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TRANSLATING STRATEGY INTO ACTION
THE BALANCED SCORECARD
M R NAIDUMBA, FCMA, FCS, LLB
PROGRAM OBJECTIVE
• To understand
• What is a Balanced Scorecard
• How the Balanced Scorecard works
• How to construct a Balanced Scorecard and use it to
achieve Strategic Goals of the organization
M R NAIDU 2
MEASUREMENT BRINGS FOCUS TO THE SUBJECT
• You can’t manage what you can’t measure
- Peter F Drucker
• In God we trust, all others must bring data
- W Edwards Deming
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WHAT IS BALANCED SCORECARD
• Limitation of Financial Metrics to measure performance in the organization
• Financial statements look backwards reflecting the past• Financial Control Systems developed during industrial age to facilitate and
monitor efficient allocation of financial & physical capital • Difficulties in placing a reliable financial value on long term value creating
assets such as:• New product pipeline• Process capabilities• Employee skills, motivation & flexibility• Customer loyalty• ……………………
• Business imperative to build long-range competitive capabilities
• Islands of excellence in the organization
M R NAIDU 5
• “Corporate Scorecard” with financial and non-financial measures used in Analog Devices created by Art Schneiderman in 1987.
• Multi-company study “Measuring performance in the organization of the future” sponsored by Nolan Norton Institute in 1990 with David Norton as study leader and Robert Kaplan as academic consultant.
• Findings of the study was summarized in an article “The Balanced Scorecard – Measures that drive performance” in Harvard Business Review Jan – Feb 1992 issue.
• The collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has created a new synthesis:
The Balanced Scorecard
M R NAIDU 6
• The Balanced Scorecard is an organizational performance measuring &
management system to realize strategic objectives.
• It compliments financial measures of past performance with measures
of the drivers of future performance and captures critical value
creation activities of the organization
• Objectives and measures in the Balanced Scorecard:-
• are derived from organization’s Vision, Mission & Strategy
• view organizational performance from 4 perspectives:-
• FINANCIAL
• CUSTOMER
• INTERNAL BUSINESS PROCESS
• LEARNING AND GROWTH
M R NAIDU 7
• Business Strategy is translated into tangible objectives and measures
• The measures represent a balance between
• External measures for shareholders and customers
• Internal measures of critical business processes and learning & growth
• The measures are balanced between
• Outcome measures – results from past efforts – lagging indicators
• Measures that drive future performance – performance drivers – leading
indicators
• Objective Measures – easily quantified outcome measures
• Subjective Measures – somewhat judgmental, performance drivers of the
outcome measures
• Financial, non-financial measures and short-term, long-term measures
M R NAIDU 8
.
• The Balanced Scorecard identifies the factors that create long-term economic value in an organization, for example:
• Customer Focus: satisfy, retain and acquire customers in targeted segments
• Business Processes: deliver the value proposition to targeted customers
• innovative products and services
• high-quality, flexible, and responsive operating processes
• excellent post-sales support
• Organizational Learning & Growth:
• develop skilled, motivated employees;
• provide access to strategic information
• align individuals and teams to business unit objectivesProcesses
Customers
People
M R NAIDU 9
CLARIFYING AND TRANSLATING THE VISION AND STRATEGY• Clarifying the vision• Gaining consensus
STRATEGIC FEEDBACK AND LEARNING• Articulating the shared vision• Supplying strategic feedback• Facilitating strategy review
and learning
COMMUNICATING AND LINKING• Communicating and
educating• Setting goals• Linking rewards to
performance measures
PLANNING AND TARGET SETTING
• Setting targets• Aligning strategic initiatives• Allocating resources• Establishing milestones
BALANCED SCORECARD
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TRANSLATING STRATEGY INTO ACTION
M R NAIDU 12
VISION
MISSION
STRATEGY
STRATEGIC
GOAL
STRATEGIC
GOAL
STRATEGIC
GOAL
OBJECTIVE
MEASURE
TARGET
OBJECTIVE
MEASURE
TARGET
OBJECTIVE OBJECTIVE OBJECTIVE OBJECTIVE
MEASURE MEASURE MEASURE MEASURE
TARGET TARGET TARGET TARGET
What we aspire to be WHY
What we do HOW
How we accomplish our Goals
End Result S.M.A.R.T GOAL
Specific Result
Indicator of Progress
Specific Result
M R NAIDU 13
GOAL OBJECTIVE MEASUREMENT TARGET INITIATIVE
Achieve OEE 85%OEE = A x P x QA = AvailabilityP = PerformanceQ = Quality
= Net operating time / Planned operating time
= Ideal cycle time / actual cycle time
= Good units produced / Total units produced
Reduce cycle time
Number of breakdowns
1 per quarterPreventive
Maintenance
Reduce equipment downtime
Increase First Pass Yield
First Pass UnitsTotal production
99.50%TQM / Six Sigma
/ Lean
Total OutputTotal Production
Time25 / Hour
Processre-engineering
M R NAIDU 14
Detailed statement of what is critical to
successfully achieve the strategic goal
The level of performance or rate of improvement
needed
How success in achieving the strategy will be
measured and tracked
Key action programs required to achieve
objectives
OBJECTIVE
DESCRIPTIONMEASURE TARGET INITIATIVE
Eliminate waste, reworks, and other errors in our
processesNumber of reworks
2 per setup for each process
Lean / six sigma
OB
JE
CT
IVE
S
ME
AS
UR
ES
TA
RG
ET
S
INIT
IAT
IVE
S
FINANCIAL
To succeed
financially, how
should we
appear to our
shareholders?
To satisfy our
shareholders
and customers,
what business
processes must
we excel at?
INTERNAL BUSINESS PROCESS
OB
JE
CT
IVE
S
ME
AS
UR
ES
TA
RG
ET
S
INIT
IAT
IVE
S
CUSTOMER
To achieve our
vision, how
should we
appear to our
customers?
OB
JE
CT
IVE
S
ME
AS
UR
ES
TA
RG
ET
S
INIT
IAT
IVE
S
LEARNING AND GROWTH
To achieve our
vision, how will
we sustain our
ability to
change and
improve?O
BJ
EC
TIV
ES
ME
AS
UR
ES
TA
RG
ET
S
INIT
IAT
IVE
S
VISION
MISSION
STRATEGY
M R NAIDU 15
M R NAIDU 16
FINANCIAL
CUSTOMER
INTERNAL BUSINESS
PROCESSES
LEARNING AND
GROWTH
Maximize
Shareholder
Value
Exceed
Customer
Expectations
Inspire
Customer
Loyalty
Create High
Quality
Products
Train
Employees
Maximize
Operational
Effectiveness
Create
Quality
Partnerships
Recruit
Quality Staff
TRANSFORMATION STRATEGY• Effectiveness• Synergy• MEDIUM RISK
OPERATIONAL STRATEGY• Operational Efficiency• Robust Systems & Processes• LOW RISK
BREAK POINT STRATEGY• Innovation• Latent Needs• Redefine Value Proposition• HIGH RISK
TRANSFORMATION STRATEGY• Effectiveness• Synergy• MEDIUM RISK
BUSINESS GROWTH
EXISTING NEW
EXISTING
NEW
PRODUCTS & SERVICES
MA
RK
ET
S
EXISTING NEW
EXISTING
NEW
MA
RK
ET
S
PRODUCTS & SERVICES
M R NAIDU 17
MEASURING BUSINESS STRATEGY
M R NAIDU 19
REVENUE GROWTH & MIX
COST REDUCTION /
PRODUCTIVITY
IMPROVEMENT
ASSET UTILISATION
STRATEGIC THEMESB
US
INE
SS
ST
RA
TE
GY
HA
RV
ES
TS
US
TA
ING
RO
WT
H • Sales Growth % in each Segment• % of Sales from New
• Products / Services• Customers
• Revenue / Employee • Investment as % of Sales• R & D Expenditure as % of
Sales
• Share of targeted Custmrs & Accounts• Cross Selling• % Sales from New Applications• Customer & Product Line Profitability
• Customer & Product Line Profitability
• % of Unprofitable Customers
• Cost vs Competitors’• Cost Reduction Rates• Indirect Expenses as a %
of Sales
• Unit Costs (per unit of output, per transaction)
• Working Capital Ratios (Cash – to – Cash Cycle)
• ROCE by Key Asset Categories• Asset Utilization Rates
• Payback period• Throughput
MARKET
SHARE
CUSTOMER
PROFITABILITY
CUSTOMER
RETENTION
CUSTOMER
ACQUISITION
CUSTOMER
SATISFACTION
M R NAIDU 20
M R NAIDU 21
VALUE PRODUCT / SERVICE ATTRIBUTES= IMAGE+ + RELATIONSHIP
FUNCTIONALITY QUALITY PRICE TIME
Product Failure Index
Customer NeedSatisfied
M R NAIDU 22
Innovation Process Operations Process Post-Sale Service Process
• Development Cycle Time
Relevant Metrics
• Quality / Defects• MCE
• Delivery Cycle Time
• Service Satisfaction
Customer Need Identified
Manufacturing Cycle Effectiveness (MCE) =Processing TimeThroughput time
Throughput Time = Processing Time + Inspection Time + Movement Time + Waiting / Storage Time
MCE 0 Inefficient ProcessMCE 1 Efficient Process
Identify the Market
Create the Product/Service Offering
Build the Products /
Services
Deliver the Products /
Services
Service the Customer
Results
Employee Productivity
Employee Retention
Employee Satisfaction
Staff Competencies
Technology Infrastructure
Climate for Action
Enablers
M R NAIDU 23
M R NAIDU 24
STAFF COMPETENCIESTECHNOLOGY INFRASTRUCTURE
CLIMATE FOR ACTION
Strategic skills Strategic technologies Key decision cycle
Training levels Strategic databases Strategic focus
Skill leverage Experience capture Staff empowerment
Proprietary software Personal alignment
Patents, copy rights Morale
Teaming
LINKING BALANCED SCORECARD MEASURES TO STRATEGY
• CAUSE-AND-EFFECT RELATIONSHIP
• PERFORMANCE DRIVERS
• LINKAGE TO FINANCIALS
• If we increase employee training about products, then they will become more knowledgeable about the full range of products they can sell;
• If employees are more knowledgeable about the products, then their sales effectiveness will improve;
• If their sales effectiveness improves, then the average margins of the products they sell will increase.
• Every measure selected for a Balanced Scorecard should be an element of a chain of cause-and-effect relationships that communicates the meaning of the business unit’s strategy to the organization
M R NAIDU 26
M R NAIDU 27
DRIVERS(Lead Indicators)
MODERATORS(Lag Indicators)
OUTCOMES
CYCLE TIMES• Customer Order
Fulfilment• Product Manufacturing
Cycle Time at each process / stage
CUSTOMER SATISFACTION
MANUFACTURING COST PER UNIT
QUALITY• Defects / Reworks• Scrap / Waste
ROA
EVA
EPS
• LAGGING INDICATORS
• Output oriented, easy to measure but hard to improve or influence
• Generally they are generic in nature
• Example. Revenue, Costs, Profits. Compliance to SLA
• LEADING INDICATORS (PERFORMANCE DRIVERS)• Input oriented hard to measure but easy to influence
• Performance Drivers are unique for each organization and within an organization for each business.
• Example. SLA of a service department• Staff should work on incidents immediately
• Incidents are assigned to the right person with right skills
• Work load distributed rationally without over burdening a few
M R NAIDU 28
OBJECTIVE / METRIC UOM PY - ACTUAL TARGET / MEASURE OF ACHIEVEMENT
TARGET DATE
REMARKSFI
NA
NC
IAL 1.Sales Growth
2.P/V Ratio % 28.00 33.00 31-03-2020 COO
3.EBIDTA
CU
STO
MER 1. Market Share % 15.00 17.00 31-03-2020 VP-Mktg
2.New Customers
3.Customer Satisfaction
INTE
RN
AL
PR
OC
ESSE
S 1. BOM Cost Rs/Lt 100.00 97.00 31-12-2019 VP – OP
2.Boiler Efficiency
3.Power Load Balancing
LEA
RN
ING
&
GR
OW
TH 1. Process Ownership Score 84.00 87.00 31-03-2020 VP-HR
2.Employee Turnover
3.Training
M R NAIDU 29
1. LEADERSHIP FROM THE
TOP
• Create the climate for change
• Create a common focus for
change activities
• Rationalize and align the
organization
2. MAKE STRATEGY
EVERYONE’S JOB
• Comprehensive
communication to create
awareness
• Align goals and incentives
• Integrate budgeting with
strategic planning
• Align resources and initiatives
4. MAKE STRATEGY A
CONTINUOUS PROCESS
• Strategic feedback that encourages
learning
• Executive teams manage strategic
themes
• Testing hypotheses, adapting and
learning
3. UNLOCK AND FOCUS HIDDEN
ASSETS
• Reengineer work processes
• Create knowledge sharing
networks
FORMULATE
EXECUTE
COMMUNICATE NAVIGATE
M R NAIDU 30
PROCESS
• Middle management task force
• Not driven by senior executive team
• Only one or few individuals involved
• Too long a development process (allowing the “best” to be the enemy of the “good”)
• Delay introduction because of missing measurements
• Static not dynamic process
• Treating the BSC as an EIS
PHILOSOPHY
• Measurement to control; not to communicate
• Management dictating actions vs employee improvisation to achieve desired outcomes
• For management only, not shared with all employees
M R NAIDU 31
Strategic PlanAnnual Budget
Corporate BSC
Functional BSC
MonitoringAudit of
Final Score
Strategic Business Plan for next five years and Business Plan for current yearAnchor & Coordinate
Identify Performance Drivers and Define their measurement processFull Responsibility
BRMs Help compile Monthly Progress Reports
Audit & Finalize Score Full Responsibility
M R NAIDU 32
M R NAIDU 33