Linking Corporate Strategy with Execution through Management Tools
“Baidu has always believed that the Balanced Scorecard (“BSC”) is not just a performance management tool used to measure operating results; it is also a universal management tool which can be used to manage day-to-day business operations. Baidu hopes that the BSC shall become an important management tool linking its corporate strategy with business execution: at the front-end, it is closely tied to the formulation of corporate strategy while at the back-end, it is integral to the business execution of each functional unit. By doing so, the Company is ultimately able to ensure the consistency in the actual strategy execution, thus realizing the value BSC has to play in performance management.”
— Mr Gu Ming, Director of Business Analysis Department
Baidu (NASDAQ code: BIDU) is the largest Chinese search engine in the world. It was founded by Mr. Li Yanhong and Mr. Xu Yong at Zhongguancun, Beijing, in January 2000. The core value of Baidu is “Simple and Reliable”. Accordingly, since its establishment, Baidu has set its corporate mission as “Enabling people to find the information they seek in the fastest and most convenient way”.
The Company lives by its philosophy of being “user-oriented”, and continuously responding to the changing needs of netizens by introducing a large variety of products around the search engine. These include functional search capabilities based on internet search engine, online community search capabilities (mainly online bulletin board - “Tieba”), vertical search capabilities in relation to different geographies and industries, MP3 search capabilities, etc., covering almost all aspect of Chinese online search market. Currently, Baidu’s market share of China’s online search stands at 70%, according to independent research statistics.
In order to drive the development of millions of small to medium-sized websites in China, Baidu leveraged on the advantage of ultra-high internet traffic over its platform to build the largest online network alliance in the world, bringing together all types of high quality websites. This enabled Baidu to substantially increase online coverage for companies seeking to do promotions, as well as market their brands, through its search engine. At the same time, all these individual websites are able to benefit from the support of the alliance family to identify more opportunities to survive and thrive.
On 5 August 2005, Baidu was listed on the NASDAQ. On the same day, it became the brightest new star in the global capital markets for that year, and went on to become the first Chinese company to be a NASDAQ constituent stock. Its consistent market performance over the years, coupled with excellent operating results and reliable returns, made the stock a proud representative of Chinese enterprises’ latent value. In the second quarter unaudited financial report announced in July 2012, Baidu made total revenue of RMB 5.456 billion, or an increase of 59.8% over the same period in prior year; its net profit amounted to RMB 2.77 billion, or an increase of 69.6% over the same period in prior year.
Mr. Gu Ming joined Baidu in 2010. Currently he is the Director of Business Analysis Department, with responsible for strategic planning and business analysis.
Optimizing Performance Management Tools in Tandem with Corporate Development
During the first decade (2000-2009) of Baidu’s development, the Company was a single business enterprise focusing on the search engine. All business sub-segments were developed around the search engine. Under such a model, execution capability was of paramount importance. It was the Company’s key success factor.
During those ten years, Baidu developed a set of KPIs that was used in its performance management. In order to win in the cut-throat competitive environment, the team had to execute faster and better than others in the marketplace. Consequently, performance targets were formulated on quarterly, monthly and even daily basis. These targets were then allocated to the respective teams to execute, and their performance timely monitored. Such a result-oriented style of performance management had served the Company well, driving its rapid rise to become the number one Chinese language search engine. By 2010, Baidu’s unaudited profit before tax was already RMB 4 billion.
In the Company’s second ten years (2010-2019), while maintaining its search engine business, Baidu began to embark on the route of business diversification. In steering towards a multi-dimensional business or products company, a lot of analyses have to be carried out and decisions made at the strategic level. These decisions are then passed down the hierarchy to each business unit or functional department to implement. This model gave rise another set of challenges. How should the Company appraise the performance of each business unit? Simply using a set of KPIs in performance management, like what they did in the last decade, can no longer satisfy the needs of the current scale of business and future development of the Company. Baidu therefore introduced the BSC management tool to support its next era of development.
Under this new methodology, the previous KPIs now form part of the BSC key indicator database. The Company starts its planning process by first determining, as exhaustive as possible, indicators that should go into the BSC database based on its corporate strategy. Thereafter, it will select, from the aforesaid database, results-oriented indicators that are core to Baidu’s business - these will be the KPIs that the teams should be accountable for. In order to ensure completeness of their execution, the Company adopted a top-down approach by decomposing these indicators at the corporate level and assigning them to each business unit or functional level. The objective is to ensure that all indicators are assigned to at least one BSC pictorial card of any business unit. At the same time, the management of the Company will also study key indicators proposed by the teams on the ground. Once these indicators are deemed suitable, they will also be decomposed and assigned to working levels as described above.
Innovation in Developing Performance Indicators that Suit the Unique Needs of the Company
In implementing the BSC, Baidu has made innovative adjustments to the normal scheme of things in order to suit the unique circumstances of the Company. Mr Gu shared his experience on how to design BSC indicators in order to forge collaboration between different departments and business units:
Baidu’s business model and organization structure determined the importance of interdepartmental collaboration. The Company’s business model begins with having a product available to internet users, like the publicly accessible search engine (www.baidu.com). Leveraging on the user base, the Company can then roll out products for clients, such as advertisements on web pages. Sales activities are organized around these business products at the same time. The generation of revenue is understandably the result of interdepartmental collaboration. Moreover, Baidu’s organization structure is not designed around business units, but rather, it was organized in a functional matrix structure. Hence, when the Company commissions a project, many departments need to be involved and coordinated. For example, when mobile cloud service was launched as a strategic initiative, the project team itself cannot accomplish the mission standalone. Other support teams such as technology, product, marketing and corporate communications, legal, government relations as well as public relations all need to be involved both at the strategic and execution levels. Another example is the internationalization initiative. Internationalization does not only mean launching products overseas. There were many other aspects that the Company needed to consider, such as, when Baidu launched a product in a certain foreign country, one of the challenges was how to ensure that the product and its related business processes were suited to the legal and regulatory environment of that country. This required the joint efforts of other departments such as the legal, marketing and corporate communications teams.
When Baidu designed the BSC indicators, it adopted an integrated approach of vertical and horizontal decomposition of indicators. On vertical front, the Company decomposed its corporate goals, strategy and plans, and assigned them to each respective department; on the horizontal front, the Company disintegrated the indicators and assigned them between the relevant departments. Under the horizontal approach, the Company ascertained the accountability, corresponding plans, touch points and deliverables, etc. of each department, developed granular targets and assigned them to their respective BSC pictorial cards. This method highlighted the impact of inter-departmental coordination, ensured the consistent understanding of each department’s objectives, and enabled all departments to work jointly towards a common goal.
Achieving Strategic Goals through Closed-loop Performance Management System
Baidu’s BSC tool is a closed-loop comprising four key cornerstones: (1) strategy development; (2) project planning; (3) project execution; (4) monitoring and evaluation, which then feeds back to strategy development.
- Strategy development. When a company reached a certain scale of business, and is in a healthy stage of development, BSC becomes a powerful tool that can help the enterprise develop sustainably for the long-term.
- Project Planning. The tool will help to make a company’s strategy realizable, i.e. turning its strategy into executable milestones. For instance, when a company sets its strategic goal as increasing its revenue forty-fold in ten years, it is a very fuzzy concept. To make this goal realizable, the management must be able to infuse this into its plans. This will in turn determine how much investment the company must make in a given year, how much output it must target to achieve, how to measure its performance, how the company set its product standards, how to operate and maintain its products, how to execute its sales activities, as well as how to set sales targets. All these become milestones and projects that the company should develop.
Taking Baidu’s annual planning as an illustration, the Company usually convenes its three-year strategy planning meeting in the fourth quarter of each year. That means that in October 2012, the Company will start to develop its detailed plans for the next three years from 2013-2015. This will cover rolling plans for the projects and initiatives that the Company will undertake. During this session, Baidu will go into details of the plans for the upcoming year and determine the mission of each department, the ownership and accountability for each project, etc. In terms of adjustments to the plans, the Company will typically perform a quarterly evaluation and make the necessary revisions.
- Project execution. In the process of execution, Baidu will incorporate the relevant KPIs from the BSC database as a measure of the standard of execution.
- Monitoring and evaluation. The Company will track, monitor, analyse and adjust the execution of the plans based on specific circumstances of the business. Through this process, the Company is able to promptly revise the corresponding strategy and plans, such that it is on track to meet the overall strategic goals.
Critical Success Factors in Implementing Performance Management System
The four critical success factors that enabled the BSC management tool to create such a positive impact on the organization are summarized as follows:
- Degree of understanding of the BSC by the management team. The perspectives of Baidu’s management team in understanding the BSC and its importance fundamentally decide the outcome of the project execution. This includes whether the projects can be executed smoothly and whether they achieved the desired results. As Mr. Gu explained: “In this regard, I believe Baidu has done very well. Everyone at all levels within the organization has placed a great deal of importance in performance management. Particularly in the past one year, their understanding the contents of the performance management system has progressively deepened. We are also trying out more new methodologies and tools to continuously improve the performance management system of the Company.”
- Effective methodology and tools. Baidu is a very large-size company with almost 18,000 employees and annual revenue in the league of tens of billions of Renminbi. Its mode of operations is also very sophisticated. Hence, implementing performance management system cannot depend on merely the words of the leadership. It has to be supported by the use of a set of management tools, encompassing business processes, policies and procedures, that is complementary to the Company’s organization structure.
- Healthy and stable business foundation. A healthy and stable business foundation is conducive to effective planning, implementation and execution of the performance management tools. It is only when a company has developed to a certain stage of maturity or complexity can the value of BSC be manifested. If the business of a company is very simple, then there is no need to implement BSC because the costs, including communications and IT, would be too inhibitive such that they outweigh the benefits to be derived.
Moreover, effective implementation of BSC requires a relatively stable operating environment. If the market condition in which the company operates is very volatile, such as those businesses facing constant intensive competition, BSC may not be suitable. This is because the volatility in the market calls for much more frequent changes and adjustments to its business. This will affect the viability of BSC implementation.
- Effective execution. In addition to the factors described above, for a performance management system to be successful, a company needs an effective team to execute the initiative – the people factor. This includes the team’s capability itself, as well as its ability to understand and apply the concept behind the BSC. To a certain extent, the team also needs to have a holistic understanding of the strategic direction of corporate development. If performance management were to be regarded as a standalone project without being able to synchronize with the Company’s operating results and strategic plan, then this initiative would lose its significance. “At Baidu, we demand that the team should not only be familiar with the technical aspects of the performance management tools, but also that they should understand by what it means by achieving strategic objectives,” said Mr. Gu.
Future Work Plan
The deployment of the BSC tool at Baidu is categorized into two levels. The first level is defined as the E-Staff level, referring to the Company’s top management. This is the first group of leaders who will set the plans for the areas that they are responsible for, in accordance with the overall strategic goals. The second level is the director level. At this level, the mission for directors of core businesses will be determined. This is accompanied with detailed work plans, key targets to accomplish as well as monitoring KPIs. In essence, the Company takes the corporate strategic goals and breaks it down into executable missions, then assigns them down the hierarchy. Currently, the BSC tool is only deployed up to the director level.
At present, the value of Baidu’s BSC tool has only been partially exploited. There is still considerable room for further enhancement. Mr. Gu hopes that as the BSC tool is continuously being promoted and applied within the organization, it will eventually become an important linkage between the corporate strategy and its execution. This means that at the front-end, it is closely tied to the formulation of corporate strategy while at the back-end, it is integral to the business execution of each functional unit. By doing so, the Company is ultimately able to ensure the consistency in the actual strategy execution, thus realizing the value BSC has to play in performance management.