week 12.ppt

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Week 12

Strategy and the

Balanced Scorecard

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The Balanced Scorecard

To achieve success in the information era, companies need more than prudent investment in physical assets or excellent management of financial assets and liabilities.

Companies mobilize and create value from their intangible assets as well as their physical and financial ones.

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The Balanced Scorecard

In some ways, the “intangible” assets are the more important ones for a firm:

Loyal and profitable customer relationships;

High-quality processes; Innovative products and services; Employee skills and motivation; Databases and information systems.

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The Balanced Scorecard

The difficulties in placing a reliable value on intangible assets prevents them from being recognized on the balance sheet.

Because the accounting model currently does not capture knowledge-based assets, what is needed is a system that would help managers measure and manage the performance of such assets.

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The Balanced Scorecard

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The Balanced Scorecard

The Balanced Scorecard (BSC) provides a system for measuring and managing all aspects of a company’s performance.

The BSC balances traditional financial measures of success, such as profits and return on capital, with non-financial measures of the drivers of future financial performance.

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The Balanced Scorecard

The BSC measures organizational performance across different perspectives derived from the organization’s strategy.

Financial: How is success measured by shareholders?

Customer: How do we create value for customers?

Internal: At what internal processes must we excel to satisfy customers and shareholders?

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The Balanced Scorecard

The BSC measures organizational performance across different perspectives derived from the organization’s strategy.

Learning & Growth: What employee capabilities, information systems, and organizational climate do we need in order to continually improve internal processes and customer relationships?

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How do we lookto the owners?

How can wecontinually learn,

grow, and improve?

In which internalbusiness processes

must we excel?

How do we lookto customers?

The Balanced Scorecard

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The Balanced Scorecard

A strategy map provides a visual representation of the linkages in the four perspectives of the BSC.

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The Balanced Scorecard

Financial Perspective

Return on Investment

Customer Perspective

Customer Loyalty

On-Time Delivery

Internal Perspective

Learning & Growth Perspective

Process Quality Cycle Time

Employees’ Process Improvement Skills

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The Balanced Scorecard

A properly constructed BSC tells the story of the business unit's strategy.

It should capture the cause and effect relationships between:

Outcome measures in the financial and customer perspectives —> e.g., ROI and customer loyalty.

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The Balanced Scorecard

A properly constructed BSC tells the story of the business unit's strategy.

It should capture the cause and effect relationships between:

The performance drivers of those outcomes that are measured in the internal and learning & growth perspectives —> e.g., zero defect processes, short cycle times, and skilled, motivated employees.

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The Balanced Scorecard

Before determining the objectives and measures, an organization must articulate its vision and mission statements.

A concise statement that defines the mid- to long-term (3 to 10 year) goals of the organization.

A concise, internally-focused statement of how the organization expects to compete and deliver value to customers

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The Balanced Scorecard

The Vision and Mission set the general direction for the organization.

But these statements are far too vague to guide day-to-day actions and resource allocation decisions.

Companies start to make the statements operational when they define a strategy of how the vision and mission will be achieved.

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The Balanced Scorecard

Typical strategies of the four BSC perspectives include:

Financial: Increase revenues through expanded sales to existing customers.

Customer: Become or remain service oriented.

Internal: Achieve excellence in order fulfillment through continuous process improvements.

Learning & Growth: Align employee incentives and rewards with the strategy.

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Building The Balanced Scorecard

Financial Perspective:

This is the ultimate objective for profit-oriented entities.

Financial objectives typically relate to profitability —> e.g., operating income and ROI.

An entity’s financial performance can be improved by either increasing revenues or increasing productivity.

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Building The Balanced Scorecard

Financial Perspective:

Revenue growth comes from: Selling new products Selling to new customers Selling in new markets.

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Building The Balanced Scorecard

Financial Perspective:

Increased productivity comes from: Lowering direct and indirect expenses

(spend less, produce the same quantity) Utilizing assets more efficiently (reduce

working and fixed capital needed to sustain operations)

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Building The Balanced Scorecard

Customer Perspective:

Identify the targeted customer segments and the measures of the business unit’s performance:

Customer acquisition Customer satisfaction Customer retention Customer profitability Market share Account share

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Building The Balanced Scorecard

Customer Perspective:

The value proposition is the unique mix of product, price, service, relationship, and image offered to the targeted customers:

Defines the company’s strategy. Communicates what the company

expects to do for its customers better or differently from its competitors.

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Building The Balanced Scorecard

Internal Perspective:

Identifies the critical processes at which the organization must excel to achieve its customer, revenue growth, and profitability objectives.

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Building The Balanced Scorecard

Internal Perspective:

Organizations perform many different processes, which may be classified into four groupings:

Operating; Customer management; Innovation; and Regulatory and social.

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Building The Balanced Scorecard

Internal Perspective:

Operating processes: The basic, day-to-day processes which produce existing products and services and deliver them to customers.

Customer management processes: The processes by which the firm expands and deepens relationships with targeted customers.

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Building The Balanced Scorecard

Internal Perspective:

Innovation processes: The processes by which the firm develops new products, processes, and services.

Regulatory and social processes: The processes which ensure the firm meets or exceeds any business regulations.

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Building The Balanced Scorecard

Learning & Growth Perspective:

Identifies objectives for the people, systems, and organizational alignment that create long-term growth and improvement.

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Building The Balanced Scorecard

Learning & Growth Perspective:

Enables management to learn where they must invest to improve:

Employee capabilities, knowledge, and skills;

Information systems and databases; Employee culture, alignment, and

knowledge-sharing.

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Key Performance Indicator Scorecards

Some organizations identify key performance indicators (KPIs) and classify them into the four BSC perspectives:

KPI’s are typically common measures such as customer satisfaction, quality, cost, employee satisfaction, and morale.

KPI measures are often simplified —> e.g., employee turnover rates.

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Key Performance Indicator Scorecards

Some organizations identify key performance indicators (KPIs) and classify them into the four BSC perspectives:

Improving KPI measures does not always ensure achieving long-term strategy.

A compensation system based on KPIs is not as powerful as one that selects measures that can be linked back to the firm’s long-term strategy.

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Strategy and the Balanced Scorecard

Financial Perspective

GOALS MEASURES

Survive Cash Flow

Succeed Quarterly sales growth and operating income by division

Prosper Increased market share and ROE

Source: Adapted from Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79.

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Strategy and the Balanced Scorecard

Customer Perspective

GOALS MEASURES

New products Percent of sales from new products

Responsive supply

On-time delivery (defined by customer)

Customer partnership

Number of cooperative engineering efforts

Source: Adapted from Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79.

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Strategy and the Balanced Scorecard

Source: Adapted from Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79.

Internal Business Perspective

GOALS MEASURES

Manufacturing excellence

Cycle time Unit cost Yield

Design productivity Silicon efficiency Engineering efficiency

New product introduction

Actual introduction schedule versus plan

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Strategy and the Balanced Scorecard

Source: Adapted from Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79.

Innovation and Learning Perspective

GOALS MEASURES

Technology leadership

Time to develop next generation

Manufacturing learning

Process time to maturity

Product focus Percent of products that equal 80% sales

Time to market

New product introduction versus competition

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Pitfalls in Designing BSCs

Several design factors can lead to problems and disappointment when applying the BSC.

Too few measures in the scorecard can lead to incomplete measurement of company strategies.

Too many measures can lead to information overload, with insufficient attention being given to the most important measures.

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Pitfalls in Designing BSCs

Several design factors can lead to problems and disappointment when applying the BSC.

The scorecard measures don’t correspond with long-term strategy:

Long-term strategy may call for creating innovative solutions for customers, but the performance measurements focus exclusively on operational improvements.

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Pitfalls in Designing BSCs

The biggest threat is a poor organizational process for developing and implementing the scorecard:

Senior management is not committed, and the BSC project is delegated to middle management.

One senior manager builds the scorecard alone.

The BSC is treated as a systems project rather than as a management project.

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Pitfalls in Designing BSCs

The biggest threat is a poor organizational process for developing and implementing the scorecard:

Senior executives feel that only they need to know and understand the strategy, and BSC responsibilities don't filter down.

The BSC is treated as a one-time event that requires the perfect scorecard for implementation.

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The Future

The balanced scorecard was originally developed to improve performance measurement, but organizations discovered that measurement has consequences far beyond reporting on the past.

The BSC concept of the 1990s evolved from a performance measurement system to a new strategic management system.

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The Future

Organizations will achieve their strategic alignment and focus in different ways, at different paces, and in different sequences, but they generally follow these five principles.

1. Translate the Strategy to Operational Terms

2. Align the Organization to the Strategy3. Make Strategy Everyone’s Job.4. Make Strategy a Continual Process5. Mobilize Leadership for Change.