Universidade Do Vale Do Itajaí (UNIVALI)

Fourth International Seville Conference on Future-Oriented Technology Analysis (FTA)
FTA and Grand Societal Challenges – Shaping and Driving Structural and Systemic Transformations
Seville, 12-13 May 2011

Using a Combination of the CommonKads and System Dynamics Methodologies to make Operational the Transition between the Definition of a Joint Innovation Strategy and its Implementation and Management

Sidnei Vieira Marinho

Universidade do Vale do Itajaí (UNIVALI),

Cristiano Cagnin

DG Joint Research Centre Institute for Prospective and Technological Studies,

Summary

The combination of Balanced Scorecard (BSC) with FTA holds the promise to set out a robust, systematic and systemic process to trigger joint innovation through research which is jointly funded by involved partners. This process combined with knowledge management approaches and supported by the CommonKADS methodology enhances the capability of the system to properly define a shared vision and its translation into a strategic research agenda (SRA) in order to reach the defined strategic objectives, and to prepare the system for the implementation of the SRA based on the options at hand and its expected impacts and possible supporting instruments.

However, most policy and decision makers face a major challenge in making operational the defined action plan or to implement the defined SRA and monitor its progress, which is critical to enable the system to become adaptive through time. Even if measures and the necessary mechanisms to monitor these are available, policy and decision markers often fail to support and shape the process towards the defined vision. This happens because they tend to manage static and linear rather than complex and interdependent systems, and also because of individual's inability to become adaptive over time.

Despite advances in the use of strategy maps in the BSC, the latter is reinforced in such an approach. Here, the communication of strategic objectives is linear and static, since it effectively ignores the circular effects of strategy feedbacks and delays, and also due to the unfolding unidirectional dimension of BSC. This means that there is no connection between strategy implementation and the restrictions imposed by the system within a changing environment.

In this context, the use of the System Dynamics (SD) methodology aligned with FTA thinking help overcoming such a limitation as it supports shaping and monitoring complex and dynamic systems, thus enabling the system and individuals to become adaptive over time. This helps policy and decision marers to understand the structures and behaviours of the involved systems using two types of notation: soft modelling or cause-effect diagrams, and hard modelling or diagrams of stocks and flows. The qualitative aspect of the methodology is used to identify the structural characteristics of the system as well as cause-effect relations and feedback structures present in the behaviour of the system. The quantitative aspect of the methodology represents the use of the structural cause-effect characteristics of the system to develop a simulation model to test the system and quantify mathematically its cause-effect relationships.

The application of a systemic proposal combining the above tools in practice shows that the notion of stakeholder involvement, mutual experimentation and learning, and of a common vision to be pursued across the system is however still neglected. Embedding FTA enables firms to steer solutions to possible challenges through joint-up decision making and implementation processes which include the coordination and mobilisation of resources across the value chain, thus supporting the system to undertake systemic transitions and develop new configurations through a multi-level governance approach, as well as mutual experimentation and learning.

1  Introduction

Despite the growing number of publications on Performance Measurement Systems, it can be observed that consensus has not yet been reached on the stages of their implementation within an organization. It was against this background, and with the objective of contributing to a deeper understanding of the principles and practices involved in performance measurement, that this study combined a critical analysis of the research literature on the subject with a systematic consultation of specialists in the area using the Delphi method in an attempt to consolidate a system capable of making strategy an integral part of operations through the use of the Balanced Scorecard system.

The systematic proposal is composed by four different phases which seek to optimize the utilization of Balanced Scorecard through the utilization of methods, tools and author’s contributions of this paper. The first phase consists on the analysis of the strategically positioning of the organization. The second phase elaborates a strategic diagnostic utilizing two methods: a SWOT analysis and the method of Global Business Network. The third phase is the way of using of the Balanced Scorecard utilizing the results of the previous phases and strategic tools, such as: analysis of scenarios to the definition of strategic objectives, system dynamics for the construction of the strategic maps, the performance prism for the selection of measures, utilization of the strategic benchmarking to the administration of the targets, the CommonKADS methodology to the strategic administration of the initiatives and the perpetual budget for the elaboration of the strategic budget. The last phase identifies mechanisms to systematize the strategic learning process utilizing the concepts of learning and systemic focus of Argyris and Schön (1978).

Once this system had been defined, its phases and stages were validated using the Delphi method in order to obtain the opinion of the specialists and to systematise the final results.The proposal was applied in three case studies, and results confirmed the feasibility of its operationalisation.

2  Balanced Scorecard

Studies demonstrate that one of the performance management systems most widely used by organizations is the balanced scorecard (MARR and SCHIUMA, 2003). It is made up of four strategic perspectives and it is innovative in that it includes some of the subjects that are of greatest importance to implementation of strategy, these are: the transformation of strategy into operational actions; the creation of correlation hypotheses based on cause and effect relationships; the monitoring of both financial and non-financial measures; and alignment and management of the scope of objectives in such a way as to facilitate feedback and strategic learning with the aim of transforming strategy into a continuous process.

The Balanced Scorecard (BSC) is a management system which presents the company vision and strategies in four perspectives. Strategy is defined as a set of cause and effect hypotheses, when implementation is the comprehension of the hypotheses throughout the organization, alignment of resources with the hypotheses, the continuous test of the hypotheses, and their adaptation in real time, according to arising needs (figure 1).

2.1  Balanced Scorecard perspectives

The Financial Perspective defines the expected strategy performance and serves as a reference for the objectives and targets defined in other perspectives of the BSC. Every measurement selected within the BSC should be part of a set of cause and effect hypotheses, with the objective of maximizing long term financial performance.

In the Costumer Perspective, the market segments are identified and the proposal of the value to be offered is chosen, with the organization verifying the results through measures customized by a specific group of clients. These measures are common to all companies and should reflect market share; client retention; client capitation; client satisfaction; and client profitability.

The Internal Processes Perspective identifies the key processes for attending the objectives of the clients’ and shareholders’ segments. The generic value chain is composed of the following processes: innovation process, operations process, and post-sale services process.

The Learning and Growth Perspective is responsible for the offer of infra-structure in order to attend the objectives of the remaining perspectives, through the management of three categories: employee capacities; information system capacities; and motivation, empowerment, and alignment.

These perspectives have their objectives outlined in measures, targets, and initiatives through cause and effect relationships (hypotheses).

2.2  Balanced Scorecard evolution: strategic maps

Experience gained over ten years of implementing the BSC allowed Kaplan and Norton to review their conceptual point of view. In 1992, the authors advocated the use of a large set of measures distributed among four perspectives. Subsequently, it was noted that the measures in place should monitor the strategy when chief executives were asked what the organization's strategic objectives were. The definition of measures moved then to a secondary role, because when there was consensus on the objectives pursued, the organization could change the unsatisfactory measures without the need to reassess its strategy. This means that the targets remain the same, even if the measures evolved through experience or new data. The focus on targets allowed the strategy to be described by the assumptions of cause and effect relationships between the objectives in the four BSC perspectives. This diagram is called the Strategic Map.

“[It] has turned out to be as important an innovation as the original Balanced Scorecard itself.” (Kaplan and Norton, 2000).

Table 1 - The different meanings Kaplan and Norton give to the concept

1. Show the strategic target: "The Strategy Map allows an organization to describe and illustrate with clarity its objectives, initiatives and targets, and the measures used to evaluate the connections that are the foundation of a firm's strategic direction."
2. Highlight the value of intellectual capital: "The strategic map, adjusted to the specific strategy of an organization, describes how intangible assets drive performance improvements of the organization's internal process, which exert maximum leverage in delivering value to customers, shareholders and communities."
3. Visually represent the strategy: "The strategic map is a visual representation of the strategy, a single page showing how the objectives in the four perspectives integrate and combine to describe the strategy."
4. Connecting the individual work to the strategy: "With the strategic map, employees have a visual representation of how their roles are connected with the overall targets of the company, while managers understand more clearly the strategy and identify ways of detecting and correcting the firm's course."
5. Demonstrate the value stream: "The objectives in the four perspectives are connected to each other by relationships of cause and effect. From the top management, it starts with the assumption that financial results will be achieved only if target customers are satisfied. "
6. Reinforce the importance of knowledge: "The foundation of any strategy map is the learning and growth perspective, which defines the competencies and essential skills needed, and technology and organizational culture necessary to support the company's strategy."

2.3  Balanced Scorecard limitations

The balanced scorecard proved to be a major advance in the struggle to communicate, align and implement strategy, and also as a source of guidance when formulating systems for measuring the performance of systems logic. However, some authors have identified weak points in the design of the balanced scorecards’ original structure which compromise its effective implementation.

The main limitations of the balanced scorecard and suggestions to overcome these described in the literature are:

Table 2 – Limitations of the Balanced Scorecard and Suggestions to Overcome Them

LIMITATION / AUTORS / SUGESTIONS / AUTORS
The balanced scorecard is more of a diagram representing relationships or a flow diagram than a map of cause and effect relationships, which nowadays is referred to as a Strategy Map / Anthony e Govindarajan, 1998; Schneiderman, 1999; Otley, 1999; Norreklit, 2000; Richmond, 2001 / System Dynamics / Todd, 2000; Richmond, 2001; Akkerman e Oorshot, 2002; Linard, Fleming e Dvorsky 2002; Schoeneborn, 2003
In order to analyse the cause and effect relationships between measures, a number of different scales are required / Norreklit, 2000; Richmond, 2001 / System Dynamics / Todd, 2000; Richmond, 2001; Akkerman e Oorshot, 2002; Linard, Fleming e Dvorsky 2002; Schoeneborn, 2003
Performance Prism / Neely, Adams e Kennerley, 2002
The cause and effect relationships between performance measures are linear and static / Butler, Letza e Neale, 1997; Anthony e Govindarajan, 1998; Schneiderman, 1999; Norreklit, 2000; Richmond, 2001 / System Dynamics / Richmond, 2001; Todd, 2000; Akkerman e Oorshot, 2002; Linard, Fleming e Dvorsky 2002; Schoeneborn, 2003
There is a need for additional perspectives if all stakeholders are to be catered for / Otley, 1999; Schneiderman, 1999; Norreklit, 2000; Neely, Adams e Kennerley, 2002; Brignall, 2002; Atkinson, 2006 / Performance Prism / Neely, Adams e Kennerley, 2002
Independent variables (non-financial ones) are incorrectly identified as primary drivers of future stakeholder satisfaction / Schneiderman, 1999 / Quality Function Deployment (QFD) / Schneiderman, 1999
There is a lack of any system to define measures linked to consistent targets / Schneiderman, 1999; Otley, 1999 / Quality Function Deployment (QFD) / Schneiderman, 1999
Swot Analysis / Lee e Ko, 2000
Analysis of Scenarios / Fink, Marr, Siebe e Kuhle 2005
Performance Prism / Neely, Adams e Kennerley, 2002
The balanced scorecard fails because of difficulties that are encountered during the implementation phase / Epstein e Manzoni, 1998; Atkinson, 2006 / Hoshin Kanri / Witcher e Chau, 2007
Employees are not represented when strategic objectives and measures are defined / Norreklit, 2000 / Hoshin Kanri / Witcher e Butterworth, 2000; Tennant e Roberts, 2001
Skandia Navigator / Walker e MacDonald 2001; Olve, Roy e Wetter, 2001; Hagood e Friedman 2002; Andriessen 2004; Wu 2005
The balanced scorecard doesn’t take into account the interaction between the processes of strategy development and implementation / Epstein e Manzoni, 1998; Atkinson, 2006
There is a lack of criteria on which to base the selection of specific performance measures / Otley, 1999; Lipe e Salterio, 2000 / Performance Prism / Neely, Adams e Kennerley, 2002
There is no criteria-based assessment of the external environment / Norreklit, 2000 / Swot Analysis / Lee e Ko, 2000

Despite not appearing in the table above, studies show that the BSC does not consider the interaction between strategy definition and implementation (EPSTEIN and MANZONI, 1998, ATKINSON, 2006). This fact weakens one of the main premises of the BSC, which is to provide strategic alignment of the organization. For many authors this occurs because the priority of organizations is often strategy formulation at the expense of its implementation (Hrebiniak and JOYCE, 2001, Kaplan and Norton, 1999, Bossidy and Charan 2004; ATKINSON 2006; HUTZCHENREUTER and Kleindienst, 2006 ; Meers, 2007 and Furr, and GOUSSEVSKAIA THOMAS, 2008). Moreover, Mintzberg et al (2003) state that the separation between strategy formulation and implementation constitutes a false dichotomy, since these are intrinsically interconnected by integration of thought and action.