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Strategy at many companies is almost completely disconnected from execution. Establishing a dedicated unit to orchestrate hoth will help to bridge the divide.

M OST COMPANIES HAVE AMBITJOUS PLANS

for growth. Few ever realize them. In their book ProlU from the Core, Chris /ook and

James Allen report that between 1988 and 199S, seven out of eight companies in a global sample of 1,854 large corporations failed to achieve profit- able growth. rhcU is, these companies were un.ihic to deliver 5.5% annual real growth in revenues and earnings while camingtheircosl of capital (a rather

modest hurdle). Yet 90% of the conipa-

fc; nies in the study had T H F f i t ^ - developed detailed I F i t U i

» strategic plans with CTPi ; much higher targets. ^ ' " ' : Why is there such M A N A l I a persistent gap be- i v i M i i r t *

tween ambition and I performance? The I gap arises, we believe, from a discon- * nect in most companies between strat- [ egy formulation and strategy execu-

tion. Our research reveals that, on average, 95% of a company's employees

> are unaware of, or do not understand, its strategy. If the employees who are closest to customers and who operate processes that create value are un- aware ofthe strategy, they surely can-

, not help the organization implement > it effectively.

It doesn't have to be like this. For I the past 15 years, we have studied com- • panies that have achieved perfor- ' mance breakthroughs by adopting the ' Balanced Scorecard and its associated

tools to help them better communi- cate strategy to their employees and to guide and monitor the execution of

THE OFFICE OF

that strategy, (l̂ or background on the Balanced Scorecard, see our book The Stralcgy-Focitscd Organization, Harvard Business School Press, 2000.)

Some companies, of course, have achieved bettor and longcr-iasting im- provements than others. The organi- zations that have managed to sustain their strategy focus have typically es-

tablished a new unit atthe corporate level

j p r rtr to oversee ali strat- I U L U r ,̂gy related activities.

MANAGEMENT ^ " ' nianugcmcnt (OSM),

• M F N T ŝ we call it. . IVI u 11 I jj^jj ,i,jg|ij appear

to be nothing more than a new name for

the familiar strategic planning unit. But the two are quite different. The typical planning function facilitates the annual strategic planning process but takes little or no leadership role in seeing that the strategy gets executed. The companies we studied, however, recognize that effective strategy execu- tion requires communicating corporate strategy; ensuring that enterprise-level plans are translated into the plans ofthe various units and departments; executing strategic initiatives to deliver on the grand plan; and aligning employ- ees' competency development plans, and their personal goals and incentives, with strategic ob- jectives. What's more, they recognize that the

by Robert S. Kaplan and David P. Norton

I a

OCTOBER 2005 73

The Office of Strategy Management

company's strategy must be tested and adapted to stay abreast ofthe changing competition. The OSM becomes the central point for coordinating all these tasks. It does not do all the work, but it facilitates the processes so that strategy execution gets accomplished in an integrated fashion across the enterprise.

In the following pages, we will describe how the con- cept of the office of strategy management came into being and how it has helped companies align key man- agement processes to strategy. Although the companies we have studied use the Baianced Scorecard as the frame- work for their strategy management systems, we believe that the lessons we draw are also applicable to compa- nies that do not use the Balanced Scorecard.

Strategy Management: The New Support Function The exhibit "The Old Strategy Calendar" depicts the strat- egy management schedule at a typical large company. The process starts about midway through the fiscal year, when the CEO and the executive team get together to clarify their strategic vision and update the strategy. Sometime afterward, similar processes take place at the business and functional units, led by unit heads and other senior executives. Toward the end of the third quarter, the finance function takes the baton, finalizing corporate and unit budgets. At the end of the year, the HR function con- ducts employees' annual performance reviews and or- chestrates the setting of professional goals and develop- ment programs. Throughout the year, meanwhile, different teams and units have engaged in performance reviews, corporate communication, and knowledge sharing.

The problem with this approach is that the activities are carried out largely in isolation and without guidance from the enterprise strategy. This partition of responsi- bilities creates the gulf between an organization's strategy and its processes, systems, and people. Surveys that we conducted of HR and IT managers reveal that the strate- gies of fully 67% of those organizations are not aligned with business unit and corporate strategies; nor do HR and IT departmental plans support corporate or business- unit strategic initiatives. Budgeting is similarly discon- nected: Some 60% of organizations do not link their fi- nancial budgets to strategic priorities. Incentives aren't aligned, either: The compensation packages of 70% of middle managers and more than 90% of frontline em- ployees have no link to the success or failure of strategy implementation. Periodic management meetings, corpo- rate communication, and knowledge management are similarly not focused on strategy execution.

Robert S. Kaplan ([email protected]) is the Baker Foundation Professor at Harvard Business School in Boston. David P. Nor- ton ([email protected]) is the founder and president ofthe Balanced Scorecard Collaborative (www.bscolcom), based in Lincoln, Massachusetts.

What can companies do to change this state of affairs? The experience ofthe Chrysler Group first suggested to us that the answer lies in bringing all strategy-related activi- ties into a single functional unit. After a string of innova- tive successes in the early 1990s, Chrysler had hit a dry spell. Performance problems were exacerbated by an eco- nomic downturn, rising costs, and encroaching imports, and by 2000, the company was staring at a projected deficit of more than $5 billion for the coming year. At this point, the parent company, DaimlerChrysler, appointed a new CEO, Dieter Zetsche, who introduced the Balanced Scorecard as part of a major change in strategy. The proj- ect was spearheaded by Bill Russo, vice president of busi- ness strategy, whose unit worked with Chrysler's execu- tive team to translate the company's new strategy into a Balanced Scorecard. Russo's unit also served as trainer and consultant to help Chrysler's business and support units create local scorecards that were aligned with cor- porate objectives and customized to local operations. Once the design phase had been completed and score- cards had been cascaded throughout the company, the strategy group maintained responsibility for the data col- lection and reporting processes for the scorecards.

Up to this point, Chrysler's Balanced Scorecard project had followed a traditional course. Where Chrysler broke new ground was in the roles assumed by the strategy group. The group took the lead in preparing scorecard- related materials to communicate the strategy to the more than 90,000 employees. Russo began to brief Zetsche before each management meeting about issues that had been revealed through the scorecard reporting and that required management attention and action. In his capacity as a member ofthe executive team, Russo fol- lowed up after each meeting to make sure that the re- quired items were communicated and acted upon. As a result of this proactive involvement in agenda setting and follow-up, the responsibilities of the business strat- egy function expanded to incorporate many new cross- enterprise strategy execution processes. Thus was bom Chrysler's Office of Strategy Management - a unit cur- rently employing some 13 full-time people who not only manage the company's strategy but also assist the busi- ness units in developing new products. Chrysler's new ap- proach to strategy execution appears to have paid off handsomely. In 2004, despite a weak domestic automo- bile market, Chrysler successfully launched a series of ex- citing new cars and generated $1.2 billion in eamings.

The U.S. Army's Balanced Scorecard project produced an office of strategy management in much the same way. A central project team at the Pentagon headquarters, under the leadership ofthe Army chief of staff, developed

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the initial scorecard, which the Army called the Strategic Readiness System (SRS). The project team also selected the software to be used for scorecard reporting and es- tablished systems and processes so that the scorecard would be regularly populated with valid, timely data. In the next phase, the team helped to cascade scorecards to 13 major subcommands and subsequently to more than 300 subsidiary commands throughout the world. The centralized project team provided training, consulting, software, and online support for the dispersed project teams. The central team also reviewed the scorecards pro- duced by local project teams to ensure that their goals were aligned with those articulated on the chief of staff's scorecard.

The Army's project team, like its counterpart at Chrys- ler, soon took on more than the traditional roles of score- card custodian and consultant. It established and took ownership of a strategy communication program. The Army team created a Web site that was accessible from around the world in both classified and unclassified ver- sions, developed an online portal and library containing information about the SRS, wrote articles about the ini- tiative, published a bimonthly newsletter, conducted an

annual conference, led periodic conference calls with SRS leaders at each command level, and conducted scorecard training, both in person and on the Web. This extensive communication process was critical for educating soldiers and civilian employees and gaining their support for the new strategy. And the Army project team, much as Chrys- ler's did, began to facilitate the monthly discussions at headquarters about the readiness status of units around the world. Once again, an ad hoc project team had turned into a sustainable part ofthe organization's structure (the team and the SRS survived the appointment of a new chief of staff in June 2004).

The creation of a central office for strategy execution may appear to risk reinforcing top-down decision making and inhibiting local initiative, but it does just the oppo- site. A unit with responsibility for the implementation of strategy becomes a convenient focal point for ideas that percolate up through the organization. These emerging ideas can then be put on the agendas of quarterly and annual strategy reviews, with the best concepts being adopted and embedded in enterprise and business unit strategies. The OSM is a facilitating organization, not a dictating one.

The Old Strategy Calendar strategy management at most companies consists of processes carried out in

isolation by different groups with different reporting lines. That's why strategy

becomes disconnected from the units responsible for executing it.

Strategy update; CEO and executive -•• team clarify vision.

Senior executives have no consistent way

to describe strategy.

Two thirds of HR and IT - organizations are

not aligned with strategy.

Line-of-business and support-unit leaders conduct strategic planning.

The vast majority of executive teams spend less than one hour per

month discussing strategy.

6 0 % of companies do not link

budgets to strategy.

CFO oversees budgeting.

7 0 % of middle managers do

not have strategy-linked incentive pay.

HR coordinates persona! goal setting, incentives, and personal development.

Top executives conduct monthly management reviews.

Corporate communications unit disseminates information.

Chief knowledge officer oversees knowledge sharing.

9 5 % of the — workforce does not understand the strategy.

= deficiencies in old management process

OCTOBER 2005 75

The Office of Strategy Management

What Good OSMs Do Most ofthe organizations we have studied follow the path Chrysler and the Army took: The Balanced Scorecard project team incrementally and organically assumes more and more responsibilities on its own initiative. But that's not the only way to institute an OSM. From these cases, we have learned what functions an effective OSM must perform and how an OSM must relate to other functions within the organization. As a consequence, a few organi- zations we advise have recently opted to make the cre- ation of an OSM an early and integral part oftheir score- card initiatives. Canadian Blood Services, the main provider of blood services in Canada with an annual bud- get of Can$900 million, more than 4,000 employees, and 17,000 volunteers, is an excellent example of an organiza- tion that created an OSM at the beginning of its journey to becoming more strategy focused. (See the sidebar "How to Wield Influence and Stay Informed," by CEO Gra- ham Sher.)

coaches the team in selecting performance targets on the scorecard measures and identifying the strategic initia- tives required to achieve them. As guardian ofthe score- card, the OSM also standardizes the terminology and measurement definitions across the organization, selects and manages the scorecard reporting system, and ensures the integrity of the scorecard data. The OSM need not be the primary data collector for the scorecard, but it should oversee the processes by which data are collected, reported, and validated. Finally, the OSM serves as the central scorecard resource, consulting with units on their scorecard development projects and conducting training and education.

Align the organization. A company can execute its strategy well only if it aligns the strategies of its business units, support functions, and external partners with its broad enterprise strategy. Alignment creates focus and coordination across even the most complex organiza- tions, making it easier to identify and realize synergies. At present, few companies actively manage the process of

A unit with responsibility for the implementation of strategy becomes a convenient focal point for ideas that PERCOLATE UP THROUGH THE ORGANIZATION.

what should people designing an OSM bear in mind as they embark on the project? Through research into Bal- anced Scorecard best practices, we've identified the activ- ities that should be directly managed by or coordinated with an OSM. Some of these activities-specifically those involved in creating and managing the scorecard, aligning the organization, and setting the agenda for monthly strategy reviews - are the natural turf of an OSM. They did not exist prior to the introduction of the Balanced Scorecard, so they can be given to a new unit without in- fringing on the current responsibilities of any other de- partment. But many other activities-strategic planning, budget supervision, or HR training, for instance - are al- ready the territory of other units. In these cases, the com- pany needs to be explicit about the allocation of respon- sibilities between the OSM and other functional units. We have identified the following basic OSM tasks:

Create and manage the scorecard. As the owner ofthe scorecard process, the OSM must ensure that any changes made at the annual strategy-planning meeting get trans- lated into the company's strategy map and Balanced Scorecard. Once the executive team has approved the ob- jectives and measures for the subsequent year, the OSM

alignment; in many cases, unit strategies have only rhe- torical links with corporate strategy. The OSMs we've studied help the entire enterprise to have a consistent view of strategy and to systematically manage organiza- tional alignment. The OSM oversees the process of devel- oping scorecards and cascading them through the levels ofthe organization. It defines the synergies to be created through cross-business behavior at lower organization levels and ensures that individual business unit and sup- port unit strategies and scorecards are linked to each other and to the corporate strategy.

Review strategy. For all their professed commitment to strategy, senior managers spend remarkably little time reviewing it. Our research suggests that 85% of executive leadership teams spend less than one hour per month dis- cussing their unit's strategy, with 50% spending no time at all. Companies that manage strategy well behave differ- ently. Top managers usually meet once a month for four to eight hours. This meeting provides the opportunity to review performance and to make adjustments to the strat- egy and its execution. The underlying hypotheses ofthe company's strategy can be tested and new actions initi- ated. Managing this meeting is a core function of the

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OSM. It briefs the CEO in advance about the strategic is- sues identified in the most recent scorecard so that the agenda can focus on strategy review and leaming, rather than just a short-term financial performance review and crisis management. The OSM then monitors the meeting to determine action plans and follows up to ensure that the plans are carried out. Since the board of directors also plays an important role in reviewing and guiding strategy, the OSM helps the chief financial officer prepare the board packet and agenda for board meetings.

Develop strategy. Typically, strategy formulation is the responsibility ofthe existing strategic planning unit. The unit performs extemal and internal competitive analysis, conducts scenario planning, organizes and runs an annual strategy meeting, and coaches the executive team on stra- tegic options. But developing strategy should not be a onetime annual event. After all, performance measures, such as those supplied by the Balanced Scorecard, provide continual evidence about the validity ofthe assumptions underlying a company's strategy. Those assumptions can be discussed periodically by the executive team, which can update the strategy if appropriate. And strategy de-

velopment should not be done only by senior managers. The OSM or strategic planning unit can act as a filter for new ideas that come from within the organization. We've found that most planning units adapt fairly quickly to the continual strategy development process we observe at scorecard-driven companies. The additional processes represent a natural extension of, and complement to, their traditional work. Problems arise when a scorecard project is managed by a group from outside planning (such as HR, quality, or an ad hoc team). As the scorecard acquires strategic importance, conflicts over strategy de- velopment can arise between the planning unit and the scorecard team. If this occurs, top management should quickly merge the two groups.

Communicate strategy. Effective communication to employees about strategy, targets, and initiatives is vital if employees are to contribute to the strategy. Canon U.S.A., a scorecard user, describes its intemal communi- cation process as "democratizing strategy," and it actively promotes understanding of the company's strategy and the scorecard in all business units and support functions. Strategy communication, therefore, is a natural turf for an

The New Strategy Calendar At scorecard-driven companies, the strategic processes are carried out or super-

vised by the office of strategy management in coordination with the appropriate

management teams or executives. This ensures that the strategy is fully reflected

in all strategy-related activities at all levels ofthe company.

Strategy update: CEO and executive team clarify vision. Balanced Scorecard team facilitates development of corporate scorecard and strategy map.

Office of strategy management oversees alignment

of all management processes with strategy.

Line-of-business and support-unit leaders align their units with strategy. Board of directors becomes aligned. Balanced Scorecard team facilitates development of unit scorecards.

CFO, HR head, CIO, and COO conduct planning and budgeting.

HR oversees alignment of personal goal setting, incentives, and personal development with strategy.

Top executives conduct monthly management reviews.

Corporate communications unit disseminates information.

Chief knowledge officer oversees knowledge sharing.

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The Office of Strategy Management

OSM. But as with strategy planning, intemal communi- cation is sometimes another unit's existing responsibility. In these situations, the OSM has tended to take an edito- rial role, reviewing the messages to see that they commu- nicate the strategy correctly, ln cases where the corporate communications group has little knowledge of or focus on strategy, such as at Chrysler and the U.S. Army, the OSM takes on primary responsibility for communicating both the scorecard and strategy to employees. In either situation, the OSM should always take the lead in crafting strategy messages delivered by the CEO, because one of the most effective communication channels is having each employee hear about strategy directly from the CEO. Finally, as part of its communication responsibilities, the OSM must cooperate with HR to ensure that educa- tion about the scorecard and its role is included in em- ployee training programs.

Manage strategic initiatives. Strategic initiatives- such as a TQM program or the implementation of CRM software - are discretionary programs that help compa- nies accomplish strategic objectives. The executive team

Integrate strategic priorities with other support functions. Existing functional departments retain prime responsibility for three other key processes necessary for successful strategy implementation: planning and bud- geting, human resource alignment, and knowledge man- agement. These processes are critical for effective strategy execution, and the OSM should play a consultative and in- tegrative role with the respective functional departments.

Planning and Budgeting. At most corporations, the var- ious functional departments are responsible for planning how the corporation will allocate resources over the year. The finance department oversees budgeting and the allo- cation of cash to the units and cross-functional initiatives; IT makes recommendations about investments in data- bases, infrastructure, and application programs; and HR makes plans for hiring, training, and leadership develop- ment. For a strategy to be effective, all the functional plans must be aligned with the strategy. The budgets pre- pared by the finance department, for example, should re- flect those established in the strategic planning process and should incorporate funding and personnel resources

It's simplest to place the office of strategy management on a par with functions that report directly to the CEO. THE OFFICE SERVES, IN EFFECT, AS THE CEO'S CHIEF OF STAFF.

typically identifies these initiatives as part of its annual planning process, although new initiatives may arise throughout the year. Ideally, the entire portfolio of such initiatives should be assessed and reprioritized several times annually. The screening, selection, and manage- ment of strategic initiatives are what drive change in the company and produce results. Our experience suggests that such initiatives should be managed separately from routine operations. Typically, they are managed by the units most closely associated with them (a CRM project, for instance, is best managed by customer service) or by an ad hoc team drawn from the functions or units affected. Responsibility for managing initiatives that already have a natural home should remain with the associated unit or function. The OSM intervenes only when an initiative falls behind schedule, is over budget, or is not delivering expected results. But the OSM should manage initiatives that cross unit and functional lines-it can thus make sure that they get the resources and attention they need. In all cases, the OSM retains responsibility for monitoring the progress of strategic initiatives and reporting on them to top management.

for cross-functional strategic initiatives. To ensure this alignment, the OSM must work closely with all tbese functional units.

Human Resource Alignment No strategy can be effec- tive unless the people who have to carry it out are moti- vated and trained to do so. Motivation and training is, of course, the natural domain of HR, which typically carries out annual performance reviews and personal goal set- ting and manages employee incentive and competency development programs, it is the responsibility ofthe OSM to ensure that HR performs these activities in a manner consistent with corporate and business unit strategic ob- jectives. The goal is to make strategy everyone's job.

Knowledge Management Finally, the OSM needs to en- sure that knowledge management focuses on sharing the best practices most critical for the strategy. If managers use the wrong benchmarks, the company's strategy will fall short of its potential. At some companies, learning and knowledge sharing are already the responsibility of a chief knowledge or leaming officer; in those cases, the OSM needs to coordinate with that person's office. But if such a function does not already exist, the OSM must take

OCTOBER 2005 79

The Office of Strategy Management

the lead in transferring ideas and best practices through- out the organization.

The exhibit "The New Strategy Calendar" illustrates the activities that a properly constituted OSM will be en- gaged in during the year. The strategy cycle launches at the beginning ofthe second quarter, when the OSM starts to plan strategy and update the enterprise scorecard. After the enterprise strategy meeting, the OSM starts the process of aligning the organization with the enterprise goals. Before the end of the third quarter, it will be coor- dinating with finance to bring unit-level plans and bud- gets in line with strategy, and by the beginning of the fourth quarter, it will be working with HR on aligning the competency development and incentives of employees with scorecard objectives. While these calendar-driven processes are going on, the unit continually engages in control and leaming: reviewing and communicating strat- egy, managing initiatives, and sharing best practices.

Positioning and Staffing the OSM Executing strategy usually involves making changes that only a CEO can empower, and the OSM will be most ef- fective when it has direct access to the CEO. Barbara Bossin, the director of strategic alignment at St. Mary's Duluth Clinic, told us she was able to overcome resis- tance to her initiatives because managers knew she had a direct reporting line to the company's chief operating and chief executive officers. An OSM buried deep in the finance or planning department may find it difficult to command similar respect and attention from senior exec- utives for strategy management priorities.

The simplest solution, therefore, is to place the OSM on a par with major functions, such as finance and marketing, that report directly to the CEO. The OSM serves, in effect, as the CEO's chief of staff. But if the OSM has originated within a power- ful function, such a positioning may not be feasible. In that case, the OSM will usually report to the chief of the function in which it is nested-such as the CFO or vice president of stra- tegic planning-but with occasional direct access to the CEO. At the Mex- ican insurance company Gnipo Na- cional Provincial (GNP), for example, the OSM reports both to the chief executive and to the chief financial officer. The OSM sets the agenda for a weekly meeting with the CEO and CFO and for a broader weekly meet- ing with the six top company execu-

tives. The office of strategy management at GNP also has amatrixed relationship with 20 Balanced Scorecard man- agers in the two major business units and nine support units and with the owners of the major strategic initia- tives. The relationship enables the OSM to coordinate the strategic planning done in the business and support units.

The OSM may be an important functional unit, but it doesn't have to be large; it is certainly not our goal to en- courage companies to build a new bureaucracy. Although Chrysler employs 13 full-time people in its OSM, reflecting the unit's involvement in product development, our ex- perience suggests that firms with sales of $500 million to $5 billion and 1,000 to 10,000 employees can get by with fewer than ten people. In principle, as the exhibit on this page shows, a fully functioning OSM should not need more than six to eight full-time-equivalent positions to cope with its activities.

We have observed that establishing an OSM does not usually involve hiring expensive new talent. The OSM is typically staffed with people who led the Balanced Score- card project-they often come from the planning and fi- nance functions, but some come from other staff groups such as quality, HR, and IT. Several organizations we stud- ied have reported that the people assigned to their OSMs do not constitute a net increase in the organization's head count. In many cases, the evolution ofa well-functioning OSM actually helps reduce overall head count, thanks to the OSM's role in streamlining and focusing management processes and helping managers eliminate layers of staff engaged in data gathering and reporting. The OSM, how- ever, should be assessed by the value it creates through successful strategy execution, not by whether it can re- duce head count

To fulfill its responsibilities success-

fully, an office of strategy management

at a large company typically needs

only six to eight full-time people.

STRATEGY MANAGEMENT TYPICAL

PROCESS n OFFTE

Scorecard management

Organization alignment

Strategy reviews

Strategic planning

Strategy communication

Initiative management

Planning and budgeting

Workforce alignment

Best-practice sharing

1.0

1.0-1.5

0.5-1.0

0.5

0.5-1.0

1.0-1.5

0.5

0.5

0.5-1.0

TOTAL FTE POSmONS 6 . 0 - 8 . 5

Many organizations have achieved dramatic performance improve- ments by sustaining a focus on im- plementation of strategy. We have captured and codified a body of knowledge from these successful or- ganizations that provides the foun- dation for an emerging professional function focusing on the manage- ment of strategy. An office of strat- egy management that is positioned at the level of other senior corporate staff offices and has responsibility for managing and coordinating all the key strategy management pro- cesses can help companies realize the benefits from this body of knowledge. ^

Reprint R0510D; HBR OnPoint 1894 To order, see page 159.

80 HARVARD BUSINESS REVIEW

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