Creating a Strategy-Focused Organization

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1 Creating a Strategy-Focused Organization Werner Bruggeman Valerie Decoene Geert Scheipers In recent years, organizations have sought to develop more comprehensive performance measurement systems to provide managers and employees with the necessary information needed to better manage their operations. Performance measurement has become an essential element of performance management. However measuring performance may create suspicion, a feel of threat and adverse reactions by managers. Performance measurement contributes to the company success only when it leads to increased performance motivation of its managers. In complex environments the performance of the organization and its different units cannot be measured by one single set of measurements. Companies with multiple organizational levels, with different linked value chain activities and offering a wide variety of products to many different types of customers, demanding differing value propositions and strategies need performance measures linked to these different strategies. In this paper we argue that the Balanced Scorecard is an essential element of an effective Corporate Performance Management system (CPM). A Performance Management System is effective when it provides the right information to the managers at the different organizational levels, when the performance information is used in a way it motivates managers most to spend more effort in the desired strategic direction and when as a consequence the managerial and organizational performance is positively affected. In the following sections we briefly describe the concept of the Balanced Scorecard and the Strategy Focused Organization and provide theoretical and empirical evidence on how the Balanced Scorecard, embedded in a Strategy-focused Organization leads to increased strategy orientation, increased strategic alignment, and when used in an interactive way, enhances empowerment of people and stimulates their intrinsic and extrinsic performance motivation. 1 Delaware Performance Management - Belgium The Netherlands France United States Asia Pacific

2 The role of the Balanced Scorecard As stated earlier, an effective CPM system should provide managers with the right performance information. It is already generally accepted that performance measurement systems should not only be based on financial performance measures. Sole reliance on financial performance measures causes dysfunctional behavior. It promotes short term behavior and sacrifices long-term behavior. Some companies only complement financial performance measures with non-financial measures by implementing a so called KPI (Key Performance Indicator) project. Many times such projects only lead to a proliferation of the reported performance, because employees do not understand why some performance indicators are critical. Many times KPIs are not aligned with the strategy. The scorecard is unbalanced and may focus attention on the wrong strategic priorities. As a consequence the Balanced Scorecard (BSC) is an essential component of an effective Corporate Performance Management system. Kaplan and Norton (1996) defined the Balanced Scorecard as a framework to facilitate the translation of the business strategy into controllable performance measures. The purpose of the BSC is to provide managers with a comprehensive system of performance measures. The characteristic of comprehensiveness in the BSC involves the provision of a broad set of measures related to the important parts of the organization, mostly organized into four perspectives: the financial perspective, the customer perspective, the internal business process perspective and the learning and growth perspective. It also means the integration of measures with strategy and valued organizational outcomes and the integration of measures across functional boundaries and the value chain. As a result the BSC is a system of linked measurements based on expected cause-and-effect relations among the performance measures within and across the BSC perspectives. These relationships can be identified by the use of strategy maps (Kaplan and Norton( 2004), Bruggeman et.al. (2009)). Creating a Strategy Focused Organization based on the Balanced Scorecard Measuring performance is not a goal on itself. The final purpose is to use the performance information to better motivate managers for performance improvement and effective strategy implementation. The purpose is to become a Strategy Focused Organization. This is an organization that puts strategy at the centre of all management processes (Kaplan and Norton, 2001). 2 Delaware Performance Management - Belgium The Netherlands France United States Asia Pacific

3 Research of Kaplan and Norton (2001) has revealed that the following five principles permit organizations to become strategy focused: mobilize change through executive leadership. Energetic leaders establishing a sense of urgency, creating a strong leadership team, and develop a clear and shared vision and strategy. translate strategy in operational terms. Executive teams use strategy mapping as a technique to better understand the cause-and-effect relationships hypothesized in de strategy, translate the strategy map into a Balanced Scorecard, set performance targets and define strategic initiatives needed to realize the targets. align the organization with the strategy. The process of translating strategy into measures and actions is cascaded down through the organization. Corporate, business unit and functional strategies, strategy maps and scorecards are aligned with each other and performance management processes become integrated vertically (across the different organizational levels) and horizontally (reinforcing inter-departmental cooperation). make strategy everyone s job. Executives make sure that all employees in the organization understand the strategy and are capable to execute it. This is done by appropriate communication and education to create awareness, by inviting employees to participate in task forces related to the different strategic initiatives, by linking personal goal setting processes and incentive compensation to the strategy and the Balanced Scorecard. make formulating strategy a continual process. This is done by installing a systematic process of reviewing the strategy (in periodic strategy review meetings), by integrating the strategy and the budgeting process into one integrated performance management process, by monitoring the implementation of strategy (by having periodic open and highly interactive performance review meetings based on the Balanced Scorecard), and by using performance data to support strategic learning (by using the performance information to test the causal relationships hypothesized in the strategy maps). Impact of creating a Strategy-Focused Organization on strategy orientation When implementing the Balanced Scorecard the management team first goes through a visioning process, a brainstorming session on the long-term strategy of their entity. Strategy Mapping gives an insight into the critical success factors and the relationship between them. The performance measures are then defined for all the critical success factors, shortterm objectives are formulated for each of the performance measures and strategic initiatives or action plans are defined. The responsibilities for the achievement of performance targets and action plans are also established. The responsibility for some of these rests with individual managers, for others the responsibility can be taken by a number of managers or by cross-functional teams. The management team meets at regular intervals (e.g. monthly, quarterly) for a performance review. The changes in all the critical indicators and the progress of the improvement projects are discussed and may be 3 Delaware Performance Management - Belgium The Netherlands France United States Asia Pacific

4 adjusted. This type of strategic control is implemented at different levels in the organization through a cascading process to ensure that strategies, performance indicators and improvement campaigns at the different levels are harmonized. This integrated management approach increases the strategy orientation of the performance management process. It leads to a more effective process of strategy formulation and communication, it improves strategic alignment, and guides managers and employees to translate strategy into actions. Some recommendations for successful implementation of Corporate Performance Management systems The implementation of corporate performance management is much more than a technical performance information project. It requires the introduction of active performance motivation processes on the different levels of the organization. Because it is essential that performance measures are linked to the strategy it is essential to use the Balanced Scorecard as the central measuring and reporting tool. However to be effective the Balanced Scorecard should be embedded in a Strategy Focused Organization. To be effective Corporate Performance Management should be organized as a highly participative and integrative process. Organize performance management as a highly participative process Top-down imposing of scorecards should be avoided. Participation of a large group of managers in the strategy formulation and BSC development process is essential. Management teams should be well trained and coached to guarantee the success of the outcome. During this process creating strategic alignment is very crucial. It creates an active strategic dialogue and improved strategy orientation, it positively influences intrinsic motivation, empowerment and role clarity, which lead to enhanced managerial and organizational performance. Furthermore, top management should be aware of the fact that successful corporate performance management also requires the organization of systematic and highly interactive performance review meetings where BSC teams plan and review the evolution of their units performance. Interactive use of performance information leads to increased empowerment, organizational capability and corporate agility. 4 Delaware Performance Management - Belgium The Netherlands France United States Asia Pacific

5 Avoid partial implementations Implementing the Strategy Focused Organization should be considered as an integrated approach. Partial implementations do not deliver the full benefits. Some examples: Some companies only introduce the BSC only to provide top managers with accurate information on the evolution of the corporate performance. The BSC is only seen as a strategic performance reporting system. The Balanced Scorecard is designed by a group of specialists at the corporate level. No shared vision is created. Lower level managers are not invited for participation and the quality of strategic alignment is low. The BSC is perceived to create more work for data collection and managers do not understand its added value. As a consequence introduction of the BSC does not create improved strategy orientation, nor does it generate a positive influence on performance motivation and empowerment. Finally managerial and organizational performance is not improved. Some companies choose the BSC implementation to stimulate involvement of many managers to determine strategy and the BSC but do not make an explicit commitment to run strategy as a continuous process. They do not organize a fixed scheme of strategy and performance review meetings. As a result managers no longer get feedback, no new strategic initiatives are planned and the performance management system is no longer effective. Literature Bruggeman W. Performance Management using the Balanced Scorecard, in Verweire K.and Van Den Berghe L. Integrated Performance Management, Sage, Bruggeman W, R. Slagmulder and S. Hoozée 2009), Handboek Beheerscontrole, Intersentia. Henri, J-F, Management Control Systems and Strategy: a resource-based perspective, Working paper Laval University, Québec, Canada, July Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard Measures that drive performance. Harvard Business Review, 70, Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: translating strategy into action. Boston, Mass: Harvard business school press. Kaplan, R. S., & Norton, D. P. (2001, a). The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Boston, Mass: Harvard business school press. Kaplan, R. S., & Norton, D. P. (2001, b). Transforming the balanced scorecard from performance measurement to strategic management: part I. Accounting Horizons, 15, Kaplan, R. S., & Norton, D. P. (2001, c). Transforming the balanced scorecard from performance measurement to strategic management: part II. Accounting Horizons, 15, Kaplan R.S. and D. Norton Managing Alignment as a Process, Balanced Scorecard Report, July- August 2005, Vol. 7, N 4. Malina, M. A., & Selto, F. H. (2001). Communicating and controlling strategy: an empirical study of the effectiveness of the Balanced Scorecard. Journal of Management Accounting Research, 13, Delaware Performance Management - Belgium The Netherlands France United States Asia Pacific

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