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Part 3: Strategic Actions: Strategy Implementation :

The challenge strategic leaders face is to verify that their firm is emphasizing financial and strategic controls so that firm performance improves. The Balanced Scorecard is a tool that helps strategic leaders assess the effectiveness of the controls. The Balanced Scorecard The balanced scorecard is a framework firms can use to verify that they have established both strategic and financial controls to assess their performance.139 This technique is most appropriate for use when dealing with business-level strategies; however, it can also be used with the other strategies firms may choose to implement (e.g., corporate level, international, and cooperative). The underlying premise of the balanced scorecard is that firms jeopardize their future performance possibilities when financial controls are emphasized at the expense of strategic controls,140 in that financial controls provide feedback about outcomes achieved from past actions, but do not communicate the drivers of future performance.141 Thus, an overemphasis on financial controls has the potential to promote managerial behavior that sacrifices the firms long-term, value-creating potential for short-term performance gains.142 An appropriate balance of strategic controls and financial controls, rather than an overemphasis on either, allows firms to effectively monitor their performance. Four perspectives are integrated to form the balanced scorecard framework: financial (concerned with growth, profitability, and risk from the shareholders perspective), customer (concerned with the amount of value customers perceive was created by the firms products), internal business processes (with a focus on the priorities for various business processes that create customer and shareholder satisfaction), and learning and growth (concerned with the firms effort to create a climate that supports change, innovation, and growth). Thus, using the balanced scorecard framework allows the firm to understand how it looks to shareholders (financial perspective), how customers view it (customer perspective), the processes it must emphasize to successfully use its competitive advantage (internal perspective), and what it can do to improve its performance in order to grow (learning and growth perspective).143 Generally speaking, strategic controls tend to be emphasized when the firm assesses its performance relative to the learning and growth perspective, whereas financial controls are emphasized when assessing performance in terms of the financial perspective. Firms use different criteria to measure their standing relative to the scorecards four perspectives. We show sample criteria in Figure 12.5. The firm should select the number of criteria that will allow it to have both a strategic understanding and a financial understanding of its performance without becoming immersed in too many details.144 For example, we know from research that a firms innovation, quality of its goods and services, growth of its sales, and its profitability are all interrelated.145 Strategic leaders play an important role in determining a proper balance between strategic controls and financial controls, whether they are in single-business firms or large diversified firms. A proper balance between controls is important, in that wealth creation for organizations where strategic leadership is exercised is possible because these leaders make appropriate investments for future viability [through strategic control], while maintaining an appropriate level of financial stability in the present [through financial control].146 In fact, most corporate restructuring is designed to refocus the firm on its core businesses, thereby allowing top executives to reestablish strategic control of their separate business units.147 Successfully using strategic control frequently is integrated with appropriate autonomy for the various subunits so that they can gain a competitive advantage in their respective markets.148 Strategic control can be used to promote the sharing of both tangible and intangible resources among interdependent businesses within a firms portfolio. In addition, the autonomy provided allows the flexibility necessary to take advantage of

The balanced scorecard is a framework rms can use to verify that they have established both strategic and nancial controls to assess their performance.

369 Figure 12.5 Strategic Controls and Financial Controls in a Balanced Scorecard Framework
Chapter 12: Strategic Leadership

Perspectives

Criteria

Financial

Cash ow Return on equity Return on assets

Customer

Assessment of ability to anticipate customers needs Effectiveness of customer service practices Percentage of repeat business Quality of communications with customers

Internal Business Processes

Asset utilization improvements Improvements in employee morale Changes in turnover rates

Learning and Growth

Improvements in innovation ability Number of new products compared to competitors Increases in employees skills

specific marketplace opportunities. As a result, strategic leadership promotes simultaneous use of strategic control and autonomy.149 The balanced scorecard is being used by car manufacturer Porsche. After this manufacturer of sought-after sports cars regained its market-leading position, it implemented a balanced scorecard approach in an effort to maintain this position. In particular, Porsche used the balanced scorecard to promote learning and continuously improve the business. For example, knowledge was collected from all Porsche dealerships throughout the world. The instrument used to collect the information was referred to as Porsche Key Performance Indicators. The fact that Porsche is now the worlds most profitable automaker suggests the value the firm gained and is gaining by using the balanced scorecard as a foundation for simultaneously emphasizing strategic and financial controls.150 As we have explained, strategic leaders are critical to a firms ability to successfully use all parts of the strategic management process. As described in the Strategic Focus, the new CEO for Wal-Mart, Mike Duke, has the strategic leadership skills to position him and his company for future success. Certainly, the future for strategic leaders similar to Duke is likely to be challenging; but he is leading a highly successful company that is increasing its market share and is likely to grow in international markets, where he has significant experience and knowledge. He appears to emphasize balanced organizational controls and uses many of the principles of the Balanced Scorecard. With people like Mike Duke in these roles, the work of strategic leaders will remain exciting and has a strong possibility of creating positive outcomes for all of a firms stakeholders.