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

Balanced Scorecard (BSC) – A New Management Balanced Scorecard (BSC) – A New Management System in theSystem in the

Science of OrganizationScience of Organization BSC – The Four PerspectivesBSC – The Four Perspectives The Strategy MapThe Strategy Map

Balanced Scorecard – A New Management Balanced Scorecard – A New Management System in the Science of OrganizationSystem in the Science of Organization

The starting point of a Balanced Scorecard execution is the The starting point of a Balanced Scorecard execution is the strategy. A scorecard program is involved, i.e. that type of strategy. A scorecard program is involved, i.e. that type of program similar with a “printed program or card enabling a program similar with a “printed program or card enabling a spectator to identify players and record the progress of a game spectator to identify players and record the progress of a game and competition.”and competition.”[i[i]]

What is significant in such a “game”? First of all, the “players” What is significant in such a “game”? First of all, the “players” are the most significant element being involved in a business are the most significant element being involved in a business process. They get together and act themselves as process. They get together and act themselves as organizational units, not individually but as if they are organizational units, not individually but as if they are “collective individuals”, or “moral personalities”. They act, “collective individuals”, or “moral personalities”. They act, therefore, collectively and, also, as units, i.e. as collective therefore, collectively and, also, as units, i.e. as collective persons. Secondly, the actors that are put together to work as persons. Secondly, the actors that are put together to work as organizational units behave not randomly but in a customized organizational units behave not randomly but in a customized way, that is by executing some specification, striving to attain way, that is by executing some specification, striving to attain the same goals and targets. So, they accept a sort of internal the same goals and targets. So, they accept a sort of internal benchmarks that help them “to understand their contribution benchmarks that help them “to understand their contribution to the organization”.to the organization”.

[i][i] Kaplan, Robert S., Norton, D. (2001). Kaplan, Robert S., Norton, D. (2001). The Strategy Focused-The Strategy Focused-Organization: How Balanced Scorecard Companies Thrive in Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, Bostonthe New Business Environment, Boston: Harvard Business School : Harvard Business School PressPress

What is, then, a “scorecard”? “An application or custom user What is, then, a “scorecard”? “An application or custom user interface that helps manage an organization’s performance (by interface that helps manage an organization’s performance (by optimizing and aligning organizational units, business processes optimizing and aligning organizational units, business processes and individuals. It should, also, provide internal and industry and individuals. It should, also, provide internal and industry benchmarks as well as goals and targets that help individuals benchmarks as well as goals and targets that help individuals understand their contribution to the organization. The use of understand their contribution to the organization. The use of scorecards spans the operational, tactical and strategic aspects of scorecards spans the operational, tactical and strategic aspects of the business and its decisions.”the business and its decisions.”[i[i]]

The elements involved when using the Balanced Scorecard are The elements involved when using the Balanced Scorecard are the organizational units, the strategy of the organization (through the organizational units, the strategy of the organization (through which the goals and targets are designed), the performance which the goals and targets are designed), the performance indicators (financial, customer, internal business processes, indicators (financial, customer, internal business processes, learning and growth) all of them being integrated in a framework learning and growth) all of them being integrated in a framework which Kaplan and Norton used to call “strategy map”. The which Kaplan and Norton used to call “strategy map”. The Balanced Scorecard “is a model of business performance Balanced Scorecard “is a model of business performance evaluation that balances measures of financial performance, evaluation that balances measures of financial performance, internal operations, innovation and learning and customer internal operations, innovation and learning and customer satisfaction”.satisfaction”.[ii[ii]]

[i][i] http://www.dmreview.com/resources/glossary.cfm http://www.dmreview.com/resources/glossary.cfm[ii] http://www.services.eliteral.com/Glossary/managerial-accounting-[ii] http://www.services.eliteral.com/Glossary/managerial-accounting-

glossary.phpglossary.php

Let’s keep in mind the idea that the Balanced Scorecard is a “model Let’s keep in mind the idea that the Balanced Scorecard is a “model of performance evaluation” designed to balance “measures of of performance evaluation” designed to balance “measures of financial performance”, “internal operations”, learning and financial performance”, “internal operations”, learning and innovation (or growth) and “customer satisfaction”.innovation (or growth) and “customer satisfaction”.

The Balanced Scorecard is “an integrated framework for describing The Balanced Scorecard is “an integrated framework for describing strategy through the use of linked performances measures in four, strategy through the use of linked performances measures in four, balanced perspectives – financial, customer, internal process and balanced perspectives – financial, customer, internal process and employee learning and growth. The Balanced Scorecard acts as a employee learning and growth. The Balanced Scorecard acts as a management system and communication tool.”management system and communication tool.”[i[i]]

““An approach for ongoing organizational monitoring defined by R. An approach for ongoing organizational monitoring defined by R. Kaplan and D. Norton in which four types performance indicators Kaplan and D. Norton in which four types performance indicators (namely: financial, customer, internal business processes, and (namely: financial, customer, internal business processes, and learning and growth) are used.”learning and growth) are used.”[ii[ii]]

[i][i] http://www.BalancedScorecard.biz/Glossary.html http://www.BalancedScorecard.biz/Glossary.html

[ii] http://www.ndu.edu/irmc/elearning/primer/glosarry.htm[ii] http://www.ndu.edu/irmc/elearning/primer/glosarry.htm

What is significant in the “strategy map” refers to what What is significant in the “strategy map” refers to what Kaplan and Norton call “linkages of cause-and-effect Kaplan and Norton call “linkages of cause-and-effect relationship” just because such linkages “show how the relationship” just because such linkages “show how the intangible assets are transformed into tangible (financial) intangible assets are transformed into tangible (financial) outcomes”. Tangible assets – cash, accounts receivable, outcomes”. Tangible assets – cash, accounts receivable, inventory, land, plant, and equipment – “have values largely inventory, land, plant, and equipment – “have values largely independent of who owns them. Intangible assets, in independent of who owns them. Intangible assets, in contrast, usually have little stand-alone value; their value contrast, usually have little stand-alone value; their value arises from being embedded in coherent, linked strategies.”arises from being embedded in coherent, linked strategies.”[i[i]]

It is important to underline that the scorecard program uses, It is important to underline that the scorecard program uses, also, financial and non-financial measures (such as “cycle also, financial and non-financial measures (such as “cycle time, market share, innovation, satisfaction, and time, market share, innovation, satisfaction, and competencies.”competencies.”[ii[ii]] Such measures allow the “value-creating Such measures allow the “value-creating process to be described and measured”process to be described and measured”[iii[iii]] not merely not merely “inferred”.“inferred”.

[i][i] Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 11 Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 11

[ii] Ibid.[ii] Ibid.

[iii] Ibid.[iii] Ibid.

Therefore, we can conclude that “strategy map and Therefore, we can conclude that “strategy map and Balanced Scorecards constitute the measurement Balanced Scorecards constitute the measurement technology for managing in a knowledge based economy.”technology for managing in a knowledge based economy.”[i[i]]

We defined three key concepts in the strategic management: We defined three key concepts in the strategic management: strategy-focused organization, strategy map and Balanced strategy-focused organization, strategy map and Balanced Scorecard. These are key-concepts of the newest Scorecard. These are key-concepts of the newest organizational science proper to a new type of society and organizational science proper to a new type of society and economy, that are knowledge-based not merely industry-economy, that are knowledge-based not merely industry-based or agriculture-based, or even military-based society based or agriculture-based, or even military-based society and economy.and economy.

When we succeeded to translate the organization’s strategy When we succeeded to translate the organization’s strategy into a “logical architecture of a strategy map and Balanced into a “logical architecture of a strategy map and Balanced Scorecard, we may assume that the “organization created a Scorecard, we may assume that the “organization created a common and understandable point of reference for all their common and understandable point of reference for all their units and employees.”units and employees.”[ii[ii]]

[i][i] Ibid. Ibid.

[ii] Ibid.[ii] Ibid.

BSC – The Four PerspectivesBSC – The Four Perspectives

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

Financial PerspectiveFinancial Perspective

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

[i][i] Ibid., p. 25 Ibid., p. 25

[ii] Ibid., p. 26[ii] Ibid., p. 26

[iii] Ibid., p. 26[iii] Ibid., p. 26

Customer PerspectiveCustomer Perspective

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

[i][i] Ibid., p. 26 Ibid., p. 26

[ii] Ibid., p. 87[ii] Ibid., p. 87

[iii] Ibid., p. 87[iii] Ibid., p. 87

Internal-Business-Process PerspectiveInternal-Business-Process Perspective The decision makers in organizations should identify those The decision makers in organizations should identify those

critical organizational processes “in which the organization critical organizational processes “in which the organization must excel.”must excel.”[i[i]]

““The internal-business-process measures focus on the internal The internal-business-process measures focus on the internal processes that will have the greatest impact on customer processes that will have the greatest impact on customer satisfaction and achieving an organization’s financial satisfaction and achieving an organization’s financial objectives.”objectives.”[ii[ii]] We notice, here, the linkage between the We notice, here, the linkage between the customer perspective and the financial one as having assured customer perspective and the financial one as having assured greater customer satisfaction would secure improved financial greater customer satisfaction would secure improved financial results for the company.results for the company.

““The operations process remains important and organizations The operations process remains important and organizations should identify the cost, quality, time, and performance should identify the cost, quality, time, and performance characteristics that will enable it to deliver superior products characteristics that will enable it to deliver superior products and services to its targeted current customers.”and services to its targeted current customers.”[iii[iii]] Having Having secured all factors contributing to the delivering of high secured all factors contributing to the delivering of high quality products and services to the clients in a timely manner quality products and services to the clients in a timely manner will improve customer’s satisfaction. will improve customer’s satisfaction.

[i][i] Ibid., 26 Ibid., 26[ii] Ibid., p. 27[ii] Ibid., p. 27[iii] Ibid., pp. 115-116[iii] Ibid., pp. 115-116

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

Learning and GrowthLearning and Growth

““The objectives in the learning and growth The objectives in the learning and growth perspective provide the infrastructure to enable perspective provide the infrastructure to enable ambitious objectives in the other three ambitious objectives in the other three perspectives to be achieved.”perspectives to be achieved.”[i[i]] Kaplan and Kaplan and Norton identified “three principal categories for Norton identified “three principal categories for the learning and growth perspective:the learning and growth perspective: Employee capabilitiesEmployee capabilities Information systems capabilitiesInformation systems capabilities Motivation, empowerment, and alignment.”Motivation, empowerment, and alignment.”[ii[ii]]

Each one of these three categories provides a Each one of these three categories provides a different explanation of what is known as being a different explanation of what is known as being a unique organizational capability. unique organizational capability.

[i][i] Ibid., p. 126 Ibid., p. 126

[ii] Ibid., p. 127[ii] Ibid., p. 127

The Strategy MapThe Strategy Map

We need to formulate two new concepts the Balanced We need to formulate two new concepts the Balanced Scorecard relies on. The first one is the concept of the Scorecard relies on. The first one is the concept of the strategy mapstrategy map. The main function of a strategy map is . The main function of a strategy map is “to make explicit the strategy’s hypothesis.”“to make explicit the strategy’s hypothesis.”[i[i]] “Each “Each measure of a Balanced Scorecard becomes embedded measure of a Balanced Scorecard becomes embedded in a chain of cause-and-effect logic that connects the in a chain of cause-and-effect logic that connects the desired outcomes from the strategy with the drivers desired outcomes from the strategy with the drivers that will lead to the strategic outcomes.”that will lead to the strategic outcomes.”[ii[ii]]

The strategy map provides a “framework for The strategy map provides a “framework for describing and managing strategy in a knowledge describing and managing strategy in a knowledge economy”economy”[iii[iii]] and it appears as a “generic and it appears as a “generic architecture” as it comprises the diagram of the most architecture” as it comprises the diagram of the most significant cause-and-effect chains the strategy is significant cause-and-effect chains the strategy is relying on in order to get finally a “profitable growth”. relying on in order to get finally a “profitable growth”.

[i][i] Ibid. Ibid.[ii] Ibid.[ii] Ibid.[iii] Ibid.[iii] Ibid.

The cause-and-effect chains reveal to those involved in The cause-and-effect chains reveal to those involved in the new management system how the intangible assets the new management system how the intangible assets can contribute to value creation. Such linkages reveal can contribute to value creation. Such linkages reveal how the improvements of various intangible assets (such how the improvements of various intangible assets (such as knowledge, skills and the customer satisfaction) may as knowledge, skills and the customer satisfaction) may affect the financial outcomes. Let’s take into account affect the financial outcomes. Let’s take into account Kaplan and Norton’s example:Kaplan and Norton’s example: ““Investments in employee training lead to improvements in Investments in employee training lead to improvements in

service qualityservice quality Better service quality leads to a higher customer satisfactionBetter service quality leads to a higher customer satisfaction Higher customer satisfaction leads to increased customer loyaltyHigher customer satisfaction leads to increased customer loyalty Increased customer loyalty generates increased revenues and Increased customer loyalty generates increased revenues and

margins.”margins.”[i[i]] The strategy map makes visible the complex linkages The strategy map makes visible the complex linkages

between an asset such as “workforce capabilities” and its between an asset such as “workforce capabilities” and its “financial value” that is hypothetically associated to such “financial value” that is hypothetically associated to such an intangible asset.an intangible asset.

[i][i] Ibid., p. 66 Ibid., p. 66

Taking into account that the value is “indirect”, Taking into account that the value is “indirect”, “contextual”, “potential”, “bundled”, the strategy “contextual”, “potential”, “bundled”, the strategy map assumes itself the role of making visible, explicit map assumes itself the role of making visible, explicit what it revealed to be hidden, implicit: the what it revealed to be hidden, implicit: the intermediate stages involved in a process of a value intermediate stages involved in a process of a value creation being that, as we have already mentioned, creation being that, as we have already mentioned, “the improvements in intangible assets affect “the improvements in intangible assets affect financial outcomes through cause-and-effect financial outcomes through cause-and-effect relationships involving two or three intermediate relationships involving two or three intermediate stages”stages”[i[i]], as it was presented in the former example., as it was presented in the former example.

The Balanced Scorecard provides the proper The Balanced Scorecard provides the proper framework that enable us to make explicit the framework that enable us to make explicit the linkages between “intangible and tangible assets in linkages between “intangible and tangible assets in value creating activities”value creating activities”[ii[ii]]..

[i][i] Ibid. Ibid.[ii] Ibid.[ii] Ibid.

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

[i][i] Ibid., p. 68 Ibid., p. 68[ii] Ibid., p. 68[ii] Ibid., p. 68[iii] Ibid., p. 69[iii] Ibid., p. 69

A “A “strategy mapstrategy map” is defined as a “” is defined as a “logic architecturelogic architecture” of ” of ““cause-and-effect linkagescause-and-effect linkages”, or as a “generic architecture ”, or as a “generic architecture for describing a strategy”[i]. Operationally, it looks like a for describing a strategy”[i]. Operationally, it looks like a diagram through which we are made aware of the diagram through which we are made aware of the strategy, i.e. a strategy-focused organization that, as a strategy, i.e. a strategy-focused organization that, as a matter of fact, is a new organization compared to itself in matter of fact, is a new organization compared to itself in a previous period of time when the managerial team had a previous period of time when the managerial team had come to formulate a strategy. come to formulate a strategy.

Let’s illustrate such a strategy map by a diagram Let’s illustrate such a strategy map by a diagram proposed by Kaplan and Norton as architecture of a proposed by Kaplan and Norton as architecture of a strategy map for a retail firm specialized in women’s strategy map for a retail firm specialized in women’s clothing. clothing.

[i] Ibid.[i] Ibid.

Source: Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 70

A Fashion Retailer’s Strategy MapThe Revenue Growth Strategy

“Achieve aggressive, profitable growth by increasing our share of the

customer’s closet”

The Productivity Strategy

“Improve operating efficiency through real estate productivity and improved

inventory management”

Profitable Growth

ProductivityGrowth

BrandImage

FashionDesign

ConsistentQuality/Fit

Price/Benefit

CompleteOffering

AvailabilityShopping

Experience

Shopping Experience

Building Image

Right Product

StrategicAwareness

GoalAlignment

StaffCompetencies

TechnologyInfrastructure

“AchievingBrand

Dominance”Theme

“FashionExcellence”

Theme

“Sourcing andDistribution”

Theme

“ShoppingExperience”

Theme

Build the Franchise

Operational

Excellence

Increase Customer Value

Learning and Growth

Internal

Financial

Customer

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

[i] Ibid., p. 23[i] Ibid., p. 23

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

outcomes”[ii] due to this new operating system.outcomes”[ii] due to this new operating system. [i] Ibid., p. 23[i] Ibid., p. 23

[ii] Ibid., p. 11[ii] Ibid., p. 11

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

[i] Ibid., p. 11[i] Ibid., p. 11

[ii] Ibid., p. 11[ii] Ibid., p. 11