times and seven ways”—of repeating the message in different formats and for different audiences— and of providing interactive, not merely one-way, forums for communicating and discussing strategy.

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6. Align, assign, and hold accountable direct reports to fulfill specific strategy execution roles?

8. Understand the true cost of execution and allocate—and protect—the required resources?

10. Welcome feedback and show they’re willing to change their minds—and their behavior?

Visionary leaders are clear about what they expect of their direct reports— and they do not hesitate to support their expectations with reinforcement, whether positive or negative. They insist that their direct reports do the same with their subordinates so that a clear message about roles, expectations, and strategic intent is cascaded horizontally and vertically throughout the organization. In assigning responsibilities and setting expectations, they also invest in developing the leadership skills of managers at all levels to prepare them for their new roles in strategy execution. They dedicate resources to preparing them for change, fostering teamwork, encouraging fresh thinking, and requiring that they know the desired behaviors and results, which will be measured and rewarded. Effective leaders monitor the performance of their subordinates against expectations and are willing to make tough decisions when, as inevitably happens, some leaders cannot live up to the new requirements.

Visionary leaders assign the best, most talented people within the organization to serve as change agents in executing strategy. They establish teams of such agents to work with organizational leaders to coordinate, integrate, and facilitate strategy. Some of these change agents are dedicated to this task full time (for example, Office of Strategy Management personnel). Others contribute (in addition to their day jobs), as members of a strategic theme team or as part of an enterprise network (see Case, p. 7).1 They specifically allocate and guarantee the financial resources required for execution, often establishing a separate strategic expenditures (StratEx) line item in their budget and financial reporting. These leaders treat this allocation as an investment with an expected return and not as an operating or capital expense.

Because of their commitment to executing strategy, visionary leaders value feedback on their leadership and are willing to modify it, if necessary. They encourage direct feedback and straight talk among and between all leaders and change agents so that ineffective or dysfunctional leadership behaviors, wherever they show up on the team, get changed. They believe in learning continuously, and constantly hone their leadership skills, as well as those of others in the organization. They lead not only with their intellect but also with their heart.

7. Adhere to a proven strategy execution process? Most executives know that succeeding at strategy execution is against the odds; more organizations fail at executing strategy than succeed. Visionary leaders understand that shortcuts, while attractive, do not yield competitive advantage or sustainable breakthrough results. To boost their chances of success, these leaders adopt proven processes to execute strategy—and enforce their consistent application throughout the organization. Leaders also clearly understand that strategy execution is not a one-time event but rather an organizational capability that can create competitive advantage. They therefore integrate the strategy execution process and the requisite capabilities into the organizational culture.

9. Make timely, often difficult, decisions based on fact, not on gut instinct or political pressures? Effective leaders develop a streamlined governance process featuring regular management reviews and objective and candid reporting on strategy performance. They clarify decision rights (who decides what, who should influence decisions, and who should be responsible and accountable) among the organization’s leaders and change agents. They invest in developing business intelligence capabilities to provide factual information on key strategic performance indicators. They see to it that leaders and change agents make prompt, often difficult, decisions based on that information. Although collaborative in their own decision-making style, they know that ultimately they are accountable for strategic decisions and expect full support in those decisions, even from dissenting executives.

The list may be daunting, which might explain why more organizations fail at strategy execution than succeed. But these attributes are hardly genetic. They involve establishing a point of view and, perhaps more important, a set of practices that can be learned, honed, and supported with a rigorous strategy execution system. With 28 years of strategy execution experience, Mark B. Hefner helps senior executive clients execute transformational strategies. A member of Palladium’s Strategy Execution Leadership team, he works primarily within the financial services, pharmaceuticals, and consumer products industries.

To learn more See “Leadership Development as the Key to Organizational Change (and Success),” a case study by Marcus Pitt, BSR September–October 2009 (Reprint #B0909D). Leadership and Change, a BSR Reader (2007), features articles by John Kotter, Jay Conger, and Robert Kaplan and David Norton, along with how-to articles from field practitioners. (Product #1863).

Continue the dialogue What’s your opinion of this top ten list? Weigh in with Mark Hefner and 15 senior executives at 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 Terán Cuevas and Maria José Ortega Moncada in BSR September–October 2010 (Reprint #B1009C). 12

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Five Pitfalls to Avoid When Writing Performance Analysis By David McMillan, Consultant, Palladium Group, Inc. Without measuring, you can’t manage. Put another way, without useful performance analysis, you can’t put to use all those measurements your organization works so hard to gather. Written performance analysis is the foundation of the strategy review process, and yet, observes David McMillan, it is generally not very good. Here are the five biggest pitfalls to avoid. The 1990s saw the rise of risk reporting by financial institutions, and with it the growing popularity of a high-level risk indicator called value at risk (VaR). VaR is an aggregate measure that reflects the probability that a portfolio of assets will lose a specific value in a given time frame, assuming that markets are normal and that there is no trading. By the turn of the millennium, many financial firms had come to rely on VaR (among other risk measures). Then, in 2007, the subprime mortgage crisis hit. Banks lost billions in writedowns; some collapsed, others were sold off or rescued through government funding. Did VaR fail as an indicator? Not at all. Did banks put too much trust in it? Perhaps. They also may not have given sufficient attention to supporting analysis. I’m not suggesting that overconfidence in VaR was a cause of the crisis. Obviously, I’m oversimplifying the role of a risk indicator in a financial crisis with deep and complex causes. But I use this example to make a point: measures alone don’t tell the story. Relying on them exclusively in monitoring organizational performance without analysis—without qualification and context—can lead to serious misperceptions about performance, if not to disaster. Measures are limited by their scope and assumptions, and by the attributes of their underlying data. They need qualification. An aggregate, for instance, is not always composed of equally weighted

components; consider banks’ overexposure to mortgage-backed securities. That is something that neither VaR nor any aggregate could possibly show. Measures need context, as internal and external forces don’t exert constant or equal impact. In the classic Balanced Scorecard (BSC) methodology, performance analysis happens at two levels: at the measure level and at the objective level. Although this article addresses writing analysis at the objective level (which certainly

Despite its value, though, most organizations’ written performance analysis is not very good. Most analysis doesn’t explain the data, discuss its underlying causes and implications, or integrate it into a broader discussion of strategic performance and environmental trends. My recent reading of strategy review reports of a handful of Palladium Hall of Fame organizations showed that even exemplars of strategy execution sometimes fall short in their written performance analysis, thus missing valuable opportunities. Fortunately, this problem can be remedied. Writing insightful, actionable performance analysis is a skill that can be learned. Through our work guiding dozens of organizations in strategy reporting, we’ve identified five common pitfalls in performance analysis. Avoid them, and you’ll be well on your way to producing performance analysis that can truly guide decision makers in making sound strategy management decisions.

Avoid these pitfalls, and you’ll be well on your way to producing performance analysis that can truly guide decision makers in making sound strategy management decisions. incorporates insights on measures), many of the concepts presented here can also be applied to writing analysis at the measure level. Written objective-level performance analysis—analysis that describes the recent and past performance of a business objective and projects future performance—is essential for turning measure data into valuable, actionable information. Analysis also provides insight into the important aspects of a business that are difficult to measure. Finally, written performance analysis examines the risks as well as the opportunities associated with a strategic objective. Without such analysis, all the effort in monitoring strategy performance is for naught.

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Pitfall #1: Focusing Only on the Measure Data, Without Explaining or Interpreting Often, performance analysis merely regurgitates what the data already show, or simply explains the components of the corresponding measure(s). What good does that do? Consider the problem with drawing inferences from jobs data—a key indicator of the nation’s economic health— without any explanation. Imagine that the next jobs report shows a gain of 150,000 jobs. Does that number alone tell us that the economy is recovering? Or that job growth will be a steady trend? Now, let’s drill down to the industry breakdown level. Suppose we see that nearly all new jobs for the

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month came from the energy sector. Was the increase triggered by the stimulus plan? Why didn’t other industries see an increase? We can’t answer these questions based on the measures alone. If we want to understand trends, market or economic developments that might impair job growth, the extent to which seasonality is affecting the data—any of the issues that form our expectations and drive our decisions—we need to dig deeper for more contextual data that might explain the performance. We need to ask: 1. What is the reason for the last period’s measure performance? How do we explain any period-to-period trends? Don’t restate the obvious (e.g., sales are down 3% because ABC division’s sales fell 4% and XYZ’s 2%). Look for information that will explain why sales are down for each division. Are both divisions suffering from the same problem, or are their numbers down for different reasons? 2. What does the measure’s outcome tell you about the performance of its corresponding objective? Do the trends in measure performance correspond to the perceived trends in objective performance (i.e., is this measure still valid for the objective)? Are future expectations of the measure’s performance sufficient to achieve desired performance at the objective level?

Pitfall #2: Omitting Qualitative Information Numbers are concrete and apparently objective, and therefore they make people (analysts and their audiences) more comfortable and confident. But numbers don’t tell the whole story. And they can mislead, whether inadvertently or not. (Think of all the ways statistics can be presented to support any side of an argument.) Qualitative information can often reveal the reasons behind the numbers better than the deepest dive into the detailed data can.

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Sometimes all the analysis in the world won’t yield a definitive explanation for a performance result. Yet even when there is no certain answer, it is always better to offer a hypothesis than to forgo explanation altogether. It seems self-evident that qualitative information is a critical element for understanding what drives performance. Yet too often such information is absent from written analysis. Many innovation-oriented companies use a BSC measure that monitors progress in the stages of their R&D efforts. Usually this measure tracks only whether projects are on schedule. At some companies, the performance report might go so far as to also note the reason a particular major project is behind schedule. However, it doesn’t answer the questions that company leaders really need to know: What are the scheduling pressures that all the behind-schedule projects share? And what general risks need to be better mitigated? For example, for a toy manufacturer, obtaining feedback from focus groups of children may be consistently taking a month or two longer than anticipated. For some objectives and measures, the only way to understand performance is to talk with people throughout the organization whose activities or decisions are connected with the objective or measure at hand. Discussions with colleagues will help get a full and accurate analysis of root causes and future expectations. If the objective relates to the organization’s efficiency in innovation, talk to the R&D project leaders; they’ll know what factors routinely lead to cost overruns. If the objective concerns customer service, talk to those who most often interact with customers to find out why customers are complaining about the service they receive. If the objective is about workforce skills, seek out managers who direct employees so that you can learn how training can be improved.

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Avoid relying on a single source, since an individual may have a particular bias (such as a personal agenda) or his experience may represent an anomaly. Try to get input from multiple, varied sources with relevance to the objective. It may not always be feasible to talk to multiple people, but it is a good idea, especially when biases are likely or hypothesis is involved. Getting accurate qualitative information is a key reason for the performance analysis writer to confer with the objective owner before starting to write and after a draft has been completed. Often we’ve seen this step overlooked, making the objective owner unprepared at the next strategy review meeting and causing her to stumble through her presentation or discover errors in the analysis. For example, suppose the analysis writer concludes that changes in productivity at a manufacturing facility were caused by a supplier’s inability to deliver on time, when in fact the supply plan called for scaling back production due to an inventory surplus. Here again, though, the writer (usually the objective coordinator) should not rely exclusively on the objective owner’s opinion. Writers shouldn’t feel obligated to trust the executive as the sole source of information about possible causes underlying performance. Seek other views from appropriate sources with relevant knowledge and access to relevant information.

Pitfall #3: Avoiding Interpretation When the Data Are Ambiguous Sometimes all the analysis in the world won’t yield a definitive explanation for a performance result. Yet even when there is no certain answer, it is always better to offer a hypothesis than to

Balanced Scorecard Report A joint publication of Palladium Group, Inc., and Harvard Business Publishing Editorial Advisers Robert S. Kaplan Professor, Harvard Business School David P. Norton Director and Founder, Palladium Group, Inc. Publishers Robert L. Howie Jr. Managing Director, Palladium Group, Inc. Joshua Macht Group Publisher Harvard Business Review Group Executive Editor Randall H. Russell VP/Director of Research, Palladium Group, Inc. Editor Janice Koch Palladium Group, Inc. Copyright © 2010 by Harvard Business School Publishing Corporation. Quotation is not permitted. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. Harvard Business Publishing is a not-forprofit, wholly owned subsidiary of Harvard University. The mission of Harvard Business Publishing is to improve the practice of management and its impact on a changing world. We collaborate to create products and services in the media that best serve our customers—individuals and organizations that believe in the power of ideas. Palladium Group, Inc., is the global leader in helping organizations execute their strategies. Our expertise in strategy management, performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, technology, conferences, communities, and certification. The Palladium Balanced Scorecard Hall of Fame for Executing Strategy® recognizes organizations that have achieved an outstanding execution premium. For more information, visit www.thepalladiumgroup.com or call 781.259.3737.

forgo explanation altogether. For decision makers, there is little that is more unsatisfying (or more irksome) than to ask “why” and be told, “I have no idea.” Offering a thoughtful educated guess will at least get the conversation started. Some objectives do not naturally lend themselves to concrete explanations. For example, identifying why customer loyalty has declined is generally quite difficult. Did your biggest competitor roll out a new advertising campaign? Did your company recently run a big promotion or change its pricing? Or did Steve Jobs or Lady Gaga mention your product? There are many possible reasons, and surveying a statistically significant sample of customers can be too expensive. Even if the hypothesis isn’t on target, it will promote speculation by leaders. And it could—and should—invite those reading the analysis who are knowledgeable about the situation to further elucidate performance. This can only help deepen understanding of organizational performance. No matter what, an informed hypothesis is always more actionable than no hypothesis at all.

Pitfall #4: Avoiding Any Discussion of Risk No one likes to be the messenger of bad news, but addressing risk openly and accurately is the key to avoiding unexpected declines in performance and greater risk. Today, many companies have a chief risk officer—a peer of the chief strategy officer and chief financial officer. Yet even in our age of heightened risk awareness, risk and strategy are still often viewed as separate areas—one involving all that could go wrong, and the other all that an organization hopes to achieve. In reality, the two are inextricably linked. The strategy represents a hypothesis of the way the business operates and the ac-

tivities that are crucial to attaining the ultimate desired outcome. Each strategic objective is achieved by successfully managing its performance drivers. Because it’s a given that there are specific risks that can impede each performance driver, why would such risks not be part of the strategic conversation? 1 When writing performance analysis, the writer needs to consider not only the key drivers of the objective and the set of actions that can lead to its successful execution, but also the major risks that could affect each key driver. For example, if your scorecard has the objective “Increase the efficiency of our R&D process,” you might identify three main drivers: (1) speed of market analysis, (2) quality of the idea pipeline, and (3) effectiveness of relationships with regulators. For each of these drivers, there are undoubtedly risks that must be monitored. For example, the propensity to track the same competitors all the time might skew your market analysis. A work environment that frowns on failure might stagnate idea generation. Turnover of key employees might significantly weaken your organization’s relationships with regulators. By identifying these risks, you can now actively track and mitigate them. The organization’s successes—or difficulties—in mitigating these risks can then add constructively to the analysis of the objective.

Pitfall #5: Focusing on Details at the Expense of the Bigger Picture For any number of reasons, performance analysis writers often delve into one aspect of an objective’s performance, overlooking the objective-level view. This “can’t see the forest for the trees” syndrome does not give decision makers the information they need. Imagine analyzing the economy’s health solely through the unemployment claims numbers. Besides the fact that a drop in claims doesn’t necessarily mean a 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 November–December 2009 (Reprint #B0911A).

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there are many other indicators that, in combination, provide a big picture, such as job growth, trade data, sales of existing homes, and consumer spending and confidence. Or imagine analyzing monthly sales at ABC division solely on the basis of the number of sales calls made. What about the impact of sales personnel changes (reductions or reassignments)? Changes in the sales commission structure? Customer service issues? Often performance analysis contains abundant detail about one particular performance driver and neglects the other drivers of an objective’s performance. In fact, it is common for performance analysis not to even indicate whether the objective is being achieved. For example, analysis that goes into depth about, say, the speed with which one R&D project is progressing, does not in any way answer the question, “Is the organization becoming more efficient at R&D in general?” Writers must step back from all the quantitative and qualitative data they have collected and approach objective-level performance analysis by first drafting a summary statement about the objective’s overall performance. For example, “In general, we have several indications that our R&D process continues to gain efficiency.” Or, using the color coding system as a point of reference, “Overall, skills development was yellow in July because of a convergence of challenges that hit in Q2.”

Executives should help create the right environment by showing they value truth and transparency (and don’t punish failure), by encouraging collaboration and information sharing, and by appointing the right people for the task. The data geeks who own the measure data play an important role in providing input to the analysis process, but they’re probably not the best choice for writing analysis because they are less likely to have the skills or knowledge necessary to cultivate sources and gather, integrate, and write up the necessary information with insight. Performance analysis that offers context, fact-based explanations, and sound hypotheses about more ambiguous performance results gives decision makers information and insight far beyond what measures alone can indicate. Solid written performance analysis enables leaders to test the hypothesis of the strategy they’ve worked so diligently to implement— and to adjust goals, targets, and expectations for the future with assurance. David McMillan is a member of Palladium Group’s Strategy practice. Currently he is advising one of Palladium’s Hall of Fame for Executing Strategy organizations in developing a nationwide healthcare strategy.

To learn more See D. McMillan, with B. Donlon, “How to Write Performance Analysis That Truly Enhances Decision Making,” BSR November–December 2008 (Reprint #B0811C).

Create a Basis for Action Avoiding these five pitfalls isn’t all that difficult. It starts with being conscious about the result you want in your performance reporting: a solid, substantive assessment of the big picture, and answers to the “why,” not just to the “what,” or, if answers are not easy to come by, some plausible hypotheses.

Continue the dialogue Continue the discussion with David McMillan on XPC at www.thepalladiumgroup.com/mcmillan Reprint #B1011D

Five prerequisites to good performance analysis If you can answer yes to the following questions, your organization is well equipped to avoid the five major pitfalls described in this article. 1. Are your performance analysis writers inquisitive? The most important question on their minds must be “Why?” Answering that question may sometimes be daunting, but that should never deter a good writer. Also, are they able to see the big picture? 2. Do the players involved in strategic performance analysis and decision making share strong cross-functional relationships? Since good performance analysis requires qualitative and anecdotal information, no one individual (objective owner or coordinator) can possibly have all the information needed to present a balanced, substantive picture. Having a network of strong relationships can make a big difference for the writer in everything from explaining risks common to all the objective’s drivers to offering plausible hypotheses for an unexpectedly sharp change in performance. 3. Do your writers understand the business? Do they know the objective’s performance drivers? Understanding, or at least being familiar with, the performance drivers of the objective gives the performance analysis writer a solid starting point for investigating the whys of performance. It also helps the writer validate—or challenge—the mental model of how the business works. 4. Is your organization a learning organization? Good performance analysis requires an environment in which mistakes can be admitted and learned from. If excuses always disguise the reasons for relative and absolute failure, performance analysis will miss the mark—and the organization will miss the opportunity to leverage those lessons. 5. Are expectations and standards high? Do your leaders expect performance analysis to reveal insights? If leaders accept anything less, they may as well just look at measures and not bother trying to manage objectives.

Sign up for the electronic version of BSR—available only to subscribers—at www.bsronline.org/ereg. Product #B10110