1. Competing on Resources Translating Strategy into Action
Balance Scorecard
“Measuring Performance in the Organization of the Future”
Kr Sharma-JIM

2. Competing on Resources – Industrial age
Massive Physical Assets – capitalization.
Mass Production – low cost standard products.
Operations based on Push model.
Bargaining Power of Buyer very limited.
Competition limited.
Internally Focused – operations.
Emphasis on efficient allocation of financial and physical assets.
Specialization of functional skills – silos.
Marketplace local.

3. Competing on Resources – Industrial age
Operations governed by production plans through value chain.
Focus on Cost Control – efficiency.
Economies of Scale
Lack integration of Customers & Suppliers.
Product Life Cycle reasonably long.
Technology embedded into physical assets facilitating mass production of standard products
Focus on Profitability – ROCE

4. From Industrial Age to……..
…..Information Age

5. Competing on Resources – Information age
Intangible - Intellectual Assets – less capital intensive.
Mass Customization – customized offerings.
Operations based on Pull model.
Bargaining Power of Buyer very high.
Competition intense.
Externally Focused – Customers.
Emphasis on efficient management of Intangible assets.
Integrated processes cutting across various functions combining the specialization, speed and efficiency.
Marketplace – global.

6. Competing on Resources – Information age
Operations governed by customers action enabling enormous improvements in cost, quality & response time.
Focus on Cost Reduction – efficiency & effectiveness.
Economies of Scope & Scale.
Integrated Supply, Production & Deliveries.
Product Life Cycle very small.
Technology leverages the resources facilitating mass customization with customized offerings.
Focus on sustainability of Profitability – performance
Efficiency in operations – Competitive Advantage

7. So.. the shift in paradigm was obvious

8. Competing for future …… initiatives
Total Quality Management - TQM.
Just in Time production & distribution systems – JIT.
Time Based Competition.
Lean Production.
Lean Enterprise.
Customer focused organizations – Outside Inn.
Activity Based Management – ABC Management.
Empowerment.
Re-engineering………..
Above initiations failed to deliver promised results, as they were fragmented – not linked with the organization’s strategy.

9. Performance Management
Performance Management is the integration of the results of performance measurement into management processes so that results can influence the decisions made by the organization.
Traditionally Performance – success of companies in 90’s was measured in terms of
Return on Investments
Operating & Cash Budgets
Focus was only on profitability.

10. Performance Management
Such Performance criteria lacked…..
Various aspects related to sources of future growth.
Breakthroughs into new avenues so as to sustain the profitability.
Insight about progress company is making in implementing long term goals.
Long term focus & focused only on short term financial performance.
Lacks valuation of company’s intangible & intellectual assets

11. Financial measures are Lagging indicators failing to capture most of the value that is being created
Financial measures in isolation are inadequate for setting guidelines for evaluating organization’s path through Competitive Landscape.
Financial measures fail to provide adequate insights for actions that are to be taken or initiated today that can create future financial value.

12. It is thus essential to redefine the criteria on the basis of which the performance of any organization is to be measured, and it calls for inclusion of qualitative measures – intangible / intellectual assets within the frame work of financial accounting model of performance management thereby communicating their status i.e. improvements or depletion to stakeholders.

13. Measurement is the language that gives clarity to vague concepts.
Measurement is used to communicate, not to control.
Strategy can be described as a series of cause and effect relationships

14. The Increasing Sophistication of Corporate Performance Measurement
Economic value added
Sophistication of Measurement Systems
Quality-related operating measures
Activity-based costing
Operating measures
Traditional accounting measures
Time

15. New perspective of Performance Management……
Strategy refers to set of hypothesis about cause ‘n’ effect.
Measurement system should thus establish relationships ( Hypothesis ) among objectives in diverse perspectives explicitly so that the same can be validated.

16. ? ROCE Customer Loyalty On-Time Delivery Process Quality Process
Cycle-Time
Employee
Skills

17. New perspective of Performance Management……
ROCE – financial measure.
Driver for ROCE – expanded sales.
Driver for expanded sales – customer loyalty.
Driver for customer loyalty – process efficiency.
Process efficiency – speed, scale & time
Driver for process efficiency – shorter cycle time, i.e. efficient internal processes.
Driver for efficient internal processes – workforce
Driver for workforce – continuous learning.

18. Financial Customer Business Process Learning ROCE Customer Loyalty
On-Time
Delivery
Process
Quality
Process
Cycle-Time
Business Process
Learning
Employee
Skills

19. Balanced Scorecard
Balanced Scorecard is a measurement tool that allows the organization to assess progress in implementing strategy.
The purpose of the Balanced Scorecard is to establish a link between performance measures and a company's strategic vision
The Balanced Scorecard was developed by Kaplan and Norton in 1992 (Kaplan & Norton, 1992).

20. Balanced Scorecard
Balance Scorecard emphasizes that financial and non-financial measures must be integral part of performance management.
Balance Scorecard complements financial measures of past performance with measures of the drivers of future performance.

21. Balanced Scorecard
Balance Scorecard is an instrument that facilitates navigation to future competitive success.
Balance Scorecard emphasizes on achieving financial objectives, besides it also includes the performance drivers of these financial objectives.

22. The Increasing Sophistication of Corporate Performance Measurement
Value-linked measurements for
business strategy, stakeholder needs, process attributes and the
business environment
Balance Scorecard
Sophistication of Measurement Systems
Economic value added
Quality-related operating measures
Activity-based costing
Operating measures
Traditional accounting measures
Time

23. Balanced Scorecard Ties performance measures to corporate strategy
“Balance” includes
short & long term objectives
financial and non-financial measures
external & internal measures
various perspectives
Purposes of the balanced scorecard include
clarify & translate vision & strategy
communicate & link strategic objectives & measures
plan, set targets & align strategic initiatives
enhance strategic feedback & learning

24. The Balance scorecard gets its name from the attempt to balance financial and non financial performance measures to evaluate both short-run and long-run performance in a single report.

25. Balanced Scorecard
Balance Scorecard measures organizational performance across four perspectives:
Financial Perspective
Customer Perspective
Internal Business Perspective
Learning & Growth Perspective
Balance Scorecard enables companies to track their financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets that they might need for future growth.

26. ? Financial Perspective How do we look to our owners and investors?
Customer Perspective
Internal Processes Perspective ?
How do we look to our customers?
How efficient and effective are the critical internal processes?
Organizational Learning Perspective
Are we able to sustain innovation and improvement?

27. Financial Perspective Organization Learning
Translate the strategy to operational terms
The Strategy
Financial Perspective
"If we succeed, how will we look to our shareholders?”
Customer Perspective
"To achieve my vision, how must I look to my customers?”
Internal Perspective
"To satisfy my customers, at which processes must I excel?”
Organization Learning
"To achieve my vision, how must my organization learn and improve?”

28. Organizational Learning
The Vertical Scorecard
Financial
Perspective
Customer
Perspective
Internal Processes
Perspective
Organizational Learning
Perspective

29. Translate the strategy to operational terms

30. Balanced Scorecard
Companies competing in information age find that financial measures in themselves are inadequate, mainly because they fail appraise and report as to how company creates future value through investments in Customers, Suppliers, Employees, Business Processes and Technology

31. Balanced Scorecard - logic model

32. Balanced Scorecard
Balance Scorecard measures organizational performance across four perspectives:
Financial Perspective
Customer Perspective
Internal Business Perspective
Learning & Growth Perspective

33. Financial Perspective:
Balanced Scorecard
Financial Perspective:
According to financial perspective of the Balance Scorecard mostly financial objectives represents the long term goal of the organization, but should be customized according the business units which are in different stages of their life cycle – growth
I am saying this mainly because financial objectives can differ significantly at each stage of the business life cycle.

34. Balanced Scorecard- Financial Perspective:
If we look closely then broadly business life cycle can have primarily three stages:
Growth – early stages, investments, Sales growth
Sustain – operating income, gross margins - ROCE
Harvest – cash flows, reduction in WC.
From above it is evident that business units operating in different stages of their life cycle can not be evaluated for a common financial metric

35. Balanced Scorecard- Financial Perspective:
Lets now have a look at the various drivers as mentioned earlier at different stages of business life cycle.
Stages Drivers
Growth Revenue growth
Sustain Cost Reduction, Productivity
Harvest Asset Utilization

36. Balanced Scorecard- Financial Perspective:
Thus to conclude the Financial perspective of the Balance Scorecard enables business units to specify not only the metrics by which long term success should be evaluated and measured, but it also takes into account that variables that are most important in creating and deriving long term sustainability of financial objectives

37. Balanced Scorecard- Customer Perspective:
This perspective attempts to identify the customers & the market segment in which company intends to operate and compete.
This perspective enables companies to identify the sources of revenue for their financial perspective.

38. Balanced Scorecard- Customer Perspective:
This perspective refers to measures related to customers such as:
Satisfaction
Loyalty
Retention
Acquisition
Profitability

39. Balanced Scorecard- Customer Perspective:
Explicit definition of
Satisfaction
Loyalty
Retention
Acquisition
Profitability, along with core outcome measurements in turn helps in defining various associated business processes.

40. Balanced Scorecard- Customer Perspective:
Core outcome measurements categories:
Market Share
Customer Retention
Customer Acquisition
Customer Satisfaction
Customer Profitability

41. Customer Perspective Core Measures Market Share Customer Acquisition
Profitability
Customer
Retention
Customer
Satisfaction

42. Balanced Scorecard- Internal Business Process Perspective:
Innovation in Business Processes should result in:
Improved Quality
Reduction in Cycle Time
Increase in Yield
Maximum Throughput
Lower Cost

43. Balanced Scorecard- Internal Business Process Perspective:
Internal Business Process Perspective of Balance Scorecard focuses in innovating business processes that are unique to an organization enabling to develop competencies which are source of Distinctive and Sustainable Competitive Advantage

44. Aligning the Balanced Scorecard to Strategy
What are some of the customer perspective measures?
Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers requests

45. Features of a Good Balanced Scorecard
It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships.
It assists in communicating the strategy to all members of the organization by translating the strategy into a coherent and linked set of measurable operational targets.

46. Pitfalls When Implementing a Balanced Scorecard
What pitfalls should be avoided when implementing a balanced scorecard?
Don’t assume the cause-and-effect linkages to be precise.
Don’t seek improvements across all measures all the time.
Don’t use only objective measures on the scorecard.

47. Evaluating the Success of a Strategy
Assume the following operating incomes:
Year Year 2000
Revenues:
(10,00,000 × 26) 2,60,00,000
(11,00,000 × 24) ,64,00,000
Expenses:
Materials ,50, ,31,320
Other ,60,00,000 1,60,00,000
Operating income ,50, ,68,680

48. Evaluating the Success of a Strategy
How can the increase in operating income of 8,18,680 be evaluated?
( 67, 68,680 – 59,50,000 )
To evaluate the success of its strategy, a company can subdivide the change in operating income into three components:
Growth
Price recovery
Productivity

49. Growth Component
The growth component measures the change in operating income attributable solely to an increase in the quantity of output sold.
Assume that for 1999, ABC produced and sold 10,00,000 devices at 26 per unit.
During the year 2000, ABC produced and sold 11,00,000 devices at 24 per unit.
What is the revenue effect of growth?

50. Growth Component Revenue effect of growth component =
(Actual units of output sold in 2000 – Actual units of output sold in 1999) × Output price in 1999
(11,00,000 – 10,00,000) × 26 = 26,00,000 F
This component is favorable because it increases operating income.

51. Cost Effect of Growth
To produce the higher output sold in 2000, more inputs would be needed.
The cost increase from growth measures the amount by which costs in 2000 would have increased if the relationship between inputs and outputs that existed in 1999 continued in 2000, and if prices of inputs in 1999 continued in 2000.

52. Cost Effect of Growth Cost effect of growth component
Actual units of input or capacity that would have been used in 1999 to produce year 2000 output assuming the same input-output relationship that existed in 1999
less Actual units or capacity to produce 1999 output
Input prices in 1999

53. Cost Effect of Growth
To produce 11,00,000 units in 2000 compared with the 10,00,000 units produced in 1999 (a 10% increase), ABC would require a proportional increase in direct materials.
Assume that 30,00,000 square centimeters of materials were used to produce the 10,00,000 units in 1999 at a cost of 1.35 per square centimeter.

54. Cost Effect of Growth
Also, assume that manufacturing conversion costs, selling and customer service costs and research and development costs were 1,60,00,000 and remained stable during 2000.
What is the cost effect of the growth component?
30,00,000 × 110% = 33,00,000 centimeters
(33,00,000 – 30,00,000) × 1.35 = 4,05,000 U

55. Operating Income and Growth
What is the net increase in operating income as a result of growth?
Revenue effect of growth component ,00,000 F Cost effect of growth component ,05,000 U Increase in operating income due to growth component ,95,000 F

56. Price-Recovery Component
The price recovery component of operating income measures the change in revenues and the changes in costs to produce the 11,00,000 devices manufactured in 2000 as a result of two factors:
Change in price of the device
Change in prices of the inputs required to make the device

57. Price-Recovery Component
Revenue effect of price-recovery component = (Output price in 2000 – Output price in 1999) × Actual units of output sold in 2000
What is the revenue effect of the price-recovery component?
(24 – 26) × 11,00,000 = 22,00,000 U
It is unfavorable because there was a decrease in price between 1999 and 2000.

58. Price-Recovery Component
Cost effect of price-recovery component = (Input prices in 2000 – Input prices in 1999) × Actual units of inputs or capacity that would have been used to produce year 2000 output assuming the same input-output relationship that existed in 1999
Assume that in the year 2000 direct materials costs were 1.31 per square centimeter.

59. Price-Recovery Component
Remember, it was assumed that manufacturing conversion costs, selling, and customer service costs and research and development costs remained stable during 2000.
What is the cost effect of the price-recovery component?
(1.31 – 1.35) × 33,00,000 = 1,32,000 F

60. Operating Income and Price-Recovery Component
What is the total effect on operating income of the price-recovery component?
Revenue effect of price-recovery component ,00,000 U
Cost effect of price-recovery component ,32,000 F Decrease in operating income due to price-recovery component ,68,000 U

61. Productivity Component
The productivity component of operating income compares how costs have decreased as a result of using fewer inputs, a better mix of inputs, and less capacity to produce year 2000 output, assuming year 2000 input prices.

62. Productivity Component
Actual units of inputs or capacity to produce year 2000 output
Actual units of inputs or capacity that would have been used to produce year 2000 output assuming the same input-output relationship that existed in 1999
Input prices in 2000

63. Productivity Component
Assume that 27,72,000 actual square centimeters of direct materials were used in the year 2000.
Actual price was 1.31/square centimeter.
Manufacturing conversion costs, selling and customer service costs, and research and development costs remained stable during 2000.

64. Productivity Component
What is the productivity component of cost changes?
(27,72,000 – 33,00,000) × 1.31 = 691,680 F
There is a 691,680 increase in operating income due to the productivity component.

65. Increase in operating income
Change in Operating Income
Increase in operating income
8,18,680
Growth
component
21,95,000 F
Price-recovery
component
20,68,000 U
Productivity
component
6,91,680 F

66. Engineered and Discretionary Costs
Fixed costs are tied to capacity.
Fixed costs do not change automatically with changes in the level of the cost driver.
How to reduce capacity-based fixed costs?
The key is understanding and managing unused capacity.

67. Engineered Costs
Engineered costs result specifically from a clear cause-and effect relationship between output and the resources needed to produce that output.
Engineered costs can be variable or fixed in the short run.
Selling and customer-service costs are engineered costs that are fixed in the short run.

68. Discretionary Costs Two important features of discretionary costs:
Discretionary costs arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred.
Discretionary costs have no clearly measurable cause-and effect relationship between output and resources used.

69. Discretionary Costs Discretionary costs include: Advertising
Executive training
Research and development
Health care
Legal resources
Public relations

70. Relationships between Inputs and Outputs
Engineered costs differ from discretionary costs along two key dimensions:
Type of process
Level of uncertainty

71. Relationships between Inputs and Outputs
Engineered costs pertain to processes that are detailed, physically observable, and repetitive.
Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understood.

72. Relationships between Inputs and Outputs
Uncertainty refers to the possibility that an actual amount will deviate from an expected amount.
The higher the level of uncertainty about the relationship between resources used and outputs, the less likely a cause-and-effect relationship will exist.

73. Identifying Unused Capacity
Identifying unused capacity is easier for engineered costs than for discretionary costs.
The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs much more difficult.