Alignment is a key factor in effective implementation of strategy. Most large organizations are divided into business units which are out of sync and work at cross purposes. The challenge is to coordinate the activities of these units and leverage their skills for the benefit of the organization as a whole. Kaplan & Norton call this alignment on their book “Alignment: Using the Balanced Scorecard to Create Corporate Synergies.”
“Most organizations attempt to create synergy, but in a fragmented, uncoordinated way,” Robert S. Kaplan and David P. Norton.
By aligning the activities of its various business and support units, an organization can create additional sources of value in various ways.
- Financial synergies can be generated through centralized resource allocation and financial management. Value can also be created if corporate headquarters can operate internal capital markets better than external market mechanisms and share knowledge across business units, in a manner that would be difficult if the different units were independent entities.
- Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Corporations can leverage their multiple products and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that less diversified and more focused organizations cannot match. Companies can also generate value by delivering a value proposition consistently throughout their decentralized units. Cross selling to specific customers can also generate value.
- Internal process synergies can be created by generating economies of scale in activities such as procurement, logistics, information technology and infrastructure. Sharing processes across units generates economies of scale in such activities and helps cut costs. Centralized resources having specialized expertise and knowledge in how to operate a key process or service can be leveraged. The sharing of common philosophies, programs and competencies across business units can also generate significant benefits. Expertise sharing can reduce the time to respond to customer needs and make the company better equipped to exploit the emerging opportunities in the business environment.
- Learning and growth synergies can be generated by developing and sharing critical intangible assets including people, technology, culture and leadership. Corporate Headquarters can put in place effective processes for developing intangible assets and promote the sharing of knowledge and best practices throughout all its business and support units. New ideas can rapidly spread across the enterprise and be assimilated by the business units in a manner that would be difficult, were they independent entities. Growing leaders faster than competition can generate competitive advantage.
There are different ways of achieving alignment. One way is to start at the top and then cascade down. Another way is to start in the middle, at the business unit level, before building a corporate scorecard and map. Some companies launch an enterprise wide initiative right at the start. Others conduct a pilot test at one or two business units before extending the scope to other enterprise units.
Alignment has four components: strategic fit, organization alignment, human capital alignment and alignment of planning and control systems. Strategic fit exists when the internal performance drivers are consistent and aligned with the desired customer and financial outcomes. Organization alignment explores how the various parts of an organization synchronize their activities to generate synergy. Human capital alignment is achieved when employees goals, training and incentives become aligned with business strategy. Planning and control systems alignment exists when management systems for planning, operations and control are linked to strategy.
As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious attention, combining both leadership and management processes to describe and measure the strategy, to align internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and targeted competency development programs and finally, to align existing management processes, reports and review meetings, with the execution, monitoring and adapting of the strategy.”
- Managing Alignment as a Process (Harvard Business School)