kaplan & norton -- strategy maps converting intangible assets into tangible outcomes(2)

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■ ■ In this issue: Understand... how you can use a revolu- tionary new tool — the strategy map — to reveal links between intangible assets and value creation. Learn... how to create value from your strategy by managing four key processes: opera- tions; customer relationships; innovation; and regulatory and social processes. Generate... superior performance by aligning your company’s strategy with the most important intangible assets: human capital, information capital, and organization capital. Customize... your strategy map to each value proposition you can use to generate profits: (1) low total cost; (2) product leadership; (3) customer solu- tions; or (4) product lock-in. Energize... everyone in your organiza- tion to achieve the perfor- mance targets of your strategy by taking advantage of a six-step process that is spelled out in this summary. ■ ■ Strategy Maps Converting Intangible Assets into Trangible Outcomes by Robert S. Kaplan and David P. Norton A summary of the original text. A n effective business strategy is a complex series of interconnections — a set of cause-and-effect rela- tionships. Employees must know exactly what they’re supposed to accomplish. They also need to know how they’re doing, and that means being able to measure how well they’re achieving strategic objectives. And yet, the traditional ways to measure strategy have not provided enough insight to help leaders decide what to do next. That’s because the usual measurements of a company’s success have been retrospective, looking back- ward to previous quarterly and annual results rather than forward to the future. Thus, many companies have suffered from concentrating on what they had done. They paid much less atten- tion to the intangibles that determined what they have to do now — and in the future. That’s why there’s been little emphasis on managing intangible assets. However, they’re the resources that make up the foundation for tomorrow’s financial success. Before we go further, let’s understand what we mean by an intangible asset. It can be the knowledge that exists in an organization to create differential advantage — and to satisfy customer needs. Intangible assets consist of things like employee capabilities, databases, information systems, cus- tomer relationships, quality, responsiveness, and products or services. Generally, a company’s intangible assets account for 75 percent or more of its market value. Conversely, its tangible assets represent less than 25 percent. That reality has great implications 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 reproduced in any manner whatsoever without written permission. To order additional copies of this summary, reference Catalog #2042.

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Page 1: Kaplan & Norton -- Strategy Maps Converting Intangible Assets Into Tangible Outcomes(2)

■ ■

IInn tthhiiss iissssuuee::

■ Understand...how you can use a revolu-tionary new tool — thestrategy map — to reveallinks between intangibleassets and value creation.

■ Learn...how to create value fromyour strategy by managingfour key processes: opera-tions; customer relationships;innovation; and regulatoryand social processes.

■ Generate...superior performance byaligning your company’sstrategy with the mostimportant intangible assets:human capital, informationcapital, and organizationcapital.

■ Customize...your strategy map to eachvalue proposition you canuse to generate profits: (1)low total cost; (2) productleadership; (3) customer solu-tions; or (4) product lock-in.

■ Energize...everyone in your organiza-tion to achieve the perfor-mance targets of your strategy by taking advantageof a six-step process that isspelled out in this summary.

■ ■

Strategy MapsConverting Intangible Assets

into Trangible Outcomesby Robert S. Kaplan and David P. Norton

A summary of the original text.

An effective business strategy is a complex

series of interconnections —a set of cause-and-effect rela-tionships. Employees mustknow exactly what they’resupposed to accomplish.They also need to know howthey’re doing, and thatmeans being able to measurehow well they’re achievingstrategic objectives.

And yet, the traditional waysto measure strategy have notprovided enough insight tohelp leaders decide what todo next. That’s because theusual measurements of acompany’s success have beenretrospective, looking back-ward to previous quarterlyand annual results ratherthan forward to the future.

Thus, many companies havesuffered from concentratingon what they had done.They paid much less atten-tion to the intangibles thatdetermined what they haveto do now — and in thefuture.

That’s why there’s been littleemphasis on managingintangible assets. However,they’re the resources thatmake up the foundation fortomorrow’s financial success.

Before we go further, let’sunderstand what we meanby an intangible asset. Itcan be the knowledge thatexists in an organization tocreate differential advantage— and to satisfy customerneeds.

Intangible assets consist of things like employee capabilities, databases, information systems, cus-tomer relationships, quality,responsiveness, and productsor services.

Generally, a company’sintangible assets account for75 percent or more of itsmarket value. Conversely,its tangible assets representless than 25 percent.

That reality has great implications 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, referenceCatalog #2042.

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In order to create value forshareholders and customers,they must use strategy mapsto identify their criticalprocesses and to measurehow well aligned their intan-gible assets are to theseprocesses.

Why are strategy mapsimportant for you and yourorganization?

The answer is that it’s critical for you and youremployees to understandwhat the strategy is — andwhy it makes business sense.

The maps provide visual clarity to help your people see,discuss, and understand thestrategy. On one page, the mapwill highlight which process-es and actions are critical,and which are secondary.

If your business strategyisn’t working as well as itshould, strategy maps canhelp you figure out whatwent wrong and make itright.

■ ■

STRATEGIES AND STRATEGYMAPS

This summary introduces thefollowing:

• First, strategy map templates describing the basic components ofhow value is createdinternally.

• Second, themes thatarticulate a strategy’sdynamics.

• Third, a new frameworkfor describing, measuring

and aligning human cap-ital, information capital,and organization capital.

A strategy map visualizes —from four perspectives — thecumulative process by whichan organization creates value.The perspectives, from top tobottom on the map, are:financial, customer, internal,and learning and growth.

You can think of the perspec-tives as four building blocks,with each perspective provid-ing leverage for the oneabove it:

• First, learning andgrowth is the foundationfor the internal perspec-tive by asking the ques-tion, "To achieve ourvision, how must ourcompany learn andimprove?"

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STRATEGY MAPS ILLUSTRATE HOW THE ORGANIZATION CREATES VALUE

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• Second, the internal perspective provides thefoundation for the cus-tomer perspectivethrough the question, "Tosatisfy our customers,which processes must weexcel at?"

• Third, the customer perspective supports thefinancial perspective byasking, "To achieve ourvision, how must we lookto our customers?"

• Fourth, the financial perspective supports theoverall business strategyby asking, "If we succeed,how will we look to ourshareholders?"

As the illustration on page 2 shows, the model can bebroken down even further for more detailed insights.For example, the learningand growth perspectiveencompasses three forms of intangible capital: human,information, and organization.

• Human capital consistsof employees’ skills, talent, and knowledge.

• Information capitalconsists of databases,information systems, and networks.

• Organization capitalconsists of culture, lead-ership, employee align-ment, teamwork, andknowledge management.

Learning and growth drivethe internal perspective, consisting of the four keyinternal processes:

1. Operations

2. Customer management

3. Innovation

4. Regulatory and social

Each of these processesdepends on several factors.For example, the customermanagement process rises orfalls depending on these fac-tors: selection, acquisition,retention, and growth.

In turn, the elements in thefour processes — usuallyindicated on the strategymap by arrows — determinethe customer value proposi-tion. That includes productattributes, relationships withcustomers, and brand image.

Finally, the strategic successof an organization’s customervalue proposition determineshow well it contributes to keyobjectives in its financial per-spective, particularly growthin revenues and margins.

The template indicates —through the arrows — therelationships between vari-ous company elements andobjectives.

For example, the arrowsshow that sustaining long-term shareholder valuedepends on the following factors: Improving the coststructure, strengtheningasset utilization, expandingrevenue opportunities, andenhancing customer value.

Thus, a strategy map outlinesthe cause-and-effect relation-ship among the factors criticalto a company’s financial

success. It’s a roadmap tofuture financial success.

The map takes companiesfrom strategy formulation tostrategy execution. If yourcompany is missing even oneelement, it may have apotentially crippling gap inits strategy.

For example, in the customerperspective, the strategyshould address the followingelements: price, quality,availability, selection, func-tionality, service, partnership,and brand image.

You probably won’t lead yourindustry in every element,but you should pay attentionto all of them.

A product without qualityprobably can’t have a lowenough price to make itattractive. Also, an other-wise outstanding productthat’s unavailable has noreal value to a customer.

Beyond those considerations,the strategy map is based onfour principles.

One is that strategy mustbalance contradictory forces.For example, companiesmust focus on creating sus-tained growth in shareholdervalue, which means theyneed to make a commitmentto the long term. At thesame time, however, theyneed to show improvedresults in the short term.The strategy has to balanceboth of these forces.

Secondly, strategy is based ona differentiated customervalue proposition. You must

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articulate clearly the distinc-tive customer segments youtarget and the specific valueproposition that will pleaseeach of them. There are fourmajor value propositions:

1. Low total cost

2. Product leadership

3. Complete customer solution

4. System lock-in

Each of these value proposi-tions clearly defines theattributes that the strategymust deliver in order to satisfy the customer.

The third principle is thatvalue is created throughinternal business processes.Companies must first identi-

fy and then focus on the criti-cal few internal processesthat deliver the differentiat-ing value proposition.

Finally, the fourth principlestates that strategic align-ment determines the value ofintangible assets. As we’vealready discussed, intangibleassets consist of human capi-tal, information capital, andorganization capital. Thepoint is that none of theseassets is valuable by itself;the value comes from its ability to help the companyimplement its strategy. Theauthors’ research, however,shows that two-thirds of companies do not createstrong alignment betweentheir strategies and their HR and IT programs. As a result, they are not getting a good return on

their investments.

■ ■

THE BALANCED SCORECARD:AN INDISPENSABLECOMPONENT OF STRATEGYMAPS

The strategy map translatesthe strategy and opens it up for discussion and fine-tuning. In combination withthe Balanced Scorecard, itenables focusing and measur-ing the various componentsof the strategy.

The Balanced Scorecard is astep in a continuum thatdescribes how a companydefines value, how it createsit, and how it measures it.

The objectives in the learningand growth perspective are to

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THE BALANCED SCORECARD FRAMEWORK

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identify the jobs — or humancapital — the systems — theinformation capital — andthe work climate — the orga-nization capital — needed tosupport the value-creatinginternal processes.

Here, the measurements willbe difficult, but not unattain-able. For example, retentionrates, new products, and thenumber of new patents arehighly measurable.

Of course, a major purpose ofstrategy maps is to facilitatediscussions among managers.The maps enable them to seeand connect relationshipsamong the objectives. Theremay be disagreements, butthey should be matters ofdegree.

Achieving objectives doesn’tjust happen by accident.They’re the effects that derivefrom specific causes. Also,fulfilling one objective allowsthe fulfillment of others.

For example, improvingemployee capabilities in cer-tain job positions — coupledwith new technology —should enable improvementin a critical internal process.

Additionally, the strongerprocesses should lead to better products. That wouldenhance the value proposi-tion for customers, increasingtheir satisfaction, loyalty,and willingness to buy moreproducts.

These improved customeroutcomes should result inincreased revenues andenhanced shareholder value.

Building a good strategy maprequires intense reflection onhow a company really createsvalue. That’s not alwaysself-evident.

Consider the situation atGray-Syracuse, a maker of precision casting parts. In developing its strategymap, the company learnedsomething surprising. Itsfront-line production workerswere best able to reduceexpensive reworks, improvequality, and increase customer satisfaction.

Gray-Syracuse directed itslimited training dollars to its entry-level people, themold assemblers. In sodoing, the company cut inhalf the time required toachieve its strategic objectives.

Strategy maps link desiredoutcomes in the customerand financial perspectives to outstanding performancein four critical internalprocesses — operations management, customer management, innovation,and regulatory and socialprocesses.

The next section will look indepth at the first two ofthese value-creating process-es: operations managementand customer management.

■ ■

VALUE-CREATING PROCESSES:OPERATIONS MANAGEMENTAND CUSTOMER MANAGEMENT

Operating processes produceand deliver goods and servicesto customers. By itself, operational excellence won’t

sustain a strategy. However,without such excellence, com-panies will have trouble withstrategic execution.

Operations managementinvolves four important elements:

1. Develop financiallystrong supplier relationships

2. Produce good products

3. Distribute and deliverthose products to customers

4. Manage risk

For many world-class compa-nies, the ability to develop andsustain supplier relationshipsis essential to creating value.For example, Toyota andWal-Mart require their sup-pliers to produce high-qualityproducts on short notice anddeliver them reliably.

Having effective supplierrelationships means the company will have lowertotal cost to acquire thegoods, materials, and ser-vices it needs. The total costincludes the purchase prices,as well as costs related toprocurement, moving, inspec-tion, payment, and storagecosts.

Among the ways to lowersuch costs include findingsuppliers that accept elec-tronic orders and payments— and that deliver productsjust-in-time. At Wal-Mart,point-of-sale terminals trigger production runs atvendor locations.

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The second important opera-tional process is to produceproducts. The key objectivesinclude: lowering productioncosts; continuously upgradingprocesses and responsiveness;strengthening fixed asset utilization; and improvingworking capital efficiency.

The third key operationsprocess is to distribute and deliver products andservices to customers. Theobjectives are to reduce cost and time, while mini-mizing product defects andcustomer complaints.

The fourth critical operationsprocess is managing risk.That’s particularly importantfor companies facing interestrate movements and foreignexchange fluctuations.

In each operations process,it’s essential to have value-creating objectives and soundmeasurement tools. Forexample, with suppliers, youshould measure the percentageof on-time deliveries.

There are two initiatives thatcan help companies makefundamental improvementsin operating processes: activity-based management,or ABM, and total qualitymanagement, or TQM.

ABM enables managers toget good results from anactivity-based costing system.As you learn each activity’scost, it will help you attackthe costs of inefficiency andlow-value activities. TQM isan effort to improve qualityin every aspect of your

organization’s activities.

There are various ways inwhich strategy maps can pro-vide significant value — evento companies that are faralong in their quality efforts.

• First, providing clearcausal linkages fromquality improvements tomeasurable customer andfinancial outcomes.

• Second, establishing targets for breakthrough,industry-leading performance.

• Third, identifying entirelynew processes to helpachieve strategic objectives.

• Fourth, setting strategicpriorities for process

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OPERATIONS MANAGEMENT STRATEGY MAP TEMPLATE

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enhancements.

The second key operationsmanagement process is cus-tomer management. In theIndustrial Era, productswere primary, and customerswere secondary.

Now, however, building customer relationships isincreasingly important. Atcompanies like Levi Straussand Dell Computer, cus-tomers can design their ownproduct configurations.

Increasingly, customer management processes areessential to help companiesacquire, sustain, and growlong-term relationships withcustomers.

Customer management consists of four generic

internal processes, including:

1. Selecting customers byidentifying importantmarket segments andcrafting an appealingvalue proposition forthem.

2. Acquiring customers bycommunicating thebrand message to themarket, securingprospects, and convertingthem to your products.

3. Retaining customers byensuring quality, correct-ing problems, and trans-forming casual buyersinto rabid fans.

4. Growing relationshipswith targeted customersby gaining their trustand getting a bigger

share of their business.

It’s true that some companies’internal processes concentrateonly on quality, cost reduc-tion, and efficiency. Butthey’re neglecting customer-centered processes that canproduce higher margins.

The figure shown below summarizes the elementsinvolved in a strong customermanagement strategy.

The customer managementtemplate looks at customermanagement from the usualfour perspectives: learningand growth, internal, customer, and financial.

The template goes far beyondgeneral statements aboutbuilding strong relationships.For example, it segments the

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CUSTOMER MANAGEMENT SCORECARD TEMPLATE

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internal process into selection,acquisition, retention, andgrowth.

It then divides the processesinto various objectives,including: understandingsegments, screening outunprofitable customers, tar-geting high-value customers,and managing the brand.

Measurements are equallydistinctive. They include:determining the profits fromeach customer segment; cal-culating the percentage ofunprofitable customers;adding up the number ofstrategic accounts; and eval-uating the customers’ degreeof brand preference.

In each perspective, the careful measurements willhold everyone’s feet to the

fire. They will allow you todetermine once and for allwhether your strategy isreally working.

■ ■

INNOVATION PROCESSES ANDSOCIAL AND REGULATORYPROCESSES

Now that we’ve explored the first two types of value-creating processes, let’s discuss the other two types:innovation processes andsocial and regulatoryprocesses.

Innovation is particularlyimportant in industries —such as semiconductors, soft-ware, and telecommunica-tions — where customersconstantly demand new products that are faster,

cheaper, smaller, and betterthan the products that werejust introduced.

Managing innovationincludes four importantinternal processes:

1. Identifying opportunitiesfor new products.

2. Managing the R&D portfolio.

3. Designing and develop-ing the new products.

4. Bringing new products tomarket.

In identifying opportunitiesfor new products, the objectives for the idea andopportunity innovationprocess include: (1) antici-pating future customer

8 A U D I O - T E C H

INNOVATION MANAGEMENT STRATEGY MAP TEMPLATE

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needs; and (2) discoveringand developing new products.

Measures for those objectiveswould include: time spentlearning targeted customers'needs, the number of client-driven new projectslaunched, and the number ofnew projects presented fordevelopment.

The second innovationprocess — managing theR&D portfolio — shouldinclude a mix of differenttypes of projects from the following categories: basicR&D, breakthrough projects,next-generation developmentprojects, development projects, and alliance projects.

To illustrate these projects,consider the product portfolioof an automobile company:

• A basic research projectmight be a fuel cell to replace the gasoline-powered engine.

• A breakthrough develop-ment project would produce a hybrid autocapable of running eitheron a battery or gasoline.

• A next-generation projectwould be a new line ofhybrid cars.

• Development projectswould develop differentmodels of the hybrid car,such as two-door, four-door, and convertible.

• An alliance project wouldoccur when the companyturns to anotherautomaker for design

and development.

The third innovation processis to design and developtruly new products. That typically consists of a seriesof stages: concept develop-ment, product planning, anddetailed product and processengineering.

This effort tests whether the new manufacturingprocesses can bring aboutthe finished product at com-mercial volume levels, andmeet functional and qualitystandards.

Of course, companies usuallydo not innovate simply forthe sake of creating interest-ing new ideas. There mustbe a linkage between theinnovations and the goals inthe customer perspective,such as:

• Offering superior productperformance compared toearlier versions.

• Getting to the marketfirst with a new productor service.

• Expanding products into new market segments.

Naturally, these outcomesare also linked to financialobjectives on the strategymap. Innovation should produce a solid return onR&D investments, as well asrevenue growth from newand existing customers.

Innovation processes oftenreceive less managementattention than operationsand customer management.

But all organizations need atleast one innovation objectiveon their strategy maps.

And, for companies whosestrategies require they beproduct leaders, innovationcan be crucial to their success.

Of course, the benefits ofinnovation won’t be fullyachievable for companiesoperating in restrictive regulatory and social envi-ronments. To avoid shut-downs, community ill will,and expensive litigation,companies must comply with social and regulatoryobligations.

In fact, there can be benefitsto leading in this area. Suchcompanies tend to becomeemployers-of-choice and beneficiaries of communitygoodwill.

Companies manage their regulatory and social performance along severaldimensions, including: envi-ronment, health and safety,employment practices, andcommunity investment.

In each area, creative companies generally canleverage their capabilities to create shareholder value.In other words, they can dowell financially by doinggood things, ethically andsocially.

In the Regulatory and SocialStrategy Map Templateshown on page 10, theseactivities can be linked tofinancial objectives, such asreducing the risk of doingbusiness and attracting

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socially conscious customersand investors, that buildlong-term shareholder value.

Consider environmentalpractices. Companies likeXerox have found that wasteisn’t only a nuisance, butalso a cost — for example, in shipping materials tolandfills.

Xerox reduced costs by paying more attention duringthe design stage to environ-mental impacts, and by operating effective programsin product take-backs.

Such efforts can lower thetotal cost of producing andrecycling products. And they can improve the company’s reputation as anenvironmentally friendly

business and a good place towork.

■ ■

ALIGNMENT IN HUMANCAPITAL, INFORMATIONCAPITAL, AND ORGANIZATIONCAPITAL

Good places to work embracemore than social responsibili-ty. They also manifest a willingness to train theirpeople in ways that allowthem to execute the organization’s strategy.

The learning and growth perspective highlights theneed to align intangibleassets with strategy. Theassets central to implement-ing any strategy are: humancapital, information capital,and organization capital.

All intangible assets succeedor fail based on their syner-gies. Their alignment withstrategy is what createsvalue.

Remember: Intangibleassets encompass such itemsas: patents, copyrights,workforce knowledge, leader-ship, information systems,and work processes.

In the learning and growthperspectives, six objectivesconsistently appear:

First, in human capital, theobjective is to create strategiccompetencies.

Second, with informationcapital, the objective isstrategic information.With organization capital,there are four parts, so the

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REGULATORY AND SOCIAL STRATEGY MAP TEMPLATE

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third objective is culture, theawareness and internaliza-tion of the shared mission,vision, and values.

Fourth, leadership, the avail-ability of leaders to mobilizethe organization.

Fifth, alignment, the combin-ing — company-wide — ofgoals and incentives with thestrategy.

Sixth, teamwork, the sharingof strategically importantknowledge and staff assets.

Alignment and integrationaren’t as easy as they mightseem. One global bankattempted to differentiateitself by offering sophisticatedfinancial products to customers.

The strategy failed becausethe complex informationtechnology needed to imple-ment it wasn’t made availablein a timely fashion. Yet thefirm’s CEO insisted the infor-mation services system wasperforming well.

In one sense, he was right.The unit had benchmarkeditself against world-classinformation services operations. So, it must beworld-class itself, right?

Not exactly. It had failedmiserably to deliver the rightservices needed for thebank’s strategy. It was a system designed not to sup-port its own company’sneeds, but to match the performance of similar units in other companies ithad benchmarked.

Strategy maps — and thediscussion they encourage —could help save companiesfrom such a fate.

That’s because a firm’s strat-egy map provides a commonpoint of reference for employ-ees and units to see howclearly their roles dovetailwith the business strategy.

Companies need to develop,align, and integrate theirhuman, information, andorganization capital to thecritical few strategic process-es. That will allow them tocreate the greatest returnsfrom their intangible assets.

Organizations need to identify human capitalrequirements for the strategy.Then, they must estimate thegap between the human capi-tal requirements and currentemployee readiness. Finally,they must build require-ments and improve readinessto execute the strategy.

The process of measuringhuman capital readinessstarts by identifying keycompetencies — thoserequired to perform each critical internal process inthe map.

Strategic job families are thepositions with employeeswho will have the greatestinfluence on enhancing theseinternal processes.

Competency profiles describein detail their job require-ments for employees in thestrategic job families.

Assessment processes definethe current capabilities —

in light of the competencyprofiles — in each job family.

The competency gap is thedifference between therequirements and the cur-rent capabilities. Thatshows the organization’shuman capital readiness.

Organizations should buildtheir human capital develop-ment programs using twohighly useful tools: thestrategic job family approachto develop specific competen-cies, and strategic values tomake the strategy everyone’sjob.

The second essential intangi-ble asset is information capital readiness.

Information capital is theraw material for creatingvalue in a modern economy.It consists of systems, databases, libraries, and networks.

Of course, all intangibles in astrategy map are worthy ofsupport. However, the levelof support will depend onyour strategy. For example:

• With a strategy based on low costs, the highestreturns come from information systems that focus on the follow-ing: quality, processimprovement, and workforce productivity.

• With a strategy based on building strong rela-tionships with customers,the greatest benefitscome from informationsystems that do twothings: first, reveal

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12 A U D I O - T E C H

knowledge about cus-tomer preferences and behavior and, sec-ond, enhance customercontact, service, andretention.

• With a strategy based on product superiority,information capital willenhance the productdesign and developmentprocess. It will accom-plish that through toolssuch as three-dimension-al modeling, virtual prototyping, andCAD/CAM.

Information capital has value only in the context ofthe strategy. It must bemanaged to align with thestrategy.

The old mind-set for managing

information capital was toevaluate performance by costand reliability. The new mind-set emphasizesevaluation based on strategicalignment.

In other words, organizationsmust manage informationcapital not as a cost, but as an asset — one whosevalue depends on how it contributes to executing theinstitution’s strategy.

Companies must also developorganization capital. Thatrefers to the company’s abili-ty to mobilize — and sustain— the process of changerequired to execute the strat-egy. Improvement generallymeans change, and goodstrategies include a changeagenda.

There are four elements thatenable organization capitalto play a key role in execut-ing the strategy. These are culture, leadership,alignment, and teamwork.

A strategy often requireschanges that may include:new products, new processes,or new customers. In turn,these changes define newbehaviors and values neededby the workforce.

The first step in developingan organization capital strategy is to define thechange agenda. This is illus-trated in the OrganizationChange Agenda figure that isshown below.

The objectives fall into twocategories of behavioralchange. One relates to

THE ORGANIZATION CHANGE AGENDA

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changes required to createcustomer and shareholdervalue. The second consists ofchanges needed to executethe strategy.

Generally, three kinds ofbehavior changes are espe-cially important for valuecreation:

• Focusing on the customer

• Innovating

• Delivering results

Four additional behaviorsare critical to executingstrategy:

• Understanding the mission, strategy, andvalues

• Creating accountability

• Communicating openly

• Working as a team

Of course, some companiesshy away from managinghard-to-measure factors likehuman capital, informationcapital, and organizationcapital. Granted, the mea-sures will be softer than thefinancial variety.

But there are significant ben-efits just from the good faitheffort to measure intangibleassets. It communicates theimportance of these driversto value creation.

Learning and growth mea-sures of the intangible assetsstimulate the improvementsin internal processes that are necessary to become a

successful strategy-focusedorganization.

■ ■

CUSTOMIZING YOUR STRATEGYMAP TO YOUR STRATEGY

Your own specific strategywill determine your organi-zation’s strategic thrust. Acompany competing on prod-uct leadership will highlightinnovation, while a companycompeting mainly on costwill emphasize operationsmanagement.

Regardless of its strategy, asuccessful company is onethat creates value for itssuppliers, employees, cus-tomers, and host communi-ties. But the companyabsolutely must create valueto reinvest in itself and toreward its shareholders.

Let’s discuss each of the fourtypes of value propositionsthat companies can use togenerate attractive profits.They are:

1. Low total cost

2. Product leadership

3. Complete customer solutions

4. Product lock-in

A classic example of a company that uses a lowtotal cost strategy success-fully is Wal-Mart. It con-ducts tough negotiationswith vendors, providingthem with very high volumepurchases in exchange forlow costs.

Then, it transfers some ofthe value to customersthrough low prices. At the same time, it retainsattractive margins for itself.

In addition to Wal-Mart,other strong companies pursuing a low total coststrategy include: SouthwestAirlines, Toyota, DellComputer, Vanguard MutualFunds, and McDonald’s.

These companies do morethan provide very competi-tive pricing. In that regard,remember the Yugo — a low-priced car whose poorquality turned off potentialbuyers.

An effective low total coststrategy offers highly com-petitive prices, and combinesthem with consistent quality,ease and speed of purchase,and decent product selection.

Companies like Wal-Mart,McDonald’s, and Dell keepcustomers’ costs down by saving them time. They dothat by reducing the timerequired to order and toreceive the product.

The best low total cost companies generally organize their strategy maps to support two general objectives:

1. Having a capable, motivated, and techno-logically enabled workforce.

2. Offering products and services that areconsistent, timely, andlow-cost.

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STRATEGY MAP TEMPLATE: LOW TOTAL COST

STRATEGY MAP TEMPLATE: PRODUCT LEADERSHIP

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A strategy map template fora low total cost strategyshows that key internalprocesses occur within theoperations management areaof the internal perspective.They include: good relation-ships with suppliers; highlyefficient operating processes;and rapid inventoryturnover.

Other factors include: simple, accessible orderingprocesses; a willingness to be product followersrather than leaders; a will-ingness to embrace continu-ous process improvement;and an emphasis on compa-ny-wide sharing of best practices.

The second type of valueproposition, product leader-ship, is used by companiessuch as Sony, Mercedes, andIntel that emphasize productinnovation and leadership.

Product leadership compa-nies want to be first-to-mar-ket with their innovations orenhancements.

Why? Because that allowsthem to command highprices from early adopters.In many cases, being first-to-market can impose highswitching costs that let com-panies defend their marketpositions without major costcutting.

In the strategy map tem-plate for product leadershipcompanies shown on page14, the key internal process-es are in the innovation areaof the internal perspective.The companies must excelat:

1. Anticipating customers’needs.

2. Discovering new oppor-tunities for superior products and services.

Other essential objectivesinclude superb product development processes, and excellence in patenting,regulatory, and brandingprocesses.

The third value propositionis complete customer solu-tions — basically, buildinglong-lasting relationshipswith customers. Thatrequires companies to develop customized solutions.

From about 1960 to 1980,this strategy characterizedIBM. It didn’t offer the lowest prices, or the mostreliable delivery, or the mostfunctional products.

But it did offer its customerscomplete solutions — hard-ware, software, installation,field service, training, educa-tion, and consulting.Moreover, it personalized the services to meet the customer’s unique needs.

Companies in this categoryemphasize customer reten-tion more than customeracquisition. They recognizethat retention typically costsmuch less than acquisition.

A strategy map template forfirms that follow this strate-gy is illustrated on page 16and shows that the key internal processes are in thecustomer management areaof the internal perspective.

Such companies’ deep understanding of their customers leads to lastingrelationships.

The final value propositiondeals with lock-in strategies.Under that approach, com-panies generate long-term sustainable value by creat-ing high switching costs for customers.

For example, people who consider switching from thewidely used MicrosoftWindows operating system to the user-friendly Applesystem can’t do so withimpunity. That’s becausemany application programsrun only on Windows.

System lock-in occurs mainlywhen a company’s core prod-ucts become the industrystandard. For that reason,companies that pursue alock-in strategy focus on the innovation area of theinternal perspective. Theyneed to:

1. Develop and enhanceproprietary standards.

2. Increase the breadth and application of thosestandards.

3. Lower potential cus-tomers’ switching costs.

Overall, a company’s strategy will contain manyobjectives. It will be mostsuccessful when integrated,aligned activities allow thecompany to offer a uniquevalue proposition.

Your organization’s strategymap should tell the unique

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STRATEGY MAP TEMPLATE: LOCK-IN

STRATEGY MAP TEMPLATE: COMPLETE CUSTOMER SOLUTIONS

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story of your strategy — onethat differentiates you fromthe competition.

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STRETCH TARGETS AND SUB-TARGETS FOR PERFORMANCEBREAKTHROUGHS

Clearly, developing your distinctive strategy requiresa good deal of thought, discussion, and debate —exactly what strategy mapscan encourage.

But remember that a strategy isn’t merely anopportunity for reflectionand discussion. It’s a call toaction.

Strategy maps must bedynamic, not static — viablein the workplace and work-able in the marketplace.

Your strategy requires a con-tinuing campaign designedto inform and energizeeveryone in an organization.

Planning the strategic campaign means taking asix-step process:

• First, define the share-holder/stakeholder valuegap.

• Second, reconcile thevalue proposition for targeted customers.

• Third, establish the time-line needed to close thevalue gap.

• Fourth, identify thevalue-creating themes.

• Fifth, create strategic

asset readiness.

• Sixth, identify and fundthe strategic initiatives.

Let’s look at the processmore closely.

The first step, determiningthe shareholder value gap,begins with defining theoverall objectives and mea-sures. In the case ofConsumer Bank, it set astretch target of increasingnet income by a whopping$100 million within fiveyears.

Once you’ve established astretch target, you can oftendiscover a planning gap,which is the differencebetween future aspirationsand current reality.Identifying the planning gap shows everyone involvedthat dramatic change is nec-essary. Next, you need toallocate the overall planninggap to different financialsub-objectives. That meansbreaking the high-level objective into manageablesteps.

Consumer Bank set threesub-objectives:

• Improving productivityby reducing cost per customer from $100 to$75.

• Improving growth byincreasing revenue percustomer from about$200 to $300.

• Improving the customerbase by tripling its number of high valuecustomers.

Achieving the three sub-objectives was necessary forthe bank to reach its overallgoal of improving net incomeby $100 million.

The second step, reconcilethe value proposition for tar-geted customer segments, hasfour dimensions:

1. Identifying target customers.

2. Clarifying the customervalue proposition.

3. Selecting the measures.

4. Balancing customerobjectives with financialgrowth goals.

Opportunities for cost andproductivity improvementsgenerally are relatively clear.But that’s often not the casewith revenue growth.

That requires explicit atten-tion to targeted customergroups. It usually includesselling more to existing cus-tomers, and selling productsto entirely new customers.

With Consumer Bank,increasing sales to existingcustomers involved turningthe bank’s employees intotrusted financial advisors.By building such relation-ships, employees wouldbecome comfortable intro-ducing customers to a package of integrated services.

The bank directed its learning and growth objec-tives toward teaching andmotivating employees tocross-sell its other offerings.

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Step three, establish thetime-line for closing thevalue gap, has two elements:

• First, setting deadlinesfor results.

• Second, allocating theplanning gap to differentstrategic themes.

As we’ve seen, ConsumerBank established a time-linefor its strategy of five years.It focused processes onachieving results within thattime.

Instead of aiming for animmediate — and impossible— leap forward, theConsumer Bank team trans-lated the vision into one consisting of manageable,time-phased steps. Theyestablished a realistic pathto an ambitious goal.

Operations processes wouldreduce cost per customer.Customer managementprocesses would increase thenumber of income-boostingrelationship customers. Andinnovation processes wouldintroduce new products andservices to increase annualrevenue per customer by 50percent.

Step four, identify the strate-gic themes, consists of twoelements:

1. Identifying the criticalfew processes, or themes,that have the greatesteffect.

2. Establishing measuresand targets.

This step involves aligning

the strategic drivers toachieve the financial andcustomer objectives.

Consumer Bank selected twooperations managementprocesses essential to mak-ing the strategy work.

One was to provide rapidresponse — measured byrequest fulfillment time. Itdid this by shifting more of its customer support toWeb-based technology.

Another was to minimizeproblems for customers and employees by simplify-ing and clarifying processes.That would increase cus-tomer satisfaction andimprove productivity.

The fifth step, create strate-gic asset readiness, involvesthree elements:

1. Identifying the human,information, and organi-zation capital required tosupport the strategicprocess.

2. Assessing the readinessof these assets to support the strategy.

3. Establishing measuresand targets.

Consumer Bank identifiedseven value-creating processes. For each one, the management team askedtwo questions: (1) "Whichjob families are critical tomanaging this process?" and (2) "Which informationsystems are critical forimproving this process?"

Finally, step six, identify and

fund the strategic initiatives,consists of two elements:

1. Defining the specific initiatives required tosupport processes anddevelop intangibleassets.

2. Determining and securing the funding.

Of course, the initiatives arewhere the rubber meets theroad. Supporting processesand developing intangibleassets are the result of thoseinitiatives.

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STRATEGY MAPS ASFRAMEWORKS FOR ACHIEVINGCRITICAL OBJECTIVES

Your organization’s strategymust be more than a set ofinitiatives — no matter howbold they might be. A strate-gy contains a multitude ofrelated elements.

Strategy maps can literallyput everyone in your organi-zation on the same page.They give you a vehicle to discuss your strategyfully, and develop it systematically.

The strategy map can helpyou avoid the trap of creat-ing a strategy that existsmore in words than in execu-tion. It can help make yourstrategy one that drives theentire organization.

It will help you and yourpeople identify powerfulassets — most of themintangible — that are vitalsources of value creation.

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It will show you how to align those key intangibleassets with critical process-es, including: operationsmanagement, customer management, innovation,and regulatory and socialprocesses.

Of course, it’s up to you totake the steps necessary tomake the strategy map trulya dynamic tool. Actions andsolid management are theultimate drivers of change.

The point is this: Your strat-egy is the essence of whatyour company is. It is thesource of competitive advan-tage, financial success, andindustry leadership. Yourstrategy map will show youthe way to the destination.Now it is up to you to beginthe journey.

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NOTES

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ABOUT THE AUTHORS

Robert S. Kaplanis the creator of the Harvard Business School video series MeasuringCorporate Performanceand the author or coauthor of thirteen Harvard Business Reviewarticles, 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. Nortonis 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 TheBalanced Scorecardand The Strategy-Focused Organization.

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