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Strategy Maps in Changing Times

By Kun Huo, Ph.D., CPA, CA; Khim Kelly, Ph.D., CA (Singapore); and Alan Webb, Ph.D., FCPA, FCA
October 1, 2022

A strategy map is a useful tool when it’s accurate, but it can cause problems when it becomes outdated as the organization’s business environment evolves.

 

Many organizations develop strategy maps as a central part of their strategic performance management system. A strategy map translates the organization’s strategic objectives into a visual graphic that depicts management’s current understanding of cause-and-effect relationships among performance measures. Such a map can be immensely powerful because it forces managers to translate what they need to achieve into simple and measurable performance outcomes that are then used to monitor progress toward attainment of strategic objectives.

 

The strategy map is also a powerful communication tool that can help employees understand how they can best direct their actions and resources to help the organization achieve its strategic objectives.

 

Many organizations face an ever-evolving business environment, encountering changes to operating conditions that are difficult to foresee. The frequency and magnitude of such changes have increased in recent years, with examples ranging from major technological breakthroughs (e.g., AI) to pandemics to geopolitical conflicts, all with the potential to significantly impact how businesses operate and survive.

 

For companies facing such rapid changes, the value of developing and communicating a strategy map is questionable given the likelihood that it will quickly become outdated as the organization’s business environment evolves. Moreover, would using an outdated and inaccurate strategy for decision-making purposes end up harming rather than benefiting the organization?

 

For example, imagine if Netflix had continued to use a strategy map initially developed based on mailing DVD rentals. Would doing so have delayed the company’s industry-changing shift to streaming video on demand in 2007? Would it have fallen behind competitors who recognized the implications of high-speed internet for home entertainment preferences? It seems likely that in this example, continued reliance on an outdated strategy map would have been detrimental to company performance.

 

Our research focused on what organizations can do if their strategy maps become outdated. Specifically, we conducted a study to better understand how managers perform when the organization’s strategy map is initially accurate but later becomes outdated, and how to improve the performance of managers in such settings (“The Beneficial Learning Effects of Combining a Hypothesis-Testing Mindset with a Causal Model,” The Accounting Review, 2022).

 

ACCURATE STRATEGY MAP

 

In our study, participants acted as managers in a business simulation game in which they were required to discover how best to profitably allocate company funds among three investment areas over multiple time periods. Unbeknownst to participants, the most profitable investment area changed from one area to another sometime during the multiple time periods when they were investing the funds.

 

We provided half of the participants with a strategy map that reflected the cause-and-effect relationships between the different investment areas and financial performance, accurately depicting one investment area as the most profitable area prior to an unexpected change in the operating environment. The other half of the participants didn’t receive a strategy map.

 

In the time periods when the strategy map accurately depicted the most profitable investment area, participants with the map performed better than those without it, investing considerably more funds in the most profitable investment area. This result supports the idea that an accurate strategy map can be a powerful tool to help managers direct their attention, effort, and resources to enable the organization to achieve its strategic objectives.

 

The main purpose of our study, however, was to demonstrate what happens when the competitive landscape for a company quickly evolves such that the most profitable investment area changes from the one depicted by the initially accurate strategy map. That is, what happens when a strategy map becomes outdated?

 

INNACCURATE STRATEGY MAP

 

The tendency to look for information that confirms prior beliefs or views is a well-known psychological bias. People find it easier to mentally process information confirming existing views rather than information that challenges their views, particularly when those views are strongly held.

 

In the context of our study, this confirmation bias is worse when participants were provided with a strategy map that was initially accurate and resulted in successful outcomes, thus strengthening beliefs about the value of continuing to use the map to make investment decisions. Consequently, when the strategy map became inaccurate, it was more difficult for these participants to learn that the most profitable investment area had changed.

 

Indeed, we found that in the time periods when the strategy map had become outdated and no longer accurately depicted the most profitable investment area, participants with the strategy map performed worse than those without a map, investing much less in the current (new) most profitable investment area.

 

HYPOTHESIS-TESTING MINDSET

 

The crux of our study was to demonstrate how to help managers overcome the crippling effect of the confirmation bias that can arise from using a strategy map that was initially accurate. Psychology research suggests that encouraging people to consider alternatives to established beliefs can be a helpful way to combat confirmation bias. In our study, half of the participants were encouraged to adopt a hypothesis-testing mindset (HTM) and to use available data to test cause-and-effect relationships. The other half of the participants didn’t receive this encouragement.

 

Without encouragement to adopt an HTM when the strategy map became inaccurate, participants with the map performed worse than those without it. Yet we found that when encouraged to adopt an HTM, participants with the strategy map did no worse than participants without the map. In other words, adopting an HTM allowed participants with the outdated strategy map to overcome the negative effects of confirmation bias.

 

Importantly, encouraging vs. not encouraging an HTM preserves the beneficial effects of a strategy map during the time when it’s initially accurate. Participants with the initially accurate strategy map performed better than those without the map in the periods when the map was still accurate, to similar degrees whether or not they were encouraged to adopt an HTM.

 

Overall, strategy maps may not be updated frequently enough to reflect important changes in the operating environment. Managers benefit from the strategy map when it’s accurate, but they’re ironically better off without one in the first place if the map becomes inaccurate. Yet if the company reminds managers to conduct hypothesis testing and to use the strategy maps as a starting point, the benefits of strategy maps can be enjoyed when they’re accurate and the downfalls avoided if they become inaccurate over time.

 

Kun Huo, Ph.D., CPA, CA, is an assistant professor at Ivey Business School at Western University. Kun can be reached at khuo@ivey.ca.
Khim Kelly, Ph.D., CA (Singapore), is the KPMG Professor of Accounting at the Kenneth G. Dixon School of Accounting at the University of Central Florida. Khim can be reached at khim.kelly@ucf.edu.
Alan Webb, Ph.D., FCPA, FCA, is the Deloitte Professor at the School of Accounting and Finance at the University of Waterloo. Alan can be reached at a2webb@uwaterloo.ca.
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