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Best Business Books 2004: Strategy

Communities of customers can enhance the experience of each customer, not just through product reviews and rankings, but by performing applications engineering. For example, a customer of Lego Mindstorms Robotics Invention System (a kit including a microprocessor to create toy robots) developed a new unauthorized operating system for the microprocessor and made it available to other customers over the Internet.

Most fundamentally, communities of customers can help shape the evolution of a company’s product lines and its entire business. EBay CEO Meg Whitman embraces the suggestions of the site’s communities of buyers and sellers, who exchange an estimated 200,000 messages a week concerning tips, problems, and possible site improvements.

Co-creation requires major changes in operations. Marketing, for example, must be organized with several “experience gateways”: one for customers interested in extensive help or involvement, another for users who want only a simple transaction, possibly one for users willing to purchase the product over the Internet, and a different gateway for users who want to touch the product or interact with a human being. Operations must be more flexible, capable of providing each customer with a consistently high-quality experience without a significant increase in costs. Management of risk is more important and more difficult, since customers are part of the experience of other customers.

One warning about The Future of Competition: It describes ideas that are still a work in progress. The ever-changing frameworks, the jargon, and the lack of specific guidance about what a company should do may frustrate readers. But it’s a valuable book, we think, because of the importance of the issues that Prahalad and Ramaswamy address and the power of their ideas.

Maps and Metrics
Strategy Maps, by Robert Kaplan and David Norton, continues the intellectual journey begun by the authors in their previous books, The Balanced Scorecard: Translating Strategy into Action (Harvard Business School Press, 1996) and The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Harvard Business School Press, 2000). Whereas a strategy map is an explicit description of an organization’s business model that can be communicated throughout the organization and embedded in metrics, the process of creating a strategy map usually stimulates the refinement (and in some cases development) of a strategy.

The four elements of a strategy map are:

  1. Financial Performance. This lagging indicator provides the ultimate definition of an organization’s success. Strategy describes how an organization intends to create sustainable growth in shareholder value.
  2. Customer Value Proposition. Success with targeted customers is a principal component of improved financial performance. In addition to measuring lagging indicators of customer success, such as satisfaction, retention, and growth, the customer perspective defines the value proposition for targeted customer segments.
  3. Internal Processes. These create and deliver the value proposition for customers. The performance of internal processes is a leading indicator of subsequent improvements in customer and financial outcomes.
  4. Learning and Growth. Intangible assets are the ultimate source of sustainable value creation. Learning and growth objectives describe how the people, technology, and organizational climate support the strategy. Improvements in learning and growth measures are leading indicators for internal process performance, customer outcomes, and financial performance.

Objectives in the four perspectives are connected in a chain of cause-and-effect relationships: Enhancing and aligning intangible assets leads to improved process performance, for example, which drives success for customers and shareholders.

Strategy Maps offers checklists of potential objectives (and associated metrics) that will stimulate any manager’s thinking. Managers with an operational orientation can even use the strategy-maps process for
creating and evolving strategy to test and refine their business model. Kaplan and Norton, however, fail to consider the complex dynamics of shareholder value creation. We suggest using their objectives and metrics, but developing your own causality.

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