Numerous studies carried out in various companies have determined that the ability to execute a strategy is more important than the definition of the strategy itself. In other words, it is wrong to think that all you need to be successful is to have a proper strategy.
A survey carried out among business consultants indicated that only 10% of correctly formulated strategies were applied successfully.
What, then, is the reason why some organizations face problems when putting correctly formulated strategies into practice?
The strategies of organizations are increasingly dynamic and changing, however the tools to measure them are not.
In a predominantly industrial economy, companies created value from their material assets, which underwent a certain physical transformation. By 1982, tangible assets accounted for 62% of the market value of industrial organizations (according to a Brookings Institution study). Ten years later this proportion fell to 38%, while more current estimates indicate that tangible assets now represent between 10 and 15% of the market value of companies.
Taking into account the above, it can be understood that the creation of value in companies increasingly involves the management of strategies based on the knowledge displayed by the intangible assets of the company, such as relationships with customers, products and services. innovative, high-quality, effective operating processes, information technology, and also the capabilities, skills and motivations of employees.
During the times of companies in which tangible assets predominated, financial indicators were adequate to record investments in materials, property, facilities and equipment of companies. However, nowadays, when intangible assets are the most important source of competitive advantage, there is a need for tools that can describe knowledge-based assets and the value creation strategies that these assets generate.
Modern organizations require a new type of management system, designed to execute strategy, not tactics. Today, companies often operate through decentralized business units and teams that are much closer to the customer. It is in these organizations that it is recognized that competitive advantage comes more from knowledge, skills and intangible relationships created by employees than from investments in physical assets.
The application of the strategy requires that all employees, both in the business units and in the support areas, are aligned and linked to it. Likewise, due to rapid technological, competitive, and regulatory changes, the formulation and application of the strategy must be a continuous and participatory process. Today's companies require a language that allows them to communicate the strategy, as well as processes and systems that help them implement it and obtain information and feedback on it.
For a company to be successful, strategy must be a fundamental part of the daily work of all the components of the organization. Relying exclusively on financial indicators as a management system led companies to make many mistakes.
Financial indicators are late data, reporting on the consequences of past actions. Relying exclusively on financial indicators can lead to short-term behavior, sacrificing long-term value creation. What, then, are the appropriate indicators of future results? Obviously those that allow us to "measure the strategy".
The balanced scorecard (hereinafter BSC) or balanced scorecard is a tool to manage strategy, that is, a tool to deal with 90% of failures. The BSC complements traditional financial indicators with performance measurement criteria oriented to three additional perspectives: that of clients, that of internal processes, and that of learning and growth.
We must see the BSC not as a replacement for financial indicators but as their complement.
However, we can also consider the BSC as a new strategic management system. Used in this way, the BSC shows the deficiencies in traditional management systems, basically through their difficulty in relating long-term strategies with short-term actions. It is common to observe that many companies emphasize only short-term financial measures, not considering the long-term, a situation that often generates serious limitations in the development of strategies.
Contributed by: Sixtina Consulting Group. Smart solutions for business management
