Learning Outcomes After completing this unit you should be able to:

Transcription

1 STRAT 7 & 8 STRATEGY MAPS Learning Outcomes After completing this unit you should be able to: Prof. JAA Lazenby Dept of Business Management Understand the meaning and role of the balanced scorecard in strategy formulation. Understand and apply strategy maps to an organisation. 1. Introduction There is another important way to look at strategy. It is perhaps also relevant to look at formulating strategy from using intangible assets as the point of departure. It is a wellknown fact that intangible assets are the ultimate source of sustainable value creation especially if intangible assets represent more than 75% of the organisation s value. What do we mean by intangible assets? It can be described as the knowledge that exists in an organisation to create competitive advantage, or the capabilities of the organisation s employees to satisfy customer s needs. The previously strategies are still applicable. The difficult thing with these strategies is that executives sometimes find it difficult to communicate the strategy among themselves or to the employees. It is clear that without a shared understanding of strategy management cannot create alignment around it. Without alignment it is difficult to implement the strategy. It is a well-known fact through various studies that failed strategies is not because of bad strategies, but because of bad execution of these strategies. It was already mentioned that organisations must leverage their intangible assets for sustainable value creation. Creating value from intangible assets differs in several important ways from creating value by managing tangible physical and financial assets. Value creation is indirect. Intangible assets like knowledge and technology have seldom a direct influence on increased revenue. The influence is indirect through the chain of cause-and-effect relationships. Value is contextual. The value of intangible assets depends on its alignment with the strategy. Training employees in Total Quality Management techniques will have greater value if one follows a low cost strategy. Product development strategy will not benefit from TQM training. Assets must be bundled to have value. As said, intangible assets by themselves will not create value. It must be bundled with other intangible and tangible assets to create value. 2. The Balanced Scorecard One way to increase the success rate of strategy implementation is through the use of the Balanced Scorecard (BSC) as a framework. See Figure

2 STRATEGIC AND CHANGE MANAGEMENT Figure 7.1: The Balanced Scorecard (Source: Kaplan and Norton, 1996:76) The elements of this framework are: The financial perspective this provides the ultimate definition of an organisation s success. Financial objectives relate to profitability and measured e.g. by operating income and return on investment. It is quite simple financial strategies focus on making more money by (1) selling more and (2) by spending less. Everything else in the company is actually measure against the issue of will it lead to sell more or spending less. This leads to the two basic approaches in the financial perspective revenue growth and productivity. (See Figure 7.4.) The customer perspective this focus on customers as a vital component to improve on the financial performance. In the customer perspective managers identify the targeted customer segments. Customer satisfaction is at the heart of this perspective. It includes what the organisation must do in terms of customer retention, customer acquisition, customer profitability and how to increase the market share. These elements are also interlink if the customers experience satisfaction, then through word-of-mouth, new customers can be acquired and by customer retention, the market share can be increased. 68 Centre for Business Dynamics, School of Management, UFS 2012

3 STRAT 7 & 8: Strategy Maps Internal business perspective the internal processes create and deliver customer value. Internal processes accomplish two important components of an organisation s strategy (1) they produce and deliver the value proposition for customers, and (2) they improve the processes and reduce costs for the productivity component in the financial perspective. If customers experience value, it will improve the customer and financial outcomes. The learning and growth perspective describes how people, technology and the organisation climate combine to support the strategy and to provide the ultimate source of sustainable value creation. Important here is that organisations must move away from generalities like, develop our people to more focussed capabilities and attributes that are required by the critical internal processes of the strategy. It is clear that these perspectives are in a chain of cause-and-effect relationship starting with the learning and growth perspective. From Figure 7.2, it is also clear that privatesector organisations as well as public sector and non-profit organisations can benefit from the BSC approach. In terms of the cause-and-effect relationship, an increase in the capabilities of the human resources, the intangible assets, will lead to an improvement in the process performance that in turn will increase success for customers and the shareholders. That will help the organisation to achieve its strategy Centre for Business Dynamics, School of Management, UFS

4 STRATEGIC AND CHANGE MANAGEMENT Figure 7.2: Cause-and effect relationships (Source: Kaplan and Norton, 2004: 8) 70 Centre for Business Dynamics, School of Management, UFS 2012

5 STRAT 7 & 8: Strategy Maps 3. Strategy Maps Strategy is not a stand-alone management process. It is one step in the continuum that moves an organisation from the vision to the work that must be performed by all employees. Figure 7.3 provides a valuable look at the continuum of the strategic management process. Figure 7.3: Place of strategy maps and the balanced scorecard (Source: Adapted form Kaplan and Norton, 2004: 33) Vision What we want to be Mission Why we exist Values What is important to us Strategy The Game plan Strategy Map Translate the strategy Balanced Scorecard Provides targets and initiatives what we need to do A strategy map is the visual representation of the cause-and-effect relationship (previously mentioned) among the components of the organisation s strategy. The general strategy map develops from the simple four-perspective model of the Balanced Scorecard. Centre for Business Dynamics, School of Management, UFS