A SIMPLE TOOL FOR THE DESIGN OF STRATEGIC MAPS

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1 A SIMPLE TOOL FOR THE DESIGN OF STRATEGIC MAPS Luis E. Quezada, Felisa M. Cordova, Pedro Palominos, Katherine Godoy, Jocelyn Ross Department of Industrial Engineering, University of Santiago, USACH Avenida Ecuador 3769 Santiago, Chile Abstract This paper describes a simple tool for the design of strategic maps, based on the Balanced Scorecard, to be used in organizations to establish performance indicators. To design the tool a number of companies who implemented the balanced scorecard were analyzed, with the purpose of obtaining the way their strategic maps were created. Three types of methods were found. They are different in the way the strategic objectives are defined. Studying the benefits and drawbacks of the three methods a simple method was derived. This paper also makes an analysis of the type of indicators that the studied companies use. Keywords: Performance indicators, balanced scorecard, strategic maps. 1 INTRODUCTION The subject of performance measurement has attracted a lot of attention in the literature of business strategy. Neely [1] states that only between 1994 and 1996, around 3615 articles on the subject were published. He argues that there are four basic questions that research in business performance seeks to address: (1) What are the determinants of business performance?, (2) How can business performance be measured?, (3) How to decide which performance measures to adopt? and (4) How can the performance measurement system be managed?. As cited by Neeley et al. [2] "when you can measure what you are speaking about, and express it in numbers, you know something about it...(lord Kelvin, )". They also state that "Performance measurement is a topic which is often discussed but rarely defined" They analyse performance measures in manufacture related to cost, quality, flexibility and time. However, the purpose of this literature review is not actually to present specific measures of performance, but to give some guides to the process of designing a measurement system. What is surprising is that for managers it is easy to decide what should be measured. What is difficult for them is to reduce the number of measures to a set that is manageable and useful. It is very easy to decide which measures of performance to use, but this does not means that they are the right measures. One relevant aspect for this project is that these authors emphasise the need to do more research in the case of small of small and medium sized companies, where performance measurement system are considered as a luxury. A large number of studies, such as those undertaken by Blenkinsop and Burns [3], Dummond [4] and Evans [5] attempt to relate external and internal variables with the management control system, but they do not study the generation of performance indices in manufacturing. In spite of the importance to given to the measurement of the performance of companies, Melnyck et al. [6] declare that performance measurement continues being a challenge both for practitioners and academia. This proposal combines two areas of knowledge, which are multicriteria analysis and performance measurement systems. A number of approaches have been developed to measure performance and to improve it [7]. Some of them are the Strategic Measurement Analysis and Reporting Technique, developed by Wang Laboratories (Lynch and Cross) [8], the Performance Measurement Questionnaire (PMQ), [9], the Integrated Dynamic Performance Measurement System [10], [11] and the Balanced Scorecard developed by Kaplan and Norton [12], [13], [14], [15], [16]). Among them, the most popular is the Balanced Scorecard (BSC). During the last decade, the BSC has been applied in many companies and has been matter of discussion in the academia. It was created as an alternative to the traditional way of measuring the value of companies in terms of their assets and market shares [15], [16]. The main contribution of the BSC is that it does not use only financial information as measurement indicators. Kaplan and Norton propose a management control system that identifies four perspectives (a) Financial, (b) Internal Processes, (c ) Clients and (d) innovation and Learning. This approach helps to identify indicators that are aligned with the vision, mission and strategies of the firm. The importance of this alignment has been studied by other authors such as Millar and Roth [17], Noble ([18] and Kathuria [19]. The BSC establishes cause-effect relationships among strategic objectives, even though they do not state the way to establish and quantify those relationships. The relationships are represented in what the authors called, which is the main subject of this work. There has been a debate, from those who state that it is the most innovative strategic tool in the recent years [20] to those who argue that it is an inflexible tool to face the changes in the environment and the challenges of the behaviour of the individuals within an organization [21]. In their literature review, Gomes et a.l [22] have found that the BSC appears to be the most cited performance measurement system and that perhaps this is an indication of the BSC wide acceptability among scholars and practitioners. While the BSC is the most cited in the

2 literature in terms of implementations, it has been criticized on the ground of over simplicity. Brignall [23] argues that it merely provides senior managers with a tool to monitor performance against strategic and operational objectives [24]. In this context, even Kaplan and Norton agreed that it is more like as strategic management tool, rather than a true complete performance management system. Gomes et al. [22] also point out that perhaps more focused on the intrinsic characteristic of each organization, some authors tended to stress the design and implementation aspects of a performance measurement system, rather than the general utility of a given performance measurement system across organizations, stress a case by case orientation rather than an uniform theory driven framework approach. Finally, Neely [25] in his analysis of the literature also stresses the dominance of the balanced scorecard. However, he points out that the research community must take the research agenda forward in order not to be trapped by solutions proposed for problems of the past. The objective of this paper is to describe a simple tool for building strategic maps. A strategic map is a component of a balanced scorecard that represents the cause-effect relationships among strategic objectives. Performance measurements are defining for each strategic objective. This work proposes the use of multicriteria analysis, which has been used as a supporting tool for the generation of performance indicators. The Analytic Hierarchy Process (ANP) [26] and the Data Envelopment Analysis (DEA) are appropriate for judging better a firm s performance [7]. They have been used in the literature for various purposes. However, their use in performance measurement has been rather limited. Valiris et al. (2005) propose the use of the simple multi-attribute rating technique to select performance measures from a larger number of then. They argue that it the smart technique is better than the analytic hierarchy process (AHP) because of its simplicity. This may be true when selecting indicators, but not necessarily when developing the indices. Bititci et al. [27], propose a conceptual model for establishing relationships in a performance measurement system. However, their conclusions are based on a very simple illustration, which reduces its possible generalisation. Perhaps the most relevant work was carried out by Yurdakul [7]. He proposed a model using ANP to measure the long term performance of a manufacturing firm. 2 THE CONCEPT OF STRATEGIC MAP As shown above, the Balanced Scorecard (BSC) is a strategic management control system that was proposed by Kaplan and Norton. In the BSC strategic objectives are derived from the vision and strategy of the organisation and then they are classified into the following perspectives: - Financial - Clients - Internal Processes - Learning and Growth. The objectives are then connected according a causeeffect relationship leading to what Kaplan and Norton call a [28].. Figure 1 shows an example of a strategic map. Financial Clients Internal Processes Learning Figure 1 : Finally, performance indicators are defined for each strategic objective, along with all their characteristics, such as current value and target. The literature states that the strategic map is derived form the vision and strategy of the organization. This work proposes a way of doing it. The interested reader can be read the book by Kaplan and Norton [28] to learn more about strategic maps. 3 RESEARCH METHODOLOGY The research methodology is based on a study of 12 organizations that have implemented a balanced scorecard according to Kaplan and Norton s methodology. Managers and consultants in charge of the process were asked about the way they created the strategic map. They were also asked about the advantages and drawbacks they found as well as recommendation they may give. Taking into account their observations the new tool was proposed. The interview also included the performance indicators that were defined as part of the process. However, the result of the analysis of this part of the study is not included in this paper. 4 THE COMPANIES The companies studied belong to a variety of economic sectors. They include both manufacturing and service firms. They have different sizes. A brief description of the companies is given: Company A: It manufactures pieces and parts for a variety of industries. Company B: It is dedicated to the research and development in the energy sector. Company C: It supplies with buses and associated services to the transportation system. Company D: It imports and delivers a variety of meat products. Company E: It is a copper mining company. Company F: It is a company in charge of the delivery of newspapers. Company G: It is an insurance company. Company H: It is a company dedicated to the production of thermal and acoustic isolation. Company I: It is a consulting company in engineering. Company J: It manufactures products made of copper.

3 Company K: It manufactures steel products for piping. Company L: This is a hospital. Figure 3 : Method 2 5 RESULTS 5.1 The method used The methods used by the companies were classified into three types, which are described below. The method 1 carries out a strategic process, including the definition of a vision and mission, internal and external analysis from which a SWOT analysis is undertaken. The strategic objectives are defined from the SWOT analysis. Figure 2 The method 2 is similar to method 1, but the difference is that two types of objectives are defined: global objectives are defined directly from the vision and mission, while specific objectives are defined from the SWOT analysis. The method 3 identifies strategic themes from the vision and mission of the organization which area the basis for defining the strategic objectives. Internal Analysis SWOT Analysis Strategic Objectives External Analysis Figure 4 : Method 3 Table 1 shows the type of method used by each one of the organisations. Companies Method 1 Method 2 Method 3 B C D H J G A K Table 1 : Classification of companies 5.2 Discussion Strategic Themes Strategic Objectives Introduction This section makes an analysis of the advantages and disadvantages of each of the methods. They were obtained by asking the managers and consultants the reason why they used the selected method. E F I L Figure 2 : Method 1 General objectives Internal Analysis External Analysis SWOT Analysis Specific Objectives Method 1 This method has the following advantages: It simplifies the diagnosis for the definition of strategies by identifying the current position and the response capacity of the firm. The SWOT analysis has many benefits. It is easy to use, it is proposition oriented and it is integrative. This method requires the use of information that make it possible the definition and selection of strategies. The SWOT analysis can be used both for generating the strategies and the strategic objectives in a consistent way. The main disadvantage is that the SWOT analysis may not represent the actual strengths, weaknesses, opportunities and threats, but the managers s concerns [29] Method 2 This method has an additional advantage over the method 1. It translates the vision and mission into general objectives, helping the organisation to identify the strategic directions within the strategic map. It has the same disadvantage of method 1.

4 Method 3 The advantage of this method is that it reinforces the declaration of vision and mission. The main disadvantage of this method is that the declaration of vision and mission establish the general paths of the organisation, so they may be too vague to achieve to a strategic map that actually lead to the achievement of the strategy of the company. External and Strategic themes Internal Analysis 6 THE PROPOSED TOOL 6.1 Introduction The methods described have similarities that will be included in the methodology proposed. It is intended to take the advantage of the positive aspects of every one of them. 6.2 The methodology It is composed of the following steps: 1. Definition if. In this step the company establishes the organisational identity (vision) and where it wants to go (mission). 2. Identification of strategic themes. The strategic themes are derived from the vision and mission and classified according to the 4 BSC perspectives. 3. Identification of critical success factors. It is necessary to identify those factor in which the company should exceed in every perspective. 4. Definition of general objectives. They are generated from the relationship between the strategic themes and the critical success factors. A method to select the most important objectives is presented later. 5. Internal and external analysis A strategic internal analysis and external analysis are carried out. 6. SWOT by perspective. From the previous study the strength, weaknesses, opportunities and threats are identified, which are classified into the perspectives of finances, clients, internal processes and learning. 7. Generation of specific objectives. Specific objectives are identified by each perspective, which must be consistent with the organisational strategy and the general objectives derived from the vision and mission. 8. Generation of strategic map. The strategic map is generating by establishing the cause-effect relationship among general and specific objectives. 9. Generation of performance indicators. Performance indicators are obtained for each strategic objective. The process is depicted in Figure 5 Critical factors General objectives success Performance Indicators Figure 5: Generation of. SWOT Analysis / Perspective Specific Objectives 6.3 Selection of strategic objectives According to the previous tool, once the strategic themes by perspective are defined, critical success factors are established in order to select those themes that are more important. The critical success factors are organized according to their importance, so that when they are related to strategic themes it is possible to identify easily which are the general objectives to be considered. It is necessary to have a reduced number of strategic themes to reduce the chance of losing the focus that it is pursued by the company. A simple technique to reduce the number of strategic objectives is the multi-attribute rating technique (SMART) proposed by Valiris et al. [30].In this case, the alternatives are the strategic themes and the criteria are the critical success factors. Alternatively, the Saaty s Analytic Hierarchical Process (AHP) could be used [31] SMART can be also used to select performance indicators as suggested by Valiris et al. [30] 6.4 SWOT / Perspective analysis It is suggested that once the strengths, opportunities, weaknesses and threats are identified they should be related to the four perspectives of the balanced scorecard in order to obtain a SWOT / Perspective matrix that helps to define the specific strategic objectives. The BSC perspectives are represented in the SWOT analysis with the following symbols: F: financial C: clients P: processes L. learning and growth

5 Strengths F C P L Weaknesses Journal of Operations & Production Management, 1999, 19 (2), [2] Neeley, A., Gregory, M. and Platts, K., (1995), "Performance measurement design: a literature review and research agenda", 1995, 15 (4), Opportunities Figure 6 : SWOT / Perspective Classification F C P L This matrix of the Figure 6 is used to classify the the strengths, opportunities, weaknesses and threats into the four perspectives of the balanced scorecard. In the same way the traditional SWOT matrix used to generate strategies can be divided into the perspectives of the balanced scorecard, as shown in Figure 7. Strengths Weaknesses Opportunities F C F C Threats P L P L Threats F C F C Figure 7 : Modified SWOT matrix P L P L Normally the entries of the SWOT matrix correspond to the strategies of the organization. In this case, the entries of the modified SWOT analysis are the strategic objectives. 7 CONCLUSIONS The importance of measuring the performance from a strategic perspective has motivated the need of improving the process of implementing a balanced scorecard. The significance of this work is that it proposes a simple tool that helps to create a strategic map. The tool was created by studying the process used by 12 companies to implement a balanced scorecard. Three types of methods were found. The tool was considering the advantages and disadvantages of the methods. The tool starts with the ddefinition if the vision and mission of the organisation. Then it continues with the identification of strategic themes and the critical success factors. Finally, general objectives are defined. On the other hand an Internal and external analysis are carried out in order to arrive to a SWOT analysis. The strength, weaknesses, opportunities and threats are identified and classified into the four perspectives of the balanced scorecard. Through the use a modified SWOT matrix, specific objectives are defined. Then, a strategic map is generating by establishing the cause-effect relationship among general and specific objectives. Finally, performance indicators are defined for each objective. 8 ACKNOWLEDGMENTS This work was supported by the University of Santiago of Chile (Project DICYT Nº QLL). 9 REFERENCES [1] Neeley, A., (1999), The performance measurement revolution: why now and what next, International [3] Blenkinsop, S. and Burns, N., (1992), "Performance measurement revisited", International Journal of Operations & Production Management, 1992, 12 (10), [4] Dumond, E. J., Making best use of performance measures and information", International Journal of Operations & Production Management, 1994, 14 (9), [5] Evans, R.E., An exploratory study of performance measurement systems and relationships with performance results, Journal of Operations Management, 2004, 22, [6] Melnyck, S.A., Stewart, D.M and Swink, M., (2004), Metrics and performance measurement in operations management: dealing with the metrics maze, Journal of Operations Management, 2004, 22, [7] Yurdakul, M., Measuring long term performance of a manufacturing firm using the analytic network process (ANP) approach, International Journal of Production Research, 003, 41(11), [8] Lynch, R. L. and Cross, K. F., 1991, Measure Up The Essential Guide to Measuring Business Performance, Mandarin: London. [9] Dixon, J., Nanni, A. and Vollmann, T., 1990, The New Performance Challenge, Business One Irwin, Burr Ridge, IL. [10] Bititci, U.S., Carrie, A.S. and McDevitt, L. (1997), Integrated performance measurement systems: a development guide, International Journal of Operations & Production Management, 1997, 17 (5), [11] Ghalayini, A.M., Noble, J.S. and Crowe, T.J. (1997), An integrated dynamic performance measurement system for improving manufacturing competitiveness, International Journal of Production Economics, 1997, 48 (3), [12] Kaplan, R.S. and Norton, D.P., The Balanced Scorecard - measures that drive performance, Harvard Business Review, Jan.-Feb 1992, [13] Kaplan, R.S. and Norton, D.P., 1996; The balanced scorecard, Harvard Business School Press, Boston, MA, USA. [14] Kaplan, R. y Norton, D. Linking the Balanced Scorecard to strategy. California Management Review., 1996, 39 (1). [15] Kaplan, R. y Norton, D. Transforming the Balanced Scorecard from performance measurement to strategic management: Part I. American Accounting Association, 2001, 15. Nº 1. [16] Kaplan, R. y Norton, D., Transforming the Balanced Scorecard from performance measurement to strategic management: Part II. American Accounting Association, 2001, 15. Nº 2. [17] Miller, J.G.and Roth, A.V, "A taxonomy of manufacturing strategies", Management Science, 1994, 40 (3), [18] Noble, M.A., (1995), Manufacturing strategy: testing the cumulative model in a multiple country context, Decision Sciences, 1995, 6 (5),

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