The Strategy-Focused Organization: Theory and Method (I)
Balanced Scorecard (BSC) – A New Management System in the
Science of Organization
 BSC – The Four Perspectives
 The Strategy Map
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Balanced Scorecard – A New Management System in the
Science of Organization
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The starting point of a Balanced Scorecard execution is the strategy. A
scorecard program is involved, i.e. that type of program similar with a
“printed program or card enabling a spectator to identify players and record
the progress of a game and competition.”[i]
What is significant in such a “game”? First of all, the “players” are the most
significant element being involved in a business process. They get together
and act themselves as organizational units, not individually but as if they are
“collective individuals”, or “moral personalities”. They act, therefore,
collectively and, also, as units, i.e. as collective persons. Secondly, the actors
that are put together to work as organizational units behave not randomly but
in a customized way, that is by executing some specification, striving to attain
the same goals and targets. So, they accept a sort of internal benchmarks that
help them “to understand their contribution to the organization”.
[i] Kaplan, Robert S., Norton, D. (2001). The Strategy Focused-Organization:
How Balanced Scorecard Companies Thrive in the New Business
Environment, Boston: Harvard Business School Press
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What is, then, a “scorecard”? “An application or custom user interface that
helps manage an organization’s performance (by optimizing and aligning
organizational units, business processes and individuals. It should, also,
provide internal and industry benchmarks as well as goals and targets that
help individuals understand their contribution to the organization. The use of
scorecards spans the operational, tactical and strategic aspects of the business
and its decisions.”[i]
The elements involved when using the Balanced Scorecard are the
organizational units, the strategy of the organization (through which the goals
and targets are designed), the performance indicators (financial, customer,
internal business processes, learning and growth) all of them being integrated
in a framework which Kaplan and Norton used to call “strategy map”. The
Balanced Scorecard “is a model of business performance evaluation that
balances measures of financial performance, internal operations, innovation
and learning and customer satisfaction”.[ii]
[i] http://www.dmreview.com/resources/glossary.cfm
[ii] http://www.services.eliteral.com/Glossary/managerial-accounting-glossary.php
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Let’s keep in mind the idea that the Balanced Scorecard is a “model of
performance evaluation” designed to balance “measures of financial
performance”, “internal operations”, learning and innovation (or growth) and
“customer satisfaction”.
The Balanced Scorecard is “an integrated framework for describing strategy
through the use of linked performances measures in four, balanced perspectives –
financial, customer, internal process and employee learning and growth. The
Balanced Scorecard acts as a management system and communication tool.”[i]
“An approach for ongoing organizational monitoring defined by R. Kaplan and D.
Norton in which four types performance indicators (namely: financial, customer,
internal business processes, and learning and growth) are used.”[ii]
[i] http://www.BalancedScorecard.biz/Glossary.html
[ii] http://www.ndu.edu/irmc/elearning/primer/glosarry.htm
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What is significant in the “strategy map” refers to what Kaplan and Norton
call “linkages of cause-and-effect relationship” just because such linkages
“show how the intangible assets are transformed into tangible (financial)
outcomes”. Tangible assets – cash, accounts receivable, inventory, land, plant,
and equipment – “have values largely independent of who owns them.
Intangible assets, in contrast, usually have little stand-alone value; their value
arises from being embedded in coherent, linked strategies.”[i]
It is important to underline that the scorecard program uses, also, financial
and non-financial measures (such as “cycle time, market share, innovation,
satisfaction, and competencies.”[ii] Such measures allow the “value-creating
process to be described and measured”[iii] not merely “inferred”.
[i] Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 11
[ii] Ibid.
[iii] Ibid.
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Therefore, we can conclude that “strategy map and Balanced Scorecards
constitute the measurement technology for managing in a knowledge based
economy.”[i]
We defined three key concepts in the strategic management: strategy-focused
organization, strategy map and Balanced Scorecard. These are key-concepts
of the newest organizational science proper to a new type of society and
economy, that are knowledge-based not merely industry-based or agriculturebased, or even military-based society and economy.
When we succeeded to translate the organization’s strategy into a “logical
architecture of a strategy map and Balanced Scorecard, we may assume that
the “organization created a common and understandable point of reference
for all their units and employees.”[ii]
[i] Ibid.
[ii] Ibid.
BSC – The Four Perspectives
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The Balanced Scorecard is the method that enable the ongoing
monitoring of strategy-focused organizations, i.e. those
companies aiming for the realization of its strategic objectives
based on measuring organizational performance from four
perspectives as follows:
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Financial Perspective
Customer Perspective
Internal-Business-Process Perspective
Learning and Growth Perspective
Financial Perspective
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“Financial performance measures indicate whether a company’s
strategy, implementation, and execution are contributing to
bottom-line improvement.”[i] Financial objectives may be
translated in various profitability-measured, for example, “by
operating income, return-on-capital employed, or, more recently,
economic value-added.”[ii] Other financial indicators used within
the financial perspective may be sales growth or “generation of
cash flows”[iii].
[i] Ibid., p. 25
[ii] Ibid., p. 26
[iii] Ibid., p. 26
Customer Perspective
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This perspective may include “specific measures of the value
propositions that the company will deliver to customers in
targeted market segments.”[i] Measuring “the elapsed time from
when a new customer demand has been identified to the time
when the new product or service has been delivered to the
customer”[ii] is an example of indicator to be used within the
customer perspective. The “incidence of defects, say part-permillion defect rates, as measured by customers”[iii] is another
example.
[i] Ibid., p. 26
[ii] Ibid., p. 87
[iii] Ibid., p. 87
Internal-Business-Process Perspective
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The decision makers in organizations should identify those critical
organizational processes “in which the organization must excel.”[i]
“The internal-business-process measures focus on the internal processes that
will have the greatest impact on customer satisfaction and achieving an
organization’s financial objectives.”[ii] We notice, here, the linkage between
the customer perspective and the financial one as having assured greater
customer satisfaction would secure improved financial results for the
company.
“The operations process remains important and organizations should identify
the cost, quality, time, and performance characteristics that will enable it to
deliver superior products and services to its targeted current customers.”[iii]
Having secured all factors contributing to the delivering of high quality
products and services to the clients in a timely manner will improve
customer’s satisfaction.
[i] Ibid., 26
[ii] Ibid., p. 27
[iii] Ibid., pp. 115-116
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Finally, the financial results of the company delivering superior
products and services will be improved. Again, we pinpoint the
importance of the linkage between the internal-business-process
perspective and customer as well as financial perspectives as the
success of the business depends on a multitude of interlinked
factors, including efficient organizational processes, high
customer satisfaction and improved financial results. Learning
and growth perspective is the last one within the philosophy of
the balanced scorecard method.
Learning and Growth
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“The objectives in the learning and growth perspective provide
the infrastructure to enable ambitious objectives in the other
three perspectives to be achieved.”[i] Kaplan and Norton
identified “three principal categories for the learning and growth
perspective:
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Employee capabilities
Information systems capabilities
Motivation, empowerment, and alignment.”[ii]
Each one of these three categories provides a different
explanation of what is known as being a unique organizational
capability.
[i] Ibid., p. 126
[ii] Ibid., p. 127
The Strategy Map
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We need to formulate two new concepts the Balanced Scorecard
relies on. The first one is the concept of the strategy map. The
main function of a strategy map is “to make explicit the
strategy’s hypothesis.”[i] “Each measure of a Balanced Scorecard
becomes embedded in a chain of cause-and-effect logic that
connects the desired outcomes from the strategy with the drivers
that will lead to the strategic outcomes.”[ii]
The strategy map provides a “framework for describing and
managing strategy in a knowledge economy”[iii] and it appears as
a “generic architecture” as it comprises the diagram of the most
significant cause-and-effect chains the strategy is relying on in
order to get finally a “profitable growth”.
[i] Ibid.
[ii] Ibid.
[iii] Ibid.
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The cause-and-effect chains reveal to those involved in the new
management system how the intangible assets can contribute to
value creation. Such linkages reveal how the improvements of
various intangible assets (such as knowledge, skills and the
customer satisfaction) may affect the financial outcomes. Let’s
take into account Kaplan and Norton’s example:
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“Investments in employee training lead to improvements in service quality
Better service quality leads to a higher customer satisfaction
Higher customer satisfaction leads to increased customer loyalty
Increased customer loyalty generates increased revenues and margins.”[i]
The strategy map makes visible the complex linkages between an
asset such as “workforce capabilities” and its “financial value”
that is hypothetically associated to such an intangible asset.
[i] Ibid., p. 66
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Taking into account that the value is “indirect”, “contextual”,
“potential”, “bundled”, the strategy map assumes itself the role
of making visible, explicit what it revealed to be hidden, implicit:
the intermediate stages involved in a process of a value creation
being that, as we have already mentioned, “the improvements in
intangible assets affect financial outcomes through cause-andeffect relationships involving two or three intermediate stages”[i],
as it was presented in the former example.
The Balanced Scorecard provides the proper framework that
enable us to make explicit the linkages between “intangible and
tangible assets in value creating activities”[ii].
[i] Ibid.
[ii] Ibid.
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The scorecard measures the intangible assets (their “value”) in
their own adequate units, other than currency (dollar, euro, etc.)
just because using a “strategy map” of “cause-and-effect
linkages” make possible to “describe how intangible assets get
mobilized and combined with other assets, both tangible and
intangible, to create value-creating customer value proportions
and desired financial outcomes.”[i] A strategy map is a “logical
architecture” emphasized as a diagram of the hypothetic “causeand-effect linkages” that specify the “relationship among
shareholders, customers, business process, and competencies”[ii]
so that the team executing a strategy be aware of the
connections between “the desired outcomes from the strategy
with the drivers that will lead to the strategic outcomes.”[iii]
[i] Ibid., p. 68
[ii] Ibid., p. 68
[iii] Ibid., p. 69
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A “strategy map” is defined as a “logic architecture” of “causeand-effect linkages”, or as a “generic architecture for describing a
strategy”[i]. Operationally, it looks like a diagram through which
we are made aware of the strategy, i.e. a strategy-focused
organization that, as a matter of fact, is a new organization
compared to itself in a previous period of time when the
managerial team had come to formulate a strategy.
Let’s illustrate such a strategy map by a diagram proposed by
Kaplan and Norton as architecture of a strategy map for a retail
firm specialized in women’s clothing.
[i] Ibid.
Source: Kaplan, Robert S., Norton, D. (2001). Op. cit., p. 70
A Fashion Retailer’s Strategy Map
The Revenue Growth Strategy
The Productivity Strategy
“Achieve aggressive, profitable growth by
“Improve operating efficiency through real
estate productivity and improved inventory
management”
increasing our share of the customer’s
closet”
Profitable Growth
Financial
Growth
Productivity
Customer
Brand
Image
Fashion
Design
Consistent
Quality/Fit
“Achieving
Brand
Dominance”
Theme
Learning and
Growth
Complete
Offering
Availability
Shopping
Experience
Shopping Experience
Right Product
Building Image
Internal
Price/
Benefit
Build the
Franchise
Operational
Excellence
Increase
Customer Value
“Fashion
Excellence”
Theme
“Sourcing and
Distribution”
Theme
“Shopping
Experience”
Theme
Strategic
Awareness
Goal
Alignment
Staff
Competencies
Technology
Infrastructure
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What is relevant in the diagram refers to the four perspectives on
value creation, (financial, customer, internal business process,
learning and growth), the “strategic themes” in the internal
business process perspective, the cause-and-effect linkages
through which the improvements in an organization’s intangible
assets propagate through improved customer satisfaction to
leveraged financial results. A “strategy scorecard replaced the
budget as the center for management processes”[i] and we can
conclude that a “new operating system” emerged to sustain a
“new strategic management process” and the focus of that
operating system is on the Balanced Scorecard method.
[i] Ibid., p. 23
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The Balanced Scorecard management system reveals to bear the
power “to focus the entire organization on strategy”[i] so that
the former fragmented organization based on a bureaucratic
staff and on budgets as operating system for management
process is largely replaced by a strategy-focused organization. It
is possible to make explicit “how the intangible assets are
transformed into tangible (financial) outcomes”[ii] due to this
new operating system.
[i] Ibid., p. 23
[ii] Ibid., p. 11
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“The strategy map and its corresponding Balanced Scorecard
measurement program provide a tool to describe how
shareholder value is created from intangible assets. Strategy maps
and Balanced Scorecard constitute the measurement technology
for managing in a knowledge-based economy.”[i] “By translating
their strategy into the logical architecture of a strategy map and
Balanced Scorecard, organizations create a common and
understandable point of reference for all their units and
employers.”[ii]
[i] Ibid., p. 11
[ii] Ibid., p. 11
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The Strategy-Focused Organization: Theory and Method