Strategy map

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The concept of strategy maps was introduced to the business world by Robert S. Kaplan and David P. Norton as a means to illustrate and elaborate their earlier concept, the balanced scorecard. The standard reference for the strategy map is the book Strategy-focused Organization.[1]. As a further standard reference is their third book Strategy Maps, but the focus was set more on one of the four perspectives of the balanced scorecard, namely "learning and growth".

The strategy map links the long-term game plan or competitive strategy of a business with its operational activities. It illustrates the cause-and-effect relationships between different key performance indicators (KPIs) that are included in a balanced scorecard.


[edit] Origin of Strategy Maps

Kaplan and Norton are credited with developing the balanced scorecard, now a strategy mapping tool, in 1992. This appeared in a paper, "The Balanced Scorecard: Measures Which Drive Performance" in the January 1992 edition of Harvard Business Review[2]. The focus of the balanced scorecard is to provide organizations with metrics against which to measure their success. The underlying principle was that you cannot manage what you cannot measure.

Based on continued experience with organizations that successfully implemented the balanced scorecard, Kaplan and Norton came to realize that there were two important factors that made organizations implement the balanced scorecard successfully -- the factors of focus and alignment. Organizations, while developing an appropriate scorecard to evaluate their business performance, were forced to rethink their strategic priorities and describe their strategies. This led Kaplan and Norton to a further principle -- you cannot measure what you cannot describe. Strategy maps, which had earlier been a part of the process of constructing the balanced scorecard, now became the central theme.

So the balanced scorecard has been evolving from a performance management tool to a comprehensive strategic management tool.

Strategy maps are a way of providing a macro view of an organization's strategy, and provide it with a language in which they can describe their strategy, prior to constructing metrics to evaluate performance against their strategies.

Strategy maps were discussed briefly in Kaplan and Norton's book on the Balanced Scorecard. A more comprehensive treatment is offered in their 2004 book -- Strategy Maps.

[edit] Perspectives

The "balance" in the balanced scorecard refers to the recognition that to achieve a comprehensive view of an organization's performance, it needs to be seen from different viewpoints, or perspectives. In the past, organizations only tended to look at financial measures, which are lagging indicators. Leading indicators come from three other perspectives, so that there are four perspectives in all:

  • Financial perspective: In private-sector organizations, this perspective contains the financial results such as profit, return on capital, cash flow, and margins. In non profit organizations, it describes income from sponsors or taxpayers, cash flow and cost control results.
  • Customer perspective: The customer is concerned with:
    • Time
    • Quality
    • Performance and Service
    • Price or rate
  • Internal (business) process perspective: Involves:
    • Operations management processes
    • Customer management processes
    • Innovation processes
    • Social and regulatory processes.
  • Learning and growth perspective: Includes human, information and organizational capital or capacities.

These four perspectives are sufficient to describe any organization's strategy, although variants abound. The order of the perspectives is important. For a private-sector organization, the financial perspective belongs at the top, where end results such as profitability will be placed. For a public-sector or nonprofit organization, the customer perspective belongs at the top, followed by the financial perspective. Apart from this rule, the basic framework of the four perspectives is robust and appropriate for any organization's strategic plan. It is important to recognize that it is the strategic objectives within the strategy map where creativity belongs, not in the basic framework itself.

Strategic improvements flow from the bottom up to a final result. So in planning, we begin by looking at a higher perspective to identify what we need. We then see what work needs to be done at the lower perspectives in order to achieve this. This information is encoded in the strategy map. The arrows of effect are from lower perspectives to higher perspectives, but the arrows of strategic inference (that are not explicitly drawn in the strategy map) are from higher perspectives to lower perspectives. The higher perspectives involve explicit stakeholders -- shareholders in the case of the financial perspective and customers in the case of the customer perspective. The lowest perspective, however, has no explicit stakeholders. Improvement in terms of the lower perspectives has a long gestation period but it is the sole way to bring about a lasting and dramatic change in the organization's performance. The human, information and organization capital referred to in the lowest perspective are termed intangible assets by Kaplan and Norton.

[edit] Mission and Vision

The mission of an organization is a concise statement of the reason for the organization's existence, the basic purpose towards which its activities are directed. The mission is linked with some core values guiding its employees' activities. The mission may also describe the organization's unique capabilities, its region or jurisdiction and how the organization delivers value to customers.

The vision of an organization is a concise statement that defines success. It is the organization's "picture of the future".

The strategy is the means by which an organization plans to achieve its vision. The strategy map is a cause-and-effect chain of strategic objectives by which the strategy will be implemented.

[edit] Customer perspective

Kaplan and Norton discuss an important notion, the value proposition. The concept is based on earlier work done by the influential economist and business theorist, Michael Porter. The value proposition is the mix of commodity, quality, price, service and warranty that the organization offers to its customers. The value proposition is aimed at targeting certain customers, that is, it has certain target segments. Kaplan and Norton talk of four broad classes of value propositions:

  • Best buy or Low total cost: Affordable prices, reliable quality, quick service. For instance, Southwest Airlines, a much touted case in business studies, adopted a best buy strategy.
  • Product leadership and innovation: The cutting edge products or industry leaders. Companies like Apple Inc. and Intel offer such a value proposition.
  • Customer complete solutions: Tailor made for the customer's individual needs and preferences. IBM offers customer complete solutions.
  • Lock in: The concept was introduced by Michael Porter. The organization tries to get a large number of buyers in a position where they are left with practically no alternative but to buy their products. For instance, they sell certain auxiliary products at cheap prices, which are not compatible with products made by other organizations. Lock in strategies exploit high switching costs for the customers making them stick to the organization. Lock in related to the concept of coercive monopoly. It can be argued that IBM's SNA strategy was one of lock-in. IBM ensured that SNA was required at key points in their mainframe architecture. As the SNA specification was complex, incomplete and subject to change by IBM, the competition were unable to provide an effective alternative. This locked customers into buying IBM products to ensure compatibility.[citation needed]

Different value propositions suit different target segments of customers. The actual value proposition offered by an organization may have a mix of the above components.

[edit] Internal process perspective

A crucial fact brought out by Kaplan and Norton is that the nature of the value proposition determines the kind of internal processes on which to focus more. The approximate correspondence between the primary value proposition and the primary internal process perspective is as follows:

  • Best buy corresponds to the operations management perspective
  • Customer complete solutions corresponds to the customer management


  • Product leadership and innovations corresponds to the innovations


[edit] Operations management processes

There are four main kinds of processes:

  • Develop and sustain supplier relationships
  • Produce products and services
  • Distribute and deliver products and services to customers
  • Manage risks

Effort should be made to reduce lead times as experienced by the customer between placing the order and delivery at the doorstep, and not just to reduce the time taken in the factory.

[edit] Customer management processes

As mentioned earlier, customer management processes have the following four components:

  • Customer selection: Determination of the target segments of customers
  • Customer acquisition
  • Customer retention
  • Customer growth

Ideally, a company would like to classify customers based on the nature of relationships they seek with the company. The classification may be based on the following parameters:

  • Use intensity
  • Benefits sought
  • Loyalty
  • Attitude

In practice, when the customers are spread across large consumer markets, the following indicators are used:

  • Demographic factors
  • Geographic factors
  • Lifestyle factors

Based on this classification, the company may decide on the target segments and may also decide on customer segments that it does not want to cultivate.

Customer retention is important because retaining a customer gives greater return on investment than trying to acquire a new customer.

Customer growth involves getting the customers to participate, helping develop a feeling of customer commitment. Customers are asked to come up with creative solutions, and loyal customers are given special offers.

[edit] Innovation Processes

There are four important processes:

  • Identify opportunities for new products and services
  • Manage the research and development portfolio
  • Design and develop the new products and services
  • Bring the new products and services into the market

The design and development of new projects consists of the following stages:

  • Concept development
  • Product planning
  • Detailed product and process engineering

The product development process has been likened by many authors to a funnel. At the initial stages, the project has the maximum flexibility. As it gets developed, it becomes narrower and narrower, as options keep getting discarded.

[edit] Regulatory and social processes

In an age of environmental consciousness, companies need to understand every externality of their activities. This is important in two ways:

  • Companies need to comply with laws and statutory regulations
  • Companies would like a good environmental and people friendly reputation that generates customer goodwill

There are four dimensions to regulatory and social processes:

  • Environment: Issues such as energy and resource consumption, and emissions into the air, water and soil
  • Safety and health: Safety hazards to employees
  • Employment practices: Diversity of employees
  • Community investment: This is discussed below

Many large corporations have established foundations by which money is systematically directed towards worthy community-based organizations.

Porter and Kramer have put forward the theory that companies must invest in a manner to improve their competitive context. Porter and Kramer identify four elements of a competitive context that companies can influence through philanthropic activities:

  • Input factor conditions: Increase in the supply of trained workers, scientific and technological institutions, and good physical infrastructure.
  • Demand conditions: Training people to make them possible target segments for the company's goods and services.
  • Rules for competition and rivalry: High performance companies can donate to organizations that help maintain the rule of law and prevent theft of their intellectual property by unscrupulous rivals.
  • Related and supporting industries: Companies can invest in suppliers and infrastructure that supports the industry in which they compete.

[edit] Learning and growth perspective

Though the intangible assets of an organization are the most powerful means by which to effect permanent change in the organization, the idea of strategy maps is to plan in a top down way -- start with the needs of the higher perspectives and work downwards to figure out what is needed at the level of the human, organization and information capital. Often this perspective is labeled "Organization Capacity" or "Capacity Building" to indicate that it covers infrastructure as well as human capacities.

[edit] Human capital

Kaplan and Norton outline the following multi step strategy for improving human capital:

  • Identify the strategic job families
  • Develop the competency profile
  • Assess the human capital readiness
  • Formulate a plan for improving the human capital

[edit] Information capital

There are three areas of information capital application:

  • Transaction processing applications: This involves the day to day, repetitive tasks.
  • Analytic applications: This involves statistical analysis used to understand and improve
  • Transformation applications: This involves change in the nature of business

[edit] Organization capital

Organization has the following four elements:

  • Culture: This describes the perception across the company of its goals, mission, and policies.
  • Leadership and accountability
  • Alignment: Linking rewards to performance
  • Teamwork: A system of global knowledge management

[edit] Case studies

The book by Kaplan and Norton also contains a number of case studies. These include both profit and non profit organizations. Some non profit organizations are:

  • American Diabetes Association
  • Boston Lyric Opera
  • Fulton County School System
  • Teach For America

[edit] Related work

The Balanced Scorecard is just one of many scorecards now used in business circles. Some of the others are:

  • Consultant Scorecard
  • HR Scorecard
  • Total Performance Scorecard
  • The Performance Prism

[edit] References

  1. ^ Kaplan, Robert S.; Norton, David P. (2001), The Strategy-focused Organization: How Balanced Scorecard Companies thrive in the new business environment., Harvard Business School Press, ISBN 978-1591391340 
  2. ^ Kaplan, Robert S.; Norton, David P. (January), "The Balanced Scorecard: Measures Which Drive Performance", Harvard Business Review, 

[edit] External links

  • A Balancing Act, by The Balanced Scorecard Institute[1]
  • Strategic decision making and national differences [2]
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