PREFACE

THE KAPLAN-NORTON COLLABORATION began in 1990 with a multi-company research project that explored new ways to measure organizational performance. We believed, at the time, that knowledge-based assets—primarily employees and information technology—were becoming increasingly important for companies’ competitive success. But companies’ primary measurement systems remained the financial accounting system, which treated investments in employee capabilities, databases, information systems, customer relationships, quality, responsive processes, and innovative products and services as expenses in the period in which they were incurred. Financial reporting systems provided no foundation for measuring and managing the value created by enhancing the capabilities of an organization’s intangible assets.

We believed that executives and employees paid attention to what they measured, and that people could not manage well what they were not measuring. Consequently, executives’ attention and effort were overly focused on influencing short-term financial measures, and insufficiently on investing in and managing the intangible assets that provided the foundation for future financial success. Without an improved performance measurement system, executives would not develop and mobilize their intangible assets effectively, and thereby would forfeit major opportunities for value creation.

From this one-year research project came the concept of a Balanced Scorecard of measurements.¹ We recommended that organizations retain financial measures, to summarize the results of actions previously taken, but that they should balance these outcome measures with nonfinancial measures in three additional perspectives—customer, internal processes, and learning and growth—that represented the drivers, the lead indicators, of future financial performance. This was the foundation of the Balanced Scorecard.

The article struck an immediate and responsive chord among executives. We began to work with several organizations to facilitate their implementation of the Balanced Scorecard. We soon learned that while executives appreciated a more comprehensive new performance measurement system, they wanted to use their new system in a more powerful application than we had originally envisioned. The executives wanted to apply the system to solve the more important problem they faced—how to implement new strategies. For not only was the nature of their internal value creation process shifting from tangible to intangible assets; the nature of competition in their external markets was shifting as well. Manufacturing companies, which formerly competed merely on production capabilities and product characteristics, discovered that success now required deep understanding of their markets and customers, and an ability to provide unique value propositions to their targeted customers. Newly deregulated service companies now faced vigorous competition from companies that had historically been outside their protected markets. Often entirely new companies had entered their industries based on effective deployment of advanced information technology. Even public-sector agencies and not-for-profit organizations were being asked to demonstrate how they created value for their constituents and stakeholders. So executives in all sectors and in all parts of the world were facing the dual challenges of how to mobilize their human capital and information resources and how to transform their organizations to new strategies, driven by informed and selective customers demanding outstanding performance.

Companies and public-sector and nonprofit organizations generally responded to the challenge by formulating new strategies and rededicating themselves—through inspirational new mission and vision statements—to deliver increased value to their customer segments and constituents. The deep problem that virtually all organizations encountered, however, was their inability to execute successfully on their new strategies. Employees could hear the words of the new mission, vision, and strategy statements, but they didn’t understand what the words meant to them. How should they do their jobs differently or better to help the organization succeed with its new strategy? Various studies indicated that 70 percent to 90 percent of organizations failed to realize success from their strategies.

Executives implementing the Balanced Scorecard intuitively understood that a strategy-based measurement system could solve the problem of how to communicate and implement strategy. As we observed executives using the Balanced Scorecard, we could see them develop a new system for managing strategy. We described the elements of this new system in another Harvard Business Review article,² and our first book,³ which consisted of two parts: Part I described the Balanced Scorecard as an enhanced performance measurement system, and Part II described how executives in early-adopting companies had embedded the Balanced Scorecard into a new strategic performance management system.

During the next four years, we tracked the performance of these adopting companies, and a new set of companies, some that we had assisted in the implementation and others that had implemented on their own. We learned that these companies were achieving breakthrough performance, and in relatively short periods of time—within two to three years of launching their BSC projects and their organizational transformations. When we asked the executives about the role of the BSC in their remarkable transformations, they responded typically with two words: alignment and focus. The BSC had enabled them to align all their organizational resources—executive teams, business units, support groups, information technology, and employee recruiting and training—to focus intensively on implementing their strategies. We documented the experiences and practices of these companies in our second book, The Strategy-Focused Organization.⁴ This book expanded on the strategic management system we introduced in Part II of The Balanced Scorecard. It showed how successful adopters followed five management principles to become “strategy-focused”:

• Translate strategy to operational terms
• Align the organization to the strategy
• Make strategy everyone’s everyday job
• Make strategy a continual process
• Mobilize change through executive leadership

In addition to learning about the management principles to become strategy-focused, we also learned how to choose measurements that would be more meaningful to executives and employees. Our initial 1992 HBR article advocated using a broad set of measurements, organized by four perspectives, to improve performance. As we started to work with companies, we naturally had to address how to select the twenty to thirty measures in an organization’s Balanced Scorecard. We soon realized that the measures should not be selected because they were already being used in the organization or because they could drive local continuous improvements. Our second HBR article described how the measurements should focus on what is most important for the organization: its strategy.⁵ And because employees would pay much attention to the selected measures, we had to be careful that we were measuring the right things. As the saying goes, “Be careful what you wish for; you might get it.” Measurement is a powerful motivator. Managers and employees strive to perform well on whatever measures get selected, particularly if the measures are tied to an incentive compensation plan. So before deciding what to measure, we had to ask executives what they were trying to accomplish: What were their objectives? This innocent question led to a seemingly small enhancement in our methodology that turned out to have far-reaching consequences.

We learned to start each engagement by getting executives to agree on word statements of their objectives in the four BSC perspectives. Once the executives agreed to the word statements of what they wanted to accomplish—how they wanted to describe success—the selection of measurements became much simpler. And, in an interesting twist, the selection of measures became somewhat less consequential. After all, when agreement existed about the objective to be achieved, even if the initial measurements for the objective turned out to be less than perfect, the executives could easily modify the measurements for subsequent periods, without having to redo their discussion about strategy. The objectives would likely remain the same even as the measurements of the objectives evolved with experience and new data sources.

The focus on objectives led to a breakthrough: Objectives should be linked in cause-and-effect relationships. Executives, as they listed objectives in the four perspectives, instinctively started to draw arrows to link the objectives. They could now articulate their strategy of how improving employee capabilities and skills in certain job positions, coupled with new technology, would enable a critical internal process to improve. The improved process would enhance the value proposition delivered to targeted customers, leading to increased customer satisfaction, retention, and growth in customers’ businesses. The improved customer outcome measures would then lead to increased revenues and ultimately significantly higher shareholder value. Soon we were coaching all the executive teams to describe their strategy by explicit cause-and-effect relationships among the objectives in the four BSC perspectives. We named this diagram a strategy map. And while every organization’s strategy map was different, reflecting their different industries and strategies, we could, after facilitating the development of hundreds of strategy maps, see a basic pattern emerge. We formulated a generic strategy map to serve as a starting point for any organization in any industry. We communicated the insights from strategy maps in our fourth HBR article,⁶ and in the chapters on translating strategy into operational terms in The Strategy-Focused Organization.

The strategy map has turned out to be as important an innovation as the original Balanced Scorecard itself. Executives find the visual representation of strategy both natural and powerful. As one executive speaker exclaimed at the start of her talk at a conference, “I love strategy maps.” When we post organizations’ strategy maps on the walls of rooms where we hold conferences, delegates use their coffee breaks to study each diagram—even for organizations completely different from their own—often sketching the map and filling in some key objectives.

The realization of the importance of strategy maps motivated us to write this third book in the Balanced Scorecard series. The “equation” below positions this book relative to its two predecessors.

Successful execution of a strategy requires three components:

{Breakthrough results} = {Describe the strategy} + {Manage the strategy}

The philosophy of the three components is simple:

• You can’t manage (third component) what you can’t measure (second component)
• You can’t measure what you can’t describe (first component)

Our first book, The Balanced Scorecard, addressed the second component by showing how to measure strategic objectives in multiple perspectives. It also presented the early ideas about the third component, how to manage the strategy. The Strategy-Focused Organization provided a more comprehensive approach for how to manage the strategy. It also introduced strategy maps for the first component, how to describe the strategy. The current book, Strategy Maps, goes into much more detail on this aspect, using linked objectives in strategy maps to describe and visualize the strategy.⁷

Thus we can rewrite the above equation as:

Breakthrough results ={Strategy Maps} + {Balanced Scorecard} + {Strategy-Focused Organization}

This book introduces several important new contributions:

1. A template that describes the basic components of how value gets created in the internal and learning and growth perspectives
2. Themes, based on value-creating processes, that articulate the dynamics of a strategy
3. A new framework for describing, measuring, and aligning the three intangible assets in the learning and growth perspective—human capital, information capital, and organization capital—to strategic processes and objectives in the internal perspective

Templates, strategic themes, and intangible assets are the building blocks for understanding and executing strategy. They provide increased granularity for executives to describe and manage strategy at an operational level of detail.

ACKNOWLEDGMENTS

We could not have produced the work in this book without the great contributions made by our colleagues at Balanced Scorecard Collaborative (BSCol), their clients, and the other organizations that brought their work to us and shared their insights. We want to express special thanks to Cassandra Frangos for her commitment and dedication to building our understanding of human capital management.

We greatly appreciate the active support and contributions of the people identified below:

Organization	Organization Champion andlor Project Leader	Balanced Scorecard Collaborative Contributor
Amanco	Roberto Salas	Mathias Mangels, Carlos Graham
American Diabetes Association	John Graham, Tom Bognanno	Mario Bognanno
Bank of Tokyo-Mitsubishi HQA	Naotaka Obata, Takehiko Nagumo	Barnaby Donlon
Boise Office Solutions	David Goudge, Scott Williams	Randy Russell
Bonneville Power	Terry Esvelt	Cassandra Frangos
Boston Lyric Opera	Janice Mancini Del Sesto, Sue Dahling-Sullivan	Ellen Kaplan
Crown Castle International	John Kelly, Bob Paladino	Jan Koch
Datex-Ohmeda	Eero Hautaniemi, Mary Ann Worsman, Brant Sonzogni	Ann Nevius
Economic Development Administration (U.S. Department of Commerce)	Dr. David Sampson, Sandy Baruah, Danette Koebele	Mario Bognanno
Fulton County School System	Martha Taylor-Greenway
Gray-Syracuse	Paul Smith	Cassandra Frangos
Handleman Company	Steve Strome, Rozanne Kokko, Gina Drewek	Geoff Fenwick, Dana Goldblatt, Mike Nagel
Ingersoll-Rand	Herb Henkel, Don Rice	Mike Clark
MDS	John Rogers, Bob Harris	Mike Nagel, Jay Weiser
Media General	Stewart Bryan, Bill McDonnell	Patricia Bush, Jan Koch
National City Corporation	Shelley Seifert	Cassandra Frangos
Northwestern Mutual	Ed Zore, Deborah Beck	Arun Dhingra
Royal Canadian Mounted Police	Commissioner G. Zaccardelli, Geoff Gruson	Andrew Pateman
Saatchi & Saatchi	Bill Cochrane, Paul Melter	Jan Koch, Patricia Bush
St. Mary’s Duluth Clinic Health System	Dr. Peter Person, Barbara Possin	Ann Nevius, Judith Ross
Swiss Re	John Coomber, Rosemarie Dissler	Antosh Nirmul
Tata Auto Plastics	Rajiv Bakshi, Muhamed Muneer (Innovative Media)
Teach for America	Jerry Hauser
Thomson Financial	Dick Harrington, Dave Shaffer, Ro Pavlick	Barnaby Donlon, Rondo Moses
Thornton Oil	Rick Claes	Patricia Bush, Lauren Keller Johnson
T. Rowe Price	Pam McGinnis	Bob Gold
U.K. Ministry of Defence	Sir Kevin Tebbit, Commander Des Cook, Captain Mike Potter, Tracy Buckingham, Simon Howard	Gaelle Lamotte
United States Army	Strategic Readiness System Team	Patricia Bush, Laura Downing
University of California, Berkeley Administrative Services	Ron Coley, Claudia Covello, Beth Luke	Cassandra Frangos
Volvofinans	Björn Ingemanson, Marianne Söderberg	Carl-Frederik Helgegren

We also wish to acknowledge the contributions of Rob Howie and Michael Contrada, who manage the conference and consulting services of BSCol. These services provide the foundation to continuously develop our own intangible assets. In preparing the internal process chapters in Part II, we benefited from and summarized the work of several academic scholars. For the chapter on operations management, we used a risk management framework developed by Lisa Meulbroek of MIT; for the chapter on customer management processes, we drew upon work of Harvard Business School faculty members Das Narandas, Rajiv Lal, Jim Heskett, and Robert Dolan; for the chapter on innovation processes, we drew on material produced by HBS faculty members Stephen Wheelwright, Kim Clark, Marco Iansiti, and Alan MacCormick, and benefited from the guidance of Stefan Thomke; and for the chapter on regulatory and social processes, we incorporated frameworks developed by HBS faculty members Forest Reinhart and Michael Porter, and benefited from the comments of Professor Marc Epstein of Rice University and Lester Lave of Carnegie-Mellon University. For the chapter on information capital, we built upon the work of Peter Weill of MIT and Marianne Broadbent of Gartner. Professor Arnoldo Hax of MIT helped us to understand the power of lock-in strategies. Professor Charles O’Reilly of Stanford provided valuable material and insights about culture and its measurement for the chapter on organization capital readiness. Michael Porter of HBS, of course, has provided the foundational work in strategy that has influenced and inspired our thinking. We are grateful for all their contributions and have attempted to integrate them faithfully within the strategy map framework.

We give special thanks to Rose LaPiana for preparing the manuscript and the graphics, coordinating the case studies, and keeping the project and us organized, and to David Porter of HBS for his administrative support.

We continue to value the enthusiasm and guidance of Carol Franco, president, and our editor, Hollis Heimbouch, at Harvard Business School Press, and the assistance of Jane Bonassar, manuscript editor, who guided us through the production process.

—Robert S. Kaplan and David P. Norton

Boston and Lincoln, Massachusetts, June 2003

NOTES

1. Robert S. Kaplan and David P. Norton, “The Balanced Scorecard: Measures That Drive Performance,” Harvard Business Review (January–February 1992).

2. Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January–February 1996).

3. Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996).

4. Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston: Harvard Business School Press, 2001).

5. Robert S. Kaplan and David P. Norton, “Putting the Balanced Scorecard to Work,” Harvard Business Review (September–October 1993).

6. Robert S. Kaplan and David P. Norton, “Having Trouble with Your Strategy? Then Map It!” Harvard Business Review (January–February 2001).

7. Strategy Maps also extends our first book, by identifying specific measures for strategy map objectives, particularly in the internal and learning and growth perspectives.