02 Feb 2004  Research & Ideas

Mapping Your Corporate Strategy

From the originators of the Balanced Scorecard system, Strategy Maps is a new book that explores how companies can best their competition. A Q&A with Robert S. Kaplan.

 

Since the 1990s, the Balanced Scorecard system has cut a path in business as a more rigorous way to measure performance by quantifying what had been considered intangible assets, such as human capital, information, and culture. The system draws strength from four perspectives: 1) financial measures; 2) customers; 3) internal processes; and 4) learning and growth. Developed by HBS professor Robert S. Kaplan, chairman of the Balanced Scorecard Collaborative, and David P. Norton, co-founder with Kaplan and president of the Balanced Scorecard Collaborative, the system has led to three books that take the ideas further, starting with The Balanced Scorecard: Translating Strategy into Action (1996) and The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2000).

Most recently, Kaplan and Norton have built on the original, four-perspective model of the Balanced Scorecard, and they link it with the time-based dynamics of strategy in their latest book, Strategy Maps: Converting Intangible Assets into Tangible Outcomes (Harvard Business School Press, 2004). In this e-mail interview, Kaplan discusses Strategy Maps' practical lessons for business leaders.

Martha Lagace: Why should companies learn more about the benefits of strategy maps? What could companies be doing better than they are now?

Robert S. Kaplan: A strategy map provides a visual representation of the organization's strategy. This is truly an example of how one picture is more powerful than 1,000 words (or even twenty-five ad hoc performance measures). The financial and customer objectives describe the outcomes the organization wants to achieve; objectives in the internal and learning and growth perspectives describe how the organization intends to achieve these outcomes. The discipline of creating the strategy map of linked objectives in the four perspectives engages the executive team, and often promotes much greater clarity and commitment to the strategy.

Once created, the strategy map is a powerful communication tool that enables all employees to understand the strategy, and translate it into actions they can take to help the organization succeed. Here is a picture of two employees of the Royal Canadian Mounted Police (RCMP) with their strategy map helping them do their job in the ice fields above the Arctic Circle.

A strategy map also provides the structure for meetings where managers can quickly see which aspects of their strategy are succeeding and where they are falling short. The causal relationships enable managers to test whether the theory of their strategy is valid.

Q: Does it matter what size a company is before it can consider creating a strategy map? At a company, who ideally should be the steward of the strategy map? And, how often can or should the map evolve at a single organization?

A: We have seen strategy maps work extremely effectively in organizations with as few as twenty-five employees, as described in the Boston Lyric Opera case in our new book. And it clearly helps to align the multiple business units and the thousands and tens of thousands of employees in large organizations, as we see in the Thompson Corporation, the U.S. Army, and Ingersoll Rand examples in the book.

Most organizations identify a single person to be the steward or organizer of the strategy map. This person ensures that data are continually fed into the map and Balanced Scorecard to keep them refreshed, organizes the monthly report distribution—usually electronically—and sets the agenda for the monthly management meeting to discuss performance against the strategy. Some organizations call this person the "Chief of Staff."

In large organizations, the process is run by a new organization called the Office of Strategy Management—which reports directly to the CEO or COO. This office manages the process of periodic review and adaptation of the strategy map—perhaps done annually—and provides a central resource for implementing all five management processes to become a strategy-focused organization (the subject of our previous book): mobilize, translate, align, motivate, and sustain.

Q: You wrote in Strategy Maps, "A strategy, as articulated by (HBS professor) Michael Porter, will be most successful when the collection of integrated and aligned activities enable the company to offer a value proposition—whether low total cost, product leadership, complete customer solutions, or system lock-in—better than competitors." Many of our readers are familiar with Porter's work. How does your work on strategy intersect with his?

A: It's actually quite simple. Porter's work helps managers formulate their strategy. Our work provides the discipline to ensure that the formulated strategy has specific objectives for shareholders and customers, an explicit customer value proposition, the critical internal processes for creating and delivering the value proposition, and aligned human resources, information technology, and organization culture.

Porter argues that strategy is determined by a unique combination of activities that deliver a different value proposition than competitors or the same value proposition better. The strategy map framework allows companies to identify and link together the critical internal processes and human, information, and organization capital that deliver the value proposition differently or better. Thus, the process of creating a strategy map and Balanced Scorecard translates the formulated strategy into specific objectives, measures, targets, and initiatives in the four inter-related perspectives.

Our work helps organizations translate, communicate, implement, and review the strategy they have formulated following Mike Porter's principles. Our methodology, however, is completely general; whichever strategic framework the organization is using, it still needs to translate and communicate it across all business units and to all employees if the strategy is to be implemented effectively.

Q: This is your third book since The Balanced Scorecard and The Strategy-Focused Organization. How would you like to build on the lessons you convey in Strategy Maps for your future research? What's next for you?

A: We will continue to expand the framework established in The Strategy-Focused Organization. The Strategy Maps book elaborates the first principle in the SFO book, going into much more depth and with a large number of examples of how to translate a strategy into measurable, linked objectives.

Our next target will be the second principle, alignment. We already have ample new material on how a variety of organizations are cascading their enterprise strategy map and scorecard out to align dispersed business units, support groups, and individuals. Dave Norton and I already have the table of contents for this next book and have started to write chapter drafts.

We are also working, in parallel, on the governance aspects of the Balanced Scorecard. In the SFO book, we described the internal governance process by which the enterprise guides, monitors, and evaluates its strategic performance. We have a new case study on First Commonwealth Financial Corporation, and a new paper on how innovating organizations are using strategy maps and Balanced Scorecards in the governance process with boards of directors and even their public shareholders.

So fortunately we are not running out of new material and applications.

Strategy Maps: Converting Intangible Assets into Tangible Outcomes

by Robert S. Kaplan and David P. Norton

Background
Founded in 1959 and headquartered in Göteborg, Sweden, Volvofinans is the leading vehicle-financing company in Sweden, with total lending reaching 23.5 billion kroners ($2.7 billion) in 2001. This small but powerful lender employs about 190 people and has a highly focused mission: support sales of Volvo and Renault products in Sweden by financing products and sales. Ford Credit International owns 50 percent of the company. Swedish Volvo dealerships own the remaining 50 percent. Dealers are thus the firm's customers and its owners. Additional customers include fleets (firms operating more than fifty company cars) and individual consumers seeking attractive financing terms for their auto purchases.

The situation
In 1996, Volvofinans's executives observed a troubling lack of shared vision throughout the company's workforce. Surveys revealed declining commitment, eroding satisfaction, and scanty knowledge of corporate goals throughout the ranks. The firm sought a tool that would enable employees to support the company's overall mission, to "promote the sales of Volvo and Renault vehicles in Sweden through competitive sales-financing solutions attractive to dealers, private customers, and companies." Intrigued by Swedish-based insurer Skandia Group's experience with the Balanced Scorecard and by Harvard Business Review articles on the subject, Volvofinans's then-managing director, along with business controller Marianne Soderberg, assembled a Scorecard team. The project produced a Scorecard that could be displayed using PowerPoint slides and Excel spreadsheets. But the project stalled because the Scorecard was difficult to circulate and use by more than one person at a time.

The project was idle until August 2000, when Björn Ingemanson became the new managing director. Determined to renew the effort, Ingemanson authorized the building of a new IT system that would facilitate easy BSC use and circulation on the company's intranet. Ingemanson and his team also decided to focus the revived initiative on the Strategy-Focused Organization principle of "making strategy everyone's job." The firm espoused having an open, decentralized culture in which employees felt free to speak their minds and challenge management's ideas. But few people outside the senior management team participated in discussions about strategy and the development of future business. Ingemanson believed it was time to mobilize the pool of intellectual capital for strategy implementation.

The strategy map
During a series of lively seminars attended by managers and employees from a cross-section of many functions and levels—up to one-third of the company's workforce—the Scorecard team began crafting Volvofinans's strategy map (see Figure 13-2). They called the document their Vägvisaren, or road map. Rank-and-file employees defined most of the map's objectives and measures—an effective first step in aligning everyone behind the strategy.

The company initially identified more than thirty-five objectives, then combined several to arrive at a manageable twenty-two. Executives also decided to emphasize product leadership and operational excellence as keys to implementing Volvofinans's strategy. Within the strategy map, themes such as motivated and involved coworkers, win/win with Volvo dealers, and growth and efficiency strategy—along with a value chain flowing from product development to customer loyalty—provided the framework for the map's cause-and-effect relationships. Although the Scorecard team included arrows indicating causal connections in the map, they decided to circulate an arrowless version throughout the organization, because people found it easier to absorb visually. The team used the strategy map to communicate high-level strategy effectively and compellingly to all employees.

The highlights from the map included the following:

Coworkers/Learning perspective: To fulfill its mission, Volvofinans needs a motivated, actively involved, and knowledgeable workforce. It now nurtures a culture of learning by encouraging everyone to participate in strategy discussions, leveraging the company's existing consensus-oriented culture. In contrast with the aborted initial Scorecard project, the team adopted objectives for "efficient IT support" and "high availability of information."

Process perspective: In this perspective, the emphasis on product leadership and operational excellence come together. This section of the map outlines ways to improve product development, sales and marketing, risk handling, credit handling, and cultivation of customer loyalty. Objectives include developing innovative financing products, continually educating Volvo dealers on Volvofinans's offerings, serving customers efficiently, and administering contracts quickly and accurately. The arrow flowing from left to right indicates the direction of the company's value chain.

Customer and financial perspectives: The process objectives feed into objectives in the customer and financial perspectives. For instance, by meeting its process objective for "market leadership in financial solutions and concepts" (reflecting its emphasis on product leadership), Volvofinans expects to boost its ability to partner successfully with dealers. Successful partnering in turn supports growth through "attractive financial solutions" and "increased credit administration services." But dealers aren't Volvofinans's only customers. Market leadership in financial solutions and concepts also supports the objective for "attractive package solutions" for fleet and end-customers. Serving these customers in turn supports another objective under the growth strategy theme in the financial perspective: "market leader within fleet administration and finance." Another objective in the process perspective—"efficient contract administration"—links directly to the financial efficiency objective to be the "market leader in cost-efficient contract administration."

Figure 13-2

Anecdotes
Volvofinans's inclusive strategy map development process paid big dividends. Recent surveys revealed that employees now had a stronger grasp of department and company strategy. Morale and commitment to company goals have also soared, as has employees' mastery of industry dynamics. These improvements led to tangible outcomes. In 2001, the company's share of the new-car financing market through Volvo dealerships in Sweden expanded, leading to significant increases in lending amounts and the number of contracts in force.

Its emphasis on product leadership and operational excellence also yielded results. The company launched "Volvo Carloan," an insurance plan that pays customers' monthly autoloan bills if they lose their jobs or develop a long-term illness. By mid-2002, more than 100,000 customers had signed up for the plan; Volvofinans's competitors have belatedly launched similar products. And the company boasts the lowest cost per administered contract in its market. Volvofinans is a member of the Balanced Scorecard Hall of Fame.

Case prepared by Carl-Frederik Helgegren of the Balanced Scorecard Collaborative, Sweden, and Lauren Keller Johnson, a contributor to the Balanced Scorecard Report. We thank Marianne Soderberg and Bjorn Ingemanson for sharing their Volvofinans experience.

Excerpted with permission from Strategy Maps, by Robert S. Kaplan and David P. Norton. Harvard Business School Press, 2004.

Royal Canadian Mounted Police V Division
Iqaluit (Baffin Island)