HOW TO BUILD A BALANCED SCORECARD©
Part 1: The Strategic Planning Process
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)
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.
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
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.
2: Identify their requirements
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
3: Determine performance gaps (external perspective)
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.
4: Set stakeholder improvement priorities
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
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.
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.
7: Establish metrics and goals for the process improvement priorities - the
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.
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
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.
9: Reassess strategy
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
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.
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
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.
Last modified: August 13, 2006