M a rc h – A p r i l 20 09 | Vo l u m e 1 1 , N u m b e r 2
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S O U R C E INSIDE THIS ISSUE
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S T R AT E G Y
Transforming Operational Planning and Review into an Operating Strategy System
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Traditional operational planning and control refers to the management processes that focus on two fundamental activities: (1) implementing the strategic plan to produce short-term results; and (2) comparing performance against the plan and taking action to ensure that results, both strategic and operational, are achieved. Several recent BSR articles have elucidated the key components of operational planning and review processes that comprise three of the six stages of Kaplan and Norton’s Execution Premium management system: Align the Organization with the Strategy, Plan and Execute Operations, and Monitor and Learn.1 Since these components constitute the newest elements in the evolving Balanced Scorecard–based management system, now is an opportune time to paint an integrated picture of what we call the “operating strategy system.”
Case File ......................................................6 The Human Capital Factor at Hindustan Petroleum
By Michael Contrada, Senior Vice President, Palladium Group, Inc.
What exactly do we mean by operating strategy system? While the term may be new to many, it has been used by operations-oriented consultants, performance management practitioners, and even some technology companies for some time. And there’s nothing new about the underlying concept. Operations refers to the day-to-day tasks of managers, supervisors, and workers. Operating strategy refers to the battery of executive decisions that focus on operational issues and tactics that, by definition, are the specific choices regarding resource allocation and the actions that are then taken to execute strategy and drive current- and next-period operations and results. However, the term “tactical (or operations) management,” while certainly an appropriate term for this domain of management, is not adequate. It does not capture the intent and requirement of the new Execution Premium management process—to make the linkage between strategy and operations a key part of the executive governing system, continuously aligning strategy and operational execution. As discussed previously in BSR, the core management processes that make up the operating strategy system are: 1. Sales and operations planning 2. Corporate portfolio and initiative management 3. Driver-based planning and rolling forecasting The first two processes define the performance targets, the associated initiatives to support them, and the resource allocation tradeoffs for the current planning period, which will vary depending on the business but usually cover the next one to two years. The third process translates these operational decisions into financial terms in the form of a financial plan, budget, or forecast, based on key operational drivers. Together, these three processes constitute the core building blocks of an operating strategy system, which must, of course, be integrated into the organization’s governance system. (See Figure 1, page 3.) Moreover, this Continued on next page
When India’s markets opened up last decade, the nation’s oil companies faced real competition for the first time. To meet the daunting challenges of this new environment, Hindustan Petroleum, India’s second-largest integrated oil company and a Fortune 500, made human capital development the centerpiece of its strategic transformation. The results are startling.
Management Synergies ..........................9 Business Interfaces, Performance Networks—and a New View of Alignment BSR readers well know the importance of horizontal alignment and crossfunctional management mechanisms. Frank Buytendijk, author of Performance Leadership (McGraw-Hill, 2008), does too. Work happens horizontally, he notes, and today, more than ever, new business models demand more mechanisms that reflect and support that fact. Organizations, he insists, must adopt business interface metrics that incentivize and promote horizontal alignment.
Executive Insight......................................12 Earning Customers’ Lifetime Loyalty: How Tesco Turned Strategy into Reality Sir Terry Leahy stirred emotions as few speakers have when he addressed attendees of the Palladium European Summit last June. Sharing the story of Tesco’s rapid transformation from struggling British grocery chain to world’s third-largest retailer, its CEO outlined the simple precepts that he and his team have followed religiously. Herewith, a slightly abridged version of his powerful talk.
Performance Management ..................15 Part II. Managing Change: Winning Hearts and Minds
A Change Management Toolkit Instill a sense of urgency. Boost skills and performance expectations. These are among the most important actions you can take to make a transformation stick. Continuing his two-part article, Jayme de Lima crystallizes proven “carrot” and “stick” approaches that should be in every organization’s change management toolkit. … And coming soon: The Balanced Scorecard Hall of Fame Report 2009, highlighting last year’s 20 winners— the most globally diverse group ever.
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operating strategy system, as we will see, represents much more than a traditional operational review process. As an integrated management approach that involves resource allocation, financial planning, and all the accompanying decisions that invariably require resource tradeoffs, executive leadership and executive decision making play critical roles in the operating strategy system. Let’s discuss each process in turn. Sales and Operations Planning The fundamental job of business is getting product out the door and services delivered to customers—the “business as usual.” Sales and operations planning (S&OP) is the process of defining what will be sold (the demand) and what resources will be required to produce the products or services (the supply). This process of matching supply and demand for the current planning period (usually 12 to 24 months) requires aligning production plans with sales plans and, ultimately, both with strategic targets. S&OP is now widely used; the Luxfer case cited in note 1 is a prime example of a company that regularly— and rigorously—uses the process. One of the most popular and well-known approaches to S&OP is put forth in the works of Thomas Wallace and Robert Stahl, authorities on sales, manufacturing, and supply chain planning and forecasting. In their book Sales and Operations Planning: The Executive’s Guide, the authors emphasize the importance of executive decision making in both ensuring that current period sales and resource plans are aligned with strategy, and that resource plan tradeoffs are made.2 They describe four core subprocesses that constitute S&OP: 1. Demand Planning. Forecasting sales, based on customers’ actual level of demand for products and
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services (as well as projections for new demand generated by marketing), and on the introduction of new products and services within the planning period.
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2. Resource Planning. Establishing production, procurement, and capacity plans that support the sales plan and achieve inventory and backorder targets.
Publishers Robert L. Howie Jr. Managing Director, Palladium Group, Inc.
3. Master Scheduling. Planning detailed product mix and build schedules that balance supply and demand at the plant (or branch office) and individual resource level. 4. Executive S&OP. Setting highlevel volume and rate targets (i.e., company aggregates), ensuring alignment with strategy, making resource tradeoffs, and adjusting and signing off on the resulting financial forecast relative to the annual financial plan (budget). S&OP is a general term that refers to a planning process for aligning demand and capacity with highlevel targets for volumes, prices, and margins—and ultimately for determining product and service mix. S&OP, as outlined here, is carried out in all organizations in one form or another. Some organizations may use Time-Driven Activity-Based Costing (TDABC), a sophisticated system developed by Robert Kaplan that relates costs to customer, product, and channel outcomes through activity analysis. (TDABC, a powerful means of planning resource capacity, eliminates the perceived complexity of Kaplan’s original Activity-Based Costing approach.) 3 Others may use spreadsheets, applying management rules of thumb. Whatever the system, what is critically important— beyond using good tools—is developing explicit assumptions for planning-period performance projections and recognizing that tradeoffs must be decided at the executive level, based on bottom-up analysis. The monthly
Editorial Advisers Robert S. Kaplan Professor, Harvard Business School David P. Norton Director and Founder, Palladium Group, Inc.
Edward D. Crowley General Manager, Newsletters, Harvard Business Publishing Executive Editor Randall H. Russell VP/Research Director, Palladium Group, Inc. Editor Janice Koch Palladium Group, Inc. Circulation Manager Bruce Rhodes Newsletters, Harvard Business Publishing Design Robert B. Levers Levers Advertising & Design Letters and Reader Feedback Please send your comments and ideas to
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[email protected] Copyright © 2009 by Harvard Business School Publishing Corporation. Quotation is not permitted. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. To order back issues or reprints of articles, please call 800.668.6705. Outside the U.S., call 617.783.7474. Harvard Business Publishing is a not-for-profit, wholly owned subsidiary of Harvard University. The mission of Harvard Business Publishing is to improve the practice of management and its impact on a changing world. We collaborate to create products and services in the media that best serve our customers—individuals and organizations that believe in the power of ideas. Palladium Group, Inc. is the global leader in helping organizations execute their strategies by making better decisions. Our expertise in strategy, risk, corporate performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, conferences, communities, training, and technology. The Palladium Balanced Scorecard Hall of Fame for Executing Strategy™ recognizes organizations that have achieved an outstanding execution premium. For more information, visit www.thepalladiumgroup.com or call 781-259-3737.
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March–April 2009
Figure 1. How the Operating Strategy System Integrates Strategy and Operational Execution: A Best-Practice View BUSINESS GOVERNING CALENDAR
Q1
Q2 Evaluate trends and opportunities
STRATEGY
Strategy planning
OPERATING STRATEGY
Q4 Finalize plans with corporate/board
Develop/refresh strategy
Business planning
Planning guidance Executive strategy review
Strategy reviews
EXECUTION
Q3
Executive strategy review
Executive strategy review
Annual business plan (AOP) Executive strategy review
Financial reviews/ rolling forecast
S&OP
Portfolio management (includes themes)
PMO (project management)
Unit operation reviews KEY:
= Operating strategy plans
= Execution activities
The simple traditional monthly operating review is being replaced by more robust decision-making approaches. (Full reviews/forecasts are prepared at the end of each quarter; some companies may also do a quick review each month, as represented by the unshaded boxes.)
executive S&OP review meeting, therefore, is a fundamental component of the operating strategy system. Corporate Portfolio and Initiative Management Corporate portfolio and initiative management, another critical component of the operating strategy system, is the process of managing discretionary spending and investment above and beyond the spending needed to deliver the current-period sales and production plan targets. Portfolio and initiative management involves a rigorous process of evaluating and prioritizing ideas, planning and approving their implementation, and instituting project and program management practices. Portfolios are gauged against a clear set of strategic objectives, measures, and targets; periodically reviewed as part of the strategy review process; and rebalanced as necessary to maintain targeted risk and performance levels.4 According to the Corporate Portfolio Management Association,
discretionary spending can run as high as 25% to 40% of expenses.5 Thus, how an organization manages such a big number is critically important to how well it optimizes business results and drives strategy execution. The corporate portfolio encompasses all the types of discretionary spending available to a business. For the purposes of our discussion, we’ll use three broad portfolio categories to classify discretionary spending: the innovation (or strategic initiative) portfolio, the productivity (or process improvement) portfolio, and the infrastructure (or the “keeping the lights on”) portfolio. The innovation portfolio refers to the strategic initiatives that are intended to transform the capabilities, positioning, and competitive advantage of a company. Generally multiyear and multiproject programs, they support key strategic priorities that represent activities above and beyond “business as usual” activities. BSR readers will recognize the process of managing strategic initiatives as Balanced
Scorecard strategic theme management, and the associated investments in these initiatives as StratEx—strategic expenditures, as distinct from CapEx and OpEx.6 (StratEx, incidentally, may represent about 10% of total discretionary spending.) Beyond the strategic initiative or StratEx portfolio, however, there are other portfolio categories that must be managed to achieve optimum results. The productivity portfolio includes process improvement projects and programs. The focus of process improvement is incremental improvement—an ongoing goal of all processes, functions, departments, and units in a business. Lean Manufacturing, Six Sigma, and Total Quality Management are all established approaches for identifying and managing process change projects. Finally, we have the infrastructure portfolio. This category encompasses the routine round of upgrades and maintenance that literally “keep the organization’s lights on”—such as equipment upgrades, facilities expansion, IT
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infrastructure improvement, routine training, and building maintenance and repair. The infrastructure portfolio may also include mandated changes, such as implementing compliance systems (e.g., Sarbanes-Oxley systems). As part of the annual strategic planning process, top management sets the overall funding for these aggregate portfolios. The resulting portfolio mix reflects the organization’s strategic priorities. A fast-growing company focused on emerging markets or a company pursuing a technological breakthrough will allocate more to the innovation portfolio in order to exploit such strategic opportunities. For more mature companies, the balance of investment will shift toward productivity and infrastructure. This set of corporate portfolios requires executives’ ongoing involvement and oversight. In the case of the innovation portfolio, BSC theme management of strategic initiatives creates a built-in, regular executive review process for strategic initiatives, as well as a mechanism for ongoing management by executive leaders. With productivity and infrastructure portfolios, however, leaders may conduct only an aggregate status review of them each month, and then rebalance the portfolios each quarter, based on current business conditions and the performance outlook. As with strategic initiatives, the active management of the portfolio projects and programs may be overseen by either functional leaders or dedicated program management offices (PMOs). Finally, as part of the executive S&OP process, the impact of strategic, productivity, and infrastructure initiatives within the current planning period must be identified and reflected in operating assumptions. The key to successful portfolio management is defining a portfo-
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lio management process and managing it deliberately to “optimize” investments. Anand Sanwal, in his book Optimizing Corporate Portfolio Management (see note 5), gives a full overview of how a rigorous portfolio and program management process can be adopted to manage the entire spectrum of discretionary spending—not just the innovation (strategic initiative) portfolio. As with S&OP, executives’ active sponsorship of and engagement in portfolio management, along with their involvement in ongoing discretionary spending decisions, is a critical component of the operating strategy review process. Driver-based Planning and Rolling Forecasting The third major element of the operating strategy system is driverbased planning and rolling forecasting. Driver-based planning is an approach to financial planning that replaces the traditional budgeting process. It uses operational driver models—equations representing the mathematical relationships between key drivers (such as call volume, machine utilization, sales conversion ratios) and financial outcomes—to predict financial results. Fundamentally, driver-based planning along with rolling forecasting constitute the process of translating the S&OP and discretionary portfolio investments into a financial plan.7 Traditionally, creating a financial plan is an annual process that establishes the budget (sometimes called the annual operating plan, or AOP). However, given the continual round of updates executives must make to the S&OP and the discretionary investment portfolios (as suggested in the discussion above), it’s clear that financial planning once a year is not adequate. Thus, more and more organizations have moved to rolling forecasting—if only partially, such as through monthly
sales updates or the quarterly reforecasting of annual results. True rolling forecasting provides a continuous performance outlook, at least five to six quarters out; its purpose is to provide a best estimate of expected future performance. Rolling forecasting is made feasible by adopting a driverbased approach to forecasting that frees the financial planning process of the detail associated with traditional budgeting by forecasting key operational “drivers.” Drivers, of course, are what S&OP, corporate portfolio management, driver-based financial plans, and rolling forecasting all have in common. They represent a shared set of business assumptions and are the key point of integration across these operating strategy processes. For example, the S&OP demand plan and the standard conversion and run rates in the production plan are sources of financial-plan drivers. Likewise, the run-rate improvements and savings assumed by the current slate of process improvement projects are sources for modifying financial-plan drivers. The impact of strategic initiatives in the planning period will also obviously affect financial-plan drivers. Because the relationships between inputs (e.g., inbound calls per month for a call center) and outputs (e.g., monthly capacity per agent improved by a training program or new technology) are transparent, all the assumptions driving a given expense or revenue forecast become much easier and more dynamic to plan and review. So once the StratEx, productivity, and infrastructure investments are factored into the S&OP assumptions, the financial plan or updated rolling forecast emerges almost automatically. For financial planning, as with the S&OP and corporate portfolio management processes, executive leadership is essential when the core operating strategy compo-
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nents are integrated and tradeoff decisions must be made. The interaction of these component parts represents the fundamental rhythm of the business and is the heartbeat of the governing system. Only those with the highestlevel purview and authority (and accountability) are in the position to make such tradeoff decisions, often involving balancing competing priorities with scarce resources. When driver-based planning and rolling forecasting are done well, the final result is a fully aligned strategic, operating, and financial plan—and not just a once-a-year plan, but a continual one. Case studies already documented in BSR provide two examples of how companies have used driver-based planning and rolling forecasts—in combination with portfolio management, process improvement, and scorecards—to improve executive management decision-making and business results.8 From Operating Reviews to Operating Strategy System One point deserves emphasis: executive-level involvement in an operating strategy system is not as simple as attending one operating review each month. While not all executives are required at all key decision-making meetings, the right leaders need to be there, and ideally, the CEO (or seniormost business unit leader) should participate too. Thus, in addition to a quarterly strategy review meeting, a monthly round of meetings among an executive team may include: 1. A demand plan review to sign off on sales forecast assumptions 2. An S&OP review to sign off on resource and action plan tradeoffs to reach desired planning period volumes, prices, and margins 3. A strategic initiative review to check status and rebalance, if necessary
4. A productivity portfolio review to check status and refocus, as required 5. A rolling forecast review to commit to next-period projected results An operating strategy review system that requires as much executive input as described here has three key implications. First, the only way such a system can work is if the executive team can delegate the routine monitoring and interim decision making associated with the review process to appropriate cross-functional teams whose job it is to support these executive decision-making reviews. The model for this is the “theme teams” that oversee the strategic initiative programs defined by the strategy map (i.e., the innovation portfolio and StratEx). Second, the insights derived from these review meetings will help streamline and sharpen the focus of the quarterly strategy review meetings, making them shorter and more effective, since the executives will be coming to them fully armed with knowledge of the key operational drivers of performance. Finally, there is no “white space” or “bandwidth” left for additional scorecard reviews at levels lower than the entire business unless they are thoroughly aligned and integrated into these executivelevel decision-making bodies in terms of key performance indicators (KPIs), targets, and project planning. There is simply no time for additional management process “overhead” if these cascaded scorecard reviews represent a separate set of meetings that do not feed the operating strategy system. In effect, this is what we mean by “operating strategy system”— explicitly building the governance process around key decisionmaking areas whereby operations and strategy become unified throughout the organization.
The Execution Premium model is a blueprint for the future of business management systems. Unlike the traditional notion of governance, in which strategy and operations are managed almost independently, with strategy being the province of senior executives, the new model recognizes the need to bring strategy into operational management —that executives must necessarily play an active, ongoing role in operations management. This discussion has attempted to synthesize some of the core aspects of the emerging operating strategy system, which explicitly builds the governing process around key decision-making areas related to linking strategy and operations. I 1. See Robert S. Kaplan and David P. Norton, “Integrating Strategy Planning and Operational Execution: A Six-Stage System,” BSR May–June 2008 (Reprint #B0805A); and the authors’ new book, The Execution Premium: Linking Strategy to Operations for Competitive Advantage (Harvard Business Press, 2008). See also Randall H. Russell and Janice Koch, “Luxfer Gas Cylinders: Mastering the StrategyOperations Linkage,” BSR May–June 2008 (Reprint #B0805B). 2. Thomas Wallace and Robert Stahl, Sales and Operations Planning: The Executive’s Guide (T. F. Wallace & Co., 2006). 3. See R.S. Kaplan, “Resource Capacity Planning in the Strategy Execution System,” BSR September– October 2008 (Reprint #B0809A). 4. Peter LaCasse, “Initiative Management: Putting Strategy into Action,” BSR November–December 2007 (Reprint #B0711B); and P. LaCasse, “Rebalance Your Initiative Portfolio to Manage Risk and Maximize Performance,” BSR September–October 2008 (Reprint #B0809D). See also R.S. Kaplan and Catherine Jackson, “Managing by Strategic Themes,” BSR September–October 2007 (Reprint #B0709A). 5. Cited by Anand Sanwal in “The Care and Feeding of Plus-Sized Portfolios,” Business Finance, September 2007. See also A. Sanwal, Optimizing Corporate Portfolio Management (Wiley, 2007). 6. For a discussion of StratEx, see D. P. Norton, “Linking Strategy and Planning to Budgets,” BSR May–June 2006 (Reprint #B0605A). 7. See a detailed discussion of this aspect of operational planning in D. P. Norton and Philip W. Peck, “Linking Operations to Strategy and Budgeting,” BSR September–October 2006 (Reprint #B0609A). 8. See two articles on Borealis: Thomas Boesen, “Creating Budget-less Organizations with the Balanced Scorecard,” BSR November–December 2000 (Reprint #B0011B); and “New Tools for a New Corporate Culture: The Budget-less Revolution,” an interview with T. Boesen, BSR January– February 2002 (Reprint #B0201C). Also see Lauren Keller Johnson, “Linking Strategic Planning and the Rolling Financial Forecast at Millipore,” BSR May–June 2007 (Reprint #B0705D).
Reprint #B0903A
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The Human Capital Factor at Hindustan Petroleum By Janice Koch, Editor, BSR; with Ashis Sen, Chief Manager, Balanced Scorecard, Hindustan Petroleum Corporation Ltd.
Employee visioning. The learning organization. Can these indeed be the foundation of a strategic transformation? Just ask Hindustan Petroleum, India’s second-largest integrated oil company. HPCL takes Motivating to Make Strategy Everyone’s Job to a new level, viewing human capital development as, in the words of its chairman, “the vehicle for delivering the organization’s strategic objectives.” HPCL’s dramatic growth and impressive accomplishments in the past five years stem from a carefully orchestrated, multipronged effort at becoming an employee-empowered, customer-focused learning organization—one dedicated to continuous improvement and innovation. A Fortune 500, with annual sales of more than $27 billion (FY 07–08), Hindustan Petroleum Corporation Ltd. (HPCL) owns and operates two major refineries and the largest lubricants refinery in India. Besides its refineries business, its other business units include Aviation, Bulk Fuel, LPG, Lubricants, Retail (60% of the company’s business), Trade (including oil and petroleum-product imports and exports), Exploration and Production, and Ventures. Its mission, beyond enhancing productivity and quality, is to grow in scale by diversifying and globalizing operations. Until the late 1990s, HPCL operated in a predictable environment, with little private-sector or global competition. In the state-regulated oil industry, even industry growth was planned by the government. But the past decade brought liberalized trade, and the opening of the Indian markets to multinationals and private enterprise created newfound competition. Although HPCL enjoyed solid financial performance, its executives recognized that customer satisfaction had to be the company’s primary goal if HPCL were to be competitive.
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They also recognized that winning customer satisfaction would take more than proclaiming its importance. Succeeding in the new environment required new skills—initiative, leadership, creativity—unfamiliar to a civil service–minded workforce. HPCL also needed to develop the means of retaining a skilled workforce, not least because as a “public sector unit,” 1 it lacks flexibility in determining pay packages. Cultivating decentralized leadership and accountability meant empowering individual employees, allowing them to help shape the organizational vision—and even helping them view the workplace as a platform for realizing their individual aspirations. Attracted to the precepts of Peter Senge, author of the seminal book The Fifth Discipline (Currency Doubleday, 1990), HPCL committed to becoming a learning organization. Co-Creating the Organizational Vision In February 2003, top executives, and functional area and SBU heads began intensive deliberations to craft their own individual visions of the organization’s— and their personal—success. From these, they articulated an organizational vision: to “delight
customers [through] superior understanding and fulfill their stated and latent needs with innovative products and services.” The vision includes being more agile than the competition, being a “learning and innovative organization,” and creating “an environment of trust, pride, and camaraderie”— all while achieving the highest possible growth rate and ROI. But neither this vision, nor the goal of becoming a learning organization, could be achieved through management edict. Employees had to participate in defining HPCL’s future. Getting employees emotionally involved would be the key to aligning them to a common purpose. Thus was born Project ACE (Achieving Continuous Excellence), aimed at creating a common vision to transform the company into an innovative, learning organization, one in which employees were inspired to learn and continuously acquire new skills. A T
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Hindustan Petroleum Corporation Ltd. Mumbai, India
Industry: Integrated oil and gas Annual revenues: $27-plus billion (FY 2007–08)
Employees: 12,000 Business units: Refineries, Aviation, Bulk Fuel, LPG, Lubricants, Retail, Trade, Exploration and Production, and Ventures Offices: Zone offices in major cities; more than 90 regional offices Operations: Terminals, service stations, bottling plants, inland relay depots, retail outlets
Pipelines: 3 major cross-country; the third, from Mundra to Delhi, opened in February 2009.
BSC adopted: 2003 BSCs in place: 200 for operating units and functional areas; 500 for team leaders
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Fifteen internal “coaches” drawn from field positions throughout HPCL were appointed to help marketing, refining, and engineering employee teams define their personal aspirations. “We invited employees to write down what they wanted to accomplish personally, what they wanted for their families, their communities, society,” notes Ashis Sen, a former coach and today the company’s BSC Chief Manager. “We then invited them to contemplate what kind of organization they’d like to create in the next five years.” The process reinforced the connection between the personal, team, and organizational visions, and yielded a collective commitment to organizational objectives. Employees also connected the importance of learning with career development and management— a connection, notes Chairman and Managing Director Shri Arun Balakrishnan, that came “out of choice, rather than compulsion.” Ultimately, hundreds of teams and some 4,000 employees (about one-third of the workforce) participated in these visioning workshops—including union representatives, who even embraced management’s stretch objectives. Making the Vision Reality Energized by contributing to the corporate vision, hundreds of frontline officers now wanted to participate in formulating the business-unit strategies that would help achieve it. Cross-functional teams were formed, made up of managers from Retail and LPG and functional managers from finance, sales, HR, and engineering. They went out into the field to talk to dealers, vendors, and end customers to better understand their needs and formulate a customer-focused strategy from the bottom up. As then-HR Director Balakrishnan noted, “We needed a system that could help us with the change management process,” a mecha-
nism for translating the vision and objectives into action—and for clarifying how this would be achieved. HPCL also needed a means of communicating performance expectations and providing feedback to employees systematically and transparently. Existing tools, like the annual operating plan, ignored performance against customer and other nonfinancial measures—or, like the annual appraisal system, had a short-term focus. The Balanced Scorecard seemed the perfect solution. First, a corporate BSC was crafted by top management, SBU heads, and other managers from across the organization. At the top it states HPCL’s enterprise strategy simply: “Increase value and growth (by delighting the customer).” A fifth perspective, Corporate Objectives, just beneath, contains four enabling objectives: sustained profitability, continuous growth, corporate citizenship, and domestic market transformation. Each SBU then drafted its own BSC. Top management wanted the businesses to craft their own strategy that aligned to the enterprise strategy and vision. This would cultivate ownership and leadership—and foster synergies across the SBUs. This new grassroots strategy development represented a radical cultural departure for the company. Middle management provided feedback on each proposed scorecard; then each SBU presented its final revision to top management and all SBU heads. SBU and frontline businessteam scorecards aligned with corporate’s, then shared services’ BSCs were built to align with corporate and SBU scorecards. Building Human Capital With the BSC in place, HPCL next launched a multipronged, integrated program of human capital initiatives and processes— the core of its learning-organization plan.
Guided by the employee survey finding that clearly stated performance expectations correlated with employee engagement and performance, the company next defined strategic job families and the competencies needed to achieve excellence in these jobs. Then management mapped its officers’ competencies and created Individual Development Plans (IDPs) to fill competency gaps. HPCL measures behavioral, technical, and IT competency, depending on the requirements of the job. Today, as many as 2,430 officers have IDPs. A KPI dictionary established uniform definitions, so that, for example, every sales officer can trust that his or her performance is being gauged on companywide measures and objectives. Training workshops and knowledge portals help employees build leadership and technical skills as well as behavioral skills such as teamwork, a customer orientation, and emotional intelligence. A Deputy General Manager is assigned to each regional office to mentor field officers in interpersonal as well as job skills. HPCL’s ISO-certified learning center in Pune offers programs by academicians, management consultants, and other outside experts. Job rotation was made mandatory for all managers. Executives believe that relocating managers helps them respect cultural diversity, and that working in different job areas helps them gain a holistic view of the organization and become more well-rounded. Interestingly, training and mentoring has prompted many employees to move into different disciplines within the company. Tracking Performance Today At HPCL, the BSC Chief Manager (who coordinates with the company’s strategy department) is responsible for all BSC activities: helping teams revise visions and
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strategies, building and refreshing BSCs, coordinating reporting, and monitoring progress on strategic initiatives. A BSC website features BSC concepts, scorecards, initiative updates, definitions, communications, a photo gallery, and frequent messages from the chairman. The performance of more than 3,000 officers is measured through an online BSC-based performance management system. Targets are set collaboratively by senior management and teams. Initially problematic, target setting among groups that work together was facilitated through servicelevel agreements (SLAs). Today, SLAs are standard practice, with agreements between marketing SBUs; between functional areas, refineries, and marketing groups; and between individual functions. An Executive Council, established in 2004, brings together the CEO and all functional directors and SBU heads to conceive and promote synergies across SBUs. For example, by expanding servicing points for lube sales at the retail outlets, sales increased for both the Lubricants and Retail SBUs. Learning and Growth Initiatives IT initiatives have been instrumental in advancing key corporate goals—including achieving greater efficiencies without increasing personnel. Through Project Parivartan (Hindi for “Change”), a two-year effort, HPCL got “wired” and implemented an ERP system that has integrated and standardized processes and improved decision making and customer responsiveness. Elevate 2008, a branded IT initiative for internal process improvement, yielded eCare, a composite HR portal for employees; the E-Revenue budget system that allows for online budget requests, budget reallocations, and proposal consolidation; a sales officers’ web portal that provides access to real-time data from the
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company’s ERP, enabling sales managers to do on-the-spot analysis and performance tracking; and E-Fuel, which established automated billing terminals at retail outlets. When it comes to training, HPCL believes in quantity, quality—and ingenuity. In April 2008, it became the first oil company to win a technical assistance grant from the U.S. Trade Development Agency. The grant allowed HPCL to contract with a major U.S. oil company to train personnel in asset reliability and inspection for pipeline and refinery assets. Fueling Performance—and the Indian Economy Since embarking on its transformation, HPCL has enjoyed marked increases in every aspect of performance, from higher sales and market share (now 17.7%) to a 35% increase in the number of high-performing managers (those with performance-linked rewards) to being a top workplace. Its Aviation unit, India’s fastest-growing (and top-ranked) jet fuel supplier, achieved 43% sales growth and a compounded annual growth rate of 35% in FY 2007–08. It is the only Indian aviation fuel company to win the Golden Peacock award for environmental management. Among the company’s innovations are a new joint venture with a sugar company to build an ethanol plant in southern India and a new state-of-the-art pilot plant for biodiesel production. A dizzying array of awards, both domestic and global, attest to the company’s successes across every area of operations. In 2008, both refineries won the Greentech Gold Award for outstanding environmental management (one for the sixth time). The company won its fourth (international) Golden Peacock Corporate Governance Award since its transformation. It also it won the NDTV Profit Business Leadership Award, given
to companies that have fueled the Indian economy and nurtured excellence. Over the past several years, HPCL has won national training, environmental, and marketing awards, and has been named best employer in India (by Hewitt Associates, among others), most admired retailer, safety innovator, and most preferred auto fuel. Its IT projects earned the company an Indian Express Indian Innovation Awards silver trophy for achieving improved logistics and cost reductions, innovations that have led to new benchmarks in retail automation, capacity utilization, and productivity. It is the only oil company to win this award. The company remains committed to the idea that developing human capital fuels organizational capital: HPCL named its HR Director as Chairman in April 2007—thanks to the impact of his human capital agenda. And that commitment has paid off. Even in the volatile 2008 market, the company managed to win steady increases in market share, despite government-imposed price freezes. Support for the BSC at the highest levels is unwavering. And luring new talent should not be a problem; last spring HPCL attracted a ratio of applicants from engineering, management, and accounting programs that rivals that of the private sector. All in all, proof positive of the power of the learning organization. I 1. Like all Indian oil companies, HPCL is a “mega public sector unit”: 51% government-owned and subject to price and wage constraints.
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See “Strategic Job Families,” by Robert S. Kaplan and David P. Norton, in BSR November– December 2003 (Reprint #B0311A). For more articles on human capital, consult the BSR article index, available at www.executionpremium.org. Reprint #B0903B
S Y N E R G I E S
Business Interfaces, Performance Networks— and a New View of Alignment
M A N A G E M E N T
March–April 2009
Performance management has traditionally been a hierarchical discipline, one that follows a top-down approach. Organizations roll up budgets, cascade scorecards, drill down to locate deviations from the plan. Yet most current business models, notes Frank Buytendijk, are not hierarchical; they are networked. Despite the advent of new structures and mechanisms (process management, theme teams), a gap persists between how businesses run and how they are managed. Buytendijk, author of Performance Leadership (McGraw-Hill, 2008), argues that the term “alignment” needs an expanded definition—and new measurement approaches.
By Frank Buytendijk, Vice President and Fellow, Oracle Enterprise Performance Management
In most organizations, business domains only “report up” on strategic objectives, and most of the reporting is “self-reporting” —that is, reporting based on a business unit’s own data. Moreover, managers are typically not aware of what their peers report. At the same time, senior managers —those generally two levels higher—are not intimately aware of the subtle details of performance reports. Managers get only “the big picture” (if they even get a fair picture). Alignment is, in reality, a primarily vertical exercise. This doesn’t much help operational managers. Many of their performance indicators are determined by drivers that are based elsewhere in the company. For instance, the claims department of an insurance company has no control over either the number of claims or the average claim size; it simply accepts what lands on the desk. Its performance indicators are influenced more by the underwriting department and the risk profiles underwriting uses to accept customers. Or consider the first-time-right percentage of telecom triple-play installations (telephone, television, Internet) that require the involvement of many matrixed departments (such
as sales, planning, operations, and billing) across multiple product lines. It takes a concerted effort to reach performance targets. New Business Models On the strategic level, vertical alignment also becomes increasingly problematic. Many new business models are based on product componentization and mass customization, involve sourcing across multiple organizations, and are driven by customer self-service. Consider the pharmaceutical industry’s move toward personalized medicine, or the configuration options carmakers offer buyers, or airlines’ online booking. Insurers, telecoms, and consumer electronics manufacturers routinely outsource customer service. Upstream, across all industries, production, logistics, and even R&D are often outsourced, alongside support functions such as HR, finance, and IT. Where does the front office stop and the back office start? Can companies still define product-market combinations themselves? Is it still meaningful to measure customer, channel, or product profitability, or is transaction profitability the only measure that counts? With businesses
increasingly organized as networks rather than hierarchies, productoriented and functionally oriented organizations will have an increasingly hard time managing this reality. The corporate hierarchy may still drive organizational accountability and people management, but it is the value chain that drives organizational performance. Clearly, vertical alignment is not enough; we also need horizontal alignment. Work doesn’t flow top-down; it flows from outside the organization into the organization and out again, passing multiple nodes in a network of activities. Work needs to be managed as a network, with flows, interfaces, inputs, and outputs. There is “feed-forward” information, which shows what is coming through the value chain, and there is feedback information, which captures the performance of the preceding steps in the value chain. Manage Work Through a Process, and People Through a Hierarchy When organizations overlook (or don’t understand) the difference between vertical and horizontal alignment, they suffer dysfunctional behaviors we have all witnessed: lack of collaboration, the sandbagging of performance targets, gaming the budget, and performance suboptimization. Why, for example, is budgeting such a mess in so many organizations? Because those organizations follow a strictly hierarchical, instead of a networked, approach. Budgeting, planning, and rolling forecasting should focus on cost and revenue drivers, on how resources and activities ultimately translate into financial results—in other words, on horizontal alignment. These processes should be overseen and managed by hierarchy, but should not be structured hierarchically. Not everything can be managed as a network, however. In the dot-com boom, many network
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organizations emerged. People were networked around business initiatives, departmental structures were dissolved, bottom-up entrepreneurial initiatives were commonplace. When the bubble burst, many of these organizations collapsed because they had lost their direction due to a lack of leadership and focus. A strong hierarchy would have helped them set a new course. Performance management must take place between the domains of the organization as much as it does within those domains. Operations managers understand this and have invested in process management to integrate activities across the value chain, using methodologies such as Six Sigma. Organizations with a sophisticated strategy management approach use theme teams and competency centers to coordinate and integrate strategy execution and operations. But generally speaking, performance management is still dominated by finance and remains a hierarchical exercise. In fact, the most common performance management mechanism for managing relationships (both internal and external) is the service-level agreement (SLA). Although effective in transactional relationships with low switching costs (e.g., IT support, logistics, cleaning services), SLAs fall short in managing the strategic relationships described earlier, where parties are interdependent. Organizations need to close the gap between how they actually run and how they are—and should be—managed. The Case for Business Interface Metrics Taking a horizontal approach to alignment challenges current best practice. For instance, we know that if we make people responsible for reaching a certain target, they should control the means and resources to make that target.
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Consequently, they will use those means and resources to make their target, and their target alone. But in practice this leads to suboptimal results; no one will even consider whether taking resources away from domain A and applying them to domain B could lead to better results for both A and B. But if we apply the idea of horizontal alignment, we would create not only metrics and targets that describe the performance of the various business domains, but also ones that measure the performance of business interfaces. Most quality problems and delays (and thus extra costs) occur at the point where work is handed over between activities, processes, or departments. For instance, organizing a sales process by region, but a central order-entry process by product, creates misalignment. Reordering the work costs time, and orders involving multiple regions or products may easily go wrong. Collecting orders and placing them at a supplier on a weekly basis may create economies of scale, but also causes delays. There are other ways of streamlining the process. When marketing hands over a promotional campaign to the call center, different interpretations of how to execute may result. In short, managing handover points improves organizational efficiency—and results. Moreover, because the act of measurement influences behavior, I propose breaking with current best practice by making multiple people responsible for what happens at business interfaces. To make their targets, they must collaborate. If the production manager and the logistical manager each optimize their plans, the result is larger production batches and unlimited product access for logistics. Each may save, say, 15% of cost. But this result is suboptimal, since it requires a large warehouse in the middle. A true optimum can be reached by aligning the flow
between production and logistics, which would eliminate the need for the warehouse. Shared metrics might include working capital, inventory levels, and wait times. Similarly, the marketing manager and the call center should share responsibility for the follow-up for a new marketing campaign. Sample metrics for co-responsibility would include conversion rate and call center queue length (measuring call center planning accuracy; i.e., good coordination would ensure enough agents). And the IT development manager and IT operations manager should co-own metrics measuring the efficiency and effectiveness of implementing new systems and system changes. Consider Brasseries de Bourbon, a Heineken operating company that pioneered the concept of business interface metrics. To optimize its processes, the company found that managers needed to consider not only the requirements of their own processes, but also those of other process owners. For instance, the CFO owns the metric “working capital,” but also co-owns “inventory levels,” which are the direct responsibility of the operations manager. This approach is cascaded down through the organization. Co-owning business interface metrics poses an interesting question. If two people are responsible for such a metric, is the company violating another best practice—the “shared responsibility is no responsibility” rule? No—and that is why we have vertical alignment. Multiple business domains report to the same manager. Fostering collaboration is one of the most important tasks of senior management. In fact, senior management’s job is not to be the best financial, sales, or IT expert; it is to make their teams run successfully. I would argue that the collaboration of their direct reports in their business
March–April 2009
Figure 1. Performance Indicators Should Be Reciprocal
interfaces is senior management’s primary responsibility.
BSC perspective
Sample stakeholder contribution
Stakeholder requirement
Financial
Cost savings through value chain integration
Fair profit
Customer
Loyalty
Transparency of pricing
Internal Process
License to operate
Responsible use of resources (green approach)
Learning & Growth
Skilled and flexible workers
Union promotion
Performance Networks Horizontal alignment isn’t just necessary within the organization; it is also needed between organizations. It spans the complete value chain, including suppliers, strategic partners, and other stakeholders. Taking a top-down, hierarchical approach to performance management, focusing solely on your organization’s performance, is foolish. Particularly in an economic downturn, the contributions of all stakeholders are important—not just customers, whose business we depend on, but also suppliers and partners, who offer their skills and services, and shareholders, who provide their capital. Regulators ensure fair competition, and society offers an infrastructure in which to do business. Concentrating on your own organization—and leaving those contributions to chance—is potentially deadly. The vast majority of decisions that impact a company’s profitability are made outside its walls. Take, for example, an insurance company. Governments and regulators set the parameters within which it conducts business, impacting cross-selling opportunities and margins. In property or car insurance, damaged goods are repaired or replaced by contracted service partners, who affect customer satisfaction. Sales performance may be driven largely by the intermediary channel (agents), and for more complex products such as life insurance, multiple financial institutions are often involved in delivering the benefit to policyholders. This “performance network” of stakeholders can be found in most industries. Current best practice is to manage these relationships with SLAs that clearly stipulate the expected performance. In more strategic relationships—outsourcing partners that perform IT, manufacturing, HR, or finance services—
When you manage stakeholder contributions, you must also manage stakeholder requirements.
where, due to asset specificity, the switching costs can be extremely high (and where SLAs fall short), they drive transactional behaviors. Increasingly, organizations invest in co-innovation (or “co-creation”) models, where they collaborate with one or more partners to devise a unique joint value proposition; examples include Nike and Apple’s Nike+, the Philips–Douwe Egberts collaboration that led to Senseo, and even competing airlines that form alliances such as OneWorld or Skyteam to offer a global network and loyalty program. (In these cases switching costs are even irrelevant, because the value proposition is based on the relationship itself.) Those relationships cannot be treated transactionally with an SLA, but require a more advanced form of performance management. First of all, they lead to a different type of performance indicator. SLAs describe the results the customer requires. But when you manage stakeholder contributions, you also need to manage stakeholder requirements. Performance indicators should thus be reciprocal in nature. Let’s use the four perspectives of the Balanced Scorecard to identify some examples. (See Figure 1.) Retailers should be concerned about the profitability of their key suppliers, who have invested in administrative and logistical value chain integration (financial perspective). Across many industries, such as airlines and telecoms, low-cost business models offering customers complete transparency hurt competitors using traditional
models with their opaque pricing structures (customer perspective). Manufacturers should invest in “green” production methods to maintain society’s approval to do business in the community (internal process). And in companies that enjoy a healthy relationship with a union, their employees should be encouraged to join the union, as this may lead to better health care, education, and employability, which benefit all parties—employee, employer, and union (learning and growth). Reflect the Horizontal Nature of Work Although vertical alignment is still needed to ensure accountability within the organization, this approach to alignment on its own ignores the importance of business interfaces and performance networks in driving organizational performance. Top-down performance management alone only widens the gap between newer, more networked business models and traditional business management. Organizations need different mechanisms, drivers, and measurement approaches that better reflect the horizontal nature of work and those increasingly vital network relationships. After all, performance management is essentially a relationship management activity. I Frank Buytendijk is a globally recognized thought leader in business intelligence and performance management. A former Gartner Research Vice President, Frank is a Vice President and Fellow for Oracle and a visiting fellow at Cranfield University School of Management.
Reprint #B0903C
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I N S I G H T
Earning Customers’ Lifetime Loyalty: How Tesco Turned Strategy into Reality
E X E C U T I V E
Balanced Scorecard Report
By Sir Terry Leahy, CEO, Tesco An abridgement of CEO Terry Leahy’s keynote presentation at the Palladium European Summit, June 2008.
The simpler, the better. That, says Tesco’s CEO, is the key to change in a complex organization. To set the then-floundering company on a new, focused path—one that its far-flung workforce could clearly understand—he adopted a simplified BSC (with “shopping lists” for key objectives) and cultivated leadership at every level. The results are nothing short of spectacular for what is today the world’s third-largest retailer. We’ve come a very long way since Tesco was a market stall in the east end of London in 1919, and indeed since the early 1990s, when our competitors were running rings around us.
Our club card is the most popular loyalty card, with around 14 million members. We’ve expanded into a whole new range of areas, and we’ve gone online with one million active customers. Our expansion overseas began in Somehow we’d lost our way. We earnest just 12 years ago, but needed a new sense of direction. today, we have nearly 4,000 stores So we asked ourselves—our in 14 overseas markets.1 Our international If it’s safer for their career prospects to operations now be wrong with the rest of the herd, rather account for some £700 million than to risk being right on their own, in profit—put well, what can we expect? another way, that almost equals Tesco’s employees—to redefine our core entire profit just a decade ago. In purpose, our values, our strategy. other words, we’ve built a whole What we came up with sounds new Tesco in the last 10 years. very simple. Our core purpose Now growing fast and in new is “To create value for customers areas can pose a formidable to earn their lifetime loyalty.” challenge. So how did we turn Our values: “To treat people how those simple words into the Tesco we like to be treated” and “No that you see today? one tries harder for customers.” Our strategy: “To grow the core It may seem odd, but one of business by developing new our first steps was to close the formats, new ways of retailing; to strategy department. I believe expand by growing internationally strategy is for the entire business and to be as strong in nonfood to embrace and to live, day in as we are in food; and to follow and day out. It should not be customers into new areas of consigned to a silo. You achieve consumption such as financial strategy with strong leadership, by services.” enthusing people, ensuring they know how their contribution each Today in the UK, we’re number day can make the business a one on High Street [Main Street].
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bit better. It’s not about micromanagement—it’s not about me telling people on the other side of the world how to merchandise. And we certainly don’t want one leader—we want thousands of leaders. Our aim is to instill a culture where people’s first thought is to take responsibility. If the business is to move forward it must take risks. And managers need to know that they can make mistakes. If they’re going to spend all of their time looking over their shoulder because they’ve got to satisfy a checklist mentality, they’re far, far more likely to take shelter in the short term and in the conventional. If it’s safer for their career prospects to be wrong with the rest of the herd, rather than to risk being right on their own, well, what can we expect? That’s important in every business. But it’s critical in retailing, because we need to respond to customers’ everyday opinions. We try to understand what matters most to customers. We spend lots of time and money trying to find out how to improve shopping for customers. And we actually change how the business is run based on what we’ve learned from those results. A T
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Tesco Hertfordshire, UK
Industry: Retail (world’s thirdlargest retailer)
Annual group sales (2008): £51.8 billion
Employees: 440,000 (280,000 in UK) Stores worldwide: 3,956 Markets: UK, China, Czech Republic, France, Hungary, Japan, Malaysia, Poland, Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, USA
March–April 2009
Now change is a word that can terrify people. It means doing something differently. It’s the unknown. But in our business, change has to be part of everyday life. So when we took our strategy out to employees, we had to ensure that everyone understood what the strategy meant to them individually, that they understood why it was important, and that they realized and accepted that change was part of routine. The Steering Wheel The Tesco version of the Balanced Scorecard is what we call the “Steering Wheel.” On one sheet of paper you can understand what the entire business and the entire team is doing—and how we’re doing. Critically, the Steering Wheel ensures that our approach is balanced—that we’re not devoting too much attention to one aspect of the business and weakening another aspect of the business unintentionally. It ensures that the entire business is moving in the same direction. It’s divided into four parts: how we organize work, how we look after people, how we take care of finance, and how we look after the customer. Each part has equal weight, and each segment is underpinned by several commitments. We call this our “every little [bit] helps” strategy; it’s the way we gradually improve the business in ways that matter to customers. Some of these commitments you’d see in many businesses. But others are unique to retailing. For example, in the customer segment, you’ll see “the aisles are clear” and “I can get what I want” (ensuring the shelves are stocked). This last objective is a miracle of logistics: obtaining hundreds of thousands of products from thousands of suppliers in dozens of countries. Yet it’s easy to understand and relevant to thousands of our staff. Besides
conveying our commitments, the management teams have tailored Steering Wheel helps us track the Steering Wheel to reflect performance. Each year, we set what’s important in their market. demanding targets to deliver But they have have a common change, to identify the improveframework—and key performance ment we want to see. We review benchmarks. They know where progress against they stand within the organization. these targets quarterly, from The future won’t involve a choice between the store level all the way up to being green or growing; you won’t be able to the executive grow as a business unless you’re green. So committee (there we’ve added a fifth element to our strategy. are also weekly and monthly reviews). It’s not just a shared management The beauty of this system is tool—it’s a language, a style of that it’s never been a theoretical working, a way of thinking— device that sits yellowing in the something that bonds all 440,000 drawer in the HR department or people together. That matters in a that I just pull out for speeches. global business in which managers The Steering Wheel literally move from department to departsteers our business and it allows ment and country to country to the people on the ground to gain experience. feel in control. They know that they can make the difference Community Impact in performance. Tesco has changed, but so has When we introduced the Steering the world. Most people now Wheel, we wanted to ensure that agree that we need to confront the entire team used it. We held the challenge of climate change town meetings for all of our by cutting carbon emissions. staff to talk through the strategy. Developed economies will have We wanted a simple means of to operate on about one-fifth of reminding everyone of these com- the carbon they use today. Our mitments that we’d be embedding industry, mass consumption, is a into the strategy. Appropriately, big carbon user. The future won’t we came up with “shopping lists,” involve a choice between being using simple phrases like “a great green or growing; you won’t be place to work,” “want everyone to able to grow as a business unless be treated with respect,” and you’re green. So we’ve added a “keen to know your stuff.” fifth element to our strategy and The great thing about the Steering to the Steering Wheel: the community plan. Wheel is that it keeps people, both individually and as a group, This addresses not simply the focused only on what matters. challenge of climate change, but And in the heat of battle, that’s also the fact that as Tesco grows, terribly important. we need to address our impact Everywhere around the world, our teams have a clear, triedand-tested management structure they can apply in their own market. Retailing is a very local business—and it must reflect local cultures, competition, and tastes. So in each country, our
on communities. Every customer is also a member of the community. People want us to be a good neighbor. We’ve drawn up annual community plans for each country in which we operate against a clear set of targets. For example, in the UK we have 11 performance
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targets in our community plan; stretch targets include reducing carrier bag usage by 50% by year-end (2008) against a baseline of 2006 (that’s two billion fewer bags), increasing the sales of locally sourced products to £1 billion, and testing carbon labeling on 100 products this year. We’ve already halved the carbon footprint of our stores by 50% since 2000, through such improvements as new refrigeration, lighting, and air-conditioning systems.2 To ensure everybody understands what the community plan means in practice and how it affects people’s day-to-day jobs, we’ve introduced a new “shopping list” for what people want us to do in the community. They want us to help them look after the environment, to be open and honest in how we buy and sell products, to help them with diet and health, and to create good local jobs. One example of our approach to being a good neighbor is in staff development. Training our people is critical; it’s really how you win in retailing. Marketing, logistics, property can all be copied. But the commitment of your people, their skills—that’s hard to copy. Our future depends on our staff
delivering what customers want, and 400,000 staff can—if they are trained to and believe in the values of the organization. Training means learning new skills —whether it involves new IT systems, new processes, or people management. It also means understanding how to deliver strategy and make things happen. That entails learning the importance of simplicity and clarity and ensuring each person knows exactly what’s expected of him or her. Our training program is accredited by the Qualifications and Curriculum Authority.3 We’ve recreated an apprenticeship program, and now have a higher qualification—a foundation degree that you can achieve by working through Tesco. Training matters to me, not just because I want Tesco to be a successful business. I want Tesco to be an engine of social mobility. I want to motivate our people, to widen their experience and raise their aspirations. Last year, we filled 3,500 management positions from within. Over the last three years we’ve appointed 27 directors, 200 store managers, and 8,000 department managers from within. Anyone can rise up; there are only six levels between me and
Coming Soon
The Balanced Scorecard Hall of Fame Report 2009 Don’t miss the latest edition of the Balanced Scorecard Hall of Fame Report, due out in May. The 2009 Report highlights the breakthrough achievements and Strategy-Focused Organization best practices of the 20 members of the Hall of Fame class of 2008—a roster that includes Dubai Electricity and Water Authority, the French Ministry of Defense, Grupo Modelo, HSBC Bank Brazil, and the University of Leeds. Previous Hall of Fame Reports—published since 2004—are available at www.executionpremium.org.
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the person at the checkout. But training is a very vital part of this. The Steering Wheel has helped us change, and it itself has changed. We’ve achieved this evolution by abiding by a few simple lessons: 1. Make everything as simple as possible. Our business is very complex, and gets more complex each year. Our challenge is to make it simple, because doing it isn’t easy. A simple aim provides clear focus; a simple proposition is easy for people to understand. Simple acts take less time to learn and do—and actually cost less. And simple systems take less time to establish. Simplicity is a very effective route to change in a complex organization. 2. Implementation matters as much as strategy. You can have a great strategy, but if it never leaves the page to become a reality, it remains just that—a piece of paper sitting on a desk. Constantly ask yourself, “How will I make this idea work?” We ask, “What difference will this make to the customer?” 3. Training and education are fundamental. Your team must understand what they’re doing, and why. Each person must know the role he or she plays, and be equipped and confident to play that role. These lessons, and the Balanced Scorecard, have helped us create a company that I believe fulfills its core purpose—to create value for customers to earn their lifetime loyalty. I 1. Sir Terry’s original figures were updated for this article, based on company data (at tesco.com). 2. Statistics are as of mid-2008, at the time of Sir Terry’s presentation. 3. A UK public agency sponsored by the Department for Children, Schools and Families that maintains and develops the national curriculum and associated assessments, tests, and examinations.
Reprint #B0903D
P E R F O R M A N C E
M A N A G E M E N T
March–April 2009
PART II. MANAGING CHANGE: WINNING HEARTS AND MINDS
A Change Management Toolkit By Jayme Alexandre Dias de Lima, Associate Consultant, Symnetics/Brazil
In Part I (BSR January–February 2009) Jayme de Lima explored common reactions to change, drawing upon seminal behavioral and management literature. He also offered communication tips to minimize employee resistance and maximize support. Here, he offers a short list of proven tools and practices—both “carrot” and “stick” approaches—that can help your transformation take root. Instill a Sense of Urgency— in Good Times and Bad The best way to impress on employees the need for change is to push them out of their comfort zone—condition them for crisis. Make employees understand that if they continue to operate in a business-as-usual fashion, the organization’s future may be endangered. As leadership expert John Kotter noted, citing the advice of a former European CEO, executives should “make the status quo seem more dangerous than launching into the unknown.”1 Beyond that, people tend to develop team spirit and collaborate best during a crisis, so invoking a sense of urgency helps unify employees. Today’s turbulent economy has already conditioned many employees for crisis, even those whose companies are sound. That doesn’t mean leaders should rely on fear to motivate employees about a change program. Experts suggest sharing facts with employees—industry statistics and financial performance data— to demonstrate that adhering to the status quo may represent the greatest threat to the company’s prospects. Facts don’t merely strengthen your argument; the act of sharing information that typically only senior managers may see conveys respect to employees. That, in turn, promotes their emotional investment in the change program. But we believe instilling a sense of
urgency is important even if your company is presently healthy. To maintain competitive advantage and succeed in today’s dynamic business environment, most organizations must keep an eye to the future and try to anticipate market and competitors’ movements as well as political, economic, and legal trends. To seize employees’ attention and make the case for change, leaders can use some of the following techniques to convey that maintaining the status quo may well lead to a not-so-bright future. Use benchmarks to show that competitors are outperforming your company. Benchmarks are effective in jolting people out of their comfort zone. Offer examples of excellence (either from within your company or from competitors) to illustrate current performance gaps—and help executives and employees alike see the organization in a broader perspective. Present long-term projections and leading indicator analyses to fortify the case for change. Use data to explain, for example, “If we don’t change this technology platform, in a couple of years we won’t be able to produce as fast as we do now, and we won’t be able to support new product development. That will erode our market share, cause sales to decrease, and prevent the company from achieving our near-term ROI goals.” Employees can relate to the ultimate consequences: budget cuts and layoffs.
If market intelligence on your low-cost competitors shows they have gained the manufacturing know-how to win market share in the near term—and your organization is now more vulnerable owing to reduced R&D or an imminent patent expiration—share these projections and scenarios with managers at all levels. If your industry is undergoing global consolidation, you can alert the workforce that you all face an “expand or be acquired” scenario. Invoke customer survey results… Even if your organization is hitting its financial targets, that doesn’t mean all’s well. Customer surveys may show steadily decreasing customer satisfaction levels. The message: “It’s only a matter of time before these levels are reflected in our financial performance.” … and customer requirements that carry weight. Does a major customer have new specifications you must meet to do business with it? A company I once worked for was undergoing its audit to obtain ISO 9000 recertification. The company was performing well, but wanted to impress on employees the need to work hard to correct the internal processes to meet ISO 9000 requirements. The quality manager communicated that if the company lost its certification, it could not sell anything to its largest customer, which represented 40% of annual revenues— and which required all its suppliers to be ISO 9000 certified. Communicating this risk mobilized everyone involved to get the job done. Emphasize the urgency of seizing opportunity. Perhaps a competitor has exited a lucrative part of the market, or a new customer segment arises, one that represents potentially significant new revenues. Perhaps top management is exploring broadening the product portfolio to take advantage of commercial synergies (say, an oil company
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Emphasize the Benefits Associated with the Change People must clearly understand the rewards for changing, whether that means expanding into global markets or simply surviving a rough marketplace. Managers must therefore learn the specific concerns of each group in order to be more persuasive when explaining such benefits. The transformation is designed not only to yield financial improvement (sales, profitability, and share value—and for employees, the prospect of better compensation), but also to create intangible benefits, such as developing skills, fostering greater teamwork, creating a more satisfying work environment, and so on. Studies have repeatedly shown that recognition and a rewarding work environment are as important to employee commitment and loyalty as compensation. Leaders should be sure to balance the emphasis on economic (tangible) results with that of “organizational” (intangible) results. Boost Skills—and Performance Expectations Make training a key part of the change program—early on. Train people so they will be prepared to deal with all the technical changes that are occurring. Training will diminish resistance (when people don’t know how to use the new tools, systems, or methods, they tend to resist change). Building new skills is also motivating: employees recognize they count enough to deserve the investment.
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Consider the example of an organization that decides to switch its customer focus from the wholesale segment to the enduser. Without educating employees about the specific needs of this segment and how to sell to it, you might create resistance. Once employees are trained on the sales dynamic for the enduser customer, they can more readily embrace the change. Clarify what the organization expects of employees’ performance in the new environment— in general as well as specific terms, according to the audience. Leaders at all levels must communicate that the old ways will no longer be accepted. Forge Consensus: Hold “Transition” Forums When the change involves groups with different or even antagonistic viewpoints about executing the change—say, a business unit and the IT team—interactive forums can help them reach consensus in an orderly, constructive manner. A neutral facilitator should begin the proceedings by identifying common goals and establishing what each party considers nonnegotiable. Each party then understands the parameters and can discuss viable solutions. Forums help validate participants’ positions, motivating them to seek compromise, which in turn helps keep people focused on achieving common goals. People tend to leave such meetings more engaged and collaboration-minded—and they’ve also experienced a mechanism they can apply in the future to iron out differences. Review Milestones Frequently According to change management authority Harold Sirkin and colleagues, a long project that is reviewed often has a greater chance of success than a short project that is rarely reviewed.
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David Norton on how to achieve an Execution Premium in tough times Improving organizational focus to enable decision making: the strategic transformation at New York City’s St. Vincent’s Hospital Performance measurement expert and author Mark Graham Brown on the ten metrics most often missing from the BSC An analysis of Merck’s change management program Palladium Group CEO David Friend on the top 10 ways to make better decisions— and make decisions better
Problems can be identified as they first emerge, allowing for prompt corrective action.2 When milestones are acknowledged along with achievements, people are reenergized and residual resistance is worn away. Success breeds success. Cultivate a New Culture Real change requires a culture change. Numerous transformation efforts have failed because not enough attention was given to preventing old ways from resurfacing once a project was implemented. The only way to make change endure is by continually and vigilantly working at renewing the culture and values that support the organization’s new focus. As leadership and change expert Mary Lippitt once noted, “The difficulty is not implementing new ideas in people’s minds, but removing the old ones.” 3 Transformation is, after all, a process, not an event. I 1. John P. Kotter, “Leading Change: Why Transformation Efforts Fail,” Harvard Business Review (March–April 1995; republished in January 2007). 2. Harold L. Sirkin, Perry Keenan, and Alan Jackson, “The Hard Side of Change Management,” Harvard Business Review (October 2005). 3. According to Lippitt, this is a variation of a quote by VISA International founder and holistic thinker Dee Hock, from his book The Chaordic Organization: “The problem is never how to get new, innovating thoughts into your mind, but how to get the old ones out.”
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responding to the increasing global demand for alternative energy sources by investing in biofuels). Whatever the potential opportunity, leaders should make employees aware of it. They should explain how the organization (and consequently the employees) will benefit, and what is necessary to get it accomplished.
