The Strategy
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The Strategy-Focused Organization October 23, 2000 In The Strategy-Focused Organization, HBS professor Robert Kaplan and David Norton, president of the Balanced Scorecard Collaborative, share the results of ten years of research into companies that have implemented the Balanced Scorecard. Drawing on more than 20 indepth case studies, they illustrate how major organizations have used the Scorecard to create an entirely new performance management framework that puts strategy at the center of a company's key management processes and systems. Mobil North America Marketing and Refining (NAM&R), a multibilliondollar division of ExxonMobil, write Kaplan and Norton,"is perhaps our best example of putting the five principles of a Strategy-Focused Organization into practice." (The five principles are: translate the strategy to operational terms; align the organization to the strategy; make strategy everyone's everyday job; make strategy a continual process; and mobilize leadership for change.) In the following excerpt they tell how Mobil NAM&R applied the last of those principles—mobilizing leadership for change— in transforming the company from "an underperforming organization that was inwardly focused, bureaucratic, and ineffecient into the leader in its industry." Perhaps the most puzzling and problematic aspect of creating Strategy-Focused Organizations is how to sustain the effort. Many companies have managers who have read the articles and the books, attended the conferences and the seminars, and returned to their organizations to lead inspiring projects that developed wonderful, strategic Balanced Scorecards. But not all of these companies were able to sustain the energy to deliver the results we reported in Chapter 1. What helps to distinguish organizations that sustain their projects to breakthrough performance from those that tried it but never delivered the results? When Bob McCool became head of Mobil NAM&R in 1992, he made it clear that the performance of the past was not acceptable; things had to change. Working with his leadership team, he developed a vision and a strategy for how these changes would be achieved. The Balanced Scorecard played an instrumental role in this process. While the pieces of the strategy existed, they were fragmented; some observers referred to it as "strategy du jour." The Balanced Scorecard helped to make this a single, integrated strategy. Heads of shared service units—marketing, human resources, and information technology, among others—were included in the membership of the leadership team to ensure that information about customers, people, and technology were incorporated in the strategic thinking and
planning. Several of these key ingredients had been lacking in past discussions. Accountability for pieces of the strategy was now clearly established within the team. McCool and Brian Baker played central roles in communicating the new strategy and the Balanced Scorecard throughout the organization, devising new compensation systems linked to the scorecard and revising the planning and budgeting processes to support the strategy. They also reinforced the strategy and the scorecard at every opportunity, especially in their face-to-face meetings with employees and managers. First Quarter, 1995 A critical incident occurred early in 1995 that revealed the commitment of the executive leadership team both to the new strategy and to the Balanced Scorecard. The winter (first quarter) of 1995 was unusually warm in North America. Sales of home heating oil and natural gas were below normal, and Mobil's revenues fell far short of the budget. In April 1995, McCool led a meeting at headquarters to review the first quarter's results. People entered the room trembling, as they knew that financial performance would be below expectations and that, in the past, poor financial results had led to people being fired. McCool opened his remarks by confirming people's fears that the first quarter results had fallen far below plan. But he continued in an unexpected way: From what I can see, we had a good quarter even though financial results were disappointing. The poor results were caused by unusually warm winter weather that depressed sales of natural gas and home heating oil. As you know, this is also the first quarter we are operating with the Balanced Scorecard, so I can see performance across a broader set of indicators. Market shares in our key customer segments were up. Refinery operating expenses were down. And the results from our employee-satisfaction survey were high. In all the areas we could control, we moved the needle in the right direction. We actually had a pretty good quarter. Keep up the good work. The audience was stunned. Never before had a senior executive of the company congratulated and encouraged them after disappointing financial performance. But what had McCool seen? The poor financial performance was due to unusual external conditions that the employees could not control. The nonfinancial measures on the scorecard, which employees could influence and control, were all moving in favorable directions. McCool confirmed his belief in the strategy when he confidently told the employees to stay the course, to keep improving the performance driver measures on the scorecard.
And his faith was soon confirmed: By the end of the year, Mobil had become the most profitable company in the industry. We often describe the nonfinancial measures on the Balanced Scorecard as leading indicators. But the measures may be not only leading; they are also sustainable. In the short run, financial results can be affected by temporary factors—the weather, interest rates, exchange rate movements, energy prices, and economic cycles. But what determines how the organization does in the long run is how well it is positioned relative to its competitors. If organizations can continue to invest, even during economic downturns, in customer relationships, process improvements, new product development, and employee capabilities, they can improve their position relative to competitors, so that when the external environment improves, they will enjoy profits much higher than the industry average. How senior executives react during short-term downturns speaks volumes about the commitment of the organization to creating long-term, sustainable value. Sustaining the Scorecard Once the Balanced Scorecard had been installed at Mobil, it became the agenda for an annual meeting of the top 125 managers in January to discuss scorecard objectives, measures, and targets for the new year and to share best practices across the business units and shared service units. The meeting was called the "Balanced Scorecard Conference," but, of course, the meeting was about the division's strategy and its execution. When the major meeting of the Executive Leadership Team and senior managers is labeled the "Balanced Scorecard Conference," managers throughout the organization don't have any trouble interpreting the commitment of senior executives to using the scorecard to create the Strategy-Focused Organization. The responsiveness of the new system to the evolution of the strategy can be powerful. Brian Baker described it this way: "I firmly believe that if I change one measure on my scorecard, change will happen." Baker is saying that by changing a measure on the scorecard, 7,000 people become aware of it, their compensation will be affected by it, and millions of dollars of initiatives will be shifted by it. When the changes are integrated into the management system in this way, the change has been institutionalized. The role of the Executive Leadership Team evolved over time. Bob McCool retired in 1996. Brian Baker was promoted from executive vice president to the head of NAM&R, and Baker further emphasized the use of the scorecard, ensuring continuity of direction. He maintained the use of the scorecard in discussions with business unit managers for compensation, for planning and budgeting, and for monthly management reviews, thereby reinforcing the central role of the scorecard in Mobil's management system.
Inspired and dedicated middle managers can sustain quality improvements, local process improvements, and many other change programs. Middle managers can also implement programs that have been ordered from centralized corporate staff groups. But creating an entire organization that is aligned to and focused on the strategy requires the active and ongoing leadership of the senior executive team as occurred at Mobil. We are skeptical that significant results can be delivered with the Balanced Scorecard without such active leadership and ongoing reinforcement. RESULTS Mobil launched its Balanced Scorecard project in 1994. The following year, 1995, was the first in which Mobil operated with a scorecard. To expand on the results reported in Chapter 1, we collected data from the company for the five years from 1994 to 1998 (in late 1999, Mobil merged with Exxon to become ExxonMobil). Figure 2-10 shows the elements of Mobil's dramatic turnaround to industry-leading profitability. The productivity strategy created a 20-percent reduction in the cost of refining, marketing, and delivering a gallon of gasoline. Mobil produced the equivalent of about 12 billion gallons of gasoline per year, so that even small changes in operating costs per gallon had an enormous impact on the bottom line. Better utilization of existing assets created additional improvements in cash flow. The productivity strategy was accomplished using several key drivers: • • • •
Product quality improved each year for four consecutive years Annual yield losses were reduced by 70 percent Safety incidents resulting in lost work were reduced by 80 percent Environmental incidents were reduced by 63 percent
The growth strategy, with its new value proposition for targeted customer segments, produced increased customer satisfaction, which led to increased revenue from nongasoline merchandise and gasoline volume growth that exceeded industry averages by more than 2 percent per year. The innovative Mobil Speedpass was one of the drivers of rapid service. Improved dealer training and quality ensured professional and friendly service. The Perfect Order program, which improved quality for four consecutive years, strengthened Mobil's relationships with commercial and industrial customers. None of this success would have occurred without a complete cultural shift at the grassroots of the organization. Annual human resource surveys showed that only 20 percent of the workforce understood Mobil's strategy in 1994. By 1998, awareness and understanding exceeded 80 percent.
From The Strategy-Focused Organization
planning. Several of these key ingredients had been lacking in past discussions. Accountability for pieces of the strategy was now clearly established within the team. McCool and Brian Baker played central roles in communicating the new strategy and the Balanced Scorecard throughout the organization, devising new compensation systems linked to the scorecard and revising the planning and budgeting processes to support the strategy. They also reinforced the strategy and the scorecard at every opportunity, especially in their face-to-face meetings with employees and managers. First Quarter, 1995 A critical incident occurred early in 1995 that revealed the commitment of the executive leadership team both to the new strategy and to the Balanced Scorecard. The winter (first quarter) of 1995 was unusually warm in North America. Sales of home heating oil and natural gas were below normal, and Mobil's revenues fell far short of the budget. In April 1995, McCool led a meeting at headquarters to review the first quarter's results. People entered the room trembling, as they knew that financial performance would be below expectations and that, in the past, poor financial results had led to people being fired. McCool opened his remarks by confirming people's fears that the first quarter results had fallen far below plan. But he continued in an unexpected way: From what I can see, we had a good quarter even though financial results were disappointing. The poor results were caused by unusually warm winter weather that depressed sales of natural gas and home heating oil. As you know, this is also the first quarter we are operating with the Balanced Scorecard, so I can see performance across a broader set of indicators. Market shares in our key customer segments were up. Refinery operating expenses were down. And the results from our employee-satisfaction survey were high. In all the areas we could control, we moved the needle in the right direction. We actually had a pretty good quarter. Keep up the good work. The audience was stunned. Never before had a senior executive of the company congratulated and encouraged them after disappointing financial performance. But what had McCool seen? The poor financial performance was due to unusual external conditions that the employees could not control. The nonfinancial measures on the scorecard, which employees could influence and control, were all moving in favorable directions. McCool confirmed his belief in the strategy when he confidently told the employees to stay the course, to keep improving the performance driver measures on the scorecard.
And his faith was soon confirmed: By the end of the year, Mobil had become the most profitable company in the industry. We often describe the nonfinancial measures on the Balanced Scorecard as leading indicators. But the measures may be not only leading; they are also sustainable. In the short run, financial results can be affected by temporary factors—the weather, interest rates, exchange rate movements, energy prices, and economic cycles. But what determines how the organization does in the long run is how well it is positioned relative to its competitors. If organizations can continue to invest, even during economic downturns, in customer relationships, process improvements, new product development, and employee capabilities, they can improve their position relative to competitors, so that when the external environment improves, they will enjoy profits much higher than the industry average. How senior executives react during short-term downturns speaks volumes about the commitment of the organization to creating long-term, sustainable value. Sustaining the Scorecard Once the Balanced Scorecard had been installed at Mobil, it became the agenda for an annual meeting of the top 125 managers in January to discuss scorecard objectives, measures, and targets for the new year and to share best practices across the business units and shared service units. The meeting was called the "Balanced Scorecard Conference," but, of course, the meeting was about the division's strategy and its execution. When the major meeting of the Executive Leadership Team and senior managers is labeled the "Balanced Scorecard Conference," managers throughout the organization don't have any trouble interpreting the commitment of senior executives to using the scorecard to create the Strategy-Focused Organization. The responsiveness of the new system to the evolution of the strategy can be powerful. Brian Baker described it this way: "I firmly believe that if I change one measure on my scorecard, change will happen." Baker is saying that by changing a measure on the scorecard, 7,000 people become aware of it, their compensation will be affected by it, and millions of dollars of initiatives will be shifted by it. When the changes are integrated into the management system in this way, the change has been institutionalized. The role of the Executive Leadership Team evolved over time. Bob McCool retired in 1996. Brian Baker was promoted from executive vice president to the head of NAM&R, and Baker further emphasized the use of the scorecard, ensuring continuity of direction. He maintained the use of the scorecard in discussions with business unit managers for compensation, for planning and budgeting, and for monthly management reviews, thereby reinforcing the central role of the scorecard in Mobil's management system.
Inspired and dedicated middle managers can sustain quality improvements, local process improvements, and many other change programs. Middle managers can also implement programs that have been ordered from centralized corporate staff groups. But creating an entire organization that is aligned to and focused on the strategy requires the active and ongoing leadership of the senior executive team as occurred at Mobil. We are skeptical that significant results can be delivered with the Balanced Scorecard without such active leadership and ongoing reinforcement. RESULTS Mobil launched its Balanced Scorecard project in 1994. The following year, 1995, was the first in which Mobil operated with a scorecard. To expand on the results reported in Chapter 1, we collected data from the company for the five years from 1994 to 1998 (in late 1999, Mobil merged with Exxon to become ExxonMobil). Figure 2-10 shows the elements of Mobil's dramatic turnaround to industry-leading profitability. The productivity strategy created a 20-percent reduction in the cost of refining, marketing, and delivering a gallon of gasoline. Mobil produced the equivalent of about 12 billion gallons of gasoline per year, so that even small changes in operating costs per gallon had an enormous impact on the bottom line. Better utilization of existing assets created additional improvements in cash flow. The productivity strategy was accomplished using several key drivers: • • • •
Product quality improved each year for four consecutive years Annual yield losses were reduced by 70 percent Safety incidents resulting in lost work were reduced by 80 percent Environmental incidents were reduced by 63 percent
The growth strategy, with its new value proposition for targeted customer segments, produced increased customer satisfaction, which led to increased revenue from nongasoline merchandise and gasoline volume growth that exceeded industry averages by more than 2 percent per year. The innovative Mobil Speedpass was one of the drivers of rapid service. Improved dealer training and quality ensured professional and friendly service. The Perfect Order program, which improved quality for four consecutive years, strengthened Mobil's relationships with commercial and industrial customers. None of this success would have occurred without a complete cultural shift at the grassroots of the organization. Annual human resource surveys showed that only 20 percent of the workforce understood Mobil's strategy in 1994. By 1998, awareness and understanding exceeded 80 percent.
From The Strategy-Focused Organization
