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HOW TO BUILD A BALANCED SCORECARD^©

Part 1: The Strategic Planning Process

by

Arthur M. Schneiderman

The objective of a strategic planning process is to identify opportunities where the organization’s current or potential capabilities can be successfully and sustainably matched against the needs of its various stakeholder groups.  Success is defined by the objective (vision and mission) of each organization.  It is measured by the value that it actually delivers to these stakeholders, relative of course, to that provided by their other alternatives. 

In a competitively based society, each of the organization’s various stakeholders has choices.  The owner’s of its capital have the option of selling that capital and investing the proceeds in other organizations that they believe will provide them with a greater return on their loaned financial assets.  Employees have the freedom to associate with a different organization where they expect to receive a greater return on the time that they invest.  Customers usually have the ability to select a different product, service, or supplier for fulfillment of their needs.  Suppliers have the choice of providing the inputs required by the organization when it wants them and at the price it’s is willing to pay.  And communities can commit their limited resources (land, infrastructure, etc.) to those organizations that they believe will prove to be the greatest asset to their constituents.

A successful organization manages its internal processes in order to win against the competition on these stakeholder battlefields.  The strategic planning process distributes the organization’s always-limited resources among these concurrent challenges.  How it deploys them will determine whether it survives as an entity in order to compete again another day.

I offer the following as a generalized model for a Strategic Planning Process:

Figure 1.  The Strategic Planning Process

(Click here for a PowerPoint version of this figure)

This process forms a closed-loop system.  It operates in a continuous cycle, with neither a beginning nor an end.  Since most organizations implementing a BSC already have an explicit or tacit strategy in place, I’ll start my description with the step identified as number one in this figure.  Also, for simplicity, I’ll describe the process in terms of the “customer” stakeholder group and leave it as an exercise for the reader to extend it to its organization’s other important stakeholders.  They usually include owners, employees, union leaders, suppliers, regulators, communities, etc.

Step 1:  Choose targeted stakeholder segments

For decades we have been admonished to make explicit in our strategy the customer segments that we intend to serve as well as those we will leave for others to serve.  This decision is sometimes referred to as strategic intent.  We do this in recognition of the view that we cannot be all things to all potential customers and therefore must focus our limited organizational resources on those chosen market segments.  We will secure leadership in them if we can satisfy their members needs better than our competition.  Our level of reward will depend on our market share and the maturity and growth rate of that segment’s demand.  

To make our decision on target market segments, we must understand the opportunity space (potential market segments) and the competitive environment as well as our own organizational competencies.  For much of the later part of the last century, we could rely on normative models to predict our chances of success based on the assumption that cumulative experience (as determined by historic relative market share) was its principal driver.  Today we understand that flexibility, agility, and rapid learning are more important competitive advantages given the rapidity of technological change and the increasing contribution of often-volatile organizational knowledge.  

Making the wrong initial choice may trigger a doom loop from which there’s little chance of recovery.  However, rapid cycling of this strategic planning process can quickly lead to convergence to a sustainable competitive position.  So let’s assume that we have initially chosen a set of related market segments where we have a reasonable chance of long-term success.  We’ll return to this assumption in Step 9 to determine its validity.  

Step 2: Identify their requirements

Each customer segment is characterized by its own unique set of requirements.  Either objectively or subjectively potential customers test each candidate supplier against these requirements.  They choose the one that comes closest to meeting their aggregate needs.  They do not weight each criterion equally, and that is what makes them different from one another.  One segment might weight price much more highly than reliability.  Another may have just the opposite weighting.  Once the targeted segments have been selected, it is important to determine their importance weighted supplier selection criteria.

Step 3:  Determine performance gaps (external perspective)

By asking our targeted customers how we are doing in meeting their various requirements we can identify our performance gaps.  Our hope is to close these gaps in order to maintain or improve our relative competitive position.  We recognize that if we do nothing, we are likely to loose ground against more aggressive competitors who are pursuing their own improvement objectives.  Performance gaps will differ from one targeted segment to another, so we need to apply this step separately for each of the market segments that we are currently serving or considering.

Step 4: Set stakeholder improvement priorities

Improving requirements that are unimportant to a targeted customer segment is often a waste of precious organizational resources that could better be used elsewhere.  It’s therefore essential that we focus our improvement efforts on major gaps in important customer requirements.  The combination of high importance and low performance is the logical basis for ranking opportunities for improvement.  Once we have completed this step, we have essentially generated a Pareto diagram of externally identified improvement priorities - tempered by our own strategic objectives.

Step 5: Link stakeholder requirements to internal processes

Many organizations stop at Step 4.  Doing so leaves both the responsibility and accountability for improvement unassigned.  They may achieve acceptance of the objective but leave undefined each individual’s role in making it happen.  Naturally, with this uncertainty, they usually conclude that closing critical performance gaps is someone else’s job.  Like spectators at an athletic event, they sit cheering in the stands, when they should in fact by out on the field as players in this struggle to win.  The key to getting their involvement is the linkage of external improvement priorities to internal processes.

One very powerful view of an organization sees it is a collection of interacting processes whose collective output is the vehicle for creating stakeholder value.  At the highest level are the macro processes such as product development, customer acquisition, production, procurement, and human resources management.  But processes are fractals.  As we look at each of their steps through a virtual magnifying glass, we see imbedded within them similar looking processes … and within them sub-processes … and within them micro-processes.  Every employ has a daily job in which they execute one or more of the steps that are contained within this hierarchy of value creating activities.  Their personal link to the overall goals and objectives of the organization flows with the output of these processes as they cumulatively create more value and the consequent increased stakeholder satisfaction.

Step 5 identifies the relationship of each process within the organization to the key stakeholder requirements identified in step 2.  It is the transition step from the external to the internal perspective.

Step 6: Establish process improvement priorities (internal perspective)

Knowing which internal processes drive the various targeted stakeholder requirements (from Step 5) and which of those requirements are most in need of strategic improvement (from Step 4), we are now in a position to set internal process improvement priorities.  Once completed, we have identified the focal points for changes in the way those involved should do their daily jobs.  

The organization can now concentrate its limited resources on the improvement of those leveraged processes with the knowledge that this will produce the greatest strategic return on the investment of those precious resources.  And each individual who spends their time executing those key processes will understand why its improvement will be worth their effort.  They’ll realize that their help is likely to be critical to the organization’s strategic success … that they are an important link in that chain of critical actions.

Step 7: Establish metrics and goals for the process improvement priorities - the Balanced Scorecard

In my experience, few organizations today make it through Step 6.  Identifying with confidence those critical internal processes whose improvement will have the greatest strategic impact is no easy matter.  More and more, they are hidden behind a cloud of complexity and confounded by uncertainty and chaos.  But for those who do, they now face several nearly daunting challenges: 

Defining measures of the output of a process that relate directly to stakeholder requirements is usually straightforward.  But these results metrics are not directly actionable.  We need to identify the internal process metrics that are the drivers of the desired improvement in these results.  Once we have successfully identified them, we need to set time-based goals.  In general, they will be stretch goals: difficult but not impossible to achieve.

I can’t imagine an organization in today’s world where people are sitting around looking for something to do.  Everyone already has a pretty full plate of work.  They can only squeeze in a limited amount of time to work on process improvement without adversely affecting the performance of those daily jobs.  In other words, organizations have a limited improvement capacity.  Asking them to do everything will guarantee that the easy ones, not necessarily the most leveraged ones will get done first.  We need to filter the priorities established in Step 6 against this limited capacity.  In doing so, we create a cut-list.  We can do the things above the cut-line, but we don’t have the capacity to do the ones below that line … at least not right now.  Acknowledging our limited capacity diffuses the organizational paralysis usually brought on by over commitment.  

To focus everyone’s attention on the short list of improvement priorities and goals, we create the instrument that has been called the Balanced Scorecard.  It captures the results of all of the proceeding steps on a single sheet of paper.  It represents a set of metrics and their associated tangible goals that are the best that we can do in advancing our strategic objectives, subject to our available organizational constraints.  In a sense the balanced scorecard is merely a rallying flag for all of the effort that has gone into its creation.  It is not an end, but an intermediate means for the strategic planning process.

The resulting balanced scorecard is the organization’s guide to its improvement priorities.  Because it is rooted in the process view of the organization, it can be easily linked from the corporate level down through the process hierarchy to the teams and individuals that are the only ones that make things happen.

Step 8:  Improve critical processes

If it were easy to close the gap between current performance and the improvement imperatives established in the previous step, those gaps would have been closed long ago.  Certainly focusing the organization’s energy around a few specific objectives is a great help.  But there is a wide range of approaches that can be used to address these vital few gaps, and they can lead to strikingly different rates of improvement.  

The fastest method is to assemble a cadre of process engineers to fundamentally redesign each key process; but this is also the most expensive way to do it.  Using the traditional trial-and-error approach not only takes too long, but its actual cost rivals that of the use of an army of process experts.  Fortunately, there is a low cost, high-speed approach that was pioneered in the 1930’s by Kepner and Tragoe and refined in the 1960’s by Japanese TQM practitioners.  This improvement model uses teams of process executors who are trained in the basics of the scientific methodology and spend a portion of their time (typically 5-10%) improving their processes.  This has proven to be the best way of closing performance gaps when many processes contribute to them.

I am not in any way suggesting that processes that do not make this list should not be improved.  A basic cornerstone of TQM is that ALL processes should be continuously improved and that EVERY employee should spend a portion of their time in those activities.  What Step 7 does is set priorities for those improvement efforts.  Process teams should focus their efforts on improving those outputs that are directly derived from that step.  

Individuals involved in multiple processes should concentrate first on those that lie on this critical strategic path.  When teams or individuals do not have a clear role in strategic improvement priorities, they should still spend a portion of their time improving the way that they do their daily jobs.  But they need to recognize and accept that scarce resources, such as training and internal and external experts, as well as management attention will go first to those who are working on improving the critical processes.

Step 9:  Reassess strategy 

Organizational defense mechanisms often mandate that our processes be run open loop.  We like to plan and do, but have a natural reluctance to check subsequent results against the original plan and take corrective action based on what we learn from that diagnosis.  We find this distasteful because the result of the check process all too often is blame rather than learning. 

When I first met Ed Deming he was around 80 years old and often noted that 80% of the root causes of defect generation were the process and only 20% the people executing those processes.  Each year that went by, that 80% number seemed to grow by 1%.  Ed died at age 94 and the last time I saw him he said: “nearly 95% of the problems lie in the process, not the people.”  I wonder what he would have said had he lived to be 100?

Once we outlaw blame as a management reaction and replace it with constructive learning, we can hope to continuously improve the strategic planning process itself.  That is the purpose of Step 9.  Before reaching this step, we have identified exactly what we need to do in order to achieve our strategic objectives.  We have focused every bit of our available organizational capacity on those required actions.  We now ask, “Did we get the results we planned for, and if not, why not?”  Out of this diagnosis we can understand weaknesses in our strategic planning process and make improvements for the next cycle.  In doing so, we are learning how to plan and act more successfully, and that, after all, is what this is all about.

One sobering result from this reflection step may be that we are doing the best that we can, but we do not have the organizational capacity to do what is necessary in order to achieve our strategic objectives.  Often this is the result of competitors who have greater organizational capacity or process know-how, so that although we’re improving, we’re inevitably loosing ground to them.  This painful knowledge should prompt us to seek other competitive niches were we have a chance of winning or face up to the unpleasant reality that our owners remaining equity might best be used by them in some other endeavor.  Since very few organizations use their process improvement capacity to their highest strategic advantage, mastery of all of these nine steps has the potential to produce some really unexpected, dark horse winners in the ever-present competitive race.

Dealing with today’s strategic planning reality

I’m fascinated by the current notion, often promoted by self-serving consultants, that there’s a simple, secret formula for developing a good strategy and it’s called a balanced scorecard.  “Buy our BSC software,” “Attend our BSC seminar,” or “Retain our BSC team of experts” and in a few short weeks or months you’ll have a winning strategy.”  And the evidence does seem to suggest that Abe Lincoln may have been right:  “... you can fool (nearly) all of the people, some of the time...”  But the truth is that developing and implementing a successful strategy still is a very difficult challenge.  Their are several contributing factors:

By any measure, organizational life is getting more and more complicated.  Everything seems to be both interconnected and important.  Clear visions of the future are obscured by this complexity and each group within the organization tries to see through that cloud with their own uniquely colored glasses.  The ideal solution - fact based knowledge - is becoming both expensive and time-consuming to generate.  In many instances, the important things “are both unknown and unknowable” to quote Ed Deming.  We live in a period of unprecedented change.  The future is increasingly unpredictable as wave after wave of technological, sociological, and political change break over us.  It is a truly exciting time to live in, but an equally frustrating time for strategic planning.

Finally, as organizations transform from physical labor to knowledge based, employees are less willing to simply do as they are told.  They need to be enrolled in the strategy before they will work hard to make it happen.  

Given these formidable challenges, how can an organization maximize its chances of developing and implementing a winning strategy?  Notice that I said “maximize its chances,” not guarantee its success.  That’s the best that any organization can hope for given its tumultuous environment.  Here’s my advice:

Sure, there is a risk that by running a wide-open, highly visible strategic planning process a competitor may learn something that they can use against you; but that danger is grossly exaggerated.  In reality that risk pales compared to the cost of poor internal alignment caused by a strategy hidden behind a shroud of secrecy.  All employees have a “need to know” if they are to contribute effectively to the organization’s success.

How an organization executes this 9-step strategic planning process will greatly influence its probability of success.  At one extreme, members of the strategic planning department can sit around an isolated table and talk through each of the steps to come up with a scorecard and its associated metrics and goals.  In my experience, that approach has a low probability of producing a decisive scorecard and a convincing call to action to those whose efforts are needed to make it happen.  At the other end of the practical spectrum, the strategic planning function can orchestrate a broad based effort that synthesizes both internal and external knowledge into a compelling and actionable plan.  

In doing so, they will encounter difficulty in processing all of the information and opinions that are generated unless they use some framework and an appropriate toolset for drawing actionable conclusions from the resulting maize of information.  That’s the purpose of Steps 1a, 2a, and 3a in my model.  By numerically weighting the strategic importance of the various stakeholder segments, each segment’s hierarchy of requirements, and their perception of our performance on each of their important ones a list of improvement priorities can be generated that separates Juran’s “vital few” from his “important many.”  Part 2  will expand more on these “a” steps.

In this, Part 1 of the article, I have described a 9-step framework that I believe represents a comprehensive process that has as one of its many important outputs a set of balanced scorecards that deploy strategic goals down to the action agents that really make strategy happen.  In the next two parts, I will describe in detail the actual methodology that I use in implementing Steps 1-6 (Part 2: Setting Process Improvement Priorities) and Step 7 (Part 3: Selecting Scorecard Metrics).  Step 8 is the theme of my Process Management Model. 

©1999-2006, Arthur M. Schneiderman  All Rights Reserved

Last modified: August 13, 2006