Strategy maps
From ideas to results
Description
In business, accurately managing and measuring intangible assets, which constitute over 75% of a company's market value, is challenging due to the limitations of traditional financial metrics.
To overcome this, many organizations globally have adopted the Balanced Scorecard approach. This method complements financial indicators with non-financial measures related to customers, internal processes, and learning and growth, thereby establishing a direct connection between a company's strategy and its outcomes.
Additionally, the development of a strategy map for each organization, illustrating the cause-and-effect relationships between intangible and tangible assets and objectives, has become central to articulating and managing strategy at an operational level.
Strategy maps, initially considered a by-product, have proven crucial in demonstrating how organizations create value, making them indispensable for effective management and maintaining a competitive edge.
Table of contents
01Strategy map fundamentals
A strategy map serves as a comprehensive visual representation of an organization's approach towards creating value, illustrating how it plans to achieve its goals. Essentially, a well-crafted strategy map interconnects several critical elements: the anticipated outcomes in terms of productivity and growth, the unique value proposition offered to customers, excellence in internal processes, and the necessary capabilities derived from intangible assets. This visual tool encapsulates the organization's strategy, enabling managers to more effectively implement their strategic plans.
Every organization devises a strategy aimed at generating value for its customers, shareholders, and stakeholders. Over time, various methodologies have been developed to articulate and refine strategies to augment value creation. Among these, the Balanced Scorecard methodology stands out by advocating that an organization's future value generation is propelled by four principal factors or perspectives. These include the financial perspective, which balances the need for long-term investment against the imperative for short-term cost reduction to satisfy shareholders; the customer perspective, which defines the distinct value proposition to customers; the internal perspective, which focuses on the processes involved in product and service delivery; and the learning and growth perspective, which emphasizes the enhancement of intangible assets such as human, information, and organizational capital to foster future value creation.
The Balanced Scorecard approach goes beyond mere financial target setting, urging the establishment of objectives and the measurement of progress across all four perspectives. This holistic approach ensures that an organization leverages its intangible assets effectively, paving the way for sustainable value creation. Strategy maps, structured around these four perspectives, ensure that the organization's goals across these domains are coherent and aligned. This alignment ensures optimal performance and prevents the activities of one part of the organization from adversely affecting the outcomes of another. By elucidating all cause-and-effect relationships, strategy maps facilitate the development and continual refinement of an effective strategy, serving as a bridge between strategic planning and the Balanced Scorecard.
02Four internal perspective themes
In the contemporary business landscape, companies and organizations create value through the production and sale of goods and services. It was once believed that managing these processes was the primary duty of management. However, in today's competitive environment, operational excellence alone is not enough to secure a sustainable competitive advantage.
To ensure efficient execution of internal processes and alignment with intangible assets and the customer value proposition, the utilization of a strategy map is crucial. Organizations create value through four primary internal processes: operations management, customer management, innovation, and regulatory and social processes.
In operations management, organizations aim to build stronger relationships with suppliers to reduce the overall cost of procuring materials. This involves streamlining ordering and accounting functions to minimize administrative costs. Organizations also seek innovative methods to produce products and services more efficiently through continuous process improvement and efficiency initiatives. They also work to reduce distribution and delivery costs and mitigate risks associated with business operations.
By focusing on operations management, organizations aim to offer competitive pricing, high-quality products, prompt delivery, and comprehensive solutions to customer problems. A well-designed strategy map provides strategic focus to these key internal processes, linking process improvement programs to significant organizational outcomes. Strategy maps are particularly beneficial for organizations implementing quality management programs, as they integrate these efforts within a strategic framework that offers cause-and-effect accountability and measurement metrics.
03Value creation from intangibles
To harness the full potential of an organization's intangible assets, two critical steps must be undertaken. Firstly, these assets need to be perfectly aligned with the strategic goals the organization aims to achieve. Secondly, a comprehensive program should be initiated, aiming to improve all of the organization’s intangible assets in a harmonious manner, rather than allowing isolated programs to counteract each other. The essence of managing intangible assets lies in evaluating their "readiness" level, which refers to how well an intangible asset fulfills the requirements set by the enterprise's overarching strategy.
In practical terms, the most effective method to manage intangible assets efficiently involves the creation of a strategic readiness report for the organization. This report should accomplish three main objectives: delineate all of the organization’s intangible assets, ensure each asset is in alignment with the strategic vision, and assess the readiness level of each asset. Conceptually, readiness can be understood as the degree to which an intangible asset is in sync with the business enterprise's strategy. The greater the readiness level, the quicker intangible assets begin to contribute to cash flow. However, it is crucial to note that readiness transforms into financial gain only when internal processes lead to increased revenue and profit.
Intangible assets will only result in tangible outcomes, such as revenue growth or cost reductions, if they are supportive of and aligned with the strategic direction. It is impractical for organizations to assign a significant monetary value to intangible assets since tangible value emerges only through the successful execution of a chosen strategy. Therefore, the strategic readiness of an intangible asset is a prerequisite for strategic success, but it does not, by itself, ensure that success will be attained. The goal with intangible assets is to manage them in a way that their readiness level is continually enhanced and expanded over time, rather than being diminished or wasted. To consistently achieve this, it is imperative to define, measure, and manage the readiness of each intangible asset individually.
04Synchronizing Strategy Maps And Strategy
A strategy map serves as a succinct yet all-encompassing representation of an organization's strategic plan. This clarity empowers executives with the capability to articulate, measure, manage, and implement the desired strategy effectively. To maximize the benefits of a strategy map, it is advisable to integrate it with a Balanced Scorecard, which includes measures, performance drivers, targets, and initiatives. This amalgamation facilitates continuous monitoring of the strategy's effectiveness and the management of initiatives aimed at bridging any discrepancies between targeted performance and actual outcomes. In essence, when utilized in conjunction with a Balanced Scorecard, a strategy map significantly enhances an organization's execution capabilities. Strategy maps are not merely static representations of corporate intentions but can be actively employed to devise a concrete action plan. The effective application of a strategy map and Balanced Scorecard in tandem involves a six-step process.
The initial step involves establishing and defining the current value gap for shareholders, essentially setting the financial objectives, measures, and targets. This entails determining the objectives for long-term revenue growth and short-term productivity enhancements, aiming for ambitious targets that will pose a challenge to the organization. The second step requires reconciling the current value proposition by identifying the target customer segments, clarifying the existing value proposition, selecting appropriate measures, and aligning customer objectives with financial growth goals. This may also involve formulating a new customer proposition to achieve the desired growth.
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