Why Does Business Need a Balanced Scorecard If

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 – – – 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 Key Performance Indicators Internal Business Organizational Financial Customer Process Learning 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 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 Customer “To achieve our vision, how should we appear to Our customers? Objectives, Measures, Targets, Initiatives Vision And Strategy Internal Business Process “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 • • • Relate to profitability-measures Operating income Return on capital employed Economic value-added Rapid sales growth Generation of cash flow

Measuring Strategic Financial Themes

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 Perspective. Core Outcome Measures • • • 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 Custo mer Need Identif ied Create Identify The the Product/ Market Service Offering Operation Cycle Postsales Service Cycle Build Deliver Service The The Products/ Customer Services Cust omer Need 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 cause-and -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 Customer • Brand recognition survey (% recognition) • Number of awards for accessories • Customer satisfaction survey (new boats, lease, resale) 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 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 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 Operational Commitment Business Improvement Initiatives Planning & Budgeting Business Performance Reporting Employee Development 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