The Strategy-Focused Organization: Theory and Method (I)

1. The Strategy-Focused Organization: Theory and Method (I) Balanced Scorecard (BSC) – A New Management System in the Science of Organization BSC – The Four Perspectives The Strategy Map

2. Balanced Scorecard – A New Management System in the Science of Organization • The starting point of a Balanced Scorecard execution is the strategy. A scorecard program is involved, i.e. that type of program similar with a “printed program or card enabling a spectator to identify players and record the progress of a game and competition.”[i] • What is significant in such a “game”? First of all, the “players” are the most significant element being involved in a business process. They get together and act themselves as organizational units, not individually but as if they are “collective individuals”, or “moral personalities”. They act, therefore, collectively and, also, as units, i.e. as collective persons. Secondly, the actors that are put together to work as organizational units behave not randomly but in a customized way, that is by executing some specification, striving to attain the same goals and targets. So, they accept a sort of internal benchmarks that help them “to understand their contribution to the organization”. [i] Kaplan, Robert S., Norton, D. (2001). The Strategy Focused-Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, Boston: Harvard Business School Press

3. What is, then, a “scorecard”? “An application or custom user interface that helps manage an organization’s performance (by optimizing and aligning organizational units, business processes and individuals. It should, also, provide internal and industry benchmarks as well as goals and targets that help individuals understand their contribution to the organization. The use of scorecards spans the operational, tactical and strategic aspects of the business and its decisions.”[i] • The elements involved when using the Balanced Scorecard are the organizational units, the strategy of the organization (through which the goals and targets are designed), the performance indicators (financial, customer, internal business processes, learning and growth) all of them being integrated in a framework which Kaplan and Norton used to call “strategy map”. The Balanced Scorecard “is a model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning and customer satisfaction”.[ii] [i] http://www.dmreview.com/resources/glossary.cfm [ii] http://www.services.eliteral.com/Glossary/managerial-accounting-glossary.php

4. Let’s keep in mind the idea that the Balanced Scorecard is a “model of performance evaluation” designed to balance “measures of financial performance”, “internal operations”, learning and innovation (or growth) and “customer satisfaction”. • The Balanced Scorecard is “an integrated framework for describing strategy through the use of linked performances measures in four, balanced perspectives – financial, customer, internal process and employee learning and growth. The Balanced Scorecard acts as a management system and communication tool.”[i] • “An approach for ongoing organizational monitoring defined by R. Kaplan and D. Norton in which four types performance indicators (namely: financial, customer, internal business processes, and learning and growth) are used.”[ii] [i] http://www.BalancedScorecard.biz/Glossary.html [ii] http://www.ndu.edu/irmc/elearning/primer/glosarry.htm

5. What is significant in the “strategy map” refers to what Kaplan and Norton call “linkages of cause-and-effect relationship” just because such linkages “show how the intangible assets are transformed into tangible (financial) outcomes”. Tangible assets – cash, accounts receivable, inventory, land, plant, and equipment – “have values largely independent of who owns them. Intangible assets, in contrast, usually have little stand-alone value; their value arises from being embedded in coherent, linked strategies.”[i] • It is important to underline that the scorecard program uses, also, financial and non-financial measures (such as “cycle time, market share, innovation, satisfaction, and competencies.”[ii] Such measures allow the “value-creating process to be described and measured”[iii] not merely “inferred”. [i] Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 11 [ii] Ibid. [iii] Ibid.

6. Therefore, we can conclude that “strategy map and Balanced Scorecards constitute the measurement technology for managing in a knowledge based economy.”[i] • We defined three key concepts in the strategic management: strategy-focused organization, strategy map and Balanced Scorecard. These are key-concepts of the newest organizational science proper to a new type of society and economy, that are knowledge-based not merely industry-based or agriculture-based, or even military-based society and economy. • When we succeeded to translate the organization’s strategy into a “logical architecture of a strategy map and Balanced Scorecard, we may assume that the “organization created a common and understandable point of reference for all their units and employees.”[ii] [i] Ibid. [ii] Ibid.

7. BSC – The Four Perspectives • The Balanced Scorecard is the method that enable the ongoing monitoring of strategy-focused organizations, i.e. those companies aiming for the realization of its strategic objectives based on measuring organizational performance from four perspectives as follows: • Financial Perspective • Customer Perspective • Internal-Business-Process Perspective • Learning and Growth Perspective

8. Financial Perspective • “Financial performance measures indicate whether a company’s strategy, implementation, and execution are contributing to bottom-line improvement.”[i] Financial objectives may be translated in various profitability-measured, for example, “by operating income, return-on-capital employed, or, more recently, economic value-added.”[ii] Other financial indicators used within the financial perspective may be sales growth or “generation of cash flows”[iii]. [i] Ibid., p. 25 [ii] Ibid., p. 26 [iii] Ibid., p. 26

9. Customer Perspective • This perspective may include “specific measures of the value propositions that the company will deliver to customers in targeted market segments.”[i] Measuring “the elapsed time from when a new customer demand has been identified to the time when the new product or service has been delivered to the customer”[ii] is an example of indicator to be used within the customer perspective. The “incidence of defects, say part-per-million defect rates, as measured by customers”[iii] is another example. [i] Ibid., p. 26 [ii] Ibid., p. 87 [iii] Ibid., p. 87

10. Internal-Business-Process Perspective • The decision makers in organizations should identify those critical organizational processes “in which the organization must excel.”[i] • “The internal-business-process measures focus on the internal processes that will have the greatest impact on customer satisfaction and achieving an organization’s financial objectives.”[ii] We notice, here, the linkage between the customer perspective and the financial one as having assured greater customer satisfaction would secure improved financial results for the company. • “The operations process remains important and organizations should identify the cost, quality, time, and performance characteristics that will enable it to deliver superior products and services to its targeted current customers.”[iii] Having secured all factors contributing to the delivering of high quality products and services to the clients in a timely manner will improve customer’s satisfaction. [i] Ibid., 26 [ii] Ibid., p. 27 [iii] Ibid., pp. 115-116

11. Finally, the financial results of the company delivering superior products and services will be improved. Again, we pinpoint the importance of the linkage between the internal-business-process perspective and customer as well as financial perspectives as the success of the business depends on a multitude of interlinked factors, including efficient organizational processes, high customer satisfaction and improved financial results. Learning and growth perspective is the last one within the philosophy of the balanced scorecard method.

12. Learning and Growth • “The objectives in the learning and growth perspective provide the infrastructure to enable ambitious objectives in the other three perspectives to be achieved.”[i] Kaplan and Norton identified “three principal categories for the learning and growth perspective: • Employee capabilities • Information systems capabilities • Motivation, empowerment, and alignment.”[ii] • Each one of these three categories provides a different explanation of what is known as being a unique organizational capability. [i] Ibid., p. 126 [ii] Ibid., p. 127

13. The Strategy Map • We need to formulate two new concepts the Balanced Scorecard relies on. The first one is the concept of the strategy map. The main function of a strategy map is “to make explicit the strategy’s hypothesis.”[i] “Each measure of a Balanced Scorecard becomes embedded in a chain of cause-and-effect logic that connects the desired outcomes from the strategy with the drivers that will lead to the strategic outcomes.”[ii] • The strategy map provides a “framework for describing and managing strategy in a knowledge economy”[iii] and it appears as a “generic architecture” as it comprises the diagram of the most significant cause-and-effect chains the strategy is relying on in order to get finally a “profitable growth”. [i] Ibid. [ii] Ibid. [iii] Ibid.

14. The cause-and-effect chains reveal to those involved in the new management system how the intangible assets can contribute to value creation. Such linkages reveal how the improvements of various intangible assets (such as knowledge, skills and the customer satisfaction) may affect the financial outcomes. Let’s take into account Kaplan and Norton’s example: • “Investments in employee training lead to improvements in service quality • Better service quality leads to a higher customer satisfaction • Higher customer satisfaction leads to increased customer loyalty • Increased customer loyalty generates increased revenues and margins.”[i] • The strategy map makes visible the complex linkages between an asset such as “workforce capabilities” and its “financial value” that is hypothetically associated to such an intangible asset. [i] Ibid., p. 66

15. Taking into account that the value is “indirect”, “contextual”, “potential”, “bundled”, the strategy map assumes itself the role of making visible, explicit what it revealed to be hidden, implicit: the intermediate stages involved in a process of a value creation being that, as we have already mentioned, “the improvements in intangible assets affect financial outcomes through cause-and-effect relationships involving two or three intermediate stages”[i], as it was presented in the former example. • The Balanced Scorecard provides the proper framework that enable us to make explicit the linkages between “intangible and tangible assets in value creating activities”[ii]. [i] Ibid. [ii] Ibid.

16. The scorecard measures the intangible assets (their “value”) in their own adequate units, other than currency (dollar, euro, etc.) just because using a “strategy map” of “cause-and-effect linkages” make possible to “describe how intangible assets get mobilized and combined with other assets, both tangible and intangible, to create value-creating customer value proportions and desired financial outcomes.”[i] A strategy map is a “logical architecture” emphasized as a diagram of the hypothetic “cause-and-effect linkages” that specify the “relationship among shareholders, customers, business process, and competencies”[ii] so that the team executing a strategy be aware of the connections between “the desired outcomes from the strategy with the drivers that will lead to the strategic outcomes.”[iii] [i] Ibid., p. 68 [ii] Ibid., p. 68 [iii] Ibid., p. 69

17. A “strategy map” is defined as a “logic architecture” of “cause-and-effect linkages”, or as a “generic architecture for describing a strategy”[i]. Operationally, it looks like a diagram through which we are made aware of the strategy, i.e. a strategy-focused organization that, as a matter of fact, is a new organization compared to itself in a previous period of time when the managerial team had come to formulate a strategy. • Let’s illustrate such a strategy map by a diagram proposed by Kaplan and Norton as architecture of a strategy map for a retail firm specialized in women’s clothing. [i] Ibid.

18. Source:Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 70 A Fashion Retailer’s Strategy Map The Productivity Strategy “Improve operating efficiency through real estate productivity and improved inventory management” The Revenue Growth Strategy “Achieve aggressive, profitable growth by increasing our share of the customer’s closet” Profitable Growth Financial Growth Productivity Customer Brand Image Fashion Design Consistent Quality/Fit Price/ Benefit Complete Offering Availability Shopping Experience Shopping Experience Right Product Building Image Build the Franchise Operational Excellence Increase Customer Value Internal “Achieving Brand Dominance” Theme “Fashion Excellence” Theme “Sourcing and Distribution” Theme “Shopping Experience” Theme Learning and Growth Strategic Awareness Goal Alignment Staff Competencies Technology Infrastructure

19. What is relevant in the diagram refers to the four perspectives on value creation, (financial, customer, internal business process, learning and growth), the “strategic themes” in the internal business process perspective, the cause-and-effect linkages through which the improvements in an organization’s intangible assets propagate through improved customer satisfaction to leveraged financial results. A “strategy scorecard replaced the budget as the center for management processes”[i] and we can conclude that a “new operating system” emerged to sustain a “new strategic management process” and the focus of that operating system is on the Balanced Scorecard method. [i] Ibid., p. 23

20. The Balanced Scorecard management system reveals to bear the power “to focus the entire organization on strategy”[i] so that the former fragmented organization based on a bureaucratic staff and on budgets as operating system for management process is largely replaced by a strategy-focused organization. It is possible to make explicit “how the intangible assets are transformed into tangible (financial) outcomes”[ii] due to this new operating system. [i] Ibid., p. 23 [ii] Ibid., p. 11

21. “The strategy map and its corresponding Balanced Scorecard measurement program provide a tool to describe how shareholder value is created from intangible assets. Strategy maps and Balanced Scorecard constitute the measurement technology for managing in a knowledge-based economy.”[i] “By translating their strategy into the logical architecture of a strategy map and Balanced Scorecard, organizations create a common and understandable point of reference for all their units and employers.”[ii] [i] Ibid., p. 11 [ii] Ibid., p. 11