10.4 Strategy maps and Balanced Scorecard
5 min read•august 14, 2024
Strategy maps and Balanced Scorecards are powerful tools for implementing and executing strategy. They visually link across four perspectives: financial, customer, internal processes, and learning and growth. This helps organizations translate complex strategies into actionable plans.
These tools align employees with strategic priorities and measure progress through key performance indicators. By cascading objectives throughout the organization, they ensure everyone understands how their work contributes to overall goals. Regular reviews keep strategies relevant and drive continuous improvement.
Strategy maps for performance measures
Linking strategic objectives
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- A visually represents how an organization's strategic objectives are linked together in a cause-and-effect relationship to create value
- The strategy map organizes objectives into four perspectives: financial, customer, internal processes, and learning and growth
- Each perspective contains strategic objectives that are linked together to show how they drive overall performance
Four perspectives in a strategy map
- objectives are at the top of the strategy map and define the financial outcomes the organization aims to achieve
- Examples include increasing revenue, reducing costs, or improving profitability
- These objectives are driven by the other perspectives
- objectives define how the organization will create value for customers to achieve the desired financial outcomes
- This includes objectives around customer satisfaction, loyalty, acquisition, and retention
- For example, improving customer service or developing new products that meet customer needs
- Internal process perspective objectives define the key operational processes the organization must excel at to deliver on the customer value proposition
- This includes innovation, operations, and post-sales service processes
- For instance, streamlining manufacturing processes or reducing time-to-market for new products
- objectives are at the foundation of the strategy map and define the skills, capabilities, and organizational culture needed to drive the internal processes
- This includes human capital (employee skills and training), information capital (systems and databases), and organizational capital (culture, leadership, alignment) objectives
- An example would be implementing a new CRM system or training program
Measuring progress with KPIs
- are defined for each strategic objective to measure progress
- Leading indicators measure drivers of performance (e.g. employee engagement)
- Lagging indicators measure outcomes (e.g. revenue growth)
- A mix of leading and lagging KPIs provides a comprehensive view of performance
Balanced Scorecard for strategy execution
Translating strategy into action
- The translates an organization's strategy map into an actionable framework to monitor and control strategy execution
- It includes strategic objectives, measures, targets, and initiatives for each of the four perspectives
- Objectives are a concise statement of what must be achieved and what is critical to success in each perspective
- For example, "Improve customer satisfaction" or "Increase market share"
- Measures are the key performance indicators used to track progress against objectives
- They should be quantifiable, measurable, and a mix of financial and non-financial, leading and lagging indicators
- Examples include customer satisfaction score, market share percentage, or number of new products launched
Setting targets and initiatives
- Targets specify the level of performance or rate of improvement needed for a measure
- They can be based on benchmarks, stakeholder expectations, or required rates of improvement
- For instance, improve customer satisfaction by 10% over last year
- Initiatives are the key action programs required to achieve objectives
- They are often large-scale projects that close performance gaps or help reach targets
- An example could be implementing a new customer loyalty program to improve retention
- Owners are assigned to each objective to drive accountability for results
- Reporting frequency is established, such as monthly or quarterly reviews
Aligning the organization
- The Balanced Scorecard helps translate strategy into operational terms
- Cascading scorecards align the organization at every level to strategic priorities
- Corporate scorecard objectives are translated into division, department, team and individual goals
- This ensures every employee understands how their day-to-day actions contribute to overall strategy
- For example, a frontline customer service rep's goal to resolve issues on first contact aligns to the company's objective of improving customer satisfaction
Communicating strategic priorities
Simplifying complex strategies
- Strategy maps and Balanced Scorecards are powerful communication tools to articulate priorities both internally to employees and externally to other stakeholders
- The visual nature of strategy maps helps simplify complex strategies into an easy to understand, one-page view of what's important
- This helps build understanding and commitment to strategic objectives
- For instance, a strategy map can quickly convey the key pillars of the strategy and how they link together
Aligning employees to strategy
- Cascading strategy maps and scorecards down to the individual level ensures every employee understands how their day-to-day actions contribute to overall strategic priorities
- This improves alignment and engagement as employees see the purpose behind their work
- Individual and team goals should be aligned to Balanced Scorecard objectives and measures
- Compensation and rewards can be tied to scorecard performance to reinforce priorities
- Regular business reviews and management meetings should be focused on discussing Balanced Scorecard results
- Problem solving efforts can be directed to areas that are underperforming against targets
Demonstrating performance to stakeholders
- Publishing Balanced Scorecard results on a regular cadence fosters transparency and accountability for results
- Celebrating wins and honestly discussing challenges reinforces the importance of strategic priorities
- Strategy maps can be used to communicate to external stakeholders, like investors, how the organization is positioned to create future value
- The Balanced Scorecard can demonstrate how the organization is performing against its strategy
- For example, showing improving customer satisfaction scores or progress on sustainability goals
Effectiveness of strategy maps vs Balanced Scorecards
Driving the right actions
- Assessing the effectiveness of strategy maps and Balanced Scorecards requires examining if they are driving the right behaviors and actions to deliver on strategic objectives
- Effective strategy maps and scorecards should be driving decision making and resource allocation
- Budgets and investments should be aligned to strategic priorities
- For instance, if entering a new market is a key objective, is the organization allocating resources to make that happen?
- Leading indicators on the Balanced Scorecard should be predictive of future performance on lagging indicators and broader strategic goals
- If not, the scorecard may need to be adjusted
- An example would be if improving employee training (leading) is not resulting in higher quality (lagging), the linkage may be flawed
Adapting to change
- To remain effective over time, strategy maps and Balanced Scorecards need to be regularly reviewed and updated as the environment changes and the strategy evolves
- They are meant to be living documents, not static snapshots in time
- Scorecards and maps should be adjusted as goals are met, initiatives are completed, or external factors change
- For example, a new competitor entering the market may require a shift in strategy and updates to the objectives and measures
- A regular review cadence, such as quarterly strategy sessions, can help keep the strategy map and scorecard aligned to the current realities of the business
- This ensures they remain relevant and continue driving the organization in the right direction
Key Terms to Review (20)
Alignment of goals: Alignment of goals refers to the process of ensuring that an organization's strategic objectives are consistently connected and support each other across different levels and departments. This alignment is crucial for maintaining a unified direction, enhancing communication, and improving overall performance. When goals are aligned, every team member understands how their work contributes to the broader mission and vision, leading to more cohesive efforts and better outcomes.
Balanced Scorecard: The Balanced Scorecard is a strategic management tool that helps organizations measure performance beyond traditional financial metrics by incorporating multiple perspectives such as customer, internal processes, and learning and growth. This holistic approach supports strategic thinking and decision-making, aligns business activities to the vision and strategy of the organization, and improves communication and monitoring across all levels of strategy.
Cause-and-effect relationships: Cause-and-effect relationships refer to the connections between actions or events where one action (the cause) leads to another action or event (the effect). Understanding these relationships is crucial for developing strategies, as it helps organizations identify how changes in one area can influence outcomes in another, thereby guiding decision-making and performance evaluation.
Customer perspective: The customer perspective refers to the viewpoint of customers regarding a company's products, services, and overall value. This perspective is crucial for organizations as it influences customer satisfaction, loyalty, and their long-term relationships with the business. Understanding the customer perspective helps businesses align their strategies to meet customer needs and expectations effectively.
David P. Norton: David P. Norton is a prominent figure in the field of management and strategy, best known for co-developing the Balanced Scorecard framework alongside Robert S. Kaplan. This framework provides organizations with a comprehensive approach to performance management by linking strategic objectives to measurable outcomes across financial and non-financial perspectives, including customer, internal processes, and learning and growth.
Financial perspective: The financial perspective is a key component of performance measurement frameworks, specifically focusing on financial objectives and metrics that reflect the economic health of an organization. It helps organizations assess their profitability, revenue growth, cost management, and overall financial sustainability. This perspective is crucial as it aligns financial goals with strategic objectives, allowing organizations to track their financial performance effectively.
Internal business processes perspective: The internal business processes perspective focuses on the essential operations and activities within an organization that create value for customers and stakeholders. It highlights the efficiency and effectiveness of internal processes, ensuring they align with the overall strategic goals of the organization. This perspective is vital for understanding how well a company can deliver on its value proposition and sustain competitive advantage.
Key performance indicators (KPIs): Key performance indicators (KPIs) are measurable values that demonstrate how effectively an organization is achieving its key business objectives. KPIs help organizations evaluate their success at reaching targets and can be used to gauge the performance of specific departments, projects, or individual employees. By providing clear metrics, KPIs play a crucial role in strategy maps and balanced scorecards as tools for strategic management and decision-making.
Learning and growth perspective: The learning and growth perspective is a component of the Balanced Scorecard framework that focuses on the intangible assets of an organization, primarily the skills, knowledge, and capabilities of its employees. This perspective emphasizes the importance of fostering a culture of continuous improvement and innovation, as well as aligning employee training and development with the strategic objectives of the organization. By investing in employee growth, organizations can enhance their overall performance and adaptability in a competitive environment.
Performance drivers: Performance drivers are the key factors that influence an organization's performance and effectiveness in achieving its strategic goals. These drivers can include various elements such as financial metrics, customer satisfaction, internal processes, and employee engagement, all of which contribute to an organization's overall success. Understanding performance drivers allows organizations to identify areas for improvement and align their resources and efforts to optimize outcomes.
Performance Management Framework: A performance management framework is a structured approach that organizations use to align their strategic objectives with operational activities, measure performance, and ensure continuous improvement. It encompasses various tools and methods, such as strategy maps and the Balanced Scorecard, which help organizations track progress toward their goals and translate strategies into actionable tasks.
Robert S. Kaplan: Robert S. Kaplan is a prominent American accountant and professor best known for his work on management accounting and performance measurement systems, particularly the Balanced Scorecard framework. He co-developed the Balanced Scorecard with David Norton, which integrates financial and non-financial performance measures to provide a comprehensive view of organizational performance. Kaplan's contributions have significantly influenced how organizations strategize, measure success, and align their operations with long-term goals.
Strategic feedback loop: A strategic feedback loop is a dynamic process through which organizations assess their performance, gather insights, and adjust their strategies accordingly. This continuous cycle helps organizations stay aligned with their goals by using data and results to inform future actions. By integrating performance metrics and strategic objectives, organizations can refine their tactics to improve effectiveness and adapt to changing circumstances.
Strategic Fit: Strategic fit refers to the alignment between an organization’s resources, capabilities, and the external environment to achieve its objectives. This concept emphasizes how well different strategies within a company complement each other, enhancing overall performance by ensuring that corporate, business, and functional strategies are interconnected and aligned with the company's mission.
Strategic management system: A strategic management system is a structured framework that organizations use to develop, implement, and evaluate their strategies to achieve long-term goals. It involves aligning resources, measuring performance, and ensuring that all parts of the organization are working together towards common objectives. This system often integrates tools like strategy maps and balanced scorecards to visualize strategy execution and track progress.
Strategic Objectives: Strategic objectives are specific, measurable goals that an organization aims to achieve to fulfill its overall vision and mission. They serve as a roadmap for decision-making and resource allocation, guiding the organization in its competitive landscape and helping to assess progress towards long-term success. By clearly defining strategic objectives, companies can align their resources, activities, and initiatives with their competitive strategies and performance measurement frameworks.
Strategic themes: Strategic themes are overarching priorities that guide an organization’s strategic direction and decision-making process. They serve as focal points that align various initiatives and goals, ensuring consistency in strategy execution and helping to communicate the organization's vision across all levels. By emphasizing specific strategic themes, organizations can better focus resources and efforts on critical areas that drive performance and competitive advantage.
Strategy map: A strategy map is a visual representation that illustrates an organization's strategic objectives and how they relate to one another. This tool helps to clarify the cause-and-effect relationships between different objectives across various perspectives, making it easier for organizations to align their initiatives with their strategic goals. By providing a clear overview, strategy maps enhance communication and understanding of the strategic plan among stakeholders.
Strategy review: A strategy review is a systematic process through which an organization evaluates its current strategies to determine their effectiveness and alignment with overall goals. This process often includes assessing performance metrics, examining external and internal environments, and making necessary adjustments to strategic plans. The insights gained during a strategy review help organizations to realign their efforts, ensuring they remain competitive and responsive to changing market dynamics.
Visual strategy map: A visual strategy map is a graphical representation that outlines an organization's strategic objectives and the relationships among them, serving as a tool to communicate and clarify the organization's vision and strategic goals. This map simplifies complex strategies into easily understandable visuals, helping stakeholders see how various initiatives align with the overall mission and objectives.