25 year history of Balanced Scorecard: Strategy maps – part three

James Creelman and Elena Gómez Domenech. Reviewed and approved by Drs Kaplan and Norton

The previous two articles described the origins of the Balanced Scorecard and the development of the principles of the Strategy Focused Organization (SFO). The SFO principles introduced the notion of a Strategy Map, which was the topic of the third of Kaplan and Norton’s five books.

Part 1

The first two chapters of the book provide an introduction and an overview of the Strategy Map.

Why strategy maps?

Kaplan and Norton provide two main reasons:

First is their uniqueness in linking intangible assets (human, information and organizational capital) to value creation. They explain that value creation from intangible assets is very different from value created by tangible and financial assets. Major differences are that:

  • intangible assets do not produce a direct, bottom-line value
  • their value is contextual, only happens if it is aligned to strategy
  • they usually do not have a market value nor a stand-alone value in isolation of the other intangible assets (only when properly combined and aligned to the strategy do they become valuable to their organization).

In this context, the Strategy Map is innovative in providing a framework to illustrate how strategy links intangible assets to value-creating processes.

The second reason is the lack of a standardized, consistent and comprehensive way to describe strategy. A simple but powerful description of the strategy is a requirement for strategy to be implemented: Kaplan and Norton introduce the Strategy Maps to address this need.

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Strategy maps described

A Strategy Map can be defined as the visual representation of an organization’s strategy. It represents in just a single page how the objectives in the four perspectives link to each other to describe a strategy. Through cause-and-effect relationships, the desired outcomes in the financial and customer perspectives become connected to the critical few internal processes in which the organization must excel. In the learning and growth perspective, the Strategy Map identifies the specific capabilities required to deliver outstanding performance in the critical internal processes.

Although each organization creates their customized set of objectives based on their strategy, Kaplan and Norton detect a common structure in their maps when observing dozens of organizations using Strategy Maps. They capture this pattern in the Strategy Map template.

  • The Financial perspective describes the economic consequences of a successful strategy implementation, which relates to maximizing shareholder’s value and increasing profitability. Organizations follow two approaches to achieve this ultimate goal: increase revenues and spend less, which are captured in this basic template to build the financial perspective of the Strategy Map. The specific approach used by an organization to increase its revenues or reduce its cost will depend on its business dynamics and strategy. It can be by selling new products to existing clients, it can be by expanding to new markets or it can be increasing the customers’ value. Similarly, about the productivity strategy, focus can be on lowering expenses, increasing the assets utilization or a combination of both.
  • The Customer perspective describes the strategy itself: who are the targeted customers and what is the organization’s differential approach to satisfy their needs (the value proposition). A key success factor for strategy execution is the consistent alignment of internal processes and organizational capabilities with the customer value proposition. Excellent performance in the Learning and Growth and Internal processes perspective drives strategy execution.
  • The Internal perspective depicts the few but critical processes that allow the organization to deliver its value proposition to its targeted customers. While an organization must run dozens or even hundreds of processes daily, just a few deliver the attributes of the value proposition. The Strategy Map should reflect only those in the internal processes perspective.
  • The Learning and growth perspective identifies the specific capabilities in the organization’s intangible assets – human capital, information capital and organizational capital- required for delivering exceptional performance in critical internal processes.

Cause and effect

Central to the Strategy Map are the cause and effect relationships. Perspectives follow an overall cause and effect logic: individual objectives within each perspective are also connected through cause and effect relationships. These connections express the underlying hypothesis in the organization’s strategy. When using the Strategy Map to manage strategy, the cause and effect relationships help executives get early warnings about future performance. If strategic hypotheses are correct, an objective underperforming in the internal perspective will sooner or later affect the value proposition objective to which it is connected.

Outcomes and enablers

Another relevant concept is the distinction between outcomes and enablers. Financial and Customer perspectives are external facing (express the objectives to deliver to shareholders and customers) and made primarily of outcome objectives. Most measures used in these perspectives are lagging indicators. On the other side, Internal, and Learning and Growth perspectives are enablers and depict the objectives required to deliver the customer value proposition and ultimately achieve the desired financial outcomes. Both perspectives usually include leading indicators of the final results to be achieved.

Part 2

Organizations should focus on the critical few internal business processes that deliver the differentiating value proposition. Kaplan and Norton classify the internal processes in four main groups: operations management, customer management, innovation and regulatory and social. They advise that each group can contain hundreds of specific sub-processes, and list some frequent objectives and measures in each domain, gathered through their exposure to hundreds of Balanced Scorecard implementations. The authors show how the different groups of internal processes are likely to link upward, to customer perspective objectives – and ultimately to financial perspective objectives- and downward, to learning and growth objectives.

1Operations management. Operational excellence on its own is no longer the basis of a sustainable strategy. But operational excellence is usually mandatory to be able to execute strategy. Operations management comprises four kinds of processes: supplier’s management, production of goods and services, distribution and risk management.

Each organization must select the critical few processes and the appropriate objectives about them which allow them to deliver their value proposition.

Kaplan and Norton explain that the consequences of effective and efficient operations on the value proposition can lead to offering competitive attributes such as perfect quality, competitive prices or speedy and timely purchase. From the learning and growth perspective, objectives related to operations management may require the company to strengthen employees’ capabilities around quality management or to build effective supply-chain management systems.

2. Customers’ management consists of four generic processes: selection, acquisition, retention, and growth (increase share of wallet).

New technologies have empowered customers to an unprecedented extent, and hence the rising importance of developing strong customer relationships.

Customers’ management objectives link to value proposition attributes of developing trust and close relationships with customers, which in turn link to financial objectives of customers’ profitability or revenue growth. From the learning and growth perspective, it will require developing customer relationship skills, systems, and a customer-centric culture.

3. Innovation management. Innovation – in products, services, and processes – ensures the sustainability of the competitive advantage of an organization. For companies with product leadership or system lock-in strategies, innovation processes are crucial. But Kaplan and Norton claim that all organizations should have at least one innovation objective in their Strategy Maps – whatever their competitive advantage is, innovation makes it sustainable.

Innovation management includes four processes: identification of opportunities for new products/services, R&D portfolio management, design and development of new products/services, delivery of the new products/services to market.

4. Regulatory and Social Processes. More and more organizations recognize the opportunity of going beyond the strict compliance of regulations, and turn the management of social and environmental processes into a powerful source of value creation. Organizations that perform well in social and regulatory aspects usually build a strong reputation. This helps to attract and retain top talent, and also enhances the organization’s image for customers and socially conscious investors. Reducing environmental incidents and improving safety at work generate improvements in terms of productivity and lower operating costs.

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Part 3

An important contribution by Kaplan and Norton in this book is the framework they introduce to describe, measure and align the three intangible assets in the learning and growth perspective to strategic processes and objectives in the internal perspective.

  • Human capital, which relates to strategic competencies (availability of skills, talents, and know-how) required to perform strategy.
  • Information capital, related to strategic information (information systems, applications, and infrastructure) needed to implement strategy.
  • Organizational capital, referring to those behaviors (culture), leadership style, alignment and teamwork required to execute strategy.

The objectives of the three components must be aligned with the objectives for the internal processes – “intangible assets take value only on the context of strategy” – and integrated to create synergies.

Kaplan and Norton identify different techniques to ensure the alignment of the intangible assets to the strategic objectives of the internal and customer perspectives.

  • The way to align human capital to strategy is through strategic job families approach
  • For the information capital, developing strategic IT portfolio for each strategic process is the prescribed technique to create alignment to strategy
  • The alignment technique to link organizational capital to strategy is developing an organizational change agenda focused on the cultural changes required to implement the new strategy.

Kaplan and Norton claim that the value of intangible assets comes from how well it is aligned to the strategy. Not by how much money is spent on building the intangible assets, nor how much these assets are worth on a standalone basis. In this context, Kaplan and Norton introduced the notion of strategic readiness to measure the ability of intangible assets to support the organization’s strategy.

Human capital readiness and strategic job families.

Four steps are required to create alignment and measure human capital intangible assets.

  • Step 1: Identify strategic job families. All jobs are important to the organization, but those with higher impact on strategy are the strategic job families. The internal processes perspective of the Strategy Map provides the starting point to identify those critical jobs for strategy implementation. But note that strategic job families are not based on hierarchy. For instance, a call center rep. might be identified as a strategic job family, but will typically be at a low hierarchical level.
  • Step 2: Build the competency profile of the strategic job families. The competency profile describes the set of knowledge, skills, and values required by those to occupy positions for the strategic jobs. This profile will be used to recruit, hire, train and develop people for those positions.
  • Step 3. Assess human capital readiness. Evaluate the capabilities and competencies of the employees in the strategic job families.
  • Step 4: Build a human capital development program. Comparison between the competencies profiles and the current performance level will reveal human capital readiness gaps. These gaps set the path for human capital development plans.

Information capital portfolio

To measure information capital readiness and align it to strategy, three steps are proposed:

  • Step 1: Describe information capital. The Strategy Map, and specifically the strategic objectives for customer management, innovation, and operations management provide the reference to identify the information capital needs. These include technology infrastructures, such as mainframes and communication networks; transactional applications, analytic applications, and transformational applications. Altogether, technology infrastructure and applications form the information capital portfolio.
  • Step 2: Align information capital to the strategy. While most of the IT budgets are typically locked into the operation and maintenance of existing applications – as much as 90%- the authors advise that organizations should secure enough budget to fund the new infrastructures and applications required to support strategy.
  • Step 3: Measure information capital strategic readiness. The authors describe a straightforward but useful approach to assess the readiness of an organization’s information capital to support the strategy: the use of a numerical score to identify the status of each key application. Levels 1-2 indicate normal and operating status. Levels 3 and 4 identify applications that are underway and funded. Levels 5 and 6 represent warnings: applications included in the information capital portfolio, required to support strategy but no action taken yet to build them.

Organizational capital and the change agenda

Organizational capital is defined as “the ability of the organization to mobilize and sustain the process of change required to execute the strategy”. Organization capital is made of four components:

  • Culture: mainly relates to the values, attitudes, and behaviors required to implement the strategy
  • Leadership: existence of leaders at all levels able to mobilise the organization towards strategy
  • Alignment: awareness about the strategy and linkage of individuals, teams and departmental goals to strategic objectives
  • Teamwork and knowledge sharing across the organization

The four elements constitute a kind of “glue” for integrating and aligning all financial, tangible and intangible assets to the strategy. To identify the objectives for organizational capital, Kaplan and Norton propose to first build an overall change agenda.

The strategic change agenda should reflect the main shifts implied by the new organizational strategy (for instance, evolve from product-centricity to customer focus). Secondly, new behaviors implied by those shifts are identified and become the base for setting the organizational capital objectives (in the same example, the shift could translate into an organizational capital objective of Foster Customer-Centric Behavior). Finally, they provide several examples of how to measure the readiness of the different organizational capital components.

Kaplan and Norton recognize that the proposed strategic readiness measures related to the Learning and Growth perspective may seem soft or subjective compared to those found in the other perspectives. They admit that is a challenge to measure the intangible assets, but argue that it is better to try to measure than not doing at all because “just the simple act of attempting to measure the capabilities of employees, knowledge systems, and organizational capital, no matter the imprecision, communicates the importance of these drivers to value creation”.

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Part 4

Kaplan and Norton illustrate how four generic differentiating strategies would be translated into Strategy Maps:

  • Low total cost strategy requires delivering consistent quality, limited product offering, and highly competitive prices. These companies should focus on operation management processes, and will likely emphasize employees’ competencies around process improvement.
  • Product leadership strategy requires being first to market, providing high-performance products and perhaps extending superior functionality of their products into multiple market segments. Organizations with this strategy will emphasize innovation processes.
  • Complete customer solution strategy is based on building long-term relationships with customers, offering comprehensive customer solutions, providing excellent service, and establishing quality relationships. These companies must focus their attention on customer management processes.
  • Lock-in strategy is about creating industry standards and high switching costs for customers. The expected financial outcomes of this strategy are around revenue growth. From an internal processes perspective, strong innovation processes are required and also legal protection for their property products on which the lock-in strategy is built.

Parting words

In the fourth and final part of this series, we describe the Execution Premium Process, This would be the final of Kaplan’s books on the Balanced Scorecard system and provides a six-stage framework for aligning strategy and operations.

About the author

A recognized thought-leading author, trainer and advisor specializing in Strategy Management, The Balanced Scorecard, Leadership & Culture Change, Enterprise Performance Management and Strategic Risk Management.

Extensive experience of leading consulting and training assignments across the world, for both Government and commercial organizations, most notably in the Gulf and Indonesia (as a resident in both) as well as Europe North America, Australia and India.

Author of numerous articles/blogs as well as 24 in-depth research-based management books, including Doing More with Less: measuring, analyzing and improving performance in the government and not-for-profit sector, Palgrave Macmillan, 2014, Risk-based Performance Management: integrating strategy and risk management (Palgrave Macmillan, 2013).