The Hindu Business Line : Plot strategy in maps that link objectives

LET'S face it: financial reporting has problems when dealing with intangibles. But this world has been putting increasing premium on knowledge-based assets. Since normally what is measured is valued and monitored, executives gradually ended up with tunnel vision.

Observing that more than 75 per cent of the average firm's market value is derived from intangible assets that traditional financial metrics don't capture, Robert S. Kaplan and David P. Norton introduced Balanced Scorecard more than a decade ago, something that became famous worldwide.

Then came a breakthrough — that objectives should be linked in cause-effect relationships — that led to the new book Strategy Maps, published by Harvard Business School Press (www.HBSPress.org). The preface gives the equation: Breakthrough results = {lcub}Strategy Maps{rcub} + {lcub}Balanced Scorecard{rcub} + {lcub}Strategy-Focused Organisation{rcub}

An important insight in the intro is that what's true of companies is even truer for countries.

"Some countries such as Venezuela and Saudi Arabia have high physical resource endowments but have made poor investments in their people and systems.

As a consequence, they produce far less output per person, and experience much slower growth rates, than countries such as Singapore and Taiwan that have few natural resources but invest heavily in human and information capital and effective internal systems."

How is value creation from intangibles different?

First, value creation is indirect. "Improvements in intangible assets affect financial outcomes through chains of cause-and-effect relationships."

Second, value is contextual. "Value of intangible asset depends on its alignment with the strategy."

Third, value is potential. "The cost of investing in an intangible asset represents a poor estimate of its value to the organisation."

Fourth, assets are bundled. "The value from intangible assets arises when they are combined effectively with other assets, both tangible and intangible."

A chapter is devoted to `innovation processes' that discusses different models, such as the funnel, stage-gate and so on. "For years, software companies followed a structured waterfall process in which one phase spilled into the next in a well-defined, sequential progression: concept design, product and feature specification, coding, and integration and testing."

Now, the practice is to be iterative, "enabling designers to incorporate changing customer requirements and evolving technologies into designs throughout the product development process.

Thus "the development process involves many `design-build-test' cycles." Microsoft's approach in building Office 2000 exploited two key processes, viz., Milestones and Daily Builds.

Information capital is categorised by the authors into four: transaction processing applications that automate repetitive transactions of the enterprise; technology infrastructure; analytic applications that help analysis, interpretation and sharing of information/knowledge; and transformational applications that change the prevailing business model of the enterprise.

Among the case studies is one about Tata Auto Plastic Systems that manufactures dashboards, door pads, air vents, bumpers, and trims.

"Its internal competencies build around two strategic themes: cost leadership to penetrate Indian and global customer markets; and innovation to build design and engineering competencies that meet global standards so that it could move up the value chain in future years."

As the intro puts it, the book could help in building "a comprehensive, integrated visual representation of strategy".

So, worth giving it a shot, rather than joining the bandwagon late in the day.

ManageMentor@TheHindu.co.in

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