The Balanced Scorecard ASQ Vermont Section 16 April

The Balanced Scorecard ASQ Vermont Section 16 April 2009 presented by Jim Whitney, Champlain College

What is the Balanced Scorecard (BSC)? n Developed in early 90 s n n Robert Kaplan (Renaissance Group) David Norton (Harvard Business School) n “Translating Strategy Into Action” n Traditional financial measures were n n Too narrow – no connection to strategy Too focused on the past – not predictive Encouraged tendency to manage qtr to qtr Too much “what” – Too little “why” 3/19/2018 ASQ Vermont Section 2

Balanced Scorecard Library n The Balanced Scorecard (1996) n Strategy-Focused Organization (2001) n Strategy Maps (2004) n Alignment (2006) n Execution Premium (2008) 3/19/2018 ASQ Vermont Section 3

BSC: Four Perspectives n Financial perspective n Customer perspective n Internal Business perspective n Learning & Growth perspective 3/19/2018 ASQ Vermont Section 4

BSC strategic focus Sanger, Mark, Supporting the Balanced Scorecard. Work Study, V 47, No 6 3/19/2018 ASQ Vermont Section 5

Example of a Balanced Scorecard 3/19/2018 ASQ Vermont Section 6

Financial perspective n Uses traditional tools and reports n Considers EVA© and ROCE n Economic Value Added n n NOPAT- (capital x cost-of-capital) Return on Capital Employed n Emphasizes growth and improvement n Links financial performance to strategy 3/19/2018 ASQ Vermont Section 7

BSC encourages use of ABC Traditional accounting Salaries $375, 000 Benefits 92, 000 Supplies 47, 000 Phone 8, 500 Travel 13, 000 Total $535, 000 Activity Based Costing Select suppliers $82, 000 Procure mat’ls 175, 000 Certify vendors 92, 000 Resolve problems 103, 500 Expedite shortages 83, 000 Total $535, 000 Johnson, Christian C. , Introduction to the Balanced Scorecard and Performance Measurement Systems, 3/19/2018 ASQ Vermont Section 8

Linking Finance to Strategy Strategic Themes Revenue Growth and Mix Cost Reduction/ Productivity Improvement Asset Utilization Sales growth rate by segment Percentage revenue from new product, services and customers Revenue per employee Investment (% of sales) R&D (% of sales) Sustain Share of targeted customers and accounts Cross selling Percentage revenue from new applications Customer and product line profitability Cost versus competitors' Cost reduction rates Indirect expenses (% of sales) Working capital ratios (cash to- cash cycles) ROCE by key asset categories Asset utilization rates Harvest Customer and product line profitability Percentage unprofitable customers Unit costs (per unit of output, per transaction) Payback Throughput Grow Business Unit Strategy 3/19/2018 ASQ Vermont Section 9

Customer Satisfaction Market Share Customer Acquisition Customer Profitability Customer Retention Customer Satisfaction 3/19/2018 ASQ Vermont Section 10

Customer perspective n n Market share (various criteria) Customer retention (absolute or relative) Customer acquisition (absolute or relative) Customer satisfaction n Specific performance criteria Defined value proposition Customer profitability n n 3/19/2018 Profitability by account Net of any special account-specific expenses ASQ Vermont Section 11

Customer perspective n Value proposition typically includes elements of Time n Quality n Price n 3/19/2018 ASQ Vermont Section 12

Internal Business perspective n n n Focus on process improvement Chose processes aligned with strategy Identify customer need Identify the market n Create the product/service offering n Build the products/services n Deliver the products/services n After-sale customer service n n Customer need satisfied 3/19/2018 ASQ Vermont Section 13

Learning & Growth perspective n Core measurements Employee productivity n Employee satisfaction n Employee retention n n Enablers Staff competencies n Technology infrastructure n Climate for action/change n 3/19/2018 ASQ Vermont Section 14

What to measure? n 20 -25 measures usually sufficient n ~ 20% of measures usually lack data No data n No measurement n No management control n No improvement n 3/19/2018 ASQ Vermont Section 15

Balancing the BSC Heaviest emphasis is on business processes 3/19/2018 ASQ Vermont Section 16

BSC and Quality “…the process of self-assessment does not, of itself, improve the organisation… a key step in the process is to identify the ‘ vital few’ [areas of improvement relating to the organization’s strategy]… EFQM Brussels Representative Office, Assessing for Excellence: A Practical Guide for Self –Assessment , 1999 “When this does not happen, the excellence model type quality tools become internally preoccupied, rigid and generally unhelpful. Harari, O. , “The eleventh reason why TQM doesn’t work, ” Management Review, V 82 No 5 3/19/2018 ASQ Vermont Section 17

Quality Improvement Horizons Andersen, H and G Lawrie, “Effective quality management through third-generation balanced scorecard, ” International Journal of Productivity and Performance Management V 53 No 7, 2004 3/19/2018 ASQ Vermont Section 18

Quality Improvement Horizons 3/19/2018 ASQ Vermont Section 19

Strategy-linked Continuous Improvement n Strategy maps ID critical processes n Top-down implementation is typical n Use rate-of-change to estimate horizon n Horizon s/b in synch with strategic goals n If not, consider process re-engineering 3/19/2018 ASQ Vermont Section 20

BSC and Quality Programs n n Symbiotic relationship: “BSC enhances quality programs – it gives focus and clear linkages to improvements in strategic customer and financial outcomes” Establishes and tests linkages between quality of process and performance 3/19/2018 ASQ Vermont Section 21

BSC and Baldridge n Baldrige subcategories mirror BSC: Customer-focused results n Financial and market results n Human resource results n Organizational effectiveness n n Curt Riemann, first Director of Baldrige National Quality Program, attended BSC presentations in early 90 s. Changes in Baldrige followed soon after. 3/19/2018 ASQ Vermont Section 22

BSC, Baldrige and EFQM criteria: Baldrige categories n Leadership (10%) n Leadership (12%) n People (9%) n Human resource focus (8. 5%) n Policy & strategy (8%) n Strategic planning (8. 5%) n Partnerships & resources (9%) n Process management (8. 5%) n Processes (14%) n Customer & market focus (9%) n People results (9%) n Information & analysis (8. 5%) n Customer results (20%) n Business results (45%) n Society results (6%) n Key perf. results (15%) 3/19/2018 ASQ Vermont Section 23

Linkages to Strategy n EFQM and Baldrige: implicit n BSC (via strategy maps): explicit Objectives n Measurements n Targets n Initiatives n 3/19/2018 ASQ Vermont Section 24

What BSC adds to quality programs n n n Explicit causal linkages through strategy maps and cascaded objectives Establishes targets for breakthrough performance (not merely best practices) Often identifies entirely new processes critical for achieving strategic objectives Sets strategic priorities for process enhancements Integrates budgeting, resource allocation, target setting, reporting, and performance feedback into ongoing management processes 3/19/2018 ASQ Vermont Section 25

Generic Strategy Map Johnson, Christian C. , Introduction to the Balanced Scorecard and Performance Measurement Systems, 3/19/2018 ASQ Vermont Section 26

Building strategy maps Requires consensus, clarity and commitment to strategy at the executive level Produces n n testable hypothesis in strategy cascading objectives Note implicit application of Theory of Constraints in use of cascading objectives. . . prevents discontinuous process optimization and optimizes organizational productivity 3/19/2018 ASQ Vermont Section 27

Strategy Maps Emphasis on best practices, w/o link to strategy, produces optimal local business processes, but suboptimal support for critical capabilities and strategic initiatives. “BSC starts with strategic priorities and then identifies the process improvements needed to support them. ” Quality models may be ad hoc and tactical, producing good local results but lacking a coherent, SBU- and enterprise-level framework 3/19/2018 ASQ Vermont Section 28

Strategy linked to operations n n Organizations with no systematic process for linking strategy to ops: only 27% as good or better than average of industry peer group With systematic linking (e. g. BSC): 70% as good or better than industry peers Source: Pateman, Andrew, Business Performance Management, December 2008 3/19/2018 ASQ Vermont Section 29

Strategy linked to operations Kaplan, Robert S and David P Norton, The Strategy Focused Organization, HBSP 2001 3/19/2018 ASQ Vermont Section 30

Alignment Five key principles: n Mobilize change through executive leadership n Translate strategy into operational terms n Align the organization to the strategy n Motivate to make strategy everyone’s job n Govern to make strategy a continual process Four archetypal value propositions n Best total cost (consistent, timely and low cost) n Product leadership (expand performance boundaries) n Customer solutions (custom products/services, know-how) n System platform (platform defines the industry standard) 3/19/2018 ASQ Vermont Section 31

Two Faces of Alignment n “Social” side Communication and teamwork n Understand support changes needed to pursue agreed-upon strategy n n “Technical” side Integration of diverse operations n Apply six sigma, TQM etc. n Cascade strategy to align processes n 3/19/2018 ASQ Vermont Section 32

BSC in execution Pateman, Andrew, Business Performance Management, December 2008 3/19/2018 ASQ Vermont Section 33

10 Golden Rules for Implementing a BSC 1. There are no standard solutions: all business differ 2. Top management support is essential 3. Strategy is the starting point 4. Limited and balanced number of objectives and measures 5. No in-depth analyses up front, but refine and learn by doing 6. Take a bottom-up and top-down approach 7. It is not a systems issue, but systems are an issue 8. Consider delivery systems at the start 9. Consider the effect of performance indicators on behavior 10. Not all measures can be quantified Roest, Pim, Information Management and Computer Security, V 5 No 5, 1997 3/19/2018 ASQ Vermont Section 34

Building a BSC with SWOT BSC measures strategic alignment and success, but does not decide or design strategy BSC defines “whats” for QFD in a strategic planning exercise, but does not provide guidance on the “hows” required for strategic management. 3/19/2018 ASQ Vermont Section 35

Example of SWOT Incorporating BSC perspectives Source: Lee, SF and Andrew Sai On Ko, Managerial Auditing Journal, 15/1/2 2000 3/19/2018 ASQ Vermont Section 36

Analysis Techniques Compared 3/19/2018 Tan, B L Development of an e-Business Selection Framework for Manufacturing SMEs: A Study of the Printing Industry. Ph. D thesis, Aston University, 2005

Using VCA & BSC to develop QFD “hows” 3/19/2018 ASQ Vermont Section Tan, B and D Bennet, “Development and Application of an Electronic-Manufacturing Selection Framework for SMEs” International Journal of innovation and Technology Management V 4 No 3 2007

Source: Lee, SF and Andrew Sai On Ko, Managerial Auditing Journal, 15/1/2 2000 3/19/2018 ASQ Vermont Section 39

BSC Success Stories n n Cigna Property and Casualty n Losing $1 m/day in 1992; BSC introduced in 1993. Became profitable in two years, sold division for $3 bn five years later. Mobil’s US Marketing and Refining Division n n Last in industry profitability in 1993, introduced BSC to communicate strategy to newly formed SBUs. Moved from last to first place in industry in two years. Brown and Root n 3/19/2018 Introduced BSC in 1992 to assist in post-merger OD. Moved to first place in their industry within three years. ASQ Vermont Section 40

Performance Prism: Next Generation BSC? 3/19/2018 ASQ Vermont Section 41

The Balanced Scorecard ASQ Vermont Section 16 April 2009 Questions?

The Balanced Scorecard ASQ Vermont Section 16 April 2009 Thank you!