Performance Measurement Prof Riccardo Tiscini 1 Performance Measurement

Performance Measurement Prof. Riccardo Tiscini 1

Performance Measurement: theoretical foundations and main performance tools ü The concept of value ü Performance measurement: financial and management accounting ü Financial analysis: general concepts and basics ü EVA (Economic Value Added) ü Financial indicators: ratio analysis v Profitability ratios v Working capital ratios v Cost volume profit analysis and break even analysis v Capital structure (leverage) ü Cash Flow Analysis ü Integrated Performance Measurement: Highlights on Balanced Scorecard 2

Performance Measurement Theoretical foundations and main performance tools 3

The concept of value Shareholders vs. Stakeholders value perspective Shareholder value perspective Stakeholder value perspective Emphasize profitability over responsibility and see the organization primarily as instrument of its owners. Emphasize responsibility over profitability and see the organization primarily as a coalition to serve all parties involved. Success can be measured by: • Share price • Dividends • Profits Success can be measured by: • Stakeholders satisfaction • See stakeholders management both as an end a means 4

The concept of value Aim of the firm: Value Creation to achieve Value VALUE CREATION The sum of the present values of future expected cash flows (point-in-time measure) The change in value due to company performance The final aim of performance measurement is to support value creation 5

Performance definition Performance Oxford dictionary definition Economic definition What people or machines do What firms do generating revenues in excess of costs The action of performing a task It is a functioning, not economic result Firm as an entity that attempts to measure both financial and non financial performance 6

Performance definition Despite the frequent use of the word “performance” its precise meaning is rarely clearly explicated. It seems logical to list all the connotations useful to define “performance”: PERFORMANCE IS Measurable by either a number or an expression To accomplish something (create value) The result of an action (value created) The ability or the potential to create a result (eg. Customer satisfaction) The comparison of the result with some benchmark A judgment by comparison 7

Performance definition Baird (1986) Corvellec, Bouguignon (1995) Performance is action oriented Performance refers simultaneously to the action, the result of an action, and to the success of the result compared to some benchmark Performance is the sum of all processes that will lead the managers to take appropriate actions in the present that will create a performing organization in the future (e. g. one that is effective and efficient) 8

Performance definition Performance is a complex concept because Indicators could be contradictory. Many concepts are not normally captured in accounting and control system (competence, awareness of brand value, existing structure of negotiation, partnership with both partners and suppliers, and organizational responsibility structure. ) how to manage it 1. Good understanding of the process 2. Good understanding of the interaction with the environment 9

The accounting perspective PERFORMANCE MEASUREMENT Performance financial measures as tools of financial management Efficient provision and use of financial resources to support the wider aims of the organizations and to manage them with effectiveness Financial objectives as a major objective of business organization Financial performance measures such as profit, return on investment or EVA used to achieve important organizational objectives Performance financial measures as a mechanism for motivation and control Financial information as a window into the organization by which specific operations are managed. 10

Performance as a tool of financial management Three main areas of the financial plan: Cash for planning Managing cash flow avoiding insolvency Profitability Long term profitability Assets purchase Attention to the balance sheet Pyramid of ratios as a tool of reporting on these matters 11

Performance as an overall business objective Main focus on reporting for shareholders Cash for planning Managing cash flow avoiding insolvency Profit Assets purchase Attention to the balance sheet Central performance indicator for shareholders. -earning per share (EPS) -price/earning ratio - capital assets pricing model (CAPM) - Economic Value Added (EVA) 12

Performance as a mechanism for motivation and control A number of financial and non financial indicators can be used: Accounting measures -Financial indicators Controllable aspects of performance can be partly captured in accounting performance measures (earning, balance sheet, etc) Performance measures -Balanced scorecard - Activity based costing - Residual income (RI) - Economic value added (EVA) Other performance drivers: -short term profitability -market share -product leadership - personnel development - employees attitudes - public responsibility -balance between short-range objectives and long-range goals Adding measures that represent performance “drivers” (accounting measures become inadequate, alternative approaches, such as balanced scorecard, are necessary) 13

Performance as a mechanism for motivation and control Balance between INTRINSIC MOTIVATION EXTRINSIC MOTIVATION Employees immediate satisfaction Employees satisfy their needs indirectly Work content itself: Price incentives: Self-defined goals; Good job to do Stock option for managers Social identity Various types of bonus Adequate for complex job Adequate for simple job 14

Performance as a mechanism for motivation and control INTRINSIC MOTIVATION Intrinsic motivation is required for: o Tasks that require creativity o Multiple task problems o Transfer of tacit knowledge Intrinsic motivation serves to support firm goals and managers must compare the related benefits and costs EXTRINSIC MOTIVATION Extrinsic motivation rises performance (first approach) Rewards crowd out intrinsic motivation: “Hidden cost of rewards” (Lepper and Green, 1978) According to this theory rewards make employees to loose interest in the immediate goals and lower their performance 15

Performance measurement 1. 2. Definition of the performance target Performance measurement PERFORMANCE ENTITY Financial Accounting PARTS OF ENTITY Management Accounting 16

Performance measurement ACCOUNTING The distinction is the targeted audience Financial Accounting Management Accounting Provides information both for managers and for external parties (stakeholders, suppliers, banks…) Provides information for company’s managers for internal decision making Planning Implementation Control 17

Performance measurement ACCOUNTING The distinction is the targeted audience Financial Accounting Management Accounting MANDATORY NON MANDATORY Provides data about past performance Its purpose is to accomplish the law data related to how organizations are actually run Mainly an organizational purpose Monetary data Both monetary and non monetary data 18

Performance measurement FINANCIAL ACCOUNTING EXTERNAL USERS • • Investors Creditors Customers/suppliers Competitors Tax authorities/Regulators External auditors …. INTERNAL USERS • Board of Directors • Department Managers: • Finance • Sales • Purchasing • HR • …. 19

Performance measurement MANAGEMENT ACCOUNTING INTERNAL USERS • Board of Directors • Department Managers 20

Performance measurement Internal Information External Information (Management Accounting) (Financial Accounting) voluntary, Not regulated by law constant periodic actual/forecast actual Financial statements, budget, Cost accounting, report… Financial statements 21

Performance measurement Management Accounting Financial Accounting Audience Internal: Workers, managers… External: Stakeholders Purpose Inform on internal decisions, feedback and control on operating performance, plan on future performance Report on past performance Time Focus current/future oriented historical Restrictions No regulations; system determined by management Regulated. Generally accepted accounting Principles and government authorities 22

Performance measurement Management Accounting Type of information Nature of information Scope Financial Accounting Financial plus operational and physical measurements on processes, technologies, suppliers Financial measurements only More subjective and judgmental, valid, relevant, accurate Objective, reliable, consistent, precise Inform local decisions and actions Report on entire organization 23

Performance measurement FINANCIAL ACCOUNTING Financial Statement Balance Sheet Financial position at a specific moment of time Income Statement Summary of revenues and expenses (profitability) for a period of time Cash Flow Statement Summary of cash in and cash out for a period of time 24

FINANCIAL ANALYSIS General Concepts FINANCIAL STATEMENT OBJECTIVES Major objectives of financial statements are: 1. to present fairly the economic and financial position of a company to actual and potential stakeholders. 2. to understand the numbers, getting behind the figures, and use the understanding to better manage a business. FINANCIAL STATEMENT ANALYSIS Is the art of analyzing and interpreting financial statements. Thus, one may develop various analytical measures to portraits meaningful relationship and extract information from raw financial data. 25

FINANCIAL ANALYSIS: GENERAL CONCEPTS FINANCIAL STATEMENT INFORMATION INTERNAL EXTERNAL Board of directors Management Stakeholders v partners v banks v savers v State v customers vsuppliers v… 26

FINANCIAL ANALYSIS: GENERAL CONCEPTS BUSINESS MANAGEMENT CIRCLE et k ar m FINANCING m ar ke t ACQUSITION OF PRODUCTION FACTORS SALES PROCESSING 2727

FINANCIAL ANALYSIS: Reclassified BSBASICS and IS – financial method LIABILITIES ASSETS FIXED (NON CURRENT) ASSETS CURRENT ASSETS o tangible o intangible o financial o inventory o trade receivables o liquidity EQUITY o Shareholders’ Equity NON CURRENT LIABILITIES q Long-term Financial Debt o Long-term Trade payables CURRENT LIABILITIES q Short-term Financial Debt o Short-term Trade payables 28

FINANCIAL ANALYSIS: BASICS Reclassified BS and IS – operating method INVESTMENTS SOURCES EQUITY (E) NET OPERATING INVESTED CAPITAL (NOIC) Fixed Assets + Inventory + Trade receivables - Trade payables - Unearned revenues NET FINANCIAL POSITION (NFP) Shareholders Equity Financial Debts -Liquidity (& Financial Current Assets) - Financial Fixed Assets 29

FINANCIAL ANALYSIS: BASICS BS and IS Structure for Profitability Analysis SOURCES INVESTMENTS EQUITY (E) NET OPERATING INVESTED CAPITAL (NOIC) Fixed Oper. Assets + Inventory + Trade receivables - Trade payables - Unearned revenues NET FINANCIAL POSITION (NFP) Shareholders Equity Financial Debts -Liquidity (& Financial Current Assets) - Financial Fixed Assets INCOME STATEMENT SALES (S) – OPERATING COSTS (OC) = EBIT - NET FINANCIAL EXPENSES/(Revenues) (NFE) = EARNINGS BEFORE TAX (EBT) - INCOME TAX (T) = NET PROFIT/(Loss) (NP) 30

EVA: Economic Value Added A simple definition of EVA : EVA is economic profit taking into account the full cost of capital including the cost of equity. Stockholders need to know how successful the company is at creation new wealth. EVA measures in real terms the increase in wealth, defined as total equity, including both creditors’ and stockholders’ equity. Why using EVA to measure performance: It is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. 31

EVA: Economic Value Added EVA is calculated as follows: Net sales -Operating expenses =Operating profit (EBIT) - Taxes =Net Operating profit after taxes (NOPAT) -Capital charges (invested capital x cost of capital) = EVA 32

EVA: Economic Value Added If NOPAT, invested capital and WACC are known, EVA can be calculated for any entity including: divisions, departments, product lines, geographic business segments. EVA is a flow, because it is a measure of profit. EVAt = NOPAT - (WACC* Invested capital) 33

EVA: Economic Value Added Weighted average cost of capital - WACC= Kd * (1 -t) * D/V + Ke * E/V Kd = cost of debt (included taxes) t = tax rate D = financial debts V = Firm value ( D+ E) Ke = cost of equity E = equity 34

EVA: Economic Value Added COST OF DEBT: interest paid divided by the principal amount borrowed or Kd = Rf + spread Rf = return on a risk free investment Spread = according with the credit standing COST OF EQUITY: rate of return shareholders require on equity capital Ke determined with the CAPM Ke = Rf + β (E(Rm)- Rf) Rf = return on a risk free investment β = specific firm risk MRP = market risk premium E(Rm) = expected return on the market 35

EVA: Economic Value Added EVA adjustments: If generally accepted accounting principles distort the measures of invested capital and operating profit, users can make adjustments necessary to improve the precision of EVA as a measure of value creation. For example: adjustments may be required in the case R&D expenses are written off the balance sheet while they should be considered “investments”. In this case an adjustment is made by adding back this costs to the invested capital and to the NOPAT. 36

EVA: Economic Value Added Many companies seem to be profitable but they are not… “Until a business returns a profit that is greater than its cost of capital, it operates a loss. ( Peter Druker, Harvard Business Review article) It helps manager to: v. MAXIMIZE THE WEALTH OF SHAREHOLDERS Identify the minimal acceptable compensation for investing in a risky enterprise. v. INCREASE THE MARKET VALUE OF THE COMPANY Increase in EVA will bring an increase in the market value of the company 37

EVA: Economic Value Added ADVANTAGES OF EVA: v. EVA is conceptually simple v. EVA makes a manager care about assets as well as income v. EVA gives a better focus on how a company is performing v. EVA covers the full range of managerial decisions (strategic planning, allocating capital, pricing acquisitions, setting annual goals, etc. ) v. EVA can be used to quantify bonuses and incentives 38

Financial Analysis RATIOS ANALYSIS The analysis of the business by ratios It permits to predict the future development of the business on the basis of the historical performance study It’s largely used from everyone needs to analyse the financial results of transaction as a means of arriving at a measure of the firm’s success and financial performance. 39

Ratios Analysis By means of analysis of financial statements it’s possible to obtain a firm’s “CHECK-UP” To verify the state of health of the firm to the aim of monitoring conditions of: Balance between profits and losses It regards the Revenues/Costs dynamic Balance between cash receipts and payments It regards the Cash inflow/outflow dynamic 40

Ratios Analysis PROFITABILITY RATIOS LIQUIDITY RATIOS Ratios designed to measure the earning power of the firm. The most common rations are: return on sales (ROS); return on investment (ROIC) and return on equity (ROE) Ratios designed to measure the ability of the firm to meet its short term liabilities as they come due. The most common ratios are: current ratio; quick ratio. WORKING CAPITAL (EFFICIENCY) RATIOS Ratios designed to measure the relation between annual sales and investments in various classes of asset accounts. The most common ratios are: average stock period; average credit period; average debt period. CAPITAL STRUCTURE (LEVERAGE) RATIOS The term leverage refers to the extend to which a firm employs debt capital to finance its operations. The main ratios in this category are: debt ratio; debt -asset ratio; debt-equity ratio; time interest earned 41 ratio.

Ratios Analysis Profitability factors The Profit and Loss Account shows the final operating result (profit/loss for the period). Net profit shall be distributed to shareholders, who will then decide if this is satisfactory compared with costs. PROFITABILITY The common used measures of profitability are: ØReturn on equity (ROE) ØReturn on investments (ROIC) ØReturn on sales (ROS) 42

Profitability Ratios Performance analysis PROFITABILITY of the capital invested by stockholders ROE NET PROFIT/EQUITY 43

Profitability Ratios Fair ROE To establish if distributed profits are satisfactory or not, it is necessary to evaluate risks and the return on risk-free assets. Fair ROE = i (risk free) + Risk Premium i = risk-free return on investment R = extra charge related to entrepreneur’s risk 44

Financial Performance Analysis Net Profit Key Factors Production income/expenses Interest income/expenses ROE Key Factors Return on investments Financing structure 45

Profitability Ratios ROIC (return on investment) = Ebit Net operating assets This ratio investigates the efficient usage of the capital invested in the business 46 46

Performance Analysis ROIC Key Factors Cost Volume Profit Analysis Turnover of fixed assets Operating income (EBIT) influenced by changes in sales Analysis of revenues by fixed assets Working capital cycle Average stock period + Average credit period Average debt period 47

Performance Analysis ROE = ROS = CAPITAL TURN OVER = ROIC Main indicator of corporate efficiency Influenced by: ü Sales üOperating investments FIXED CAPITAL NET WORKING CAPITAL 48

COST VOLUME PROFIT ANALYSIS SALES - PRODUCTION COSTS EBIT Earning before interests and taxes EBIT and any other factors impacting on it are key to analyse the leverage effect 49

COST VOLUME PROFIT ANALYSIS COSTS FIXED VARIABLE Do not depend on production changes and do not vary accordingly Vary in proportion to production changes 50

COST VOLUME PROFIT ANALYSIS FIXED COSTS VARIABLE COSTS Total fixed costs Total costs Y = bx Y=A A = total fixed costs Produced volume b = variable unit cost x = produced volume Produced volume 51

COST VOLUME PROFIT ANALYSIS FIXED COSTS v This function shows total fixed costs incurred by the company. v FIXED UNIT COSTS, meaning per production unit, vary according to the business volume. This means that as the volume produced increases, fixed unit costs decrease (all other conditions being equal). 52

COST VOLUME PROFIT ANALYSIS VARIABLE COSTS v This function shows total variable costs incurred by the company. v Please note that VARIABLE UNIT COSTS (b), meaning per production unit, do not vary along with business volume, all other conditions being equal. On their turn, variable unit costs depend on the number of required production factors (“INTERNAL” EFFICIENCY) and the relevant factor price (“EXTERNAL” EFFICIENCY). 53

COST VOLUME PROFIT ANALYSIS FIXED & VARIABLE COSTS v This is a relative distinction because it depends on the reference period and the conditions of operating programmes (all operating costs decrease in the long-term). v In other words, fixed costs remain unchanged only for the period to which operating programmes refer and in connection with a certain relevant business volumes. v Some costs can be classified as “semi-variable”. 54

COST VOLUME PROFIT ANALYSIS FIXED & VARIABLE COSTS v Fixed costs can be classified as structural costs (technical, production, commercial, etc. ) and planned costs (resulting from annual management decisions); the former vary according to volume, the latter do not. v Fixed costs may record a ‘stop-go’ variability. v The variability of variable costs can follow different trends (proportional, progressive, digressive, regressive). 55

COST VOLUME PROFIT ANALYSIS TOTAL COSTS Total variable costs REVENUE Y = A + bx Produced volume Revenue Produced volume 56

COST VOLUME PROFIT ANALYSIS COST-PROFIT VOLUME ANALYSIS Analyses the changes in the operating result as sales volume vary Identifies the breakeven point generated by sales prices, fixed costs, variable unit costs Compares different price and cost structures with a view to finding the best solution in terms of expected operating result 57

COST VOLUME PROFIT ANALYSIS Total costs PROFIT AREA Break-even point LOSS AREA Produced volume 58

COST VOLUME PROFIT ANALYSIS Total costs Y = A + bx Break-even point TR = TC; TR = FC+VC; p*Q = FC + vc*Q; p*Q - vc*Q = FC; Q*(p-vc) = FC Produced volume Q = CF/ (p-vc) CONTRIBUTION MARGIN 59

COST VOLUME PROFIT ANALYSIS The distinction between fixed and variable costs sets the stage for the analysis of the COST VOLUME PROFIT ANALYSIS the extent to which operating income is influenced by changes in production and sales. 60

COST VOLUME PROFIT ANALYSIS HIGH LEVERAGE DEGREE LOW LEVERAGE DEGREE High sensitivity of EBIT as production and sales vary Low sensitivity of EBIT as production and sales vary FOCUS ON VOLUMES FOCUS ON MARGINS 61

COST VOLUME PROFIT ANALYSIS The DEGREE OF OPERATIVE LEVERAGE gives an ex-post measurement of this sensitivity: The same ex-ante measurement can be obtained with the following ratio: Δ% Operating income O. L. D. = Δ% Sales O. L. D. = Contribution margin Operating income 62

FIXED ASSETS TURNOVER The Fixed Asset Turnover is the ratio of Sales to the value of Fixed assets. It indicates how well the business is using its fixed assets to generate sales. Fixed Asset Turnover = SALES FIXED OPERATING ASSETS The higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales. 63

WORKING CAPITAL RATIOS The Working Capital Cycle corresponds to the average time elapsed between cash payments to purchase production factors and cash takings generated by the sales of goods or services. Average stock period + Average credit period Average debt period = DURATION OF THE WORKING CAPITAL CYCLE This index is useful to assess crises or liquidity problems due to mismatches between cash inflow and outflow. 64

LIQUIDITY RATIOS The three most common measure of liquidity are the: CURRENT RATIO QUICK RATIO AVERAGE COLLECTION PERIOD It measures the balance between current assets ( cash, account receivables, inventories) and liabilities It measures the balance between quick assets ( assets quickly converted to cash) and liabilities It measures the speed with which the firm generate cash Working capital ratios 65

CAPITAL STRUCTURE RATIOS Fixed assets Equity Fixed assets EQUITY > 1 Current assets Long term liability Short term liability Fixed assets Equity + LTL Fixed Assets EQUITY Long term liability (LTL) > 1 Current assets Short term liability 66

CAPITAL STRUCTURE (LEVARAGE) RATIOS DEBT RATIO Total financial debts Total assets Fixed assets Current assets DEBT EQUITY RATIO Capital supplied by lenders Total financial debts Equity Fixed assets EQUITY Loans Liability EQUITY Loans Current assets Liability 67

FINANCIAL LEVERAGE ROE(before taxes) = ROIC + (ROIC – i) * Q DEBT EQUITY RATIO i < ROIC I > ROIC Q= FINANCIAL DEBTS EQUITY positive financial leverage negative financial leverage 68

BALANCED SCORECARD It is a tool for translating strategy into actions at all levels of the organization. It provides a set of measures that give managers a fast view of the business. Kaplan and Norton articulate four perspectives that can guide companies as they translate strategy into action It has the following characteristics: • suited for managing business strategy; • common language at all levels of the organization; • common set of principles to manage day by day operations; • designed to identify and manage business purposes; • a balance between relatively opposing forces in strategy; • Leading and lagging indicators and measures; • Financial and non financial goals; • matching between strategic goals and objectives, target, metrics. 69

Balanced Scorecard How do we look to shareholders? Financial perspective How do customers see us? Customer perspective GOALS MEASURES What must we excel at? Internal Business perspective GOALS MEASURES Vision and strategy Innovation and learning perspective GOALS MEASURES Can we continue to improve and create value? 70

Four perspectives of the Balanced Scorecard FINANCIAL PERSPECTIVE: • What are the financial target? • What drives the target? • What kind of profits and revenues to achieve? • In a no profit organization, what budget guides the company? A common mistake is that companies forget the link between financial and non–financial goals. The financial perspective considers the relationship between stated financial goals and other goals. 71

Four perspectives of the Balanced Scorecard FINANCIAL PERSPECTIVE MEASURES: Objectives Measures Revenue Growth: Increase the number of new products Create new applications Develop new customers and markets Adopt a new pricing strategy Revenue Growth: % of revenues from new products % of revenues from new applications % of revenues from new sources Product and customer profitability Cost reduction: Reduce unit product cost Reduce unit customer cost Reduce distribution channel cost Cost reduction: unit product cost unit customer cost Cost per distribution channel Asset Utilization: Improve asset utilization Asset Utilization: ROI/EVA/Cash Flow 72

Four perspectives of the Balanced Scorecard CUSTOMER PERSPECTIVE Before setting goals is essential to answer the following questions: • What is your target market? • Who are your customers? • What values do the existing customers perceive? • … Customer perspective is viewed as the set of objectives the organization must achieve to gain customer acquisition, acceptance and perpetuation. 73

Four perspectives of the Balanced Scorecard CUSTOMER PERSPECTIVE MEASURES: Brand equity measures Market share Customer retention Customer satisfaction Average spending time Lifetime value to customers Sales per employee Customer profitability by channel product…. 74

Four perspectives of the Balanced Scorecard CUSTOMER PERSPECTIVE MEASURES: Objectives Core: Increase market share Increase customer retention Measures Increase customer acquisition Increase customer satisfaction Increase customer profitability Market share % growth, existing customers % of repeating customers Number of new customers Rating from customer surveys Customer profitability Performance Value: Decrease price Decrease postpurchase cost Improve product functionality Improve product quality Increase delivery reliability Improve product image and reputation Price Postpurchase cost Rating from customers surveys % of returns % On-time delivery Rating from customer surveys 75

Four perspectives of the Balanced Scorecard INTERNAL BUSINESS PROCESS PERSPECTIVE Focus on internal processes, cultures and procedures in all departments and business units affecting customers and financial performance. • In which processes must we be the best to win customers? • What internal activities do we need to develop? • …. . Internal perspective helps organization to define what re-tool to win. 76

Four perspectives of the Balanced Scorecard INTERNAL PERSPECTIVE MEASURES: Activity based costs of major contributing activities and outputs Inventory turns Number of new products Number of returns Lead time for product development Product lifecycle measures: • Mean time between failure of existing products • Weighted defects count 77

Four perspectives of the Balanced Scorecard INTERNAL PERSPECTIVE MEASURES: Measures Objectives Innovation: Increase the number of new products Increase proprietary products Decrease product cycle time Operations: Increase process quality Increase process efficiency Postsales Services: Improve service quality Increase service efficiency Decrease service time Number of new products/total products % revenue form proprietary products Time to market Quality cost % of defective units Unit cost trend Output/input Cycle time 78

Four perspectives of the Balanced Scorecard LEARNING AND GROWTH PERSPECTIVE This perspective is the base for all perspectives and reminds us that all results achieved are based on learning and growth of people working in the company. • How do we train our people? • What climate and culture can help to grow? • What should we do in developing and training our people to achieve our objectives? • …. Learning and growth perspective reminds us of the relevance of the continuing learning and growth goals and how they affect the continued competitiveness of the organizations. 79

Four perspectives of the Balanced Scorecard LEARNING AND GROWTH PERSPECTIVE MEASURES: Training by level Retention number One-to-one interviews with employees Employees and vendors satisfaction Pay benchmarks Personal development plan …. 80

Four perspectives of the Balanced Scorecard LEARNING AND GROWTH PERSPECTIVE MEASURES: Measures Objectives Increase employee capabilities Increase motivation and alignment Increase information capabilities system Employee satisfaction ratings Employee turnover % Hours of training Employee productivity (revenue/employee) Suggestion per employee Suggestion implemented per employee % of processes with real time feedback capabilities 81

The Complete Balanced Scorecard Strategy Map Improve Shareholder Value Financial Perspective: the drivers of shareholder value Customer Perspective: the differentiating value proposition Productivity Strategy Improve Cost Structure Increase Asset Utilization q Cost per Unit Learning & Growth Perspective: role for intangible assets – people, systems, climate and culture Enhance Customer Value q Customer q Asset Turnover �Market and Account Share q Internal Perspective: how value is created and sustained Revenue Growth Strategy Shareholder Value ROCE Profitability q Customer Acquisition Customer Retention q Create Value from New Products & Services q New Revenue Sources Customer Satisfaction Product Leader Customer Solutions Customer Value Proposition Product/Service Attributes Price Quality Time Low Total Cost Relationship Function Service Image Relations Operations Theme Customer Management Theme (Processes that Produce and Deliver Products & Services) (Processes that Enhance Customer Value) Brand Innovation Theme (Processes that Create New Products and Services) Regulatory and Society Theme (Processes that Improve the Environment and Communities) Human, Information, and Organizational Capital Strategic Competencies Strategic Technologies Climate for Action