Balanced Score Card

Strategy To Measures

Outline

What is Balanced Score Card Demand/Need for Balanced Score Card Recap some key concepts Performance measures and incentives

Long-term objectives BSC Perspectives Strategy Types of strategy cost leadership & differentiation Strategies Scorecard

Controllability and responsibility centers Attributes of a good performance measure Tension between control & planning

Outcome measures, monitoring & readjustment

Suresh Radhakrishnan, Cost and Performance Management, June 2004 2

Cause effect Value propositions Strategy maps

What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the companys strategy. It directs a company to link its own long-term strategy with tangible goals and actions.

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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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Suresh Radhakrishnan, Cost and Performance Management, June 2004

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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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 Measure can help prioritize actions Assists goal congruence

Relative Importance & Prioritization

Financial vs. Non-financial

Suresh Radhakrishnan, Cost and Performance Management, June 2004 7

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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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 Understandable
Criteria used in preparing objectives

Acceptable
Flexible Measurable Motivating

Suitable

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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The Four Perspectives in a Balanced Scorecard

Financial performance Customer knowledge Internal business processes Learning and growth

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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The Balanced Scorecard

Financial To succeed financially, how should we appear to our shareholders? Customer To achieve our vision, how should we appear to our customers? Internal Business Process To satisfy our shareholders and customers, what business processes must we excel at?

Vision and Strategy

Learning and Growth To achieve our vision, how will we sustain our ability to change and improve?

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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SWOT Analysis Diagram

Numerous environmental opportunities

Cell 3: Supports a turnaround-oriented strategy

Cell 1: Supports an aggressive strategy

Critical internal weaknesses

Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy

Substantial internal strengths

Major environmental threats

Suresh Radhakrishnan, Cost and Performance Management, June 2004 13

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation
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Suresh Radhakrishnan, Cost and Performance Management, June 2004

Cost Leadership Business Level Strategy

Key Criteria:
Relatively standardized products Features acceptable to many customers

Lowest competitive price

Suresh Radhakrishnan, Cost and Performance Management, June 2004 15

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
Suresh Radhakrishnan, Cost and Performance Management, June 2004 16

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Small, Highly Trained Sales Force Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

Support Activities

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Suresh Radhakrishnan, Cost and Performance Management, June 2004 Primary Activities

Marketing & Sales

Inbound Logistics

Service

Highly Efficient Systems to Link Suppliers Products with the Firms Production Processes

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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?

Suresh Radhakrishnan, Cost and Performance Management, June 2004 18

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
Suresh Radhakrishnan, Cost and Performance Management, June 2004 19

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
Suresh Radhakrishnan, Cost and Performance Management, June 2004

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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training Strong capability in basic research

Human Resource Management Technological Development

Investments in technologies that will allow the firm to consistently produce highly differentiated products

Support Activities

Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Purchase Procurementof highest quality replacement parts

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

Extensive Rapid and timely personal product deliveries relationships to customers with buyers Premium Pricing

Suresh Radhakrishnan, Cost and Performance Management, June 2004

Marketing & Sales

Inbound Logistics

Service

Accurate and responsive order processing procedures

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Primary Activities

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Differentiation Business Level Strategy

Effectiveness with Differentiation grows out of Value Chain activities
Examples:

Heineken beer Steinway pianos Mercedes Benz autos Intel microprocessors Caterpillar tractors

Raw materials Raw materials & Workmanship Technology and Workmanship Constant Innovation

Service buyers needs quickly anywhere in the world Suresh Radhakrishnan, Cost and Performance Management, June 2004 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
Suresh Radhakrishnan, Cost and Performance Management, June 2004 24

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
Suresh Radhakrishnan, Cost and Performance Management, June 2004 25

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 Suresh Radhakrishnan, simultaneously Cost and Performance Management, June 2004 driving down costs

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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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Integrated Low Cost/Differentiation Strategy

Southwest Airlines
Low Cost Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats Differentiation Focus on customer satisfaction

High level of employee dedication

New flight services for business travelers (phones and faxes)
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No travelSuresh Radhakrishnan, Cost and Performance Management, June 2004 agent reservations

Types of Grand Strategies

Concentrated growth Market development Product development Innovation Horizontal integration Vertical integration Concentric diversification

Conglomerate diversification Turnaround Divestiture Liquidation Bankruptcy Joint ventures Strategic alliances Consortia
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Suresh Radhakrishnan, Cost and Performance Management, June 2004

The Balanced Scorecard

Financial To succeed financially, how should we appear to our shareholders? Customer To achieve our vision, how should we appear to our customers? Internal Business Process To satisfy our shareholders and customers, what business processes must we excel at?

Vision and Strategy

Learning and Growth To achieve our vision, how will we sustain our ability to change and improve?

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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The Strategic Balanced Scorecard Framework

The Vision & Strategy

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

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

Results

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? Suresh Radhakrishnan, Cost and Performance Management, June 2004

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A Country Pilot Approach Was Adopted

Building The Top Level Balanced Scorecard Followed a Typical Approach 7-10 weeks
Confirm Vision & Strategy Define Critical Success Factors Agree Critical Success Factors & Strategic Linkages Develop Performance Measures Establish Performance Targets Implementation of Roll-out Plan

Executive interviews

Workshop #1

Workshop # 2

Workshop # 3

1-2 Weeks

2-3 Weeks

2-3 Weeks

2 Weeks

Key Outputs
Over-arching framework for performance measures
Consistent management team consensus and understanding

The timeline is event driven; executive time is typically the determining factor

Detailed implementation plan including technology and dependencies on other enablers e.g. rewards Education materials and communication strategy
Suresh Radhakrishnan, Cost and Performance Management, June 2004 32

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.
Suresh Radhakrishnan, Cost and Performance Management, June 2004 33

Illustrative Business Model

Improvement / Learning
Gain & Share Best Practices

Business Process
Manage Supply Chain Complexity

Customer / Consumer
Provide Enhanced Value To Market x

Financial

Achieve Organic Value Growth

Increase Staff Competence

Build and Maintain Strong Customer Relationships Drive For Innovation

Become Preferred Supplier in Market Y

Maximize Value Creation

Gain Business Environment Intelligence Build Strong Brand

Achieve Consumer Brand Preference

Increase Cost Efficiency

Suresh through the How & Why Test! ValidateRadhakrishnan, Cost and Performance Management, June 2004

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Increase Staff Competence

Improvement / Learning
Gain & Share Best Practices

Business Process Customer/Consumer

Financial

Increase Staff Competence

Build and Maintain Strong Customer Relationships

Gain Business Environment Intelligence

Objective : Improve employee skill level in key areas of the business model, through training and recruitment

Critical Activities : Define required skills / competencies Assess current skill set Schedule training needs Define recruiting needs Follow training program Monitor skill level

Leading Measure : % managers with personal new personal development plan Lagging Measure : % managers with personal development plan on track

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Strategic measures - Illustrative

Improvement / Learning Business Process
Manage Supply Chain Complexity

Customer / Consumer
Provide enhanced value

Financial
Achieve organic value growth

Leading: number of skus in range Lagging: order fill rate

Increase staff competence

Leading: growth in skus listing distribution percentage number of product facings out of stock Lagging: market share trend

Leading: customer churn Lagging: sales growth sales margin

Leading: percentage people with competence profile defined Lagging: percentage people with training program on track

Drive for innovation

Maximize value creation

Leading: number of running innovation projects Lagging: percentage sales from new products

Leading: forecasted economic profit Lagging: actual economic profit

Gain business environment intelligence

Achieve consumer brand preference

Leading: number of targeted sources accessible Lagging: information system user satisfaction index

Suresh Radhakrishnan, Cost and Performance Management, June 2004

Leading: price gap relative to competition Lagging: 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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Linking the Balanced Scorecard to Strategy

Financial Customer
Return on Investment Customer Loyalty

On-time Delivery

Internal Processes

Process Quality

Process Cycle Time

Organizational Learning

Employee Skills
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Suresh Radhakrishnan, Cost and Performance Management, June 2004

Cause and Effect Relationships

Learning Internal Customer Financial
Lag Indicators Return on Investment Revenue Growth Return on Investment
Revenue growth

Lead Indicators

Customer Retention Share of Wallet Customer Retention

Share of Wallet

On-time Delivery
On-time delivery

Customer Satisfaction Survey Customer Satisfaction Survey Customer Complaints Customer Complaints and and Returns Returns Cycle Time Yield, Variability Cycle Time
Yield, Variability Employee Teams Employee Training Employee Teams Employee Training
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Employee Satisfaction Employee Skills Employee Satisfaction

Employee Skills

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Value Propositions

Operational excellence

(e.g., Dell)

Customer intimacy

(e.g. Nordstrom)

Product leadership

(e.g. Intel)

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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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

Suresh Radhakrishnan, Cost and Performance Management, June 2004

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Framework for Developing a Healthcare Strategy Map

Financial Perspective
Growth/ Revenue
Financial Viability

Efficiency/Cost Management

Customer Perspective
(Patients, Referring Physicians, Payers, Academic Community

Image/ Reputation

Relationship

Outcomes

Access

Internal Processes Perspective Learning & Growth Perspective

Planning

Innovation

Relationship Management

Care Delivery

Operating Efficiency

Skills & Competencies

Culture & Climate

Information, Systems & Tools

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Suresh Radhakrishnan, Cost and Performance Management, June 2004