An Introduction to the Balanced Scorecard and the Strategy Focused Organization

TEC March 6, 2005

Balanced Scorecard Collaborative, Inc. 55 Old Bedford Road Lincoln, MA 01773 Tel: 781.259.3737 Fax: 781.259.3389 bscol.com

Why Do Organizations Struggle So Hard With Strategy?

1 in 10 organizations execute their strategies successfully

Fortune Magazine, 1998

72% of CEOs believe that executing their chosen strategy is more difficult than developing a good strategy
Malcolm Baldrige CEO Survey, 2002

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

#5

MAKE STRATEGY A CONTINUAL PROCESS

The Problem:

The Strategic Management Process Is Missing in Most Organizations

STRATEGY

60% of organizations dont link strategy & budgets

update the strategy Strategic Learning Loop

test the hypotheses

85% of management teams spend less than one hour per month on strategy issues

BALANCED SCORECARD

BUDGET

78% of organizations lock budgets to an annual cycle 20% of organizations take more than 16 weeks to prepare a budget

funding

Management Control Loop

reporting

PERFORMANCE Input (Resources)

Initiatives & Programs

92% of organizations do not report on lead indicators

Output (Results)

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

Strategy Development or Strategy Execution? Organizations Need Both

Strategic success requires going beyond successful 1 strategy formulation to successful strategy execution

Strategy Formulation

Sound

Missed Opportunity

Strategic Success

Flawed

Doomed From The Start

At Risk

Flawed Strategy Execution

Sound

Source:

1Execution:

The Discipline of Getting Things Done, by Larry Bossidy, 2002.

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Strategy Execution Challenge

There are generally accepted tools to manage finances, customers, processes, and people. But what about strategy?
Financial Management Tools
EVA Balance Sheets Income Statements Shareholder Value Analysis

Process Management Tools

Six Sigma Supply Chain Integration Cycle Time Reduction TQM

Strategy Management Tools

Customer Management Tools

Customer Satisfaction Measurement Customer Relationship Management Segmentation Analysis

People Management Tools

Core Competencies Knowledge Management

One-to-One Marketing

Pay for Performance

HRIS

The Balanced Scorecard is the vehicle that fills the Strategy Management Gap
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Balanced Scorecard Organizations Are Achieving Breakthrough Results

BREAKTHROUGH RESULTS
Private Sector
Mobil
From last to first in industry ROI 6% --> 16%

Public Sector
Shareholder Value

SMDC Health System

Profitability up $23m Customer Satisfaction

Wendys International
Mkt. Cap $2.5 --> $4b Stock Price up 75%

Profitable Growth

City of Charlotte
Customer Satisfaction = 70% Public Official Award

Customer Satisfaction

UPS
Revenues Net Income 9% 33%

Duke Childrens Hospital

Organizational Alignment
Customer Satisfaction #1 Cost/Case 33%

Hilton Hotels
Customer Loyalty 5% EDITDA margins 3% above average

Defense Logistics Agency

Cost Reduction
$130MM in Savings in FY2002 Processed $2.2B more requisitions for its customers

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

How Did They Do It? They Created Strategy-Focused Organizations

STRATEGY: They made strategy the central organization agenda FOCUSED: They created incredible focus on the strategy ORGANIZATION: They mobilized their employees to act in fundamentally different ways, guided by the strategy

STRATEGY

The Balanced Scorecard Is a Performance Management Program That Puts Strategy at the Center of the Process
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Reflecting a Natural Cause and Effect Logic of Business Performance

And Realize the Vision

Financial Results

To Drive Financial Success...

Customer Benefits

Needed to Deliver Unique Sets of Benefits to Customers...

Internal Capabilities

To Build the Strategic Capabilities..

Knowledge, Skills, Systems, and Tools

Equip our People...

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

The Balanced Scorecard Should Tell the Story of the Strategy

Illustrative Example: Southwest Airlines
Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer

What will drive operating efficiency?

More customers

More customers on fewer planes How will we do that?

Flight Is on time

Lowest prices

Attract targeted customer segments who value price and on time arrivals What must the internal focus be? Fast turnaround Will our people do that?

Internal Fast ground turnaround

Learning Ground crew alignment

Educate and compensate ground crew regarding how they contribute to the firms success Employee stockholder program

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

Lets Take a Minute to Agree Upon Some Common Vocabulary

Diagram of the cause and effect relationships between strategic objectives (Strategy Map)
Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers

Statement of what strategy must achieve and whats critical to its success

How success The level of in achieving performance the strategy or rate of will be measured and improvement needed tracked

Key action programs required to achieve objectives

Objectives
Internal Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time

Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

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2003 Balanced Scorecard Collaborative, Inc. bscol.com

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