Kaplan vs. Porter

The author of this report has been asked to compare and contrast two very popular models when it comes to strategic business decisions and the management involvement surrounding the same. One of those two approaches is the work of Kaplan and Norton while the other is that of Porter. Kaplan and Norton had a “notion,” per the assignment parameters, of a strategic management system while Porter’s work as come to be known as the Five Forces. The two frameworks are similar in some ways but they are also very different in other ways. This brief report shall compare and contrast the two approaches in several ways so as to reveal what makes them different and what makes them the same. While the two approaches being compared and contrasted in this report are different, they are both aligned toward the same overall goal and are centered on the same basic premise of strategic decision-making and business situational awareness.

Analysis

The centerpiece of the Kaplan and Norton approach has come to be known as the strategy map. It is basically a workflow diagram that is centered on strategic decision making. A strategy map using the Kaplan and Norton framework has four basic levels, those being the financial perspective, the customer perspective, the internal perspective and the learning/growth perspective. It was introduced to the business and scholarly world in 1992 via the Harvard Business Review publication. It was meant as a performance measurement system and a strategic management system. At its heart, the strategy map is a diagram that helps describe and delineate how an organization creates values by connecting the different strategic objectives that they have. To be more specific, there is a linkage of items that have a cause and effect relationship with each other and the underpinnings of the diagram is always going to be the balanced scorecard approach. This is where the four foci come from, actually. Indeed, strategy maps are an outgrowth and part of the overall balanced scorecard approach (VBM, 2013).

The facets of a strategy map are pretty basic and so is the creation of the same. All of the information for the final strategy map is contained in one page and it thus enables fairly easy strategic communication for the people that use the map. As noted before, the four balanced scorecard facets are present, those being financial, customer, internal and learning/growth. The basic premise of the financial perspective is to create long-term shareholder value. It is meant to build a productivity strategy of improving the overall cost structure of the business and a utilization of assets that is aligned with growth and expanding the opportunities that the business has. These opportunities are meant to increase shareholder value. Strategic growth is driven by things such as price, quality, availability, selection, branding, functionality, service and business partnerships. In terms of the internal perspective, operations and customer management process should be creating product and service attributes. Concurrent to that, innovation, regulatory and social process and so forth help with relationships and the business image of a firm. All of the processes mentioned above are held up and supported by the proper and timely allocation of human resources, information resources and organizational capital. Organization capital is the confluence of company culture, leadership, alignment and teamwork. One major part of the strategy map diagram is that cause and effect relationships are connected by arrows (VBM, 2013).

On the other hand, there is the Porter Five Forces model. The Kaplan model was based on the internal environment and the Porter model is based on the internal environment. Even with this major difference, they are similar in that the Porter model is also well-represented by a diagram. Most commonly, the diagram is manifested by a circle or other shape in the center that represents competitive rivalry. Exterior to that but all influencing rivalry would be the threat of new entry, buyer power, threat of substitution and supplier power. Basically, the diagram infers that the latter four of those items influence and has effects on the first. Competitive rivalry, the centerpiece, can be summarized in the form of the number of competitors, quality differences, other differences, switching costs and customer loyalty. Buyer power is all about the number of customers, the size of each order, the differences between competitors, price sensitivity, ability to substitute and cost of changing. Threat of substitution is fairly simple to comprehend as it is just the substitute performance overall as well as the cost of change. Supplier power is about the number of suppliers, the size of those suppliers, the uniqueness of the service, the ability for a firm to substitute and the cost of changing to accomplish the same. Finally, there is the threat of new entry. This manifests in the form of the time/cost of new entry, specialist knowledge requirements, economies of scale, cost advantages (or lack thereof), technology protections and barriers to entry (MindTools, 2016). Some versions of the Porter diagram show existing competitors as a rolling wheel with the other four forces imposing influence as the competition cycle grinds on (SASB, 2014)

The ways in which these two models are similar and the ways in which they are different are fairly easy to decipher. Indeed, the first reason they are similar is that they both are easily and cleanly represented by diagrams. The only caveat to that is that the Kaplan and Norton model is much more robust and complex. This is not to say that it is impossible for an average business person to understand. Rather, it is just to say that the Kaplan and Norton model is much larger and intricate as compared to the Porter model which is rather simple. There is something to be said for being specific and including all of the relevant points. However, the Porter model simplifies things and covers what it wants to cover at a much higher level. The overall level of detail and complexity is the same between both models but the representation of Porter’s model is kept in a simpler form.

Another reason they are similar is that they both are directly related to the strategic business decision model. They are technically focusing on different things, at least for the most part, but they both relate to the idea of keeping costs down, satisfying the customer, using money and resources efficiently and taking all important facets of the business model into account. Where they differ greatly is that the Porter model is exterior-facing and the Kaplan and Norton model is introspective. Indeed, it is important to note that what manifests outward and what happens in an exterior fashion is an entirely different matter than what a company is doing and saying internally. They are obviously related and they obviously need to be strongly aligned. However, one example that the author of this report could offer is that what a company chooses to (or must, in the case of a public company) do outwardly in terms of financial reporting is one thing but internal management accounting and metric tracking is quite another. All of those financial metrics and measurements are important but the way in which they are reported and used can differ greatly based on the situation in question. In short, the Porter model is all about perceiving and reacting to the external environment. The Kaplan and Norton model is about internal controls and executing internal business decisions that make financial and procedural sense.

Conclusion

Any company that is wise will use both of the models discussed in this report or something else that covers the same. The internal workings of a company are important but they should be driven by what is happening exterior of the company. To do otherwise is less than wise and can lead to a company getting complacent or replaced by more modern competitors.

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. Abstract. Valuebasedmanagement.net. Retrieved 18 March 2016, from http://www.valuebasedmanagement.net/methods_strategy_maps_strategic_communication.html

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