BSC and the systems of management (Part 2)
The Balanced Scorecard and the Strategic Management system
The first (and the main) thing that is needed to be performed is establishing the linking between Balanced Scorecard and the Strategic Management system. Without such connection BSC system loses one of the main of its function – establishing the linking between strategic and operational activities of the company. BSC not linked to the Strategic management turns from the fundamental system into just the collection of the isolated indicators which do not have any influence on the strategic development of the company.
The important tool of the strategic management system is the strategic planning. The result of planning gives the information that is used as a basis of strategy map creation and the indicators forming. But many companies all over the world do not pay enough attention to the strategic planning. It happens that even those few companies that have such activity as strategic plan making sometimes no not use it at all. A lot of documents related to the strategy (including the strategic plan) usually contain just some not exact wordings that sure are unclear for everybody except for the creators of those papers. It sure is not possible to translate such terms as “stable position on the market”, “increase of profitability” or “cost-saving” into operational goals. That is why the problem of unclear strategy might ruin all the benefit from the implementation of BSC because it simply ties the system up.
To prevent such problem the cooperation of BSC and the strategic management should start in the early beginning of the implementation process. Most of the projects of the system’s implementation usually begin with the collection of the information, needed to form the strategy correctly and exactly. The information source could be the interview with top managers, other key staff suggestions, different kinds of reports and some other company’s documents or opinions of the persons concerned. All the information collected needs to be processed and analyzed in order to create the strategy map of the company.
On the other hand, the structure of Balanced Scorecard (meaning theoretical issue by Kaplan and Norton) could become a good fundament to create a full-fledged strategy. The logic of the four perspectives (Financial, Customer, Innovation and learning and Internal processes – read more in the article “What is Balanced Scorecard concept: the four perspectives”) promotes a well organized distribution of resources (every activity of the company will have its own part of resources) in order to balance the development direction of the company. Certainly the strategy based on the four perspectives is going to be much closer to the ideal strategy referring to the BSC concept and the experience of many companies.
In the future steps (when the strategy is created and the whole company is working to achieve the strategic goals) the information of performance of all the indicators could be a good source to analyze in order to review and update the strategy. BSC in this case will encourage the top management (especially the person or the group of persons responsible for the strategy) to pay enough attention to the strategic planning.
A practical example
One of the companies offering outsource service of BSC implementation noticed during the analysis of the information collected inside one the companies that almost no employee knows what are the strategic goals of the company. They paid attention just to the operational tasks without any idea of what are they for the company and what could happen the next day. Certainly the graphs of the company’s performance (before BSC, sure, only financial indicators were available) presented a decrease of all the most important measurements. Also this situation has led to a complete wrecking of the plan of sales and loss of a significant number of clients in recent year. The summary of the outsourcers was deplorable: if the company will not determine its strategy and explain it somehow to its employees as soon as possible, it will crush within a year!
The way to start solving the problem was the following: top management was suggested to try to think about the company’s future, to abstract from everyday routine. This was just the first step. After giving the heads of the company some time specialists began to involve them to the early beginning of the BSC implementation process. Why not? BSC needs changes to be implemented – for the company it was vital to be changed. The logic of actions happened after that could be found above.
Summary
The previous example showed one of the worst situation but about 70% of companies worldwide actually have a problem with linking between strategic and operational management subsystems. BSC is not the only concept aimed to solve this problem but if it is decided to implement Balanced Scorecard into the business the establishing cooperation between strategy and exact tasks should not be missed; this cooperation is an important part of a concept. Paying enough attention to this problem, top managers can avoid a significant loss if BSC implementation becomes useless and gain lots of benefits of Balanced Scorecard proper work as well as setting up strategy oriented business model.
Certainly sometimes companies could be successful even without a stable linking between the strategic and the operational subsystems but most of those cases actually show not really objective performance values (for example, just financial indicators) or present just a short term view of the company’s situation.
The map of the article
- Part 1: This part is the intro, the first part of the whole article. It also contains the pyramid of management systems;
- Part 2: BSC and the Strategic Management system;
- Part 3: BSC and the Budgeting system;
- Part 4: BSC and the motivation system;
- Part 5: Balanced Scorecard and the subsystem of Organization Design. This part also contains the conclusion and summary for the whole article.
