1 performance management week 12 the balanced scorecard drury – chapter 23

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Performance Management

Performance Management

Week 12The Balanced Scorecard

Drury – Chapter 23

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The Balanced Scorecard

Strategic management accounting•Late 1980s – traditional management accounting critized for not contributing to new business approaches and competitive environment

•Strategic management accounting introduced as a way forward

•Provide information for strategy formulation and managing strategy implementation

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Strategic management accounting•Attention given to integrated framework of performance measurement – to clarify, communicate, and manage strategy

•Recent development – emphasize and seek to incorporate performance measurement within the strategic management process

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Balanced Scorecard - Back-ground•Prior to 1980s, management accounting control systems only focus on financial measures of performance

•Information in monetary terms – motivated managers to focus more on cost reduction – ignored important variables necessary to compete in the competitive environment.

•Variables such - product quality, delivery reliability, after sales services, customer satisfaction – ignored by traditional PM

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Back-ground (cont)

•In the 1980s, state of confusion, with increase in importance in non-financial variables to compete successfully – no standards

•Need to link financial and non-financial PM

•The Balanced Scorecard was created by Kaplan and Norton in 1992, refined along the way

•Formulated a set of non-financial measures to provide top management a fast but

comprehensive view of the organizational unit (division, department, SBU)

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Back-ground (cont)

•Variables designed to answer the following:

•How do customers see us?The customer perspective

•What must we excel at?The internal business process perspective

•Can we continue to improve and create value? The learning and growth perspective

•How do we look to shareholders? The financial perspective

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Back-ground (cont) #

•Aims:•Provide a comprehensive framework for•Translating firm’s strategic objectives into•A coherent set of performance measures (PM)

•How?•Each firm to express major goals for each of the 4 perspectives and•Translate these goals into specific PM•Each firm must decide its critical PM•Choice will vary over time, but must link to its strategy

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© 2000 Colin Drury

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As a Strategic Management System•Objectives of the Balanced Scorecard are:

•Derived from a top-down process

•Driven by the mission and strategy of the business unit

•Translate mission & strategy into a linked set of measures that define both

•Long-term strategic objectives and•Mechanisms for achieving such objectives

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As a Strategic Management System (cont)

•Objectives of the Balanced Scorecard are: (cont)

•Performance Measures to incorporate a balance between:

•external measures relating to customers and •internal measures relating to critical business

process, innovation, and learning•A balance between outcome measures (past effort results) & measures that drive future performance

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As a Strategic Management System (cont)


•Successful implementation (Kaplan & Norton):•Clarify and translate vision and strategy into specific objectives, and identify critical drivers of the strategic objectives •Communicate and link strategic objectives & measures

•Employees to translate high level objectives into local objectives that support the SBU’s global strategy

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As a Strategic Management System (cont) #


•Successful implementation (Kaplan & Norton):

•Plan, set targets, and align strategic initiatives•Targets should be 3-5 year period, on yearly basis for control

•Enhance strategic feedback and learning•Allowing managers to monitor and make adjustments (even changes to strategy)

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As a Strategic Management System (cont) #

•Balanced Scorecard : Example•Financial perspective:

•Goal/objective: increase shareholder value

•Measure: Increase profit thru sales growth

•Target performance: $100B

•Actual performance: $95B

•Customer perspective: •Goal: Increase market share

•Measure: Market share of product X

•Target performance: 20%

•Actual performance: 21%

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The Balanced ScorecardAs a Strategic Management System (cont) #

•Balanced Scorecard : Example•Internal business process perspective:

•Goal/objective: improve product X quality

•Measure: quality index/yield

•Target performance: 98 %

•Actual performance: 97 %

•Learning and growth perspective: •Goal: improve process skills

•Measure: % of employees trained in quality management

•Target performance: 90%

•Actual performance: 92%

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(1) The financial perspective

•Evaluates the profitability of the firm’s strategy

•Example: cost reduction strategy: measures ROI resulting from such cost reduction strategy

•Typical measures include ROI, RI (residual income) and EVA (economic value added)

•Other objectives: revenue growth, cost reduction and asset utilization.

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(1) The financial perspective #

• Argument: by focusing on other perspectives, financial measures will take care of themselves.

•Financial success = doing the fundamentals well•Kaplan: needed – provide feedback on “improved” financial performance•Summarises the economic consequences of strategy implementation

•Typical objectives:

•Increase ROI by say 20%•Increase sales by say 100%

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(2) The customer perspective

Identifies targeted market segments & measures the firm’s success in

these segments

•Identify customer & market segments (both existing & potential)

•Develop performance measures to track unit’s ability level

•Measures relate to customer loyalty, & strategy outcome

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(2) The customer perspective (cntd)

Market share

•Population of sales in a specific market that the firm obtains•Can be measured in:

•Sales revenue•Unit sales•Number of customers

•Measure of market penetration•Estimates of market size is required

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(2) The customer perspective (cont)

Market share

•Major contribution:•Indicates if adopted strategy lead to

expected results in the targeted market segment

•Possible: sales growth objectives achieved temporarily from non-targeted segments

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Customer retention & loyalty

•One way to maintain or increase market share in targeted customer segment•Can be measured as:

•Average duration of a customer relationship•No of new customers referred by existing

ones•Valuable feedback: find out where they have

gone, and why

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Customer acquisition

•Can be measured by:

•No of new customers•Total sales to new customers•No of new customers in % of prospective

inquiries•Ratio of new customers per sales call

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Customer satisfaction

•Use questionnaire surveys & customer response cards•Can be measured by:

•Examine letters of complaints•Feedback from sales reps•Use of mysterious shoppers

•Limitation: only measure attitudes, but not actual buying behaviour

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Customer profitability•Satisfied customer must be profitable customers•Above only measure means to achieve customer

profitability, not outcome•Analyse profitability by segment, •Identify unprofitable segment•To apply life-cycle profitability analysis for decision on retention or abandoning customers•On unprofitable customers:•Change their buying behaviour to cut costs or

increase price – otherwise to drop them

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Value propositions (Kaplan)

•Product attributes to create loyalty & satisfaction•3 categories:

•Product / service attributes•Include features, price, & quality

•Customer relationship•Include delivery, buying experience

•Image & reputation•Include intangible factors

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Value propositions (Kaplan) (cont)

•3 dimensions of measurement:•Time-based measures

•Speedier response •lead time use to measure customers’ expectations

•100% on-time delivery•no of late delivery as performance driver

for customer satisfaction & retention

•Reduce time taken to bring new product to market

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•3 dimensions of measurement:•Quality

•Quality delivered to and received by the customer •Measures include:

•Defective units delivered•No of customers complaints•Returns & warranty claims•surveys

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(2) The customer perspective (cont) #


•3 dimensions of measurement:•Price

•Concern by customers whether low cost or differentiated strategy

•Reporting mechanism comparing prices with competitors

•For “bidding” process, % of bids accepted indicates price competitiveness

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(3) The internal business perspectiveFocuses on internal operations that:

•enhances customer perspective by creating value for customers and•enhances financial perspective by increasing

shareholder value•example: strategy to improve internal process

target after benchmarking against competitors•3 sub-processes:

•Innovation process•Operation process•Post sales process

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(3) The internal business perspective3 principal internal business processes:

(a) innovation process

•Creates products, services, and processes that will meet the needs of

customers•Include new markets, new customers, emerging / latent needs of existing customers

•Continuous R & D creating innovative products /services provides companies with

competitive advantage•R & D getting more important in value chain

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(3) The internal business perspective (cont)

3 principal internal business processes:

(a) innovation process (cont)

•measures (Kaplan) include:•% of sales from new products•New product introduction v competitors, & v plan•Time to develop next generation of the products•No of key items firm is 1St or 2nd to market•Break-even time (time from development to launch) with enough pay-back

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(3) The internal business perspective (cont) #

3 principal internal business processes:

(c) Post sales service processes

•Provides service and support to customers after sales

•Includes warranty & repair activities, treatment of defects & returns•Measures on response to customers

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(4) The learning perspectiveStress importance of investing for the future in

other areas (not assets, R & D,)

•Identify infrastructure needed for long term growth•Infrastructure includes people, systems, organizational procedures•Kaplan’s 3 principal categories:

•Employee capabilities•Information system capabilities•Motivation, empowerment, alignment

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(4) The learning perspective (cont)

(A) Employee capabilities•3 core measurement outcomes:•Employee satisfaction

•Consider driver of the other 2•Pre-condition to up customer satisfaction•Measured thru survey, index by dept

•Employee retention•Measured by annual % of resigned key staff

•Employee productivity•Measured by sales per employee

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(4) The learning perspective (cont)

(B) Information system capabilities•Employees required effective information for effective decision making•Measures of strategic information availability include:

•% of processes with:•Real time quality•Cycle time•% of customer-facing employees with on-line information

•Measures seek to provide indication of availability of internal process info to front-line employees

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(4) The learning perspective (cont) #

(C) Motivation, empowerment & alignment

•Measure of motivated & empowered employees – no of suggested improvements per

employee

•Performance driver for employee and organizational alignment – whether they have goals aligned with company objectives

•Outcome measures:•% of employees with personal goals aligned to

the balanced scorecard•% of employees who achieve personal goals

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Aligning the Balanced Scorecard •Different strategies call for different scorecards•Some common measures found on company scorecards:

•Financial perspective•Operating income, revenue growth, revenues from new products, gross margin %, cost reductions in key areas, economic value added, ROI

•Customer Perspective•Market share, customer satisfaction, customer retention %, time taken to fulfil customers’ request, no of customer complaints

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Aligning the Balanced Scorecard (cont)

•Internal Business Process Perspective

•Innovative process: manufacturing capabilities, no of new products, new product development times, no of new patents•Operations process: yield, defect rates, time taken to deliver products to customers, % of on-time deliveries, average time taken to manufacture orders, set-up time, manufacturing downtime•Post-sales services: time taken to replace or repair defective products, hours of customer training for using the product

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Aligning the Balanced Scorecard (cont) #

•Learning and growth perspective

•Employee education and skill levels, employee satisfaction score, employee turnover rates, information system availability, % of processes with advanced control, % of employee suggestions implemented, % of compensation based on individual & team incentives

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Sample Balanced Scorecard A: Financial Perspective

Objective:

Increase shareholder value

Measures:

Increase in operating income

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Sample Balanced Scorecard A: Financial Perspective

Initiatives: TargetPerformance

ActualPerformance

Manage costs andunused capacity

Build strong customerrelationships

$2,000,000

$3,000,000

6%Build strong customerrelationships

$2,100,000

$3,420,000

6.48%

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Sample Balanced Scorecard B: Customer Perspective

Objectives:

Increase market share

Measures:

Market share in communicationnetworks segment

Customer satisfaction survey

Increase customer satisfaction

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Sample Balanced Scorecard B: Customer Perspective

Initiatives:Target

PerformanceActual

Performance

Identify future needsof customer

Identify new targetcustomer segments

6%

7

90% give toptwo ratings

Increase customer focusof sales organization

7%

8

87% give toptwo ratings

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Sample Balanced Scorecard C: Internal Business Process Perspective

Objectives:

Improve manufacturingquality and productivity

Measures:

Yield

On-time delivery

Meet specified delivery dates

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Sample Balanced Scorecard C: Internal Business Process Perspective


ActualPerformance

Identify problems andimprove quality

Reengineer orderdelivery process

78%

92%

79.3%

90%

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Sample Balanced Scorecard D: Learning and Growth Perspective

Objectives:

Align employee andorganization goals

Measures:

Employee satisfaction survey

Improvements in process controls

Improve manufacturing processes

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Sample Balanced Scorecard D: Learning and Growth Perspective


ActualPerformance

Employeeparticipation and

suggestion programto build teamwork

Organize R&D/manufacturing teamsto modify processes

80% ofemployees

give toptwo ratings

5

88% ofemployees

give toptwo ratings

5

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Pitfalls When Implementinga Balanced Scorecard

What pitfalls should be avoided whenimplementing a balanced scorecard?

1. Don’t assume the cause-and-effectlinkages to be precise.

2. Don’t seek improvements acrossall measures all the time.

3. Don’t use only objective measureson the scorecard.

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Pitfalls When Implementinga Balanced Scorecard (cntd)

4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.

5. Don’t ignore nonfinancial measures whenevaluating managers and employees.

6. Don’t use too many measures.

1 performance management week 12 the balanced scorecard drury – chapter 23

Documents

strategythe balanced

strategic management

internal measures

set of nonfinancial

outcome measures

external measures

contperformance measures

linked set of measures