Building Strategy With Balanced Scorecard

Building Strategy Focused Organizations

with the Balanced Scorecard

Dr. Robert S. Kaplan

Marvin Bower Professor of Leadership Development

HARVARD BUSI(ESS SCHOOL

and

Chairman

BALA(CED SCORECARD COLLABORATIVE

The Balanced Scorecard Describes How the Strategy Will Be Executed

Strategic Theme: Internal Product DevelopmentF

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Annual Revenue Growth

Percent Revenues from New Products

Revenue Growth

Innovative

Strategy Map Objective Measure Target Initiative

Customer Retention

Grow Revenue from new products

Satisfy Customer Needs for State-of-Art Capabilities

+25%

30%

80%

xx

xx

Relationship Management Program

22002 Balanced Scorecard Collaborative, Inc and Robert S. Kaplan. All rights reserved.

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Development

Stable High-Talent

Workforce

Innovative Products Share of Account

Product Functionality

Time to Market

Specialized Competency Availability

Key Staff Retention

of-Art Capabilities

Accelerate New Product Development

Acquire, Develop and Retain Strategic Skills

40%

#1 in indy.

9 mos.

100%

95%

Gain Sharing Program

University Liaison/ Technology Transfer

Development Cycle Time Reengineering

Competency Model New Hiring Program

Supervisory Training Benefits Program

Balanced Scorecard Users Have Been Executing Their Strategies Reliably and Rapidly

1993 $275 loss1998 Top Quartile

$3b spin-off

Saatchi & Saatchi

CIG(A Property & Casualty

ATT Canada

Shareholder Value:1997 $500m2000 $2.5b

1995 $300M loss1998 Customer base doubles1999 $7b spin-off

1993 Last in industry1995-99 #1 in profitability

Mobil: (orth America


UC / San Diego

Southern Citrus

2000 $2.5b

Winner of 1999 RIT / USA Today Quality Cup for Education

1995 1998

1999 $7b spin-off

Shipments on Spec Rework Absenteeism Cost per Pound ()

70%6%

10%29

97%2%1%19

Duke Childrens Hospital

Cost per patient Length of stay Net margin Customer Satisfaction

33%31%

+$15M#1

GTE (Verizon) Human Resources

Reduced employee turnover during merger

+ $23M

Balanced Scorecard Hall of Fame: (orth America


Balanced Scorecard Success Stories: Europe

ABB SwitzerlandABN / Amro

Borealis

British Broadcasting Corp.Bank of Ireland


British Telecom

Coca-Cola / SwedenGeneral Motors of Europe

Shell InternationalSiemens / Germany

Whirlpool of EuropeWinterthur

A Gap Existed Between Mission-Vision-Strategy and Employees Everyday Actions

MISSIONWhy we exist

VALUESWhats important to us

VISIONWhat we want to be

STRATEGYOur game plan


EMPOWERMENT / PERSONAL OBJECTIVESWhat I need to do

TOTAL QUALITY MANAGEMENTWhat we must improve

The Balanced Scorecard Links Vision and Strategy to Employees Everyday Actions

BALANCED SCORECARDTranslate, Focus and Align

MISSIONWhy we exist

VALUESWhats important to us

VISIONWhat we want to be

STRATEGYOur game plan


Translate, Focus and Align

STRATEGIC INITIATIVESWhat are the priorities

STRATEGIC OUTCOMES

SatisfiedSHAREHOLDERS

Delighted CUSTOMERS

Efficient and EffectivePROCESSES

Motivated & PreparedWORKFORCE

EMPOWERMENT / PERSONAL OBJECTIVESWhat I need to do

TOTAL QUALITY MANAGEMENTWhat we must improve

Strategy Execution is the #1 (on-Financial Factor Driving Shareholder Valuations

1. Strategy Execution

35% of valuation decision is based on

non-financial data The Non-Financial Factors That Influence Shareholder Valuations


1. Strategy Execution2. Management Credibility3. Quality of Strategy4. Innovation (New Products)5. Attract Talented People

Source: Measures That Matter, Ernst & Young LLP, 1998

The Principles of a Strategy-Focused Organization

TRANSLATE TRANSLATE STRATEGYSTRATEGY

EXECUTIVE EXECUTIVE LEADERSHIPLEADERSHIP

CEO Sponsorship Executive Team Engaged New Way of Managing Accountable for Strategy A Performance Culture

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives BALANCED SCORECARD


CONTINUAL CONTINUAL PROCESSPROCESS

ORGANIZATION ORGANIZATION ALIGNMENTALIGNMENT

EVERYONES EVERYONES JOBJOB

Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process

Corporate Role Corporate - SBU SBU - Shared Services External Partners

Strategic Awareness Goal Alignment Linked Incentives

SCORECARD

Principles of the Strategy Focused Organization:TRA(SLATE THE STRATEGY TO OPERATIO(AL TERMS

Measurement is the language that gives clarity to vague concepts.

"If we succeed, how will we look to our shareholders?

The Strategy

Financial Perspective

Customer Perspective

#1


Measurement is used to communicate, not to control.

Strategy can be described as a series of cause and effect relationships

"To achieve my vision, how must I look to my

customers?


"To satisfy my customer, at which processes must

I excel?

Internal Perspective

"To achieve my vision, how must my organization learn

and improve?

Organization Learning

A Strategy Map Describes How The Organization Intends to Create Value

Traditional financial framework for describing shareholder value creation

Customer value proposition establishes context for value

Long Term Shareholder Value

Financial

Customer

New Revenue Sources

Increase Customer

ValueImprove Asset

UtilizationImprove Cost

Structure

Customer Value Proposition

Price Quality

Timeliness Features

Service Relationships

Brand


establishes context for value

Internal processes describe how value is created and sustained

Role & status of intangible assets people, systems, alignment - is articulated

Internal

Learning & Growth Strategic

CompetenciesStrategic

TechnologiesLeadership & Governance

Climate for Action

Innovation Process

Customer Management

Process

Operations Process

Social & Environmental

Processes

Increase Customer

Value

Build the Franchise

Provide Operational Excellence

Be a Good Citizen

Quality Features Relationships

Internal Processes Deliver Value Over Different Time Horizons

Strategic ObjectiveSustained Growth in Shareholder Value

Customer Management

Strategies

Operational Effectiveness

Strategies

Product Innovation Strategies

short-wave long-wave

mid-wave1-2 yrs 3-5+ yrs2-3 yrs


Time (years)

Shareholder Value

($)

1 2 3 4 5

product innovation

customer management

operational effectiveness

Increase ROCE to 12%Revenue Growth Strategy Productivity Strategy

New Sources of Non-Gasoline Revenue

Increase Customer Profitability Through

Premium BrandsBecome Industry

Cost LeaderMaximize Use of Existing Assets

ROCENet Margin (vs. industry)

Non-Gasoline Revenue & Margin

Volume vs. Industry Premium Ratio

Cash Expense (cpg) vs. Industry

Cash Flow

Speedy Purchase

Clean Safe Quality Product Trusted Brand

Friendly Helpful Employees



Help Develop Business

Skills

More Consumer Products

Recognize Loyalty

Share of Targeted Segment

Mystery Shopper Score

Dealer Profit Growth

Dealer Satisfaction

Differentiators

Delight the Consumer Win-Win Dealer RelationsBasic

Mobil (AM&R Strategy Map


Create Non-Gasoline

Products & Services

Build the Franchise Increase Customer Value Achieve Operational Excellence Be a Good Neighbor

Improve Environmental,

Health and Safety

Understand Consumer Segments

Best-In-Class Franchise

Teams

Improve Hardware

Performance

Improve Inventory

Management

On-SpecOn-Time

Industry Cost Leader

New Product Acceptance Rate Environment

Incidents Safety Incidents Dealer Quality

Rating

Yield Gap Unplanned

Downtime

Inventory Levels

Run-Out Rate

Activity Cost vs. Competition


A Motivated and Prepared Workforce

Aligned Personal Growth

Climate for Action Functional Excellence Leadership Skills Integrated View

Competencies Process Improvement

Technology

Personal BSC Employee Feedback

Strategic Skill Coverage Ratio

Systems Milestones

Learning & Growth Perspective

(ew Source of Revenues and Customer Loyalty Attractive Convenience Store


Add & Retain High

Value Customers

Migrated New

Value PropositionBasic Requirements Differentiators

Grow Revenue Maximize Profit Reduce Cost Per CustomerIncrease

Revenue/ Customer

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Add and Retain High Value and High Potential Value

CustomersIncrease Revenue

per CustomerReduce Cost per Customer

Internet Banking Company:Add and Retain High Value Customers Theme


Time Savings Security Price Reliability

Multiple Channels Service Features/Ease of Use Products

Basic Requirements Differentiators

Maximize

Reliability

Manage

Attrition

Effective Marketing Programs

Develop Superior Products

and FeaturesDevelop Superior Service

Attract and Retain Key Employees

Enhance Bench

Strength and Succession

Planning

Increase Managerial &

Technical Competencie

s

Develop Organizatio

n and Culture

Deploy Scorecard

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Grow Revenue Maximize Profit Reduce Cost Per CustomerIncrease

Revenue/ Customer

Cross-Sell Existing

Products/ Services

Grow Revenues from New

Services

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Internet Banking Company:Increase Revenue per Customer Theme



Enhance Bench


Planning


Technical Competencie

s

Develop Organizatio

n and Culture

Deploy Scorecard

Increase Fees

and Balance

s

Develop Individualized

Marketing Programs

Develop Third Party

Relationships

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Grow Revenue Maximize Profit Reduce Cost Per Customer

Migrate Customers to OFS

Migrate Mass Increase

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Internet Banking Company: Reduce Cost per Customer Theme

Increase Revenue

Per Customer



Enhance Bench


Planning


Technical Competencies

Develop Organizatio

n and Culture

Deploy Scorecard

Mass Consumer

s to On-line

Increase Customers Use of On-Line

Increase Efficienc

yManage Alliance Costs

Develop Customer

Self-Service

Develop Custome

r Self-Help

Automate OFS

Processes

Streamline Manual

Processes

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Add & Retain High Value Customers

Migrated New

Value PropositionBasic Requirements Differentiators

Grow Revenue Maximize Profit Reduce Cost Per Customer for the BankIncrease

Revenue Per

Customer

Cross-Sell Existing Products

and Services

Grow Revenues from New Products

and Services

Migrate Wells Fargo Customers

to OFS

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Online Financial Services: Complete Strategy Map


Time Savings Security Price Reliability

Multiple Channels Service Features/Ease of Use Products

Basic Requirements Differentiators

Maximize

Reliability

Manage

Attrition

Implement Cost

Effective Marketing Programs

Enhance Product and

FeaturesDevelop Superior Service

Capability


Enhance Succession

Planning

Increase Manager and

Employee Competencies

Develop Organization and Culture

Deploy Scorecard throughout

Division

Increase Fees and

Balances

Grow Internal

Revenues

Develop Individual Marketing Programs

Develop Third Party

Relationships

Migrate Mass

Consumers to On-line

Increase Customers Use of On-Line

Increase Efficiency

Manage Alliance Costs

Develop Customer

Self-Service

Develop Customer Self-Help

Automate Processes

Streamline Manual

Processes

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City of Charlotte Had a Mission and Vision

Public Service is Our Business

Mission Statement

The mission of the City of Charlotte is to ensure the delivery of quality

public services that promote the safety, health and quality of life of its

citizens. We will identify and respond to community needs and focus on

the customer through:

Creating and maintaining effective partnerships

Attracting and retaining skilled motivated employees

Using strategic business planning.


Using strategic business planning.

Vision Statement

The City of Charlotte will be a model of excellence that pu ts the citizens

first. Skilled , motivated employees will be known for provid ing quality

and value in all areas of service. We will be a platform for vital

economic activity that gives Charlotte a competitive edge in the

marketplace. We will partner with citizens and businesses to

make this a community of choice for living, working and

leisure activities.

Charlotte: Five Strategic Themes

Community Safety

Transportation

City Within a City


City Within a City

Restructuring Government

Economic Development


Reduce Crime

Increase Perception

of Safety

Availability of Safe, Convenient

Transportation

Maintain CompetitiveTax Rates

Improve Service Quality

Promote Economic

OpportunityStrengthen

Neighborhoods

Community Safety

City Within a City

Restructuring Government Transportation


The Corporate Level Scorecard

City of Charlotte: City Council Focus Areas


Financial Accountability Perspective

ExpandNon-CityFunding

MaximizeBenefit/Cost

Grow Tax Base

Maintain AAA Rating

Learning and Growth Perspective

Enhance Knowledge

Management Capabilities

Close Skills Gap

Achieve PositiveEmployee

Climate

Internal Process Perspective

StreamlineCustomer

Interactions

Improve Productivity

IncreasePositiveContacts

Secure Funding/Service

Partners

Promote Community

Based Problem Solving

Increase Infrastructure

Capacity

Promote Business

Mix

Strategy Stakeholder KPI

Several Different Types of Balanced Scorecards Have Emerged in Practice


Strategy Card

StakeholderCard

KPICard

A KPI Scorecard: The Four Ps

Profits

Portfolio (loan volume)

Process (ISO certification)


People (diversity)

Whats missing from the 4Ps KPI scorecard?

Where are the customers?

What is the value proposition?

How does ISO certification lead to increases in loan

volume?


How does a more diverse work force lead to ISO

certification?

Is there no role for information technology?

Is innovation not important?

A Good Balanced Scorecard Tells the Story of Your Strategy

Every measure is part of a chain of cause and effect linkages

All measures eventually link to organizational outcomes


All measures eventually link to organizational outcomes

A balance exists between outcome measures (financial, customer) and performance drivers (value proposition, internal processes, learning & growth)













SCORECARD

Principles of the Strategy Focused Organization:LI(K A(D ALIG( THE ORGA(IZATIO( AROU(DITS STRATEGY

#2

LINE BUSINESSES SUPPORT UNITS

CORPORATE

SBUA

SBUB

SBUC

SBUD

CORPORATE SCORECARD(Shared Strategic Agenda)

Themes Measures

EXTERNAL PARTNERS

Customer Scorecards

#1. A Corporate Scorecard defines

overall strategic priorities.

#3. Each Support Unit develops a

plan and BSC for best practice sharing to create synergies across SBUs.

1. Financial Growth

2. Delight the Consumer

xxx

xxx

Finance

Marketing


Strategies Are Executed Through Business Units. The Strategies of the Business Units Must Be Integrated If Organization Purpose and Synergies Are to Be Achieved.

Distributor Scorecard

Joint Venture Scorecard

Vendor Scorecard

New Venture Scorecard

Outsourcer Scorecard

#2. Each SBU develops a

long-range plan and BSC consistent with corporate

strategic agenda.

#4. Plans and BSCs define

relationships with external partners consistent with

SBU strategy.

3. Win-Win Relationships

4. Safe & Reliable

5. Competitive Supplier

6. Good Neighbor

7. Motivated & Prepared

8. Quality

xxx

xxx

xxx

xxx

xxx

xxx

xx xx xxxx

Distribution

Procurement

Purchasing

Safety

Human Resources

Information Technology

ConglomerateIndependent Operating Companies

PerformanceChemicals

IndustrialChemicals

Machinery& Equipment

DefenseSystems

FMC


AgriculturalFood IngredientsPharmaceuticalLithium

AlkaliPeroxynPhosphorus

EnergyFoodMachineryTransportation

GroundSystemsArmaments

No Corporate Balanced Scorecard Each Operating Company Develops an Independent BSC for its

Strategy and Operations

Saatchi & Saatchi: Achieve Worldwide Alignment

Common Client Objective: Create PICS (Permanently Infatuated Clients)

A lead office is an ideas company, one that is capable of transforming our clients businesses,


capable of transforming our clients businesses, brands, and reputations!

All country offices must be capable of creating and delivering traditional advertising, with best-in-category creative capabilities, before becoming a lead office.

Saatchi & Saatchi: Achieve Worldwide Alignment

Common Client Objective: Create PICS

(Permanently Infatuated Clients)

Three types of country offices, each with own BSC

strategy map template

1. Lead Markets (US, UK): Product Leadership

Award winning, creative shops


Award winning, creative shops

2. Prosper Markets (Continental Europe):

Operational Excellence

Reverse losses, become financially viable,

support global clients in local country

3. Drive Markets (Developing nations (Brazil))

Establish presence



Reduce Crime

Increase Perception of Safety

Availability of Safe, Convenient

Transportation

Maintain CompetitiveTax Rates

Improve Service Quality

Promote Economic

OpportunityStrengthen

Neighborhoods

ExpandNon-CityFunding

MaximizeBenefit/Cost

Grow Tax Base

Maintain AAA Rating

Charlotte Dept. of Transportation Identified its Objectives from the City Scorecard


Internal Process Perspective

Learning and Growth Perspective

Enhance Knowledge


Close Skills Gap

Achieve PositiveEmployee

Climate

StreamlineCustomer

Interactions

Improve Productivity

IncreasePositiveContacts

Secure Funding/Service

Partners

Promote Community



Capacity

Promote Business

Mix

CustomerMaintain thetransportation

system

Operate thetransportation

system

Develop thetransportation

system

Determineoptimal system

design

Improveservicequality

Expand non-City funding

Maximizebenefit/costFinancial

CDOT Balanced Scorecard


Increaseinfrastructure

capacity

Securefunding/service

partners

Improveproduct ivity

Increasepositivecontacts

Enhanceautomated

info systems

Enhancefield

technologyClose skills

gapEmpoweremployees

Internal Process

Learning

Perspect iv e O bject iv e Lead Measure Lag Measure

Custom er

C-1 Main ta in th e tran sp or ta tion system

C-2 Op era te th e tran sp or ta tion system

C-3 Develop th e tran sp or ta tion system

C-4 Determ in e th e op tim al system d esign

C-5 Im p rove serv ice qu ality

C-6 Stren g th en n eighborh ood s

C-1 Repair Response : rep a ir resp on se action

C-1 Travel Speed : average travel sp eed by

facility an d selected loca tion

C-2 O n-Tim e Buses : p u blic tran sit on -tim e

C-3 Program s Introduced : n ew ly in trod u ced

p rogram s, p ilots, or p rogram sp ecifica tion s

C-5 Responsiveness : % of citizen com p la in ts

an d requ ests resolved a t th e CDOT level

C-6 Issue Response: d efin ed situ a tion s

w h ere CDOT id en tifies, resp ond s to

n eigh borh ood tra ffic & m obility issu es

C-1 H igh Q uality S treets : con d ition of lan e

m iles 90 ra tin gC-2 Safe ty : city -w id e accid en t ra te; n o. of

h igh accid en t loca tion s

C-3 Basic M obility : ava ilability of tran sit

C-4 Plan Progress : % com p lete on 2015

Tran sp or ta tion Plan

C-5 Com m ute Tim e : average comm u te

tim e on selected road s

C-6 ( eighborhood-O riented Program s:

p rogram s im p lem en ted as a resu lt of

Comm un ity -based p roblem solv in g

F-1 Exp and n on -City fu n d in g F-1 Funding Leverage : d olla r va lu e from

Charlotte Dept. of Transportation:Balanced Scorecard


Financial

F-1 Exp and n on -City fu n d in g

F-2 Maxim ize ben efit / cost F-2 Costs : costs com p ared to oth er m u n icip a l-

ities an d p r iva te sector com p etition

F-1 Funding Leverage : d olla r va lu e from

n on -City sou rces

F-1 ( ew Funding Sources : d olla r va lu e

from sou rces n ot p rev iou sly ava ilable

Internal Process

I-1 Ga in in frastru ctu re cap acity

I-2 Secu re fu n d ing / serv ice p ar tn ers

I-3 Im p rove p rod u ctiv ity

I-4 In crease p ositive con tacts w ith Comm un ity

I-1 Capital Investm ent: $ alloca ted to cap ita l

p rojects in ta rgeted areas

I-2 Leverage funding /serv ice partners : n ew

fu n d ing / resou rce p ar tn ers id en tified

I-3 Cost per U nit: cost p er u n it

I-3 Com petitive Sourcing : % of Bu d get bid

I-3 Problem Identification : sou rce & action

I-4 Custom er Com m unications : n o.,typ e,freq .

I-1 Capacity Ratios : in crem en ta l cap acity

bu ilt vs. requ ired by 2015 Plan

I-2 ( o. o f Partners : n um ber of p ar tn ers

I-3 Street M aintenance Cost: cost/ lan e m i.

I-3 Transit Passenger Cost:cost/ p assger

I-4 Custom er Surveys : su rvey resu lts

con cern in g serv ice qu a lity

Learning

L-1 Enhan ce au tom ated in form ation system s

L-2 Enhan ce field tech nology

L-3 Close th e skills gap

L-4 Em p ow er em p loyees

L-1 IT Infrastructure : com p lete rela tiona l

d a tabase across CDOT

L-3 Skills Identified : key sk ills id en tified in

stra teg ic fu n ction s

L-4 Em ployee Clim ate Survey : resu lts of

em p loyee su rvey

L-1 In form ation A ccess : stra teg ic In form a-

tion ava ilable vs. u ser requ irem en ts

L-2 Inform ation Tools : stra teg ic tools

available vs. u ser requ irem en ts

L-3 Skills Transfer: sk ill ev id en ce in job

L-4 Em ployee G oal A lignm ent: tra in ing /

ca reer d evelopm en t a lign ed w / M ission

Principles of the Strategy-Focused Organization:LI(K A(D ALIG( THE ORGA(IZATIO( AROU(D ITS STRATEGY


CORPORATE

SBUA

SBUB

SBUC

SBUD


Themes Measures

EXTERNAL PARTNERS





1. Financial Growth xxx Finance


Customer Scorecards



Vendor Scorecard





strategic agenda.



SBU strategy.



4. Safe & Reliable


6. Good Neighbor


8. Quality

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xx xx xxxx

Marketing

Distribution

Procurement

Purchasing

Safety

Human Resources


Shared (Corporate) Services

We have done very little to define our strategy for corporate staffutilization. How does staff provide competitive advantage? Arethey offering low cost or differentiated services. If they areoffering neither, we should probably outsource the function.


-Larry D. BradyPresident FMC Corporation

Creating Shared Service Unit Linkages

Shared Service UnitShared Service UnitSBUSBU

Linkage ScorecardLinkage Scorecard

Define the SBU objectives and measures that the support unit is expected to help achieve.

Shared Service Unit Shared Service Unit

33

22


Shared Service Unit strategies and scorecards must also reflect the linkage to its internal customers

Shared Service Unit Shared Service Unit Scorecard Scorecard

A Business In a BusinessA Business In a Business

Financial

L&G

Customer InternalMission

Service Agreement

Customer Satisfaction Feedback 44

11

BUSINESS UNITS SHARED SERVICES

CORPORATE

SBUA

SBUB

SBUC

SBUD


Themes Measures

Convenience Store Marketing

Gasoline Marketing

Manufacturing Services

Supply Programs

Environment and Safety


1. Financial Growth


3. Win-Win Relationship

4. Safe and Reliable


6. Good Neighbor

7. Quality

xxx

xxx

xxx

xxx

xxx

xxx

xxx

}}}}}}

{{{{{{

Align & Integrate Support Units - Human Resources -with the Strategy


Human Capital Readiness Report

HR Organization Scorecard


Human Resources

7. Quality8. Motivated and Prepared

xxx

xxx xx xxxxxx

}}

{{

Define the SBU Human Capital Strategy

What is the impact of human capital on the strategy?

Install Integrated Strategic Management Process

Jointly manage strategic initiatives.

Develop SSU Strategy / Scorecard

Align resources with strategic requirements.

A B C

Human Capital Development

Program

Strategy Focused Management

Process

BThe Enterprise Strategy Map The HR Organization Strategy Map

Financials

Customer (External)

Internal Processes

Shareholder Value

Growth Productivity

Customer Value Proposition

Innovation Customer ManagementOperations Excellence

Good Neighbor

Shareholder Value

Financials

HR Effectiveness

HR Efficiency

Linking the HR Organization to Enterprise Strategy


Human Capital Readiness Report

Human Capital Development

Program

Learning & Growth

Strategic Skills

Leader-ship Culture

Align-ment Learning

Strategic Human Capital Planning

Strategic HR Management

Clients & Employees

HR Processes

HR Org. Learning & Growth

Strategic Skills

Leader-ship Culture

Align-ment Learning

Competency Development

Leadership Development Climate

Goals & Incentives

Teams & Integration

HR Skills & Leadership HR Systems HR Climate

Principles of the Strategy-Focused Organization:LI(K A(D ALIG( THE ORGA(IZATIO( AROU(D ITS STRATEGY


CORPORATE

SBUA

SBUB

SBUC

SBUD


Themes Measures

EXTERNAL PARTNERS





1. Financial Growth xxx Finance


Customer Scorecards



Vendor Scorecard





strategic agenda.



SBU strategy.

1. Financial Growth



4. Safe & Reliable


6. Good Neighbor


8. Quality

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xx xx xxxx

Finance

Marketing

Distribution

Procurement

Purchasing

Safety

Human Resources


Defining the Balanced Scorecard for Strategic Themes: Managing the Virtual Organization

Executive Teams Manage Strategic

Themes

MayorCity Council

City Manager

Business UnitsSupport Units Leadership Team

Strategic Themes Aviation

Planning Budget &

Evaluation

City Within A CityCity Within A City

Strengthen Neighborhoods

Financial


Expand Grow Tax


Community Safety

City in a City

Transport-ation

Restructuring Government


Planning Commission

Police

Utilities Engineering &

Property Mgmt. Fire

Neighborhood Development

Solid Waste Services

Transportation

Business Support Services

Finance

Human Resources

Learning & Growth

Perspective

Internal Process

Perspective


Expand New-City Funding

Grow Tax Base

Secure Funding/ Service Partners

Promote Community



Capacity

Enhance Knowledge


Close Skills Gap

Achieve Positive

Employee Climate

Washington State: The Salmon Recovery Problem

Endangered Species Listing of 18 Species Federal Approval of Recovery Plans -- oror

no government or private entity make take any salmon - - thusthus


no government or private entity make take any salmon - - thusthus forestry, agriculture, hydro power production, transportation

improvements and land use changes stopped or curtailed i.e.. A train wreck

Fractured governance - who is in charge?

Salmon Recovery RegionsAreas with Salmon, Trout, or Steelhead that are Listed, Proposed for Listing, or have a High

Potential for Future Listing Under the Endangered Species Act

Puget Sound Chinook listed as threatened 3/16/99

Hood Canal Summer Chum listed as threatened 3/16/99

Washington

Upper Columbia River

Spring-run Chinook listed as endangered 3/16/99

Steelhead listed as endangered 8/18/97

Bull Trout listed as threatened 6/10/98

Northeast Washington



Washington Coastal

Lake Ozette Sockeye listed as threatened 3/16/99

Lower Columbia River

Chinook listed as threatened 3/16/99 Chum listed as threatened 3/16/99Steelhead listed as threatened 3/19/98Bull Trout listed as threatened 6/10/98

Middle Columbia River Steelhead listed as threatened 3/16/99


Snake RiverSteelhead listed as threatened 8/18/97; Walla Walla County added 3/16/99

Sockeye listed as endangered 4/22/92Spring/Summer-run Chinook listed as threatened 8/22/92

Fall-run Chinook listed as threatened 8/22/92

Bull Trout listed as threatened 6/10/98 New listing as of March 16, 1999 Previous listings

Multiple Governments Involved

Alaska

Canada27

Tribes


Montana

Idaho

Oregon

CA

Tribes

Federal Agencies Involved

Department of Agriculture Natural Resource Conservation Service Forest Service

Department of Commerce National Marine Fisheries Service

Department of Interior Fish & Wildlife Service


Fish & Wildlife Service Bureau of Reclamation

Environmental Protection AgencyState DepartmentCouncil on Environmental Quality

State Agencies Involved

Indirect reporting Direct reportingNatural Resources HealthTransportation EcologyFish & Wildlife AgricultureState Parks Community, Trade and EDNW Power Planning Salmon Recovery Team

Council Puget Sound Water Quality


Council Puget Sound Water QualitySalmon Recovery Conservation Commission

Funding Board Interagency Comm for Outdoor Recreation

Local Governments Involved

39 Counties 277 Cities 44 Sewer Districts 125 Water Districts 36 Irrigation Districts


36 Irrigation Districts 32 Public Utility Districts 14 Port Districts 48 Conservation Districts 170 Municipal Water Suppliers

State & State

Agencies (MFS Salmon

Evolutionarily

Significant Units

Salmon, Bull Trout, Tri-Co

HB2514

WRIA

Planning

HB2496

Restoration

Projects

SRF Board

Water

Legislation

Independent

Science Panel

(MFS Recovery

Team

Salmon Sec

4(d) Rules

Salmon Sec 7

Consultation


FWS Bull Trout

Definable

Population

Segments

(GOs and

Enhancement Groups

Salmon, Bull Trout,

Environmental Quality,

and Hydropower

Development

Watershed

Councils

Tribes

Tri-Co

US/Canada

Treaty

SSHIAP

Early Action

Package

Bull Trout Sec

4(d) Rules

Bull Trout Sec 7

Consultation

Salmon Recovery Scorecard

Goal: Restore salmon, steelhead, and trout populations to healthy and harvestable levels

and improve habitats on which fish rely.

Customer: To protect an important element of Washingtons quality of life We will have productive and diverse wild salmon populations.

We will meet the requirements of the Endangered Species Act/Clean Water Act.

Processes: Our habitat, harvest, hatchery, and hydropower activities

will benefit wild salmon. Freshwater and estuarine habitats are healthy and accessible

Rivers and streams have flows to support salmon.


Rivers and streams have flows to support salmon.

Water is clean and cool enough for salmon

Harvest management actions protect wild salmon.

Enhance compliance with resource protection laws.

Collaboration: We are engaged with citizens and our salmon recovery partners.

We will reach out to citizens

Salmon recovery roles are defined and partnerships strengthened.

Financial and Infrastructure: Our building blocks for success include Achieve cost-effective recovery and efficient use of government resources

Use best available science and integrate monitoring and research with planning and implementation

Citizens, salmon recovery partners and state employees have timely access to the information, technical assistance, and funding they need to be successful.

The Corporate Strategy is communicated to Business Units through key themes, opportunities for integration and synergies, and shared measures

Summary:Top-to-Bottom Strategy Alignment Unleashes Full Organization Potential


Cooperation and greater synergy between business units and staff and shared service functions becomes formalized through the Scorecard













SCORECARD

Top-Down Bridging Bottom-Up Process

CORPSBU

EDUCATION

Principles of the Strategy Focused Organization:MAKE STRATEGY EVERYO(ES EVERYDAY JOB

#3

HR Processes Are Essential for Moving Strategy From the Top to the Bottom


Process To Share the Strategy & Align

the Workforce

Bottom-Up Process to Internalize &

Execute the Strategy

The Strategy Focused Workforce

EDUCATION

PERSONAL GOAL ALIGNMENT

BALANCED PAYCHECKS

Making Strategy Everyones Job

Creating a Climate to Support

Strategic Change

Create Strategic Awareness

1 Insure that each individual has sufficient

understanding of the strategy (You cant execute


Awareness

Align Personal Objectives

Align Incentive Compensation

2

3

understanding of the strategy (You cant execute what you dont understand)

Insure that each individual knows where they fit into the overall game plan

Reinforce desired behavior and increase intensity of awareness

Win/Win RelationshipImprove Dealer/Wholesale Marketer profitability through customer-driven products and services and by developing their business competencies.

Total profit earned at Mobil outlets and split between our dealers/whole-sale marketers and Mobil.

Good NeighborProtect the health and safety of our people, the communities in which we work, and the environment we all share.

Composite of:- reportable releases

to air and water- reportable spills- community reported

incidents.

1993 1994 Target

Environmental Index

On Spec On TimeProvide quality products supported by quality business processes that are on time and done right the first time.

Quality Index Composite of incidents

of:

Safe & ReliableMaintain a leadership position in safety while keeping our refineries fully utilized.

Financially StrongReward our shareholders by providing a superior long-term return which exceeds that of our peers.

Income divided by capital employed

ROCE USM&R Days Away ManufacturingFrom Work Reliability Index

12%

USM&R Strategic Themes ...will guide us to our vision and are defined above each graph.

USM&R Strategic Measures ...that will keep us focused on achieving USM&Rs strategic themes are explained in the graphs and the bulleted text accompanying them.

1993 1994 Target

Dealer/Mobil Gross Profit


1993 1994 Target

of:- product off spec- order shipped late- business process errors- customer complaints- cost of rework.

1993 1994 Target

capital employed including all allocations.

1993 1994 Target 1993 1994 Target

7%

8%

1993 1994 Target

Delight the CustomerUnderstand our consumers needs better than anyone and offer them products and services which exceed their expectations.

Mystery Shopper

The Mystery Shopper program rates how well each of our stations is delivering the best buying experience.

Competitive SupplierProvide product to our terminals at a cost equal to or better than the competitive market maker.

1993 1994 Target

Laid-down Cost

Our cost to deliver product to the terminal vs. lowest cost provider.

1993 1994 Target

Motivated & PreparedDevelop and value teamwork and the ability to think Mobil, act locally.

Climate Survey

Survey of employees to measure how people perceive the Mobil workplace environment.

Employee Innovations: Mobil Speedpass


Building Strategic Awareness Requires a Comprehensive Communications and Education Program

One-on-One / Face-to-Face Communications

Hallway / Coffeepot Communications Small Group Meetings Video Conferencing Telephone Conversations

The Communication Channel The Communication Channel ContinuumContinuum

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Personal Communication

Hilton Hotels

Town Hall Meetings

Mobil NAM&R

E-mail (Open Door)


Reference: Jos Miniace & Elizabeth Falter, Communication: A Key Factor in Strategy Implementation, Planning Review, Jan-Feb, 96.

Voice mail E-mail Large Group Meetings Hand-Written Personal Notes Advanced Copies of Agendas Faxes Interoffice Memos Formal Speeches Letters Newsletters Reports

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E-mail (Open Door) Motorola

Strategy Maps

Ann Taylor

Management Development

Novacor

BSC Newsletter

Rockwater



Strategic Change





Awareness



2

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Insure that each individual knows where he or she fits into the overall game plan


Employee Innovations: Mobil Speedpass






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Town Hall Meetings

Mobil NAM&R

E-mail (Open Door)




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Novacor

BSC Newsletter

Rockwater



Strategic Change





Awareness



2

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A performance model provides the framework for cascading and aligning personal goals

A personal scorecard focuses individuals on the part of the performance model they can impact

Corporate Measures Balanced Scorecard Business Unit Measures Individual Goals1993 1994 1995 1996 1997

100 120 160 180 250

100 450 200 210 225

100 85 80 75 70

Targets Financial1993 1994 1995 1996 1997

Targets

Earnings Net Cash Flow Overhead & Operating Expense

And Near Term Action Steps

1.

Ultimately, Team and Individual Goals and Objectives Are Aligned to the Strategy

Customer Example Financial Example

Corporate Parent

Division Operating Margin CustomerSatisfaction

Operating Margin


100 85 80 75 70

100 75 73 70 64

100 97 93 90 82

100 105 108 109 110

Targets Operating Targets Overhead & Operating Expense

Overhead & Operating Costs Finding & Development Costs Total Annual Production (Indexed: 1993=100)

2.

3.

4.

5.

Corporate Objectives Individual Measures1.2.3.4.5.

Double our value in 10 years. Increase our earnings by an average of 20% a

year Achieve an internal rate of return 2% above the

cost of capital. Reduce our overhead & operating costs by a

further 30% by 1997. Reduce our 5-year average finding &

development costs by 20%. Reach the top quartile of industry profitability by

1997. Increase production by 10% by 1997. (ame:

Location:

If we can achieve all these

business objectives, we will be

a top quartile competitor

Customer retention

First Pass Yield Schedule

Adherence

Line Availability

Schedule adherence

On time delivery

VP of Opns

Plant Manager

Shift Supervisor

Variable Costs Mfg Overhead

Scrap rate

Labor/Unit

Satisfaction Variable Costs Period Expenses





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E-mail (Open Door)




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Ann Taylor


Novacor

BSC Newsletter

Rockwater



Strategic Change





Awareness



2

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Mobil Lubricants (Lubes) Had Each Employee Build a Personal Balanced Scorecard

At least one objective/measure per perspective

(o more than 15 measures

Personal scorecard must support

supervisors scorecard


supervisors scorecard

Every supervisor must have an objective and

measure for coaching and employee development

Scorecard must include an objective and measure that

supports another part of the business

Strategic Themes

FinancialReward our shareholders by providing a long-term return which exceeds our peers.

Division President

Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Level 7

VP Order Fulfillment

Manager of Plant Operation

Facility Manager

Delivery Supervisor

Terminal Coordinator

MVDriver

CustomerProvide value-added business solutions to our customers and channel

ROCE (%)Cash Flow ($MM)Integrated Cost ($MM)Integrated Income ($MM)

Market Share - FinishedPercent Perfect OrdersDistributor SurveyDevelop/Implement

Customer Survey

LOB Integrated Cost ($MM)Net Integrated Income ($MM)

Percent Perfect OrdersDistributor SurveyDevelop/Implement

Customer Survey

FA & Inv. Value ($MM)Transformation Cost ($MM)

Percent Perfect Orders

Inventory Carrying CostLine 44 / CPGFormulation Giveaway $M

Percent Perfect OrdersService Failures of Strategic

Product Lines

Line 25 CPGBackhaul $

% On-Time Delivery

Develop Market Info Survey

Line 2 CPGUnavailable HoursBackhauls Savings

% On-Time Delivery Empty Drums Returned

Line 2 CPGIdle TimeOut of Route MilesGPM

% On-Time Delivery Returns

Drums

Creating Line-of-Sight Alignment at Mobil Lubes


channel partners.

InternalDevelop market focused strategies and become operationally excellent.

L & GCreate a high performance organization by equipping our people to succeed.

Safety IndexEnvironmental IndexContinuous Improvement

Cost Reduction ($MM)Develop/Implement Capital

Plan

Employee Development Plans Completed (%)

Develop / Implement / Measure progress of Change Program

Safety IndexEnvironmental IndexDevelop/Implement

Standard OfferingAsset Utilization

Refinery Capacity (%)Network vs. Optimum (%)

Inventory Accuracy


Develop/ImplementMarketing Comp. PlanProduct Mgt. Comp. PlanDistrib/Logistics Comp. Plan

Safety IndexEnvironmental IndexComplexity Index

Inventory Accuracy


Attendance

DAFW Hits Off-Spec Receipts Transfers to Move Excess

Base Stock


Develop Plan Climate Survey

Motor Vehicle Accidents DAFW


Employees Trained ISO 9000 Certification

Complete Environmental Self Audit

Safety Meetings Complete

% Attendance Safety Meeting

Training on CCE

Accurate ReportingRepts. 731, 601, 727

LOG Book Violations Completed CEO

Market Surveys

Customer Assessment

Develop Personal Imp. Plan

SBU Scorecard



Strategic Change





Awareness



2

3




Linking Compensation to the Balanced Scorecard

Experience with successful BSC users indicates that linking the BSC to incentive compensation is essential to success

Executive Perspectives Supported by Research

People got that scorecard out and did the calculations to see how much money they were going to get. We

Mercer survey of compensation practices in 214 companies (1999)


money they were going to get. We could not have got the same focus on the scorecard if we didnt have the link to pay.

Brian Baker, Mobil

It would be hard to get people to accept a totally different way of measurement - which the BSC is - if you dont reinforce that change through incentive compensation.

Gerry Isom, CIGNA

88% of responding companies consider the use of balanced scorecard measures linked to reward systems to be effective.

(ew England Sales & Distribution - 1995 Compensation Linkage

Weight s Net W eight Perf. Factor Goal *

Fina ncial (30%)Net Profit After Tax 15% 5% 1.00 22Full C ost Per Gallon 30% 9% 1.00 6.8Gasoline Volume Growth 15% 5% 1.06 103%Lubes Growth R ate 30% 9% 1.06 101.5%Premium Product 10% 3% 0.96 100%Customer (15%)Mys tery S hopper Rating 60% 9% 1.10 82


Mys tery S hopper Rating 60% 9% 1.10 82Customer C omplaints 40% 6% 1.00 824

Inte rnal (35%)Gross Profit/Store 20% 7% 0.96 12,500# of Commitment Stations 20% 7% 1.00 527Environmental Incidents 20% 7% 1.06 19Days A bsent From Work 20% 7% 1.06 16Accid ents 20% 7% 1.06 20Le arning & Growth (20%)Climate Survey 50% 10% 1.03 4Developmental Plans 50% 10% 1.00 2

Total Index 100%

Performance F actor 1.03

The Incentive Compensation System at CIG(A P&C

Total Shares = Business Shares + Performance Shares

Share Value Determined from BSC (Par Value = $10.00)

Strategic Objective Financial Measures Non-Financial Measures% Weight

(F1) Shareholder 20 Net Operating Income

Example #1$5.00/Share 50 Business Sharesx


(F1) Shareholder Expectations

(F2) Operating Performance

(F3) Growth

(E1) Producer Relationship

(I2) Underwrite Profitability

(L2) Information Technology

20

15

20

20

20

5

Net Operating Income

Accident Year Combined

GWP

Producer Feedback (Councils, Surveys, etc.)

U/W Practice Reviews

Upgrade Computer Literacy

$5.00/Share 50 Business Shares+ 100 Performance Shares= 150 Shares

Bonus = $750.00

Example #2$14.00/Share 50 Business Shares

+ 10 Performance SharesBonus = $840.00

x

x










Linked to Budgeting Linked to

Operational Improvements

Management Meetings

Feedback System Learning Process



SCORECARD

Setting Stretch Targets: If youre not careful - youll get what you measure!


Time Frame: December 1 - January 31NAM&R BSCCoordinator

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Metric Owners

Business Unit & Shared Service Unit Heads Discuss BSC Targets With Executive Leadership Team Coach

Review current year BSC results to set stage for proposed Business Unit/Strategic Partner

What takes place at the ELT Coach Review?


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BU/SSU L

eadership

Tea

m

BU/SSU Leadership Team

-

for proposed Business Unit/Strategic Partner Scorecard

Review proposed BSC in terms of strategy, measures, plan, level of difficulty and rationale

Review alignment to NAM&R Reverse Engineer Template

How to think aboutperformance factors:

Objective:

IntensityFactor

Business Group Variable Pay Opportunity . . . . . .

Variable Pay

PercentPerformance

Factor Qualitative20 1.25 BEST IN CLASS

1.20 WellAbove1.15 Average1.12

Mobil (AM&R: Setting Performance Ranges


Objective:

External Benchmark1.00 means target equals

the average of competition

1.25 means target equals thetop of the competitive group

Subjective:

Internal Benchmark1.00 means the difficulty

of the dive is average

Determining the difficulty of achieving results sets the tone . . .

1.121.091.06 Above Average1.03

7 1.00 Average0.900.80

1 0.75 Below Average

Achieving Stretch Target Performance May Require

Strategic Initiatives Capital Investments New Products/Services


New Customers New Regions New Partners

1Identify All Potential

Candidates for Strategic Initiative

ConsiderationMarketing Projects,

Activities, etc.

Development Projects,

Activities, etc.OFS Projects, Activities, etc.

Other Projects, Activities, etc.

The Scorecard Process Provides Rigor for Selecting and Managing Initiatives

Criteria


2Screen Candidates to Identify Those That

Qualify as Strategic

3Select Strategic

Initiatives

Initiative:E-Bill Presentment

Strategic Thrust(s):AC/IR/RC

Primary Strategic Objective:Continue Leadership in Superior

Products

Area Score

Strategic Importance

Cost

Benefit

Required for Other Initiatives/Dependencies

Time to Implement

Points

8

-2

4

1

-2

Comments

The killer application X

$

$

X

# months

Overall Score 9 X

Ranking

1

2

3

4

5

6

7

N

Initiiative

E-Bill Presentment

A

B

C

D

E

F

G

Strategic Thrust(s) and Objectives(s)

AC/IR/RCCont. Leadership in Superior Products

Strategic Importance Cost Benefit

Required for Other Initiatives/

DependenciesTime to Implement Overall Score Overall Points

9

9

8

8

7

7

7

X

Prioritized List of Strategic Initiatives

Criteria

Linking Initiatives to Scorecard Measures

Many initiatives even if successfully implemented would not improve any BSC measure

Action: Eliminate or consolidate

Several BSC measures, especially in internal, learning &


Several BSC measures, especially in internal, learning & growth perspectives had no initiative designed to improve it

Action: Add several new strategic initiatives Redeploy resources to new initiatives

Conclusion: Without the guidance of the BSC, many organizations are likely to have both too many and too few initiatives!

Strategic Planning and the BSC

The Planning and Management System Based on the Balanced Scorecard Effectively Addresses Critical Failures in Previous Strategic Planning Systems:

Targets are set to achieve breakthrough performance Initiatives and capital investments are identified to achieve


Initiatives and capital investments are identified to achieve the strategic targets

Many non-strategic investments and initiatives are eliminated Resources are supplied for strategic investments and

initiatives Short-term targets are established for the financial and non-

financial Balanced Scorecard measures Operational reviews assess progress on the strategic

trajectory

Using the BSC to Link Strategy to Operational Management

Activity-Based Costing

Cost of Internal Processes

Customer Profitability

Activity-based Budgeting

Shareholder Value


Shareholder Value

Explicit Value Proposition

Path for Revenue Growth Strategy

Quality Programs

Link to Customer and Financial Outcomes

Identify New Processes; Set Priorities

Integrated Strategic Management Approach

The Balanced Scorecard Strategy Map

Improve Shareholder ValueRevenue Growth Strategy Productivity Strategy

Build the Franchise Increase Customer ValueImprove Cost

StructureImprove Asset

Utilization

Shareholder ValueROCE

New Revenue Services Customer Profitability Cost per Unit Asset Utilization


Customer Perspective Customer Value Proposition

Operational ExcellenceCustomer IntimacyProduct Leadership

Customer Acquisition Customer Retention Customer Profitability



Price

Perspective



Product/Service Attributes

Strategic Competencies

Strategic Technologies

Climate for Action

Build the Franchise Increase Customer Value

Achieve Operational Excellence

Become a Good Neighbor

(Innovation Processes)

(Customer Management Processes)

(Operations & Logistics Processes)

(Regulatory & Environmental

Processes)

Quality

Customer Satisfaction

Time Function Service Relations Brand

Relationship Image

Integrating ABM into the BSC Framework

Internal Perspective: Measuring the Cost of Critical

Internal Processes

Customer Perspective: Measuring the Cost-to-Serve

to Reveal Customer Profitability


Activity-Based (Operational) Budgeting

Internal Business Processes

Innovation Process

Customer Management

ProcessOperations

Process

Supply-Chain Management Operations Efficiency:

Measurements for Internal Business Processes


Operations Efficiency: Cost, Quality, Cycle Time

Capacity Management

Process customerorders

Salariesand Fringes

Eqpmt& Tech.

Supplies

Purchase materials

Schedule production

Move materials

Set up machines

OccupancySalariesand Fringes

$250,000

,

Activity-Based Costing: From Expense Categories to Activities

Activity-BasedCosting


Set up machines

Inspect items

Maintain product information

Perform engineering changes

Expedite ordersIntroduce new products

Resolve quality problems

$480,000TOTAL

Occupancy

$120,000

Equipment &Technology$75,000

Supplies$35,000

TOTAL $480,000

Costing


Strategy Formulation: Identify Profitable Customer and

Market Segments

Financial Perspective: Measuring the Cost and

Profitability of Customer Segments



Internal Processes




The Balanced Scorecard Strategy Map

Improve Shareholder ValueRevenue Growth Strategy Productivity Strategy

Build the Franchise Increase Customer ValueImprove Cost

StructureImprove Asset

Utilization

Shareholder ValueROCE

New Revenue Services Customer Profitability Cost per Unit Asset Utilization


Customer Perspective Customer Value Proposition

Operational ExcellenceCustomer IntimacyProduct Leadership

Customer Acquisition Customer Retention Customer Profitability



Price

Perspective



Product/Service Attributes

Strategic Competencies

Strategic Technologies

Climate for Action

Build the Franchise Increase Customer Value

Achieve Operational Excellence

Become a Good Neighbor

(Innovation Processes)

(Customer Management Processes)

(Operations & Logistics Processes)

(Regulatory & Environmental

Processes)

Quality

Customer Satisfaction

Time Function Service Relations Brand

Relationship Image

Activity-Based Costing Reveals Hidden Profit and Hidden Cost Customers

Revenues

Apparent ProfitsHidden Costs


CostsHiddenProfits

Customer CustomerA B

Customer CustomerA B

Traditional Costing Accurate Costing

Measuring Customer Profitability

Order custom products

Small order quantities

Unpredictable order arrivals

Customized delivery

Order standard products

High order quantities

Predictable order arrivals

Standard delivery

High Cost-to-Serve Customers Low Cost-to-Serve Customers


Change delivery requirements

Manual processing

Large amounts of pre-sales support (marketing, technical, and sales resources)

Large amounts of post-sales support (installation, training, warranty, field service)

Require specialized inventory

Pay slowly (high accounts receivable)

No changes in delivery requirements

Electronic processing (EDI)Little to no pre-sales support (standard pricing and ordering)No post-sales support

Little inventory support required

Pay on time


CustomerProfits


Most Profitable

Customers

MostUnprofitableCustomers

Customers

Options for Managing Customers

Passive:Product is crucialGood supplier match

Aggressive:Price-sensitive and few

Costly to service, but pay top dollar

Net (ABC)Margin

Realized

ProfitsHi

Customers that are above the cost-plus diagonal are more

profitable

Types of Customers


Profitability depends on whether and how much the net product margins recover the customer-specific costs.

Source: Shapiro, Rangan, Moriarty and Ross, Manage Customers for Profits (Not Just Sales) Harvard Business Review (Sept-Oct 1987).

Aggressive:Leverage their buying powerLow Price and lots of customized service and features

Price-sensitive and fewspecial demands

Realized

Cost to Serve Losses

LowLow Hi

CUSTOMER PERSPECTIVE:Actions from Integrating ABC and BSC

Easy Transform

ABC

Targeted

Profitable Unprofitable

Customers


Easy

(Retain)Transform

Monitor Easy

(Fire)

Targeted

Untargeted

BSC


Strategy Formulation: Identify Profitable Customer and

Market Segments

Financial Perspective: Measuring the Cost and

Profitability of Customer Segments



Internal Processes




Strategic Initiatives

Enhancement

10%

25%

BSC StrategicInitiatives

Operational and Strategic Budgeting


Maintenance

Operations

Infrastructure

25%

65%

Activity-Based Budgeting forOperations

ABC

Activity-Based Budgeting (ABB) reverses the relationships of an ABC model

ResourcesResources

ABB

ResourcesResources

Resource

Drivers

Resource

Drivers


Products

ActivitiesActivities

Products

ActivitiesActivities

Activity Cost

Drivers

Activity Cost

Drivers

Activity Cost

Drivers

Activity Cost

Drivers

Borealis introduced a new process to replace what the budget did,but also accomplished a lot more, and with fewer resources

Balanced scorecardBalanced scorecard

-- NonNon--financial targetsfinancial targets& measurements& measurements

-- Link to strategyLink to strategy-- Financial targets relative to Financial targets relative to

Rolling Financial ForecastRolling Financial Forecast

-- Quarterly updateQuarterly update-- Rolling 5 quarters outlookRolling 5 quarters outlook


Controlling fixed costs Controlling fixed costs

-- Activity accounting andActivity accounting andproduct costingproduct costing

-- Improved cost understandingImproved cost understanding-- Product and customer costingProduct and customer costing

- Annual outlook

-- Financial targets relative to Financial targets relative to marketmarket

-- Financial targetsFinancial targets& measurement& measurement

-- Limited costLimited costunderstandingunderstanding

- Annual plan

BUDGETBUDGET

-- Annual outlookAnnual outlook

Investment managementInvestment management

-- Trend reporting & 5 quarterTrend reporting & 5 quarteroutlookoutlook

-- Decentralised decisionsDecentralised decisions-- Frames if neededFrames if needed

Economic Value Added (EVA):The Basics

Net sales- Operating expenses

Operating profit (EBIT: earnings before interest & tax)

- TaxesNet operating profit after tax (NOPAT)


Net operating profit after tax (NOPAT)- Capital charges (Invested capital Cost of capital)

Economic Value Added (EVA)

EVA is a registered trademark of Stern Stewart & Co.

Financial Perspective: Shareholder Value (EVA) and BSC

Shareholder Value/EVA

Build Increase

Revenue Strategy Productivity Strategy

ImproveImprove

Financial Strategy


BuildThe

Franchise

IncreaseCustomer

Value

New sources of revenue

ImproveAsset

Utilization

ImproveCost

Structure

Improve profitability of existing customers

Reduce cash expenses

Eliminate defects, improve yields

Manage capacity from existing assets

Incremental investments to eliminate bottlenecks

EVA is a registered trademark of Stern Stewart & Co.

Typical EVA Actions

Reduce Costs

Invest when (OPAT > cost of capital

Disinvest when (OPAT < cost of capital

(sell off under-performing and under-


(sell off under-performing and under-

utilized assets)

Financial strategies to reduce cost of capital

(share repurchase, increase financial

leverage through higher debt/equity ratio)

(ote: (OPAT = (et Operating Profit After Taxes

Adding the BSC to EVA

Revenue Growth

Explicit Objectives, Measures and Targets

for Customers

The Customer Value Proposition


The Customer Value Proposition

Internal Business Processes for Innovation

and Enhanced Customer Relationships

Infrastructure Investments in People,

Systems and Organizational Alignment

Internal Business Processes

Innovation Process

Customer Management

ProcessOperations

Process

Supply-Chain Management

Impact of Quality Programs

Responsive Conform to Customer


Management Operations Efficiency:

Cost, Quality, Cycle Time Capacity Management

Customer Value Proposition: Rapid Lead Times

On-Time Delivery

Zero Defects

Customer Requests

BSC Adds to Total Quality Programs

Explicit Causal Links from Operational Improvements to

a Customer-Based Value Proposition

Explicit Linkages to Productivity Enhancements and

Financial Outcomes


Financial Outcomes

Identify Entirely New Processes for Improvement

Set Strategic Priorities for Resources to Enhance

Process Improvements






Shareholder Value


Shareholder Value

Explicit Value Proposition and Path

for Revenue Growth Strategy

Quality Programs


Identify New Processes

Set Priorities

BSCObjectives

Business Excellence in Two Steps:Combining Business Excellence and Strategy Focused Management Allows Organiztions to Do the Right Things Right


do things right

-100-200

-1000do the rightthings

Time (TBM)Quality (TQM)Cost (ABM)

BSC Adds to Total Quality Programs

Explicit Causal Links from Operational Improvements to

a Customer-Based Value Proposition

Explicit Linkages to Productivity Enhancements and

Financial Outcomes


Financial Outcomes

Identify Entirely New Processes for Improvement

Set Strategic Priorities for Resources to Enhance

Process Improvements






Shareholder Value


Shareholder Value

Explicit Value Proposition and Path

for Revenue Growth Strategy

Quality Programs


Identify New Processes

Set Priorities

BSCObjectives

Business Excellence in Two Steps:Combining Business Excellence and Strategy Focused Management Allows Organiztions to Do the Right Things Right


do things right

-100-200

-1000do the rightthings

Time (TBM)Quality (TQM)Cost (ABM)





Missio

Building Strategy With Balanced Scorecard

Documents

Transcript of Building Strategy With Balanced Scorecard