The_Balanced_Scorecard

THE BALANCED SCORECARD Chapter Five: Internal-Business-Process Perspective THE BALANCED SCORECARD CHAPTER FIVE:INTERNAL-BUSINESS-PROCESS PERSPCTIVE Table of contents PART ONE – A SUMMARY OF CHAPTER FIVE 3 1. Introduction 3 1.1 Definition: Internal Business Process 3 1.2 Traditional Focus vs. BSC measures 3 2. The Internal Business Process Value Chain 4 2.1 The Innovation Process – the long wave of value creation: 4 2.2 The Operations Process – the short wave of value creation 6 2.3 The Postsale Service 7 3. Critical appreciation of the Balanced Scorecard 7 PART ONE – A SUMMARY OF CHAPTER FIVE 1. Introduction 1.1 Definition: Internal Business Process According to Kaplan and Norton internal business processes need to be defined when implementing a balanced scorecard. They define these as processes which are most critical for achieving customer and shareholder objectives. In order to define objectives and measures for these internal processes two requirements need to be made: a. Objectives and measures for the financial and customer perspective need to be defined since each perspective contributes to the other and they all affect the business’ strategy. b. Objectives and measures for the IBP-perspective need to be developed. The linkage between vision, strategy and perspectives can be illustrated as follows: [pic] At first a vision needs to be formulated. Afterwards every business needs a strategy to emerge to this vision. The four perspectives contribute to the vision. Nevertheless the IBP-perspective contributes to the financial and customer perspectives since in the IBP perspective it is defined how customer and shareholder objectives/measures can be achieved. 1.2 Traditional Focus vs. BSC measures Traditionally the focus was most often on attempting to improve existing processes. Kaplan and Norton suggest a completely new approach of the internal business processes consisting of: A. The innovations process: • define current and future needs • provide new solutions for these needs B. The operations process: • delivering existing products and services C. Postsale service • offering services af ter the sale In the past most companies were relying only on financial measures and tried to improve and control existing processes as well as existing departments and responsibilities. The BSC on the contrary proposes to supplement financial measures with measures of quality, yield, throughput and cycle times. They propose such a procedure as the improvement of individual processes means not defining integrated processes. Integrated processes can be regarded as those which span several departments, i.e. order fulfillment, production planning. Yet this does not mean that just combining financial with non financial measures will sum up to major improvements. The objectives and measures need to be aligned to the business’ strategy in order to meet the shareholders’ and customers’ expectations. 2. The Internal Business Process Value Chain [pic] The balanced scorecard approaches the IBP perspective by presenting a generic value chain which any business can apply to itself. It comprises the innovation process which concentrates on identifying the market and creating products. Then there follows the operations process in which products are built and delivered to the customer. At last there is the postsale service that consists of every action that takes places after the customers has bought the company’s product. 2.1 The Innovation Process – the long wave of value creation: From the traditional point of view R&D was not a primary element of a business unit‘s value chain. The focus was mostly on processes whereas R&D was treated as a support process. Money could only be made in production processes so the key to success was supposed to be the efficient manufacturing of high volume products. Today’s insight on the other hand shows that innovation advanced to a critical internal process and a competitive advantage can be reached through a continued stream of innovative products. Yet, there are hardly any measures for these processes. The innovation process is often defined as the long wave of value creation as here value is created mostly over a longer period of time. The innovation process can be divided into two parts: 1. Market research in order to identify: • the size of the market • customers’ preferences • prices for targeted products and services This refers to existing as well as new markets and the opportunities linked with them. When defining new markets and new opportunities and placing the own products in those markets the BSC talks about moving into “white spaces”. In this context companies need to ask themselves: a) What range of benefits will customers value in tomorrow’s products' b) How might we, through innovation, preempt competitors in delivering those benefits to the marketplace' 2. Product/service design and development: • research to develop radically new products • research to exploit existing technology • development efforts to bring new products/ services to the market The challenge is to generate and advantage in competition. Such an advantage depends to a great extent on reducing the innovation cycle time. Furthermore there are high cost reduction opportunities for innovation processes as most operations processes are already optimized. Still R&D processes bring along some difficulties as often a large amount of money is spent on R&D but there is no financial measure for it. Further on there is not hardly any relationship between input and output. Some measures for the research might be: 1. Percentage of sales from new products 2. New product introduction vs. competitors‘ 3. New product introductions vs. plan 4. Time to develop next generation of products Additionally the ratio of operating profit before taxes over a certain period to total development cost can be considered as a further measure. Therefore the focus should not only be on developing innovative products but products which will generate profit that repays the developments costs! Measures for product development: • Increase yields • Reduce cycle times • Lower costs Another method which can be applied to measure development processes is the break even time metric. This measure aims at the time from the beginning of product development until the investment has been paid back. It measures three critical dimensions: 1. Costs of R&D process 2. Profitability of the innovation 3. Time to market Advantages: • Includes development costs • Encourages the development of products that meet real customer needs • Faster launch of products in comparison to competitors Disadvantages: • Difficulty to average across multiple projects ( distortion of an aggregate index • Danger of developing non-innovative products ( due to pressure to reduce cycle times and spending and to increase yield In conclusion the break-even-time metric is good for describing behavior as the time to market is to be reduced and profitable innovations need to be developed. Project managers should not concentrate on just reducing development times by developing products which do not meet the customers’ expectations. 2.2 The Operations Process – the short wave of value creation The operation begins with the customer order and finishes with the delivery of the product. It stresses efficient, consistent and timely delivery of existing products and services to existing customers. Traditional measures are labor efficiency and machine efficiency as well as purchase price. In order to improve these figures labor and machines need to be kept busy. As a matter of fact one would then be building inventory which is not related to customer orders and again this means a high capital lock up. Further on suppliers need to be switched in order to achieve cheaper prices. This in return means poor quality and uncertain delivery times. Therefore measures of quality and cycle times must be added to traditional measures. Process time management can in this context play an important role. The manufacturing cycle effectiveness is a tool to optimize cycle times: [pic] In an ideal Just In Time production flow process the ratio equals 1. Then processing time equals throughput time. To optimize the MCE the inspection, movement and storage times need to be optimized. These times are regarded as non-value-added time. Kaplan and Norton differentiate between manufacturing and service industries. Manufacturing industries might measure defect rates, yields, waste, rework, returns. Whereas service industries rather define measures which for example affect customer satisfaction or costs and therefore can be measured by inaccurate information or long waiting times. 2.3 The Postsale Service The postsale service is the final stage in the internal value chain. It’s tasks are: Warranty and repair service; Treatment of defects and returns and processing of payments. In order to meet customers’ expectations. The process of the postsale service can be measured with following figures: • Speed: From customer request to solution of the problem • Efficiency of resources used • “First pass yields” • Invoicing and collection process One must keep in mind that speed and efficiency of resources do not always go hand in hand but often work against each other. Therefore companies need to determine from their strategy whether to focus on the one or the other. 3. Critical appreciation of the Balanced Scorecard The balanced scorecard is a management system that is not widely spread in Europe although it offers approaches of how to optimize the business performance. First of all it is important to point out that there are several European companies which are using the BSC and are performing well, e.g. Hapag Lloyd, Deutsche Bank. Yet as a matter of fact the BSC is applied incorrectly in the most cases. It is often treated as a collection of key figures which do not have any link to each other. The challenge is therefore to establish a coherent system of performance indicators which will really benefit the company. This is what Kaplan and Norton try to explain: Instead of allocating hard facts which are hardy to translate companies are given the opportunity to add “soft” facts to their measures. This is especially effective as far as the customer, IBP and learning and growth perspectives are concerned. Adding hard figure measures to the objectives of these perspectives is difficult and further more these figures need to be interpreted. Measuring soft facts can thus be easier to handle. Nevertheless the BSC asks for several requirements: On the one hand a vision is required and from this vision a strategy must be deduced. Only those who have a strategy can implement the BSC. On the other hand one must break up traditional views which might have worked out effectively for years. Changing a company’s culture and philosophy might be required. This is a task that only few can master without damaging the business. On the contrary the BSC might fail in companies because they are free to customize the BSC to their needs and this leads to a misunderstanding of the balanced scorecard itself. The goal of the scorecard is not to inspire managers to think up alternative figures but to link all measures to each other. One should understand what will happen if the company excels at a certain objective in the customers perspective and how this contributes to the overall objective. In consequence of this it is not only the manager who needs to understand the basics of the BSC but it is also the simple employee who should become aware of effect of his actions. This can be regarded as one of the major weaknesses of the BSC: Human resources are not taken into consideration as much as they should. In the learning and growth perspective employees are a factor that is focused on yet the intangible assets of human resources are not being appreciated enough. Hence I think the Balanced Scorecard is not a very useful measurement and management tool since it is far to cost- intensive to implement. Also nowadays there are many companies which are highly diversified and are therefore not able to implement the Balanced Scorecard.