Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
The Balanced Scorecard: Translating Strategy Into Action (17 page)
Metro Bank’s internal perspective (see Figure 5-7) follows the same sequencing of value chain objectives that we described for Kenyon. Metro’s ability, in its innovation process, to identify and sell into profitable market segments was measured by its profitability in targeted market segments. This measure was implemented via an extensive activity-based costing system that could produce monthly profit and loss statements for each of the 3 million accounts at the bank. The ability to create new products for targeted customers was measured by the percentage of revenue from new products. And the ability to deliver the product through desired distribution channels was measured by the percentage of transactions conducted through various channels (ATM, teller, computer-mediated).
A key internal-perspective objective was for salespersons to increase their productivity, both by selling to more customers in targeted segments, and by increasing the depth of relationship the bank had with its targeted customers. This productivity objective was reflected in the three strategic measures shown under the Cross-Sell strategic theme in Figure 5-7.
The delivery of products and services to customers was measured by two aggregate indices:
- “Trailway to Trolls”
- Internal customer satisfaction
The “Trailway to Trolls” measure (trolls are grumpy customers; see
appendix
) was an index composed of up to 100 different service delivery failures that could produce customer dissatisfaction. The components in the “Trailways to Trolls” index were publicized to personnel in all the bank’s branches and offices so that every employee was aware of the defects that should be avoided. The internal customer satisfaction index was constructed by monthly surveys of randomly selected customers in the bank’s targeted segments.
Figure 5-6
The Internal Scorecard and Linkages—Kenyon Stores
Our third example illustrates the internal-business-process perspective for Pioneer Petroleum. Recall, from
Chapter 4
, that Pioneer had to meet objectives from two types of customers: its immediate customers, the gasoline dealers; and its consumers who ultimately purchased Pioneer’s products at retail outlets. Pioneer’s internal perspective had to incorporate objectives and measures that would meet the expectations of both the gasoline retailers and the automobile drivers.
Figure 5-7
The Internal Scorecard—Metro Bank
- Develop new products and services
- Develop the dealer
Figure 5-8
The Internal Scorecard and Linkages—Pioneer Petroleum
The objective to develop the dealer was accomplished by two measures. Pioneer established a tool kit for its marketing representatives. The tool kit helped the reps make more focused and effective calls with franchisees and also provided a template for the marketing representatives to evaluate the performance of individual dealers along seven dimensions:
- Financial management
- Service bays
- Personnel management
- Car wash operation
- Convenience stores
- Gasoline purchasing
- Better buying experience
These ratings gave feedback to the individual dealers about their opportunities for improvement. The ratings were aggregated into an index that Pioneer monitored to determine whether it was successfully upgrading the quality and performance of its franchised dealers. Pioneer also used key dealer retention as a measure of whether it was retaining the loyalty of high-volume, profitable dealers.
For its end-use consumers, Pioneer, in addition to the objective of developing new products and services, identified an objective to promote the brand image. This was measured by Pioneer’s share of market in key geographic areas among its three targeted consumer-market segments: Road Warriors, True Blues, and Generation F3s (see descriptions on
page 66
). To assess whether its franchised dealers were delivering a superior buying
experience to targeted consumers, Pioneer employed a mystery shopping rating, in which an independent third party shopped at each station monthly (and local competitors quarterly). The mystery shopper made a gasoline and snack purchase and then calculated a dealer quality score that could be compared to the station’s previous performance and to competitive stations. The score was particularly weighted toward five key areas:
- Facility exterior
- Service islands
- Sales area
- Personnel
- Restrooms
The mystery shopper rating provided information and incentives for franchised dealers to offer the value proposition that would attract consumers in Pioneer’s three targeted segments.
In the internal-business-process perspective, managers identify the critical processes at which they must excel if they are to meet the objectives of shareholders and of targeted customer segments. Conventional performance measurement systems focus only on monitoring and improving cost, quality, and time-based measures of existing business processes. In contrast, the approach of the Balanced Scorecard enables the demands for internal process performance to be derived from the expectations of specific external constituencies.
One recent development has been to incorporate the innovation process as a vital component of the internal-business-process perspective. The innovation process highlights the importance of, first, identifying the characteristics of market segments that the organization wishes to satisfy with its future products and services, and, then, designing and developing the products and services that will satisfy those targeted segments. This approach enables the organization to put considerable weight on research, design, and development processes that yield new products, services, and markets.
The operations process remains important and organizations should identify the cost, quality, time, and performance characteristics (see
appendix
) that will enable it to deliver superior products and services to its targeted
current customers. And the postsale service process enables companies to feature, when appropriate, important aspects of service that occur after the purchased product or service has been delivered to the customer.
Process Time Measurement
The value proposition being delivered to targeted customers often includes short response times as a critical performance attribute (see discussion in
Chapter 4
. Many customers value highly short lead times, measured as the time elapsed from when they place an order until the time when they receive the desired product or service. They also value reliable lead times, as measured by on-time delivery. Manufacturing companies generally have two ways of offering short and reliable lead times to customers. One is to have efficient, reliable, defect-free, short-cycle order fulfillment and production processes that can respond rapidly to customer orders. The other is to produce and hold large stocks of inventory of all products so that any customer request can be met by shipments from existing finished-goods inventory. The first way enables the company to be a low-cost and timely supplier. The second way usually leads to very high production, inventory carrying, and obsolescence costs, as well as an inability to respond quickly to orders for nonstocked items (because the manufacturing processes are typically busy building inventories for normally stocked items). Since many manufacturing companies are attempting to shift from the second way of satisfying customer orders (producing large batches for just-in-case inventory) to the first way (producing small orders, just-in-time), reducing cycle or throughput times of internal processes becomes a critical internal-process objective. Cycle or throughput times can be measured many different ways. The start of the cycle can correspond to the time when:
- customer order is received
- customer order, or production batch, is scheduled
- raw materials are ordered for the order or production batch
- raw materials are received
- production on the order or batch is initiated
Similarly the end of the cycle can correspond to the time when:
- production of the order or the batch has been completed
- order or batch is in finished goods inventory, available to be shipped
- order is shipped
- order is received by the customer
The choice of starting and ending points is determined by the scope of the operating process for which cycle time reductions are being sought. The broadest definition, corresponding to an order fulfillment cycle, would start the cycle with receipt of a customer order and would stop when the customer has received the order. A narrower definition, aimed at improving the flow of physical material within a factory, could correspond to the time between when a batch is started into production and when it has been fully processed. Whatever definition is used, an organization would continually measure cycle times and set targets for employees to reduce total cycle times.
A metric used by many organizations attempting to move to just-in-time production flow processes is manufacturing cycle effectiveness (MCE), defined as:
This ratio is less than 1 because:
For many operations, processing time, the time when the product is actually being worked on (machined or assembled) is less than 5% of throughput time; that is when total throughput time may be six weeks (30 working days), only one to two days of actual processing time may be required. During the remaining time, the part or product is being inspected, moved around the factory, or is simply waiting: in storage, on the factory floor, or just before or just after a processing operation until the next operation can be scheduled, the machine set up, and the part fixtured into place. In an ideal JIT production flow process, the throughput time for a part just equals its processing time. In this ideal situation, the MCE ratio equals 1,
a goal that, like zero defects, may never be attainable but is worth moving toward.
The theory behind the MCE ratio is that all time, other than processing time—time used for inspection, reworking defective items, moving items from one process to the next, and just having items wait until processed at the next stage—is waste or non-value-added time. This time is wasted because the physical form of the product is not being enhanced to meet a customer’s need. And the product is being delayed for delivery to the customer, with no value added during the delay. As the MCE ratio approaches 1, the organization knows that the amount of time wasted moving, inspecting, repairing, and storing products is decreasing, and its ability to respond rapidly to customer orders is improving.