Balanced Scorecard & Its Applications

The Balanced Scorecard: Great Idea by 2002 21 languages 17 languages

BSC Hall of Frame: Success Story One Bob McCool became head of Mobil NAM&R in 1992 when the past performance was not acceptable. Mobil launched its Balanced Scorecard project in 1994. From 1994 to 1998. The productivity strategy created a 20-percent reduction in the cost of refining, marketing, and delivering a gallon of gasoline. The growth strategy, with its new value proposition for targeted segments, produced increased customer satisfaction led to increased revenue that exceeded industry averages by more than 2 percent per year. Kaplan and Norton, 2001

BSC Hall of Frame: Success Story Two Chrysler Group, the US automobile division of DaimlerChrysler, which faced a forecast loss of $5.1 billion in 2001. The division brought in a new CEO, who used the BSC to communicate a turnaround strategy. Despite continued weakness in the US automobile market, Chrysler generated $1.9 billion in profits in 2004. Kaplan and Norton, 2006

Balanced Scorecard (BSC) Initiated by Robert S. Kaplan, a Professor at HBS and David P. Norton, President of Balanced Scorecard Collaborative/Palladium. They did research by belief that existing performance measurement approaches, primarily relying on financial accounting measures, were becoming obsolete. Research finding  Balanced Scorecard—Strategic Measures That Drive Performance

BSC: Strategic Measuring for Performance Four Management Functions : Planning, Organizing, Leading, Controlling If you can’t measure, you can’t managed If you can’t measure, you can’t improved What gets measure, gets done  Measurement is core of the Balanced Scorecard

Balanced Scorecard (BSC) The Balanced Scorecard expands the set of business unit objective beyond summary financial measures. A set of cause-and-effect performance measures linkage among four distinct perspectives—finance, customer, internal business process, and learning & growth—used to translate strategy into desired results. The main focus of initial Balanced Scorecard is as an innovative strategic measurement tool, delivering strategy by emphasising control and communication. Balanced Scorecard has been evolving from a measurement system to a comprehensive strategy management system.

Balance Scorecard Perspectives Financial Perspective Objectives Key Performance Indicators Targets Initiatives STRAEGY Learning & Growth Perspective Customer Internal Process Perspective Kaplan and Norton, 1996

Four Perspectives of BSC Financial: What are our shareholders expectations for financial performance? Customer: To each our financial objective, how create value for our customers? Internal Process: What processes must we excel at to satisfy our customers and shareholders? Learning & Growth: How do we align out intangible assets—people, systems, and culture—to improve the critical processes? Kaplan and Norton, 2006

Financial Perspective What is Financial Strategy? [to satisfy shareholders] Productivity strategy Improve cost structure/yields Increase asset utilization Growth strategy Expand revenue opportunities Enhance customer Value How to reach the financial goals?

Performance Measures in Financial Perspective Return on investment Economic value added Sales growth rate by segment Percentage revenue from new product, service, or customer Share targeted customer an account Cross-selling Cross-selling Customer and product line profitability Revenue/employee Cost reduction rate Unit cost Payback Return on Capital Employed Working capital ratios (cash-to-cash cycle)

Customer Perspective Information about market & customer Customer selection, acquisition, retention & growth Who are profitable customers? — Target Segmentations What do they need? [same as the thing we serve them] — Customer Values Propositions (e.g. QSC&V – quality, services, cleanliness, and value)

Customer Value Propositions Best buy or Low total cost: Affordable prices, reliable quality, quick service. Product leadership and Innovation: The cutting edge products or industry leaders. Customer complete solutions: Tailor made for the customer's individual needs and preferences. Lock in or System platform: Lock in strategies exploit high switching costs / industrial standard for the customers making them stick to the organization.

Performance Measures in Customer Perspective Market Share: Reflects the proportion of business in a given market (in term of number of customer, dollar spent, or unit volume sold) that a business unit sells. Customer Acquisition: Measures, in absolute or relative, the rate at which a business unit attracts wins new customers or business. Customer Retention: Measures, in absolute or relative, the rate at which a business unit retains or maintains ongoing relationships with its customers. 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, after allowing for the unique expenses required to support customer.

Internal Process Perspective In order to serve customers’ need and satisfy other stakeholders, what process the organization need to be excellent. The nature of the customer value proposition determines the kind of internal processes How to build excellent process to serve customer and other stakeholders.

The Internal-Business-Process Value Chain Process for delivering customer value propositions Customer need Customer satisfaction Process for delivery customer values Innovation process Operations process Customer process Customer satisfaction Customer need Design R&D Production Marketing Services Kaplan and Norton, 1996

Supply Chain A continuous business process from suppliers to customers ~HRM~ ~Procurement ~ ~Finance & Accounting~ ~MIS~  Inbound Logistics Operation Outbound Logistics Marketing & Sales Services

Internal Process Perspective Production Management Processes Customer Management Processes Innovation Processes Regulatory & Social processes

Operations management processes Developing and sustaining supplier relationships Producing products and services Distributing and delivering products and services to customers Managing risks

Customer management processes Customer selection Customer acquisition Customer retention Customer growth

Innovation processes Identifying opportunities for new products and services Managing the research and development portfolio Design and developing the new products and services Delivering the new products and services into the market

Regulatory & social processes Environment: Issues such as energy and resource consumption, and emissions into the air, water and soil Safety and health: Safety hazards to employees Employment practices: Diversity of employees Community investment: Community-based organizations

Internal Process Perspective Matching marketing strategies with internal processes Best buy corresponds to the operations management perspective Customer complete solutions corresponds to the customer management perspective Product leadership and innovations corresponds to the innovations perspective

Performance Measures in Internal Process Perspective Quality Response time Cost Yields Waste Scrap Rework New product introduction Service error rate Product development cycle Hours with customer Time to market

Learning & Growth Perspective What competencies the organization need in order to obtain or sustain competitiveness? Competencies’ Gap Analysis How to fill the gap between ‘what organization what to be’ and ‘its current position’ Competencies, Employee Satisfaction and Retention Management Information System Corporate Culture and Motivations

Learning & Growth Perspective Human Capital—Employees' skills, talent, and knowledge. Organization Capital—Culture, leadership, employee alignment, teamwork, and knowledge management Information Capital—Databases, information systems, network, and technology infrastructure

Performance Measures in Learning & Growth Perspective Employee satisfaction Employee retention/turnover rate Employee productivity Information system availability Organizational Climate Index Personal Goals Alignment Index Staff development

Key Performance Indicators Derived from strategy Clearly defined/explicit purpose Mixed performance driver and outcome measures Optimum number of measures (from 15 to 25 measures) Construct Strategy Map (causal model—cause-and-effect relationships)

Characteristics of good performance indicators Relevant Accurate Understandable To measure things that can be measured within certain time. Comprehensive VS The main things

How to set targets Stretch Target Incremental Target Baseline Target Benchmarking Stakeholders requirement Capacity Incremental Target Comparing with baseline/last year Baseline Target Natural number/Normal rate

Balance Scorecard: How is it “balanced”? Financial VS Non-financial measures Tangible VS Intangible assets Long-term VS Short-term Goals Internal VS External Perspective Performance Drivers VS Outcomes Cause-and-effect relationships

Contribution of BSC Provide information to management and create accountability Influence behaviours Facilitate development (learn and adapt) Achieve goal congruence and make a system self-correcting Encourage continuous improvement

How to use the Balanced Scorecard Strategic Measurement Systems Framework for Implementing Strategy Strategic Management System

BSC Strategic Measurement Systems Strategy Key Performance Indicators Targets

BSC Framework for Implementing Strategy KPIs & Targets Initiatives & Resources

BSC Strategic Management System Strategy BSC & KPIs Yearly Strategic Learning Strategic Initiatives & Resources Quarterly Implementation Performance Report

Suwit Srimai Faculty of Technology & Management Prince of Songkla University, Thailand e-mail : suwit.s@psu.ac.th