1. Competing on Resources Translating Strategy into Action Balance Scorecard copyright@Vinod Kr Sharma-JIM “ Measuring Performance in the Organization of the Future”

13. 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

14. The Increasing Sophistication of Corporate Performance Measurement Time Sophistication of Measurement Systems Operating measures Traditional accounting measures Quality-related operating measures Activity-based costing Economic value added

16. ? ROCE Customer Loyalty On-Time Delivery Process Quality Process Cycle-Time Employee Skills

18. ROCE Customer Loyalty On-Time Delivery Process Quality Process Cycle-Time Employee Skills Financial Customer Business Process Learning

22. The Increasing Sophistication of Corporate Performance Measurement Time Sophistication of Measurement Systems Operating measures Traditional accounting measures Quality-related operating measures Activity-based costing Economic value added Balance Scorecard Value-linked measurements for business strategy, stakeholder needs, process attributes and the business environment

26. How do we look to our owners and investors? How do we look to our customers? Internal Processes Perspective How efficient and effective are the critical internal processes? Organizational Learning Perspective Are we able to sustain innovation and improvement? Customer Perspective ? Financial Perspective

27. Strategic Linkages How do we look to our owners and investors? How do we look to our customers? Internal Processes Perspective How efficient and effective are the critical internal processes? Organizational Learning Perspective Are we able to sustain innovation and improvement? Strategic Vision Customer Perspective Financial Perspective

28. "If we succeed, how will we look to our shareholders?” The Strategy Financial Perspective "To achieve my vision, how must I look to my customers?” Customer Perspective "To satisfy my customers, at which processes must I excel?” Internal Perspective "To achieve my vision, how must my organization learn and improve?” Organization Learning Translate the strategy to operational terms

29. The Vertical Scorecard Financial Perspective Customer Perspective Internal Processes Perspective Organizational Learning Perspective

30. Translate the strategy to operational terms

31. The Balanced Scorecard Strategy Map Improve Shareholder Value Revenue Growth Strategy Productivity Strategy Build the Franchise Increase Customer Value Improve Cost Structure Improve Asset Utilization New Revenue Sources Customer Profitability Cost per Unit Asset Utilization Shareholder Value ROCE Product Leadership Customer Intimacy Operational Excellence Price Quality Time Function- ality Service Relation- ships Brand Customer Value Proposition Image Relationship Product/Service Attributes A Motivated and Prepared Workforce Strategic Competencies Strategic Technologies Climate for Action Financial Perspective Customer Perspective Internal Perspective Learning & Growth Perspective Source: Kaplan & Norton, The Strategy Focused Organization “ Be a Good Corporate Citizen” (Regulatory and Environmental Processes) “ Build the Franchise” (Innovation Processes) “ Achieve Operational Excellence” (Operational Processes) “ Increase Customer Value” (Customer Management Processes)

34. Balanced Scorecard - logic model

42. Measuring Strategic Financial Themes Harvest Sustain Growth Business Stages in Life Cycle Sales growth rate % revenue from new products, services & customers Revenue Employees Investment ( % of Sales ) R & D ( % of Sales ) Revenue Growth & Mix Cost reduction & Productivity Asset Utilization Strategic Themes Share of targeted customers, % of revenue from new customers, Customer & product profitability Indirect exps. As % of Sales, Cost reduction rates, cost Vs competition Cash -2- cash cycle ratio, Working Capital ratios, ROCE, Assets utilization rates Customer & Product line profitability Unit costs per unit of output, unit cost of per transaction Payback Throughput

47. Objectives: What the strategy is trying to achieve Increase Market Share and Customer Satisfaction Measures: How success or failure (performance) against objectives is monitored Market share in communication network segment & Customer satisfaction survey Targets: The level of performance or rate of improvement needed Initiatives: Key action programs required to achieve targets Identify future needs of customers Balanced Scorecard- Customer Perspective:

50. Customer Profitability Market Share Customer Satisfaction Customer Acquisition Customer Retention Customer Perspective Core Measures

59. Objectives: Improve manufacturing capability Reduce delivery time to customers Meet specified delivery dates Measures: Percentage of processes with advanced controls Order delivery time On-time delivery Targets: The level of performance or rate of improvement needed Initiatives: Key action programs required to achieve targets Manage cost and unused capacity Balanced Scorecard- IBP Perspective:

67. Features of a Good Balanced Scorecard It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships. It assists in communicating the strategy to all members of the organization by translating the strategy into a coherent and linked set of measurable operational targets.

68. Pitfalls When Implementing a Balanced Scorecard What pitfalls should be avoided when implementing a balanced scorecard? Don’t assume the cause-and-effect linkages to be precise. Don’t seek improvements across all measures all the time. Don’t use only objective measures on the scorecard.

69. Evaluating the Success of a Strategy Assume the following operating incomes: Year 1999 Year 2000 Revenues: (10,00,000 × 26) 2,60,00,000 (11,00,000 × 24) 2,64,00,000 Expenses: Materials 40,50,000 36,31,320 Other 1,60,00,000 1,60,00,000 Operating income 59,50,000 67,68,680

71. Growth Component The growth component measures the change in operating income attributable solely to an increase in the quantity of output sold. Assume that for 1999, ABC produced and sold 10,00,000 devices at 26 per unit. During the year 2000, ABC produced and sold 11,00,000 devices at 24 per unit. What is the revenue effect of growth?

72. Growth Component Revenue effect of growth component = (Actual units of output sold in 2000 – Actual units of output sold in 1999) × Output price in 1999 (11,00,000 – 10,00,000) × 26 = 26,00,000 F This component is favorable because it increases operating income.

73. Cost Effect of Growth To produce the higher output sold in 2000, more inputs would be needed. The cost increase from growth measures the amount by which costs in 2000 would have increased if the relationship between inputs and outputs that existed in 1999 continued in 2000, and if prices of inputs in 1999 continued in 2000.

75. Cost Effect of Growth To produce 11,00,000 units in 2000 compared with the 10,00,000 units produced in 1999 (a 10% increase), ABC would require a proportional increase in direct materials. Assume that 30,00,000 square centimeters of materials were used to produce the 10,00,000 units in 1999 at a cost of 1.35 per square centimeter.

76. Cost Effect of Growth Also, assume that manufacturing conversion costs, selling and customer service costs and research and development costs were 1,60,00,000 and remained stable during 2000. What is the cost effect of the growth component? 30,00,000 × 110% = 33,00,000 centimeters (33,00,000 – 30,00,000) × 1.35 = 4,05,000 U

77. Operating Income and Growth What is the net increase in operating income as a result of growth? Revenue effect of growth component 26,00,000 F Cost effect of growth component 4,05,000 U Increase in operating income due to growth component 21,95,000 F

79. Price-Recovery Component Revenue effect of price-recovery component = (Output price in 2000 – Output price in 1999) × Actual units of output sold in 2000 What is the revenue effect of the price-recovery component? (24 – 26) × 11,00,000 = 22,00,000 U It is unfavorable because there was a decrease in price between 1999 and 2000.

80. Price-Recovery Component Cost effect of price-recovery component = (Input prices in 2000 – Input prices in 1999) × Actual units of inputs or capacity that would have been used to produce year 2000 output assuming the same input-output relationship that existed in 1999 Assume that in the year 2000 direct materials costs were 1.31 per square centimeter.

81. Price-Recovery Component Remember, it was assumed that manufacturing conversion costs, selling, and customer service costs and research and development costs remained stable during 2000. What is the cost effect of the price-recovery component? (1.31 – 1.35) × 33,00,000 = 1,32,000 F

82. Operating Income and Price-Recovery Component What is the total effect on operating income of the price-recovery component? Revenue effect of price-recovery component 22,00,000 U Cost effect of price-recovery component 1,32,000 F Decrease in operating income due to price-recovery component 20,68,000 U

83. Productivity Component The productivity component of operating income compares how costs have decreased as a result of using fewer inputs, a better mix of inputs, and less capacity to produce year 2000 output, assuming year 2000 input prices.

85. Productivity Component Assume that 27,72,000 actual square centimeters of direct materials were used in the year 2000. Actual price was 1.31/square centimeter. Manufacturing conversion costs, selling and customer service costs, and research and development costs remained stable during 2000.

86. Productivity Component What is the productivity component of cost changes? (27,72,000 – 33,00,000) × 1.31 = 691,680 F There is a 691,680 increase in operating income due to the productivity component.

87. Change in Operating Income Increase in operating income 8,18,680 Growth component 21,95,000 F Price-recovery component 20,68,000 U Productivity component 6,91,680 F

88. Engineered and Discretionary Costs Fixed costs are tied to capacity. Fixed costs do not change automatically with changes in the level of the cost driver. How to reduce capacity-based fixed costs? The key is understanding and managing unused capacity.

89. Engineered Costs Engineered costs result specifically from a clear cause-and effect relationship between output and the resources needed to produce that output. Engineered costs can be variable or fixed in the short run. Selling and customer-service costs are engineered costs that are fixed in the short run.

90. Discretionary Costs Two important features of discretionary costs: Discretionary costs arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. Discretionary costs have no clearly measurable cause-and effect relationship between output and resources used.

93. Relationships between Inputs and Outputs Engineered costs pertain to processes that are detailed, physically observable, and repetitive. Discretionary costs are associated with processes that are sometimes called black boxes , because they are less precise and not well understood.

94. Relationships between Inputs and Outputs Uncertainty refers to the possibility that an actual amount will deviate from an expected amount. The higher the level of uncertainty about the relationship between resources used and outputs, the less likely a cause-and-effect relationship will exist.

95. Identifying Unused Capacity Identifying unused capacity is easier for engineered costs than for discretionary costs. The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs much more difficult.