Click here to visit:
Now Available! Exclusive New Benefit for HBR Subscribers: Online access to the past twelve issues of HBR! Simply
select the issue you want to access from the drop down menu above.
Measuring the Strategic Readiness of How to Have an Honest Conversation
Intangible Assets About Your Business Strategy
Robert S. Kaplan and David P. Norton Michael Beer and Russell A. Eisenstat
Worse Than Enemies Launching a World-Class Joint Venture
Kerry J. Sulkowicz James Bamford, David Ernst, and David G.
Fubini
Getting IT Right
Charlie S. Feld and Donna B. Stoddard The HBR List
The HBR List: Breakthrough Ideas for 2004
Is Your Company Ready to
Go?
Measuring the Strategic
Readiness of Intangible
From the Editor Best Practice
Assets
Robert S. Kaplan and For Strategy, the Readiness Is All Turning Gadflies into Allies
David P. Norton Thomas A. Stewart Michael Yaziji
Forethought Panel Discussion
Get your HBR
Subscriber Alert Books in Brief Opt Artists
Don Moyer
> | Click Here HBR Case Study
Also in this Issue
Give My Regrets to Wall Street
The next issue of HBR
Mark L. Frigo and Joel Litman Letters to the Editor
online will post on the
1st of the month.
Managing Yourself Executive Summaries
Success That Lasts Reprints and Subscriptions
Laura Nash and Howard Stevenson
About HBR
Copyright © 2004 Harvard Business School Publishing. All rights reserved.
, Click here to visit:
>| Purchase Reprint
| February 2004 > Measuring the Strategic Readiness of Intangible Assets
>| Printable Version
Measuring the Strategic Readiness of
>| E-mail a Colleague
>| Executive Summary
Intangible Assets
A real—and revolutionary—opportunity lies in studying and assessing how
well prepared a company’s people, systems, and culture are to carry out The Strategy Map
its strategy. Human Capital
Readiness at Consumer
Bank
by Robert S. Kaplan and David P. Norton Seven Behaviors for
Transformation
How valuable is a company culture that enables employees to understand and believe in
their organization’s mission, vision, and core values? What’s the payoff from investing in
a knowledge management system or in a new customer database? Is it more important
to improve the skills of all employees or focus on those in just a few key positions? Robert S. Kaplan
() is the
Measuring the value of such intangible assets is the holy grail of accounting. Employees’ Marvin Bower Professor of
skills, IT systems, and organizational cultures are worth far more to many companies Leadership Development at
Harvard Business School in
than their tangible assets. Unlike financial and physical ones, intangible assets are hard Boston. David P. Norton
for competitors to imitate, which makes them a powerful source of sustainable () is
competitive advantage. If managers could find a way to estimate the value of their the founder and president
intangible assets, they could measure and manage their company’s competitive position of the Balanced Scorecard
Collaborative (www.bscol.
much more easily and accurately.
com) in Lincoln,
Massachusetts. This article
But that’s simpler said than done. Unlike financial and physical assets, intangible assets is based on their book
are worth different things to different people. An oil well, for example, is almost as Strategy Maps: Converting
valuable to a retail firm as it is to an oil exploration corporation because either company Intangible Assets into
Tangible Outcomes
could sell it swiftly if necessary. But a workforce with a strong sense of customer service (Harvard Business School
and satisfaction is worth far more to the retailer than it would be to the oil company. Press, 2004).
Also, unlike tangible assets, intangible assets almost never create value by themselves.
They need to be combined with other assets. Investments in IT, for example, have little
>|Harvard Business
value unless complemented with HR training and incentive programs. And, conversely,
Review OnPoint Edition
many HR training programs have little value unless complemented with modern
technology tools. HR and IT investments must be integrated and aligned with corporate This article is enhanced with
strategy if the organization is to realize their full potential. Indeed, when companies a summary of key points to
separate functions like HR and IT organizationally, they usually end up with competing help you quickly absorb and
apply the concepts and a
silos of technical specialization. The HR department argues for increases in employee bibliography to guide further
training, while the IT department lobbies for buying new hardware and software exploration.
packages.
What’s more, intangible assets seldom affect financial performance directly. Instead, >|Harvard Business
Review OnPoint
they work indirectly through complex chains of cause and effect. Training employees in
Collection
Total Quality Management and Six Sigma, for instance, should improve process quality.
That improvement should then increase customer satisfaction and loyalty—and also This article is also part of the
create some excess resource capacity. But only if the company can transform that specially priced OnPoint
loyalty into improved sales and margins and eliminate or redeploy the excess resources collection “Focusing Your
will the investment in training pay off. By contrast, the impact of a new tangible asset is Organization on Strategy—
with the Balanced Scorecard,
immediate: When a retailer develops a new site, it sees financial benefits from the sales 2nd Edition” which includes
in the newly opened outlet right away. four OnPoint articles with an
overview comparing different
Although these characteristics make it impossible to value intangible assets on a perspectives on this topic.
freestanding basis, they also point the way to a new approach for quantifying how
intangible assets add value to the company. By understanding the problems associated
with valuing intangible assets, we learn that the measurement of the value they create is
embedded in the context of the strategy the company is pursuing. Companies such as
Dell, Wal-Mart, or McDonald’s that are following a low-cost strategy derive value from
Six Sigma and TQM training because their strategies are predicated on continuous
process improvement. The strategy of offering customers integrated solutions (rather
than discrete products) pursued by Goldman Sachs, IBM Consulting, and the like
,requires employees good at establishing and maintaining long-term customer
relationships. An organization cannot possibly assign a meaningful financial value to an
intangible asset like “a motivated and prepared workforce” in a vacuum because value
can be derived only in the context of the strategy. What the company can measure,
however, is whether its workforce is properly trained and motivated to pursue a
particular goal.
Viewed in this light, it becomes clear that measuring the value of intangible assets is
really about estimating how closely aligned those assets are to the company’s strategy.
If the company has a sound strategy and if the intangible assets are aligned with that
strategy, then the assets will create value for the organization. If the assets are not
aligned with the strategy or if the strategy is flawed, then intangible assets will create
little value, even if large amounts have been spent on them.
In the following pages, we will draw on the concepts and tools of the Balanced Scorecard
to present a way to systematically measure the alignment of the company’s human,
information, and organization capital—what we call its strategic readiness—without which
even the best strategy cannot succeed.
Defining Strategic Readiness
In developing the Balanced Scorecard more than a decade ago, we identified, in its
Learning and Growth Perspective, three categories of intangible assets essential for
implementing any strategy:
• Human Capital: the skills, talent, and knowledge that a company’s employees
possess.
• Information Capital: the company’s databases, information systems, networks, and
technology infrastructure.
• Organization Capital: the company’s culture, its leadership, how aligned its people
are with its strategic goals, and employees’ ability to share knowledge.
To link these intangible assets to a company’s strategy and performance, we developed
a tool called the “strategy map,” which we first introduced in our previous article for
Harvard Business Review, “Having Trouble with Your Strategy? Then Map
It” (September–October 2000). As the exhibit “The Strategy Map” shows, intangible
assets influence a company’s performance by enhancing the internal processes most
critical to creating value for customers and shareholders. Companies build their strategy
maps from the top down, starting with their long-term financial goals and then
determining the value proposition that will deliver the revenue growth specified in those
goals, identifying the processes most critical to creating and delivering that value
proposition, and, finally, determining the human, information, and organization capital
the processes require.
The Strategy Map
This article focuses on the bottom—the foundation—of the map and will show how
intangible assets actually determine the performance of the critical internal processes.
Once that link has been established, it becomes easy to trace the steps back up the map
to see exactly how intangible assets relate to the company’s strategy and performance.
That, in turn, makes it possible to align those assets with the strategy and measure their
contribution to it. The degree to which the current set of assets does—or does not—
contribute to the performance of the critical internal processes determines the strategic
readiness of those assets and thus their value to the organization. The strategic
readiness of each type of intangible asset can be thought of as follows:
Human Capital (HC): In the case of human capital, strategic readiness is measured by
whether employees have the right kind and level of skills to perform the critical internal
processes on the strategy map. The first step in estimating HC readiness is to identify
the strategic job families—the positions in which employees with the right skills, talent,
and knowledge have the biggest impact on enhancing the organization’s critical internal
processes. The next step is to pinpoint the set of specific competencies needed to
perform each of those strategic jobs. The difference between the requirements needed
to carry out these jobs effectively and the company’s current capabilities represents a
“competency gap” that measures the organization’s HC readiness.
Information Capital (IC): The strategic readiness of information capital is a measure
of how well the company’s strategic IT portfolio of infrastructure and applications
supports the critical internal processes. Infrastructure comprises hardware—such as
, central servers and communication networks—and the managerial expertise—such as
standards, disaster planning, and security—required to effectively deliver and use
applications. Two categories of applications, in turn, are built on this infrastructure:
Transaction-processing applications, such as an ERP system, automate the basic
repetitive transactions of the enterprise. Analytic applications promote analysis,
interpretation, and sharing of information and knowledge. Either type may or may not be
a transformational application—one that changes the prevailing business model of the
enterprise. Levi’s uses a transformational application to tailor jeans to individual
customers. Home Shopping Network uses a transformational application to measure the
“profits per second” being generated by currently offered merchandise. Transformational
applications have the most potential impact on strategic objectives and require the
greatest degree of organization change to deliver their benefits.
Organization Capital (OC): Organization capital is perhaps the least understood of the
intangible assets, and the task of measuring it is correspondingly difficult. But in looking
at the strategic priorities that companies in our database of Balanced Scorecard
implementations used for their organization capital objectives, we found a consistent
picture. Successful companies had a culture in which people were deeply aware of and
internalized the mission, vision, and core values needed to execute the company’s
strategy. These companies strove for excellent leadership at all levels, leadership that
could mobilize the organization toward its strategy. They strove for a clear alignment
between the organization’s strategic objectives and individual, team, and departmental
goals and incentives. Finally, these companies promoted teamwork, especially the
sharing of strategic knowledge throughout the organization. Determining OC readiness,
we concluded, would involve first identifying the changes in organization capital required
by the new strategy—what we call the “organization change agenda”—and then
separately identifying and measuring the state of readiness of the company’s cultural,
leadership, alignment, and teamwork objectives.
Strategic readiness is related to the concept of liquidity, which accountants use to
classify financial and physical assets on a company’s balance sheet. Accountants divide a
firm’s assets into various categories, such as cash, accounts receivable, inventory,
property, plant and equipment, and long-term investments. These are ordered
hierarchically according to the ease and speed with which they can be converted to cash
—in other words, according to the degree of their liquidity. Accounts receivable is more
liquid than inventory, and both accounts receivable and inventory are classified as short-
term assets since they typically convert to cash within 12 months, faster than the cash
recovery cycle from such illiquid assets as plant and equipment. Strategic readiness does
much the same for intangible assets—the higher their state of readiness, the faster they
contribute to generating cash.
Human Capital Readiness
All jobs are important to the organization; otherwise, people wouldn’t be hired and paid
to perform them. Organizations may require truck drivers, computer operators,
production supervisors, materials handlers, and call center operators and should make it
clear that contributions from all these employees can improve organizational
performance. But we have found that some jobs have a much greater impact on strategy
than others. Managers must identify and focus on the critical few that have the greatest
impact on successful strategy implementation.
John Bronson, vice president of human resources at Williams-Sonoma, estimates that
people in only five job families determine 80% of his company’s strategic priorities. The
executive team of a chemical company has identified eight job families critical to its
strategy of offering customized innovative solutions. These job families employ, in
aggregate, 100 individuals—less than 7% of the total workforce. Kimberlee Williams,
vice president of human resources at Unicco, a large integrated facilities-services
management company, says that three job families are key to its strategy: project
managers, who oversee the operations in specific accounts; operations directors, who
broaden the relationships within existing accounts; and business development
executives, who help acquire new accounts. These three job families employ only 215
people, less than 4% of the workforce. By focusing human capital development activities
on these critical few individuals, the chemical company, Unicco, and Williams-Sonoma
can greatly leverage their human capital investments. It is sobering to think that
strategic success in these three companies is determined by how well they develop
competencies in less than 10% of their workforces.
Once a company identifies its strategic job families, it must define the requirements for
these jobs in considerable detail, a task often referred to as “job profiling” or
“competency profiling.” A competency profile describes the knowledge, skills, and values
Now Available! Exclusive New Benefit for HBR Subscribers: Online access to the past twelve issues of HBR! Simply
select the issue you want to access from the drop down menu above.
Measuring the Strategic Readiness of How to Have an Honest Conversation
Intangible Assets About Your Business Strategy
Robert S. Kaplan and David P. Norton Michael Beer and Russell A. Eisenstat
Worse Than Enemies Launching a World-Class Joint Venture
Kerry J. Sulkowicz James Bamford, David Ernst, and David G.
Fubini
Getting IT Right
Charlie S. Feld and Donna B. Stoddard The HBR List
The HBR List: Breakthrough Ideas for 2004
Is Your Company Ready to
Go?
Measuring the Strategic
Readiness of Intangible
From the Editor Best Practice
Assets
Robert S. Kaplan and For Strategy, the Readiness Is All Turning Gadflies into Allies
David P. Norton Thomas A. Stewart Michael Yaziji
Forethought Panel Discussion
Get your HBR
Subscriber Alert Books in Brief Opt Artists
Don Moyer
> | Click Here HBR Case Study
Also in this Issue
Give My Regrets to Wall Street
The next issue of HBR
Mark L. Frigo and Joel Litman Letters to the Editor
online will post on the
1st of the month.
Managing Yourself Executive Summaries
Success That Lasts Reprints and Subscriptions
Laura Nash and Howard Stevenson
About HBR
Copyright © 2004 Harvard Business School Publishing. All rights reserved.
, Click here to visit:
>| Purchase Reprint
| February 2004 > Measuring the Strategic Readiness of Intangible Assets
>| Printable Version
Measuring the Strategic Readiness of
>| E-mail a Colleague
>| Executive Summary
Intangible Assets
A real—and revolutionary—opportunity lies in studying and assessing how
well prepared a company’s people, systems, and culture are to carry out The Strategy Map
its strategy. Human Capital
Readiness at Consumer
Bank
by Robert S. Kaplan and David P. Norton Seven Behaviors for
Transformation
How valuable is a company culture that enables employees to understand and believe in
their organization’s mission, vision, and core values? What’s the payoff from investing in
a knowledge management system or in a new customer database? Is it more important
to improve the skills of all employees or focus on those in just a few key positions? Robert S. Kaplan
() is the
Measuring the value of such intangible assets is the holy grail of accounting. Employees’ Marvin Bower Professor of
skills, IT systems, and organizational cultures are worth far more to many companies Leadership Development at
Harvard Business School in
than their tangible assets. Unlike financial and physical ones, intangible assets are hard Boston. David P. Norton
for competitors to imitate, which makes them a powerful source of sustainable () is
competitive advantage. If managers could find a way to estimate the value of their the founder and president
intangible assets, they could measure and manage their company’s competitive position of the Balanced Scorecard
Collaborative (www.bscol.
much more easily and accurately.
com) in Lincoln,
Massachusetts. This article
But that’s simpler said than done. Unlike financial and physical assets, intangible assets is based on their book
are worth different things to different people. An oil well, for example, is almost as Strategy Maps: Converting
valuable to a retail firm as it is to an oil exploration corporation because either company Intangible Assets into
Tangible Outcomes
could sell it swiftly if necessary. But a workforce with a strong sense of customer service (Harvard Business School
and satisfaction is worth far more to the retailer than it would be to the oil company. Press, 2004).
Also, unlike tangible assets, intangible assets almost never create value by themselves.
They need to be combined with other assets. Investments in IT, for example, have little
>|Harvard Business
value unless complemented with HR training and incentive programs. And, conversely,
Review OnPoint Edition
many HR training programs have little value unless complemented with modern
technology tools. HR and IT investments must be integrated and aligned with corporate This article is enhanced with
strategy if the organization is to realize their full potential. Indeed, when companies a summary of key points to
separate functions like HR and IT organizationally, they usually end up with competing help you quickly absorb and
apply the concepts and a
silos of technical specialization. The HR department argues for increases in employee bibliography to guide further
training, while the IT department lobbies for buying new hardware and software exploration.
packages.
What’s more, intangible assets seldom affect financial performance directly. Instead, >|Harvard Business
Review OnPoint
they work indirectly through complex chains of cause and effect. Training employees in
Collection
Total Quality Management and Six Sigma, for instance, should improve process quality.
That improvement should then increase customer satisfaction and loyalty—and also This article is also part of the
create some excess resource capacity. But only if the company can transform that specially priced OnPoint
loyalty into improved sales and margins and eliminate or redeploy the excess resources collection “Focusing Your
will the investment in training pay off. By contrast, the impact of a new tangible asset is Organization on Strategy—
with the Balanced Scorecard,
immediate: When a retailer develops a new site, it sees financial benefits from the sales 2nd Edition” which includes
in the newly opened outlet right away. four OnPoint articles with an
overview comparing different
Although these characteristics make it impossible to value intangible assets on a perspectives on this topic.
freestanding basis, they also point the way to a new approach for quantifying how
intangible assets add value to the company. By understanding the problems associated
with valuing intangible assets, we learn that the measurement of the value they create is
embedded in the context of the strategy the company is pursuing. Companies such as
Dell, Wal-Mart, or McDonald’s that are following a low-cost strategy derive value from
Six Sigma and TQM training because their strategies are predicated on continuous
process improvement. The strategy of offering customers integrated solutions (rather
than discrete products) pursued by Goldman Sachs, IBM Consulting, and the like
,requires employees good at establishing and maintaining long-term customer
relationships. An organization cannot possibly assign a meaningful financial value to an
intangible asset like “a motivated and prepared workforce” in a vacuum because value
can be derived only in the context of the strategy. What the company can measure,
however, is whether its workforce is properly trained and motivated to pursue a
particular goal.
Viewed in this light, it becomes clear that measuring the value of intangible assets is
really about estimating how closely aligned those assets are to the company’s strategy.
If the company has a sound strategy and if the intangible assets are aligned with that
strategy, then the assets will create value for the organization. If the assets are not
aligned with the strategy or if the strategy is flawed, then intangible assets will create
little value, even if large amounts have been spent on them.
In the following pages, we will draw on the concepts and tools of the Balanced Scorecard
to present a way to systematically measure the alignment of the company’s human,
information, and organization capital—what we call its strategic readiness—without which
even the best strategy cannot succeed.
Defining Strategic Readiness
In developing the Balanced Scorecard more than a decade ago, we identified, in its
Learning and Growth Perspective, three categories of intangible assets essential for
implementing any strategy:
• Human Capital: the skills, talent, and knowledge that a company’s employees
possess.
• Information Capital: the company’s databases, information systems, networks, and
technology infrastructure.
• Organization Capital: the company’s culture, its leadership, how aligned its people
are with its strategic goals, and employees’ ability to share knowledge.
To link these intangible assets to a company’s strategy and performance, we developed
a tool called the “strategy map,” which we first introduced in our previous article for
Harvard Business Review, “Having Trouble with Your Strategy? Then Map
It” (September–October 2000). As the exhibit “The Strategy Map” shows, intangible
assets influence a company’s performance by enhancing the internal processes most
critical to creating value for customers and shareholders. Companies build their strategy
maps from the top down, starting with their long-term financial goals and then
determining the value proposition that will deliver the revenue growth specified in those
goals, identifying the processes most critical to creating and delivering that value
proposition, and, finally, determining the human, information, and organization capital
the processes require.
The Strategy Map
This article focuses on the bottom—the foundation—of the map and will show how
intangible assets actually determine the performance of the critical internal processes.
Once that link has been established, it becomes easy to trace the steps back up the map
to see exactly how intangible assets relate to the company’s strategy and performance.
That, in turn, makes it possible to align those assets with the strategy and measure their
contribution to it. The degree to which the current set of assets does—or does not—
contribute to the performance of the critical internal processes determines the strategic
readiness of those assets and thus their value to the organization. The strategic
readiness of each type of intangible asset can be thought of as follows:
Human Capital (HC): In the case of human capital, strategic readiness is measured by
whether employees have the right kind and level of skills to perform the critical internal
processes on the strategy map. The first step in estimating HC readiness is to identify
the strategic job families—the positions in which employees with the right skills, talent,
and knowledge have the biggest impact on enhancing the organization’s critical internal
processes. The next step is to pinpoint the set of specific competencies needed to
perform each of those strategic jobs. The difference between the requirements needed
to carry out these jobs effectively and the company’s current capabilities represents a
“competency gap” that measures the organization’s HC readiness.
Information Capital (IC): The strategic readiness of information capital is a measure
of how well the company’s strategic IT portfolio of infrastructure and applications
supports the critical internal processes. Infrastructure comprises hardware—such as
, central servers and communication networks—and the managerial expertise—such as
standards, disaster planning, and security—required to effectively deliver and use
applications. Two categories of applications, in turn, are built on this infrastructure:
Transaction-processing applications, such as an ERP system, automate the basic
repetitive transactions of the enterprise. Analytic applications promote analysis,
interpretation, and sharing of information and knowledge. Either type may or may not be
a transformational application—one that changes the prevailing business model of the
enterprise. Levi’s uses a transformational application to tailor jeans to individual
customers. Home Shopping Network uses a transformational application to measure the
“profits per second” being generated by currently offered merchandise. Transformational
applications have the most potential impact on strategic objectives and require the
greatest degree of organization change to deliver their benefits.
Organization Capital (OC): Organization capital is perhaps the least understood of the
intangible assets, and the task of measuring it is correspondingly difficult. But in looking
at the strategic priorities that companies in our database of Balanced Scorecard
implementations used for their organization capital objectives, we found a consistent
picture. Successful companies had a culture in which people were deeply aware of and
internalized the mission, vision, and core values needed to execute the company’s
strategy. These companies strove for excellent leadership at all levels, leadership that
could mobilize the organization toward its strategy. They strove for a clear alignment
between the organization’s strategic objectives and individual, team, and departmental
goals and incentives. Finally, these companies promoted teamwork, especially the
sharing of strategic knowledge throughout the organization. Determining OC readiness,
we concluded, would involve first identifying the changes in organization capital required
by the new strategy—what we call the “organization change agenda”—and then
separately identifying and measuring the state of readiness of the company’s cultural,
leadership, alignment, and teamwork objectives.
Strategic readiness is related to the concept of liquidity, which accountants use to
classify financial and physical assets on a company’s balance sheet. Accountants divide a
firm’s assets into various categories, such as cash, accounts receivable, inventory,
property, plant and equipment, and long-term investments. These are ordered
hierarchically according to the ease and speed with which they can be converted to cash
—in other words, according to the degree of their liquidity. Accounts receivable is more
liquid than inventory, and both accounts receivable and inventory are classified as short-
term assets since they typically convert to cash within 12 months, faster than the cash
recovery cycle from such illiquid assets as plant and equipment. Strategic readiness does
much the same for intangible assets—the higher their state of readiness, the faster they
contribute to generating cash.
Human Capital Readiness
All jobs are important to the organization; otherwise, people wouldn’t be hired and paid
to perform them. Organizations may require truck drivers, computer operators,
production supervisors, materials handlers, and call center operators and should make it
clear that contributions from all these employees can improve organizational
performance. But we have found that some jobs have a much greater impact on strategy
than others. Managers must identify and focus on the critical few that have the greatest
impact on successful strategy implementation.
John Bronson, vice president of human resources at Williams-Sonoma, estimates that
people in only five job families determine 80% of his company’s strategic priorities. The
executive team of a chemical company has identified eight job families critical to its
strategy of offering customized innovative solutions. These job families employ, in
aggregate, 100 individuals—less than 7% of the total workforce. Kimberlee Williams,
vice president of human resources at Unicco, a large integrated facilities-services
management company, says that three job families are key to its strategy: project
managers, who oversee the operations in specific accounts; operations directors, who
broaden the relationships within existing accounts; and business development
executives, who help acquire new accounts. These three job families employ only 215
people, less than 4% of the workforce. By focusing human capital development activities
on these critical few individuals, the chemical company, Unicco, and Williams-Sonoma
can greatly leverage their human capital investments. It is sobering to think that
strategic success in these three companies is determined by how well they develop
competencies in less than 10% of their workforces.
Once a company identifies its strategic job families, it must define the requirements for
these jobs in considerable detail, a task often referred to as “job profiling” or
“competency profiling.” A competency profile describes the knowledge, skills, and values
