FILE: STRATEGIC MANAGEMENT Converting Intangible Assets .

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Concentrated Knowledge for the Busy Executive www.summary.comVol. 26, No. 4 (2 parts) Part 1, April 2004 Order # 26-09Converting Intangible Assets Into Tangible OutcomesSTRATEGYMAPSTHE SUMMARY IN BRIEFBy Robert S. Kaplan andDavid P. NortonCONTENTSStrategy MapsPages 2, 3Value-Creating ProcessesPages 3, 4, 5Manage RiskPage 3Innovation ThroughOperationsPage 4Intangible AssetsPages 5, 6, 7Triple Bottom-LineStrategy MapPage 5Building Strategies andStrategy MapsPages 7, 8IBM’s Complete CustomerSolutionPage 8More than 75 percent of the average company’s market value comesfrom intangible assets that traditional metrics don’t measure. The BalancedScorecard is a revolutionary performance measurement system that allowsorganizations to quantify critical intangible assets, such as people, information and culture. Now the people who first developed the BalancedScorecard, Robert S. Kaplan and David P. Norton, have created a powerfulnew tool based on their ongoing research. The strategy map allows companies to describe the links between intangible assets and value creation soall aspects of strategy can be implemented in a manner that ensures sustained value creation.The strategy map allows managers to align investments in people, technology and organization capital for the greatest impact. By paying closeattention to improving internal processes such as operations, customer relationships, innovation and culture — and making proper investments inintangible assets — human capital, information capital, and organizationcapital management can implement a structured plan to achieve strategicsuccess.What You’ll Learn In This Summary Which organizational processes are most critical for enhancing productivity. How to understand a strategy map and the cause-and-effect relationships between processes and intangible assets. How to manage internal processes to achieve your differentiated valueproposition. How to define and measure intangible assets and then integrate andalign them with strategy for true value. How to develop a customized strategy map for your company based onyour unique strategy and goals. How to plan an implementation campaign based on the strategy map.Published by Soundview Executive Book Summaries, P.O. Box 1053, Concordville, Pennsylvania 19331 USA 2004 Soundview Executive Book Summaries All rights reserved. Reproduction in whole or part is prohibited.FILE: STRATEGIC MANAGEMENT

STRATEGY MAPSby Robert S. Kaplan and David P. Norton— THE COMPLETE SUMMARYA Strategy Map Represents How the Organization Creates alPerspectiveLearning andGrowthPerspectiveProductivity StrategyImprove CostStructureIncrease AssetUtilizationQualityPriceOperations ManagementProcesses Supply Production Distribution Risk ManagementExpand RevenueOpportunitiesCustomer Value ct/Services Attributes Retention latory and SocialProcesses Opportunity ID Design/Develop R&D Portfolio Launch Environment Employment Safety and Health CommunityHuman CapitalInformation CapitalCultureLeadershipStrategy MapsA strategy describes how an organization can createsustained value for its shareholders, customers and communities. Most organizations have different methods ofcommunication, alignment and implementation, but theBalanced Scorecard (BSC) is an effective way for nonprofits and public-sector organizations to describestrategies for creating value. The BSC includes the lagging indicators of financial performance and customervalue proposition, and the leading indicators of internalprocesses as well as learning and growth.Measure With the Strategy MapThe strategy map is a visual framework of the causeand-effect relationships among the components of anorganization’s strategy, and it is used to integrate thefour perspectives of a BSC — financial, customer, internal, and learning and growth. It provides a uniform andconsistent way to describe strategy so the objectives andmeasures on the BSC can be established and managed.It illustrates the time-based dynamics of a strategy andthe relationships that link desired outcomes in the customer and financial perspectives to outstanding performance in critical internal processes. These processes inturn create and deliver the organization’s value proposition to targeted customers and promote productivityobjectives in the financial perspective. The strategy mapOrganization CapitalAlignmentTeamworkalso identifies the specific capabilities in the organization’s intangible assets that are required for deliveringexceptional performance in critical internal processes.The strategy map is based on several principles, including the following: Strategy balances the contradictory forces ofshort-term financial objectives for cost reduction andincreased productivity, and the long-term objective ofprofitable revenue growth. Strategy is based on a differentiated customer(continued on page 3)The authors: Robert S. Kaplan is the Marvin BowerProfessor of Leadership Development at Harvard BusinessSchool and chairman of the Balanced ScorecardCollaborative. David P. Norton is co-founder and presidentof the Balanced Scorecard Collaborative.Book Copyright 2004 by Harvard Business SchoolPublishing Corp. Summarized by permission of the publisher, Harvard Business School Press, 60 Harvard Way,Boston, MA 02163. 454 pages. 35.00. ISBN 1-59139134-2.Summary Copyright 2004 by Soundview ExecutiveBook Summaries. www.summary.com, 800-521-1227,610-558-9495.For Additional Information on the authors, go to:http://my.summary.comPublished by Soundview Executive Book Summaries (ISSN 0747-2196), P.O. Box 1053, Concordville, PA 19331USA, a division of Concentrated Knowledge Corporation. Published monthly. Subscriptions: 195 per year in U.S.,Canada & Mexico, and 275 to all other countries. Periodicals postage paid at Concordville, PA and additional offices.Postmaster: Send address changes to Soundview, P.O. Box 1053, Concordville, PA 19331. Copyright 2004 bySoundview Executive Book Summaries.Available formats: Summaries are available in print, audio and electronic formats. To subscribe, call us at1-800-521-1227 (1-610-558-9495 outside U.S. & Canada), or order on the Internet at www.summary.com.Multiple-subscription discounts and Corporate Site Licenses are also available.2EnhanceCustomer ValueInnovationProcessesCustomer ManagementProcesses Selection AcquisitionGrowth StrategyLong-TermShareholder ValueSoundview Executive Book Summaries SoundviewExecutive Book Summaries GREER MCPHADEN – Senior Contributing EditorDEBRA A. DEPRINZIO – Art and DesignCHRIS LAUER – Managing EditorCHRISTOPHER G. MURRAY – Editor-in-ChiefGEORGE Y. CLEMENT – Publisher

Strategy Maps — SUMMARYStrategy MapsManage Risk(continued from page 2)value proposition, because satisfying customers is thesource of sustainable value creation. Value is created through internal businessprocesses. Strategy maps and BSCs describe what theorganization hopes to achieve, that is, strategic themes. Strategy consists of simultaneous, complementary themes or clusters of internal processes that deliver benefits at different points in time. Strategic alignment determines the value ofintangible assets. The three components in the learningand growth perspective are human, information andorganization capital. Value-Creating ProcessesThere are a few processes that companies must focuson to deliver a differentiating value proposition and thatare most critical for enhancing productivity and maintaining an organization’s franchise to operate. Operations Management. Producing and delivering products and services to customers. Customer Management. Establishing and leveraging customer relationships. Innovation. Developing new products, services,processes and relationships. Regulatory and Social. Conforming to regulationsand societal expectations and building stronger communities.Executives practicing the art of strategy must identifythe critical few processes that are the most important forcreating and delivering their differentiating customervalue proposition.Operations Management ProcessesThere are four ways organizations can improve theiroperations management processes to deliver goods andservices:1. Develop and sustain supplier relationships. Thebest suppliers are low-cost, not just low-price. Lowerthe total cost of acquiring goods or services by: workingwith suppliers to achieve just-in-time capability; seekingtheir new ideas and suggestions; outsourcing; and establishing supplier partnerships to provide services directlyto customers.2. Produce products and services. Lower the cost ofproduction by continuously improving process quality,process responsiveness, fixed asset utilization, andworking capital efficiency.3. Distribute and deliver products and services tocustomers. Deliver responsively to customers, lower thecost to serve them, and enhance the quality of deliveryCompanies can manage risk by modifying operations. For example, Microsoft uses an operating policy of employing large numbers of temporary workers who can be laid off if business slows down.Disney built its major theme parks in areas whereweather is generally pleasant and predictable:Anaheim, Calif., and Orlando, Fla. This lowers thevolatility of theme park revenues due to weather conditions. Companies can also take operating actionsto reduce the risk that their products or services willbe made technologically obsolete by competitors orby employee actions that can damage their brandand company reputation.service.4. Manage risk. Do more than just avoid income andcash-flow fluctuations. Create shareholder value in waysthat investors cannot accomplish on their own. Reducecosts of financial distress, such as bankruptcy; moderatethe risk faced by important nondiversified investors;decrease taxes; reduce monitoring costs; and lower thecost of capital.Activity-based management (ABM) and total qualitymanagement (TQM) are two ways to help employeesmake fundamental improvements in operating processesby determining the cost of a process and then improvingit. The five steps of ABM are:1. Develop the business case.2. Establish priorities.3. Provide cost justification.4. Track the benefits.5. Measure performance for ongoing improvement.Strategy maps can provide significant value to companies using other quality programs in these four ways:1. They provide explicit and testable causal linkages between strategy and reality.2. They establish targets beyond existing best practices.3. They identify entirely new processes that arecritical for achieving strategic objectives.4. They set strategic priorities for process enhancements.Customer Management ProcessesIn the past, customer management focused on transactions — promoting and selling the company’s products.(continued on page 4)For Additional Information about Activity-Based Management,go to: http://my.summary.comSoundview Executive Book Summaries 3

Strategy Maps — SUMMARYValue-Creating Processes(continued from page 3)Building customer relationships was not a priority. Nowthat technology allows customers to launch their owntransactions, the balance of power has shifted to them.Customer management processes must help the company acquire, sustain and grow long-term, profitable relationships with targeted customers.Customer management must: Select customers. Identify attractive segments, crafta value proposition to appeal to those segments, andcreate a brand image that will attract those segments tothe company’s products and services. Acquire customers. Communicate the company’svalue proposition to the market, secure prospects, convert them to customers, and build dealer relationships. Retain customers. Ensure quality, create valueadded partnerships, correct problems, and transform customers into highly satisfied raving fans. Grow relationships with customers. Get to knowcustomers, build relationships with them, and increasethe company’s share in customers’ purchasing activity.Customer management processes focus on the relationship and image dimensions of the basic customervalue proposition. Effectively acquiring customersimproves the customer perspective of the strategy map.The effects of the financial perspective of the strategycome primarily through related revenue growth.Innovation Through OperationsIdentifying the specific functionality of a product orservice that is of interest to the customer and beingfirst-to-market are both important objectives for theinnovation process to provide customers with thevalue proposition. For example, continuous reductionsin the size of the basic memory or processing chip insemiconductors generate advantages in speed andfunctionality of the device. And for innovative companies, being six months late in product innovationcould be more costly than a 20 percent overrun. Athird customer objective is to innovate by extendingexisting or new products into new markets. Honda’sexcellence in engine performance was originally developed for motorcycles and cars. Now the company hasentered other segments such as lawnmowers andbackup engines for utilities. Canon’s product leadership in optics for cameras has been leveraged intoproducts for printers, copiers and medical electronics.E-Bay expanded its consumer auction capability into apowerful tool for selling used and reconditioned commercial equipment.4Financial measures include sales from new productsand revenue mix versus target. Learning and growthlinkages require strong support from information technology, such as databases; employee competencies, suchas customer marketing and service; and a customer-centric culture and climate.Innovation ProcessesMaintaining competitive advantage requires continualinnovation to drive customer acquisition and growth,margin enhancement, and customer loyalty. Despite itsimportance, innovation is often overlooked in favor ofother management processes.Managing innovation should include four importantprocesses:1. Identify opportunities for new products and services. Anticipate future customer needs by consultingexternal sources and customers. Develop new, moreeffective, or safer products to meet their needs.2. Manage the research and development portfolio.Actively manage the product/offer portfolio thatincludes a mix of different kinds of projects: new science and technology; entirely new products; the nextgeneration of existing products; enhanced features forspecific market segments; and alliance projects throughacquisitions, licensing or subcontracting.3. Design and develop new products and services.Use a specific development process with explicit goalsto bring new concepts to market. Develop a concept,plan a product, and engage in detailed product andprocess engineering. Manage the project portfolio,reduce development cycle time, and manage development cycle cost.4. Bring new products and services to market.When new products are developed, manage a rapidlaunch, effectively produce the new products, and effectively market, distribute and sell the new products.Excellent innovation processes affect different areas ofthe strategy map. They offer customers a value proposition by supplying specific performance attributes in atimely manner and extending existing or new productsinto new markets. The financial aspect of the strategymap achieves revenue growth and enhanced marginsfrom innovative products and services that offer distinctadvantages over competitor products. For innovation, thelearning and growth perspective of organizations needsexpertise in the underlying science and technology fornew products; a high-level information technology to create and deliver products; teamwork both within the company and with external idea sources; and a culture that(continued on page 5)For Additional Information on structured innovation processes,go to: http://my.summary.comSoundview Executive Book Summaries

Strategy Maps — SUMMARYValue-Creating ProcessesTriple Bottom-Line Strategy Map(continued from page 4)emphasizes innovation, disruption and change.Regulatory and Social ProcessesAt a minimum, companies must comply with nationaland local regulations on the environment, employeehealth and safety, and hiring and employer practices toavoid shutdowns or litigation. They should also strive toenhance their reputations among customers, investors,their community, and potential and current employees.Be as rigorous in assessing returns from communityinvestments as other investments.1. Environment. Because of extensive regulation,organizations are forced to consider issues like energyand resource consumption, water emissions, solid wasteproduction and disposal, and aggregate environmentalmeasures. To leverage their environmental capabilitiesto create shareholder value, organizations reduce costswith waste management, differentiate their products byoffering environmentally friendly products, managetheir competitors by creating voluntary standards, redefine their markets with recycling programs, and managerisk by providing their people with better information.2. Safety and health performance. Different measures include Occupational Safety and HealthAdministration (OSHA) requirements, lost workdays,accidents and illnesses per hours worked, off-the-jobinjuries, or employee exposures to hazardous compounds. Determine what makes the most sense to yourorganization given your strategy and other processes.3. Employment practices. Much of the quantitativereporting about employment practices focuses onachieving employee diversity. Companies should notjust have employee practices on their BSC to complywith regulatory reporting standards, but to explicitlydrive the strategy toward enhancing shareholder value.4. Community investment. This can be achievedthrough employee volunteerism, corporate foundations,and other philanthropic efforts. Though many companies report on the investments they make in communitybased organizations, there are no measures for evaluating the outcomes. Executives should demand tangiblereturns from community-based programs as they wouldfrom any other investment. Intangible AssetsIntangible assets are invaluable to sustainable valuecreation, but their value derives from their interrelationand cannot be measured independently. Their soft naturemakes measurement more subjective than financial measurements of organizational performance. The learningAmanco is a company in Latin America that produces and markets plastic pipes and fittings for fluidtransportation. Its mission is to profitably produceand sell complete, innovative, world-class solutionsfor the transportation and control of fluids whileoperating in a framework of ethics, eco-efficiencyand social responsibility. In 2002, the companyrevised an earlier sustainability scorecard to alignbetter with the BSC framework.The company’s strategy map shows Amanco’scommitment to triple bottom-line performance:1.Create economic value sustainably.2.Generate value through a system of corporatesocial responsibility.3.Generate value through environmental management.The financial, customer, process and technologydimensions support this strategy with specific objectives and targets: 10 percent annual sales increases;measuring on-time delivery; adding a screeningphase to product development to determine healthand environmental impact; using e-business to create a deeper knowledge of customer needs; andmeasuring job satisfaction.Amanco adds a fifth dimension: environmentaland social. The environmental performance objectives are to reduce per-unit inputs and wastes fromproducts and processes by measuring per-unit energy and water consumption and the waste and scrapof raw materials. Its social impacts objectives relateto community development projects throughoutLatin America; each operating company must implement at least one project with a nongovernmentalorganization (NGO) in a local communit

Converting Intangible Assets Into Tangible Outcomes STRATEGY MAPS THE SUMMARY IN BRIEF More than 75 percent of the average company’s market value comes from intangible assets that traditional metrics don’t measure. The Balanced Scorecard is a revolutionary performance measurement system that allows organizations to quantify critical .

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