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1. Creating the Strategy-focused OrganizationThe ability to execute strategy. A study of 275 portfolio managers reported that the ability to execute strategy was more important than the quality of the strategy itself.' These managers cited strategy implementation as the most important factor shaping management and corporate valuations. This finding seems surprising, as for the past two decades management theorists, consultants, and the business press have focused on how to devise strategies that will generate superior performance. Apparently, strategy formulation has never been more important.
Yet other observers concur with the portfolio managers' opinion that the ability to execute strategy can be more important than the strategy itself. In the early 1980s, a survey of management consultants reported that fewer than 10 percent of effectively formulated strategies were successfully implemented.' More recently, a 1999 Fortune cover story of prominent CEO failures concluded that the emphasis placed on strategy and vision created a mistaken belief that the right strategy was all that was needed to succeed. "In the majority of cases-we estimate 70 percent-the real problem isn't [bad strategy but] . . . bad execution," asserted the authors.' Thus, with failure rates reported in the 70 percent to 90 percent range, we can appreciate why sophisticated investors have come to realize that execution is more important than good vision.
Why do organizations have difficulty implementing well-formulated strategies? One problem is that strategies-the unique and sustainable ways by which organizations create value-are changing but the tools for measuring strategies have not kept pace. In the industrial economy, companies created value with their tangible assets, by transforming raw materials into finished products. A 1982 Brookings Institute study showed that tangible book values represented 62 percent of industrial organizations' market values. Ten years later, the ratio had dropped to 38 percent.' And recent studies estimated that by the end of the twentieth century, the book value of tangible assets accounted for only 10 percent to 15 percent of companies' market values.' Clearly, opportunities for creating value are shifting from managing tangible assets to managing knowledge-based strategies that deploy an organization's intangible assets: customer relationships, innovative products and services, high-quality and responsive operating processes, information technology and databases, and employee capabilities, skills, and motivation.
In an economy dominated by tangible assets, financial measurements were adequate to record investments in inventory, property, plant, and equipment on companies' balance sheets. Income statements could also capture the expenses associated with the use of these tangible assets to produce revenues and profits. But today's economy, where intangible assets have become the major sources of competitive advantage, calls for tools that describe knowledge-based assets and the value-creating strategies that these assets make possible. Lacking such tools, companies have encountered difficulties managing what they could not describe or measure.
Companies also have had problems attempting to implement knowledge-based strategies in organizations designed for industrial-age competition. Many organizations, even until the end of the 1970', operated under central control, through large functional departments. Strategy could be developed at the top and implemented through a centralized command-and-control culture. Change was incremental, so managers could use slow-reacting and tactical management control systems such as the budget. Such systems, however, were designed for nineteenth- and early twentiethcentury industrial companies and are inadequate for today's dynamic, rapidly changing environment. Yet many organizations continue to use them. Is it any surprise that they have difficulty implementing radical new strategies that were designed for knowledge-based competition in the twenty-first century? Organizations need a new kind of management system-one explicitly designed to manage strategy, not tactics.
Most of today's organizations operate through decentralized business units and teams that are much closer to the customer than large corporate staffs. These organizations recognize that competitive advantage comes more from the intangible knowledge, capabilities, and relationships created by employees than from investments in physical assets and access to capital. Strategy implementation therefore requires that all business units, support units, and employees be aligned and linked to the strategy. And with the rapid changes in technology, competition, and regulations, the formulation and implementation of strategy must become a continual and participative process. Organizations today need a language for communicating strategy as well as processes and systems that help them to implement strategy and gain feedback about their strategy. Success comes from having strategy become everyone's everyday job.
Several years ago, we introduced the Balanced Scorecard.' At the time, we thought the Balanced Scorecard was about measurement, not about strategy. We began with the premise that an exclusive reliance on financial measures in a management system was causing organizations to do the wrong things. Financial measures are lag indicators; they report on outcomes, the consequences of past actions. Exclusive reliance on financial indicators promoted short-term behavior that sacrificed long-term value creation for short-term performance. The Balanced Scorecard approach retained measures of financial performance, the lagging indicators, but supplemented them with measures on the drivers, the lead indicators, of future financial performance.
But what were the appropriate measures of future performance? If financial measures were causing organizations to do the wrong things, what measures would prompt them to do the right things? The answer turned out to be obvious: Measure the strategy! Thus all of the objectives and measures on a Balanced Scorecard-financial and nonfinancial-should be derived from the organization's vision and strategy. Although we may not have appreciated the implications at the time, the Balanced Scorecard soon became a tool for managing strategy-a tool for dealing with the 90 percent failure rates.
Several of the first companies that asked us to help them adopt the Balanced Scorecard-Mobil Oil Corporation's North America Marketing and Refining Division, CIGNA Corporation's Property & Casualty Division, Chemical Retail Bank, and Brown & Root Energy Services' Rockwater Division-were underperforming; they were losing money and trailing the industry. Each organization had recently brought in a new management team to turn performance around. Each new management team introduced fundamentally new strategies in an effort to make their organizations more customer-driven. The strategies did not simply rely on cost reduction and downsizing; rather, they required repositioning the organization in its competitive market space. More important, the new strategies required that the entire organization adopt a new set of cultural values and priorities. In retrospect, we had been asked to introduce the Balanced Scorecard into four worst-case scenarios: failing, demoralized organizations that needed their workforces of up to 10,000 employees to learn and understand a new strategy and change behavior that had been imbedded for decades...