Building Strategy With Balanced Scorecard

Building Strategy Focused Organizations with the Balanced Scorecard
Dr. Robert S. Kaplan

Marvin Bower Professor of Leadership Development HARVARD BUSI ESS SCHOOL and Chairman BALA CED SCORECARD COLLABORATIVE
The Balanced Scorecard Describes How the Strategy Will Be Executed

Strategic Theme: Internal Product Development
Strategy Map Objective Grow Revenue from new products Measure Annual Revenue Growth Percent Revenues from New Products Target +25% xx Initiative
Financial
Revenue Growth
30%
xx
Customer
Innovative Products
Satisfy Customer Needs for Stateof-Art Capabilities
Customer Retention
80%
Relationship Management Program Gain Sharing Program
Share of Account
40%
Internal
World Class Internal Product Development
Accelerate New Product Development
Product Functionality
#1 in indy.
University Liaison/ Technology Transfer
Time to Market
9 mos. Development Cycle Time Reengineering
Learning & Growth
Stable HighTalent Workforce
Acquire, Develop and Retain Strategic Skills
Specialized Competency Availability Key Staff Retention
100%
Competency Model New Hiring Program
95%
Supervisory Training Benefits Program
2002 Balanced Scorecard Collaborative, Inc and Robert S. Kaplan. All rights reserved.
Balanced Scorecard Users Have Been Executing Their Strategies Reliably and Rapidly
Mobil: orth America 1993 1995-99 Last in industry #1 in profitability CIG A Property & Casualty 1993 1998 ATT Canada 1995 1998 1999 Southern Citrus 33% 31% +$15M #1
1995 1998
$275 loss Top Quartile $3b spin-off
Saatchi & Saatchi Shareholder Value: 1997 $500m 2000 $2.5b Duke Childrens Hospital Cost per patient Length of stay Net margin Customer Satisfaction
$300M loss Customer base doubles $7b spin-off
Shipments on Spec Rework Absenteeism Cost per Pound ()
70% 6% 10% 29
97% 2% 1% 19
UC / San Diego Winner of 1999 RIT / USA Today Quality Cup for Education
GTE (Verizon) Human Resources Reduced employee turnover during merger
+ $23M
Balanced Scorecard Hall of Fame: orth America
Balanced Scorecard Success Stories: Europe

ABB Switzerland ABN / Amro Borealis Bank of Ireland British Broadcasting Corp. British Telecom Coca-Cola / Sweden General Motors of Europe Shell International Siemens / Germany Whirlpool of Europe Winterthur
2002 Balanced Scorecard Collaborative, Inc and Robert S. Kaplan. All rights reserved. 5
A Gap Existed Between Mission-Vision-Strategy and Employees Everyday Actions

MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan
TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do
The Balanced Scorecard Links Vision and Strategy to Employees Everyday Actions
MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do
STRATEGIC OUTCOMES
Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE
Strategy Execution is the #1 on-Financial Factor Driving Shareholder Valuations
35% of valuation decision is based on non-financial data
The Non-Financial Factors That Influence Shareholder Valuations 1. 2. 3. 4. 5. Strategy Execution Management Credibility Quality of Strategy Innovation (New Products) Attract Talented People
Source: Measures That Matter, Ernst & Young LLP, 1998

The Principles of a Strategy-Focused Organization

TRANSLATE STRATEGY Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives ORGANIZATION ALIGNMENT Corporate Role Corporate - SBU SBU - Shared Services External Partners EXECUTIVE LEADERSHIP CEO Sponsorship Executive Team Engaged New Way of Managing Accountable for Strategy A Performance Culture CONTINUAL PROCESS Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process
BALANCED SCORECARD
EVERYONES JOB Strategic Awareness Goal Alignment Linked Incentives
#1
Principles of the Strategy Focused Organization: TRA SLATE THE STRATEGY TO OPERATIO AL TERMS
The Strategy
Financial Perspective
Measurement is the language that gives clarity to vague concepts. Measurement is used to communicate, not to control. Strategy can be described as a series of cause and effect relationships
"If we succeed, how will we look to our shareholders? Customer Perspective "To achieve my vision, how must I look to my customers? Internal Perspective "To satisfy my customer, at which processes must I excel? Organization Learning "To achieve my vision, how must my organization learn and improve?
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A Strategy Map Describes How The Organization Intends to Create Value

Long Term Shareholder Value
Financial
New Revenue Sources Increase Customer Value Improve Cost Structure Improve Asset Utilization
Traditional financial framework for describing shareholder value creation
Customer Value Proposition
Customer
Price Quality
Timeliness Features
Service Relationships
Brand
Customer value proposition establishes context for value
Innovation Process Internal Build the Franchise
Customer Management Process Increase Customer Value
Operations Process
Social & Environmental Processes Be a Good Citizen
Provide Operational Excellence
Internal processes describe how value is created and sustained Role & status of intangible assets people, systems, alignment - is articulated
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Learning & Growth
Strategic Competencies
Strategic Technologies
Climate for Action
Leadership & Governance
Internal Processes Deliver Value Over Different Time Horizons

Strategic Objective short-wave Sustained Growth in Shareholder Value mid-wave 1-2 yrs Operational Effectiveness Strategies 2-3 yrs Customer Management Strategies 3-5+ yrs Product Innovation Strategies long-wave
Shareholder Value ($)
product innovation
customer management
operational effectiveness
Time (years)
Mobil AM&R Strategy Map

Increase ROCE to 12%
Revenue Growth Strategy

New Sources of NonGasoline Revenue
ROCE Net Margin (vs. industry)
Productivity Strategy
Become Industry Cost Leader Cash Expense (cpg) vs. Industry Maximize Use of Existing Assets Cash Flow
Increase Customer Profitability Through Premium Brands Volume vs. Industry Premium Ratio
Customer Perspective
Share of Targeted Segment Mystery Shopper Score
Non-Gasoline Revenue & Margin
Delight the Consumer Basic

Clean Safe Quality Product Trusted Brand Speedy Purchase
Win-Win Dealer Relations Differentiators

Friendly Helpful Employees Recognize Loyalty More Consumer Products Help Develop Business Skills Dealer Profit Growth Dealer Satisfaction
Build the Franchise Create NonGasoline Products & Services

New Product Acceptance Rate
Increase Customer Value Understand Consumer Segments
Achieve Operational Excellence

Improve Hardware Performance Yield Gap Unplanned Downtime On-Spec On-Time Improve Inventory Management Inventory Levels Run-Out Rate Industry Cost Leader Activity Cost vs. Competition
Be a Good Neighbor
Internal Perspective
Improve Environmental, Health and Safety

Environment Incidents Safety Incidents
Best-In-Class Franchise Teams

Dealer Quality Rating
A Motivated and Prepared Workforce

Climate for Action Competencies Functional Excellence Leadership Skills Integrated View
Strategic Skill Coverage Ratio
Technology Process Improvement
Learning & Growth Perspective
Aligned Personal Growth

Personal BSC Employee Feedback
Systems Milestones
13
ew Source of Revenues and Customer Loyalty Attractive Convenience Store
14
Internet Banking Company: Add and Retain High Value Customers Theme
Add and Retain High Value and High Potential Value Customers Increase Revenue per Customer Reduce Cost per Customer
Financial
Grow Revenue Increase Revenue/ Customer
Maximize Profit
Reduce Cost Per Customer
Add & Retain High Value Customers
Customer
Migrated
Value Proposition
Basic Requirements Differentiators
New
Time Savings Security Price Reliability
Multiple Channels Service Features/Ease of Use Products
Maximiz e Reliabilit y
Manag e Attritio n Develop Superior Products and Features
Internal
Effective Marketing Programs Develop Superior Service
Learning & Growth
Attract and Retain Key Employees
Enhance Bench Strength and Succession Planning
Increase Managerial & Technical Competencie s
Develop Organizatio n and Culture
Deploy Scorecard
15
Internet Banking Company: Increase Revenue per Customer Theme

Financial
Grow Revenue Increase Revenue/ Customer Cross-Sell Existing Products/ Services
Maximize Profit
Customer
Grow Revenue s from New Services
Increas e Fees and Balance s
Internal
Develop Individualized Marketing Programs Develop Third Party Relationship s
Learning & Growth
Increase Managerial & Technical Competencie s
Deploy Scorecard
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Internet Banking Company: Reduce Cost per Customer Theme

Financial
Grow Revenue
Increase Revenue Per Customer
Maximize Profit
Customer
Migrate Customer s to OFS
Migrate Mass Consumer s to Online
Increase Customer s Use of On-Line
Increase Efficienc y Manage Alliance Costs Develop Customer SelfService
Streamline Manual Processes Automate OFS Processes Develop
Custome r SelfHelp
Learning & Growth
Increase Managerial & Technical Competencies
Deploy Scorecard
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Online Financial Services: Complete Strategy Map

Financial
Grow Revenue Increase Revenue Per Customer Cross-Sell Existing Products and Services
Maximize Profit
Reduce Cost Per Customer for the Bank
Add & Retain High Value Customers
Customer
Migrated
New
Value Proposition Basic Requirements Differentiators

Time Savings Security Price Reliability Multiple Channels Service Features/Ease of Use Products
Grow Revenues from New Products and Services Migrate Mass Consumers to On-line
Migrate Wells Fargo Customers to OFS
Increase Fees and Balance s
Grow Internal Revenue s
Increase Customer s Use of On-Line
Maximiz e Reliabilit y
Manag e Attritio n
Internal
Implement Cost Effective Marketing Programs
Develop Individual Marketing Programs
Increase Efficiency Manage Alliance Costs Streamline Manual Processes Automate Processes Develop Third Party Relationships Develop Customer SelfService Develop Customer Self-Help
Enhance Product and Features Develop Superior Service Capability
Learning & Growth
Enhance Succession Planning
Increase Manager and Employee Competencies
Develop Organization and Culture
Deploy Scorecard throughout Division
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City of Charlotte Had a Mission and Vision

Public Service is Our Business
Mission Statement
The m ission of the City of Charlotte is to ensu re the d elivery of quality public services that prom ote the safety, health and qu ality of life of its citizens. We w ill id entify and respond to com m u nity need s and focu s on the custom er throu gh: Creating and m aintaining effective partnerships Attracting and retaining skilled m otivated emp loyees Using strategic business planning.
Vision Statement
The City of Charlotte w ill be a m od el of excellence that pu ts the citizens first. Skilled , m otivated em ployees w ill be know n for provid ing qu ality and valu e in all areas of service. We w ill be a platform for vital
econom ic activity that gives Charlotte a com petitive ed ge in the marketplace.
We w ill partner w ith citizens and businesses to
make this a community of choice for living, w orking and leisure activities.
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Charlotte: Five Strategic Themes

Community Safety Transportation City Within a City Restructuring Government Economic Development
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City of Charlotte: City Council Focus Areas

Community Safety City Within a City Restructuring Government Transportation Economic Development
The Corporate Level Scorecard

Reduce Crime Increase Perception of Safety Strengthen Neighborhoods Improve Service Quality Availability of Safe, Convenient Transportation Maintain Competitive Tax Rates Promote Economic Opportunity
Financial Accountability Perspective
Expand Non-City Funding
Maximize Benefit/Cost
Grow Tax Base
Maintain AAA Rating
Internal Process Perspective
Increase Positive Contacts
Promote Community Based Problem Solving
Secure Funding/Service Partners
Improve Productivity
Streamline Customer Interactions
Increase Infrastructure Capacity
Promote Business Mix
Learning and Growth Perspective
Enhance Knowledge Management Capabilities
Close Skills Gap
Achieve Positive Employee Climate
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Several Different Types of Balanced Scorecards Have Emerged in Practice
Strategy Card
Stakeholder Card
KPI Card
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A KPI Scorecard: The Four Ps

Profits Portfolio (loan volume) Process (ISO certification) People (diversity)
23
Whats missing from the 4Ps KPI scorecard?

Where are the customers? What is the value proposition? How does ISO certification lead to increases in loan volume? How does a more diverse work force lead to ISO certification? Is there no role for information technology? Is innovation not important?
A Good Balanced Scorecard Tells the Story of Your Strategy
Every measure is part of a chain of cause and effect linkages All measures eventually link to organizational outcomes A balance exists between outcome measures (financial, customer) and performance drivers (value proposition, internal processes, learning & growth)
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BALANCED SCORECARD
26
#2
Principles of the Strategy Focused Organization: LI K A D ALIG THE ORGA IZATIO AROU D ITS STRATEGY
#3. #1. A Corporate Scorecard defines overall strategic priorities. Each Support Unit develops a plan and BSC for best practice sharing to create synergies across SBUs.
CORPORATE
CORPORATE SCORECARD (Shared Strategic Agenda)

Themes Measures SBU A
LINE BUSINESSES
SBU B SBU C SBU D
SUPPORT UNITS
EXTERNAL PARTNERS
1. Financial Growth 2. Delight the Consumer 3. Win-Win Relationships 4. Safe & Reliable 5. Competitive Supplier 6. Good Neighbor 7. Motivated & Prepared 8. Quality
xxx xxx xxx xxx xxx xxx xxx xxx xx xx xx xx
Finance Marketing Distribution Procurement Purchasing Safety Human Resources Information Technology
Customer Scorecards Distributor Scorecard Joint Venture Scorecard Vendor Scorecard New Venture Scorecard Outsourcer Scorecard
#2. Each SBU develops a long-range plan and BSC consistent with corporate strategic agenda.
#4. Plans and BSCs define relationships with external partners consistent with SBU strategy.
Strategies Are Executed Through Business Units. The Strategies of the Business Units Must Be Integrated If Organization Purpose and Synergies Are to Be Achieved.
Conglomerate Independent Operating Companies
FMC
Performance Chemicals
Industrial Chemicals
Machinery & Equipment
Defense Systems
Agricultural Food Ingredients Pharmaceutical Lithium
Alkali Peroxyn Phosphorus
Energy Food Machinery Transportation
Ground Systems Armaments
No Corporate Balanced Scorecard Each Operating Company Develops an Independent BSC for its Strategy and Operations
Saatchi & Saatchi: Achieve Worldwide Alignment

Common Client Objective: Create PICS (Permanently Infatuated Clients) A lead office is an ideas company, one that is capable of transforming our clients businesses, brands, and reputations! All country offices must be capable of creating and delivering traditional advertising, with best-in-category creative capabilities, before becoming a lead office.
29
Saatchi & Saatchi: Achieve Worldwide Alignment

Common Client Objective: Create PICS (Permanently Infatuated Clients) Three types of country offices, each with own BSC strategy map template 1. Lead Markets (US, UK): Product Leadership Award winning, creative shops Prosper Markets (Continental Europe): Operational Excellence Reverse losses, become financially viable, support global clients in local country Drive Markets (Developing nations (Brazil)) Establish presence
2.
3.
Charlotte Dept. of Transportation Identified its Objectives from the City Scorecard
Reduce Crime Increase Perception of Safety Strengthen Neighborhoods Improve Service Quality Maintain Competitive Tax Rates Availability of Safe, Convenient Transportation Promote Economic Opportunity
Financial Accountability Perspective
Expand Non-City Funding
Maximize Benefit/Cost
Grow Tax Base
Maintain AAA Rating
Internal Process Perspective
Secure Funding/Service Partners
Streamline Customer Interactions
Promote Community Based Problem Solving
Improve Productivity
Increase Positive Contacts
Increase Infrastructure Capacity
Promote Business Mix
Learning and Growth Perspective
Enhance Knowledge Management Capabilities
Close Skills Gap
Achieve Positive Employee Climate
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CDOT Balanced Scorecard
Cus tom er
Maint ain t he transport ation system
Operate the transport ation system
Develop t he transport ation system
Determine optimal system design
Improve service quality
Financial
Expand nonCity funding
Maximize benefit/cost
Inte rnal Process
Increase infrastructure capacity
Secure funding/service partners
Improve product ivity
Increase positive contacts
Learning
Enhance automated info systems
Enhance field technology
Close skills gap
Empower employees
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Charlotte Dept. of Transportation: Balanced Scorecard

P ersp ect iv e O bject iv e
C -1 M ain ta in th e tr an sp o r ta tio n sy stem C -2 O p era te th e tr an sp o r ta tio n sy stem
Lea d M ea sure
C -1 Re p air Re sp o n se : r ep a ir r esp o n se a ctio n C -1 Trav e l S p ee d : a v er ag e tr a v el sp eed b y fa cility an d selected lo ca tio n C -2 O n -Tim e Bu se s : p u b lic tr a n sit o n -tim e C -3 Pro g ram s In tro d u ce d : n ew ly in tr od u ced p r og r a m s, p ilo ts, o r p ro g r a m sp ecifica tio n s C -5 Re sp o n siv e n e ss : % o f citiz en co m p la in ts an d r eq u ests r esolv ed a t th e C D O T lev el C -6 Issu e Re sp o n se : d efin ed situ a tio n s w h er e C D O T id en tifies, resp o n d s to n eig h b o rh o o d tr a ffic & m o b ility issu es
La g M ea sure
C -1 H ig h Q u ality S tree ts : co n d itio n o f la n e m iles 90 ra tin g C -2 S afe ty : city -w id e a ccid en t ra te; n o. o f h ig h a ccid en t lo ca tio n s C -3 Basic M o b ility : a v a ila b ility o f tra n sit C -4 Plan Pro g re ss : % co m p lete o n 2015 Tra n sp or ta tio n P la n C -5 Co m m u te Tim e : a v era g e co m m u te tim e o n selected r oa d s C -6 e ig h b o rh o o d -O rie n te d Pro g ram s: p r og r a m s im p lem en ted a s a r esu lt o f C o m m u n ity -b a sed p r o b lem so lv in g F-1 Fu n d in g Le v e rag e : d o lla r v a lu e fr o m n on -C ity so u r ces F-1 e w Fu n d in g S o u rce s : d o lla r v a lu e fr o m so u r ces n o t p r ev io u sly a v a ila b le
Cu sto m e r
C -3 D ev elo p th e tra n sp o r ta tio n sy stem C -4 D eter m in e th e o p tim a l sy stem d esig n C -5 Im p r o v e ser v ice q u ality C -6 Str en g th en n eig h b o r h o o d s
F-1 Exp an d n on -C ity fu n d in g
Fin an cial
F-2 M a xim iz e b en efit / co st
F-2 Co sts : co sts co m p ar ed to o th er m u n icip a lities a n d p r iv a te secto r co m p etitio n
I-1 G a in in fr a str u ctu r e ca p a city I-2 Secu r e fu n d in g / ser v ice p a r tn er s
In te rn al Pro ce ss
I-3 Im p r o v e p r o d u ctiv ity I-4 In cr ease p o sitiv e co n ta cts w ith C o m m u n ity
I-1 Cap ital In v e stm en t : $ allo ca ted to ca p ita l p r o jects in ta rg eted ar ea s I-2 Lev e rag e fu n d in g /se rv ice p artn e rs : n ew fu n d in g / r eso u r ce p ar tn er s id en tified I-3 Co st p e r U n it : co st p er u n it I-3 Co m p e titiv e S o u rcin g : % o f Bu d g et b id I-3 Pro b le m Id e n tificatio n : so u r ce & a ctio n I-4 Cu sto m e r Co m m u n icatio n s : n o .,ty p e,fr eq .
I-1 Cap acity Ratio s : in cr em en ta l ca p a city b u ilt v s. r eq u ir ed b y 2015 P lan I-2 o . o f Partn e rs : n u m b er o f p ar tn er s I-3 S tree t M ain te n an ce Co st : co st/ la n e m i. I-3 Tran sit Passe n g e r Co st :co st/ p a ssg er I-4 Cu sto m e r S u rv e y s : su r v ey r esu lts co n cer n in g ser v ice q u a lity
L-1 En h a n ce a u to m a ted in fo r m a tio n sy stem s
L-1 IT In frastru ctu re : co m p lete r ela tio n a l d a ta b ase a cr o ss C D O T L-3 S k ills Id e n tifie d : k ey sk ills id en tified in str a teg ic fu n ctio n s L-4 Em p lo y e e Clim ate S u rv e y : r esu lts o f em p lo y ee su r v ey
Le arn in g
L-2 En h a n ce field tech n o lo g y L-3 C lo se th e sk ills g a p L-4 Em p ow er em p loy ees
L-1 In fo rm atio n A cce ss : str a teg ic In fo r m a tio n a v a ila b le v s. u ser r eq u ir em en ts L-2 In fo rm atio n To o ls : str a teg ic to o ls a v aila b le v s. u ser r eq u ir em en ts L-3 S k ills Tran sfe r: sk ill ev id en ce in jo b L-4 Em p lo y e e G o al A lig n m e n t : tr ain in g / ca r eer d ev elo p m en t a lig n ed w / M ission
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Principles of the Strategy-Focused Organization: LI K A D ALIG THE ORGA IZATIO AROU D ITS STRATEGY
CORPORATE

LINE BUSINESSES
SBU B SBU C SBU D
SUPPORT UNITS
EXTERNAL PARTNERS
34
Shared (Corporate) Services
We have done very little to define our strategy for corporate staff utilization. How does staff provide competitive advantage? Are they offering low cost or differentiated services. If they are offering neither, we should probably outsource the function. -Larry D. Brady President FMC Corporation
35
Creating Shared Service Unit Linkages

SBU 3
Linkage Scorecard
Shared Service Unit
Define the SBU objectives and measures that the support unit is expected to help achieve.
Shared Service Unit Scorecard

A Business In a Business
Service Agreement
Customer
Financial
Mission
Internal
Customer Satisfaction Feedback
L&G
Shared Service Unit strategies and scorecards must also reflect the linkage to its internal customers
Align & Integrate Support Units - Human Resources with the Strategy
CORPORATE
CORPORATE SCORECARD (Shared Strategic Agenda) Themes 1. Financial Growth 2. Delight the Consumer 3. Win-Win Relationship 4. Safe and Reliable 5. Competitive Supplier 6. Good Neighbor 7. Quality Measures xxx xxx xxx xxx xxx xxx xxx xx xx xx xx } } } } } } } { { { { { { { Convenience Store Marketing Gasoline Marketing Manufacturing Services Supply Programs Environment and Safety Information Technology Human Resources SBU A BUSINESS UNITS SBU B SBU C SBU D SHARED SERVICES
8. Motivated and Prepared xxx
A
Define the SBU Human Capital Strategy What is the impact of human capital on the strategy?
B
Install Integrated Strategic Management Process Jointly manage strategic initiatives.
Human Capital Development Program
C
Develop SSU Strategy / Scorecard Align resources with strategic requirements.
Human Capital Readiness Report
HR Organization Scorecard
Strategy Focused Management Process
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Linking the HR Organization to Enterprise Strategy

The Enterprise Strategy Map The HR Organization Strategy Map
Shareholder Value Productivity HR Effectiveness HR Efficiency Shareholder Value Growth
Financials
Financials
Customer (External)
Internal Processes
Innovation
Customer Management
Operations Excellence
Good Neighbor
Learning & Growth
Strategic Skills
Leadership
Culture
Alignment
Learning
Human Capital Readiness Report
Strategic Skills
Leadership
Culture
Alignment
Learning
Clients & Employees
Human Capital Development Program
Competency Development
Leadership Development
Climate
Goals & Incentives
Teams & Integration
HR Processes
HR Skills & Leadership
HR Systems
HR Climate
HR Org. Learning & Growth
Strategic Human Capital Planning

Strategic HR Management
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Principles of the Strategy-Focused Organization: LI K A D ALIG THE ORGA IZATIO AROU D ITS STRATEGY
CORPORATE

LINE BUSINESSES
SBU B SBU C SBU D
SUPPORT UNITS
EXTERNAL PARTNERS
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Executive Teams Manage Strategic Themes
Defining the Balanced Scorecard for Strategic Themes: Managing the Virtual Organization
Mayor City Council City Manager
City Within A City

Strengthen Neighborhoods
Support Units
Budget & Evaluation Business Support Services Finance Human Resources
Business Units
Aviation Planning Commission Police Utilities Engineering & Property Mgmt. Fire Neighborhood Development Solid Waste Services Transportation
Leadership Team
Strategic Themes
Community Safety Financial Accountability Perspective Expand New-City Funding Grow Tax Base
City in a City Internal Process Perspective Secure Funding/ Service Partners Promote Community Based Problem Solving Increase Infrastructure Capacity
Transportation
Restructuring Government Enhance Knowledge Management Capabilities Achieve Positive Employee Climate
Economic Development
Close Skills Gap
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Washington State: The Salmon Recovery Problem
Endangered Species Listing of 18 Species Federal Approval of Recovery Plans -- or

no government or private entity make take any salmon - - thus forestry, agriculture, hydro power production, transportation improvements and land use changes stopped or curtailed i.e.. A train wreck
Fractured governance - who is in charge?
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Salmon Recovery Regions

Areas with Salmon, Trout, or Steelhead that are Listed, Proposed for Listing, or have a High Potential for Future Listing Under the Endangered Species Act
Upper Columbia River Puget Sound

Chinook listed as threatened 3/16/99 Hood Canal Summer Chum listed as threatened
3/16/99
Northeast Washington
Bull Trout listed as threatened 6/10/98
Spring-run Chinook listed as endangered 3/16/99 Steelhead listed as endangered 8/18/97 Bull Trout listed as threatened 6/10/98
Washington Coastal
Lake Ozette Sockeye listed as threatened
3/16/99
Lower Columbia River

Chinook listed as threatened 3/16/99 Chum listed as threatened 3/16/99 Steelhead listed as threatened 3/19/98 Bull Trout listed as threatened 6/10/98
New listing as of March 16, 1999 Previous listings
Middle Columbia River

Steelhead listed as threatened 3/16/99 Bull Trout listed as threatened 6/10/98
Snake River
Steelhead listed as threatened 8/18/97; Walla Walla County added 3/16/99 Sockeye listed as endangered 4/22/92 Spring/Summer-run Chinook listed as threatened 8/22/92 Fall-run Chinook listed as threatened
8/22/92
Bull Trout listed as threatened 6/10/98
42
Multiple Governments Involved
Alaska 27 Tribes Oregon Montana CA Idaho Canada
43
Federal Agencies Involved

Department of Agriculture
Natural Resource Conservation Service Forest Service
Department of Commerce
National Marine Fisheries Service
Department of Interior
Fish & Wildlife Service Bureau of Reclamation
Environmental Protection Agency State Department Council on Environmental Quality
44
State Agencies Involved

Indirect reporting
Natural Resources Transportation Fish & Wildlife State Parks NW Power Planning Council Salmon Recovery Funding Board
Direct reporting
Health Ecology Agriculture Community, Trade and ED Salmon Recovery Team Puget Sound Water Quality Conservation Commission Interagency Comm for Outdoor Recreation
45
Local Governments Involved
39 Counties 277 Cities 44 Sewer Districts 125 Water Districts 36 Irrigation Districts 32 Public Utility Districts 14 Port Districts 48 Conservation Districts 170 Municipal Water Suppliers
46
State & State Agencies Water Legislation
Independent Science Panel
MFS Recovery Team
MFS Salmon Evolutionarily Significant Units
HB2514 WRIA Planning
HB2496 Restoration Projects
SRF Board
Salmon Sec 7 Consultation
Salmon Sec 4(d) Rules
Watershed Councils US/Canada Treaty
Salmon, Bull Trout, Environmental Quality, and Hydropower Development
Tri-Co Early Action Package Bull Trout Sec 4(d) Rules Bull Trout Sec 7 Consultation FWS Bull Trout Definable Population Segments
47
Tribes
SSHIAP
GOs and Enhancement Groups
Salmon Recovery Scorecard

Goal: Restore salmon, steelhead, and trout populations to healthy and harvestable levels and improve habitats on which fish rely. Customer: To protect an important element of Washingtons quality of life
We will have productive and diverse wild salmon populations. We will meet the requirements of the Endangered Species Act/Clean Water Act.
Processes:

Our habitat, harvest, hatchery, and hydropower activities will benefit wild salmon.
Freshwater and estuarine habitats are healthy and accessible Rivers and streams have flows to support salmon. Water is clean and cool enough for salmon Harvest management actions protect wild salmon. Enhance compliance with resource protection laws.
Collaboration: We are engaged with citizens and our salmon recovery partners.
We will reach out to citizens Salmon recovery roles are defined and partnerships strengthened.
Financial and Infrastructure: Our building blocks for success include

Achieve cost-effective recovery and efficient use of government resources Use best available science and integrate monitoring and research with planning and implementation Citizens, salmon recovery partners and state employees have timely access to the information, technical assistance, and funding they need to be successful.
48
Summary:Top-to-Bottom Strategy Alignment Unleashes Full Organization Potential
The Corporate Strategy is communicated to Business Units through key themes, opportunities for integration and synergies, and shared measures
Cooperation and greater synergy between business units and staff and shared service functions becomes formalized through the Scorecard
49

BALANCED SCORECARD
50
#3
Principles of the Strategy Focused Organization: MAKE STRATEGY EVERYO ES EVERYDAY JOB
HR Processes Are Essential for Moving Strategy From the Top to the Bottom
CORP SBU
Top-Down Bridging Process To Share the Strategy & Align the Workforce
EDUCATION PERSONAL GOAL ALIGNMENT BALANCED PAYCHECKS

The Strategy Focused Workforce
Bottom-Up Process to Internalize & Execute the Strategy
51
Making Strategy Everyones Job

Creating a Climate to Support Strategic Change 1
Create Strategic Awareness
Insure that each individual has sufficient understanding of the strategy (You cant execute what you dont understand) Insure that each individual knows where they fit into the overall game plan
2
Align Personal Objectives
3
Align Incentive Compensation
Reinforce desired behavior and increase intensity of awareness
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USM&R Strategic Themes ...

will guide us to our vision and are defined above each graph.
Win/Win Relationship
Improve Dealer/Wholesale Marketer profitability through customer-driven products and services and by developing their business competencies.
Good Neighbor
Protect the health and safety of our people, the communities in which we work, and the environment we all share.
Environmental Index Composite of: - reportable releases to air and water - reportable spills - community reported incidents. 1993 1994 Target 1993 1994 Target
Dealer/Mobil Gross Profit
USM&R Strategic Measures ...

that will keep us focused on achieving USM&Rs strategic themes are explained in the graphs and the bulleted text accompanying them.
Total profit earned at Mobil outlets and split between our dealers/whole-sale marketers and Mobil.
Financially Strong
Reward our shareholders by providing a superior longterm return which exceeds that of our peers.
ROCE Income divided by capital employed including all allocations. 12% 8% 7%
Safe & Reliable

Maintain a leadership position in safety while keeping our refineries fully utilized.
USM&R Days Away From Work Manufacturing Reliability Index
On Spec On Time
Provide quality products supported by quality business processes that are on time and done right the first time.
Quality Index Composite of incidents of: - product off spec - order shipped late - business process errors - customer complaints - cost of rework.
1993
1994
Target
1993
1994
Target
1993
1994
Target
1993
1994
Target
Delight the Customer

Understand our consumers needs better than anyone and offer them products and services which exceed their expectations.
Competitive Supplier
Provide product to our terminals at a cost equal to or better than the competitive market maker.
Motivated & Prepared

Develop and value teamwork and the ability to think Mobil, act locally.
Mystery Shopper The Mystery Shopper program rates how well each of our stations is delivering the best buying experience. Our cost to deliver product to the terminal vs. lowest cost provider.
Laid-down Cost Survey of employees to measure how people perceive the Mobil workplace environment.
Climate Survey
1993
1994
Target
1993 1994 Target 2002 Balanced Scorecard Collaborative, Inc and Robert S. Kaplan. All rights reserved.
1993
1994
Target 53
Employee Innovations: Mobil Speedpass
54
Building Strategic Awareness Requires a Comprehensive Communications and Education Program

The Communication Channel Continuum
Rich Channels One-on-One / Face-to-Face Communications Hallway / Coffeepot Communications Small Group Meetings Video Conferencing Telephone Conversations Voice mail E-mail Large Group Meetings Hand-Written Personal Notes Advanced Copies of Agendas Faxes Interoffice Memos Formal Speeches Letters Newsletters Reports
Best Practice Examples

Personal Communication Hilton Hotels Town Hall Meetings Mobil NAM&R E-mail (Open Door) Motorola Strategy Maps Ann Taylor Management Development Novacor BSC Newsletter Rockwater
55
Reference: Jos Miniace & Elizabeth Falter, Communication: A Key Factor in Strategy Implementation, Planning Review, Jan-Feb, 96.
Lean Channels

Insure that each individual has sufficient understanding of the strategy (You cant execute what you dont understand) Insure that each individual knows where he or she fits into the overall game plan
2 Align Personal Objectives 3

56
Employee Innovations: Mobil Speedpass
57


58
Lean Channels


59
Ultimately, Team and Individual Goals and Objectives Are Aligned to the Strategy
A performance model provides the framework for cascading and aligning personal goals
Customer Example Corporate Parent Customer Satisfaction Customer retention On time delivery First Pass Yield Schedule Adherence Line Availability Schedule adherence Division Financial Example
A personal scorecard focuses individuals on the part of the performance model they can impact
Corporate Measures
Balanced Scorecard Financial
Business Unit Measures

1993 1994 1995 1996 Targets 1997 1.
Individual Goals
And Near Term Action Steps
Operating Margin Operating Margin Variable Costs Period Expenses Variable Costs Mfg Overhead Scrap rate Labor/ Unit
1993
1994
1995
1996 Targets
1997
100 100 100
120 450 85
160 200 80
180 210 75 Targets
250 225 70
Earnings Net Cash Flow Overhead & Operating Expense
Operating
64 82 110 Overhead & Operating Costs Finding & Development Costs Total Annual Production
(Indexed: 1993=100)
Targets
2.
100 100 100
75 97 105
73 93 108
70 90 109
VP of Opns
3.
Plant Manager
Corporate Objectives
Double our value in 10 years. Increase our earnings by an average of 20% a year Achieve an internal rate of return 2% above the cost of capital. Reduce our overhead & operating costs by a further 30% by 1997. Reduce our 5-year average finding & development costs by 20%. Reach the top quartile of industry profitability by 1997. Increase production by 10% by 1997.
Individual Measures
1. 2. 3. 4. 5. 4.
Shift Supervisor
If we can achieve all these business objectives, we will be a top quartile competitor
ame: Location:
5.
60


61
Lean Channels


62
Mobil Lubricants (Lubes) Had Each Employee Build a Personal Balanced Scorecard
At least one objective/measure per perspective o more than 15 measures Personal scorecard must support supervisors scorecard Every supervisor must have an objective and measure for coaching and employee development Scorecard must include an objective and measure that supports another part of the business
Creating Line-of-Sight Alignment at Mobil Lubes

Level 1 Level 2 VP Order Fulfillment Level 3 Manager of Plant Operation Level 4 Facility Manager Level 5 Delivery Supervisor Level 6 Terminal Coordinator Level 7 MV Driver
Strategic Themes
Financial
Reward our shareholders by providing a long-term return which exceeds our peers.
Division President
ROCE (%) Cash Flow ($MM) Integrated Cost ($MM) Integrated Income ($MM)
FA & Inv. Value ($MM) Inventory Carrying Cost LOB Integrated Cost ($MM) Transformation Cost ($MM) Line 44 / CPG Net Integrated Income ($MM) Formulation Giveaway $M
Line 25 CPG Backhaul $
Line 2 CPG Unavailable Hours Backhauls Savings
Line 2 CPG Idle Time Out of Route Miles GPM
Customer
Provide valueadded business solutions to our customers and channel partners.
Market Share - Finished Percent Perfect Orders Distributor Survey Develop/Implement Customer Survey
Percent Perfect Orders Distributor Survey Develop/Implement Customer Survey
Percent Perfect Orders
Percent Perfect Orders % On-Time Delivery Service Failures of Strategic Product Lines Develop Market Info Survey
% On-Time Delivery Empty Drums Returned
% On-Time Delivery Returns Drums
Internal
Develop market focused strategies and become operationally excellent.
Safety Index Environmental Index Continuous Improvement Cost Reduction ($MM) Develop/Implement Capital Plan
Safety Index Environmental Index Develop/Implement Standard Offering Asset Utilization Refinery Capacity (%) Network vs. Optimum (%) Inventory Accuracy Employee Development Plans Completed (%)
Safety Index Environmental Index Complexity Index
DAFW Hits Off-Spec Receipts Transfers to Move Excess Base Stock
Motor Vehicle Accidents DAFW
Complete Environmental Self Audit Safety Meetings Complete % Attendance Safety Meeting
Accurate Reporting Repts. 731, 601, 727 LOG Book Violations Completed CEO Market Surveys Customer Assessment
Inventory Accuracy Employee Development Plans Completed (%) Attendance Employee Development Plans Completed (%) Develop Plan Climate Survey Employee Development Plans Completed (%) Employees Trained ISO 9000 Certification
L&G
Create a high performance organization by equipping our people to succeed.
Employee Development Plans Completed (%) Develop / Implement / Measure progress of Change Program
Training on CCE
Develop Personal Imp. Plan
Develop/Implement Marketing Comp. Plan Product Mgt. Comp. Plan Distrib/Logistics Comp. Plan
SBU Scorecard

2
Align Personal Objectives
65
Linking Compensation to the Balanced Scorecard

Experience with successful BSC users indicates that linking the BSC to incentive compensation is essential to success
Executive Perspectives
People got that scorecard out and did the calculations to see how much money they were going to get. We could not have got the same focus on the scorecard if we didnt have the link to pay. Brian Baker, Mobil It would be hard to get people to accept a totally different way of measurement - which the BSC is - if you dont reinforce that change through incentive compensation. Gerry Isom, CIGNA
Supported by Research
Mercer survey of compensation practices in 214 companies (1999) 88% of responding companies consider the use of balanced scorecard measures linked to reward systems to be effective.
66
ew England Sales & Distribution - 1995 Compensation Linkage

Weight s Fi na nci al (30%) Net Profit After Tax Full C ost Per Gallon Gasoline Volume Growth Lubes Growth R ate Premium P roduct Cus tom er (15%) Mys tery S hopper Rating Customer C omplaints I nte rnal (35%) Gross Profit/Store # of Commitment Stations Environmental I ncidents Days A bsent From Work Accid ents Le ar ni ng & Gr ow th (20%) Climate Survey Developmental Plans Total Index Performance F actor 50% 50% 10% 10% 100% 1.03 1.03 1.00 4 2 20% 20% 20% 20% 20% 7% 7% 7% 7% 7% 0.96 1.00 1.06 1.06 1.06 12,500 527 19 16 20 60% 40% 9% 6% 1.10 1.00 82 824 15% 30% 15% 30% 10% 5% 9% 5% 9% 3% 1.00 1.00 1.06 1.06 0.96 22 6.8 103% 101.5% 100% Net W eight Perf. Factor Goal *
67
The Incentive Compensation System at CIG A P&C

Total Shares = Business Shares + Performance Shares Share Value Determined from BSC (Par Value = $10.00)
Strategic Objective
(F1) Shareholder Expectations (F2) Operating Performance
% Weight
20
Financial Measures
Net Operating Income
Non-Financial Measures
Example #1 $5.00/Share Bonus x 50 Business Shares + 100 Performance Shares = 150 Shares = $750.00
15
Accident Year Combined GWP
(F3) Growth
20
(E1) Producer Relationship
20
Producer Feedback (Councils, Surveys, etc.)
(I2) Underwrite Profitability
20
U/W Practice Reviews
Example #2 $14.00/Share Bonus x 50 Business Shares + 10 Performance Shares = $840.00
(L2) Information Technology
Upgrade Computer Literacy
68

TRANSLATE STRATEGY Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives ORGANIZATION ALIGNMENT Corporate Role Corporate - SBU SBU - Shared Services External Partners EXECUTIVE LEADERSHIP CEO Sponsorship Executive Team Engaged New Way of Managing Accountable for Strategy A Performance Culture CONTINUAL PROCESS Linked to Budgeting Linked to Operational Improvements Management Meetings Feedback System Learning Process
BALANCED SCORECARD
69
Setting Stretch Targets: If youre not careful - youll get what you measure!
70
Business Unit & Shared Service Unit Heads Discuss BSC Targets With Executive Leadership Team Coach
Time Frame: December 1 - January 31

NAM&R BSC Coordinator Metric Owners
What takes place at the ELT Coach Review?

ELT Coach
Review current year BSC results to set stage for proposed Business Unit/Strategic Partner Scorecard Review proposed BSC in terms of strategy, measures, plan, level of difficulty and rationale Review alignment to NAM&R Reverse Engineer Template
BU/SSU Leadership Team
BU/SSU Leadership Team
- Inc and Robert S. Kaplan. All rights reserved. 2002 Balanced Scorecard Collaborative,
71
Mobil AM&R: Setting Performance Ranges

Business Group Variable Pay Opportunity . . . . . .
Intensity Factor
Variable Pay Percent 20
Performance Factor 1.25 1.20 1.15 1.12 1.09 1.06 1.03
Qualitative BEST IN CLASS Well Above Average

How to think about performance factors: Objective:
Above Average Average
External Benchmark 1.00 means target equals the average of competition 1.25 means target equals the top of the competitive group Subjective:
1.00 0.90 0.80
0.75
Below Average
Internal Benchmark 1.00 means the difficulty of the dive is average
Determining the difficulty of achieving results sets the tone . . .

Achieving Stretch Target Performance May Require
Strategic Initiatives Capital Investments New Products/Services New Customers New Regions New Partners
73
The Scorecard Process Provides Rigor for Selecting and Managing Initiatives
1 Identify All Potential Candidates for Strategic Initiative Consideration
OFS Projects, Activities, etc. Marketing Projects, Activities, etc.
Development Projects, Activities, etc. Other Projects, Activities, etc.
Criteria
Initiative:
Strategic Thrust(s): Primary Strategic Objective:
2 Screen Candidates to Identify Those That Qualify as Strategic
E-Bill Presentment
Area Strategic Importance Cost Benefit Required for Other Initiatives/Dependencies Time to Implement Overall Score
AC/IR/RC
Continue Leadership in Superior Products
Score
Points 8 -2 4 1 -2 9
Comments
The killer application X $ $ X # months X
Ranking
Initiiative
Strategic Thrust(s) and Objectives(s) AC/IR/RC Cont. Leadership in Superior Products
Strategic Importance
Cost
Benefit
Required for Other Initiatives/ Time to Implement Dependencies
Overall Score
Overall Points
3 Select Strategic Initiatives
E-Bill Presentment
Prioritized List of Strategic Initiatives

74
Linking Initiatives to Scorecard Measures
Many initiatives even if successfully implemented would not improve any BSC measure Action: Eliminate or consolidate Several BSC measures, especially in internal, learning & growth perspectives had no initiative designed to improve it Action: Add several new strategic initiatives Redeploy resources to new initiatives Conclusion: Without the guidance of the BSC, many organizations are likely to have both too many and too few initiatives!
75
Strategic Planning and the BSC
The Planning and Management System Based on the Balanced Scorecard Effectively Addresses Critical Failures in Previous Strategic Planning Systems: Targets are set to achieve breakthrough performance Initiatives and capital investments are identified to achieve the strategic targets Many non-strategic investments and initiatives are eliminated Resources are supplied for strategic investments and initiatives Short-term targets are established for the financial and nonfinancial Balanced Scorecard measures Operational reviews assess progress on the strategic trajectory
Using the BSC to Link Strategy to Operational Management

Activity-Based Costing Cost of Internal Processes Customer Profitability Activity-based Budgeting Shareholder Value Explicit Value Proposition Path for Revenue Growth Strategy Quality Programs Link to Customer and Financial Outcomes Identify New Processes; Set Priorities Integrated Strategic Management Approach
The Balanced Scorecard Strategy Map

Improve Shareholder Value Financial Perspective
Shareholder Value ROCE
Build the Franchise New Revenue Services
Increase Customer Value Customer Profitability
Improve Cost Structure Cost per Unit
Improve Asset Utilization Asset Utilization
Customer Acquisition
Customer Retention Customer Profitability

Product Leadership Customer Intimacy
Price

Product/Service Attributes Quality Time Function Service
Operational Excellence Image Brand
Relationship Relations
Customer Satisfaction
Build the Franchise
Increase Customer Value (Customer Management Processes)
Achieve Operational Excellence (Operations & Logistics Processes)
Become a Good Neighbor (Regulatory & Environmental Processes)
(Innovation Processes)

Strategic Competencies Strategic Technologies Climate for Action
78
Integrating ABM into the BSC Framework

Internal Perspective: Measuring the Cost of Critical Internal Processes Customer Perspective: Measuring the Cost-to-Serve to Reveal Customer Profitability Activity-Based (Operational) Budgeting
79
Measurements for Internal Business Processes

Customer Management Process
Internal Business Processes
Innovation Process
Operations Process
Supply-Chain Management Operations Efficiency: Cost, Quality, Cycle Time Capacity Management
80
Activity-Based Costing: From Expense Categories to Activities

Salaries and Fringes $250,000
, Salaries and Fringes Occupancy Eqpmt & Tech. Supplies
Process customer orders Purchase materials Schedule production
ActivityBased Costing
Occupancy $120,000
Move materials Set up machines Inspect items Maintain product information
Equipment & Technology $75,000
Perform engineering changes Expedite orders Introduce new products
Supplies $35,000
Resolve quality problems
TOTAL
$480,000
TOTAL
$480,000
81

Strategy Formulation: Identify Profitable Customer and Market Segments Financial Perspective: Measuring the Cost and Profitability of Customer Segments Internal Perspective: Measuring the Cost of Critical Internal Processes Customer Perspective: Measuring the Cost-to-Serve to Reveal Customer Profitability Activity-Based (Operational) Budgeting
The Balanced Scorecard Strategy Map

Improve Shareholder Value Financial Perspective
Shareholder Value ROCE
Build the Franchise New Revenue Services
Increase Customer Value Customer Profitability
Improve Cost Structure Cost per Unit
Improve Asset Utilization Asset Utilization
Customer Acquisition
Customer Retention Customer Profitability

Product Leadership Customer Intimacy
Price

Product/Service Attributes Quality Time Function Service
Operational Excellence Image Brand
Relationship Relations
Customer Satisfaction
Build the Franchise
Increase Customer Value (Customer Management Processes)
Achieve Operational Excellence (Operations & Logistics Processes)
Become a Good Neighbor (Regulatory & Environmental Processes)
(Innovation Processes)

Strategic Competencies Strategic Technologies Climate for Action
83
Activity-Based Costing Reveals Hidden Profit and Hidden Cost Customers
Revenues Hidden Costs Apparent Profits
Costs Hidden Profits
Customer A
Customer B
Customer A
Customer B
Traditional Costing
Accurate Costing
84
Measuring Customer Profitability

High Cost-to-Serve Customers Order custom products Small order quantities Unpredictable order arrivals Customized delivery Change delivery requirements Manual processing Large amounts of pre-sales support (marketing, technical, and sales resources) Large amounts of post-sales support (installation, training, warranty, field service) Require specialized inventory Pay slowly (high accounts receivable)
Low Cost-to-Serve Customers Order standard products High order quantities Predictable order arrivals Standard delivery No changes in delivery requirements Electronic processing (EDI) Little to no pre-sales support (standard pricing and ordering) No post-sales support Little inventory support required Pay on time
Customer Profitability
Customer Profits
Most Profitable Customers
Customers
Most Unprofitable Customers
86
Options for Managing Customers

Types of Customers Profits
Hi Customers that are above the cost-plus diagonal are more profitable
Passive: Product is crucial Good supplier match

Net (ABC) Margin Realized
Costly to service, but pay top dollar
Price-sensitive and few special demands
Low Low
Aggressive: Leverage their buying power Low Price and lots of customized service and features
Hi Cost to Serve
Losses
Profitability depends on whether and how much the net product margins recover the customer-specific costs.
Source: Shapiro, Rangan, Moriarty and Ross, Manage Customers for Profits (Not Just Sales) Harvard Business Review (Sept-Oct 1987).
87
CUSTOMER PERSPECTIVE: Actions from Integrating ABC and BSC

Customers Profitable Targeted BSC Untargeted Monitor Easy (Fire) Easy (Retain) ABC Unprofitable Transform
88

Strategy Formulation: Identify Profitable Customer and Market Segments Financial Perspective: Measuring the Cost and Profitability of Customer Segments Internal Perspective: Measuring the Cost of Critical Internal Processes Customer Perspective: Measuring the Cost-to-Serve to Reveal Customer Profitability Activity-Based (Operational) Budgeting
Operational and Strategic Budgeting
BSC Strategic Initiatives
Strategic Initiatives Enhancement Maintenance
10%
25%
Activity-Based Budgeting for Operations

Infrastructure Operations 65%
90
Activity-Based Budgeting (ABB) reverses the relationships of an ABC model

ABC
Resources
ABB
Resources
Resource Drivers
Resource Drivers
Activities
Activities
Activity Cost Drivers Products Products
Activity Cost Drivers
91
Borealis introduced a new process to replace what the budget did,but also accomplished a lot more, and with fewer resources
Rolling Financial Forecast

- Quarterly update - Rolling 5 quarters outlook
Balanced scorecard
- Non Non-financial targets & measurements - Link to strategy - Financial targets relative to market - Financial targets & measurement
- Annual outlook
BUDGET
- Limited cost understanding - Annual plan - Annual outlook
Controlling fixed costs

- Activity accounting and product costing - Improved cost understanding - Product and customer costing
Investment management
- Trend reporting & 5 quarter outlook - Decentralised decisions - Frames if needed
92
Economic Value Added (EVA): The Basics

Net sales Operating expenses Operating profit (EBIT: earnings before interest & tax) Taxes Net operating profit after tax (NOPAT) Capital charges (Invested capital Cost of capital) Economic Value Added (EVA)
EVA is a registered trademark of Stern Stewart & Co.

Financial Perspective: Shareholder Value (EVA) and BSC
Shareholder Value/EVA
Financial Strategy
Revenue Strategy
Build The Franchise New sources of revenue
Increase Customer Value Improve profitability of existing customers
Improve Cost Structure Reduce cash expenses Eliminate defects, improve yields
Improve Asset Utilization Manage capacity from existing assets Incremental investments to eliminate bottlenecks
EVA is a registered trademark of Stern Stewart & Co.
94
Typical EVA Actions
Reduce Costs Invest when OPAT > cost of capital Disinvest when OPAT < cost of capital (sell off under-performing and underutilized assets) Financial strategies to reduce cost of capital (share repurchase, increase financial leverage through higher debt/equity ratio)
ote: OPAT = et Operating Profit After Taxes

Adding the BSC to EVA
Revenue Growth Explicit Objectives, Measures and Targets for Customers The Customer Value Proposition Internal Business Processes for Innovation and Enhanced Customer Relationships Infrastructure Investments in People, Systems and Organizational Alignment
96
Impact of Quality Programs

Internal Business Processes
Innovation Process Customer Management Process Operations Process
Responsive Conform to Customer Requests
Supply-Chain Management Operations Efficiency: Cost, Quality, Cycle Time Capacity Management
Customer Value Proposition:
Rapid Lead Times On-Time Delivery Zero Defects

97
BSC Adds to Total Quality Programs

Explicit Causal Links from Operational Improvements to a Customer-Based Value Proposition Explicit Linkages to Productivity Enhancements and Financial Outcomes Identify Entirely New Processes for Improvement Set Strategic Priorities for Resources to Enhance Process Improvements
98

Activity-Based Costing Cost of Internal Processes Customer Profitability Activity-based Budgeting Shareholder Value Explicit Value Proposition and Path for Revenue Growth Strategy Quality Programs Link to Customer and Financial Outcomes Identify New Processes Set Priorities
Business Excellence in Two Steps: Combining Business Excellence and Strategy Focused Management Allows Organiztions to Do the Right Things Right
BSC Objectives
-100 -200 do things right

Time (TBM) Quality (TQM) Cost (ABM)
do the right things
-1000
100
BSC Adds to Total Quality Programs

Explicit Causal Links from Operational Improvements to a Customer-Based Value Proposition Explicit Linkages to Productivity Enhancements and Financial Outcomes Identify Entirely New Processes for Improvement Set Strategic Priorities for Resources to Enhance Process Improvements
101

Activity-Based Costing Cost of Internal Processes Customer Profitability Activity-based Budgeting Shareholder Value Explicit Value Proposition and Path for Revenue Growth Strategy Quality Programs Link to Customer and Financial Outcomes Identify New Processes Set Priorities
Business Excellence in Two Steps: Combining Business Excellence and Strategy Focused Management Allows Organiztions to Do the Right Things Right
BSC Objectives
-100 -200 do things right

Time (TBM) Quality (TQM) Cost (ABM)
do the right things
-1000
103

BALANCED SCORECARD
104
Strategic Control
Replacing the budget with the Balanced Scorecard is a step in the right direction
Mobils Balanced Scorecard
FINANCIAL
Strategic Objectives Financially Strong Delight the Consumer Win-Win Relationship Safe & Reliable Competitive Supplier Good Neighbor Quality Motivated & Prepared
Strategic Measures Return on Capital Employed Mystery Shopper Rating Dealer / Pioneer Gross Profit Split Manufacturing Reliability Index Days Away from Work Rate Laid Down Cost vs. Best Competitive Ratable Supply Environmental Index Quality Index Strategic Competency Availability
corrections
INTERNAL
CUST
result
L&G
Performance Initiatives & Programs
input
output
It creates strategic focus but not strategic learning
105
Performance Management Software Facilitates Strategic Reporting and Learning

Measures $ Q1 Q2 Q3
Initiatives
Target Marketing Effort for Southwest Region On schedule On schedule Delayed
Assessment
Recent Performance in the Business Growth area has been at or above performance for the past three quarters. The following assessments have been provided by initiative owners: a. Anne Sullivan b. John Dark c. Marianne Ritchie 9/25/96 11/14/96 1/15/97
106
Performance Overview in Red and Green
Shareholder
Relative Operating Profit Total Fixed Costs
Cash Flow
Customer
Development Projects
Complaints Handling
Business Processes
Operability
Technical Tests Passed
LTA
People
Target Reached Performance Review's Target not reached
107
The ew Management Meeting: Strategic Review Process

PRESENT (Event-Driven Learning)
Review Strategic Issues (20%) Discuss Implications (40%)
FUTURE (Continuous Learning)

Provide input to strategic issues currently being worked Dialog about performance explain anomalies suggest solutions identify issues Identify strategic issues for discussion at next group meeting
Review Strategic Issues (60%) )
Review Performance (40%) )
Review performance data (available on-line)
Discuss Implications (30%) Review Performance (10%)
THE MONTHLY STAFF MEETING
BETWEEN THE MEETING
THE QUARTERLY STRATEGIC REVIEW MEETING
108
Using the Feedback System to Facilitate Cultural Change

Who can use the system?
Privileged few Strategy is everyones job Open Reporting to All
Communicating problems
The only thing worse than Better dead than red bad news is bad news late. Admit your problems How can we help
Competition vs. Cooperation

To be the best individual Strategy is a team sport. To be on the best team
Reducing Reports
Produce data and reports just-in-case Fewer reports Focused reports
109
I will not read your old reports.

City of Charlotte: City Managers Four Key Questions

How are you doing running your business? How are you building the community and contributing to the citys strategic themes? How are you building your people? How are you contributing to looking to the future? The balanced scorecard has become the common theme that unites discussions across all these questions. Pamela Syfert, Charlotte City Manager
110
The ew Management Meeting: Strategic Learning Replaces Control

The Shift In Focus (At City of Charlotte) Control Is the project on-time? on-budget? Learning What is the impact of the project on neighborhoods jobs transportation
111
City of Charlotte: City Managers Four Key Questions

How are you doing running your business? How are you building the community and contributing to the citys strategic themes? How are you building your people? How are you contributing to looking to the future? The balanced scorecard has become the common theme that unites discussions across all these questions. Pamela Syfert, Charlotte City Manager
112
The ew Management Meeting: Strategic Learning Replaces Control

The Shift In Focus (At City of Charlotte) Control Is the project on-time? on-budget? Learning What is the impact of the project on neighborhoods jobs transportation
113
Effective Strategic Management Is Based Upon a Double Loop Learning Approach

The Strategy
Financial Perspective Customer Perspective
Strategic Feedback That Encourages Learning
update the strategy
Learning Perspective
incorporate learning
Test hypotheses
about your strategy
Assess changes in
the environment
Strategic Learning Loop

Balanced Scorecard
Financial
Identify emerging
strategies
result
Strategic Objectives Financially Strong Delight the Consumer Win-Win Relationship Safe & Reliable
Strategic Measures Return of Capital Employed Mystery Shopper Rating Dealer/Pioneer Gross Profit Split Manufacturing Reliability Index Days Away from Work Rate
corrections
Internal
Cust
Competitive Supplier
Laid Down Cost vs. Best Competitive Ratable Supply
Operational Control Loop

Performance
L&G
Motivated & Prepared
Strategic Competency Availability
input
Initiatives & Programs
output
114
Store 24 Introduced an Innovative Strategy to Build Customer Intimacy: Ban Boredom

GROWTH Sales Growth*
ROI ROCD*
PRODUCTIVITY Gross Profit $ / Labor $
EBITA* EBITDA Gross Profit Gross Profit Growth* New Concepts Net gross profit from concepts <2 years old* New Customers Growth in core categories* Customer count* Contribution Contribution $ And % change* Asset Utilization Inventory turns* Hurdle rate on projects*
Basic Requirements Quality, Value, Cleanliness, Selection Friendly Enjoyable Experience
Differentiators Interesting Promotions Survey: Enjoyable experience
Build the Franchise Continually develop and successfully roll out new and innovative programs Roll-out rating (Ban Boredom Programs)*
Increase Customer Value Enhance the customer experience with flawless implementation Pride rides* Mystery shoppers*
Operational Excellence Focus on store, in stock, and associate productivity In stock average* Gross profit $ / labor $* Gross profit $ / labor hour*
Competencies Required competencies are built on tenure and capability rating Tenure* Capability evaluation*
Technology Focus on technology is on information systems use
Climate for Action Ability to implement relies heavily on employee satisfaction Gallup poll*
Technology evaluation sheet*
* Measures 2002 Balanced Scorecard Collaborative, Inc and Robert S. Kaplan. All rights reserved. 115
Testing the Strategy in Real Time Leads to Strategic Learning

Updated Strategy: Cause You Just Cant Wait
ROI ROCD*
EBITA* EBITDA Gross Profit Gross Profit Growth* New Items Net sales from new items* New Customers Growth in core categories* Customer count* Contribution Contribution $ And % change* Asset Utilization Inventory turns* Hurdle rate on projects*
Basic Requirements Quality, Value, Cleanliness, Selection Friendly
Differentiators Fast & Efficient Competitive comparison*
Build the Franchise Rapid rollout of new merchandise New item program rating*
Increase Customer Value Enhance the customer experience of speed and efficiency Average in/out time*
Operational Excellence Focus on store, in stock, and associate productivity In stock average* Gross profit $ / labor $* Gross profit $ / labor hour*
Competencies Required competencies are built on tenure and capability rating Capability evaluation*
Technology Focus on technology is on information systems use
Climate for Action Ability to implement relies heavily on employee satisfaction Gallup poll*
* Measures
Technology evaluation sheet*
116

BALANCED SCORECARD
117
Pitfalls
1.
Middle Management Team: Lack of Senior Management Commitment (Bacon and Eggs Breakfast)
2. Done by One or Two Individuals 3. Held at the Top: For Senior Management Only 4. Too Long a Development Process: Best Becomes the Enemy of the Good 5. Treating the Balanced Scorecard as a Systems Project 6. Led by Inexperienced Consultants 7. Done Only for Compensation
118
An Effective Balanced Scorecard Development Process Encourages Focused Participation by Leadership Team and Leverages Knowledge Within the Organization
The Balanced Scorecard Design Program
Leadership Team Workshops
Workshop No. 1 Establish executive consensus on strategic issues Review draft Balanced Scorecard objectives and strategy map
Workshop No. 2 Finalize objectives and measures Review strategic initiatives and high level targets
Workshop No. 3 Review implementation plan Discuss implications on change management
Core Team Analysis & Preparation
Task 1
Task 2
Task 3
Task 4
Define Balanced Scorecard Architecture
Develop Objectives and Strategy Map
Develop Measures, Targets and Initiatives
Develop Implementation Plan
119
Value is Added Throughout the Process

Task 1. Define Balanced Scorecard Architecture Task 2. Draft the Balanced Scorecard Deliverables Draft Balanced Scorecard Preliminary objectives Strategy Map Task 3. Develop Measures, Targets & Initiatives Deliverables Scorecard measures High-level targets Strategic initiatives Feedback system demo Task 4. Develop Implementation Plan Deliverables Balanced Scorecard rollout plan
Deliverables Project plan Financial gap Balanced Scorecard architecture Value Chain
Frameworks for strategic architecture & measurement system
Strategy architecture case studies Strategy map Strategic themes Measurement frameworks Target setting approaches Initiatives alignment Strategic feedback and learning model
Implementation approaches Management process Communications & alignment Strategic initiatives planning/implementation
120
Typical Balanced Scorecard Project Schedule

Week Task 1: Define Strategic Architecture Project Kickoff Task 2: Draft the Balanced Scorecard Workshop I Task 3: Develop Measures, High Level Targets & Initiatives Workshop II Task 4: Develop Implementation Plan Workshop III 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
2 Wks
4 Wks
4 Wks
2 Wks
121
Balanced Scorecard Project Team

BSCol Engagement Officer/ Principal (part-time) Executive Sponsor/ Steering Committee Overall project ownership Consultations/pre-presents as needed
BSCol Project Leader (full-time)
2 days/week Client Project Leader Executive Leadership Team
3 half- to full-day workshops One 90-minute briefing/ interview Consultations/ pre-presents as needed
BSCol Project Team 1-2 Consultants (full-time)
Client Core Team Staff knowledgeable of business strategies and organization
1-2 staff 2-3 days/week Briefings with others as needed
122
BSCols Framework for Building the SFO

4 6 Weeks 12-16 Weeks
Assessment
Phase 0
Phase I: BSC Design and Mobilization

1 - 2 Years Rapid BSC Cascading and Deployment Planning and Budgeting Governance Feedback and Learning Performance Management 0.5 - 2 Years
Phase II: Build the SFO
Business Process Improvements

Stream 1 Order Fulfillment Customer Service/CRM Stream 3 Product Innovation Stream 4 Infrastructure
HR IT Etc
Stream 2
Based On What You Have Learned in This Conference, Rate Your Organizations Readiness to Execute Its Strategy
EXECUTIVE LEADERSHIP ORGANIZATION ALIGNMENT
CEO Sponsor Executive Team Engages New Way of Managing Accountable for Strategy A Performance Culture
TRANSLATE STRATEGY
Corporate Corporate SBU SBU Shared Services
Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives CONTINUAL PROCESS
EVERYONES JOB
Strategic Awareness Goal Alignment Linked Incentives
Rate Yourself
E D C B A
Best Practice Were OK Moving Slowly Thinking About It Clueless
Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process
124
The SFO Readiness Profile: Plot Yourself

TRANSLATE STRATEGY
Develop strategy maps and Balanced Scorecards
E D C B A
EXECUTIVE LEADERSHIP
Mobilize the organization
ORGANIZATION ALIGNMENT
Cascade the scorecard to create linkage
CONTINUAL PROCESS
Feedback systems to facilitate learning
Communicate
Personal Scorecard
Incentives
EVERYONES JOB
Mobilize Change through Executive Leadership
B
Thinking
D
OK
Clueless
Moving Slowly
Best Practice
125
Building the SFO: Some Thoughts on Priority and Sequence

TRANSLATE STRATEGY
#1
CONTINUAL PROCESS
Communicate
Personal Scorecard
Incentives
EVERYONES JOB
B
Thinking
D
OK
Clueless
Moving Slowly
Best Practice
126

TRANSLATE STRATEGY Top-down First Wave of Results
#2 #1
#2
#2
CONTINUAL PROCESS
Communicate
Personal Scorecard
Incentives
EVERYONES JOB
B
Thinking
D
OK
Clueless
Moving Slowly
Best Practice
127

TRANSLATE STRATEGY Top-down First Wave of Results
#2 #1
#2
#2
#4
CONTINUAL PROCESS
#5 #3 #4 #4
Bottoms-up
Communicate
Sustained Results
Personal Scorecard
Incentives
EVERYONES JOB
B
Thinking
D
OK
Clueless
Moving Slowly
Best Practice
128
For More Information...
Visit our website @ bscol.com


Building Strategy With Balanced Scorecard

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Building Strategy With Balanced Scorecard

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Building Strategy Focused Organizations with the Balanced Scorecard

Dr. Robert S. Kaplan

The Balanced Scorecard Describes How the Strategy Will Be Executed

Satisfy Customer Needs for Stateof-Art Capabilities

Relationship Management Program Gain Sharing Program

World Class Internal Product Development

Accelerate New Product Development

University Liaison/ Technology Transfer

9 mos. Development Cycle Time Reengineering

Learning & Growth

Stable HighTalent Workforce

Acquire, Develop and Retain Strategic Skills

Specialized Competency Availability Key Staff Retention

Competency Model New Hiring Program

Supervisory Training Benefits Program

$275 loss Top Quartile $3b spin-off

$300M loss Customer base doubles $7b spin-off

Shipments on Spec Rework Absenteeism Cost per Pound ()

GTE (Verizon) Human Resources Reduced employee turnover during merger

Balanced Scorecard Hall of Fame: orth America

Balanced Scorecard Success Stories: Europe

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

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

35% of valuation decision is based on non-financial data

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

The Principles of a Strategy-Focused Organization

EVERYONES JOB Strategic Awareness Goal Alignment Linked Incentives

A Strategy Map Describes How The Organization Intends to Create Value

Traditional financial framework for describing shareholder value creation

Customer Value Proposition

Customer value proposition establishes context for value

Innovation Process Internal Build the Franchise

Customer Management Process Increase Customer Value

Social & Environmental Processes Be a Good Citizen

Provide Operational Excellence

Learning & Growth

Climate for Action

Leadership & Governance

Internal Processes Deliver Value Over Different Time Horizons

Shareholder Value ($)

Mobil AM&R Strategy Map

Revenue Growth Strategy

ROCE Net Margin (vs. industry)

Non-Gasoline Revenue & Margin

Delight the Consumer Basic

Win-Win Dealer Relations Differentiators

Build the Franchise Create NonGasoline Products & Services

Increase Customer Value Understand Consumer Segments

Achieve Operational Excellence

Improve Environmental, Health and Safety

Best-In-Class Franchise Teams

A Motivated and Prepared Workforce

Technology Process Improvement

Learning & Growth Perspective

Aligned Personal Growth

ew Source of Revenues and Customer Loyalty Attractive Convenience Store

Grow Revenue Increase Revenue/ Customer

Reduce Cost Per Customer

Add & Retain High Value Customers

Time Savings Security Price Reliability

Multiple Channels Service Features/Ease of Use Products

Manag e Attritio n Develop Superior Products and Features

Effective Marketing Programs Develop Superior Service