Balanced Score Card

Strategy To Measures

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Outline
 What is Balanced Score Card
 Demand/Need for Balanced Score Card
 Recap some key concepts
 Performance measures and incentives
 Controllability and responsibility centers
 Attributes of a good performance measure
 Tension between control & planning
 Long-term objectives
 BSC Perspectives
 Strategy Types of strategy – cost leadership & differentiation
 Strategies Scorecard
 Cause – effect
 Value propositions
 Strategy maps
 Outcome measures, monitoring & readjustment

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What is the Balanced Scorecard?

The Balanced Scorecard is a set of

measures that are directly linked to the
company’s strategy. It directs a
company to link its own long-term
strategy with tangible goals and
actions.

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Demand/Need for BSC
 Consider a retail store
 Customer experience
 Price/volume
 If bonus is based on volume, what do you expect
 ??

Takeaway
 What you measure is what you get

 Thus,
 Communicate strategy
 Trade-offs of multi-dimensional inputs

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Key Concepts
Performance measures & Incentives
 What you measure is what you get

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Key Concepts
 Controllability & Responsibility Centers
 Plant Managers
 Direct control: Costs
 Indirect control: Customer experience thru quality, on-time
delivery (marketing activities)
 Should plant managers be a profit or cost center?
 ??
 Link to performance & incentives
 Link to physician referrals
 Union Medical Center Case

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Key Concepts
Attributes of a good performance measures
 Provide information that is relevant & reliable
 Relevance, measure is influenced by actions
 Reliable, measure not influenced by factors
beyond the control
 Relative Importance & Prioritization
 Measure can help prioritize actions
 Assists goal congruence
 Financial vs. Non-financial

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Key Concepts
 Tension between planning & control
 Measure that is good for control may not
be good for planning
 End-of-year spending spree (to exhaust
budgets)
 Decision facilitating vs. Directing attention
measures

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Types of Long-Term Objectives
 Profitability
 Productivity
 Competitive position
 Employee development
 Employee relations
 Technological leadership
 Public responsibility
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 Qualities of Long-Term Objectives

Achievable
Acceptable
Criteria used
Understandable in preparing Flexible
objectives

Suitable Measurable
Motivating

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 The Four Perspectives in a Balanced
Scorecard

 Financial performance
 Customer knowledge
 Internal business processes
 Learning and growth

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 The Balanced Scorecard
Financial
‘To succeed financially,
how should we appear to
our shareholders?”
Internal
Customer Business
“To achieve Vision Process
our vision, “To satisfy our
and
how should shareholders
Strategy and customers,
we appear to
our what business
customers?” Learningand
Learning andGrowth
Growth processes must
‘Toachieve
‘To achieveourourvision,
vision, we excel at?”
howwill
how willwewesustain
sustainour
our
abilitytotochange
ability changeand
and
improve?”
improve?”

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 SWOT Analysis Diagram

Numerous environmental
opportunities

Cell 3: Supports a Cell 1: Supports

turnaround-oriented an aggressive
strategy strategy
Critical internal Substantial
weaknesses internal
Cell 4: Supports a Cell 2: Supports a strengths
defensive strategy diversification
strategy

Major environmental threats

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 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Focused
Narrow Focused
Target Differen-
Market Low Cost
tiation
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Cost Leadership Business Level Strategy

Key Criteria:
Relatively standardized products

Features acceptable to many customers

Lowest competitive price

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Cost Leadership Business Level Strategy
Requirements:
Constant effort to reduce costs through:
 Building efficient scale facilities
 Minimizing costs of sales, R&D and service
 State of the art manufacturing facilities
 Tight control of production costs and
overhead
 Monitoring costs of activities provided by
outsiders
 Simplification of processes

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 Value Creating Activities Common to a
Cost Leadership Business Level Strategy
Simplified Planning Relatively Few
Cost Effective
MIS Systems Firm Infrastructure
Practices to Reduce
Planning Costs
Management Layers to
Reduce Overhead

Human Resource Management

Consistent Policies to Effective Training Programs
to Improve Worker M
Reduce Turnover Costs
Efficiency and Effectiveness AR
Easy-to-Use Manufacturing
Technological Development
Investments in Technology in order G
Technologies to Reduce Costs Associated with
Manufacturing Processes
IN
Systems and Procedures to find the
Activities

Procurement
Support

Frequent Evaluation Processes to

Lowest Cost Products to Purchase
Monitor Suppliers’ Performances
Raw Materials
Highly Efficient Efficient Plant Delivery Schedule Small, Highly Effective Product

M Service
Systems to Link Scale to Minimize that Reduces Trained Sales Installations to
Operations

Suppliers’ Manufacturing
Outbound
Costs Force Reduce Frequency

Marketing
Logistics
Inbound

Products with the Costs and Severity

& Sales
Logistics

IN
Firm’s Production Selection of Low Products Priced to of Recalls
Processes Timing of Asset Cost Transport Generate Sales

G
Purchases Carriers Volume

R
A
Located in Close Policy Choice of Efficient Order National Scale
Proximity with Plant Technology Sizes Advertising
Suppliers
Organizational Interrelationships
Learning with Sister Units

Primary Activities 17
 Three Key Questions

1. How can an activity be performed

differently or even eliminated?

2. How can a group of linked value

activities be regrouped or reordered?

3. How might coalitions with other

firms lower or eliminate costs?
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Major Risks of Cost Leadership
Business Level Strategy

Dramatic technological change could take

away your cost advantage

Competitors may learn how to imitate

Value Chain

Focus on efficiency could cause Cost Leader

to overlook changes in customer preferences
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Differentiation Business Level Strategy
Key Criteria:
Value provided by unique features
and value characteristics

Command premium price

High customer service
Superior quality

Prestige or exclusivity

Rapid innovation
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Differentiation Business Level Strategy

Requirements:
Constant effort to differentiate products through:

• Developing new systems and processes

• Shaping perceptions through advertising
• Quality focus
• Capability in R&D
• Maximize Human Resource contributions
through low turnover and high motivation

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 Value Creating Activities Common to a
Differentiation Business Level Strategy
Highly Developed Information A companywide
Firm Infrastructure
Systems to better understand
customers’ purchasing preferences
emphasis on producing
high quality products
Compensation programs Extensive use of subjective Superior
Human Resource Management
intended to encourage worker rather than objective M
personnel
creativity and productivity performance measures AR
training

Coordination among R&D,

Technological
Investments in technologies that will
Development
Strong
G
product development and
marketing
allow the firm to consistently produce
highly differentiated products
capability in
basic research
IN
Activities
Support

Systems and procedures used to find Purchase of highest quality

Procurement
the highest quality raw materials
replacement parts

Superior Consistent Accurate and Strong Coordin- Complete field

M Service
handling of manufacturing of responsive order ation among stocking of
Operations

Outbound functions in R&D, replacement parts

Marketing
incoming raw attractive processing
Logistics
Inbound

Marketing and
Logistics

& Sales
materials to products procedures

IN
minimize Product
damage and Development

G
improve the

R
Rapid responses Extensive
quality of the Rapid and timely personal

A
to customers
final product unique product deliveries relationships
manufacturing to customers with buyers
specifications
Premium
Pricing

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Primary Activities
 Differentiation Business Level Strategy
Effectiveness with Differentiation
grows out of Value Chain activities
Examples:

Heineken beer Raw materials

Steinway pianos Raw materials & Workmanship

Mercedes Benz autos Technology and Workmanship

Intel microprocessors Constant Innovation

Caterpillar tractors Service buyers’ needs quickly

anywhere in the world 23
Create Value with Differentiation by:

Lowering Buyers’ Costs

Raising Buyers’ Performance

Creating Sustainability through:

• Creating barriers by perceptions of uniqueness
• Creating switching costs through differentiation
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Major Risks of a Differentiation
Business Level Strategy

Customers may decide that the

cost of “uniqueness” is too great

Competitors may learn how to

imitate Value Chain

The means of uniqueness may no

longer be valued by customers
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Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy may:

Adapt more quickly

Learn new skills and technologies

Utilize Flexible Manufacturing Systems to create

differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units
Utilize innovation and process improvement to
create high quality differentiated products while
simultaneously driving down costs 26
Integrated Low Cost/Differentiation Strategy

Recognize that the Integrated Low Cost/

Differentiation business level strategy involves a
Compromise

The risk is that the firm may become “Stuck in

the Middle” lacking a strong commitment to or
expertise with either type of generic strategy

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Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost Differentiation
Use a single aircraft model Focus on customer
(Boeing 737) satisfaction
Use secondary airports
High level of employee
Fly short routes dedication
No meals
New flight services for
15 minute turnaround time business travelers
No reserved seats (phones and faxes)
No travel agent reservations 28
 Types of Grand Strategies

 Concentrated growth  Conglomerate

diversification
 Market development
 Turnaround
 Product development
 Divestiture
 Innovation
 Liquidation
 Horizontal integration
 Bankruptcy
 Vertical integration
 Joint ventures
 Concentric
diversification  Strategic alliances
 Consortia

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 The Balanced Scorecard
Financial
‘To succeed financially,
how should we appear to
our shareholders?”
Internal
Customer Business
“To achieve Vision Process
our vision, “To satisfy our
and
how should shareholders
Strategy and customers,
we appear to
our what business
customers?” Learningand
Learning andGrowth
Growth processes must
‘Toachieve
‘To achieveourourvision,
vision, we excel at?”
howwill
how willwewesustain
sustainour
our
abilitytotochange
ability changeand
and
improve?”
improve?”

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The Strategic Balanced Scorecard Framework
The
TheVision
Vision&
&Strategy
Strategy

Financial
To satisfy our shareholders, what
Effect financial objectives must we
accomplish?

Customer
Results
To achieve our financial goals, what
customer needs must we satisfy?

Internal Business Process

Cause To satisfy our customers, in which
internal business processes must we
excel?

Innovation, Learning & Growth Actions

To achieve and maintain a competitive
position, how must the organization
learn and improve?
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A Country Pilot Approach Was Adopted
Building The ‘Top Level’ Balanced Scorecard Followed a
Typical Approach
7-10 weeks

Agree Critical Implementation

Confirm Define Success Develop Establish
Critical of
Vision Factors & Performance Performance
Success Strategic Roll-out
& Measures Targets
Factors Linkages Plan
Strategy

 Executive  Workshop #1  Workshop # 2  Workshop # 3

interviews

1-2 Weeks 2-3 Weeks 2-3 Weeks 2 Weeks

Key Outputs
The timeline is event driven; executive
• Over-arching framework for performance measures time is typically the determining factor
• Consistent management team consensus and understanding
• Detailed implementation plan including technology and dependencies
on other enablers e.g. rewards
• Education materials and communication strategy
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Content of Executive Interviews

 Objectives – Project and Interview

 Business Imperative
 Approach To Interview.
 Overall Strategic Positioning.
 The Four Balanced Scorecard Perspectives:
 Financial.
 Customer.
 Business Process.
 Improvement & Learning.
 An Illustrative Business Model: A ‘Strawman For
Discussion Only’.

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 Illustrative Business Model
Improvement / Learning Business Process Customer / Consumer Financial

Gain & Share Manage Provide

Best Practices Supply Chain Enhanced
Complexity Value To
Market x Achieve
Organic
Value
Growth

Build and
Increase Maintain Become
Staff Strong Preferred
Competence Customer Supplier
Maximize
Relationships in Market Y
Value
Creation
Drive For
Innovation

Achieve
Increase
Gain Business Consumer
Cost
Environment Brand
Efficiency
Intelligence Preference

Build Strong
Brand

Validate through the ‘How’ & ’Why’ Test! 34

 Increase Staff Competence
Improvement / Learning Business Process Customer/Consumer Financial
Gain & Share
Gain
Best & Share
Practices
Best Practices

Build and
Increase Build and
Maintain
Increase
Staff Maintain
Strong
Staff
Competence Strong
Customer
Competence Customer
Relationships
Relationships

Gain Business
Gain Business
Environment
Environment
Intelligence
Intelligence

Objective : Critical Activities : Leading Measure :

Improve employee skill
level in key areas of the
business model, through
training and recruitment
• Define required skills / • % managers with personal
competencies ‘new’ personal
• Assess current skill set development plan
• Schedule training needs
• Define recruiting needs Lagging Measure :
• Follow training program • % managers with personal
• Monitor skill level development plan on track

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 Strategic measures - Illustrative
Improvement / Learning Business Process Customer / Consumer Financial
Manage Supply Achieve organic
Provide enhanced value
Chain Complexity value growth

Leading: Leading: Leading:

• number of sku’s in • growth in sku’s listing • customer churn
range • distribution percentage Lagging:
Lagging: • number of product facings • sales growth
• order fill rate • out of stock • sales margin
Lagging:
Increase staff • market share trend
competence

Leading: Drive for innovation Maximize value

• percentage creation
people with
competence Leading: Leading:
• number of running • forecasted
profile defined
Lagging: innovation projects economic profit
• percentage Lagging: Lagging:
• percentage sales from • actual economic
people with
training program new products profit
on track

Gain business Achieve consumer

environment intelligence brand preference

Leading: Leading:
• number of targeted sources accessible • price gap relative to
Lagging: competition
• information system user satisfaction Lagging:
index • brand preference
rating
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 A Strategic Scorecard
 Should include leading and lagging
indicators
 Lead indicators – drivers of long term value
 Lag indicators – feedback measures on
current performance
 Should include outcome measures as
well as measures of the drivers of those
outcomes
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Causes and Effects
 A strategic scorecard should link all
measures with the overall strategy

 A strategy is a set of hypotheses about

causes and effects

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Learning and Action
 Measurement is valuable only if
management can learn from and act on
the results
 Causal linkages in a strategy map
enable managers to make and test
strategy hypotheses

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Linking the Balanced Scorecard to Strategy

Return on
Financial Investment

Customer Customer Loyalty

On-time Delivery

Internal Processes Process Quality Process Cycle Time

Organizational Learning Employee Skills

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Cause and Effect Relationships
Lag Indicators Lead Indicators
 Return on Investment
Learning Internal Customer Financial

 Revenue Growth
•Return on Investment
•Revenue growth
 Customer Retention  Customer Satisfaction
• Share of
Customer Wallet
Retention
Survey Satisfaction Survey
• Customer
 Customer Complaints
•Share of Wallet • Customer Complaints and
and Returns
Returns
 On-time Delivery  Cycle Time
 Yield, Variability
•On-time delivery •Cycle Time
•Yield, Variability
 Employee Satisfaction  Employee Teams
 Employee Skills  Employee Training
•Employee Satisfaction •Employee Teams
•Employee Skills •Employee Training

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Building a Strategy Map
 Develop a strategic vision (what the
organization wants to become)
 Strategy must define the logic of how to
achieve that vision
 Articulating the value proposition is the
core of a business strategy

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Value Propositions
 Operational excellence
(e.g., Dell)
 Customer intimacy
(e.g. Nordstrom)
 Product leadership
(e.g. Intel)

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Strategic Objectives for
Different Value Propositions
 Operational excellence
(competitive pricing, product quality &
selection, on-time delivery)
 Customer intimacy
(customer relationships, exceptional service,
complete solutions)
 Product leadership
(continuing innovation in functionality,
features, overall performance)
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Strategy Maps
 Provide a visual representation of the
critical objectives and the crucial
relationships that drive performance

 Clarify to employees how their jobs are

linked to organizational objectives

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 Framework for Developing a
Healthcare Strategy Map
Financial
Financial Viability
Perspective Growth/ Efficiency/Cost
Revenue Management

Customer
Perspective Image/
(Patients, Referring Relationship Outcomes Access
Physicians, Payers,
Reputation
Academic Community

Internal Relationship Care Operating

Processes Planning Innovation
Management Delivery Efficiency
Perspective

Learning & Culture &

Skills & Information,
Growth Competencies Climate Systems & Tools
Perspective
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