Summary by Manuel Pagan
Master of Accountancy Program
University of South Florida, Summer 2002
Balanced Scorecard Main Page | Performance
Measures Main Page | Strategy Main Page
The key to executing your corporate strategy is to have people in your organization understand it. This has become increasingly difficult in the new economy where the tangible has given way to the intangible. A strategy map can help your organization organize in this highly complex and confusing environment.
Wartime Anecdote
Imagine that you are a general leading an army in faraway foreign land. Critical to your success would be timely information on the enemy’s locations, major cities, infrastructure, transportation and communications systems, and topography. You would also need insight on the interdependencies of all these systems. Without this information, you couldn’t communicate your attack strategy to the officers in the field. You would be leading a campaign while blind to all the factors necessary to be successful.
Unfortunately, many executives attempt to implement a strategy under these conditions. Executives typically lack a comprehensive and well-formulated strategy, especially one that considers the web of interdependencies among the parts of the whole organization. They also fail to give their employees the necessary information to implement the strategy. How can a company carry on a strategy that is incomplete and not understood? A strategy map is a comprehensive tool that articulates a companies’ critical objectives, the relationships among the objectives that drive organizational performance, and properly articulates this to employees.
Why Strategy Maps?
During the industrial age, companies created value by processing raw materials into tangible products. Land, factories, equipment, and line workers were the tools of industry. The information revolution has brought with it a shift from these tangible assets to intangible assets: information, customer relationships, innovation, employee skills, and knowledge are now driving forces behind our economy. Interestingly, given the pervasiveness of intangible assets, we still lack the proper tools to describe them and the value they create.
The main difficulty is that the value of intangible assets depends on their organizational context and a company’s strategy. The balanced scorecard was developed to help organizations understand how they create value into today’s information economy.
Balanced Scorecard
The balanced score card measures a company’s performance in four major areas:
Financial Perspective
Customer Perspective
Internal Processes Perspective
Learning and Growth Perspective
A Balanced Scorecard shows the knowledge, skills, and systems, that your employees will need to innovate and build the right strategic capabilities and efficiencies that deliver specific value to the market, which will eventually lead to higher shareholder value. Kaplan and Norton introduced the scorecard concept in 1992 (See Summary). Since then they have noticed certain patterns and have brought them into a visual framework – a strategy map - that basically imbeds the four major areas into a cause and effect chain, connecting desired outcomes with the drivers of those results.
From the Top Down
The authors claim the best way to build a strategy map is from the top down. Corporate executives should first review their mission statement, core values, goals, and objectives. With that information in hand, executives can develop a strategic vision. That vision must create a clear strategy/goal and define, logically, how to arrive at the destination.
Financial Perspective
Building a strategy map begins with a financial strategy to increase shareholder value. Two basic levels must be addressed here: revenue growth and productivity. Revenue growth can further be divided into revenue from new sources (new products and new customers) and increasing value to current customers. Productivity also has two parts: improving the companies cost structure and using the assets more efficiently. In general, the productivity strategy yields results sooner than the revenue strategy.
Mobil Example: Throughout the four perspectives, the authors give examples of what Mobil has implemented. Mobile, which recently merged with Exxon, is a vertically and horizontally integrated oil conglomerate. Mobil’s financial perspective strategy includes:
Revenue: Introducing new sources of non-gasoline revenue.
Revenue: Sell more premium brands to increase customer profitability.
Productivity: Become industry cost leaders.
Productivity: Maximize the use of existing assets.
Customer Perspective
The core of any business strategy is the customer value proposition, which describes the unique mix of products, service attributes, customer relations, and corporate image that a company offers. Typically, the customer value proposition is chosen from one of three areas: operational excellence, customer intimacy, and product leadership. A successful company will usually be a leader in one of these categories, and top tier standouts in the other two.
Mobil Example: Mobil’s customer perspective strategy includes:
Clean, safe, and quality products.
Speedy purchases (this was the catalyst for the Mobile speed pass, now used by millions).
Friendly, helpful workers.
Recognition of loyal customers.
Offer more consumer products.
Help dealers develop their business skills.
Internal Process Perspective
Once the financial and customer perspectives are clear, the company can now determine how to best offer the unique differentiated value propositions. This perspective has four major parts: build the franchise by innovating, increase customer value by deepening relationships, achieve operational excellence by improving supply chain management, the cost, quality and cycle time of internal processes, asset utilization and capacity management, and becoming a good corporate citizen.
Mobil Example: Mobil’s internal process perspective strategy includes:
Create non-gasoline products and services.
Understand customer segments better and build best-in-class franchise teams.
Improve hardware performance and inventory management.
Deliver products on spec and on time, and become the industry cost leader.
Improve environmental health and safety.
Learning and Growth Perspective:
The foundation of any strategy map is the learning and growth, which defines the core competencies, skills, technology, and corporate culture necessary to support the other three perspectives. These objectives enable a company to align its human resources and information technology with its strategy.
Mobil Example: Mobil’s learning and growth perspective strategy includes:
Promote functional excellence, develop leadership skills, and create an integrated view of the company among the employees.
Adopt new technology that encourages and aids process improvements.
Align business and personal goals.
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For some illustrations of strategy maps see Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press. (Summary).
Other Related Summaries:
Kaplan, R. S. and D. P. Norton. 1992. The balanced scorecard - Measures that drive performance. Harvard Business Review (January/February): 71-79. (Summary).
Kaplan, R. S. and D. P. Norton. 1993. Putting the balanced scorecard to work. Harvard Business Review (September-October): 134-147. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action
Boston: Harvard Business School Press. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard
Business Review (January-February): 75-85. (Summary).
Kaplan, R. S. and D. P. Norton. 1997. Why does business need a
balanced scorecard? Journal of Cost Management (May/June): 5-10. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment.
Harvard Business School Press. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part I.
Accounting Horizons (March): 87-104. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic
management: Part II. Accounting Horizons (June): 147-160. (Summary).
Kaplan, R. S. and D. P. Norton. 2004. Measuring the strategic readiness of intangible assets. Harvard Business Review (February): 52-63. (Summary).
Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).
Martin, J. R. Not dated. Balanced scorecard concepts. Management And Accounting Web. Bal Score Sum
Martinsons, M., R. Davison and D. Tse. 1999. The balanced scorecard: A foundation for the strategic management of information systems. Decision Support Systems (25): 71-88. (Summary).
Norreklit, H. 2003. The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society 28(6): 591-619. (Summary).
Paladino, B. 2007. 5 key principles of corporate performance management: How do Balanced Scorecard Hall of Fame, Malcolm Baldrige, Sterling, Fortune 100, APQC, and Forbes award winners drive value? Strategic Finance (June): 39-45. (Note).
Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).
Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review (May-June): 43-59. (Summary).
Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).
Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Note: Schonberger criticizes the KPI or scorecard approach from the lean enterprise perspective. Summary).