Strategy Maps and the Balanced Scorecard

In this section, we use the Chipset example to develop strategy maps and the four perspectives of the balanced scorecard. The objectives and measures Chipset’s managers choose for each perspective relate to the action plans for furthering Chipset’s cost-leadership strategy: ­improving manufacturing quality and efficiency.

Strategy Maps

A useful first step in designing a balanced scorecard is a strategy map. A strategy map is a diagram that describes how an organization intends to create value by connecting strategic objectives in the financial, customer, internal-business-process, and learning-and-growth perspectives in explicit cause-and-effect relationships. Exhibit 13-2 presents Chipset’s strategy map. Follow the arrows to see how a strategic objective affects other strategic objectives in the same or in a different perspective. For example, empowering the workforce helps align employee and organization goals and improves manufacturing and business processes, which, in turn, improves manufacturing quality and productivity, reduces customer delivery time, helps to meet delivery dates, and improves post-sales service, all of which lead to an increase in customer satisfaction. Improving manufacturing quality and productivity grows operating income directly; it also increases customer satisfaction that, in turn, increases market share, which then leads to growth in operating income and shareholder value.

Chipset could include many other cause-and-effect relationships in the strategy map in Exhibit 13-2. But Chipset, like many other companies implementing the balanced scorecard, focuses on only those relationships that it believes to be the most significant so that the scorecard does not become unwieldy and difficult to understand.

Structural Analysis of Strategy Maps

Chipset’s managers step back to assess and refine the strategy map before developing the balanced scorecard. They use structural analysis to think carefully about the causal links in the strategy map. The analysis helps Chipset’s managers to “read” and gain insights into the strategy map.

There are five types of items to consider in a structural analysis: strength of ties (causal links), orphan objectives, focal points, trigger points, and distinctive objectives.^* We define these items below and refer to the strategy map we developed in Exhibit 13-2 to illustrate them. In the discussion, we refer to the learning and growth perspective as the bottom of the map and the financial perspective as the top.

STRENGTH OF TIES

Ties are the causal links between strategic objectives and can be qualified as strong, moderate, or weak. Strong ties are those causal links where the impact of one strategic objective on another is high, relative to other ties in the map. Similarly, moderate ties (alternatively, weak ties) are those causal links where the impact of one strategic objective on another is average (alternatively, low), relative to other ties in the map. Managers and management accountants, who have a deep understanding of the business, determine whether a tie is strong, moderate, or weak, based on historical data, logic, and judgment. In Exhibit 13-2, strong ties are indicated with dark, thick arrows; moderate ties are indicated with thin arrows; and weak ties are indicated with dotted arrows.

A strong tie indicates that if managers successfully implement a particular strategic objective, it will have a strong causal impact on the strategic objective that is affected. Note that there are five strong ties in Exhibit 13-2. For example, Chipset’s managers believe that to improve manufacturing quality and productivity, the organization must improve its manufacturing controls and manufacturing and business processes. To achieve the latter, the organization must in turn enhance its information system capabilities and develop employee process skill.

Aligning employee and organization goals is also important for improving manufacturing quality and productivity, but this effect is deemed moderate and thus is not as strong or important as that of improving manufacturing controls and manufacturing and business processes.

Where a tie is moderate or weak, managers anticipate that implementing the respective strategic objective will not have a strong impact on accomplishing the strategic objectives linked to it. A tie may be moderate because factors outside the organization’s and the manager’s control affect the outcome of the linked strategic objective. For example, an increase in market share might have only a moderate effect on operating income because other factors, such as bargaining by customers or price pressure from competitors, affect operating income.

Tie strength affects how managers allocate resources across strategic objectives. Because managers believe that a strategic objective with a strong tie will heavily impact the objective linked to it, they may be willing to invest more resources in these objectives. As we will see later, tie strength may also influence how managers craft initiatives and metrics in the balanced scorecard and the weights that managers put on different elements of the scorecard.

There are many moderate ties and one weak tie in the map depicted in Exhibit 13-2. Chipset’s managers closely examine weak ties. Consider the strategic objective of a ­follow-up service call. Chipset’s managers believe that even if they were to achieve this objective, it will only have a weak effect on improving post-sales service. That’s because in the technology-heavy context of linear integrated circuit devices (LICDs), customers are not interested in post-sales follow-up calls. What customers really want is for Chipset to respond quickly and to solve aggressively any problems they might have when these problems arise. It is Chipset’s responsiveness to specific problems rather than routine follow-up calls that customers value.

ORPHAN OBJECTIVES

Consider again Exhibit 13-2. We refer to the strategic objective of follow-up service call as an orphan. An orphan objective is a strategic objective with only weak ties (if any) leading out of it to other strategic objectives. Orphan status usually indicates that the strategic objective does not contribute to the larger strategy in a way that warrants allocation of resources. At the very least, management should analyze the value that each orphan objective brings to the organization’s overall strategy. In Chipset’s case managers decide to not conduct any more follow-up service calls and to remove the item from its strategy map because this strategic objective has at best a weak effect on ­improving post-sales service.

FOCAL POINTS

Some strategic objectives have a hub-and-spoke quality and have multiple ties flowing into and/or out of them. A focal point is a strategic objective that has multiple links from other objectives funneling into it (see Exhibit 13-2). A focal point indicates strategic complexity; multiple strategic objectives need to be coordinated to fully achieve the focal objective. For example, improve manufacturing quality and productivity (in the internal business process perspective) is a focal point because three other strategic ­objectives—improve manufacturing and business processes, improve manufacturing controls, and align employee and organization goals—must be met for Chipset to fully see an improvement in manufacturing quality and productivity. Even though it is complex to fully deliver on focal point strategic objectives, it is important for Chipset to achieve it. That’s because, without it, Chipset may not be able to meet its overarching strategic objectives to grow operating income and to increase shareholder value. If, however, the focal point has only weak ties emanating from it, the strategy map analysis would suggest that the company not invest resources in the focal point objective. That’s because it is complex to fully achieve the strategic objective, and the objective only has questionable benefits, even if it is successfully achieved.

TRIGGER POINTS

A trigger point is a strategic objective that has multiple ties to other objectives spurring out from it. Trigger points are exciting because if an organization can fully achieve the trigger point strategic objectives, they enable the achievement of multiple other strategic objectives. In Exhibit 13-2, improve manufacturing and business processes (internal-business-process perspective) is a trigger point because it supports and helps achieve four other strategic objectives (improve manufacturing quality and productivity, reduce delivery time to customers, meet specified delivery dates, and improve post-sales service). Because of their centrality to many other strategic objectives across the strategy map, trigger points require special attention from managers. Trigger points are interesting even if one of the links emanating from it is weak, as long as the other ties are strong or moderate.

DISTINCTIVE OBJECTIVES

Strategic objectives that distinguish an organization from its competitors and that are viewed as critical for achieving the organization’s strategy are distinctive objectives. They are frequently located within the learning and growth and ­internal-business-process perspectives, because they define important activities undertaken by a company to satisfy customers and achieve financial performance. In the map, these strategic objectives are labeled with a “D.”

Recall that based on its competitive analysis, Chipset’s management chooses to pursue a cost-leadership strategy—lowering costs and reducing prices instead of developing more advanced chips and charging a higher price. The key steps to achieving cost leadership require Chipset to enhance manufacturing quality and efficiency by, for example, eliminating excess capacity, and to reduce delivery time to customers. As a result, Chipset’s managers and management accountants identify improving manufacturing quality and productivity and reducing delivery time to customers as distinctive objectives that allow Chipset to differentiate itself from its competitors. Chipset’s managers debate whether they should choose “lower level” strategic objectives such as improve manufacturing controls or improve manufacturing and business processes as distinctive objectives rather than the ones they have chosen. They do not because Chipset’s managers, like managers at many companies, prefer to choose as distinctive objectives those objectives that customers experience. It is higher manufacturing quality and productivity and lower delivery times that give Chipset a distinctive competitive advantage, while improving manufacturing controls and manufacturing and business processes are important steps in achieving those objectives.

Thinking about distinctiveness within the internal-business-process perspective has two other benefits. First, the objectives in the internal-business-process perspective describe the development of core capabilities. As a result, these strategic objectives produce long-term benefits in addition to short-term ones, creating sustainable competitive advantage. Second, the objectives in the internal-business-process perspective force senior managers to develop nonfinancial metrics to measure important, but difficult-to-quantify activities, within which competitive advantage resides.

If no strategic objective is truly distinctive, managers need to revisit the strategic objectives and think about how to modify or replace them to achieve a strategy that distinguishes the company from its competitors while creating value for its customers. In this way, a structural analysis, that is, “reading” a strategy map helps companies both implement and refine their strategies.