TRANSLATING STRATEGY INTO ACTION

THE BALANCED SCORECARD

M R NAIDUMBA, FCMA, FCS, LLB

PROGRAM OBJECTIVE

• To understand

• What is a Balanced Scorecard

• How the Balanced Scorecard works

• How to construct a Balanced Scorecard and use it to

achieve Strategic Goals of the organization

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MEASUREMENT BRINGS FOCUS TO THE SUBJECT

• You can’t manage what you can’t measure

- Peter F Drucker

• In God we trust, all others must bring data

- W Edwards Deming

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WHAT IS BALANCED SCORECARD

• Limitation of Financial Metrics to measure performance in the organization

• Financial statements look backwards reflecting the past• Financial Control Systems developed during industrial age to facilitate and

monitor efficient allocation of financial & physical capital • Difficulties in placing a reliable financial value on long term value creating

assets such as:• New product pipeline• Process capabilities• Employee skills, motivation & flexibility• Customer loyalty• ……………………

• Business imperative to build long-range competitive capabilities

• Islands of excellence in the organization

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• “Corporate Scorecard” with financial and non-financial measures used in Analog Devices created by Art Schneiderman in 1987.

• Multi-company study “Measuring performance in the organization of the future” sponsored by Nolan Norton Institute in 1990 with David Norton as study leader and Robert Kaplan as academic consultant.

• Findings of the study was summarized in an article “The Balanced Scorecard – Measures that drive performance” in Harvard Business Review Jan – Feb 1992 issue.

• The collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has created a new synthesis:

The Balanced Scorecard

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• The Balanced Scorecard is an organizational performance measuring &

management system to realize strategic objectives.

• It compliments financial measures of past performance with measures

of the drivers of future performance and captures critical value

creation activities of the organization

• Objectives and measures in the Balanced Scorecard:-

• are derived from organization’s Vision, Mission & Strategy

• view organizational performance from 4 perspectives:-

• FINANCIAL

• CUSTOMER

• INTERNAL BUSINESS PROCESS

• LEARNING AND GROWTH

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• Business Strategy is translated into tangible objectives and measures

• The measures represent a balance between

• External measures for shareholders and customers

• Internal measures of critical business processes and learning & growth

• The measures are balanced between

• Outcome measures – results from past efforts – lagging indicators

• Measures that drive future performance – performance drivers – leading

indicators

• Objective Measures – easily quantified outcome measures

• Subjective Measures – somewhat judgmental, performance drivers of the

outcome measures

• Financial, non-financial measures and short-term, long-term measures

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.

• The Balanced Scorecard identifies the factors that create long-term economic value in an organization, for example:

• Customer Focus: satisfy, retain and acquire customers in targeted segments

• Business Processes: deliver the value proposition to targeted customers

• innovative products and services

• high-quality, flexible, and responsive operating processes

• excellent post-sales support

• Organizational Learning & Growth:

• develop skilled, motivated employees;

• provide access to strategic information

• align individuals and teams to business unit objectivesProcesses

Customers

People

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CLARIFYING AND TRANSLATING THE VISION AND STRATEGY• Clarifying the vision• Gaining consensus

STRATEGIC FEEDBACK AND LEARNING• Articulating the shared vision• Supplying strategic feedback• Facilitating strategy review

and learning

COMMUNICATING AND LINKING• Communicating and

educating• Setting goals• Linking rewards to

performance measures

PLANNING AND TARGET SETTING

• Setting targets• Aligning strategic initiatives• Allocating resources• Establishing milestones

BALANCED SCORECARD

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TRANSLATING STRATEGY INTO ACTION

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VISION

MISSION

STRATEGY

STRATEGIC

GOAL

STRATEGIC

GOAL

STRATEGIC

GOAL

OBJECTIVE

MEASURE

TARGET

OBJECTIVE

MEASURE

TARGET

OBJECTIVE OBJECTIVE OBJECTIVE OBJECTIVE

MEASURE MEASURE MEASURE MEASURE

TARGET TARGET TARGET TARGET

What we aspire to be WHY

What we do HOW

How we accomplish our Goals

End Result S.M.A.R.T GOAL

Specific Result

Indicator of Progress

Specific Result

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GOAL OBJECTIVE MEASUREMENT TARGET INITIATIVE

Achieve OEE 85%OEE = A x P x QA = AvailabilityP = PerformanceQ = Quality

= Net operating time / Planned operating time

= Ideal cycle time / actual cycle time

= Good units produced / Total units produced

Reduce cycle time

Number of breakdowns

1 per quarterPreventive

Maintenance

Reduce equipment downtime

Increase First Pass Yield

First Pass UnitsTotal production

99.50%TQM / Six Sigma

/ Lean

Total OutputTotal Production

Time25 / Hour

Processre-engineering

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Detailed statement of what is critical to

successfully achieve the strategic goal

The level of performance or rate of improvement

needed

How success in achieving the strategy will be

measured and tracked

Key action programs required to achieve

objectives

OBJECTIVE

DESCRIPTIONMEASURE TARGET INITIATIVE

Eliminate waste, reworks, and other errors in our

processesNumber of reworks

2 per setup for each process

Lean / six sigma

OB

JE

CT

IVE

S

ME

AS

UR

ES

TA

RG

ET

S

INIT

IAT

IVE

S

FINANCIAL

To succeed

financially, how

should we

appear to our

shareholders?

To satisfy our

shareholders

and customers,

what business

processes must

we excel at?

INTERNAL BUSINESS PROCESS

OB

JE

CT

IVE

S

ME

AS

UR

ES

TA

RG

ET

S

INIT

IAT

IVE

S

CUSTOMER

To achieve our

vision, how

should we

appear to our

customers?

OB

JE

CT

IVE

S

ME

AS

UR

ES

TA

RG

ET

S

INIT

IAT

IVE

S

LEARNING AND GROWTH

To achieve our

vision, how will

we sustain our

ability to

change and

improve?O

BJ

EC

TIV

ES

ME

AS

UR

ES

TA

RG

ET

S

INIT

IAT

IVE

S

VISION

MISSION

STRATEGY

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FINANCIAL

CUSTOMER

INTERNAL BUSINESS

PROCESSES

LEARNING AND

GROWTH

Maximize

Shareholder

Value

Exceed

Customer

Expectations

Inspire

Customer

Loyalty

Create High

Quality

Products

Train

Employees

Maximize

Operational

Effectiveness

Create

Quality

Partnerships

Recruit

Quality Staff

TRANSFORMATION STRATEGY• Effectiveness• Synergy• MEDIUM RISK

OPERATIONAL STRATEGY• Operational Efficiency• Robust Systems & Processes• LOW RISK

BREAK POINT STRATEGY• Innovation• Latent Needs• Redefine Value Proposition• HIGH RISK

TRANSFORMATION STRATEGY• Effectiveness• Synergy• MEDIUM RISK

BUSINESS GROWTH

EXISTING NEW

EXISTING

NEW

PRODUCTS & SERVICES

MA

RK

ET

S

EXISTING NEW

EXISTING

NEW

MA

RK

ET

S

PRODUCTS & SERVICES

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MEASURING BUSINESS STRATEGY

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REVENUE GROWTH & MIX

COST REDUCTION /

PRODUCTIVITY

IMPROVEMENT

ASSET UTILISATION

STRATEGIC THEMESB

US

INE

SS

ST

RA

TE

GY

HA

RV

ES

TS

US

TA

ING

RO

WT

H • Sales Growth % in each Segment• % of Sales from New

• Products / Services• Customers

• Revenue / Employee • Investment as % of Sales• R & D Expenditure as % of

Sales

• Share of targeted Custmrs & Accounts• Cross Selling• % Sales from New Applications• Customer & Product Line Profitability

• Customer & Product Line Profitability

• % of Unprofitable Customers

• Cost vs Competitors’• Cost Reduction Rates• Indirect Expenses as a %

of Sales

• Unit Costs (per unit of output, per transaction)

• Working Capital Ratios (Cash – to – Cash Cycle)

• ROCE by Key Asset Categories• Asset Utilization Rates

• Payback period• Throughput

MARKET

SHARE

CUSTOMER

PROFITABILITY

CUSTOMER

RETENTION

CUSTOMER

ACQUISITION

CUSTOMER

SATISFACTION

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VALUE PRODUCT / SERVICE ATTRIBUTES= IMAGE+ + RELATIONSHIP

FUNCTIONALITY QUALITY PRICE TIME

Product Failure Index

Customer NeedSatisfied

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Innovation Process Operations Process Post-Sale Service Process

• Development Cycle Time

Relevant Metrics

• Quality / Defects• MCE

• Delivery Cycle Time

• Service Satisfaction

Customer Need Identified

Manufacturing Cycle Effectiveness (MCE) =Processing TimeThroughput time

Throughput Time = Processing Time + Inspection Time + Movement Time + Waiting / Storage Time

MCE 0 Inefficient ProcessMCE 1 Efficient Process

Identify the Market

Create the Product/Service Offering

Build the Products /

Services

Deliver the Products /

Services

Service the Customer

Results

Employee Productivity

Employee Retention

Employee Satisfaction

Staff Competencies

Technology Infrastructure

Climate for Action

Enablers

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STAFF COMPETENCIESTECHNOLOGY INFRASTRUCTURE

CLIMATE FOR ACTION

Strategic skills Strategic technologies Key decision cycle

Training levels Strategic databases Strategic focus

Skill leverage Experience capture Staff empowerment

Proprietary software Personal alignment

Patents, copy rights Morale

Teaming

LINKING BALANCED SCORECARD MEASURES TO STRATEGY

• CAUSE-AND-EFFECT RELATIONSHIP

• PERFORMANCE DRIVERS

• LINKAGE TO FINANCIALS

• If we increase employee training about products, then they will become more knowledgeable about the full range of products they can sell;

• If employees are more knowledgeable about the products, then their sales effectiveness will improve;

• If their sales effectiveness improves, then the average margins of the products they sell will increase.

• Every measure selected for a Balanced Scorecard should be an element of a chain of cause-and-effect relationships that communicates the meaning of the business unit’s strategy to the organization

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DRIVERS(Lead Indicators)

MODERATORS(Lag Indicators)

OUTCOMES

CYCLE TIMES• Customer Order

Fulfilment• Product Manufacturing

Cycle Time at each process / stage

CUSTOMER SATISFACTION

MANUFACTURING COST PER UNIT

QUALITY• Defects / Reworks• Scrap / Waste

ROA

EVA

EPS

• LAGGING INDICATORS

• Output oriented, easy to measure but hard to improve or influence

• Generally they are generic in nature

• Example. Revenue, Costs, Profits. Compliance to SLA

• LEADING INDICATORS (PERFORMANCE DRIVERS)• Input oriented hard to measure but easy to influence

• Performance Drivers are unique for each organization and within an organization for each business.

• Example. SLA of a service department• Staff should work on incidents immediately

• Incidents are assigned to the right person with right skills

• Work load distributed rationally without over burdening a few

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OBJECTIVE / METRIC UOM PY - ACTUAL TARGET / MEASURE OF ACHIEVEMENT

TARGET DATE

REMARKSFI

NA

NC

IAL 1.Sales Growth

2.P/V Ratio % 28.00 33.00 31-03-2020 COO

3.EBIDTA

CU

STO

MER 1. Market Share % 15.00 17.00 31-03-2020 VP-Mktg

2.New Customers

3.Customer Satisfaction

INTE

RN

AL

PR

OC

ESSE

S 1. BOM Cost Rs/Lt 100.00 97.00 31-12-2019 VP – OP

2.Boiler Efficiency

3.Power Load Balancing

LEA

RN

ING

&

GR

OW

TH 1. Process Ownership Score 84.00 87.00 31-03-2020 VP-HR

2.Employee Turnover

3.Training

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1. LEADERSHIP FROM THE

TOP

• Create the climate for change

• Create a common focus for

change activities

• Rationalize and align the

organization

2. MAKE STRATEGY

EVERYONE’S JOB

• Comprehensive

communication to create

awareness

• Align goals and incentives

• Integrate budgeting with

strategic planning

• Align resources and initiatives

4. MAKE STRATEGY A

CONTINUOUS PROCESS

• Strategic feedback that encourages

learning

• Executive teams manage strategic

themes

• Testing hypotheses, adapting and

learning

3. UNLOCK AND FOCUS HIDDEN

ASSETS

• Reengineer work processes

• Create knowledge sharing

networks

FORMULATE

EXECUTE

COMMUNICATE NAVIGATE

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PROCESS

• Middle management task force

• Not driven by senior executive team

• Only one or few individuals involved

• Too long a development process (allowing the “best” to be the enemy of the “good”)

• Delay introduction because of missing measurements

• Static not dynamic process

• Treating the BSC as an EIS

PHILOSOPHY

• Measurement to control; not to communicate

• Management dictating actions vs employee improvisation to achieve desired outcomes

• For management only, not shared with all employees

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Strategic PlanAnnual Budget

Corporate BSC

Functional BSC

MonitoringAudit of

Final Score

Strategic Business Plan for next five years and Business Plan for current yearAnchor & Coordinate

Identify Performance Drivers and Define their measurement processFull Responsibility

BRMs Help compile Monthly Progress Reports

Audit & Finalize Score Full Responsibility

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