Kaplan & Norton vs. Porter: Comparing Strategic Frameworks

Introduction

This paper compares and contrasts two widely used models in strategic business decision-making. One is the framework developed by Kaplan and Norton, centered on a strategic management system commonly known as the Balanced Scorecard. The other is Porter's Five Forces model. The two frameworks are similar in some respects but differ significantly in others. While both approaches serve different functions, they are ultimately aligned toward the same overarching goal: strategic decision-making and business situational awareness.

The Kaplan and Norton Strategy Map

The centerpiece of the Kaplan and Norton approach is known as the strategy map—a workflow diagram centered on strategic decision-making. This framework operates across four levels: the financial perspective, the customer perspective, the internal perspective, and the learning and growth perspective. It was introduced to the business and scholarly world in 1992 via the Harvard Business Review and was designed to function as both a performance measurement system and a strategic management system. At its core, the strategy map is a diagram that describes how an organization creates value by connecting its various strategic objectives. More specifically, it links items that have a cause-and-effect relationship with one another, with the Balanced Scorecard approach serving as its foundation. Strategy maps are, in fact, an outgrowth of the overall Balanced Scorecard framework (VBM, 2013).

The components of a strategy map are relatively straightforward. All relevant information is contained on a single page, enabling clear and efficient strategic communication. The four Balanced Scorecard perspectives are each present: financial, customer, internal, and learning and growth. The financial perspective aims to create long-term shareholder value by building a productivity strategy that improves the firm's overall cost structure and aligns asset utilization with growth opportunities. Strategic growth is driven by factors such as price, quality, availability, selection, branding, functionality, service, and business partnerships.

From the internal perspective, operations and customer management processes should be generating product and service attributes. Concurrently, innovation, regulatory compliance, and social processes contribute to business relationships and a firm's overall image. All of these processes are supported by the timely allocation of human resources, information resources, and organizational capital. Organizational capital encompasses company culture, leadership, alignment, and teamwork. A defining visual feature of the strategy map is that cause-and-effect relationships between elements are connected by arrows (VBM, 2013).

Porter's Five Forces Model

In contrast to the internally focused Kaplan and Norton model, Porter's Five Forces model examines the external competitive environment. Like the Kaplan and Norton framework, it is well represented by a diagram. Most commonly, the diagram places competitive rivalry at the center—represented by a circle or similar shape—while four surrounding forces exert influence upon it: the threat of new entry, buyer power, the threat of substitution, and supplier power.

Competitive rivalry, at the center of the model, can be understood in terms of the number of competitors, quality differences, other points of differentiation, switching costs, and customer loyalty. Buyer power relates to the number of customers, the size of each order, differences among competitors, price sensitivity, the ability to substitute, and the cost of switching. The threat of substitution concerns the overall performance of substitute products or services and the cost of switching to them. Supplier power is shaped by the number of suppliers, their relative size, the uniqueness of what they offer, a firm's ability to substitute suppliers, and the cost of doing so.

Finally, the threat of new entry manifests through factors such as the time and cost required to enter the market, specialist knowledge requirements, economies of scale, cost advantages or disadvantages, technology protections, and other barriers to entry (MindTools, 2016). Some versions of the Porter diagram depict existing competitors as a rotating wheel, with the four surrounding forces continuously exerting pressure as the competitive cycle turns (SASB, 2014).

Conclusion

Any strategically minded company would benefit from using both of the models discussed in this paper—or comparable alternatives that serve the same purposes. The internal workings of a firm are critically important, but they should be driven by an awareness of what is happening in the external environment. Failing to account for external forces risks complacency and leaves a company vulnerable to being displaced by more agile and modern competitors. Strategic management is most effective when both internal and external perspectives are considered together.

References

MindTools. (2016). Porter's Five Forces: Assessing the balance of power in a business situation. Mindtools.com. Retrieved 18 March 2016, from https://www.mindtools.com/pages/article/newTMC_08.htm

SASB. (2014). Sustainability and the Five Forces model. Sustainability Accounting Standards Board. Retrieved 18 March 2016, from http://www.sasb.org/five-forces/

VBM. (2013). Summary of strategy maps—Kaplan Norton. Valuebasedmanagement.net. Retrieved 18 March 2016, from http://www.valuebasedmanagement.net/methods_strategy_maps_strategic_communication.html