To create synergy, we require more than a concept and a strategy. The enterprise value proposition defines the strategy for value creation through alignment, but it doesn't describe how to achieve it. The alignment strategy must be complemented with an alignment process. The alignment process, much like budgeting, should be part of the annual governance cycle. Whenever plans are changed at the enterprise or business unit level, executives likely need to realign the organization with the new direction.
The alignment process, of necessity, should be cyclic and have a top-down bias. The targeted corporate synergies should be defined at the top and realized in the business units. Just as the CFO coordinates the budgeting process, a senior executive should coordinate the alignment process—a responsibility for the Office of Strategy Management (OSM).6 The annual planning process provides an architecture around which the alignment process can be executed. Following are the eight alignment checkpoints for corporate, business units, and support units of a typical multi-business organization to hit during the annual planning process.
- Enterprise value proposition: The corporate office defines strategic guidelines to shape strategies at lower levels of the organization.
- Board and shareholder alignment: The corporation's board of directors reviews, approves, and monitors the corporate strategy.
- Corporate office to corporate support unit: The corporate strategy is translated into those corporate policies that will be administered by corporate support units.
- Corporate office to business units: The corporate priorities are cascaded into business unit strategies.
- Business units to support units: The strategic priorities of the business units are incorporated in the strategies of the functional support units.
- Business units to customers: The priorities of the customer value proposition are communicated to targeted customers and reflected in specific customer feedback and measures.
- Business support units to suppliers and other external partners: The shared priorities for suppliers, outsourcers, and alliance partners are reflected in business unit strategies.
- Corporate support: The strategies of the local business support units reflect the priorities of the corporate support unit.
Using these eight checkpoints as a point of reference, an organization can measure and manage the degree of alignment, and hence the synergy, being achieved across the enterprise. Organizations that master this process can create competitive advantages that are difficult to dislodge.
The company embarked on its first major diversification program in thirty years.
Although it is not strictly part of organizational alignment—the primary focus of this book—the enterprise must also align its employees and management processes with the strategy. Having aligned and integrated strategies at all organizational units yields little if employees are not aware of the strategy and are not motivated to help their organizational unit implement it. Enterprises must have active policies to communicate, educate, motivate, and align employees with the strategy. They must also align their ongoing management processes—for resource allocation, target setting, initiative management, reporting, and reviews—with the strategy.
Case Study: Sport-man Inc.
We illustrate many of the alignment issues with a disguised case study, Sport-Man Inc. (SMI). The company founded in 1925 to manufacture and market men's work boots. Its early success was attributed to a classic waterproof, lace-up boot that became the standard for workers in construction, farming, and other professions that require strenuous outdoor labor. SMI built a successful national sales base from its headquarters in Massachusetts by establishing channels with large department and specialty shoe stores.
During World War II, SMI received a large contract from the U.S. Army that put its combat boots on the feet of more than two million soldiers. Its success carried into the postwar boom economy. Building on the Sport-Man brand, the company added a line of hiking boots and became more aware of opportunities for growth in the leisure market. In the 1960s, it added a line of men's casual shoes sold through company-owned retail stores. The 1970s saw a diversification into men's clothing, a new line of business (LOB) that focused on outdoor clothing for work or play. The clothes soon became synonymous with the "hunter look." Capitalizing on the growth of suburban malls, SMI soon had more than one hundred retail stores, mostly in the Northeast. During the 1980s, it took the product nationwide, with outlets in more than four hundred malls.
Growth slowed in the mid-1990s. Sport-Man was a great brand, but its market for men's outdoor shoes and clothing had become saturated. A comprehensive strategy review revealed that the Sport-Man brand could be extended to other apparel lines. Furthermore, its retail footprint in major malls throughout the United States provided an excellent channel for opening new stores for the new product lines. The new retail stores could be located in space contiguous to existing Sport-Man stores to make for convenient cross selling opportunities with existing customers. Finally, SMI's competency, developed over the forty-year postwar period, in sourcing products from factories in Europe and Asia would allow rapid growth in its new apparel lines, as well as permit significant cost economies.
Thus, the company embarked on its first major diversification program in thirty years by broadening its offerings under the Sport-Man brand. The specifics of the strategy were as follows:
- Add two new lines of business to complement the two current lines of men's shoes and men's outdoor clothing:
- A new LOB of men's casual clothing.
- A new LOB focused on sporting goods: clothing, athletic shoes, and equipment.
- Achieve distribution synergies by sharing real estate in the 400 malls that SMI already occupies.
- Share customer lists and credit cards with the new businesses.
- Share the company's competency in product purchasing.
- Share key management skills with the new LOBS.
Financially, SMI had dual objectives: Maintain market share in its core outdoor shoes and clothing product lines and grow the new LOBs to a similar share over the next five years. SMI would harvest cash from its mature businesses to invest in the growth of the new businesses.
SMI's executives recognized that this strategy required extraordinary alignment and teamwork throughout the business lines. They wanted customers to view each brand as a stand-alone business, but they wanted the business units to cooperate by redistributing cash among them and sharing customer lists, credit cards, real estate, vendors, technology, key employees, and knowledge. With the exception of real estate, current businesses had been allowed to manage themselves independently, so the teamwork required by the new strategy would be a significant change.
SMI management turned to the Balanced Scorecard to help create the necessary organization alignment in the following ways:
- Clearly define corporate's strategy for each of the business units and, in particular, how they would work together to create synergy.
- Align the business units with the corporate strategy.
- Align the support units with the business units.
- Create a governance process to ensure that alignment is perpetually maintained.
Figure 1-5 shows the first step in this process: the creation of the enterprise scorecard, which describes how synergy will be created. Financial synergy at SMI will be achieved by using the surplus cash flow from the mature businesses to invest in the growth of the new businesses. The corporate measure, sales growth per store, emphasizes that existing stores must participate in normal industry growth while the new stores experience targeted revenue growth. The corporate scorecard also measures the amount of cash flow generated and invested.
The customer synergy comes from sharing SMI's current customer base with the new businesses. The corporate customer measure, percentage of revenue from common customers, monitors this objective directly, and annual growth in sales per customer emphasizes the importance of cross-selling across product lines.
SMI expected three sources of internal process synergies: (1) using a dominant product category to attract the customer into the store (measured by the category market share); (2) sharing real estate in malls by building clusters of SMI stores and brands (measured by sales per square foot and multi-store traffic); (3) purchasing economies of scale (measured by returns and order fulfillment).
Finally, learning and growth synergies would be achieved by rotating experienced professionals to key jobs in the new companies (key staff rotation), by sharing computer systems (common systems versus plan) and knowledge (best-practice sharing), and, finally, by creating full organization alignment (alignment index).
This enterprise scorecard captures the essential elements of the overall strategy. It provides SMI with the top-down guidance from corporate to the business and service units that needs to be reflected in their strategic planning.