Using systems thinking to enhance strategy maps

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  • Using systems thinking toenhance strategy maps

    Martin KuncSchool of Business, University of Adolfo Ibanez, Santiago, Chile

    Abstract

    Purpose This paper aims to propose a method to assist organisations to develop their causalmodels, as well as to understand them, and to propose systems thinking as a method to achieve theseobjectives.

    Design/methodology/approach The paper starts with a review of the literature related to theconcerns existing with respect to strategy maps and the interrelationships between measures. Then itexplains the benefits of systems thinking and causal loop diagrams. Finally, the paper presents theresults obtained from a group of 32 students who took a course in strategic control systems and usedsystems thinking to design a performance measurement system for their businesses.

    Findings The number of concepts included in students causal loop diagrams averages 16, whichare in line with the number of measures suggested in the Balanced Scorecard literature, but only 48 percent of concepts were related to the four perspectives suggested in the Balanced Scorecardmethodology. Few students acknowledged the existence of time delays in the interrelationships.

    Research limitations/implications While the sample is statistically significant, it represents theresults of one course.

    Practical implications The use of systems thinking and causal loops diagrams simplifies thedesign of a Balanced Scorecard and improves the alignment of the organisation with the performancemeasurement system.

    Originality/value While scholars have criticised the interrelationships between measures in theBalanced Scorecard, few have suggested solutions to this issue. The paper presents the application of awell-known tool to improve the processes of designing and understanding the interrelationshipsbetween measures in the Balanced Scorecard.

    Keywords Balanced scorecard, Performance management, Strategic management,Cause and effect analysis, Business performance

    Paper type Research paper

    IntroductionIn recent years, new strategic control systems that combine a set of financial andnon-financial measures have become widely available for managers (Nrreklit, 2000).The most well known strategic control system is the Balanced Scorecard (Kaplan andNorton, 1996a). The Balanced Scorecard aims to translate a business units mission andstrategy into tangible objectives and measures. The measures represent a balancebetween outcome measures the financial performance of the organisation and themeasures that will drive future performance such as customer satisfaction, criticalbusiness processes, innovation, learning and growth (Kaplan and Norton, 1996a). TheBalanced Scorecard has followed a process of evolution from its beginnings as aperformance measurement tool, which looked beyond the traditional financialmeasures, to a strategic management and control system (Neely et al., 2003; Marr andSchiuma, 2003; Lawrie and Cobbold, 2004; Bible et al., 2006). Early on, a navigationmetaphor was used to illustrate the need for additional performance measures (Kaplan

    The current issue and full text archive of this journal is available at

    www.emeraldinsight.com/0025-1747.htm

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    Received November 2007Revised February 2008

    Accepted February 2008

    Management DecisionVol. 46 No. 5, 2008

    pp. 761-778q Emerald Group Publishing Limited

    0025-1747DOI 10.1108/00251740810873752

  • and Norton, 1996a, p. 1). Over time, the navigation metaphor expanded to include theprocess of strategic mapping (Kaplan and Norton, 2004) and decisions about where tolead a firm (Kaplan and Norton, 2006). To summarise, the Balanced Scorecard intendsto be a feed-forward control system as it links outcome measures and performancedrivers in cause-and-effect relationships (Nrreklit, 2000).

    However, the Balanced Scorecard has received some criticisms related to theinterrelationships between measures (Nrreklit, 2000; Marr and Schiuma, 2003; Lawrieand Cobbold, 2004). In a recent review of performance measurement systems, scholarshave recommended that greater clarity in the linkages between different dimensions ofthe organisational performance should become an important issue during the processof designing performance measurement systems (Neely et al., 2003). For example, Ittnerand Larcker (2000, p. 3) suggest the lack of an explicit casual model of the relationsbetween measures contributes to difficulties in evaluating the relative importance ofperformance measures, and they add without knowing the size and timing ofassociations among measures, companies find it difficult to make decisions or measuresuccess based on them. As organisations increasingly use causal models like strategicmaps for the basis of their performance measurement systems (Franco-Santos andBourne, 2005), methodologies already established to develop causal models can bemore widely employed to help in the design phase of performance measurementsystems.

    This paper aims to contribute with a method to assist organisations to develop theircausal models (Othman, 2006) as well as understanding them (Franco and Bourne,2003). In this paper, systems thinking (Senge, 1999) is proposed as a method to achievethese objectives. The use of systems thinking, as a methodology to overcome some ofthe criticisms, arises from the authors experience in teaching strategic control systemscourses in executive MBA programmes. The paper is organised as follows: first areview of the criticisms of the Balanced Scorecard is introduced and, later on, anintroduction to systems thinking and its role on improving the design andunderstanding of Balanced Scorecards. Then the results of the application of systemsthinking in class are shown before concluding with some remarks.

    The role of causal models in performance measurement systemsWhen a performance outcome is wrong, managers should clearly know where theerrors are coming from so they can intervene in leveraging points that improve theperformance of the organisation at the lowest possible cost. A relevant notionemployed in the previous statement is that of interconnectedness between processes,areas and functions in the organisation: the belief that all different aspects andfunctions of the organisation are interrelated and that one cannot improve one area, orthe whole, without influencing other areas as well (Porter, 1996). In other words, theBalanced Scorecard should be robust enough to assist the implementation of strategythrough a reduction of the causal ambiguity between actions and results (Marr, 2005;Marr and Schiuma, 2003).

    In order to understand how long-term, non-financial objectives of interconnectedprocesses, areas or functions in the organisation translate into value, Kaplan andNorton developed the idea of mapping causal relationships between strategicobjectives and their measures into a strategy map in chapter seven of their first book(Kaplan and Norton, 1996a). Later on Kaplan and Norton emphasised this idea in a

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  • later book Strategy Maps: Converting Intangible Assets into Tangible Outcomes(Kaplan and Norton, 2004). Recent studies have found that about half of the firmsemploying formal performance measurement systems visualised causal links betweenmeasures using cause-and-effect diagrams (Marr, 2005). Research has also shown firmsusing causal models had higher performance over time than companies than did notuse them (Marr, 2005; Othman, 2006). However, only half of the companies with formalperformance measurement systems have implemented and tested causal relationshipsbetween measures (Marr, 2005); and other firms implemented strategy maps thatsimply resembled process maps without any connection to firms strategy andcompetitive advantages (Wilkes, 2005).

    Strategy maps formalise managers business models as a step for creating a testablestrategy (Franco-Santos and Bourne, 2005; Merchant, 2007). Therefore, these type ofcontrol systems can be used not only to cascade down performance metrics toimplement the strategy but also to provide with the necessary information to verify thecontent and validity of the actual strategy (Franco-Santos et al., 2007). The implicitbelief with the development of causal models for performance measurement is that,from the thousands of observable variables and their interrelationships, only somecausal linkages will be dominant in determining overall performance of the firm. In anycircumstance, performance measures should reflect business reality, adequacy andpracticality (Neely et al., 2003).

    Banker et al. (2004) suggest that when managers understand the linkages betweenperformance measures and strategic objectives, they tend to use more strategicallylinked performance measures for evaluating the performance of employees thancommon financial measures. Moreover, employees tend to use more strategicallylinked performance measures to guide their decisions and actions (Banker et al., 2004).The use of performance measurement system becomes more interactive inhigh-performing businesses as managers communicate and discuss performanceboth at formal meetings and at every opportunity (Bourne et al., 2005). Bothmanagers and employees will benefit from the adoption of well developed causal mapssupporting the Balanced Scorecard (Banker et al., 2004), and the performance of thefirm will improve through the development of appropriate behaviours in theorganisation (Franco-Santos and Bourne, 2005).

    Causal models and organisational learningAn adequate causal model helps members of organisations to understand howobjectives can be achieved (Kaplan and Norton, 1996a) as well as to evaluateindividuals performance based on strategically linked measures rather than commonfinancial measures (Banker et al., 2004). In other words, strategic control systemsespoused with causal maps can enhance learning processes in the organisation.

    After implementing a Balanced Scorecard, managers can develop a strategicfeedback system to test, validate, and modify the hypotheses embedded in a strategy(Kaplan and Norton, 1996b). These hypotheses are related to magnitude and speed ofresponse between changes in performance drivers and the associated outcomemeasures. Initially these impacts must be done subjectively and qualitatively but it is astart until the organisation gets enough data to conduct periodic strategic reviews(Kaplan and Norton, 1996a). These reviews should seek to understand the past in orderto learn about possible futures. In that sense, Kaplan and Norton (1996a) said:

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  • Whether managers reaffirm the existing strategy but adjust their judgments about the speedand magnitude of the cause-and-effect relationships, or the managers adopt a modified orentirely new strategy, the scorecard will have successfully stimulated a strategic(double-loop) learning process among key executives about the viability and validity oftheir strategy (p. 269).

    This aspect is important since Rich (2007) found that managers did not rate theimportance of individual performance measures equally and the decision outcomeswere not always related to the factors which managers thought were important at thebeginning of the process of designing a Balanced Scorecard. This aspect is alsosignificant when different managers do not weight similarly the information employedin strategic decisions even though they face similar problems and have access tosimilar information (Kunc and Morecroft, 2007).

    The time dimension in the Balanced ScorecardThe development of the scorecard should also describe the temporal relationship of thestrategy in order to assist organisations in understanding how decisions made todaywill affect future outcomes (Kaplan and Norton, 1996a, p. 160). Without knowing thesize and timing of associations among measures, companies find it difficult to makedecisions or measure success based on them (Ittner and Larcker, 2000). However, it hasreceived criticism because the temporal link between the variables is not clear(Nrreklit, 2000). For example, the learning and growth perspective suggest trainingand other activities to improve the performance of business processes and, later on, thevalue added to customers, but it does not explicitly portrays the temporal horizonbefore results can be seen.

    A cognitive view of performance measurement systems and systemsthinkingNrreklit (2000) suggests that relationships between the indicators of the BalancedScorecard seem to be of finality rather than causality and this situation invalidates theconcept of Balanced Scorecard. A finality relationship occurs when human actions andviews are related to each other or, in other words, the actions are performed becausethey are adapted to views of a person and consequently are result of managerscognition (Nrreklit, 2000). However, the author disagrees with Nrreklit (2000) that theBalanced Scorecard may not be valid if finality relationships tie the performancemeasures in the balanced scorecard.

    The organisational outcomes in terms of firm performance and competitiveadvantage are, in a philosophical yet practical sense, reflections of managers valuesand cognitive biases. In other words, firms can be viewed as top management mentalmodels (an interpretist view of business) transformed into real organisations(a functional view of business) (Kunc and Morecroft, 2008). Kaplan and Norton (1996b,p. 17) affirm that a properly constructed Balanced Scorecard should articulate thetheory of the business. In other words, the Balanced Scorecard should reflect thedominant logic (Prahalad and Bettis, 1986) of the top management team since itrepresents the top management teams conceptualisation of the business and it is usedas an administrative tool to accomplish managers goals and make decisions to achievethis conceptualisation. However, managerial cognition has to be tied up to the reality ofcompanies, and reality is determined by accounting data and financial calculus

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  • (Nrreklit, 2000) as well as resources (Warren, 2002). Thus, even performance measuresthat reflect managerial cognition should have a connection to financial information andreflect business reality (Neely et al., 2003).

    The Balanced Scorecard can be an important representation of the dominant logicexisting in the organisation, and, as such, it can be considered as a key tool for strategiccontrol and learning (Kaplan and Norton, 1996b) but it needs different assumptionsand tools to construct it. These tools should consider performance indicators(especially leading indicators) and their relationships as simply representations of topmanagement team dominant logic, or theories in use about the business, and theyshould not impose frameworks that restrict or encapsulate managers presentation oftheir strategy, such as the four perspectives suggested in the Balanced Scorecard. Inother words, the development of performance measurement systems should start fromwhat is important to measure for the managers, and what is important to measure isdete...

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