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The Journal of Product Innovation Management, to run in 1997
By Robert S. Kaplin and David P. Norton
Boston: Harvard Business School Press, 1996
322 + xi pages $29.95
reviewed by John D. Trudel CMC
There are three audiences. The book will appeal first to the business schools. Certainly, anything that helps MBAs move beyond today’s fixation with the manipulation of financial abstractions and toward developing real competitive advantage would be welcomed. Process consultants will cherish this book. Indeed, the cover carries a sound-bite from the czar of reengineering and downsizing, Michael Hammer, who terms it, "A landmark achievement." Finally, those at high levels in corporate America will read the book, if only for self-defense.
If I had to summarize this book in one sentence, I would say it was "An accountant’s approach to innovation and strategy." Actually it was written by an accounting professor and a consultant who specializes in performance measurement, one whose methods won an award from the Department of Defense. The Balanced Scorecard brings Harold Geneen’s or Robert S. McNamara’s detailed metrics into the 90s. The book’s touchstone is the Machine Age mantra, "If you can’t measure it, you can’t manage it."
So what is new, and what is different? The central metaphor, detailed in Chapter One and alluded to throughout the book, is the notion of a passenger visiting the cockpit of an airliner and being horrified at seeing that it contains only a single instrument. The pilot explains that on this flight he is "working on airspeed." He says that on previous flights he had managed altitude and gotten "pretty good at it."
When the passenger mentions that other things, like fuel quantity, might also be important, the pilot agrees. "You’re right; fuel is significant, but I can’t concentrate on doing too many things at the same time." He will concentrate on fuel once he "Gets to be excellent at airspeed."
The authors develop this metaphor, noting that the Machine Age (they call it the Industrial Age) used only one gauge to manage business, the infamous quarterly report. The conclusion, correct in my opinion, is that it is foolish to be managing a business in today’s world by using only financial controls that are anchored to an accounting model developed "centuries ago for an environment of arm’s length transactions between independent entities." They doubt that the reader would board an airliner with only one gauge in the cockpit. By extension, they suggest that one should not "board" corporations that use only one business metric.
The aircraft metaphor could be taken further, but, unfortunately, it is not. In real life, during the most crucial flight regimes -- landing, air-combat, etc. -- the pilot focuses his or her primary attention outside the cockpit. At the most crucial times, the gauges become secondary. During check rides (I am a qualified multi-engine instrument pilot), the emphasis is on system failures and emergencies, while routine flight is assumed and almost incidental. Autopilots can "fly the gauges" better than any pilot, but humans are expected to make custom interventions and intuit strategic decisions that go far beyond what information appears on the panel.
In any case, we learn that a pilot who uses a full panel is better than a pilot who flies by only one gauge. While no such pilots exist, the authors correctly note that many businesses have been killed or wounded by managers who put too much emphasis on pressure for short term financial performance. Today we have CEOs with nicknames like "Chainsaw."
"Why not just scrap the use of dysfunctional financial metrics?" you may ask. Why not just run your business well, and let the numbers take care of themselves? Perish the thought! The authors recoil from such fiscal heresy with an apocalyptic tale of an unnamed electronics company. This misguided firm made "breakthrough improvements" in operational parameters, only to see its stock price drop by 70%. The authors explain this "anomalous outcome" by saying that the transformed organization was so efficient that it had great gobs of expensive, unused capacity. I frankly tend to doubt that explanation. More likely it was a firm like a DEC, IBM, or Apple that missed a major market transition. Having the wrong products is the likely problem, though excess capacity may well be a symptom.
In any case, the book’s nirvana is The Balanced Scorecard (BSC), which measures financial, customer, internal, and innovation and learning perspectives. While many or most organizations already use non-financial metrics, the BSC is to be used strategically at all levels of the company. It is said to create a "shared model of the entire business." Perhaps.
However, when you work though the depth of detail, it is clear that a financial perspective still dominates. Chapter Four treats "customer perspective," but it is careful to pay homage to the need for profits. It mentions market share, segments, and the normal things, but is focused on enforcing "customer profitability." This metric presumably helps to ensure that the customers sought are the most profitable possible.
It brought to mind the unfortunate image of a Dilbert cartoon strip. The boss notes that 20% of the customers are causing 80% of the costs, and proposes eliminating them. "You mean the ones who actually use our products?" asks Dilbert. "Yes, plus those injured by unpacking them." Scott Adams may be caustic, but his point is valid. Some businesses have prospered by investing unreasonably to convert unhappy, demanding, lead customers into enthusiastic allies.
Likewise, the section on New Products contains what is, I think, a typically lethal, though seemingly reasonable flaw. The suggested scorecard demands a higher margin from new products than from the mature, existing products they replace. Thus did IBM cling to mainframes, DEC to minicomputers, and Tektronix to analog oscilloscopes, missing explosive new market opportunities. Thus did Cray Research go bankrupt. Thus did Apple fall. ( Interestingly, both firms were in the initial group study that led to the BSC. Metrics are a two-edged sword!)
Still, I, for one, would welcome the use of almost anything that helped get U.S. business past its fiscal fixation. Can the BSC really do this? It seems not.
On page 210, we get a report from the President of a firm that was an early implementer of BSC. He gave a presentation to a group of financial analysts who owned "up to 40% of our shares." So long as he spoke of plans and forecasts for future earnings, the analysts were on the edge of their seats. Unfortunately, when he spoke of plans for improved quality and customer response times, 90% left to make phone calls. The authors’ conclusion, "If financial analysts remain indifferent to measures of a company’s long term strategy, we are not optimistic that Balanced Scorecard reporting will become part of an organization’s communication program…" Too bad. It was a nice try.
Lack of acceptance by the financial community may not matter. TQM and reengineering failed in most cases, and still became major business trends. Certainly, BSC offers reasonableness, broad applicability, and quantification. It is bound to improve performance at some companies.
The authors, along with the rest of us, are struggling with a major challenge. The core problem is that while the Machine Age was about measurement, repetition, process, and routine, the Information Age is not. The Machine Age was about optimization, but the Information Age is about change, new opportunities, creative destruction, and ever increasing returns. The Machine Age was about control and predictability, but the Information Age is about ordered chaos.
In the new world, there is a lack of objective reality to measure. What matters more is what reality can be created though knowledge-based interaction with people and events. The winners are the leaders who intuitively envision and effectively ride the next wave. Bill Gates lost money on Windows for a decade, but he does not care. When Windows 3.0 finally worked, it was worth it all, and more. McCaw cellular was never profitable, but was sold to AT&T for billions. Motorola’s huge bet on Iridium is unlikely to be justified by any "scorecard," balanced or not.
Still, the business methods that "sell" have been the standard, generalized methods like BSC. Consultants and educators have a choice. Most try cookie-cutter process to help managers cope with disruptive changes by incremental, linear routine. The rest of us are like Naturopaths, Pilgrims, Explorers, or perhaps Shamans or Quantum Physicists who deal in individual, custom interventions for breakthrough results. The first group, being legion, makes far more money. Hence this book. If you liked reengineering, you will love BSC.
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