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.