How to Build a Balanced Scorecard* Introduction

8/14/2019 How to Build a Balanced Scorecard* Introduction

1/35

HOW TO BUILD A BALANCED SCORECARD*

Introduction

byArthur M. Schneiderman

The balanced scorecard (BSC) has undergone significant change since itswidespread popularization in the early 1990s. Although the first balancedscorecard was an integral part of its creators strategic planning process, its

subsequent emulations focused on it as a simple instrument rather than as oneelement of a total planning system. Consequently, most early adopters just tooktheir myriad of existing non-financial performance measures and force-fitted themto an arbitrary framework that classified scorecard metrics into the prescribedcategories of financial, customer, internal, and learning and growth.

Ive chronicled elsewhere the resulting common failure modes. Number one onthat list was:

The independent (i.e. non-financial) variables on the scorecard are incorrectlyidentified as the primary drivers of future stakeholder satisfaction.

Unfortunately this fundamental misapplication of the BSC concept is still all tooprevalent.

However, academics, consultants, and practitioners alike have learned much overthe last decade. Leading edge BSC proponents recognize that a meaningfulscorecard must be viewed as an integral part of an organizations overallmanagement system. But to build on its brand image, Balanced Scorecardpromoters have used its moniker to provide a name umbrella over its continuouslyredefined and expanding boundaries. Today, in best-practice organizations, theBSC is tantamount to their business planning system.

But having recognized that the BSC itself is only one part of a comprehensive

process, there has still been little documented about that process itself. What hasbeen written describes the method for its creation and use in such general termsthat a practitioner is left with insufficient detail on exactly what needs to bedone. The objective of this e-paper is to provide my view of that missing level ofdetail.

In Part 1, I will describe a 9-step process that assures the identification of amanageable and actionable set of BSC metrics that link directly to anorganizations strategic objectives. But organizational success - just like a coin ora magnet - has two sides: planning and doing. Successful organizations excel atboth. They do the right things and they do them right. My focus in this e-paper

will be on the planning side of that fateful coin. I refer you to my other writings
http://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/BSC_INTRO_AND_CONTENTS.htmhttp://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/BSC_INTRO_AND_CONTENTS.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htmhttp://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/BSC_INTRO_AND_CONTENTS.htmhttp://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/BSC_INTRO_AND_CONTENTS.htm


2/35

on process management (see also my publications) for more on its control,improvement, and reengineering facets.

Part 2 addresses the difficult task of translating strategically chosen stakeholdersegment requirements into a prioritized list of internal process improvements. It isthe improvement of these targeted processes and sub-processes that will make-or-brake the realization of strategic success. What makes identification of these vitalfew processes difficult are their many interdependencies and varying impact.Seeing through that cloud of complexity and uncertainty requires the use of someunfamiliar analytical tools and an appropriate balance between established factsand the organizations collective instincts.

Finally, in Part 3, I will describe the fundamentals for extracting the appropriateset of BSC metrics from the near-infinite list of possibilities that still exist evenafter the vital few processes are identified. Finding those leveraged internalprocess measures is key in achieving a successful BSC implementation.

*This e-paper was first posted on December 20, 2000 (Part 3 was posted earlier).It will be appearing in hard copy as a Chapter in the Handbook of PerformanceMeasurement, Michael Bourne, Editor, Gee Publishing, 2001.

return to top Part 1

HOW TO BUILD A BALANCED SCORECARD

Part 1: The Strategic Planning Process


The objective of a strategic planning process is to identify opportunities where theorganizations current or potential capabilities can be successfully and sustainablymatched against the needs of its various stakeholder groups. Success is defined bythe objective (vision and mission) of each organization. It is measured by thevalue that it actually delivers to these stakeholders, relative of course, to thatprovided by their other alternatives.

In a competitively based society, each of the organizations various stakeholders

has choices. The owners of its capital have the option of selling that capital andinvesting the proceeds in other organizations that they believe will provide themwith a greater return on their loaned financial assets. Employees have thefreedom to associate with a different organization where they expect to receive agreater return on the time that they invest. Customers usually have the ability toselect a different product, service, or supplier for fulfillment of their needs.Suppliers have the choice of providing the inputs required by the organizationwhen it wants them and at the price its is willing to pay. And communities cancommit their limited resources (land, infrastructure, etc.) to those organizationsthat they believe will prove to be the greatest asset to their constituents.

A successful organization manages its internal processes in order to win against thecompetition on these stakeholder battlefields. The strategic planning process
http://www.schneiderman.com/Concepts/PM_Model/PM_Model.htmhttp://www.schneiderman.com/Activities/publications.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_Setting_Improvement_Priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/3_Selecting_Metrics/slecting_scorecard_metrics.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htmhttp://www.schneiderman.com/Concepts/PM_Model/PM_Model.htmhttp://www.schneiderman.com/Activities/publications.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_Setting_Improvement_Priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/3_Selecting_Metrics/slecting_scorecard_metrics.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htm


3/35

distributes the organizations always-limited resources among these concurrentchallenges. How it deploys them will determine whether it survives as an entity inorder to compete again another day.

I offer the following as a generalized model for a Strategic Planning Process:

Figure 1. The Strategic Planning Process

(Click here for a PowerPoint version of this figure)

This process forms a closed-loop system. It operates in a continuous cycle, withneither a beginning nor an end. Since most organizations implementing a BSCalready have an explicit or tacit strategy in place, Ill start my description with the

step identified as number one in this figure. Also, for simplicity, Ill describe theprocess in terms of the customer stakeholder group and leave it as an exercise
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%201.ppthttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%201.ppt


4/35

for the reader to extend it to its organizations other important stakeholders.They usually include owners, employees, union leaders, suppliers, regulators,communities, etc.

Step 1: Choose targeted stakeholder segments

For decades we have been admonished to make explicit in our strategy thecustomer segments that we intend to serve as well as those we will leave forothers to serve. This decision is sometimes referred to as strategic intent. We dothis in recognition of the view that we cannot be all things to all potentialcustomers and therefore must focus our limited organizational resources on thosechosen market segments. We will secure leadership in them if we can satisfy theirmembers needs better than our competition. Our level of reward will depend onour market share and the maturity and growth rate of that segments demand.

To make our decision on target market segments, we must understand theopportunity space (potential market segments) and the competitive environment

as well as our own organizational competencies. For much of the later part of thelast century, we could rely on normative models to predict our chances of successbased on the assumption that cumulative experience (as determined by historicrelative market share) was its principal driver. Today we understand thatflexibility, agility, and rapid learning are more important competitive advantagesgiven the rapidity of technological change and the increasing contribution of often-volatile organizational knowledge.

Making the wrong initial choice may trigger a doom loop from which theres littlechance of recovery. However, rapid cycling of this strategic planning process canquickly lead to convergence to a sustainable competitive position. So lets assume

that we have initially chosen a set of related market segments where we have areasonable chance of long-term success. Well return to this assumption in Step 9to determine its validity.

Step 2: Identify their requirements

Each customer segment is characterized by its own unique set of requirements.Either objectively or subjectively potential customers test each candidate supplieragainst these requirements. They choose the one that comes closest to meetingtheir aggregate needs. They do not weight each criterion equally, and that is whatmakes them different from one another. One segment might weight price muchmore highly than reliability. Another may have just the opposite weighting. Oncethe targeted segments have been selected, it is important to determine theirimportance weighted supplier selection criteria.

Step 3: Determine performance gaps (external perspective)

By asking our targeted customers how we are doing in meeting their variousrequirements we can identify our performance gaps. Our hope is to close thesegaps in order to maintain or improve our relative competitive position. Werecognize that if we do nothing, we are likely to loose ground against moreaggressive competitors who are pursuing their own improvement objectives.Performance gaps will differ from one targeted segment to another, so we need to

apply this step separately for each of the market segments that we are currentlyserving or considering.


5/35

Step 4: Set stakeholder improvement priorities

Improving requirements that are unimportant to a targeted customer segment isoften a waste of precious organizational resources that could better be usedelsewhere. Its therefore essential that we focus our improvement efforts onmajor gaps in important customer requirements. The combination of highimportance and low performance is the logical basis for ranking opportunities forimprovement. Once we have completed this step, we have essentially generated aPareto diagram of externally identified improvement priorities - tempered by ourown strategic objectives.

Step 5: Link stakeholder requirements to internal processes

Many organizations stop at Step 4. Doing so leaves both the responsibility andaccountability for improvement unassigned. They may achieve acceptance of theobjective but leave undefined each individuals role in making it happen.Naturally, with this uncertainty, they usually conclude that closing critical

performance gaps is someone elses job. Like spectators at an athletic event, theysit cheering in the stands, when they should in fact by out on the field as players inthis struggle to win. The key to getting their involvement is the linkage ofexternal improvement priorities to internal processes.

One very powerful view of an organization sees it is a collection of interactingprocesses whose collective output is the vehicle for creating stakeholder value. Atthe highest level are the macro processes such as product development, customeracquisition, production, procurement, and human resources management. Butprocesses are fractals. As we look at each of their steps through a virtualmagnifying glass, we see imbedded within them similar looking processes and

within them sub-processes and within them micro-processes. Every employ hasa daily job in which they execute one or more of the steps that are containedwithin this hierarchy of value creating activities. Their personal link to the overallgoals and objectives of the organization flows with the output of these processesas they cumulatively create more value and the consequent increased stakeholdersatisfaction.

Step 5 identifies the relationship of each process within the organization to the keystakeholder requirements identified in step 2. It is the transition step from theexternal to the internal perspective.

Step 6: Establish process improvement priorities (internal perspective)

Knowing which internal processes drive the various targeted stakeholderrequirements (from Step 5) and which of those requirements are most in need ofstrategic improvement (from Step 4), we are now in a position to set internalprocess improvement priorities. Once completed, we have identified the focalpoints for changes in the way those involved should do their daily jobs.

The organization can now concentrate its limited resources on the improvement ofthose leveraged processes with the knowledge that this will produce the greateststrategic return on the investment of those precious resources. And eachindividual who spends their time executing those key processes will understand

why its improvement will be worth their effort. Theyll realize that their help is


6/35

likely to be critical to the organizations strategic success that they are animportant link in that chain of critical actions.

Step 7: Establish metrics and goals for the process improvement priorities - the

Balanced Scorecard

In my experience, few organizations today make it through Step 6. Identifyingwith confidence those critical internal processes whose improvement will have thegreatest strategic impact is no easy matter. More and more, they are hiddenbehind a cloud of complexity and confounded by uncertainty and chaos. But forthose who do, they now face several nearly daunting challenges:

Choosing metrics: What exactly should we measure?

Setting Goals: How will we define success?

Avoiding over commitment: Do we have the organizational capacity to do all ofit?

Defining measures of the output of a process that relate directly to stakeholderrequirements is usually straightforward. But these results metrics are not directlyactionable. We need to identify the internal process metrics that are the driversof the desired improvement in these results. Once we have successfully identifiedthem, we need to set time-based goals. In general, they will be stretch goals:difficult but not impossible to achieve.

I cant imagine an organization in todays world where people are sitting aroundlooking for something to do. Everyone already has a pretty full plate of work.

They can only squeeze in a limited amount of time to work on processimprovement without adversely affecting the performance of those daily jobs. Inother words, organizations have a limited improvement capacity. Asking them todo everything will guarantee that the easy ones, not necessarily the mostleveraged ones will get done first. We need to filter the priorities established inStep 6 against this limited capacity. In doing so, we create a cut-list. We can dothe things above the cut-line, but we dont have the capacity to do the ones belowthat line at least not right now. Acknowledging our limited capacity diffuses theorganizational paralysis usually brought on by over commitment.

To focus everyones attention on the short list of improvement priorities and goals,

we create the instrument that has been called the Balanced Scorecard. It capturesthe results of all of the proceeding steps on a single sheet of paper. It representsa set of metrics and their associated tangible goals that are the best that we cando in advancing our strategic objectives, subject to our available organizationalconstraints. In a sense the balanced scorecard is merely a rallying flag for all ofthe effort that has gone into its creation. It is not an end, but an intermediatemeans for the strategic planning process.

The resulting balanced scorecard is the organizations guide to its improvementpriorities. Because it is rooted in the process view of the organization, it can beeasily linked from the corporate level down through the process hierarchy to the

teams and individuals that are the only ones that make things happen.


7/35

Step 8: Improve critical processes

If it were easy to close the gap between current performance and theimprovement imperatives established in the previous step, those gaps would havebeen closed long ago. Certainly focusing the organizations energy around a fewspecific objectives is a great help. But there is a wide range of approaches thatcan be used to address these vital few gaps, and they can lead to strikinglydifferent rates of improvement.

The fastest method is to assemble a cadre of process engineers to fundamentallyredesign each key process; but this is also the most expensive way to do it. Usingthe traditional trial-and-error approach not only takes too long, but its actual costrivals that of the use of an army of process experts. Fortunately, there is a lowcost, high-speed approach that was pioneered in the 1930s by Kepner and Tragoeand refined in the 1960s by Japanese TQM practitioners. This improvement modeluses teams of process executors who are trained in the basics of the scientificmethodology and spend a portion of their time (typically 5-10%) improving their

processes. This has proven to be the best way of closing performance gaps whenmany processes contribute to them.

I am not in any way suggesting that processes that do not make this list should notbe improved. A basic cornerstone of TQM is that ALL processes should becontinuously improved and that EVERY employee should spend a portion of theirtime in those activities. What Step 7 does is set priorities for those improvementefforts. Process teams should focus their efforts on improving those outputs thatare directly derived from that step.

Individuals involved in multiple processes should concentrate first on those that lieon this critical strategic path. When teams or individuals do not have a clear rolein strategic improvement priorities, they should still spend a portion of their timeimproving the way that they do their daily jobs. But they need to recognize andaccept that scarce resources, such as training and internal and external experts, aswell as management attention will go first to those who are working on improvingthe critical processes.

Step 9: Reassess strategy

Organizational defense mechanisms often mandate that our processes be run openloop. We like toplan and do, but have a natural reluctance to check subsequentresults against the original plan and take corrective action based on what we learn

from that diagnosis. We find this distasteful because the result of the checkprocess all too often is blame rather than learning.

When I first met Ed Deming he was around 80 years old and often noted that 80%of the root causes of defect generation were the process and only 20% the peopleexecuting those processes. Each year that went by, that 80% number seemed togrow by 1%. Ed died at age 94 and the last time I saw him he said: nearly 95% ofthe problems lie in the process, not the people. I wonder what he would havesaid had he lived to be 100?

Once we outlaw blame as a management reaction and replace it with constructivelearning, we can hope to continuously improve the strategic planning process

itself. That is the purpose of Step 9. Before reaching this step, we have identifiedexactly what we need to do in order to achieve our strategic objectives. We have


8/35

focused every bit of our available organizational capacity on those requiredactions. We now ask, Did we get the results we planned for, and if not, whynot? Out of this diagnosis we can understand weaknesses in our strategic planningprocess and make improvements for the next cycle. In doing so, we are learninghow to plan and act more successfully, and that, after all, is what this is all about.

One sobering result from this reflection step may be that we are doing the bestthat we can, but we do not have the organizational capacity to do what isnecessary in order to achieve our strategic objectives. Often this is the result ofcompetitors who have greater organizational capacity or process know-how, sothat although were improving, were inevitably loosing ground to them. Thispainful knowledge should prompt us to seek other competitive niches were wehave a chance of winning or face up to the unpleasant reality that our ownersremaining equity might best be used by them in some other endeavor. Since veryfew organizations use their process improvement capacity to their highest strategicadvantage, mastery of all of these nine steps has the potential to produce some

really unexpected, dark horse winners in the ever-present competitive race.

Dealing with todays strategic planning reality

Im fascinated by the current notion, often promoted by self-serving consultants,that theres a simple, secret formula for developing a good strategy and its calleda balanced scorecard. Buy our BSC software, Attend our BSC seminar, orRetain our BSC team of experts and in a few short weeks or months youll have awinning strategy. And the evidence does seem to suggest that Abe Lincoln mayhave been right: ... you can fool (nearly) all of the people, some of the time...But the truth is that developing and implementing a successful strategy still is avery difficult challenge. Their are several contributing factors:

increasing real-world complexity,

nonexistent data,

chaos and uncertainty,

getting organizational commitment and buy-in.

By any measure, organizational life is getting more and more complicated.

Everything seems to be both interconnected and important. Clear visions of thefuture are obscured by this complexity and each group within the organizationtries to see through that cloud with their own uniquely colored glasses. The idealsolution - fact based knowledge - is becoming both expensive and time-consumingto generate. In many instances, the important things are both unknown andunknowable to quote Ed Deming. We live in a period of unprecedented change.The future is increasingly unpredictable as wave after wave of technological,sociological, and political change break over us. It is a truly exciting time to livein, but an equally frustrating time for strategic planning.

Finally, as organizations transform from physical labor to knowledge based,

employees are less willing to simply do as they are told. They need to be enrolledin the strategy before they will work hard to make it happen.


9/35

Given these formidable challenges, how can an organization maximize its chancesof developing and implementing a winning strategy? Notice that I said maximizeits chances, not guarantee its success. Thats the best that any organization canhope for given its tumultuous environment. Heres my advice:

Take every feasible opportunity to expose employees first hand to thatenvironment and make sure that they share what they learn with others withinthe organization.

Maximize employee involvement in the strategic planning process itself, byassuring that those with the best knowledge contribute to its relevant steps.

Use tools that can analyze fuzzy data, which often is in the form of sentencesrather than hard numbers.

Seek group gut feel, rather than that of individuals who may be distant in bothtime and intimacy with the current situation.

Make strategy development an open rather than a secret process within the

organization

Sure, there is a risk that by running a wide-open, highly visible strategic planningprocess a competitor may learn something that they can use against you; but thatdanger is grossly exaggerated. In reality that risk pales compared to the cost ofpoor internal alignment caused by a strategy hidden behind a shroud of secrecy.All employees have a need to know if they are to contribute effectively to theorganizations success.

How an organization executes this 9-step strategic planning process will greatlyinfluence its probability of success. At one extreme, members of the strategic

planning department can sit around an isolated table and talk through each of thesteps to come up with a scorecard and its associated metrics and goals. In myexperience, that approach has a low probability of producing a decisive scorecardand a convincing call to action to those whose efforts are needed to make ithappen. At the other end of the practical spectrum, the strategic planningfunction can orchestrate a broad based effort that synthesizes both internal andexternal knowledge into a compelling and actionable plan.

In doing so, they will encounter difficulty in processing all of the information andopinions that are generated unless they use some framework and an appropriatetoolset for drawing actionable conclusions from the resulting maize ofinformation. Thats the purpose of Steps 1a, 2a, and 3a in my model. Bynumerically weighting the strategic importance of the various stakeholdersegments, each segments hierarchy of requirements, and their perception of ourperformance on each of their important ones a list of improvement priorities canbe generated that separates Jurans vital few from his important many. Part2 will expand more on these a steps.

In this, Part 1 of the article, I have described a 9-step framework that I believerepresents a comprehensive process that has as one of its many important outputsa set of balanced scorecards that deploy strategic goals down to the action agentsthat really make strategy happen. In the next two parts, I will describe in detailthe actual methodology that I use in implementing Steps 1-6 (Part 2: Setting

Process Improvement Priorities) and Step 7 (Part 3: Selecting Scorecard Metrics).Step 8 is the theme of my Process Management Model.
http://www.schneiderman.com/Concepts/PM_Model/PM_Model.htmhttp://www.schneiderman.com/Concepts/PM_Model/PM_Model.htm


10/35

Introduction return to top Part 2


Part 2: Setting Improvement Priorities*

by

Arthur M. Schneiderman

Preface

Im a long-time advocate of the KISS principle: Keep it simple, stupid, orits more formal ancestor known as Ockham's razor. But as problemsbecome more complex, so unfortunately do their simplest solutions. Scanahead in this part and your initial reaction may be that what Im proposinglooks awfully complicated. But, if theres a simpler way of getting to atruly effective answer, Ive yet to find it; nor am I aware of anyone elsewho has.

Thats because one of the inevitable consequences of our current form ofprogress is that over time it creates ever-increasing complexity. We can nolonger manage that complexity with the basic toolset that worked in asimpler, bygone era. Those tools helped in understanding systems wherethe whole effectively behaved as the sum of its individual parts. The toolswere used to break a big problem into a set of small, manageable pieces.By optimizing the pieces, we could expect to optimize the whole system.The very best of mangers could even do this in their heads.

Today, complexity arises from the increasing interdependencies betweenthe many small pieces of a big issue. The response it depends that onceserved as a ubiquitous excuse, now takes on legitimate meaning. Theinterdependencies become further compounded by their eventual non-linearity. Together these two effects have pushed the critical problemspace well beyond the capabilities of simple tools and individual gut feel.More and more often we are confronted with situations where the whole ismuch greater than the sum of its individual parts. The setting of processimprovement priorities now resides in that elusive domain. Yet it isessential to identify the real improvement priorities, not just for theeffective use of limited organizational change capacity, but also to weavethe convincing story needed to marshal organizational support and buy-in.

Even when an insightful executive can see through that cloud of

complexity, verbal explanations are ineffective in transferring his gut feelto others. They must take his conclusions on faith. But today, fewer and
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/how_to_build_a_BSC_intro.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_Setting_Improvement_Priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/how_to_build_a_BSC_intro.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_Setting_Improvement_Priorities/setting_improvement_priorities.htm


11/35

fewer organizations can rely on faith as their alignment mechanism.Knowledge workers in particular demand a compellingly and logicalargument before they will sincerely commit to making it happen.

In 1979 the Japanese Union of Scientists and Engineers, the driving forcebehind Japans TQM revolution, codified a set of tools that they called the7-Management and Planning Tools (or 7-MP). Over the last thirty years the7-MP have proven their effectiveness in the achievement of consensus orwhat we might call collective or group gut feel. Its one of thosetools, the Matrix Diagram, which I will be using here.

Other tools useful in dealing with this increased complexity have beenaround for half-a-century. The challenge is to choose the simplest of thesetools that can adequately address the issue at hand. Oversimplifying the

problem in order force-fit it to our more familiar approaches can onlycreate the illusion of understanding, which cannot be a sound foundation

for action. So be forewarned that what follows, in my view is the least

complicated way of correctly identifying strategic process improvementpriorities in todays increasingly complex environment.

This Part describes a methodology for deriving process improvement priorities froman organizations strategy. It relies heavily on the framework used in QualityFunction Deployment11 (QFD). That framework uses a series of interrelatedmatrices to numerically define the strength of the causal relationships that existbetween the whats and hows of effective planning. As you will see, itsignificantly extends the use of simple casual-loop diagrams (as used for examplein BSC Strategy Maps) that only serve to identify major causal linkages. Byquantifying the strengths of these linkages and providing an aggregation

mechanism, this approach often uncovers pervasive process improvementopportunities that would be missed when only the most obvious dependencies areconsidered. Furthermore, since its output is a numerically weighted list ofstrategic process improvement priorities, it helps us get the greatest strategicbang for the organizations limited change capacity buck.

We will start by looking at various strategies and their relationships to segmentedstakeholder requirements. This will allow us to place a strategically chosenimportance weighting on each requirement. In doing so, we explicitly identifythe specific stakeholder segments that we choose to serve and by implication,those that are not on our strategic agenda. Next, we will determine actual

performance, both absolute (based on customer needs and wants) and relative(based on competitor performance) and combine strategic importance andperformance to generate a numerical scoring where the higher the value thegreater is the strategic need for improvement of that particular stakeholderrequirement.

Our second matrix defines the relationship between stakeholder requirements andeach of the organizations various value creating processes. It quantifies theimpact of each key internal process on each of the stakeholder requirements.Finally, we will combine improvement priorities derived from the first matrix withprocess linkages from the second to produce a process improvement prioritization

list. This list will represent a scored ordering of processes in need of improvement
http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0915299410http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0915299410http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/Analog's_Version_of_the_Strategy_Map.htmhttp://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0915299410http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0915299410http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/Analog's_Version_of_the_Strategy_Map.htm


12/35

in terms of the impact of these improvements on stakeholder satisfaction and,therefore, strategic success.

As I will show, this approach is amenable to various levels of detail. At oneextreme, it reduces to a simple normative model that states if this is yourstrategy, than this is what your targeted stakeholders expect and these are theprocesses you have to get right in order to satisfy those expectations. Forsimplicity, thats the example Ill use here. At the other extreme, detailed studiesmay be necessary to determine the organizations real vs. professed strategy,actual customer requirements by targeted segment, perceived performance,organizational barriers, etc. Where in this spectrum a particular situation liesdepends on the level of detail necessary to achieve the required consensus foraction. Often this is determined through a process of successive approximations,starting with the simple normative model and adding more detail until thatconsensus is reached.

One definition of consensus is the achievement of a state in which the least

supportive member of the group can live with the majoritys view. But aconsensus for action often requires a much stronger commitment from that lastindividual, particularly when their active support and participation is required tomake that action happen.

Stakeholders and Their Requirements

Organizations have a number of stakeholders. Generally, we identify them as:

customers,

stockholders or owners,

employees,

suppliers, and

the communities in which we do business.

In some cultures, the environment and future generations are being added to thislist (see The Fifth Fitness). In some industries, there are multiple customers. For

example, in higher education customers can include parents, future employers,academic peers, and research sponsors, as well as students and alumni. Inhealthcare not only patients but also doctors, hospitals, regulatory agencies, andinsurers needs must be addressed. Where appropriate, distinctions need to bemade between historical, current, and future requirements, as well as differentclasses of stakeholders such as large corporations, small businesses andindividuals.

An organization must identify its strategy and the key requirements for each of itsstrategically chosen stakeholders. For example, is its stockholder strategy income,growth or non-profit driven? If it is income driven, then its targeted stockholders

will place a high weighting on a steady dividend stream and a stable stock price.They will be satisfied with average returns on their investment. On the other
http://www.schneiderman.com/The_Art_of_PM/fifth_fitness/fifth_fitness.htmhttp://www.schneiderman.com/The_Art_of_PM/fifth_fitness/fifth_fitness.htm


13/35

hand, the stockholders of growth driven companies do not value dividends, acceptabove average price volatility, but demand strong long-term growth in stock price.They expect to be compensated for higher volatility (or b) with above averagelong-term returns. The owners of non-profit organizations usually have non-financialexpectations for the return on their investment.

Employee related strategies range from nurturing to competitive. Employees innurturing organizations hope for security, lifetime employment, liberal benefits,low stress and a family-like environment, while those in internally competitivecompanies seek an entrepreneurial environment with rapid personal advancementopportunities. They place much higher value on short-term rewards than on long-term job security.

Obviously, the various stakeholder strategies need to form a self-consistent set.They are not in general independent. Income driven companies tend to havenurturing employee strategies, while growth driven companies often have morecompetitive employee strategies.

Strategies and the Treacy and Wiersema Value Disciplines

As you can see from the above examples, the strategy is really a name for aparticular profile of targeted stakeholder requirements. The name only takes ongeneral meaning if most companies or business units can be assigned to one of theidentified categories based on similarity of their targeted stakeholderrequirements.

One such recent classification system is that ofTreacy and Wiersema2 (T/W). Theyhave defined three Value Disciplines as a way for classifying companiescustomer strategies. In the remainder of this Part, I will be using the T/W model

as an example of the application of this methodology. Using their one-dimensionalview of the organizations stakeholders greatly simplifies my description of theelements of the methodology. But:

Please keep in mind that the T/W model applies only to customerstrategies. All stakeholder strategies must be considered if arobust prioritization is to be achieved. Omission of a stakeholdergroup often will lead to priorities selected at their expense. Forexample, the T/W approach alone will probably give the wronganswer if applied to a company whose most important strategicimperative is increased stockholder value through growth.

Customers do not usually value the growth of their suppliers.Therefore, revenue growth generating processes will tend to bede-emphasized when only the customer perspective is taken intoaccount. So in applying what follows to a particular companysituation the T/W Value Disciplines MUST BE augmented orreplaced with a similar type classification for the all of theimportant stakeholder strategies. The methodology for doing thisis quite straightforward.

T/W identify three Value Disciplines, which they called operational excellence,product leadership, and customer intimacy:

Companies pursuing an operational excellence strategy provide the lowest totalpurchase cost to their customers by providing high quality (conformance to
http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0201407191http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0201407191


14/35

specification), low price, and ease of purchase. They accomplish this bystreamlining processes to minimize costs and hassle, standardizing, providing high-speed transactions, and creating a culture that abhors waste and rewardsefficiency.

Product leadership companies provide the best possible product to their customers.They focus on creativity and rapid commercialization. They relentlessly pursue waysto leapfrog their own products before someone else does. Intermediate milestones,keeping on track, and celebrating interim victories, characterize their productdevelopment process. They operate a loose, entrepreneurial organization, areresults driven, and encourage individual efforts.

Customer intimate companies provide their key customers with the best totalsolution to their problem. Their focus is on individual key customers rather thanmarkets. Their most important process is solution development, which ischaracterized by delegated decision-making and specific rather than generalsolutions.

Key Customer Requirements

Lets now look from the perspective of customers. They have a portfolio ofrequirements and will most often choose the supplier that best meets them.There are many ways to define the general set of customer requirements. Oftenthey need to be industry specific. For manufacturing, the set of requirements Iusually use is as follows:

1. Product Features

a. Performance Specifications. These are defined by the performancecharacteristics of the product relative to competition. Often they

relate to speed, accuracy, resource usage, size, etc.

b. Fitness for use. Does the product do what I need to have done?

c. Fitness for latent needs. Does the product meet an important needthat I did not previously know I had?

d. Aesthetics. Is the product visually appealing?

2. Quality

a. Conformance to specification. Does the product actually perform asspecified when received?

b. Reliability. Does the product continue to perform as specified overits useful life?

c. Durability. Is the product robust to normal wear and tear?

d. Serviceability. Is the product easily serviced when needed?

3. Cost

a. Price. This is the actual realized selling price, after discounts, etc.

b. Cost of ownership. The additional life-cycle costs I incur with theproduct including inspection, inventory carrying costs to cover poor

delivery, rework costs, warrantee costs, etc.4. Availability


15/35

a. Quoted Lead Time. Ability to get a commitment to receive theproduct when I want it.

b. Minimum/maximum order size. Ability to get the product in thequantity that I need.

5. Servicea. Delivery. Past performance to committed delivery dates.

b. Responsiveness. Broadly defined, this is the ability to get timelyanswers to all queries.

6. Relationship

a. Willingness to partner.

b. Reputation.

In any particular situation it is important to replace the above list with an

appropriate classification of key customer requirements. These requirementsanswer the question: What do our customers consider in making their purchasedecision between alternative products and/or suppliers?

Relating Strategy to Key Customer Requirements

If we consider customers using the above purchase criteria, and map them againstthe T/W Value Disciplines, we arrive at Figure 2.


16/35

Figure 2. Relating Strategy to Customer Requirements


The central part of this matrix arrays the three Value Disciplines against the list ofpossible customer requirement. The symbol used at the intersections representstheir degree of relationship. For example, the double circle shows that there is a

strong relationship between Product Leadership and Specifications. The singlecircle shows that there is a moderate relationship between Customer Intimacy andOwnership Costs. The triangle denotes a weak relationship between OperationalExcellence and aesthetics, etc. Blank cells denote no significant relationship.

Implicit in the use of this tool is that these relationships remain essentiallyconstant over the appropriate planning period, which is typically a year. Byregularly revisiting them, the matrix can be updated to better reflect the currentsituation. Also, for simplicity I have omitted an additional step often used in QFD.In that step, we examine the interrelationships between the various requirementsto identify conflicts and reinforcements. We capture them in what are called

roofs and use them to identify the impact of candidate changes in one selectedrequirement on the others. This becomes necessary when the improvement of one
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%202.ppthttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC.ppthttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%202.ppt


17/35

requirement can worsen performance on another. For example, adding featuresmay be offset by an undesirable increase in price. There are also synergisticimprovements. Quality improvement usually leads to a reduced cost and increasedresponsiveness. If changing degrees of relationship and linkages betweenrequirements becomes important, I generally abandon this entire approach in favor

of System Dynamics simulation modeling since it is optimized for those dynamicsituations.

The filled in matrix in Figure 2 represents my interpretation of the operationaldefinitions of the different T/W strategies. For example, the matrix defines acustomer intimate company as one that sets its highest priority on providingproducts and services that meet customers needs, including latent needs, whilebeing both responsive and willing to form collaborative relationships.Furthermore, it makes sure that it has competitive specifications, low post-delivery quality and ownership costs, and that its reputation is consistent withthese goals. Finally, it ensures that delivery and minimum order size do not

conflict with its higher priorities. Its customers are indifferent to the blankrequirements unless performance drops below an easily maintained level.

Once filled out, the matrix becomes the dictionary that defines the variousstrategies. As you look across each row, you can clearly see that each strategy hasits own distinctive signature. Should a new customer segment appear that has asignificantly different set of key requirements, a new name must be created andadded to the list of strategies to capture that unique segment.

In filling out the matrix, I have adhered to some simple pragmatic rules. For it tobe useful, the matrix should be sparsely populated. There is a tendency for peopleto see strong relationships between all of the elements. If this happens, than the

matrix looses its ability to distinguish the different strategies. When working witha group of people, a facilitator can help by asking questions such as what is themost important relationship? or where is the relationship very weak orinsignificant? or which is more important a or b? A good goal is to have 40%- 60% of the elements blank and a fairly uniform distribution of strong, medium,and weak symbols. Looking along both rows and columns, there should besignificant differences in the degree of relationship. In other words, the strategiesshould look different from one another. The use of a non-linear weighting scalewill further help in combating too many unimportant relationships.

In developing or refining a matrix, a team may encounter significant disagreement

about a relationship. If progress is to be made, the team should make a tentativechoice. It can then go back after completing the exercise to test sensitivity of theconclusions to that particular relationship. This is made easy through the use ofQFD specific or spreadsheet software. I recommend QualiSofts QFD Designer,which I used to prepare Figures 2 and 3. Usually many relationships have to changesignificantly for it to make any difference in the overall conclusions. If sensitiverelationships are found, than further study of them is required. For example, ifimprovement priorities change depending on how important reliability is tocustomers, than a small focused survey can be done to answer that specificquestion. Consensus and buy-in are essential parts of this process and can only beachieved by bringing actual data to significant areas of disagreement.

There are two alternatives for the next step. If the organization knows which ofthe three strategies it is following, then 1 is used in that strategys column entry


18/35

and 0 is entered for all of the others. The importance to customer row iscalculated by replacing the symbol in each matrix element with the numericalweight for that symbol, multiplying by the number in that row of the strategycolumn, and adding the resulting numbers by column. In this case, the resultwould simply be the weights for the chosen strategy.

However, the organization often determines that its business is or should be splitamong the three value disciplines, say 70%-20%-10%, and that its internal processesdo not differentiate between orders from customers in different segments3. In thiscase the strategy column would contain the numbers .7, .2, and .1 (alwaystotaling 1.0) and the same calculation would be made to determine overallimportance to customers. Our purpose here is to discount important requirementsfor the less strategically significant customer segments.

The particular weights chosen here, 9-3-1, are used to accentuate the differencesin relationships. This is a common set used in QFD. Others include 5-3-1 and 3-2-1. Again, sensitivity testing using different weighing schemes can determine the

robustness of the conclusions. What is really important is that items toward thetop of the list really belong there and visa versa.

Sometimes, the organization cannot agree on which value discipline(s) it isfollowing. This may result from lack of data, multiple strategies, orinappropriateness of the strategy classification system to their particular business.In this case, a second approach may be necessary: a market segmentation study.One way of doing this is through surveys or interviews of a representative sampleof key customers (50-100). This sample can include past, present and potentialfuture customers and non-customers (i.e., customers of competitors). Eachcustomer is asked to distribute 100 points between the key customer

requirements.

It is also useful to uncover trends in their point allocations by asking for significantdifferences in how they would have distributed the points five years ago and whatthey think might be requirements of increasing and decreasing importance overthe next five years (remember, the total stays at 100). For example, pointallocations to quality and delivery have tended to drop, as they have becomegivens for doing businesses, while relationship, JIT delivery, and e-commerceare likely to increase in importance in the future. At the same time, need forimprovement of the organization and its principal competitors can be ascertainedusing a scale of zero (low need) to ten (high need) for later use.

The resulting data are sorted into groups of customers having similar key customerrequirements. This can be done using statistical sorting techniques or bysubjective means. I prefer the latter. Translating the point allocations into barcharts and laying them out on a table, they can be visually grouped into similarprofiles or customer fingerprints. Occasionally, an organization might requiremore rigorous analysis although in my experience the increased expense adds littleor no real value.

It is worthwhile to mention here the techniques developed by Noriaki Kano4 fordistinguishing requirements that are delighters, satisfiers, and must-bes(without it, they are dissatisfied). This simplified form of conjoint analysis is

widely used in Japan.
http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=1563270323http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=1563270323http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htm


19/35

Often, industry surveys published in trade journals or analysts research reportscan be used in place of, or as a adjunct to direct surveys or interviews. Thisreduces the cost of determining key customer requirements but at the price ofcustomer specificity and interactive learning through the interview process. Eitherway, the result is a direct numerical scoring of key customer requirements by

importance to them (the higher the points, the greater the importance).

The resulting numbers for a specific customer segment are entered into theimportance to customer row of the matrix. This time the calculation is run inreverse, multiplying the weights by the importance, and now summing the resultacross the rows and entering the sum into the strategy column. Ideally, one ofthe numbers in the strategy column will be much larger than the others. Thisrepresents the appropriate Value Discipline being followed. If there is no clearwinner, then the T/W model is not useful for this market segment. What wehave in fact done is used the methodology as a diagnostic to determine theappropriate strategy name based on key customer requirements. If the T/W

names dont fit, then we can give the new profile its own, unique name.

Assessing Need for Improvement

The objective to this point has been to rate the key customer requirements interms of importance to customers in the targeted market segment. We did this byusing the appropriate T/W Value Discipline or by direct measurement. The nextstep is to determine need for improvement. Ill be assuming that the product ofimportance to customer and need for improvement is a good indicator ofimprovement priority. For those who are unsettled by this assumption, I referyou to the emerging branch of mathematics known as fuzzy logic. A morerigorous approach would be to use the utility function from economics theory, butthat would represent a much more complicated refinement.

Here we have three alternatives:

1. By entering 1 in the need for improvement row, we are ineffect determining the key customer requirements you need toget right in order to satisfy those customers. In the next step,this will produce the enabling business processes or corecompetencies required to achieve leadership in this strategy orValue Disciple.

2. By entering absolute need for improvement in the need for

improvement row, we are in effect determining theperformance gap relative to customers perceived needs. Thiswill lead to a prioritization of improvements most useful to themarket leader in maintaining or increasing its leadershipposition. There are two sources for these data:

a. Consensus voting by knowledgeable insiders.

b. Direct data from customers. For example, if we askedcustomers to rate our performance on a scale of one toten, where ten would be their ideal supplier, then thedifference between our score and ten would be an

indication of our absolute need for improvement on thatrequirement.


20/35

3. By entering relative need for improvement in the need forimprovement row, we are in effect determining theperformance gap relative to our best competitor with respectto that requirement. This will lead to a prioritization ofimprovements with the objective of gaining share against the

market leader. Again, there are two sources for relativeperformance data:

a. Consensus voting by knowledgeable insiders.

b. Direct data from customers. For example, customerscan be asked to rate our performance relative to eachcompetitor on a scale of one to ten. The numericaldifference between us and the market leader, or thebest in class for each requirement can then be used as ameasure of need for improvement.

Need for improvement scores can be determined in this way depending on theprioritization objective, be it:

what do we have to get right?,

what do we have to do to maintain leadership?, or

what do we have to improve in order to gain market share?

This is also the place where trend data can be used to explain past performance

and to predict future areas in need of improvement.It is nice to have the importance to customer row total 100 and the need forimprovement scores be based on the original range of from zero to ten. This canbe accomplished be re-normalizing and rounding-off the entries where necessary.

Linking Customer Requirements to Business Processes

We can now turn to our second matrix. This matrix relates the key customerrequirements to the underlying business processes. There are many ways toclassify business processes. The one I will use here is the system described by TomDavenport4. We will use the requirements improvement priority weights

determined in the previous matrix. Our objective is to identify the impact of eachbusiness process on each of these key customer requirements. Following the samerules as previously described, figure 3 represents my view of these relationships.
http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0875843662http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0875843662http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0875843662http://shop.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=2MXMPFXQXT&mscssid=KEHS6UL6B7HW9LPJJNL1GSDW5Q65DT8E&isbn=0875843662


21/35

Figure 3. Linking Requirements to Processes


This matrix contains the essence of an organizations understanding of its businessprocesses. It is probably unique to a given industry and market segment. In itsdetail, it may be dependent on each individual organization. In a sense, itcaptures the organizations knowledge of the internal drivers for customer (orstakeholder) satisfaction. When done by a group of process experts, it constitutestheir collective wisdom as to the key business drivers in their particular industry.It is the truly proprietary part of what an organization learns about itself in

applying this approach.
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%203.ppthttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_Setting_Improvement_Priorities/Part2_2.gifhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/How%20to%20Build%20a%20BSC%20Fig%203.ppt


22/35

One of the most important properties of this matrix is that it is not diagonal; thereis not a unique one-to-one correspondence between a key customer requirementand a single business process. Consider, for example, on-time delivery. Businessesdo not usually have an on-time delivery process, staffed by an on-time deliverydepartment and led by a Vice President of on-time delivery. On-time delivery

performance depends instead on many independently managed processes within anorganization (see for example my article on Metrics for the Order FulfillmentProcess). In figure 3, the major drivers are manufacturing, logistics (supplierdelivery), and information management (scheduling and MRP). It is this multiple-dependency that creates an interconnected business system, which in turncauses the need for this approach to prioritization.

Once the matrix is complete and the customer based improvement prioritiestransferred from the first matrix, the initial priority can be calculated. This isdone by multiplying the weights by the improvement priority and summing thecolumns. But before the final improvement priority is determined, the issue of

degree of difficulty or organizational readiness must be addressed.

Organizational Difficulty

Processes differ in complexity, both from a technical and people perspective.Improvement is more difficult in a process where the root causes relate to humanbehavior then it is for a process where only equipment or methods need to bechanged. Also, data provides the basic fuel for the improvement process. Can theneeded data be generated by the improvement team or does it have to come fromsomeone else? Cross-functional processes can be complicated by conflictingobjectives and ever-present politics. Since our goal is rapid improvement inresults, we need to raise the priority of processes that can be improved quicklyand drop the priority of the more difficult ones. We do this by adding the rowtitled organizational difficulty to the matrix.

One very interesting commonly observed phenomenon is that success breedssuccess. Over time, many of the initial organizational barriers dissolve on theirown, making the passed-over process improvements more easily tractable. Often,the elimination of the old culture of blame is the key to this transformation.

Organizational difficulty is characterized using a subjective scale ranging from 1(low) to 5 (high). In practice, teams can easily assign values, since theconsideration becomes the number and severity of issues rather than who is at

fault. Once the organizational difficulty is established, the final priority forprocess improvement is determined by dividing the initial priority by theorganizational difficulty and rescaling.

The QFD Designer software includes a bar graphing capability that makes the finalresults for each matrix quickly apparent. The use of the symbols rather thannumbers in filling out the matrices serves a similar role in the visual display of therelevant information.

Performance Goals

The final step in completing the matrix is to determine principal performance

metrics and their associated goals, at least for the high priority improvementtargets. These goals must be aggressive yet achievable. When met, they would


23/35

move this process from its current high to a significantly lower priority forimprovement. It is these performance metrics and goals that have earned theirplace on the appropriate BSC.

In addition to my writings on the half-life method for goal setting, Part 3 willdescribe a systematic approach for identifying the appropriate measures andmetrics for each of the resulting strategic processes improvements.

Results for the Normative Model

Figure 3 has been completed for an organization successfully pursuing operationalexcellence. The improvement priorities were determined based on customerrequirements rather than performance gaps. Organizational difficulty wasassumed the same for all processes. Principal performance goals are based on anorganization that is delighting its customers (i.e. theres no customer identifiedneed for improvement). The resulting process priorities are score ordered in figure4 in terms of decreasing priority.

Figure 4. Process Priorities for Operational Excellence

The normalized scores are calculated by dividing the raw score by the total of allraw scores and than multiplying by 100. In can be interpreted as the percentageof effort or resources that should be focused on maintaining that process atsuperior performance levels. It should serve as a major input into anorganizations budgeting and resource allocation processes. The last column

represents the cumulative normalized scores.

KeyBusinessProcess

Raw

Score

Normalized

Scor

e

Cumulative

%

Manufacturing

4662121

Custom

erRequirementsIdentifica

tion

2491133

Integ

ratedLogistics

2341143

Hu

manResourcesManage

ment

20

5

953

CustomerAcquisition

178861

ProductDevelopm

ent

177869

AssetManage

ment

175877

PerformanceMonitoring

155784

Inform

ationManagement

141691

Po

st-SalesService

75394

OrderManagement

74397

PlanningandReso

urceAllocation

573100


24/35

As can be seen from figure 4, the number one priories of an operationally excellentcompany are its manufacturing related processes. Understanding its customerrequirements and managing its suppliers are next in importance. Getting thesethree processes right will get them nearly half way there.

Following the same procedure as above, figures 5 and 6 show the process prioritiesfor product leadership and customer intimacy.

Figure 5. Process Priorities for Product Leadership

Success in product leadership depends heavily on understanding customerrequirements. In fact its more important than the product development processitself. This result is entirely consistent with the TQM admonition: market in, notproduct out. Next in importance are product development, post-sales service,

and HR management. Post-sales service is important because I assumed that itplayed a major role in determining fitness for use, a very important customerrequirement for product leadership. HR management is key in attracting andretaining the creative people needed for product leadership.

KeyBusinessProcess

Raw

Score

Normalized

Sc

ore

Cumulative

%

Customer

RequirementsIdentification

2162525

Produc

tDevelopment

1361641

Po

st-SalesService

12

3

1455

HumanResourcesMana

gement

1051268

CustomerAcquisitio

n

81977

PlanningandRe

sourceAllocation

72885

AssetMana

gement

39590

Manufacturing

37494

Infor

mationManagement

30398

IntegratedLogistics

12199

OrderManagement

71100PerformanceMonit

oring

10100

KeyBusines

sProcess

Raw

Score

Normalized

Score

Cumulative

%

CustomerRequirem

entsIdentification

3491919

Cust

omerAcquisition

3041736

Post-SalesService

2611450


25/35

Figure 6. Process Priorities for Customer Intimacy

Winning in customer intimacy requires excellence in all processes that directlytouch the customer. Most important are understanding their requirements,acquiring and retaining them, and maintaining high levels of post-sales support.

Conclusions for Part 2

At the start of this Part, I said that this approach is amenable to various levels ofdetail. The examples used here are at the simplest level and provide a normativemodel for process prioritization based on Treacy and Wiersemas Value Disciplines

(figures 4-6). There are no real surprises in the normative model, and thats goodnews. The methodology passes this simple validation test.

The rich and counter-intuitive insights arise when actual strategies, stakeholder

requirements, performance, and constraints are added to the picture. But unlike

individual gut feel, how these collective conclusions were reached can be explained to

others by following the logic trail. After stripping away what turns out to be the

unessential elements of the two matrices, a much simpler picture unfolds, one that is

easily used to illuminate that logic path. I refer you to Analog Devices later version of its

Scorecard Story for such an example.

*This Part is an extension of a research project done for a major internationalconsulting company in 1995 and described in a working paper that I wrote thatyear.

1 See for example: Yoji Akao (Editor), Quality Function Deployment: Integrating CustomerRequirements into Product Design,Productivity Press Inc., May 1990, ISBN: 0915299410

2 Michael Treacy and Fred Wiersema, "The Discipline of Market Leaders: Choose Your Customers,Narrow Your Focus, Dominate Your Market", Addison Wesley Longman, Inc., 1994, ISBN:0201406489

3 In this case, the possibility of creating cells within a process that are dedicated to a particularcustomer segment should be investigated.

4See for example: Shoji Shiba, Alan Graham, and David Walden, A New American TQM: FourPractical Revolutions in Management, Productivity Press Inc., January 1993, ISBN: 1563270323, pg.221.

Product

Development

1891061

PlanningandResourceAllocati

on

156969

Hu

manResourcesManage

ment

14

7

877

Manufacturing

135785

InformationMonitori

ng

111691

PerformanceMo

nitoring

54394

OrderManagement

48397

Asset

Management

35299

Int

egratedLogistics

25110

0
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/2_setting_improvement_priorities/setting_improvement_priorities.htm


26/35

5 Thomas H. Davenport, Process Innovation: Reengineering Work Through InformationTechnology, Harvard Business School Press (October 1992) ISBN: 0875843662

Part 1 return to top Part 3


Part 3: Selecting Scorecard Metrics*


A balanced scorecard contains a concise set of strategically important measures.They capture the vital few drivers of the organizations future success. Ive calledthese scorecard measures metrics and defined them as:

Metrics are a subset of measures of those processes whoseimprovement is critical to the success of the organization

Once we have identified those processes, we face the challenge of selecting thissubset from a seemingly endless list of possibilities. Usually this decision is basedon what measures are already available or can easily be obtained, benchmarkingstudies, or executive edict. But there is a much better way of doing it.

Classifying MeasuresMeasures of a process come in two flavors: I call them results measures andprocess measures, although each has many aliases:

Results Measures Process Measures

Output Input

Outcome Driving

Lagging Leading

External Internal

Reactive Predictive

Static Dynamic

Effect Causal

Retrospective Prospective

Dependent Independent

Whichever set of names you choose, there is a very important difference betweenthem:

Results measures characterize the output of the process. They arethe consequences of actions taken within it. Since they are
http://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/3_Selecting_Metrics/slecting_scorecard_metrics.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/1_The_Business_Process/the_business_process.htmhttp://www.schneiderman.com/Concepts/Scorecard/How_to_Build_a_Balanced_Scorecard/3_Selecting_Metrics/slecting_scorecard_metrics.htm


27/35

descriptors of the output, they relate directly or indirectly to thingsthat a customer of that process can sense or measure.

Process measures, on the other hand, are the internal measuresfrom within the process that determine these results. In most cases,the customer has little or no interest in or knowledge of them.

The SIPOC Method

One very useful model for generating candidate measures is called the SIPOCmethod. SIPOC stands for

SupplierInputProcessOutputCustomer.

In using this model, we usually start by identifying all of the customers of theprocess and determine their complete sets of requirements. Here, customersinclude both the external purchaser of the final product or service as well as otherinternal processes that are part of the organizations value creating activities (or,

as we say in TQM: The next process step is the customer.). Through a processcalled Voice of the Customer we translate these requirements into resultsmeasures that characterize the output of the process in terms that are bothmeaningful to and measurable by the process executors. This translation isnecessary because the customer often describes their requirements in words thatdo not have a direct process counterpart.

Next, we reverse this procedure by identifying all of the external inputs that weneed in order to execute the process, define our requirements for each of theseinputs, and ideally working with our suppliers, translate them back into a set ofspecifications that are expressed in the suppliers own language (Voice of the

Supplier).Output measures and their associated quantifiable customer requirements(OutputCustomer) are clearly results measures. Measures associated with stepsinternal to the process (Process) are obviously process measures. But what aboutinput and supplier measures (SupplierInput)? Symmetry would suggest that sincethey are results measures of the suppliers value creation process, they must alsobe results measures for our process. But is that necessarily so? In other words,can a measure that is a results measure for an upstream process be a processmeasure in a subsequent step? The answer here is a little bit tricky.

What is different about SupplierInput measures are that we cannot improve them

directly from within our own process. We can only do so indirectly by changingspecifications, or suppliers, or through the redesign of our product and/or process(design for x-ability). Their actual improvement is directly controllable only bythe supplier of that input. Often we have a limited ability to affect our supplierscontrol or improvement efforts (through partnering, for example) or to redesignour products and/or processes. If that is the case, then we need to treat thatmeasure as a given (that is, a constant) and that measures classification into theresults or process category then becomes moot.

Generally speaking, to indirectly change an input measure requires the exercise ofdifferent internal process within our organization - the supplier selection process

by which we choose suppliers, and/or the product and process design processes.Even in that case, it is difficult to argue that they are anything but results


28/35

measures. In other words, unless we include within our process sub-processes forsupplier selection and product/process redesign, we must view these measures asthe result measures of other internal or external processes.

Any given process is part of a system of interacting processes. This is one of theimportant reasons why its critical to have sponsorship of all improvement effortsby someone who is in a position to set appropriate boundaries and constraints tothat effort.

The Math of Metrics

From a mathematical point of view, the last alias-pair is the traditional choice ofterms. For each results measure, we can write a symbolic equation that relatesthis dependent measure (or more correctly, dependent variable) to theindependent ones:

In words, this equation simply states that the dependent measure, yi, is a functionof (i.e. depends on, or is determined by) all of the independent measures:x1,x2,up toxn, where n is the total number of independent process measures.

For example, if the process were baking a cake, then one dependent measurewould be the lightness (in the Language of the Customer) of the resulting cake,measured by its density (in the Language of the Process) in grams per cubiccentimeter. Here, y1 would be cake density and the goal is for it to be in aspecific range: not too light, not too heavy, but just right. What about thexs?The list would include oven temperature, cooking time, amounts used of the

various ingredients, freshness of ingredients, etc. These are the measures that areincluded or implied in a clear recipe (or Standard Operating Procedure (SOP)).Other dependent measures would include moistness, sweetness, and flavor forexample and we could create instruments that would measure each of them, aswell as establishing each of their associated target ranges. Each dependentmeasure would depend on one or more of the many independent measures.

Determining drivers of change

In general, we are trying to limit variation of and/or improve dependent measuresin order to make our product more attractive to its customers. So lets look athow this equation changes with changes in the independent measures:

The symbol stands for a small change in the measure. So this equation saysthat the change in a dependent measure is the sum of the weighted changes in allof the independent measures. For very small changes in the measures,mathematicians can show that this simple additive relationship holds in mostpractical cases. The weights aij are sometimes called influence coefficients or

impact parameters.1 They represent the effect that a small change in thejth

independent measure has on the ith dependent measure. Ifaij is zero, than small


29/35

changes in its independent measure have no effect on that dependent measure. Ifthe value ofaij is large compared to the other coefficients, then the dependentmeasure is very sensitive to changes in that independent measure. Its theseinfluential independent measures that are usually the targets for both processcontrol and process improvement and are therefore candidate scorecard metrics.

In process control, they are called critical nodes. By locking them, we assurethat variation in the dependent measures that they affect will be maintainedwithin a range thats acceptable (but not necessarily satisfactory) to the customer.For process improvement they indicate the likely root causes of the gap betweencurrent and target results.

Unfortunately in practice, for large changes in the measures, this simple model isoften limited by two phenomena: non-linearity and interaction. Non-linearitycauses the influence coefficients to change (increase or decrease) for largechanges in their independent measure. Interaction occurs when interdependenciesdevelop between the various independent measures (they loose their

independence).

Some Simple Examples

The exact mathematical function takes on different forms for different dependantmeasures and processes. Here are some examples:

Example 1:

The time required to execute a process from its start to its finish is calledits cycle time. If the variousxs are the cycle times, tj, for the internalprocess steps that lie on the critical path, then the total cycle time, T,

is

Example 2:

The overall yield of a process depends on the sequential yield of theinternal sub-process steps. Lets say that if the process were perfect (nointernal yield loss), it would produce 100 output units. If the actual yield in

the first step is 90%, then only 90 potential outputs survive it to the nextstep. If that steps yield were 80%, then only 80% of those 90 or 72 wouldmake it to the next step, etc. Therefore, the overall yield is given by:

For Example 1 above, all of the influence coefficients have a constant value of 1,that is any increase or decrease in a critical path cycle time simply adds orsubtracts that change from the total cycle time. We could include non-critical

path sub-process cycle times, but their influence coefficients would all be zero(until they became long enough to enter the critical path). On the other hand, for
http://www.schneiderman.com/Concepts/PM_Model/step_4.htmhttp://www.schneiderman.com/Concepts/PM_Model/step_6.htmhttp://www.schneiderman.com/Concepts/PM_Model/step_4.htmhttp://www.schneiderman.com/Concepts/PM_Model/step_6.htm


30/35

example 2 it is straight forward to show that the influence coefficient is inverselyproportional to that sub-process yield (aTj=YT/Yj). What this means is thatimproving a low yielding process step by 1% (for example from 25% to 26%) has agreater impact on total yield than that same 1% improvement in a high yieldingprocess step (going from say 95% to 96%). In other words, lower yield process steps

have larger influence coefficients.

In many manufacturing environments, process or manufacturing engineers knowthe mathematical relationships between the dependent and independentmeasures. Usually they do this based on a physical or chemical theory of whatshappening in the process. When this is the case, these experts can help in theselection of those independent measures that are the principle drivers of change inany given results metric. Once identified, these process metrics generallyrepresent the primary targets for improvement efforts and are tracked on theappropriate scorecard.

Empirically Determining Process Metrics

As a rule-of-thumb, low influence coefficient independent measures vastlyoutnumber the critical few (see Why Do Root Cause Analysis?). So trial-and-erroris not a viable option. Finding the process metrics in practice often ends uprequiring a mixture of both art and science.

When a theoretical equation does not exist or is not known, we need to resort toempirical observation. Total Quality Management (TQM) employs teams that applythe scientific methodology (the PDCA Cycle and the 7-Step Method) and basicanalysis tools (the 7 QC Tools) for identification of the root causes (processmetrics) of undesirable outcomes (results metrics). Ive explained this process in

more detail in my article Are There Limits to TQM?"The vast majority of process improvements can be discovered using these simplescientific tools. For more complex situations, three additional approaches aresometimes used: heuristic techniques, design of experiments (DOE), and simulationmodeling.

Heuristic Methods

I once assisted a team trying to reduce defects in welded pipe used in the oilindustry. The particular defect was called hook cracks since they had the shapeof a fishhook. In stratifying defect data by shift, I discovered that one crew had

significantly lower defect levels than the others. I narrowed it down to the welderoperator and interviewed him in the hopes of documenting his secret so that thisbest practice could be shared with the others. Each welder setting was specifiedwith a range determined by the industrial engineers. I asked him how he chose asetting from within these ranges and his answer was I can tell by the sound thewelder makes. The other operators just tried to pick the mid-point. The IEsresponse: Sound has nothing to do with weld quality.

A few months later I visited an identical pipe mill in Japan where the operatorsrelied on an additional meter to adjust the mill settings. Using a microphoneplaced near the weld site and connected to a measuring instrument (a spectrum

analyzer), their IEs had determined that if the sound frequency was within acertain range, a perfect weld was produced. Outside that range, the resulting
http://www.schneiderman.com/The_Art_of_PM/root_cause/why_do_root_cause_analysis.htmhttp://www.schneiderman.com/The_Art_of_PM/root_cause/why_do_root_cause_analysis.htm


31/35

product was defective. What was the defect? No one remembered at first sincethe discovery had been made several years before. Finding an old-timer theycame back with the answer: Something called hook cracks. Why should a goodweld have a certain pitch to the sound it made? There was no acceptedtheoretical explanation; it simply worked. The Japanese IEs were willing to

accept this heuristic observation while their American counterparts had discardedit as scientifically baseless.

As another example, Kano2 observed an important non-linearity in the independentmeasures that we call customer satisfaction. He classified the independentattributes that drive customer satisfaction (such as particular product features,price, availability, reliability, etc.) into four categories:

To place each independent measure into one of these categories, Kano developeda structured multiple-choice survey tool. He than created a heuristic decoderring for determining the measure type from the responses to paired questions. Byunderstanding current performance and the type of measure, the user could thanrank all of the independent measures by their improvements impact on customersatisfaction.

In general, heuristic methods are based on empirical observation, not on anyunderlying mathematical theory. They are often discovered through gut feel orwhat Ive called the ins: instinct, intuition, insight, inspiration, innovation,invention, etc. Their justification is therefore based on the fact that they simplywork in practice. Although we preach management by fact it is important toalso acknowledge that in many instances, and through mechanisms that we do noteven understand, some people are able to see through process complexity andidentify the underlying drivers.

How to Build a Balanced Scorecard* Introduction

Documents

Transcript of How to Build a Balanced Scorecard* Introduction