Executing Strategy with the Balanced Scorecard January 30, 2006 Presented by Paul R. Niven

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© 2006 The Senalosa Group, Inc. All Rights Reserved

Executing Strategy with the Balanced Scorecard

January 30, 2006

Presented by Paul R. Niven

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Agenda

• Introductions

• Performance Measurement Background – What led us to the BSC?

• The Balanced Scorecard

• Success Stories

• Strategy Maps

• Essentials of Implementing the Balanced Scorecard

• Questions & Answers

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Introduction to Paul

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Paul Niven and the Balanced Scorecard

• BSC Practitioner first, then consultant, and writer

• Led a BSC project with large Canadian firm in mid-90s

• Have consulted with Bearing Point (Chicago) and CSC (San Diego)

• Formed The Senalosa Group in 2001

• Have written 3 books and many articles on the subject of Balanced Scorecard

• Speak at conferences and seminars around the world

• Have worked with clients in many different sectors

Translated into 12 languages

Released June, 2003

Released April, 2005

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Performance Measurement and Balanced Scorecard Background

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The Changing Landscape of Performance Management

• 80% of respondents reported making changes in their PM system during the last 3 years. For 33% the change was described as a “major overhaul” More than 50% of respondents indicated their

company is currently changing its PM system. (From Strategic Finance Magazine)

• More than 50% of the Fortune 1000 have turned to the Balanced

Scorecard. (Bain & Company study)

• Hackett reported in their 2002 Benchmarking study that 96% of the 2000 global companies surveyed either were using a BSC or planned to implement it

The question is why???

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Three Challenges

Prominence of the Balanced

Scorecard

Difficulty Executing Strategy

Difficulty Executing Strategy

Rise of Intangible

Assets

Rise of Intangible

Assets

Over-reliance on Financial

Measures

Over-reliance on Financial

Measures

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“They (knowledge workers) now account for a full third of the American workforce, outnumbering factory workers two to one. In another twenty years they are likely to make up two-fifths of the workforces of all rich countries.”

-Peter F. Drucker, The Economist, November 2001

38%

62%

75%

1982 1992 Today

The increasing value of intangible assets in organizations

Our Economy is Changing

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• Not consistent with today’s business realities

• Driving by rearview mirror

• Tend to reinforce functional silos

• May sacrifice long-term thinking

• Not relevant to many levels of the organization

The Alto

Financial Measures Don’t Tell the Whole Story

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Only 10% of organizations execute their

strategy

Barriers to Strategy Execution

Only 5% of the workforce

understands the strategy

Vision Barrier

Only 25% of managers have

incentives linked to strategy

People Barrier

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

strategy

Management Barrier

60% of organizations

don’t link budgets to strategy

Resource Barrier

Chart adapted from material developed by Robert S. Kaplan and David P. Norton

The Strategy Story

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Clearly, A Change is Needed

Intangible Assets Strategy Financial Measures

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Customer

Objectives"To achieve our vision, how should we appear to our customers?"

Measures Targets Initiatives

Internal Business ProcessObjectives"To satisfy our

shareholders and customers, what business processes must we excel at?"


Financial

Objectives"To succeed financially, how should we appear to our shareholders?"


Learning and GrowthObjectives"To achieve our

vision, how will we sustain our ability to change and improve?"


Visionand

Strategy

Balanced Scorecard Fundamentals

Source: Harvard Business Review, 1992

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Customer






Financial






Visionand

Strategy

• Represent the “destination” or “end in mind” of your strategic story

• Focus on shareholder value, revenue growth, and productivity

Example Measures:

• Return on invested capital• Gross revenue

• Revenue by segment• Asset utilization

Financial Perspective

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Customer






Financial






Visionand

Strategy

• Should answer three questions:

• Who are our customers?

• What is our value proposition in serving them?

• Operational Excellence

• Product Leadership

• Customer Intimacy

• What do customers expect or demand?

Example Measures:

• Customer Loyalty• Market Share

• Customer Retention

Customer Perspective

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Customer Value Propositions

Lowest Total Cost (Operational Lowest Total Cost (Operational Excellence)Excellence)

Innovation/Product LeadershipInnovation/Product Leadership Customer Solutions (Customer Customer Solutions (Customer Intimacy)Intimacy)

“Operationally excellent companies deliver a combination of quality, price, and ease of purchase that no one else can match”

CostcoMcDonaldsDell Computer

“A Product leadership company pushes its products into the realm of the unknown, the untried, or the highly desirable…Superior performance for customers.”

SonyIntel

“A Customer Intimate company builds bonds with customers; it knows the people it sells to and the products and services they need”

NordstromMobil (Early BSC adopter)

Best SolutionMost Innovative Product Best Total Cost

To attract and retain customers, different “value propositions” are required based on your strategic choice………….

The first three value propositions are based on Treacy & Wiersema, The Discipline of Market Leaders, Addison Wesley, 1995

System Lock InSystem Lock In

“Lock in companies provide the best platform for buyers and sellers to meet”

E-BayMicrosoftYellow Pages

Best Exchange

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Customer






Financial






Visionand

Strategy

• Key processes we must excel at to drive value for customers

• Also focus on customer value proposition

• Normally contains the largest number of measures

Example Measures:

• On-time delivery• Product development cycle time

• Customer response time

Internal Process Perspective

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Customer






Financial






Visionand

Strategy

• Often overlooked

• Represent the “enablers” of the other three perspectives

• “Soft” measures can drive “hard” results

Example Measures:

• Employee satisfaction• Strategic job coverage ratio

• Internal communication rating

Employee Learning & Growth Perspective

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Employee Learning & Growth Perspective

Human Capital – Understand what competencies we need,

what we have, and how to close the gap

Information Capital – Understand the IT applications and infrastructure we need to

support the strategy

Organizational Capital -

Culture – Build an organization that internalizes the shared vision, strategy, and values required to execute

Leadership – Develop leaders who can effectively leverage human capital

Goal Alignment – Encourage personal contribution through goal and incentive alignment

Knowledge Sharing/Teamwork – Share knowledge and experience through teamwork

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Who is Using Performance Measurement?

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Everybody!

Can you guess the country represented by this flag???

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Company Success Stories

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Strategy Maps

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Halifax

Truro

Sydney

Antigonish

Maps Get Us From “A” to “B”

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Formation of a Strategy

Landmark 1

Successfully Executed Strategy

Landmark 2

Strategy is Also a New Destination

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A Good Balanced Scorecard Tells the Story of Your Strategy on a Strategy Map

Strategy Map

Increase ProfitabilityFinancial

Learning

Attract Morecustomers

Align ground crew

operations

Ensure Lowest prices

Fly Fewer planes

Offer on time flight

Customer

InternalMaintain Fast

ground turnaround

Illustrative Example: Southwest Airlines

What will drive operating efficiency?

• More customers on fewer planes

How will we do that?

• Attract targeted customer segments who value price and on time arrivals

What must the internal focus be?

• Fast turnaround

Will our people do that?• Educate and compensate ground crew

regarding how they contribute to the firm’s success

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Customer Perspective

Internal Process Perspective

Learning & Growth Perspective

Financial Perspective

Profitable Growth Operational Productivity

Maximize Sustainable Value for

Our Shareowners

Build customer loyalty

Provide simple, consistent and

reliable processes

Leverage best practices to achieve best in class

performance

Exercise best in class governance/controls

Grow Revenue & Earnings Achieve optimalROIC levels

Exceed customer expectations in service

delivery

Offer superiorvalue in distribution and supply

chain services

Exercise and outwardly communicate business practices that drive

channel integrity

Introduce/enhanceProducts and services

Hire, develop, and retain the

best performers

Leverage technology to improve productivity

and drive customer results

Foster a culture that rewards

teamwork and promotes balance

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Government I.S. Strategy Map

Customer Focus Know Our Business Keep Pace With Technology Work Smarter Always On

Customer

Internal

Employee Learning and Growth

Financial

Continuously review and simplify internal practices and procedures

Understand and anticipate customers’

business needs

Participate knowledgably

and contribute to meeting needs

Increase customer satisfaction

Proactively provide effective and innovative

solutions

Keep system up and running

Efficient delivery through

consensus

Get off the 3rd floorExplore

alternatives and anticipate use of new technology

Proof of concept

Get more bang for our buck!

Information & Communication: Share information, listen more, and respond

Skills & Training: Hire, develop and retain solid performers

Culture: Foster an environment that encourages, recognizes, and rewards contribution

Create accountability and ownershipEnsure teamwork that fosters mutual respect, support, and learningBe consistent

Continuously improve and

simplify customer experience

Build it right, keep it healthy

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Financial

Customer

Internal Process

Employee Learning & Growth

Aliant Inc. Strategy Map

Increase Shareholder Value

Everything Begins With The Customer

Create a Workforce that is Informed, Developed, Engaged and Inspired

Grow AliantProfitably

Continuously Improve and Simplify End to End Customer

Experiences

Build an Environment Where People Feel Valued and Maximize Their Potential

Allocate All Aliant Resources Effectively

Stimulate New Product and Service Development &

Adoption

Serve Customers on Their Terms With Passion and Integrity to Build Loyalty

Deliver More Value Through Integrated Offerings

Share Information, Listen More and Respond

Create a Safe & Healthy Environment That Respects the

Balance in People’s Lives

Innovate, Collaborate,and Allocate

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Brother Industries (USA)

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The BSC has gained wide acceptance, but problems exist

• More than 50% of the Fortune 1000 have turned to the Balanced

Scorecard. (Bain & Company study)

• Hackett reported in their 2002 Benchmarking study that 96% of the 2000 global companies surveyed either were using a BSC or planned to implement it

• Harvard Business Review calls the BSC one of the 75 most influential business ideas of the 20th century

• But as many as half of all BSC users aren’t achieving the results they hoped for

It’s all about Implementation practices!!!

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Balanced Scorecard Implementation Essentials

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Overview of Implementation Essentials

• A guiding rationale for the BSC

• Executive Sponsorship

• An effective team

• A Balanced Scorecard “Champion”

• Training, Education, and Communication

• Strategy Maps

• Measures

• Cascading the Balanced Scorecard

• Reporting Results

• Linkage to Management Processes

• Living It!

Let’s examine a few of these in more detail…..

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“To make initiatives work it took passionate, all-consuming commitment from the top…Every leadership action must demonstrate total commitment to the initiative.”

-Jack Welch, Jack: Straight From the Gut

• No BSC initiative will survive without active executive sponsorship

• Executives hold key knowledge for BSC success

• Everyone watches what the boss watches

• You can influence executive sponsorship

Executive Sponsorship

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Balanced Scorecard Reporting

• Can be high-tech or low-tech

• Key point is to begin discussing results soon!

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Balanced Scorecard Reporting

• Hold strategy centered management meetings

• Most meetings suffer from serious faults*:

• Lack of drama

• Lack of contextual structure

• “The Discipline of Getting Things Done”

* Based on “Death by Meeting” by Patrick Lencioni

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Cascading the Balanced Scorecard

Mission, Values, Vision

FinancialObjectives Measures Targets Initiatives

CustomerObjectives Measures Targets Initiatives

Internal ProcessesObjectives Measures Targets Initiatives Objectives Measures Targets Initiatives







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Team and Personal Balanced Scorecards

• Allows everyone to demonstrate how they contribute to overall goals

• Creates a consistent language through

measurement

• Achieves a laser- like focus on strategy

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Cascading Example

City ScorecardPerspective Objective Measure Target

Customer Provide safe, convenient transportation

Increase in average ridership of public transportation

10%

Department of Transportation ScorecardPerspective Objective Measure


Percentage of fleet available

90%

Target

Perspective Objective Measure


Percentage of vehicle repairs completed within 24 hours

Target

75%

Maintenance Department Scorecard

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Thank you for your time. If you have any other questions, please feel free to contact me at: (760) 789-2449 or [email protected]

www.senalosa.com

Questions???

Documents

Executing Strategy with the Balanced Scorecard January 30, 2006 Presented by Paul R. Niven