BALANCED BUSINESS SCORECARD

ISI/MBB04/2007

The balanced scorecard is a management system (not only a measurement system). It enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. Fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
2 ISI/MBB04/2007

A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the 'balanced scorecard'. The balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.

ISI/MBB04/2007

The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success . These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.

ISI/MBB04/2007

Presentation covers

Need for a balanced business scorecard What is a balanced scorecard How to build and implement a balanced scorecard

ISI/MBB04/2007

The importance of a management system

Vision and Strategy

Management System

Fundamentals

Projects

Initiatives

ISI/MBB04/2007

TAKING OFF THE BLINDERS...

In strategy it is important to see distant things as if they were close and to take a distanced view of close things.

Miyamoto Musashi The Book of Five Rings

ISI/MBB04/2007

Elements of a good Management System

Derived from the Vision and Strategy of the organization Planning

Long term strategic plan Short term business plan and budgets Focused set of measures Measures represent organization's plan and vision Plans are regularly reviewed and suitably revised Rewards are linked to driving key measures 8

Measurement

Review

Performance

ISI/MBB04/2007

Genesis of Balanced Scorecard

Situation

Bias towards Financial Measures Initiatives not all linkable to financials, hence
Either Or

not undertaken

too many initiatives

Top Management need to focus

9 ISI/MBB04/2007

Advantages Balanced Scorecard because:

financial and ... external and ... outcomes and ... quantitative and ...

nonfinancial indicators internal measures performance drivers qualitative factors

10

ISI/MBB04/2007

Genesis of Balanced Scorecard

The Balanced Scorecard solution - Kaplan & Norton

A set of measures based on

Finance Customer Internal Learning

processes and growth

Linked to vision and strategy Balances short and long term needs Builds leading and lagging indicators

11

ISI/MBB04/2007

12

ISI/MBB04/2007

Balanced Score Card 2007 Organization : NXP Semiconductors Limited Thailand

Freq Financial 1. EBIT (M EURO), cum M 3.a Break-even point (%) (Excl Subcon) M 4. Business Renewal Cost Savings (M.Euro), cum M 5. Purchasing Savings (M.Euro) Cum M Customer 1. Customer Satisfaction % M 2. RLIP(%) M 3. Stacked Leadtime, 95% tile (days) M 4a. Number of PSX Cust Complaints (#) M 4b. Number of automotive Complaints (#) M 5. TPT customer Complaints, 90% tile (days) M Process 1. Assembly Yield (PPM) M 2. Cost of Non-Quality Improvement (M.Euro), Cum M 3. SPC Assy CpK > 1.67 (%) M 4. Assy Asset Operational Utilisation (%) M 5. Test Asset Operational Utilization (%) M Learning 1. Number of black&green belts trained #, M Cum 2.Skill Matrix Score M 1 1.5 53.7 0.0 0.1 63.8 90.3 6.9 20.0 15.0 6.6 1464 0.429 95.2 85.0 89.7 0.0 89.0
13

2 2.0 67.3 0.4 0.1 65.7 90.7 7.6 17.0 16.0 6.4 1386 1.060 95.3 87.3 89.3 0.0 91.0

3 2.2 67.9 0.3 (0.0) 83.4 89.6 7.2 9.0 24.0 6.7 1400 1.563 95.7 87.2 88.9 0.0 92.0

Results (Month) Q1 4 2.2 61.8 0.3 (0.0) 70.2 90.2 7.2 46.0 55.0 6.6 1417 1.560 95.4 86.5 89.3 0.0 93.0 0.9 84.2 0.3 0.0 83.7 82.9 9.9 16.0 23.0 6.5 1600 1.777 95.5 86.0 89.6 0.0 92.0

5 2.4 61.3 0.4 0.4 86.2 84.7 7.1 9.0 10.0 6.8 1300 1.892 96.1 87.8 91.5 15.0 92.0

6 3.4 63.9 0.7 0.6 91.8 88.6 7.1 9.0 5.0 7.0 1300 2.238 96.3 89.0 92.0 16.0 78.0

Q2 3.4 67.2 0.7 0.6 87.0 85.2 7.3 34.0 12.0 6.9 1400 2.238 96.0 87.6 91.0 16.0 82.0

ISI/MBB04/2007

You can't improve what you can't measure. Metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics that managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis. Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.

14

ISI/MBB04/2007

The value of metrics is in their ability to provide a factual basis for defining: Strategic feedback to show the present status of the organization from many perspectives for decision makers Diagnostic feedback into various processes to guide improvements on a continuous basis Trends in performance over time as the metrics are tracked Feedback around the measurement methods themselves, and which metrics should be tracked Quantitative inputs to forecasting methods and models for decision support systems
15 ISI/MBB04/2007

COMPETITIVENESS REQUIRES INNOVATION

No existing market share is safe today, no product life is indefinite. Competition will tear away market niches and technology advantages from the established business through the weapon of innovation. Companies will become merely a shadow of their glory days or will vanish if they do not find a way to re-create their market success through a steady stream of innovative products and customer-oriented solutions.
16 ISI/MBB04/2007

Innovation requires the planned abandonment of established, familiar, customary or comfortable ways of working whether in products or services, competencies or human relationships or the organization itself.

INNOVATING FOR COMPETITIVENESS

Conclusion: Innovation means that you must be Business organized to Assessment allow constant change. Breakthrough Planning System Change Management
ISI/MBB04/2007

Strategic Decision Making

17

CHAIN OF CAUSATION
Our Survival is dependent upon growing the business Our business growth is largely determined by customer satisfaction Customer satisfaction is governed by quality, price and delivery Our process capability is greatly limited by variation Process variation leads to an increase in defects, costs and cycle time To eliminate variation, we must apply the right knowledge In order to apply the right knowledge, we must first acquire it To acquire new knowledge means that we must have the will to survive
18 ISI/MBB04/2007

TOP-LEVEL METRICS OF SUCCESS

A good measurement Time-to-market system begins with the Warranty cost high-level organizations Market share balanced scorecard for Customer satisfaction measuring success and Key financials: cascades these metrics to action measures used by front-line workers.

Sales margin Operating profit Return on net assets Cash flow Employee satisfaction

19

ISI/MBB04/2007

OPERATIONAL DEFINITION OF A MEASURE

Operational definitions provide a standard way of calculating the performance results of a work process. An operational definition of a performance measure describes that measure in objective terms that are logical, quantifiable or measurable. The operational definition eliminates all speculation about how to apply the measurement in the real-world environment. Each operationally defined measure is assigned to a measurement owner for both implementation and assurance of capability of data collection and analysis.
20 ISI/MBB04/2007

STRATEGIC ISSUE DEVELOPMENT

Process Map Investment Allocation Process Evaluation Process Benchmarks

Criteria

Project Selection

Process Measures

Technology Assessment

21

ISI/MBB04/2007

22

ISI/MBB04/2007

23

ISI/MBB04/2007

24

ISI/MBB04/2007

25

ISI/MBB04/2007

Finance

To succeed financially, how should we appear to our shareholders Financial measures

Show economic consequences of actions already taken Show if strategy, implementation have given results

Typically can be:

Operating Income ROCE

26 ISI/MBB04/2007

Customer

To achieve our vision, how should we appear to our customers Measures typically can be related to:

Customer satisfaction Customer retention/business expansion with existing New customer acquisition Value delivery - to customer Market and account share in targeted segments

Segment specific drivers could be:

Shorter lead times Innovative products and services Better quality

27 ISI/MBB04/2007

Core Measures
Market Share

Customer Acquisition Perceived image

Customer Value

Customer Retention

Perceived quality

Customer Satisfaction

28

ISI/MBB04/2007

Internal Business Processes

Identify the market

Create the Product/ Service Offering

Build the Products/ Services

Deliver the Products/ Services

Service the Customer

Innovation Process Basic and Applied Research % sales from new products Time to market - vs. competitors Time to develop next generation products Product Development Break even time No of times design modified
29 ISI/MBB04/2007

Internal Business Processes

Identify the market

Create the Product/ Service Offering

Build the Products/ Services

Deliver the Products/ Services

Service the Customer

Operations Process Standard Quality Time Cost Asset utilisation Additional Service Performance (accuracy, size, clarity) Flexibility
30 ISI/MBB04/2007

Internal Business Processes

Identify the market

Create the Product/ Service Offering

Build the Products/ Services

Deliver the Products/ Services

Service the Customer

Innovation Process Standard Warranty and Repair Activities Treatment of defects and returns Processing of payments QCD Additional Invoicing and Collections Dispute resolution
31 ISI/MBB04/2007

Learning and Growth

To achieve our vision, how will we sustain our ability to change and improve The infrastructure that the organisation must build to create longterm growth and improvement Come from:

People Systems Organisational procedures

Measures include

Employee Satisfaction Retention Training Skills

32 ISI/MBB04/2007

Learning & Growth Measurement Framework

Core Measurements
Results Employee Retention Employee Satisfaction Employee Productivity

Enablers
Staff Competencies Technology Infrastructure
33

Climate

ISI/MBB04/2007

Measures

Employee Satisfaction

Satisfaction rating Suggestions per employee Improvement projects implemented/employee

Employee Productivity

Revenue per employee Value added per employee Output produced to employee compensation

Employee skill/competency building

Skill matrix score

34

ISI/MBB04/2007

Cause / Effect Relationship in scorecard

Finance

EVA Customer Loyalty On-time delivery Process Quality Process Cycle time Employee Skills
35 ISI/MBB04/2007

Customer

Internal Processes

Learning and Growth

Elements to Measures - Relationships

B S C E le m e n t F in a n c e S tr a te g ic A r e a sS tr a t E le m e n t M e a s u r e s S h a re h o ld e r V a luE V A e EVA

P ro f ita b ility G ro s s C o n trib n / P e rs o n m o n th C u s to m e r C u s to m e r L o y a lty e te n tio n R R e p e a t O rd e r V a lu e / T o ta l V a l S a tis f a c tio n C u s to m e r P ro je c t R a tin g O n -tim e d e liv e ry O n -tim e d e liv e ry% d e la y in p ro je c t m ile s to n e s I n te rn a l P ro c e s s e sro c e s s Q u a lity B u g s P B u g s / L in e o f c o d e P ro c e s s C yc le tim M M S c o re Ce C M M S c o re E s tim a tio n F u n c tio n P t P la n v s A c tu a l U tilis a tio n % I d le tim e L e a rn in g a n d G roE m p lo y e e S kills S kill M a trix w th % s kills a v a ila b le v s p ro je c t e s t S kill m a trix s c o re R e c ru itm e n t % p ro f ile p a ra m e te rs m e t % le a v in g w ith in s ix m o n th s 36 e te n tio n R A ve ra g e o rg a g e ISI/MBB04/2007

Developing the Scorecard

Vision Strategic Goals Key Business Objectives
(Business Plans)

CSF's
Lin kag e

Al

nt me i gn

Fin. $$

Balanced Business Scorecard (BBS)

Cust.

Balanced Business Scorecard Process

Learning

Key Performance Indicators (KPI's)

Key Business Processes

37

ISI/MBB04/2007

PERFORMANCE MANAGEMENT FEATURES

Business case is the collection of choices about how to proceed based upon analysis of scenario options Critical assumptions are factors that could change the future within the time domain of the planning horizon Vision is the desired state to be achieved by the plan Planning horizon is the length of the vision Strategy is the persistence of vision Budget is the cost of strategy
38 ISI/MBB04/2007

Implementing the scorecard

Develop vision Establish key objectives and strategies Evaluate current measures for suitability in

reflecting the strategic intent, Critical Success Factors reflecting the four quadrants of the BBS reflecting a combination of leading and lagging indicators
39 ISI/MBB04/2007

Implementing the scorecard

Establish the first-cut BBS with CEO

Identify key functions, processes that drive the measures

Establish next-level BBS for key functions, processes Integrate the measures

with MIS report with KPIs and Performance Appraisal Process

Deploy and assess

40 ISI/MBB04/2007

Six Sigma and Balanced Scorecard

An approach that combines the targeted performance indicators of a Balanced Scorecard with the statistical rigor of Six Sigma can be used to effectively focus an organization on the achievement of strategic goals in essence, creating the ultimate "management cockpit." Adopting this structured approach to planning, managing and monitoring improvement brings cohesion to conflicting constituencies and builds confidence in proposed process improvements. In turn, this confidence can have a measurable impact on the organization by accelerating the implementation of change, often viewed as a delicate balance between cost, quality and efficiency.
41 ISI/MBB04/2007

Six Sigma and Balanced Scorecard

One of the crucial elements of the project charter in the. define phase of a Six Sigma project is the selection of project metrics. Project metrics selected should reflect the voice of the customer (customer needs), as well as ensure that the internal metrics selected by the organization are achieved. Metrics selected should be simple and straightforward and meaningful. Metrics selected should create a common language among diverse team members.
42 ISI/MBB04/2007

Developing Project Metrics

The most common approach used by teams is to understand the problem statement, brainstorm metrics, and finally decide what metrics can help . them achieve better performance. The team then reviews these metrics with executive management to ensure that they are in synergy with the overall strategy of the business, and an iterative approach may be utilized. Care should be exercised in determining what is measured.
43 ISI/MBB04/2007

Balanced Scorecard Approach To Metrics

Many Six Sigma professionals advocate the use of a Balanced . Scorecard type of approach for the selection of project metrics as a method for ensuring that the project meets both customer and business needs. The Balanced Scorecard approach includes both financial and non-financial metrics, as well as lagging and leading measures across the four areas or perspectives: Financial, Customer, Internal Processes, and Employee Learning and Growth. Lagging measures are those that are measured at the end of an event, while leading measures are measures that help as achieve the objectives and are measured upstream of the event.
44 ISI/MBB04/2007

Financial

Example Project Balanced Scorecard Internal Business Processes

Defects, Inspection Data, DPMO, Sigma Level Rolled Throughput Yield Supplier Quality Cycle Time Volume Shipped Rework Hours Employee Learning and Growth Six Sigma Tool Utilization Quality of Training Meeting Effectiveness Lessons Learned Total Trained in Six Sigma Project Schedule Versus Actual Date Number of Projects Completed Total Savings To Date

Inventory Levels Cost Per Unit Hidden Factory Activity Based Costing Cost Of Poor Quality Customer Overall Project Savings Customer Satisfaction On Time Delivery Final Product Quality Safety Communications

Most Balanced Scorecard metrics are based on brainstorming, however the approach of brainstorming can have limited success in establishing sound metrics that have a good balance between lagging and leading measures
45 ISI/MBB04/2007

46

ISI/MBB04/2007

47

ISI/MBB04/2007

Once the strategy map for the project is determined, the team can begin brainstorming appropriate metrics for each of the objectives and, while doing so, maintain a balance in . selection between leading and lagging measures. This kind of an approach ensures that the team selects a set of metrics that are aligned with the strategy used by them on the Six Sigma Project. Metrics selected in this way not only ensure that appropriate metrics are developed but also help the team in the project planning and creates a purpose of direction for the team
48 ISI/MBB04/2007

In Conclusion
The Balanced Scorecard is a management system used to focus and prioritize management energy toward achieving both short and long term organizational goals and with the ability to give early warning signals for midcourse correction
49 ISI/MBB04/2007

OPS 2006

PHILIPS STRATEGY

50

ISI/MBB04/2007

51

ISI/MBB04/2007

52

ISI/MBB04/2007

53

ISI/MBB04/2007

54

ISI/MBB04/2007