Use the following as a guide to set out your group’s corporate strategy and sub-strategies. For each section you are required to enter: what is your strategy? why you have decided on this strategy? how you are going to implement it? That is what are the decisions you will enter to achieve this strategy?– Must relate to the BSB Game decision making parameters. Refer to Lecture 1, 2 and 3 - Strategy and the BSG The final document should be approximately 2 pages in length. Corporate Strategy What is your overall strategy? Marketing and Competitive Strategy How are you going to meet customer needs in a competitive environment? Operational Strategy How are you going to make the right quality shoe in the right place, delivered in the right time? Human Resource Strategy How are you going to maximise the efficiency of your workers? Finance Strategy How are you going to fund the company? Investor Strategy What is your dividend policy? Please note that it is critical that that this assessment is completed as this document is, in effect, an implementation plan which will inform your decisions in the Business Strategy Game.
body.fm Article 44 The Balanced Scorecard—Measures that Drive Performance Robert S. Kaplan and David P. Norton What you measure is what you get. Senior executives understand that their organization’s measurement system strongly affects the behavior of managers and employees. Executives also understand that traditional financial ac- counting measures like return-on-investment and earnings- per-share can give misleading signals for continuous im- provement and innovation—activities today’s competitive environment demands. The traditional financial perfor- mance measures worked well for the industrial era, but they are out of step with the skills and competencies com- panies are trying to master today. As managers and academic researchers have tried to remedy the inadequacies of current performance measure- ment systems, some have focused on making financial measures more relevant. Others have said, “Forget the fi- nancial measures. Improve operational measures like cycle time and defect rates; the financial results will follow.” But managers should not have to choose between financial and operational measures. In observing and working with many companies, we have found that senior executives do not rely on one set of measures to the exclusion of the other. They realize that no single measure can provide a clear per- formance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures. During a year-long research project with 12 companies at the leading edge of performance measurement, we de- vised a “balanced scorecard”—a set of measures that gives top managers a fast but comprehensive view of the busi- ness. The balanced scorecard includes financial measures that tell the results of actions already taken. And it comple- ments the financial measures with operational measures on customer satisfaction, internal processes, and the orga- nization’s innovation and improvement activities—opera- tional measures that are the drivers of future financial performance. Think of the balanced scorecard as the dials and indica- tors in an airplane cockpit. For the complex task of navigat- ing and flying an airplane, pilots need detailed information about many aspects of the flight. They need information on fuel, air speed, altitude, bearing, destination, and other in- dicators that summarize the current and predicted environ- ment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously. The balanced scorecard allows managers to look at the business from four important perspectives. (See the exhibit “The Balanced Scorecard Links Performance Measures.”) It provides answers to four basic questions: • How do customers see us? (customer perspective) • What must we excel at? (internal perspective) • Can we continue to improve and create value? (inno- vation and learning perspective) • How do we look to shareholders? (financial perspec- tive) While giving senior managers information from four dif- ferent perspectives, the balanced scorecard minimizes in- formation overload by limiting the number of measures used. Companies rarely suffer from having too few mea- sures. More commonly, they keep adding new measures whenever an employee or a consultant makes a worthwhile suggestion. One manager described the proliferation of new measures at his company as its “kill another tree pro- gram.” The balanced scorecard forces managers to focus on the handful of measures that are most critical. Several companies have already adopted the balanced scorecard. Their early experiences using the scorecard have demonstrated that it meets several managerial needs. First, the scorecard brings together, in a single management report, many of the seemingly disparate elements of a com- pany’s competitive agenda: becoming customer oriented, shortening response time, improving quality, emphasizing teamwork, reducing new product launch times, and man- aging for the long term. 1 Article 44. The Balanced Scorecard—Measures that Drive Performance Second, the scorecard guards against suboptimization. By forcing senior managers to consider all the important operational measures together, the balanced scorecard lets them see whether improvement in one area may have been achieved at the expense of another. Even the best objective can be achieved badly. Companies can reduce time to mar- ket, for example, in two very different ways: by improving the management of new product introductions or by releas- ing only products that are incrementally different from ex- isting products. Spending on setups can be cut either by reducing setup times or by increasing batch sizes. Similarly, production output and first-pass yields can rise, but the in- creases may be due to a shift in the product mix to more standard, easy-to-produce but lower-margin products. We will illustrate how companies can create their own balanced scorecard with the experiences of one semicon- ductor company—let’s call it Electronic Circuits Inc. ECI saw the scorecard as a way to clarify, simplify, and then op- erationalize the vision at the top of the organization. The ECI scorecard was designed to focus the attention of its top executives on a short list of critical indicators of current and future performance. Customer Perspective: How Do Customers See Us? Many companies today have a corporate mission that focuses on the customer. “To be number one in delivering value to customers” is a typical mission statement. How a company is performing from its customers’ perspective has become, therefore, a priority for top management. The bal- anced scorecard demands that managers translate their 2 ANNUAL EDITIONS general mission statement on customer service into spe- cific measures that reflect the factors that really matter to customers. Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost. Lead time measures the time required for the company to meet its cus- tomers’ needs. For existing products, lead time can be mea- sured from the time the company receives an order to the time it actually delivers the product or service to the cus- tomer. For new products, lead time represents the time to market, or how long it takes to bring a new product from the product definition stage to the start of shipments. Qual- ity measures the defect level of incoming products as per- ceived and measured by the customer. Quality could also measure on-time delivery, the accuracy of the company’s delivery forecasts. The combination of performance and service measures how the company’s products or services contribute to creating value for its customers. To put the balanced scorecard to work, companies should articulate goals for time, quality, and performance and service and then translate these goals into specific measures. Senior managers at ECI, for example, established general goals for customer performance: get standard prod- ucts to market sooner, improve customers’ time to market, become customers’ supplier of choice through partnerships with them, and develop innovative products tailored to customer needs. The managers translated these general goals into four specific goals and identified an appropriate measure for each. (See the exhibit “ECI’s Balanced Business Scorecard.”) To track the specific goal of providing a continuous stream of attractive solutions, ECI measured the percent of sales from new products and the percent of sales from pro- prietary products. That information was available inter- nally. But certain other measures forced the company to get data from outside. To assess whether the company was achieving its goal of providing reliable, responsive supply, ECI turned to its customers. When it found that each cus- tomer defined “reliable, responsive supply” differently, ECI created a database of the factors as defined by each of its major customers. The shift to external measures of perfor- mance with customers led ECI to redefine “on time” so it matched customers’ expectations. Some customers defined “on-time” as any shipment that arrived within five days of scheduled delivery, others used a nine-day window. ECI it- self had been using a seven-day window, which meant that the company was not satisfying some of its customers and overachieving at others. ECI also asked its top ten custom- ers to rank the company as a supplier overall. Depending on customers’ evaluations to define some of a company’s performance measures forces that company to view its performance though customers’ eyes. Some com- panies hire third parties to perform anonymous customer surveys, resulting in a customer-driven report card. The J.D. Powers quality survey, for example, has become the stan- dard of performance for the automobile industry, while the Department of Transportation’s measurement of on-time arrivals and lost baggage provides external standards for airlines. Bench-marking procedures are yet another tech- nique companies use to compare their performance against competitors’ best practice. Many companies have intro- duced “best of breed” comparison programs: the company looks to one industry to find, say, the best distribution sys- tem, to another industry for the lowest cost payroll process, and then forms a composite of those best practices to set objectives for its own performance. In addition to measures of time, quality, and perfor- mance and service, companies must remain sensitive to the cost of their products. But customers see price as only one component of the cost they incur when dealing with their suppliers. Other supplier-driven costs range from ordering, scheduling delivery, and paying for the materials, to receiv- ing, inspecting, handling, and storing the materials; to the scrap, rework, and obsolescence caused by the materials, and schedule disruptions (expediting and value of lost out- put) from incorrect deliveries. An excellent supplier may charge a higher unit price for products than other vendors but nonetheless be a lower cost supplier because it can de- liver defect-free products in exactly the right quantities at exactly the right time directly to the production process and can minimize, though electronic data interchange, the ad- ministrative hassles of ordering, invoicing, and paying for materials. Internal Business Perspective: What Must We Excel at? Customer-based measures are important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. After all, excellent customer performance derives from processes, Other Measures for the Customer’s Perspective A computer manufacturer wanted to be the competitive leader in customer satisfaction, so it measured competitive rankings.The company got the rankings through an outside organization hired to talk directly with customers. The com- pany also wanted to do a better job of solving customers’ problems by creating more partnerships with other suppli- ers. It measured the percentage of revenue from third-party relationships. The customers of a producer of very expensive medical equipment demanded high reliability. The company devel- oped two customer-based metrics for its operations: equip- ment up-time percentage and mean-time response to a service call. A semiconductor company asked each major customer to rank the company against comparable suppliers on efforts to improve quality, delivery time, and price performance. When the manufacturer discovered that it ranked in the mid- dle, managers made improvements that moved the company to the top of customers’ rankings. 3 Article 44. The Balanced Scorecard—Measures that Drive Performance decisions, and actions occurring throughout an organiza- tion. Managers need to focus on those critical internal op- erations that enable them to satisfy customer needs. The second part of the balanced scorecard gives