This is the second article in a 2 part series. Last time we looked at how Southwest Airlines and other successful companies carefully target a well defined market in order to eventually dominate it. By focusing on a winnable market they are able to concentrate all of their limited resources thereby increasing their chances of success.

This time we look in some detail at how Southwest Airlines uses the Balanced Scorecard to execute strategy. Note how simple their Balanced Scorecard is. That’s one of the many reasons it is so widely used by large and small companies. Indeed, simple can be powerful.

Strategy

Southwest Airlines achieves its desired financial outcomes by providing its customers with what they want most and by keeping costs down. These objectives are mutually supportive in that they are both heavily impacted by the speed at which their flights are turned around on the ground. Fast turnaround removes many of the reasons that flights are delayed and keeps the planes in the air a greater percentage of the time thus reducing the required number of aircraft in the fleet.

Let’s step back for a moment and consider that a strategy is in fact a hypothesis. The way we play this game of business (and this applies equally to nonprofits) is by developing a market approach based on research, experience and gut. We combine these into a theory that says if we do certain things our customers will respond in a certain way. This theory is our strategy. Yet no strategy is ever perfect. None is ever executed exactly as planned nor does it ever produce the exact results we expect. And the world around us is constantly changing. Even when we identify strong causal links we need to be on the lookout for how changing external conditions affect our outcomes.

So strategy is a plan-do-measure-learn-plan-do-measure-learn etc. continuous cycle. Michael Gerber in the book The E-Myth describes this process as “Innovation, Quantification and Orchestration”. It’s a never ending learning and development process where we try something, measure our success, lock in what works, change what needs changing and then continue doing, measuring and learning. For optimal strategy execution we need a tool that clearly lays out the major components of our big theory and provides a means to measure if we are actually doing what we said we would do and getting the results we thought we would get in the time frame we expected. Arguably the best tool to accomplish this is the Balanced Scorecard.

The Balanced Scorecard

The table below shows how Southwest Airlines deconstructed its strategy into a Balanced Scorecard. The left hand column is where Southwest lays out its primary Objectives (critical success factors) into the four Perspectives: (1) Shareholder, (2) Customer, (3) Internal Processes, and (4) Learning & Growth. This part is referred to as the Strategy Map. It may look a bit complicated with all the arrows but if you follow them carefully you’ll see how they walk you through the cause and effect components of the strategy.

The next columns show the Measures and Targets that Southwest uses to measure the execution of its strategy. The last column lists the broad Initiatives that are the special project areas within each Perspective that will most affect the successful execution of the plan. (Balanced Scorecard “official” terminology is capitalized in this discussion to identify it.)

 

The first thing a Balanced Scorecard does is to serve as a story board for the company to describe its strategy to key stakeholders – especially employees. The story can be told either from the top down or vice versa. I prefer bottom up. In this case, Southwest’s strategy story is that it will “align” (i.e. train and motivate) its ground crew to turn planes around quickly. By doing so more flights will be on time, which will increase revenue, and each plane will be spending more productive time in the air, which reduces cost and air fares. The end result is greater profitability i.e. revenues up faster than costs.

To track execution and outcomes, Southwest has chosen to Measure the % of ground crew trained and the % with stock options; minutes on the ground and % on-time departures; customer ranking in terms of low-price fares and the FAA ranking of on-time departures; and finally, plane lease cost, seat revenue and overall enterprise market value. You can also see from this example how the related Targets and supporting Initiatives are connected to the Objectives and Measures.

After the Balanced Scorecard is complete most companies tie budgets and compensation plans to it and then establish it as the basis of their monthly management meetings. The conversation centers on understanding the variance of actual results to targeted results for each Measure. By drilling down into the causes and implications of both positive and negative variances, a management team can keep focusing attention and effort on the company’s most important strategic issues, thereby making the most progress over time.

There are additional approaches and subtleties in a Balanced Scorecard that go beyond the scope of this article. And keep in mind that every Balanced Scorecard company has numerous operational measures that are critical to the proper functioning of the business, and some have process initiatives like Six Sigma and TQM that support the execution of the strategy and contain a host of measures within themselves. But the Balanced Scorecard is the unifying strategic process that aligns all of the other activities. As such it is the CEO’s most important tool and when used consistently as the core strategic management process it virtually assures achievement of the organization’s ambitious goals. Thus, in a company that uses the Balanced Scorecard fully and persistently, success is a question of how and when, not if.

Brian Kinahan of SUMMIT Performance Systems shows CEOs how to substantially increase profits along with team direction, productivity and morale by deploying a Balanced Scorecard, the world’s most successful strategy implementation tool. For additional information about the Balanced Scorecard and SUMMIT workshops, log on to www.summit-performance.com or call SUMMIT directly at 919-321-1474.