kaplan & norton - strategy maps converting intangible assets into tangible outcomes

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In this is sue:

s U n d er st a n d ...

how you can use a revolu-tionary new tool — thestra tegy ma p — to reveallinks between intangibleassets and value creation.

s L ea r n . ..

how to create value fromyour stra tegy by mana gingfour key processes: opera-tions; customer relationships;innovat ion; a nd regulat orya nd social processes.

s Gen er a t e...

superior performance bya ligning your compa ny’sstra tegy with the mostimporta nt intangible assets:

huma n capita l, informa tioncapita l, and organiza tioncapital.

s C u s t o m i z e . . .

your strat egy map to eachvalue proposition you canuse to generate profits: (1)low t ota l cost ; (2) productleadership; (3) customer solu-tions; or (4) product lock-in.

s En er gi ze...

everyone in your organiza-

tion to a chieve the perfor-ma nce targets of yourstrat egy by taking adva ntageof a six-step process th a t isspelled out in this summary.

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Strategy Maps

Converting Intangible Assets

into Trangible Outcomes

by Robert S. Kaplan and David P. Norton

A summ ary of the or i g ina l tex t .

An effective businessstra tegy is a complex

series of int erconnections —a set of caus e-a nd-effect rela -tionsh ips. E mployees mustknow exactly what they’resupposed to accomplish.They a lso need to know how th ey’re doing, and t ha tmean s being a ble to measurehow well they’re achieving

st ra tegic objectives.

And yet , the tradit iona l wa ysto measure strategy have notprovided enough insight tohelp lea ders decide wha t t odo next. Tha t’s because theusua l measurements of acompany’s success have beenretrospective, looking back-ward to previous quarterlyand annual results rathertha n forw ard to the future.

Thus, ma ny compan ies ha vesuffered from concentratingon w hat they had done.

They pa id much less at ten-tion to the intangibles thatdetermined wh at they have

to do now — and in the

future.

Tha t’s w hy th ere’s been litt leempha sis on ma na ginginta ngible a ssets. However,they’re the resources thatma ke up the founda tion fortomorrow’s fina ncial s uccess.

B efore w e go furt her, let’sunderstand w hat we meanby an inta ngible asset . I tca n be the kn owl edge th at

exists i n an organ i zation to cr eate di ffer ent ia l advant age

— and to sati sfy customer

needs.

Int a ngible a ssets consistof thin gs like employeecapabilit ies, databases,informa tion syst ems, cus-tomer relat ionships, qua lity,responsiveness, and productsor services.

Generally, a company’sinta ngible a ssets a ccount for75 percent or more of itsma rket va lue. C onversely,its t a ngible a ssets representless than 25 percent.

Tha t reali ty ha s greatimplica tions for executives.

Volume 13, No. 2 (2 sections). Section 2, February 2004.

© 2004 Audio-Tech Business Book Summaries 13-4.

No part of this publication may be used or reproducedin any manner whatsoever without written permission.

To order additional copies of this summary, reference

Catalog #2042.



In order to create value forsha reholders an d customers,they must use strat egy ma psto identify t heir crit icalprocesses a nd to measur ehow w ell a l igned th eir inta n-gible assets a re to theseprocesses.

Why a re strat egy ma psimporta nt for you and yourorganization?

The a nsw er is tha t it ’scritical for you and youremployees t o understa ndwhat the stra tegy is — a ndwhy it ma kes business sense.

The ma ps provide visua lclar ity to help your people see,discuss, and understan d thestra tegy. On one page, the ma pwill highlight which process-es and a ctions are crit ical,a nd w hich a re secondary.

If your business stra tegyisn’t w orking as w ell as itshould, strategy maps canhelp you figure out w ha twent w rong an d make itr ight .

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STRATEGIES AND STRATEGY

MAPS

This summa ry int roduces thefollowing:

• First , stra tegy ma ptemplates describingth e ba sic component s ofhow va lue is crea tedinternally.

• Second, themes t ha tart iculate a stra tegy’sdynamics.

• Third , a new framework

for describing, measuring

an d aligning hum an cap-

i tal , inform at ion capi tal ,

a nd organi zati on capit al.

A stra tegy map visualizes —from four perspectives — t hecumula tive process by w hichan organization creates value.

The perspectives, from top tobott om on th e map, a re:f in ancial, customer, i ntern al,

a nd learni ng and growth.

You can think of the perspec-tives a s four building blocks,w ith each perspective provid-ing levera ge for t he oneabove it:

• First , learn ing andgrowth is the founda tionfor th e i nt er na l per spec-

t ive by asking th e ques-tion, " To a chieve ourvision, how must ourcompany lear n a ndimprove?"

2 A U D I O - T E C H

STRATEGY MAPS ILLUSTRATE HOW THE ORGANIZATION CREATES VALUE



• Second, the in tern al perspective provides thefoundation for the cus-tomer perspectiveth rough t he quest ion, " Tosa tisfy our customers,w hich processes must w eexcel at?"

• Third, the customer

perspective supports thefina ncial perspective bya sking, " To achieve ourvision, how must w e lookto our cust omers?"

• Fourth, the fin ancial perspective supports theoverall business stra tegyby a sking, "I f w e succeed,how w ill we look to ourshareholders?"

As t he illustra tion on pa ge2 shows, the model can bebroken down even furtherfor m ore deta iled insight s.For example, th e lea rninga nd growt h perspectiveencompasses three formsof inta ngible ca pita l: huma n,

informa tion, a nd organiza tion.

• H uman capi ta l consistsof employees’ skills,talent, and knowledge.

• I nform at ion capi tal

consists of dat a bases,information systems,an d networks.

• Organi zati on capit al consist s of cultur e, lea d-ership, employee a lign-ment , tea mwork, an dknowledge management.

Learning and growth drivethe internal perspective,consist ing of t he four keyinternal processes:

1. Opera t ion s

2. C us tom er ma n a gem en t

3. Innova t ion

4. R eg ula t or y a nd s ocia l

E a ch of these processesdepends on several factors.For exam ple, th e cust omermanagement process rises orfalls depending on these fac-tors: selection, a cquisition,retent ion, a nd growth .

In t urn, the element s in thefour processes — usuallyindicated on the strategyma p by a rrows — determineth e cust omer va lue proposi-tion. Tha t includes productattributes, relationships withcustomers, and brand image.

Finally, the strategic successof an organization’s customerva lue proposition det ermineshow well it contributes to keyobjectives in its fin a ncial per-spective, part icularly growth

in revenues and margins.

The template indicates —through the arrows — therelationships betw een va ri-ous compan y elements a ndobjectives.

For exa mple, the a rrowsshow tha t susta ining long-term shareholder value

depends on th e follow ingfa ctors: Improving th e coststructure, strengtheninga sset utilization, expa ndingrevenue opportunities, andenha ncing customer va lue.

Thus, a stra tegy ma p outlinesthe cause-and-effect relation-ship among the factors criticalto a compa ny’s fina ncia l

success. I t ’s a roa dma p tofuture financial success.

The ma p ta kes compan iesfrom strategy formulat ion t ostrategy execution. If yourcompany is missing even oneelement , it ma y ha ve a

potentially crippling gap inits strategy.

For exa mple, in t he customer

perspective, the strat egyshould a ddress t he follow ingelement s: price, qua lity,a va ilability, selection, func-tionality, service, partnership,and brand image.

You proba bly w on’t lead yourindustry in every element,but you should pay a tt entionto a ll of th em.

A product w ithout qua lityprobably can ’t ha ve a low enough price to ma ke ita tt ra ctive. Also, a n oth er-w ise outst a nding producttha t ’s unava ila ble has noreal va lue to a customer.

B eyond those considerat ions,the stra tegy map is based onfour principles.

One is tha t str ategy must

bal ance contr ad i ctor y forces.

For exam ple, compa niesmust focus on crea ting sus-tained growth in shareholdervalue, which means they

need to make a commitm entto the long term. At th esame time, however, theyneed to show improvedresults in the short t erm.The stra tegy ha s to ba lan ceboth of these forces.

Secondly, str at egy is based on a di ffer ent ia ted customer

val ue pr oposit i on. You must

B U S I N E S S B O O K S U M M A R I E S 3



a rticula te clea rly th e distinc-tive customer segments youta rget a nd t he specific va lueproposition tha t w ill plea seeach of them. There are fourma jor va lue propositions:

1. L ow t ot a l cost

2. P r od uct l ea d er sh ip

3. C om plet e cu st om ersolution

4. S y st em lock-in

E a ch of th ese value proposi-tions clearly defines t hea t t r ibutes tha t t he s t ra tegymust deliver in order t osa tisfy t he customer.

The th ird principle is th a tval ue is cr eated th r ough

i n tern al busin ess pr ocesses.

Companies must first identi-

fy a nd t hen focus on the crit i-cal few internal processesthat deliver the differentiat-ing va lue proposition.

Finally, the fourth principlesta tes tha t str ategic al i gn-

ment determ ines th e val ue of

i nt angibl e assets. As we’vea lready discussed, inta ngiblea ssets consist of huma n capi-ta l , informa tion capita l , a ndorganiza tion capital. Thepoint is t ha t n one of thesea ssets is valua ble by itself;the value comes from itsa bility to help the compan yimplement its str a tegy. Thea uth ors’ resea rch, however,shows that two-thirds ofcompanies do not createstrong a lignment betw eentheir stra tegies and theirHR a nd IT progra ms. Asa r esult , they a re notgetting a good return on

their investments.

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THE BALANCED SCORECARD:AN INDISPENSABLE

COMPONENT OF STRATEGY

MAPS

The strat egy ma p tra nslatesthe strategy and opens itup for discussion a nd fin e-tun ing. In combina tion w ithth e Ba lan ced Scoreca rd, itenables focusing a nd m easur-ing the various componentsof th e stra tegy.

The Balanced Scorecard is astep in a continuum th a tdescribes how a companydefines va lue, how it createsit , and how it measures it .

The objectives in th e learn inga nd growt h perspective are t o

A U D I O - T E C H4

THE BALANCED SCORECARD FRAMEWORK



identify th e jobs — or hu ma ncapital — the systems — theinforma tion ca pital — a ndth e work climat e — the orga-niza tion ca pital — needed tosupport the value-creatinginternal processes.

Here, the mea surements willbe difficult , but not una tt a in-a ble. For example, retent ionra tes, new products, a nd t henumber of new pat ents arehighly measurable.

Of course, a major purpose ofstra tegy maps is to facili ta t ediscussions among managers.The ma ps ena ble them t o seea nd connect relationshipsa mong th e objectives. Ther ema y be disagreements, butth ey should be mat ters ofdegree.

Achieving objectives doesn’tjust ha ppen by a ccident.They’re the effects tha t derivefrom s pecific causes. Also,fulfilling one objective allowsthe fulfillment of others.

For exam ple, improvingemployee capa bilities in cer-t a in job posit ions — coupledw ith n ew t echnology —should ena ble improvementin a crit ica l interna l process.

Addit iona lly, th e strongerprocesses should lead tobett er products . Tha t w ould

enha nce the va lue proposi-tion for customers, increasingth eir sa tisfa ction, loya lty,a nd w illingness to buy moreproducts.

These im proved cust omeroutcomes should result inincrea sed revenues a ndenha nced sha reholder value.

B uilding a good stra tegy maprequir es int ense reflection onhow a compan y really crea tesva lue. Tha t’s not a lwa ysself-evident.

Consider the situation atG ra y-Syra cuse, a ma ker

of precision casting parts.In developing its str a tegyma p, th e compa ny learn edsomething surprising. I tsfront-line production w orkerswere best able to reduceexpensive rew orks, improvequality, and increasecustomer sa tisfa ction.

G ra y-Sy ra cuse directed itslimited training dollars toits entry-level people, themold a ssemblers. In sodoing, the company cut inha lf the time required toa chieve its st ra tegic objectives.

Strategy maps link desiredoutcomes in th e customera nd finan cial perspectivesto outst a nding performa ncein four crit ical interna l

processes — operationsmanagement, customerma na gement , innovat ion,an d regulat ory a nd socialprocesses.

The next section will look indepth a t th e first tw o ofth ese va lue-creat ing process-es : oper ati ons management

a nd customer management .

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VALUE-CREATING PROCESSES:OPERATIONS MANAGEMENT

AND CUSTOMER MANAGEMENT

Operat ing processes producea nd d eliver goods a nd servicesto customers. B y itself,operational excellence won’t

susta in a stra tegy. However,wi thout such excellence, com-panies will ha ve trouble w ithstrategic execution.

Operations managementinvolves four importantelements:

1. D evelop fina ncia l lystr ong supplierrelationships

2. Produce good product s

3. D is t ribu t e a nd deliverthose products tocustomers

4. Ma na ge r isk

For many world-class compa-nies, the a bility t o develop and

sustain suppl ier relat ionshi ps

is essent ial t o creat ing va lue.For exa mple, Toyota a ndWa l-Ma rt requir e their sup-pliers t o produce high-qua lityproducts on short notice anddeliver t hem r eliably.

H a ving effective supplierrelationships means thecompa ny will ha ve low ertota l cost to acquire thegoods, ma terials, a nd ser-vices it needs. The tota l costincludes the purcha se prices,a s well as costs relat ed toprocurement , m oving, inspec-t ion, payment , a nd storagecosts.

Among th e wa ys t o low ersuch costs include findingsuppliers t ha t a ccept elec-tronic orders an d paym ents— a nd t ha t deliver productsjust-in-time. At Wal-Mart,point-of-sale terminalstrigger production r uns a tvendor loca tions.




The second importa nt opera -tiona l process is t o produce

products. The key objectivesinclude: low ering productioncosts; continuously upgra dingprocesses and responsiveness;strengt hening fixed a ssetutilizat ion; a nd improvingw orking ca pita l efficiency.

The t hird key opera tionsprocess is to d is t r i bu te

and del i ver products and

ser vi ces to customer s. Theobjectives are to reduce

cost a nd t ime, while mini-mizing product defects andcustomer complaints.

The fourth critical opera tionsprocess is managing r i sk.

Tha t’s pa rticula rly importa ntfor companies facing interestra te movements a nd foreignexcha nge fluctuat ions.

In each opera tions process,it ’s essential to ha ve value-creating objectives and soundmea surement tools. Forexample, with suppliers, youshould measure the percentageof on-tim e deliveries.

There are tw o initiat ives th a tcan help compan ies ma kefundamental improvementsin opera tin g processes:acti vit y-based management ,

or ABM , a nd total qual i ty

management, or TQM.

AB M enables ma na gers toget good results from ana ctivity-bas ed costing syst em.As you learn each activity’scost, it w ill help you a tt a ckth e costs of inefficiency a ndlow-va lue a ctivit ies. TQM isa n effort to improve qua lityin every a spect of your

orga niza tion’s a ctivities.

There are va rious w a ys inwh ich str at egy ma ps can pro-vide significa nt va lue — evento companies that are fa ra long in th eir qua lity efforts.

• First , pr ovid i ng cl ear causal l in kages fr om

quali ty impr ovements to

measur abl e customer and

fi nan cia l out comes.

• Second, establishing

tar gets for breakt hr ough ,industry- leading

performance.

• Third, id enti fying enti rely new pr ocesses to hel p

achi eve str ategic objecti ves.

• Fourth, sett in g str ategic pr i ori ti es for pr ocess


OPERATIONS MANAGEMENT STRATEGY MAP TEMPLATE



enhancements.

The second key operationsma na gement process is cus-tomer ma na gement . In theIndustr ia l Era , productswere pr imary , a nd customerswere secondary.

Now, however, buildingcustomer relationships isincrea singly importa nt. Atcompanies like Levi Straussand Dell Computer, cus-tomers ca n design their ownproduct configurations.

In creasing ly, customerma na gement processes a reessential to help companiesacquire, sustain, and grow long-term relationships withcustomers.

Customer ma na gementconsist s of four generic

internal processes, including:

1. Selecti ng customers byidentifying importan tma rket segments a ndcra ft ing an appealingvalue proposition forthem.

2. Acquir i ng customer s bycommun ica ting t hebrand m essage to thema rket, securingprospects, and convertingthem to your products.

3. Retai ni ng customer s byensuring quality, correct-ing problems, an d tra ns-forming casua l buyersinto rabid fans.

4. Growi ng relat ionshi ps

with targeted customersby gaining their t rustan d get t ing a bigger

sha re of th eir business.

It ’s t rue th a t some compan ies’internal processes concentrateonly on qua lity, cost reduc-tion, a nd efficiency. B utth ey’re n eglecting cust omer-centered processes that can

produce higher ma rgins.

The figure shown below summa rizes the elementsinvolved in a strong customerma na gement stra tegy.

The customer managementtemplate looks at customerma na gement from the usualfour perspectives: learn ingan d growt h, internal ,customer, a nd finan cial.

The t emplat e goes far beyondgeneral statements aboutbuilding st rong relat ionships.For exa mple, it segments t he


CUSTOMER MANAGEMENT SCORECARD TEMPLATE



interna l process into selection,

acqui si ti on, retent ion, a ndgrowth.

It then divides the processesint o va rious objectives,including: understandingsegment s, screening out

unprofita ble customers, ta r-geting high-value customers,and ma naging the brand.

Measurements are equallydist inctive. They include:determining the profits fromeach customer segment; cal-cula ting the percenta ge ofunprofitable customers;a dding up the number ofstra tegic a ccount s; and eva l-ua ting the customers’ degreeof bra nd preference.

In each perspective, thecareful mea surements w illhold everyone’s feet t o the

fire. They will allow you todetermine once and for allwh ether your stra tegy isreally w orking.

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INNOVATION PROCESSES AND

SOCIAL AND REGULATORY PROCESSES

Now that we’ve exploredth e first tw o types of va lue-creating processes, let’sdiscuss th e other t w o types:innovation processes a ndsocia l and r egul atory

processes.

Innovation is particularlyimportant in industries —such as semiconductors, soft-w ar e, and telecommunica-t ions — where customersconsta nt ly dema nd n ew products that are faster,

cheaper, smaller, and bettertha n the products tha t w erejust introduced.

Mana ging innovat ionincludes four importantinternal processes:

1. Ident ifying oppor tunit iesfor new products.

2. Ma n a gin g t he R &Dportfolio.

3. D es ig ning a nd develop-ing th e new products.

4. B r i ng ing new pr oduct s t omarket .

In id enti fying opport un it ies

for new pr odu cts, t heobjectives for t he idea a ndopportunity innovationprocess include: (1) a nt ici-pat ing futur e customer


INNOVATION MANAGEMENT STRATEGY MAP TEMPLATE



needs; and (2) discoveringa nd d eveloping new products.

Measures for those objectivesw ould include: tim e spentlearning t a rgeted customers'needs, th e number of client-driven new projects

laun ched, and t he number ofnew projects presented fordevelopment.

The second innovationprocess — managing the

R& D por t fol io — shouldinclude a mix of differentty pes of projects from t hefollow ing cat egories: ba sicR&D, brea kth rough projects,next-genera tion developmentproject s, d evelopmentprojects, and allianceprojects.

To illustr a te t hese projects,consider th e product portfolioof an automobile company:

• A basi c r esear ch projectmight be a fuel cellto replace the ga soline-

pow ered engine.

• A breakth r ough devel op-

ment pr oject wouldproduce a hybrid a utocapable of running eitheron a bat tery or gasoline.

• A next-generat i on pr oject

would be a new line ofhybrid cars.

• Devel opment pr ojects

w ould develop differentmodels of th e hybrid ca r,such as two-door, four-door, and convertible.

• An al l i ance pr oject wouldoccur when the companyturns t o anothera utoma ker for design

a nd development.

The third innovation processis to desi gn and devel op

tr ul y new pr odu cts. Thatty pica lly consists of a seriesof st a ges: concept develop-ment , product pla nning, a nd

deta iled product a nd processengineering.

This effort tests w heth erthe new manufac tur ingprocesses can bring a boutth e finished product a t com-mercia l volume levels, a ndmeet funct iona l and qua litys t andards .

Of course, compa nies usua llydo not innovate simply forth e sake of creat ing interest-ing new ideas . There mustbe a linkage betw een th einnovations an d the goa ls inth e customer perspective,such a s:

• Offering superior productperformance compared toearlier versions.

• G et t ing to the marketfirst w ith a new productor service.

• Expan ding productsinto new marketsegments.

Naturally, these outcomesa re also linked to fina ncial

objectives on the strategyma p. Inn ova tion shouldproduce a solid ret urn onR&D investment s, as w ell asrevenue growt h from new a nd existing customers.

In nova tion processes oftenreceive less managementat tent ion t ha n operat ionsan d customer ma na gement .

B ut a l l organizat ions need a tleast one innovat ion objectiveon t heir stra tegy maps.

And, for companies whosestra tegies require they beproduct lead ers, innovat ioncan be crucial t o their

success.

Of cours e, th e benefits ofinnovat ion w on’t be fullyachievable for companiesoperating in restrictiveregulatory and social envi-ronmen ts . To a void shut -downs, commun ity ill w ill,a nd expensive lit iga tion,companies must complywit h social a nd regulatoryobligations.

In fa ct , there ca n be benefitsto lea ding in this area. Suchcompanies tend to becomeemployer s-of-choice a ndbeneficiaries of communitygoodwill.

Companies manage theirregulatory a nd social

performance along severaldimensions, including: envi-ronment , health and safety,employment practices, andcommunity investment .

In ea ch a rea, creat ivecompanies generally canleverage their capabilitiesto crea te sha reholder value.In other words, they ca n do

well finan cially by doing good things, ethically andsocially.

In t he Regulatory a nd S ocialSt ra tegy Ma p Templateshown on page 10, th esea ctivities can be linked tofinancial objectives, such asreducing th e risk of doingbusiness a nd a t t ra ct ing




socia lly conscious cust omersa nd investors, tha t buildlong-term shareholdervalue.

Consider environment a lpra ctices. Compa nies likeXerox have found th at wa steisn’t only a nuisance, buta lso a cost — for exa mple,in shipping materials tolandfills.

Xerox reduced costs bypaying more attention during

th e design st a ge to environ-mental impacts, and byoperating effective programsin product t a ke-ba cks.

Such efforts can lower thetota l cost of producing a ndrecycling products. Andthey can improve thecompany’s reputation as anenvironmentally friendly

business an d a good place towork.

s s

ALIGNMENT IN HUMAN

CAPITAL, INFORMATION

CAPITAL, AND ORGANIZATION

CAPITAL

Good places to work embracemore than social responsibili-ty. They also ma nifest aw illingness to tra in theirpeople in w a ys th a t a llow

them to execute theorganiza tion’s stra tegy.

The lea rning a nd growt hperspective highlights theneed to a lign inta ngiblea ssets w ith stra tegy. Thea ssets cent ra l to implement-ing an y stra tegy are: huma ncapital, informa tion ca pita l,an d organizat ion capita l .

All inta ngible as sets succeedor fa il based on t heir syner-gies. Their a lignment wit hstra tegy is wha t crea tes

value.

Remember: Intangiblea ssets encompass such it emsa s: pat ents, copyrights,w orkforce knowledge, lea der-ship, informat ion sy stems,and work processes.

In th e learning and growthperspectives, s ix object ives

consistently a ppear:

First , in huma n capita l , theobject ive is t o cr eate str ategic

competencies.

Second, w ith informa tioncapita l, th e objective isstr ategic inform ati on.

With orga niza tion ca pital,th ere a re four part s, so th e


REGULATORY AND SOCIAL STRATEGY MAP TEMPLATE



third objective is culture, t heawareness and internaliza-tion of th e sha red mission,vision, a nd va lues.

Fourth, leadership, the ava il-a bility of lea ders t o mobilizethe organization.

Fif th, al ignment, th e combin-ing — compa ny -w ide — ofgoals and incentives with thestrategy.

Sixth, teamwork, the sharingof stra tegica lly importa ntknowledge and staff assets.

Alignment a nd integra tionaren’t a s easy a s they mightseem. One globa l ba nkattempted to differentiateitself by offering s ophist icat edfinan cial products tocustomers.

The strategy failed becauseth e complex informa tiontechnology needed to imple-ment it wa sn’t ma de availablein a t imely fa shion. Yet the

firm’s CEO insisted the infor-ma tion services system wa sperformin g w ell.

In one sense, he w a s r ight .The unit ha d benchma rkeditself aga inst w orld-classinformation servicesopera tions. So, it must beworld-class itself, right?

Not exactly. I t ha d fa iledmiserably t o deliver t he rightservices n eeded for t heban k’s stra tegy. I t wa s asystem d esigned not t o sup-port its ow n compa ny ’sneeds, but to mat ch th eperforma nce of simila runits in other companies ithad benchmarked.

S t ra tegy ma ps — and thediscussion they encourage —could h elp save compan iesfrom such a fa te.

That’s because a firm’s strat-egy ma p provides a commonpoint of reference for employ-

ees a nd un its t o see how clearly their roles dovetailwith the business strategy.

Compa nies need t o develop,a lign, and integra te theirhuma n, informa tion, a ndorganization capital to thecritical few strategic process-es. Tha t will a llow th em tocreate the greatest returnsfrom th eir inta ngible a ssets.

Organizations need toidentify huma n capita lrequirements for the strategy.Then, they must estimat e thegap between the human capi-tal requirements and currentemployee rea diness. Fina lly,th ey must build require-ments a nd improve rea dinessto execute the strategy.

The process of measuringhuma n capita l readinessstarts by identifying keycompet encies — thoserequir ed to perform ea chcritical internal process inthe map.

Str ategic job fam il ies are thepositions w ith employees

who will have the greatestinfluence on enhancing theseinternal processes.

Competency pr ofil es describein deta il their job r equ i r e- ments for employees in th estrategic job families.

Assessment pr ocesses definet he cur rent capabil i t ies —

in light of the competencyprofiles — in each job family.

The competency gap is thedifference between therequirements a nd th e cur-rent capa bilities. Tha tshows t he orga nizat ion’s

huma n capita l readiness.

Orga nizat ions should buildth eir hum a n capita l develop-ment programs using tw ohigh ly useful tools: th estr ategic job fam i ly approacht o develop specific compet en-cies, and str ategi c val ues t oma ke the st ra tegy everyone’sjob.

The second essential intangi-ble a sset is informat ion

capi tal r eadi ness.

Information capital is thera w m at erial for creat ingva lue in a modern economy.It consists of syst ems,dat aba ses, l ibraries, an dnetworks.

Of course, all intangibles in astra tegy map are worthy ofsupport . H owever, th e l evel

of support w ill depend onyour st ra tegy. For example:

• With a strategy basedon l ow costs, th e highestretur ns come frominforma tion systemsthat focus on the follow-

ing: qua lity, processimprovement, a ndworkforce productivity.

• With a strategy basedon bui ld in g str ong rela-

ti onshi ps wi th customer s,

the great est benefitscome from informa tionsystems tha t do tw othings: first , revea l





knowledge about cus-tomer preferencesa nd beha vior a nd, sec-ond, enha nce cust omercontact, service, andretention.

• With a strategy based

on pr odu ct super i or i t y,informa tion ca pita l w illenhance the productdesign and developmentprocess. I t w ill a ccom-plish t ha t t hrough toolssuch as three-dimension-a l modeling, vir tua lprototyping, a ndC AD/C AM.

Informa tion capita l ha svalue only in the context ofthe stra tegy. I t must bemana ged to al ign wi th the

strategy.

The old mind-set for managing

informa tion capita l wa s toevaluate performance by costa nd reliability. Thenew mind-set empha sizesevaluation based on strategicalignment .

In other words, orga niza tions

must ma na ge informa tioncapital not a s a cost, bu ta s a n asset — one whosevalue depends on how itcontributes to executing theinstitut ion’s stra tegy.

Companies must also developorgani zati on capit al. Thatrefers to th e compan y’s a bili-ty to mobilize — a nd sust a in— the process of cha ngerequired to execute th e stra t-egy. Im provement genera llymean s change, an d goodstra tegies include a cha ngeagenda .

There are four elements thatenable organization capitalto play a key role in execut -ing th e st ra tegy. Theseare culture, leadership,alignment , a nd teamw ork.

A stra tegy often requires

cha nges th at ma y include:new products, n ew processes,or new customers. In turn,these changes define new behaviors a nd va lues neededby t he w orkforce.

The first step in developingan organizat ion capita lstra tegy is to define thecha nge a genda . This is illus-tra ted in the Organ izat ionCha nge Agenda f igure tha t isshow n below.

The objectives fall into twocategories of behavioralcha nge. One relates to

THE ORGANIZATION CHANGE AGENDA



changes required to crea tecustomer a nd sh a reholderva lue. The second consist s ofcha nges n eeded t o executethe strategy.

Generally, three kinds ofbehavior cha nges a re espe-

cia lly importa nt for va luecreation:

• Focusing on thecustomer

• Innovat ing

• Delivering results

Four add itiona l beha viorsare critical to executingst ra tegy :

• Understa nding t hemission, str a tegy, an dvalues

• Creating accountability

• Communicating openly

• Working a s a tea m

Of course, some companiesshy aw ay f rom mana gingha rd-to-mea sure fa ctors likehuman capital, informationcapital , a nd organizat ioncapital . G ra nted, the mea-sures will be softer tha n th efinan cial va riety.

But there are significant ben-

efits just from the good faitheffort to measure int a ngiblea ssets. I t communica tes theimportance of these driversto va lue creat ion.

Learning and growt h mea -sures of the inta ngible a ssetsstimula te th e improvementsin interna l processes tha ta re necessa ry t o become a

successful st ra tegy-focusedorganization.

s s

CUSTOMIZING Y OUR STRATEGY

MAP TO Y OUR STRATEGY

Your own specific strategywill determine your organi-zat ion’s strat egic thr ust . Acompany competing on prod-uct lea dership will highlightinnovation, while a companycompeting mainly on costw ill empha size opera tionsmanagement .

Regar dless of its str a tegy, asuccessful company is onetha t creates value for i tssuppliers, employees, cus-tomers, and host communi-t ies. B ut the companya bsolutely m ust create va lueto reinvest in itself and torewa rd i ts sha reholders.

Let’s discuss each of the fourtypes of value propositionstha t companies ca n use to

genera te a t t ra ct ive profits .They are:

1. L ow t ot a l cos t

2. P r od uct lea d er sh ip

3. C om pl et e cu st om ersolutions

4. P r oduct lock -i n

A cla ssic example of acompany tha t uses a low total cost strategy success-fully is Wa l-Ma rt . It con-ducts tough negotiationsw ith vendors, providingthem w ith very high volumepurchases in excha nge forlow costs.

Then, it transfers some ofth e value to customersthrough low prices. Atthe sa me t ime, i t retainsa t t ra ct ive margins for i tself .

In a ddition to Wa l-Ma rt ,other st rong compa nies

pursuing a low tota l coststra tegy include: Southw estAirlin es, Toyota , DellComputer, Vanguard MutualFunds, and McDonald’s.

These companies do moreth a n provide very competi-t ive pricing. In tha t regard,remember th e Yugo — alow-priced car whose poorqua lity turn ed off potent ia lbuyers.

An effective low tota l coststr a tegy offers highly com-petitive prices, and combinesthem w ith consistent q uali ty,ease a nd speed of purchase,and decent product selection.

Compa nies like Wa l-Ma rt ,McDonald’s, and Dell keep

customers’ costs dow n bysa ving th em time. They dotha t by reducing the t imerequired t o order a nd t oreceive th e product.

The best low tot a l costcompa nies genera llyorgan ize their stra tegyma ps to support tw o generalobjectives:

1. H a vin g a ca pa ble,motivat ed, and techno-logically enabledworkforce.

2. O ff er ing pr oduct sand services that areconsistent, t imely, a ndlow-cost.





STRATEGY MAP TEMPLATE: LOW TOTAL COST

STRATEGY MAP TEMPLATE: PRODUCT LEADERSHIP



A stra t egy ma p templa te fora low total cost str a tegyshows t ha t key interna lprocesses occur w ithin th eopera t ions ma na gement a reaof the int erna l perspective.They include: good rela tion-ships wit h suppliers; highly

efficient operating processes;a nd ra pid inventoryturnover.

Oth er fa ctors include:simple, a ccessible order ingprocesses; a w illingnessto be product follow ersra t her than leaders ; a w i ll-ingness t o embra ce cont inu-ous process improvement ;a nd a n emphasis on compa-ny-w ide sha ring of bestpractices.

The second ty pe of va lueproposition, pr odu ct leader - ship, is used by compa niessuch a s S ony, Mercedes, andInt el tha t empha size productinnovat ion a nd lea dership.

P roduct lead ership compa -

nies wa nt to be first-to-ma r-ket with their innovat ions orenhancements.

Why? B ecause tha t a l lowsthem t o comma nd highprices from ea rly a dopters.In m a ny cas es, being first-to-market can impose highswitching costs that let com-panies defend their market

positions w ithout ma jor costcut t ing.

In the s t ra tegy map tem-plat e for product lea dershipcompa nies shown on page14, th e key int erna l process-es are in th e innovat ion areaof the int erna l perspective.The compan ies mus t excela t :

1. Ant icipa t ing cus tomers ’needs.

2. Discover ing new oppor-tunities for superiorproducts a nd services.

Other essential objectives

include superb productdevelopment processes,a nd excellence in pa tent ing,regulat ory, an d bra ndingprocesses.

The t hir d va lue propositionis compl ete customer sol u-

t ions — basically, buildinglong-last ing r elat ionshipsw ith customers. Tha trequires compa nies todevelop customizedsolutions.

From about 1960 to 1980,this stra tegy cha ra cterizedIB M. I t didn’t offer thelowest prices, or the mostrelia ble delivery, or th e mostfunctiona l products.

B ut it d id offer its customers

complete solutions — hard-ware, software, installa t ion,field service, tra ining, educa-tion, and consulting.Moreover, it persona lizedth e services to meet th ecustomer’s unique needs.

Companies in this categoryempha size customer reten-tion more th a n customer

a cquisit ion. They recognizetha t retent ion typically costsmuch less th an a cquisit ion.

A stra t egy ma p templa te forfirms tha t follow t his stra te-gy is illustra ted on page 16and shows t ha t the keyinternal processes are in thecustomer ma na gement a reaof the int erna l perspective.

Such compa nies’ deepundersta nding of theircustomers leads to lastingrelationships.

The fina l va lue proposit iondea ls w i th lock-i n str ategies.

U nder tha t a pproa ch, com-

pan ies genera te long-termsusta inable value by creat -ing high s w itching costs forcustomers.

For example, people whoconsider sw itching from thewidely used MicrosoftWindows operat ing sy stemto t he u ser-friendly Applesyst em ca n’t do so w ithimpun ity. Tha t’s beca usema ny a pplica t ion programsrun only on Windows.

System lock-in occurs mainlywhen a company’s core prod-ucts become the indust rystan dard. For tha t reason,companies that pursue alock-in s tr a tegy focus onthe innovat ion a rea of theint erna l perspective. They

need to:

1. D ev elop a n d en h a nceproprietary standards.

2. I n cr ea s e t h e br ea d t hand application of thoses t andards .

3. L ow e r pot en t ia l cu s-tomers’ switching costs.

Overall, a compa ny’sstrategy will contain manyobjectives. It w ill be mostsuccessful when integrated,a ligned act ivit ies a llow thecompa ny t o offer a uniq uevalue proposition.

Your orga niza tion’s st ra tegymap should tell the unique




STRATEGY MAP TEMPLATE: LOCK -IN

STRATEGY MAP TEMPLATE: COMPLETE CUSTOMER SOLUTIONS




story of your str ategy — onetha t dif ferent ia tes you fromthe competition.

s s

STRETCH TARGETS AND SUB-TARGETS FOR PERFORMANCE

BREAKTHROUGHS

Clea rly, developing y ourdist inct ive stra tegy r equiresa good dea l of thought ,discussion, and debate —exact ly wha t s t ra tegy ma pscan encourage.

B ut remember tha t astra tegy isn’t merely anopportunity for reflection

a nd discussion. It ’s a cal l to

action.

Stra tegy maps must bedynamic, not static — viablein th e workplace and w ork-able in the marketplace.

Your stra tegy requires a con-t inuing cam paign designedto inform a nd energize

everyone in a n organ izat ion.

P lanning the s t ra teg iccampaign means taking asix-step process:

• First , defi ne th e shar e- holder / stakeholder value

gap.

• Second, r econci l e th e

val ue pr oposi ti on for ta r geted customer s .

• Third, establ i sh t he ti me-

l i ne needed t o cl ose th e

val ue gap.

• Fourth, id ent i fy the val ue-cr eat i ng themes.

• Fif th, cr eat e str at egi c

asset r ead i ness.

• Sixth, ident i fy and fund th e str ategic in it iat ives.

Let’s look at th e processmore closely.

The first st ep, determining th e sha r ehold er val ue gap,

begins with defining theovera ll objectives a nd mea -sures. In the ca se ofConsumer B a nk, it set astretch ta rget of increasingnet income by a w hopping$100 million w ith in fiveyears .

Once you’ve established astretch target, you can oftendiscover a plann in g gap,

w hich is th e differencebetw een future a spira t ionsa nd current rea lity.Identifying the plan ningga p shows everyone involvedtha t dra ma tic cha nge is nec-essar y. Next, you need toallocate the overall planninggap to different financial

sub-objectives. Tha t mean sbreaking th e high-levelobjective int o ma na geablesteps.

Consumer B a nk set th reesub-objectives:

• Improving productivityby r educing cost percustomer from $100 to

$75.

• Improving growth byincrea sing r evenue percustomer from a bout$200 to $300.

• Improving th e customerbase by tripling itsnumber of high valuecustomers.

Achieving the three sub-objectives was necessary forthe ba nk to reach its overa llgoal of improving net incomeby $100 mill ion.

The second step, reconcile th e valu e pr oposit ion for t ar -

geted customer segmen ts, ha sfour dimensions:

1. I den t ify in g t a rgetcustomers.

2. C la r i fy ing t he cu st om ervalue proposition.

3. S elect i ng t he m ea s u res .

4. B a l a n cin g cu st om erobjectives w ith fina ncialgrowt h goals.

Opportunit ies for cost a ndproductivity improvementsgenerally a re relat ively clea r.B ut t ha t ’s often not t he ca sewit h revenue growt h.

Tha t r equires explicit a tt en-tion to ta rgeted customer

groups. I t usua lly includesselling more to existing cus-tomers, an d sel l in g products

to ent i r el y new customer s.

With C onsumer B a nk,increa sing sa les to existingcustomers involved t urnin gthe bank’s employees intotrust ed f ina ncia l ad visors.By building such relation-

ships, employees wouldbecome comfort a ble int ro-ducing customers to apackage of integratedservices.

The bank directed itslearning and growth objec-t ives toward teaching andmotiva ting employees tocross-sell its other offerin gs.

B U S I N E S S B O O K S U M M A R I E S



St ep three, establ ish th e ti me-l i ne for closin g the

val ue gap, ha s tw o elements:

• First , set t ing deadlinesfor r esults.

• Second, a lloca ting the

planning ga p to differentstra tegic themes.

As w e’ve seen, Consu merB an k established a t ime-linefor its strategy of five years.It focused processes ona chieving results within t ha tt ime.

Inst ead of a iming for a nimmedia te — and im possible— leap forw a rd, theConsumer Ba nk team t rans-lat ed the vision int o oneconsisting of manageable,tim e-pha sed st eps. Theyestablished a realist ic pathto an a mbit ious goa l .

Oper at i ons pr ocesses wouldreduce cost per cust omer.Customer management

pr ocesses would increase thenu mber of income-boost ingrelat ionship customers. Andi nnovat i on pr ocesses wouldintroduce new products andservices to increase annualrevenue per customer by 50percent.

S tep four, id ent i f y th e str ategi c th emes, consists of tw o

elements:

1. I den t if ying the cr it ica lfew processes, or themes,tha t ha ve the grea t esteffect.

2. E s t a blis hin g m ea s ur esand targets .

This step involves aligning

the str a tegic drivers toa chieve the f inancial a ndcustomer objectives.

Consumer B a nk selected tw oopera t ions ma na gementprocesses essentia l to ma k-ing the stra tegy work.

One was to provide rap id

r esponse — mea sured byrequest fulfillment t ime. Itdid this by shif t ing moreof its customer support t oWeb-based technology.

Another wa s to min im ize

problems for customersa nd employees by simplify-ing a nd clar ifying processes.Tha t w ould increase cus-tomer sa t isfact ion a ndimprove productivit y.

The fift h st ep, creat e str at e- gi c asset r ead i ness, involvesth ree element s:

1. I den t ify in g t h e h um a n ,informa tion, a nd organi-zat ion capita l required t o

support the st ra tegicprocess.

2. As ses sing t he r ea d ines sof these assets tosupport the strategy.

3. E s t a blis hin g m ea s ur esand targets .

Consumer B a nk identif ied

seven va lue-crea tingprocesses. For each one,the mana gement t eam a skedtw o qu estions: (1) " Whichjob families ar e crit ical t omanaging this process?"and (2) "Which informationsyst ems ar e crit ical forimproving this process?"

Finally, step six, id ent i fy and

fun d t he str ategic in it ia t i ves,

consists of tw o elements:

1. D ef in ing t he s pecif icinit ia t ives required t osupport processes anddevelop int a ngibleassets.

2. D et er min in g a n dsecuring t he funding.

Of course, the initia tives a rewh ere the rubber meets t heroa d. Su pport ing processesand developing intangiblea ssets a re the result of thoseinit ia t ives.

s s

STRATEGY MAPS AS

FRAMEWORKS FOR ACHIEVING

CRITICAL OBJ ECTIVES

Your orga niza tion’s st ra tegymust be more tha n a set ofinitiatives — no matter how bold they might be. A stra te-gy conta ins a mult i tude ofrelated elements.

Strategy maps can l i terallyput everyone in y our orga ni-zat ion on the sa me page.They g ive you a vehicleto discuss your strategyfully, a nd develop itsystematically.

The stra tegy ma p ca n h elpyou avoid the trap of creat-

ing a s t ra tegy tha t exist smore in w ords t ha n in execu-tion. I t can help ma ke yourstra tegy one that drives theentire organizat ion.

It will help you and yourpeople identify pow erfula ssets — most of th eminta ngible — tha t a re vita lsources of value creation.




I t w ill show you how toalign those key intangiblea ssets w ith crit ical process-es, including : opera tionsma na gement , customerma na gement , innovat ion,a nd regulat ory a nd socialprocesses.

Of course, it ’s up t o you tota ke the steps necessa ry t omake the s t ra t egy map t ru lya dyn a mic tool. Actions an dsolid ma na gement a re theultimate drivers of change.

The point is th is: Your st ra t-egy is the essence of w ha tyour compa ny is. I t is th esource of competitive advan-tage, financial success, andindust ry lea dership. Yourstra tegy map w ill show youthe wa y to the dest inat ion.Now it is up to you to beginth e journ ey.

s s

B U S I N E S S B O O K S U M M A R I E S

N OTES



ABOUT THE AUTHORS

Robert S. Kaplan is the creator of the Harvard Business School video series Measuring

Corporate Performance and the author or coauthor of thirteen Harvard Business Review

articles, more than 100 other papers, and eleven books, including three with DavidNorton. Dr. Kaplan is Chairman of the Balanced Scorecard Collaborative. He can bereached at [email protected].

David P. Norton is President of Balanced Scorecard Collaborative, Inc., a professionalservices firm that facilitates the worldwide awareness, use, enhancement, and integrityof the Balanced Scorecard. With Robert Kaplan, he is the cocreator of the BalancedScorecard, coauthor of four Harvard Business Review Articles, and coauthor of The

Balanced Scorecard and The Strategy-Focused Organization.

HOW TO ADD THIS BOOK TO YOUR LIBRARY

To order this book, please send check or money order for $35.00, plus$3.50 shipping and handling to:

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Strategy Maps, summarized by arrangement with Harvard Business School Press, from Strategy Maps:

Converting Intangible Assets into Tangible Outcomes by Robert S. Kaplan and David P. Norton.Copyright 2004 by Harvard Business School Publishing Corporation.

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kaplan & norton - strategy maps converting intangible assets into tangible outcomes

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