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The new New Economy Analyst
Report – July 18, 2001
Juergen Daum’s new New
Economy Best Practice service
©2001 Juergen Daum. All rights reserved.
à Deutsche Version
Interview
with David P. Norton: “Intangible Assets and the Balanced Scorecard”
News categories: the New Economy Economics, enterprise and
business strategy, strategic enterprise management and business performance
management, value based management
David
Norton is – together with Harvard Professor Robert S. Kaplan - the co-author of
the Balanced Scorecard concept1. He is also a cofounder and
president of Balanced Scorecard Collaborative Inc., based in Boston, USA (http://www.bscol.com/),
which facilitates the worldwide awareness, use, enhancement, and integrity of
the Balanced Scorecard. It also provides services for Balanced Scorecard users.
This is
a shortened version of an interview with David Norton from the book “"Intangible Assets and Value
Creation"”2 by Juergen
Daum. This shortened version has
been published in the German Newsletter “Controlling & Finance”, issue
6/2001. Juergen Daum worked already before together with David Norton
on SAP’s White Paper “Strategic Enterprise
Management – Translating Strategy Into Action: The Balanced Scorecard” (May
1999).
Juergen Daum:
Why has strategic management become so important today ?
David Norton:
Strategy has always been important. But what is different is the way in which
value is being created in the new economy. The new value drivers are intangible
assets such as the knowledge of your people, computer systems and software,
your work processes, the culture that allows you to innovate. Organizations
understand strategy and how to compete in the new economy. But they do not have
the management tools that allow them to do this. As a result we find that 7 out
of 10 organizations fail to execute their strategy.
Juergen Daum: Why do they fail ?
David Norton:
The fundamental difference in this new economy is that there is not a direct
one-to-one relationship between an intangible asset, like the knowledge of a
worker, and a financial outcome. I cannot show that if I send my workers to
training programs for a month, that sales will go up or costs will go down.
Instead I have to make the case that training will improve something like
quality, and if quality will improve, customer confidence will improve, and if
customer confidence improves, then they will buy more. The nature of a
intangible asset is that you have to describe the steps that are involved in
the value creation. And that’s what strategy is.
Juergen Daum:
What are the limitations of the traditional financial management system ?
David Norton:
You cannot isolate the value of a single intangible asset like knowledge. How you create value is like a recipe. You
have to put together several ingredients. Training your people is only one
ingredient. You also have to give them computer systems. You have to give them
incentives. You have to give them leadership. It’s impossible for a financial
system to describe this process of value creation. Financial systems are always
snapshots: they can’t describe a time-based logic of cause and effect. They
can’t integrate different kinds of assets into what I would call a strategic
recipe. That’s why you need something different. That’s why the Balanced
Scorecard has become so popular with organizations.
Juergen Daum:
Why is a “Strategy-Focused Organization” important ?
David Norton:
Every performance management system has a point of focus. Typically that point
of focus is financial performance. What
we have learned from working with organizations, is, if you want to execute
your strategy, then you have to put the strategy at the center of your
management system. You should educate people about the strategy. Their
compensation and incentives should be tied to the strategy. When you allocate
resources in your budgets, then those should be tied to the strategy. Those
things seem to be obvious, but they do not happen in most organizations today.
I think that the breakthrough of the Balanced Scorecard is, that for the first
time an organization has a way that it can describe its strategy because it
allows you to deal with non-financial factors - the intangible assets - and to
show how those are being tied to financial outcomes. And once you describe it,
you can manage it.
Juergen Daum:
Why and how should this be organized as a continuous process ?
David Norton:
The Balanced Scorecard describes the theory of your strategy. You believe that,
if you do A, B will happen. So you now have to start monitoring the strategy
through your feedback systems. In effect what you are doing is testing the
hypothesis. You should always ask the question, if I am doing A, is B
happening? For example, if I am training my people, is quality improving? And
if quality is improving, is customer retention improving? And you have to do
this on a continuous basis, if you want to execute your strategy.
Juergen Daum:
How can the Balanced Scorecard help the members of the executive team to better
work together ?
David Norton:
These people get to the top because they are the best within their niche. The
chief financial officer, the human resource officer, the operations officer,
the marketing officer, each has mastered a very complex discipline. And when
they get to the top, they understand much about their discipline, but very
little about the disciplines of others. One of the magical things that happens
when they come together, develop their strategy, and use a tool like the
Balanced Scorecard, is that they begin to learn about the other disciplines.
That enables them to appreciate how their piece of the organization is
influenced by others. It creates a shared mindset that comes from understanding
all of these pieces of the strategy and how you fit in it. They now start
working on it as a team and providing input.
Juergen Daum:
What are the advantages of a Balanced Scorecard based management system?
David Norton:
Various studies that have been done indicate that seven out of ten, or nine out
of ten organizations that have strategies are unable to execute them. What we
found with Balanced Scorecard companies is that they beat those odds and that
they beat them quite dramatically. We have a set of case studies of
organizations that over the decade of the nineties used the Balance Scorecard
to help them to execute their strategies and they have succeeded dramatically.
Companies like Mobil Oil, which moved from last in industry profitability to
first. The Balanced Scorecard gave them a way, to get their organization
focused. And focus is what makes the difference. The bottom line for a Balanced
Scorecard user is that they successfully execute their strategy.
Juergen Daum:
What will be the major challenges for companies in the next decade?
David Norton: One is external to the organization
in the macro economy. Investors, regulators, employees and the public are all
demanding more insight into how the organizations are doing. And right now the
only record of how organizations are doing is financial. So I think that a
Balanced Scorecard approach is going to become a standard way of reporting
outside the organization to investors and shareholders. Just as the economy has
moved from tangible to intangible, reporting on the economy will move from the
tangible to the intangible. That’s the migration from financial reporting to
Balanced Scorecard reporting.
Juergen Daum:
And what other challenges you see in the future?
David Norton:
The second thing that I see happening deals with the discipline of management.
The intangible economy demands that you look at relationships between today’s
actions and their long term-impact. In other words, it requires that you do
systems thinking and the analytical tools that are required to support it.
Finally, the third thing that I see is the concept of the balanced strategy. A
strategy requires you to create a balance between short-term productivity; mid
term customer value, and long-term innovation. And companies will have to
report out on this. They will have to report out on their pipeline of new products.
They will also have to report out on things like customer retention and quality
as well as how they are doing with costs per transaction.
Juergen Daum:
Mr. Norton, thank you very much for this very interesting interview.
1 See also their new
book: Robert S. Kaplan, David P. Norton, The Strategy-focused
Organization, Harvard Business School Press, ISBN: 1578512506
2 English Edition:
Juergen H. Daum, "Intangible Assets and Value
Creation", John Wiley & Sons Ltd., ISBN 0470845120 (Mai 2002).
German Edition: Juergen
H. Daum, „Intangible Assets
oder die Kunst, Mehrwert zu schaffen“, Galileo-Press, ISBN 3-89842-112-0
(April 2002).
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