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eagleflyfree THE EXECUTION PREMIUM LINKING STRATEGY TO OPERATIONS FOR COMPETITIVE ADVANTAGE Robert S. Kaplan David P. Norton HARVARD 80STON, BUSINESS PRESS MASSACHUSETTS eagleflyfree Copyright 2008 Harvard Business School Publishing Corporation All rights reserved. Printed in the United States of America 12 II 10 09 08 5 4 3 2 1 No part of this publication may be reproduced, retrieval system, or transmitted, photocopying, recording, or otherwise), lisher. Requests for permission or mailed to Permissions, Boston, Massachusetts stored in or introduced into a in any form, or by any means (electronic, mechanical, without the prior permission of the pub- should be directed to permissions@hbsp.harvard.edu, Harvard Business School Publishing, 60 Harvard Way, 02163. Library of Congress Cataloging-in-Publication Data Kaplan, Robert S. The execution premium: advantage/Robert p. linking strategy to operations S. Kaplan, for competitive David P. Norton. em. Includes bibliographical references and index. ISBN-l3: 978-1-4221-2116-0 1. Strategic planning. 1. Norton, 2. Business planning. 3. Organizational effectiveness. David P., 1941- II. Title. HD30.28.K35434 2008 658.4'OI2-dc22 2008004645 The paper used in this publication Standard for Permanence meets the requirements of Paper for Publications of the American and Documents National in Libraries and Archives Z39.48-l992. eagleflyfree -~----- CONTENTS vii Preface Acknowledgments xi 1. Introduction 2. Develop the Strategy 35 3. Plan the Strategy 69 4. Strategic Initiatives: Launching the Strategy into Motion 103 5. Aligning Organizational Units and Employees 125 6. Plan Operations: Align Process Improvement Programs 157 7. Plan Operations: Sales Forecasts, Resource Capacity, and Dynamic Budgets 185 8. Operational and Strategy Review Meetings 221 9. Meetings to Test and Adapt the Strategy 251 10. The Office of Strategy Management 281 Index About the Authors 305 319 eagleflyfree PREFACE IN 1992, WE INTRODUCED the Balanced Scorecard as a performance measurement system. 1 We helped several companies implement this approach and learned how they used this performance measurement tool as the cornerstone of a new management system that would drive the implementation of their strategies.2 We spent the next several years refining the strategy management system and published our updated framework in our second book, The Strategy-Focused Organization. The framework was built around five management principles: 1. 2. 3. 4. 5. Mobilize change through executive leadership Translate strategy into operational terms Align the organization to the strategy Motivate to make strategy everyone's job Govern to make strategy a continual process Our third book, Strategy Maps, expanded on Principle 2 by introducing a general framework for translating a strategy into objectives that are linked, in cause-and-effect relationships, across the four Balanced Scorecard perspectives: financial, customer, internal process, and learning and growth. The framework aligned processes, people, technology, and culture to the customer value proposition and shareholder objectives. Our fourth book, Alignment, expanded on Principle 3 and showed how to use strategy maps and scorecards to align organizational units, both line business units and corporate staff ones, to a comprehensive corporate strategy. The organizational alignment enabled the enterprise to eagleflyfree viii PREFACE capture the synergies from operating multiple units within the same corporate entity. The last chapter in Alignment described the application of Principle 4, communicating the strategy and aligning individuals' goals and incentives to business unit and corporate objectives. Most companies, in implementing the strategy management system based on the Balanced Scorecard, followed a sequence that generally began with Principle 1 (mobilize the executive team), followed quickly by Principle 2 (translate the strategy into a strategy map of linked strategic objectives with an accompanying Balanced Scorecard of measures and targets) and Principle 3 (align the various parts of the business through linked scorecards). Principle 4 required redesign of some key Human Resource systems (goal-setting, incentives), while Principle 5 required the redesign of various planning, budgeting, and control systems. Typically, the implementation of Principles 4 and 5 did not start until the program was one or more years down the road. In fact, we found that companies were able to get breakthrough results just by implementing Principles 1, 2, and 3 in their entirety and performing a few basic activities in Principle 4, such as a program to communicate strategy to employees, and, following one practice in Principle 5, instituting a new management meeting to review strategy. This limited approach produced results until the leader who had introduced the program departed. The message was clear; a strong leader using the tools of Principles 1, 2, and 3 could mobilize, focus, and align the organization to achieve excellent performance. However, because the new approaches had not been embedded in the ongoing management systems of the organization (Principle 5), the performance was often not sustained. We had not yet found a way to embed the ongoing management of strategy into the organization's way of doing business. In 2004, we and our colleagues at the Balanced Scorecard Collaborative convened an Action Working Group (AWG) of about twelve companies to address how to sustain a focus on strategy implementation. Our group included several Balanced Scorecard Hall of Fame companies, including Hilton Hotels, Motorola, Ricoh, Serono, KeyCorp, Canon, and the U.S. Army. Among their most important innovations was to introduce a small but dedicated group of managers to oversee the various processes required for strategy execution. We described this group as an office of strategy management (OSM) and published this finding in a 2005 Harvard Business Review article. 3 Through continued engagement with this working group, both in North America and Europe, we eventually identified all the key processes required to implement Principle 5, "Make strategy a continual process." eagleflyfree PREFACE ix The current book, The Execution Premium, reports on these findings. In the book, we describe how companies can establish strong linkages from strategy to operations so that employees' everyday operational activities will support strategic objectives. We introduce a new framework for management review meetings that clearly separates the operational review meetings, which solve short-term problems and monitor the improvement of key operational processes, from the meetings that review and improve strategy execution. While we set out, in writing this book, to document the best practices for SFO Principle 5, we ended up with a self-contained and comprehensive management system that links strategy and operations. The system integrates the contributions from our four earlier books, and those of many other recent management innovations, including strategy development, operational management and improvement, activity-based costing, business intelligence, and analytics. The closed-loop management system described in this book represents the "end-state" that enterprises can aspire to reach for connecting excellence in operational execution to strategic priorities and vision. Since the strategy execution closed-loop management system is a recent development, we would like to encourage a dialogue between us and our readers. We have established a Web site, executionpremium.org, where we will post links to surveys, assessment tools, and references to assist managers in applying the ideas in the book. Further, we hope to use the site as a bulletin board or to host blogs that facilitate an exchange of views and best practices. NOTES 1. R. S. Kaplan and D. P. Norton, "The Balanced Scorecard: Measures that Drive Performance," Harvard Business Review (January-February 1992): 71-79. 2. R. S. Kaplan and D. P. Norton, "Using the Balanced Scorecard as a Strategic Management System," Harvard Business Review (January-February 1996):75-85; Part Two, "Managing Business Strategy," in R. S. Kaplan and D. P. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996). 3. R. S. Kaplan and D. P. Norton, "The Office of Strategy Management," Harvard Business Review (October 2005): 72-80. eagleflyfree ACKNOWLEDGMENTS WE HAVE BENEFITED GREATLY from the experiences of the organizations that we cite in this book. Their ability to extend our ideas with sophisticated applications is a true source of managerial innovation and progress. In particular, our thanks go to the following contributors: Bank of Tokyo-Mitsubishi Borealis Brazilian National Confederation of Industry (CNI) Canadian Blood Services Federal Bureau of Investigation Hillside Family of Agencies HSBC Rail KeyCorp Lockheed Martin LG Philips LCD Luxfer Gas Cylinders Marriott Vacation Club International Takehiko N agumo Thomas Boesen Jose Augusfo Coelho Fernandes Graham Sher, Sophie de Viller:;, Andy Shaw Dennis Richardson, Maria Cristalli Peter Aldridge Michele Seyranian, Lesa Evans Ed Meehan, Pamela Santiago, Richard Dinnan, Lance Freedman, Jeff DeLeon, Maria Rasmy, Josh Stalher Ron Wirahadiraksa John Rhodes, David Rix Karl Sweeney eagleflyfree ACKNOWLEDGMENTS Xll Motorola GEMS Nemours Nordea Oracle/Latin America Ricoh Corporation SAS International Merck Serono Statoil State Street Corporation Thai Carbon Black University of Leeds Mark Hurlbert David Bailey Sven Edvinsson Cheryl McDowell Sam IChioka, Brad Nelson, Marilyn Michaels David Schwerbrock Roland Baumann, Lawrence Ganti Bjarte Bogsnes Jack Klinck S. Srinivasan Michael Arthur, Simon Donoghue We are indebted to the professional staff of the Balanced Scorecard Collaborative and the Palladium Group who, using these approaches, help their clients create execution premiums. In particular, we recognize Kit Jackson, who taught us how to use strategic themes for multiple strategy execution processes and provided invaluable feedback on an early draft of the book; Ed Barrows for his work on the strategy development process; Anne Nevius for her contributions to health care management; and Laura Downing for her contributions to the management of public sector organizations and her constructive feedback as a reviewer of an earlier version of the book. Additional thanks go to Peter LaCasse, Michael Contrada, and Mathias Mangels for their work on initiative management; Cary Greene, Philip Peck, and Duane Punnewaert for their work on dashboards, driver-based planning, and rolling forecasts; to our colleagues in Symnetics, Brazil-Reinaldo Manzini and Fanny Schwarz-for providing examples of how to link strategy to operational process improvements; and to Andre Coutinho for his facilitation of strategy maps, scorecards, and strategic initiatives for Brazil and its provinces, such as Rio Grande du Sol. We would also like to acknowledge Randy Russell, who managed our group research programs; and Rob Howie and Linda Chow for their management of our Balanced Scorecard Hall of Fame program. Dennis Campbell, of Harvard Business School, showed us how to use analytics to design operational dashboards (the TD Canada Trust example in Chapter 6) and to test the causal linkages in a strategy (the Store 24 example in Chapter 9). The staff of HBS Press provided their usual excellent encouragement and support from the original conception of the book through its produc- eagleflyfree ACKNOWLEDG MENTS xiii tion and delivery. We especially thank Hollis Heimbouch, who has been the editor for all five of our Balanced Scorecard books, Brian Surette, \\-ho took over the editorial role during the production process, production editor Jen Waring, and copy editor Betsy Hardinger. Finally, we are indebted to Steve Fortini, who prepared many of the complex graphics, and to our assistants-Rose LaPiana and David Porterwho managed the logistics of the writing, graphics, and production processes, and our wives, Ellen and Melissa, who tolerate our continued passion for writing at a time of life when many of our contemporaries are lowering their golf handicaps. eagleflyfree