Harvard Business Review - 2004.02.pdf

Click here to visit:Is Your Company Ready to Go?Measuring the Strategic Readiness of Intangible Assets Robert S.Kaplan and David P.Norton Get your HBR Subscriber Alert|Click HereThe next issue of HBR online will post on the 1st of the month.Now Available!Exclusive New Benefit for HBR Subscribers:Online access to the past twelve issues of HBR!Simply select the issue you want to access from the drop down menu above.Measuring the Strategic Readiness of Intangible Assets Robert S.Kaplan and David P.NortonWorse Than Enemies Kerry J.SulkowiczGetting IT Right Charlie S.Feld and Donna B.StoddardHow to Have an Honest Conversation About Your Business Strategy Michael Beer and Russell A.EisenstatLaunching a World-Class Joint Venture James Bamford,David Ernst,and David G.FubiniThe HBR ListThe HBR List:Breakthrough Ideas for 2004 From the EditorFor Strategy,the Readiness Is All Thomas A.Stewart ForethoughtBooks in BriefHBR Case StudyGive My Regrets to Wall Street Mark L.Frigo and Joel Litman Managing YourselfSuccess That Lasts Laura Nash and Howard Stevenson Best PracticeTurning Gadflies into Allies Michael Yaziji Panel DiscussionOpt Artists Don Moyer Also in this IssueLetters to the EditorExecutive SummariesReprints and SubscriptionsAbout HBRCopyright 2004 Harvard Business School Publishing.All rights reserved.View Back Issues Click here to visit:|February 2004 Measuring the Strategic Readiness of Intangible Assets Measuring the Strategic Readiness of Intangible Assets A realand revolutionaryopportunity lies in studying and assessing how well prepared a companys people,systems,and culture are to carry out its strategy.by Robert S.Kaplan and David P.Norton How valuable is a company culture that enables employees to understand and believe in their organizations mission,vision,and core values?Whats the payoff from investing in a knowledge management system or in a new customer database?Is it more important to improve the skills of all employees or focus on those in just a few key positions?Measuring the value of such intangible assets is the holy grail of accounting.Employees skills,IT systems,and organizational cultures are worth far more to many companies than their tangible assets.Unlike financial and physical ones,intangible assets are hard for competitors to imitate,which makes them a powerful source of sustainable competitive advantage.If managers could find a way to estimate the value of their intangible assets,they could measure and manage their companys competitive position much more easily and accurately.But thats simpler said than done.Unlike financial and physical assets,intangible assets are worth different things to different people.An oil well,for example,is almost as valuable to a retail firm as it is to an oil exploration corporation because either company could sell it swiftly if necessary.But a workforce with a strong sense of customer service and satisfaction is worth far more to the retailer than it would be to the oil company.Also,unlike tangible assets,intangible assets almost never create value by themselves.They need to be combined with other assets.Investments in IT,for example,have little value unless complemented with HR training and incentive programs.And,conversely,many HR training programs have little value unless complemented with modern technology tools.HR and IT investments must be integrated and aligned with corporate strategy if the organization is to realize their full potential.Indeed,when companies separate functions like HR and IT organizationally,they usually end up with competing silos of technical specialization.The HR department argues for increases in employee training,while the IT department lobbies for buying new hardware and software packages.Whats more,intangible assets seldom affect financial performance directly.Instead,they work indirectly through complex chains of cause and effect.Training employees in Total Quality Management and Six Sigma,for instance,should improve process quality.That improvement should then increase customer satisfaction and loyaltyand also create some excess resource capacity.But only if the company can transform that loyalty into improved sales and margins and eliminate or redeploy the excess resources will the investment in training pay off.By contrast,the impact of a new tangible asset is immediate:When a retailer develops a new site,it sees financial benefits from the sales in the newly opened outlet right away.Although these characteristics make it impossible to value intangible assets on a freestanding basis,they also point the way to a new approach for quantifying how intangible assets add value to the company.By understanding the problems associated with valuing intangible assets,we learn that the measurement of the value they create is embedded in the context of the strategy the company is pursuing.Companies such as Dell,Wal-Mart,or McDonalds that are following a low-cost strategy derive value from Six Sigma and TQM training because thei