Gaining Strategic Alignment: Making Scorecards Work, Part 1

By William Fonvielle and Lawrence P. Carr

Soichiro Honda, founder of the Honda Motor Company, described “The Sacred Obligations of Senior Leadership” this way:

His third point may well be the most important. Alignment is a necessary condition for organizational effectiveness. By “alignment” we mean having a common agreement about goals and means. On the largest scale, alignment is the achievement of goal congruency where all parts and functions of an organization’s value chain work toward the same purpose. In its ideal form, all members of the organization can align their personal values and objectives with those of the firm.

When alignment is strong, people feel a clear and shared sense of purpose, inspiration and energy run high, and both individual and team effectiveness increase. Alignment is strong at many Internet and start-up companies where everyone is focused on a few critical business goals. These firms are typified by a strong sense of dedication and intense personal engagement on the part of nearly all involved. Commitment is reflected in long workdays and personal sacrifices willingly given for the “good of the firm.” The challenge is to continue the alignment as the firm grows in size and complexity.

In this article, we will show how a firm’s measurement system, when linked to its strategy, can be used as an organizational alignment tool. We use examples of companies that we worked with (or that participated in our field research) as well as some from the literature. We demonstrate how a custom measurement system (where measures are linked to key success factors) can be critical in building a sense of shared values and a common strategic direction among all parts and people in an organization.

Alignment is essential for successful implementation of strategy. We offer techniques and caveats for implementing and using “balanced” measurement systems by managers to gain strategic alignment.

The Dangers of Misalignment

Dr. Bob Frost, who directs the consulting firm Measurement International, acknowledges the challenges of the alignment process.

“For a measurement system to become ‘the way we do business around here,’” Frost says, “three things have to happen:

When alignment within an organization is weak, people wind up working at cross purposes, and actions become less effective. Often, functional or individual objectives take precedence over the needs of the larger organization or the customer. Morale and productivity diminish over time, and the organization becomes more vulnerable to competitors and market forces. Misalignment can take several forms:

To the last point, a survey of 293 organizations in the United Kingdom showed that in poorly performing organizations, two-thirds of employees did not have a good understanding of overall organization goals. Even in well-performing organizations, fully a third did not understand the organization’s goals.1

Colina Insurance (a diversified German insurance company and part of the AXA group) had to conquer misalignment when it created a Customer Care Center (CCC) to provide better customer service and to stem increasing customer defections. The concept was that the CCC would provide customers with a single telephone number to handle questions and problems for all its insurance products. Conceived as a 24/7 operation, the system had as its goal to handle 90% of all customer problems on the first call.

The directors of the various insurance groups (health, auto, life, property, and casualty) were called on to fund this new central service department, but they did not uniformly agree with the concept of the operation. Concerns were raised about costs, productivity issues, the CCC staff’s capabilities, the existing information technology, and the system’s potential to resolve customers’ problems. The CCC manager knew that his department by itself was not the solution to stemming customer defections, and he was concerned that this would be the measure used to judge his performance.

A balanced scorecard was developed to resolve the CCC manager’s measurement concerns and to assure the directors on an ongoing basis that the CCC was operating effectively and efficiently. The measures chosen reflected the strategic intent of the CCC and incorporated the various concerns of the directors. The CCC manager was comfortable with the new measures and was able to use the scorecard to manage and motivate his department. The funding group managers were comfortable, as the set of agreed-upon measures gave them the confidence that the CCC would perform as designed.

For obvious reasons, new programs and initiatives run a very strong risk of eventual failure when alignment is lacking. Even when they produce quick results, such initiatives typically fall into disuse over time. The history of the quality movement offers many examples. Without constant and persistent urging on the part of management, the commitment to quality typically deteriorates, even in firms where quality provides an obvious competitive advantage.

Consistently successful firms, however, manage to create and maintain alignment around this or other strategic dimensions. At GE, for example, everyone in the organization is continuously indoctrinated in the critical importance of quality and is educated in the Six Sigma tools of quality, which GE describes as “a highly disciplined process that helps us focus on developing and delivering near-perfect products and services.” Moreover, infrastructure systems such as training, career development, and rewards and compensation all support the central message.

Likewise, DuPont enjoys one of the best safety records in industry largely because its entire global workforce is aligned around the issue. At DuPont, safety is the strategic imperative.

Cascading Strategy and Scorecards

In practice, alignment is not only a matter of individuals agreeing on goals and means; it also refers to the need for business processes and functions to rally their actions around the flagpole of the organization’s strategy. The strategic alignment process must start at the top level of the organization and “cascade” down, unifying direction for units and functions, teams, and ultimately individuals (Figure 1).

 

Tying performance measures to strategic goals is a critical step. Without measures, many organizations fail in communicating and cascading their strategy. As Texas Instruments’ Emery Powell once said, “A strategy without metrics is just a wish, and metrics that are not aligned with strategy are a waste of time.”

Often, strategic plans and goals are filed away with all the supporting data, assumptions, and logic used to create the strategy. To avoid this sorry state of affairs, managers need to ingrain the strategy in the fabric of the organization so that individual beliefs and actions are steered in the appropriate direction.

The General Motors European Strategy Board sought to improve organization-wide alignment and innovation through the creation of a balanced scorecard in 1998. Rather than leave each area of the company to its own devices, every scorecard for each of the eight business units and 12 separate functions in different countries was developed according to a common process and format. In addition, each business unit and function had to set consistent prioritized strategic objectives that aligned with GME’s corporate scorecard. In addition, a common scorecard template has been devised and cascaded for all 25 national sales companies in GME, although they select their own objectives according to their business circumstances. Thus, the Board’s strategic direction cascades to and guides the manufacturing, sales, marketing, people, process, and systems capability of each.

At Mobil Oil Corporation in the United States, the balanced scorecard is beginning to serve as a model for the personal scorecard. “One of Mobil’s major groups is doing the personal scorecard with notable success,” reports Edward T. Lewis, Jr., Americas M&R business specialist in the Marketing and Refining Division. “There is a clear benefit to getting people to understand how their behavior drives results in the business unit,” he adds. “The next step is to get more leverage and benefit from each individual to see exactly what they need to accomplish to drive exceptional business unit results. The personal scorecard concept might be the answer.”

Measuring Performance

The notion of alignment is bound tightly to the notion of a performance measurement system. It can serve as an excellent tool to cascade a firm’s strategy. Measurements signal to all levels what is important in the organization. This importance is manifested in at least three ways:

In addition, the presence of measures greatly influences behavior as testified to by the old axiom, “You get what you measure.” Thus, an effective performance management system must have as its foundation a strong performance measurement system.

That performance measurement systems and scorecards should directly reflect the organization’s strategy has become a fundamental tenet of performance measurement theory. This approach helps management:

Serono, a $1.4 billion Swiss biotech firm, sees the value of linking strategy and performance. Over the past five years, Serono successfully shifted production from conventional methods to biotechnology. Since assuming the reins of leadership from his father in 1995, Ernesto Bertarelli has been shaping and developing his management team as well as forging the biotechnology vision. The company has transformed itself from dependency on a single product family, infertility drugs, to offering multiple products. Serono is currently building the infrastructure to support a worldwide marketing effort.

Bertarelli boldly and publicly proclaimed a five-point strategic intent:

  1. As a provider of specialty pharmaceuticals, we will focus on niche markets where we can contribute with innovative products.

  2. An entrepreneurial and pioneering spirit will be fostered throughout the firm.

  3. We will strive to be the partner of choice for patients, physicians, and payers in our chosen fields.

  4. We will expand R&D efforts worldwide to create a global presence.

  5. We will attract, develop, and train the best talent in the pharmaceutical and biotechnology industries.

Bertarelli developed a balanced scorecard system to monitor the company’s performance against each item of the strategic intent. He then set about building a scorecard for the entire organization as an aligning mechanism. His purpose was to maintain the firm’s strategic focus by keeping the five elements of strategy in front of departments and people. Bertarelli, moreover, believes that the scorecard will help people to coordinate their efforts.

Organizational Alignment

Particularly at the level of teams and individuals, companies often try to improve organizational alignment with organizational behavior or organizational development interventions. Experience suggests, however, that many, or most, such interventions fail to achieve their goals. Employees may interpret these programs as “the flavor of the month” or may regard such initiatives as time-wasting intrusions. Often they are tied to themes such as waste reduction or productivity improvement. These are goals that many employees may regard as insufficiently strategic, a threat to job security, or requiring more work without obvious reward.

In response to these failures, more and more senior managers are attempting to create alignment by rallying employees behind a single big idea, such as “customer satisfaction,” “shareholder value,” or “economic value added.” The problem with these approaches is that although alignment may be created around the goal, the organization is typically misaligned around the means to reach the goal.

Getting functions or business units aligned with the overall strategy is also often problematic. Many organizations are made up of fiefdoms, unwilling to share power, resources, information, or ideas in the interests of the greater good. Trapped in their own “stovepipes,” business units or functions may find it difficult to see how actions at their level can lead to greater achievement for the total organization.

Fortunately, top managers have at their disposal the most powerful tool yet devised for creating alignment and managing performance.

“Strategic performance management concerns alignment, innovation, and translating our vision and strategy into action by using the balanced scorecard process,” explains Martin Shotbolt, leader of General Motors Europe’s Information Systems & Services Change Management Team. This U.K.-based unit has become an internal Center of Excellence for GM, leading the cascading of scorecard developments that started in mid-1998.

“We use this process to expand the meaning of our objectives organization-wide and put measures against them so that people understand what the business is trying to achieve,” Shotbolt says. “This level of alignment has been a huge challenge—getting our people facing in the same direction, bringing a stronger focus to their collective performance, and introducing clarity for what they do.”

A robust performance measurement system linked to strategy can provide the basis for aligning an organization around both goals and means. Such a system should be able to:

Roberto Fuentes, a senior manager in the Finishes Division of DuPont Mexico, observed that the very act of creating scorecards for the overall Finishes business and for each of the three strategic business units within the Finishes Division was a powerful experience. The exercise clarified strategy, both overall and for each business, and clearly identified the strategic links and synergies across the division.

Achieving alignment between what human resources (HR) does and what corporate strategy requires has been a critical issue at Universal Music Group (UMG), created after a late-1998 merger between two music companies, Universal and PolyGram. The strength of the global enterprise stems from combining international economies of scale with a local entrepreneurial market focus. It does so in more than 40 countries with record label brands that include MCA, Decca, Island, DGG, and Mercury.

Within the corporation, a central HR team in New York determines HR strategy to guide managers and HR practitioners across the business, using an internal consultancy model.

“Our success factor for global HR is to avoid having a rigid, bureaucratic structure, which allows internal consultancy on HR solutions for business managers to work, providing that HR practitioners understand their company’s business strategy in the first place,” explains Jonathan Smilansky, executive vice president of HR at UMG. “By using this approach, they are far better placed to help others achieve strategic goals.”

In effect, he says, the issue for HR practitioners is strategic alignment. To enable these linkages between HR and business strategy, practitioners use a framework called the HR Strategy Contribution Matrix, which is being adopted at UMG. There are three steps: