Alignment: Using the Balanced Scorecard to Create Corporate Synergies.

Alignment: Using the Balanced Scorecard to Create Corporate Synergies

by Robert S. Kaplan and David P. Norton, 2006, (Harvard Business School Press) hardback, 302 pages. ISBN 1591396905

Movie sequels are rarely as good as the original. So it is with Alignment by Robert Kaplan and David Norton, the fourth book in a series that started with The Balanced Scorecard a decade ago. The authors position the series as 'the foundation for a new science of strategy management.' This claim has to be based on the enormous success and popularity of their The Balanced Scorecard and Strategy Maps among businessmen and women. I have great difficulty seeing the contributions as 'a new science of strategy management.'

Alignment is a great title for a book. The reason is that alignment of strategy with organization and management processes is important but hard to do. Alignment isn't a new issue. The McKinsey 7S model in 1982 argued the need for alignment of strategy with structure, systems, staff, style (culture), skills, and shared values (Peters & Waterman 1982). When one sees an organization that is dysfunctional and underperforming, the lack of alignment is readily apparent. For example, when the computer industry changed in the early 1980s, IBM had an enormous challenge of alignment, away from the mainframe business model to software and services. This was a challenge taken on by a new outside CEO with a remit to change virtually every aspect of how the company operated. Observing a lack of alignment is only the first step in the process. How one obtains alignment is another matter.

The alignment strategy and process outlined in the book is comprehensive. It involves 'wiring up' the multi-business company by developing strategy maps and balanced scorecards for each and everything--from corporate office to corporate support, corporate office to business units, business units to support, customers, and suppliers. The book provides a rich set of examples of organizations with the visual display of themes and initiatives. Readers of The Balanced Scorecard and Strategy Maps will be familiar with the displays. The case studies are interesting and varied. They range from the US Army and the Royal Canadian Mounted Police to IBM Learning, Ingersoll Rand, and DuPont. As a communication device the alignment process will find its way into management meetings and strategy reviews to link initiatives with financial, customer, internal and learning and growth objectives.

Kaplan and Norton rightly describe the multi-business corporation challenge as being 'how to operate multiple units within the structure to create value beyond what individual units could achieve on their own.' This is the familiar notion from corporate strategy and finance texts that the whole needs to be greater than the sum of the parts. The question I raise on reading Alignment is whether the book's proposals, to 'wire up' the processes, is the best way to get alignment with direction and create value. For it to be a preferred path, one has to ask whether the process proposed is superior to other approaches in terms of cost and benefits, and whether it really gets to the difficult issues of strategy implementation.

Wiring up management processes has few supporters these days. The abandonment of cumbersome strategic planning processes has been a relief to managers and a regret to only a few strategic planners. The complexity of large multi-business corporations and their geographic diversity have led companies to go down a different path, seeking simpler approaches around strategic priorities, emphasizing organization adaptation to change and adopting performance management and rewards that are aligned with desired outcomes and behaviours. The authors of Alignment touch on KKR, the private equity firm, in discussing conglomerates. The magic of private equity, as practiced by successful private equity firms such as KKR, is their success in alignment using very simple means. They are 'active owners,' with a governance system set up to make decisions quickly in the interests of shareholders. They have a focus on cashflow as the financial objective. They offer super-charged incentives for the management team, and replace managers quickly who don't meet performance expectations. The 'management system' of private equity firms is simple and low-cost, but at the same time has demonstrated that it can handle the complexity of large businesses and multiple businesses in a portfolio. The simplicity and results are leading many practicing managers to emulate the private equity model for alignment in the public company ownership environment.

For those companies that are in public ownership the route to alignment is increasingly through what McKinsey calls 'strong performance cultures.' The interventions are typically around finance, customers, and people. With finance, it is usually rigorous adoption of ROI benchmarks in capital allocation and divestment, a hallmark of Wesfarmers' successful multi-business strategy. Richard Rumelt of UCLA has done some research recently on capital allocation in multi-business companies with Dan Lovallo of the AGSM and UWA (Lovallo & Rumelt 2006). The surprising conclusion of their work is that multi-business companies have almost double the proportion of their assets in businesses that don't generate returns to cover their cost of capital, compared to single business firms. As Rumelt said recently when visiting the AGSM, 'they have difficulty weeding the garden'. Not so for companies with strong performance cultures. When it comes to customers, it is the notion of customer referral as the acid test of customer loyalty and retention, exemplified by the responses to the question: 'would you recommend this product/service to a friend?' With people, it is employee satisfaction and the actions it takes to change this. For example, ANZ Banking Group's breakout program to change mindsets and behaviours saw employee satisfaction increase from 50% in 2000 to 85% in 2004. In ANZ's case it took an enormous investment in time and effort to get the alignment (ANZ 2005).

Alignment is likely to remain a topic of great interest to businessmen and women. The book by Kaplan and Norton raises an important issue. It comes at a time when businesses are eschewing complexity for simplicity. This is not the 'new science of strategy management' but a visually appealing and logical setting out of relationships in a business.

References

Australia & New Zealand Banking Group Limited, ANZ: Annual Report 2005, Melbourne. http://www.anz.com/aus/shares/finance/annual.asp

Kaplan, R.S. & Norton, D.P. 1996, The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Harvard.

Kaplan, R.S. & Norton, D.P. 2004, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Harvard Business School Press, Harvard.

Lovallo, D. & Rumelt, R. 2006, 'New perspectives on internal capital allocations', working paper presentation, presented at UWA, Perth, in October 2006 October.

Peters, T.J. & Waterman, R.H. 1982, In Search Of Excellence, Harper & Row, New York.

Rob McLean

former Dean

Australian Graduate School of Management