Moving the Strategy Frontier - Management by Objectives (APO) Vs. Balanced Scorecard (BSC)
I. Moving the Frontier of Strategy
Just as species evolve to adapt to change, become stronger, and survive, different contributions on management theory contributed to a true evolution and strengthening of knowledge about strategy and planning.
Just as species in the animal kingdom evolve to adapt to change, strengthen and survive, the different contributions on administrative theory, throughout the history of humanity, contributed to a true evolution and strengthening of knowledge and development. of various tools related to the definition, implementation, monitoring and adjustment of strategy and planning. In this article we will try to explain this evolution and how it has affected and influenced the changes in planning tools, from Management by Objectives and reaching the Balanced Scorecard (BSC)
This Frontier of Strategy was gradually moving according to the evolution of Administrative Theory, from its first contributors such as: Frederick Taylor, Frank and Lillian Gilbreth, Henry Fayol, Henry Gantt, Harrington Emerson, Harlow Person, Elton Mayo and others more (scientific administration); even Quantitative Management thinkers such as Charls Bernard (decision theory), Cox and Kendall (experimental design), von Neumann (game theory), Harris and Arrow (inventory control), Leontieff, Kantorovich, and Samuelson (programming linear), Morse and Kendall (queuing theory), Dodge, Roming and Deming (sampling theory), Thomas, Deemer and Jennings (simulation theory or Monte Carlo), Shewhart and Schlaifer (decision theory) and others; even the modern contributors to the current Administration,such as Peter Drucker (objective management), Deming, Juran and Crosby (total quality administration), Kaouro Ishikawa and Akao (Hoshin Kanri, policy administration), David Sumanth, Scott Sink and Carl Thor (productivity administration), Mizuno and Akao (QFD, Quality Function Deployment), Michael Hammer (reengineering), Robert Camp (benchmarking), Michael Porter (differentiation and competitiveness), Norton and Kaplan (balanced scorecard), Bob Galvin (Six Sigma) and the most modern administrative theories on Supply Chain Management, Lean Manufacturing, Lean-Sigma and others.Scott Sink and Carl Thor (Productivity Management), Mizuno and Akao (QFD, Deployment of Quality Function), Michael Hammer (Reengineering), Robert Camp (Benchmarking), Michael Porter (Differentiation and Competitiveness), Norton and Kaplan (balanced scorecard), Bob Galvin (Six Sigma) and the most modern administrative theories on Supply Chain Management, Lean Manufacturing, Lean-Sigma and others.Scott Sink and Carl Thor (Productivity Management), Mizuno and Akao (QFD, Deployment of Quality Function), Michael Hammer (Reengineering), Robert Camp (Benchmarking), Michael Porter (Differentiation and Competitiveness), Norton and Kaplan (balanced scorecard), Bob Galvin (Six Sigma) and the most modern administrative theories on Supply Chain Management, Lean Manufacturing, Lean-Sigma and others.
To understand this evolution, we have to understand the situations of the environment and the economy that prevailed in the 20th century and how these influenced the different administrative thoughts and theories of each era, so we will identify four major developments in strategic thinking and theory.
First great evolution, in search of the Increase in Production:
In the early 19th century, market growth was significant and the industry was continually expanding. Inventions and mechanization were the order of the day. The labor force was being supplanted by tools and work machines, the small workshops were replaced by the big chimneys and huge factories. A tremendous emphasis was placed on production and economies of scale. The search for efficiency and low costs were the focus of business. What was important was the volume produced, the efficiency and the unit costs. It was the land of plenty. Without experience and little knowledge in Administration and Leadership, the Managers were true dictators, abusing their authority. Productivity standards, piecework compensation, were subjectively defined,without taking into account the capacity of the work systems or an in-depth analysis of the organization's performance, what it was about was “obtaining the maximum production”, at the “least cost”. Competition was minimal and the focus was towards producing and producing any type of products, since the market had been there to buy them. The employee's talent and reasoning ability took second place, which were replaced by his ability and strength to produce more and more, so much emphasis was placed on the concept of "worker", people with little knowledge who He worked daily to maximize production based on his brute force, "simple people, for simple jobs."Competition was minimal and the focus was towards producing and producing any type of products, since the market had been there to buy them. The employee's talent and reasoning ability took second place, which were replaced by his ability and strength to produce more and more, so much emphasis was placed on the concept of "worker", people with little knowledge who He worked daily to maximize production based on his brute force, "simple people, for simple jobs."Competition was minimal and the focus was towards producing and producing any type of products, since the market had been there to buy them. The employee's talent and reasoning ability took second place, which were replaced by his ability and strength to produce more and more, so much emphasis was placed on the concept of "worker", people with little knowledge who He worked daily to maximize production based on his brute force, "simple people, for simple jobs."so much emphasis was placed on the concept of "worker", people with little knowledge who worked daily to maximize production based on their brute force, "simple people, for simple jobs."so much emphasis was placed on the concept of "worker", people with little knowledge who worked daily to maximize production based on their brute force, "simple people, for simple jobs."
At the beginning of the 19th century, the employee's talent and reasoning ability took second place, which were replaced by his ability and strength to produce more and more, in such a way that much emphasis was given to the concept of "worker", people with little knowledge who worked daily to maximize production based on their brute force, "simple people, for simple jobs".
Given these antagonistic conditions, it resulted in the workers trying to defeat the system and the administrators squeezing every last drop of worker productivity, a real class struggle began. It was neither a happy nor a long-term efficient situation, but it served the purpose of producing many goods well to meet the demand of an expanding economy. These were the conditions when a young engineer, named "Frederick Taylor" began to develop an administrative system, based on the standardization and efficiency of operations, what is today known as traditional or scientific administration.
Presumably, in this scenario, planning was guided by an autocratic definition of objectives towards employees (in a few cases based on data) whose fundamental purpose was "to increase the ability to produce at a low cost", regardless of the means of how to achieve them, nor the participation of the employee in the definition of said objectives, thus giving rise to the so-called “administration by objectives (APO)”. The frontier of the strategy was located in the increase in production.
Second great evolution, towards the Optimization of Operations and Resources:
The First and Second World Wars gave way to a growing emphasis on the efficiency of operations, based on quantitative methods of analysis. This school of quantitative administration, gesture of the integration of teams from various disciplines: mathematics, physics, engineering, economics and statistics. The central idea was that the study and multidisciplinary solution of a problem, from the point of view of "Operations Research (IO)", was more efficient and faster than otherwise. At this time, what remained important was low-cost production, but maximized by the concept of "speed", since to beat the opponent, it was necessary to produce ammunition, weapons and supplies faster than the opponents. So the quantitative management approachIt was he "maximizing production at the highest possible speed, thus optimizing the scarce existing resources". During this time of quantitative administration, Statistical Process Control (CEP) originated, however, it was not used in the US until many years later, but Japan was the country that actually developed it.
The central idea was that the study and multidisciplinary solution of a problem, from an operations research point of view, was more efficient and faster than otherwise. At this time, what remained important was low-cost production, but maximized by the concept of "speed", since to beat the opponent, it was necessary to produce ammunition, weapons and supplies faster than the opponents.
The markets were reduced and the need for resources for the war were key, so added to this need for speed of production in the war industry, there was the phenomenon of optimizing scarce resources in other industries, so that the emphasis was towards the control of expenses and costs, financial control, to achieve the stated objectives. The new focus of management by objectives was then towards optimization of resources and the financial, brought with it the increasing use and management based on budgets. The frontier of the strategy moved from the growth of production, towards the optimization of operations, and of scarce resources, through financial control.
Third great evolution, towards Quality in Operations:
The next great move of the frontier of strategy occurred after the Second World War and this was precisely in the country destroyed by war, Japan. The occupying forces delegated to General Douglas MacArthur to command efforts to rebuild the economy. So MacArthur relied on American experts for this difficult task. One of these experts was Homer Sarasohn, an engineer at MIT, who directed Civil Communication operations. He needed to establish an information center, in order to communicate and educate the population quickly and with the greatest possible coverage, so he decided to do it by radio. So he proceeded, to the installation of radio-producing plants, however,Given that the raw materials were scarce and of poor quality and that the administrators and workers were new and very low-skilled, the first radio productions were anything but “quality products” usable for the mission of communication with the population. So Homer adopted the strategy of training managers and engineers in quality management techniques.
Then, the JUSE Engineers amalgamated the concepts of CEP, of ACT with the concepts of APO, thus taking the first steps towards "quality planning".
The Civil Communication section worked with JUSE (Japan Institute of Engineers) to implement a “Statistical Process Control (CEP)”, for which it needed to quickly train administrators in these quantitative management tools. The choice was then made by a professor at Columbia University, who was an expert in these statistical methods of quality control, Professor "Edward Deming". Starting in June 1,950, Deming trained hundreds of Japanese administrators and engineers in three key aspects: (1) the use of the scientific cycle or method of improving operations (PHVA, plan, do, verify, and act), (2) the importance of understanding and eliminating the causes of variation and (3) quality control based on control charts and statistics.Later, in 1954, they invited Joseph Juran to give training on the role of management in managing quality activities. So the CEP movement started, quickly transformed into a Total Quality Management (ACT) concept.
Another event was critical in this evolution of concepts, the appearance in the 50's of the book "The practice of management" by Peter Drucker, which described in great detail the importance of the Administration by Objectives (APO) tool widely used in America. The Japanese associated the use of the CEO and the APO, one of the explanations for why they had lost the war, given the strengthening that these management tools had brought to the Allies in their ability to produce more, with better quality.
Then, the JUSE Engineers amalgamated the concepts of CEP, of ACT with the concepts of APO, thus taking the first steps towards "quality planning" which later evolved into what is known as the "Hoshin Kanri". The JUSE created in 1957 the "Deming Prize" for business excellence in Japan, to promote industrialization and increase competitiveness, by sharing practices of excellence and promoting the massive use of the concepts of CEP, ACT and Quality Planning. In 1,957, Kaoro Ishikawa published a document emphasizing the importance of administration through management policies or quality planning. In 1960, Juran again with JUSE, introduced management responsibility for planning improvements and setting goals and targets in Japan.
What they discovered in this research were a series of management practices related to quality management, planning and administration by objectives. These integrated techniques were known as "Hoshin Kanri".
In 1,965, the Bridgestone Tire company sponsored an investigation in Japan, to understand its management and planning techniques used by the companies that won the Deming Price, this event was critical to the development of the concepts and tools of strategic planning. What they discovered in this research were a series of management practices related to quality management, planning and administration by objectives. These integrated techniques were known as "Hoshin Kanri". Subsequent to this event, Hoshin began slowly entering the US in the early 1980s. This happened to a greater degree because some North American companies already had subsidiaries in Japan, which were winners of the Deming award for excellence in management,such as subsidiaries of Hewlett Packard, Fuji Xerox, and Texas Instruments. These events quickly moved the frontier of planning to set as many goals as possible, with a financial focus on efficiency, towards the integration of APO, ACT and CEP, known as “Hoshin Kanri”. The Japanese gave it that name Hoshin Kanri, since the word "Ho" means "direction" and the word "Shin" means "needle", so Hoshin could be translated as "direction of the needle" or "compass". The word "Kanri" means control or management. In such a way that we could understand Hoshin Kanri, as the "compass management or business direction".with a financial focus on efficiency, towards the integration of APO, ACT and CEP, known as “Hoshin Kanri”. The Japanese gave it that name Hoshin Kanri, since the word "Ho" means "direction" and the word "Shin" means "needle", so Hoshin could be translated as "direction of the needle" or "compass". The word "Kanri" means control or management. In such a way that we could understand Hoshin Kanri, as the "compass management or business direction".with a financial focus on efficiency, towards the integration of APO, ACT and CEP, known as “Hoshin Kanri”. The Japanese gave it that name Hoshin Kanri, since the word "Ho" means "direction" and the word "Shin" means "needle", so Hoshin could be translated as "direction of the needle" or "compass". The word "Kanri" means control or management. In such a way that we could understand Hoshin Kanri, as the "compass management or business direction".The word "Kanri" means control or management. In such a way that we could understand Hoshin Kanri, as the "compass management or business direction".The word "Kanri" means control or management. In such a way that we could understand Hoshin Kanri, as the "compass management or business direction".
This change in the planning frontier focused on the integration and prioritization of the main objectives and goals, but mainly, on their means to achieve it, not only from a financial point of view, but also from the quality approach of operations and processes of the business, to guarantee quality for the client. The planning frontier moved and expanded from the growth of production, towards the optimization of operations and financial resources, and later towards the quality of operations as a differentiating factor for the client.
Fourth great evolution, towards the differentiation and search for Value for Clients, Shareholders and Employees:
According to Proter, this competitive problem occurs due to the managerial failure to differentiate “operational efficiency” from “strategic effectiveness”. Many organizations have exhausted or overused the use of tools that seek operational efficiency, in order to lower the expenses or increase the value of the company, using the same business model as that of its competitors.
The next great move in the frontier of strategy occurred in the 1980s and 1990s, when the globalization of the economy brought with it an opening of markets and intense competition to capture customer preference. This era of globalization was characterized by continuous technological changes, a reduction in the life cycle of products, greater customer demands, greater purchase options, tailor-made products, cooperation throughout the supply chain and a greater number from more qualified competitors. This intense competition for customer preference required a clear strategic differentiation, to compete in the market with an "advantage over the competitors." Michel Porter in 1980 wrote about "competitive strategy,techniques to analyze the industry and competitors. " Porter referred to the five forces that defined competitiveness in a market and the attractiveness and margins of an industry. According to Porter, competitors today can quickly copy an organization's strategy and its position in the market, in such a way that the differentiation in the world of intense competition is "temporary". On the other hand, according to Porter, hypercompetition by the markets has resulted in a continuous erosion of margins, given the focus on imitating and copying strategies. According to Porter, this competitive problem occurs due to the managerial failure to differentiate "operational efficiency" from "strategic effectiveness".Many organizations have exhausted or overused the use of tools that seek operational efficiency, in order to lower expenses or increase the value of the company, using the same business model as that of their competitors.
As a result of this search for operational efficiency, productivity and speed, a series of administrative techniques have been developed that seek such operational efficiency, such as: reengineering, ISO 9,000, ERP, time-based competitiveness, benchamrking, etc. Although these techniques have managed to increase operational efficiency and reduce costs in the short term, they have failed in the long term, since they do not allow maintaining a unique and differentiating competitive position in the market. According to Porter, operational effectiveness is a requirement, but it is not a guarantee of achieving high long-term returns. The end result is that many companies fail to further increase their income, using the same business model as that of their competitors and that the only way to generate more value is by being different from the competitors.
Porter argues that operational efficiency means "performing activities similar to those of competitors in better shape", while strategic effectiveness is "performing activities different from that of competitors" with the aim of positioning itself as unique in the minds of customers. One of the main tools to accelerate this "competitive similarity" is the widely used benchmarking technique. To eliminate this hyper-competition trap, the only possibility for organizations is the search for "strategic innovation", which allows them a clear differentiation in the market and a unique competitive position, which seeks the ultimate goal of creating value for customers, shareholders and employees. This quest for value trilogy (value for customers,shareholders and employees) is the essence of the creation of the Balanced Scorecard (BSC).
Kaplan and Norton defined that to guarantee the creation of financial value (value for shareholders), it is first necessary to ensure the creation of value for customers, through a unique and differentiating strategy, and that this is only achieved if there are processes and development of the intangible capital (value for employees) that manage to create said unique position in the market.
Robert Kaplan and David Norton wrote an article entitled “Balanced Scorecard –Measures that drive Performance” in January 1,992, in which they discussed the need to use new performance measurement systems, as a key component to improve Organizational results and be more competitive. According to Kaplan and Norton, traditional systems that measure only financial results, such as "return on investment", "earnings per share", "economic value added", etc., can send wrong or biased signs about creation Organizational value. They determined that no single type of measurement provides managers with all the information necessary to make decisions and focus efforts on critical areas of business value.Kaplan and Norton defined that to guarantee the creation of financial value (value for shareholders), it is first necessary to ensure the creation of value for clients, through a unique and differentiating strategy, and that this is only achieved if there are processes and development of the Intangible capital (value for employees) that manage to create this unique position in the market.
In such a way, that this movement of the frontier of the strategy brought with it a focus on the definition of a differentiating strategy that ensures value creation for clients, shareholders and employees. The planning frontier moved and expanded from production growth, toward optimization of operations and financial resources, then toward quality of operations, and finally toward strategic differentiation, unique market positioning, and creation of Value for customers, shareholders and employees (the trilogy of value).
The four great evolutions:
The evolution of administrative and strategy concepts brings with it a series of new management paradigms, which have moved from efficiency and optimization of production, to the search for differentiation and a unique market positioning, to guarantee the creation of Value for customers, shareholders and employees. This administrative evolution, as we presented previously, is solely due to the impulse caused by the accelerated change in world economic conditions in the 1990s. As we can see in the graph that summarizes this movement of the strategy frontier, administrative science evolved from Management by Objectives (APO) in the 20s, 30s and 40s, which was perfected with the appearance of Operations Research (IO) and Budgeting, in the 40s, 50s, and 60s,to then integrate into quality planning or hoshin in the 60s and 70s and finally towards the Balanced Scorecard (BSC) in the 80s and 90s. With each one of these evolutions, the Organizations have obtained higher levels of productivity, caused by a greater creation of Value for clients, employees and shareholders.
Another series of administrative techniques also contributed their grain of sand, in this evolution of the frontier of strategy and planning knowledge, however, to facilitate historical analysis, we have selected only some of them, considering them the most relevant in the development of strategic management thinking and the most used during the history of administrative development.
II. Scorecard Based Management (1) - The 4 Key Elements
During the last years we have had diverse experiences in the implementation of projects (more than 100 different projects) of Strategy, Balanced Scorecard (BSC), Alignment and Human Development, in different Organizations of Latin America (Companies in Mexico, Guatemala, Honduras, Nicaragua, Salvador, Costa Rica, Panama, the Dominican Republic, Colombia, Peru, Chile, Argentina, Ecuador, and other countries), both private and public, small (from companies with 100 employees and less than US $ 1 million in sales) and large (Up to companies with 15,000 employees and more than US $ 2 billion in Sales), national and multinational, NGOs and oriented towards profits, industry, commerce and services, etc., we have been able to integrate a “Latino Model” (appropriate to our realities, diverse situation, context and cultures),to understand how to fully manage an Organization based on Strategy and BSC.
We understand that the key to differentiation, competitive advantage, value creation (for clients, employees, shareholders) and achieving results in an environment of continuous change in macro and micro environmental conditions, lies in seeing the strategy, not how an event (in one go), but to see it as a true management process, a "Strategy-based Administration", which will guarantee Organizational Excellence.
From our perspective, the four critical components necessary to implement an efficient Scorecard-based Management management process are: Strategic Approach, Transfer to Balanced Scorecard (BSC), Synchronization and Deployment, and Culture of Execution. According to our experiences in Latin America, the success in the implementation of Strategy and Balanced Scorecard projects lies in turning the strategy into the guide or promoter of daily business management.
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(1) "Administration based on Scorecards" is a Model proposed by Professors Antonio Kovacevic and Alvaro Reynoso. Professor Kovacevic is a full professor at the Catholic University of Chile in the area of Strategy. He currently works as a Partner of the consulting company PENSUM with operations in South America. Professor Reynoso is a full professor at Texas A&M University in the area of Productivity and Quality. He currently works as a Partner of the consulting company PCA / Strategylink with operations in Mexico, Central America and the Caribbean. He is Director of the Center of Excellence in Human Capital, of the Club Tablero de Comando.
We can quickly define these four critical components, and for the purposes of this article (2) we can conclude that when we talk about Manage based on Scorecard we mean:
Conform Quality Planning or Hoshin, driven by the need to produce, efficiently, optimizing resources, but with high quality, to become what we know today as Balanced Scorecard (BSC) driven by the need for differentiation and a unique positioning within a global economy of intense competition.
- Strategic approach: the definition of a unique and differentiating competitive strategy, a business model that supports said strategy and its prioritization through an objective map (strategic map). Transferred to the BSC: the operationalization of the objectives in KPIs (financial and non-financial), goals, means and projects and their integration in the Balanced Scorecard. Synchronization and deployment: horizontal alignment and linking of all processes to the strategy, and vertical alignment, linking of all people at all levels to said strategy and the development of different individual Balanced Scorecards to guarantee shared responsibility and synchronized performance in the execution of the strategy. Culture of execution: focused information, monitoring,organizational learning and decision making, performance evaluation, coaching and development of human capital, necessary to achieve results.
III. To move from Administration by Objectives (APO) to the Balanced Scorecard (BSC) it is necessary to change management paradigms:
As we analyzed previously, the first great movement on the frontier of the strategy occurred with the appearance of the Administration by Objectives (APO) driven by the need for greater production, which was perfected in the 1950s with the emergence of the Research of Operations (IO) and Budgeting and Financial Control, which was pushed by the need to optimize scarce resources for the Second World War, to later amalgamate in Japan with the theories of Statistical Process Control (CEP) and Quality Management Total (ACT), to conform the Quality Planning or Hoshin, driven by the need to produce, with efficiency, optimizing resources, but with high quality,until it became what we know today as the Balanced Scorecard (BSC) driven by the need to achieve differentiation and a unique market positioning, within a global economy of intense competition.
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(2) For a greater detail on this topic, refer to the article written by Engineer Alvaro Reynoso, entitled “How to Manage through Scorecards - A Model built on the basis of Latin American Experiences”.
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This movement from the frontier of the Strategy brings as a consequence the necessary understanding and use of a series of fundamental differences in the knowledge, beliefs and managerial paradigms, which impact on the quality and speed of the execution of the strategy, and on the achievement From the results. Based on the definitions of the four key elements of Administration based on Scorecards, we will carry out an analysis of what this evolution of the frontier of strategy from Management by Objectives (APO) has meant, in terms of management beliefs and paradigms., up to the Balanced Scorecard (BSC). To develop this analysis we will base ourselves on 20 critical management paradigms, which are presented below:
i) Strategic Approach - necessary paradigm shift:
Five fundamental paradigm shifts are discussed, regarding the definition of the Strategic Approach, which are:
(1) As we can see, while APO emphasizes the importance of budgeting and Financial objectives and goals, what we call a “rear-view approach”, that is, an extrapolation from the past, the BSC demands a true provisioning process, a projection of the future that we want to create, what we call a “windshield approach” or an administration by Vision. This is a profound paradigm shift as APO accepts the conditions of the past, the BSC defies those conditions and tries to build a different future for the Organization.
(2) Due to this past extrapolation approach, the APO defines budget-controlled sales growth as a strategy, which essentially means “a little more of the same”, while the BSC demands the definition of a strategy differentiated, that is to say unique, which allows the Organization to compete with an advantage in the market. According to the BSC, an organization must determine its value position from three possible options: operational excellence, customer intimacy, and product leadership. The emphasis of the search for this differentiation is that in order to survive in the business, you must be willing to differentiate yourself and create a unique kind of positioning for your clients, if you want to compete with advantage in a specific market and achieve a return on your investment..
(3) The APO determines a set of objectives, through the determination of a SWOT analysis, while the BSC, due to its focus on differentiation, orients its objectives to the needs of customers, employees and shareholders, and this will be the only way to create value, understand what customers need and understand how competitors do to satisfy it, if you understand these two positions (demand and supply), then you will have a very good chance of satisfying those needs in a better way and different from that of its competitors. Additionally, the SWOT is regularly based on individual performance of functional departments and not on system or entire supply chain capacity, factors required for BSC planning. In other words, the BSC demands a SWOT based on data,information and comparisons (benchmarks) and not based on hunches or anecdotes.
(4) The objective setting in APO requires a quantitative knowledge of the competitors (market share, sales, etc.) through the use of benchmarking analysis, while the BSC seeks to understand not only from a point of view. quantitative view, but from a qualitative approach, as competitors do to satisfy the needs of the market, studying for it, not only their results, but primarily their source of competitive advantage or what we call "the core competencies" of competitors, those elements that make it different and allow them to achieve results.
(5) While the APO seeks to achieve numerous objectives, the BSC demands prioritization and focus, on those truly critical objectives to achieve the Vision and implement the Strategy of differentiation and value for clients. These central objectives are reflected in a graphic representation, called the Strategic Map, which allows visualizing how the Organization will achieve results and create Value. The Strategic Map has its foundations in showing various cause-effect relationships necessary to give those elements of the strategy that drive (causes) the results (effects) of the organization.
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ii) Operationalization of the Strategy -necessary paradigm shift:
Five fundamental paradigm changes are discussed, regarding the Operationalization of the Strategy, which are:
(6) For the operationalization of the Strategy, the APO basically uses objectives, which must comply with being Specific, Medial, Actionable (action-oriented), Relevant and include Times (completion dates), a concept known as SMART. The BSC to operationalize the objectives includes these and other attributes, which are summarized in what in hoshin we call 3Ms (measure, goal and means). Each objective must include an indicator or measure of systematic monitoring and adjustment, called KPI, which allows making decisions in execution, in addition to defining goals, long, medium and short term and traffic lights (red, yellow and green) or tolerable limits of action or decision-making (these goals are assigned to a person responsible for their achievement) and finally strategic means or initiatives are defined,which must be deployed until reaching tactics or implementation plans (activities, dates, managers, resources, controls, etc.). A relevant aspect of differentiation is that while APO defines annual goals to verify achievements, in BSC each goal has a KPI aligned
(7) The APO focuses on defining eminently financial and growth objectives and goals, while the BSC requires balanced objectives, goals and KPIs, both shareholder value, financial productivity and growth (effect) as well as customer goals, processes and intangible capital (causes), the latter called "drivers" of results or "measures before the fact".
(8) In most cases in APO, the definition of goals is based on hunches, anecdotes or feelings, generally from a supervisor or boss, whereas in BSC, in order to define goals, knowledge of the ability to internal systems (value chain) and extended systems (supply chain) in terms of their performance through knowing information about: levels, trends, GAPs, variabilities, customer specifications and even comparative levels against competitors and projections of long term. This information makes the definition of goals fall on the plane of the "real" and not of the "anecdotal" as in the case of APO goals.
(9) A great difference in terms of organization management is the fact that while APO defines specific goals, acceptable levels of performance, decision-making limits or variability of systems are used in BSC, concepts extracted from Control Process Statistics (CEP) and operationalized through the use of traffic lights (red, yellow and green). This aspect of information management through variabilities and semaphores, makes management a real performance control and Organizational learning. The BSC understands variations to the system as a complex effect of several variables (information, materials, methods, machinery, people, external factors, etc.) and not as in the case of the APO, where the sole responsibility for achieving the results is people's performance.This paradigm shift is easy to understand, since as we discussed previously, the APO's focus was on controlling people to produce more, while the BSC's focus was on creating Value for clients, employees and shareholders, through of the systems or the business model.
(10) Regularly in APO strategic initiatives are isolated from objectives, goals and controls, while in BSC strategic initiatives should be prioritized according to their contribution to the achievement of the objectives, goals, resources and budgets required for their execution. Each of the determined and prioritized strategic initiatives are operationalized based on implementation plans (which include: activities, controls, dates, managers, resources, etc.), in addition to each strategic initiative or project, has a series of goals and KPIs to systematically monitor their impact and effectiveness in executing the strategy, achieving results and creating Value for clients, employees and shareholders.
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iii) Alignment –change of necessary paradigms:
Five fundamental paradigm shifts are discussed regarding Alignment
Strategic of the Organization, which are:
(11) The APO fragments the performance of the system by defining isolated and unrelated departmental goals and objectives, each department defines goals in the direction it believes to be correct, but in many cases, these are in the opposite direction from those of other departments, thus creating destruction of value. At BSC we need a systemic, integrated or cross-functional approach to this definition of goals, based on the expected results in the system and not based on personal or departmental positions. The performance of the system is superior to the performance of each department. This level of Alignment of objectives and goals is one of the great and profound differences between APO and BSC, which impact on the achievement of Organizational objectives.
(12) Although the birth of APO was for the control of people's performance, since it does not use any methodology for aligning and linking objectives, the definition of personal goals is isolated and disconnected from the requirements of the system and other areas or departments. The BSC requires a clear linking of horizontal and vertical goals and objectives (systems and processes) (people at all levels) to guarantee a cause-effect contribution of systems, processes and people for the achievement of Organizational goals.
(13) In APO, daily work is seen as operational and disconnected from strategic objectives and goals (strategy is one thing and people's work is another), while in BSC the annual, quarterly, monthly and daily activities of People and areas must be fully connected or aligned to the achievement of objectives and goals. This level of alignment makes the activities that a person develops in her daily work are linked directly to the strategy and achievement of personal goals and objectives. This process of linking daily activities with personal objectives and goals, demands a new role from the bosses, a role of true "tutors or accelerators" of the performance of their subordinates.
(14) Because in APO there is a lack of alignment (cause and effect) between the performance of people and the achievement of strategic business objectives, it is that the performance of people is different from the performance of processes, the system and Organization. The BSC requires total alignment between the Organization's vision, objectives, goals, and resources, and these, in turn, with the performance of the departments, processes, and people, through a cascade process of linking that we call synchronization (horizontal) and deployment (vertical) of the strategy. Due to this complete link between the strategy and the performance of people, processes, departments and the organization, it is that at BSC we say that: “in order to achieve the strategy, the work of all people is required,of all levels, every day. " This cause-effect linking process contributes to performance optimization, by ensuring true synchronized performance and the achievement of shared responsibility at all levels of the Organization. Sometimes this level of alignment goes beyond the Organization's own borders and integrates suppliers, partners, intermediaries and key customers towards the achievement of a common strategy for all, a true "convergent supply chain", in search of results. for all its key players and to create value for customers in the end.through ensuring true synchronized performance and the achievement of shared responsibility at all levels of the Organization. Sometimes this level of alignment goes beyond the Organization's own borders and integrates suppliers, partners, intermediaries and key customers towards the achievement of a common strategy for all, a true "convergent supply chain", in search of results. for all its key players and to create value for customers in the end.through ensuring true synchronized performance and the achievement of shared responsibility at all levels of the Organization. Sometimes this level of alignment goes beyond the Organization's own borders and integrates suppliers, partners, intermediaries and key customers towards the achievement of a common strategy for all, a true "convergent supply chain", in search of results. for all its key players and to create value for customers in the end.value for customers.value for customers.
(15) The training and development of competencies (knowledge, skills and behaviors) of people in APO is detached from the strategy and is administered in an operational way by a personnel or human resources department. At BSC training and skills development is directly linked to the achievement of strategic objectives and goals, to ensure that investment in training is not an expense, but a true creation of human capital, understood the concept of human capital, as "The impact of people's actions and investments in development on business results." Since in APO, there is no link between staff development and strategy, we refer to this as a “human resources out” model,While since the BSC demands complete alignment of the development of competencies, with the achievement of the strategic objectives and business results, we call it as a model of "human resources in".
iv) Execution - change of necessary paradigms:
Five fundamental paradigm changes are discussed, regarding the creation of a Culture of Execution, which are:
(16) In APO, the achievement of objectives and the review of strategic plans are regularly carried out once a year, at the end of it, thus having a great learning cycle, management after the fact, based on things or events that have already they occurred, a true "rear-view management." This goal review coincides, in many cases, with the process of reviewing personal goals or evaluating individual performance. The BSC requires consistency, monitoring and leadership, to develop a systematic review of the achievement of the proposed objectives and goals, in some cases, on an annual, semi-annual, quarterly, monthly, weekly and daily basis, a management before the fact, based on what can happen, a true "windshield management". This systematic review processes,analysis and adjustment of the strategy, is aligned with a mentoring, support or coaching process on the part of each boss with his subordinates, to guarantee that the goals are achieved at the end of the year.
(17) Since APO only understands the variation of goals, as a consequence of people, it is that its performance management model is based on reward and punishment (carrot and stick), while at BSC it is required to the understanding of the variables (information, materials, methods, machinery, people, external factors, etc.) that cause deviation from the goals in the systems and since the BSC is an evolution of the Total Quality Administration (ACT) is requires an Organizational learning process, which allows Planning, Doing, Verifying, and Acting (PHVA), a true scientific method of learning. This learning is presented in two ways, operational learning and strategic learning. The first is based on the fact that each area is measuring,analyzing and improving their own indicators (this type of review is regularly conducted weekly, biweekly or monthly), while the second is based on the validation of the strategic hypotheses raised in the planning process and the study of the impact of the external variables (political, social, economic, etc.), in the achievement of organizational results (this type of review is regularly conducted every three, four or six months and annually).in achieving organizational results (this type of review is regularly conducted every three, four or six months and annually).in achieving organizational results (reviews of this kind are conducted regularly every three, four or six months and annually).
(18) In APO culture is non-existent, something that cannot be seen or touched, while in BSC it is necessary for the achievement of objectives and the development of a consistent culture of strategy execution, control and modify, the organizational culture, based on values and on those behaviors of business leaders, critical to the achievement of Objectives and Goals. BSC seeks a modification of culture, via "modeling of people's behavior".
(19) The use of information in APO is circumstantial and only when the achievement of the results is reviewed at the end of the year. At BSC information is the essential component for the control and management of the strategy. At BSC we refer to "focused information." By focused information we mean: all that "critical information" that I must have on one page, which allows me to "make decisions". The key is that the information must allow us to take action (actionable information): use of traffic lights (minimum, acceptable, outstanding performance), data analysis, trends and comparison of variables, cascade analysis of causes (cause-effect performance trees), etc. Today at BSC we talk about "war rooms" or "decision-making rooms",that they are only physical places where all the visible information is found to carry out cause-effect analyzes (double and triple learning cycles) to understand why the results were not given. This makes the alignment between the information systems and the BSC critical to achieving business results.
(20) Given the multiple objectives and the disconnection of people's performance with the business goals given in APO and the fact that the strategy is more of the same, it is that if there are results, they are only "small increments ”. Given that at BSC, we seek differentiation and unique business models, as well as prioritization and focus on those critical variables only, it is that the achievement of results is “radical or dramatic”.
IV. Conclusions:
The most ironic thing is that many people, trainers and consultants who are in the design and implementation processes of BSC, have also not understood the profound changes in the way of managing a business that are required for BSC to be a reality and impact the results. They are true merchants of knowledge and unaware of the why and how of their birth and existence.
As we have seen throughout this article, just as species evolve to adapt to change, grow stronger, and survive, the strategy has also evolved and grown stronger. Despite the fact that the planning frontier has moved and expanded from the growth of production (APO), towards the optimization of operations and financial resources (IO + financial control), then towards the quality of operations (hoshin) and finally, towards the differentiation and creation of Value for clients, shareholders and employees (BSC), even in many of the Universities and Business Schools they continue to teach the old planning concepts, based on APO paradigms. This blurring of business schools causes a real confusion of concepts,which is being taken advantage of by the merchants of knowledge. The most ironic thing is that many people, trainers and consultants who are in the design and implementation processes of BSC, have also not understood the profound changes in the way of managing a business that are required for BSC to be a reality and impact the results. They are true merchants of knowledge and unaware of the why and how of their existence.
We have discussed 20 paradigm changes in planning, necessary to bring the strategy to results, which are some of the basic foundations of the conception and development of the BSC. Our purpose is to clarify and demystify the “false prophets”, who make planning and the BSC a business. This ignorance is causing real destruction in Organizations, since as Peter Drucker says "people only know, what they know" and until something else is known about the BSC, we will not see the true potential that this tool has, the true creation of Value for shareholders, clients and employees.
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