P A R T T W OP A R T T W OALIGNING THE ORGANIZATION TO CREATE SYNERGIES
THE BALANCED SCORECARD PROVIDES a powerful framework for business units to describe and implement their strategies. A Strategy-Focused Organization, however, requires more than having each business unit using its own Balanced Scorecard to manage a great strategy. Most organizations consist of many different business units as well as shared service (or support) units. For maximum effectiveness, the strategies and the scorecards of all such units should be aligned and linked with one another. The linkages across the scorecards establish the theory of managing shared service units and decentralized business units within a single corporate entity. We refer to these linkages as the “strategic architecture” of the organization. They describe how the organization creates synergies by integrating the activities of otherwise segregated and independent units.
The strategic architecture starts with a clear definition of the corporate role. The corporation—or division, sector, or group—exists to create synergies among its component business and support units. If the corporation cannot create synergies across its component parts, then investors will wonder why the business units shouldn’t be spun off, to operate independently without the cost and bureaucratic overhead of an unproductive corporate office.
Scholars have established a rich history explaining the existence and growth of complex business organizations. Alfred Chandler described how corporations in the United States, Germany, and Japan gained competitive advantage in the twentieth century by leveraging synergies across related business units.1 These units exploited scale advantages in product development, manufacturing, and marketing and customer relationships to dominate smaller, more focused companies.
More recently, Goold, Alexander, and Campbell articulated a compelling theory of how multibusiness companies gain corporate advantage by influencing—called “parenting”—the businesses they own and control.2 Successful companies create more value through their “parenting advantage” than do rivals owning the same set of businesses. The essence of the parenting advantage arises from a fit between the capabilities of the corporate parent and the critical success factors for the individual business units. The parenting advantage can come from different sources. Among these are managing and exploiting common capabilities, operations, customers, technology, core competencies, or external relationships (with governments, unions, lenders, or suppliers) among the business units. The parenting advantage could also arise from the ability of the corporate parent to implement effective management systems for certain types of companies (innovative startups that must excel at market identification and product development, or mature commodity-type companies that must be leaders in continual cost reduction). A third source arises from the parent’s ability to allocate capital and people across the business units.
In a related stream of research, Collis and Montgomery describe a resource-based view for corporate-level strategy:3
An outstanding corporate strategy is not a random collection of individual building blocks but a carefully constructed system of interdependent parts…. [I]n a great corporate strategy, all of the elements [resources, businesses, and organization] are aligned with one another. That alignment is driven by the nature of the firm s resources - its special assets, skills and capabilities. 4
The parenting advantages described by Goold, Alexander, and Campbell and the resource alignment described by Collis and Montgomery can be implemented through Balanced Scorecard linkages. The corporate role or critical resources should be articulated in a corporate-level scorecard. The corporate role can be translated into a set of priorities and a scorecard that is communicated to the rest of the organization. For example, Figure II-1 illustrates the corporate scorecard for a fashion retailer. The company used the scorecard as a template to define the priorities shared by each business and support unit.
The financial component of the corporate strategy in Figure II-1 stresses aggressive growth targets for each strategic business unit that will dramatically raise shareholder value. In the customer perspective, the strategy clarifies marketing goals of fashion leadership and brand dominance that will project a consistent corporate image across its business units. The corporate strategy identifies opportunities to create economies of scale in corporate staff groups, such as real estate and purchasing, that will support the strategies and plans of each SBU. Finally, it defines the opportunity to share intellectual capital in the form of key personnel and information systems. In this company, each SBU subsequently developed its own strategy and its own scorecard, but these were guided by the corporate template. The synergies defined in the corporate scorecard created an organization in which the whole was greater than the sum of its parts.
While the need for a unifying linkage and alignment process may seem obvious and straightforward, many companies nevertheless fail to link their business and shared service units to divisional and corporate strategy. For example, an unsuccessful implementation of the Balanced Scorecard occurred in a large European bank that failed in this linkage process. This bank was an early Balanced Scorecard adopter, starting its process in 1994. We did not, however, feature this experience in Chapter 1 when describing companies’ success stories with the Balanced Scorecard. By early 1998, the bank was experiencing declining profits. The bank’s new strategy, around which its Balanced Scorecard had been built, was to offer innovative and sophisticated financial products and services to global customers (corporations) that could be accessed seamlessly from any location around the world. The strategy failed when the complex information technology required to implement this strategy was not deployed in a timely or effective fashion.
When questioned about the performance of the information services (IS) business unit, however, the CEO replied that this unit was performing very well according to its Balanced Scorecard. It turned out that when the directive from the top came to implement Balanced Scorecards in each business unit, the bank’s IS unit went to what it perceived were the best, most admired IS units in the world. It benchmarked the performance of those IS units and adopted the metrics used by these “high-performing” information technology groups. According to these metrics, the bank’s IS unit was now “world class,” performing comparably to its top-tier benchmarked peer group. The IS unit, while performing well against externally determined metrics, had failed miserably to deliver the services that were vitally needed by a major business unit. Because of this lack of alignment, the business unit and the bank’s strategy could not be implemented and eventually failed. The bank’s experience is a classic lesson on the consequences from not aligning scorecards (and strategies) across the organization.
Figure II-1 Link and Align the Organization around Its Strategy
Synergies arise from excellent interactions among business units, and these potential interactions need to be explicitly recognized in the strategies—and the scorecards—of the individual units. We describe, in the next two chapters, how the Balanced Scorecard helps organizations to link effective corporate-level strategies to their business units and shared services.
1. A. D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Belknap Press, 1990); Strategy and Structure: Chapters in the History of the Industrial Enterprise, rpt. ed. (Cambridge, MA: MIT Press, 1982); The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA.: Belknap Press, 1977).
2. M. Goold, A. Campbell, and M. Alexander, Corporate-Level Strategy: Creating Value in the Multibusiness Company (New York: John Wiley & Sons, 1994), and A. Campbell, M. Goold, and M. Alexander, “Corporate Strategy: The Quest for Parenting Advantage,” Harvard Business Review (March-April 1995): 120-32.
3. D. Collis and C. Montgomery, “Competing on Resources: Strategy in the 1990s,” Harvard Business Review (July-August 1995): 118-28, and “Creating Corporate Advantage,” Harvard Business Review (May-June 1998): 70-83.
4. Collis and Montgomery, “Creating Corporate Advantage,” 72.