The Balanced Scorecard - Implementing Strategy

WebinarFebruary 2, 2010

Agenda

• Driving growth: need for strategy and effective deployment

• Understanding the Balanced Scorecard (BSC) and its benefits– The four perspectives of the BSC

• Building the BSC: Steps of the BSC process• Cascading the BSC in the organization

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Growth: Need for Strategy and Effective Deployment

Where Do We Want to Be in 5 Years?

Vision Statements – Do they really provide the direction needed?

Strategy Is

Intended Strategy Deliberate Strategy

Unrealized Strategy

Realized Strategy

Emergent Strategy

Intended = Realized?

Strategy fails if it is little more than…..

Hope Extrapolation

Rationalization

Self-DefensePaper Exercise

Fabrication Vision?

Strategic Vs Operational Management

STRATEGIC MANAGEMENT

• Long term future horizons

• Building sustainable competitive advantage

• External focus

• Thinking Strategically

OPERATIONAL MANAGEMENT

• Short to medium term

• Seeking operational improvements

• Internal focus

• Fire fighting

10

The Ambidextrous Nature of Business

Managing Current Business

Create the Future Business

Focus: Doing things Better

Focus: Doing things Different

Selectively Abandon the Past

11

The Ambidextrous Apple

Managing Current Business

Finding the Future

12

Preservation and Evolution

Phase1 Innovation

Phase 2 Improving

Phase 3 Maturity

Phase 4 Reinventing the Future

Time

Gro

wth

Growth

13

Channels for Growth

Growth is #1 agenda for almost every CEO

Primary Vehicle for Growth is through Organic Growth or Mergers & Acquisitions (M&A)

Several Studies have shown that most M&A fail (One study showed that over 62% of the time M&A destroy shareholders wealth)

However delivering Organic Growth consistently and repeatedly has been challenging due to poor success rates with implementation of strategy

14

Forbes List of 100 Largest Companies

• To celebrate the 70th anniversary, in 1987 Forbes published its “Forbes 100” list of largest American companies and then compared it to its original list from 1917.

• However, only 18 of the original companies managed to stay in “Top 100” list through 1987. Sixty one of them no longer existed and twenty one fell off the “Top 100” list.

• The overall long-term return to the shareholders from this is group of 18 companies was 20% less than that of the overall market.

• Only two companies, General Electric and Kodak performed better than the overall market. Since then Kodak’s performance deteriorated significantly.

15

Can We Beat The Odds?

Current Business Future Business

• 80% of all venture capital investments fail

• Over 90% of companies fail to sustain above-average shareholder return for longer term

• 75% of all new products that established companies put into their markets fail

Sustaining Growth is Difficult in the Long Term

Classical Management Control System

Designed Around Short-term Control Oriented Financial Framework

BudgetPersonal Incentives

Strategy & Vision

Review & Reorient

Planning & Capital

Allocation

Focus on Financial Measures

The Alignment Paradox

9 of 10 Companies Fail

to Execute Strategy

Only 5% of the work force understands

the strategy

60% of organizations don’t

link budgets to strategy

85% of executive teams spend less than one hour per month discussing

strategy

Only 25% of managers have

incentives linked to strategy

You Can’t Manage Strategy With a System Designed for Operational Control

Source: Fortune Magazine Survey

Strategy Implementation – Need of a Framework

Vision

Long Term Goals

Balanced Framework: End Results and Drivers of

Performance

Strategy Everyone’s Job

Benefits of BSC – Evidence?

• Survey conducted with the US Institute of Management Accountants’ members in 2006, the results of which included:– 88% of members from organizations regularly using the

Balanced Scorecard reported improvements in performance; and

– 66% stated that they also achieved increase in profits

The Balanced Scorecard

Strategy ImplementationUsingUsing

MeasurementToTo

Communicate, Focus, Review And Align

Background

Conceived In 1991 Robert Kaplan: Harvard Professor

David Norton: Management Consultant

Several insights into the process based on work done

Balanced Scorecard: Evolved Framework

Internal Business ProcessTo satisfy our customers, in which internal business processes must we excel?

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

Financial

The Vision & StrategyThe Vision & Strategy

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

Innovation, Learning & GrowthTo achieve and maintain a competitive position, how must the organization learn and improve?

Cause

Effect

Results

Actions

The Strategy Map

Constructing The Scorecard

BSC Addresses Barriers to Strategy Implementation

Balanced Scorecard

A Management System Built On Strategy: Goal is to enable effective corporate management

Translation Through Objectives and

measures

Translating Vision & Strategy

Planning & Resource Allocation Driven By Strategy

Business Planning

Review Strategy In The Light Of Recent

Performance

Feedback & LearningAligning

Organization, Departmental and

Individual Objectives

Communicating & Linking

Benefits of Implementing BSC

• It makes strategy operational • Translates strategy into performance measures

and targets• Brings to focus drivers of future performance

– Focused measurement for “success”

• Umbrella/filter for a variety of diverse corporate programs

• Aligns employees to strategy execution

Keeping Up With Change

Ongoing business

Change

Failure of changemanagement systems

to exploit benefits

Sustaining mechanismsto build on success

Benefit of Balanced Scorecard

The Four Perspectives of BSC

The Financial Perspective

“Results”

The Financial Perspective

Return On Investment

Productivity StrategyRevenue Strategy

Asset UtilizationStrategy Cost Strategy

Consideration of risk management strategies is critical

Financial Objectives – Examples

• Increase product portfolio• Establishing new services• Reduce cost• Improve asset utilization• Increase revenue (organic/ inorganic)• Improve productivity

The Customer Perspective

The Customer Perspective

Market Share

CustomerRetention

CustomerAcquisition

CustomerSatisfaction

CustomerProfitability

Enhancing Customer Value

Relationship

Image

CustomerValue

Product / Service Attributes

Functionality

Quality

Price

Schedule

Basic Differentiators

Customer Objectives – Examples

• Increase geographical reach• Increase customer base• Enhance brand image• Build end to end solutions• Enhance client relationships• Providing value-added services

The Internal Process Perspective

Internal Process Perspective

ProductService

Leadership

CustomerIntimacy

OperationalExcellence

GoodNeighbor

% New Product Sales

New Product Intro. Vs Competitors’

Process Capability

Time to Market

Target SegmentShare

ContactManagement

Complaints

Quality

Cost

Schedule

Regulatory

Legal / Ethical

Community

InnovationManagement

CustomerManagement

Supply ChainManagement

RegulatoryManagement

Internal Process Objectives – Examples

• Improve supply chain performance• Reduce waste• Improve value creation• Improve regulatory compliance• Improve technology absorption• Improve NPD performance (time to market/

success rate)

The Learning & Growth Perspective

Learning & Growth Perspective

Employee capability

Information systemscapability

Motivation, empowermentand alignment

TechnologyInfrastructure

Learning & Growth Objectives – Examples

• Enhance employee morale• Develop leadership• Improve knowledge management• Build key/strategic competencies• Improve communication• Build required infrastructure• Institutionalize strategic thinking

Building the Balanced Scorecard: Steps

MissionWhy we exist

VisionWhat we want to be

Core ValuesWhat we believe in

StrategyOur game plan

Personal ObjectivesWhat I need to do

Strategic OutcomesStrategic OutcomesStrategic

ShareholdersDelighted

CustomersEffective

ProcessesMotivated and

Prepared Workforce

Balanced ScorecardImplementation and focus

Strategic InitiativesWhat we need to do

Building the BSC

Translating the Mission and Vision into Desired Outcomes

Step 1: LT Goals – Definition

• Long Term Goals (LT Goals)– Statements (quantitative/ qualitative) that give tangible

shape to aspirations based on the Vision• 3 to 5 year time horizon• Directional• Will not include aspects of actions/ how to

– Example• Achieve revenues of 1000 cr• Be a global player/ number one in market

– Not a LT Goal• Increasing sales• Improve market share• Enter a new market

Step 2: Strategic Objectives – Definition

• Strategic Objectives– Provide a direction for meeting the Long-Term goals– They are high level how's which can hold in there

umbrella a series of strategic initiatives

• Example– Expanding geographical reach– Entering into strategic alliances– Deliver first time on time

• Not Objectives– Open an office– Appoint an agent– Change a vendor

This assumes that the strategy of the

organization is articulated based

on which the objectives can be

defined.

Step 3: Strategic Metrics – Definition

• Finalization of Strategic Metrics and Targets– For each strategic objective

• The targets associated with each metric will need to be finalized based on baseline performance which will need to be ascertained

Types Of Strategic Measures

Lagging Measures

To Gauge Outcomes OfStrategy

Strategic Objective

Outcome Measures

Common MeasuresAcross The Industry

Leading Measures

To Understand processesAnd Activities

Performance Drivers

Strategy DependentUnique Measures

Selecting Measures

• Caution

• Do not select what “can” be measured: select what “should” be measured

• Counter balance the measures to prevent strategy distortion

• Restrict the number of measures to the level of control / action

Lag / Lead Existing / New

Strategic Impact

Measure Cycle

Degree Of Diff

Cultural Shift

Change Quantum

Step 4: Strategic Initiatives – Definition

• Strategic Initiatives– Specific actions which help realize the strategic objective

and achieve associated target – Operationalize objectives on a daily work / project level

basis– One or more initiatives will be typically needed for

achieving an objective

• Example– Objective is: Improve project management– Initiatives could be:

• Create project planning templates• Establish method for tracking risks• Establish method for interdependency management

LT Goals – Objective – Initiatives

Sales – 1.5 bn USD

Increase win-rate

LT Goals

Customer Objective

• Hiring people from customer/competition• Influence design of tender document so that it favours USP of Organization

Initiatives

Quality Organization & International

Standards on QHSE

Deliver first time on time

Process Objective

• Set up interdependency management• Reduce execution defects in process

– 1 –Identify

InitiativesMarketing Projects,

Activities, etc.

Development Projects,

Activities, etc.Quality

Projects, Activities, etc. Corporate

Projects, Activities, etc.

– 2 –Screen

Initiatives

FinancialFinancial PerspectivePerspective

CustomerCustomer PerspectivePerspective

InternalInternal PerspectivePerspective

OrganizationOrganization LearningLearning

Output: Short List of Strategically Aligned InitiativesOutput: Short List of Strategically Aligned Initiatives

Prioritizing Strategic Initiatives

Managing Dependencies

XYZ Strategy MapFi

nanc

ial

Cus

tom

er

Pers

pect

ive

Inte

rnal

Pr

oces

sLe

arni

ng

& G

row

thLT Goals

Objective 1 Objective 2

Objective 1

Objective 2 Objective 3

Objective 1

Objective 2

Objective 2 Objective 3

Objective 3

Objective 1

Objective 4

Initiative 1

Initiative 2

XYZ Group Strategy Map

Financial

Learning & Growth

BusinessProcesses

Customer

Enhance Long-termShareholder Value

Double Sales In 4 Yrs No. 1, 2 or 3 Market Player Double Profits In 3 yrs

New Customers / Markets

Business Review Process

Strategic Thinking

Brand Equity

Reputation Management Business Excellence

Finance Review Process

Code Of Conduct Internal Communication

Company / EmployeeAlignment

Talent Retention /Mobilization

LeadershipDevelopment

Customer loyalty / value

BSC – Example

Objective Initiative Owne r &

Team

Lead Metric

Target Lag Metric Target

Industry wise focused selling

Identifying and developing industrial specialist (Pilot in one area- Power/ Defense )

a) % sales increase / industry b) No of application s transplante d / industry

a) 15% b) 25 % hit rate > 1L business

a) No of new applications developed / Industry b) No of applications shown for transplant/ Industry

a) 5 / industry / annum b) 100 % where applicabl e

Enhance product portfolio through new agencies

Identification and finalization of agencies (> 100L potential business )

Business generated through new agency

> 100 L / annum

a) No of agencies interacted / month b) No of agencies identified and launched

a) 10 / month b) 2/ annum

Enhance business by JV workshops

Formation of JVs % increase in turnover from JVs

Rs 50 L / JV / annum

No of JVs / Division / Year

1/Annu m

Cascading the BSC

Step 1. A Corporate Scorecard defines overall strategic

priorities and context

Step 2. Each SBU develops a long-range plan

and BSC consistent with the corporate strategic agenda

Step 4. Departments, teams

and individuals develop scorecards consistent

with their organization’s strategy

Corporate / GroupCorporate / Group

SBU CSBU CSBU SBU BB

SBU SBU AA

Teams and Individuals

Support FunctionsSupport Functions

Step 3. Each Support Unit

develops a scorecard to support the internal

customers

Align All Levels Of The Organization

Org Strategy Map Final DraftFi

nanc

ial

Cus

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er

Pers

pect

ive

Inte

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Pr

oces

sLe

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& G

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thTarget 2012

•XY bn USD Turnover •12% + PBIT /Year•ROCE – 40%

C1 - Focus on new products, services and

regions

F1 - Increase revenue

(international & domestic)

Target 2012•Major Player in rrr regions•International standard on QHSE•New products - mnp

F2 - Cost competitiveness

P3 - Reduce cost and time over-run

Indicate cause and effect linkage

Sample SBU - Strategy Map: Cascaded from Corporate

Fina

ncia

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usto

mer

Pe

rspe

ctiv

eIn

tern

al

Proc

ess

Lear

ning

&

Gro

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Target 2012•ZZ Bn USD Turnover •8% + PBIT /Year•Best regional service provider (MENA)

F1 - Establish the presence in the segment

(grow revenue)

P3 - Improve adherence to internal

project milestones

F3 – Cost Competitiveness

Example of Strategic Initiatives for Procurement

1. Identify and source from low cost countries (including India) for competitive sourcing, and establish and implement the process

2. Create the infrastructure to make skids in-house3. Develop alternate vendors in single source situation

P F1 Enable Cost Competitiveness for

Organization

Strategic KRAs Routine KRAs

Performance Planning for

Appraisal

Development Planning

Strategic

CompetenciesOther Skill

Gaps

Performance Appraisal Aligned to BSC

BSC Routine Job based on JD

BSC Tracking

BSC – Performance Tracking

Initiatives

Objectives

SBU/ JV/ BE BSC

Initiatives

Objectives

SBU/ JV/ BE BSC

Initiatives

Objectives

Corporate BSC

Validation of Assumptions

• Collect information on actual status on assumptions made at the time of defining each Objective/ initiative

• Ratify assumption– Assumption incorrect

• Possibility of initiative failure

BSC – Performance Tracking

• Review mechanism– Integrated with business review– Coordinated by BSC coordinators– Use of defined templates and presentations– Compilation prior to review meet

• Outcomes– Mid-course corrections