May 21, 2004
A Strategy Map is a diagram showing a company or business unit's overall strategy. Along with Strategy Maps comes the concept of a Balanced Scorecard. A Balanced Scorecard contains the quantitative measures showing how well the strategy is going, such as market segment share and average cost per customer. The two work hand in hand, so much so that the terms "Strategy Map" and "Balanced Scorecard" have become interchangeable. This is unfortunately often confusing.
Shown on the upper right is an example of a Strategy Map PDF prepared for a small software startup company in Vilnius, Lithuania. This map demonstrates the unrivaled power of the concept, once understood.
Think of Strategy Maps as the reasoning behind a plan and the Balanced Scorecard as the measure of how well that plan is going. Note that strategic planners do the Strategy Map first, and then the Balanced Scorecard.
Here's a simplified example:
Imagine your top managers pounding out a strategy for the coming year. They would start with the goal of maximizing net profit. Then working backwards from that, they set the sub goals of Maximize Income and Minimize Expenses. They then develop a high level strategy for each: Diversified revenue streams and Minimize overhead per customer. This is the financial perspective of the business.
But nothing happens unless customers buy the product. Thus the Strategy Map framework says to then plan the Customer Perspective strategies that will result in achieving your Financial Perspective strategies. The managers did this, and came up with the three strategies shown: more products for the customer to choose from, a broad enough product line so that a customer can find everything they were looking for lead to diversified revenue streams, and increasing quality to reduce repair costs.
Note how the map shows which strategies in the customer area support strategies above them. You can see at a glance what the overall strategy is. This is the beauty and the power of Strategy Maps.
Once the total strategic plan is set a key question arises: how can we best measure it is being executed well? That's what the Balanced Scorecard is for. It is "balanced" because it takes in far more than just traditional financial measures. Financial measures are lagging indicators because they tell what has already happened. They give an unbalanced view of performance, one that has led many an astute manager to unexpected failure. What people also need is leading indicators that tell how well things are going, and how well the lagging indicators are probably going to come out. For example, the above Strategy Map might have this Balanced Scorecard:
The strategic objectives come right off the map. The measures of achievement may be on the map for richness of information or they may be implied. Often there is great debate over what measure is best, or if a reliable, cost effective quantitative measure can even be designed.
Once the scorecard starts being used, data such as that shown is collected, published, and used for analysis and decisions. Scorecard results show at a glance how the business is doing.
In the above example all four measures are improving. But in the real world this seldom happens. For example, revenue might be down. But if the rest of the scorecard is steady or improving, there is usually no cause for concern. This is because analysis will usually show that the revenue dip was temporary and caused by factors outside the control of the company, such as a recession, a natural disaster, or an event unique to the industry, such as one of only two factories in the world making a critical part burned down.
Just like Strategy Maps, in a Balanced Scorecard you can see in seconds how well your strategic plan is proceeding. Not just management, but anyone can see it, because the measures are simple and few in number. Everyone in the company gets the same picture. This is the beauty and power of the Balanced Scorecard.
Working together, strategy maps and balanced scorecards are a "framework for change." They were introduced to the business world in the mid 1990s by the work of Robert Kaplan and David Norton. As Harvard Business Review Online says:
The Balanced Scorecard [and Strategy Maps] has transformed companies around the globe. This performance management system helps top executives set corporate strategy and objectives and then translate them into a coherent set of measures, transforming strategy into a continuous process owned by everyone. The scorecard also enables you to communicate high-level goals down to all organizational levels. Employees know not only what to do, but why. Most important, the scorecard augments financial measures with objectives and metrics in customer relationships, internal processes, and learning and growth--less tangible areas notoriously difficult to measure.
Exactly why is this daring duo of tools so powerful? The answer lies in the fact that positive feedback loops must be present to improve performance. There is no other way to learn from one's own behavior and improve it.
Consider the four step Cycle of Continuous Improvement. This causal loop diagram shows how measures are used to improve performance. Start reading it at the top. Imagine you have just performed something, such as writing this article. Now how might you measure how well you did it? Perhaps by the number and amount of positive content of emails you got from the people that read it. That would be your measure of performance. You could then analyze that feedback and improve your ability to write articles well. That would then improve your actual performance the next time. This would in turn improve your measure of performance, as you got even more emails saying better things. Because you are now practicing analysis over and over, your ability to do analysis improves. And so does your ability to do the next article well, and so on. The cycle goes around over and over, with all four elements improving each time. Improvement may be slow at first, but once the cycle gets going it tends to give dramatic, fast improvement.
This is a positive feedback loop because an increase in each element ultimately causes that same element to increase even more. This is also known as a virtuous cycle or a race to the top.
Now let's relate the power of this positive feedback loop to maps and scorecards.
Actual performance is the strategic objectives that make up a Strategy Map. Measure of performance makes up the scorecard. Neither is a direct measure of any company's greatest asset: its Ability to do something well, also known as human capitol or the right people. However, in our opinion there is an even more important asset than that. It is Feedback analysis skill, which is another term for the ability to learn. Given a choice between someone with high skills and other person with lower skills but a higher ability to learn, the shrewd, far-sighted manager will pick the second person every time, because it is the ability to learn that gives a company its greatest competitive or cooperative advantage in the long run. This is because the ability to learn is the same as the ability to control one's own evolution, and to better win the battle of the survival of the fittest in any particular market niche or endeavor.
Or instead of improving your ability to achieve competitive goals, you can choose to improve your ability to achieve cooperative goals. Because we are living more and more in a world where cooperation increases the total payoff available to all players, which course you should take is becoming more and more obvious.
Therefore what Strategy Maps and Balanced Scorecards really offer in one tidy little package is a tried and true way for an entire company to become a unified learning organization, with that learning supporting a particular organizational thinking structure: the one created by the Strategy Map. Think about it. You now have everyone thinking along the same lines, in the same strategic directions, and self-evolving at the speed of performance and measurement cycles.
But that's not all. Another reason maps and scorecards are so powerful is they are a mature process for strategic planning and management of that plan. This process maximizes the chances of success if followed correctly. This is relatively easy to do once the fundamentals of the process are known. The literature is beginning to be too large to survey. I'm still new at this myself, but the key principles seem to be, in order of importance:
1. Become strategy focused: Get everyone in the company, and we mean everyone, educated and focused on the Strategy Map. Tie compensation, continued employment, and promotion to scorecard results. Center corporate planning around Strategy Maps and scorecard results. Don't look at your financial statement first: look at your scorecard. FOCUS, FOCUS, FOCUS on the right STRATEGY.
2. Use causal flow principles: Develop your Strategy Map using sound causal flow diagram principles. Show the crucial relationships. Be sure there is a good cause for all objectives to be achieved. The conscious, proper use of causal flow diagrams can take you and your organization up to the more mature level of SYSTEMS THINKING.
3. Measure well: Develop a good measure for all important objectives and use those measures to manage strategic plan execution. The proper use of measures CLOSES THE CYCLE OF CONTINUOUS IMPROVEMENT LOOP.
4. Use four map areas: Group your Strategy Map into the four areas of Financial Perspective, Customer Perspective, Internal Processes, and Personal Learning and Growth, in that sequence. (The last two were left out in the above introductory example.) Start at the foundation and ensure that the personal area drives the layer above it, which drives the layer above it, and so forth. Use of this flow of influence, or value chain, is a powerful STRUCTURAL SUCCESS PATTERN.
There are many more process elements, but this handful of rules to follow should get you well along the road. Maps and scorecards are not a panacea, but if used wisely they can turn strategic chaos into clarity, and clarity into company wide focus, and focus into results.
This introduction is intended to give you an initial overview. The rest is up to you.
The best overall first book to study appears to be The Strategy Focused Organization: How balanced scorecard companies thrive in the new business environment, by Kaplan and Norton, 2001, 397 pages. For more examples and further detail, see their next book, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, 2004. An option to these long books is their seminal articles in the Harvard Business Review. However, any serious user of this tool probably needs at least The Strategy Focused Organization.
Their first book, The Balanced Scorecard, 1996, has now been translated into nineteen languages. However their 2001 book is a bit better, due to a more refined process and further empirical studies supporting their assertions. This is just what one would expect after the passing of five years of, guess what, continuous improvement by Kaplan and Norton of the power of the tool.
There is also Kaplan's and Norton's website, home of the Balanced Scorecard Certification Program.
About a year after the original version of this article was written, I added a modified form of strategy maps to the System Improvement Process. Here are two examples: The Starvation Problem maps a common folk saying. The Proper Coupling Strategy Map is from the analysis of the proper coupling part of the sustainability problem, which is a work in progress. For more on this tool, see the chapter on The Transformation Strategy Map in the Analytical Activism book.