Aligning Business and Support Units to Enterprise Strategy

1. Aligning Business and Support Units to Enterprise Strategy • Dr. Robert S. Kaplan • Baker Foundation Professor • Harvard Business School • Chairman, Professional Practice Committee • The Palladium Group/Balanced Scorecard Collaborative

2. Financial Perspective Customer Perspective Process (Operational Capacity) Process Perspective Learning & Growth Learning & Growth Financial The Balanced Scorecard Model of Value Creation Non Profit and Public Sector Organizations Private Sector Organizations Mission (Customer) Perspective “How do we have a social impact with our citizens/constituents?” "If we succeed, how will we look to our shareholders?” Support Perspective “How do we attract resources and authorization for our mission?” "To achieve our vision, how must we look to our customers?” “To have a social impact and to attract resources and support, at which processes must we excel?” "To satisfy our customers and shareholders, at which processes must we excel?” “How do we align our intangible assets to improve critical processes?” “How do we align our intangible assets to improve critical processes?” “How should we manage and allocate our resources for maximum social impact?”

3. Most organisations do not know how to execute strategy. Less than 10% of strategies effectively formulated are effectively executed. Only 15% of the 794 programs reviewed in Fiscal 2005 were rated effective. - Fortune Magazine - Barron’s Between 1988 and 1998, only 13% of companies were able to deliver 5.5% annual real earnings growth and deliver returns that covered their cost of capital. - Chris Zook, Profit From the Core Companies on average realize only 60% of the financial performance their strategies promise... more than one-third of executives surveyed placed the figure at less than 50%. - Harvard Business Review

4. According to a recently completed Monitor study, strategy execution is the single most important issue to the executive suite. "Using a 1-5 scale, please rate the level of interest / concernyou have in the following business issues at present.” All Positions n = 354 Executing the strategy Markettrends Forecasting & reporting effectiveness IT capabilities Product innovation / time to market ITO / BPO Investor relations Regulatory, compliance, and risk management Customer service Growing the top line Product / service fulfillment HR SCM Source: Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level and 56% are from companies with revenue greater than $1 billion

5. Organizations with a formal strategy execution process in place are dramatically outperforming organizations without formal processes. Yes No (54%)(46%) Do you have a formal strategy execution process in place? Describe your organization’s current performance. Winners Losers Source: BSCol Research (Survey of 143 performance management professionals, drawn from BSCol On-Line Community, March 2006)

6. Balanced Scorecard Hall of Fame for Executing Strategy By Industry 2000 – 2006

7. CGISS Commercial Vehicle Business Unit The typical benefits from successfully executing strategy are dramatic. Hall of Fame Company Descriptions • Successful merger of 2 mega-banks • Net business profit increased 117% • Moody’s / S&P credit rating from A2 /BBB to A1/A • Revenues from $1.8B to $9.8B • Number one in market share (22%) • Customer satisfaction awards (4years) • Turned $100M loss to $100M profit • 55% target market share • 40% revenue growth (2 years) (4 years) (2 years) SM MATURITY • Wireless data revenue up 74% • Fortune – Most admired innovator • Forbes – One of 26 best managed • Industry leading margins • Customer loyalty up • Cost per room down • Industry leading stock growth • Return on assets from 16% to 137% • Market share = 2X nearest competitor • World class call centers (3 years) (3 years) Royal Canadian Mounted Police China Resources Microelectronics Coffee Growers of Columbia • Stakeholder satisfaction rose 9% to 16% • Saved $20 million in one year on protective policing • Viewed as model organization by funding organizations • Inventory turnover from 1.4 to 3.7 • Operating profit grew 70% • Output per employee grew 65% • Exports doubled in value • Debt down 36% • Growers’ price yield increases from 84% to 93% (4 years) (3 years) (3 years)

8. Strategy-Focused (Hall of Fame) Organizations Use Five Strategy Execution Principles II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

9. Strategy Maps and Balanced Scorecards Translate Strategy into Action II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP 2.1 Strategy translated in strategy map 2.2 Strategy described in Balanced Scorecard 2.3 Targets identified for all measures 2.4 Strategic initiatives rationalized 2.5 Executives accountable for initiatives V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

10. The strategy map aligns processes and intangible assets to deliver value to customers and shareholders. Productivity Strategy Growth Strategy Long-Term Shareholder Value Financial Perspective Improve Cost Structure Increase Asset Utilization Expand Revenue Opportunities Enhance Customer Value Customer Value Proposition Customer Perspective Price Quality Availability Selection Functionality Service Partnership Brand Product / Service Attributes Relationship Image OperationsManagement Processes Customer ManagementProcesses InnovationProcesses Regulatory & Social Processes Select Customers Acquire New Customers Retain Existing Customers Grow Business with Customers Process Perspective Supply Produce Distribute Manage Risk Environment Safety & Health Employment Community Identify New Opportunities Select the R&D Portfolio Design and Develop Launch Human Capital Learning & Growth Perspective Organization Capital Culture Leadership Alignment Teamwork Information Capital

11. University of Leeds Strategy Map: 15 070426_Strategy-Execution_IrishMgt_Inst_Norton_PRINT

12. Strategy-Focused Organization Use a Best Practices Framework II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP III. ALIGN THE ORGANIZATION TO THE STRATEGY V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS 3.1 Corporate contribution to strategy defined 3.2 Enterprise scorecard guides business units 3.3 Enterprise scorecard guides support units 3.4 Scorecards align suppliers and/or customers 3.5 Scorecard reports to board and/or shareholders IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

13. 3. Alignment: Cascade & Integrate Objectives Throughout the Organization

14. University of Leeds Cascades its University Strategy Map Out to Each Academic Unit Defined set of University Measures Develop key University Targets Develop Faculty Measures Develop key Faculty Targets

15. Senior executives, business unit managers, and the CIO struggle with managing the IT resource. The three essential questions: The CEO and CFO ask:What is the return from our investment in Information Technology? Business managers ask:Why can’t you run IT more like a business (and focus on me, your customer)? The CIO asks: How can IT meet the growing needs of its customers (the business units) given the constraints placed on its resources?

16. Strategic Financial Service Portfolio Strategic HR Service Portfolio Strategic Information Capital Portfolio • Strategic Competency Development • Organization and Leadership development • Performance Management Process • Technology Infrastructure • Transaction Processing Applications • Analytic and Decision Support Applications • Transactions, Controls & Processing • External Compliance & Communication • Planning and Decision Support Services Strategic Support Services Form the Bridge Between Enterprise and Functional Strategy HR - Strategic HR Service Portfolio IT - Info Capital Portfolio FIN- Financial Service Portfolio HR IT FIN 1 2 Enterprise Strategy (Strategy Map) Strategic Support Service Portfolio

17. Aerospace Inc. Enterprise Information Systems Strategy Magnify the Power of Aerospace Inc. Through IT Serve the National Interest and Increase Shareholder Value Grow revenue – V3 Improve margins – V1 Leverage investments – V2 to Business and Technology Leaders say: “Guarantee secure, reliable, high-quality solutions” – C1 “Innovate withme to winbusiness andkeep it sold” – C5 Realize theReal-Time Net-Centric Strategy “Showme the value” – C2 “Deliver on commitments to enable my Mission Success” – C3 “Understand my unique business and customer” – C4 Run the Business Earn Trusted Partnerships Advance the Business that Continuously improve solutions, performance, and responsiveness – P8 Anticipate, influence, and deliver on expectations – P11 Transform AI through effective collaboration,net-centric capabilities,and innovative solutions – P13 Drive process improvement through innovative information access – P7 Build the next generation infrastructureand business systems – P6 Strengthen communication, interactions, and relationships – P10 Accelerate horizontalintegration – P12 Focused Actions executes Aggressively pursue knowledge of business strategies – P9 Understand and manage unit costs – P5 Achieve Operational Excellence Through Disciplined Performance Drive standardization and consolidation – P1 Optimize portfolios of assets, initiatives, and service offerings – P4 Effectively select and leverage suppliers – P2 Excel at program management and system engineering – P3 Our Diverse, Empowered Workforce Attract, develop, and retain a talented, energized, strategy-focused workforce – W1 Live our values and demonstrate SPIRIT – W2 Promote creative thinking and innovative solutions – W3

18. Strategy-Focused Organizations Use a Best Practices Framework II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB 4.1 Strategic awareness created 4.2 Personal goals aligned 4.3 Personal incentives aligned 4.4 Competency development aligned

19. Motivate to Make Strategy Everyone’s Job Create Strategic awareness : “Communicate seven times seven different ways” • Personal relevance (WIIFM) brings the strategy to life • Sustained communication uses different channels to get the message across • Leadership meetings • CEO random visits to employees • Dear Colleague Quarterly Letter in Mellon News • Learning lunches & informal discussions • Intranet • Working groups facilitated by HR • Staff briefings Source: Presented by Jack Klinck, Vice Chairman, Mellon Europe at BSCol European Summit, June 2005

20. You can’t tell them just once. “Communicate Seven Times, Seven Ways” Portal&Website Posters Publications Rolling Status Training © Lockheed Martin Enterprise Information Services

21. Alignment: “Put Yourself On The Map” © Lockheed Martin Enterprise Information Services

22. Making Strategy a Continual Process: The role for scorecards and dashboards II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY A. RESOURCE MANAGEMENT 5.1 Budget is driven by strategy 5.2 Planning linked to strategy 5.3 Portfolio of strategic initiatives aligned to themes B. KEY PROCESS MANAGEMENT 5.4 Process improvement aligned to strategy 5.5 Best practice sharing in place C. LEARNING & CONTROL 5.6 Strategy reviewed and adapted on a regular basis 5.7 Data and analytics guide strategy IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

23. How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY DEVELOPMENT 5. STRATEGY TESTING AND ADAPTING • Define mission, vision, and values • Conduct strategic analysis • Formulate strategy • Conduct profitability analysis • Conduct strategy correlation analysis • Examine emerging strategies 2. STRATEGY TRANSLATION Strategic Plan • Define strategic objectives and themes • Select measures and targets • Select strategic initiatives • Align the organization StratEx . Balanced Scorecard Strategy Map 4. MONITORING AND LEARNING 3. OPERATIONAL PLANNING Operating Plan b. Hold strategy reviews • Improve key processes • Develop sales forecast • Plan resource capacity • Prepare budgets P&L’s OpEx/CapEx Dashboards a. Hold operations reviews EXECUTION Results Process Initiative

24. Linking Process Management to BSC Strategic Processes Strategy Map • To achieve this strategic process objective, how must we improve?

25. Linking a Balanced Scorecard R&D strategic objective to critical success factors and metrics. 18. BE AGILE AND EFFECTIVE ON THE DEVELOPMENT OF CUSTOMER-ORIENTED SOLUTIONS Strategic Objective and Metrics • RDEI - R&D Effectiveness Index • Time-to-Market BE CONTINUOUSLY INNOVATIVE ON OUR PRODUCT LINES HAVE AN IN-DEPTH UNDERSTANDING ABOUT OUR MARKETS AND THEIR TARGET-SEGMENTS HAVE A CONTINUOUS MONITORING PROCESS RELATED TO OUR PRODUCTS PERFORMANCE Critical Success Factors Business Processes Metrics # of Protected Ideas # of Co-created Proposals % Performance-Controlled Products NEW PRODUCTS PLAN AND STRATEGY DEVELOPMENT SALES AND NEW PRODUCTS DEVELOPMENT EVALUATION SCHEDULING, BUDGETING AND PRIORITIES ESTABLISHING IDEA TESTING PROPOSALS DEVELOPMENT ESTABLISH PRIORITIES AND PROTECT NEW PRODUCT IDEAS

26. Dashboards articulate the critical link between strategy management and operations management MOVE MODEL MAP THEME linked to PROCESS PROCESS linked to METRICS PROCESS supports THEME METRICS improve PROCESS • Identify operational processes key to executing strategy and manage those processes using analytical models rather than instincts • Analytical models identify drivers to the process and display these drivers on a dashboard accessible to managers that can make an impact • Drivers include not only financial (lagging) metrics, but operational, environmental, demographic, and other situational leading indicators • Models will be updated with actual results and the cause-and-effect correlations will be improved • Dashboards tailored based on the user and the ability to “drill-down” from a strategic objective to a low-level operational metric maintained across the enterprise value chain

27. With advances in technology, next-generation dashboards can now fulfill the role of full-fledged performance management tools Advanced visualization methods, with ability to represent large, complex data sets, makes information “actionable” Alignment to strategy – focused on processes that are key to overall strategy execution Ability to display data from multiple sources, mix of quantitative and qualitative information Pre-defined navigation paths to facilitate analysis and improve user experience, improved audit trails and data transparency

28. 3. OPERATIONAL PLANNING • Improve key processes • Develop sales forecast • Plan resource capacity • Prepare budgets How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY DEVELOPMENT 5. STRATEGY TESTING AND ADAPTING • Define mission, vision, and values • Conduct strategic analysis • Formulate strategy • Conduct profitability analysis • Conduct strategy correlation analysis • Examine emerging strategies 2. STRATEGY TRANSLATION Strategic Plan • Define strategic objectives and themes • Select measures and targets • Select strategic initiatives • Align the organization StratEx . BSC Strategy Map 4. MONITORING AND LEARNING Operating Plan b. Hold strategy reviews P&L’s OpEx/CapEx Dashboards a. Hold operations reviews EXECUTION Results Process Initiative

29. Companies use strategy scorecards and operational dashboards to inform their different management meetings. • Operational Review Meetings: Role for KPI Dashboards • Frequent (daily, twice weekly, weekly) • Departmental and functional personnel • Identify and solve operational problems (late deliveries, equipment downtime, supplier problems) • Promote continuous improvement (better, faster, cheaper) • Strategy Review Meetings: Role for Balanced Scorecard and Time-Driven ABC Reports • Monthly • Management team; cross functional, multiple business units • Discuss and solve problems with strategy implementation • Manage product and customer profitability

30. The leadership team uses the BSC to review performance, test strategic hypotheses and make informed decisions Use of a BSC Report in Strategy Review Meetings 1 • Identify Performance Issues: • Focus on the performance of objectives NOT measures. I03 Identify Adverse Trends 3 2 Analyze Objective Performance: Support trends • What are the measures telling us? Are the measures driving change and adding focus? 5 • What are the root causes of what’s occurring? What are the expectations for the future? And, are current initiatives sufficient to close the performance gap? • Are initiative on track to deliver expected value? If not, why and what can be done to remedy issues? 4 K01 Develop Quality Tracking Program K01 Develop Quality Tracking Program • What action steps – including additional or different initiatives - are required to improve performance going forward? IO3 Identify Adverse Trends Develop program to track all incident root causes identified during reviews and perform trend analysis Application needs to be selected within next 60 days to stay on schedule • Take Action: • Discuss and agree on how to remedy issues. • Assign accountability to ensure decisions are implemented. 6 7 ILLUSTRATIVE

31. 3. OPERATIONAL PLANNING • Improve key processes • Develop sales forecast • Plan resource capacity • Prepare budgets How the Closed-Loop Management System Links Strategy and Operations 1. STRATEGY DEVELOPMENT 5. STRATEGY TESTING AND ADAPTING • Define mission, vision, and values • Conduct strategic analysis • Formulate strategy • Conduct profitability analysis • Conduct strategy correlation analysis • Examine emerging strategies 2. STRATEGY TRANSLATION Strategic Plan • Define strategic objectives and themes • Select measures and targets • Select strategic initiatives • Align the organization StratEx . Balanced Scorecard Strategy Map 4. MONITORING AND LEARNING Operating Plan b. Hold strategy reviews P&L’s OpEx/CapEx Dashboards a. Hold operations reviews EXECUTION Results Process Initiative

32. Software Role in Strategy Management Application software should support the Balanced Scorecard approach to creating a Strategy-Focused Organization: • clearly communicate strategy and measures across the organization • display linkages among objectives, measures, and initiatives • capture and analyzing performance data across the organization • provide relevant information on results in a clear, concise and useful manner A systematic selection approach supports unlocking the full potential of the Balanced Scorecard management system

33. Illustrative The Objectives and Measures shown are for illustration purposes only.

34. What Are Some of the Benefits from Automated BSC Solutions? “You don’t have to wait for the next meeting to be informed. Management meetings focus only on the real issues…. We expect to save $5 mm a year from administration costs alone by replacing spreadsheet managed Balanced Scorecards with [an automated application].” Peter Geelen, CIO Philips Corporate Control “Instant communication…. Easy to understand view of the data…. Saves 20 – 40 hours of labor per month preparing charts…. Saves management time reviewing results.” Ben Patterson, Unisys Corporation “[The integration of an automated BSC application has increased the] visibility that we are experiencing around the intangibles, the knowledge, the idea generation and helping that differentiate what we do.” Michael Collins, WorldTravel BTI Formally McCord Travel Management

35. Strategy-Focused Organizations Use a Best Practices Framework II. TRANSLATE STRATEGY TO OPERATIONAL TERMS I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP 1.1 Leaders drive strategy execution 1.2 Executives make case for change 1.3 Leaders reinforce strategic priorities 1.4 Well articulated strategy exists 1.5 Office of Strategy Management established V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS III. ALIGN THE ORGANIZATION TO THE STRATEGY IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

36. Managing Strategy CEO CFO OPS CSMO CIO CHCO Strategy Management: An Emerging Professional Group Managing Quality Managing Money Executive Team Held together bya shared view ofthe strategy • Black Belts • ISO Certified • Accountants (CPAs) • Controllers Managing Customers Managing Technology MKTG • Market Research • Brand Management • Engineers • Scientists Managing People • Aligning and Developing Human Capital

37. The Office of Strategy Management facilitates nine strategy management processes throughout the year. Strategy ManagementProcesses Accountable Executives Coordinated By Annual Cycle Q1 Q2 Q3 Q4 • Annual Update of Strategy • Clarify Vision • Adapt Corporate Strategy O F F I C E O F S T R A T E G Y M A N A G E M E N T • CEO/Executive Team Enterprise Strategic Planning Modify the Corporate Scorecard / Strategy Map • BSC Project Team (OSM) • Align the Organization • Corporate and business units aligned • Business and support units aligned • Board of Directors aligned • LOB Leaders Organization Planning and Alignment • Support Unit Leaders Modify Business and Support Unit Scorecards • BSC Project Team (OSM) • Chief Financial Officer • Human Resources Officer • Chief Information Officer • Chief Operating Officer • Planning / Budgeting • Budgets • Plans • Initiatives Financial & Resource Planning • Finance • IT • HR • Employee Alignment • Personal goals • Employee incentives • Personal development • Human Resources Officer Employee Alignment Review Strategy and Operations • CEO/Executive Team/OSM • Program Office (OSM?) • Chief Knowledge Officer • Corporate Communications Manage Strategic Initiatives Management Control & Learning Share Best Practices Communicate Strategy