STRATEGIC PLANNING AND BALANCED SCORECARD AT PLIVA

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1 Mislav Vučić PLIVA d.d., Strategic Planning Office STRATEGIC PLANNING AND BALANCED SCORECARD AT PLIVA How and for what purpose PLIVA uses Balanced ScoreCard Abstract: The strategic planning process at PLIVA attempts to answer where the company wants to be in 7-10 years and how to get there. It is dynamic process of continuously examining external environment and analyzing internal capabilities. Once the strategy is formulated, PLIVA uses Balanced Scorecard for implementing strategy and managing performance. Keywords: PLIVA, strategic planning, Balanced ScoreCard, performance management 1. Introduction to strategic planning at PLIVA The strategic planning process at PLIVA attempts to answer two very fundamental questions: Where do we want to be 7-10 years from now?, and How will we get there? The process requires that PLIVA develop a vision of itself; how do we see ourselves in the future. It looks at the big picture from a long-range perspective, whereas the short-term planning/budgeting represent specific tactics for carrying out the Strategic Plan year to year. Strategic planning is a dynamic process of continuously looking at our current situation and plotting the next move. This requires a solid understanding of the organization as well as an understanding about the environment that the organization operates in. The best organizations are always engaged in some form of strategic planning. Although we at PLIVA have a regularly scheduled annual strategic planning exercise, strategy revision or update is performed whenever internal or external circumstances require it. In a world of rapid change, it is becoming imperative for management to think strategically. And since the rate of change in pharmaceutical is escalating, the importance of strategic planning continues to grow. Some organizations have intuitive thinkers who almost seem to see into the future, whereas others employ more formal strategic planning process. We at PLIVA use both approaches.

2 In PLIVA, we wish to establish Strategic Management as the process of identifying and pursuing the organization s vision by aligning PLIVA s internal capabilities with the demands of environment. 2. Key benefits of Strategic Planning To be able to design the strategic planning process that best suits the needs of the organization (in particular the needs of the Management Board), the organization needs to be clear on what it wants to achieve from such a process. For us, the main benefits we wish to achieve are: framework and clearly defined procedures that guide and support the management of PLIVA shared Vision increased level of commitment of both management and employees to company s goals ability to set priorities and to match resources to opportunities ability to deal with risks 3. Design of PLIVA s strategic planning process [1] PLIVA s planning process has been designed to allow us to achieve aforementioned objectives. We have modeled the process that combines intelligence about external environment with profound analysis of internal resources, thus providing sound basis for management's strategic decision-making. The strategic planning process in PLIVA consists of two major building blocks: Planning, and Performance & Risk Management. (see Figure 1) 3.1. Planning The planning process starts with gathering intelligence on changes in the environment that might affect PLIVA s business. We check for global and industry trends, which provide information needed to identify Opportunities and Threats in PLIVA s environment. External analysis also involves identifying Key Success Factors (KSFs) associated with successful participation in the pharmaceutical industry. Next, we perform internal analysis to identify company s Strengths and Weaknesses relative to Key Success Factors. Upon clustering all findings, we compose SWOT (Strengths, Weaknesses, Opportunities, Threats) matrix, taking into consideration identified Key Success Factors.

3 This analysis provides basis for updating or changing Vision Statement. From the Vision Statement, we define Strategic Directions and set long-term strategic objectives, which are then translated into operational mid- to short-term objectives and projects. Finally, all employees with university degree get their personal objectives cascaded from organizational objectives Performance and Risk Management Planning doesn't make much sense without controlling whether the results are being achieved and identifying explanations for company s performance. When necessary, corrective actions are designed to bring performance back on track. Each business activity has some degree of risk associated with it that influences achievement of the agreed objectives. Therefore, it is vital to recognize and manage business risks to improve chances of success. Reports on performance and risk management are feedback into planning system, thus closing the loop. PERFORMANCE & RISK MANAGEMENT Manage/monitor results and risks Take corrective actions Balanced Scorecard 7>3>1 Year PLANNING Vision Strategic objectives Planning Personal target setting Clear summary of changes Agreed 7(3) year BSC (PLIVA, Div, SF) Motivated staff Agreed strategic projects Agreed personal objectives Agreed & shared Vision Agreed 3/1 year operating BSC Agrees priority projects / milestones FIGURE 1: PLIVA planning process

4 4. Target setting Based on industry trends, investor expectations, PLIVA s Vision Statement, and some other factors, the Board sets corporate strategic objectives. It also identifies key projects that need to be carried out to reach the targets. These are complex, multi-functional projects that require Board s active involvement and co-ordination. 5. Implementing Strategy As the research by Kaplan and Norton has shown, the companies do not have such a problem with defining strategy as they have with executing it. Only one third of companies manage to implement significant portions of their strategy, although four out of five have clear strategic plans (see Figure 2). And yet, the execution of the strategy is the only way to ensure creation of company s sustainable competitive advantage. FIGURE 2: The success rate of implementing strategy The research has shown that some of the most important reasons for failure to implement strategy are top management s failure to communicate strategy to management and employees, excessive focus on financial data, and lack of link between strategy and operational activities.

5 To address these problems, the two have developed a new management tool - Balanced ScoreCard. A couple of years ago, PLIVA has decided to implement it The reasons for Balanced ScoreCard s introduction The importance of non-financial aspects of a business (people, skills, processes, competencies) has been steadily increasing over the last two decades (See Figure 3). Intangible assets Tangible assets 38% 62% 85% 62% 38% 15% FIGURE 3: The percentage of market value related to Source: Brookings Institute, Baruch Lev analysis of S&P 500 companies In the New economy the intangible assets will play even more dominant role in creation of value. Therefore it is essential for any company s long-term success to have in-place a management system that is not solely focused on financial data. Since the pharmaceutical industry is one of the industries in which intangible assets are of crucial importance (from skilled scientists to intellectual property protection), it was necessary to integrate non-financial business aspects into PLIVA s management system. Besides that, PLIVA had at that point developed new and ambitious strategy. For its implementation PLIVA needed to point all its resources into desired direction The Balanced Scorecard at PLIVA [2] The Balanced Scorecard (BSC) is a management tool for managing performance and implementing strategy. It is used to translate strategy into operational objectives, projects and activities. We are using

6 Balanced ScoreCard to link organisation s objectives, Key Performance Indicators (KPIs, measures) and projects with strategy to drive performance. Through integration of non-financial objectives and measures into management system, Balanced ScoreCard enables PLIVA s management to spot early signals of change in performance. By cascading Balanced ScoreCard form PLIVA to business division, to support functions, to departments, we use it to align whole company with strategy, thus making it easier to execute it. The implementation is much easier since every manager and employee has a good understanding of corporate strategy and of his/her role in making that strategy come true. The Balanced ScoreCard is also used as a powerful tool for communicating strategy to other interested parties. We not only use it to explain corporate strategy to employees, but also to explain one unit s strategy to other unit s management. 6. Harmonisation Once we have fully developed Balanced Scorecards of business divisions, we organize separate meetings between divisional and functional management in order to harmonize divisions and functions BSC. This is crucial step in the whole process as it ensures that various Balanced Scorecards within the company are in balance. We pay extra attention to harmonizing targets among connected Balanced Scorecards. 7. Evaluation and Control Successful implementation requires monitoring the progress of achieving targets and projects. Performance review meetings are done on a regular basis with an emphasis on discussing how present level of performance influences long-term objectives. 8. Updating the Plan The final step in this entire process is to repeat the process; i.e. update the Strategic Plan. The process needs to be dynamic since the operating environment is changing. As a minimum, strategic plans need to be updated yearly by going through the basic process of critical issues, objectives, KPIs etc. This will involve new staffing, new projections, and new implementation steps. In some cases, you may need to change your approach to strategic planning.

7 References [1] PLIVA, Strategic Planning Office: Strategic Planning Manual [2] PLIVA, Strategic Planning Office: Balanced Scorecard Manual 3 Kaplan, Norton: The Strategy-Focused Organization, HBS Press, 2001