Q&A with Robert Kaplan And David Norton on Strategy Maps and IT’s Link to Corporate Strategy

Strategy is all talk, no action. Every company is certain it has a rock-solid strategy (see, it’s right there in the company newsletter!). But going from paper to execution is where most companies fail—nine out of 10, to be exact, according to Robert Kaplan and David Norton, who in 1990 developed the Balanced Scorecard concept—a set of measures to track customers, internal processes, learning and growth. Kaplan and Norton started with metrics, but they have been gradually working their way up toward the ethereal realm of strategy. They’ve made the trip slowly and deliberately, using the cultlike group of followers and customers (Kaplan and Norton are happy to help you with your strategy) that has coalesced around the Balanced Scorecard.

There is very little that is new in Kaplan and Norton’s ideas—you hear the competitive advantage themes developed by strategy guru Michael Porter in the ’80s and the value disciplines pushed by Michael Treacy and Fred Wiersema in the ’90s. But the good news about Kaplan and Norton is that they have created a continuum from the lowest-level measures of the Balanced Scorecard to the highest precepts of business strategy. They call this top-to-bottom approach the strategy map and have outlined it in their third book, Strategy Maps, which is due out in February 2004. Executive Editor Christopher Koch sat down with Kaplan, Harvard Business School professor and chairman of the Balanced Scorecard Collaborative (BSC), and Norton, president of BSC, to discuss strategy and its link to IT.

CIO: Some CIO readers are skeptical of strategy. Give me an example of a company whose business strategy wasn’t, “We are going to be number one in our market.”

Robert Kaplan: That’s not a strategy; that’s a prayer. [Laughs.] Strategy is really about positioning yourself and differentiating yourself—what is going to make you different from or better than competitors. Just a vague statement about being number one is not a strategy. It’s not saying what’s the strategic value proposition you are offering your customers.

Well, GE is lauded for its strategy, but its strategy boils down to “We will be number one or two in our markets, or we will get out.”

David Norton: Being number one or number two in a market is an objective; it’s not a strategy. Strategy is how you intend to do those things. I think that most organizations have strategies. Skeptics say, “We don’t have a strategy,” but what they’re really saying is, “I don’t understand the strategy. It hasn’t been communicated to me in a way that I can understand.”

If you want to describe the financial status of the company, you build an income statement and a balance sheet, and everyone understands it. But if you want to describe your business strategy, there is no general way to do that. So as a result, executives, even when they have a strategy, can’t really communicate it to their peers and get consensus on it, and they have no hope of communicating it to the thousands of people who work for them.

And that’s where the idea of the strategy map comes into play.

Define a strategy map.

Norton: A strategy map is a model of how an organization creates value. Strategy is how you intend to create value for your shareholders. The “how” is different for every organization. The strategy map at the highest level defines the shareholders’ objectives for long-term value, for growth and for productivity. The second level of the strategy map has to do with the customer and a value proposition. If you’re going to please your shareholder by growing, you have to appeal to a unique value proposition of price, quality, relationship, brand and so forth. So the strategy then forces you to be very clear about segmenting the market, understanding your customers and what they want.

Then the third level defines the processes you are going to emphasize to satisfy that customer. So how am I going to innovate and build new products? How am I going to manage the customer interface? How am I going to build and deliver the products? How am I going to function as a positive member of the community—what are my social responsibilities?

Finally, the foundation is the people, the technology and the organizational climate—the intangible assets. So it’s really defining the logic of how you will go about finding the skills and technologies you need to support a process that is going to create new products that are going to satisfy a customer and create profit for the shareholder.

Give me an example of a company that has made good use of the strategy map.

Kaplan: Let’s use Mobil [a Balanced Scorecard client] as an example. At the highest level, they have their mission statement: to offer the number-one buying experience for consumers when they purchase gasoline. The next level would be the vision: to become the most profitable integrated oil and gas refining marketing company. The specifics when you get in the financial perspective are, We will grow revenue 2 percent faster than the industry average. Second, we will get an increasing share of our revenue from nongasoline products and services. Now you’re getting very specific. The customer piece is, We will be the number-one station of choice for customers in these three targeted segments who value a great buying experience. And that’s already a choice because it says, in effect, We’re going to charge higher prices, and we’re not going to appeal to the price-sensitive customer because we’re going to offer the best buying experience for those segments of the population who value not just the purchase of the gasoline but also quick service, quick purchase and a quick payment. Then you get to measures, which pick up on how well you are delivering.

At what point in this strategy map did Mobil bring in IT?

Kaplan: Part of getting that fast, friendly buying experience at Mobil is that every gasoline pump at a Mobil station has to have technology at the pump—a credit card reader. Then someone got the idea that you could do better than a credit card. You could have a Speedpass embedded in a key chain that the customer waves at the pump. That was using IT for competitive advantage. That differentiated the buying experience.

They have another objective, which is to have the lowest refinery operating costs in the industry. So they have technology related to process improvement, the best monitoring systems in refineries and also feedback for people as they improve their processes to lower the cost. They were actually able to work out how technology will help them implement their strategy.

So it’s possible to map IT to your business strategy. Let’s say a company is trying to compete by being low cost, like a Wal-Mart or Costco. There the information technology resource should be offering customers easy ways of buying, it should offer the company easy ways of connecting with suppliers to lower their cost of acquisition, and the company should also offer ways for employees to improve processes and strive for Six Sigma process improvements—all of which support a low total-cost strategy.

If you’re working for a pharmaceutical company trying to become a product leader by coming up with new treatments and new drugs, then the IT that’s most valuable for that would be virtual prototyping. Or if you’re an automobile company, it would be simulation crash tests.

Those are three very different strategies, and because of that, the demands on the IT resource are completely different. It gets back to Dave’s point about the strategy map. The strategy map enables you to work down from the kinds of value proposition that you’re offering your customers to the critical investments in IT and human resources that will best support your ability to position yourself in the marketplace.

How do you keep the IT and business strategies from developing in isolation from each other?

Norton: You have to redefine the management system so that it ties to the strategy. One part of the management system is the budgeting process. The IT budgeting process should be integrated with the strategy of the business. In our research, we found that only one-third of IT organizations link their own planning and budgeting to the strategy of the business. So you have to change the process.

Kaplan: Ideally we like to have the company formulate its strategy first and then the IT group can determine how it can add value. It doesn’t always happen that way. Sometimes the IT group is ahead in using our approach, but then we encourage the IT group to go to the business and ask them what their strategy is.

Norton: This is exactly how it happened at GM of Europe. They started building the strategy map within the IT organization. The IT organization became, in effect, like consultants who went out to the business unit managers and built these little strategy maps that defined the priorities of the business unit.

Let’s look at intangibles. You say that 75 percent of a company’s value is in intangible assets that cannot be measured by financial systems. Things like people, data, processes, brand, customer relationships, innovation and culture. At what point will we start putting values on these things so that we can start valuing companies properly?

Kaplan: Our thesis is the intangible assets don’t have a value by themselves. It’s only when they are linked and aligned with the company strategy that the value is created.

But systems have value, don’t they?

Norton: The right question is, What’s the value of my process? You can measure the value of your new product development process. You can count the number of new products [that have come out of the process in the past few years and their value]. Now, having done that, the question is, Do you have the technology to support that new product development process? And so the way that we should measure that is not in terms of the financial value of the system, but rather in the state of readiness of those technologies to support the strategy. The question then is, Do I have the technology, do I have people trained to do this, do I have the incentives to get full value out of the process? Because the process itself is where you make the money, not the IT system.

What if you could get to a standard set of metrics for intangibles that would go into the balance sheet but would not be numeric—they would be standardized across companies and required for reporting purposes?

Norton: There are trends afoot where this is beginning to happen in pieces. J.D. Power, for example, performs the equivalent of an audit around quality in an organization. And there are HR surveys, like Fortune’s 100 best places to work survey, that apply a kind of standard set of questions to employee surveys and develop 10 or 20 key measures. People use that as a point of reference. We were number 72 in the top 100 places to work. [International Organization for Standardization] certification is another example. Most of the car companies will tell you what their product development cycle is and what the man-hours per car are.

But this gets murky when you talk about IT. Companies spend billions on systems that are used in almost completely intangible ways. I think so far that has served to the detriment of IT because the costs are tangible but the value is intangible.

Norton: But again I think the problem is that the focus goes back to IT rather than the process. We can be happy if the organization is in the top 100 places to work, but how did they do that? Maybe they were all able to work at home because they had great Internet access and services. How did you get your product development cycle down from six years to four? You used CAD/CAM and an engineering database. The nonfinancial results speak for themselves, but then the question is, Where does IT fit into this? That’s where I think you make a mistake trying to focus and quantify the value of IT because, as I said earlier, you can’t isolate IT from training, from other nontechnology programs put in place, incentive programs and so forth.

Is there anything you would add for CIOs struggling to make sense of strategy in their organizations?

Norton: The message to the IT executive would be: If you want to sit at the strategy table, it doesn’t exist, so you have an opportunity to build it—defining the strategy, participating in this process. Then everybody has a way to align their activities to the strategy. Everyone is then strategic. When I have seen this done in practice, I have seen CIOs get up and talk about their strategy, and you can’t tell that they are a CIO. They’re talking about business issues, and technology is part of it.