Strategy map
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In the realm of business, the concept of strategy maps was introduced by Robert S. Kaplan and David P. Norton. The standard reference is the book Strategy Maps by Robert S. Kaplan and David P. Norton.
Kaplan and Norton are credited with developing the Balanced scorecard in 1992. This appeared in an epoch making paper in the Harvard Business Review. 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 implementing the Balanced Scorecard successfully -- the factors of focus and alignment. Organizations, while drawing up the scorecard for themselves, 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.
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.
Contents |
[edit] Perspectives
Kaplan and Norton do not explicitly define what a perspective means, but they list the four main perspectives that an organization (whether profit or non profit) must have:
- Financial perspective: In profit organizations, this involves the shareholders, while in non profit organizations, it involves those subsidizing or financing the organization.
- Customer perspective: The customer perspective is concerned with:
- Customer selection
- Customer acquisition
- Customer retention
- Customer growth
- Internal (business) process perspective: Involves:
- Operations management processes
- Customer management processes
- Innovation processes
- Social and regulatory processes.
- Learning and growth perspective: This involves developing the human, information and organizational capital.
Some important facts about the perspectives and their ordering:
- The perspectives are arranged in descending order of measurability, urgency, tangency and visibility.
- The organization's mission, vision, core values, and main goals are in terms of the higher perspectives.
- The detailed strategies are in terms of lower perspectives.
The basic idea is that we start off 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, internally focused statement of the reason for the organization's existence, the basic purpose towards which its activities are directed, and the values guiding its employees' activities. The mission is linked with some core values. It also describes how to compete and deliver value to customers. The vision of an organization is a concise statement describing the organization's middle to long term goals. It is external, market oriented, and should express in a colorful and visionary manner how the organization wants to be perceived by the world. The main differences between mission and vision are:
- The mission is internally focused, while the vision is externally focused
- The mission is in the very long term, while the vision is middle to long term
A strategy means selecting a set of activities in which an organization will excel to create a sustained difference in the market place. The strategy map is akin to a macro view of the strategies followed by the organization.
[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, Southwestern 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 Ericsson, Motorola 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. The software company Microsoft has often been accused of lock in. 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. 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
perspective
- Product leadership and innovations corresponds to the innovations
perspective
[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 environment 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 environment friendly 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.
[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
