THE STRATEGY EXECUTION SOURCE · evolution of the Balanced Scorecard (BSC) management system....
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ON BALANCE INSIDE THIS ISSUE Case File .............................. 6 Earning the Execution Premium at Nemours Health System A major capital expansion was the catalyst for adopting the Balanced Scorecard system at this leading U.S. pediatric healthcare system. Nemours’ unwavering adherence to strategy execution— leaders virtually live, eat, sleep, and breathe it—has energized and unified the organization and helped transform ambitious goals into reality. Management Synergies: A Special Two-Part Section ..........9 Co-Creating Strategy with Experience Co-Creation Hear from Venkat Ramaswamy and Francis Gouillart, the creators of Experience Co-Creation, about this exciting approach to collaboratively developing new value propositions with customers both internal and external. It’s an approach embraced by Nokia, Apple (with iPod and iTunes), Unilever, Medtronics, Crédit Agricole, Google, Progressive Insur- ance, and many more companies. Co-Creating a New Value Proposition at Real Tokio Marine Vida e Previdência From the beginning, this Brazilian insurer—a joint venture of ABN Amro Bank and Japan’s Tokio Marine Nichido Fire—turned to Experience Co-Creation to develop a differentiated customer value proposition in the highly commodi- tized, highly competitive world of insurance and pension products. ECC methodology uncovered a host of high-potential ideas the company could never have conjured through normal operations. Performance Management ........13 Using the Strategy Map for Competitor Analysis Strategy differentiation requires knowing what competitors are doing. The best way to understand (and beat) their strategy is through the strategy map—more precisely, a new tool called the Strategy Map Analysis Table that lists key competi- tors’ strategic actions side by side, perspective by perspective. Continued on next page THE STRATEGY EXECUTION SOURCE July–August 2008 | Volume 10, Number 4 Special Book Preview Special Book Preview Excerpted from Kaplan and Norton’s newly released book, The Execution Premium. The Office of Strategy Management: Emerging Roles and Responsibilities By Robert S. Kaplan and David P. Norton Four years ago, Kaplan and Norton introduced the concept of a new enterprise function—the Office of Strategy Management (OSM)— to coordinate and integrate all strategy management processes. Since then, their research of high-performing organizations has yielded new insights about the three primary roles this office plays. In 2004, we and our colleagues at the Balanced Scorecard Collaborative commenced a research project to improve our understanding of the long-term evolution of the Balanced Scorecard (BSC) management system. Through our Balanced Scorecard Hall of Fame for Executing Strategy program, we had identified many companies that had achieved dramatic results with their BSC programs. Yet each of them was uncertain about its ability to sustain such performance in the future. “The BSC is like a project,” observed one manager. “Once we complete the design, everyone goes back to their old jobs.” Another told us, “The use of the BSC was mandated by our CEO. What will happen to the program when he leaves?” Our research project attracted, among others, 15 BSC Hall of Fame organizations, including Hilton Hotels, Motorola, Ricoh, Serono, KeyCorp, Canon USA, and the U.S. Army. We learned from them that sustaining a performance management system like the BSC requires two components: 1. Having a clearly defined process that fits comfortably into the governance cycle of the organization 2. Establishing an entity (a department or organization) that is responsible for its management and its success Among the most significant outcomes of the research project was that it ultimately helped us define a six-stage management process that integrates strategy with operations. (This holistic system was described in our cover story in the last issue. 1 ) But early on, it led to a different discovery: that many of the participating companies had introduced a new office or function to prevent the fragmentation of strategy management processes and to better integrate strategic activities and operations. We introduced the concept of this new office back in 2004, in “Strategic Management: An Emerging Profession,” 2 and since then have done extensive work on the roles and responsibilities of the function and its leaders. While the organizations gave this important new office a variety of titles (such as Organizational Transformation, Performance Management, or Business Excellence), we came up with a simple descriptive title—the Office of Strategy Management (OSM). In high-performing organizations, the OSM integrates and coordinates
Transcript of THE STRATEGY EXECUTION SOURCE · evolution of the Balanced Scorecard (BSC) management system....
ON
BA
LA
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E
INSIDE THIS ISSUE
Case File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Earning the Execution Premiumat Nemours Health System
A major capital expansion was the catalyst for adopting the Balanced Scorecard system at thisleading U.S. pediatric healthcare system. Nemours’ unwaveringadherence to strategy execution—leaders virtually live, eat, sleep,and breathe it—has energized and unified the organization andhelped transform ambitious goalsinto reality.
Management Synergies:A Special Two-Part Section ..........9Co-Creating Strategy with Experience Co-Creation
Hear from Venkat Ramaswamy andFrancis Gouillart, the creators ofExperience Co-Creation, about thisexciting approach to collaborativelydeveloping new value propositionswith customers both internal andexternal. It’s an approach embracedby Nokia, Apple (with iPod andiTunes), Unilever, Medtronics, CréditAgricole, Google, Progressive Insur-ance, and many more companies.
Co-Creating a New Value Proposition at Real Tokio Marine Vida e Previdência
From the beginning, this Brazilianinsurer—a joint venture of ABNAmro Bank and Japan’s Tokio Marine Nichido Fire—turned toExperience Co-Creation to developa differentiated customer valueproposition in the highly commodi-tized, highly competitive world ofinsurance and pension products.ECC methodology uncovered a hostof high-potential ideas the companycould never have conjured throughnormal operations.
Performance Management........13Using the Strategy Map for Competitor Analysis
Strategy differentiation requiresknowing what competitors aredoing.The best way to understand(and beat) their strategy is throughthe strategy map—more precisely,a new tool called the Strategy MapAnalysis Table that lists key competi-tors’ strategic actions side by side,perspective by perspective.
Continued on next page
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 E
J u l y – A u g u s t 2 0 0 8 | V o l u m e 1 0 , N u m b e r 4
Special Book PreviewSpecial Book PreviewExcerpted from Kaplan and Norton’s newly released book, The Execution Premium.
The Office of Strategy Management: Emerging Roles and ResponsibilitiesBy Robert S. Kaplan and David P. Norton
Four years ago, Kaplan and Norton introduced the concept of a newenterprise function—the Office of Strategy Management (OSM)—to coordinate and integrate all strategy management processes.Since then, their research of high-performing organizations hasyielded new insights about the three primary roles this office plays.
In 2004, we and our colleagues at the Balanced Scorecard Collaborative
commenced a research project to improve our understanding of the long-term
evolution of the Balanced Scorecard (BSC) management system. Through
our Balanced Scorecard Hall of Fame for Executing Strategy program, we had
identified many companies that had achieved dramatic results with their BSC
programs. Yet each of them was uncertain about its ability to sustain such
performance in the future. “The BSC is like a project,” observed one manager.
“Once we complete the design, everyone goes back to their old jobs.” Another
told us, “The use of the BSC was mandated by our CEO. What will happen to
the program when he leaves?”
Our research project attracted, among others, 15 BSC Hall of Fame organizations,
including Hilton Hotels, Motorola, Ricoh, Serono, KeyCorp, Canon USA, and the
U.S. Army. We learned from them that sustaining a performance management
system like the BSC requires two components:
1. Having a clearly defined process that fits comfortably into the governance cycle of the organization
2. Establishing an entity (a department or organization) that is responsible for its management and its success
Among the most significant outcomes of the research project was that it ultimatelyhelped us define a six-stage management process that integrates strategy withoperations. (This holistic system was described in our cover story in the lastissue.1) But early on, it led to a different discovery: that many of the participatingcompanies had introduced a new office or function to prevent the fragmentationof strategy management processes and to better integrate strategic activities andoperations. We introduced the concept of this new office back in 2004, in“Strategic Management: An Emerging Profession,” 2 and since then have doneextensive work on the roles and responsibilities of the function and its leaders.
While the organizations gave this important new office a variety of titles (such asOrganizational Transformation, Performance Management, or Business Excellence),we came up with a simple descriptive title—the Office of Strategy Management(OSM). In high-performing organizations, the OSM integrates and coordinates
activities across functions andbusiness units to align strategyand operations. The OSM is likethe designer of an intricate watchwho keeps the various mecha-nisms synchronized despite theirrunning at different speeds. For the OSM, these mechanisms arethe organization’s planning andcontrol processes. They includemaintaining dashboards and hold-ing daily and weekly operationalcontrol meetings; updating infor-mation on strategic measures and initiatives and preparing the executive team for monthlystrategy management reviewmeetings; and continually scan-ning the external environmentand performing analysis to preparefor quarterly or annual strategyassessment meetings to test andadapt the strategy. The OSM isalso like an orchestra leader.It does not create the strategic“music” being played, but it keeps the diverse organizationalplayers—executive team, businessunits, regional units, support units (finance, human resources,information technology), themeteams, departments, and, ultimately,employees—aligned with eachother. In this way, they can createbeautiful music together, executingthe enterprise’s strategy in unison,with each group playing its dis-tinctive role.
In fact, the Office of StrategyManagement plays three basicroles: (1) that of the architectresponsible for the overall designand execution of the performancemanagement process; (2) that of the process custodian of theintegrated planning and controlsystem; and (3) that of the inte-grator responsible for interfacingwith and coordinating all otherstrategy-related systems and activities. (See Figure 1.)
The OSM as Architect
We introduced the concept of the OSM as a means of creatingand aligning new cross-businessintegrated strategy management
processes. Typically, manyprocesses that are central to strategy execution—includingbudgeting, employee performancemanagement, and strategic plan-ning—are run by different areasof the organization at differenttimes of the year using differentframeworks, languages, and con-ventions. The isolation of theseprocesses from one another is amajor barrier to effective strategyexecution. Moreover, some impor-tant strategy execution processesmay not be carried out at all, suchas developing theme-based strategymaps, establishing a systematicapproach to funding strategic initiatives and assigning accounta-bility for them, linking strategicplans to operational budgets, orpreparing for and running strategymanagement review meetings.The OSM ensures that any missingstrategy execution processes areput in place, while bringing orderto an otherwise incomplete andfragmented collection of manage-ment processes. The OSM designsthe framework and processes fora single, integrated, closed-loopstrategy planning and operationalexecution system. This is its“watchmaker” role: ensuring thatall the requisite components arein place and working synchro-nously, without friction.
Ensuring synchronicity means thatthe proper sequence and linkageof strategy execution processesshown in Figure 2 (page 4) are in place. Typically, the strategycycle recommences at the begin-ning of the second quarter. Thatis when the planning groupbegins to research and preparefor the annual strategy develop-ment meeting at which the seniorexecutive team updates the enter-prise strategy, strategy map, andscorecard. After this meeting, theOSM starts the process of aligningall business and support unitstrategies with each other as wellas with the enterprise strategy.It also ensures that priorities have been established to achieve
Balanced Scorecard Report
Editorial AdvisersRobert S. Kaplan
Professor, Harvard Business SchoolDavid P. Norton
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B a l a n c e d S c o r e c a r d R e p o r t
targeted improvements in the BSC’s process metrics. During the third quarter, the OSM sees toit that the finance department’sresource planning and budgetingprocess produces business- andsupport-unit plans as well asoperating and capital budgets thatcan deliver the strategy and areconsistent with forecasted processimprovements. In the fourth quar-ter, the OSM works with humanresources (HR) to help align com-petency development efforts andemployee incentive programswith scorecard objectives.
While these annual planningprocesses occur at specific peri-ods and in sequence, the enter-prise continually conducts severalcontrol and learning processes:communicating strategy, reviewingoperations and strategy, managingstrategic initiatives, and sharingbest practices. The OSM ensuresthat all these processes are inplace, introducing any missingones and establishing the linkagesthat must exist between them.
The OSM as Process Custodian
Besides integrating existing man-agement processes, strategy execu-tion also calls for some new ones.To ensure effective coordinationand accountability organization-wide, the OSM should have primary ownership of the followingstrategy execution processes.
Develop the strategy. Typically,strategy development is theresponsibility of an existing strate-gic planning unit. But developingstrategy should not be just anannual event. After all, perfor-mance measures, such as those supplied by the Balanced Score-card, provide a steady stream of evidence about the validity of the assumptions underlying acompany’s strategy. Strategy devel-opment and strategy executionshould therefore not be carriedout in isolation. We recommendthat the processes for developing,as well as those for executing,strategy be overseen by one group
—the Office of Strategy Manage-ment. In effect, we advocate thatthe traditional strategic planningdepartment be expanded into themore comprehensive OSM, wherethe OSM assumes responsibilityfor facilitating both strategy devel-opment and its execution.
Plan the strategy (create andmanage the scorecard). As theowner of the scorecard process,the OSM ensures that any changesmade at the annual strategy-planning meeting are translatedinto the company’s strategy mapand Balanced Scorecard. Once the executive team has approvedobjectives and measures for thefollowing year, the OSM coachesthe team in selecting performancetargets for scorecard measuresand identifying the strategic initia-tives required to achieve them.As guardian of the scorecard,the OSM also standardizes the terminology and measurementdefinitions across the organiza-tion, selects and manages thescorecard reporting system, andensures the integrity of the score-card data. The OSM need not bethe primary collector of BSC data,but it should oversee the process-es by which data are collected,reported, and validated. Finally,the OSM serves as the centralscorecard resource, consultingwith units on their scorecard
development projects and con-ducting training and education.
Align the organization. A company can execute its strategyonly if it aligns the strategies of itsbusiness units, support functions,and external partners with itsenterprise strategy. Alignment creates focus and coordinationacross even the most complexorganizations, making it easier to identify and realize synergies.Few companies today activelymanage the alignment process; in many cases, unit strategies are only nominally linked withcorporate strategy. The OSM pro-vides a mechanism for ensuring a consistent view of strategythroughout the entire enterpriseto systematically manage theprocesses for achieving organiza-tional alignment. The OSM over-sees the cascading of scorecardsvertically and horizontally through-out the organization. It definesthe synergies to be createdthrough cross-business behaviorat lower organizational levels.Finally, it validates that the strate-gies and scorecards proposed bybusiness and support units arelinked to each other and to corporate strategy.
Review the strategy. Managingthe meetings at which the execu-tive team reviews strategic
Architect
IntegratorProcess
Custodian
Office ofStrategy
Management
Ensures that processes owned and run by other functional executives are linked to the strategy
Defines and clarifies the philosophy of performance management and the processes required to execute the strategy
Defines, develops, and oversees execution of closed-loop processes required to manage the strategy
• Human capital
• Other functional departments
• Strategy communications
• Initiative management
• Financial resource management (planning and budgeting)
• Key operating process management
• Best practice management
• Develop the strategy
• Manage the scorecard
• Align the organization
• Review the strategy
• Test the strategy
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Figure 1. The Three Key Roles of the Office of Strategy Management
The updated OSM “definition” not only groups the office’s multiple roles into three broad categories, but also explicitly identifies more key processes it integrates, such as
financial resource management.
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performance and makes adjust-ments to the strategy is a corefunction of the OSM. The OSMbriefs the CEO in advance on thestrategic issues raised by the mostrecent scorecard results. This way,the agenda can focus on strategyreview and learning, rather than just on short-term financial per-formance and crisis management.The OSM works with the strategictheme owners to get their color-coded performance results andqualitative assessments of theirtheme’s strategic objectives andstrategic initiatives. The OSM prepares the briefing booklet for the executive team to reviewbefore each meeting. At thebeginning of the meeting, theOSM presents a brief progressreport on each action plan recom-mended at earlier meetings,records all new recommended
action plans, and follows up withthe assigned manager or depart-ment to ensure that the actionsare carried out.
Test and adapt the strategy.Each year, as the planning andbudgeting process begins anew,the organization has a new inputto consider—reviewing currentstrategy through its BalancedScorecard. The BSC is based on a set of hypotheses about theimpact of certain drivers ondesired performance outcomes.Using the time-trend data from theBSC and appropriate analytictechniques, organizations canlearn and react to change morerapidly. Several organizations have reported that the insightsgained from such annual statisticalreviews have accelerated theirresponse time by as much as one year.
The sophisticated analytics neededto statistically estimate and teststrategic linkages may require anew capability for the organization.The OSM is the natural place tobuild a corporate capability foranalyzing data generated by theorganization’s BSCs. As part of theannual strategy refresh, the OSM can provide the outputs from thedetailed P&L calculations and the analytic studies conducted on the strategy’s performance.
The OSM as Integrator
A variety of existing managementprocesses must be informed byand aligned to the strategy. TheOSM is responsible for coordinat-ing the strategic linkages of theseprocesses.
Link strategy to financialresource management (plan-ning and budgeting). At most
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Current year Following year
Q1 Q2 Q3 Q4 Q1 Q2
Develop/updatethe strategy
Plan the strategy
Alig
n th
e or
gani
zati
on
• StratEx• Operating budget
• Personal goals• Incentives• Personal development
• Applications• Infrastructure
• Key process alignment
Organizationalalignment
Financialresourcealignment
Humancapitalalignment
IT alignment
Businessprocessalignment
Strategy communications
Quality management programs
Initiative management
Best practice sharing
Execute the strategy
Revi
ew a
nd te
st
Operationalreviews
Strategyreviews
Strategytesting
Restart planning
cycle
• Strategy map/themes• Measures/targets• Strategic initiatives
• Corporate-SBU aligned• SBU-support unit aligned
• Mission, vision, values• Strategic goals• Strategic analysis and formulation
Figure 2. Strategy Management: An Integrated, Closed-Loop Process
This table illustrates the annual sequence of key strategy management stages and their component steps. Regular operational and strategy reviewsprovide critical monitoring and feedback, allowing the strategy to be tested anew each year as the planning cycle recommences.
corporations, finance overseesbudgeting and cash allocation.IT makes recommendations aboutinvestments in databases, infra-structure, and applications. AndHR formulates plans for hiring,training, and leadership develop-ment. For a strategy to be effective,all functional plans must bealigned with the strategy. Toensure this alignment, the OSMmust work closely with financeand the other functional units to align their near-term performancetargets and budgets with strategicobjectives.
Link strategy to key operatingprocesses. Strategy is executedthrough business processes.The strategic themes identify theprocesses that are most crucial to the strategy. These processesmust be analyzed, redesigned,and managed. The OSM shouldwork with the theme teams orlocal line managers to see that the necessary resources and orga-nizational support are provided.The OSM should also ensure thatteams and managers provide statusreports to the executive team.
Align the plans and resources of human capital and otherimportant functional supportdepartments. Besides coordinat-ing the linkage between strategyplanning and finance, the OSMensures that the plans for otherfunctional departments are consis-tent with executing the strategy.Particularly important are the HR and IT departments, but, inprinciple, all functional units—such as research and development,real estate, purchasing, logistics,marketing, and sales—contributeto successful strategy execution,and their plans must reflect theircontributions. The OSM plays aconsulting and integrating rolewith these functional departmentsto help them align their strategiesand plans with enterprise andbusiness unit strategy.
Consider the HR department,which has primary responsibility
for employee motivation, training,and performance. HR is typicallyresponsible for executing annualemployee performance reviews,goal-setting, training and compe-tency development, and managingincentive and compensation pro-grams. The OSM ensures that HRperforms these activities in a man-ner consistent with corporate andbusiness unit strategic objectives.
Communicate strategy. Effectivecommunication to employeesabout strategy, targets, and initia-tives is vital if employees are tocontribute to the strategy. CanonUSA, a BSC user and BSC Hall ofFame organization, describes itsinternal communication processas “democratizing strategy.” Canon’sOSM actively promotes under-standing of the company’s strategyand BSC throughout all businessunits and support functions. Butas with budgeting and HR man-agement, strategy communicationsis often the responsibility of anexisting organizational unit. Inthese situations, the OSM can initially play an editorial role,reviewing or helping to craft themessages to see that they commu-nicate the strategy correctly. Inorganizations that lack a corporatecommunications group, or whosegroup has little knowledge of orfocus on strategy, the OSM wouldassume primary responsibility for communicating both strategyand scorecard to employees.
Manage strategic initiatives.When the organization usestheme owners and theme teamsto carry out the selection andmanagement of strategic initiatives,the OSM monitors the overallprocess, soliciting informationabout initiative status and per-formance and reporting this information to the executive teamin advance of the strategy man-agement review meeting.
For organizations that do not usetheme owners and theme teams,the OSM is the default for runningthe initiative selection and ration-
alization process. For initiativesthat already have a natural home,the OSM assigns responsibility totheir appropriate unit or function.Any initiatives that cross unit orfunctional lines should be man-aged by the OSM to ensure they get the necessary financial andhuman resources. Where themeteams exist, the OSM retainsresponsibility for monitoring theprogress of initiatives.
Share best practices. Finally,the OSM needs to ensure thatknowledge management focuseson sharing the best practices most critical for the strategy. Ifmanagers use the wrong bench-marks, the company’s strategy will fall short of its potential. Atsome companies, learning andknowledge sharing are alreadythe responsibility of a chiefknowledge or learning officer;there, the OSM must coordinatewith that person’s office. But ifsuch a function does not alreadyexist, the OSM must take the leadin transferring ideas and best prac-tices throughout the organization.
A Proven Success Factor
Many organizations have achieveddramatic performance improve-ments by sustaining a focus onstrategy implementation. We havecaptured and codified a body ofknowledge from these successfulorganizations that provides thefoundation for an emerging pro-fessional function focused on the management of strategy. AnOffice of Strategy Managementthat is positioned at the level of other senior corporate staffoffices, with responsibility andauthority for managing and coordinating all the key strategymanagement processes, can helporganizations realize the benefitsfrom this body of knowledge. �
1. R. S. Kaplan and D. P. Norton, “Integrating Strategy Planning and Operational Execution: A Six-Stage System,” BSR May–June 2008 (Reprint #B0805A).
2. BSR May–June 2004 (Reprint #B0405A).
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Reprint #B0807A
A nearly 6.5% increase in rev-enues, a double-digit rise inpatient satisfaction, increases inon-time immunizations, a 30%reduction in documentationtime—such results in the space of two years for a healthcareorganization are laudable indeed.And as Nemours begins breakingground on its new state-of-the-art hospital in Orlando, Fla., the institution’s triple-A bond ratingmay well be its most importantexecution premium, for it will ultimately represent a savings ofmillions of dollars in financing the organization’s ambitiousgrowth plans.
One of the nation’s largest pediatrichealth systems, Nemours drawspatients from throughout the U.S.and the world with its reputationfor high-quality specialty medicineand personalized, family-centeredcare. Through its flagship facility,the 180-bed Alfred I. duPont Hospital for Children in Wilming-ton, Del., and 20 clinics inDelaware, New Jersey, Pennsylva-nia, and Florida, Nemours servedalmost 250,000 children in nearlyone million encounters in 2007.Headquartered in Jacksonville, Fla.,it employs 4,200 associates, morethan 10% of them specialty andsubspecialty physicians. Nemours’award-winning KidsHealth.org is the world’s most visited pedi-atric health, parenting, and teenwebsite.
Established in 1940 with a bequestfrom the estate of Alfred I. duPont,
philanthropist and founder of the DuPont chemicals empire, theNemours Foundation began as acharitable venture that providedcare for disabled, but curable,children and the elderly inDelaware. The Nemours healthsystem attracted internationalorthopedic leaders and forged a reputation for providing world-class care. Nemours has growninto a multifaceted healthcareorganization and major referralcenter that provides integratedclinical treatment coupled withresearch, advocacy, and educationalhealth and prevention services.
Nemours seeks to serve childrenwith “one high standard of qualityand distinction,” regardless of the patient’s ability to pay. Theorganization strives to become aleading children’s health systemby 2015, ranking within the top5% nationally for patient satisfac-tion and targeted quality out-comes. Its customer intimacy strategy aims for a personalizedfocus on each child and a com-mitment to children and their families to make every Nemoursexperience “uniquely satisfying.”
One Vision,“One Nemours”
In 2004, plans for a major capitalexpansion in Florida forcedNemours executives to rethinktheir strategy and managementprocesses, particularly resourceallocation and initiative prioritiza-tion. The organization was struc-tured by region and health practice,which generated a culture of
competing agendas and resourcedemands. Without internal align-ment and shared strategic goals,leaders knew their growth scenariowould likely fail. They realizedthat a total transformation was inorder, one that would strengthenand unify the organization arounda vision of “One Nemours.”
In 2005, Nemours adopted theBalanced Scorecard system tocarry out its strategic transforma-tion. However, leadership changes,including the CEO’s retirement,soon stalled progress. In thespring of 2006, incoming CEO and President Dr. David Bailey (a pediatrician and Nemours’ COOsince 2002) established a newexecutive team of 14 top leadersfrom operational and supportunits. With the BSC program as a top priority, the team rolled out an enterprise strategy mapand scorecard that comprised four key goals: (1) “Be a leader in improving children’s healththrough our integrated health system, becoming a preeminentvoice for children”; (2) “Care foreach and every child as if theywere our own”; (3) “Be a greatplace to work”; and (4) “Be effec-tive stewards of all of our assets,continually improving them toadvance our mission.” The firstBSC results were reported inAugust 2006.
In late 2006, the executive teambegan cascading the BSC to business and support units.Today, scorecards are in place forNemours’ Health and Preventiondivision, the Delaware Valleyregion (a business unit), and theFlorida region, as well as for IS,HR, and Clinical Informatics (thearea comprising clinical applica-tions and electronic medicalrecords). More are planned.
From the beginning, the executiveteam recognized the potential ofthe BSC framework as an organi-zational leadership tool and a keyto sustainable growth. In quickorder, it developed a comprehen-sive strategy management system
B a l a n c e d S c o r e c a r d R e p o r tC
AS
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LE Earning the Execution Premium
at Nemours Health System By Wendy Garling, Contributing Writer
How many CEOs bet their job on the success of their manage-ment system? How many organizations embark on an organiza-tional transformation by setting a solid foundation of strategymanagement process discipline? Through its unwaveringfocus on alignment, processes, and cross-functional teambuilding, Nemours, the children’s health system (and 2007BSC Hall of Fame winner) has already earned its executionpremium in spades.
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(SMS), including top-level commit-tees that form the nerve center ofthe process: the Strategy Manage-ment Governance Team, AnnualCalendar Committee, PerformanceManagement Committee, StrategicCommunications Committee, andInitiative Management Committee.All committees meet regularly andinclude executive team membersas active participants. Committeeswork cross-functionally, sharingbest practices to ensure consistencyand strategic alignment.
Strategy Drives Everything
In just two years, Nemours hasmade tremendous strides inimplementing its SMS and execut-ing its strategy. A core team of executives and data and tech-nology specialists—led by anexecutive team member reportingdirectly to the CEO—facilitates allSMS functions in a hub-and-spokeformat that extends into all strategy
committees and scorecard units.Nemours’ Center for ProcessExcellence (effectively its Office of Strategy Management) supportsenterprise strategy by developingteams of internal educational andbusiness process consultants whodeploy where needed within theorganization to promote under-standing of the SMS and improveprocesses to meet performancetargets (for example, using LeanSix Sigma). Strategy review sessionstake place monthly at every cas-caded BSC level.
Strategy now drives initiative man-agement and resource allocation.The Initiative Management Com-mittee, launched in May 2007,whittled a portfolio of more than300 initiatives down to 12 byusing the enterprise strategy map to vet only those that werestrategically relevant. Initiativesaddressing near-term prioritiestake precedence, and the commit-
tee also asks “What resources do we need to do this right?”Winning initiatives are mapped toscorecard objectives with a focuson cross-functional collaborationand ownership. For example,in the the People and Learningperspective, the objective relatedto building an employee culture oftrust is owned by the VP of QualityControl, not the VP of HR. Alloca-tions for ongoing operations arefocused on maximizing consistencyacross the organization, therebycreating a “One Nemours” archi-tecture. On the finance side, theBSC is integrated into Nemours’annual capital planning softwaresystem to ensure that all invest-ments align with enterprise or cascaded scorecards.
The BSC framework, along with a new executive incentive paysystem, has also instilled greateraccountability and corporate focusin decision makers. Executives
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Stewardship
Customers
Processes
Impact and community Service and quality Efficiency and environment
People and LearningWe willenable our
people
Ensuringstewardshipof the trust
and assuredfinancialstrength
That providea uniquelysatisfyingcustomer
experience
Strategic DestinationBy 2015, Nemours will be recognized nationally as a leading children’s health system,
defined as being in the top 5% for patient satisfaction and targeted quality outcomes.
VisionFreedom from disabling conditions.
MissionTo provide leadership, institutions, and services to restore and improve
the health of children through care and programs not readily available, with one high standard of quality and distinction regardless of the recipient’s financial status.
To deliverthe strategic
processes
;
Figure 1. Nemours’ 2008 Strategy Map
Nemours’ strategy map has always been written so that any employee can understand it. The 2008 iteration, excerpted here, adds a statement of strategic destination. To the right of the “house” is a column of text (not shown) that defines the strategy map, states the purpose of each of
Nemours’ 12 initiatives, and highlights them by perspective and objective. Also not shown: the objectives (represented by the bubbles), core values,and a statement of commitment.
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now share financial risk, regardlessof whether a target is within their domain of responsibility.Their compensation is assessedcollectively based on exectives’aggregate year-end performance.As a result, they view investmentsholistically as an integrated portfolio.
Building a High-Performing Organization
Says Terri Young, VP of humanresources, “When we first cametogether in 2005, we came as individuals with a siloed mentalitywho saw no value in being ateam. What the SMS did wasmake us look at our objectivesmore globally and functionallyand drive us toward the rightobjectives for the organization asa whole. In two years it helped us transform from a group ofindividuals to a team on the cuspof being a high-performing team.”
Nemours regards its people as itsgreatest asset, and its core values—excel, respect, serve, honor, andlearn—as the key to building aculture of trust. Executives makeit their responsibility to reinforcethe case for change by modelingvalues and strategy-focused team behaviors to all associates.Getting there has taken hardwork. A leadership developmenttool Nemours calls its Standards of Behavior provides a writtenframework for all executive inter-actions.
Additionally, executive team performance is enhanced byNemours’ monthly strategy reviewsessions. These mandatory face-to-face meetings, facilitated by theCEO, alternate between Delawareand Florida. Effective this year,all executive team members,including the CEO, are requiredto attend at least two cascadedstrategy review meetings to gaininsight into other teams’ activitiesand challenges. Recent experimentswith videoconferenced review
meetings only reinforced the beliefin in-person meetings. “Commit-ting to that time,” says TerriYoung, “has been critical to oursuccess and where we are today.”
Building strategy awareness andinternal brand support is a 2008priority, through an integratedapproach that combines strategy,behavioral change, and serviceand operational excellence. “Weare embarking on a very aggres-sive brand strategy,” says GinaAltieri, VP of Corporate Services.“To deliver on our brand promisewe first need to focus internallyand be sure that everyone insidethe organization understands whatour promise is and what we aretrying to deliver before we bringit outside.” Besides its existingcomprehensive strategy communi-cations program, Nemours haslaunched its “Whatever It Takes”initiative. Branded on every asso-ciate’s name badge, the initiativefocuses on improving customersatisfaction through associatetraining and onsite mentoring.To build workforce performance,an outside consultant providesleadership coaching and changemanagement support to Nemours’top 100 executives and managers.By the end of 2009, Nemoursexpects to complete the cascadeof the performance managementsystem to include personal BSCsfor all associates. A pay-for-performance program will follow.
Nemours is also leveraging IT toenhance enterprise performance.In Clinical Informatics an ambi-tious two-year project, calledNemoursOne (a play on “OneNemours”), is under way tomigrate all electronic medicalrecords (inpatient and outpatient)and clinical business systems toone seamless, all-Epic platform.1
In a daunting further move, ClinicalInformatics and IS, which used to report to different groups,now both report to Corporate Services. This change is expectedto improve collaboration and
foster better project management.
The Execution Premium
Nemours’ 360-degree strategymanagement efforts have yieldedan impressive execution premiumthus far, not the least the organi-zation’s sustained triple-A bondrating (enabled by its ability todemonstrate a clear strategy).In 2007, operating income was$63.1 million, an increase of 120%over the previous year. Patientsatisfaction scores skyrocketed,and nurse turnover was an enviable 2.2%, compared with the 9.1% national average. In jobrecruitment, the BSC frameworkhas brought needed process consistency and accelerated theaverage time-to-fill. Managementof the electronic medical recordhas improved, as the BSC hashelped in monitoring and report-ing key results.
Modest about their big gains thusfar, Nemours’ leaders prefer tofocus on the work ahead. Theorganization’s five-year “Blueprintfor the Future (Strategic Plan2008–2012),” modeled on its strat-egy map architecture, defines thegrowth and investment that willfurther Nemours’ overarching goaland support its dream of a multi-year capital expansion. Says CEOBailey, “In developing Nemours’strategy, our objective was to create a credible and relevantdirection that is distinguishedboth by its simplicity and its powerto assist leadership in makingtough decisions. Ultimately, successwill depend on our willingness to remain on course, be lean andfocused, and adjust our initiatives,but not our aspirations.” �
1. Epic is a software platform used widely in thehealthcare industry.
Nemours, along with 14 otherorganizations, is profiled in the Balanced Scorecard Hall ofFame Report 2008.
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Why Experience Co-Creation?What is so powerful about aninclusive model of strategy devel-opment? Customers today aremore knowledgeable, moredemanding, less passive, andmore connected, thanks to thetransparency created by the Inter-net, new communications, andsocial interaction technologies.Products and services are morereadily imitable—and commoditi-zation erodes customer loyalty.Companies that don’t engage theircustomers risk losing them. ECCputs the focus back on the cus-tomers’ needs and wants—and onhow the company can most effec-tively meet them. It gives customersan investment in the relationship.
ECC can take many forms.Google, for example, co-createswith customer communities; a worldwide network of itsemployees’ friends contributesideas to help design new Webservices. Dell, Toyota, Starbucks,and Boeing encourage their customers and end-users to submit ideas and concepts fornew products and services thatenhance customer experiences.
ECC is based on three principles:
1. Individuals’ experiences are central to conceiving valuepropositions. We must lookbeyond product and service offerings to see how customersexperience value propositions—and connect the two.
2. We must go beyond processesto interactions. If we start withexperiences, then we must focuson the interactions between theindividual customer and company,and on generating outcomes ofvalue to individuals. Our DARTmodel helps shift this focus.
• Dialogue: How can we create a corridor of two-way communi-cation between individuals and the company to facilitatetransparency and manage risk-return for both sides?
• Access: How can we enableaccess to tools, knowledge, andexpertise that facilitates dialogueand allows value co-creation to take place?
• Risk-return: How can we helpindividuals and the company understand and balance risk-return relationships that under-lie their interactions to generateeconomic benefits to both?
• Transparency: How can we create transparency in theseinteractions to build strategiccapital for the firm?
3. We must involve and engagethe customer. To create the capabilities for value co-creation,companies must involve andengage individuals, starting withcustomer-facing employees andthen expanding to customers andother stakeholders. Through a co-creative process of strategy develop-ment, companies can generatestrategic themes and differentiated
value propositions that connectwith customer experiences.
The Real Tokio Marine Vida e Previdência case study (page 10),highlights some unique aspects ofECC. For example, ECC can serveas the “glue” that binds two verydifferent corporate cultures—inthis case, a Dutch financial servicesgiant (ABN Bank) and a Japaneseinsurance company (Tokio MarineNichido Fire). It can engage clients,the sales channel, and employees collectively, bringing a sense ofshared contribution to the organi-zation’s strategy. Most important,ECC is a compelling way for com-panies to create “blue oceans’—theareas of opportunity for strategicdifferentiation and value innova-tion. Companies can create themthrough experience innovation(rather than conventional product-service innovation), as well as byco-creating value curves with theircustomers (rather than guessingand defining what’s good forthem).
The implementation of ECCmethodology is a replicableprocess that can be applied on an ongoing basis. Strategy thusbecomes a continuous process of collective engagement and discovery of new opportunities.
Companies can get started by opening up the customer perspective of their BalancedScorecard to co-creation, as wellas by opening up selected strategicthemes to co-creation. A customer-facing entity, such as the saleschannel, which disproportionatelyimpacts customer experiences, isa good place to start. So is engag-ing with clients. Both approachesare illustrated in the case study.
ECC is both the means and theend to creating change. Imple-menting it can be a powerfulapproach to developing and executing innovative initiatives,establishing new competitiveadvantage, sustaining growth,and generating superior success. �
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Experience Co-CreationBy Venkat Ramaswamy, Professor of Business, Ross School of Business,University of Michigan, and cofounder, ECC Partnership; and Francis Gouillart,cofounder and President, ECC Partnership
Experience Co-Creation (ECC) is a new paradigm of strategyinnovation. It’s about how companies can innovate compellingvalue propositions by co-creating strategy with their customer-facing employees and their customers. Embraced with successby such diverse organizations as La Poste, Crédit Agricole,and Nokia, ECC is the subject of Ramaswamy and Gouillart’sforthcoming book, Co-Creating Strategy.
Reprint #B0807C
Established in 2005, Real TokioMarine Vida e Previdência(RTMVP) is a joint venture ofDutch financial services giant ABNAmro Bank and Tokio MarineSeguradora (a unit of the Japan-ese insurer Tokio Marine NichidoFire). The company sells lifeinsurance and pension productsthrough ABN’s 2,000 Real Bankbranches and Tokio Marine’sagents throughout Brazil. WithReal Bank’s strong banking presence and Tokio Marine’sestablished agent network, thefledgling company has aimedfrom the beginning to strengthen relationships with its distributionchannel in marketing its insuranceand pension products. The com-pany has four business units: two life insurance units (one retail,one corporate) and two pensionservices units (one retail, one corporate). With $765 million in revenues and $2.9 billion inassets under management, RTMVPis today Brazil’s fifth-largest pen-sion investment services providerand its sixth-largest life insurer.1
RTMVP adopted the BalancedScorecard in June 2006, just 10months after its inception. Early in the scorecard construction,executives ran into difficulty: howto define the customer and saleschannel value propositions? Theinsurance and pension market
in Brazil, as elsewhere, is one inwhich products are similar, anddifferentiation is chiefly a functionof price and services offered. Tocompete with established market-place players, RTMVP executives(adherents of blue ocean theoryand value innovation2) knew theyhad to innovate—and that theywould need a specific innovativevalue proposition for each businessunit. But more important, theyunderstood that innovation meantmore than product innovation—which is fleeting, and lasts only as long as your rivals can figureout how to imitate you. Theywanted to innovate the customerexperience. But how?
The answer lay in Experience Co-Creation. (See preceding article.) Experience Co-Creation is based on the assumption that customers’—both internal and external—real experienceswith an organization represent an important, largely untapped,source of innovation. ExperienceCo-Creation requires a shift inthinking, from the product innova-tion paradigm to the experienceinnovation paradigm. The moreactively companies involve stake-holders in creating their experi-ence, the more innovative theresults might be. And by involvingcustomers—giving them a say andan investment in the outcome—companies can cement these
stakeholder relationships.
RTMVP implemented a six-stepco-creation program based on the prescribed 10-step programdeveloped by Gouillart andRamaswamy. Over an eight-monthperiod, some 200 external clients,sales channel managers, and othercompany professionals from thefour business units participated in developing innovative valuepropositions for each unit.
Step 1: Identifying the Customer’sKey Interactions and Experiences
Before you can innovate the customer experience, you mustfirst characterize the existing one. That means identifying the main points of interaction(“touch points”)—that is, the locus and nature of the existingclient experience. RTMVP built an“experiences map” that showedthe main players and the type of interactions. Examples of inter-actions with the sales channelinclude training and support (e.g.,to help external clients cope inthe difficult periods of their livesthat characterize the times theydeal with their insurer—a death inthe family, retirement). A typicalinteraction for a corporate clientwould be the implementation of a new corporate pension plan.
Step 2: Understanding Existing Experiences
What are clients’ current experi-ences like? The next step forRTMVP involved determining theprimary desirable outcomes ofeach interaction—and whetherthe company was delivering onthem. Was the experience positiveor negative? What was painful?Confusing?
In training the sales channel,for example, RTMVP learned thatthe bank’s relationship managerswanted training sessions on pension and insurance productsthat were less one-size-fits-all and more oriented toward theirindividual needs. They wanted
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Proposition at Real TokioMarine Vida e Previdência By Luís Eduardo de Carvalho, Former Senior Manager, Symnetics (Brazil);with Ziléa Santos, Superintendent of Operations Support and Technology,Real Tokio Marine Vida e Previdência
Brazilian insurer Real Tokio Marine Vida e Previdência is a compelling example of how Experience Co-Creation can be used to develop a differentiated value proposition for a new player in a fairly commoditized industry. It is equallycompelling as an example of the integrated use of three different, yet complementary, methodologies—theBalanced Scorecard, Value Innovation, and Experience Co-Creation—to achieve this aim.
information that would yieldresults—that is, that would helpimprove their sales. They wantedtraining in the more complexproducts that are often confusingto clients, because better trainingwould likely translate into moresales.
Figure 1 is a hypothetical experi-ence map of a fictitious insurershowing how existing experiencesmight rank. (A typical map wouldshow about 15 interactions.) In this example, sales channel sup-port gets high marks for kindness,but appears ill-prepared and hasonly spotty product knowledge.HR professionals—the corporatepension clients—appear happy to have had no surprises in theirpension plan implementations but seem dissatisfied with havingto make process changes andunclear about the pace of theimplementation.
In RTMVP’s case, classifying theexperiences as positive, negative,or neutral was not easy, especiallyfor the business unit team. Fewpeople want to admit they didn’tprovide their clients a positiveexperience—or that they missedopportunities to innovate. Theimplications can be scary. Thisanalysis, based on internal per-ceptions and interpretation, was
only half the story. Before tappingclient perceptions, RTMVP neededto conduct objective analysis.
Step 3: Creating New Experience Scenarios
Next, RTMVP studied the negativeclient experiences. Each businessunit project team—the unit man-agers and their key subordinates,along with others related to thetouch points (for example, thehead of the call center)—heldDART sessions (dialogue, access,risk-return, and transparency) toanalyze customer experiences andconsider how to redesign themthrough experience co-creation.Each session addressed four basicquestions:
1. How can we make the experi-ence more two-way, ensuringthat the client’s voice is repre-sented? (Dialogue)
2. How can we give clientsgreater access to information to reduce uncertainty—so,for example, they know what their policy covers (and what it doesn’t), or they know howlong they might be on hold atthe call center? (Access)
3. How can we share and reducerisks for both sides throughinformation sharing? (Risk-return)
4. How can we be more transpar-ent with clients, sharing thestrengths and weaknesses ofour products? (Transparency)
These sessions proved unusuallyfruitful. For example, in the train-ing and product developmentanalysis, the team realized theyrarely collaborated with saleschannel professionals, insteadproviding one-size-fits-all trainingand developing new productswithout their input. Two innova-tion opportunities emerged. Thefirst was customized training, inwhich an individual’s trainingneeds are identified through anonline test and a customizedonline program is developed forthe employee. The second, “oneidea brings the next,” is a tool for co-creating new products andservices. Still under development,it will allow all employees tosuggest new product ideas andprioritize the best ones throughan online vote.
An innovation that resulted fromthe transparency analysis is the“transparency flyer.” Intended fordelivery to clients as they are purchasing insurance, this infor-mation sheet will inform them in clear and concise terms of thekey features of products, includ-ing what is not covered in theirpolicy—addressing the commonuncertainties consumers haveabout the insurance they areabout to buy.
Step 4: Co-Creating New Experiences with Clients and the Sales Channel
Armed with a list of new clientexperience possibilities, RTMVPwas now ready to hold client co-creation sessions. Relationshipmanagers selected clients toinvite, telling them that RTMVPwanted to be a new kind of com-pany and develop product andservice ideas with them. On theretail side, many clients wouldparticipate in the same session.
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Insurance Company Sales Channel Corporate Clients
Sales ChannelTraining Experience
Relevance
Adjusted to my needs
Results-oriented
= Positive or neutral
= Negative experience
= Confusing or neutral experience
Sales ChannelSupport Experience
Readiness
Deep knowledge of products
Kindness
New Corporate PensionPlan Implementation
Experience
No surprises
No changes in my process
Fast
Figure 1. Hypothetical Experiences Map for a Corporate Pension Unit
This experience map ranks a few of the existing experiences of a hypothetical insurer’s internal (sales channel) and external (corporate pension plan) customers against the ideal
experience. An experience map typically shows 15 such interactions.
For corporate, one client partici-pated in each session, to protectconfidentiality. To encourageclients’ participation in the sessions, the company offeredonline gift certificates.
Unlike the traditional focus group,whose purpose is chiefly to vali-date a hypothesis, the co-creationsession is dedicated to the DARTprinciples. There are no two-waymirrors or hidden agendas; partici-pants and company are together inthe open, and candor is the goal.
RTMVP held 10 co-creation sessions with clients and another 10 with internal clients—bankrelationship managers and insur-ance agents. Each session began
with the facilitator stating theproject objective and defining co-creation. Clients were askedtheir opinion of current experi-ences and what they suggested to improve them. Then the projectteam presented the new experi-ences scenarios, soliciting clients’opinions and suggestions on howto improve them.
Step 5: Building the Business Unit Value Curve
With client input in hand, eachbusiness unit was now ready toconstruct its own value curve.The value curve, a tool of valueinnovation,3 is a directional graphthat plots the intensity level of the outcomes of different valuepropositions—that is, the expectedrelative value of each proposi-tion—on a 1 to 5 or 1 to 10 scale.The propositions usually includefactors such as price, transparency,product diversity, channel support,
and flexibility. Values assigned areintuitive; the value curve is not(and cannot be) quantitatively rigorous. But like the BSC strategymap, the value curve helps com-municate a value propositionreadily and precisely. Each valuecurve the units created graphedthe current state and projectedstate year by year through 2010.
Step 6: Consolidating the ValueCurves into a Corporate ValueProposition
Once each business unit haddetermined its own value propo-sitions, RTMVP could now consol-idate them into a corporate valueproposition. By analyzing all the value outcomes in detail,
the companyidentified sevencommon keyattributes. Threerelated to thesales channel:channel support,joint productdevelopment,and channel
education (on products). Fourrelated to clients: client ease,transparency, access, and special-ized consulting services (expertisein financial planning when sellingproducts).
Now, RTMVP had a corporatevalue proposition derived fromactual customer experience and from all business units, andshaped by customer input—avalue proposition that could nowbe inserted into the corporatestrategy map.
“More and More Blue Oceans”
With its co-creation platform inplace, RTMVP is now turning tothe actions plans—one for each“attribute.” The company hasbegun to implement a channeleducation program, a customizedtraining program, and transparen-cy flyers. It also plans to redesignpension fund statements based on client input, so that they will
allow plan administrators to cherry-pick the information theywant displayed. And as part of its specialized consulting servicesproposition, the company plans to offer add-on services to its corporate pension clients.
A not inconsiderable side benefitof the experience co-creationeffort is a better IT system.RTMVP now has more concreteinformation in hand with whichto redesign its technology platform,a task that before could only bebased on assumptions about newproducts and services.
Time will tell whether RTMVP’snew value proposition and strategicdifferentiation will pay off asexpected. Says Ziléa Santos, proj-ect leader, “We want to find morethan one blue ocean. We wantour people to be prepared to find,on their own, more and more blueoceans.” Experience Co-Creation,they believe, is the key. �
1. Source: SUSEP (the Brazilian insurance regulatoryagency), December 2007. The pension rankingincludes reserves (assets under management) oftraditional pension plans and PGBL, a type of pension product offered in Brazil. Life insuranceranking includes life insurance and VGBL (anothertype of insurance product) premiums.
2. Kim and Mauborgne’s blue ocean strategy presents an approach to strategy formulation that emphasizes the importance of finding a special place in the market—a blue ocean—wherecompetitors become irrelevant. Reaching that placeinvolves value innovation: innovating the customervalue proposition by simultaneously reducing cost and increasing customer satisfaction. Valueinnovators include Cirque du Soleil, Southwest Airlines, IKEA, Bloomberg Financial News, FormulaOne Hotels, and the Nintendo video game Wii.
3. Value outcomes are represented in the horizontal axis and intensity in the vertical axis. Seehttp://www.blueoceanstrategy.com/about/tools/strategy_canvas.html.
See W. Chan Kim and RenéeMauborgne, Blue Ocean Strategy(Harvard Business School Press,2004).
Look for Francis Gouillart andVenkat Ramaswamy’s new bookon Experience Co-Creation, Co-Creating Strategy, due out in 2009.More information on ECC is avail-able at www.eccpartnership.com.
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Now, RTMVP had a corporate value proposition
derived from actual customer experience and
from all business units, and shaped by customer
input—a value proposition that could now be
inserted into the corporate strategy map.
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Competitor analysis tends to be qualitative, addressing suchquestions as “Who are our keycompetitors?” “What products orservices do they offer or are theyplanning to offer?” “Where dothey compete geographically?”and “What are their criticalresources and capabilities?” All are important questions. But theiranswers are not in themselves sufficient for understanding themore central question: “How do our key rivals compete?”And recent data confirms that companies neglect to performongoing, sophisticated analysis oftheir competitors and competitors’moves. An April 2008 McKinseysurvey of 1,825 executives foundthat a majority noted their compa-nies learned of a competitivemove too late to respond before it hit the market.1 Classifying com-petitors by strategy type (such asoperational excellence or productinnovation) is a useful next step,but it, too, fails to address theessential underpinnings of thestrategy.
Consider Wal-Mart. Most peopleknow that Wal-Mart competes on low prices. Some are evenaware that the company’s uniquetechnology platform and logisticspractices support this strategy. Butrelatively few people know thatWal-Mart’s quarter-over-quarterfinancial returns are driven not
simply by low prices, but also by customer selection decisions,vendor management practices,and workforce selection anddevelopment. All of these factorstogether deliver more than just thecompany’s long-touted “every daylow prices”; they also deliver itssustainable competitive positionin a highly dynamic industry.2 Allof this information—in combina-tion—addresses the question ofhow Wal-Mart competes. Goodcompetitive analysis seeks thislevel of insight.
In 1979, preeminent strategy expertMichael Porter devised the Five-Forces framework for analyzingindustry forces that shape strate-gy, a framework as relevant todayas it was when it was introduced.3
The central force within themodel, “rivalry among existingcompetitors,” is based on two elements: (1) the intensity withwhich companies compete; and(2) the basis on which they compete. Intensity is chiefly afunction of the number of com-petitors and their commitment to the industry. The basis onwhich companies compete isdetermined by their strategies,such as cost-based competition or some form of differentiation.Organizations can gain and sus-tain competitive advantage whenthey compete in a way that isunique and largely inimitable by
competitors. In practice, this ishard to achieve. But enhancedcompetitor analysis can shed lighton how industry rivals compete—insight that can help you craft aviable strategy, and, more impor-tant, one that yields sustainableadvantage and sustainable profits.
A New Approach
The architecture of the strategymap provides an ideal means of articulating—and assessing—the strategies of competing organ-izations because its frameworkenables managers to answer the “what?” questions associatedwith competitor performance(share, customer base, products,resources, and capabilities) aswell as the “how”—the ways inwhich elements of the strategy fit together to deliver results. Youcan develop a full strategy mapfor each key competitor. But asummary of key competitiveattributes can help you comparethe basis of competition for eachkey competitor within each score-card perspective. We call this theStrategy Map Analysis Table.
To demonstrate what a StrategyMap Analysis Table looks like andhow much it can reveal aboutcompetitors’ strategy, let’s considerthe low-cost U.S. passenger airlineindustry. One of the most compet-itive industries since its deregula-tion in the early 1970s, the U.S.passenger airline industry isknown for its low barriers toentry, price-based competition,and intense rivalry. Profitabilityhas been very low—at times,even negative, when the industrygrapples with rapidly rising fuelcosts. In the low-cost segment,however, carriers have been ableto operate in the black, if notthrive; this segment includes thelikes of AirTran, JetBlue, andSouthwest Airlines.4 How do they accomplish this, and, morespecifically, how do they competeagainst each other? First, let’s lookat how a Strategy Map Analysis
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Without a doubt, the strategy map has become the dominanttool organizations use to articulate and monitor their strategy.But the strategy map offers another significant benefit:representing the strategy of your competitors—that is, thebasis on which your closest rivals differentiate themselvesand compete. By clarifying and comparing your competitors’strategies—and being equipped with such information upfront, while you are developing (or overhauling) your strategy—you can ensure yours has a sharper competitive edge.
Table for these competitors mightbe constructed. (See Figure 1.)
Financial perspective. Key financial information, such as rev-enue growth rate, ROI, net profitmargin—shown by total companyperformance or performance bymarket segment—is listed in thisperspective. Each competitor hasits own column of data for thepurposes of side-by-side compari-son. To blend the elements of thetraditional strategy map perspec-tives (i.e., strategic objectives)with this data (actual quantitativevalues), note under the perform-ance information the key driversof productivity and growth, suchas cost structure improvement or
expanded revenue. This associatesthe financial outcomes with whatare known or believed to be thekey financial strategies. For all of the airlines, we see a potentialrelationship between flight volume(service) and profitability—in thissampling, the more flights, thehigher the profit margin. This is a correlation that could be exploredfurther as part of the strategy formulation process.
In the customer perspective,market segment and market sharedata or strategic group are amongthe data shown, enabling a side-by-side comparison of target segments, market share, and thevalue discipline (or value proposi-
tion) associated with an airline’sgiven customer segment. In thecase of AirTran, the value disci-pline is operational excellenceand customer intimacy; for JetBlue,it is customer intimacy and inno-vation. Other data can be added,such as share growth informationor customer feedback, to indicateperformance within each distinctcustomer segment that the com-pany serves.
The internal process perspectiveshows the value chain—the chainof activities from materials pro-curement to internal operations to external activities such as sales.In the airline industry, for example,the value chain consists of infra-
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Return on total capital
Net profit margin
Operating margin
Revenue / revenue growth
AirTran JetBlue Southwest
Value proposition
Segments / share
Service
Geography
Load factor
After-sales service
Marketing and sales
Passenger service
Flight operations
Fleet planning / procurement
Infrastructure
Human resources
Technology
4%
1%
4.5%
$2.3 billion / 22%
Operational excellence/customer intimacy
Price-sensitive business and leisure travelers (2% market share)
700 flights daily to 56 destinations
Serves mostly eastern U.S. to capture dense market
76%
Rewards programs for business and student travelers
One-way fares, simple fee structure, walk-up rates, in-house media and PR
Affordable business class, Advanced Seating, XM Radio
Hub and route service from Atlanta, baggage agreements with other air
carriers (e.g., United, USAir, BA)
Two types of aircraft (Boeing 717 and 737), 4 years old, separate business class
Has own internal call center
8,100 FT employees, 400+ PT employees; high productivity
Highly functional, sophisticated e-commerce platform
3%
0.8%
11%
$2.8 billion / 20%
Customer intimacy/innovation
Value-oriented leisure and business travelers (3% market share)
550 flights daily to 53 destinations
Serves 21 states and Caribbean to capture largest market
80%
Rewards programs for business and student travelers; AMEX partnership
One-way fares, pre-assigned seats, no overbookings policy, vacation packages
JetBlue “Experience,” DirecTV, PPV movies, XM Radio, branded snacks
Point-to-point routes from flagship (New York) or focus cities: Boston, Ft. Lauderdale, Long Beach, WDC
Two types of aircraft (Airbus 320 and Embraer 190), 3 years old, one class
Owns LiveTV to offer in-flight TV
8,785 FT employees, 2,847 PT employees; flexible work
All electronic ticketing, most of bookings through website
5.5%
4.6%
13%
$9.8 billion / 9%
Operational excellence
No-frills business and leisure travelers (10% market share)
> 3,300 flights daily to 64 destinations
Serves 32 states; largest airline by passenger
72%
Rapid Rewards programs based on number of trips; VISA partnership
One-way fares, simple fees, no assigned seating, partner credit plan
Folksy customer service, limited snacks and drinks, new Business Select service
Point-to-point routes; short-haul, high-frequency flights serve
secondary airports; fast turnarounds
One type of aircraft (Boeing 737), one class, high skill in fuel contract hedging
Started “gate makeover” program
34,378 FTEs; 82% unionized; offers early retirement to eligible employees
Limited technology investments—mostly to support key initiatives
FINANCIAL PERSPECTIVE
CUSTOMER PERSPECTIVE
Sources: Valueline Investment Survey, company 10-K filings, and company websites
LEARNING & GROWTH PERSPECTIVE
INTERNAL PROCESS PERSPECTIVE
This side-by-side comparison of leading competitors highlights key elements of their strategy and their causal relationships throughout the four strategy map perspectives. Much of the information comes from publicly available data.
Figure 1. Strategy Maps Analysis Table for Select Low-Cost Passenger Airlines
structure, fleet planning and procurement, flight operations,passenger service, marketing and sales, and after-sales service.These activities are often groupedinto themes that represent thevalue propositions. But the indi-vidual activities can be organizedinto a generic value chain thatrepresents the way most organiza-tions in the industry compete,which can then provide a basisfor comparison. On a basic level,this analysis helps identify the differences in key processes andactivities from firm to firm. Thesedifferences can be correlated tothe customer value propositionand, ultimately, to financial performance.
You can gain further insight byactually determining the cost ofperforming each activity. Whilethis information may be difficultto obtain, if it is at all possible todo so, it can be very revealing:comparative cost differences inthe value chain indicate whereorganizations are choosing to makekey investments that they believewill help deliver on their valueproposition. For instance, it wouldbe useful to know if the invest-ments JetBlue has made to supportthe JetBlue “experience” (e.g.,DirecTV, XM Satellite Radio) arerecaptured through improvedpricing.
In the learning and growthperspective, workforce and tech-nology data can be aggregated for each competitor. If you havethe time and inclination to do the additional research, you candevelop key job family informa-tion for each competitor. Often,the job families are readily identi-fiable; for example, in the airlineindustry, they would include flightattendants, who play a major rolein customer service, and baggagehandlers, whose work is critical inensuring that flights depart ontime. Once identified, the work-force capability and productivitycan be considered. Some organi-
zations are known for employeeexcellence in specific areas—likeDisney’s customer service people.Studying competitors’ HR policiesand practices can reveal muchabout how they hire, train, anddevelop best-in-class employees.
Uncovering the Strategy Story
Each airline shown in the tablehas carved out a profitable place in the $100 billion U.S.air transportation industry. More-over, during the period of analysis,each of our three carriers grew at a rate faster than the 6% composite revenue growth rate.Southwest, however, is the clearleader in terms of margin andreturn. The question is: How does Southwest do it?
A quick scan tells us that South-west serves more locations withmore flights than its closest rivalscombined, leveraging scale in itsentire operation. Furthermore,its no-frills philosophy permeatesevery activity in the value chainto such a degree that the compa-ny has been able to offset lowerload factors than rivals. In theinternal process perspective, wesee that Southwest has no assignedseating, offers a limited snackselection, and has no investment in a specific type of customerexperience, unlike its rivals. It fliesonly one type ofaircraft (versustwo) with onestandard cabinconfiguration,emphasizingshort-haul routes.Perhaps mostcritical is South-west’s skill infuel-contract hedging, a capabilitythat gives it a major advantageand most certainly has helpedsave money since fuel costsbegan skyrocketing. Does thisanalysis imply that AirTran andJetBlue should follow Southwest’slead? Not necessarily. Innovationin the customer experience, as
well as in the types of servicesprovided, can be valuable formsof differentiation if, and only if,customers are willing to pay forthose additional features. Other-wise, such investments won’t trans-late into additional profits; theywill only represent additionalcosts that cannot be recaptured.It seems this might be the case in our analysis. Further data mightbe worth collecting if a deep dive is warranted in any one area.But overall, this representation inthe structure of the Strategy Mapprovides a useful means of keycompetitor comparison.
The Information Gathering Challenge
The analysis in Figure 1 was created using publicly availabledata. Fortunately, for most organi-zations, much more data is avail-able than ever before, thanks in large part to the Internet. Still,some organizational or industryinformation may be hard toobtain, especially informationabout organizations that are pri-vately held. Check with industryassociations and other competitive intelligence providers that trackand compile such information.Frequently cited data sourcesinclude IDG, Standard & Poor’s,Hoover’s, Gartner, and the Corpo-
rate Executive Board information.Another good source: analystsfrom the major investment firms.Their deep industry expertiseextends beyond companies toinclude knowledge of externalfactors affecting industry perform-ance, such as regulation. Yourown employees—salespeople and customer service representatives,
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Comparative cost differences in the value chain
indicate where organizations are choosing to
make key investments that they believe will
help deliver on their value proposition.
for example—can also be a richsource of information, becausethey interact with customers andcompany decision makers on adaily basis. (If you’re EconoAir,it’s easy to find out the averagenumber of flight attendants perflight or how much food yourcompetitors offer passengers.)Still, if after searching, you findonly limited information, don’thesitate to make educated estimates in order to fill in themissing information. As more data becomes available, you can update the analysis. Buildinga strategy map is, after all, an iterative process.
A New Strategic Use for the Strategy Map
Like many other performancemanagement tools and systems,the strategy map may have beenconceived for one purpose, butcan also be applied for others.The snapshot view that the BSCstrategy map provides of all thecomponent parts of an organiza-tion’s strategy (and their causalrelationships), can be constructedinto a revealing map of competi-
tors’ strategy. Other tools can be applied in the same way,from the widely known frame-works such as Baldrige criteriaand the EFQM Excellence model,to more emerging tools such as the Performance Prism or theReturn Driven Strategy Frame-work. All can help you analyze,compare, and dissect competitors’strategies. By plugging data into a framework like the Strategy Map Analysis Table, you can notonly ensure that you are thinkingcomprehensively; but you canalso identify important relation-ships between key variables andsee key points of differentiationamong competitors.
More than just a tool to improvestrategy articulation and execution,the Strategy Map Analysis Tablecan help organizations formulatetheir strategy based on competitiveintelligence—and thus improvethe quality of their competitivethinking even before translatingstrategy into action. �
1. Kevin Coyne and John Horn, “How CompaniesRespond to Competitors: A McKinsey Global Survey,” McKinsey Quarterly, May 2008.
2. “Every day low prices” was Wal-Mart’s slogan
for years. The company recently changed it to “We save people money so they can live better.”
3. Michael Porter’s Five-Forces model calibrates theattractiveness of an industry and aids in identifyingspecific forces that are shaping it, favorably orunfavorably: the bargaining power of buyers, thebargaining power of suppliers, the availability ofsubstitutes, the threat of new entrants, and industryrivalry. See Michael E. Porter, Competitive Strategy:Techniques for Analyzing Industries and Competi-tors (Free Press, 1980).
4. Southwest, in business since 1971, was recentlyfined by the FAA for maintenance lapses and skip-ping inspections in 2007. It’s unclear how muchmoney the airline saved during that period by for-going inspections and to what extent those savingscontributed to its profitability. We chose to keepthis example because of the company’s longevity,prominence, and sustained success in the low-costsegment.
For more information on selectedperformance management frame-works, visit: www.quality.nist.gov(Baldrige National Quality Program), www.sternstewart.com(Economic Value Added),www.efqm.org (EFQM ExcellenceModel), www.performanceportal.org(Performance Management Association), and www.returndriven.com (Return Driven Strategy).
Coauthor Mark L. Frigo is also the Eichenbaum Foundation Distinguished Professor of Strategy and Leadership in the School of Accountancy at DePaul.
T O L E A R N M O R E
B a l a n c e d S c o r e c a r d R e p o r t
16 To subscribe to Balanced Scorecard Report, call 800.668.6705. Outside the U.S., call 617.783.7474. bsr.harvardbusinessonline.org
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C O M I N G U P I N B S R
• Robert Kaplan on using Time-Driven
Activity-Based Costing to create opera-
tional budgets linked to the strategic plan
• Benchmarking: the key to strategic
planning at Public Service Gas & Electric
• A conversation with PSE&G’s two
top executives, CEO Ralph Izzo and
President Ralph LaRossa, on motivating,
aligning, and inspiring employees
• Rebalance your initiative portfolio
to optimize your program
• How to write effective, actionable
performance analysis
• The Art of Change Management:
the principles underlying behavior and
attitudes to change, and how to use
them to advantage
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