perspectives

Management Accounting
Opportunities in China
A Personal Perspective
Robert S. Kaplan, Harvard Business School

6
 Vol.1, Issue 1, 2019

ABSTRACT
I am pleased to have the opportunity to offer my personalized view of management
accounting challenges and opportunities in the inaugural issue of CHINA
MANAGEMENT ACCOUNTING REVIEW. My comments will reflect my past and current
research agenda. It will not, therefore, be a general and comprehensive overview of all
the opportunities for management accounting theory and practice development.

Let me start by listing five big challenges, and then link these to solutions I have
helped to develop and implement over the past 35 years.

KEYWORDS
Balanced scorecard; Strategy map; Activity-based costing; Risk management systems;
New ecosystems

Challenge 1: times a company’s tangible book assets. For

Financial Accounting ignores example, Infosys, the great Indian IT services
Intangible assets company, had about $9 billion of shareholder’s
equity on its 2016 balance sheet, most of this
As documented by my former Harvard being cash, yet its market value was about $40
Business School colleague, Professor Alfred billion. Similarly high market-to-book ratios
Chandler in his monumental books, The Visible now apply to several of the U.S. and China’s
Hand and Scale and Scope, companies during most valuable corporations, such as Google,
the Industrial Era (1800–1970) succeeded by Facebook, and Alibaba. The challenge for
investing in and managing physical and financial management accountants is to recall a basic
assets. Management accounting tools built upon principle of science and management, “If you
financial accounting statements, where physical can’t measure it, you can’t understand and
assets such as inventory, land, buildings, and manage it.” Clearly, company’s values are
equipment appeared along with financial coming from sources other than financial and
assets such as cash, accounts receivable and physical assets, and management accountants
marketable securities. Performance measures should learn how to quantify the new sources
such as operating income and return on assets, of value creation.
return on invested capital, and economic value
added reported how well companies managed Challenge 2:
their physical and financial assets to produce Companies fail at strategy
financial returns to shareholders. execution
During the past 50 years, however, the
sources of competitive advantage have shifted All corporations today do strategic
away from tangible physical and financial planning. But most companies fall short in
assets to how well a company manages its achieving the targets established in their
‘intangible assets,’ such as its employees, strategic plans. A Harvard Business Review
innovation, quality, customer relationships, study reported, “Companies on average realize
and brand. That is why we have seen market- only 60% of the financial performance their
to-book ratios increasing to four and five strategies promise... More than one-third of

7
perspectives

executives surveyed placed the figure at less Challenge 3:

than 50%. Bossidy and Charan observed, in Traditional cost accounting fails
their strategy execution book, ‘In the majority when products, services, and
of cases – 70 percent – the real problem isn’t customers proliferate
bad strategy … It’s bad execution.’ Jamie
Dimon, CEO of JP Morgan Chase, has stated, Companies start out focused with a limited
‘I’d rather have a mediocre strategy that is product line, sold within a limited geographi-
executed well than a brilliant strategy executed cal region, to a targeted set of customers. Over
poorly.’ time, successful companies expand the scale
Research I did with Dave Norton, 20 years and scope of their operations. They add new
ago, revealed the following four barriers to products lines, offer expanded services, sell to
strategy execution: new customer segments, and expand to new
1.Communication: in a typical workforce, geographic areas. All this expansion seems
only 5% of employees could tell you what their good, in the short run, but it also requires
company’s strategy was. While senior execu- many more resources to manage the increased
tives have the decision rights to select the strat- complexity of a company’s operations. As
egy, the strategy must be implemented by the documented by Tom Johnson and me, 30 years
employees. If they don’t know what the strat- ago, in Relevance Lost: The Rise and Fall of
egy is, they cannot participate in implementing Management Accounting, cost accounting sys-
it. tems did not adapt to companies’ increased va-
2.Incentives: 75% of managers have their riety of operations. As a result, companies get
incentive plans linked to short-term financial distorted signals about where they are making
performance, not to strategic targets. When money and where they are losing it. Companies
incentives are not aligned with accomplishing lack accurate information about which of their
strategic objectives, the company will focus on product lines, market segments, and geogra-
short-term financial improvements and not to phies are profitable and which are not. Conse-
building the capabilities required to implement quently, they have poor insight about the ac-
an ambitious 5 year strategy. tions they can take to reduce costs and restore
3.Resources: 60% of organizations don’t profitability. Our work shows that a company’s
link budgets to strategy. Strategies generally most profitable 20% of products and customers
require new capabilities and new initiatives. If generate not 80% of profits, but, typically, 150
resources are not supplied for strategic initia- to 300% of profits. The least profitable prod-
tives and capability building, then any new ucts and customers, therefore lose 50 to 200%
strategy will almost surely fail. of profits. Often the largest loss customers are
4.Monitoring: 85% of executive teams among the highest in volume, since you can’t
spend less than one hour per month discussing lose a great deal of money with a small cus-
their strategy; 50% spend zero hours monitor- tomer.
ing and guiding strategy. No strategy will work
perfectly, especially in today’s dynamic, vola- Challenge 4:
tile, and highly competitive world. If managers Management control systems
do not devote time to assessing the progress pay insufficient attention to
of their strategy, and adapting to changes and strategy risks
shortfalls, then the strategic plan will soon be-
come obsolete and useless. Almost all companies have under-invested
Management accounting should play a role in their risk management systems. This became
in overcoming all these shortcomings and bar- painfully clear during the 2007-2009 Global
riers to effective strategy execution. Financial Crisis as large, important banking

8 China Management Accounting Review

 Vol.1, Issue 1, 2019

organizations became insolvent. Subsequent avoidable and should not have occurred. That
analysis revealed that they were using the they did occur reflects inadequate companies’
wrong risk measures, or at best, had a very poor attention to risk management.
understanding of the risk measures they used
and relied on. They treated risk management Challenge 5:
as a compliance issue rather than one requiring Widespread poverty and
active engagement by senior executives and the inequality despite rapid
Board. economic growth
But it is not just financial institutions that
failed at managing risk. BP’s explosion in the Global corporations in the U.S., Europe,
Gulf of Mexico can be traced to an absence of and now China and rest of Asia have helped to
effective risk management policies, a failure generate tremendous growth during the past 50
that led to loss of life, severe loss of reputation, years. That growth, however, has not benefited
environmental pollution, and a direct financial everyone. In developed economies, a small and
cost to the company of more than $50 billion. decreasing fraction of the population has cap-
Boeing’s failure to manage the risks of its new tured the most recent gains, while many people
787 Dreamliner aircraft led to three years of in rural and working class communities have
delay, lost sales, supplier bankruptcy, and at experienced actual socio-economic declines.
least $10 billion in additional development Similarly, while economic growth has raised
costs. Volkswagen has experienced huge the standard of living in Africa, Asia, and Latin
recalls and more than $10 billion in out-of- America, billions remain in extreme poverty,
pocket costs because it allowed engineers to outside the formal economy. This is particu-
install software to bypass regulatory pollution larly true of countries with large rural popula-
testing. And the explosion of the Rui Hai tions. While not obviously in the normal set of
International Logistics chemicals warehouse in problems addressed by management account-
Tianjin caused more than 150 deaths and 700 ing, I now believe that management accounting
injuries. All these disasters, and many more I can play a key role in reducing inequality and
could name – the list grows each year, were alleviating systemic poverty.

Vision and Strategy

es

es
es
tiv

tiv
ur

ets

Financial Perspective
jec

as

tia
rg
Me
Ob

Ini
Ta

If we succeed, how will we

look to our shareholders?

Customer
es

es
es
tiv

tiv
ur

ets
jec

Perspective
as

tia
rg
Me
Ob

Ini
Ta

To achieve my vision,
how must I look to my
customers?
es

Internal
es
es
tiv

tiv
ur

ets
jec

as

tia

Perspective
rg
Me
Ob

Ini
Ta

To satisfy my customer,
at which processes must
I excel?
es

es
es
tiv

Learning & Growth

tiv
ur

ets
jec

as

tia
rg
Me
Ob

Ini
Ta

To achieve my vision, how

must my organization learn
and improve?
Figure1:
The Balanced Scorecard defines a strategy's cause and effect relationships

9
perspectives

1. Financial: the strategy for growth, profit-

This is an ambitious agenda. How can ability, and risk viewed from the perspective of
management accounting address these five big the shareholder.
challenges? 2. Customer: the strategy for creating value
and differentiation from the perspective of the
Challenge 1: Financial Accounting customer.
ignores Intangible assets 3. Business: Processes the strategic priori-
Solution: ties for various business processes that create
Introduce a Balanced Scorecard value for customers and shareholders.
and Strategy Map 4. Learning and Growth: the priorities to
create a climate that supports organizational
Dave Norton and I developed the Balanced change, innovation, and growth.
Scorecard to provide a new framework for Several years after introducing the Bal-
describing value-creating strategies that link anced Scorecard, and after building Balanced
intangible and tangible assets. The scorecard Scorecards for dozens of companies, we saw a
does not attempt to “value” an organization’s consistent pattern emerging in the architecture
intangible assets but it does measure these as- of the scorecard. We described the new frame-
sets in units other than currency. The Balanced work as a “Strategy Map,” a logical and com-
Scorecard describes how intangible assets get prehensive architecture for describing strategy,
mobilized and combined with intangible and as illustrated in Figure 2. A strategy map speci-
tangible assets to create differentiating cus- fies the critical elements and their linkages for
tomer value propositions and superior financial an organization’s strategy.
outcomes.
The scorecard provided a framework for Financial objectives for growth and produc-
organizing strategic objectives using the four tivity to enhance shareholder value
perspectives displayed in Figure 1: Customer objectives, including market and
account share, and acquisition, retention and
satisfaction of targeted customers where profit-
Financial Perspective able growth will occur
Financial performance, a
Sustained lag indicator, measures the Customer objectives reflecting the value
Shareholder Value
Productivity Revenue Growth
tangible outcomes from
the strategy.
proposition offered to targeted customers that
would lead them to do more and higher-margin
Customer Perspective business with the company
The customer value Process objectives related to innovation
Product/Service Attributes Relationship Image proposition defines the
source of value.
and operational excellence in the processes that
Price Quality Time Function Relation Brand
produce the products and services embedded in
the company’s value proposition
Process Perspective Investments required in people, systems,
Strategic processes create and organizational culture to generate and sus-
Oparations Customer Regulatory value for customers and
Management Management Innovetion
Processes and Social shareholders. tain growth.
Processes Processes Processes
Organizations build strategy maps from the
top down, starting with the destination and then
Learning & Growth Perspective charting the routes that lead there. Corporate
Aligned Intangible assets
Human Information Organication drive improvement in the executives first review their mission statement,
strategic processes.
Capital Capital Capital
why their company exists, and core values,
what their company believes in. From that in-
Figure2: A Strategy Map describes how the enterprise creates value for shareholders and customers formation, they develop their strategic vision,

10 China Management Accounting Review

 Vol.1, Issue 1, 2019

what their company wants to become. This performance of their products and services.
vision creates a clear picture of the company's The customer perspective also identifies the
overall goal, which could be to become a top intended outcomes from delivering a differenti-
quartile performer. The strategy identifies the ated value proposition. These would include
path intended to reach that destination. market share in targeted customer segments,
account share with targeted customers, acquisi-
Financial Perspective tion and retention of customers in the targeted
The typical destination for profit-seeking segments, and customer profitability.
enterprises is a significant increase in share-
holder value. Companies increase economic Process Perspective
value through two basic approaches revenue Once an organization has a clear picture of
growth and productivity. A revenue growth its customer and financial perspectives, it can
strategy generally has two components: build determine the means by which it will achieve
the franchise with revenue from new markets, the differentiated value proposition for custom-
new products, and new customers; and increase ers and the productivity improvements for the
sales to existing customers by deepening re- financial objectives. The process perspective
lationships with them, including cross-selling captures these critical organizational activities,
multiple products and services, and offering which fall into four high-level processes:
complete solutions. A productivity strategy also
generally has two components: improve the 1.Operations Management Processes that
cost structure by lowering direct and indirect improve supply-chain management, production
expenses; and utilize assets more efficiently by and service delivery processes, asset utiliza-
reducing the working and fixed capital needed tion, and resource-capacity management
to support a given level of business. 2.Customer Management Processes that
expand and deepen relationships with existing
Customer Perspective customers
The core of any business strategy is the cus- 3.Innovation Processes to develop new
tomer-value proposition, which describes the products and services and to penetrate new
unique mix of product, price, service, relation- markets and customer segments
ship, and image that a company offers. It de- 4.Regulatory and social process to deliver
fines how the organization differentiates itself improved environmental performance and
from competitors to attract, retain, and deepen social performance to citizens in communities
relationships with targeted customers. The where we operate
value proposition is crucial because it helps an
organization connect its internal processes to Learning and Growth Perspective
improved outcomes with its customers. The final region of a strategy map is the
Specifically, companies that pursue a strate- learning and growth perspective, which is the
gy of lowest cost to the customer need to excel foundation of any strategy. In the learning and
at competitive pricing, product quality, prod- growth perspective, managers define the em-
uct selection, lead time and on-time delivery. ployee capabilities and skills, technology, and
For customer solutions, an organization must corporate climate needed to support a strategy.
stress the quality of its relationships with cus- These objectives enable a company to align its
tomers, including exceptional service, and the human resources and information technology
completeness and suitability of the solutions with the strategic requirements from its critical
it offers individual customers. And companies internal business processes, differentiated value
that pursue a product-leadership strategy must proposition, and customer relationships. After
concentrate on the functionality, features, and addressing the learning and growth perspective,

11
perspectives

companies have a complete strategy map with Companies that do this lose sight of the essence
linkages across the four major perspectives. of the scorecard: its focus, its simplicity, and
The strategy map and Balanced Scorecard its vision. The real benefit comes from making
enables managers to measure and manage all the scorecard the cornerstone of the way you
the critical capabilities needed to improve per- run the business. It should be the core of the
formance and create a differentiated and sus- management system, not the measurement
tainable advantage even in highly competitive system. It should become the lever to
markets. streamline and focus strategy that can lead to
breakthrough performance.
Challenge 2: Companies fail at Brady and other early BSC implementation
strategy execution leaders (at Mobil US Marketing and Refining,
Solution: Cigna Property and Casualty, and Chemical
Use the strategy map and Retail Bank) adopted and used the scorecard
Balanced Scorecard in a Strategy to help them describe their strategies and
Execution System implement a new strategy management system
based on scorecard measurements. The new
As Dave Norton and I began to help com- insights helped us formulate the fundamental
panies implement the Balanced Scorecard, structure for a generic strategy management
several senior executives taught us that the system (Kaplan and Norton, 1996a and b).
Balanced Scorecard could operate in a far more Over the next ten years, we continued to
powerful manner than its use as a better perfor- learn and modify how the strategy map and
mance management system. Larry Brady, then scorecard can be used as a comprehensive and
President of the FMC Corporation, stated: integrated management system that links strat-
Don’t think of the scorecard as a new egy formulation and planning with operational
measurement system that eventually requires execution and feedback and learning. We de-
hundreds and thousands of measurements and scribed the new strategy execution system in
a big, expensive executive information system. our 5th Balanced Scorecard book, called The
Execution Premium. The system has six major
stages as shown in Figure 3.
It starts in Stage 1 with a process to
2. TRANSLATE THE STRATEGY
· Strategy Map/Themes
1. DEVELOP THE STRATEGY develop the strategy using tools developed by
· Mission, Values, Vision
· Measures / Targets
· Strategy Formulation
strategy scholars such as Michael Porter, Clay
· Initiative Portfolios
· Funding / Stratex Christensen, Chan Kim and Rene Mauborgne,
and many strategy consulting companies,
3. align the organization 6. Test & adapt such as McKinsey, Boston Consulting Group
· Bussiness Units · Profitability Analysis and Bain Consulting. In Stage 2, the strategy
· Support Units · Strategy Correlations
· Employees · Emerging Strategies execution system plans the strategy with
tools, such as strategy maps and Balanced
Scorecards. Strategic themes organize strategy
4. plan operations
· Key process improvement
5. MONITOR & LEARN map objectives and provide a mechanism for
· Strategy Reviews
· Sales planning
· Resource capacity plan
· Operating Reviews defining portfolios of strategic initiatives and
· Budgeting accountability. Cause-and-effect models help
to set targets and evaluate the strategy. Once
EXECUTION the high-level strategy map and Balanced
Process
Initiative
Scorecard have been articulated, the system,
in Stage 3, aligns the organization to the
Figure3: The Kaplan-Norton six-stage closed loop management system for Strategy Execution strategy by cascading linked strategy maps and

12 China Management Accounting Review

 Vol.1, Issue 1, 2019

scorecards to all organizational units. It aligns costing (ABC). This management accounting
employees through a formal communications innovation enable indirect and support
process and linking employees’ personal expenses (my preferred term for describing
objectives and incentives to strategic objectives. what others call ‘overhead’) to be assigned
With all organizational units and employees to products, services and customers based
aligned to the strategy, the system in Stage 4 on the quantitative demands that these cost
plans operations using tools such as quality objects placed on the organization’s common
and process management, reengineering, and shared resources. Originally, when Robin
process dashboards, rolling forecasts, activity- Cooper and I introduced ABC, we followed
based costing, resource capacity planning, procedures that we had observed in several
and dynamic budgeting. As the strategy and companies that inspired the development of
operational plans get executed, the enterprise, ABC. These procedures involved extensive
in Stage 5, monitors and learns about problems, interviewing of people to learn what fraction
barriers, and challenges in periodic, usually of their time was spent on activities such as set
monthly, strategy review meetings. This up for products, order and receive materials,
process integrates information about operations respond to customer requests, and design a
and strategy in a carefully designed structure of new product. Such interviewing and surveying
management review meetings. Finally, in Stage turned out to be impractical to implement and
6, managers use internal operational data and sustain in large organizations with thousands of
new external environmental and competitive products and customers. In the early 2000’s, a
data to test and adapt the strategy, launching former HBS student of mine, Steve Anderson,
another loop around the integrated strategy and I developed a simpler and more powerful
planning and operational execution system. I way of doing ABC, which we called ‘Time-
recognize that this is a high-level summary of a Driven Activity-Based Costing’ or TDABC.
complex new management system. I encourage We described the new approach in a Harvard
readers to learn much more about the Kaplan- Business Review article and book. TDABC
Norton strategy execution system by reading gets to the essence of costing by stripping it
the Execution Premium book, where each of down to estimating two parameters: the cost per
the six stages is described in depth. Proper use minute of each resource – people, equipment
of the strategy execution system solves all four and facilities – which we call the ‘capacity cost
of the previously noted barriers to effective rate,’; and the time required of each resource to
strategy execution: communication, alignment, produce a product, deliver a service, and serve
resource allocation, and periodic management a customer. By multiplying the cost per minute
reviews. with the resource time required, and sum up
over all activities done for the production
Challenge 3: Traditional cost and delivery cycle, you easily obtain the total
accounting fails when products, resource costs.
services, and customers proliferate TDABC was the conceptual breakthrough
Solution: that enabled companies, even with tens of
Introduce activity-based costing, thousands of products, and hundreds of thou-
especially time-driven activity- sands or millions of customer transactions each
based costing month, to calculate accurate costs for each
product, transaction, and customer. Compa-
The problems with conventional standard nies could now see where they were making
costing systems, primarily the inaccurate money and where they were losing money in
allocation of overhead costs have been a highly granular and transparent way. The in-
solved with the introduction of activity-based formation enabled managers to take a variety

13
perspectives

of targeted actions to lower costs and improve Challenge 4: Management control

profits by improving the efficiency of high- systems pay insufficient attention to
cost processes, redesign products and services strategy risks
so they would be simpler and less expensive Solution:
to produce and deliver, and modify customer Introduce risk management
relationships through menu-based pricing, systems for managing strategy
minimum order sizes, and customized services. and external risks
Applying TDABC to the expanding scale and
scope of Chinese enterprises will enable them Risk management has largely been over-
to become far more efficient and profitable. looked by the management accounting pro-
A happy postscript to my TDABC work fession. Yet this represents another great op-
started in 2010 when I received a phone call portunity for management accountants to add
from my strategy colleague, Michael Porter. considerable value for the Chinese economy.
He had introduced a powerful new framework I have found it helpful to distinguish
to health care, which he called value-based among three types of risks. Preventable risks
health care delivery. The goal is to produce are caused by employees’ unauthorized,
better patient outcomes, measured at the illegal, unethical, or inappropriate actions.
medical condition level, while lowering the In general, management knows the actions it
cost to achieve these outcomes. Michael told wants employees to avoid (they are ‘known
me that none of the provider organizations he knowns’) and has specific management
had been working with seemed to measure tools to deter or prevent such events from
costs in ways that made sense to him. His occurring. Ideally, companies want to drive
insight proved correct since existing health the probability of preventable risks to zero
care cost measurement approaches were not using standard approaches such as internal
following proper cost accounting principles. controls, segregation of duties, internal
I responded with my belief that time-driven audit, and active whistle-blower programs.
activity-based costing (TDABC) would work These are all well known to professionals in
well in health care, but I had never found any compliance and risk management. The more
hospital administrator or clinician willing to interesting and challenging risks occur in the
try it out. Mike indicated that he knew of a few two other categories, which risk management
hospitals and clinicians who might be good professionals often ignore.
candidates for pilot projects and asked whether Strategy risks are inherent in all
we could work collaboratively on this issue. organizations, since all strategies involve
I readily accepted and from that emerged a introducing new risks in anticipation of
great partnership between us. We described generating high returns. For example, some
our progress and success in a September 2011 companies operate in inherently hazardous
HBR article, ‘How to Solve the Cost Crisis industries, such as mining, chemicals, and
in Health Care,’ and have continued to work oil and gas exploration. Others, such as
actively with many wonderful hospital systems high-technology, pharmaceutical, medical
in the U.S. and, increasingly, around the device, and aerospace companies, engage
world to introduce accurate cost and outcomes in expensive high-risk research projects to
measurement into health care. This is a huge develop new products. Managers, in principle,
opportunity for management accountants in can identify strategy risk events (they are
China, to help make the country’s health care ‘known unknowns’) and can influence both
system more effective and more efficient. It their likelihood and impact. While managers
is tremendously exciting work with very high have some ability to reduce the likelihood and
payoffs. impact of strategy risks, they cannot entirely

14 China Management Accounting Review

 Vol.1, Issue 1, 2019

eliminate the probability of their occurrence. and controllability of the different categories of
Some residual risk, inherent to the strategy, risk they face. I have performed this work with
always remains. The role of risk management is Professor Anette Mikes, and we have published
to conduct workshops and implement processes several articles that describe our framework
to identify these risks, assess their potential in more detail; see, for example, Kaplan and
impact, and ensure that management mitigates Mikes, “Managing Risks: A New Framework,”
the most consequential risks through risk- Harvard Business Review (June 2012): 48-60;
mitigating investments and active monitoring and “Risk Management–The Revealing Hand,”
of risk dashboards. Journal of Applied Corporate Finance (Winter
The third category of risk, which I call 2016) Vol. 28 No. 1: 8-18.
external risks arise from events outside
the company and its strategy and beyond Challenge 5: Widespread poverty and
the company’s direct influence or control. inequality despite rapid economic
Managers cannot estimate the likelihood of growth
external risks and, in many cases, are not Solution:
even aware they exist (they are ‘unknown Create new ecosystems for
unknowns’) and that they could jeopardize the inclusive growth
company’s strategy and survival. Managing
external risks requires a process of ‘risk My current research agenda is an ambitious
envisionment,’ in which managers rely less on attempt to deploy strategy maps and Balanced
quantitative risk management and more on their Scorecards to help companies implement
experience, intuition, and imagination to create shared value and inclusive growth strategies.
new mental models about future scenarios and Critics are currently blaming corporate profit-
strategic uncertainties. Once external risks have maximizing behavior for ignoring persistent
been envisioned, managers can brainstorm poverty and inequality. Powerful international
about how to enhance organizational resilience institutions, such as the G20, the World Bank,
to withstand the most consequential of them. and the IMF advocate that the private sector fo-
In short, management wants to, and gener- cus on inclusive growth, defined as economic
ally can, eliminate preventable risk events from growth that produces benefits for all sections of
occurring; it reduces the likelihood of strategy society. In response, companies have attempted
risks and mitigates their adverse consequences, to upgrade their traditional corporate social
should they occur, in a cost-effective way; and, responsibility (CSR) programs to shared value
finally, it anticipates the most dire consequenc- and sustainability strategies designed to deliver
es of external risks by modifying strategies and positive economic returns while simultane-
taking actions to reduce their consequences ously improving the quality of life for those in
should they occur. The power of this multidi- low-income, distressed communities.
mensional risk taxonomy arises from the very But these new types of strategies are
different management processes, organizational complex to envision and implement.
units, and actions put in place to deal with each Poorly functioning supply chains and high
risk category. The internal audit, a powerful unemployment cannot be solved by any single
and effective process for managing preventable company through targeted ‘point solutions,’
risks, may be useless for managing strategy such as building a new warehouse, selecting
and external risks. Conversely, solutions for a local distributor, or building a new school
managing strategy and external risks would not or training center. A sustainable, scalable
be effective or efficient for managing prevent- solution requires that the companies help create
able risks. Organizations must tailor their risk an entirely new ecosystem in communities
management processes to the inherent nature where they operate, distribute, and sell. The

15
perspectives

corporation must establish new relationships they participated in creating. The strategy map
and alliances with local residents, their would be followed by creation of a Balanced
governments, other local businesses, service Scorecard that specifies financial and non-fi-
providers, NGOs, and external funders. nancial performance metrics for all ecosystem
Building such an ecosystem is not at all participants. The scorecard would quantify the
easy. Simply enhancing the relationship be- tangible benefits from participating – financial
tween established companies in the corporate returns for participating corporations and the
sector has been problematic. By some esti- seed and impact investors – and measurable
mates, more than 50% of joint ventures and social benefits for local citizens. The existence
strategic alliances fail to achieve their desired of a shared scorecard should inhibit the short-
synergies. An inclusive growth strategy is or- term incentives of large corporations to exploit
ders of magnitude more complex than building their power to capture most of the gains from
such traditional private-sector strategic partner- a more productive ecosystem. Having measur-
ships. The new ecosystem requires previously able objectives and results will also help the
unrelated actors from multiple sectors – cor- ecosystem raise capital for growth.
porate, NGO and public - to collaborate. And Beyond its value in clarifying and building
these actors typically find it difficult to engage consensus for the multi-sector inclusive growth
in productive partnerships because each has strategy, the BSC metrics also provide the
rather deep mistrust of the attitudes and mo- accountability for performance and the foun-
tives of those outside its sector. dation for an ecosystem governance system.
This suggests that ecosystem creation Monitoring and governance gets performed
should include a mechanism to align multiple during periodic strategy review meetings at
stakeholders around the new strategy. This is which all participants review the measured
exactly the role played by a strategy map and performance, identify the root causes of per-
scorecard to create organizational alignment formance shortfalls, and develop action plans
around a company’s strategy. As documented to correct the deficiencies and to adapt to
by Kaplan, Norton and Rugelsjoen in the HBR changing circumstances. Such strategy review
article ‘Managing Alliances with Strategy meetings keep everyone aligned and working
Maps,’ HBR Jan 2010, a co-created strategy together towards achieving their shared goals.
map helps strategic partners align on their
common strategic goals and what needs to be Summary
done to achieve them. We have consistently
seen that such co-creation of strategies and I hope these five challenges and solutions
metrics by diverse individuals breaks down illustrate the tremendous opportunity ahead
barriers. As one corporate CEO observed, ‘The for management accountants in China. The
scorecard gave us a common language about profession can and should help to advance the
our strategic direction and intent. We could country’s economy to the next level of perfor-
develop and communicate strategy so that it mance and accountability. It should contribute
was quite clear for everyone. The wide-spread to raising the standard of living and quality of
participation in developing the scorecard gave life for all citizens. I hope that the mission of
it great acceptance.’ the CHINA MANAGEMENT ACCOUNT-
It is reasonable to assume that potential ING REVIEW will be to stimulate creation
partners in a new ecosystem could similarly and dissemination of management knowledge
collaborate to build a strategy map for inclu- and practice that advances societal goals. Good
sive growth. The process would help to create luck for the journey ahead.
trust and a shared understanding and consensus
among them to implement the new strategy

16 China Management Accounting Review