“Walking and chewing gum at the same time.” How many times have you heard this lighthearted reference to the need for simultaneous attention to multiple priorities? The phrase implies that such parallel processing is not only necessary, but easy. After all, everyone can walk while they are chewing gum.
But when we transfer this thinking to the world of corporate strategy, the concept of parallel processing is neither obvious nor easy. Many strategies have been successfully developed around single themes. “Chainsaw Al” Dunlap had a successful run with cost-cutting, productivity improvement programs that dramatically increased current profits and the shareholder value of his organizations. Dot-com companies created enormous shareholder value on the promise of future profits from innovative product and service strategies. Unfortunately, neither of these strategies worked in the long run. The cost-cutters achieved one-time gains but, in general, were unable to create sustainable growth. The dot-coms promised long-term growth but could not generate short-term profits. Shareholder value in both of these cases has dropped to small fractions of its highs.
It's not enough to create shareholder value. Value creation must be sustained. While this may seem obvious, many planning frameworks continue to use point estimates to define success. Statements like “increase return on capital to 14 percent” or “increase same-store sales by 5 percent” define stretch performance targets which are used to mobilize organizations. When such targets are achieved, there is cause to celebrate. But the victories can be hollow if they cannot be repeated year after year. Shareholders want short-term performance, but they also want that performance to be sustained. In other words, shareholders want their organizations to walk and chew gum at the same time.
We recently analyzed the strategies of some 50 organizations for which we had developed strategy maps and scorecards. We found that these organizations seldom had strategies developed around single themes. While there was generally an overarching theme such as “Be the Industry Leader,” the strategy itself consisted of three to six components. For example, the strategy of a large pharmaceutical company had four themes:
– Achieve “best cost” in all business processes. Streamline all multi-functional processes so they would be better, faster, and cheaper.
– Become customer- and market-focused. Better understand customer segments, improve customer targeting, and build effective value propositions.
– Accelerate value from the discovery and development processes. Improve the hit rate and reduce the cycle times necessary to bring new drugs to market.
– Develop new businesses for exceptional growth. Balance risk and reward to build a portfolio of attractive growth opportunities.
The Value Creation Model
The multiple strategic themes found at the pharmaceutical company were typical of the companies we analyzed. Most of their strategies reflected the need to balance long- and short-term performance. Short-term performance demonstrates that the organization is disciplined, that it can convert an opportunity into bottom-line performance. Today's short-term results spring from the long-range investments made at some time in the past. They prove to investors that similar investments made today will be converted into profits in the future. By complementing these short-term strategies with a range of other strategies, these companies created a time-balanced agenda of action and value.
Strategy describes how an organization intends to create value for its shareholders (or stakeholders, for non-profit organizations). The overarching strategic objective is to create sustained growth in shareholder value. The overall strategy consists of several complementary strategic themes, which fall into three categories:
– Operational Effectiveness Strategies that improve the efficiency of core business processes.
– Customer Management Strategies by which to better understand and leverage relationships with customers.
– Product Innovation Strategies that help develop new products, markets, and relationships to sustain future growth.
How soon do the impacts of these strategies kick in? Operational Effectiveness strategies have near-term impacts, usually within 12 to 24 months. Product Innovation strategies show results in the long-term; depending on the industry, that could be two to three years for service companies, three to five years for manufacturing, and up to 10 years for pharmaceuticals. Customer Management strategies generally fall somewhere in between; new segmentation, value propositions, and service strategies generally take two to three years to bring to fruition. By simultaneously pursuing strategies from each of these categories, an organization establishes a continuum of new value for the shareholder over the planning horizon.
The Complexity and Choreography of Lead Indicators
When we first conceived of the term “Balanced Scorecard,” our objective was to balance lag indicators (financial measures) with lead indicators (performance drivers). As we set out to uncover the performance drivers that help realize strategy, the lead indicators became more complex. That there are long-lead indicators as well as short-lead indicators is an important distinction, and one that has led to a more precise understanding of the role sub-strategies play in value creation. Strategy describes how an organization creates value for its shareholders, but it's only by time-balancing the strategy that this value can be sustained over time. Plainly speaking: organizations that can walk and chew gum simultaneously have the greatest chances of success.
The author, Dr. David P. Norton is President of the Balanced Scorecard Collaborative.
1. Partial Excerpt from Balanced Scorecard Report copyright by the President and Fellows of Harvard College. Quotation is not permitted, and may not be reproduced in whole or in part in any form whatever without permission from the publisher.
© 2004 Balanced Scorecard Collaborative, Inc. Reprinted with permission.