Appraising an Organisation

By Dr.Ashvini Ravi

Associate Dean –Academics

MyBskool.com

Types

1. Internal - Value Chain

2. Comparative - Benchmarking

3. Comprehensive- Balanced Score Card

1.Internal Analysis techniques

Value Chain analysis- Those businesses that focused their innovation

around creating or improving customer value consistently outperformed competitors in their industries

Revenue and earnings analysis from 100 business launches demonstrated that the value innovators generated 38% of the cumulative revenues and 61% of the total profit.

It seems that value innovation offers the potential for significant competitive advantage.

How does an organisation create value ????

Learn from the entrepreneurial innovations that have made companies like McDonald’s successful

McDonald’s first “studied what value meant to the customer, defined it as quality and predictability of product, speed of service, absolute cleanliness, and friendliness, then set the standards for all of these”

They essentially designed an end product that defined customer value

Then created an efficient process to deliver this value

Inexpensively to the customer Economically for the organization.

Unique Supply Chain

Controlled Temperatures

Procurement WarehousingTransportation Retailing

Development of the “Cold Chain”

What is a cold chain ???

Why does Mc Donalds need a cold chain ??

What is a Cold Chain ?

Warehousing, transportation and retailing of products under controlled temperatures.

Necessary for ice creams, frozen vegetables, processed meats, dairy and bakery products.

Frozen foods need sub-zero temperatures up to -20°C

Produces over 2,000 pounds of cheese per month. 15 bulk cooling centers throughout the district from

which it purchases milk. Checks fat content. Detects minute traces of pesticides or

antibiotics administered to cows. This instant rejection forces farmers to follow the best

practices in terms of raising livestock, using proper feeds, and cutting down on the use of pesticides and animal medicines.

 McDonald's has provided assistance in the selection of high quality seeds.

Exposed the farms to advanced drip-irrigation technology.

Helped develop a refrigerated transportation system allowing a small business in India to provide fresh, high-quality lettuce to McDonald's urban restaurant locations thousands of miles away. 

Technical and financial support extended by OSI Industries Inc., USA and McDonald’s India Private Limited :

Hi-tech refrigeration plants for manufacturing frozen food at temperatures as low as - 35° C. 

 The latest vegetable mixers and blenders are in operation. Keeping cultural sensitivities in mind, both processing lines

are absolutely segregated to ensure that the vegetable products do not mix with the non-vegetarian products. 

Specializes in handling large volumes of products Offers wide range of services: quality inspection, storage,

inventory management, deliveries, data collection, recording and reporting.

Effective process control for minimum distribution cost. A one-stop shop for all distribution management services. Dry and cold storage facility to store and transport perishable

products.

 (Distribution Centers for Delhi and Mumbai)

Monitors food as the ingredients move from farms to processing plants to the restaurant

Implements McDonald's Quality Inspection Program (QIP), which carries out quality checks at over twenty different points in the Cold Chain system.

Amrit Food (Supplier of long life UHT Milk and Milk Products for Frozen Desserts)

Customer Value at McDonald

McDonald's unique 'cold chain’ Mac Donald spent more than six years setting up in India Enabling customers at retail counters to get the highest

quality food products, absolutely fresh and at great value. Cut down on its operational wastage Maintain the freshness and nutritional value of raw and

processed food products This has involved procurement, warehousing,

transportation and retailing of perishable food products, all under controlled temperatures.

It trained the local farmers to produce lettuces or

potatoes to specifications explained to the suppliers precisely why only one

particular size of peas was acceptable (if they

were too large, they would pop out of the patty and get burnt )

The restaurants were not supposed to stock more than three days of inventory

the time limit for distribution centres or warehouses was a stringent 14 days to minimize costs and optimize quality control.

This required round-the-clock monitoring of pick-ups and truck movements. Since most of the items were perishable, McDonald's standards covered the entire delivery schedules.

Cleanliness (including the personal hygiene of the drivers),

Temperature control of the food (digital probes were inserted into items selected at random) it transported.

There were data logs to track the movement of each batch.

In the case of a complaint from a restaurant, the batch could be identified, isolated, and dumped.

Learnings from Turkey, the Philippines, Australia, and the US.

All of McDonald's suppliers followed the internationally acclaimed HACCP systems ( Hazard Analysis and Critical Control Point (HACCP) system to keep food safe

from harvest to consumption) wherein both inputs and finished goods were subjected to chemical and microbiological tests.

At the retail outlets, the entire production line was automated using sophisticated technology

Only the final compilation of the bun, cheese

and patty - which was done by hand.

McDonald created and delivered the

Quality, Service, Cleanliness and Value

(QSC&V)

Successful execution of this strategy allows shareholders to extract an excess portion of this created value as earnings.

Therefore, the organization gains advantage over competitors

When it can create and deliver sufficient value to induce customer to purchase its product or service,

Rather than blind acceptance of the status quo, the value innovator assumes a fresh-start mentality and attempts to shape the industry’s environment.

Value innovation also seeks the simultaneous reduction of costs to both the customer and the organization.

Creating Value

Blackberry I pod BMW Dell Facebook Ebay Flip kart

Michael Porter

Michael Porter’s Value Chain analysis

Porter – 1985 introduced the value chain framework.

Set of interlinked value creating activities performed

Procurement of basic Raw material to ultimate consumer

Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs.

These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.

The chain of activities gives the products more added value than the sum of added values of all activities.

It is important not to mix the concept of the value chain with the costs occurring throughout the activities.

A diamond cutter can be used as an example of the difference.

The cutting activity may have a low cost, but the activity adds much of the value to the end product

since a rough diamond is significantly less valuable than

a cut diamond. 

The value-chain concept has been extended beyond individual firms.

It can apply to whole supply chains of an industry and distribution networks.

 A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).

Example of value chain changes

Airlines :Backward- Maintenance, Catering

Forward- Own booking offices , Air Asia –ebooking

Dell- direct marketing

2. Comparative Analysis

Benchmarking

Bench marking

In the early 1980s, Xerox found itself increasingly vulnerable to intense competition from both the US and Japanese competitors

Xerox's management failed to give the company strategic direction.

It ignored new entrants (Ricoh, Canon, and Sevin) who were in the lower-end market and in niche segments. 

The company's operating cost (and therefore, the prices of its products) was high and its products were of relatively inferior quality in comparison to its competitors.

Xerox also suffered from its highly centralized decision-making processes.

Return on assets fell to less than 8% and market share in copiers came down sharply from 86% in 1974 to just 17% in 1984.

Between 1980 and 1984, Xerox's profits decreased from $ 1.15 billion to $ 290 million

The average manufacturing cost of copiers in Japanese companies was 40-50% of that of Xerox.

Xerox's products had over 30,000 defective parts per million - about 30 times more than its competitors.

REAPING THE BENEFITS

Increase in the number of satisfied customers. Highly satisfied customers for its copier/duplicator

and printing systems increased by 38% and 39% respectively

Customer complaints to the president's office declined by more than 60%

Customer satisfaction with Xerox's sales processes improved by 40%

Service processes increased by 18%

Administrative processes improved by 21% Number of defects reduced by 78 per 100 machines. Service response time reduced by 27%. Inspection of incoming components reduced to below 5%. Defects in incoming parts reduced to 150ppm. Inventory costs reduced by two-thirds. Marketing productivity increased by one-third. Distribution productivity increased by 8-10 %. Increased product reliability on account of 40% reduction in unscheduled

maintenance. Notable decrease in labour costs. Errors in billing reduced from 8.3 % to 3.5% percent. Became the leader in the high-volume copier-duplicator market segment. Country units improved sales from 152% to 328%.

. Bench Marking

Definition :A process for improving performance by constantly identifying ,understanding and adapting best practices and processes followed inside and outside the company and implementing the results.

The main emphasis of benchmarking is on improving a given business operation or a process by exploiting 'best practices,' not on 'best performance’.

Simply put, benchmarking means comparing one's organization or a part of it with that of the other companies.

“Benchmarking is the practice of being humble enough to admit that someone else is better at something and wise enough to try and learn how to match and even surpass them at it.” - APQC, 1998

BENCHMARKING THOUGHTS

BENCHMARKING In sharp contrast to the conventional

approach of setting the future goals extrapolated from the internal practices and past trends.

Since external environment and market conditions change rapidly; goal setting which is internally focused can’t be true reflection of customer’s expectations.

BENCHMARKING

Customers’ expectations are highly liquid and are driven by standards set by best performer.

Any product or service just below these standards may not catch the eyes of customer.

Why use Benchmarking

Survival lies in emulating best and not in lagging behind

Bench marking is time and cost efficient because it involves imitation and adaptation rather than pure invention. Prevents “Re-inventing the wheel”.

Quantum-leaps in performance

Why use Benchmarking

An effective ‘wake-up call’ and helps to make a strong case for change

Practical ways in which step changes in performance can be achieved by learning from others who have already undertaken comparable changes

The impetus for seeking new ways of doing things and promotes a culture that is receptive to fresh approaches and ideas

Opportunities for staff to learn new skills and be involved in the transformation process from the outset.

Types of Benchmarking

Internal benchmarking

External benchmarking

Functional benchmarking

Internal benchmarking

Sharing opinions between departments within the same organisation

ADVANTAGES:

Easier to implement Easier to access data

DISADVANTAGES:

External ideas blocked

External Benchmarking

Comparison with external organisations to discover new ideas, methods, products and services.

The gap between internal and external practices displays the way where to change and if there is any need to change.

Advantages Helps to measure

one’s own performance Helps to search for

best practices

Disadvantages Takes time Requires support Legal/ethical isssues Industrial espionage

Functional Benchmarking:

Comparative research to seek world-class excellence by comparing business performance not only against competitors but also against the best businesses operating in different industry

Advantages:

Discovering innovative practices

Disadvantage:

Not suitable for every organisation

Other Types of Benchmarking

Product Benchmarking Process Benchmarking Strategic Benchmarking

How companies compete, identify the winning strategies that have enabled high-performing companies to be successful in their marketplaces.

Gap Analysis (Spider chart)

Current performance of the host Current performance of the partner

Current performance of the host for variable ‘K’.

Best of the best (current performance of the partner for variable ‘A’.

Total customer satisfaction

– Clearly defined purpose– Continual analysis &

reassessment– BM methodology must be

appropriate– Significance of results must be

clear– Conclusions must be justified by

the data– Never compromise integrity for

the sake of findings

BENCHMARKING ESSENTIALS

BENCHMARKING ESSENTIALS

Investigation must be systematic A high code of ethics is essential Successful benchmarking requires a

planned approach Requires senior management

commitment Must establish & enforce milestones Must report findings to senior

management

Internal training for company personnel

Access to a benchmarking database

Professional BM analysts to support studies

The process must be institutionalized!

BENCHMARKING ESSENTIALS

1. Fear of being seen as “copying”2. Fear of losing competitive advantage

by sharing information3. Arrogance – “we are the best, why

benchmark?”4. Benchmarking trap – benchmark that

which is convenient, but may not be important.

Adapted from Watson 1992

BARRIERS TO BENCHMARKING

5. Impatience – “A quintessential trait”6. Excuses are too easy:

– We are too small– We are too busy– We are too different– Nobody else does what we do– We do it better than anyone else

Adapted from Watson 1992

BARRIERS TO BENCHMARKING

1. Key is to “Adapt not adopt” – Deming

2. Benchmarking does not come as a natural process for many – competitiveness does, but not benchmarking, because benchmarking requires a team approach.

BENCHMARKING OBSERVATIONS

Value Chain analysis

It seems that value innovation offers the potential for significant competitive advantage

McDonald’s first “studied what value meant to the customer, defined it as quality and predictability of product, speed of service, absolute cleanliness, and friendliness, then set the standards for all of these”

Benchmarking means comparing one's organization or a part of it with that of the other companies.

Different types of benchmarking How Xerox benchmarked …..

How did McDonald improve customer value ?

How did Xerox benchmark ?

Comprehensive Analysis-Combination of techniques

1. Balanced Score card-

Proposed by Robert S Kaplan and David Norton-Set of measures that give top Management a comprehensive view of business

Why Do Organizations Struggle So Hard With Strategy?

1 in 10 organizations execute their strategies successfully

1 in 10 organizations execute their strategies successfully

72% of CEOs believe that executing their chosen

strategy is more difficult than developing a good strategy

72% of CEOs believe that executing their chosen

strategy is more difficult than developing a good strategy

Fortune Magazine, 1998

Malcolm Baldrige CEO Survey, 2002

Strategic Learning Loop

Initiatives & Programs

test the hypotheses

Output(Results)

reportingManagement Control Loopfunding

Input(Resources)

update the strategy

PERFORMANCE

85% of management teams spend less than one hour per

month on strategy issues

92% of organizations do not report on lead indicators

60% of organizations don’t link strategy & budgets

78% of organizations lock budgets to an annual cycle

20% of organizations take more than 16 weeks to

prepare a budget

MAKE STRATEGY A CONTINUAL PROCESS

STRATEGY

BALANCED SCORECARD

BUDGET

The Problem: The Strategic Management Process Is Missing in Most Organizations

#5

Strategy Development or Strategy Execution?

Organizations Need Both

Strategic

Success

Strategic

Success

At RiskAt RiskDoomed From

The Start

Doomed From

The Start

Missed

Opportunity

Missed

Opportunity

Str

ateg

y F

orm

ula

tion

Flawed Sound

Fla

wed

Sou

ndStrategic success requires going beyond successful strategy formulation to

successful strategy execution

Source: 1Execution: The Discipline of Getting Things Done, by Larry Bossidy, 2002.

Strategy Execution

1

Strategy Execution ChallengeThere are generally accepted tools to manage finances, customers, processes,

and people. But what about strategy?

The Balanced Scorecard is the vehicle that fills the Strategy Management Gap

Financial Management ToolsEVA

Balance Sheets

Income Statements

Shareholder Value Analysis

Customer Management ToolsCustomer Satisfaction Measurement

Customer Relationship Management

Segmentation Analysis

One-to-One Marketing

Process Management ToolsSix Sigma

Supply Chain Integration

Cycle Time Reduction

TQM

People Management ToolsCore Competencies

Knowledge Management

Pay for Performance

HRIS

Strategy Management Tools

?

Where it started . . .

Introduced in 1992, by Robert Kaplan and David Norton, the Balanced Scorecard is the most commonly used framework for ensuring that agencies execute their strategies. Today, about 70% of the Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance.

Balanced Scorecards are used as the roadmap for creating the “Strategic Management System” And this will drive overall organizational performance

1. Customer Perspective- How do customers see us2. Internal Business Perspective- What must we

excel in ?3. Innovation and learning perspective-Can we

continue to create value ?4. Financial perspective – How do we look at

shareholders ?

4 key performance measures in Balanced Scorecard

Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth) to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to the market (customer) which will eventually lead to higher shareholder value (financial).

Balanced Scorecard Organizations Are Achieving Breakthrough Results

Public Sector

SMDC Health System

• Profitability up $23m• Customer Satisfaction

City of Charlotte

• Customer Satisfaction = 70%

• Public Official Award

Duke Children’s Hospital

• Customer Satisfaction #1• Cost/Case 33%

Defense Logistics Agency

• $130MM in Savings in FY2002• Processed $2.2B more requisitions for its

customers

Private Sector

Hilton Hotels

• From last to first in industry• ROI 6% --> 16%

• Customer Loyalty 5%• EDITDA margins 3% above

average

UPS

• Revenues 9%• Net Income 33%

Wendy’s International

• Mkt. Cap $2.5 --> $4b• Stock Price up 75%

Mobil

BREAKTHROUGH RESULTS

Shareholder Value

Profitable Growth

Cost Reduction

Organizational Alignment

Customer Satisfaction

STRATEGY:They made strategy the central organization agenda

FOCUSED: They created incredible focus on the strategy

ORGANIZATION: They mobilized their employees to act in fundamentally different ways, guided by the strategy

The Balanced Scorecard Is a Performance Management Program That Puts Strategy at the Center of the Process

How Did They Do It? They Created “Strategy-Focused Organizations”

STRATEGY

Knowledge, Skills, Systems, and Tools

Financial Results

To Build the Strategic Capabilities..

Needed to Deliver UniqueSets of Benefits to Customers...

To Drive Financial Success...

And Realize the Vision

Equip our People...

Internal Capabilities

Customer Benefits

…Reflecting a “Natural Cause and Effect Logic” of Business Performance

Strategic Theme: Operating Efficiency

ProfitabilityFinancial

Learning

Morecustomers

Ground crew alignment

Lowest prices

Fewer planes

Flight Is on time

Customer

Internal

Fast ground turnaround

Illustrative Example: Southwest Airlines

The Balanced Scorecard Should Tell the Story of the Strategy

What will drive operating efficiency?”

• More customers on fewer planes

How will we do that?

• Attract targeted customer segments who value price and on time arrivals

What must the internal focus be?

• Fast turnaround

Will our people do that?

• Educate and compensate ground crew regarding how they contribute to the firm’s success

• Employee stockholder program

Let’s Take a Minute to Agree Upon Some Common Vocabulary

Objectives

• Fast ground turnaround

Statement of what strategy must achieve and what’s

critical to its success

Target

• 30 Minutes• 90%

The level of performance or

rate of improvement

needed

Strategic Theme: Operating Efficiency

ProfitabilityFinancial

Learning

Morecustomers

Ground crew alignment

Lowest prices

Fewer planes

Customer

Internal

Fast ground turnaround

Diagram of the cause and effect relationships between strategic

objectives (Strategy Map)

Flight Is on time

• Cycle time optimization

Key action programs

required to achieve

objectives

InitiativeMeasurement

• On Ground Time• On-Time

Departure

How success in achieving the

strategy will be measured and

tracked

PHILIPS

WHICH IS THE COUNTRY OF ORIGIN OF THIS COMPANY ?

Philips was founded in 1891 by Gerard Philips who established a facility at Eindhoven, a small town in the Netherlands, to produce carbon filament lamps and electrical products.

Gerard's younger brother, Anton, joined the business in 1895 as a salesperson.

By the early 1900s, Gerard's company had emerged as one of the largest producers and marketers of carbon-filament lamps.

In the 1920s, Philips began the mass production of consumer goods, and started to diversify its product range. X-ray radiation and radio reception were key focus areas for Philips and the company's innovations in these areas were protected through patents.

During the late 1990s the external environment was changing rapidly and Philips needed to respond quickly to these changes.

However, the existing organization structure at Philips did not support this kind of change.

The company's operations were spread across several countries, and the products were most often sold in the country in which they were manufactured.

Due to high manufacturing costs, the products could not be priced competitively.

This led to the company initiating job cuts, selling unprofitable businesses and closing down several manufacturing facilities

Rapid changes in the external business environment and growing competition due to Asian manufacturers

With growing wage levels, selling and manufacturing in the same country was not a lucrative value proposition.

This was especially the case in some of Philips' major markets in Western Europe where the cost of manufacturing had increased significantly.

At the same time, the growing influence of Asian companies like LG and Samsung increased competition in the businesses in which Philips was operating.

These changes made Philips realize that its operations needed to be more flexible, more innovative, and value adding. A silo mentality had developed in the organization due to years of bureaucracy...

Implementing Balanced Scorecard At Philips, the initiative to implement the Balanced

Scorecard system came from the top management at its headquarters in the Netherlands. All the subsidiaries of Philips across the world were instructed by their quality departments on how to go about the implementation...

Knowledge, Skills, Systems, and Tools

Financial Results

To Build the Strategic Capabilities..

Needed to Deliver UniqueSets of Benefits to Customers...

To Drive Financial Success...

And Realize the Vision

Equip our People...

Internal Capabilities

Customer Benefits

…Reflecting a “Natural Cause and Effect Logic” of Business Performance

The balanced scorecard serves not only as the starting point for identifying those areas where breakthroughs in performance are most needed, but also as an instrument for tracking progress."

- Annual Report, Philips Electronics NV, 2001

Philips realized the need to transform into a flexible organization and shift focus from high-volume business to high-value business.

In order to bring in the desired change, Philips embarked on an improvement program, in all its divisions and departments across the world, encompassing all the employees

The program, called Business Excellence through Speed and Teamwork (BEST), described a set of methods and tools through which Philips aimed to improve business and financial performance.

BEST was a company-wide initiative aimed at achieving excellence in every aspect of business at Philips. Philips used several tools and approaches as a part of BEST.

One of them was Balanced Score Card

The top management, and all the divisions identified the factors that were important to create value and they were

grouped under four perspectives - competence, process, customers and financial. After establishing the 'Critical Success Factors' (CSFs), key indicators to measure the CSFs were decided. Some of the indicators like achieving revenue growth, employee satisfaction, customer satisfaction were common for all the business units while other indicators differed.

During the periodical management reviews, the Balanced Scorecard was used as an instrument to evaluate actual performance against the targets and to monitor future plans.

Philips used the traffic light system with the green light indicating a target that had

been met, amber indicating performance in line with the

target, and red denoting a problem area,

to measure the level of achievement of the key indicators.

The 117-year-old Dutch company was a lumbering conglomerate that made everything from semiconductors to light bulbs, without clear leadership in anything.

Today Philips is on its way to becoming a case study in European restructuring. While still a conglomerate, it has streamlined its business and revitalized its brand under the leadership of chief executive Gerard Kleisterlee. Its financial performance has also improved.

in 2006, Philips unloaded 80% of its volatile semiconductor business for 6.4 billion euros ($9.6 billion). It has also been steadily selling off its holdings in Taiwan Semiconductor which it hopes to unwind by 2010. Philips also plans to sell most of its nearly 20% stake in its South Korean venture, LG Philips LCD, by next year. Exit from

Exit from Semiconductor business

Building capability in Health Care and Lighting

Meanwhile, Philips has been busy putting all of this cash to work.

In December, it announced a share buyback, worth 5 billion euros ($7.2 billion). It has also been on a shopping spree, buying a handful of companies that will bolster its growth prospects. These include Respironics (in home health care), Visicu (in health care information technology), and Genlyte (in lighting fixtures). These deals should put Philips in a position to deliver more stable growth and better profitability in the future.

Philips is a leading maker of light-emitting diodes (LEDs), LEDs are brighter, cooler, and more-energy efficient than regular bulbs, and Philips is building a dominant position in this market.

Philips [also] is capitalizing on another important trend-the growth of home care and patient monitoring.

Another growth opportunity: emerging markets. About a third of Philips' revenue comes from emerging markets, including Asia, Latin America, and Russia.

Balanced Scorecard Implementation at Philips

Our aim for adopting the balanced scorecard solution is to consistently communicate strategy deep down into Philips' 80 businesses and support more than 10,000 managers with tools to turn strategy into action by sharing knowledge, aligning actions, monitoring progress and learning."1

- Peter Geelen of Philips Corporate Control, Responsible for the Balanced Scorecard Project, in 2001.

Balanced Score Card is a comprehensive Management System for --- STRATEGY PLANNING AND EVALUATION

Techniques used for Organisation Appraisal

Types-

1. Internal – Value Chain, Quantitative,qualitative

2. Comparative- Historical, Industry norms, Benchmarking

3. Comprehensive- Balanced Score Card, Key Factor Rating

Key factor Rating

Used by consultants :

Look at the strengths and synergies, that result in capabilities described earlier….

Credit worthiness Low cost of capital Product Price

Asking relevant questions in each area

How does the company’s products compare wrt ….Brand Image …..

OCP- Organisation Capability Profile

Factor Weakness-5

Normal0

Strength+5

Source of fund…

The chart helps strategists to assess the S &W of the organisation in each functional area

SAP – Strategic Advantage Profile

Outcome of the Organisation Appraisal

Similar to ETOP for opportunities and threats

Gets input from OCP

Picture of more critical factors affecting Strategic Posture

For a -------- companyCapability Factor S or W Competitive

S or W

Finance High cost of capital

HR Comparable to competitors

The Organisation Appraisal can be done by a detailed OCP or a summarised SAP