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The Abstraction Series
Topic 1Balanced Scorecard
Originated by Dr. Robert Kaplan and David Norton
A Performance Measurement Framework which added non-financial measures to counter balance the effects of Financial performance
Aligns Business Activities to the Vision and Strategy of the Organization
Balanced Scorecard
The Four layers
Problems Balanced scorecard can Solve
Problems that can
be solved
Unclear Vision & Strategy
Non- Alignment of Long Term & Short Term
Goals
Measurement Issues
Communication Gaps
Excessive Focus on Financial
Performance
Non-Availabilit
y of Feedback
The Nine Step Framework
Performance Measures Providing a way to see if the strategy is working
Focus employees' attention on what matters most to success
Allow measurement of accomplishments, not just of the work that is performed
Provide a common language for communication
Explicitly defined terms of owner, unit of measure, collection frequency, data quality, expected value(targets), and thresholds
Ensuring Valid Measurement of the right things
Verifiable Measures to Ensure Data Collection Accuracy
Asking the Right Questions Who are our profitable customers?
Do we pay the most attention to those customers?
Do we know what these customers expect from us now and in the (near) future?
Do we develop the products and services that will keep us in the running?
Do our employees develop the knowledge and skills that the markets (will) ask?
Do we recruit the right people?
Overall Process
Phase 1: The Strategic Foundation
Phase 2: Three Critical Components
Phase 3: Deployment
Phase 1: The Strategic Foundation
Three examples of strategic objectives
Over the next six months, delivery times will decrease by 15% through more localized distribution centers.
By the year 2003, customer turnover will decline by 30% through newly created customer service representatives and pro-active customer maintenance procedures
Operating downtimes will get cut in half by cross training front line personnel and combining all four operating departments into one single Service center
Consists of three steps:- Communicate the Strategy across all Levels- Determine Major Strategic Areas for focussed efforts- Build a Strategic Grid for each Major Strategic Area
Step 1: Strategic Alignment and Communication
Phase 1: Step 1: CommunicateAfter Clearly formulating the Strategy it needs to be effectively Communicated
Stakeholder Group Forms of Communication
Shareholders Press Conference
Division Managers Management Retreat / Presentation
District Managers Site to Site Visits / handouts
Operating Staff Site to Site Visits / handouts
Administrative Staff Site to Site Visits / handouts
Suppliers Personal Contact / Mailing
Distributors Personal Contact / Mailing
Phase 1: Step 2: Strategic AreasStrategic Success Through Fence-Lined Strategic Areas is required for Clear Success Demarcations
Shareholder Value
Financial Revenue Growth
Customer More Customers
Processes Customer marketing & Service Programmes
Learning Support Systems & Personnel
Linking Strategic Goal to a Strategic Area
Strategic Goal By the Year 2014, the company will have most innovative product line of hand held Computers
Strategic Area Product Innovation
Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.
Flowing Strategic Objectives within the Financial Perspective
Shareholder Value
Grow Revenues Operating Revenues
New Sources of Revenues
Increase Customer
ProfitabilityLower Costs High Utilization
of Assets
Linking Customer Objectives to Financial Objectives
FinancialShare Value
Growing More Revenues
CustomerAcquire More Customers
Aggressive Pricing (Value Addition)
Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.
Linking Objectives down to Internal processes
FinancialShare Value
Growing More Revenues
CustomerAcquire More Customers
Aggressive Pricing (Value Addition)
Internal processes
Improve Operational Efficiency
Cost Reduction Programme
Knowledge based System
Reduction in Non-Core Activities
Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.
Strategic objectives defined for all four perspectives
FinancialShare Value
Growing More Revenues
CustomerAcquire More Customers
Aggressive Pricing (Value Addition)
Internal processes
Improve Operational Efficiency
Cost Reduction Programme
Knowledge based System
Reduction in Non-Core Activities
Learning & Growth
Training – Best Practices in Cost Management
Database Network on Operational Performance
Re-Alignment with focus on Core-Competencies
Phase 2: Three Critical Components Step 4: Measurements• Every Strategic Objective Should be measurable
• Not all can be quantified and measured but it makes evaluation of such objectives difficult
• Some Basic Guidelines:• Measurements Communicate what is
strategically important by linking back to strategic Objectives
Linked
• Measurements are continuous over time, allowing comparisonsRepeatable
• Measurements can be used for establishing targets, leading to future performanceLeading
•Measurements are Reliable, verifiable and accurateAccountable
•Measurements can be derived when neededAvailable
Phase 2: Step 4: Measurements
• Cause Effect Relationship between Leading and Lagging Indicators• Customer perspective
Customer Perspecti
ve
Lagging Indicators are Desired Results
Customer Satisfaction Customer Retention Market Share
Leading Indicators – Value Attributes to Customers
Quality Time Price Image Reputation
Phase 2: Step 4: Measurements
• Internal Process Perspective
Pre-Deliver
y Results
Delivery
Results
Post deliver
y ResultsLeading Indicator:
No. of New Products Introduced
Leading indicator: Delivery Response Time to Customers
Leading Indicator: Cycle Time for Resolving Customer Complaint
Phase 2: Step 4: Measurements
• Learning and Growth Perspective
Results for
Employees
System
Results
Results for the OrganizationLeading Indicator:
Attrition RateLeading Indicator: Centralized database of Employees
Leading Indicator: Number of Employee Suggestions
Phase 2: Step 5: Targets
• Setting Targets Based on Strategic Goals
Current Year Sales Revenues
Goal: A 40% Sales growth in a Span of 3 years
Year 2009 Year 2010 Year 2011
Rs. 1,00,000 Rs. 1,10,000 Rs. 1,22,000 Rs. 1,40,000
Phase 2: Step 5: Targets• Adding Measurements & Targets to the Balanced Scorecard
Perspectives Objectives Measurements
Targets
2009 2010
FinancialMaximum ReturnsUtilization of AssetsRevenue Growth
Return on EquityUtilization Rates% change in Revenues
12%7%11%
13%8%11%
CustomerCustomer RetentionCustomer ServiceCustomer relations
% RetentionSurvey Rating% of self Initiated Calls
75%85%35%
75%88%40%
Internal Processes
Fast deliveryEffective ServiceOptimal CostResource Utilization
Turnaround Time1st Time Resolvement% Cost of SalesProductivity Indicator
15m68%66%77%
14m69%64%80%
Learning & Growth
High Skill LevelsEmployee SatisfactionOutstanding Leaders
Skill Set RatioSurvey index5 Point Ranking
65%75%4.5
68%77%4.8
Phase 2::Step 6: Programmes Sponsored by Upper level Management
Utilizes Designated Leaders and Cross Functional Teams
Consists of Deliverables, Milestones and a Timeline
Requires Resources: Man / Machine / Money / material / Market etc.
Structured Programmes have greater impact on Strategic goals
Phase 3: Deployment Review and Re-alignment
Integration of Other Business Areas with the Strategically improved Areas
Finally linking compensation with the scorecards
Building the Scorecards for the Entire Value Chain i.e. Customers, Production, sales, Innovation and all such elements
Phase 3: Step 7: Best Practices
Easy to Achieve but difficult to maintain because of Perfectionist Goals
Successful companies have developed more tolerance levels
A Consumer Electronics Manufacturing Firm
Consumer Electronics Public Ltd. Company
Customer
Quality Number of Defects
Price Aggressive Pricing
Delivery Number of On-Time Deliveries
Shipments Sales Growth
New products Number of New Products to Support
Support Customer Satisfaction Survey
Internal
Efficiency in Manufacturing Cycle Time
New Product Introductions Rate of New Introductions
New Product Success Number of Orders
Sales Penetration Actual Vs. Planned
New Businesses Volume of Investment in Diversification
A Consumer Electronics Manufacturing Firm
Consumer Electronics Public Ltd. Company
Innovation
Technology Leadership Product Performance Benchmarking
Cost leadership Quarterly Manufacturing Overheads
Market Leadership Market Share (Across All Markets)
Research & Development Number of new products
Financial
Sales Annual Growth Rate
Cost of Sales Annual Trend Line
Profitability Return on capital Employed
Prosperity Cash Flows
Employee
Competitive Salaries Local Area Comparisons
Opportunity Satisfaction Rating
Citizenship Contributions to Community
Questions????
Epstein, Marc, and Jean-François Manzoni. "Implementing Corporate Strategy: From Tableaux de Bord to Balanced Scorecards." European Management Journal , April 1998, pp. 190-203.
"Harvard Business Review Balanced Scorecard Report." Harvard Business Review, 2002 to present (bimonthly).
Kaplan, Robert S., and David P. Norton. Alignment: Using the Balanced Scorecard to Create Corporate Synergies. Harvard Business School Press, 2006.
Kaplan, Robert S., and David P. Norton. "The Balanced Scorecard: Measures That Drive Performance." Harvard Business Review, July 2005, pp. 71-79.
Kaplan, Robert S., and David P. Norton. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press, 2000.
Kaplan, Robert S., and David P. Norton. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Harvard Business School Press, 2004.
References
Niven, Paul R. Balanced Scorecard Diagnostics: Maintaining Maximum Performance. John Wiley & Sons, 2005.
Niven, Paul R. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results, 2d ed. John Wiley & Sons, 2006.
http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx
http://www.clickhrd.com/knowledge_base/images/metrus-balance-scorecard.jpg
http://www.strategy2act.com/solutions/bsc_toolkit/9-scorecard-helps-to-solve-full.gif
http://www.exinfm.com/training/pdfiles/course11r.pdf
References