Balanced Scorecard Report the strategy execution source
march – april 2011 : vol 13 no 2
Building a Co-Creative Performance Management System By Venkat Ramaswamy, Hallman Fellow of Electronic Business and Professor of Marketing, Ross School of Business, University of Michigan; and Francis J. Gouillart, President, Experience Co-Creation Partnership Co-creation has captured great attention (and unleashed spectacular results) in many companies, governments, and other organizations around the world. Authors Ramaswamy and Gouillart explore the many dimensions of co-creation in their new book, The Power of Co-Creation: Build It With Them to Boost Growth, Productivity, and Profits (Free Press, 2010). Here, they advocate for a new generation of performance management systems based on the co-creation process. The co-creative performance management system uses the traditional structure of the Balanced Scorecard, but the process it uses to engage the various stakeholders is quite different and leads to dramatic results for many companies. So what is different about a co-creative performance management process? In a classic Balanced Scorecard performance management system, the company’s management team builds a strategy map, develops a set of metrics, identifies key initiatives it wants to sponsor, and defines a management process that it then cascades throughout the organization. Most Balanced Scorecard processes start at the top of the firm with a series of executive workshops, and the model developed by the executive team then gets passed on and fine-tuned at each level, from the proverbial boardroom to the proverbial boiler room. In a co-created performance management system, management sets only a few broad themes and top-level measures, stopping far short of developing a full strategy map and scorecard. Management then invites employees—or teams of employees—to build their own individual strategy maps and scorecards within the broad context that has been set. The other role of management is to set up processes and tools that allow individuals or teams to connect their scorecards with those of other people whose participation is required for them to succeed. In other words, management encourages individuals or teams to build their own connections within the organization. The result is a higher level of engagement by individuals in the goal-setting process, because the experience of developing your own scorecard is more exciting than having it defined for you by the company and makes you more invested in outcomes. From the company’s standpoint, it leads to the development of a richer set of strategies initiated at lower levels in the organization, with individuals making new connections continued on the following page
also in this issue: Four Steps for Integrating Strategic Risk Management into Your Strategy Review Process . . . . . . . . . . . . . . . . . . . . 7 Textbook Strategic Transformation Yields Triumphant Results for AKSA Acrylic Chemical . . . . . . . . . . . . . . . . . . . . . 11 How to Embed Innovation into Your Organizational Culture, Part 2: Adopting and Sustaining Ideas . . . . . . . . . . . 14
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that lead to new opportunities, a result of
In the co-creation approach, one of
partners. Conversely, a failure to grow
their freedom to self-select their growth
management’s new roles is to establish
would result in little or no value increase
partners.
engagement platforms—places and
for ERM partners, with most of the
The Trend Toward Co-Creation in Business
technology-enabled tools that allow
proceeds of such a sale accruing to the
employees to debate, discuss, and
private equity firm that took the financial
establish priorities, and to participate in
risk in the first place.
The management process we advocate in
the transformation process. This does
this article is a special application of the
not mean that senior management
larger management philosophy we call
should abdicate its responsibility in the
co-creation. In the traditional company-
performance management process. On
centered system, value is generated by
the contrary, senior managers play a
the company processes. In contrast,
critical role in setting high-level goals
co-creation generates value by engaging
and in defining how co-creation should
individuals in the development of new
work within the firm.
interactions, leading to new experiences for the firm. Our new book, The Power of
The Growth Challenge at Environmental Resources Management
Co-Creation, provides numerous examples
Consider the performance management
of co-creating new value for work pro-
system of Environmental Resources
cesses, organizational processes, strategy
Management (ERM), a successful global
formulation, ecosystem building, and
environmental consulting services firm
government policy work.
founded nearly 40 years ago. Headquar-
for them and new growth opportunities
In co-creative enterprises, individuals participate in designing value through their own experiences, a practice that leads to recasting many organizational processes, including performance management. In a traditional execution paradigm—where alignment is the primary consideration, and cost and efficiency often dominate the strategic agenda—management
tered in the UK, it has 137 offices in 39 countries, employs about 3,300 people, and generates $695 million in revenues. ERM helps large corporations and governments identify and manage their environmental and related risks, providing services ranging from traditional remediation for environmental managers in the chemical and oil and gas industries to sophisticated liability risk assessments
can develop a top-down performance
for senior executives involved in mergers
model and cascade it throughout the organization without paying particular attention to individuals’ experiences. In the new knowledge enterprise, however, individuals invariably know better than management what initiatives they can
and acquisitions. ERM’s 366 partners are scattered all over the world; 40 hold regional or practice-area leadership roles. ERM is also backed by a private equity firm recruited to finance its growth.
John Alexander, his newly appointed COO (now CEO), became concerned that, despite the clear imperative to grow, the 40 leadership partners might remain overly focused on short-term profit and pay insufficient attention to growth. Although they were initially puzzled that their colleagues did not, in their own self-interest, rally around the growth mandate, Regan and Alexander realized that it was hard for partners to visualize this future, somewhat abstract, value increase. Simply put, the firm was very successful with its existing model, and partners had largely been lulled into complacency by its steady, decades-long record of success.
The Challenge of Building New Connections The entire history of ERM is one of excellence at the unit (“office”) level. Each office is managed by a powerful head who controls resources and clients in his or her territory. (Formerly “operating companies,” or “OpCos,” local entities are now called “business units.”) Recruitment and talent development are done at the office level, essentially following an apprenticeship model in which junior members strive to emulate the office’s
undertake to improve the firm’s overall
The pressure for growth at ERM is
partners. Most offices have a unique
performance. This bottom-up way of
particularly strong because of its high-
character that reflects the personality of
building the firm’s performance model—
leverage model, which relies on having
the office head.
rolling up individual scorecards and
a private equity partner in its capital
connecting them in the context of the en-
structure. ERM’s economic model is predi-
terprise strategy—requires a co-creation
cated on the assumption of high growth
approach between individuals and with
in revenue and profit. If growth goals are
management. This co-creation approach
met, the firm’s value would increase sub-
is designed to trigger growth by allowing
stantially. ERM might then bring in a new
individuals to build new interactions
investor or become publicly listed, allow-
with each other—first internally and
ing the private equity partner to exit the
then with customers and other external
business at a significant value gain while
stakeholders.
also generating significant value for ERM
1 Regan later became chairman of ERM. He retired in 2010.
2
Late in 2005, then-CEO Pete Regan1 and
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s c o r e c a r d
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However, the strength of ERM’s officebased operational excellence had also become its Achilles’ heel. As is often the case in professional services firms, some of the OpCos had become isolated baronies that resisted any corporate mandate for growth or any suggestion that they share resources across offices. Office heads tended to protect their clients as well as their engineers, often
preventing either from accessing other capabilities of the firm. Partners in each office could succeed by being outstand-
strategic themes
ing at operations year after year, relying only on existing services and clients. Bonuses would remain high as long as
growth themes Operational excellence
Service excellence
Global key client management
New innovative services
1
2
3
4
financial
office heads did not hire or promote any new partners whose risky behavior could threaten the bonuses. As a result, the firm
customer
was not growing. Every office already used a performance
process
scorecard. Although officially called a Balanced Scorecard, ERM’s version focused mainly on financial and operational metrics (revenue and profit), with
People
learning and growth
foundation theme
a smattering of people measures (e.g., staff turnover, safety and health record). Regan and Alexander realized that any growth strategy they developed had to preserve the firm’s strength in opera-
FIGURE 1: FOUR THEMES OF THE ERM BALANCED SCORECARD, 2005–2008 Senior management added three growth themes to the existing theme of Operational Excellence: Service Excellence, Global Key Client Management, and New Innovative Services.
tional excellence. As a result, they made
lay out the growth agenda and plan how
been increasingly gaining large, global
Operational Excellence the first theme
shares would be allocated to individu-
clients such as ExxonMobil, BP, and
of their new strategy map. They also
als. The team decided to add three new
General Electric, companies that had
concluded that there was nothing wrong
growth themes to the established theme
large process or discrete manufacturing
with the existing scorecard as long as it
of operational excellence (and a support-
facilities. These companies expected
was viewed for what it was: an opera-
ing theme about people): Service Excel-
ERM to provide the same level of service
tional scorecard rather than a driver of
lence, Global Key Client Management, and
everywhere in the world, a challenge
performance. As Alexander said, “It is not
New Innovative Services (see Figure 1).
for a firm so utterly decentralized. To
an either-or situation between profit and growth. What we need is a mechanism that rewards operational excellence and
Service Excellence, the first of the three growth themes, was defined by the team
address this challenge, ERM initiated a key client director (KCD) program; global leaders were appointed to selected large
encourages growth at the same time.”
as “the ability to meet customer expecta-
Setting the Direction for Growth
torically had been less focused on client
“How about building something like a
satisfaction than on delivering technical
strategic scorecard?” Regan suggested.
commitments. As a result, clients often
“We could have two scorecards. The first
praised the quality of the work but occa-
would reward operational excellence in
sionally complained about a tardy study,
the form of an end-of-year cash bonus,
some offices’ lack of responsiveness to
The third growth theme, New Innovative
like what we have now. The second one
requests for additional information, or
Services, included migrating services
might grant new shares to partners,
the insufficient discussion of expecta-
from office to office. ERM’s key service
allowing them to receive some new tan-
tions at proposal development time,
directors (KSDs) act as practice leaders
gible rewards for working on growth. The
leading to misunderstandings later. Man-
or subject-matter experts in designing
value of those shares is potentially very
agement’s challenge was to motivate the
and delivering new services. They serve
high if we hit our growth targets. This
office heads to engage with a new service
as thought leaders in practices such
would capture partners’ attention and
excellence team and encourage them to
as Mergers and Acquisitions (advising
would help rebalance the agenda for the
adopt these service best practices within
on potential environmental liabilities
dual mandates of operational excellence
their offices.
within M&A deals) or Remediation and
and strategic growth.”
tions.” As an engineering firm, ERM his-
business development and delivery initiatives for those clients. The main challenge for KCDs was to orchestrate the collaboration of multiple local offices in selling and delivering services globally.
Consulting Management (RCM) (provid-
The second growth theme, Global Key
Late in 2005, Regan and Alexander assem-
Client Management, related to the global
bled senior management in Houston to
nature of ERM’s large clients. ERM had
m a r c h – a p r i l
accounts to coordinate and integrate all
ing a turnkey service, from investigating a problem to executing the engineering and construction of large remediation
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projects). The KSDs had to penetrate the inner sanctum of regional offices and
Key service directors 15% 2 people
Midwest partners 40%
motivate them to develop new service capabilities outside their existing comfort zones—an effort that typically required recruiting a new partner in each office to spearhead the new practice. Therein lay the rub: the new partner
Midwest OpCo Head
International OpCo heads 5%
could put at risk the steady flow of bonuses for the existing partners.
Other U.S. OpCo heads 15% 3 people
The management team put together a high-level blueprint of each growth Key client directors 5%
theme that connected strategic objectives via the capabilities they wanted to build, tied processes to each theme,
U.S. CEO 10% U.S. CFO and sales directors 10%
indicated the desired client outcomes, and represented the hoped-for financial results. “This is as far as we should go in laying out direction,” said Alexander. From that point, he wanted to turn over the scorecard-building process to the 40
FIGURE 2: MIDWEST OPCO HEAD, CO-CREATION PARTNERS FOR GROWTH SCORECARD Three co-creation partners of the Midwest OpCo head represented 70% of his strategic scorecard: Midwest partners, KSDs in the Midwest, and other U.S. OpCo heads with some project or client connection to the Midwest.
regional and practice leader partners and have them generate their personal
The growth themes originally devel-
focus on three major constituencies he
scorecards based on the blueprint that
oped in 2005 were fleshed out in the UK
decided to address (that together repre-
had been developed. All office heads had
meeting (albeit still in high-level terms).
sented 70% of his strategic scorecard).
to show how they would partner with
Now, each of the 40 service partners had
His first growth ambition, he reasoned,
the service excellence team, the KSDs,
to identify the specific individuals with
should be to engage his Midwest partner
and the KCDs to grow beyond the office’s
whom he or she would have to engage
colleagues differently than in the past,
traditional perimeter. The reverse also
to make these growth themes a reality.
coaxing them to make new hires and
needed to happen: the service excellence
Doing this required developing common
nudging them toward taking greater
team, the KSDs, and the KCDs had to
goals with colleagues across ERM’s com-
risk. He suggested that 40% of his share
engage with the office heads and agree
plex matrix of geographies, services, and
allocation should go toward accomplish-
with them on what they would accom-
global clientele. No longer a soft litany
ing this new goal. He suggested that
plish together.
of desirable behaviors, the performance
15% of his growth points be allocated to
management system became an exercise
new services within the Midwest, a goal
Co-Creating Individual Scorecards
in building new connections. The result
that required partnering with two specif-
The two ERM executives laid out a three-
was a strategic scorecard with teeth,
ic KSDs in the M&A and Remediation and
step engagement process involving three
potentially leading to the co-creation of
Consulting Management practices. He
global meetings over a one-year period. In
significant wealth for all parties.
proposed that another 15% of his shares
February 2006, they kicked off the personal scorecard process in the UK. They used their scheduled Rio de Janeiro global meeting to assess progress in May 2006. The process culminated with a meeting in Basking Ridge, N.J., in November 2006, at which each personal scorecard was finalized. This timetable allowed ERM to roll out the new performance management process in 2007, including the potential granting of new shares for each partner.
4
b a l a n c e d
s c o r e c a r d
The head of the Midwest OpCo, for example, identified seven constituencies with whom he would have to engage to drive the growth agenda of the firm (see Figure 2). The objectives tied to the seven constituencies were weighted according to their importance to the firm’s growth agenda. But their weighting also
go toward inter-OpCo collaboration, that is, signing up to sell and deliver services in partnership with three other U.S. office heads who either had prospects or projects in the Midwest or were interested in developing business in their own geographies with large Midwestheadquartered corporations.
reflected the weighting of each objective
Instead of the battles of previous years—
in the measurement of the individual’s
in which functional leaders complained
performance. For simplicity’s sake, let us
about lack of access to the other offices,
r e p o r t
Results
midwest partners (40%) 15 partners
In the chairman’s words, 2007 turned
Rally the group of Midwest partners around the need to broaden the talent pool in the Midwest through external hires (People theme)
out to be “a year of exceptional per-
Develop an effective way of setting priorities and targets for the Midwest partners, providing the right combination of leadership and individual freedom to operate (People theme)
formance.” ERM achieved its greatest growth ever, boosting earnings by 23% and revenues by 19%. Operating cash
key service directors (15%) 2 people
flow exceeded 100% of operating profit.
Partner effectively with Key Service Director A in developing the Air program in the Midwest (New Innovative Services theme)
Operating profit grew faster than net
Partner effectively with Key Service Director B in developing the RCM practice in the Midwest (New Innovative Services theme)
operational gearing raised our operating
other u.s. opco heads (15%) 3 people
These results were achieved as ERM was
Partner effectively with Southwest, Northeast, and West U.S. OpCo heads to assemble the right business development team on inter-OpCo opportunities (Service Excellence theme)
involved in reshaping regional manage-
revenues, and “the impact of this positive margin to above 13%.” 2
ment teams and focusing on areas of increasing client demand such as climate
Provide Southwest, Northeast, and West U.S. OpCo heads with the right Midwest resources when delivering on projects involving other OpCos (Service Excellence theme)
change, compliance assurance, and impact assessment and planning. Since ERM introduced the co-created BSC
FIGURE 3: STRATEGIC SCORECARD OBJECTIVES (EXCERPT) This slice of the Midwest OpCo head’s strategic scorecard indicates its link to specific stakeholders as well as to relevant strategic themes and objectives.
four years ago, the company’s performance has remained exemplary. In FY 2008, net revenues grew another 23%,
and office heads recriminated about the
sponsoring KSDs who could commit
with earnings before interest and tax
high cost, weak client skills, and lack of
resources to help him get there (the
(EBIT) up 26%. Even during the worldwide
accountability of functional heads—the
New Innovative Services theme). He set
recession, ERM managed to continue
new co-created performance system
common goals with three of his OpCo
growing in FY 2009, with revenues up 9%
invited all parties to agree on joint goals.
head colleagues in the U.S. on business
in constant currency, and EBIT up 6%.
Most important, each side stood to gain
development and project delivery service
as a result of doing what also happened
targets (the Service Excellence theme).
The Midwest business unit is also a very
In the last of the three workshops, all 40
heavy focus on growth. For example, the
senior partner scorecards were posted on
old Midwest OpCo had only one practice-
a wall, and each partner was invited to
oriented lead partner, whereas ERM was
examine colleagues’ scorecards and work
attempting to develop four of them on a
out any discrepancies. Reciprocity was a
global basis. Today, all four practices have
Once the various parties identified op-
key operating principle; if partner A had
a partner representing them in the Mid-
portunities for new connections between
partner B prominently featured on his
west. Previously, the unit had no partner
them, they went on to agree on the
strategic scorecard, then partner B should
focused on sales; now, it has a person in
specific performance targets that would
also have partner A on his own scorecard.
charge of leading the sales effort. Predict-
define success in that interaction and the
There were a few alignment
ably, revenues and profits have followed
ways each goal would tie to the growth
issues to be worked out at the last
the investments made.
themes that had been identified. For
minute, but by and large, partners had
example, the head of the Midwest office
co-created their own interlocking agen-
Co-Creating Strategy Itself
identified the specific ways he would
das long before the meeting, making
In the past two years, ERM has gone
foster growth with his Midwest partners
the final workshop more a celebration
beyond developing a co-creative per-
by encouraging them to hire new blood
of the new growth agenda than a con-
formance management system and has
and by setting more ambitious revenue
frontational working session. The ERM
started co-creating its very strategy.
growth targets for the office as a whole
leadership team had managed to recon-
Under the guidance of Scott Nadler, head
(the People theme). He set revenue
cile operational excellence and growth
of strategy development, the company
goals in the two specific practice-based
objectives through co-creation.
has unleashed a powerful process aimed
to be the right thing for the firm. Figure 3not only shows how each scorecard is linked to identified stakeholders, but also specifies the theme and objective of each type of stakeholder interaction.
programs in partnership with the two
different organization today, with a
at developing a bold new strategy. The
2 Peter Regan, “Chairman’s Report,” August 2008.
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new process involves co-creating not only from within (today, all 3,500 employees
themes
worldwide participate) but also with
One Company
outside stakeholders, such as customers,
Environmental Sustainability
Market Focus
regulators, and environmental experts. The strategy-building process also features an ambitious objective for the private equity-backed firm that ERM is: to ensure that the strategy drives the next equity deal rather than the converse. ERM has used a multitude of engagement
Make a step change in collaboration
Build strong practice communities
Develop people with the strategy
Focus on sectors we can lead
Use acquisitions as necessary
Build a stronger brand
platforms over the past two years, includ-
Embed sustainability into all we do
capabilities
ing the following: • An award-winning intranet called Minerva, which captures best practices for the firm and invites discussions about them
FIGURE 4: ERM’S NEW FIVE-YEAR STRATEGY: A STEP CHANGE IN AMBITION (JANUARY 2010) One Company, Market Focus, and Environmental Sustainability are ERM’s new strategic themes, supported by seven key capabilities.
• Blogs offering opportunities for employees to post free-form comments and featuring detailed, voluntary surveys • Face-to-face meetings (more than 200
matters of sustainability. Perhaps the entire organization is now mobilized around the sustainability theme.
have been held) led by the senior leadership team and involving more
Toward a Democratization of Performance Management
than 1,000 people • Global sessions and messages offering
Successful co-creative performance
regional CEOs the opportunity to cus-
management processes have both a
tomize engagement themes and content
bottom-up and a top-down component.
according to regional needs and goals
The bottom-up component of the process is critical to the transformation into a
• CEO “jams” (ask-the-CEO forums)
co-creative enterprise. In the top-down
• Constant reinforcement through all mechanisms that “we [management] hear you” through blogs, updates,
team develops a high-level view of the and guides the transformation process,
communiqués.
as the ERM example shows.
From a content standpoint, the new
The art of co-creation lies in simultane-
ERM strategy is focused on making environmental sustainability the heart of the firm’s new value proposition. Figure 4 describes the three key themes of the new strategy and their seven supporting capabilities. Compared with the original four themes from the 2005–2008 period, this reflects a dramatic rise in the firm’s level of ambition over the last two years. ERM’s new strategy map and scorecard represent a massive strategic transformation, raising the firm’s central value proposition from operational remedia-
ously identifying innovative ideas and the people willing to mobilize themselves around them. The faster an organization— whether for-profit or not-for-profit—can scale up its engagement process, the more likely it is to get a truly transformative result. Ideas matter, but it’s the self-selected groups of stakeholders
Continue the dialogue
providing the passion and energy to
Discuss co-creating the BSC—and the strategy—with the authors and ERM’s Scott Nadler on XPC: www.thepalladiumgroup.com/ bsr/cocreating.
pursue those ideas that ultimately makes the greatest difference in a performance management process.
tion to board room–level advice on all
b a l a n c e d
Francis Gouillart is founder and president of the Experience Co-Creation Partnership, a consulting firm that helps client companies build co-creative management and organizational capabilities. He has had a long-standing relationship with Balanced Scorecard creators David Norton and Robert Kaplan, and has participated in numerous Balanced Scorecard assignments. His previous book, Transforming the Organization (with James N. Kelly; McGrawHill), was published in 1996.
component, the senior management organization’s goals, and facilitates
responses, and other management
6
Venkat Ramaswamy is Hallman Fellow of Electronic Business and Professor of Marketing at the Ross School of Business, University of Michigan. He speaks, teaches, and consults globally about co-creation, mentoring many organizations in their quests to become co-creative enterprises. His previous book, The Future of Competition, (with C. K. Prahalad), laid the groundwork for co-creation thinking.
most impressive achievement is that the
s c o r e c a r d
Also visit www.powerofcocreation.com. Reprint #B1103A
r e p o r t
Four Steps for Integrating Strategic Risk Management into Your Strategy Review Process
Both of these types of risk events—and many others—are foreseeable. The failure to identify and adequately prepare for them is a failure of management as much as it is a shortcoming in process.
By Edward A. Barrows Jr., Strategy Coach; Lecturer, Babson and Boston colleges; and former VP, Palladium Group, Inc.
Four Steps for Incorporating Strategic Risk Management into Strategy Review Meetings
Managing strategic risks is an essential part of strategic planning and strategy execution. Yet to their peril, many executives pay little ongoing attention to those critical environmental factors that could derail their business. The author, a strategy formulation expert who introduced the concept of applying strategy maps to competitive analysis, outlines four steps organizations can take right away to integrate strategic risk management into their strategy review meetings—and protect themselves from the most critical threats to their business. In January 2010, PwC (then Price waterhouseCoopers) released its 13th annual Global CEO Survey. The report, which gauged sentiment from almost 1,200 CEOs, found that by far the most frequently cited lesson learned over the past few years was that companies need to be prepared to manage risk in good times and bad. “Effective risk management,” the report noted, “cannot be done on the fly.” Observed one survey respondent, “Risk management should be a long-term systematic strategy—not just implemented at the time of the crisis.” Yet despite this clear confirmation of what many senior managers already know, surprisingly few companies have taken steps to formally embed risk management in their strategic planning or strategy management processes. Failing to do so leaves companies exposed to a raft of risks, many of which could literally put them out of business. Fortunately, those organizations that have adopted the Balanced Scorecard management system and have implemented a process of regular strategy review meetings have a ready-made forum in which senior leaders can improve the management of many types of strategic risk.1
What exactly do we mean by “strategic risk management”? Palladium Group defines strategic risk management as being about identifying, evaluating, and managing the risk associated with your business strategy. It includes evaluating events and scenarios that can have not only a negative—but also a positive—impact on an organization’s performance. The idea is to make your leadership team more agile in responding to events if and when they occur.2
Organizations that have adopted the Balanced Scorecard and use it as the basis for reviewing their strategy can employ four basic steps that will improve the tactical management of strategic risk. These steps range from identifying the most critical strategic risks that the organization faces to assessing the impact of those risks on the strategy. From the outset, it’s important to keep in mind one basic tenet: strategic risk management is an active process. To improve risk management, leaders must commit to incorporating it into the basic management structures of the enterprise.
Step 1: Identify and Profile Critical Risks Strategic risks (or “issues,” as many people call them) emanate from many sources, both external and internal. Take, for instance, the now-defunct music distributor Handleman Company. Until 2010, the company distributed music, videos, books, and software
Despite this clear confirmation of what many senior managers already know, surprisingly few companies have taken steps to formally embed risk management in their strategic planning or strategy management processes. Risks jeopardizing an organization’s strategy can include a major shift in technology—such as the development of digital imaging (which has caused the near demise of the film processing industry) or a major disaster, such as the oil spill caused by the explosion of BP’s Deepwater Horizon drilling platform.
to mass merchants such as Wal-Mart throughout the United States, Canada, and Latin America. After years of successful growth, the company suffered a rapid, double-digit decline in sales as a result of dramatic changes in the music industry, the company’s main source of revenue. The technology shift from
1 That is, risks that are foreseeable based on gathering the best information available in a disciplined and rigorous system of vigilance. Obviously we are not referring to so-called Black Swan events, which, by definition, are unforeseeable. 2 Internal company document.
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analog to digitized music was a quintessential strategic risk that ultimately destroyed Handleman. The merger of two competitors or the retirement of key employees are examples of two other common strategic risks. Many managers already pay attention to the strategic risks their businesses face. They often know, for example, about key competitors that are considering a merger, or about a major cohort of employees in the company that will soon be retiring. Those managers who are not aware of strategic risks can look easily enough to trade associations, publications, and industry experts for information and insights on potentially threatening industry developments. But it is not enough to simply stay abreast of external or internal events. Nor is it sufficient merely to identify the risks themselves. Organizations must adopt a structured approach to profiling strategic risks. Top leaders should convene to brainstorm the known risks their organization faces. Ideally, every manager should have her own functional point of view, but those risks that have the potential to affect the entire business most significantly should be at the top of the list of critical risks. Those that would have the most impact on the strategy should be inventoried in a usable format such as the template shown in Figure 1. Formulating strategic risks in this way can help you begin to actively manage them. This format allows you to create a snapshot of each strategic risk. It indicates future trends and the potential impact of the risk on the organization and its strategy. Perhaps most important, it helps managers develop potential responses in advance, and not at the point of crisis, when, as the CEO cited in the PwC survey inferred, it is usually too late. In this way, organizations can develop clear-headed, wellthought-through, measured responses long before they are required.
strategic issue name: Shift to digitized music
Date: 1/31/05
current and future situation Critical Data/Information: The New York Times and the Wall Street Journal have begun publishing data from behavioral scientists that talk about the shift to portable digital media. Further, websites are emerging that provide for file sharing and downloading. A recent tradeshow showcased new technologies aimed at accelerating the shift to digitized music. Trends and Extrapolation: The expectation of decline in the music segment of our business could extend from low single-digit to significant double-digit decreases.
Information Sources: New York Times Wall Street Journal Nielsen Related Objectives and Initiatives: Impact the ability to “grow revenue and improve profitability.”
impact and response Potential Impact: The advent of MP3 players and alternative delivery means have provided a viable alternative to physical distribution of music. It is possible that a rapid decline in music distribution will occur over the coming years that will unfavorably impact our business and, if severe enough, could force us into bankruptcy.
Time to Impact: Starting now... will accelerate into 2006 and 2007.
Possible Responses: There are three responses identified at this time: 1) Continue to manage the business as is. 2) Begin the development of a digital distribution organization. 3) Identify a partner to help establish relationships with emerging developers/distributors.
Chosen Response: Continue to manage the business as is.
FIGURE 1: STRATEGIC RISK TEMPLATE—NOTIONAL EXAMPLE: HANDLEMAN Using an example from Handleman Company, this template provides a way to create a snapshot of each critical strategic risk, including, most importantly, a place to anticipate possible responses.
Identifying the risks is in itself a valuable exercise, because it forces organizations to become aware of and evaluate the most critical risks confronting the organization.
Step 2: Assign Risks to Key Individuals or Teams Accountability is essential in any type of management, whether strategy management, operational management, or risk management. It is particularly so in strategic risk management because risk can be so ubiquitous it is often assumed to be everyone’s job (code for “no one in particular’s job”). Capturing and profiling risks will be of little value if an organization then fails to establish a mechanism for preparing for risk events and ensuring that ultimately its preparations can indeed be carried out. Some risks fall within specific functional areas. Those associated with credit, for example, will likely be the responsibility of the CFO. Risks associated with procurement will probably be under
the purview of the VP of supply chain management. This approach is effective at a basic level in that it ensures there is a point of contact in the organization assigned to managing risk. But a more effective method is to assign risks to teams—in particular, to theme teams. Theme teams are groups of managers who are responsible for managing the major elements (strategic themes) of an organization’s strategy as identified in the architecture of the strategy map.3 Managing strategic risks via theme teams offers three benefits. First, it assigns people with a cross-functional view of the organization to each individual risk. Their collective experience and focus will naturally provide a more rigorous—and more comprehensive— view of the impact of the given risk on the business. Second, managers are intimately familiar with the initiatives and ancillary actions that are under way to drive progress toward achieving strategic objectives. These managers are in an ideal position to understand
3B SR has published numerous articles on theme teams, including “Managing by Strategic Themes,” by Robert S. Kaplan and Catherine (Kit) Jackson (BSR September–October 2007, Reprint #B0709A). For a more complete list, consult the BSR Index, available free via download at www.strategyexecutions.com. 8
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how strategic risks could undermine these initiatives. Finally, because they are simultaneously managing risks and key actions, they are in the best possible position to develop effective responses. The individuals and teams that your organization deems accountable for strategic risks are effectively the “keepers” of the risk profiles. They are responsible for inventorying strategic risks, writing up and maintaining the profiles, and providing any needed follow-up information to support the strategy review process and review meetings.
Step 3: Update Strategic Risk Profiles Incorporating the strategic risk review into the fiber of the organization’s management review processes and structures demands that you have the discipline to regularly update the risk profiles. The nature of an organization’s strategic risks can change virtually every day, sometimes imperceptibly. Thus, it is critical to your active strategic risk management process that you include a step aimed at ensuring that risk templates— the inventory of risks and their potential impacts—are kept up to date. Updating strategic risk profiles entails effectively the same process as that used to create the profile. The individual or teams responsible for monitoring the particular risk need to access the necessary data sources to identify changes, assess those changes, and add them to the body of the strategic risk template. One Balanced Scorecard Hall of Fame organization—a technology goods manufacturer—makes it a practice to assess strategic issues every month. Managers were so concerned about the potential gravity of risks that the organization hired a former CIA intelligence analyst to scan the environment and compile monthly intelligence summaries. Then, each month, the analyst briefs the top team in person in a half-day, closed-door session in which leaders assess the
time
item
detail
8:00 am
Action Item Review
Review status of prior actions
8:30 am
Meeting Overview
Review strategy map Highlight key issues Review initiatives Review measures
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Key Strategic Risks Review
Status update of key strategic risks Review of recent developments Changes in trends and extrapolations Impact effects and response considerations
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Theme Assessments
Operational Excellence, Customer Intimacy, Product Innovation
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Theme Assessments: Continued
Operational Excellence, Customer Intimacy, Product Innovation
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Meeting Review
Communication and feedback
3:00 pm
Action Log and Wrap-Up
Upcoming actions
Adapted from The Execution Premium, p. 243.
FIGURE 2: STRATEGY REVIEW MEETING AGENDA WITH STRATEGIC RISKS ADDED Add a time slot to your strategy review meeting agenda that’s dedicated to reviewing key strategic risks based on the updated strategic risk templates.
issues and the potential risk impacts. Organizations needn’t go as far as hiring former CIA operatives to beef up their issues analysis. However, it is worth considering all the ways and means possible for making it routine to obtain accurate, timely updates of your strategic risk management profiles. Assign the updating step as a key responsibility for every manager and theme team member with responsibility for a given strategic risk.
Step 4: Assess the Impact on Strategy The last, and perhaps most critical, step in the process is assessing the impact of each strategic risk on your strategy. Otherwise, steps 1 to 3 are moot efforts. Before every strategy review meeting, each theme team should convene not only to update strategic initiatives, scrutinize measure data, and evaluate progress, but also to spend time assessing the impact of each strategic risk on the theme. With the templates updated (in step 3), the work of the team at this point is to assess what could happen to the strategy and determine
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the actions, if any, that can be taken to mitigate the risk. This information can now be fed to the strategy review team members for discussion in their strategy review meetings. How might this process work? Let’s consider this using an example drawn from the 2008 book The Execution Premium: Linking Strategy to Operations for Competitive Advantage. In it, Balanced Scorecard creators Robert Kaplan and David Norton profiled HSBC Rail, a division of the HSBC Group that leases and maintains railway cars for rail systems in the UK and other nations. Every month the group’s strategy council— which consists of its top leaders—meets to review performance on strategic themes. Throughout the two-and-ahalf-hour meetings, the CEO leads the discussion on performance, interjecting questions related to risks associated with strategic initiatives. For a more robust analysis, the strategy council— or any other organization’s strategy council, for that matter—might expand the discussion of risks beyond those affecting strategic initiatives into the major strategic risks that could affect
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the overall business. For example, the team could make it a point to discuss the impact of a major labor strike on business continuity or to estimate the long-term leasing effects from reductions in ridership associated with terrorist activities—both of which are plausible risks for the company. Given the gravity of these and other issues, it would be useful to expand the meeting agenda to incorporate a review of other key strategic risks in addition to those affecting initiatives. An updated agenda for such a meeting is shown in Figure 2 (previous page). Although no set amount of time must be added to the agenda, the schedule should be expanded to ensure that enough time is allocated to carefully consider changes in critical risks. Here’s another example, and one that shows how a company effectively monitored a critical strategic risk over time. Once a year, the CEO of a New England–based security software company
Still, nothing remains a closed case forever. Management in this example should not necessarily permanently remove the risk from its list of critical strategic risks; it might only move it down on the list. This is another reason it’s smart to assign the monitoring of strategic risks to individuals and theme teams: they’re close to industry developments and would be the first to know about any big technological leaps forward.
Let the Strategy Management Structures Already in Place Do Double Duty Strategic risk management can at times seem overwhelming to business leaders. The term casts a wide net; anything can
It’s smart to assign the monitoring of strategic risks to individuals and theme teams: they’re close to industry developments and would be the first to know about any big technological leaps forward. has his leaders study key issues and risks the business faces. The study gives cross-functional groups of managers— effectively theme teams—a view of the ways major changes occurring in the business landscape will affect the company’s business. One of the key risks they identified was the advent of optical scanning technology. The CEO saw this as a potential risk to the company’s core technology product. The teams regularly monitored developments in this technology over five years. After each risk assessment, the CEO and the management team decided that there was no immediate threat because the technology was still nascent. No action was ever required other than maintaining a watchful eye on developments. But management knew that the
Ed Barrows Jr. helps senior management teams improve their strategic planning, strategic performance management systems, and strategic decision making. He has 20 years’ experience in guiding clients of all sizes and has done so as a professional with Deloitte, GE Capital, PwC, and, most recently, Palladium Group. A retired Marine Corps lieutenant colonel, and a CPA and MBA, he is pursuing a doctorate at Cranfield University.
situation could easily change in the near future. In this case, the outcome “no action required” was appropriate, because it was made only after detailed profiling and assessment over an appropriate period.
be included in it. To sharpen the focus—and ensure your process is effective— go back to the strategy map and its strategic themes and objectives. A sound strategic risk management process should assess those forces that, if left unchecked and unaddressed, could undermine any of these components of your organization’s strategy— and, in fact, the strategy itself. By modifying the strategy review meeting agenda to incorporate the four steps highlighted here, managers can make significant improvements not only in their strategic risk management but also to their overall strategy management.
To learn more See our special issue on risk management, BSR November–December 2009 (Product #B09110). In it you’ll find the following articles, which are also available individually: “Risk Management and the Strategy Execution System,” by Robert S. Kaplan (Reprint #B0911A). “What Bad Things Could Happen? Risk Management at Jet Propulsion Laboratory,” by Gentry Lee, Chief Engineer, Planetary Flight Systems Directorate, JPL (Reprint #B0911B). “Leadership and Strategic Risk Management: An SFO Approach,” based on a presentation by Jack Klinck, EVP and Global Head of State Street Alternative Investment Solutions (Reprint #B0911C). “Integrating Risk Management into the Strategic Planning Process at Canadian Blood Services (a one-page graphical article), by Dodge Bingham, Palladium Group, Inc. (Reprint #B0911D). “Managing Operational Risk at Mars, Incorporated,” adapted from a presentation by Larry Warner, Staff Officer of Risk Management, Mars, Incorporated (Reprint #B0911E). For more on managing risk within the strategy management process, see: “Strategic Risk Management: The New Core Competency” by Mark L. Frigo, PhD, Director, The Center for Strategy, Execution, and Valuation, Kellstadt Graduate School of Business, DePaul University, BSR January–February 2009 (Reprint #B0901B). “Aligning Enterprise Risk Management with Strategy Through the BSC: The Bank of TokyoMitsubishi Approach,” by Takehiko Nagumo, Senior Manager, Corporate Planning Office, Bank of Tokyo-Mitsubishi (Tokyo), BSR September–October 2005 (Reprint #B0509D).
Continue the dialogue Join senior risk management professionals in their discussion about their risk management goals and approaches at www.thepalladiumgroup.com/bsr/riskreporting. Reprint #B1103B
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CASE
Textbook Strategic Transformation Yields Triumphant Results for AKSA Acrylic Chemical
mers, a strategy that would enable the company to make more efficient use of its existing infrastructure while also increasing the percentage of value-added products in its offerings portfolio.
By Lauren Keller Johnson, Contributing Writer
Pulling off the new strategy required major changes. For instance, AKSA would need to start competing on value and not cost, sharpen its market and customer focus, step up growth in global markets, and simplify its organizational structure. The company adopted the Balanced Scorecard to execute these changes. In 2006, a team consisting of AKSA’s general manager, eight directors, 14 managers, and members of its strategic planning office created the company’s first strategy map (which had 16 objectives) and scorecard (characterized by SMART [specific, measurable, achievable, related, and time-bound] targets).
A convergence of punishing forces, from cheaper competition to global warming, prompted senior executives at Turkey’s AKSA Acrylic Chemical (the world’s leading acrylic fiber producer) to make a bold shift in strategy. Operational excellence was no longer enough. In its BSC-based transformation, the company instituted sweeping changes, including a rigorous approach to strategy formulation, strategy-linked process improvement, and product co-creation with customers—all based on a business model that values human capital as AKSA’s foremost asset. The company’s remarkable efforts have yielded remarkable results, winning it entry in 2010 into the Palladium Balanced Scorecard Hall of Fame. The carpets on your floors, the upholstered sofa in your living room, your favorite knitwear, those cozy socks— these and other items you rely on every day may well have had their origin at AKSA Acrylic Chemical, Inc. Based in Istanbul, the 42-year-old company is the world’s largest producer of acrylic fiber used in textile manufacturing. AKSA is one of four firms within parent company AKKÖK’s Chemistry group, and brings in 45% of AKKÖK’s revenues. (AKKÖK’s other groups include Energy, Textile, and Real Estate.) In 2010, the company recorded about $850 million in revenue. Its global market share stood at 12.5%; its Turkish share, at 70%. AKSA serves customers in more than 50 countries on five continents. Listed on the Istanbul Stock Exchange, the company employs 820 people, most of them factory workers.
Shifting Strategic Focus—from Operational Excellence to Product Innovation AKSA had long focused its strategic efforts on operational excellence, steadily applying process improvement techniques including TQM, Six Sigma, and the European Foundation for
Quality Model (EFQM). But in the 1990s, executives realized that the company’s fortunes were tied too closely to oil prices: the price of acrylonitrile, the raw material accounting for most of the costs of AKSA’s acrylic fiber product, rises and falls with oil prices, which are notoriously volatile. That makes AKSA vulnerable to oil industry trends and acrylonitrile producers’ decisions. But AKSA faced additional challenges. In January 2005, the World Trade Organization’s member countries agreed to eliminate quotas to reflect free trade principles. As a result, acrylic fiber made by Chinese competitors began flooding AKSA’s markets. And because of global warming, customers in the apparel industry wanted thinner knitwear made with alternative materials such as cotton. As the 1990s dawned, consumption of AKSA’s acrylic fiber shrank in developed countries while increasing in emerging markets. To reduce AKSA’s vulnerability to such forces, executives decided in 2005 to radically shift the company’s strategy from operational excellence to R&D-driven innovation and product leadership. The goal: accelerate development of special products such as carbon fiber and poly-
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On the corporate strategy map, each of the four perspectives had one or two strategic themes; for example, Growth and Profitability for the financial perspective; Sustainability through Product Leadership and Innovation (captured in the slogan “You imagine, we produce!”) for the customer perspective; Value CoCreation, Production, and Flexibility and Resilience for the process perspective; and Corporate Reputation and Intellectual Capital for the learning and growth perspective. The following year, the map and scorecard were cascaded to the business units (Acrylic Fiber, Outdoor & Special Fiber, Carbon Fiber, and Energy) and support units (including HR and IT). Reflecting the new strategy, the company also created a scorecard specifically for its R&D and Innovation function. Since rolling out its BSC program, AKSA has reinforced the effort by injecting uncommon discipline and rigor into management of its new strategy. For example, the company uses well-established methods for analyzing industry trends and formulating strategy. These
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Vision/mission and strategy
Strategy map
Operational measures and targets
Budget
Goal-setting process Individual objectives Measures and targets
Performance plan
Intermediate review
Cash compensation
Performance review Evaluation and final rating
FIGURE 1: INTEGRATED INDIVIDUAL PERFORMANCE PLAN This schematic shows how AKSA integrates the individual performance plan for each employee with key elements of the strategy, from the top down and the bottom up.
Final evolution Development plan
Non-cash compensation
Personal development plan
Value contract
Improved strategy-oriented individual performance
include Michael Porter’s Five Forces model; SWOT (strengths, weaknesses, opportunities, and threats) analyses; and PESTEL (political, economic, social, technological, environmental, legal) analyses. One early SWOT analysis revealed several key weaknesses in AKSA’s R&D function—including insufficient cooperation with universities, laboratories, and public institutions that were conducting R&D activities that could help AKSA improve its product offerings. The company addressed these weaknesses during the following two years, turning R&D weakness into strength in the form of enhanced R&D capability through cooperation with 10 leading Turkish universities.
Co-Creating Value with Customers The company also established a CoCreation Center in 2008, through which it collaborates with customers as well as sister companies in AKKÖK to develop product concepts. The center’s ultimate goal is to expand its customer base through the development of customerled and customer-tailored new products. Key tactics include sharing AKSA’s strategies with customers and creating new products in partnership with them, with an eye toward enhancing customer satisfaction. The center also strives to raise customers’ awareness of AKSA’s products and
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ensures that products meet customers’ expectations regarding matters such as quality standards and compliance with environmental requirements. In addition, the center draws on analyses of competitors’ products to improve AKSA’s existing offerings as well as to identify new products that customers might need. Through weekly teleconferences and visits with key customers, product development directors gain additional insight into domestic and international markets, generate ideas for products that could be developed for its customers’ customers, and involve clients early in the R&D process. To further support co-creation of value with customers, AKSA provides laboratory services for customers to use in conducting fiber analyses, and it regularly updates the equipment in the lab.
Prioritizing Leadership and Human Capital AKSA views leadership and human capital as critical means for executing its new strategy. (Indeed, human capital makes up 25% of AKSA’s Intellectual Capital Model, which also includes process capital, customer capital, and relationship capital.) The HR function is considered a true strategic partner and has its own strategy map. Each employee has an individual performance plan (see Figure 1), and the company
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has defined three leadership levels—all of which have individual performance linked to strategic objectives: •S trategic—including the board of directors; AKSA’s and its parent company’s executive committees; and committees responsible for general strategy, Total Quality Management, marketing strategies, risk management, legal issues, health and safety, customer complaints, and strategic planning •M anagerial—including committees focused on process management, training, Six Sigma project execution, and procurement •O perational—including committees responsible for inventory management, environment coordination, scrap inventory, quality management, design, and new technology installation and start-up Leaders are assigned to sponsor strategic initiatives, which have included increasing installed capacity, researching alternative energy production methods, reducing environmental waste, and developing new chemical formulas—to name only a few examples. AKSA evaluates performance through the lens of contribution to the strategy, including tracking return on investments in initiatives through a web-accessible
project database. Assessments include 360-degree feedback as well as benchmarking of leadership and competency development practices that have been implemented by exceptional companies that have been in other industries such as healthcare, transportation, and mining. Leaders also play a key role in motivating and aligning employees through a multichannel communication effort designed to regularly convey AKSA’s strategic priorities, mission, values, targets, and strategic performance to teams. Communications are tailored to different managerial and employee audiences. Communication channels include daily internal TV programs and access to scorecards through information kiosks; monthly department meetings and celebrations of successes; quarterly performance reports and strategy reviews; and annual publications of corporate objectives. The company backs its leadership approach by identifying strategic job families, investing most heavily in development (through training) or acquisition (through recruiting) of competencies directly affecting innovation. These competencies include gathering information, creativity, conceptual thinking, self-confidence, and team training. AKSA has also taken steps to craft a culture of innovation; for instance, it provides awards as well as individual and team incentives for inventions and patents.
Linking Process Improvement to Strategy AKSA has a five-year rolling strategic plan that incorporates budget management with strategy management. The plan enables the company to link process improvement to strategy. Strategic initiatives are grouped into two categories defined by level of impact on business processes: (1) “breakthrough, gap-closing programs” designed to realize strategic objectives and improve numerous processes (such as TQM and Six Sigma initiatives); and (2) “incremen-
tal improvement projects” intended to affect only one or a few processes, such as installation of new technology and enhancement of on-the-job safety. Breakthrough, gap-closing programs are prioritized based on four criteria: potential for meeting performance targets associated with a strategic objective, possible return on investment, resources required, and feasibility. All process improvement initiatives are allocated to strategic, managerial, and operational leaders through input from process owners. Each initiative is then aligned to one or more corporate-level strategic objective.
An Impressive Execution Premium Says board member and general manager Mustafa Yilmaz, “One of the most important steps in strategic management is to ensure the deployment of strategy through the organization and to secure its spreading and ownership throughout all management layers.” AKSA’s results strongly suggest that the company has mastered this step. In three years—and amid a global economic downturn when some competitors closed up shop—AKSA saw dramatic improvements in its innovation prowess, sales, profits, returns on investment and equity, market share, customer satisfaction, and employee loyalty.
market share jumped from 8.25% to 12.5% and the company’s customer loyalty index went from 87.5 to 90.5 (out of 100). Meanwhile, process efficiency improved, demonstrated by such achievements as a decrease in raw materials wastage from 103 tons to 72 tons. And reflecting AKSA’s careful attention to human capital, employee turnover decreased 50%. AKSA’s achievements have captured the attention of parent company AKKÖK, which has approved the development of corporate and functional scorecards for other subsidiaries including AKPA (which is in charge of overseas marketing operations), AKSA Egypt (which handles production operations in that nation), and AKTOPS (which is responsible for production of top/staple fiber, or fiber that can be twisted into yarn). AKSA monitors these subsidiaries’ performance on strategic objectives and uses the findings to inform management decisions.
To learn more Many high-performing organizations have used the BSC as a central framework for undertaking a strategic transformation. For more about manufacturers that have done so, see “From Operational Excellence to Execution Premium at Three 2008 Hall of Fame Organizations,” BSR September–October 2009 (Reprint #B0909B); and “Surmounting the Competitive Squeeze: Thai Manufacturer Adapts and Thrives with the BSC,” BSR January–February 2006 (Reprint #B0601B).
As one example of results gained from the company’s attention to product innovation, AKSA can now provide pigmented products in batches of less than 500 kilograms, a capability that lowers stock costs for customers. None of its competitors has been able to do the same. Innovation has also led to improvement in the water resistance of AKSA’s products. On the financial results front, sales increased from $531 million to $685 million; net profit from $10.2 million to $57 million; and EBITDA from $47.5 million to $63.6 million from 2005 to 2008. In that same time frame, global
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BSR has also published numerous articles on aligning employees to the strategy. You’ll find a complete listing in the BSR Index, available free via download at www.index2010.hbr.org. AKSA Acrylic Chemical, a 2010 Palladium Balanced Scorecard Hall of Fame winner, is profiled in the forthcoming Strategy Execution Champions: The Palladium Balanced Scorecard Hall of Fame Report 2011, due out in June (visit www.strategyexecutions.com). Reprint #B1103C
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tools & techniques
How to Embed Innovation into Your Organizational Culture, Part 2: Adopting and Sustaining Ideas
verts who aren’t comfortable speaking up in a live forum but who would participate in online discussions.
By Cassandra Frangos, Ed.D, Director, Cisco Center for Collaborative Leadership
Hold lunch meetings as a way to get people talking about the challenges they face with their innovation projects. Some meetings could feature a technical presentation (that could be videotaped). Others might be freewheeling discussions in which senior-level project managers invite participants to talk about their project challenges and brainstorm solutions.
The most innovative companies manage innovation holistically across the entire enterprise. In Part 1 of this article (BSR January– February), Cassandra Frangos, former human capital practice leader at Palladium Group, discussed key practices used by successful innovating companies to move innovation from idea to reality. Here, she offers successful practices used in the adoption phase of the innovation process, practices you can embed as objectives in your innovation scorecard to help ensure that ideas are successfully adopted—and that your innovation process is a sustained effort. Companies that successfully innovate apply specific practices related to culture, talent management, and organizational structure—key areas within the foundational learning and growth perspective of the Balanced Scorecard that also link to the customer and process perspectives. These practices are managed across the three fundamental phases of the innovation process: generating ideas (phase 1), moving ideas to reality (phase 2), and adopting ideas by commercializing them or enabling internal or external customers to apply them (phase 3). (See Figure 1.) Once an idea has won the sponsorship and funding it needs to become a new product, service, or business process, it is ready to be commercialized (launched as a new product, service, or process) or passed on to an internal or external customer for the customer’s use. In this phase, adoption, just as in phases 1 and 2, an organization’s cultural practices, talent management practices, and structure strongly determine success. These best practices can also help sustain innovation as a process.
Culture In the realm of organizational culture, knowledge sharing plays a key role in influencing whether the company adopts
a new product, service, or business process. By sharing knowledge about an innovation, people deepen their understanding of why it makes sense and what it’s meant to accomplish, as well as how they can tackle problems that may arise during adoption. Knowledge sharing can be fostered through a variety of activities and technologies; consider embedding these objectives in your innovation strategy map. Objective: Link people through social networks and other Web 2.0 tools Increasingly, companies are using social networks to share knowledge in innovating and promoting idea adoption. Some companies use internal tools such as wikis to record information in a collaborative fashion; others use mailing lists and intranet forums. New Zealand’s Kiwibank, a 2009 Palladium Balanced Scorecard Hall of Fame winner, uses XPC Inside, its own private network within Palladium’s online Execution Premium Community (XPC), for discussing and overcoming obstacles in strategy execution. Such knowledge-sharing technologies bring people together in person and later in a virtual environment. They also help foster interaction among people of different personality types—for example, intro-
Objective: Establish informal sharing sessions
Talent Management Practices Talent management practices are as important in sustaining the overall innovation process as they are in adopting the ideas themselves. To ensure that the commitment to innovation is sustained, organizations need to groom future innovators. Only then will innovations gain long-term traction and generate new ideas that could ultimately create fresh forms of business value. But probably only 5% to 10% of your high-potential leaders have the skills and attributes required to become innovators,1 and grooming future innovators is no small feat. Finding such talent is hard enough, but the bigger problem is what to do with it. Consider these practices. Objective: Give potential innovators the right assignments Identify individuals who seem to have potential, and give them assignments that strengthen their innovation skills. Starwood, the hospitality company, identified a midlevel product manager as a potential innovator and then assigned him to lead a team to develop new inroom entertainment services (a project outside of his full-time responsibilities). He’d had little leadership experience, but because of a successful track record within his group, and because his division head saw his potential, he was given a chance.2
1 D. K. Rigby, K. Gruver, and J. Allen, “Innovation in Turbulent Times,” Harvard Business Review, June 2009. 2 J. Cohn, J. Katzenbach, and G. Vlak, “Finding and Grooming Breakthrough Innovators,” Harvard Business Review, December 2008.
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sources
Balanced Scorecard Report A joint publication of Palladium Group, Inc., and Harvard Business Publishing Editorial Advisers Robert S. Kaplan Professor, Harvard Business School
organizational theme/focus
learning & growth
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 © 2011 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 strategy execution consulting. Our strategy, performance management, and business intelligence solutions deliver breakthrough performance for our clients. 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.
innovation any new or novel idea that adds business value External/internal sources of ideas and innovation
New product development
Internal change and transformation
Culture
Talent
Structure
Link people through social networks
Assign potential innovators appropriately
Create stand-alone growth units
Take promising innovators out of the organizational chart
Manage stand-alone units via cross-unit links
Establish informal sharing sessions
David P. Norton Director and Founder, Palladium Group, Inc.
Increased value for customers
Customer co-creation
customer
growth
value
Expose innovators to front line Provide mentoring Develop soft skills
FIGURE 1: SECTION OF AN INNOVATION STRATEGY MAP (WITH SAMPLE OBJECTIVES) These sample objectives in the learning and growth perspective reflect best practices for phase 3 of the innovation process: adopting and sustaining ideas. How can you be confident that managers have the skills required to succeed in a new assignment? Examine the problems they’ve wrestled with in the past. Their earlier success is less important than the experience they gained dealing with the problem and developing the skills and intuition to meet future challenges successfully. Indeed, one problem with predicting future success from past success is that managers can succeed for reasons not of their own making, and we often learn far more from our failures than our successes. Failure and bouncing back from failure are critical lessons. As long as they are willing and able to learn by doing things wrong and recovering from mistakes, managers can acquire an instinct for better navigating through the minefield the next time around.3
At financial services company J.P. Morgan Chase & Co., senior managers ensure that rising innovators land in the right hub positions. CEO Jamie Dimon, along with the head of HR, spearheaded what the company calls “ascension plans” to chart a handful of possible career paths for future innovators in concert with the innovators themselves. “It is foolish,” Dimon asserts, “to think there’s only one possible, ideal career path for our high-potential managers [who are] most likely to one day orchestrate largescale innovations.” If the right position does not exist for one of the firm’s innovators, Dimon or another executive team member creates it. He considers developing breakthrough innovators to be one of his key responsibilities.5
Objective: Take promising innovators out of the formal organizational chart
Objective: Give future innovators opportunities to gain precious commercialization insights
Take potential innovators out of their line positions, and replant them in the middle of your company’s organizational chart, where there are no formal boxes or job titles. There, they can become “innovation hubs,” with easy access to influencers across the organization, more autonomy, and broader (albeit more ambiguous) job responsibilities. Positioning them in this way allows them to better see how existing products, ideas, people, or even entire businesses can be recombined in new, value-adding ways.4
Provide would-be innovators oppor tunities to learn about the end-user and sales considerations critical to achieving commercial success. A global industrial products company in the UK insists that its rising innovators do a stint in the sales department, where they can learn key elements of successful commercialization: what makes customers tick and how to develop the salesmanship vital to spearheading large-scale innovation efforts down the
3C . R. Christensen and M. E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (HBS Press, 2003). 4C ohn, Katzenbach, and Vlak, ibid. 5 Ibid.
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road. They work alongside experienced salespeople developing pitches, analyzing customer needs, going on client calls, and even helping to close sales.6 Objective: Provide mentoring Pair future innovators with carefully selected mentors who can continually educate them about the people they’ll likely encounter and the interactions they’re likely to have while advancing the adoption of innovative ideas. Assigning mentors enables protégés to test new ideas and assumptions with a seasoned expert before introducing them to others in the company. It also helps them understand the underlying agendas of the senior executives who must be won over. Mentors can share information that might be relevant to a particular course of action (for example, someone else may have already tried it and failed) and can test drive and sharpen protégés’ arguments to help build their confidence. There’s mutual advantage to internal mentoring. Mentors gain insights on how innovators think and what motivates them—valuable information for helping foster and sustain an innovative environment. Objective: Develop potential innovators’ soft skills The companies I studied invest heavily in developing future innovators’ soft skills—particularly communication skills. Innovators are usually technical or have deep expertise in their field, and their communication skills may not be up to par. One business leader created an internal conference for innovators to present their ideas and projects, with a series of 10- to 15-minute talks, each followed by 10 minutes of questions. The forum gave participants a chance to learn how to speak in front of people and also gave others an opportunity to meet these up-and-comers and recognize their talent.
Organizational Structure When ideas are adopted, they move from a team setting to a home in the formal organizational structure. There, people must spend time and money nurturing these ideas so that they deliver, and continue to deliver, their promised business value. To create homes for your company’s innovations, consider these approaches. Objective: Create stand-alone growth units Establish stand-alone units charged with creating new growth businesses. Examples of this approach include Cisco Systems’ Emerging Technology Group, Procter & Gamble’s FutureWorks division, and IBM’s Emerging Business Opportunities program. Of course, setting up these units requires extensive resource commitments and careful planning. Procter & Gamble’s FutureWorks division is a fully staffed team dedicated to all three phases of the innovation process: identifying, developing, and seeding new growth platforms for the corporation. As with business units, stand-alone innovation units are profit centers. They may be defined by brands, product lines, customer segments, geographic regions, or other criteria. Their work includes choosing which customers to serve, which products and services to offer, which competitors to challenge, and which capabilities to draw on. Their leaders must balance creative aspirations with commercial realities.7 Objective: Manage stand-alone units through cross-unit links Some organizations balance innovation with business as usual by becoming “ambidextrous.” 8 They separate their new, exploratory units from their traditional, profit-oriented ones, allowing each innovation unit to adopt its own processes, structures, and culture. At
6 Ibid.
the same time, they maintain tight links across these units at the senior executive level, managing organizational separation through a tightly integrated senior team. This approach may provide a way for companies to pioneer radical or disruptive innovations while also pursuing incremental gains. Indeed, one study showed that more than 90% of the ambidextrous organizations researched achieved their goals, compared with much lower percentages among organizations that used other types of structures (such as crossfunctional teams).9
Given the difficult challenges facing organizations today, no company can afford to take an ad hoc approach to innovation. Innovation should follow a disciplined, three-phase approach: generating ideas, moving them toward reality, and adopting them for the long term. When bolstered with powerful practices related to culture, talent management, and structure, this approach will help your organization continually advance and realize promising ideas, even through the most challenging stages. More important, it will foster a culture that ensures good ideas are in steady supply. Cassandra Frangos is a director in Cisco’s Center for Collaborative Leadership and leads Cisco’s Executive Action Learning Forum, a premier leadership development and business innovation program for high-potential executives.
To learn more This article and Part 1 (which appeared in the January–February 2011 BSR) are derived from Frangos’s white paper, “From Brilliant Idea to Measurable Business Value: How to Sustain Innovation in Your Organization.” To obtain a copy, please email her at
[email protected].
Continue the dialogue Discuss innovation measures and culture with your peers on XPC at www.thepalladiumgroup. com/bsr/frangosInnovation.
7 Rigby, Gruver, and Allen, ibid. 8C . A. O’Reilly III and M. L. Tushman, “The Ambidextrous Organization,” Harvard Business Review, April 2004.
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9 Ibid.
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