Balanced Scorecard Translating Strategy Into Action (Kaplan & Norton, 1996) A 4-hour Introduction

Introduction BSC, what’s that? ”..provides managers with the instrumentation they need to navigate to future competitive success..” ”..translates an organization’s mission and strategy into a comprehensive set of measures that provides the framework for a strategic measurement and management system..”

Introduction There has been an increasing need to mobilize and exploit, not just tangible assets, but also and even more so intangible assets

Intangible assets enable Develop customer relationships that retain the loyalty of existing customers and enable new customer segments and market areas to be served effectively and efficiently Introduce innovative products and services desired by targeted customer segments Produce customized high-quality products and services at low costs and with short lead times Mobilize employee skills and motivation for continuous improvements in process capabilities, quality, and response time deploy IT (databases and other systems)

The Basic Framework Financial Internal Business Customer Vision and To succeed financially, how should we appear to our shareholders? Vision and Strategy Customer To achieve our vision, how should we appear to our customer? Internal Business Process To satisfy our shareholders and customers, what busi- ness processes must we excel at? Learning and Growth To achieve our vision, how will we sustain our ability to change and improve?

The Strategic Framework for Action Clarifying and Trans- lating the Vision and Strategy Clarifying the vision Gaining consensus BSC Communicating and Linking Communicating and educa- ting Setting goals Linking rewards to perfor- mance measures Strategic Feedback and Learning Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning Planning and Target Setting Setting targets Aligning strategic initiatives Allocating resources Establishing milestones

Why Does Business Need a Balanced Scorecard? Financial perspective Customer perspective Internal-Business-Process perspective Learning and Growth perspective

Internal-Business-Process Enables the business (unit) to: Deliver the value proposition that will attract and retain customers Satisfy shareholder expectations of excellent financial returns. The IBP measures focus on the internal processes that will have the greatest impact on customer satisfaction and achieving an organization’s financial objectives.

IBP traditional vs. BSC approach Two fundamental difference: Traditional: monitor and improve existing BP BSC: usually identify entirely new processes at which firms must excel to meet customer and financial expectations Traditional: focus on processes which deliver today’s products and services to today’s customers. BSC: incorporate innovation processes into IBP enabling value creation as driver of FUTURE performance.

Value system Company Value Supplier Customer Customer Customer value value value value The direction of transaction-based value creation The two-way value process within a relationship

IBP: value chain perspective Innovation Operations Customer Need Identification Satis- facation Design Develop Make Market Service Time-to-market Supply Chain Business Processes Innovation Process Product Desin Product Development Operations Process Manufacturing Marketing Postsale Service

The Value Chain Decomposed Firm infrastructure (finance, accounting, legal) Human resource management Technology development Procurement The value chain depicts the firm as a collection of value-creating activities. One widely accepted version sets out five primary activities (inbound logistics, production operations, outbound logistics, marketing and sales, and service) and four support activities. A firm creates more value than its competitors only by performing some or all of these activities better than they do. To do this, the firm must possess resources and capabilities that its competitors lack; otherwise the competitors could immediately copy any strategy for creating superior value. Inbound logistics Production operations Outbound logistics Marketing and sales Service

Drug Development Process – ’the Staircase model’ – the ’FIPCO’ model Discovery (2-10 years) Preclinical Testing Laboratory and animal testing Phase I 20-80 healthy volunteers used to determine safety and dosage Phase II 100-300 patients used to look for efficacy and side effects Phase III 1000-5000 patiens used to monitor adverse reactions to long-term use Regulatory Review/Approval Additional Postmarketing Testing Phase IV Years 0 2 4 6 8 10 12 Preclinical Clinical

Cause-and-Effect Relationship ROCE Financial Customer Customer Loyalty On-Time Delivery Process Quality Process Cycle Time IBP Employee Skills Learning and Growth

Core Skills Action Platform Core Product(s)/ Service(s) Technological Knowledge Market-Access Organisational Values Competitive Advantage Market B Market A Market N Action Platform Base

Measuring Business Strategy On a very broad level: Growth start-up, take-off, maturity, decline Sustain Harvest Lead to financial themes in business strategy: Revenue growth and mix Cost reduction/productivity improvement Asset utilization/investment strategy

Measuring Strategic Financial Themes Strategic Themes Revenue Growth and Mix Sales growth rate by segment Percentage revenue from new product, services, and custo- mers Share of targeted customers and accounts Cross-selling Percentage revenues from new applications, Customer and product line profitability Percentage unprofitable custo- Cost Reduction/Produc- tivity Improvement Revenue/Employee Cost versus competitors’ Cost reduction rates Indirect expenses (expenses of sales) Unit costs (per unit of output, per transaction) Asset Utilization Investment (percentage of sales) R&D (percentage of sales) Working capital ratios (cash- to-cash cycle ROCE by key asset categories Asset utilization rates Payback Throughput Harvest Sustain Growth Business Unit Strategy

Recap: cash-to-cash cycle (Churchill, HBR, 2001, How Fast Can You Grow) Purchase Raw Materials or Mer- chandise from Supplier Sell Product Days Receivable Days Inventory Days Payable Cash-to-cash Cycle Pay Supplier for Materials (Merchandise) Collect cash from customer

Customer Perspective Core Measurement include: Market share Reflects the proportion of business in a given market (#customer, $spent, unit volume sold) that the business sells. Customer retention Tracks, in absolute or relative terms, the rate at which a business unit retains or maintains ongoing relationships with its customers. Customer acquisition Measures, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer satisfaction Assesses the satisfaction level of customers along specific performance criteria within the value proposition Customer profitability Measures the net profit of a customer, or a segment, after allowing for the unique expenses required to support that customer.

Customer perspective – the logic Market Share Customer Profitability Customer Acquisition Customer Retention Customer Satisfaction

Customer Value Proposition Generic: Value = Product/Service Attributes + Image + Relationship Functionality Quality Price Time Example: Retail Banking Product/Service Attributes Image Relationship Breadth of Offering Error Free Seamless Services Know- ledgeable Convenient Personal Adviser Responsive Strategic Measures Service Failure Index Request Fulfillment Time Core Customer Measure Customer Very satisfied Survey Customer Retention Market share New Customer Acquisition

IBP – the Generic Value Chain model; RECAP Postsale Service Process Innovation Operations Customer Need Identification Customer Need Satis- facation Identify the Market Create the Product/ Service Offering Build the Products/ Services Deliver the Product/ Service the Customer

IBP Three principal business processes Innovation Operations the firm studies the emerging or latent needs of customers (e.g. Gap-model) Operations Existing products are produced and delivered Postsale services

The Innovation Process Customer Need Identification Satis- facation Identify the Market Create the Product/ Service Offering Build the Products/ Services Deliver the Innovation Operations Postsale Process Seek answers to two crucial questions: What range of benefits will customers value in tomorrow’s products? How might we, through innovation, preempt competitors in delivering those benefits to the marketplace?

The firm’s R&D group Performs basic research to develop radically new products and services for delivering value to customers Performs applied research to exploit existing technology for the next generation of products and services, and Makes focused development efforts to bring new products and services to market Historically, little attention devoted to developing performance metrics for product design and development processes-.

Measures for basic and applied research Percentage of sales from new products Percentage of sales from proprietary products New product introduction versus competitors’; also new product introduction versus plan Manufacturing process capabilities Time to develop next generation of products

Measure for product development Break-even time metric (BET) the time from the beginning of product development work until the product has been introduced and generated enough profit to pay back the investment oriinally made in its development Rather a metric for desired behaviour than a measure of outcome Time-to Market the time the product starts to generate sales Break-Even-After Release (BEAR) The time from sales began to when the product generates profit

Value Chain Postsale Service Process Innovation Process Operations Manage Risk Customer Need Identification Customer Need Satis- facation Make the Market Create the Product Determine Channel Market and Sell Distribute and Services Leverage Relationship Manage the Business Strategic Themes Target Profitable Segments Match the Customer with the Channel Service Quality Cross-sell Strategic Measures Quality of Market Share (profitability by segment) % of Revenue from new products Channel Transaction Mix Internal Customer Satisfaction Cross-sell Ratio Selling Contacts per salesperson New Revenue per

Operations Process – time, quality and cost measurements Cycle or throughput times can be measured in many ways. The start corresponds to the time when: Customer order is received Customer order, or production batch is scheduled Raw materials are ordered for the order or production batch Raw materials are received Production on the order or batch is initiated The end corresponds to: Production of the order or the batch has been completed order or batch is in finished goods inventory, available to be shipped order is shipped order is received by the cutomer

Learning and Growth Perspective Three principal categories: Employee capabilities Information systems capabilities Motivation, empowerment, and alignment

Linking BSC measures to strategy Cause-and-effect relationships Performance drivers Linkage to financials