In today's challenging marketplace, general managers and financial executives must determine where to invest their limited time and attention. In this interview, Driving Corporate Performance faculty cochairs Robert S. Kaplan and Robert Simons discuss the importance of strategy execution in both the private and public sectors—and how the program can help participants secure a competitive edge in any industry or economy.
What Are The Greatest Challenges Presented By Today's Fast-Moving Global Economy?
Simons: The pace of change around the world has never been greater, and business leaders must be adept at anticipating and responding to these changes. To illustrate the magnitude of the problem, consider the S&P 500 index. If you compare the list of companies in 2000 with those today, you’ll see that more than 50 percent of the companies that existed in 2000 are gone. Failed business models and bankruptcies have separated the winners from the losers. Tom Siebel, founder of Siebel Systems and C3 (a new business case that we’ll be studying in our course), calls this a mass extinction event.
Economies and companies face several big challenges. Europe, China, Japan, and formerly dynamic emerging nations like Brazil and Turkey remain in a slow-growth mode. Anti-competitive governmental regulation in southern Europe, Japan, and many developing economies discourages business investment, hiring, and expansion. Many economies are burdened with high public debt and future obligations for government pensions and medical care. This restricts options for discretionary government spending on growth-inducing investments, such as infrastructure, education, and R&D.
The purpose of our Driving Corporate Performance program is to give business leaders, and the staff that supports them, the insight and tools to successfully navigate this rapidly changing landscape.
What Challenges Do Business Leaders Face When Attempting To Drive Exceptional Levels Of Corporate Performance?
Simons: Business leaders must address a very dynamic set of tensions. Striking the right balance among growth, profit, and control is critical. It's relatively easy to maximize one or two of these goals, but the trick is to build an organization that can excel on all three dimensions. Business leaders must understand how to manage the performance expectations of an expanding array of constituents. This means not only continuing to deliver exceptional market value, but also finding ways to meet the expectations of customers, employees, and the communities where they live and work.
The way that we manage people has also changed fundamentally. Twenty years ago, it was all about the compensation plan—people did what they were paid to do. But today, employees want to belong to an organization where they're contributing something important and making a difference. This program provides the frameworks and tools for participants to understand these tensions and help their organization respond effectively. By learning how to prioritize the many issues demanding their attention, business leaders can be more strategic in increasing their personal "return on management."
Kaplan: Many of the challenges we address in Driving Corporate Performance have to do with the limitations of the financial measures used for companies' income statements and balance sheets. These financial statements worked well for 19th- and 20th-century companies that created value mostly through their physical and financial assets. The economy was dominated by capital-intense companies that were producing steel and aluminum, machine tools, automobiles and other transportation equipment, as well as merchandising companies that had most of their assets in physical inventory.
But today, most of a company's value comes from its intangible assets—people, customer relationships, quality, and innovation activities. Companies must invest to enhance their intangible assets—training employees, improving processes, creating new products and services, and building customer loyalty. Financial accountants view this spending as an expense that decreases the company's income and net worth. But a company is worth far more when it improves capabilities and intangible assets that can drive and sustain future value.
As Peter Drucker said, if you don't measure something, you can't manage it. If we're failing to measure how well we're doing with our most important intangible assets, we're probably not managing them well. And that's the motivation for the Balanced Scorecard (BSC). We may not be able to measure these assets in financial terms, but we can certainly quantify and improve them. The BSC gives us a structured, comprehensive framework for measuring and linking customer loyalty, the innovativeness of new products, the quality of processes, and the skills of employees to business strategies.
How Has The Balanced Scorecard Changed Over The Years?
Kaplan: When we first introduced the Balanced Scorecard in the early 1990s, it solved the performance measurement gap that existed when we relied only on financial measures. Over the next 10 years, we realized that the BSC also solved an even more pressing organizational problem—an estimated 80–90 percent of companies fall far short of achieving their strategic targets. The BSC turned out to be one of the best management tools for effective strategy execution. We learned this by initially working with a half-dozen organizations that used the BSC for both measurement and strategy purposes.
Now, we have a systematic, comprehensive view of strategy execution that greatly improves the likelihood that managers will succeed in implementing their strategies. It includes components such as aligning spending on strategic initiatives to the strategy, communicating to and motivating employees around the strategy, linking performance improvement programs to strategic priorities, conducting regular strategy-review meetings, and introducing a new Office of Strategy Management.
The way in which we implement the BSC today is very different from—and much more powerful than—the method we used when we started on this journey more than 25 years ago. The Driving Corporate Performance program provides a great opportunity for every participant to get the best current knowledge about the BSC strategy execution system.
What Type Of Research Have You Been Working On Lately?
Kaplan: We're teaching governmental and nonprofit organizations how to use the BSC to promote performance and accountability. Citizens are now demanding greater accountability for government spending. Previously, government agencies lacked a measurement that could report on their outcomes. We're seeing quite a few public-sector and nonprofit organizations around the world adopting the BSC approach not only as their management system to deliver better outcomes at lower cost, but also as their accountability report to show citizens and stakeholders the positive social impact they're having.
The most exciting new work involves using Balanced Scorecards as the unifying framework when creating new ecosystems for inclusive growth strategies. These strategies leverage the powerful incentives from companies' profit-seeking strategies to mitigate the poverty and inequality that still remain for 1 billion people at the "bottom of the pyramid." Corporations can engage with external funders and local community leaders to create and sustain new ecosystems of supply, talent, and distribution that transform the economic and social conditions in poverty-stricken communities.
Inclusive growth strategies should be co-created with all players in the new ecosystem—local communities and their residents, NGOs, external funders, intermediaries, and the corporation. The co-creation process includes building linked strategy maps and Balanced Scorecards to ensure that all players understand the inclusive growth strategies and how they can achieve economic benefits from participating in the new ecosystem. It also helps all players build relationships and trust across organizational and sectoral boundaries.
Simons: I'm working on two major topics. The first is gaining a better understanding of how managers use performance measurement systems and the allocation of organizational resources to stimulate entrepreneurial behavior in their organizations. This will be a big theme in our Driving Corporate Performance program.
This work started when we noticed that managers are increasingly holding subordinates accountable for performance measures that are much wider than the resources they control. For example, the managers of a narrow function or cost center might be accountable for customer satisfaction. When we linked this observation to the definition of entrepreneurs—individuals who pursue opportunity without regard to the resources they control—we realized that this can be a very powerful mechanism to stimulate innovation and creativity in any organization.
The second project that I’m working on is understanding how high-impact business leaders make personal choices that maximize their effectiveness. This work builds on my work on strategy execution (which I will share with participants during the program), and brings it down to the personal level.
What Is The Major Goal Of The Driving Corporate Performance Program?
Kaplan: Driving Corporate Performance is designed to help companies compete more successfully by implementing powerful performance measurement, management, and control systems. It's aimed at general managers, chief financial officers, vice presidents of finance, strategic planning officers, and controllers, and others with planning, control, and accounting responsibilities. We delve into the best practices used by market-leading companies to develop, implement, and execute strategies that measure productivity and drive performance.
The Balanced Scorecard and the new Job Design Optimization Tool (JDOT) are complementary core components of the program. Bob Simons has been working on management control systems for more than 25 years, and has recently introduced the JDOT. His Harvard Business Review article and book, Seven Strategy Questions: A Simple Approach for Better Execution, illustrate how organizations can identify their most important customers and what they can do to meet their needs.
Simons: We want to supply the insight and tools that will allow participants to win in competitive markets. With digital transformation, heightened customer expectations, and increasingly agile competitors, the task has never been more challenging or important. Participants will be interacting with and learning from faculty experts who have dedicated their professional lives to understanding and building cutting-edge solutions to these challenges.
What Strategic Tools Do Participants Bring Back To Their Companies To Implement?
Simons: The program provides a number of takeaway tools that participants can apply as soon as they return to work. Many companies say that they have a Balanced Scorecard, but participants will learn how to build and administer scorecards that deliver exceptional results. They’ll also learn how to use the JDOT, which is accessible online after the program, to test any job in their organization to ensure that resources and measures are properly aligned for effective strategy execution.
Kaplan: Participants come away with frameworks for making the "control function" in an organization more strategic. After learning about strategy maps and scorecards during the case studies, we have participants engage in an exercise that requires them to create a strategy map and Balanced Scorecard for their company or organizational unit. Then, guided by the faculty, they discuss their work in small groups, compare strategy maps, and make suggestions.
When participants emerge from the program, they not only have greater knowledge of their unit's strategy, but also have a draft of the strategy map and BSC that they can use in their companies. Many past participants have reported that they've implemented these tools in their units—some across the entire organization. They have gained some very tangible benefits.
Have the participating organizations benefited in measurable ways?
Simons: One of the most rewarding parts of chairing this program is hearing back from participants when they've implemented the change agenda that they developed during their week with us. Every year, we receive feedback and appreciation as they realize the power of the new action-based ideas they learned and the value that this creates in their organizations. Sometimes, their success stories are documented in case studies that we can then teach to new cohorts of participants in the program.
Why do you still find this topic so compelling, and what keeps you motivated?
Kaplan: Part of the mission of Harvard Business School is to make a positive difference in the world. As I see the Balanced Scorecard being adopted—not just by private-sector companies, but also by governments in emerging markets such as South America, Africa, and the Middle East—I find it very exciting. And now I’m embarking on a new research agenda, where we’re using strategy maps and Balanced Scorecard to align multiple participants from the for-profit, nonprofit, and government sectors for value creation in new ecosystems for supply, talent, and distribution. This work could be path-breaking and highly impactful for addressing poverty and inequality around the world. I want to stay involved to keep that momentum moving forward.