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
  organizations 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/man
  agerial-accounting-glossary.php

4

• Lets 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/glos
  arry.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 measurediii 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 organizations
  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 companys 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 flowsiii.
• 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 customerii 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
  customersiii 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 organizations 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
  customers 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 strategys 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
  economyiii 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.
  Lets take into account Kaplan and Nortons
  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 stagesi, 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 activitiesii.
• 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
  competenciesii 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
  strategyi. 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.
• Lets 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
  womens clothing.
• i Ibid.

18
Source Kaplan, Robert S., Norton, D. (2001). Op.
cit., p. 70
A Fashion Retailers 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
customers closet
Profitable Growth
Financial
Productivity
Growth
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 organizations intangible
  assets propagate through improved customer
  satisfaction to leveraged financial results. A
  strategy scorecard replaced the budget as the
  center for management processesi 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 strategyi 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)
  outcomesii 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