Transcript Document 7131559

Why Does Business Need a
Balanced Scorecard?
If you can’t measure it,
You can’t manage it.
Why Balanced Scorecard?
• An organization’s measurement system
strongly affects the behavior of people both
inside and outside the organization.
• If companies are to survive and prosper in
information age competition, they must use
measurement and management systems
derived from their strategies and
capabilities.
Why Balanced Scorecard?
• Unfortunately, many organizations espouse
strategies about customer relationships, core
competencies, and organizational
capabilities while motivating and measuring
performance only with financial measures.
Historical Measurement System
• Historically, the measurement system for
business has been Financial
• Accounting has been called the “language
of business”
• Managers are pressured to deliver consistent
and excellent short-term financial
performance.
Financial Measurement
• Trade-offs are made that limit the search for
investments in growth opportunities.
• Under pressure for short-term financial
performance, companies reduce spending on
–
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–
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new product development
process improvements
human resource development
information technology, data bases, and system
customer and market development.
Financial Measurement
• In the short-run, a company could maximize shortterm financial results by exploiting customers
through high prices or lower service.
• In the short-run, these actions enhance reported
profitability.
• But the lack of customer loyalty and satisfaction
will leave the company highly vulnerable to
competitive inroads.
Financial Measurement
• Financial measures are inadequate for
guiding and evaluating organizations
through competitive environments.
• They are lagging indicators that fail to
capture much of the value that has been
created or destroyed by managers’ actions in
the most recent accounting period.
Balanced Scorecard
• BSC provides executives with a
comprehensive framework that translates a
company’s vision and strategy into a
coherent set of performance measures
Translating a Mission into Desired Outcomes
Vision (What we want to be)
Mission (Why we exist)
Strategy (Our game plan)
Balanced Scorecard (Implementation and focus)
Strategic Initiatives (What we need to do)
Personal Objectives (What I need to do)
Strategic Outcomes
Satisfied
Shareholders
Delighted
Customers
Effective
Processes
Motivated and Prepared
Workforce
Mission Statements
• Communicate fundamental values and
beliefs to all employees
• Addresses core beliefs and identifies target
markets and core products
• Should be Inspirational
• Supplies energy and motivation to the
organization
Mission Statements
• Rockwater (an undersea construction company)
CEO led a two-month effort among senior
executives and project managers to develop a
detail mission statement.
• A project manager from a drilling platform asked
– What am I supposed to do?
– How should I behave each day to deliver on our
mission statement?
• There is a large void between the mission
statement and employees’ day-to-day actions.
Mission Statements
• Mission statements are insufficient to guide
employee’s day to day actions.
• BSC translates mission and strategy into
objectives and measures.
Balanced Scorecard
•
Where is the organization going?
•
How do we get there
Vision &
Mission
•
What are the strategic goals
for which we are striving?
Strategy
•
What do we need to “do well”
to achieve these strategic
goals
•
How do we measure
how well we are doing?
Strategic Goals
Critical Success Factors
Internal
Business Organizational
Financial Customer Process
Learning
Perspective Perspective Perspective Perspective
Key Performance Indicators
Internal
Business Organizational
Financial
Customer
Process
Learning
Perspective Perspective Perspective Perspective
Balance Scorecard
• The scorecard provides a framework, a
language, to communicate mission and
strategy.
• It uses measurement to inform employees
about the drivers of current and future
success.
Balanced Scorecard
• By articulating
• the outcomes the organization desires and
• the drivers of those outcomes,
• Senior executives hope to channel the
energies, the abilities, and the specific
knowledge of people throughout the
organization toward achieving the longterm goal.
What is a Balanced Scorecard?
A Strategic Management System that includes…
• a set of Cause & Effect relationship assumptions
linking key indicators and strategy
• a set of targets for each one of the key indicators
linked to a compensation system
• a strategic feedback loop
Strategic Feedback Process
A strategic feedback process supports executives decisionmaking and allows executives to revise strategy as needed
Organizational
Strategy
Measure
the
strategy
Determine
Tactical
priorities
Update the
Strategy
Balanced Scorecard
Financial Strategic Objective
Strategic Measure
--Financially Strong
--Return on Capital Employed
CUST
--Delight the Consumer--Mystery Shopper Rating
--Win-Win Relationship –Dealer/Pioneer Gross Profit split
Internal --Safe & Reliable
--Manufacturing Reliability Index
--Competitive Supplier --Days Away from Work Rate
--Good Neighbor
--Laid Down Cost vs. Best
--Quality
Competitive Reliable Supply
--Environmental Index
--Quality Index
L&G
--Motivated & Prepared –Strategic Competency Availability
Strategic
Learning
Loop
Operations Planning & Monitoring
Business
Plans
Strategic
Initiatives
Budget
Individual
Perf. Mgmt
Problem
Solving
Test strategy
And identify
issues
Four Scorecard Perspectives
Financial Perspective
To succeed financially, how should we appear to our
internal and external shareholders?
Customer Perspective
To achieve our financial goals, how should we appear to
our customers?
Process Perspective
To satisfy our shareholders and customers, at which
internal business processes must we excel?
Learning and Growth Perspective
To achieve our vision, how will we improve the skills of
our human resources, increase the effectiveness of our
business processes and sustain our ability to change?
Translating Vision and Strategy: Four Perspectives
Financial
“To succeed financially, how should
we appear to our shareholders?”
Objectives, Measures, Targets, Initiatives
Internal Business Process
Customer
“To achieve our vision, how
should we appear to
Our customers?
Objectives, Measures,
Targets, Initiatives
Vision
And
Strategy
“To satisfy our shareholders
And customers, what
Business processes must
We excel at?”
Objectives, Measures,
Targets, Initiatives
Learning and Growth
“To achieve our vision, how will we
sustain our ability to change and improve?”
Objectives, Measures, Targets, Initiatives
Defining Key Performance Indicators
Critical Success Factor
KPI (Measures)
•Exceed Shareholders’ Financial
Covenants
•Increase cash flow by
product/service
•Revenue from accessories, operations
•Return on Capital Employed(ROCE)
•Cash flow by product($by product)
•Increase customer awareness of
LBC and its products/services
•Brand recognition survey (% recognition)
•Number of awards for accessories (# of
awards)
•Advertise through direct mail,
magazines, trade show, internet
•Customer hit rate in Southeastern US (# of
leads)
•Customer hit rate (# of leads)
•Build customer database
•Create internal website for
marketing and sales
•Number of awards for best website
•Outsource programming needs to reduce
costs (%progress & cost)
•Customer database (% progress & cost)
•Internet website (% progress & cost)
•Build intranet site (% progress & costs)
Financial
Customer
Internal Business
Process
Organizational
Learning
Financial Perspective
• Financial performance measures indicate
whether a company’s strategy,
implementation, and execution are
contributing to bottom-line improvement.
Financial Perspective
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•
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•
•
•
Relate to profitability-measures
Operating income
Return on capital employed
Economic value-added
Rapid sales growth
Generation of cash flow
Measuring Strategic Financial Themes
Revenue and Growth Mix
Strategic Themes
Cost Reduction/
Productivity Improv.
Revenue/employee
Asset
Utilization
Investment (% of sales)
R&D (% of sales)
Business Growth
Unit
Strategy
Sales growth rate by segment
% revenue from new
product, services, and customers
Sustain
Share of targeted customers
and accounts
Cross selling
% revenues from new applications
Customer and Product line
profitability
Cost versus competitors'
Cost reduction rate
Indirect expenses
(% of sales)
Working capital ratios
Cash-to-cash cycle
ROCE by key asset categories
Asset utilization rates
Harvest
Customer and Product line
profitability
% unprofitable customer
Unit cost (per unit of
output, per transaction
Payback
Throughput
Customer Perspective
• Identify the customer and market segments
in which the business unit will compete and
• The measures of the business unit’s
performance in these targeted segments.
• Includes several core or generic measures of
the successful outcomes from a wellformulated and implemented strategy.
Customer PerspectiveCore Outcome Measures
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•
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Customer satisfaction
Customer retention
New customer acquisition
Customer profitability
Market and account share in targeted market
Market
Share
Customer
Outcomes
Customer
Profitability
Account
Share
Customer
Retention
Customer
Acquisition
Customer
Satisfaction
Customer Perspective
• Measures of value propositions that the
company will deliver to customers in
targeted market segments.
Customer Perspective
• The segment specific drivers of core
customer outcomes represent factors
critical for customers to switch to or remain
loyal to their suppliers
• Short lead-time
• On-time delivery
• A constant stream of innovative products
and services
Customer Perspective
• A supplier able to anticipate their emerging
needs and capable of developing new
products and approaches to satisfy those
needs.
Customer Perspective
• Enables business unit managers to articulate
the customer and market-based strategy that
will deliver superior future financial returns.
Internal Business Process
Perspective
• Identify the critical internal processes in
which the organization must excel.
The Internal Value Chain
Innovation
Cycle
Operation
Cycle
Postsales
Service
Cycle
Custo
mer
Need
Identif
ied
Create
Identify
The
the
Product/
Market
Service
Offering
Build
Deliver
Service
The
The
The
Products/ Products/
Customer
Services Services
Cust
ome
r
Nee
d
Satis
fied
Internal Business Process
Perspective
• These processes enable the business unit to
• Deliver the value propositions that will
attract and retain customers in targeted
market segments,
• Satisfy shareholder expectations of
excellent financial returns.
Internal Business Process
Perspective
• Focus on the internal processes that will
have the greatest impact on customer
satisfaction and achieving an organization’s
financial objectives.
Internal Business Process
Perspective
• Two fundamental differences between the
traditional and the BSC approaches to
performance measurement.
• Traditional approaches attempt to monitor
and improve existing business processes.
• Focus on improvement of existing
processes.
Internal Business Process
Perspective
• BSC approach usually identify entirely new
processes at which an organization must
excel to meet customer and financial
objectives.
• It must develop a process to anticipate
customer needs or one to deliver new
services that target customers value.
(processes not currently performing)
Internal Business Process
Perspective
• BSC incorporates innovation processes into
the IBP perspective.
• Traditional performance measurement
systems focus on the processes of
delivering today’s products and services to
today’s customers.
• They control and improve existing
operations
Internal Business Process
Perspective
• Short-wave of value creation from.
• Receipt of an order from an existing customer for
an existing product (or service).
• Ends with the delivery of the product to the
customer.
• Value created from producing, delivering, and
servicing this product and the customer at a cost
below the price it receives.
Internal Business Process
Perspective
• The drivers of long-term financial success
may require an organization to create
entirely new products and services that will
meet the emerging needs of current and
future customers.
Internal Business Process
Perspective
• The innovation process -long-wave of value
creation
• A more powerful driver of future financial
performance than the short-term operating
cycle.
Internal Business Process
Perspective
• The ability to develop a multiyear productdevelopment process.
• The ability to reach entirely new categories
of customers.
• May be more critical for future economic
performance than managing existing
operations efficiently, consistently and
responsively.
Learning and Growth Perspective
• Identifies the infrastructure that the
organization must build to create long-term
growth and improvement.
• Customer and IBP perspectives identify the
factors most critical for current and future
success.
Learning and Growth Perspective
• Businesses are unlikely to be able to meet
their long-term targets for customers and
internal processes using today’s
technologies and capabilities.
• Intense global competition requires that
companies continually improve their
capabilities for delivering value to
customers and shareholders.
Learning and Growth Perspective
• Organizational learning and growth come
from three principal sources:
• People
• Systems
• Organizational procedures.
Learning and Growth Perspective
• BSC approaches will reveal large gaps
between the existing capabilities of people,
systems and procedures and what will be
required to achieve breakthrough
performance.
Learning and Growth Perspective
• To close these gaps, businesses will have to
invest in reskilling employees, enhancing
information technology and system, and
aligning organizational procedures and
routines.
• These objectives are articulated in the
learning and growth perspective of the
Balanced Scorecard.
Learning and Growth Perspective
• Employee-based measures along with
specific drivers of these generic measures
• Employee satisfaction
• Employee retention
• Employee training
• Employee skills-indexes of the particular
skills required for the new competitive
environment.
Learning and Growth Perspective
• Information system capabilities.
• Measured by real-time availability of
accurate, critical customer and internal
process information to employees on the
front lines of decision making and actions.
Learning and Growth Perspective
• Organizational procedures can examine
alignment of employee incentives with
overall organizational success factors
• Measured rates of improvement in critical
customer-based and internal processes.
Balanced Scorecard
• Translates vision and strategy into
objectives and measures across a balanced
set of perspectives
• The scorecard includes measures of desired
outcomes as well as processes that will
drive the desired outcomes for the future.
Linking Multiple Scorecard
Measures to a Single Strategy
• Balanced Scorecards are more than
collections of critical indicators or key
success factors.
• The multiple measures on a properly
constructed BSC should consist of a linked
series of objectives and measures that are
both consistent and mutually reinforcing.
Linking Multiple Scorecard
Measures to a Single Strategy
• BSC should incorporate the complex set of cause
and effect relationships among the critical
variables, including leads, lags and feedback
loops, that describe the trajectory the flight plan
of the strategy.
• The linkages should incorporate both cause-andeffect relationships, and mixtures of outcomes
measures and performance drivers.
Cause-and-Effect Relationships
• A properly constructed Balanced Scorecard
should tell the story of the business unit’s
strategy.
• It should identify and make explicit the
sequence of hypotheses about the causeand-effect relationships between outcome
measures and the performance drivers of
those outcomes.
Cause-and-Effect Relationships
• Every measure selected for a BSC should be
an element in a chain of cause-and-effect
relationships that communicates the
meaning of the business unit’s strategy to
the organization.
Performance Drivers
• A good BSC should also have a mix of outcome
measures (lagging indicators) and performance
drivers (leading indicators) of the business unit’s
strategy.
• Outcome measures without performance drivers
do not communicate how the outcomes are to be
achieved.
• They do not provide an early indication about
whether the strategy is being implemented
successfully.
Performance Drivers
• Outcome measures without performance
drivers do not communicate how the
outcomes are to be achieved.
• They do not provide an early indication
about whether the strategy is being
implemented successfully.
Performance Drivers
• Performance drivers (cycle time, PPM
defect rates) without outcome measures
may enable the business unit to achieve
short-term operational improvements, but
will fail to reveal whether the operational
improvements have been translated into
expanded business with existing and new
customers and to enhanced financial
performance.
Cause & Effect and Lead/Lag Indicators
KPI’s
Financial
•Return on Investment (ROI)
•Cash flow by product ($ by product)
•Revenue from accessories and operations
Lag
Lag
Lag
Customer
•Brand recognition survey (% recognition)
•Number of awards for accessories
•Customer satisfaction survey (new boats, lease, resale)
Lag
Lag
Lag
•Customer hit rate (no. of leads)
•Boat resales ($ & % of total revenues)
•Market analysis (Competitors price vs. LBC)
•Leases for new boats ($ & % of total revenue)
•Service and product quality standards met (new boats, lease, resale)
•Costs & expenses ($ by product/service by dept.)
•Cycle time per service offering
•New high end boat sales ($ & % of total revenue)
Lead
Lag
Lead
Lag
Lead
Lag
Lag
Lag
•Customer database (% advanced & cost)
•Internet website (% advanced & cost)
•Outsource programming needs
•Number of awards
•Leasing program with banks (% advanced & costs)
•Pipeline of new product ideas (no. of ideas)
•Activity Based Costing Analysis (% advanced & costs)
•Training hours by employee for each function
Lead
Lead
Lead
Lead
Lead
Lead
Lead
Lead
Internal
Business Process
Organizational
Learning
Performance Commitment Framework
Structures and links those elements that provide direction,
information, and motivation across the organization.
Framework
Strategic
Commitment
Strategic Objectives
Critical Success Factors
Performance Metrics
Operational
Commitment
Targets and Budgets
Improvement Initiatives
Organizational
Commitment
Goal Setting
Performance Evaluation
Information Delivery
Performance Commitment Framework
Clearly defined processes for creating
Strategic Commitment
Strategic
Assessment
Strategic
Feedback
Balanced
Scorecard
the proper metrics and targets at all
levels…and links to insure alignment
across the organization.
Performance Commitment results in
an integrated and streamlined
performance management system.
Organizational Commitment
Employee
Development
Operational Commitment
Business
Improvement
Initiatives
Planning
&
Budgeting
Business
Performance
Reporting
Individual
Goal
Setting
Individual
Performance
Appraisal
Reward System
Strategic Commitment
Translates strategy into tangible objectives and
metrics and enables strategic decisions
How does Strategic Commitment implement strategy?
• Creates a balanced set of measures which can be
used to manage the business
• Focuses the organization on strategy by
communicating priorities
• Assists groups and individuals in understanding
how they contribute to the organization’s strategy
• Provides executives with feedback to make strategic
decisions
Strategic Commitment
Translates strategy into tangible objectives and
metrics and enables strategic decisions
Why is Strategic Commitment important?
• A common understanding of strategy is required to
ensure alignment of action
• Without information management decisions are a
guessing game
• Lack of communication of priorities creates conflict
• Research has shown a strong correlation between
employee motivation and the knowledge of how an
employee contributes to the organization as a whole
Operational Commitment
Aligns strategy with operating plans and
budgets and enables operating decisions
How does Operational Commitment implement
strategy?
• Aligning budgets and business plans with
strategy and initiatives
• Creating financial targets that reflect strategic
priorities
• Reporting progress against strategic measures
Operational Commitment
Aligns strategy with operating plans and
budgets and enables operating decisions
Why is operational Commitment important?
• Strategically important priorities must receive
the appropriate level of resources
• Target modeling clarifies the level of resources
that are available up-front to set expectations and
eliminate the need for time consuming budget
iterations
• Ability to make decisions based on accurate and
timely strategic information increases the quality
of operating decisions
Organizational Commitment
Aligns strategy with team and individual
goals and provides the basis for rewards
How does Organizational Commitment implement
strategy?
• Creates individual goals which support team goals
• Ensures that employee development is focused on
strategically important business issues
• Evaluates employees on their performance in
support of strategy
Organizational Commitment
Aligns strategy with team and individual
goals and provides the basis for rewards
Why is Organizational Commitment Important?
• Customer satisfaction is directly linked to
employee satisfaction
• Measurement and linkage to rewards of employees
creates strong motivation
• Employees with clear expectations and feedback
are more productive