CONCEPTUAL DESIGN OF INDUSTRIAL STRATEGY MAP TO ACHIEVE WORLD- CLASS ENTERPRISES; Case Study: BANKING INDUSTRY

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1 CONCEPTUAL DESIGN OF INDUSTRIAL STRATEGY MAP TO ACHIEVE WORLD- CLASS ENTERPRISES; Case Study: BANKING INDUSTRY Mohammad m. Rahimian 1,Shohreh Nematollahi 2 1- MSc in industrial management (Operation Management ), Institute for Management and Planning Studies, Tehran, Iran. m.rahimian@imps.ac.ir 2- MSc in industrial management (OR), Institute for Management and Planning Studies, Tehran, Iran. Sh.nematolahi@imps.ac.ir Abstract Change in today's business world has created a new generation of companies called World-class organizations. This situation has made change imperative for organizations. Today, one of the most important challenges facing services, businesses and manufacturing organizations to achieve world-class service is compiling consistent organizational strategies. On the other hand, planning and implementing an effective and successful strategy in this area needs drawing a map of an effective strategy to clarify the relationship between the strategic objectives of the organization. Balanced scorecard gives us the possibility of drawing strategy map, but in this method the relationships between strategic objectives and their interactions in different layers are not completely clear. Therefore, the aim of the present study is to explore the influencing factors between strategic objectives of the balanced assessment by using DEMATEL. In this study, to investigate the interaction of strategic objectives, the banking industry's strategy map is drawn with DEMATEL method. Keywords: Conceptual Design, Strategy Mapping, Businesses, World Class, Balanced Scorecard, DEMATEL Method 1. Introduction Today, international trade increases growing technology and thus reduces the competitive product lifecycle. That's why most businesses face significant uncertainties and continual commitment to reform, because traditional approaches to business in the present day are not enough. On the other hand, achievement of performance at international standards in organizations retains survival and credit in terms of globalization and therefore, access to world-class organization position has become one of the strategic goals of most manufacturing and service organizations. In this case, only organizations that are able to think global and act local are successful. Banking Industry is no exception because in today's global economy literature, the role of the financial system, money and capital market and consequently financial and credit institutions as executive arms of government s economic development tool is quite tangible, so that sustainable 1

2 economic development is not possible without the development of financial markets. Hence, credit and financial organizations have a pivotal role in this field. One of the most important issues that lead to achieving world-class performance is compiling organizational strategies consistent with it (Grubler, 2005). That is why it is essential that managers understand the nature and importance of strategic planning in their organization, and by developing appropriate strategies lead the organization to achieve performance with world-class standards. David (2011) believes that strategy formulation will enable the organization to act in an innovative way and avoid passive performance. In other words, instead of reacting to incidents, organization tries to influence the environment and in addition to environmental impact analysis on itself, be able to use opportunities and block threats. On the other hand, complexity and elegance in business decision making has made strategic management essential. Research in this area suggests that implanting developed strategies is much more difficult than formulating good ones (Kaplan and Norton, 2001, p. 49). Another challenge is to measure the effective implementation of strategies for success in the future, which indicates continuous problems to managers, researchers and consultants. Rao (2006), however, believes that although the financial measures are important nowadays, but new frameworks have emerged which is responsible for a wide range of criteria. These frameworks are going to respond to criticisms that exist in the level of financial measures. In particular, it is said that they are single and looking backward and only record a single firm s history. Kaplan and Norton (1992) presented theory of the balanced scorecard as an approach to the integration of financial and non-financial measures in the management of world-class competitive environments (Lin and Zhang, 2014). Given that one of the problems that hinder the implementation of strategies is that strategy should remain at the level of general and general orientation, Kaplan and Norton (1996) provided concept of Strategy Map in the framework of the Balanced Scorecard. Strategy Map shows organization strategies in cause and effect relationship. Moreover, it expresses how to convert strategy into measurable objectives and the organizational units and even staff. On the other hand, another problem that organizations are faced in a balanced assessment is that the degree of qualitative and quantitative objectives and the impact of them on each other are not well known. The purpose of this study is to find the relationships between strategic objectives in four aspects of Balanced Scorecard. The relationship between objectives, with systematic and accurate depiction of strategy map and, is carried out by the method of prioritizing organizational goals. 2. Theoretical foundations and research background 2-1. Balanced scorecard Balanced Scorecard (BSC) was first proposed by Kaplan and Norton in order to provide a framework for measuring the performance of multiple critical aspects of the business. This is a tool for organizing the strategic objectives relating to the customer, internal processes, learning and growth perspectives, and also provides financial perspective. By integrating these four perspectives, Balanced Scorecard helps managers to better understand functional interrelationships which leads to improvement of problem-solving and decision-making (Makchy, 2014). 2

3 In 1992, Kaplan and Norton started a research project to investigate the reasons for the success of the top twelve American companies and study performance evaluation in them. They announced that to perform a complete assessment of the organization performance, following four aspects should be assessed respectively: 1. Financial perspective: in this perspective, the economic results of the implementation of strategies are examined. like planning systems in which financial performance measures with criteria such as operating profit, return on investment and the value were determined before strategic planning, in assessing balanced performance, financial Performance as a tool to control the balance is measured with the same proportions and parameters (Robert and Simons, 2000). 2. Customer perspective: in this perspective, managers choose their competitive market, which will include current and potential customers and markets. This aspect of scorecard includes some general main parameters and a series of sub-parameters. The main parameters are: customer satisfaction, customer retention, attracts new customers, customer profitability and market share (Kaplan and Norton, 1996). 3. Learning and growth perspective: in this perspective level of access to specific capabilities in three main sources of human resources, information systems and guidelines and procedures is examined; since learning and development takes place when these three sources are provided. In order to assess objectives of this perspective, factors such as customer access to information and internal processes by managers and operational staff regarding MIS and harmony of staff motivation with organizational goals and mission, regarding guidelines and procedures are evaluated. (Robert and Simons, 2000) 4. Internal processes perspective: in this perspective internal and key processes which enable organization to create value for attracting and retaining customers and meet the expectations of shareholders are determined (Robert and Simons, 2000). Kaplan and Norton s work was determinant of the fact that successful companies choose their objectives in each of these four perspectives and select criteria for the evaluation, and determine quantitative targets for each of the criteria for specified evaluation period. Then, in order to achieve these goals, executive initiatives are planned and put into effect. Kaplan and Norton called this performance evaluation Balanced Scorecard or balanced evaluation (Kaplan and Norton, 1383, p. 12). Balanced scorecard completes financial measures of past performance with indicators of future performance determinants. Scorecard objectives are determined from organization strategy and vision. In fact, BSC is a tool for interpreting the mission of the organization in which the strategy is embodied and provides tangible objectives and measurable performance criteria (Voa et al., 2009). An important preliminary step before selecting Balanced Scorecard objectives and measures is outlining strategy in detail of a process that Kaplan and Norton have described it in detail. 3

4 Financial What should we do to achieve financial success for our shareholders? Customers How to present ourselves to costumers in order to achieve the vision Vision and Strategy Internal processes Which processes should the company focus on to provide shareholders and customers? Growth and learning How can we sustain our ability to change and develop in order to fulfill the vision? Figure 1. Framework of balanced scorecard 2-2. DEMATEL method (Decision Making Trial and Evaluation) This method was first used in BMI (Battelle Memorial Institute) Foundation, Switzerland, in 1972 in a project that was implemented in Geneva Research Center. Then Fontela and Gabous in 1976 developed the DEMATEL technique and generally offered 5 key steps for it. In fact the DEMATEL method is a comprehensive approach to analyze complex problems and models that are ongoing between complex factors of cause and effect relationships. In other words, this model was invented with this approach that proper use of the scientific method can improve the structure of complex issues and participate in identifying solutions with hierarchical structure. This methodology extracts mutual relationships in the studied graph that are influential or can be influenced, with taking advantage of principles of graph theory in a way that the amount of mutual influence of relations are determined by numeric Points. Moreover, due to the intrinsic properties of the objective it can confirm the association between goals. Other top feature of this decision making method is that each element can affect the upper and lower levels and be influenced by each of them. Also, the importance and weight of the elements in the model, is not determined by upstream or downstream elements, but by the whole model (Trvitik et al., 2003). Five steps of this method are as follows: 1. Providing direct relationship matrix: first, the audiences are asked to assess the direct influence between the two elements by ranking them using 0, 1, 2 and 3, which respectively indicate no impact, low impact, medium impact and high impact. The audience opinion is 4

5 considered as Xij, a component of the matrix, and with this interpretation that it is the degree that the audience believes, factor i influences factor j. 2. Normalization of direct relationship matrix: If the initial direct relation matrix is called D, it can be normalized using equation (2) and the value of S can be obtained from equation (3). It is important to consider that using equation (3) all elements of the matrix D are placed between zero and one. (2) [ ] (3) 3. Calculating matrix of relationships: this stage explores calculation of impressions and direct effects. If we call whole relations matrix T, it can be calculated by equation (4): (4) In this matrix, I is identity matrix. R is a matrix that its components are created by matrix C and Ttotal rows of columns and total columns of the matrix T. we suppose that r i is the total of i-th row of T, in this case R i shows direct and indirect effect of i on other elements. Suppose C j is the total j-th column of T, in fact it shows direct and indirect effects that other elements have on j. highest total row shows the elements that strongly influence the other elements highest total column represents the elements that are actually under the influence. [ ] (5) [ ] [ ] (6) [ ] [ ] (7) If (R i -C j ) is positive, factor I is the cause, but if it is negative, I is caused. Also with the amount of (R i +C j ) we can prioritize elements. In other words, the greater the value of (R i +C j ), the more importance and priority. 4. Set the threshold values for cause and effect graph: After calculating the matrix T and determine the cause factor, threshold value must be specified in order to eliminate simple effects. In this study, the threshold value was determines 24/0 by experts. Values less than 24/0 will be eliminated and only higher values will be shown in the graph. 5. Determining relations and drawing cause and effect relationship map: Lee graphs are obtained by drawing ordered pairs (R i +c j, R i -C j ) in which horizontal axis (R i +c j ) is formed by the name of superior and vertical axis (R i -C j ) is formed by the name of relation. Then network 5

6 relation map is done which clearly states the relationship between factors, levels of effectiveness and impact (Lee et al., 2011) Research background Wu et al. (2007) used DEMATEL technique for determining causal relationship of managers competence. He and colleagues (2008) determined the balanced scorecard causal relationships in knowledge management by DEMATEL method. Tseng (2010) used DEMATEL to assess the effectiveness of effective criteria. He also used fuzzy theory to assess uncertainty. Lee et al (2011) to evaluate the correlation between factors and draw a network of relationships, used DEMATEL method. Jasbi et al (2011) drew the strategy map of Saipa Yadak by using fuzzy data and balanced scorecard and DEMATEL method. Chen et al (2011) drew sights of each balanced scorecard s causal relationships. Falatouny et al (2012) explained the cause and effect model to draw causal relationships between the four perspectives of the balanced scorecard by using DEMATEL method. To associate key performance indicators with the strategy map and draw a cause and effect relationship between them in Taiwan banking, Huang (2012) used DEMATEL method. In SAPCO, Alvandi and colleagues (2012) created cause and effect relationship between the four perspectives of the balanced scorecard and key performance indicators for each of them individually. 3. Research Methodology This research aims to map out strategies in Iran s banking industry and prioritize them so that banks could achieve world class performance and compete with their global competitors. Since strategy map expresses the relationship between strategic objectives and performance evaluation indicators, and since in the Balanced Scorecard strategy relationship between the strategic objectives in different layers is not entirely clear, and it is unclear which strategic objectives are related and influence each other, in this paper the DEMATEL method is used to discover important factors between objects and their mutual relations, and then banking industry strategy map to achieve world-class performance is drawn. 4. Research Findings Now according to the above methodology, we perform the first phase of DEMATEL method which results in establishing a direct relationship between indicators of the balanced scorecard. It is shown in table 2. 6

7 Table 2. Direct relationship matrix A B C D E F G H I J K L A B C D E F G H I J K L The results of stage 3 and 4 can be seen as relationship matrix of the balanced scorecard indicators in Table 3: Table 3. Total Matrix A B C D E F G H I J K L A B C D E F G H I J K L

8 Results of stages 4 and 5 are seen in table 4: Table 4. Matrix R and C A B C D E F G H I J K L C R R+C R-C Now in the fifth stage, according to the R + C, criteria superiority is as below: The most important criterion is the standard G and it is selected as the main factor. Due to the R-C, it can be said that E, G, H, I, J, K and L criteria are cause and A, B, C and F standards are caused. Figure 1 shows Map of a network connection (NRM) which is banking industry's strategic plan to achieve world class competition. A B C Financial D E F Customer A G H I Internal J K L Growth Figure 1. Map of network connection 5. Conclusion Strategy Maps obtained from DEMATEL method indicates that the relationship between measures of each perspective does not only lead to relationships within each perspective, but each criterion is associated with criteria of other sights and affects them directly and indirectly. Also process improvement criteria have been detected the most important criteria and obviously just by focusing on improving it, other criteria will improve too. On the other hand, the criteria for financial 8

9 perspective are the most important caused criteria and income growth is the most important one. Therefore, by knowing weight of the caused and cause criteria, it becomes clear that improvement in which measures directly or indirectly effects caused criteria such as income growth and leads to desired results and also improves competitive indicators of banks against universal rivals. References Alvandi, M. & Fazli, S. & Yazdania, L. &Aghaee, M. (2012). An Integrated MCDM Method in Ranking BSC Perspectives and key Performance Indicators (KPIs). Management Science, Letters 2. Chen, F. & Hsu, T. & Tzeng, G. (2011). A balanced scorecard approach to establish a performance evaluation and relationship model for hot spring hotels based on a hybrid MCDM model combining DEMATEL and ANP. International Journal of Hospitality Management, 30. Ekmekçi, Y. (2014). Implementing of Balanced Scorecard: Sample of Turkish. Falatoonitoosi, E. & Leman, Z. & Sorooshian, S. (2012).Casual strategy mapping using integrated BSC and MCDM DEMATEL. Journal of American Science. Hung, W. (2012).Constructing a strategy map for banking institutions with key performance indicators of the balanced scorecard. Evaluation and Program Planning, 35. Jassbi, J. & Mohamadnejad, F. & Nasrollahzadeh, H. (2011). A Fuzzy DEMATEL framework for modeling cause and effect relationships of strategy. Expert Systems with Applications, 38. Kaplan, R.S. & Norton, D, P. (1993). Putting the Balanced Scorecard to work. Harvard Business Review. September-October, pp Kaplan, R.S. & Norton, D.P. (1996b). Using the Balanced Scorecard as a strategic management system. Harvard Business Review. January-February, pp Kaplan, R.S. & Norton. D.P. (1996a). Translating strategy into action the Balanced Scorecard. Harvard Business School Press, Boston. Kaplan, R.S. & Norton, D.P. (2001). The strategy Focused Organization ;How Balanced scorecard companies Thrive in New Business Environment. Harvard Business School Press, Boston, MA. Kaplan, R.S. & Norton, D.P. (1992). The Balanced Scorecard measures that drive performance. Harvard Business Review, January-February, pp Kloot, Louise & John, Martin (2000); Strategic performance management: a balanced approach to performance management issues in local government ; Management Accounting Research; 11; pp: Lee, W.S. & Huang, A. & Cheng, C.M. (2011). Analysis of Decision Making Factors for Equity Investment by DEMATEL and Analytic Network Process. Expert System with Application, 38 Lin, Zh. & Yu, Z. & Zhang, L. (2014). Performance outcomes of balanced scorecard application in hospital administration in China. China Economic Review 30. 9

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