by Emily Chan
WHAT GETS MEASURED GETS DONE: THE BALANCED SCORECARD
As I said in the section on performance measurement for sales, it is simply human nature—what gets measured gets done. To ensure execution of strategy, you have to measure progress so it can be monitored and pushed.
Key Performance Indicator, or KPI, has been a hot subject in recent years. The term is self-explanatory—the indicators (or measurements) used to monitor performance. One of the most powerful KPIs used in measuring execution of strategy is the Balanced Scorecard. It is beyond the scope of this book to explain this framework in enough detail for application. When I first tried to implement this framework, I had to read three books and engage a Balanced Scorecard consultant to help me. It seems worth at least describing the concept of the framework, however, as it can stimulate thoughts on how you can design simpler frameworks for your own purposes.
The Balanced Scorecard was developed in the early 1990s by Robert Kaplan, a professor at HBS, and David Norton, a consultant from Boston. Despite its relatively short history, it was hailed by Harvard Business Review as one of the 75 most influential ideas of the twentieth century. It is said to have been adopted by at least half of the Fortune 1000 organizations in the United States. Numerous HBS case studies have been written on this subject. In fact, it is seen as such an important concept that Harvard Business Publishing publishes a periodical solely on this subject.4
As with the Porter frameworks, the concept of the Balanced Scorecard is not complex. The starting point is to have a vision and a strategy. Vision is where the company wants to be in the long-term. Strategy is what needs to be done to achieve the vision. Figure 11.4 outlines the concept of the Balanced Scorecard.
Figure 11.4 Overview of Balanced Scorecard Framework by Robert S. Kaplan and David P. Norton
For each of the perspectives, the following scorecard details need to be defined:
Objectives in accordance to strategy and vision
Measures chosen to show whether and to what extent the objective is getting achieved
Figure 11.5 Some Elements from the HBS Mobil Case Balanced Scorecard
Targets for each measure
Initiatives (or projects) that need to be implemented to achieve the targets and objectives
After the scorecard is defined for all perspectives, regular meetings are held and reports are generated to track actual performance against the targets and to make amendments to the scorecard to fit ever-changing business needs. Incentive systems should be set up to motivate continuous, successful implementation.
Figure 11.5 shows part of the Balanced Scorecard from the HBS Mobil case study, and Table 11.3 sketches the associated scorecard details.5
Table 11.3 Customer Perspectives for the HBS Mobil Case (Extract)
You may have many questions about the framework—do we need a vision? How to define a vision? Exactly how to look at each perspective? Should we apply a weighting to emphasize the more important indicators? And so on. As discussed, the Balanced Scorecard is not easy to implement. The Mobil exercise took a big team at the company, together with Richard Norton as consultant, eight months just to draft, let alone implement. Therefore, instead of getting into details of the Balanced Scorecard, the key is to recognize the important best practices in driving strategy execution, as highlighted by the Balanced Scorecard framework:
Measuring strategy execution involves setting clear and explicit objectives, measures, and targets—and then following up on them with a structured process and system that includes regular meetings, regular reporting, and built-in incentives.
Multiple perspectives are essential. It is tempting to just focus on financial measures, but financial success can be achieved only if customers are satisfied, operations are smooth, and employees are trained and equipped. In addition, financial measures are lag indicators—they show the results of actions already taken. To drive strategy, there must also be a focus on lead indicators—those measures such as training or equipment that will drive future performance.
Any indicator is subject to gaming. For example, if only growth is measured, then it is tempting to achieve growth by forgoing profit or other important aspects of the business and strategy. Gaming is reduced by a holistic set of indicators that all work to drive the vision and strategy.
Communication needs to be explicit. The Balanced Scorecard is not just a measurement tool. It is also a communication tool. It communicates how the vision and the strategy will be achieved. It also communicates that management is serious about execution and following through.
DIY SKELETON FRAMEWORK: THE TREE
One of the easiest skeleton frameworks to use is The Tree. It is widely used not just by management consultants like McKinsey but also in problem solving both within and outside business. The Tree gives a straightforward methodology for you to list out the factors step by step. Four key points about The Tree:
It starts with a central strategic question. Then it breaks that question down logically one level at a time into subquestions and sub-sub- questions and so on.
All the questions at the same level should be mutually exclusive so they do not overlap. Overlapping is inefficient as it means duplication. If they overlap, it means the questions can be restructured.
Taken as a group, the questions and subquestions should be collectively exhaustive. Together, they should cover all the issues that need to be addressed to answer the central question.
As much as possible, especially at the higher levels, the questions should be closed; that is, they should all have yes-or-no answers. This helps focus on drawing conclusions. As the level gets lower, gradually, closed questions may be replaced by open-ended questions that call for detailed narrative answers.
This process is easier to illustrate with an example. Say the central question is “Can I make money writing a book about HBS?” Figure 11.6 could be part of The Tree.
There is often more than one way of drawing a tree. The way you choose will depend on the issues you want to highlight and the hypothesis you are testing. It will also be affected by the way the data is available. If the questions and subquestions are collectively exhaustive, then however you draw The Tree, it should still be able to answer the central question. Figure 11.7 shows another way to draw The Tree for my business book example. The Tree in Figure 11.6 will work better if you believe that the markets in different places are quite different from each other. The one in Figure 11.7 will work better if the you believe that the geographic markets are quite similar and hence need no highlighting.
Figure 11.6 Part of a Logic Tree
Figure 11.7 Another View of a Logic Tree
Notes
1. Paul R. Niven, Balanced Scorecard Step by Step (New York: Wiley, 2002), 90.
2. President Eisenhower served as supreme commander of the Allied forces in Europe during the Second World War before he became president. He is well-respected by many for war strategy. Many in the business community found that application of war strategy in business could be very effective.
3. Michael E. Porter, Competitive Advantage—Creating and Sustaining Superior Performance (New York: Free Press, 1985), 7.
4. Balanced Scorecard Report; subscription available at http://hbp.harvardbusiness.org/ep/subscribe.html.
5. Mobil Corporation’s U.S. Marketing and Refining Division. Source: Robert S. Kaplan and Ed Lewis, “Mobile USM&R (A): Linking the Balanced Scorecard,” Harvard Business Review (May 1997).
12
FILLING IN THE BLANKS
WHAT DATA?
Once you have a framework, the next step is to define the data needed to analyze the factors in the framework and test the hypothesis. The most efficient way to do so is to work backward—first decide on the analysis based on the logic tree (how you are going to use the data) and then collect the data. Using the logic tree for writing a business book presented in Figure 11.6, a worksheet to list out the data needed for one of the questions can look like the one in Figure 12.1.
In this worksheet example:
The first column is a list of the issues on the logic tree that require analysis to get to an answer. Most issues that need detailed analysis are at the lower levels of the logic tree. As the lower-level issues are analyzed and conclusions drawn, issues at higher levels can be solved based on these outcomes. In this example, by analyzing issues 5a and 5b in Figure 11.6, it may be possible to draw a conclusion on issue 4 without further analysis.
The second column is the list of analyses planned for each issue. As noted, the most efficient way is to work backward. The worksheet lists the analysis in the format it would be displayed on a PowerPoint slide (or as a diagram in a text document), which might also have a title drawing a conclusion based on the latest hypothesis. Data needed to complete each analysis is clearly labeled. It should be noted this list of analyses is just a starting point. Most of them will have to be adjusted based on data availability and changes in hypothesis. For example, when I address the first graphical analysis on Figure 12.1, I might discover that it is impossible or will take too much trouble to get data on “# sold since published,” but an easily available list shows how many have been sold since year 2000. In this case, I might decide that the analysis can be adjusted to “# sold since 2000” and still be useful for understanding the competition issue. Or, based on interviews, I might find too many competitive books to be displayed in a graph. If so, I might replace this analysis of individual competitive books by another that groups the books into categories for comparison.
The third column lists sources for the data needed to complete each analysis in the second column.
Figure 12.1 Assessing Data Needs
Both qualitative and quantitative data are important for analysis—and not easy to collect. Of the two, quantitative data is often seen as more valuable.
One of my HBs professors liked to repeat this quote from Lord Kelvin (1883):1
“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.”
Quantitative data is especially useful because such measures can be synthesized. For example, current market size and growth rate can be multiplied together to estimate future market size. Qualitative comments such as “big market” and “fast growth” cannot be multiplied in the same way.
In addition, quantified measures allow unbiased and unambiguous comparisons of strategic options, scenarios, and trade-offs as well as tangible estimation of resource needs, potential payoffs, and risks. This is a key point as strategy is always about allocation of limited resources—which industry to put your resources (money, time, staff)—and where to invest to develop competitive advantages.
The keys to obtaining effective qualitative and quantitative data are access to a wide range of data sources, ability to deduce unavailable data, discipline to check the data, and pragmatism in using the data.
WHERE FROM?
Starting from the sources easiest to access, these are the key data sources:
The Internet
Associations and bureaus
Interviews
Analysts’ reports
Professional databases
Benchmarking
Sampling
The Internet
Almost everyone knows the Internet is a powerful source of data. For strategy study, you can find the following sources of data online:
Internet bookshops like Amazon make it very easy to access a wide range of books using search words related to the industries you are studying.
Websites of key existing and potential players in each of the five forces—suppliers, buyers, competitors, and substitutes—can provide information on your playing field.
If any existing player is a public company, it will have to file annual reports. These reports will have information on its industries, its performance in each one, its vision and strategy, and its market outlook, as well as its financial data. Often companies will put these reports on their own websites. Most companies will mail you the annual report free if you call up or write to their Investor Relations Department.
Internet search on Google or Yahoo! with key words including the name of the industry, product, brand names if any, and key companies involved will turn up more information.
Associations and Bureaus
Trade associations, semi-government bodies, and government bureaus collect statistics. Such data is often published and for sale at very reasonable prices. Besides the officially published data, some associations may also be willing, usually for a fee, to provide tailored reports based on both the published data and on the raw data the report was drawn from. This could be useful if the published data do not answer your “logic tree” question but you can see how the raw data behind the report can be analyzed to provide the answer.
Interviews
People with knowledge of the industry—industry veterans, ex-employees, suppliers, buyers, investment bank analysts, and so on—are often willing to talk about what they know. This is one of the fastest and most direct ways to get firsthand information.
When I first started out as a consultant, my job consisted mainly of finding telephone numbers from directories and cold-calling senior executives to set up telephone or face-to-face interviews for my superiors. I was very skeptical when I was first asked to do this. I thought, “Why would people agree to talk to me?” but I quickly found out it was easier than I thought. Of course, working for a well-known consulting firm helped as many potential interviewees recognized the name of the firm when I introduced myself over the phone. You would be surprised that many people like talking about themselves and their business, especially if the topic is not confidential or if they see a potential for business in the future. Over the years, I have set up and conducted many interviews. A few best practices I have learned are listed in Appendix B.
Analysts’ Reports
Investment banks such as Goldman Sachs hire stock analysts to research and evaluate key industries and key companies in those industries. The analysts then write reports on their findings. One of the purposes of these reports is to enable the bank’s private bankers and outside brokers to advise their clients in stock trading. These reports are valuable as analysts often have access to company senior executives who understand that these reports could help stock trading of their companies. Unfortunately, these reports are not freely available. The easiest way to obtain them is via friends or contacts at these banks. This is related to the chapter on social networking. If you do not know anyone, you can try to purchase some of these reports through the Internet either by e-mailing the banks or by searching for some finance Web sites that sell such research reports.
Professional Databases
Professional databases such as Bloomberg and Lexis-Nexis are highly efficient as they give you access to a large selection of journal and newspaper articles using keyword searches. They are available by subscription. Some companies have research departments that subscribe to these services. Otherwise, select libraries, especially business and university libraries, may provide access. Some of these services are also available for individual subscription. You can go onto Google to search for the local sales representatives of these databases. You can contact them to find out about individual subscription or ask for a list of libraries that carry these databases.
Benchmarking
Benchmarking—identifying and studying comparables that can be used as indicators of possibilities or as a comparison to stimulate insights—is a very useful data source. For example, in 2007, a client of mine wanted to evaluate whether to spend R&D dollars on a revolutionary consumer electronics technology. In trying to analyze the Porter Five Forces, we used the Walkman, digital camera, and iPod as benchmarks to understand the product life cycle, speed of copycats, and the like for revolutionary consumer electronics.
In 2000, I was involved in helping
a state-owned bank in mainland China determine its strategy in anticipation of the opening up of the financial market to foreign competition. A key component of the study was to analyze the market development and evaluate the successes and failures of state-owned banks in other countries such as Japan that have undergone similar deregulation.
Information on benchmark targets can be found using the kind of sources discussed in connection with other types of data in this section.
Sampling
Sampling involves looking at a relatively few instances to provide an indication of the whole population. Statisticians often talk about “statistical significance,” which means you need a certain quantity such as number of surveys before the data collected can be trusted to have an acceptable degree of accuracy. In business, due to time and other resource constraints, it is often difficult if not impossible to get enough data for rigorous significance. But even small samples with no statistical significance could be invaluable as an estimate. For example, a client of mine, a multinational beverage company, once wanted to enter the bottled water business in Thailand. We needed to understand the sales volume of the key competitors, but no data was readily available. So a team of us sat in a rented car across the street from the warehouses of the two biggest competitors and counted the number of truckloads leaving the warehouse every day for one week each. We took pictures of the trucks and found out their capacity from the truck dealers. Based on these daily deliveries, we did some seasonal adjustments and estimated monthly and annual sales volumes.