Strategy maps as management control systems
Strategy maps model does not only include a system of key performance indicators in a certain format, but also characterizes conditions for its effective use. Strategy map concept becomes in such a way a part of strategic management control system and at the same time a very clear answer to avalanche of criticism towards traditional managerial control systems. It would be interesting to compare Norton and Kaplan model with analogous systems. With the emergence of strategy maps concept the system of managerial control has broaden. It would be wrong to say that financial indicators have lost their significance, but now they meet demands of the system that contain both financial and nonfinancial key performance indicators.
From financial to strategic control
The early 1990s faced severe criticism of the traditional managerial control system because of excessive focus on financial indicators. Control over financial indicators was not effective anymore because of changes in the global economy, appearance of new business ideas, intensification of competition and globalization of markets.
In the 20th century the traditional system of managerial control was functioning under conditions of mature markets and technologies that were changing very slowly. There is a joke that traditional system of managerial control has stopped developing in around 1925. By that time its key instruments which are also used nowadays had formed: budgeting, cost calculating using “standard cost” method, transfer pricing, DuPont model etc. Managerial control was mainly about maintaining of company efficient functioning. As a result managers were focused on expenses and ways to decrease them, while sales growth was not given due attention.
But times have changed, new technologies have appeared, and thus business acquired different demands. Financial indicators represented consequences of previously adopted decisions and they could not adequately reflect processes of long-term strategic development of business. Many managers came to understand that in order to maintain competitive advantage in the market it is imperative to have more complete information on different aspects of running business. That’s why in early 1980s a serious of new concepts and instruments of managerial control appeared – total quality management, business process redesign, lean production, Six Sigma and a number of others.
New methods rarely gave initiative to accounting or financial control departments. The goals of new managerial tools often conflicted with goals of traditional managerial systems. The strategy based on independence of personnel in decision-making does not harmonize with short-term planning which is predetermined by high priority of financial indicators. As a result, functions of managerial control systems have broadened with control of external factors and storage of strategic information which makes correct forecast quite possible.
Criticism of traditional managerial control systems
Modern business environment has new demands to managerial control systems used by any company. In the early 1990s the criticism of traditional managerial control systems has intensified. Of course, this criticism was supported by a number of reasons, namely:
- Unreliability of information for decision making. Information on expenses, sales volumes and profitability is the key information managers use in decision making. Traditional financial indicators reflect results for the past periods. Such information may lead to decision-making which will not meet of requirements of strategic goals.
- Inability to take into account modern requirements for business organization and strategy development. Goals and tasks of financial control conflict with tasks of strategic planning. For instance, based on information of financial control company management may make the decision to cut expenses on development and innovation, personnel education, cancellation of share emission, and delay investment decisions. As a result the key problem is to match short-and long-term goals.
- Decisions are based on information obtained in the accounting system. Managerial control is performed based on accounting information which complies with legal requirements. Shareholders always want to have information on company performance in order to consider alternative investment options. Financial indicators only do not give full and adequate picture of business development.
- Distorted information on expenses and control over investments. Traditional control over expenses did not include analysis of reasons for emergence of such expenses. It only registered the amount and where such expenses appeared. Nowadays, traditional methods of sharing expenses when in direct expenses are allocated in proportion to direct expenses is out of date. Ties between direct and indirect expenses have changed as a result of increase in expenses for development and innovation, synergy effect, simplification of production processes schemes. Production of different product types in the same or similar production lines makes it difficult to calculate profitability of every product. Moreover, sometimes it is impossible to calculate full cost for development of a product in the long term. It is imperative to develop a new method to share expenses other than traditional method of expenses deduction, like well-known ABC method.
- Provision of personnel with incomplete information. Financial indicators will not tell much to most employees in the company as it is very difficult for them to understand relation between their job and figures in annual or quarter reports. Financial indicators are too difficult to understand and this fact slows down decision-making and performing of urgent countermeasures, if necessary.
- Lack of attention to business environment in which company operates. Traditional system of financial indicators does not reflect possible conduct of competitors and customers and future, and consequently it cannot warn the company on possible changes in the industry or business environment. Key financial indicators used in most of such systems are mostly focused on internal programs of the company. They are designed to compare current indicators with the results obtained during previous periods. That’s why using these indicators, it is very difficult to compare co performance, strengths and weaknesses to key competitors in the market.
- Orientation on current performance. Leaders in the market prefer monthly and quarterly reports, which leads to making of short-term investment decisions. Besides, focus on long-term perspective forces managers to manipulate financial indicators to make current conditions of the company look better than they really are. As a result, false managerial decisions are made.
Strategic maps: is it about registration of facts or strategic analysis?
Balanced Scorecard. Both words in the name of this extremely popular strategic management and performance evaluation tool are equally important. The word “balance” stresses the importance of using both financial and non financial indicators. In other words financial indicators are balanced with nonfinancial ones. As a result, the company gets the most complete information. But what about the word scorecard? Is it like score in a game? Well, this is partially so. Balanced Scorecard stores information on company performance. But still, it would be wrong to consider Balanced Scorecard and strategy maps as a form to save performance results. Strategy maps make it possible to forecast certain conditions and future results. Strategy map is an illustration to the company business plans. Strategy maps characterize goals and tasks to be implemented by company departments. That is why strategy maps are often used as a kind of alternative to budget formation (moreover, strategy maps influence the entire process of budget formation). Strategy maps help set the right balance between short- and long-term goals, agree strategic development plans of different department, branches and business units of the company. Very often the contents of strategy maps caused lively discussions. As known, usually discussions result in adoption of very creative decisions and ideas. That’s why the strategy map only looks like a scorecard the stores information this is an effective strategic management tool.
Understanding of business nature
The key task of strategy maps is to give the most complete characteristic of all key success factors for the company. Although financial indicators are extremely important for the company operating in market environment, non-financial indicators are equally important as they can warn the company at the early stages on non-favorable or dangerous factors which are unreachable for financial indicators. The company management must take these factors into account and develop prompt response actions.
Until recently most companies applied the concept of strategy maps mostly in the internal environment. However, experience in evaluation of customer relations and improvement of internal business processes would be quite helpful in relations with shareholders.
Not everybody would agree that the company strategy and its successful implementation could be pictured with the help of a few indicators. It is so much easier to set a task and organize control system over its implementation. In such a way, managers get much freedom. It is also possible to improve the system of financial indicators in such a way so that they correctly reflect company success in attraction of new customers, improvement of internal business processes, development of new products etc.
At the same time, implementation of strategy maps may have some negative effects. A strict control system will be built which will change managerial style. Top management will be constantly issuing orders and instructions to subordinate managerial levels. But when all employees in the company understand benefits of using strategy maps and their own contribution to implementation of strategic goals, such a drawback will not matter at all!
Summary
When properly implemented, Balanced Scorecard and strategy maps with have a dual effect. On the one hand this is a very reliable system of managerial control and accounting. The scorecard system will store information on company performance at a given moment as well as track changes over certain periods of time. But on the other hand, strategy maps will encourage company personnel to generate productive and creative ideas. For instance, an ordinary manager who understands his contribution to implementation of strategic goals for the company is more likely to offer some things that will change company performance for the better. It is not a secret that discussions as a rule end in adoption of interesting and compromising decisions.
It is imperative to get personnel involved in discussion of strategic maps and the process of KPI development. Sometimes, front line employees know much more about company regular customers than top-managers who have never seen these customers. Strategy maps concept makes it possible to broaden managerial control system and acquire new functions. Company personnel needs to understand strategic goals and ways of their implementation, otherwise Balanced Scorecard and strategy maps will remain just another control system which will cause personnel anxiety and irritation.
