How strategy maps frame an organization's objectives: in an excerpt from their new book, two noted authors on corporate management outline how organizations can mobilize and sustain their intangible assets for value-creating internal processes.
The strategy literature is uncommonly diverse. Scholars and practitioners have very different frameworks for strategy and don't even agree on its definition. While "strategy maps"--to be discussed in this article--and Balanced Scorecards can be developed for any strategic approach, we base our approach on the general framework articulated by Michael Porter, a founder and outstanding leader in the strategy field. Porter argues that strategy is about selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace. The sustainable difference can be to deliver greater value to customers than competitors, or to provide comparable value, but at lower costs than competitors. He states, "Differentiation arises from both the choice of activities and how they are performed."
The Balanced Scorecard strategy map provides a framework to illustrate how strategy links intangible assets to value-creating processes. The financial perspective (Figure 1) describes the tangible outcomes of the strategy in traditional financial terms. Measures such as return on investment (ROI), shareholder value, profitability, revenue growth and cost per unit are the lag indicators that show whether the organization's strategy is succeeding or failing. The customer perspective defines the value proposition for targeted customers. The value proposition provides the context for the intangible assets to create value.
If customers value consistent quality and timely delivery, then the skills, systems and processes that produce and deliver quality products and services are highly valuable to the organization. If customers value innovation and high performance, then the skills, systems and processes that create new products and services with superior functionality take on high value. Consistent alignment of actions and capabilities with the customer value proposition is the core of strategy execution.
The financial and customer perspectives describe the desired outcomes from the strategy. Both perspectives contain many lag indicators. How does the organization create these desired outcomes? The internal process perspective identifies the critical few processes that are expected to have the greatest impact on the strategy. For example, one organization may increase its internal R & D investments and reengineer its product development processes so that it can develop high-performance, innovative products for its customers. Another organization, attempting to deliver the same value proposition, might choose to develop new products through joint-venture product partnerships.
The learning and growth perspective identifies the intangible assets most important to the strategy. The objectives in this perspective identify which jobs (human capital), which systems (information capital), and what kind of climate (organization capital) are required to support the value-creating internal processes. These assets must be bundled together and aligned to the critical internal processes.
[FIGURE 1 OMITTED]
The objectives in the four perspectives are linked together by cause-and-effect relationships. Starting from the top is the hypothesis that financial outcomes can be achieved only if targeted customers are satisfied. The customer value proposition describes how to generate sales and loyalty from targeted customers. The internal processes create and deliver the customer value proposition. And intangible assets that support the internal processes provide the foundation for the strategy. Aligning objectives in these four perspectives is the key to value creation and, hence, to a focused and internally consistent strategy.
This architecture of cause and effect, linking the four perspectives, is the structure around which a strategy map is developed (see Figure 2). Building a strategy map forces an organization to clarify the logic of how it will create value and for whom.
Creating value from intangible assets differs in several important ways from creating value by managing tangible physical and financial assets:
1. Value creation is indirect. Intangible assets such as knowledge and technology seldom have a direct impact on financial outcomes such as increased revenues, lowered costs and higher profits. Improvements in intangible assets affect financial outcomes through chains of cause-and-effect relationships. For example, employee training in total quality management (TQM) and Six Sigma techniques can directly improve process quality. Such improvement can then be expected to lead to improved customer satisfaction, which, in turn, should increase customer loyalty. Ultimately, customer loyalty leads to improved sales and margins from long-term customer relationships.
2. Value is contextual. The value of an intangible asset depends on its alignment with the strategy. For example, training employees in TQM and Six Sigma techniques has greater value for organizations following a low total-cost strategy than for one following a product leadership and innovation strategy.
3. Value is potential. The cost of investing in an intangible asset represents a poor estimate of its value to the organization. Intangible assets, like employees trained in statistical quality control and root cause analysis, have potential value but not market value. Internal processes such as design, production, delivery and customer service are required to transform the potential value of intangible assets into tangible value. If the internal processes are not directed at the customer value proposition or financial improvements, then the potential value of employee capabilities, and intangible assets in general, will not be realized.
4. Assets are bundled. Intangible assets seldom create value by themselves. They do not have a value that can be isolated from organizational context and strategy. The value from intangible assets arises when they are combined effectively with other assets, both tangible and intangible. For example, quality training is enhanced when employees have access to timely, detailed data from process-oriented information systems. Maximum value is created when all the organization's intangible assets are aligned with each other, with the organization's tangible assets and with the strategy.
Strategy Is a Step in a Continuum
The overarching mission of the organization provides the starting point by defining why the organization exists or how a business unit fits within a broader corporate architecture. The mission and the core values that accompany it remain fairly stable over time. The organization's vision paints a picture of the future that clarifies the organization's direction and helps individuals understand why and how they should support the organization.
In addition, the vision sets the organization in motion, from the stability of the mission and core values to the dynamics of strategy, the next step in the continuum. Strategy is developed and evolves over time to meet the changing conditions posed by the external environment and internal capabilities.
Most organizations already have mission and vision statements. While the exact definitions of mission and vision can vary, the following provide helpful guidelines:
Mission. A concise, internally focused statement of the reason for the organization's existence, the basic purpose toward which its activities are directed, and the values that guide employees' activities. The mission should also describe how the organization expects to compete and deliver value to customers.
Vision. A concise statement that defines the mid-to long-term (three- to 10-year) goals of the organization. The vision should be external and market-oriented and should express--often in colorful or "visionary" terms--how the organization wants to be perceived by the world.
Mission and vision statements set the general goals and direction for the organization. They help shareholders, customers and employees understand what the company is about and what it intends to achieve. But these statements are far too vague to guide day-to-day actions and resource allocation decisions. Companies make their mission and vision statements operational when they define a strategy for how the mission and vision will be achieved.
Strategy Consists of Simultaneous Complementary Themes
In developing the internal perspective of their strategy map, managers identify the processes that are the most important for their strategies. Companies following a product leadership strategy would stress excellence in their innovation processes; companies following a low total-cost strategy must excel at operating processes; and companies following a customer solutions strategy will emphasize their customer management processes.
But even with an emphasis on one of the four clusters of internal processes--operations management, customer management, innovation and regulatory/social--companies must still follow a "balanced" strategy and invest in improving processes in all four clusters. Typically, the financial benefits from improvements to the processes in the four internal perspective themes occur over different time periods.
Cost savings from improvements in operational processes deliver quick benefits (within six to 12 months). Revenue growth from enhancing customer relationships accrues in the intermediate term (12 to 24 months). Innovation processes generally take longer to produce revenue and margin improvements (say, 24 to 48 months). The benefits from regulatory and social processes also typically take longer to capture as companies avoid litigation and shutdowns, and enhance their image as an employer and supplier of choice in every community in which they operate.
There are literally hundreds of processes taking place simultaneously in an organization, each creating value in some way. The art of strategy is to identify and excel at the critical few processes that are the most important to the customer value proposition (italics are the magazine editor's). All processes should be managed well, but the few strategic processes must receive special attention and focus since these create the differentiation of the strategy.
The selected strategic processes should also be drawn from all four clusters. Every strategy should identify one or more processes within operations management, customer management, innovation and regulatory and social. In this way, the value creation process is balanced between the short and long term. This ensures that the growth in shareholder value will be sustained over time.
The critical few strategic processes are often organized as strategic themes. Strategic themes allow organizations to focus actions and to provide a structure for accountability. Strategic themes are the building blocks around which the execution of strategy occurs.
Consider an example. Seven strategic themes were selected by a high-tech manufacturing company. Its strategy was to broaden the value proposition from a narrow product quality focus to one that delivered tailored product configurations capable of solving customer problems. At the heart of this strategy were two customer management themes--solution selling and relationship management. These themes provided the foundation of the new customer partnership.
[FIGURE 2 OMITTED]
Two operations management themes--just-in-time production and flexible manufacturing--ensured that the products could be configured and delivered within the short time horizons required by the customer. Two innovation themes--internal product development and technology partnerships--provided two balanced sources of the technical know--how required to stay at the leading edge. The regulatory and social component of the strategy--build the community--reflected the company's desire, as the community's dominant employer, to help strengthen the institutions that influenced the quality of life of its employees. Thus, the company reduced the complexity of its strategy into seven strategic themes, each connected logically to the customer value proposition and financial outcomes.
Learning and Growth: Strategic Alignment of Intangible Assets
The fourth perspective of the Balanced Scorecard strategy map, learning and growth, describes the organization's intangible assets and their role in strategy. We organize intangible assets into three categories:
* Human capital: The availability of skills, talents and know-how required to support the strategy.
* Information capital: The availability of information systems, networks and infrastructure required to support the strategy.
* Organization capital: The ability of the organization to mobilize and sustain the process of change required to execute the strategy.
Whereas all organizations attempt to develop their people, technology and culture, most do not align these intangible assets with their strategies. The key to this alignment is granularity--to move beyond generalities such as "develop our people" or "live by our core values" and focus on specific capabilities and attributes required by the strategy's critical internal processes. The Balanced Scorecard strategy map enables executives to pinpoint the human, information and organization capital required by the strategy.
The Balanced Scorecard: Translating Strategy into Action
The strategy map describes the logic of the strategy, showing clearly the objectives for the critical internal processes that create value and the intangible assets required to support them.
The Balanced Scorecard translates the strategy map objectives into measures and targets. But objectives and targets will not be achieved simply because they have been identified; the organization must launch a set of action programs to enable the targets for all the measures to be achieved.
The organization must supply scarce resources--people, funding and capacity--for each action program. We refer to these action programs as strategic initiatives. For each measure on the Balanced Scorecard, managers must identify the strategic initiatives needed to achieve the target. The initiatives create results. Hence, the execution of strategy is managed through the execution of initiatives.
The action plans that define and provide resources for the strategic initiatives must be aligned around the strategic themes, and must be viewed as an integrated bundle of investments instead of as a group of stand-alone projects. Each strategic theme should have a self-contained business case.
Figure 2 shows an action plan and business case for the "quick ground turnaround" theme of a low-cost airline. This theme was core to the low total-cost customer value proposition. It would contribute to on-time departures and arrivals that would increase satisfaction among customers, leading to future revenue increases. It also would enable the company to reduce costs by operating with fewer planes and flight crews than competitive airlines, so that it could offer lower fares to attract price-sensitive customers while still earning profits and a return on investment above its cost of capital.
Intangible assets were required to enable the strategy: new skills for the ramp agent, an improved information system and the alignment of the ground crew to the strategy. The middle of the figure shows the Balanced Scorecard of measures and targets for the strategic objectives in the strategy map. The right side of the figure identifies the strategic initiatives and the costs required to achieve the targets established in the scorecard.
The company has identified eight initiatives--each affecting one or two objectives--and all eight initiatives are necessary for the strategy to succeed. If one is deleted, a critical objective will be missed and the chain of cause-and-effect relationships will be broken.
For example, ground crew training and a new crew scheduling system might be introduced, but if the ground crew does not understand how it fits in (communications program) or does not have incentives to improve organizational performance (employee stock ownership plan, or ESOP), then the strategy will fail. Thus, the strategic theme for fast ground turnaround required aligned capabilities for intangible assets and a complete set of strategic initiatives.
Bringing It Together: The Strategy Map
A strategy map provides a visual representation of the strategy. It provides a single-page view of how objectives in the four perspectives integrate and combine to describe the strategy. Each company customizes the strategy map to its particular set of strategic objectives.
Typically, the objectives in the four perspectives of a strategy map lead to about 20 to 30 measures being required in the associated Balanced Scorecard. Some people have criticized the Balanced Scorecard, believing that people cannot focus on 25 different measures. If a scorecard is viewed as 25 independent measures, it will indeed be too complicated for an organization and its employees to absorb. But this is the wrong way to think about the Balanced Scorecard.
The strategy map shows how the multiple measures on a properly constructed Balanced Scorecard provide the instrumentation for a single strategy. Companies can formulate and communicate their strategies with an integrated system of approximately two to three dozen measurements that identify the cause-and-effect relationships among the critical variables, including leads, lags and feedback loops, that describe the trajectory, or the fight plan, of the strategy.
The processes in the internal perspective create and deliver the value proposition for customers, the productivity improvements for the shareholders and the societal performance for communities and nations. These are the processes that must be performed at an outstanding level, and in harmony with each other, if the company's strategy is to be achieved.
The learning and growth objectives describe how the organization's intangible assets must be enhanced for performing and continually improving the critical internal processes. Organizations that can mobilize and sustain their intangible assets for the value-creating internal processes will be their industries' leaders.
The strategy map provides the visual framework for integrating the organization's objectives in the four perspectives of a Balanced Scorecard. It illustrates the cause-and-effect relationships that link desired outcomes in the customer and financial perspectives to outstanding performance in critical internal processes--operations management, customer management, innovation and regulatory/social processes.
These critical processes create and deliver the organization's value proposition to targeted customers and also promote the organization's productivity objectives in the financial perspective. Further, the strategy map identifies the specific capabilities in the organization's intangible assets--human capital, information capital and organization capital--that are required for delivering exceptional performance in the critical internal processes.
This article has been adapted from a single chapter of Strategy Maps: Converting Intangible Assets into Tangible Outcomes, the new book by Robert S. Kaplan and David P. Norton. The order of some sections has been changed by the editors to facilitate the flow of the article.
Robert S. Kaplan is the Marvin Bower Professor of Leadership Development at Harvard Business School and Chairman of the Balanced Scorecard Collaborative. David P. Norton is Co-Founder and President of the Balanced Scorecard Collaborative.
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|Author:||Norton, David P.|
|Article Type:||Cover Story|
|Date:||Mar 1, 2004|
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