Executive Summary for this reading Which are the three most CRITICAL ISSUES for this reading? Please explain why? and analyze

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NOT LONG AFTER ITS SUCCESSFUL IPO, the Conner Corporation (not its real

name) began to lose its way. The company’s senior executives continued their prac-

tice of holding monthly one-day management meetings, but their focus drifted.

The meetings’ agenda called for a discussion of operational issues in the morn-

ing and strategic issues in the afternoon. But with the company under pressure

to meet quarterly targets, operational items had started to crowd strategy out

of the agenda. Inevitably, the review of actual monthly and forecast quarterly

fi nancial performance revealed revenues to be lower, and expenses to be higher,

than targeted. The worried managers spent hours discussing how to close the

gap through pricing initiatives, capacity downsizing, SG&A staff cuts, and sales

hbr.org | January 2008 | Harvard Business Review 63

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.

by Robert S. Kaplan and David P. Norton

the Management System

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64 Harvard Business Review | January 2008 | hbr.org

LEADERSHIP AND STRATEGY | Mastering the Management System

campaigns. One executive noted, “We have no time for

strategy. If we miss our quarterly numbers, we might cease

to exist. For us, the long term is the short term.”

Like Conner, all too many companies – including some

well-established public corporations – have learned how

Gresham’s Law applies to their management meetings:

Discussions about bad operations inevitably drive out dis-

cussions about good strategy implementation. When com-

panies fall into this trap, they soon fi nd themselves limping

along, making or closely missing their numbers each quarter

but never examining how to modify their strategy to gener-

ate better growth opportunities or how to break the pat-

tern of short-term fi nancial shortfalls. Analysts, investors,

and board members start to question the imagination and

commitment of the companies’ management.

In our experience, however, breakdowns in a company’s

management system, not managers’ lack of ability or effort,

are what cause a company’s underperformance. By manage-

ment system, we’re referring to the integrated set of processes

and tools that a company uses to develop its strategy, translate

it into operational actions, and monitor and improve the effec-

tiveness of both. The failure to balance the tensions between

strategy and operations is pervasive: Various studies done in

the past 25 years indicate that 60% to 80% of companies fall

short of the success predicted from their new strategies.

By creating a closed-loop management system, compa-

nies can avoid such shortfalls. (See the exhibit “How the

Closed-Loop Management System Links Strategy and Opera-

tions.”) The loop comprises fi ve stages, beginning with strat-

egy development, which involves applying tools, processes,

and concepts such as mission, vision, and value statements;

SWOT analysis; shareholder value management; competi-

tive positioning; and core competencies to formulate a strat-

egy statement. That statement is then translated into specifi c

objectives and initiatives, using other tools and processes,

including strategy maps and balanced scorecards. Strategy

implementation, in turn, links strategy to operations with

a third set of tools and processes, including quality and pro-

cess management, reengineering, process dashboards, rolling

forecasts, activity-based costing, resource capacity planning,

and dynamic budgeting. As implementation progresses,

managers continually review internal operational data and

external data on competitors and the business environment.

Finally, managers periodically assess the strategy, updating it

when they learn that the assumptions underlying it are obso-

lete or faulty, which starts another loop around the system.

A system such as this must be handled carefully. Often the

breakdown occurs right at the beginning, with companies

formulating grand strategies that they then fail to translate

into goals and targets that their middle and lower manag-

ers understand and strive to achieve. Even when companies

do formalize their strategic objectives, many still struggle

because they do not link these objectives to tools that sup-

port the operational improvement processes that ultimately

must deliver on the strategy’s objectives. Or, like Conner,

they decide to mix discussions of operations and strategy

at the same meeting, causing a breakdown in the strategic-

learning feedback loop.

In the following pages we draw upon our extensive re-

search and experience advising companies, as well as non-

profi t and public sector entities, to describe the design and

implementation of a system for strategic planning, opera-

tional execution, and feedback and learning. We present

a range of tools that managers can apply at the different

stages, most developed by other management experts and

some of our own design. (See “A Management System Tool

Kit” on page 67 for further reading on the tools discussed.)

We will show how these can all be integrated in a system that

links the management of strategy and operations.

ST AG

E

1 Develop the Strategy The management cycle begins with articulating the com-

pany’s strategy. This usually takes place at an annual off-

site meeting during which the management team either

incrementally improves an existing strategy or, on occasion,

introduces an entirely new one. (Our experience suggests

that strategies generally have three to fi ve years of useful

life.) Developing an entirely new strategy may take two sets

of meetings, each lasting two to three days. At the fi rst, ex-

ecutives should reexamine the company’s fundamental busi-

ness assumptions and its competitive environment. After

some homework and research, the executives will hold the

second set of meetings and decide on the new strategy. Typi-

cally, the CEO, other corporate offi cers, heads of business

and regional units, and senior functional staff attend these

strategy sessions. The agenda should explore the following

questions:

What business are we in and why? This question focuses managers on high-level strategy planning concepts. Before for-

mulating a strategy, managers need to agree on their compa-

ny’s purpose (mission), its aspiration for future results (vision),

and the internal compass that will guide its actions (values).

The mission is a brief statement, typically one or two sen-

tences, that defi nes why the organization exists, especially

what it offers to its customers and clients. The pharma-

ceutical fi rm Novartis presents a good example: “We want

to discover, develop and successfully market innovative

Robert S. Kaplan ([email protected]) is the Baker Foundation Professor at Harvard Business School in Boston. David P. Norton

([email protected]) is the founder and director of the Palladium Group, based in Lincoln, Massachusetts. They are the authors of The

Execution Premium: Linking Strategy to Operations for Competitive Advantage (Harvard Business School Press, forthcoming in 2008).

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hbr.org | January 2008 | Harvard Business Review 65

Execute processes and initiatives

Operating plan

Dashboards

Budgets

Pro forma P&Ls

results

results

performance metrics

performance metrics

S TA

G E 2 TRANSLATE THE STRATEGY

Define strategic objectives and themes

Select measures and targets

Select strategic initiatives

PLAN OPERATIONS

Improve key processes

Develop sales plan

Plan resource capacity

Prepare budgets

S TA

G E

3

DEVELOP THE STRATEGY

Define mission, vision, and values

Conduct strategic analysis

Formulate strategy

S TA

G E

1

TEST AND ADAPT THE STRATEGY

Conduct profitability analysis

Conduct strategy correlation analysis

Examine emerging strategies

S TA

G E

5

S TA

G E

4 MONITORAND LEARN Hold strategy reviews

Hold operational reviews

Strategic plan

Strategy map

Balanced scorecard

StratEx

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 fi ve-stage system. A company begins by developing a strategy statement and then translates it into the specifi c 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 con- tinually 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, updat- ing it if they learn that the assumptions underlying it are out-of-date or faulty, starting another loop around the system.

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66 Harvard Business Review | January 2008 | hbr.org

LEADERSHIP AND STRATEGY | Mastering the Management System

products to prevent and cure diseases, to ease suffering and

to enhance the quality of life. We also want to provide a

shareholder return that refl ects outstanding performance

and to adequately reward those who invest ideas and work

in our company.”

The vision is a concise statement that defi nes the mid- to

long-term (three- to 10-year) goals of the organization. Cigna

Property and Casualty, an insurance company division we

worked with in the 1990s, stated its goal this way: “to be

a top-quartile specialist within 5 years.” Though short, this

vision statement contained three vital components:

Stretch goal: “top quartile” in profi tability (at the time,

Cigna P&C was at the bottom of the fourth quartile).

Defi nition of market focus: “a specialist,” not a general-

purpose underwriter, as it was at the time.

A time line for execution: “5 years” (a heartbeat in the

slow-moving insurance industry).

The stretch goal in the vision statement should truly be

a diffi cult reach for the company in its present position. The

CEO has to take the lead here; indeed, one of the principal

roles of an effective leader, as Jim Collins and Jerry Porras

noted in Built to Last, is to formulate a “big, hairy, audacious

goal (BHAG)” that challenges even well-performing orga-

nizations to become much better. The classic example is

Jack Welch’s challenge for every GE business unit to become

number one or two in its industry. In determining a stretch

goal, it pays to look at the fi nancial market’s expectations as

a benchmark, since the company’s share price usually con-

tains an implicit estimate of future profi table growth, which

can be well beyond that achievable through incremental

improvements to existing businesses. If a company is setting

a new goal, rather than reaffi rming an established goal, man-

agers may need to undertake pre-offsite research and engage

in extensive discussion at the meeting.

Finally, the values (often called core values) of a company

prescribe the attitude, behavior, and character of an organi-

zation. Value statements, which are often lengthy, describe

the desirable attitudes and behavior the company wants to

promote as well as the forbidden conduct, such as bribery,

harassment, and confl icts of interest, that employees should

defi nitely avoid. These excerpts from the value statement of

the internet service provider Earthlink illustrate the compo-

nents of value statements:

We respect the individual, and believe that individuals

who are treated with respect and given responsibility

respond by giving their best.

We are frugal. We guard and conserve the company’s

resources with at least the same vigilance that we

would use to guard and conserve our own personal

resources.

We are believers in the Golden Rule. In all our dealings

we will strive to be friendly and courteous, as well as

fair and compassionate.

•

•

•

•

•

•

We feel a sense of urgency on any matters related to

our customers. We own problems and we are always

responsive. We are customer-driven.

The reaffi rmation of mission, vision, and values puts ex-

ecutives in the right mind-set for considering the rest of the

agenda and setting the company’s fundamental guidelines.

What are the key issues we face in our business? With mission, vision, and values established, managers undertake

a strategic analysis of the company’s external and internal

situation. The management team studies the industry’s eco-

nomics using frameworks such as Michael Porter’s fi ve forces

model (bargaining power of buyers; bargaining power of sup-

pliers; availability of substitutes; threat of new entrants; and

industry rivalry). The team assesses the external macroeco-

nomic environment of growth, interest rates, currency move-

ments, input prices, regulations, and general expectations of

the corporation’s role in society. Often this is described as a

PESTEL analysis, encompassing political, economic, social,

technological, environmental, and legal factors. Managers can

then dive into competitiveness data and consider the dynam-

ics of the company’s fi nancial, technological, and market

performance relative to its industry and competitors.

After the external analysis, managers should assess the

company’s internal capabilities and performance. One ap-

proach is to use Michael Porter’s value chain model, catego-

rizing capabilities used in the processes that create markets;

develop, produce, and deliver products and services; and sell

to customers. Or the internal analysis could identify the dis-

tinctive resources and capabilities that give the fi rm a com-

petitive advantage. Finally, unless managers are introducing

an entirely new strategy, they will want to assess the perfor-

mance of the current strategy, a topic we discuss more later.

The next step is to summarize the conclusions from the

external and internal analyses in a classic SWOT matrix, as-

sessing the ability of internal attributes and external factors

to help or hinder the company’s achievement of its vision.

The aim here is to ensure that the strategy leverages inter-

nal strengths to pursue external opportunities, while coun-

tering weaknesses and threats (internal and external factors

that undermine successful strategy execution). This analysis

will reveal a series of issues that the strategy must address:

the best role for new products and services; whether new

partners need to be acquired; what new market segments

the company might enter; and which customer segments

are contracting. These issues will become the focus of the

strategy formulation process, which often takes place at a

subsequent meeting.

How can we best compete? Finally, managers tackle the strategy formulation itself – the statement describing the

strategy and how the company proposes to achieve it. In this

step managers decide on a course of action that will create

a sustainable competitive advantage by distinguishing the

company’s offering from competitors’ and, ultimately, will

•

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hbr.org | January 2008 | Harvard Business Review 67

A Management System Tool Kit

Where to learn more about the concepts and frameworks described in this article

Develop the Strategy

Competitive Strategy

Michael E. Porter Competitive Advantage: Creating and Sustaining Superior Performance Free Press, 1985 (republished with a new introduction, 1998)

Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors Free Press, 1980 (republished with a new introduction, 1998)

Michael E. Porter “What Is Strategy?” Harvard Business Review November–December 1996

Chris Zook and James Allen Profi t from the Core: Growth Strategy in an Era of Turbulence Harvard Business School Press, 2001

Resource-Based Strategy

Jay B. Barney Gaining and Sustaining Competitive Advantage – 3rd edition Prentice-Hall, 2006

Jay B. Barney and Delwyn N. Clark Resource-Based Theory: Creating and Sustaining Competitive Advantage Oxford University Press, 2007

David J. Collis and Cynthia A. Montgomery

“ Competing on Resources: Strategy in the 1990s” Harvard Business Review July–August 1995

Gary Hamel and C.K. Prahalad Competing for the Future Harvard Business School Press, 1994

Blue Ocean Strategy

W. Chan Kim and Renée Mauborgne Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant Harvard Business School Press, 2005

Disruptive Strategy

Clayton M. Christensen and Michael E. Raynor The Innovator’s Solution: Creating and Sustaining Successful Growth Harvard Business School Press, 2003

Emergent Strategy

Gary Hamel “Strategy Innovation and the Quest for Value” Sloan Management Review Winter 1998

Henry Mintzberg “Crafting Strategy” Harvard Business Review July–August 1987

Translate the Strategy

Robert S. Kaplan and David P. Norton The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment Harvard Business School Press, 2000

Robert S. Kaplan and David P. Norton Strategy Maps: Converting Intangible Assets into Tangible Outcomes Harvard Business School Press, 2004

Robert S. Kaplan and David P. Norton The Execution Premium: Linking Strategy to Operations for Competitive Advantage Harvard Business School Press, 2008

Plan Operations

Process Improvement

Wayne W. Eckerson Performance Dashboards: Measuring, Monitoring, and Managing Your Business John Wiley & Sons, 2006

Michael Hammer Beyond Reengineering: How the Process-Centered Organization Is Changing Our Work and Our Lives HarperBusiness, 1996

Peter S. Pande, Robert P. Neuman, and Roland R. Cavanagh The Six Sigma Way: How GE, Motorola, and Other Top Companies Are Honing Their Performance McGraw-Hill, 2000

James P. Womack, Daniel T. Jones, and Daniel Roos The Machine That Changed the World: The Story of Lean Production Macmillan, 1990

Budgeting and Planning Resource Capacity

Jeremy Hope and Robin Fraser Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap Harvard Business School Press, 2003

Robert S. Kaplan and Steven R. Anderson Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profi ts Harvard Business School Press, 2007

Test and Adapt Strategy

Dennis Campbell, Srikant Datar, Susan L. Kulp, and V.G. Narayanan

“ Testing Strategy Formulation and Implementation Using Strategically Linked Performance Measures” HBS Working Paper, 2006

Thomas H. Davenport and Jeanne G. Harris Competing on Analytics: The New Science of Winning Harvard Business School Press, 2007

Anthony J. Rucci, Steven P. Kirn, and Richard T. Quinn

“ The Employee-Customer-Profi t Chain at Sears” Harvard Business Review January–February 1998

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68 Harvard Business Review | January 2008 | hbr.org

LEADERSHIP AND STRATEGY | Mastering the Management System

lead to superior fi nancial performance. The strategy must

respond, in some form, to the following questions:

Which customers or markets will we target?

What is the value proposition that distinguishes us?

What key processes give us competitive advantage?

What are the human capital capabilities required to excel

at these key processes?

What are the technology enablers of the strategy?

What are the organizational enablers required for the

strategy?

Managers can draw upon an abundance of models and

frameworks as they formulate the strategy. Michael Porter’s

original competitive advantage framework, for example, pre-

sented the strategy decision as a choice between whether

to provide generic low-cost products and services or more

differentiated and customized ones for specifi c market and

customer segments. The Blue Ocean approach, popularized

by W. Chan Kim and Renée Mauborgne, helps companies

search for new market positions by creating new value prop-

ositions for a large customer base. Resource-based strategists

(including those in the core competencies school) empha-

size critical processes – such as innovation or continual cost

reduction – that the company does better than competitors

and can leverage into multiple markets and segments. Clay

Christensen has identifi ed how new entrants can disrupt

established markets by offering an initially less capable prod-

uct or service at a much lower price to attract a large cus-

tomer base not targeted by the market leaders.

We are agnostic with respect to these frameworks; we

have seen each one we’ve described be highly successful.

Which among them is the right choice probably depends

on a company’s circumstances and its competitive analysis.

The Porter and resource-based frameworks help companies

leverage existing competitive positions or internal capabil-

ities, whereas the Blue Ocean and disruptive technology

frameworks help them search for entirely new positions.

ST AG

E

2 Translate the Strategy Once the strategy has been formulated, managers need to

translate it into objectives and measures that can be clearly

communicated to all units and employees. Our own work

on developing strategy maps and balanced scorecards has

contributed to this translation stage.

The strategy map provides a powerful tool for visualiz-

ing the strategy as a chain of cause-and-effect relationships

among strategic objectives. The chain starts with the com-

pany’s long-term fi nancial objectives and then links down

to objectives for customer loyalty and the company’s value

propositions. From there, it links to goals related to criti-

cal processes and, ultimately, to the people, the technology,

and the organizational climate and culture required for suc-

cessful strategy execution. Typically, a large corporation will

•

•

•

•

•

•

create an overall corporate strategy map and then link it to

strategy maps for each of its operating and functional units.

Even though a strategy map reduces a complex strategy

statement to a single page, we have learned that many man-

agers fi nd the multiple objectives (typically, 15 to 25) on a

map, along with their corresponding measures and targets,

somewhat complex to understand and manage. Some of

a map’s objectives relate to short-term cost reduction and

quality improvements while others refl ect long-term innova-

tion and relationship goals. Managers often fi nd it challeng-

ing to balance these myriad objectives.

In our recent work, we’ve found that companies can sim-

plify the structure and use of a strategy map by chunking it

into three to fi ve strategic themes. A strategic theme, typically

a vertical slice within the map, consists of a distinct set of

related strategic objectives. (For an example, see “Mapping

Strategic Themes,” a generic strategy map organized by three

vertical strategic themes and a horizontal theme to cluster

the learning and growth objectives.)

Strategic themes offer several advantages. At the busi-

ness unit level, the theme structure allows unit managers to

customize each theme to their local conditions and priori-

ties, creating focus for their competitive situation while still

keeping their objectives integrated with the overall strategy.

Second, the vertical strategic themes typically deliver their

benefi ts over different time periods, helping companies si-

multaneously manage short-, intermediate-, and long-term

value-creating processes. Using themes, executives can plan

and manage the key elements of the strategy separately but

still have them operate coherently.

Once managers have developed the strategy map, they

link it to another tool of our design: a balanced scorecard of

performance metrics and targets for each strategic objective.

We believe that if you don’t measure progress toward an

objective, you cannot manage and improve it. The balanced

scorecard metrics allow executives to make better decisions

about the strategy and quantitatively assess its execution.

A third step at Stage 2 involves identifying, and authoriz-

ing resources for, a portfolio of strategic initiatives intended

to help achieve the strategy’s objectives. A strategic initia-

tive is a discretionary project or program, of fi nite duration,

designed to close a performance gap. It might focus on, say,

developing a customer loyalty program or training all em-

ployees in Six Sigma quality management tools.

In our original conception of the strategy map and the

balanced scorecard, we encouraged companies to select ini-

tiatives independently for each objective. We came to real-

ize, however, that by doing so, companies would fail to ben-

efi t from the integrated and cumulative impact of multiple,

related strategic initiatives. Achieving an objective in the

customer or fi nancial realm generally requires complemen-

tary initiatives from different parts of the organization, such

as human resources, information technology, marketing,

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hbr.org | January 2008 | Harvard Business Review 69

This generic strategy map illustrates how a corporate strategy can be sliced into four themes, each with its own cause-and-effect relationships.

Real-life maps will be more complex but will still have the desirable property of mak-

ing strategy much easier to understand and manage. The strategic themes provide a common structure that unit managers can use to develop their own maps within the big picture and a governance structure that assigns accountability for actions.

Mapping Strategic Themes

VISION: By 2013, become the leading company in our industry

Increase return on capital

Financial Perspective

Improve productivity Increase revenues in existing segments

and markets

Grow revenues in new products and services

Improve Operating Quality and Effi ciency

Grow High-Value Customer Relationships

Accelerate Product Innovation

Customer Perspective

Be a leader in quality and reliability

Provide valued service, applications expertise,

and support

Introduce innovative, high-performance

products and solutions

Process Perspective

Improve supply chain effi ciency and effectiveness

Improve quality, cost, and fl exibility of

operating processes

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