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Strategic Planning and the Balanced Scorecard
Henry Schwarzbach, Ph.D. University of Rhode Island
What is a Strategy?
Strategy describes how an organization matchesits own capabilities with the opportunities in themarketplace to accomplish its overall objectives.The process for developing strategy can be either a formal strategic management process or if can be informal and “on the fly.” Informal strategic planning is often employed when: the stakeholders cannot agree on objectives; there is a lack of planning expertise: the environment is too turbulent for long term planning; the organization is not given the authority to conduct strategic planning.
Basic Strategies for any organization
1. Product differentiation/ NicheHow can our firm provide a better product for our customers?
2. Cost leadershipHow can our firm provide services to our customersat a lower cost than our competitors?
The essence of the strategic planning process is determining how to design and implement one the these twobasic strategies, given the firm’s strengths and weaknesses, opportunities and threats. The Balanced Scorecard framework helps to link the strategic design, implementation, and performance evaluation.
Steps in Classical Formal Strategic Planning
Define the mission , customers/stakeholders, Goals and objectives, shared values, and visionAnalyze the firm’s strengths and weaknesses,
opportunities and threats
Identify the current strategiesEvaluate the current strategies with respect to the
SWOT analysis identifying critical issues
Define strategic alternativesSelect the best strategic alternatives
Implement the strategy and monitor performance
Strategy and Porter’s Five Forces Model
When designing strategy must consider five forces:
Competitors – other firmssPotential entrants into the marketEquivalent products/services –
Bargaining power of customers Bargaining power of input suppliers, including
employees, regulators and the community
External Analysis
Port Strategy and the Balanced Scorecard
The BSC Model focuses on:1.Strategies for Learning and Growth2. Strategies for Adding Customer Value 3.Strategies for internal business processes
4.Financial Strategies
Survey Results on Current Status of Strategic Planning in U.S. and Korean
Ports Do ports have formal Mission Statements? Our survey found…
Yes, 76% of U.S. Ports Yes, 54.5% of Korean ports
Do ports have formal strategic planning systems? Survey found….Yes, 51.5% of U.S. portsYes, only 36.4% Korean ports
SWOT Analysis - strengths, weaknesses, opportunities, and threats.Over 70% of U.S. and Korean ports with formal strategic planning conduct SWOT analysis
Satisfaction with current Strategic Planning Process5.56 out of a possible 7 for U.S. ports4.25 out of a possible 7 for Korean ports
Status of the Balanced ScorecardIn the Port Industry
Our survey asked port managers about the BalancedScorecard and we found:
1. Very few ports in the U.S. and none in Korea are using the balanced scorecard? This is not surprising since most U.S. port managers are not familiar with the balanced scorecard and neither are those in Korea.
2. The few ports in the U.S. that we found using the Balanced Scorecard were very satisfied with it so far.
The Balanced Scorecard
The basic premise of the balanced scorecard is, “managers do what is measured.” Thus we need to develop performance measures that signify accomplishment of our strategies. The measures should flow directly from the strategies. Kaplan and Norton who originated the BSC recommend four perspectives
1.Customer/Stakeholder2. Internal Business Process3. Financial 4. Learning and growth
Linking The Balanced Scorecard to Strategy I
CustomerWho do we define as our
customer? How do we create value for our customer?Financial
How do we add value for customers while controlling
costs? How do we raise the funds necessary to support operations.?
How do we enable ourselves to grow and change, meeting
ongoing demands?
Employee Learning & Growth
To satisfy customers while meeting budgetary constraints, at what
business processes must we excel?
Internal Process
Strategy
Mission
Linking The Balanced Scorecard to Strategy II
Customer
Increase value to the customersFinancial
Increase revenue, control costs, cover the cost of
capital, attract investment capital, manage cash flow
Increase employee and information system capabilities
Employee Learning & Growth
Develop new products, better understand the
customer needs, increase customer value, lower cost, improve effectiveness and efficiency of key processes
Internal Process
Strategy
Achieve Objectives
Linking The Balanced Scorecard to Strategy II
Financial
Learning and Growth
Internal Process
Strategic Initiatives for Product/Process Differentiationand cost leadership drive the model
Strategic Initiatives
Customer objectives
Developing A Model Balanced Scorecard for a Port
Objective 1: Attract more cruise ships
Measures: 1. Cruise ship passenger visits 2. Cruise ship fees earned 3. Economic impact of cruise ship tourism
Customer Perspective
Strategic initiative: Develop a promotional marketing program and promote to cruise ship lines.
Financial Perspective
Initiatives: TargetPerformance
ActualPerformance
Sell Surplus Property
Improve collection procedures
$2,000,000Lower day’sreceivables
to 30
$2,100,000
32 days
Internal BusinessProcess Perspective
Initiatives: TargetPerformance
ActualPerformance
Expand cargo dock
Add improved cargo Handling equipment
1200 ft of dock
25 TEU loaded/Unloaded per hr.
1100 ft of dock
26 TEU perHr.
Learning and Growth PerspectiveObjectives:
Align employee andorganization goals
Measures: Employee satisfaction survey
Finance department evaluation
Improve MIS cash forecasting capability
Learning and Growth Perspective
Initiatives: TargetPerformance
ActualPerformance
Employeeparticipation and
suggestion programto build teamwork
Add Peoplesoft cashForecasting module
80% ofemployees
give toptwo ratings
Average rating of 9 out
of 10
88% ofemployees
give toptwo ratings
Average Rating 5
Aligning the BalancedScorecard to Strategy
Different strategies call for different scorecards.What are some of the financial
perspective measures?Operating income/Return on investment
Revenue/ Revenue growth/Revenue from new initiatives
Cost reduction is some areas/cost per TEU movedMeasures of economic impact in the community or region
Aligning the BalancedScorecard to Strategy
What are some of the customerperspective measures?
Market shareCustomer satisfaction
Customer retention percentageTime taken to fulfill customers requests
Community satisfaction/Environmental Impact
Aligning the BalancedScorecard to Strategy
What are some of the internal businessperspective measures?
Ship ServicingCargo Handling capabilities
On time serviceDowntime
Warehousing/storage
Aligning the BalancedScorecard to Strategy
What are some of the learning and growthperspective measures?
Employee education and skill levelEmployee satisfaction scores
Employee turnover ratesInformation system availability
Percentage of processes with advanced controls
Continuous Port Strategic Management with the Balanced Scorecard
Scan External Environment for opportunities and
threats
Develop a strategic intelligence systemStrategy Implementation
Implement required changes in operations to effect revised strategic
initiatives Adjust the mission, vision,
strategies, and BSC Measures and targets for changes in the
Internal and External environment
Strategy Development
Collect and report data on BSC measures and compare to targets
Internal Reporting on BSC performance
Strengths of theBalanced Scorecard
1. Links strategy to mission to implementation and performance2. Allows goal alignment throughthe organization.3. Provides a means to evaluate strategic planning.3. Provides a vehicle for communicating mission, vision and strategies.
Pitfalls When Implementinga Balanced Scorecard
What pitfalls should be avoided whenimplementing a balanced scorecard?
1. Don’t assume the cause-and-effectlinkages to be precise.
2. Don’t seek improvements acrossall measures all the time.
3. Don’t use only objective measureson the scorecard.
Pitfalls When Implementinga Balanced Scorecard
4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.
5. Don’t ignore nonfinancial measures whenevaluating managers and employees.
6. Don’t use too many measures.
Pitfalls When Implementinga Balanced Scorecard
7. Maintain flexibility to add new measures for emergent strategies. Watch out for excessive centratization and rigidity.8. Complexity adds cost. Keep it as simple as possible. Consider the cost versus the benefit of when selecting BSC measures. 9. Garbage in, garbage out. Insure that reliable data can be collected for all measures.