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1 Management must consider both financial and operational performance measures Measures should be linked with company goals and strategy Financial measures.

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Presentation on theme: "1 Management must consider both financial and operational performance measures Measures should be linked with company goals and strategy Financial measures."— Presentation transcript:

1 1 Management must consider both financial and operational performance measures Measures should be linked with company goals and strategy Financial measures are only one measure among many Uses key performance indicators 1

2 2 The Balanced Scorecard The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI. Increase IncreaseSales Reduce ReduceExpenses Assets Im glad we used the balanced scorecard to tell which approach is best. Im glad we used the balanced scorecard to tell which approach is best.

3 3 COMPANY GOALS CRITICAL FACTORS KEY PERFORMANCE INDICATORS Examples of critical factors and corresponding KPIs Operational efficiency Employee excellence Financial profitability Market share Yield rate Training hours Revenue growth Customer satisfaction 3

4 4 FinancialCustomer Internal Business Learning and Growth 4

5 5 How do we look to shareholders? –Ultimate goal is to generate income for owners KPIs: –Sales revenue growth –Gross margin growth –Return on investment –Working capital used 5

6 6 How do customers see us? –Top priority for long-term success Customer concerns: –Product price –Product quality –Sales service quality –Product delivery time KPIs: –Customer satisfaction –Market share –Number of customers and repeat customers –Rate of on-time deliveries 6

7 7 At what business processes must we excel? Three factors: –Innovation KPI: Number of new products developed –Operations KPIs: –Product efficiency – number of units produced –Product quality – defect rate –Post-sales service KPIs –Number of warranty claims –Average wait time on phone for customer service 7

8 8 How can we continue to improve and create value? Three factors: –1) Employee capabilities KPIs: –Hours of employee training –Employee satisfaction and turnover –Number of employee suggestions implemented –Dollars per worker on Workers Compensation Exp –Sales dollars per worker Copyright (c) 2009 Prentice Hall. All rights reserved.8

9 9 –2) System capabilities KPIs: –Percentage of employees with online access to customer data –Percentage of processes with real-time feedback –3) Companys climate for action – A balance of responsibility and authority Copyright (c) 2009 Prentice Hall. All rights reserved.9

10 10 Key Features of Performance Management

11 11 Key Features of Performance Management Is an essential part of organisation strategy: - derived from the mission and vision statements - links the mission and vision, strategy, goals and processes of the organisation

12 12 Key Features of Performance Management (Continued) Provides quantitative and qualitative information: - assesses non-financial as well as financial criteria - is a decision making tool - provides a standardised and consistent approach

13 13 Key Features of Performance Management (Continued) Provides a multidimensional focus on people and processes: - is a process not a system - measures processes not functions - needs top-down and bottom-up communication and understanding - enables delegation and empowerment - enhances employee satisfaction

14 14 Key Features of Performance Management (Continued) Provides both external and internal perspectives: - focuses on customer satisfaction - can be used to benchmark against competitors

15 15 Key Features of Performance Management (Continued) Continuous Improvement - emphasises causes, promotes self- diagnosis and identifies areas for improvement - promotes effective planning

16 16 Why Balanced Scorecard ?

17 17 Why Balanced Scorecard? Financial performance measurements no longer adequate Financial evaluations are reactive Financial measures not able to reflect contemporary value creating actions A Holistic measurement tool formulating an integral part of strategy (cross functional integration)

18 18 Bridges financial measurements and strategy Lever to streamline and focus strategy Translate company strategy into specific measurable objectives Put strategy not control at the centre Pulls people to the overall vision Why Balanced Scorecard? (Continued)

19 19 Why Balanced Scorecard? (Continued) It is a framework for creating a set of measures that gives managers a fast and comprehensive view of the business. It is a tool providing all of the critical indicators of a businesses current and future performance. It supplements traditional financial measures with three additional perspectives:

20 20 Balanced Scorecard - Principles

21 21 Balanced Scorecard - Principles Performance measures are balanced to reflect key areas of corporate activity which will create long term shareholder value Performance measurement are designed to monitor value drivers - quality, cycle time and service are key determinants of customer satisfaction which is the ultimate driver

22 22 Balanced Scorecard - Principles (Continued) Financial measures are used to explicitly include shareholder value calculations Organisation learning is specifically measured - ability to change, rate of change and continuous improvements

23 23 Balanced Scorecard - Principles (Continued) A top-down process is used to directly link vision and strategy - both senior management sponsorship, involvement and commitment, and lower level participation and agreement are all necessary Measures must link individual worker performance to overall organisation vision and strategy

24 24 Balanced Scorecard Values

25 25 Balanced Scorecard Values Translate business plan into a set of clear measures and targets As a reporting tool, will give managers regular feedback on their performance, allowing them to assess their situation and improve Provide a fair, data based, systematic mechanism for setting performance targets and rewarding achievement

26 26 Balanced Scorecard Values (Continued) Allow each business unit to focus on a few high value opportunities Be able to pinpoint issues and identify performance improvement opportunities Provide a checks and balances system to manage short term performance and strategic implications Ensure a comprehensive measurement system, measuring all perspectives of the business

27 27 What does the Balanced Scorecard measure?

28 28 What does the Balanced Scorecard measure? Product Internal Processes Customer Innovation and improvements

29 29 Vision & Strategy CUSTOMER CUSTOMER Happy Customers how should we appear to our customer - to achieve our vision? LEARNING & I NNOVATION Happy Employees how will we sustain our ability to service, change and improve - to achieve our vision? INT. BUS. PROCESS PROCESS Way of doing things what business processes must we excel at - to satisfy our shareholders? FINANCIAL FINANCIAL Financial Health how should we appear to our shareholder - to succeed financially?

30 30 Customer Perspective Demands that managers translate their general mission statements on customers into specific measures that reflect what really matters to the customer eg. - Lead time - Quality - performance - Service

31 31 Internal Processes Internal measures should stem from the business processes that have the greatest impact on customer satisfaction, e.g. - Factors that effect cycle time - Quality - employee skills - productivity

32 32 Innovation and learning perspective A companys ability to innovate, improve and learn, ties directly to the companys value. 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 revenue and margins.

33 33 Financial Perspective Financial performance measures indicates whether the companys strategy, implementation and execution are contributing to bottom-line improvement e.g. - profitability - growth - shareholder value

34 34 The Balanced Scorecard is like the dials in an airplane cockpit: It gives managers complex information at a glance Kaplan and Norton

35 35 How does these measures differ from traditional measurements?

36 36 How does these measures differ from traditional measurements? Grounded in Organisations Strategic Objectives Focus strategic vision Provide balance Ensure a focus beyond the current year

37 37 Barriers to Effective Balanced Scorecard Implementation

38 38 Barriers to effective Balanced Scorecard Implementation Measurements are non quantifiable Measurements are input rather than output driven No buy-in from employees/management Balanced Scorecard perceived as latest fad. No migration planning No system to support measurements

39 39 No follow-up on operational improvements with another round of actions Strategies not effectively executed Lack or no clear understanding on Balanced Scorecard mechanism Preoccuaption of measurements instead of outputs Barriers to effective Balanced Scorecard Implementation (Continued)

40 40 Balanced Scorecard Benefits

41 41 Balanced Scorecard Benefits Synergy between efforts Focus Cross functional integration Create customer and supplier partnership Continuous improvement Team rather than individual accountability Assist managers in understanding interrelationships

42 42 Balanced Scorecard Benefits (Continued) Tool to measure individual as well as group performance Scientific approach to quantifying strategic objectives

43 43 Practical Application of the Balanced Scorecard

44 44 If you cant measure it you cant manage it Kaplan and Norton

45 45 Clarifying and Translating the Vision and Strategy Strategic Feedback and Learning Planning and Target Setting Communicating and Linking Communicating and educating Setting goals Linking rewards to performance measures Clarifying the vision Gaining consensus Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning Setting targets Aligning strategic initiatives Allocating resources Establishing milestones Balanced Scorecard Kaplan & Norton, 1996 A Strategic Framework for Action

46 46 MPT Strategy Learning & Growth perspective Develop employees Motivate employees Customer & Stakeholder perspective Satisfy customers Retain customers Process perspective Increase efficiency Provide high quality Port service Financial perspective Satisfy Stakeholders Strategy linked to Balanced Scorecard

47 47 Balanced Scorecard Tying the Balanced Scorecard Measures to the Strategy for Success –Company develops three to five performance measures for each dimension –Measures should be tied to company strategy –Balance among the dimensions is critical You get what you measure!

48 48 How Balance is Achieved in a Balanced Scorecard Performance is assessed across a balanced set of dimensions Balance quantitative measures with qualitative measures There is a balance of backward-looking measures and forward-looking measures

49 49 Developing a Strategy Map for a Balanced Scorecard A strategy map is a diagram of the relationships of the strategic objectives across the four dimensions Used to test the soundness of the strategy Identifies how strategy is linked to measures on the scorecard Communicates strategic objectives to employees

50 50 Keys to a Successful Balanced Scorecard Targets –For each measure, there should be a target so managers know what they are expected to achieve Initiatives –For each measure, the company must identify actions that will be taken to achieve the target Responsibility –A particular employee must be given responsibility and held accountable for successfully implementing each initiative Funding –Initiatives must be funded appropriately Top Management Support –It is crucial to have the full support of top management

51 51 Return on Investment (ROI) Formula ROI = Net operating income Average operating assets Average Current & Non Current Assets. Income before interest and taxes (EBIT) Income before interest and taxes (EBIT)

52 52 Return on Investment (ROI) Formula Regal Company reports the following: Net operating income $ 30,000 Net operating income $ 30,000 Average operating assets $ 200,000 Average operating assets $ 200,000 $30,000 $200,000 15% = 15% ROI =

53 53 Controlling the Rate of Return Three ways to improve ROI... Increase IncreaseSales Reduce ReduceExpenses Assets

54 54 ROI and the Balanced Scorecard The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI. Increase IncreaseSales Reduce ReduceExpenses Assets Im glad we used the balanced scorecard to tell which approach is best. Im glad we used the balanced scorecard to tell which approach is best.

55 55 Criticisms of ROI In the absence of the balanced scorecard, management may not know how to increase ROI. Managers often inherit many committed costs over which they have no control. Managers evaluated on ROI may reject profitable investment opportunities.

56 56 Criticisms of ROI As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your divisions ROI -- the higher your ROI, the bigger your bonus. The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%. You have an opportunity to invest in a new project that will produce an ROI of 25%. As division manager would you invest in this project?

57 57 Criticisms of ROI As division manager, I wouldnt invest in that project because it would lower my pay!

58 58 Your division before new investment: Net operating income $ 60,000 Average operating assets 200,000 ROI 30% New investment: Net operating income $ 10,000 Average operating assets 50,000 ROI 20% Your division after new investment: Net operating income $ 70,000 Average operating assets 250,000 ROI 28% Criticisms of ROI

59 59 Criticisms of ROI Gee... I thought we were supposed to do what was best for the company!

60 60 Residual Income - Another Measure of Performance Net operating income above some minimum return on operating assets

61 61 Residual Income A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets. In the current period the division earns $30,000. Lets calculate residual income.

62 62 Residual Income (EVA)

63 63 Motivation and Residual Income Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.

64 64 Your division before new investment: Net operating income $ 60,000 Average operating assets 200,000 ROI 30%

65 65 Your division after new investment: Net operating income $ 70,000 Average operating assets 250,000 ROI 28% An increase of $2,500 in residual income!!


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