ERPM Insights

Previously, I focused on developing objectives for the Financial, Customer and Internal Process perspectives of the strategy map. In this post I will conclude on the four-part series “creating objectives for your organization’s strategy map perspectives” by focusing on the Employee Learning and Growth perspective. In the preceding posts, I emphasized on the importance of balancing the objectives of your strategy map as this gives a clear indication of the main drivers of your business’s performance. How balanced are the objectives on your corporate strategy map? Most organizations make the huge mistake of focusing only on financial objectives at the expense of other non-financial objectives.

Objectives in the Employee Learning and Growth perspective of the strategy map are really the enablers of the other perspectives. Remember the whole idea of constructing the strategy map is to communicate the strategy and identify the cause-and-effect relationships between organizational processes responsible for effectively executing that strategy and driving business performance. In today’s knowledge economy, it is critical for managers to know and understand that intangible assets are the main drivers of value creation. In the last two decades or so, the value of intangible assets in contributing towards business success has increased tremendously outpacing the contribution of fixed assets. These intangible assets of the business can be split into three distinctive areas of capital – human capital, information capital and organizational capital.

Human capital refers to skills, talent and know-how necessary to support the execution of the business strategy. Motivated employees with the right kind of skills, know-how and tools are the key ingredients in driving process improvements, meeting customer expectations and ultimately driving financial returns. Since people are any organization’s most critical source of value, having the right mix of human capital objectives in the Employee Learning and Growth perspective is critical. Possible objectives relating to human capital include “Close the skills gap in strategic positions”, “Train employees for success” and “Recruit and retain the best and the brightest employees”. Be clear though what you mean by “best” and “brightest” as these terms are relative.

When it comes to closing the skills gap in strategic positions, it is crucial to understand that not all jobs are created equally. At the same time, not all jobs being filled within the company are critical to achieving your strategy. It is therefore important to match your best people with the most strategically critical jobs. The starting point involves identifying those positions that are pivotal to ensuring the successful execution of key processes as set forth in the Internal Process perspective of your strategy map. This will ultimately drive your customer value proposition and in turn ensure you achieve your stated financial objectives.

Organizations that have successfully managed to close the skills gap in strategic positions have done so through training and retaining current key staff, tailoring recruitment of new employees to the strategic needs of the organization and putting in place effective succession planning programs to help capture the knowledge of long-term employees and pass it on to the next generation.

Training employees for success goes beyond simply counting the number of training hours per month, per quarter, per half year or per full year. This is unlikely to lead to sustained business success. What managers need to do is, after the training program, assess and evaluate a change in behaviour; a demonstration of the new skills or knowledge in action and an improvement in results. This helps determine the effectiveness of the training program, focus future training in specific areas to bolster skills and knowledge and ultimately improve the company’s future performance.

Information capital refers to the information systems, networks and infrastructure required to support the strategy. Today, technology is an enabler of business strategy. It is the engine that keeps companies and entire industries moving forward and remaining competitive. Thus having the right mix of information capital and aligning IT with strategy is critical to executing strategy effectively and achieving sustainable business performance. Given the pervasive influence of technology in today’s modern economy, almost every organization should consider information capital objectives on its strategy map. Possible objectives relating to information capital include:

• Improve the organization’s technology infrastructure.
• Leverage technology to manage risks, execute strategy and drive business performance.
• Increase knowledge management and information sharing within the organization.
• Create, share and use information effectively for better decision-making.

It is therefore critical to consider the linkage between technology and strategy in business. The objectives you choose under this class of capital should reflect the contribution of IT you require in order to successfully execute your business strategy.

Organizational capital focuses on the ability of the organization to rally and sustain the process of change required to deliver the strategy. When it comes to organizational capital, there are two key elements to consider – culture and alignment. How are things done at your workplace? Do you support team work, positive feedback, and innovation or a combative management and meeting style prevails? Every now and then, you need to gauge your organization’s current culture and determine whether it is aligned with your strategic direction. Should you wish to fully exploit the advantages of intangible assets such as culture and knowledge, it is therefore critical to ensure the actions of your employees are aligned with the organization’s mission, values, vision, and most ultimately, strategy. Thus employees should have a clearer understanding of the building blocks of the organization’s mission, values, vision and strategy.

Having the right culture that is aligned to the strategy can be achieved through:

• Recruiting and selecting people you believe embody the culture you are attempting to either maintain or create.
• Intense socialization and training initiatives which demonstrate what you expect from employees.
• Utilizing the organization’s formal reward systems to advance culture. For example, if you value teamwork, customer-centric approach and attitude and innovation, those traits should be tangibly rewarded in an effort to have that culture deeply entrenched.

Misalignment of culture and strategy can lead to disastrous results. To ensure alignment, you ought to review the cascaded Balanced Scorecards from throughout the organization. While most of your scorecards will rightly contain unique objectives and measures, they should be aligned toward a common corporate strategy.

To sum up, your strategy map should help you identify the specific capabilities in your organization’s intangible assets that are required for delivering exceptional performance in the critical internal processes.

I hope you enjoyed this four-part series on creating objectives for your organization’s strategy map. I welcome your thoughts and comments.

My previous two posts focused on developing objectives for the financial and customer perspectives. Once an organization has a lucid depiction of these financial and customer objectives, the next step is developing objectives for the internal processes and learning and growth perspectives. In this post, I will dwell on the objectives in the internal perspective.

Value is created through internal business processes. In other words, internal processes create and deliver the value proposition for customers. Thus objectives in your strategy map’s internal process perspective must describe how you intend to accomplish your organization’s strategy. There are so many processes operating in an organization at the same time, each creating value in some way. It is therefore important to focus on those processes that allow you to deliver on your strategy and differentiate your organization from its rivals.

The challenge for most organizations is selecting those critical few processes that exceptionally drive value for their customers and enable them to achieve the desired financial results. Robert Kaplan and David Norton, the originators of the Balanced Scorecard, have identified and grouped internal business processes into four categories. These categories are common to almost any business undertaking and can assist you to identify and focus on those critical few processes that result in the differentiation of your strategy. The four categories are:

• Operations Management Processes. These relate to the basic day-to-day processes you use to produce your existing products and services and deliver them to your customers. For example acquiring raw materials from suppliers, converting these raw materials to finished goods, distributing the finished goods to the market and managing business risks. Thus you could have objectives such as Increase throughput, Maximise yield, Attract channel partners and Minimize risk appearing on your strategy map under the internal processes perspective.
•  Customer Management Processes. These are the processes that enable you to grow and strengthen relationships with targeted customers. Today, customers hold more power than suppliers and have an extensive say about the company’s products and services. It is therefore more critical to understand your customers and their behaviours in order to win in the marketplace. The critical processes involved in managing customers involve:
  • Customer Selection: Identifying customers based on a set of customer characteristics that describe an attractive customer segment for your company and for which the company’s value proposition is most attractive. Attributes that can be used to define your customer segments include income, wealth, age, family size, lifestyle, price sensitiveness, early adoption and technical sophistication.
  • Customer Acquisition: Acquiring the targeted customers through generating leads, communicating to new potential customers, choosing the right entry-level products, pricing the products and closing the sale.
  • Customer Retention: Retaining customers by offering them excellent services and being responsive to their requests.
  • Deepening customer relationships: This can be achieved through managing existing relationships effectively, cross-selling multiple products and services, and establishing your organization as the most trusted adviser and supplier.
  • Having objectives such as Increase customer retention, Cross-sell products to customers and Maximise share of customer spending on your strategy map.

• Innovation Processes. These are the processes that focus more on creating new products, processes and services which ultimately help the company to infiltrate new markets and customer segments. In today’s fiercely competitive environment, an organization must be creative and have the ability to identify opportunities for new products and services. It must clearly understand its industry, engage its employees and customers to generate new ideas and apply innovative technologies in order to outshine the rivals. Having identified opportunities for new products and services and generated ideas, a decision has to be made on whether to finance the projects internally, work with joint ventures or outsource entirely. The next innovation sub-process includes design and development of the new products and services with objectives related to the introduction of new products to the market. Finally, the new products and services are delivered to the market. It is important to note that the innovation process, for a particular product or service, wraps up when you have achieved your sales and production targets at the desired levels of functionality, quality and cost.

• Regulatory and Social Processes. These help the organization to repeatedly earn the right to operate in the communities and countries in which they produce and sell. National and local regulations inflict standards on companies’ practices. Instead of just complying with the least standards established by regulations, companies must strive to go beyond the minimal standards and perform better. Having an excellent reputation for performance along regulatory and social dimensions will help the company attract and retain high-quality employees. Also, avoiding or lowering environmental incidents and improving employee health and safety improve productivity and lowers operating costs. Thus companies should have objectives such as Exercise best-in-class governance, Maintain health and safety of employees, Become more involved in our community and Encourage community prosperity on their strategy maps.

Given the vast number of processes available to create value, managers must identify and focus on just the critical few processes that will allow them to execute their strategy effectively. The selected strategic processes should also be selected from all four categories above. This way, the value creation process is balanced between the short and long term and this also ensures that growth in shareholder value is sustainable over time.

Watch out for my next post on developing objectives for the employee learning and growth perspective.

Not all prospective customers will support your revenue and profitable growth or find your offerings worthwhile. Because of this, many organizations face the challenge of determining which factions represent the best market for their particular products and services and focusing their strategy map objectives on that group of customers. Although many organizations profess to serve a subset of core customers, in reality, they are following “same-for-all” approach, attempting to serve a broad landscape of customers. As a result, they end up doing little for anyone.

When developing objectives for the customer perspective of the strategy map, it is important to ask two questions:

1. Who are your target customers?
2. What is your value proposition in serving them?

To answer the first question, it is necessary to conduct a customer profitability analysis of existing and potential customers. Some customers might appear profitable on face value, whereas in reality they are resource suckers and are not aligned with your strategy. Thus you need to come up with a strategy that enables you identify particular customer segments that have greater growth and profitability potential.

The second question helps you express how you will differentiate yourself and, subsequently, what markets you will serve. In other words, your organization’s value proposition helps you define your customer strategy by describing the distinctive blend of product, price, service, relationship and image that your organization offers its target customers. The value proposition should communicate what the organization expects to do for its customers better or differently than its rivals.

The value proposition you select will greatly influence the objectives you choose since each will entail a different emphasis. It is also important to note that the objectives and measures for a specific value proposition define the organization’s strategy. By developing objectives and measures that are explicit to its value proposition, the organization will be able to convert its strategy into tangible measures that are easily understood by all employees and capable of being improved.

Depending on your organization’s mission, vision and strategy, below are four customer value propositions you can choose to follow:

• Operational excellence: Following this value proposition means your focus is on lowest total cost, convenience and often ‘”no extras”. Your objectives for operational excellence should underscore attractive prices, excellent and consistent quality, short lead times, ease of purchase and good selection. Possible objectives under this value proposition include:
  • Attractive prices – Ensure lowest prices, Offer lower prices than competitors and Offer best value to the consumer.
  • Excellent and consistent quality – Reduce manufacturing defect rates and Eliminate service errors.
  • Convenience – Reduce customer complaints relating to service or delivery.
  • Good selection – Maximise inventory turns, Ensure product availability and Minimize stockouts.
• Product innovation and leadership: For you to be able to deliver on this value proposition, your products must offer superior functionalities that leading-edge customers value and are prepared to pay more for them. Being a product leader means you should be prepared to promote your organization’s brand image and build strong brand awareness to ensure the market recognizes your innovative new products. The objectives you may include in your customer perspective are:
  • Monitor help line calls per product. This will help you determine the level of interest in your latest products or services.
  • Increase number of customer needs satisfied. This enables you ensure expectations are being met.
• Customer intimacy: The organization must completely understand its customers and be able to provide them with customized products and services bespoke to their needs. Thus you must strive to offer a complete solution that ensures the customer receives the greatest benefit from the products offered. Should you follow the customer-intimate approach, below are some of the customer-intimate attributes and objectives you might use:
  • Customer knowledge– You need to possess a deep and detailed knowledge of your customers. Using an objective such as “Increase training hours on products and services offered” enables you to determine staff knowledge and see if more training is required.
  • Solutions offered – It is important to note that customers turn to you because you are offering them an unmatched total solution. You may therefore include as an objective within the customer perspective”Increase total number of solutions offered per client”.
  • Customer data – In order to deliver complete customer total solutions, organizations require abundant and insightful data on their customers. “Increase % of employees with access to customer information” may be stated as an objective to ensure this key differentiator of success will be monitored.
  • Customer relationships – As a customer-intimate organization, your goal should be to build long-lasting relationships with your customers. “Provide staff at client locations” could be an objective illustrating the deep relationships your organization maintains with its clients.
• Lock-in: This arises when companies create high switching costs for their customers by making their products the standard of the industry. “Create barriers to entry and high switching costs” may be stated as an objective to ensure the organization remains as one of the dominant suppliers.

Watch out for my next post on developing objectives for the strategy map internal process perspective.

In my previous blog post, I touched on why your organization needs a strategy map. I discussed what a strategy map is and how it helps organizations translate their strategy. The strategy map provides the visual framework for integrating the organization’s objectives in the four perspectives of a BSC. It shows the cause-and-effect relationships that link desired outcomes in the customer and financial perspectives to exceptional performance in key internal processes. Furthermore, the strategy map highlights the precise capabilities in the organization’s intangible assets that are essential for delivering outstanding performance in the critical internal processes. In this post I will turn my attention on developing objectives for the financial perspective.

The balanced scorecard was developed to help organizations overcome their reliance on financial measures of performance. Proponents of the BSC argued that an excessive focus on any particular area of measurement often led to poor overall results. In order to successfully measure, manage and deliver performance, organizations must find a balance between financial and non-financial measures. The BSC provides this much needed balance. The tool balances the accuracy and integrity of financial measures with the drivers of future financial performance of the organization.

Although some criticism has been levied against the overabundant use of financial measures, a question that is normally raised is, “Should organizations include a financial perspective when developing their strategy map and BSC?” Despite their evident weaknesses, the answer is yes. Financial indicators represent a vital component of the scorecard process. Without financial objectives and measures of performance, even a well-built strategy map and BSC is incomplete. Financial performance measures show whether the company’s strategy, including its implementation and execution, are contributing to the bottom line improvement.

For profit-seeking organizations, the ultimate aim is to create greater long-term value for shareholders. To achieve this, the company must improve its revenue growth and productivity. Profitable revenue growth can be achieved through selling completely new products, selling to customers in entirely new segments and deepening relationships with existing customers. Strengthening existing relationships enables the company to sell more of its existing product or service, or additional products and services.

Enhancing productivity is achieved through improved cost structure and increased asset utilization. Implementing ABC/M enables you to gain complete visibility about your product, service, customer, channel and segment costs. This in turn will help you eliminate defects, reduce cash expenses and improve yields. Such cost reductions enable the organization to produce the same quantity of outputs while spending less on people, materials, energy and supplies.

Improving asset utilization is often achieved through managing capacity from existing assets and reducing the working capital and fixed capital needed to support a given level of business. For example, suppose you are a manufacturing organization or retailer, utilizing techniques such as just-in-time gives you the opportunit

y to support a given level of sales with fewer inventories. Also, reducing unscheduled downtime on equipment provides you with an opportunity to produce more without experiencing an unnecessary increase in fixed assets investment.

Thus when developing the objectives of the financial perspective, the challenge is achieving a balance between the short-term and long-term objectives. Actions to improve revenue growth normally take longer to create value than actions to improve productivity. Under the day-to-day pressure to show financial results to shareholders, the norm is to favour the short-term over the long-term.  As an organization you have to ask yourself, “How much further can you grow without overspending?” At the same time, “If you decide to focus more on austerity as a business model, what is the risk of distancing your company from customers who are hungry for innovative new products and services?”

Developing the first layer of the strategy map forces the organization to address this tension. Thus in order to drive shareholder value, the financial component of the strategy must include both revenue growth and productivity objectives. Balancing these two dimensions will ultimately set out the framework for the remainder of the strategy map.

Watch out for my next post on developing objectives for the strategy map customer perspective.