[Robert S. Kaplan and David P. Norton] (BookZa.org)

t h e s t r a t e g y e x e c u t i o n s o u r c eBalanced Scorecard Report

november december 2010 : vol 12 no 6

Leading Change with the Strategy Execution SystemBy Robert S. Kaplan

Traditionally, leadership and strategy execution have been studied

as two separate, yet parallel, disciplines. Generally, leadership

scholarship identifies principles, but not a means of integrating

them into an overarching management approachof putting them

into action. Here, Robert Kaplan bridges the two literatures to

see how they reinforce each other. Drawing on the work of the

preeminent leadership scholar John Kotter, Kaplan demonstrates

how the six stages of the Kaplan/Norton strategy execution

system can help operationalize Kotters eight principles of change

managementand thus help embed both disciplines more firmly

into the organizational culture.

Research shows that leadership is the single most important factor explaining

whether companies succeed in implementing the Kaplan/Norton strategy execution

system. Without exception, the companies, nonprofits, and public sector enter-

prises that have won entry into the Palladium Hall of Fame for Executing Strategy

benefited from visionary and committed leadership. Conversely, when investigating

why apparently similar projects in other organizations failed to deliver impressive

results, we find that the lack of effective leadership behind the project explains

most of the shortfalls.

We are not the only ones who extol the critical importance of leadership in driving

change. For decades, leadership scholars have been studying the roots of effective

leadership and the processes that leaders follow to implement change and achieve

results. In this article, I bridge the two separate literaturesleading change and

strategy executionto see how they mutually reinforce each other.

John Kotter, formerly of Harvard Business School, is one of the most influential

leadership scholars. He wrote a best-selling 1995 Harvard Business School

Press book, Leading Change, and followed that with a popular version for mass

audiences, Our Iceberg Is Melting (St. Martins Press, 2006). His research, described

in these books, identifies an eight-step process for leading successful change

(paraphrased here):

1. Establish a sense of urgency.

2. Form a powerful guiding coalition.

3. Create the vision for change and a strategy for achieving it.

also in this issue:

Advancing Strategyand

Postmerger Integration

Through the Strategy Execution

Infrastructure at Merck & Co. . . . . . . . . . . . . . . . 7

The Top Ten Attributes of

Effective Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Five Pitfalls of Writing

Performance Analysis. . . . . . . . . . . . . . . . . . . . . . 13

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continued on the following page

4. Communicate the vision and

strategy.

5. Empower others to act on the vision

and strategy.

6. Produce short-term wins.

7. Sustain the effort; produce still more

change.

8. Institutionalize the new culture.

Our focus is documenting how well

these general principles for leading

successful change apply to the six-stage

strategy execution system that David

Norton and I described in The Execu-

tion Premium.1 What is striking is the

absence of any role for measurement

and management systems in the Kotter

model. But perhaps this is not surpris-

ing. Kotter is a scholar of leadership and

organizational behavior, and likely feels

that changing and aligning measure-

ment and management systems is out

of scope for his teaching and consulting

assignments. We, however, can lever-

age the measurement and management

processes in our strategy execution

framework to enhance the eight Kotter

principles and make them more op-

erational and effective for enterprise

leaders.

Step 1. Establish a Sense of UrgencyKotters first step is for leaders to over-

come complacency with the status quo.

The beliefs reflected in several popular

management maxims must be over-

come to create the climate for change,

including the most destructive of all: If

it aint broke, dont fix it. In a world of

continuous change, global competition,

and dynamic technological disruption,

the maxim should be rephrased as,

If it aint broke, it soon will be, or in

the words used by legendary pitcher

Satchel Paige to explain his life philoso-

phy, Dont look backsomeone may be

gaining on you. Kotters observation is

not unique to him. In their best seller,

Built to Last, Jim Collins and Jerry Porras

observed, Visionary companies may

appear straitlaced and conservative to

outsiders, but theyre not afraid to make

bold commitments to BHAGs, Big Hairy

Audacious Goals.2

Several of the CEOs of Palladium Hall of

Fame for Executing Strategy companies

understood well the importance of

getting the organization to recognize

current problems and of implementing

change immediately. One recalled

starting meetings by writing the letters

L O W on a whiteboard. When his ex-

ecutive team inquired about the mean-

ing of these letters, he replied, Look

out window, meaning, Compare our

results with the competition; were not

as good as we think. Bill Catucci, who

led two dramatic transformations of

underperforming organizations, claimed

that at AT&T Canada, Our only core

competency was losing money. We were

good at this, losing C$1 million per day.

Despite dismal financial performance

at both companies, when Catucci talked

individually with members of his senior

executive team, each said, My depart-

ment is performing fine. If theres a prob-

lem, it must be caused by someone else.

Catucci described how he overcame this

finger-pointing, blame-shifting culture:

I told them that were all in the same

boat, and if theres a hole on your side of

the boat, its not your problem to solve;

its our problem. Were going to succeed

or sink together. Both of these lead-

ers, and many others, started their BSC

projects by convincing the organization

that it either had a major performance

problem or would soon have one, unless

executives collectively crafted a new

strategy for future success.

Step 2. Form a Powerful Guiding CoalitionOften, resistance to change comes from

within the senior management team.

Some members are on the team because

they head a major corporate function,

such as human resources (HR), finance,

or technology, or a major business or

geographical unit. They view themselves

as technical, product-line, or regional

experts but are still unused to or uncom-

fortable thinking like a senior general

manager with accountability for overall

corporate results. Effective leaders

must help senior managers leave their

comfort zone as subject-matter experts

and think about overall company direc-

tion and strategy.

When asked to do so, however, many

managers worry about what the change

will mean to them and how will it affect

their function or product line. They be-

come defensive, which manifests itself

in resistance to change. Leaders must

identify who will be the team players

for the new strategy and who may have

to be asked to consider other employ-

ment opportunities, because continued

resistance and negativism can under-

mine any change effort.

Most CEOs who have successfully imple-

mented the Kaplan/Norton strategy

execution system report to us that the

process of building a strategy map and

scorecard with their leadership team

was the most useful benefit of the

program. Although they extolled the ben-

efits of having a map and a scorecard,

they felt the process of creating them

helped forge a consensus among the

team members about the strategy and

a commitment to helping the enterprise

achieve it that had never before existed.

You could take our scorecard and give

it to a competitor and it wouldnt work,

explained one CEO. You had to have

sweated through the hours and hours

of work and effort that went behind

the card to get the benefits from the

measures. Its got to become part of

the companys belief system, almost

a religion. The active dialogue and

debate that take place over the 12-week

period of developing a strategy map and

scorecard are an essential part of the

process of building clarity, consensus,

and commitment to a new way of doing

business. The dialogue emphasizes that

the goal is to determine what is right,

not who is right, and that everyones

views can influence the final docu-

ments. Participants in the process recall

2 b a l a n c e d s c o r e c a r d r e p o r t

1 R. S. Kaplan and D. P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (HBS Press, 2008).

2 J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins Publishers, 2004).

3n o v e m b e r d e c e m b e r 2 0 1 0 : v o l u m e 1 2 , n u m b e r 6

all the objectives and measures that

had been proposed but that were ulti-

mately left off the map and scorecard,

imbuing the final documents with even

more personal meaning. This difficult

process of debating and agreeing on the

strategy is a powerful mechanism for

building a guiding coalition at the top of

the enterprise.

Step 3. Create the Vision for Change and a Strategy for Achieving ItThis principle is clearly already embed-

ded as stage 1 of the Kaplan/Norton

strategy execution system: Develop

the Strategy. In this stage, we state

that every enterprise should annually

review and reaffirm its mission state-

ment (the organizational purpose, why

the organization exists) and its value

statements (the attitudes and behaviors

the organization insists on when dealing

with employees, customers, suppliers,

and communities). The enterprise should

craft a vision statement, which consists

of a measurable stretch target (such as

a BHAG) and a date for achieving it. The

vision serves to mobilize the organiza-

tion into action by defining a target that

it cannot achieve through business-

as-usual actions. This motivates the

leadership team to select a strategy that

will enable it to achieve the vision. We

find that this step and step 2 in Kotters

framework are usually simultaneous,

not sequential; defining the vision and

selecting the strategy are an essential

part of creating the guiding coalition for

transformational change.

In our recent work, we have inserted

an additional step between crafting

the vision and developing the strategy:

creating a strategic agenda. Leaders

can use this management tool to link

the vision to the strategy. The strategic

agenda compares the current status

of several organizational structures,

capabilities, and processes with what

they need to become over the next three

to five years.

Consider the challenges faced by the

U.S. Federal Bureau of Investigation (FBI)

in the aftermath of the 9/11 terrorist

attacks. To respond to its new challenges

and competitive threats, the FBI needed

a completely new strategy and major

changes in its organizational culture.

FBI Director Robert Mueller recognized

the need to prepare and educate all

employees about the massive changes

ahead. He prepared the strategic change

agenda shown in Figure 1 to describe the

scale and scope of the transformation.

The change agenda indicates that the

FBI would have to undergo a major shift

from being a case-driven organization

(reacting to crimes already committed)

to becoming a threat-driven organiza-

tion (attempting to prevent a terrorist in-

cident from occurring). Instead of being

secretive, agents now had to work out-

side of the traditional operational silos

and become contributors to integrated

teams. In even more of a discontinuity,

the FBI had to learn to share informa-

tion and work collaboratively with other

federal and local agencies to prevent

incidents that could harm U.S. citizens.

These guidelines, which emerged from

extensive dialogue throughout the or-

ganization, engaged all levels of the FBI

to participate in setting the goals for the

new strategic direction and contributed

to widespread understanding and sup-

port for the new strategy that followed.

Director Mueller carried a laminated

FBI strategic change agenda chart with

him whenever he visited a field office.

If agents expressed skepticism about

or resistance to the new initiatives and

structures, he reminded them, using the

single-page summary, why change was

necessary.

A strategic change agenda helps the

leadership team articulate the cultural,

structural, and operating changes

necessary to transition from the past to

the future.

Step 4. Communicate the Vision and StrategyWhile the selection of the vision and

strategy is ultimately the responsibil-

ity of the leadership team, the strategy

must be executed by all the organiza-

tions employees. One of the most pow-

erful benefits of the strategy map and

FIGURE 1: THE FBIS STRATEGIC CHANGE AGENDA

FBI Director Robert Mueller created this strategic change agenda to educate employees about the transformational changes the agency needed to undergo post-9/11.


scorecard is their ability to make the

strategy completely clear and action-

able to every employee. We learned from

the early BSC-adopting executives the

value they placed on communication.

One CEO declared, You overcommuni-

cate the strategy; its like trying to hit a

nail into granite. The first few times you

try, it glances off their consciousness.

Eventually, a little bit sinks in and then

you have to keep pounding it in deeper

and deeper. Communication specialists

have told us, You cant communicate

it just once. You have to tell people

seven times and seven different ways,

throughout the year.

But just communicating the words in

the vision and strategy is never enough.

Employees hear the words, but they

dont know the answer to the questions,

Whats in it for me? What am I supposed

to do differently and better to help the

organization implement its strategy and

achieve its vision? Words have ambigu-

ous meanings, and different people

interpret them differently. Balanced

Scorecard measures eliminate the am-

biguity and provide a clear message and

targets for every employee. As another

CEO remarked, I struggled with how to

merge two great companies with proud

histories and 12 different languages

and cultures. The scorecard gave us a

common language about our strategic

directions and intent. We could develop

and communicate strategy so that it was

clear for everyone. The president of a

global hotel chain told how every single

employee, from the hotel manager

through housekeepers and dishwash-

ers, had become aligned to the strategy:

Team members now understand the

strategy and align their objectives and

incentives to performance that will en-

able us to achieve our strategic goals.

Communication enables all employees

to understand the strategy and how

they can contribute to its successful

execution. It unleashes the power-

ful forces of what psychologists call

intrinsic motivation, in which people

internalize for themselves the goals of

the companys strategy. Employees

continually ask two key questions about

their organization:

1. Does my company have a strategy for

success?

2. How does my coming to work each

day play a role in my companys

success?

Employees want to work for a success-

ful, high-performing organization. A

company that can clearly communicate

its mission, vision, and strategy to em-

ployees answers the first question well.

As employees learn about the key pro-

cesses for delivering value to customers

and capital suppliers, they start to link

their daily activities to the accomplish-

ment of organizational objectives. They

search for ways to do their job differ-

ently and better to contribute to these

objectives. In this way, all employees

become empowered to act, leading to

the next Kotter principle.

Step 5. Empower Others to Act on the Vision and StrategyMiddle managers and all employees

must feel that they can take actions that

will contribute to successful strategy

execution. Such empowerment may be

difficult to establish in decentralized

and diversified companies where differ-

ent business units and individuals are of-

ten unsure about how their local actions

contribute to overall success. Compa-

nies can now use linked strategy maps

and scorecards to align all organization-

al units to achieve corporate synergies.3

Companies such as Infosys, Statoil, and

HSBC Brasil have hundreds of strategy

maps and scorecards throughout the

enterprise that help them achieve both

vertical alignmentobjectives drawn

from the corporate scorecardand hori-

zontal alignmentobjectives shared

with other business units. The decentral-

ization of strategic objectives facilitates

local decision making and empowers de-

cision making throughout the enterprise

that is coherent and synergistic.

To facilitate even more local decision

making that cuts across organizational

lines, companies also form theme teams

based on the thematic structure of

their strategy maps.4 Theme teams are

empowered to execute on boundary-

crossing initiatives.

Stage 4 of the strategy execution

system, Plan Operations, provides yet

another mechanism to empower front-

line and back-office employees to act on

strategic priorities. In this stage, teams

drill each BSC process objective into a

detailed process map. The process map

typically identifies multiple opportuni-

ties for process redesign and process

improvements that can be accomplished

by local teams. Once processes have

been properly designed and structured,

employees strive to achieve continuous

improvements in these critical pro-

cesses. Companies design dashboards

that provide continual motivation

and feedback for ongoing operational

process enhancements. The high-level

guidance from the strategy map and

scorecard ensures that all such local

process improvements are aligned with

the vision and strategy.

Step 6. Produce Short-Term WinsA principal challenge for any change

management program is sustaining mo-

mentum during the journey. Although

visionary leadership can generate

excitement and high motivation at the

launch of the program, interest and en-

thusiasm can wane during the difficult

months as the change gets under way

but the destination (the target in the

vision statement) is still distant. Many

change efforts fail during this critical

middle stage of the journey as managers

and employees get discouraged by the

distance still to be traversed.

Strategy maps and scorecards solve

this problem. They define not only the

destination but also the road map to

achieve it. Objectives and measures

in the internal process and the learn-

ing and growth perspectives provide

3 R. S. Kaplan and D. P. Norton, Alignment: Using the Balanced Scorecard to Create Corporate Synergies (Harvard Business Press, 2006).

4 R. S. Kaplan and C. Jackson, Managing by Strategic Themes, BSR SeptemberOctober 2007 (Reprint #B0709A).


near-term indicators of the progress the

organization is making in improving the

capabilities required to realize break-

through performance for customers and

shareholders. The multiple perspectives

of the Balanced Scorecard automatically

provide a balance between the longer-

term outcomes the strategy is striving to

achievefor customers and sharehold-

ersand the near-term improvements

in processes, employee capabilities, and

information technologies intended to

drive those outcomes.

One immediate source of short-term

wins is the initiative rationalization

process, which companies usually

conduct in the third or fourth month of

their Balanced Scorecard implementa-

tion.5 Companies generally find that they

can eliminate or consolidate at least

25% of their existing initiatives without

affecting strategy execution. The savings

from eliminating nonstrategic initiatives

usually exceed the cost of the entire BSC

project, providing a near-term benefit

from implementing the new strategy

execution system.

Beyond the ability to rationalize initia-

tive spending and motivate and track

near-term process and learning and

growth performance, the multiple

themes within the process perspective

provide a natural balance between

short- and long-term performance.

Companies can generally achieve signifi-

cant improvements in key operational

management processes within six to

12 months. When the returns from op-

erational improvements begin to slow,

improvements in customer manage-

ment processes (improving acquisition,

loyalty, and growth) can play a more

dominant role, typically in months 12

to 24. Finally, innovation processes will

produce a new stream of products and

customers during months 18 to 30,

providing the final boost to achieving

the visionary stretch target.

For example, the leadership team of a

retail banking unit of a large financial in-

stitution established a vision to increase

operating income from $20 million to

$130 million in five years. Managers

and employees were initially shocked

by the audacity of this goal. But the

theme-based strategy map and score-

card showed them a feasible path to this

destination. The operational efficiency

theme had a target to reduce the cost

per customer by 25% over the five years,

with 80% of this improvement occurring

in the first two years. The customer man-

agement theme had a target to increase

annual revenue per customer, through

cross selling and increased balances

and fees, by 50%. Eighty percent of this

improvement would occur in years 2 to

4. And a customer acquisition theme had

a target of tripling the number of high-

value customers. Much work had to be

done in improving processes, developing

new products and services, and re-

branding the bank before the customer

growth could occur, so most of the

increase in customers was targeted for

years 3 to 5. Each themes targets phased

in over time and interacted with one

another (lower cost and higher revenues

per customer, multiplied by many more

customers) to exceed the ambitious five-

year profit improvement vision.

As they plan their trajectory for achiev-

ing the vision, companies assign short-

term targets to improve operational

processes, middle-term targets to im-

prove customer management processes,

and longer-term targets to improve

their innovation processes. In this way,

managers and employees can track their

progress and achievements all along the

trajectory to success. They are not left in

the dark about whether their strategy is

delivering on performance.

Step 7. Sustain the Effort; Produce Still More Change

Although intrinsic motivation can

inspire employees to do their jobs

differently and better, sustaining their

motivation will require extrinsic motiva-

tion to maintain and reward employees

efforts. Extrinsic motivation occurs

when managers set explicit targets

for employee performance and align

their incentives to reward the achieve-

ment of personal and organizational

goals. In stage 3 of the Kaplan/Norton

strategy execution system, Align the

Organization, employees discuss with

their supervisors and HR managers the

limited set of personal objectives that

they will attempt to achieve in the up-

coming period. They must demonstrate

that achieving their personal objec-

tives will contribute, in some way, to

achieving business unit and company-

wide strategic objectives. The forces of

extrinsic motivation are also unleashed

when employees have explicit incen-

tives, usually monetary but sometimes

also nonmonetary, that are awarded

based on achieving personal, business

unit, and corporate targets. The number

1 response from CEOs when asked what

they would have done differently in

implementing the strategy execution

system is linking variable pay to perfor-

mance sooner, because it

created such a powerful motivational

force for employees.

In addition to sustaining momentum by

aligning personal goals and rewards to

strategic objectives, stages 5 and 6 of

the Kaplan/Norton strategy execution

system provide ongoing feedback for

learning and improvement opportuni-

ties in strategy execution. Although all

companies perform periodic operational

reviews, a new feature introduced by

the strategy execution system is a

separate, usually monthly, strategy

review meeting. At this meeting, the

leadership team reviews progress

and shortfalls in strategic objectives,

reallocates resources among strategic

initiatives, and implements midcourse

Although intrinsic motivation can inspire employees to do their

jobs differently and better, sustaining their motivation will require

extrinsic motivation on the part of the company.

5 P. LaCasse and T. Manzione, Initiative Management: Putting Strategy into Action, BSR NovemberDecember 2007 (Reprint #B0711B).


changes in the strategic trajectory.

Among the questions asked at this meet-

ing are, Why are we falling short of the

target? What corrective actions should

we consider? Are strategic initiatives

on schedule and on budget? Where do

we need to put more resources? Do we

need a multifunctional, multibusiness

task force to address a problem? Much

as a racing ships captain adjusts course

to compensate for changes in wind,

current, and competitors actions, the

strategy review meetings enable leaders

to revisit the strategy at least monthly

and react to new information, challeng-

es, and opportunities.

The strategy review meetings stress

learning and improvement, not finger-

pointing or blaming. Using words rarely,

if ever, used to describe the operational

monthly variance analysis meetings

conducted by the finance staff, several

managers have told us, These are the

best meetings we have ever had. We are

talking about important issues and de-

veloping action plans to address them.

They are fun and exciting.

Even more change occurs during stage

6, Test and Adapt the Strategy, when

the organization reviews a years worth

of data on strategy implementation to

learn what has worked and where the

strategy may be flawed.6 By measuring

the strategy, the company can distin-

guish between when it is implementing

a bad strategy well versus when it is

implementing a good strategy badly

an extremely important distinction that

has very different action implications

for the leadership team.

Formulating the strategy execution

system as a continuous closed-loop

system emphasizes that accomplishing

strategic change requires an integrated

and embedded management system to

sustain the change and provide multiple

opportunities for learning, improve-

ment, and adaptation.

Step 8. Institutionalize the New CultureThe final step in Kotters leading change

process is to ensure that a new culture

gets established to sustain the change.

The biggest change introduced by the

new Kaplan/Norton strategy execution

system is that the enterprises core

management system is centered on

implementing strategy and not on

achieving a budgets short-term financial

targets. Companies have been using the

budget as their central management

system for more than a century, and

this practice has engendered a pervasive

culture of short-term financial control.

It is indeed difficult to supplement and

eventually replace the budget culture

with the innovation and learning re-

quired for a strategy execution culture.

We have found that to accomplish and

sustain a strategy-focused culture, com-

panies need a new organizational func-

tion, which we call the Office of Strategy

Management (OSM). 7 The new OSM func-

tion keeps the organization focused on

strategy execution by implementing the

six-stage management system through-

out the year. The OSM does not select

the strategy, nor is it responsible or

accountable for its successful implemen-

tation. These remain the responsibili-

ties of line management. But busy and

easily distracted senior executives need

the constant attention of a small staff

dedicated to ensuring that all the pro-

cesses required for successful strategy

execution get performed on schedule

throughout the year. Establishing an

OSM and having it dictate the rhythm

and pace of the strategy execution

process are essential in establishing and

sustaining a strategy-focused culture.

Putting Principles into Action Leading change is demanding. Leaders

must establish direction by developing a

vision of the future along with a

strategy for producing the changes

needed to achieve the vision. Once the

vision and strategy have been selected,

leaders must align all employees to

them, communicating the direction and

creating the coalitions committed to

achieving the strategic vision. And

leaders must continually use intrinsic

and extrinsic motivation to inspire

employees to stay the course and

remain focused on moving in the right

direction. The new Kaplan/Norton

strategy execution system provides

leaders with a tool previously unavail-

able for accomplishing their tasks: the

capability to create an entirely new

management system designed for and

aligned to the journey toward achieving

transformational change.


6 D. Campbell, Putting Strategy Hypotheses to the Test with Cause-and-Effect Analysis, BSR SeptemberOctober 2002 (Reprint #B0209E).

7 R. S. Kaplan and D. P. Norton, The Office of Strategy Management, Harvard Business Review, October 2005 (Product #R0510D). See also Chapter 10 in Kaplan and Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (HBS Press, 2008); and Kaplan and Norton, The Office of Strategy Management: Emerging Roles and Responsibilities, BSR JulyAugust 2008 (Reprint #B0807A).

Robert S. Kaplan, along with

David P. Norton, created the

Balanced Scorecard concept.

The Baker Foundation Profes-

sor at Harvard Business School,

and Chairman of Professional

Practice at Palladium Group,

he also codeveloped activity-

based costing. Kaplan has

authored or coauthored 14

books (5 of them with Norton),

20 Harvard Business Review

articles (8 with Norton), more

than 130 papers, and dozens of

articles for Balanced Scorecard

Report.

To learn moreSee Leading Change, by John Kotter (Harvard

Business School Press, 1995); and Our Iceberg Is

Melting, also by Kotter (St. Martins Press, 2005).

For more on Kaplan and Nortons six-stage

strategy execution system, see Integrating

Strategy Planning and Operational Execution:

A Six-Stage System, by Kaplan and Norton, BSR

MayJune 2008 (Reprint #B0805A). Also, visit

www.hbr.org and click on the topic Leadership

for seminal books and articles on the subject by

the worlds foremost authorities.

Reprint #B1011A

CASE

Both Merck and Schering-Plough have

a long and rich history of working to

improve peoples health and well-being,

from discovering vitamin B1 and

inventing the first measles vaccine to

creating the first statins for treating

high cholesterolwith many other

innovations in between. Our scientists

have also developed many products to

improve animal health, including

vaccines and antibiotics.

Headquartered in Whitehouse Station,

N.J., Merck operates in more than

140 countries and has a workforce of

approximately 93,000. The second-

largest pharmaceutical company in the

world in terms of revenue, the company

(known outside the United States and

Canada as MSD) produces prescription

medicines, vaccines, biologic therapies,

and consumer care and animal health

products. The Merck/Schering-Plough

merger united two science-centered

companies (combined 2009 sales: $46.9

billion) with complementary product

portfolios to create a powerful innova-

tion platform for the long term. But

joining together two science-centered

companies to achieve long-term growth

requires careful, purposeful integration.

Merck has long known that a good

strategy does not in itself guarantee

success. Legacy Merck established

a solid strategy management founda-

tion in 2005, when it created a Strategy

Realization Office (or SRO, our Office

of Strategy Management), and adopted

the Balanced Scorecard methodology

to execute its Plan to Win strategy.1

It had a corporate strategy map and

Balanced Scorecards for every division

and function. Schering-Plough, though

not a BSC user, employed strategy

management techniques, including a

strategic road map, and its people were

focused on the importance of culture

and change programs in adding value.

One factor that sets the Merck/

Schering-Plough merger apart from the

many mergers in our industry is the

methods by which we are managing

the integration and achieving strategic

alignment. Postmerger, the strategy

map and BSC have been, and continue

to be, crucial in galvanizing the entire

organization around the strategy and

in ensuring that our five divisions and

eight support functions are aligned.

The map provides an easy and effec-

tive way to communicate our strategic

priorities to our thousands of employ-

ees throughout the world. And with

scorecards and dashboards already

built, complemented by integration-

specific monitoring capabilities, we had

the tools and competencies in place to

track integration progressand meld it

with the overarching strategy manage-

ment process.

Greater Team Power

One important factor in achieving inte-

gration success has been our SRO. The

merger planning activities were over-

seen by the Integration Management

Office (IMO). The SROs enterprisewide

capability helped create the framework

for implementing and monitoring the

plans after Day 1 of the official merger,

capitalizing on the capabilities of the

Program Realization Offices2 and other

networks throughout the company. This

approach has yielded many benefits,

not the least of which is helping to

maintain a focus on the importance of

successful execution and realization of

the strategy.

Before the merger, IMO teams at

both companies began planning and

designing for the new organization.

Tom helped lead integration planning

from the Schering-Plough side and

Vittorio Nisita was an integral member

of the team on the Merck side. Tom

was tapped to succeed Vittorio as

leader of the new Mercks SRO follow-

ing the merger close. The two worked

together for two months at year-end

to smooth the transition. When the

merger officially closed in November

2009, the SRO expanded from three to

nine people, adding a new (integration)

delivery leader, a change director (who,

for example, would coordinate systems

implementation decisions across the

Advancing Strategyand Postmerger Integration Through the Strategy Execution Infrastructure at Merck & Co. By Tom Hall, Senior Director, and Patricia Jaar Watson, Manager,

Strategy Realization Office, Merck & Co., Inc.

In November 2009, pharmaceutical giants Merck and Schering-

Plough merged to create a stronger, more diverse, and more truly

global company. To clarify strategic priorities and align activities

around key objectives, the new Merck leveraged the strategy map

and Balanced Scorecard, already in use for five years at legacy

Merck. Here, key players in the companys Strategy Realization

Office (its OSM) discuss how this existing strategic infrastructure

smoothed strategic alignment as well as the merger integration

process in many ways.


1 See V. Nisita, Driving Transformational Change: Strategy Execution at Merck, BSR JulyAugust 2009 (Reprint #B0907C). Vittorio Nisita helped create Mercks Strategy Realization Office in 2006 and was its leader from April 2008 through December 2009.

2 Project Realization Offices mirror the SRO and support key functions, certain key geographies, and key sites in managing work portfolios and addressing intent, people, and delivery risks at the local level.

b a l a n c e d s c o r e c a r d r e p o r t8

enterprise), and other personnel to

monitor progress against merger objec-

tives (such as head count and value

capture). Some from Schering-Plough

had had prior experience with mergers

there.

The IMO continued to lead integration

efforts, but as the integration planning

efforts became integration realization

efforts, IMO governance transitioned

to ongoing strategy execution. Divisions

and functions carried out their respec-

tive key integration initiatives as part

of their broader business and strategic

portfolios.

Aligning Around Strategic Priorities

Recognizing the magnitude of our in-

tegration, Merck devised a three-phase

road map to define our mission, vision,

and focus over the next three to eight

years. (See Figure 1.) Phase 1, Launch (i.e.,

launching the new Merck), is focused

on unifying the company and fostering

the culture that will set the foundation

for our strategy. Its goal: for Merck to

become a new company that retains

the best in class of its legacy entities.

In phase 2, Accelerate, we will allocate

resources for our most promising

opportunities and continue to seek op-

erational efficiencies. Well be creating

an environment that supports sustain-

able short- and long-term growth. The

work of these phases will position us

for phase 3, Breakthrough, in which we

realize our vision of becoming the best

healthcare company in the world.

Scorecards are critical to our alignment

as a company. In a company of our size,

we use the Balanced Scorecard process

to cascade the strategic priorities and

company scorecard to the divisions and

functions, and, ultimately, to individuals

as they develop their personal objec-

tives. This ensures that everything we

do, at every level, relates to our strategic

priorities and is focused on driving the

successful execution of Mercks strategy.

Our Executive Committee (EC) was

announced in August 2009 before

(and subject to) the merger close. That

November, immediately following the

close, the SRO worked with the EC to

flesh out the near-term mechanisms

to support the realization of road map

objectives. For example, to ensure

strategy and scorecard alignment, we

introduced EC alignment sessions. These

sessions were designed to establish a

common understanding of key priorities

by defining objectives and performance

goals and by identifying organizational

interdependencies, risks, and measures

of success. We needed to updateand,

in the case of entirely new divisions

(such as Consumer Care), createBSCs.

Next, we partnered with members of the

EC (each of whom is responsible for a

division or function) and with their BSC

representatives (senior-level managers

who coordinate and ensure strategy

execution in their areas). First, we held

one-on-one meetings with these senior

managers to identify scorecard and

strategy map elements. This is how we

identified all the organizational inter-

dependencies. We scrutinized every

objective on each strategy map, asking

ourselves: What did it mean? What

were we measuring? These sessions

yielded the new 2010 company strategy

map and scorecard. (See Figure 2.) This

painstaking process provided visibility

and created the transparency we saw as

essential for alignment.

Then, we held a joint meeting with

divisional and functional representa-

tives to present our findings from each

one-on-one meeting. This allowed the

representatives to see each areas priori-

ties and understand the organizational

interdependenciesfor example, how

Global Services Objective B supports

Researchs high-priority Objective A. In

addition to ensuring alignment, this

meeting helped ensure that resource al-

location was in line with plans. We then

repeated this process at the EC level

one-on-ones with EC members followed

by a joint team meeting. Naturally, we

did our best to streamline the time de-

mands on top executives, but everyone

understood how important this collabo-

ration was to achieving unity.

Each scorecard was thus rigorously

tested (now an annual practice) for its

vertical alignment with the company

strategy map and scorecard, and its

horizontal alignment with the other

division and function scorecards.

Communicating the Strategy Map and Scorecard, from the Top Down

In February, approximately 300 com-

pany leaders gathered for the first time

following the merger as the leadership

team to focus on Mercks immedi-

ate priorities. Our CEO, Richard Clark,

presented the New Merck road map and

the 2010 strategy map and corporate

scorecard. Breakout sessions led by

each EC member followed to allow for

discussion.

Within days, the CEO hosted a live

webcast to introduce the 2010 strategy

Day 1 18 Months

12 26 Months

Years 3 8

breakthrough

accelerate

launch

FIGURE 1: THE NEW MERCK ROAD MAP

map and company scorecard to the

entire company. He also created a video

message. Division and function heads,

as EC leaders, also held meetings for

their people about their areas BSC and

how it aligns to the companys priori-

ties. Some were taped for a webcast

and available for later viewing by any

employee. This chain of communication

drilled down from region to country to

site level, so that employees could learn

about the strategy and their role in it.

Communications from our HR leader

emphasized the importance of creat-

ing individual performance objectives

aligned with the companys objectives

as part of the global performance

management and employee develop-

ment system. Scorecards are part of

determining our variable compensation

and unite employees around ensuring

company success.

To promote enrollment (our term for

buy in) in the Balanced Scorecard

methodologywhich was, after all,

new to roughly half the workforcewe

created a strategy website. The site

features definitions, strategy maps, de-

scriptions of objectives, and measures

for every BSC. To help people in differ-

ent areas understand the priorities of

each group, we show the weight of each

measure. The site also provides regular

updates and archived articles and web-

casts from leadership. An online training

session is also available to employees.

The SRO, HR, and our Global Communi-

cations group have made a concerted

effort to coordinate strategy, perfor-

mance management, and compensation

communications to emphasize the link

to our strategic priorities and scorecard.

We convene to study the timeline of

events for each group so that we can

support each one anothers messages.

For example, the HR leads notification

about midyear performance reviews

includes a reminder to employees to

study their areas BSC and to talk to their

manager if they feel their work is not

aligned with the BSC.

Leveraging the Strategy Execution Infrastructure to Support Large- Scale Integration

We believe that strategy is something

you do, not something you have. Suc-

cessful execution necessitates commu-

nication, teamwork, and collaboration

across the organization. The SRO there-

fore works with the EC on a continuous

basis to develop, execute, and track

Mercks long-term strategic plan at the

enterprise level. The SRO launched the

New Merck Strategy Execution Network,

a network of integration leaders, divi-

sion and function Program Realization

Office leads, and other team members

who are added as needed. The networks

role is to enhance coordination, ensure

clarity of strategic priorities, and act as

our change agents for major strategic

initiatives. It ensures that interdepen-

dencies and change impacts on the

organizations are understood. It identi-

fies issues that arise and agree upon

the actions needed to address them.

Ultimately, network members help drive

successful execution at the local level.

This cross-functional group aims to

bring together the right people to cut

through obstacles to resolve compa-

nywide strategy issues with maximum

efficiency.

The Strategy Execution Network meets

regularly to ensure shared understand-

ing of the portfolio of workintegra-

tion team plans as well as companywide

strategic initiatives. This practice gives

us all an enterprise view of what is

planned, which helps in managing

expectations, identifying interdepen-

dencies, prioritizing our work, tracking

progress, and assessing capacity.

At network meetings, each person

spends five minutes debriefing the

group on how his top project affects

the whole enterprise. From its start, the

network has taken advantage of the

standard tracking mechanisms (score-

cards, dashboards, integration KPIs)

already in place.

One of the risks associated with merger

integration or any protracted change

program is the loss of momentum in the

business. In the Launch phase, we have

emphasized maintaining momentum

while preparing for the future. The BSC

plays an important role in fostering a

common vision throughout our global

workforce. And the Strategy Execution

Network also plays a role in dealing with

issues other than integration that could

lead to loss of momentum.


launch

Maximize pipeline value with efficient ROI Grow earnings Grow revenue

maximize shareholder value

fin

anci

alcu

sto

mer

peo

ple

and

cu

ltu

re

inte

rn

al b

usi

nes

s d

riv

ers

Enhance Mercks standing with customers and other key stakeholders Engage customers, co-create solutions

become the most trusted industry leader in delivering value to customers, including patients

Build a sustainable culture characterized by customer focus, courage and candor, and rapid, disciplined decision making Build, engage, and retain diverse talent globally

create a high-performance organization

Maintain focus on global growth opportunities in human health, consumer

health, and animal health

sustain momentum become one company position for acceleration & breakthrough phases

Drive global performance of key products and stratgic geographies

Integrate global operations and implement new models

Develop longer-term strategies that transform and grow the business

Deliver the late-stage pipeline and successfully launch new products Achieve merger synergies

FIGURE 2: 2010 STRATEGY MAP

The 2010 strategy map reflects the priorities of the Launch phase.

Aligning Incentives with Strategic Priorities

In legacy Mercks Annual Incentive Plan

(AIP), three componentsperformance

on the company BSC, performance on

the division or function BSC, and the

individuals performancewere added

together to compute the individuals

bonus. Under this system, lackluster

company performance wouldnt prevent

an individual from receiving a respect-

able bonus. Legacy Schering-Ploughs

bonus pool was based on two financial

measures of company performance and

allocated to each business unit or geog-

raphy based on relative performance,

with individual performance determin-

ing the final incentive amount.

The new Merck revised the AIP to reflect

our total rewards philosophy by

ensuring it comports with shareholder

interests and by promoting a pay-for-

performance culture. The funding for

AIP awards is based on company and

division or function performance as

measured by the BSCs. This pure-

scorecard approach enables us to bal-

ance short- and long-term goals while

also pulling nonfinancial levers, such

as culture and employee engagement,

to achieve goals. Individual performance

plays a role in determining an employ-

ees actual AIP reward. A leadership

behaviors modifier was adopted to

foster the desired cultureone based

on customer focus, rapid and disciplined

decision making, and courage and

candor. Leaders who achieve desired

results in ways contrary to these

standards lose performance points.

Setting Targets

Alignment of objectives to the strategy

is not sufficient if the measures and

their targets are not aligned to objec-

tives. The SRO partners with the divi-

sions and functionsincluding Global

Finance and Global HRand finally

with the EC to develop target-setting

principles and targets for all BSCs.

Certain measures are mandatory: every

BSC must have culture and nonfinancial

measures, along with a compliance and

health, safety, and welfare modifier; the

latter promotes doing things the right

way, not just hitting the targets. We also

provide guidance to the divisions and

functions on how to set their targets.

For example, with measures related to

P&L, we work with Global Compensa-

tion and Finance to determine how

to set targets, so that the measures

typical performance weighting doesnt

distort results but rather helps ensure

fairness among groups.

And again, the target-setting process is

used in conjunction with communica-

tions from our HR leader emphasizing

the importance of creating individual

performance objectives aligned with

the companys objectives as part of the

global performance management and

employee development system.

Finally, our targets are aligned with our

annual profit plan. The SRO reviews past

performance, resource allocation, stra-

tegic initiatives, projects, and time lines

to ensure that the targets are ambitious

but achievable without creating undue

or excessive risk taking. We also want

to be sure they make sense: are the re-

sources there to achieve the target? The

link to our annual incentive plan makes

it critical that all scorecards are held to

the same standards.

Getting Strategy-Focusedand Back to Business as UsualFast

Merger integration can be a disruptive

time for employees, and yet coming

together as one company and maintain-

ing business momentum are crucial to

success. Our strategy management

infrastructureour mechanisms,

teams, processes, and toolshas been

instrumental to our continuing

progress on the integration and to our

historic success with strategy execu-

tion. By supporting line execution and

realization of the overall strategy, the

SRO helped incorporate integration

priorities into our overall strategic

priorities while maintaining the

appropriate governance, performance

management, interdependency

management, and issue resolution. And

overall, our strategy management

system has facilitated enterprisewide

alignment by ensuring that employees

at every level remain focused on the key

priorities even as the merger integration

work continued. Finally, our system

and infrastructure have enabled our

integration management team leaders

to shift their focus back to business as

usual sooner and more seamlessly,

without the new Merck losing sight of

our integration commitments and

goalsand our road map.


Reprint #B1011B

Patricia Jaar Watson is

manager of the Strategy

Realization Office. She is

responsible for managing

and administering scorecard

processes.

To learn moreThe BSC system has enabled SMDC Health

System to achieve alignment more readily with

its new acquisitions. See Breaking Down

the Silos at SMDC Health System, BSR July

August 2009 (Reprint #B0907B). And though

not an example of merger alignment, Motivat-

ing Cross-Boundary Thinking and Acting at

Ingersoll-Rand (BSR MarchApril 2005; Reprint

#B0503B), describes how a global behemoth got

its disparate businesses aligned strategically.

Tom Hall heads the Strategy

Realization Office within

Mercks Corporate Strategy

Office. Among his respon-

sibilities are managing the

company strategy map and

Balanced Scorecard processes.


In our many years of experience guiding

CEOs and business unit heads, weve

identified and honed a list of top ten

attributes of visionary and effective

leaders based on the traits of those

who have successfully steered their

organizations through strategic trans-

formation and onward to measurable

and sustainablebreakthrough results.

How do you and your fellow executives

measure up? Do your leaders

1. View strategy execution as their job?

Sure, most CEOs know that strategy is

part of their job. But how many limit

their involvement to a high-level role in

the strategy formulation process and

then completely delegate its execution?

Effective leaders recognize the impor-

tance of a hands-on approach. They are

deeply involved not only in developing

the strategy but also in executing it.

They consider it their job to actively

lead and manage throughout every step

of strategy executionday after day,

month after month, year after year. To

them, its a daily responsibility.

2. Have a keen understanding of the change process?

No one would disagree that adopting

and implementing a new strategy is a

change program; but how many leaders

view strategy execution as a constantly

evolving process? Visionary leaders

understand that strategy execution, and

not only implementation, is fundamen-

tally a change management endeavor.

Performanceand assumptions

are constantly monitored, tested, and

revised as needed (as described in the

Kaplan/Norton six-stage strategy

execution system). Strategy execution

inherently involves continuous change.

There is no real steady state; it is a

dynamic process.

Visionary leaders also understand the

human dynamics of change and the

importance of considering the variety

and complexity of human responses to

change. First and foremost, this calls

for demonstrating the need for change

and creating a sense of urgency. For

example, leaders must make a compel-

ling case for changeto everyone in

the organization, and not only their

direct reports. Visionary leaders are

adept at building commitment from the

top down. They know how to convey a

motivating, shared vision for the future

of the organization and are careful to

ensure that the strategic intent is clear

and clearly understood throughout the

organization. They understand how to

lead people through difficult transi-

tions, managing how change will affect

all stakeholdersnot only managers

and employees, but also customers,

suppliers, shareholders, and the board

of directors.

3. Know howand whento push the leadership accelerator?

Visionary leaders understand (and dont

just give lip service to the idea) that

executing a transformational change

strategy takes substantially more

energy on the part of leaders than an

incremental change strategy does. As

a result, they push the accelerator

demanding more time, energy, visible

support, and hands-on leadership from

their team membersto lead execu-

tion when the stakes (and the change

requirements) are high.

4. Stay the course?

Visionary leaders are unwavering in

their focus on and commitment to the

strategy. They fully expect to encounter

resistance, if not outright opposition,

even from members of their own man-

agement team or the board. Rather than

capitulate or compromise, however, they

take proactive steps to engage potential

opponents and involve others to win

opponents support. They demonstrate,

publicly and privately, by word and by

action, that nothing will diminish their

commitment to executing the strategy

and achieving breakthrough results.

5. Put a premium on communicat-ing to all stakeholders during the transition?

Clearly, all stakeholders need to under-

stand the strategy: what it is, why it

needs to be implemented now, and how

adopting it will lead the organization

toward breakthrough results. They need

to recognize that senior management

is committed to it. And they need to

understand how they can contribute to

successful strategy execution. Unfor-

tunately, many leaders are perfunctory

about communications. It takes more

than a video and an email from the CEO

to convince stakeholders of the CEOs

commitment. Effective leaders are ac-

tively and personally involved in talking

to the spectrum of stakeholders, in vari-

ous media, to gain their buy in. And they

rally their team members and organiza-

tional resources (not just HR but also the

communications group) to help develop

and coordinate ongoing communica-

tions. They understand the importance

of seven times and seven waysof

repeating the message in different

formats and for different audiences

and of providing interactive, not merely

one-way, forums for communicating and

discussing strategy.

The Top Ten Attributes of Effective Leaders By Mark B. Hefner, Vice President, Palladium Group, Inc.

A sound strategy management process and visionary leadership:

these are the two universal characteristics of the more than 140

organizations that have won a place in the Palladium Balanced

Scorecard Hall of Fame for Executing Strategy over the past 10 years.

But if leadership is a prerequisite of successful strategy execution,

why do so many organizations leave it to chance? Although many

leaders are natural born, leadership can be cultivated.


6. Align, assign, and hold account-able direct reports to fulfill specific strategy execution roles?

Visionary leaders are clear about what

they expect of their direct reports

and they do not hesitate to support

their expectations with reinforcement,

whether positive or negative. They insist

that their direct reports do the same

with their subordinates so that a clear

message about roles, expectations, and

strategic intent is cascaded horizontally

and vertically throughout the organiza-

tion. In assigning responsibilities and

setting expectations, they also invest

in developing the leadership skills of

managers at all levels to prepare them

for their new roles in strategy execution.

They dedicate resources to preparing

them for change, fostering teamwork,

encouraging fresh thinking, and requir-

ing that they know the desired behav-

iors and results, which will be measured

and rewarded. Effective leaders monitor

the performance of their subordinates

against expectations and are willing to

make tough decisions when, as inevita-

bly happens, some leaders cannot live

up to the new requirements.

7. Adhere to a proven strategy execution process?

Most executives know that succeed-

ing at strategy execution is against

the odds; more organizations fail at

executing strategy than succeed. Vision-

ary leaders understand that shortcuts,

while attractive, do not yield competi-

tive advantage or sustainable break-

through results. To boost their chances

of success, these leaders adopt proven

processes to execute strategyand

enforce their consistent application

throughout the organization. Leaders

also clearly understand that strategy

execution is not a one-time event but

rather an organizational capability that

can create competitive advantage. They

therefore integrate the strategy execu-

tion process and the requisite capabili-

ties into the organizational culture.

8. Understand the true cost of execution and allocateand protectthe required resources?

Visionary leaders assign the best, most

talented people within the organization

to serve as change agents in executing

strategy. They establish teams of such

agents to work with organizational

leaders to coordinate, integrate, and

facilitate strategy. Some of these change

agents are dedicated to this task full

time (for example, Office of Strategy

Management personnel). Others con-

tribute (in addition to their day jobs),

as members of a strategic theme team

or as part of an enterprise network (see

Case, p. 7).1 They specifically allocate

and guarantee the financial resources

required for execution, often establish-

ing a separate strategic expenditures

(StratEx) line item in their budget and

financial reporting. These leaders

treat this allocation as an investment

with an expected return and not as

an operating or capital expense.

9. Make timely, often difficult, decisions based on fact, not on gut instinct or political pressures?

Effective leaders develop a streamlined

governance process featuring regular

management reviews and objective and

candid reporting on strategy perfor-

mance. They clarify decision rights (who

decides what, who should influence de-

cisions, and who should be responsible

and accountable) among the organiza-

tions leaders and change agents. They

invest in developing business intelli-

gence capabilities to provide factual in-

formation on key strategic performance

indicators. They see to it that leaders

and change agents make prompt, often

difficult, decisions based on that infor-

mation. Although collaborative in their

own decision-making style, they know

that ultimately they are accountable

for strategic decisions and expect full

support in those decisions, even from

dissenting executives.

10. Welcome feedback and show theyre willing to change their mindsand their behavior?

Because of their commitment to execut-

ing strategy, visionary leaders value

feedback on their leadership and are

willing to modify it, if necessary. They

encourage direct feedback and straight

talk among and between all leaders

and change agents so that ineffective

or dysfunctional leadership behaviors,

wherever they show up on the team,

get changed. They believe in learning

continuously, and constantly hone their

leadership skills, as well as those of

others in the organization. They lead not

only with their intellect but also with

their heart.

The list may be daunting, which might

explain why more organizations fail at

strategy execution than succeed. But

these attributes are hardly genetic.

They involve establishing a point of

view and, perhaps more important, a

set of practices that can be learned,

honed, and supported with a rigorous

strategy execution system.

Reprint #B1011C

With 28 years of strategy

execution experience, Mark B.

Hefner helps senior executive

clients execute transforma-

tional strategies. A member of

Palladiums Strategy Execution

Leadership team, he works

primarily within the financial

services, pharmaceuticals, and

consumer products industries.

Continue the dialogueWhats your opinion of this top ten list? Weigh

in with Mark Hefner and 15 senior executives at

www.thepalladiumgroup.com/bsr/HefnerChange.

To learn moreSee Leadership Development as the Key to

Organizational Change (and Success), a case

study by Marcus Pitt, BSR SeptemberOctober

2009 (Reprint #B0909D).

Leadership and Change, a BSR Reader (2007),

features articles by John Kotter, Jay Conger,

and Robert Kaplan and David Norton, along

with how-to articles from field practitioners.

(Product #1863).

1 Read about yet another approach to such networks in Beyond the OSM: Strategy Execution Champions Help Foster Strategy Execution Capability, by Marina Mier y Tern Cuevas and Maria Jos Ortega Moncada in BSR SeptemberOctober 2010 (Reprint #B1009C).


The 1990s saw the rise of risk reporting

by financial institutions, and with it the

growing popularity of a high-level risk

indicator called value at risk (VaR). VaR

is an aggregate measure that reflects

the probability that a portfolio of assets

will lose a specific value in a given

time frame, assuming that markets are

normal and that there is no trading.

By the turn of the millennium, many

financial firms had come to rely on VaR

(among other risk measures).

Then, in 2007, the subprime mortgage

crisis hit. Banks lost billions in write-

downs; some collapsed, others were

sold off or rescued through government

funding. Did VaR fail as an indicator?

Not at all. Did banks put too much trust

in it? Perhaps. They also may not have

given sufficient attention to supporting

analysis.

Im not suggesting that overconfidence

in VaR was a cause of the crisis. Obvious-

ly, Im oversimplifying the role of a risk

indicator in a financial crisis with deep

and complex causes. But I use this ex-

ample to make a point: measures alone

dont tell the story. Relying on them

exclusively in monitoring organizational

performance without analysiswithout

qualification and contextcan lead to

serious misperceptions about perfor-

mance, if not to disaster.

Measures are limited by their scope and

assumptions, and by the attributes of

their underlying data. They need qualifi-

cation. An aggregate, for instance, is not

always composed of equally weighted

components; consider banks overex-

posure to mortgage-backed securities.

That is something that neither VaR nor

any aggregate could possibly show.

Measures need context, as internal and

external forces dont exert constant or

equal impact.

In the classic Balanced Scorecard (BSC)

methodology, performance analysis

happens at two levels: at the measure

level and at the objective level. Although

this article addresses writing analysis

at the objective level (which certainly

incorporates insights on measures),

many of the concepts presented here

can also be applied to writing analysis

at the measure level.

Written objective-level performance

analysisanalysis that describes

the recent and past performance of a

business objective and projects future

performanceis essential for turning

measure data into valuable, actionable

information. Analysis also provides

insight into the important aspects of a

business that are difficult to measure.

Finally, written performance analysis

examines the risks as well as the op-

portunities associated with a strategic

objective. Without such analysis, all

the effort in monitoring strategy perfor-

mance is for naught.

Despite its value, though, most organi-

zations written performance analysis

is not very good. Most analysis doesnt

explain the data, discuss its underlying

causes and implications, or integrate it

into a broader discussion of strategic

performance and environmental trends.

My recent reading of strategy review

reports of a handful of Palladium Hall of

Fame organizations showed that even

exemplars of strategy execution some-

times fall short in their written perfor-

mance analysis, thus missing valuable

opportunities. Fortunately, this problem

can be remedied. Writing insightful,

actionable performance analysis is a

skill that can be learned.

Through our work guiding dozens of

organizations in strategy reporting,

weve identified five common pitfalls in

performance analysis. Avoid them, and

youll be well on your way to producing

performance analysis that can truly

guide decision makers in making sound

strategy management decisions.

Pitfall #1: Focusing Only on the Measure Data, Without Explaining or Interpreting

Often, performance analysis merely re-

gurgitates what the data already show,

or simply explains the components of

the corresponding measure(s). What

good does that do?

Consider the problem with drawing

inferences from jobs dataa key indica-

tor of the nations economic health

without any explanation. Imagine that

the next jobs report shows a gain of

150,000 jobs. Does that number alone

tell us that the economy is recovering?

Or that job growth will be a steady

trend? Now, lets drill down to the

industry breakdown level. Suppose

we see that nearly all new jobs for the

Five Pitfalls to Avoid When Writing Performance Analysis By David McMillan, Consultant, Palladium Group, Inc.

Without measuring, you cant manage. Put another way, without

useful performance analysis, you cant put to use all those

measurements your organization works so hard to gather. Written

performance analysis is the foundation of the strategy review

process, and yet, observes David McMillan, it is generally not very

good. Here are the five biggest pitfalls to avoid.

Avoid these pitfalls, and youll be well on your way to producing

performance analysis that can truly guide decision makers in

making sound strategy management decisions.

14

month came from the energy sector. Was

the increase triggered by the stimulus

plan? Why didnt other industries see an

increase? We cant answer these ques-

tions based on the measures alone. If

we want to understand trends, market

or economic developments that might

impair job growth, the extent to which

seasonality is affecting the dataany

of the issues that form our expectations

and drive our decisionswe need to dig

deeper for more contextual data that

might explain the performance. We need

to ask:

1. What is the reason for the last

periods measure performance? How

do we explain any period-to-period

trends? Dont restate the obvious

(e.g., sales are down 3% because ABC

divisions sales fell 4% and XYZs 2%).

Look for information that will explain

why sales are down for each division.

Are both divisions suffering from the

same problem, or are their numbers

down for different reasons?

2. What does the measures outcome tell

you about the performance of its cor-

responding objective? Do the trends

in measure performance correspond

to the perceived trends in objective

performance (i.e., is this measure still

valid for the objective)? Are future

expectations of the measures perfor-

mance sufficient to achieve desired

performance at the objective level?

Pitfall #2: Omitting Qualitative Information

Numbers are concrete and apparently

objective, and therefore they make

people (analysts and their audiences)

more comfortable and confident. But

numbers dont tell the whole story. And

they can mislead, whether inadvertently

or not. (Think of all the ways statistics

can be presented to support any side of

an argument.) Qualitative information

can often reveal the reasons behind the

numbers better than the deepest dive

into the detailed data can.

It seems self-evident that qualitative

information is a critical element for un-

derstanding what drives performance.

Yet too often such information is absent

from written analysis.

Many innovation-oriented companies

use a BSC measure that monitors

progress in the stages of their R&D

efforts. Usually this measure tracks

only whether projects are on schedule.

At some companies, the performance

report might go so far as to also note

the reason a particular major project

is behind schedule. However, it doesnt

answer the questions that company

leaders really need to know: What are

the scheduling pressures that all the

behind-schedule projects share? And

what general risks need to be better

mitigated? For example, for a toy

manufacturer, obtaining feedback

from focus groups of children may be

consistently taking a month or two

longer than anticipated.

For some objectives and measures, the

only way to understand performance

is to talk with people throughout the

organization whose activities or deci-

sions are connected with the objective

or measure at hand. Discussions with

colleagues will help get a full and

accurate analysis of root causes and

future expectations. If the objective

relates to the organizations efficiency

in innovation, talk to the R&D project

leaders; theyll know what factors

routinely lead to cost overruns. If the

objective concerns customer service,

talk to those who most often interact

with customers to find out why custom-

ers are complaining about the service

they receive. If the objective is about

workforce skills, seek out managers who

direct employees so that you can learn

how training can be improved.

Avoid relying on a single source, since

an individual may have a particular

bias (such as a personal agenda) or his

experience may represent an anomaly.

Try to get input from multiple, varied

sources with relevance to the objective.

It may not always be feasible to talk to

multiple people, but it is a good idea,

especially when biases are likely or

hypothesis is involved.

Getting accurate qualitative informa-

tion is a key reason for the performance

analysis writer to confer with the

objective owner before starting to write

and after a draft has been completed.

Often weve seen this step overlooked,

making the objective owner unprepared

at the next strategy review meeting

and causing her to stumble through her

presentation or discover errors in the

analysis. For example, suppose the anal-

ysis writer concludes that changes in

productivity at a manufacturing facility

were caused by a suppliers inability to

deliver on time, when in fact the supply

plan called for scaling back production

due to an inventory surplus.

Here again, though, the writer (usually

the objective coordinator) should not

rely exclusively on the objective owners

opinion. Writers shouldnt feel obli-

gated to trust the executive as the sole

source of information about possible

causes underlying performance. Seek

other views from appropriate sources

with relevant knowledge and access to

relevant information.

Pitfall #3: Avoiding Interpretation When the Data Are Ambiguous

Sometimes all the analysis in the world

wont yield a definitive explanation for

a performance result. Yet even when

there is no certain answer, it is always

better to offer a hypothesis than to

b a l a n c e d s c o r e c a r d r e p o r t

Sometimes all the analysis in the world wont yield a definitive

explanation for a performance result. Yet even when there is no

certain answer, it is always better to offer a hypothesis than to

forgo explanation altogether.

forgo explanation altogether. For deci-

sion makers, there is little that is more

unsatisfying (or more irksome) than

to ask why and be told, I have no

idea. Offering a thoughtful educated

guess will at least get the conversation

started.

Some objectives do not naturally lend

themselves to concrete explanations.

For example, identifying why customer

loyalty has declined is generally quite

difficult. Did your biggest competitor

roll out a new advertising campaign?

Did your company recently run a big

promotion or change its pricing? Or

did Steve Jobs or Lady Gaga mention

your product? There are many possible

reasons, and surveying a statistically

significant sample of customers can be

too expensive.

Even if the hypothesis isnt on target,

it will promote speculation by leaders.

And it couldand shouldinvite those

reading the analysis who are knowl-

edgeable about the situation to further

elucidate performance. This can only

help deepen understanding of organi-

zational performance. No matter what,

an informed hypothesis is always more

actionable than no hypothesis at all.

Pitfall #4: Avoiding Any Discussion of Risk

No one likes to be the messenger of

bad news, but addressing risk openly

and accurately is the key to avoiding

unexpected declines in performance

and greater risk.

Today, many companies have a chief risk

officera peer of the chief strategy of-

ficer and chief financial officer. Yet even

in our age of heightened risk awareness,

risk and strategy are still often viewed

as separate areasone involving all that

could go wrong, and the other all that an

organization hopes to achieve. In real-

ity, the two are inextricably linked. The

strategy represents a hypothesis of the

way the business operates and the ac-

tivities that are crucial to attaining the

ultimate desired outcome. Each strate-

gic objective is achieved by successfully

managing its performance drivers. Be-

cause its a given that there are specific

risks that can impede each performance

driver, why would such risks not be part

of the strategic conversation? 1

When writing performance analysis, the

writer needs to consider not only the

key drivers of the objective and the set

of actions that can lead to its success-

ful execution, but also the major risks

that could affect each key driver. For

example, if your scorecard has the objec-

tive Increase the efficiency of our R&D

process, you might identify three main

drivers: (1) speed of market analysis,

(2) quality of the idea pipeline, and (3)

effectiveness of relationships with regu-

lators. For each of these drivers, there

are undoubtedly risks that must be

monitored. For example, the propensity

to track the same competitors all the

time might skew your market analysis.

A work environment that frowns on

failure might stagnate idea generation.

Turnover of key employees might signifi-

cantly weaken your organizations rela-

tionships with regulators. By identifying

these risks, you can now actively track

and mitigate them. The organizations

successesor difficultiesin mitigating

these risks can then add constructively

to the analysis of the objective.

Pitfall #5: Focusing on Details at the Expense of the Bigger Picture

For any number of reasons, performance

analysis writers often delve into one

aspect of an objectives performance,

overlooking the objective-level view.

This cant see the forest for the trees

syndrome does not give decision makers

the information they need.

Documents

[Robert S. Kaplan and David P. Norton] (BookZa.org)