CORPORATE STRATEGY DESIGN PROCESS

• The task of developing a comprehensive strategy for a firm that integrates the finance, marketing, operations functions is complex.

• Robert Kaplan and David Norton in their seminal paper “Strategy Focused Organization” have developed a generic strategic map template.

• This template is a generic one which can be customized to suit any firm.

• And Norton claim that the template helps executives teams to articulate their strategies and dramatically improves the quality of their insights.

• The template facilitates great precision in defining the customer value proposition and increases awareness that internal processes, competencies, and technologies must be linked to that value proposition.

• The purpose of the template is to foster a “cause-effect mentality” that encourages more innovative approaches to strategy implementation.

• The template is also useful to analyze or reverse-engineer an existing strategy.

• Starting with the structure of the template, you should be able to reverse the logic and deduce the current strategy.

Financial Perspective

• Whether companies use the return on investment (ROI) or return on capital employed (ROCE) or some other value-based metric as the high-level financial objective, they have two basic strategies for driving financial performance:1. Revenue growth2. Productivity

• The revenue growth strategy has two components:

1. Build the franchise (N)a) New productsb) New marketsc) New customers

2. Increase the customer value (P, n,𝜂)• Work with existing customers to expand their

relationship with the company. This component focuses on processes that integrate the firm’s systems with the customer’s to make the process more efficient.

• The productivity strategy features the efficient execution of operational activities (c ) in support of existing customers.

• Productivity strategies focus on cost and efficiency.

• The productivity strategy has two components:1. Improve the cost structure

a) Lower direct costb) Lower indirect costsc) Share common resources

2. Improve asset utilization (Turnover)• Reduce the working capital and fixed capital needed

to support a given level of business by more efficient utilization, more careful acquisition, or disposal of part of current asset and fixed asset base.

• By increasing the turnover (cycles), we can reduce the working capital and fixed asset requirements.

A crude exampleWorking capital

Level of business

Bread-maker 1 10 kg of flour Uses household equipment

Makes 250 loafs of bread and sells locally ( x 4 times a day)

Bread-maker 2 50 kg of flour Uses a machine

Makes 1000 loafs of bread and sells in town in a day.

• The productivity strategy generally yields results sooner than the growth strategy.

• Kaplan and Norton stress a balanced approach to ensure that cost and asset reduction do not compromise a company’s growth opportunities.

• Kaplan and Norton argue that companies that are in early-stage start-up mode see opportunities for rapid growth will emphasize objectives from the revenue growth side. Cost and productivity would be less emphasized as these organizations spend heavily to develop and introduce new products/services and to extend to new markets.

• Companies in the mature end of the their life cycles 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 the revenue growth and from cost reduction and productivity.

The Customer Perspective

• The customer perspective is the heart of strategy and defines how growth will be achieved.

• Customers are the engine of growth.• The value proposition defines the specific

strategies to compete for new customers or an increased share of existing customer business.

• A clear definition of this value proposition is the most important single step in the development of a strategy map.

• Value proposition is the bundle of benefits.

• The value proposition is the device by which a company differentiates itself in the marketplace.

• The three different ways to differentiate:1. Product leadership 2. Customer intimacy3. Operational efficiency

• Operationally excellent companies deliver a combination of quality (U+), Price (C-), and ease of purchase that no one else can match.

• Successful companies excel at one these three dimensions of value, while maintaining threshold standards on the other two.

• Example: HDFC Bank

Internal Perspective

• The internal perspective defines the business processes and the specific activities the organization must master to support customer value proposition.

• The activities of an organization are embedded in the internal business processes that comprise the value chain.

• Kaplan and Norton’s template segments the value chain into four sets of business processes. 1. Product leadership2. Customer intimacy3. Operational excellence4. Regulatory and environmental considerations

• A product leadership would require a leading-edge innovation process that creates new products and best-in-class functionality and bring them to market rapidly.

• A customer intimacy strategy requires excellent customer management processes such as relationship management and solution development.• A strategy for operational excellence

emphasizes cost, quality, 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-added customer relationships but choose an internal business process that focuses 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.

The Learning and Growth Perspective

• The learning and growth perspective defines the intangible assets needed to enable activities and customer relationships to be conducted at the highest levels of performance.

• There are three principal categories:1. Strategic competencies2. Strategic technologies3. Climate for action

• Strategic competencies are the strategic skills and knowledge required by the workforce to support strategy.

• Strategic technologies are the materials and process technologies, information systems, databases, tools, and network required to support strategy.

• Climate for action provides the cultural shifts needed to motivate, empower, and align the workforce behind the strategy.