Imagine you’ve just left a director’s meeting with the following order: “Increase profits.” Where do you start? For a start, forget profits.
For Robert Kaplan, the hugely influential Harvard Business School professor of Finance, by proceeding with care, improving processes and engaging in a permanent process of correcting the direction in which the company is moving, businesses are able to improve their financial objectives.
Kaplan’s model, the Balanced Scorecard, proposes a chain whereby if employees are well qualified, they will be able to improve processes. By developing the most efficient processes, manufacturing and delivery times will be reduced, so creating satisfied clients, improving market position and consequently profits.
The Balanced Scorecard is based on the principle that a company’s knowledge based assets – primarily employees and information technology – are increasingly important for competitive success. This idea was borne out of the inadequacy of traditional financial management systems to effectively measure the value created by enhancing the capabilities of an organization’s intangible assets.
You can’t manage what you can’t measure. As a result and there has been a tendency for executives to focus on influencing short-term financial measurements and not on the intangible assets that actually provide the foundation for financial success. What the Balanced Scorecard aims to do is complement traditional financial measurements with non-financial measurements in three key areas
- Internal processes
- Learning and growth.
It is these assets that represent the drivers of future financial performance.
With these new comprehensive performance measurement systems in place, the challenge is to implement new strategies accordingly. Kaplan offers 5 management principles for becoming “strategy-focused”:
- Translate strategy to operational terms
- Align the organisation to the strategy
- Make strategy everyone’s everyday job
- Make strategy a continual process
- Mobilise change through executive leadership
He makes a comparison with launching a rocket ship to Mars – we know what the ultimate objective is, but we also have to plan the journey. To determine, for example, what will be the trajectory, and whilst the rocket ship is on route, to continually check it is going in the right direction and if necessary to make adjustments.
In the same way a company should set its objectives - know where it wants to be in three or five years time and a plan for how it intends to get there. However on the way there needs to be regular feedback to management about how the journey is progressing, a flow of information between all levels of management and the opportunity to evaluate if the company is still moving in the right direction to arrive at its stated objectives.
When stating these objectives, businesses need to take into account the four perspectives as set out in the Balanced Scorecard – i.e. financial, customer, information technology and learning and growth goals. And these objectives should be linked in cause and effect relationships. Improving employee capabilities and skills in certain job positions, coupled with new technologies, would enable a critical internal process to improve. The improved process would enhance the value proposition delivered to targeted customers, leading to increased customer satisfaction, retention and growth in customers’ businesses. The improved customer outcome measures would then lead to increased revenues and ultimately significantly higher shareholder value. In this sense the improvement of employee skills is an impulse factor which, by a series of cause and effect relationships, finally leads to improved financial results.
Kaplan’s work on strategy has been successfully put into practice by businesses across the globe and he has worked as a consultant for companies such as KPMG, PeopleSoft, Mobil and Chase Manhattan Bank. All of which bears testimony to the importance of his ideas in the business world today.