Anglo-Saxon or Rhineland model?
Kaplan and Norton see financial goals as the ultimate objective of the organization. They follow the Anglo-Saxon model that centralizes stockholders, and not the Rhineland model, which focuses on all stakeholders. To generate stockholder value, the organization has to be successful with a selected group of customers or segments of customers.
Success with customers buoys profits
Success with the target audience is the driver in realizing financial objectives. That’s why the makers of the strategy map (top management) have to formulate a value proposition for the selected demographics in the customer and market perspective of the Balanced Scorecard. A clear description of this value proposition shows how the leadership thinks it will create revenue growth using this target audience.
Create lasting value for customers
The customer value proposition indicates how management wants to create lasting value for the target audience, as well as how the organization wants to distinguish itself from the competition. That’s why, according to Kaplan and Norton, this perspective describes the core of the organization’s strategy. That’s why this perspective is crucial. What do Kaplan and Norton say about formulating the customer perspective and how it can be used to shape strategic decisions?
Focus on specific customer segments
The first step is selecting the demographics the organization wants to focus on. According to Kaplan and Norton, the strategy describes the specific customer segments the organization wants to focus on to reach its desired revenue growth and profits. The organization needs to measure customer satisfaction, repeat purchases, and market share for these customer segments.
Mix of product and service characteristics
When management knows who the company’s customers are or should be, they can determine specific objectives and goals for the value proposition. That should specify what the organization wants to offer this group of customers. The value proposition, then, describes the mix of product or service characteristics, price, service, relationship, and image the organization offers it customers. The creators of the strategy map have to describe what the organization expects to do better and different for its customers compared to the competition. In other words: what sets the organization apart in the eyes of the customer?
There are several strategies available when determining the customer value proposition, according to Kaplan and Norton. In “The Strategy Focused Organization” (2001) they use the Treacy and Wiersema models: Product leadership, customer intimacy, and operational excellence. In “Strategy Maps” (2004), four strategies are defined.
1. Best total cost
Kaplan and Norton see strategies as value propositions for customers. Their “best total cost” strategy focuses on being a low-cost provider of products and services of a high and consistent quality, usually in a very competitive market. Customers get a good product or service for an attractive price. Product standardization is important to keep production costs under control. Other hallmarks of this strategy: an uncomplicated sales process and a quick delivery of the product or service. Examples are Aldi, Ryanair, and Lidl, who all offer very competitively-priced products and services for their target audience.
2. Product leadership
This strategy is about offering products or services at higher prices because they’re superior to the competitors’ offerings. The company that chooses this strategy perfectly attunes the functionality of its products to the customer and deliberately chooses a certain speed, accuracy, weight, or size, to name some examples. Also, this vendor is leading the pack when it comes to technological development (“expand the existing performance boundaries into the highly desirable”). This organization will be one of the first to release new technologies or applications. Apple is one example, as they’re known for being innovators, offering products of excellent quality.
3. Complete customer solutions
These companies provide the best total solution to customers, so they never have to look at the competition. This strategy can be successful when the customer actually gets everything they need with one-stop shopping. The products and services have to be completely in line with the customer’s wants and needs.
The organization offers complete solutions, so not just the product or service, but also additional services such as organizational advice, training, and support, for example. Organizations that choose this strategy offer complete solutions, such as multiple bundled products and services. For example, big department stores often stock everything that a lot of customers need, from food to clothing to household items.
4. System lock-in
The last proposition mentioned by Kaplan and Norton is system lock-in. This strategy is about making it expensive or difficult for customers to switch to the competition. This discourages customers from choosing a different product or system. This means offering customers an easily-accessible, wide range of products and services. This formula is more effective when the customer switches to a widely available standard.
Microsoft is one example of an organization that uses this strategy and used it to make its Windows platform into an industry standard. Once a company has reached this position, they can increase their strength by also adding value to companies that offer supplemental products and services. They can do this by offering services such as access to a large customer database, and privileging organizations by awarding certificates. Microsoft, for example, recognizes certain software developers who only make their products for Windows, and has consultants who recommend Microsoft products.
Forced to make strategic choices
By describing the second horizontal layer of the strategy map in detail, organizations are forced to make important strategic choices. Management has to decide what their target demographic is, and the value proposition that sets them apart from the competition.
The creators of the strategy map have now achieved the following:
- In the financial perspective, they clarified which success factors contribute to profit and revenue growth, respective to productivity improvement. With that, the economic consequences of the strategy become explicit.
- The customer perspective clarifies which value proposition is expected to be successful with the selected demographic (“strategy is a hypothesis”).