This is the third step (or perspective) of the creation of a Balanced Scorecard. The crux in this step is solidifying the way you design your processes so that you can serve your demographic according to your strategy as defined in previous steps. That requires the people making the strategy map to determine which internal processes have the biggest influence on the success of your strategy, and thus deserve the most attention.
The most influential factor
The quality and performance of the most important internal processes is seen as the biggest influence on the (improvement of) value proposition for customers. And of course, the value proposition greatly influences financial results. According to Kaplan and Norton, the internal processes determine the success of two vital components of the company strategy:
- The value proposition to the organization’s customers.
- Lowering costs and improving processes, which lead to an increase of productivity.
A bridge from process to customer
In this way, Kaplan and Norton bridged the gap between the process perspective and the customer and financial perspectives. Kaplan and Norton distinguish four clusters of internal processes. All four have to be supplied with objectives in the strategy map. They are:
- Operational processes.
- Customer management processes.
- Innovation processes.
- Regulatory and social processes.
Focus on primary processes
Operational processes are the daily, primary processes used by a company in order to produce and deliver products and services to customers. Determine the most important aspects of the primary processes and set objectives for them. These objectives have to be closely (causally) related to the ability to deliver the customer value proposition as defined in step 2.
Customer management & CRM
Customer management is used to intensify and deepen customer relations, thus increasing your company’s value to the customer. Kaplan and Norton distinguish four processes of customer management & CRM.
1. Selecting the customers
The big question for this process is: for which customers is the value proposition most relevant? This process also involves determining customer characteristics that fit the target demographic, for example income, age, life style, and price. But you could also segment the audience based on more psychological factors, such as sensitivity or receptiveness to innovation. For this last category, customers are often divided into groups: innovators, early adopters, late majority, and laggards.
2. Acquiring your demographic
The acquisition process consists of generating leads, communicating with potential customers, determining an attractive, suitable offer, and of course, the final sale.
3. Customer retention
Companies can extend and deepen their relationship with customers by offering perfect services, reacting quickly to requests, and meeting their wants and needs.
4. Increasing revenue and sales for current customers
You can do this by, for example, cross-selling, or getting on the shortlist and gaining the status “preferred supplier”. But of course, there are more possibilities.
The people creating the strategy map will have to set objectives for the customer management processes as well, in order to increase customer value. The relationship between increasing customer value and thus reaching the desired revenue growth plays a role in the background.
Innovation processes enable a company to develop new products, processes, and services. This allows them to serve new markets and demographics. Kaplan and Norton say managing innovation contains the following partial sub-processes:
- Identifying the possibilities and opportunities for new products and services.
- Managing the R&D portfolio.
- Developing and designing new products and services.
- Releasing these new products and services.
Innovation processes often have to be developed under pressure of the operational processes. To keep the company strategy balanced, it’s necessary to set separate objectives for these processes.
Regulatory and social processes
The fourth and last cluster of internal processes outlined by Kaplan and Norton are the social and regulatory processes. These help the organization retain the license to operate in their society. Consider aspects like environment, safety, health, good leadership, and taking social responsibility.
Are they equally important?
The problem now is that the four types of processes are all important, but not equally important. When drawing the strategy map, the trick is separating the processes that are critical to the success of the company strategy (vital few versus trivial many). The selection of processes will therefore be different for every company or organization. Kaplan and Norton limit your freedom in this area too, however: according to them, every strategy map should contain and describe one or more process from every cluster.
Forced to create balance
The strategy map, by definition, has to contain objectives pertaining to operational processes, customer management processes, innovation processes, and social and regulatory processes. The reason for this is that it forces the strategy map to create a balance of value-creating internal processes, with long and short-term goals.