Balanced Scorecard Basics

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CEO sponsorshipExecutive team engaged“New way of managing”Accountable for strategyA performance culture

Strategic awarenessGoal alignmentLinked incentives

SFO Best Practice Benchmarks

TRANSLATE STRATEGY INTO OPERATIONAL TERMS

ALIGN THE ORGANIZATION TO THRE STRATEGY

MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP

GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS

Mission/visionStrategy mapsBalanced ScorecardTargetsInitiatives

Corporate roleCorporate - SBUSBU - shared servicesExternal partners

Linked to budgetingLinked to managementManagement meetingsFeedback systemLearning process

If Used Properly the Balanced Scorecard/Strategy Focused Organization Provides a Proven Framework to Manage This Journey to Achieve the 5 Principles of the Strategy Focused Organization

BALANCED SCORECAR

D

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A successful Balanced Scorecard program starts with a recognition that it is not a “metrics” project, it’s a “change” process.

Creating the Climate for ChangeUnfreeze the organization

Show the need for change

Creating the Leadership TeamBreaking down functional bias

Creating the Vision and StrategyBSC as a “visioning process”

BSC to clarify the strategy

Creating Team AccountabilityAccountability for cross-functional strategic themes at Executive Team level

Change the Culture

Leadership Roles

Principle 1Executive Team Leadership To Mobilize Strategic Change

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The Objective

Link management process to strategy

The Problem

How do you describe a strategy?

You can’t manage something that you can’t describe!

Principle 2Translate the Strategy to Operational Terms

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• Measurement is the language that gives clarity to vague concepts.

• Measurement is used to communicate, not to control.

• Strategy can be described as a series of cause and effect relationships.

"To achieve my vision, how must my organization learn and improve?”

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

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

"If we succeed, how will we look to our shareholders?”

The Strategy

Financial Perspective

Customer Perspective

Internal Perspective

Organization Learning

The Balanced Scorecard Provides a Framework to Translate the Vision and Strategy Into Operational Terms

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Traditional financial framework for describing tangible outcomes

Innovation Process

Customer Management

Process

Operational Process

Social & Environmental

Process

Long Term Shareholder

Value

Financial

Customer

Internal

Learning & Growth Strategic

CompetenciesStrategic

TechnologiesLeadership & Governance

Climate for Action

New Revenue Sources

Increase Customer

Value

Improve Asset

Utilization

Improve Cost Structure

Customer Value Proposition

Increase Customer

Value

Build the Franchise

Provide Operational Excellence

Be a Good Citizen

PriceQuality

TimelinessFeatures

ServiceRelationships

BrandCustomer value proposition establishes context for value

Internal processes describe how value is created and sustained

Role and status of intangible assets is defined

A Strategy Map Describes How an Organization Intends to Create Value for Its Stakeholders

2 Examples of Strategy Maps are on the following pages

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• Management• Market orientation• Innovation and technology

Grow assuring portfolio

diversification

Pursuecost

leadership

Assure profitability and value

Sustain revenues

and optmize margin

Downstream

CustomerLoyalty

FinancialPerspective

MarketPerspective

ProcessPerspective

Learning and GrowthPerspective

“Keep leadership in the Brazilian marketof oil and derivates”

• Quality of products and services• Supply commitment• Competitive price

Assure international

standards for EHS

“Consolidation as an energy company”

Increase international

presencePursue natural

gas market leadership

Create sinergies among Service Areas, Financial

Areas and Corporate Units with Business

Areas

Drive information

towards business

Educate community and labour force for

social responsibilty

FosterClimate

for results

Become benchmark in operational

costs

Offer high quality

products and services to

the consumer

• Quality of products and services• Competitive price

Commitment with society

• Social responsibility• Ethics and transparency

Follow customer

and competitive behaviour

Reinforce brand

imange

• Decision Support• Knowledge Management

Increase refining capacity

“Expand international operations”

Epand Reserves

and Production

Integrated operations for eletric

energy

Develop natural gas

market

Assure capital

discipline

Develop and Improve Strategic

Competencies

• Domestic• International

Increase quality of products

and services

Enterprise Excellence

Market Orientation Responsible operation

Integrated Growth

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Growth Strategy Efficiency StrategyF2.

Growth by attractive financial solutions

F4. Market leader within fleet

administration / finance

F8. Market leader in

costefficient contract

administration

F6. Professional risk handling

F5. Growth through

increased credit

administration services

F9. Utilize synergy

advantages

Product Development

Sales & Marketing Efficient credit handling

P1. Market leader in financial

solutions and concepts

P5. Continued

education of Volvo dealers

P8. Efficient contract

administration

Motivated and Involved coworkers

M1. Active participation

among everyone

M3Quality focused

coworkersM4.

Right competence

M6. High

availability of information

P9. Efficient customer

care

Customer loyalty

M7. Attractive workplace

P3. Efficient market

communications with active sales

support

F1. Active, profitable sales support

Win / Win with Volvo dealersK2. Natural partner for

Volvo dealers

VPS/VLS End customer

Close customer relations

Fleet customers

K4. Attractive package solutions

K3. Natural partner for

VPS/VLS

P7. Efficient financial

activity and funding

Risk handling

M8. Efficient IT

support

TechnologyCompetenceCulture

Fina

ncia

lPr

oces

sC

owor

kers

/ Le

arni

ngC

usto

mer

K7. Professional

service

AB Volvofinans Strategy Map

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What the strategy is trying to achieve

The level of performance or

rate of improvement

needed

Processes and programs

required to reach the target

How performance against the objective is monitored

Objective Target InitiativeMeasure

Customer

Internal

Learning

Financial

Lowest prices

Plane Utilisation

Fast ground turnaround

Ground crew alignment

Attract & Retain More Customers

Profits and RONA

The Basic Components of a Balanced Scorecard are:Objectives, Measures, Targets and Initiatives

Operating Efficiency

Fast ground turnaround

On Ground TimeOn-Time Departure

30 Minutes90%

Turnaround Cycle Time Optimisation

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Employee SurveyPersonal BSC (%)Strategic Competency

L1 Climate for ActionL2 Competencies

Motivated and Prepared Workforce

New Product ROIDealer Quality ScoreYield GapUnplanned DowntimeInventory Levels

Run-out Rate

Activity Cost vs. CompetitionPerfect OrdersDays Away from Work

I1 Innovative products and services

I2 Best-In-Class Teams

I3 Refinery Performance

I4 Inventory Management

I5 Cost LeaderI6 On Spec/On TimeI7 Improve EHS

Build the Franchise

Increase Customer Value

Operational Excellence

Good Neighbor

Share of SegmentMystery Shopper RatingDealer Gross Profit Growth

C1 Delight Targeted Consumer

C2 Improve Dealer Profitability

Delight the Customer

Win-Win Dealer Relations

ROCECash FlowNet Margin Full Cost/gallonVolume Growth Premium RatioNon-Gasoline Revenue

Measures

F1 ROCEF2 Cash FlowF3 ProfitabilityF4 Cost LeaderF5 Profitable Growth

Objectives

Financially Strong

Strategic Priorities

>4.880%85%

20%+4.5+<3%<2%15% Sales<90%

99%+

<250/yr

45%4.5+25%

18%$500mm11%Parity5%/yr45%$2b

Targets

Skills ProgramCompetency Dvlpmnt

Review Program

PM Program

ISO 9000

Safety Training

Mystery Shopper

Dealer Committee

Asset Disposition ProgramC Store Alliances

Initiatives

Financial

Customer

Internal

Learning & Growth

Financially Strong

A Balanced Scorecard looks like this!

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Strategies Are Executed Through Business Units. The Strategies of the Business Units Must Be Integrated If Organization Purpose and Synergies Are to Be Achieved.

LINE BUSINESSES SUPPORT UNITS

CORPORATE

SBUA

SBUB

SBUC

SBUD

CORPORATE SCORECARD(Shared Strategic Agenda)

Themes Measures

DEPT, TEAMS, PERSONAL

#1. A Corporate Scorecard defines overall strategic priorities.

#3. Each Support Unit develops a plan and BSC for “best practice” sharing to create synergies across SBUs.

#2. Each division develops a long-range plan and BSC consistent with corporate strategic agenda.

#4. Plans and BSC’s define relationships with external partners consistent with SBU strategy.

1. Financial Growth

2. Delight the Consumer

3. Win-Win Relationships

4. Safe & Reliable

5. Competitive Supplier

6. Good Neighbor

7. Motivated & Prepared

8. Quality

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xx xx xxxx

Finance

Marketing

Distribution

Procurement

Purchasing

Safety

Human Resources

Information Technology

Principle 3Link And Align The Organization Around Its Strategy (Cascading)

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Principle 4Making Strategy Everyone’s Job

Creating a Climate to Support Strategic

Change

Create Strategic Awareness

Align Personal Objectives

Align Incentive Compensation

1

2

3

Ensure that each individual has sufficient understanding of the strategy (You can’t execute what you don’t understand)

Ensure that each individual knows where they fit into the overall game plan

Reinforce desired behavior and increase intensity of awareness

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Summary: Making Strategy Everyone’s Job

BSC defines the strategic agenda…this is the educational “curriculum”

BSC is the shared framework (chart of accounts) to ensure linkage

BSC defines what competencies are strategic

BSC defines specific measurable parameters and goals

Education and communication to create awareness

Setting linked objectives

Build required competencies

Link and align incentives

Successful Approaches to… Role of theBalanced Scorecard

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DiscussImplications

(40%)

ReviewPerformance

(40%))

ReviewStrategic Issues

(20%)

Present(Event-driven Learning)

Future(Continuous Learning)

The Monthly Staff Meeting

Between The Meeting The Quarterly Strategic Review

Meeting

Principle 5Making Strategy a Continuous Process

Provide input to strategic issues currently being worked on

Dialog about performanceExplain anomaliesSuggest solutionsIdentify issues

Identify strategic issues for discussion at next group meeting

Review performance data(available on-line)

DiscussImplications

(30%)

Review Performance(10%))

ReviewStrategic Issues

(60%)

The Management Meeting must be focused on making decisions about the strategy

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Growth

Grow Sustainable Total Shareholder Returns

Create breakthrough Growth opportunities

Effective capital, cash, and cost management

Leverage base business to drive

growth

Extract value from integrated value

chains

Differentiators

Culture that puts the good for client

first

Create a Culture of accountability and high performance

Build targeted capabilities to drive the client strategy

Reward & recognise high performance

SAFETY SAFETY

Leverage investment in Information Systems

Sha

reho

lder

Cus

tom

erIn

tern

al B

usin

ess

Pro

cess

Peo

ple

Saf

ety

Demonstrated leadership commitment Take a systems approach to Safety Engage the workforce

Selectively grow the product & service

range

Challenge strategic marketing & channel

management

Innovative solutions Next generation products & services

Quality of relationships

Minimum Expectations• Price• Tech support• Quality• Footprint/Accessibility• Product range• Delivery

TR

MG

RFMD

BG

LS

Build Relationships

Develop relationship mgt

systems & process

Build win-win partnerships

LS/RF

Improve Selling/Account Mgmt Capability

Strategic Expansion Products & Services

Identify & rapidly implement

acquisitions

RLE

Develop ability to deliver Integrated

SolutionsDeepen existing

customer relationships

Develop culture that balances risk and

reward

Identify & exploit market &

investment opportunities

Business Excellence

Manage working capital

Continuous focus on costs

Big Impact Must Maintain

Leverage value chain to enhance product & service capability

Manage business complexity

Overhaul pricing policy & procedure

Build Flexible manufacturing &

distribution

GP

Enhance client Reputation

Above targetOn Track (within limits)Significantly below targetData Not Available

One Example of a Management Report using the BSC – displays how the organization is performing across its Strategy

Channel MixG3

Perspective – Objective:

Theme Owner:Measure Leader:Source:Frequency:

Growth Theme – G3Challenge and Improve Channel ManagementGeoff PlummerAssoc, Raids (AI)Annual, Monthly (Raids)Quarterly Review

2nd Tier 10%

Others 10%

SSX 40%

client 40%

Others 8%

2nd Tier 12%

SSX38% client 42%

Others 8%

2nd Tier 14%

SSX 36% client 42%

2003Revenue $240m

2004Revenue $245m

2005Revenue $250m

Target = 35%

Reduce reliance on XXXX by increasing structural sales through client and second tier firms. Issues

Strategy to drive sales through client and second tier firms has not grown at the agreed target rates.

Implications

• Unless the issue in not redressed more quickly then we risk falling well short of 2004 and 2005 agreed target levels.

• This has an estimated 2003FY EBITDA impact of $10m

Actions

• Proposed focus group be formed to develop action plan to mitigate non performance, pulling together SME from across Distribution and Market Mills

• Detailed estimation of best worst case impact on 2003FY results

Accountability

Rob Freeman

Strategic Initiatives

Status Initiative Name

G Target second tier customers in Victoria

R Grant franchises to 15 new firms

Y Development of client channel management strategy

Sample Measure Report

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Project Description: To allocate 15 new franchises by 1 December, 2003

Comments: • Only seven franchises have been awarded to date and we are at risk at not meeting the target of 15 by 01/12/03

• Sales and EBIT contribution from the seven franchises awarded to date has been well down on budgeted forecasts, primarily due to adverse market conditions experienced over the past six months

Date Status Milestones Ownership

02/03/03 Complete Finalisation of standard Franchise terms and conditions review Gerry Baker

07/08/03 In process Negotiation of Broome and Mandurah franchises Bill Taylor

09/12/03 Not Started Preparation of Lead Team presentation of project outcomes Fred Smith

Actual vs. Projected Franchise Growth

Theme Owner: Name

Initiative Owner: Fred Smith

Expected Completion: 09 December 2003

Budgeted Franchise Contribution Q1 Q2 Q3 Q4

Budgeted SalesActual Sales

Variance

$86m$41m$45m

$102$82m$20m

$145m$103m$42m

$191m

Budgeted EBITActual EBIT

Variance

$25m$12m$13m

$31m$25m$06m

$44m$31m$13m

$57m

Franchises BudgetedFranchises Allocated

Variance

060303

100604

130706

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K2 Franchise Growth Project

Actual vs. Projected Franchise Contribution

Sample Measure Report