Strategy level Linkage in TPS Level 5

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Prof. Dr. Péter Horváth Balanced Scorecard - Translating Strategies into Action August 1998

Agenda:

Agenda 1. We have a strategy, what is next? 2. Strategy Implementation with the Balanced Scorecard Implementing the Balanced Scorecard Improvement of the Strategic Management Process with the Balanced Scorecard 3. Conclusion

Strategic Management - Overview:

Strategic Management - Overview Checking resources/costs Company Strategy Definition SGF Strategy Definition Strategic Objectives Measurement Factors Action Programs Annual Planning, Budgets, Main Strategic Emphasis, etc. Competitors Customers Suppliers Technologies etc. Internal Analyses - Key competences - Strong/weak points - etc. Methods - Portfolio - Life cycle - ABC - etc. Breaking down by Departments Feedback, Learning, ... - Trends - Risks - Opportunities The Problem lies at the transition between strategy elaboration and strategy implementation Stage 1: Strategy elaboration Stage 2: Strategy implemen- tation (application of BSC)

Implementation of Strategies is a Top Issue:

Source: 1998 Renaissance/ CFO Magazine Survey of US Companies have a Vision/Mission Statement (87% of UK Companies) 91% of the Executive Management in US companies cleary understand the vision (59% in UK) 71% Implementation of Strategies is a Top Issue Source: Survey among approx. 150 German Companies done by the management consultancy Kurt Salmon Associates. Wirtschaftswoche, edition No. 3/ 8.1.1998 of the German companies are dissatisfied with the translation into action of their strategies measurements. 50% 98% of German companies consider strategic work as “important” or even “very important” Source: Wirtschaftswoche, edition No.48/ 20.11.1997, survey by the Düsseldorf HFU (Hermann Fuchslocher Unternehmensberatung). consider the visions to be completely strange to market. 20% employees of the middle management can’t identify with the newly given strategies. 50% employees of the middle management feel integrated in the elaboration of the strategy 35% 32% of European Top-Managers say: “A better implementation of our plans would make an improvement in performance of 50%.” 68% of European Top-Managers say: “I’m convinced that we would improve the operating income by 20%, if we had translated our strategies and plans into actions more successfully.” Source: Study of Mercuri International for Strategy Implementation, 1998 - Sample: 592 European Top-Managers + 50% + 20% Current Studies of the Middle Management in US companies cleary understand the vision (40% in UK) 40% of the Line Employees in US companies cleary understand the vision (7% in UK) 3% Often the success fails at poor communication and acceptance of the strategy

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Main Reasons for Implementation Problems Does the behavior and work of your employees change with a change of strategy? Strategy indifference of employees Does your reporting system change with a change of strategy? Strategy indifference of reporting systems Strategy indifference of short term planning Does the trend of budgeting change with a change of strategy? Indifference towards strategy has to be overcome

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0% 10% 20% 30% 40% 50% 60% 70% 1 2 3 4 5 totally agree don´t agree at all Example: Alignment as prerequisite for strategy concurring behavior of employees Quelle: Fragebogen Nr. 40 after successful use of BSC before use of BSC Statement: Everyone in our company strives for the same goals Frequency of mentioning in %

Example: Consistent break down of a strategic goal causes strategy concurring behavior:

Development of accidents at work Example: Consistent break down of a strategic goal causes strategy concurring behavior 5 employees 10 employees 25 employees 60 employees 350 employees 450 employees Penetration of over 50% Sample company: Reduction of accidents through management by objectives 0 10 20 30 40 50 60 70 80 90 87 88 89 90 91 92 93 94 95 96 97 industry average own company low level can be maintained Scource: Company of chemical industry MbO causes an immediate reduction of accidents Jahr # of accidents

Different strategies require a differentiated measurement of performance:

Different strategies require a differentiated measurement of performance Source: Schiemann, W. and Lingle, J., Bullseye! Hitting Your Strategic Targets, 1997 Measurement Area Cost leadership Innovation Customer Intimacy Product/Service Quality Price attributes like... Maintenance costs Warrants costs Attributes like... Innovation Serviceability Attributes like... Reliability Availability Responsiveness Customer % of deals closed Market share Perception of price Customer value Acceptance of new products Speed of migration Customer value vs. Competitors Customer loyalty/retention Financial Operational ROA Revenue/employee Productivity ROI Revenues from new products Return on R&D dollars ROS Market share Account share Revenue dollars/customers People Satisfaction vis-à-vis Turnover Absenteeism Productivity Satisfaction vis-à-vis Development Autonomy Communication Satisfaction vis-à-vis Training Empowerment Example: Adjustment of the reporting system to the strategy

Basic requirements for strategic success:

Basic requirements for strategic success source: Motorola University (adapted) goals abilities actionplan resources incentives goals goals goals goals abilities abilities abilities abilities actionplan actionplan actionplan actionplan resources resources resources resources incentives incentives incentives incentives + + + + + + + + + + + + + + + + + + + = = = = = = confusion fear failing launch frustration little change chaos goals abilities actionplan resources incentives + + + + = intended change information + + + + + information information information information + information Only an integrated approach leads to success

Integration of the strategy relevant success factors:

Integration of the strategy relevant success factors BSC Management by Objectives (“incentives”) Strategy (“goals”) Management Information System (“information”) Planning, Budgeting, Infrastructure (“resources”) Strategy Break Down (“actionplan”) Employee Potentials (“abilities”) Balanced Scorecard is the method to synchronise the instruments essential for strategy implementation

Agenda:

Agenda 1. We have a strategy, what is next? 2. Strategy Implementation with the Balanced Scorecard Implementing the Balanced Scorecard Improvement of the Strategic Management Process with the Balanced Scorecard 3. Conclusion

Proceedings of a Balanced Scorecard Project:

Proceedings of a Balanced Scorecard Project Strategy Translation into action Feedback - Finding - Commitment - MbO - MIS - Planning - Reviews, Updates Establishment of Balanced Scorecard (about 6 months) Stage 1 : Creation of Preconditions check strategy for BSC suitability specify BSC level define project organisation and proceedings Stage 2 : BSC elaboration define strategic objectives goals priorising and linking find measurements quantify goals define initiatives break down of BSC´s Improvement of strategic management process Stage 3: Integration into current systems monitoring incentives reviews

Transfering Strategies into Action:

Transfering Strategies into Action Put strategy into concrete form Aid comman understanding Specification of strategic direction Initiatives “We see ourselves as partners of ours customers. Customer orientation is more than a phrase. We want to be the fist choice for our customers at buying decisions.” Clear definition of strategic goals Selection of measurements “Easy to deal with company” Improve image Number of new customers Customer satisfaction index More personal with customer contact Education service A successful strategic management needs clearly defined strategic objectives, strategic measurements, and initiatives Frequency of customer complaints Enhance customer loyalty Set up of Call Center

The Horváth & Partner Filter for Selection of Strategic Goals:

The Horváth & Partner Filter for Selection of Strategic Goals Strategic Relevance (Does it really make a relevant difference to our customers?) (Necessity to act as difference between current initiatives and for achieving our goals necessary initiatives) Necessity to Act Only relevant for deviation (exception reports, diagnostic element) (e.g. maintain low mistake rate) BSC-Goals Strategic change necessary (e.g. reduce number of variants) Low priority (e.g. improve ambience of buildings) Selective attention (e.g. increase capacity of cafeteria) What are the strategic relevant goals, which have to appear on the BSC?

Example: Excerpt of the BSC of a software devision :

Example: Excerpt of the BSC of a software devision Strategic Objectives Measurements Concrete figures ROCE above branch standard ROCE ROCE > 24% Growing faster than the market Sales increase Increase rate of >13% Increase cash flow Discounted free cash flow Increase of + 5% p.a. Innovator image Sales share of new products and services Percentage of services newer than 2 years is > 60% Excellent cost effectiveness Customer assessment Nr. 1 with 60% of customers min. Being the customers’ preferred supplier Sales share with regular customers Share > 50% Influence on customer requirements at an early stage Consultation for customers prior to opening the proposal process Increase by 5% p.a. Development of regional market A Number of new customers in region A Increase by 30% p.a. Fast hardware installation Workdays between placing ordersand hardware installation 90% under 10 workdays Excellent project management Percentace of projects without overrun 90% Continuous improvement Half-life index value Annual improvement by > 10% High degree of staff satisfaction Index of staff satisfaction and number Improvement suggestions per staff Satisfaction index > 80%, > 20 suggestions per MA Financial Perspective What should our situation be in the eyes of investors? Customer Perspective: What should our situation be in the eyes of customers? Process Perspective: For which processes do we need to produce excellent results? Learning Perspective: How can we keep up our flexibility and improvement capabilities? Balanced Scorecard Initiatives Increase marketing budget by 30% Selling of not operating assets xyz headunting of a top engineer implement target costing estabishment of key account management employ distribution personal for region A proactive contacting customers reengineering production hardware establish new software for project management establishment of CIP incentives for improvement suggestions The Balanced Scorecard does not end at the strategic objectives

Example: Main Initiatives of a Strategy in a BSC:

optimal management of change allign all ressources to strategic goals enable self management entrepreneuring in all devisions improve qualifikation processes close to customer lean + flexible strengthen + communicate service quality from being a monolith to fleet (e.g. SvA) extend insurances to live helping systems value for customers increase customer bondages improve image simplify products use capital for binding customers ROE = 15% concentration on high profit customers Finance complete customer policy Customer Processes Growht stabilize damage quota integration of XYZ´s values into company culture Example: Main Initiatives of a Strategy in a BSC Customer bonds (less but good customers) Decentralisation Merger with XYZ successful Linking the strategic goals through cause and effect relations

Balanced Scorecard Hierarchy:

Balanced Scorecard Hierarchy SCORECARD Divisions (Level 1): SCORECARDs Departments (Level 2): SCORECARDs Functions/Processes/... (Level 3): Whole company F K P I 15-20 Control dimensions Production F K P I 15-20 Control dimensions Marketing F K P I 15-20 Control dimensions ... F K P I 15-20 Control dimensions ... F K P I 15-20 Control dimensions ... F K P I 15-20 Control dimensions ... F K P I 15-20 Control dimensions Break down of goals The breaking down of goals is realised by BSCs of lower levels or through linking to the traditionel annual management by objectives process

Example: Chemical Industry: Vertical Integration of Goals accomplishes operationality:

Example: Chemical Industry: Vertical Integration of Goals accomplishes operationality cost leadership increase productivity reduction of number of types by x integration of type A and B in devision Y further develope type A and B, so that one can be omitted team goals department goals devision goals com- pany goals* Strategy Consistency of goals ......... ......... ......... ......... * example company of chemical industry Breaking down the goals withing an organisation will assure strategic change

Example: British Railroad: Soft Goals:

Example: British Railroad: Soft Goals General Manager Functional Manager Sector Manager Depot Manager Technical Manager Worker/Workgroups Strategic company goal: “At least 95% of all trains arrive with a delay of less then 5 minutes!” Punctiality % available trains available crew available trains put toghether correctly trains at wrong place trains with tech. problems ... ... % trains with elumination problems % trains with wheel problems % number gernerally overhault wheels as planned availability of lathe % trains with engine problems % departures on time waiting time on route ... ...

Agenda:

Agenda 1. We have a strategy, what is next? 2. Strategy Implementation with the Balanced Scorecard Implementing the Balanced Scorecard Improvement of the Strategic Management Process with the Balanced Scorecard 3. Conclusion

Four Step Strategic Management Process with BSC:

Four Step Strategic Management Process with BSC Stage II: Communicating and Combining strategy communication breaking down of objectives combining of incentive systems with BSC Stage III: Setting Up of Business Plans coordinating strategic initiatives budgeting setting milestones Stage IV: Learning and Adapting feedback and possibly adaptation of strategy strategy development Balanced Scorecard Stage I: Translation of the Vision clarification of vision and strategy drawing up of the BSC Source: Kaplan/Norton (1996) The Balanced Scorecard is not a measurement system, but a management system

BSC and Budgets: Strategic Initiatives:

BSC and Budgets: Strategic Initiatives To stage III: Derivation bugets Example: A typical BSC which initiates a Target Costing Project Customer Benefits Finances Company Objectives Measure- ment Factors Objectives Initiatives Customers Internal Learning Value for Money New products Costs in com- parison to other companies in the trade/ industry Figures from customer surveys Innovation rate Costs for one Rated N/1 among 60% 50% by1999 minus 30% Target Costing Quality Function Deployment Reduction of processing time Target Costing Reduction of number of components Production Process Innovation ... ... ... ... Target Costing Project Project Leader: ... Capacity: 3,5 MJ Duration: 10/97 - 6/98 Target: ... Amortisation time: 1,5 Jahre Contribution to Strategy Realisation: ... ... ... ... ...

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Budget Review (Budget oriented) Sales by customer/product/region Operative problems (e.g. machine break down) Marketing actions Operative employee issues (e.g. lay off) ... Strategic Review (BSC oriented) Development in new market Development of Co-operations Improvement of customer satisfaction Skillsportfolio of employees ... January February March April May June ... January February March April May June ... The Strategic Agenda To Stage IV: The management process with a BSC requires continually strategic feedback and learning

Strategic Learning:

Strategic Learning Performance Reviews Should Test The Hypothesis Of The Strategy Project Profitability Backlog Rorecast vs. Budget Cash Flow ROC Customer Satisfaction Price Index Closeout Cycle Safety/ Loss Control Rework Tender Success # Hours w/Prospect New Product Revenue Staff Attitude Survey Staff Suggestions Revenue per Employee FINANCIAL CUSTOMER INTERNAL LEARNING X X X X X X X X Hi Lo X X X X X X X X X Hi Lo Lo Hi Lo Hi Invoice Payment Cycle Customer Satisfaction Customer Satisfaction Staff Morale X X X X X X X X X X X X X X X X Lo Hi Hi Lo Hi Lo Lo Hi Rework Staff Suggestions Staff Suggestions Staff Morale Source: Kaplan 1997 To Stage IV: Continuous learning via the business modell Customer/ Market Rating Market/ Account Share Project Performance index Continious Improvement Index

Integration of Shareholder Value and Balanced Scorecard:

Integration of Shareholder Value and Balanced Scorecard Top-down derivation of relevant valueoriented measurements 1 2 Bottom-up performance measurement for strategies and initiatives PuL Balance sheet Cash-flow Shareholder Value Vision and Strategy Company-/Business modell Plan Ist Shareholder Value Value increase DCF-yield Business- processes Finances Strategic objectives Measure- ments Targets Initiatives Customers Innovation/ Growth Shareholder Value helps finding strategies whereas Balanced Scorecard helps translating strategies Strategic objectives Measure- ments Targets Initiatives Strategic objectives Measure- ments Targets Initiatives Strategic objectives Measure- ments Targets Initiatives

Example: Connection BSC and Shareholder Value :

Example: Connection BSC and Shareholder Value Assumptions: Programs for customer penetration are being intensified Additional budgets Additional growth Balanced Scorecard: Additional marketing budget: 90 mio Growth: 5% annual Free Cash Flow 80 100 120 140 160 180 200 220 240 260 1980 1999 2000 2001 2002 Years Shareholder Value Basic Plan Szenario 2 3.603 Mio 2.622 Mio (Mio DM) presence on all relevant world markets (marketshare) yield expectations growth cash flow profitability Finances Customer Processes fascinating products and services (growth regular and new customers) successful placement (sales) best practice sales processes (process costs in % of sales)) translation of a brand name marketing strategy (degree of being known)

Requirements for a Software Support to BSC:

Requirements for a Software Support to BSC BSC – BFO Support for development of a BSC (project accompany) Support for ongoing strategic management process with BSC complete documentation of every step in the project understandability of selection decisions process control through regulation of proceedings automatic saving of different BSC versions parallel processing of models distribution of partial models simulation possibilities for changes flexibility: changes without big programming expenditures possible, e.g. individually designable distribution of reports, input masks... interfaces to common data banks (BFO, OLAP,...) scroll down possibilities of cause and effect relations and goal hierarchies possibility of strategic feedback transparency of strategy oriented budgeting

Example: Mask of a BSC Oriented Software for Monitoring:

Example: Mask of a BSC Oriented Software for Monitoring

Agenda:

Agenda 1. We have a strategy, what is next? 2. Strategy Implementation with the Balanced Scorecard Implementing the Balanced Scorecard Improvement of the Strategic Management Process with the Balanced Scorecard 3. Conclusion

Success Story BSC: A Leading Retail Chain:

Success Story BSC: A Leading Retail Chain Empirically documented: a 5% increase of employee satisfaction increases customer satisfaction by 1,3%, which results in 0,5% increase in revenues Based on this model the company could increase customer satisfaction by 4% at generally decreasing customer satisfaction increase market share by 9% originating at a loss of $ 3 bill. achieve a profit of $ 752 mio. Achieved within 2 years with the help of BSC Source: Harvard Business Review, Jan-Feb 1998 Employee satisfaction Marketshare Customer satisfaction Profit 9% 15% 4% + 3,7 Mrd.

Sussess Story BSC: Mobil Oil:

Sussess Story BSC: Mobil Oil Mobil Oil (USM&R) 1993 #7 in profitability 1995 1996 1997 #1 in profitability #1 in profitability #1 in profitability BSC Introduced Status Year Status M o bil “In 1997 we’ve hit the #1 ranking for our third consecutive which is unprecedented for a major oil company. ...and the Scorecard gets the lion’s share of the credit. We created a performance mindset with the Balanced Scorecard.” Brian Baker EVP, Marketing &Refining Mobil Oil Corporation Source: Kaplan Symposium, 1998 The Balanced Scorecard has enabled Mobil Oil to implement strategy reliably and rapidly

Hints on the Implementation of Balaced Scorecard:

Hints on the Implementation of Balaced Scorecard n Begin by clarifying the objectives of the BSC Programme, e.g. to achieve clarity and a consensus concerning the strategy, laying down change programmes, increasing decentralised responsibilities. n BSC must be initiated by top management. BSC is a top-down approach. n The BSC is developed by an interdisciplinary top management team, and not only by controllers. n Never "sell" BSC as a mere controlling system. Above all, it is a communication and learning system. n Link the perspectives. n Differentiate according to organisational levels.

Résumé: 10 Basic Principles of the Balanced Scorecard :

Résumé: 10 Basic Principles of the Balanced Scorecard Conclusion: The Balanced Scorecard is a great strategic tool, which fills the heads of the employees instead of the binders of the managers! 1. BSC examines the company from 4 perspectives : financial management, customers, internal processes, learning and growth. 2. BSC combines financial regulation quantities and non-financial regulation quantities. 3. BSC is rather more of a management process than a measurement approach. 4. The BSC describes the specific strategy of a Business Unit. 5. BSC includes only goals and measures which drive strategic change. BSC does not include diagnostic elements. 6. BSC is the Vehicle for a 4-step strategic management process : translation of the vision, communication and connections, drawing up of Business Plans, learning and adaptation. 7. BSC helps converting strategies to actions . 8. BSCs for the whole company, the Business Units and for individual managers are coordinated with one another . 9. Items to be found in a “ good ” BSC: - short-term and long-term objectives - required results and the drivers for these results - links between the 4 perspectives through cause-and-effect relations. - only measurement quantities which are directly or indirectly connected to financial results. 10. The process of drawing up a BSC is more important than the results.

References:

References Robert S. Kaplan, David P. Norton: The Balanced Scorecard - Translating Strategy into Action, Boston 1996. Bernd Gaiser, Lutz Kaufmann: Strategische Ziele in konkreten Kennzahlen darstellen, in: Blick durch die Wirtschaft, 24. September 1997, S. 3 Péter Horváth, Lutz Kaufmann: Balanced Scorecard - ein Werkzeug zur Umsetzung von Strategien, in: Harvard Business Manager, 20. Jg., Heft 5, 1998, S. 39-48

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