the Strategic Readiness of Intangible Assets - MBA IT ALK · or McDonald's that are following a low-cost ... database of Balanced Scorecard implementations used ... Measuring the

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the StrategicReadiness ofIntangibleAssetsH o w VALUABLE IS A COMPANY culture that enables

employees to understand and believe in their orga-nization's mission, vision, and core values? What's

the payoff from investing in a knowledge managementsystem or in a new customer database? Is it more impor-tant to improve the skills of all employees or focus on thosein just a few key positions?

Measuring the value of such intangible assets is theholy grail of accounting. Employees' skills, IT systems, andorganizational cultures are worth far more to many com-panies than their tangible assets. Unlike financial andphysical ones, intangible assets are hard for competitors toimitate, which makes them a powerful soiirce of sustain-able competitive advantage. If managers could find a wayto estimate the value of their intangible assets, they couldmeasure and manage their company's competitive posi-tion much more easily and accurately.

But that's simpler said than done. Unlike financial andphysical assets, intangible assets are worth different thingsto different people. An oil well, for example, is almost asvaluable to a retail firm as it is to an oil exploration corpo-ration because either company could sell it swiftly if nec-essary. But a workforce with a strong sense of customerservice and satisfaction is worth far more to the retailer

by Roberts. Kaplan

and David P. Norton

52 HARVARD BUSINESS REVIEW

.•.A\

A real-and revolutionary- opportunitylies in studying and assessing how well :prepared 4 company's jieople, systems, jand cultu^BBB|^^Bff-y out its strategy!

Measuring the Strategic Readiness of Intangibie Assets

than it would be to the oil company. Also, unlike tangibleassets, intangible assets almost never create value bythemselves. They need to be combined with other assets.Investments in IT, for example, have little value unlesscomplemented with HR training and incentive programs.And, conversely, many HR training programs have littlevalue unless complemented with modern technologytools. HR and IT investments must be integrated andaligned with corporate strategy if the organization isto realize their full potential. Indeed, when companiesseparate functions like HR and IT organizationally, theyusually end up with competing silos of technical special-ization. The HR department argues for increases in em-ployee training, while the IT department lobbies for buy-ing new hardware and software packages.

What's more, intangible assets seldom affect financialperformance directly. Instead, they work indirectly throughcomplex chains of cause and effect. Training employees inTotal Quality Management and Six Sigma, for instance,should improve process quality. That improvement shouldthen increase customer satisfaction and loyalty-and alsocreate some excess resource capacity. But only if the com-pany can transform that loyalty into improved sales andmargins and eliminate or redeploy the excess resourceswill the investment in training pay off. By contrast, the im-pact of a new tangible asset is immediate: When a retailerdevelops a new site, it sees financial benefits from thesales in the newly opened outlet right away.

Although these characteristics make it impossible tovalue intangible assets on a freestanding basis, they alsopoint the way to a new approach for quantifying howintangible assets add value to the company. By under-standing the problems associated with valuing intangibleassets, we learn that the measurement ofthe value theycreate is embedded in the context ofthe strategy the com-pany is pursuing. Companies such as Dell, Wal-Mart,or McDonald's that are following a low-cost strategy de-rive value from Six Sigma and TQM training becausetheir strategies are predicated on continuous process im-provement. The strategy of offering customers integratedsolutions (rather than discrete products) pursued byGoldman Sachs, IBM Consulting, and the like requiresemployees good at establishing and maintaining long-term customer relationships. An organization cannot pos-sibly assign a meaningful financial value to an intangibleasset like "a motivated and prepared workforce" in a vac-

Robert S. Kaplan ([email protected]) is the Marvin BowerProfessor of Leadership Development at Harvard BusinessSchool in Boston. David P. Norton ([email protected]) isthe founder and president ofthe Balanced Scorecard Col-laborative (wviw.bscoicom) in Lincoln, Massachusetts. Thisarticle is based on their book Strategy Maps: ConvertingIntangible Assets into Tangible Outcomes (Harvard Busi-ness School Press, 2004)-

uum because value can be derived only in the context ofthe strategy. What the company can measure, however, iswhether its workforce is properly trained and motivatedto pursue a particular goal.

Viewed in this light, it becomes clear that measuringthe value of intangible assets is really about estimatinghow closely aligned those assets are to the company'sstrategy. If the company has a sound strategy and if theintangible assets are aligned with that strategy, then theassets will create value for the organization. If the assetsare not aligned with the strategy or if the strategy isflawed, then intangible assets will create little value, evenif large amounts have been spent on them.

In the following pages, we will draw on the conceptsand tools ofthe Balanced Scorecard to present a way tosystematically measure the alignment of the company'shuman, information, and organization capital - what wecall its strategic readiness - without which even the beststrategy cannot succeed.

The Strategy Map

The strategy map provides a framework for linking

intangibie assets to sharehoider value creation

through four interrelated perspectives. The^nanc/a/

perspective describes the tangible outcomes ofthe

strategy in traditional financial terms, such as ROI,

shareholder value, profitability, revenue growth, and

iower unit costs. The cusfomerperspecf/Ve defines the

value proposition the organization intends to use to

generate sales and ioyalty from targeted customers.

This value proposition forms the context in which

the intangibie assets create value. The internal pro-

cess perspective identifies the critical few processes

that create and deliver the differentiating customer

vaiue proposition. At the foundation ofthe map, we

have the learning and growth perspective, which iden-

tifies the intangible assets that are most important

to the strategy. The objectives in this perspective

identify which Jobs (the human capital), which sys-

tems (the information capitai), and what kind of cii-

mate (the organization capitai) are required to sup-

port the value-creating internal processes. These

intangible assets must be integrated and aligned

with the criticai internai processes.


M e a s u r i n g t h e S t r a t e g i c R e a d i n e s s o f I n t a n g i b l e A s s e t s

Defining Strategic ReadinessIn developing the Balanced Scorecard more than a decadeago, we identified, in its Leaming and Growth Perspec-tive, three categories of intangible assets essential for im-plementing any strategy:• Human Capital: the skills, talent, and knowledge thata company's employees possess.

• Information Capital: the company's databases, informa-tion systems, networks, and technology infrastructure.

• Organization Capital; the company's culture, its leader-ship, how aligned its people are with its strategic goals,and employees' ability to share knowledge.

To link these intangible assets to a company's strategyand performance, we developed a tool called the "strat-egy map," which we first introduced in our previous arti-cle for Harvard Business Review, "Having Trouble withYour Strategy? Then Map It" (September-October 2000).Asthe exhibif'The Strategy Map"shows, intangible assets

influence a company's performance by enhancing the in-ternal processes most critical to creating value for cus-tomers and shareholders. Companies build their strategymaps from the top down, starting with their long-termfinancial goals and then determining the value proposi-tion that will deliver the revenue growth specified inthose goals, identifying the processes most critical to cre-ating and delivering that value proposition, and, finally,determining the human, information, and organizationcapital the processes require.

This article focuses on the bottom - the foundation -ofthe map and will show how intangible assets actuallydetermine the performance of the critical intemal pro-cesses. Once that link has been established, it becomeseasy to trace the steps back up the map to see exactly howintangible assets relate to the company's strategy and per-formance. That, in turn, makes it possible to align thoseassets with the strategy and measure their contribution toit. The degree to which the current set of assets does-or

Sustained Shareholder Value

Productivity Strategy

FinancialPerspective

CustomerPerspective

InternalProcessPerspective

Improve coststructure

Increase assetutilization

Revenue Growth Strategy

Enhance Expand revenuecustomer value opportunities

Customer Value Proposition

Price Quality Availability Selection Functionality Service Partnership Brand

Product/Service Attributes Relationship linage

Operations ManagementProduce and deliverproducts and services

Customer ManagementEnhance customer value

InnovationCreate new productsand services

Regulatory and SocialImprove communitiesand the environment

Strategic JobFamilies

Strategic ITPortfolio

OrganizationChange Agenda L) Creating

Alignmentand Readiness

Learningand GrowthPerspective

Human Capital• Skills• Training• Knowledge

1

Information Capita!• Systems•Databases• Networks

Organization Capital•Culture• Leadership•Alignment•Teamwork

FEBRUARY 2004 55


does not-contribute to the performance ofthe critical in-ternal processes determines the strategic readiness ofthose assets and thus their value to the organization. Thestrategic readiness of each type of intangible asset can bethought of as follows:

Human Capital (HC): In the case of human capital,strategic readiness is measured by whether employeeshave the right kind and level of skills to perform the crit-ical intemal processes on the strategy map. The first stepin estimating HC readiness is to identify the strategic Jobfamilies-X\\e positions in which employees with the rightskills, talent, and knowledge have the biggest impact onenhancing the organization's critical intemal processes.The next step is to pinpoint the set of speciiic competen-cies needed to perform each of those strategic jobs. Thedifference between tbe requirements needed to carry outthese jobs effectively and the company's current capabil-ities represents a "competency gap" that measures theorganization's HC readiness.

Information Capital (IC): The strategic readiness ofinformation capital is a measure of how well the com-pany's strategic IT portfolio of infrastructure and appli-cations supports the critical internal processes. Infra-structure comprises hardware-such as central servers andcommunication networks - and the managerial exper-tise-such as standards, disaster planning, and security-required to effectively deliver and use applications. Twocategories of applications, in tum, are built on this infra-structure: Transaction-processing applications, such as anERP system, automate the basic repetitive transactions ofthe enterprise.-4na/yt;c applications promote analysis, in-terpretation, and sharing of information and knowledge.Either type may or may not be a transformational appli-cation - one that changes the prevailing business modelofthe enterprise. Levi's uses a transformational applica-tion to tailor jeans to individual customers. Home Shop-ping Network uses a transformational application tomeasure the "profits per second" being generated by cur-rently offered merchandise. Transformational applica-tions have the most potential impact on strategic objec-tives and require the greatest degree of organizationchange to deliver their benefits.

Organization Capital (OC): Organization capital is per-haps the least understood ofthe intangible assets, and thetask of measuring it is correspondingly difficult. But inlooking at the strategic priorities that companies in ourdatabase of Balanced Scorecard implementations used fortheir organization capital objectives, we found a consis-tent picture. Successful companies had a culture in whichpeople were deeply aware of and internalized the mis-sion, vision, and core values needed to execute the com-pany's strategy. These companies strove for excellent lead-ership at all levels, leadership that could mobilize theorganization toward its strategy. They strove for a clearalignment between the organization's strategic objectives

and individual, team, and departmental goals and incen-tives. Finally, these companies promoted teamwork, espe-cially the sharing of strategic knowledge throughout theorganization. Determining OC readiness, we concluded,would involve first identifying the changes in organiza-tion capital required by the new strategy-what we callthe "organization change agenda"-and then separatelyidentifying and measuring the state of readiness of thecompany's cultural, leadership, alignment, and teamworkobjectives.

Strategic readiness is related to the concept of liquidity,which accountants use to classify financial and physicalassets on a company's balance sheet. Accountants dividea firm's assets into various categories, such as cash, accountsreceivable, inventory, property, plant and equipment, andlong-term investments. These are ordered hierarchicallyaccording to the ease and speed with which they can beconverted to cash - in other words, according to the de-gree of their liquidity. Accounts receivable is more liquidthan inventory, and both accounts receivable and inven-tory are classified as short-term assets since they typicallyconvert to cash within 12 months, faster than the cash re-

Human Capital Readinessat Consumer Bank

Here we can see how human capita! at our composite

company,Consumer Bank, is linked to its critical strate-

gic processes and how well the company scores in terms

ofthe skills and capabilities it needs. The top row lists

the internai processes the bank identified as critical to

delivering its value proposition. The second row shows

the jobs that have the greatest influence on those pro-

cesses-the strategic Job families. The third row lists the

competencies needed for each job, and the fourth row

specifies the number of people with those skills the com-

pany requires.

The bottom row shows how ready Consumer Bank's

human capital is for its new strategy. Taken together,

these internal assessments indicate the extent to which

the bank actually has the capacity it needs. The bank is

in excellent shape for its two operations management

processes (ioo% and 90% readiness) but deficient for

the two customer management processes (only 40% and

50% readiness) and for one ofthe innovation processes

(20% readiness). The aggregate measure of 65% human

capital readiness (in the red zone) is a weighted average

of readiness scores for all seven strategic job families. In

terms of human capital, this report tells executives how

quickly they can implement their new strategy.


Measuring the Strategic Readiness of Intangible Assets

covery cycle from such illiquid assets as plant and equii>ment. Strategic readiness does much the same for intan-gible assets-the higher their state of readiness, the fasterthey contribute to generating cash.

Human Capital ReadinessAil jobs are important to the organization; otherwise, peo-ple wouldn't be hired and paid to perform them. Organi-zations may require truck drivers, computer operators,production supervisors, materials handlers, and call cen-ter operators and should make it clear that contributionsfrom all these employees can improve organizational per-formance. But we have found that some jobs have a muchgreater impact on strategy than others. Managers mustidentify and focus on the critical few that have the great-est impact on successful strategy implementation.

John Bronson, vice president of human resources atWilliams-Sonoma, estimates that people in only five jobfamilies determine 80% of his company's strategic priori-ties. The executive team of a chemical company has iden-tified eight job families critical to its strategy of offering

customized innovative solutions. These job families em-ploy, in aggregate, lOO individuals - less than 7% of thetotal workforce. Kimberlee Williams, vice president ofhuman resources at Unicco, a large integrated facilities-services management company, says that three job fami-lies are key to its strategy: project managers, who overseethe operations in specific accounts; operations directors,who broaden the relationships within existing accounts;and business development executives, who help acquirenew accounts. These three job families employ only 215people, less than 4% ofthe workforce. By focusing humancapital development activities on these critical few Indi-viduals, the chemical company, Unicco, and Williams-Sonoma can greatly leverage their human capital invest-ments. It is sobering to think that strategic success in thesethree companies is determined by bow well they developcompetencies in less than 10% of their workforces.

Once a company identifies its strategic job families, itmust define the requirements for these jobs in consider-able detail, a task often referred to as "job profiling" or"competency profiling." A competency profile describesthe knowledge, skills, and values required by successful

StrategicProcesses

StrategicJob Families

CompetencyProfile

NumberRequired

Strategic jobReadiness

Operations Management

Minimizeproblems

Provide rapidresponse

Qualitymanager

Call centerrepresentative

'Six Sigmaprogram

• Problemmanagementsystem

'Customerinteractioncenter

• Problemmanagementsystem

•Teambuilding

30 20

100% 90%

Customer Management

Cross-sell the , Shift toproduct line ' appropriate

channel

Certifiedfinancialplanner

Telemarketer

'Solutionsselling

' Relationshipmanagement

•Phoneselling

• Product-lineknowledge

Product-line -Orderknowledge | management_ , . , system

• Professionalcertification

J L

100 20

40% 50%

Innovation

Understand I Develop newcustomer productssegments

Consumermarketer

joint venturemanager

' Marketresearch

• Marketcommuni-cation

• Cross-businessprocess

'Relationshipmanagement

' Negotiation

'E<ommerceknow-how

J L

10 30

20% 70%

Regulatoryand Social

Diversifyworkforce

Communityrecruiter

• Communityroots

• Publicrelations

• Legalframeworks

10

80%

OverallAssessmentof HumanCapitalReadiness

65%

FEBRUARY 2004 57

M e a s u r i n g the S t ra teg ic Readiness o f I n t a n g i b l e Assets

occupants in the job family. Often, HR managers will in-terview individuals who best understand the job require-ments to develop a competency profile they can use torecruit, hire, train, and develop people for that position.To see how this might be done, consider Consumer Bank,a composite example distilled from our experiences inworking with about a dozen retail banks.

Consumer Bank was migrating from its historic strategyof promoting individual products to one offering com-plete financial solutions and one-stop shopping to tar-geted customers. The map for this new strategy identifiedseven critical internal processes, one of which was "cross-sell the product line." Human resources and line execu-tives then identified the financial planner as the job mostimportant to the effective performance of this process.A planning workshop further identified four skills funda-mental to the financial planner's joh: solutions selling, re-lationship management, product-line knowledge, andprofessional certification. For each internal process on itsstrategy map. Consumer Bank replicated this approach,identifying the strategic job families and critical compe-tencies each required. The results are summarized in theexhibit "Human Capital Readiness at Consumer Bank."

To take the next step-assessing the current capabilitiesand competencies of each ofthe employees in each stra-tegic job family-companies can draw from a broad rangeof approaches. For example, employees can themselves as-sess how well their current capabilities fit the job require-ments and then discuss those assessments with a mentoror career manager. Alternatively, an assessor can solicit360-degree feedback on employees' performance fromtheir supervisors, peers, and subordinates. From these as-sessments, employees get a clear understanding of theirobjectives, meaningful feedback on their current levelsof skill and performance, and specific recommendationsfor future personal development.

Consumer Bank estimated that it needed lOO trainedand skilled financial planners to execute the cross-sellingprocess. But in assessing its recent targeted hiring, training,and development programs, the bank's HR group deter-mined that only 40 of its financial planners had reacheda high enough level of proficiency. The bank's human cap-ital readiness for this piece of the strategy was, therefore,only 40%, as the exhibit shows. By replicating this analysisfor all its strategic job families, the bank learned the stateof its human capital readiness and thus whether the orga-nization could move forward quickly with its new strategy.

Information Capital ReadinessExecutives must understand how to plan, set prioritiesfor, and manage an information capital portfolio that sup-ports their organization's strategy. As with human capital,the strategy map serves as a starting point for delineatinga company's IC objectives. In the case of Consumer Bank,

the chief information officer led an initiative to identifythe specific information capital needs of each ofthe seveninternal processes previously identified as critical to thebank's new value proposition.

For the customer management process "cross-sell theproduct line," the workshop team identified an applica-tion for customers to analyze and manage their portfoliosby themselves (a customer portfolio self-management sys-tem) as a transformational application. The workshopteam identified an analytical application for the same pro-cess (a customer profitability system) and a transaction-processing application {an integrated customer file). Theinternal process "understand customer segments" alsoneeded a customer profitability system, as well as a sepa-rate customer feedback system to support market research.The process "shift to appropriate channel" required astrong foundation of transactional systems, includinga packaged CRM software suite that included modules forlead management, order management, and sales forceautomation. For the operations process "provide rapid re-sponse," participants identified a transformational appli-cation (customer self-help) as well as an analytic applica-tion (a best-practice community knowledge managementsystem) for sharing successful sales techniques amongtelemarketers. Finally, the "minimize problems" processrequired an analytical application (service quality analy-sis) to identify problems and two related transaction-levelsystems (one for incident tracking and another for prob-lem management).

After defining its portfolio of IC applications, theproject team identified several required components of ITinfrastructure. Some applications needed a CRM transac-tions database. Others required that a Web-enabled in-frastructure be integrated into the bank's overall Web sitearchitecture. The team also learned about the need for aninternal R&D project to develop a new interactive voice-response technology. All together, the bank's planningprocess defined an information capital portfolio made upof 14 unique applications (some of which supported morethan one internal process) and four IT infrastructureprojects. (See the exhibit "Information Capital Readinessat Consumer Bank.")

The team then turned to assessing the readiness ofthebank's existing portfolio of IC infrastructure and applica-tions, assigning a numerical indicator from 1 to 6 to eachsystem. A score of i or 2 indicates that the system is al-ready available and operating normally, perhaps needingonly minor enhancements. A score of 3 or 4 indicates thatthe system has been identified and funded but is not yetinstalled or operational. In other words, current capabil-ity does not yet exist but development programs areunder way to close the gap. A score of 5 or 6 signals thata new infrastructure or application is needed to supportthe strategy, but nothing has yet been done to create,fund, and deliver the capability. Managers responsible for



Information Capital Readiness at Consumer BankThe firsttwo rows ofthe information capital readiness report, like the human capital report, list the

company's critical internal processes and its strategic job families. The remaining five rows specify the

various items in the IC portfolio, assigning scores indicating how well developed each item is. In this

example, Consumer Bank has the IC portfolio it needs to support innovation but is less able to support

the jobs most critical to its customer management and operational excellence goals.

StrategicProcesses

StrategicJob Families

Transforma-tional Appli-cations

AnalyticalApplications

Transaction-ProcessingApplications

TechnologyInfrastructure

Operations Management

Minimizeproblems

Qualitymanager

Service qualityanalysis2

Incidenttracking6

Problemmanagement2

Web enabled3

Computertelephonyintegration4

Provide rapidresponse

Call centerrepresentative

Customer Management

Cross-sell theproduct line

Certifiedfinancialplanner

Shift toappropriatechannel

Telemarketer

Innovation

Understandcustomersegments

Consumermarketer

Strategic Information Capital Portfolio

Customerself-help4

Best-practicecommunityknowledgemanagementsystem3

Workforcescheduling3

Problemmanagement2

Computertelephonyintegration4

Interactivevoice response3

Customerportfolio self-management4

Customerprofitability3

Integratedcustomerfile2

CRM packagedsoftware2

Web enabled3


CRM/teadmanagement6

CRM/ordermanagement2

CRM/salesforce auto-mation4

Web enabled3

Computertelephonyintegrated4

CustomerprofitabilityI

Customerfeedback2

CRM packagedsoftware2

Develop newproducts

Joint venturemanager

1


Projectmanagement2

CombinedReadinessLevel

J L J L J L J L J L

Ratings

1OK

Minor enhance-ments needed

3New developmentunder way

New developmentbehind schedule

Major enhance-ments required

6New applicationrequired

FEBRUARY 2004 59

M e a s u r i n g the S t ra teg ic Readiness o f I n t a n g i b l e Assets

the IC development programs provided the subjectivejudgments for this simple measurement system, and theCIO was responsible for assessing the integrity ofthe re-ported numbers. In the IC exhibit, we can also see thatConsumer Bank aggregated the readiness measures of in-dividual applications and infrastructure programs-desig-nating them green, yellow, or red, based on the worst-caseapplication in the category-to create a portfolio statusreport. With such a report, managers can see the strategicreadiness of the organization's information capital at aglance, easily pinpointing the areas in which more re-sources are needed. It is an excellent tool for monitoringa portfolio of information capital development programs.

Many sophisticated IT organizations already use morequantitative, objective assessments of their informationcapital portfolios than the subjective process we've justdescribed for Consumer Bank. These organizations surveyusers to assess their satisfaction with each system. Theyperform financial analyses to determine the operatingand maintenance costs of each application. Some conducttechnical audits to assess the underlying quality of thecode, ease of use, quality of documentation, and fre-quency of failure for each application. From this profile,an organization can build strategies for managing itsportfolio of existing IC assets just as one would managea collection of physical assets like machinery or a fleet oftrucks. Applications with high levels of maintenance canbe streamlined, for example, applications with high oper-ating costs can be optimized, and applications with highlevels of user dissatisfaction can be replaced. This morecomprehensive approach can be effective for managing aportfolio of applications that are already operational.

Organization Capital ReadinessSuccess in performing the critical internal processes iden-tified in an organization's strategy map invariably re-quires an organization to change in fundamental ways.Assessing OC readiness is essentially about assessing howwell the company can mobilize and sustain the organiza-tion change agenda associated with its strategy. For in-stance, ifthe strategy involves focusing on the customer,the company needs to determine whether its existing cul-ture is customer-centric, whether its leaders have the req-uisite skills to foster such a culture, whether employeesare aware ofthe goal and are motivated to deliver excep-tional customer service, and, flnally, how well employeesshare with others their knowledge about the company'scustomers. Let's explore how companies can make thesekinds of assessments for each of the four OC dimensions.

Culture. Ofthe four, culture is perhaps the most com-plex and difficult dimension to understand and describebecause it encompasses a wider range of behavioral terri-tory than the others. That's probably why "shaping theculture" is the most often-cited objective in the Learning

and Growth section of our Balanced Scorecard database.Executives generally believe that changes in strategy re-quire basic changes in the way business is conducted at alllevels of the organization, which means, of course, thatpeople will need to develop new attitudes and behav-iors-in other words, change their culture.

Assessment of cultural readiness relies heavily on em-ployee surveys. But in preparing surveys, companies needto distinguish clearly between the values that all employ-ees share-the company's base culture-and the percep-tions that employees have of their existing system - theclimate. The concept of base culture has its roots in anthro-pology, which defines an organization's culture as the sym-bols, myths, and rituals embedded in the group conscious-ness (or subconscious). To describe a company's baseculture, therefore, you have to uncover the organization'ssystems of shared meanings, assumptions, and values.

The concept of climate has its roots in social psychol-ogy and is determined by the way organizational influ-ences - such as the incentive structure or the perceivedwarmth and support of superiors and peers-affect em-ployees' motivation and behavior. The anthropologicalcomponent reflects employees' shared attitudes and be-liefs independent ofthe actual organizational infrastruc-ture, while climate reflects their shared perception of ex-isting organizational policies, practices, and procedures,both formal and informal.

Surveying perceptions of existing organizational poli-cies and practices is a fairly straightforward task, butgetting at the base culture requires a little more digging.Anthropologists usually rely on storytelling to identifyshared beliefs and images, but that approach is inade-quate for quantifying the alignment of culture to strategy.Organizational behavior scholars have developed mea-surement instruments, such as Charles O'Reilly and col-leagues' Organizational Culture Profile, in which employ-ees rank 54 value statements according to their perceivedimportance and relevance in the organization. Onceranked, an organization's culture can be described with areasonable degree of reliability and validity. Then the or-ganization can assess to what extent the existing cultureis consistent with its strategy and what kinds of changesmay be needed.

One caveat: Managers do need to be aware that somevariations in culture are necessary and desirable in differ-ent operating units or functions. The culture of an R&Dgroup, for example, should be different from the cultureof a manufacturing unit; the culture of an emergent busi-ness unit should be different from the culture of a matureone. Executives should strive for agreement throughoutthe organization about corporatewide values such as in-tegrity, respect, treatment of colleagues, and commitmentto customer satisfaction. But some value statements inthe survey instrument should refer to the culture of spe-cific operating units. So, for example, surveys ofthe em-



ployees in operations and service-delivery units wouldinclude statements about quality and continuous im-provement, whereas the R&D department survey mightinclude statements about creativity and innovation. Foremployees involved in customer acquisition, statementsmight relate to retention and growth or to a deep under-standing of individual customers' preferences and needs.

Leadership. If companies change their strategies, peo-ple will have to do some things differently as well. It is theresponsibility of leaders at all levels ofthe organiza-tion-from the CEO of a retail chain down to the localstore managers-to help employees identify and under-stand the changes needed and to motivate and guidethem toward the new ways of working.

In researching the best practices in our Balanced Score-card database, we were able to identify seven generictypes of behavioral changes that build organization capi-tal, and each fell into one of two categories: changes thatsupport the creation of value-such as increasing people's

focus on the customer-and those required to carry outthe company's strategy-such as increasing accountability.The sidebar "Seven Behaviors for Transformation" de-scribes these behavioral changes in more detail.

To ensure that it gets the kind of leaders it needs, a com-pany should draw up a leadership competency model foreach of its leadership positions. This is a kind of job pro-file that defines the competencies a leader is expected tohave to be effective in carrying out the company's strat-egy. For example, one manufacturing company, attempt-ing to create teams to solve customers' problems, identi-fied and defined three competencies essential for peopiein team leadership positions:

• Customer Focus - Outstanding leaders understandtheir customers. They place themselves in the customers'minds and spend time with them to understand their cur-rent and future needs.

• Fostering Teamwork - Outstanding leaders work col-laboratively with their own teams and across organiza-

Organization Capital Readiness ReportThe various measures for organization capital readiness should be put together in a readiness

report, which shows, for all the components of organization capital, where the company needs to

introduce changes to its behaviors and policies. The report shown here is a simplified version of

one prepared by a company in our Balanced Scorecard database.

Attribute

Culture

Leadership

Aligninent

Teamwork

Strategic Objective

Foster awareness andinternaiization ofthemission, vision, and corevalues needed to executethe strategy

Develop leaders at all levelswho can mobilize the organi-zation toward its strategy

Align goals and incentiveswith the strategy at all levelsofthe organization

Ensure that knowledge andstaff assets that have strate-gic potential are shared

Strategic Measure

Customer-focused (customersurvey; percentage who understandthe organization's mission)

Other core values (employee changereadiness survey)

Leadership gap (percentageof key attributes in competencymodel rated above threshold)

Strategic awareness (percentage ofstaff who can identify organization'sstrategic priorities)

Strategic alignment (percentage ofstaff whose objectives and incentiveslinkto Balanced Scorecard)

Sharing best practices (numberof knowledge managementsystem hits per employee)

Target

80%

90%

80%

100%

5.0

Actual

68%

52%

92%

75%

60%

6.1

FEBRUARY 2004 61


tional and geographic boundaries. They empower theirteams to achieve excellence.

. Open Communications - Outstanding leaders tell thetruth. They openly share information with peers, manag-ers, and subordinates. They tell the whole story, not justhow it looks from their position.

Often, organizations will measure leadership traits,such as those listed above, through employee surveys. Astaff or external unit solicits information from subordi-nates, peers, and superiors about a leader's mastery ofthecritical skills. This personal feedback is used mainly forcoaching and developing the leader, but the unit can alsoaggregate the detailed (and confidential) data from the in-dividual reviews to create a status report on the readinessof key leadership competencies needed throughout theorganization.

Alignment An organization is aligned when all em-ployees have a commonality of purpose, a shared vision,and an understanding of how their personal roles supportthe overall strategy. An aligned organization encouragesbehaviors such as innovation and risk taking because in-dividuals' actions are directed toward achieving high-levelobjectives. Encouraging and empowering individual ini-tiative in an unaligned organization leads to chaos, as theinnovative risk takers pull the organization in contradic-tory directions.

Achieving alignment is a two-step process. First, man-agers communicate the high-level strategic objectives inways that all employees can understand. This involvesusing a wide range of communication mechanisms: bro-chures, newsletters, town meetings, orientation and train-

ing programs, executive tal ks, company intranets, and bul-letin boards. The goal of this step is to create intrinsic mo-tivation, to inspire employees to internalize the organi-zation's values and objectives so that they want to helpthe organization succeed. The next step uses extrinsic mo-tivation. The organization has employees set explicit per-sonal and team objectives aligned to the strategy and es-tablishes incentives that reward employees when theymeet personal, departmental, business unit, and corporatetargets.

Measuring alignment readiness is relatively straight-forward. Many survey instruments are already availablefor assessing how much employees know about and howwell they understand high-level strategic objectives. It isalso fairly easy to see whether or not individuals' personalobjectives and the company's existing incentive schemesare consistent with the high-level strategy.

For example, a large property and casualty insurancecompany adopted a new strategy intended to reduce itsunderwriting losses by creating a tighter link between theunderwriters, who decide whether to accept a new pieceof business, and the claims agents, who deal with the con-sequences from poor underwriting decisions. Historically,these specialists lived in different parts of the organiza-tion, and their incentives were totally unrelated to eachother, which clearly did little to foster cooperation be-tween them or with the line business units they sup-ported. To reflect the new strategy, the company changedto a team-based compensation system in which every-one's incentive pay was based on a common set of mea-sures (their Balanced Scorecard). Underwriters and claims

Seven Behaviors for TransformationAll new strategies require employees to

make, and leaders to identify and foster,

some specific changes in behavior. But

in our research, companies that have suc-

cessfully changed their strategies have

needed only a limited number of behav-

ioral changes-justseven, in fact- to max-

imize the contributions oftheir peopie

to the execution oftheir new strategies.

The changes fall into two categories:

• Value Creation: Behaviors that support

value creation are those that increase

focus on customers, innovation, and

results.

• Strategy Execution: Behaviors that sup-

port strategy execution are those that in-

crease employees' understanding ofthe

company's mission, vision and values;

accountability; communications; and

teamwork.

Of course, no organization will try to

change all seven behaviors at once. Typi-

cally, a company will identify the two to

four most important ones for implement-

ing a specific strategy. For example, firms

in deregulated industries like utilities or

telecommunications now place a heavy

emphasis on becoming customer focused

and innovative, which are, for them, to-

tally new behaviors. Previously, operating

from a monopoly position, they had fo-

cused on operating efficiency and on

avoiding risks to protect revenues.

That said, customer focus was the most

frequently identified required new behav-

ior in all the companies we studied. That's

partly because virtually every strategy

initiative starts with a clarification or

redefinition ofthe customer vaiue prop-

osition. But some new strategies impose

different priorities. Companies introduc-

ing shareholder value programs, for exam-

ple, may already be sufficiently customer

focused and will need instead to focus on

results.

Companies adopting strategies that

require high degrees of integration com-

monly need to increase communication.

That was so, for instance, for one pharma-

ceutical company in our database that

was attempting to transfer knowledge

and marketplace experience from its

commercial division to its product

development group.


M e a s u r i n g the S t ra teg ic Readiness of I n t a n g i b i e Assets

agents, who worked in service departments shared by thevarious business units, were now rewarded using the Bal-anced Scorecard measures related to the business unitsthey supported. The company used a survey instrumentto capture the employees' perceptions of the improvedteamwork created by aligning the incentive systems.

Teamwork and Knowledge Sharing. There is no greaterwaste than a good idea used only once. Most organiza-tions have to go through a cultural change to shift indi-viduals from hoarding to sharing their local knowledge.No asset has greater potential for an organization thanthe collective knowledge possessed by all its employees.That's why many companies, hoping to generate, organize,develop, and distribute knowledge throughout the orga-nization, have spent millions of dollars to purchase or cre-ate formal knowledge management systems.

The challenge in implementing such systems is moti-vating people to actually document their ideas and knowl-edge to make them available to others. Most organiza-tions in our Balanced Scorecard database attempted todevelop such motivation by selecting "teamwork" and"knowledge sharing" as strategic priorities in their Learn-ing and Growth Perspective. Typical measures for thesepriorities included the number of best practice ideas theemployees identified and used, the percentage of employ-ees who transferred knowledge in a workout process, thenumber of people who actually used the knowledge man-agement system, how often the system is used, the per-centage of information in the knowledge managementsystem that was updated, and how much was obsolete.

For knowledge sharing to matter, it must be alignedwith the priorities ofthe strategy map. For example, oneorganization-a chemical company-created several bestpractice communities to complement the intemal pro-cess objectives on its strategy map. The Improve Work-place Safety community consisted ofthe safety directorsfrom every facility. They studied the best practices at thehigh-performing plants and created a best practice-^shar-ing program. The company's output measure,"days awayfrom work," dropped by 70%. In another example, a chil-dren's hospital was attempting to reduce costs withoutreducing the quality of patient care. Intensive discussionsresulted in a top-ten list of best practices already beingused somewhere in the hospital. The hospital then formedcross-functional medical practice teams of physicians,nurses, and administrators to implement as many of theseprocedures as they practically could. It measured success,the output of this knowledge-sharing process, by the"number of best practices utilized." The effective imple-mentation of best practices over the next three years ledto dramatic improvements in organizational outcomes:Readmission rates dropped by 50%, cost per case andlength of stay each declined by 25%, and both customersatisfaction and quality of care increased. In these andmany other examples in our case files, organizations en-

hanced their performance by aligning the teamwork andknowledge-sharing component of their organization cap-ital with their strategy.

To get an overview of organizational readiness, compa-nies can put the information they obtain from their vari-ous surveys and assessments together in a report like theone shown in "Organization Capital Readiness Report." Inthis exhibit, the leadership measure, drawn from the lead-ership competency model, displays the company's esti-mate, based on employee surveys, of the degree to whichthe company possesses the key attributes for leadership.At 92%, the company is above target on its leadership ob-jective and can be considered strategically ready in termsof this dimension. The company's OC with respect to team-work and knowledge sharing is also in good shape. Butthe firm is performing inadequately in alignment and indeveloping the right culture, and these problems are low-ering its overall level of organization capital readiness.

The intangible assets described in the Balanced Score-card's Leaming and Growth Perspective are the founda-tion of every organization's strategy, and the measures inthis perspective are the ultimate lead indicators. Humancapital becomes most valuable when it is concentratedin the relatively few strategic job families implementingthe intemal processes critical to the organization's strat-egy. Information capital creates the greatest value whenit provides the requisite infrastructure and strategic ap-plications that complement the human capital. Organiza-tions introducing a new strategy must create a culture ofcorresponding values, a cadre of exceptional leaders whocan lead the change agenda, and an informed workforcealigned to the strategy, working together, and sharingknowledge to help the strategy succeed.

Some managers shy away from measuring their intan-gible assets because these measures are usually "softer,"or more subjective, than the financial measures they con-ventionally use to motivate and assess performance. TheBalanced Scorecard movement has encouraged organiza-tions to face the measurement challenge. Using the sys-tematic approaches set out in this article, companies cannow measure what they want, rather than wanting onlywhat they can currently measure. Even if the measuresare imprecise, the simple act of attempting to gauge thecapabilities of employees, information systems, and orga-nization capital communicates the importance of thesedrivers for value creation. In the course of our work, wehave seen many companies find new ways to measure -and consequently new ways to enhance the value of-theirintangible assets. The measurement and management ofthese assets played a prominent role in their transforma-tion into successful, strategy-focused organizations. ^

Reprint R0402C; HBR OnPoint 5887To order, see page 125.

FEBRUARY 2004 63

Documents

the Strategic Readiness of Intangible Assets - MBA IT ALK · or McDonald's that are following a low-cost ... database of Balanced Scorecard implementations used ... Measuring the