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Mastering the Management System www.hbrreprints.org Successful strategy execution has two basic rules: Mastering the understand the management cycle that links strategy and Management System operations, and know what tools to apply at each stage of the cycle. by Robert S. Kaplan and David P. Norton Reprint R0801D This article is made available to you by Robert S. Kaplan, Harvard Business School. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org Successful strategy execution has two basic rules: understand the management cycle that links strategy and operations, and know what tools to apply at each stage of the cycle. Mastering the Management System by Robert S. Kaplan and David P. Norton Not long after its successful IPO, the Conner corporations—have learned how Gresham’s Corporation (not its real name) began to lose Law applies to their management meetings: its way. The company’s senior executives Discussions about bad operations inevitably continued their practice of holding monthly drive out discussions about good strategy one-day management meetings, but their implementation. When companies fall into focus drifted. this trap, they soon find themselves limping The meetings’ agenda called for a discus- along, making or closely missing their num- sion of operational issues in the morning and bers each quarter but never examining how strategic issues in the afternoon. But with the to modify their strategy to generate better company under pressure to meet quarterly growth opportunities or how to break the targets, operational items had started to pattern of short-term financial shortfalls. crowd strategy out of the agenda. Inevitably, Analysts, investors, and board members start the review of actual monthly and forecast to question the imagination and commitment quarterly financial performance revealed rev- of the companies’ management. enues to be lower, and expenses to be higher, In our experience, however, breakdowns in than targeted. The worried managers spent a company’s management system, not manag- hours discussing how to close the gap through ers’ lack of ability or effort, are what cause a pricing initiatives, capacity downsizing, SG&A company’s underperformance. By manage- staff cuts, and sales campaigns. One executive ment system, we’re referring to the integrated noted, “We have no time for strategy. If we set of processes and tools that a company uses miss our quarterly numbers, we might cease to to develop its strategy, translate it into opera- exist. For us, the long term is the short term.” tional actions, and monitor and improve the Like Conner, all too many companies— effectiveness of both. The failure to balance including some well-established public the tensions between strategy and operations OPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. OPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C harvard business review • january 2008 page 1 This article is made available to you by Robert S. Kaplan, Harvard Business School. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org Mastering the Management System is pervasive: Various studies done in the past planning, operational execution, and feed- 25 years indicate that 60% to 80% of compa- back and learning. We present a range of nies fall short of the success predicted from tools that managers can apply at the different their new strategies. stages, most developed by other manage- By creating a closed-loop management ment experts and some of our own design. system, companies can avoid such short- (See “A Management System Tool Kit” for falls. (See the exhibit “How the Closed-Loop further reading on the tools discussed.) We Management System Links Strategy and will show how these can all be integrated in Operations.”) The loop comprises five stages, a system that links the management of strat- beginning with strategy development, which egy and operations. involves applying tools, processes, and con- cepts such as mission, vision, and value state- Stage 1: Develop the Strategy ments; SWOT analysis; shareholder value The management cycle begins with articulat- management; competitive positioning; and ing the company’s strategy. This usually takes core competencies to formulate a strategy place at an annual offsite meeting during statement. That statement is then translated which the management team either incre- into specific objectives and initiatives, using mentally improves an existing strategy or, on other tools and processes, including strategy occasion, introduces an entirely new one. (Our maps and balanced scorecards. Strategy im- experience suggests that strategies generally plementation, in turn, links strategy to opera- have three to five years of useful life.) Devel- tions with a third set of tools and processes, oping an entirely new strategy may take two including quality and process management, sets of meetings, each lasting two to three reengineering, process dashboards, rolling days. At the first, executives should reexamine forecasts, activity-based costing, resource the company’s fundamental business assump- capacity planning, and dynamic budgeting. tions and its competitive environment. After As implementation progresses, managers con- some homework and research, the executives tinually review internal operational data and will hold the second set of meetings and de- external data on competitors and the business cide on the new strategy. Typically, the CEO, environment. Finally, managers periodically other corporate officers, heads of business and assess the strategy, updating it when they regional units, and senior functional staff learn that the assumptions underlying it are attend these strategy sessions. The agenda obsolete or faulty, which starts another loop should explore the following questions: around the system. What business are we in and why? This A system such as this must be handled question focuses managers on high-level carefully. Often the breakdown occurs right at strategy planning concepts. Before formulat- the beginning, with companies formulating ing a strategy, managers need to agree on their grand strategies that they then fail to trans- company’s purpose (mission), its aspiration late into goals and targets that their middle for future results (vision), and the internal and lower managers understand and strive to compass that will guide its actions (values). achieve. Even when companies do formalize The mission is a brief statement, typically their strategic objectives, many still struggle one or two sentences, that defines why the because they do not link these objectives to organization exists, especially what it offers to Robert S. Kaplan ([email protected]) tools that support the operational improve- its customers and clients. The pharmaceuti- is the Baker Foundation Professor at ment processes that ultimately must deliver cal firm Novartis presents a good example: Harvard Business School in Boston. on the strategy’s objectives. Or, like Conner, “We want to discover, develop and success- David P. Norton (dnorton@ they decide to mix discussions of operations fully market innovative products to prevent bscol.com) is the founder and director and strategy at the same meeting, causing and cure diseases, to ease suffering and to of the Palladium Group, based in a breakdown in the strategic-learning feed- enhance the quality of life. We also want to Lincoln, Massachusetts. They are the back loop. provide a shareholder return that reflects authors of The Execution Premium: In the following pages we draw upon our outstanding performance and to adequately Linking Strategy to Operations for extensive research and experience advising reward those who invest ideas and work in Competitive Advantage (Harvard companies, as well as nonprofit and public our company.” Business School Press, forthcoming sector entities, to describe the design and The vision is a concise statement that de- in 2008). implementation of a system for strategic fines the mid- to long-term (three- to 10-year) harvard business review • january 2008 page 2 This article is made available to you by Robert S. Kaplan, Harvard Business School. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org Mastering the Management System How the Closed-Loop Management System Links Strategy and Operations Most companies’ underperformance is due to breakdowns between strategy and operations. This diagram describes how to forge tight links between them in a five-stage system. A company begins by developing a strategy statement and then trans- lates it into the specific objectives and initiatives of a strategic plan. Using the strategic plan as a guide, the company maps out the operational plans and resources needed to achieve its objectives. As managers execute the strategic and operational plans, they continually monitor and learn from internal results and external data on competitors and the business environment to see if the strategy is succeeding. Finally, they periodically reassess the strategy, updating it if they learn that the assumptions underlying it are out-of-date or faulty, starting another loop around the system. 1 STAGE DEVELOP THE STRATEGY Define mission, vision, and values Conduct strategic analysis Formulate strategy E G TRANSLATE Strategic TEST AND ADAPT TAGE TA 2 5 S S THE STRATEGY plan THE STRATEGY Define strategic Strategy map Conduct profitability performance objectives and themes Balanced
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