The Strategy Design Process1[1]

The task of developing a comprehensive strategy for a firm that integrates the Finance, Marketing
and Operations functions is complex. Robert Kaplan and David Norton in The Strategy Focused
Organization (Harvard Business School Press, 2001) have developed a generic strategy map
template that they use in consulting work. The template is a starting point for the strategy design
process and is tailored for a particular firm.

Kaplan and Norton claim that the template helps executive teams describe their strategies and
dramatically improved the quality of their insights. The template facilitates great precision in
defining the customer value proposition and increase awareness that internal processes,
competencies, and technologies must be linked to that value proposition. The purpose is to foster a
cause-and-effect mentality that encourages more innovative approaches to strategy implementation.

The template is also useful to analyze or reverse-engineer an existing strategy. Mapping what a
firm is currently doing into the template should tell the story of the strategy. Starting with the
structure of the template, you should be able to reverse the logic and deduce the current strategy.

Exhibit 1 is the template proposed by Kaplan and Norton. It’s very important to keep in mind that
the positioning of a perspective on the template does not in any way indicate the importance of the
idea. For example, the “Learning and Growth Perspective” at the bottom of the template is just as
important as the “Financial Perspective” at the top. When properly constructed the strategy map
should portray an integrated and logical description of how the strategy will be accomplished.

Exhibit 1 Kaplan and Norton's Generic Strategy Map

Financial Perspective – Whether companies use return on investment, return on capital employed
(ROCE), economic value added (EVA), or some other value-based metric as the high-level
financial objective, they have two basic strategies for driving financial performance: growth and

1[1]
This material is an edited version of Chapter 3, “Building Strategy Maps”, Robert S. Kaplan and David P. Norton,
The Strategy Focused Organization, The Harvard Business School Press, 2001, pp. 69-105.
productivity. The revenue growth strategy focuses on developing new sources of revenue and
profitability. It generally has two components:
1. Build the franchise. Develop new sources of revenue from new markets, new products, or
new customers. This dimension of the strategy implies the greatest amount of change and
requires the longest time to execute.
2. Increase customer value. Work with existing customers to expand their relationship with the
company. This component tends to be intermediate term in duration and focuses on
processes that integrate the firm’s systems with the customer’s to make processes more
efficient.

The productivity strategy features the efficient execution of operational activities in support of
existing customers. Productivity strategies focus on cost reduction and efficiency. Like the revenue
growth strategy, the productivity strategy generally has two components:
1. Improve cost structure. Lower the direct costs of products and services, reduce indirect
costs, and share common resources with other business units.
2. Improve asset utilization. Reduce the working and fixed capital needed to support a given
level of business by great utilization, more careful acquisition, or disposal or parts of the
current and fixed asset base.

The productivity strategy generally yields results sooner than the growth strategy. Kaplan and
Norton stress a balanced approach to ensure that cost and asset reductions do not compromise a
company’s growth opportunities. They argue that companies that are in early-stage startup mode
see opportunity for rapid growth and will emphasize objectives from the revenue growth side. Cost
and productivity will be less emphasized, as these organizations spend heavily to develop and
introduce new products and services and to extend into new markets and applications. Companies
in the mature end of their lifecycle will emphasize the cost reduction and asset utilization
components, as limited opportunities remain to find new customers or expand into new markets.
Most companies are in the middle of their life cycle and employ a “profitable growth” strategy that
requires a balance of the contributions from revenue growth and from cost reduction and
productivity.

The Customer Perspective – This is the heart of the strategy and defines how growth will be
achieved. The value proposition defines the specific strategy to compete for new customers or
increased share of existing customer businesses. A clear definition of this value proposition is the
most important single step in the development of a strategy map. This is how a company
differentiates itself in the marketplace. The following are three different ways to differentiate:2[2]
1. Product leadership. A product leadership company pushes its products into the realm of the
unknown, the untried, or the highly desirable. Sony Corporation and Intel Corporation
epitomize this strategy.
2. Customer intimacy. A customer-intimate company builds bonds with its customers: it
knows the people it sells to and the products and services it needs. The Home Depot, Inc
has successfully executed this strategy.
3. Operational excellence. Operationally excellent companies deliver a combination of quality,
price and ease of purchase that no one else can match. Good examples of these companies
are McDonald’s Corporation, Southwest Airlines, and Dell Computer Corporation.
Treacy and Wiersema claim that successful companies excel at one of these three dimensions of
value while maintaining “threshold standards” on the other two. This is similar to Terry Hill’s
concept of “order winners” and “qualifiers” described in the previous section. For example, The
Home Depot differentiates itself through the knowledge and helpfulness of its sales staff. The
company must still have excellent product selection, high-quality inventory management, and
reasonable prices, but these are not the primary reasons for its targeted customers to shop there. As
a contrast Intel, Sony and many pharmaceutical companies succeed by offering the best product for

2[2]
M. Treacy and F. Wiersema, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus,
Dominate Your Market, Addison-Wesley, 1995, pp. 31-38
their customers’ needs. Prices of product leadership companies are generally high and service is
adequate but not necessarily exceptional. Companies such as McDonald’s Corporation that stress
operational excellence excel at being competitive on prices, customer-perceived quality, and lead-
time response.

The Internal Perspective – This defines the business processes and the specific activities that the
organization must master to support the customer value proposition. It is important that strategy not
only specify the desired outcomes, it must also describe how these outcomes will be achieved. As
Michael Porter states, “The essence of strategy is in the activities – choosing to perform activities
differently or to perform different activities than rivals.”3[3]

The activities of an organization are embedded in the internal business processes that comprise its
value chain. Kaplan and Norton’s template segments the value chain into four sets of business
processes. These processes align with the three customer value perspectives just introduced, and
add a fourth perspective that being regulatory and environmental considerations.

Here it is important to stress the importance of Operations Management. Operations Management

is all about the design of effective business processes. Whether we are talking about the
management of a sales force executing a Marketing Plan, a group of Finance wizards managing an
investment portfolio, or a factory making jet aircraft these processes must be designed so that they
operate effectively. Operations Management is all about designing and managing these processes.

A product leadership strategy would require a leading-edge innovation process that creates new
products with best-in-class functionality and brings them to market rapidly. Customer management
processes might focus on rapid acquisition of new customers to consolidate the early mover
advantage that a product leader creates.

A customer intimacy strategy requires excellent customer management processes such as

relationship management and solution development. The innovation process would be motivated
by the needs of targeted customers, focusing on those new product developments and service
enhancements that contribute to better customer solutions.

A strategy of operational excellence emphasizes cost, quality, the quickness of operating processes,
excellent supplier relationships, and speed and efficiency of supply and distribution processes.

It is not uncommon to see companies that claim to have a strategy of innovation or value-adding
customer relationships but choose internal business process that focus on cost minimization. Cost
minimization implies an emphasis on efficiency, high labor productivity and standardization. These
companies have a complete disconnect between the internal and customer perspectives of their
strategy.

A strategy of regulatory and environmental excellence is important for companies such as

telecommunications and utilities, whose prices and operations are regulated to some extent by the
government. Companies whose operations entail significant Environment, Health and Safety (EHS)
risks need to comply with regulations in the communities where they operate. Beyond compliance,
these companies may even seek to achieve a reputation as a leader to enhance their ability to recruit
and retain employees, and to maintain and expand their physical presence in communities. When
such regulatory and EHS considerations are important for a successful strategy, companies may
include several objectives in a “good corporate citizen” theme in the internal perspective.

The Learning and Growth Perspective – This defines the intangible assets needed to enable
activities and customer relationships to be performed at high levels of performance. There are
three principle categories:
3[3]
Porter, “What is Strategy”, p. 77.
 1. Strategic competencies: The strategic skills and knowledge required by the workforce to
support the strategy.
2. Strategic technologies: The materials and process technologies, information systems,
databases, tools, and network required to support the strategy.
3. Climate for action: The cultural shifts needed to motivate, empower, and align the
workforce behind the strategy.

Learning and growth strategies are important for long term development of the firm. It is vitally
important that a firm align human resources, information technology, corporate climate, and
research activities with requirements from the strategic business processes and customer
differentiation strategy.

Kaplan and Norton have developed their concept of “The Balanced Scorecard” to tell the story of
how well an integrated strategy is being executed. They propose that an integrated set of measures
be developed to track performance from financial, customer, internal, and learning and growth
perspectives. Cause-and-effect linkages in strategy maps describe a path by which improvements in
the capabilities of intangible assets get translated in tangible customer and financial outcomes.

Kaplan and Norton use the example of Rockwater, a division of Brown & Root Energy Services.
Rockwater is an undersea contractor that does projects with major oil companies around the world.
Rockwater developed a strategy to improve its return-on-capital financial performance through two
strategic themes: operations excellence – reducing costs and improving quality, and customer
management – developing long-term partnerships with targeted (Tier I) customers. Both themes
required new capabilities and attitudes on the part of the workforce (see Exhibit 2).

Exhibit 2 Rockwater's Strategy Map

For the operational excellence theme, improved attitude and morale among employees led to a
higher frequency of suggestions (linkage A1 in Exhibit 2). The suggestions in turn led to many
improvements in work practices that significantly reduced the incidence of costly rework (linkage
A2). The lower incidence of rework translated directly into lower project costs (A3), higher
profitability, and a higher return on capital (A4). The project teams could also leverage their cost-
reduction experiences into lower prices for future work for price-sensitive (Tier II) customers.
For the customer management strategic theme, the company observed that its most satisfied value-
seeking (Tier I) customers were serviced by employees who had scored highest on measures of
attitude and alignment with Rockwater’s strategy (linkages B1 and B2). These satisfied customers
paid outstanding invoices with the shortest delays (linkage B3), thirty to ninety days faster than
dissatisfied customers paid. The short collection period led to lower levels of working capital and
higher cash flows leading directly (linkage B4) to an increased return on capital.

The linkages in strategy maps provide the recipes for transformation and value creation over time.
Near term, value creation can focus on operational excellence; medium term, increasing customer
value is important; long term, build the business through loyalty and new customers. Collectively,
these perspectives ensure the short and long term performance of the firm.

4[1]
This material is an edited version of Chapter 3, “Building Strategy Maps”, Robert S. Kaplan and David P. Norton,
The Strategy Focused Organization, The Harvard Business School Press, 2001, pp. 69-105.
5[2]
M. Treacy and F. Wiersema, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus,
Dominate Your Market, Addison-Wesley, 1995, pp. 31-38
6[3]
Porter, “What is Strategy”, p. 77.