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8/3/2019 PMS & Balanced Scorecard
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Performance Management&
Balance Scorecard
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Performance Management & Balanced Scorecard
Purpose of Balanced Scorecard :A method of implementing a business strategyby translating it into a set of performance
measures derived from strategic goals thatallocate rewards to executives and managersbased on their success at meeting or exceedingthe performance measures.
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Reasons for the Need of a Balanced Scorecard1. Focus on traditional financial accounting
measures such as ROA, ROE, EPS givesmisleading signals to executives with regards toquality and innovation. It is important to look atthe means used to achieve outcomes such asROA, not just focus on the outcomesthemselves.
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Reasons for the Need of a Balanced Scorecard2. Executive performance needs to be judged on
success at meeting a mix of both financial andnon-financial measures to effectively operate abusiness.
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Reasons for the Need of a Balanced Scorecard 3. Some non-financial measures are drivers of
financial outcome measures which givemanagers more control to take correctiveactions quickly.(Example: controls in jet cockpit for pilot)
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Reasons for the Need of a Balanced Scorecard 4. Too many measures, such as hundreds of
possible cost accounting index measures, canconfuse and distract an executive from focusingon important strategic priorities. The balancedscorecard disciplines an executive to focus onseveral important measures that drive thestrategy.
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1. Financial: How do we look to our Shareholders?2. Customer: How do our Customers See Us?3. Internal Business Process: What should we do
that is Excellent?4. Employee and Organization Innovation and
Learning: Can we continue to Improve and AddValue?
Balanced Scorecard Perspectives
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Cycle Times CustomerSatisfaction
Customer orderfulfillmentProduct assemblycycle time
ROA
EVA
EPS
Drivers Moderators Outcomes(lead indicators) (lag indicators)
Balanced ScorecardChain of Causality of Performance Measures
QualityDefect rateScrap rate
ManufacturingUnit Costs
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Drivers Moderators Outcomes(lead indicators) (lag indicators)
Employee Employee Growth inSatisfaction Retention Rate Revenues
Employee Product andSuggestions Process Innovations
Balanced ScorecardChain of Causality of Performance Measures
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Financial Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)
Financial measures are outcomes that representthe executives success at achieving strategicperformance goals
Financial measures are influenced by the Stageof the Life Cycle which reflects different strategic
priorities
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Financial Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)
Sustain/Maturity ROCEEVA
Earn excellentreturn on capitalinvested
Growth Sales GrowthRevenueProductivity
Generate newaccounts &increase marketshare
Harvest/Decline Cash FlowReduce UnitCosts
Obtainimmediatepayback oninvestments from
cash cow
Life Cycle Stage
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Business Business Inventory cycle time
Quality defect rate
Distributor satisfactionCustomer satisfactionDistributor price margin
Business Distributor/Dealer Customer
Different Customer Models Relevant Customer Metrics
Customer Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)
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Business Customer Customer order fulfillment
cycle time
Customer satisfactionCustomer price margin
Different Customer Models Relevant Customer Metrics
Customer Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)
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Internal Business Process Measuresand the Balanced Scorecard
Internal Business Process Measures
Quality
YieldThroughputCycle timeCost efficiency
Order Fulfillment
ProcurementRepair servicequality/downtimeWarranty quality
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Serviceto theCustomer
Internal Business Process Measuresand the Balanced Scorecard
Model of Internal Business Process Logistics
CustomerNeed
Identified
InnovationProcess
OperationsProcess
Post-SaleService
Process
CustomerNeed Satisfied
IdentifyMarket
CreateProduct
BuildProduct
DeliverProduct
RelevantMetrics:
DevelopmentCycle Time
QualityDefects
MCE
DeliveryCycleTime
ServiceSatisfaction
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Manufacturing Cycle Effectiveness (MCE)
Processing Time
Throughput Time
Throughput Time = Processing time + inspection time +movement time + waiting/storage time
MCE 0, implies inefficient processMCE 1, implies less wasted time, greater efficiency
Internal Business Process Measuresand the Balanced Scorecard
MCE =
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Employee and Organization Capabilitiesfor Innovation and Learning Measures
What are employee and organizationcapabilities for innovation and learningmeasures?
Represent ways to improve the other 3scorecard outcomes or measures.They nurture the other 3 areas
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Employee and Organization Capabilitiesfor Innovation and Learning Measures
Learning Measures Employee skill levels(certification rate)# suggestions peremployeeEmployee learning
curve (time to reachacceptable level ofoutput or quality)
Employee Measures Employee satisfactionEmployee retentionEmployee productivity
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Strategy
Internal Customer FinancialProcess T 1 T2
T0
LearningT3
Balanced Scorecard: Causal Relationships
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Balanced Scorecard: Cascading Goals
# EmployeeSuggestionsCorporate
SBU
Department
Team
ROCECorporate
SBU
CustomerSatisfactionCorporate
SBU
Retail Store
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Incentive Compensation for Executives withthe Balanced Scorecard
Executive Bonus Pool is designed as a percentage ofBase SalaryThe bonus pool represents potential earnings from thebonus for an executive if all performance measures areachievedPartial success with meeting performance measuresresults in the allocation of a bonus representing a lesseramount of the total potential bonus.Example: The bonus pool for a CEO equals 100 percentof salary. Range of bonus equals 0 to 100 percent ofsalary depending on success of CEO performance.
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Example: Automobile Company BalancedScorecard Reward Matrix for Bonus
Category Measure WeightingFinancial (50%) EVA 25%
Unit Profit 15%Market Growth 10%
Customer (20%) Customer satisfaction survey10%Dealer satisfaction survey 10%
Internal (20%) Above average rank onProcess industry quality survey 10%
Decrease in dealerdelivery cycle time.. 10%
Innovation (10%) Suggestions/employee 5%and Learning Emp. satisfaction survey 5%
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The Balanced Scorecard
Critical Thinking Questions 1. What happens to the balanced scorecard when the
strategy changes? (example: moving from a growth toan extract profits strategy )
2. How should resistance by executives or managers tonew measures be handled?
3. What if executives or managers sub-optimize and onlyfocus on categories in the reward matrix with the largestpayoff such as EVA and Customer Satisfaction?