A strategy map is a visual depiction of an organization’s strategy. It shows how the organization aims to fulfill its mission and vision through a connected series of ongoing improvements. In a business setting, the strategy map outlines the long-term plan or competitive strategy for achieving higher profitability. In a nonprofit or governmental organization, it showcases the approach towards enhancing the performance of its mission.
Both cases demonstrate the cause-and-effect relationships between various strategic objectives and their inclusion in a balanced scorecard, which also incorporates key performance indicators (KPIs). The introduction of strategy maps to the business world can be traced back to 2001 when Robert S. Kaplan and David P. Norton introduced it as an extension of their earlier concept, the balanced scorecard. Their book, The Strategy-focused Organization, serves as the main reference for strategy maps [1].
A further standard reference is their third book Strategy Maps, which provides numerous examples of the use of strategy maps in various organizations. Kaplan and Norton introduced the balanced scorecard performance management concept in a paper, “The Balanced Scorecard: Measures that Drive Performance” in the January 1992 edition of Harvard Business Review[2]. The balanced scorecard provides organizations with a “balanced” range of metrics against which to measure their performance. This includes non-financial metrics such as learning and growth of employees, efficiency of internal business processes, and customer satisfaction. Kaplan and Norton found that focus and alignment were crucial for successful implementation of the balanced scorecard. Developing a scorecard forced organizations to reassess their strategic priorities and explain their strategies.
Kaplan and Norton concluded that if something cannot be described, it cannot be measured. Strategy maps, which were previously used in creating the balanced scorecard, became the main focus. As a result, the balanced scorecard transformed from a performance management tool into a comprehensive strategic management tool. Strategy maps offer an overall perspective of an organization’s strategy and serve as a framework for describing their strategies before establishing performance metrics.
Strategy maps were briefly discussed in Kaplan and Norton’s book on the Balanced Scorecard titled “Strategy Maps” (2004). The book provides a more extensive treatment of the topic. [edit] The concept of “balance” in the balanced scorecard acknowledges the need to consider various perspectives in order to obtain a comprehensive view of an organization’s performance. Traditionally, organizations primarily focused on financial measures, which are indicators that track past performance.
There are four perspectives that contribute to leading indicators: financial perspective, customer perspective, internal process perspective, and learning and growth perspective. In private-sector organizations, the financial perspective encompasses profit, return on capital, cash flow, and margins. In non-profit organizations, it includes income from sponsors or taxpayers, cash flow, and cost control. The customer perspective focuses on specific concerns related to customers. The internal process perspective involves various aspects of business processes. The learning and growth perspective encompasses human, information, and organizational capital. These four perspectives provide a comprehensive description of any organization’s strategy, although there may be variations. The order of the perspectives is important, with the financial perspective being prioritized in private-sector organizations and the customer perspective taking precedence in public-sector or non-profit organizations.
Aside from this rule, the fundamental structure of the four perspectives is strong and suitable for any organization’s strategic plan. It is crucial to acknowledge that creativity should be applied to the strategic objectives within the strategy map, rather than the basic framework itself. Strategic enhancements progress from the bottom upwards until a final outcome is reached. Hence, during the planning stage, we first analyze a higher perspective to determine our needs, and subsequently identify the necessary actions in the lower perspectives to attain these goals. All of this information is conveyed through the strategy map.
The arrows of effect go from lower perspectives to higher perspectives, while the arrows of strategic inference (not explicitly shown in the strategy map) go from higher perspectives to lower perspectives. The higher perspectives involve explicit stakeholders, such as shareholders in the financial perspective and customers in the customer perspective. However, the lowest perspective does not have any explicit stakeholders. Improvements in the lower perspectives take a long time to develop but are the only way to achieve lasting and significant change in the organization’s performance.
In Kaplan and Norton’s perspective, the intangible assets that include human, information, and organization capital are referred to as intangible assets. [edit] The mission and vision of an organization provide a clear purpose for its existence. It is a brief statement that guides the organization’s activities and is related to its core values. The mission may also highlight the organization’s unique capabilities, geographic location, and the value it provides to customers. The vision, on the other hand, defines what success looks like for the organization.
The organization’s “picture of the future” is its vision, and the means by which it plans to achieve this vision is its strategy. The strategy map, which is a cause-and-effect chain of strategic objectives, is used to implement the strategy. [edit] Kaplan and Norton discuss the customer perspective and emphasize the value proposition. This concept builds on the work of economist and business theorist Michael Porter and refers to the combination of commodity, quality, price, service, and warranty that an organization offers to its customers.
The value proposition focuses on specific customers, meaning it has target segments. Kaplan and Norton discuss four main types of value propositions: Best buy or Low total cost, which includes affordable prices, reliable quality, and quick service. For example, Southwest Airlines used a best buy strategy. Product leadership and innovation, which involves offering cutting-edge products or being industry leaders. Companies like Apple Inc. and Intel provide this type of value proposition. Customer complete solutions, which are customized to meet individual customer needs and preferences.
IBM provides customers with comprehensive solutions. The concept of lock-in, introduced by Michael Porter, is a strategy used by the organization to make customers essentially have no choice but to purchase their products. For example, they offer certain auxiliary products at low prices that are not compatible with products from other organizations. This strategy takes advantage of the high costs associated with switching to keep customers loyal to IBM. Lock-in is related to the concept of coercive monopoly.
The argument can be made that IBM’s SNA strategy involved lock-in. IBM made sure that SNA was necessary at crucial points in their mainframe architecture. Due to the complexity, incompleteness, and potential changes to the SNA specification by IBM, competitors were unable to offer a viable alternative. This resulted in customers being forced to purchase IBM products in order to guarantee compatibility. [citation needed] Each target segment of customers may have different value propositions that suit their needs. An organization’s actual value proposition may consist of a combination of the aforementioned components. [edit] From the perspective of internal processes
Kaplan and Norton emphasize that the value proposition plays a significant role in determining which internal processes to prioritize. They provide approximate matches between specific value propositions and corresponding internal process perspectives. For example, Best buy aligns with the operations management perspective, Customer complete solutions align with the customer management perspective, and Product leadership and innovations align with the innovations perspective.
There are four main types of processes: Develop and sustain supplier relationships, Produce products and services, Distribute and deliver products and services to customers, and Manage risks. It is important to focus on reducing lead times for customers from order placement to delivery, both outside and inside the factory. [edit] Customer management processes have four components: Customer selection (identifying target customer segments), Customer acquisition,
Customer retention and growth are two important objectives for companies. Ideally, companies aim to categorize their customers based on the type of relationship they desire with the company. This categorization can be determined by various parameters including use intensity, benefits sought, loyalty, and attitude. However, in reality, when dealing with a widespread consumer market, companies often rely on indicators such as demographic factors, geographic factors, and lifestyle factors. By classifying customers based on these indicators, companies can identify target segments and also select which customer segments they do not want to cultivate.
Customer retention is crucial as it yields a higher ROI compared to acquiring new customers. To foster customer growth, active participation is encouraged to cultivate a sense of commitment. Customers are tasked with generating innovative solutions, while loyal ones receive exclusive offers. [edit] The innovation process encompasses four essential steps: identifying opportunities for new products and services, managing the research and development portfolio, and designing and developing new offerings.
Introducing new products and services to the market involves several stages: concept development, product planning, and detailed product and process engineering. This process is often compared to a funnel by many authors, where flexibility is at its maximum in the initial stages and gradually narrows as options are eliminated. It is crucial for companies in today’s environmentally conscious age to consider all externalities of their activities.
This is important in two ways: Companies need to comply with laws and statutory regulations. Companies would like a good environmental and people-friendly reputation that generates customer goodwill. There are four dimensions to regulatory and social processes:
- Environment: Issues such as energy and resource consumption, and emissions into the air, water, and soil
- Safety and health: Safety hazards to employees
- Employment practices: Diversity of employees
- Community investment: This is discussed below
Many major companies have created foundations in order to systematically allocate funds to deserving community organizations. According to Porter and Kramer, companies should invest in ways that enhance their competitive environment. Porter and Kramer outline four aspects of a competitive environment that companies can influence through their philanthropic efforts: the availability of skilled workers, scientific and technological institutions, and quality physical infrastructure.
Demand conditions refer to the training of individuals to create potential markets for a company’s products and services. Rules for competition and rivalry include the option for successful companies to contribute resources to organizations that safeguard intellectual property from unethical competitors. Related and supporting industries involve investments in suppliers and infrastructure that support the industry a company operates in. [edit] The aspect of learning and growth is also considered.
While intangible assets hold the greatest potential for creating lasting change within an organization, strategy maps provide a top-down approach to planning. This involves starting with the requirements of higher perspectives and then determining the necessary elements at the levels of human, organization, and information capital. This perspective is often referred to as “Organization Capacity” or “Capacity Building,” encompassing both infrastructure and human capabilities. [edit] Human capital
Kaplan and Norton propose a multi-step strategy to enhance human capital, which includes identifying strategic job families, developing competency profiles, assessing human capital readiness, and formulating a plan for improvement.
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In addition, there are three areas of application for information capital: transaction processing applications for daily repetitive tasks, and analytic applications for statistical analysis to enhance understanding and improvement.
Transformation applications involve changing the nature of a business. Organization capital includes four elements: culture, leadership and accountability alignment, teamwork, and a system of global knowledge management. The book by Kaplan and Norton also includes various case studies, featuring both profit and non-profit organizations.
Some non profit organizations include: American Diabetes Association, Boston Lyric Opera, Fulton County School System, Teach For America, and AIESEC.
Related work includes scorecards used in business circles such as Consultant Scorecard, HR Scorecard, Total Performance Scorecard, and The Performance Prism.
References and external links: A Balancing Act, by The Balanced Scorecard Institute[1], Strategic decision making and national differences [2].
