The Balanced Scorecard
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- Summary of the Balanced Scorecard method. Abstract.
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K and Cauvin E Financial and nonfinancial performance measures. Neufeld G. A, Semeoni P. A and Taylor M. The balanced scorecard allows managers to look at the business from four important perspectives. While giving senior managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. Companies rarely suffer from having too few measures. More commonly, they keep adding new measures whenever an employee or a consultant makes a worthwhile suggestion. Several companies have already adopted the balanced scorecard.
Their early experiences using the scorecard have demonstrated that it meets several managerial needs. 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 market, for example, in two very different ways: by improving the management of new product introductions or by releasing only products that are incrementally different from existing 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 increases may be due to a shift in the product mix to more standard, easy-to-produce but lower-margin products. ECI saw the scorecard as a way to clarify, simplify, and then operationalize 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. Many companies today have a corporate mission that focuses on the customer. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers. For existing products, lead time can be measured from the time the company receives an order to the time it actually delivers the product or service to the customer.
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. Quality measures the defect level of incoming products as perceived and measured by the customer. 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.
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 developed two customer-based metrics for its operations: equipment 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.
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.
The managers translated these general goals into four specific goals and identified an appropriate measure for each. 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 proprietary products. That information was available internally. 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.
ECI itself 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 customers to rank the company as a supplier overall. Some companies hire third parties to perform anonymous customer surveys, resulting in a customer-driven report card. The J. In addition to measures of time, quality, and performance 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 receiving, inspecting, handling, and storing the materials; to the scrap, rework, and obsolescence caused by the materials; and schedule disruptions expediting and value of lost output 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 deliver defect-free products in exactly the right quantities at exactly the right time directly to the production process and can minimize, through electronic data interchange, the administrative hassles of ordering, invoicing, and paying for materials.
After all, excellent customer performance derives from processes, decisions, and actions occurring throughout an organization. Managers need to focus on those critical internal operations that enable them to satisfy customer needs. The second part of the balanced scorecard gives managers that internal perspective. The company performed a monthly survey of randomly selected employees to determine if they were aware of TQM, had changed their behavior because of it, believed the outcome was favorable, or had become missionaries to others.
Hewlett-Packard uses a metric called breakeven time BET to measure the effectiveness of its product development cycle. Lower levels of the organization aimed to radically cut the times required to process customer orders, order and receive materials from suppliers, move materials and products between plants, produce and assemble products, and deliver products to customers.
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The internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction—factors that affect cycle time, quality, employee skills, and productivity, for example. Companies should decide what processes and competencies they must excel at and specify measures for each. Managers at ECI determined that submicron technology capability was critical to its market position.
They also decided that they had to focus on manufacturing excellence, design productivity, and new product introduction. The company developed operational measures for each of these four internal business goals. Since much of the action takes place at the department and workstation levels, managers need to decompose overall cycle time, quality, product, and cost measures to local levels.
Information systems play an invaluable role in helping managers disaggregate the summary measures.
What are the Four Perspectives of the Balanced Scorecard
When an unexpected signal appears on the balanced scorecard, executives can query their information system to find the source of the trouble. If the aggregate measure for on-time delivery is poor, for example, executives with a good information system can quickly look behind the aggregate measure until they can identify late deliveries, day by day, by a particular plant to an individual customer.
Managers at ECI are currently limited by the absence of such an operational information system. The company is in the process of developing a more responsive information system to eliminate this constraint. The customer-based and internal business process measures on the balanced scorecard identify the parameters that the company considers most important for competitive success. But the targets for success keep changing. Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities.
That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins—in short, grow and thereby increase shareholder value. Its manufacturing improvement measure focuses on new products; the goal is to achieve stability in the manufacturing of new products rather than to improve manufacturing of existing products.
Like many other companies, ECI uses the percent of sales from new products as one of its innovation and improvement measures. If sales from new products are trending downward, managers can explore whether problems have arisen in new product design or new product introduction. In addition to measures on product and process innovation, some companies overlay specific improvement goals for their existing processes.
For example, Analog Devices, a Massachusetts-based manufacturer of specialized semiconductors, expects managers to improve their customer and internal business process performance continuously. The company estimates specific rates of improvement for on-time delivery, cycle time, defect rate, and yield. These targets emphasize the role for continuous improvement in customer satisfaction and internal business processes. Typical financial goals have to do with profitability, growth, and shareholder value.
ECI stated its financial goals simply: to survive, to succeed, and to prosper. Survival was measured by cash flow, success by quarterly sales growth and operating income by division, and prosperity by increased market share by segment and return on equity. Should they pay attention to short-term financial measures like quarterly sales and operating income? Many have criticized financial measures because of their well-documented inadequacies, their backward-looking focus, and their inability to reflect contemporary value-creating actions. Shareholder value analysis SVA , which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more forward looking.
But SVA still is based on cash flow rather than on the activities and processes that drive cash flow. Some critics go much further in their indictment of financial measures. They argue that the terms of competition have changed and that traditional financial measures do not improve customer satisfaction, quality, cycle time, and employee motivation.
In their view, financial performance is the result of operational actions, and financial success should be the logical consequence of doing the fundamentals well. In other words, companies should stop navigating by financial measures. By making fundamental improvements in their operations, the financial numbers will take care of themselves, the argument goes. Assertions that financial measures are unnecessary are incorrect for at least two reasons.
Let us demonstrate rather than argue this point. In the s, a chemicals company became committed to a total quality management program and began to make extensive measurements of employee participation, statistical process control, and key quality indicators. Using computerized controls and remote data entry systems, the plant monitored more than 30, observations of its production processes every four hours.
The department managers and operating personnel who now had access to massive amounts of real-time operational data found their monthly financial reports to be irrelevant. But one enterprising department manager saw things differently.
He created a daily income statement. Each day, he estimated the value of the output from the production process using estimated market prices and subtracted the expenses of raw materials, energy, and capital consumed in the production process. The daily financial report gave operators powerful feedback and motivation and guided their quality and productivity efforts.
The department head understood that it is not always possible to improve quality, reduce energy consumption, and increase throughput simultaneously; tradeoffs are usually necessary. He wanted the daily financial statement to guide those tradeoffs. The operators were empowered to make decisions that might improve quality, increase productivity, and reduce consumption of energy and materials. That feedback and empowerment had visible results.