Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Robert J. AllioContributing Editor, principal of Allio Associates, located in Providence, RI (email@example.com). A veteran corporate planner and strategist, his most recent book is Seven Faces of Leadership (Xlibris, 2002).
Strategy Maps: Converting Intangible Assets into Tangible Outcomes
Robert S. Kaplan and David P. NortonPublished by Harvard Business School Press, 2004
Strategy Maps is the Robert S. Kaplan and David Norton sequel to their classic earlier book The Balanced Scorecard (1996). The two central points of the balanced scorecard concept are that corporations must measure performance from multiple perspectives and managers should use the scorecard to align commitments and resources with objectives. The scorecard is intended to help managers balance financial results and customer satisfaction with internal, learning, and growth perspectives. This latest book recognizes that organizations must leverage their intangible assets (human, information and organization capital) to achieve value creation. And it expands on their previous introduction of strategy maps, a visual framework intended to diagram cause and effect of strategy objectives. According to the authors, a strategy map "provides a normative checklist for a strategy's components and interrelationships".
The authors argue that strategic outcomes (like profitability and customer loyalty) are defined from the financial and customer perspective, but internal management processes supported by learning and growth is determined strategy implementation. They note that intangible assets represent more than 75 percent of an average company's market value – and the mobilization of these assets is therefore a critical aspect of strategic management. The authors believe (and we concur) that "most companies don't succeed in implementing their strategies". Their solution: corporations should use the combination of the balanced scorecard and strategy maps to manage implementation.
The balanced scorecard model is based on the following premises:
Financial performance, a lag indicator, provides the ultimate definition of an organization's success. Strategy describes how an organization intends to create sustainable growth in shareholder value. Success with targeted customers leads to improved financial performance. In addition to measuring the lagging outcome indicators of customer success, such as satisfaction, retention and growth, the customer perspective defines the value proposition for targeted customer segments. Choosing the customer value proposition is the central element of strategy.
Internal processes create and deliver the value proposition for customers. The performance of internal processes is a leading indicator of subsequent improvements in customer satisfaction and financial outcomes.
Intangible assets must be leveraged to create sustainable value. Learning and growth objectives describe how the people, technology, and organization climate combine to support the strategy. Improvements in learning and growth measures are lead indicators for internal process, customer, and financial performance.
Objectives in the four perspectives link together in a chain of cause-and-effect relationships. Enhancing and aligning intangible assets leads to improved process performance, which, in turn, drives success for customers and shareholders.
Strategy Maps reemphasizes the importance of managing the firm as a system, reminding us that focusing on only a single dimension of the firm's activities will compromise overall performance. And it presents a step- by-step approach to developing strategy.
These are the six steps in the Kaplan-Norton model:
Define the shareholder/stakeholder gap (set the stretch targets and the value gaps that must be closed).
Reconcile the customer value proposition (identify the target customer segments and the value propositions that provide new sources of customer value).
Establish the time line for sustained results (show how the value gaps will be closed over the planning horizon).
Identify the strategic themes (allocate the value gap to a few strategic initiatives).
Identify and align intangible assets (define the readiness gap in human, information, and organization capital).
Identify and fund the strategic initiatives (allocate resources to the strategy).
Managers interested in applying the strategy map methodology will find strategy map templates for four classes of "generic strategy":
low total cost (the driving force for Southwest Airlines, Dell, and Wal-Mart);
product leadership (exemplified by Sony, Mercedes, and Intel);
complete customer solutions (the differentiator for IBM, Goldman Sachs, and Mobil); and
system lock-in (as practiced by Microsoft, Cisco, and Gillette).
This taxonomy for strategic choice derives from the concepts of strategy formulation developed by Porter, Tracy and Wiersema, Hax and Wilde, and others. These are useful starting points for thinking about strategy, although the ultimate strategy choices need to consider as well the more contemporary resource-based view (RBV) of strategy development (The RBV theorists contend that successful firms have resources that others lack; they select strategies to generate economic rents from these resources).
Kaplan and Norton provide many excellent examples of strategic choice in action drawn from case files, spanning the private, public, and nonprofit sectors. Two caveats: the authors unfortunately don't tell us much about how to set priorities, and they don't address the daunting task of managing the planning process.
Excerpt from Strategy Maps by Robert S. Kaplan and David P. NortonChart reprinted by permission of Harvard Business School Press. ù 2004 Harvard Business School Publishing; All rights reserved.
Nonetheless the authors deliver a good education in the basics of making strategy. But what's the utility of a visual map of this process? A pictorial presentation of strategy may indeed appeal to right-brained executives. But it still requires that we go through the challenging intellectual work of competitive analysis, market research, strategy formulation, and implementation planning. The picture usually makes sense only after we hear the words!
Visual presentations in themselves are not new. The Arthur D. Little consultants in the 1970s pioneered the technique of depicting a complete business plan, including the situation analysis, strategy, implementation, and financial performance on a single 17″×22″ sheet. The documentation was portable – which appealed enormously to organizations suffering from a history of slaving over 5-inch binders. And it greatly facilitated comparisons within multi-unit corporations.
The Kaplan-Norton strategy map serves the same function, while adding some additional dimensions. Unfortunately, many of the maps shown in this book are so complex that managers will require a Global Positioning System navigate through them. And a number of supplemental exhibits (waterfall models, stage-gate models) add to the complexity. The important point for readers is that the strategy map represents a holistic picture of a firm's intended behavior and a mental map of the management landscape that perhaps can be shared easily with all the stakeholders. In one sense, its chief advantage is for communicating, not creating, strategy. But in addition, the authors also claim "the strategy map has facilitated performance breakthroughs by allowing them [executives] to link their management processes to a clearly defined strategy".
One short chapter begins to develop the role of regulatory and social processes – the importance of a triple bottom line that includes economic, social, and environmental measures of performance. It coaches managers on how to align all their economic, social, and environmental initiatives and manage all their internal and external resources to achieve strategic goals. Without offering much evidence, Kaplan and Norton assert, "many companies today recognize that achieving excellence in environmental, safety, health, employment, and community practices is part of long-term value-creating strategy". Their case of Latin-American manufacturer Amanco illustrates an enlightened approach to strategic management that many US firms might well emulate. The Amanco triple bottom line includes the generation of value through a system of corporate social responsibility and environmental management, while creating sustainable economic value.
Don't look for innovation in strategic thinking in Strategy Maps. Good strategists have embraced the thought process Kaplan and Norton advocate here for decades: in sum it is, how can I allocate my resources to give value to my customers and differentiate myself from my competitors? Nevertheless, if you want a refresher on how to think about strategy and manage an organization as a system, and if you're ready to experiment with communicating your strategic initiatives with maps, this book merits your attention.