On Strategy as a Hypothesis
How the strategy-focused organization use the Balanced Scorecard
by Mr. M'Naouar Hamdi, Executive Manager

« The capacity to implement a strategy is more important than the strategy itself  »! This is nothing new, nor is it a brainwave; indeed, it is the result of a study involving hundreds of executives and decision-makers. Other studies concluded that the problem is coming from the bad execution and not from a bad strategy, and only 10% of the strategies correctly formulated were applied successfully.

Strategy couldn't be achieved if not understood, and it couldn't be understood if not described.

A strategy must be implemented at all levels of the organisation; it must belong in the core of the management system.

In today's knowledge economy, sustainable value is made by the development of immaterial assets, such as the skills and knowledge of the staff, the information technology which backs up the staff and connects the firm with its customers and suppliers, and an enterprise climate that is conducive to innovation, problem solving and improvement. Each of these immaterial assets may contribute in the creation of value.

In an economy characterised by material assets, financial indicators were adapted to control stocks, factories and materials, on the organisation's balances.In today's economy, where the immaterial assets are the main source of competitive advantages; this needs other tools to describe the assets based on knowledge and strategiy creating the added value that these assets could generate.

Several factors cause the financial indicators-such as they are used in the traditional management control systems of the industrial age-to fall short of measuring these assets and connecting them to the creation of value. These factors consist in the fact that:

1. Value is indirect
2. Value depends on the context
3. Value is incremental
4. The assets are inter-related.

Value is not to be found in any one immaterial asset in particular. It is generated through the creation of a whole set of assets accompanied by a strategy that inter-connects them. The Balanced Scorecard supplies a new framework for the description of a given strategy by connecting the immaterial and material assets of value-generating activities. It describes how immaterial assets may be mobilised and combined with other assets, both material and immaterial, to yield value offers that are value-generating for the customer.

The concept of strategic map remains on a logical structure which defines the strategy by specifying the relations between the shareholders, customers, operating processes and skills. The strategic map of a balanced scorecard explains the hypotheses of the strategy. A strategic map for a balanced scorecard is a generic structure for the description of a strategy. Indeed, strategic maps help to see the strategy in a consistent, integrated and systemic way. Each indicator of the balanced scorecard is integrated within a cause and effect chain relationship which connects the strategy's desired results with the elements that generate the strategic results.

The strategic map describes the process by which the immaterial assets are turned into material results on the financial line or the customer line. Strategic maps provide a basis for the management system which allows efficient and rapid implementation of the strategy.

The balanced scorecard makes it possible to reach beyond the confines of exclusively financial measurement systems by clearly using the value-generation process and the critical roles of immaterial assets. The prospective performance chart describes the various indirect links necessary for bringing the improvements introduced in the immaterial assets of a given organisation-the ultimate enablers of knowledge-based strategies-to bear on the flesh and blood customer and to the financial results of the strategy. The value offer to the client describes the context which explains that the immaterial assets are value-generating. The strategic topics give the « recipe » for combining the immaterial ingredients of skills, technology and working climate with the internal processes in order to yield concrete reset, such as customer loyalty, and turnover and profitability increase.

Strategy is a stage within a continuum

Strategy is not an isolated management process. It belongs in a continuum which starts with the mission of the organisation, such as illustrated by the figure further down ( Fig. : Translating a mission into desired results)

Strategy is a hypothesis

The strategy derives its essence from the way we choose to undertake the activities in a manner different from that of our competitors, in such a way as to make a unique value offer.

Porter describes the foundations of the strategy as the activities in which the organisation chooses to excel: «  At the end of the day, all differences in cost or in price between companies derive from hundreds of activities necessary to create, produce, sell and deliver their products and services... The differentiation results at once from the activities and the manner in which they are undertaken . »

The process of designing the balanced scorecard rests on the assumption that the strategy is a set of hypotheses. Besides, strategic hypotheses imply an identification of the activities which induce (prospective indicators) the desired results (monitoring indicators). The recipe according to which the strategy may be implemented is that each person in the organisation should clearly understand the underlying hypotheses, bring his/her resources in line with these hypotheses and adapt them according to the needs in real time.

The balanced scorecard defines the set of long term objectives and activities, i.e. the enablers , which will make the difference between the firm and its competitors and generate value for both the customer and the shareholder on the long term, i.e. the results .

The process is top-down. It starts with the definition of the point of view of the shareholder and of the customer: What are the financial objectives for growth and productivity? What are the main growth sources? Once the financial objectives have been defined, the questions to be addressed next are: « Who are the target customers that will generate an increase in turnover and a more profitable composition of the products and services sold? What are the objectives and how to measure their satisfaction? » . The customer line should also include the value offer which describes how the firm differs from others in attracting the target customers, build their loyalty and strengthen its relationships with them.

The financial objectives and those of the customers are desired results , but they do not specify how such results are to be achieved. It is the internal processes which define the activities necessary to create the desired value offer and differentiation for the customer, as well as the desired financial result. The « value offer » to the customer belongs in the core of any strategy for a given firm; it is the centrepiece where the internal processes have to be connected with the best results to the customer. The value offer describes the unique composition of product, price, service, relationship and image which the firm ensures to its customers. The value offer defines the market segments targeted by the strategy and the way in which the firm will differ from its competitors with regard to the targeted segments. A clearly formulated value offer states the ultimate objective on which the strategic concepts (such as product superiority, client intimacy, and operational excellence) of the main internal processes are focused. This is one of the key stages of the balanced scorecard development process.

The fourth axis, i.e. that of learning and development , is based on the recognition that the capacity to conduct internal processes in new ways and in a manner different from that of the competitors depends on the infrastructure of the firm: the skills, capacity and knowledge of the staff; the information technology which they use; and the climate in which they work.

The fact that the learning and development axis should be placed at the bottom end of the diagram of the balanced scorecard cannot by any means be considered as diminishing its importance. Quite the contrary, this axis represents the foundation on which all that is above does rest.

When the strategic map is properly designed, it provides a full description of the strategy and of the logic according to which the strategy will be implemented. It also makes it possible to check whether the organisation's prospective performance chart indicators correspond to its strategy.

Performing organisations are using the balanced scorecard in a such a way they ensure that the hole will be much more than the sum of the parts.

Organisations that have already adopted the balanced scorecard with success emphasize two key words: consistency and convergence . In order to ensure these two concepts, such « strategy- focused organizations » have followed a recurrent scheme, though differing from one organisation to another. Such a scheme comprises five principles (the principles of a strategy- focused organization):

• Translate the strategy into operational terms (such as described above);
• Bring the organisation in line with the strategy, i.e. ensure consistency;
• Make the strategy the daily business of everybody;
• Turn the strategy into a continuous process;
• Effect change via the leadership of the executives.

In order to lead the programme of any balanced scorecard to a successful conclusion, it is indispensable to recognise that this is not a « measurement » system; it is rather a project of change.