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Chapter 4
Strategy and
the Balanced Scorecard
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The Balanced Scorecard
What gets measured gets managed
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Whats on Your Desk Today?
Urgent operating
problems
Employee
turnover
recruiting
Last years
initiative
This years new
initiative
40 e-mailsand 10 voice mails
Financial
performance
pressure
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Traditional Management Tools
Financial
Reports:
P/L
BalanceSheet
ROI-ROCE
Operating
Statistics
Strategic
Plan
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The Theory of Management
FinancialResults
Operating
Statistics
StrategicPlan Operations
Management
Control
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Traditional Management Tools
Created by different departments
Reviewed by different managers
Reviewed in different time frames
No connection to each other
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The Problem
Poor linkage of strategic plan to operationsand expected financial results; strategies arenot actionable
Strategies are not linked to departmental,
team, and individual goals Strategies are not linked to both long-term
and short-term resource allocation
Feedback is tactical, not strategic
(e.g., focuses on financial reporting only) The resultpoor execution and long-term
outcomes
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Kaplan and Norton
Study in 1990Measuring Performance inCompanies
Balance Financial, customer, internal, innovation, and
learning
Short-term and long-term objectives
Financial and nonfinancial measures
Leading and lagging indicators
Internal and external performance
Aligning measures with strategy
Developing a theory of the company
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Balanced Scorecard as aStrategic Management System
Clarify and translate vision and strategy
Communicate and link strategicobjectives and measures
Plan, set targets, and align strategic
initiatives Enhance strategic feedback and
learning
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Balanced Scorecard in Healthcare
Highly complex environment
Multi-stakeholder leadership
Resists change
Catastrophic failure difficult to anticipate
Excellent strategic management tool
Use increasing in many healthcare
organizations
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Elements of the BalancedScorecard
Mission and vision Perspectives
Financial
Customer
Internal business process Learning and growing
Linking measures to strategy
Structure and strategy
Strategic alignmenttop to bottom
Targets, resources, initiatives, and budgets
Feedback and the strategic learning process
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Mission and Vision:Some Balanced Scorecard Examples
Achieve financial strength
Develop reputation/brand
Grow the business Be able to demonstrate operational excellence
Form strategic alliances, especially with
physicians
Develop IT infrastructure to improve continuity of
care Source: Inamdar and Kaplan,Journal of HealthcareManagement, May/June 2002
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The Four Perspectives
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Financial Strategies
Grow
Revenue growth
Sustain
Profitability, ROI, ROCE
Harvest
Cash flow, working capital
Risk management
Diversity
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Revenue Growth and Mix
New products (e.g., HP and 3M)
New applications for existing
products
New customers and markets
New relationshipspartnerships
New product and service mix
New prices
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Cost ReductionProductivity
Increase revenue/employee
Reduce unit cost Improve channel mixhow customers
use products or services (e.g., online
reservations for air travel)
Reduce overheadsales, marketing,
general and administrative
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Asset Utilization
Investment Strategy Manage working capital
Accounts payable
Inventory
Accounts receivable
Improve asset allocation
Sharing of IT, specialized equipment,buildings
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Risk Management
Through Diversity Revenue sources
Market segments Customers
Products
Asset allocations
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CustomersMarket Segmentation
What is the key value proposition to bedelivered to the targeted market segment?
Healthcare market segment examples: Patient with chronic illnesses (e.g., diabetes)
Obstetric care
Sports medicine Cancer
Emergency care
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Standard Measures
Market share
Customer retention
Customer acquisition
Customer satisfaction
Customer profitability
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The Value Proposition
Product and service attributes
Low price, leading edge, or high performance, etc.
Time: quick, slow Customer relationship
Customer intimate (e.g., Nordstrom) or not
(e.g., HP)
Integrated supply chain relationship
Image and reputation
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Hospital Example
Market segment: pregnant womenages 1835
Product attributes
Quick access Warm, welcoming facilities
Customer relations Strong relationships with nurses, midwifes, and
doctors
Image High-quality care
Excellent referrals and transport for high risk
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Internal Business Process
Create
Product/
Service
Identify
the
Market
Build
Product/
Service
Deliver
Service
Innovation
OperationsProcess
Post-Sale
Services
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Innovation
Identify the market
What benefits will customers value intomorrows market?
How can we innovate to deliver thesebenefits?
Create the product
Basic research
Applied research
New product to market
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Measures forProduct Development
Percentage of sales from new products
Percentage of sales from proprietary products
New product introductions Time to develop new products
Time to break even
(development cost = accumulated profit)
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Operations Process
Process optimization in a stable
environment
Statistical process control Rapid prototyping
Six Sigma
Quality function deployment and Lean
Real-time simulation and control
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Post-Sale Services
Warranty and repair
Billing and collection Rapid reliable service contracts
Feedback on product performance to
drive improvement
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Learn and Grow
Results
Staff
Competencies
Employee
Satisfaction
Employee
Productivity
Employee
Retention
Information Technology
and DataClimate for
Actions
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Measures of
Employee Satisfaction Involvement with decisions
Recognition for doing a good job
Access to sufficient information to do the jobwell
Active encouragement of creativity andinitiative
Support for staff-level functions Overall satisfaction with the organization
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Drivers ofLearning and Growing
Reskilling
Level and intensity of reskilling
Number of employees involved Information systems capabilities
Motivation, empowerment, alignment
Suggestions and involvement in decisions Team performance and rewards
Personal alignment and rewards
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Linking Balanced Scorecard
Measures to Strategy
Cause-and-effect relationship
Outcomes and performance drivers
Link to financials
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Cause-and-Effect Relationships
A strategy is set of hypotheses about cause
and effect (if, then statementse.g., If the
wait time in the emergency department is
lowered, then the patient will be more
satisfied.)
Every measure selected for a Balanced
Scorecard should be an element of a chain ofcause-and-effect relationships that
communicates the organizations strategy
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Outcomes andPerformance Drivers
Outcome indicators Lag
Tend to be generic
Examples: profitability, market share, customersatisfaction
Performance drivers Predict the future
Are specific to strategy
Examples: emergency room wait time, remodeling ontime lines
Need equal mix of both types
Suggested maximum is 5 per quadrant or 20
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Link to Financials
Financial goals are topmost in BalancedScorecard
Each other strategy eventually needs tolink to financial goals
Causal pathways need to be clear andquantitative, if possible
Some healthcare organizations makethe customer/patient topmost
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Strategy Maps and Initiatives
Strategic method of execution
Set of linked initiatives Can be small action or major project
If, then statements
Links to top quadrant results (finance, customer)
Initiatives can become formal project
Metrics Leading
Lagging
Dates
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Finance
BusinessProcesses
Learning andGrowth
Customers
General Balanced Scorecard
Provide employees
with skills, tools, and
motivation
Improve marketing
and customer
service
Improve
operations
Improve
financial
results
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Finance
BusinessProcesses
Learning andGrowth
Customers
Emergency Department (ED) Balanced Scorecard
Learn Lean process improvement
tools:
Goal = complete by December 1
Measure market share:
Goal = 5% increase
Measure patient wait
time:
Goal:
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Finance
BusinessProcesses
Learning andGrowth
Customers
Obstetric (OB) Service Balanced Scorecard
Customer service training:
Goal = complete by July 1
Measure market share:
Goal = 5% increase
Measure patient
satisfaction (facilities):Goal: >90%
Remodel OB suite:
Goal = complete
by November 1
Increase net revenue of
OB product line:
Goal = 10%
Contract for emergency
transportation:
Goal = complete by
November 1
Begin tours and survey:
Goal = patient
satisfaction >90%
Measure patient satisfaction
(perceived clinical quality):Goal: >90%
Measure patient
satisfaction (high touch):Goal: >90%
R d G l B l d S d
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Learning andGrowth
Customers
Rotated General Balanced Scorecard
Provide employees with
skills, tools, and
motivation
Improve availability of
financial resources
Improve
operations
Improved patient
results and
satisfaction
Finance
BusinessProcesses
Targets Resources Initiatives and
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Targets, Resources, Initiatives, andBudgets
Set stretch targets
Identify strategic initiatives
Identify critical cross-organizationinitiatives
Link to annual resource allocation and
budgets
Remember to maintain critical monitoring
systems for nonstrategic operations
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Display Results Graphically
Sa le BSC Fi a ial
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Sample BSCFinancial
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Revenue
Profitability
S l BSC C t
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Sample BSCCustomer
0%
20%
40%
60%
80%
100%
120%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Customer Satisfaction
Sample BSC Operations
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Sample BSCOperations
0%
5%
10%
15%
20%
25%
30%
35%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
20
40
60
80
100
120
140
160
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$0
$50
$100
$150
$200
$250
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fast-Track Admitting Percentage
Cost per Unit
Incremental New Admissions
S l BSC L d G
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Sample BSCLearn and Grow
82%
84%
86%
88%
90%
92%
94%96%
98%
100%
102%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Six Sigma Training Scores
0%
20%
40%
60%
80%
100%
120%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Customer Service Training Scores
P j t S l ti
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Project Selection (Niven)
Criteria Weight Project
APoints
Project
A Score
Project
BPoints
Project
BScore
Link to strategy 45% 7 3.15 1 0.45
Financial gain 15% 5 0.75 10 1.5
Project cost 10% 5 0.5 10 1.0
Key personnel
required
10% 8 0.8 10 1.0
Time to complete 10% 8 0.8 10 1.0
Affects other
projects
10% 3 0.3 10 1.0
Total 6.3 5. 95
Feedback and the Strategic
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Feedback and the StrategicLearning Process
Clarifying vision
and strategy
Planning and
target setting
Strategic feedback
and learning
Communication and
linking strategy
C di S d
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Cascading ScorecardsLinking Directly or Influencing Higher-Level Scorecards
Increased patientsatisfaction
Higher brand
recognition
Clean and timelybills
Corporate
Support
(IT)
LineDepartment
(OB)
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Does the Strategy Work?
Double loop learning Can you achieve the initiatives goals (control
loop)?
If not, what other initiative can achieve thestrategic goals (secondary loop)?
Control loopweekly; strategic (secondary)loopquarterly
Tools
Statistical tools (e.g., correlation analysis) Anecdotal reporting
Peer review
Team review and problem solving
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Implementation
Link scorecards at corporate anddepartmental level
Use scorecards to communicate
strategy implementation
Link cross-departmentally
Link to budgets
Monitor all operating statisticsmaybe basis for new initiatives
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End of Chapter 4