Balanced Scorecard

Building Strategy Focused Organizations with the Balanced Scorecard Dr. Robert S. Kaplan Marvin Bower Professor of Leadership Development HARVARD BUSINESS SCHOOL and Chairman BALANCED SCORECARD COLLABORATIVE

The Balanced Scorecard: A Good Idea in 1992

Balanced Scorecard in 1992

\u201cThe Balanced Scorecard \u2013 Measures that Drive Performance\u201d Harvard Business Review, 1992

The Balanced Scorecard: A Great Idea by 2002 Balanced Scorecard by 2002

21 translations

17 translations

50% usage in Fortune 500 Harvard Business Review \u201cHall of Fame\u201d 50,000+ BSC on-line members

Balanced Scorecard Hall of Fame Implemented Strategies and Achieved Breakthrough Results… Fast Mobil 3 years

Saatchi & Saatchi

+ $2b

• Last to first • Cash flow +$1.2b • ROI 6% --> 16%

ATT Canada

3 years

+ $7b

2-5 years

2-5 years

Cigna

Brown & Root • #1 in growth & profitability

+ $3b

3 years

City of Charlotte

Duke Children’s

• Customer Satisfaction = 70% • Public Official Award

3-5 years

• Customer Satisfaction #1 • Cost/Case 33%

Wells Fargo

Southern Garden

• # Customers 450% • Best Online Bank

• Least Cost Producer 2 years 3 years

Chemical Bank • 99% Merged Target Asset Retention

3 years

Hilton Hotels • Customer Satisfaction • Market Revenue Index

UPS • Revenues 9% • Net Income 33%

2 years

3 years

3 years

Question: Question:

How Howcan cancomplex complexorganizations organizations achieve results like achieve results likethis thisin insuch such short periods of time? short periods of time?

Answer: Answer:

Alignment! Alignment!

The Balanced Scorecard process allows an organization to align and focus all its resources on its strategy

BUSINESS UNITS

STRATEGY

EXECUTIVE TEAM

INFORMATION TECHNOLOGY

HUMAN RESOURCES

BUDGETS AND CAPITAL INVESTMENTS

A Gap Exists Between Mission-Vision-Strategy and Employees’ Everyday Actions MISSION Why we exist VALUES What’s important to us VISION What we want to be STRATEGY Our game plan

TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

The Balanced Scorecard Links Vision and Strategy to Employees’ Everyday Actions MISSION Why we exist VALUES What’s important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

STRATEGIC OUTCOMES Satisfied SHAREHOLDERS

Delighted CUSTOMERS

Efficient and Effective PROCESSES

Motivated & Prepared WORKFORCE

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

EXECUTIVE LEADERSHIP

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

BALANCED SCORECARD

• • • • •

ORGANIZATION ALIGNMENT

• • • •

Corporate Role Corporate - SBU SBU - Shared Services External Partners

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture CONTINUAL PROCESS

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• • • • •

Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process

#1

Principles of the Strategy Focused Organization: TRANSLATE THE STRATEGY TO OPERATIONAL TERMS The Strategy Financial Perspective

Measurement is the language that gives clarity to vague concepts. Measurement is used to communicate, not to control. Building the scorecard develops consensus and teamwork throughout the organization

"If we succeed, how will we look to our shareholders?” Customer Perspective

"To achieve my vision, how must I look to my customers?” Internal Perspective

"To satisfy my customer, at which processes must I excel?” Organization Learning

"To achieve my vision, how must my organization learn and improve?”

The Complete Balanced Scorecard Strategy Map Improve Shareholder Value

Financial Perspective: the drivers of shareholder value

Customer Perspective: the differentiating value proposition

Productivity Strategy Improve Cost Structure

Enhance Customer Value Customer Profitability

Asset Turnover

Market and Account Share Customer Acquisition

Learning & Growth Perspective: role for intangible assets – people, systems, climate and culture

Revenue Growth Strategy

Increase Asset Utilization

Cost per Unit

Internal Perspective: how value is created and sustained

Shareholder Value ROCE

Customer Retention

Create Value from New Products & Services New Revenue Sources

Customer Satisfaction Product Leader Customer Solutions

Customer Value Proposition Product/Service Attributes

Price

Quality

Time

Operations Theme (Processes that Produce and Deliver Products & Services)

Low Total Cost

Relationship

Function

Service

Customer Management Theme (Processes that Enhance Customer Value)

Image

Relations

Brand

Innovation Theme (Processes that Create New Products and Services)

Regulatory and Society Theme (Processes that Improve the Environment and Communities)

Human, Information, and Organizational Capital Strategic Competencies

Strategic Technologies

Climate for Action

Mobil NAM&R Strategy Map Increase ROCE to 12%

Financial Perspective

Customer Perspective Share of Targeted Segment Mystery Shopper Score

Revenue Growth Strategy New Sources of Non-Gasoline Revenue

Increase Customer Profitability Through Premium Brands

Non-Gasoline Revenue & Margin

Volume vs. Industry Premium Ratio

Become Industry Cost Leader

Cash Flow

“Win-Win Dealer Relations”

Basic Clean Safe Quality Product Trusted Brand

Maximize Use of Existing Assets

Cash Expense (cpg) vs. Industry

“Delight the Consumer” Differentiators Speedy Purchase

“Build the Franchise”

Internal Perspective

Productivity Strategy

ROCE Net Margin (vs. industry)

Friendly Helpful Employees

“Increase Customer Value”

Create Non-Gasoline Products & Services

Understand Consumer Segments

New Product Acceptance Rate

Best-In-Class Franchise Teams

More Consumer Products

Recognize Loyalty

“Achieve Operational Excellence” Improve Hardware Performance

Improve Inventory Management

Yield Gap Unplanned Downtime

Inventory Levels Run-Out Rate

On-Spec On-Time

Industry Cost Leader Activity Cost vs. Competition

Dealer Quality Rating

Help Develop Business Skills

“Be a Good Neighbor”

Improve Environmental, Health and Safety Environment Incidents Safety Incidents

A Motivated and Prepared Workforce

Learning & Growth Perspective

Climate for Action

• Aligned • Personal Growth Personal BSC Employee Feedback

Competencies

• Functional Excellence • Leadership Skills • Integrated View Strategic Skill Coverage Ratio

Technology

• Process Improvement Systems Milestones

Dealer Profit Growth Dealer Satisfaction

New Source of Revenues and Customer Loyalty Attractive Convenience Store

The Balanced Scorecard Framework Is Readily Adapted to Non-Profit and Government Organizations The Mission "If we succeed, how will we look to our taxpayers (or donors)?”

”To achieve our vision, how must we look to our customers?”

“To “To satisfy satisfy our our customers, customers, financial donors and financial donors and mission, mission, what what business processes processes must must we we excel excel at?" at?" “To “To achieve achieve our our vision, how must our people learn, learn, communicate, and work together?”

The Mission, rather than the financial / shareholder objectives, drives the organization’s strategy

Boston Lyric Opera Strategy Map

Our mission is to ensure the long-term future of opera in Boston and New England by (1) producing the highest quality professional productions of diverse opera repertoire that are artistically excellent as well as musically and theatrically innovative; (2) developing the next generation of opera talent; (3) engaging and educatin a diverse community about opera to become enthusiastic audience members, educators, supporters, and volunteers. (HBS Case #9-101-111)

National/International Opera Scene

Supporters/Subscribers

CUSTOMER

Target Generous and Loyal Contributors/ Prospects

Focus on Board Investment and Recruitment

Build Artistic Reputation for High Standards

Launch Unique Residency Program for Artists

Enhance Customer Relationships

INTERNAL BUSINESS PROCESSES

Streamline Ticketing/Gift Acknowledgement Processes

Increase One-on-One Contact

Improve Board Support Systems

Provide Staff with Skill Training

Promote Collaborations

Insure Operational Excellence

Develop Web-based Service/ Products

Contract “Best” Talent

Develop Strategic Job Competencies

LEARNING AND GROWTH

Present Diverse Repertory

Community

Leverage Board Effectiveness with Education and Fundraising Training

Develop Innovation Review Process

Increase Brand Awareness

Increase Cost Efficiency/Quality Assurance

Increase Revenue

Systematize Financial Processes

Launch Comprehensive PR Campaign

Develop

New Products/ Program

Strengthen Strategic Alignment

Build Growth-Enabling Infrastructure

Develop Strategic Communications Plan

Create HR Plan

Incorporate Milestone Evaluations

Fiscal Health

FINANCIAL

Focus on Educ./Comm. Programs for Greater Boston

Build Community Support

Build Multi-Year Support

Invest in Strategic Technologies

Growth Planning Create Long-Term Investment Strategy

Develop Realistic Pro Formas

Institutionalize Multi-Year Budgeting

Develop Administrative Residency Program

Medical Readiness for the Transformed Army n io s s i M r e d l o h e k ta S

s s e c o r P l a n r te n I

th w o r G & g n i n r a e L s e c r u o

Core Competencies Protect and Sustain A Healthy and Medically Protected Force Deploy a Trained and Equipped Medical Force that Supports Army Transformation Manage the Care of the Soldier and Military Family

Battlefield

Performing Our Mission in Any Environment

Home Station

Focus on Customers / Sound Business Practices

Enable Mission Readiness Achieve Fiscal Accountability

Army Medical Command Strategy Map Project and Sustain A Healthy and Medically Protected Force Protected from disease and injury C-2

Healthy soldiers C-1 n o i s s i M

Trained Medics C-3

Lower Army’s medically related costs F-1

Smaller Footprint C-5

Flexible Medical Forces C-4

DoD/Army

l a i c n a n i F

Reduce cost of ownership of the deployable force F-2

Manage the Care of the Soldier and the Military Family Quality, Compassionate Healthcare C-8

s s e c o r P l a n r te In

Passion for Eliminating Wasted Time C-9

Battlefield

Align Resources with Population Requirements

Enable Mission Readiness

Eliminate the Hassle Factor C-10

IP - 5

Develop Fast Accurate Analysis, Forecasting, Modeling and Planning

IP- 3

th w o r G &

Healthy Patients and Families are #1 C-7

l a i c n a n i F

Provide State of the Art Health Risk Assessments IP1 and Countermeasures Expedient, Products to Market to Compassionate Support the Transforming Disposition of Medically Army Unfit Soldiers Monitor Medical IP-13 IP - 4 Threats and the Return Soldiers Safe Patient Fitness of the Force to Duty Care IP- 2 Leverage IP-7 IP-6 Streamline Capabilities of Access to Care Institutional AMEDD IP 10

Leverage Science & Technology

s e c r

DoD/Army/Soldiers

Deploy a Trained and Equipped Medical Force that Supports Army Transformation

r e d l o h e k ta S

g n i n r a e L

l ai c n a n i F

Market the Army Healthcare System IP- 9

IP- 14

Maintain a Reliable Facility and Installation Infrastructure IP- 12

IP- 8

Focus on Our Customers / Sound Business Practices

Recruit & Retain a Quality AMEDD Force

Develop Leaders L1

L-3

Train the Medical Force

L-4

Beneficiary/DoD/Army Optimize Total (MCSC+ Direct) System Efficiency F-3

Home Station

Integrate Direct and Network Care IP-11

Implement Clinical and Business Best Practices IP- 15

Leverage Information Management and Information Technology

L-2

Goal 1: Project and Sustain a Healthy and Medically Protected Force Strategic Theme: r e m to s u C / n io s is M

l a rn e t In

l ia c n a in F

Healthy Soldiers C-1

Protected From Disease and Injury C-2

Provide State of the Art Health Risk Assessments and Countermeasures IP-1

Monitor Medical Threats and the Fitness of the Force IP-2

Lower Army’s Medically Related Costs F-1

Objective Statement

Measures

C-1 Percent of units reporting medical readiness. C-1 Improve and sustain the general health of soldiers to ensure medically-ready deployable forces.

C-2 Sustain the health and fitness of the C-2 Number of Man-Years Lost Due to Disease, deployed forces, preventing casualties from Injury, Stress Reactions. disease, injuries, and stress reactions. IP-1 Enhance health and performance IP-1 Percent of threats (Infectious Disease, through strategies, tools, products and chemical and biological warfare) on the validated, other countermeasures to reduce risks ofprioritized threat lists for which effective disease, non-battle injury, chemical and countermeasures are available to deployable and biological warfare casualties, and stress deployed forces . reactions. Promote the use and assess the effectiveness of these countermeasures throughout their life cycle. IP-2 Percent of requested medical threat/risk IP-2 Improve monitoring and reporting on assessments and health status reports delivered electronically on demand to operational demand the medical risk assessments and the health status of units and individuals.commanders and their staffs. F-1 Identify, Target & Reduce the Army’sF-1a Number of injury/illness driven claims (Rate Medically-Related Costs and Increase per 100 employees); Return to Duty Rates Through Improved Management F-1b Cost of injury/illness driven claims.

Several Different Types of “Balanced Scorecards” Have Emerged in Practice

Strategy Card

Stakeholder Card

KPI Card

A KPI Scorecard: The Four “P’s” •

Profits

•

Portfolio (loan volume)

•

Process (ISO certification)

•

People (diversity)

What’s missing from the 4P’s KPI scorecard? •

Where are the customers?

•

What is the value proposition?

•

How does ISO certification lead to increases in loan volume?

•

How does a more diverse work force lead to ISO certification?

•

Is there no role for information technology?

•

Is innovation not important?

A Good Balanced Scorecard Tells the Story of Your Strategy

• • •

Every measure is part of a chain of cause and effect linkages All measures eventually link to organizational outcomes A balance exists between outcome measures (financial, customer) and performance drivers (value proposition, internal processes, learning & growth)

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

EXECUTIVE LEADERSHIP

BALANCED SCORECARD

• • • • •

ORGANIZATION ALIGNMENT

• • • •

CONTINUAL PROCESS

Corporate Role Corporate - SBU SBU - Shared Services External Partners

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• • • • •

Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process

Principles of the Strategy-Focused Organization: LINK AND ALIGN THE ORGANIZATION AROUND ITS STRATEGY #3.

#1.

Each Support Unit develops a plan and BSC for “best practice” sharing to create synergies across SBUs.

A Corporate Scorecard defines overall strategic priorities.

CORPORATE

LINE BUSINESSES

CORPORATE SCORECARD

SUPPORT UNITS

EXTERNAL PARTNERS

(Shared Strategic Agenda) Themes

Measures

SBU A

SBU B

SBU C

SBU D

xxx

•

Finance

2. Delight the Consumer xxx

•

Marketing

•

Customer Scorecards

3. Win-Win Relationships xxx

•

Distribution

•

Distributor Scorecard

4. Safe & Reliable

xxx

•

Procurement

•

Joint Venture Scorecard

5. Competitive Supplier

xxx

•

Purchasing

•

Vendor Scorecard

6. Good Neighbor

xxx

•

Safety

•

New Venture Scorecard

•

Human Resources

•

Outsourcer Scorecard

•

Information Technology

1. Financial Growth

7. Motivated & Prepared xxx 8. Quality

#2. Each SBU develops a long-range plan and BSC consistent with corporate strategic agenda.

xxx

xx

xx

xx

xx

#4. Plans and BSC’s define relationships with external partners consistent with SBU strategy.

Strategies Are Executed Through Business Units. The Strategies of the Business Units Must Be Integrated If Organization Purpose and Synergies Are to Be Achieved.

Principles of the Strategy-Focused Organization: LINK AND ALIGN THE ORGANIZATION AROUND ITS STRATEGY #3.

#1.

Each Support Unit develops a plan and BSC for “best practice” sharing to create synergies across SBUs.

A Corporate Scorecard defines overall strategic priorities.

CORPORATE

LINE BUSINESSES

CORPORATE SCORECARD

SUPPORT UNITS

EXTERNAL PARTNERS

(Shared Strategic Agenda) Themes

Measures

SBU A

SBU B

SBU C

SBU D

xxx

•

Finance

2. Delight the Consumer xxx

•

Marketing

•

Customer Scorecards

3. Win-Win Relationships xxx

•

Distribution

•

Distributor Scorecard

4. Safe & Reliable

xxx

•

Procurement

•

Joint Venture Scorecard

5. Competitive Supplier

xxx

•

Purchasing

•

Vendor Scorecard

6. Good Neighbor

xxx

•

Safety

•

New Venture Scorecard

•

Human Resources

•

Outsourcer Scorecard

•

Information Technology

1. Financial Growth

7. Motivated & Prepared xxx 8. Quality

#2. Each SBU develops a long-range plan and BSC consistent with corporate strategic agenda.

xxx

xx

xx

xx

xx

#4. Plans and BSC’s define relationships with external partners consistent with SBU strategy.

Washington State: The Salmon Recovery Problem

• •

•

Endangered Species Listing of 18 Species Federal Approval of Recovery Plans -- or or – no government or private entity make “take” any salmon - - thus thus – forestry, agriculture, hydro power production, transportation improvements and land use changes stopped or curtailed – i.e.. A train wreck

Fractured governance – six states, another country (Canada) and 27 Indian tribes – eight US agencies, 12 state agencies, 39 counties, 277 cities – 300 water and sewer districts, 170 local water suppliers

Many Regulations and Constituents Influence Salmon Recovery Projects U.S. & State Agencies

Independent Science Panel

NMFS Recovery Team

Water Legislation HB2514 WRIA Planning

Watershed Councils

HB2496 Restoration Projects

Salmon Sec 7 Consultation

Salmon, Bull Trout, Environmental Quality, and Hydropower Development

US/Canada Treaty

Tribes

SRF Board

NMFS Salmon “Evolutionarily Significant Units”

Salmon Sec 4(d) Rules

Early Action Package

Bull Trout Sec 7 Consultation SSHIAP

NGO’s and Enhancement Groups

Tri-Co

Bull Trout Sec 4(d) Rules

FWS Bull Trout “Definable Population Segments”

Salmon Recovery Scorecard Goal: Restore salmon, steelhead, and trout populations to healthy and harvestable and improve habitats on which fish rely. Customer: To protect an important element of Washington’s quality of life •

We will have productive and diverse wild salmon populations.

•

We will meet the requirements of the Endangered Species Act/Clean Water Act.

Processes:

Our habitat, harvest, hatchery, and hydropower activities will benefit wild salmon.

•

Freshwater and estuarine habitats are healthy and accessible

•

Rivers and streams have flows to support salmon.

•

Water is clean and cool enough for salmon

•

Harvest management actions protect wild salmon.

•

Enhance compliance with resource protection laws.

Collaboration: We are engaged with citizens and our salmon recovery partners. •

We will reach out to citizens

•

Salmon recovery roles are defined and partnerships strengthened.

Financial and Infrastructure: Our building blocks for success include •

Achieve cost-effective recovery and efficient use of government resources

•

Use best available science and integrate monitoring and research with planning and implementation

•

Citizens, salmon recovery partners and state employees have timely access to the information, technical assistance, and funding they need to successful.

Summary: Top-to-Bottom Strategy Alignment Unleashes Full Organization Potential

• The Corporate Strategy is communicated to business units and agencies through key themes, opportunities for integration and synergies, and shared measures • Cooperation and greater synergy between business units, staff and shared service functions, and across diverse organizational units becomes formalized through the Scorecard

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

EXECUTIVE LEADERSHIP

BALANCED SCORECARD

• • • • •

ORGANIZATION ALIGNMENT

• • • •

Corporate Role Corporate - SBU SBU - Shared Services External Partners

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture CONTINUAL PROCESS

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• • • • •

Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process

#3

Principles of the Strategy Focused Organization: MAKE STRATEGY EVERYONE’S EVERYDAY JOB

HR Processes Are Essential for Moving Strategy From the Top to the Bottom CORP SBU

Top-Down “Bridging Process” To Share the Strategy & Align the Workforce

• EDUCATION • PERSONAL GOAL ALIGNMENT

• BALANCED PAYCHECKS The Strategy Focused Workforce

Bottom-Up Process to Internalize & Execute the Strategy

Making Strategy Everyone’s Job Creating a Climate to Support Strategic Change 1

2

3

Create Strategic Awareness

• Insure that each individual has sufficient understanding of the strategy (You can’t execute what you don’t understand)

Align Personal Objectives

• Insure that each individual knows where they fit into the overall game plan

Align Incentive Compensation

• Reinforce desired behavior and increase intensity of awareness

USM&R Strategic Themes ...

Win/Win Relationship

Good Neighbor

will guide us to our vision and are defined above each graph.

Improve Dealer/Wholesale Marketer profitability through customer-driven products and services and by developing their business competencies.

Protect the health and safety of our people, the communities in which we work, and the environment we all share.

Dealer/Mobil Gross Profit

Environmental Index • Composite of:

• Total profit

USM&R Strategic Measures ...

earned at Mobil between our

- reportable releases to air and water

dealers/whole-s

- reportable spills

outlets and split

that will keep us focused on achieving USM&R’s strategic themes are explained in the graphs and the bulleted text accompanying them.

ale marketers and Mobil. 1993

1994

Target

- community reported incidents.

1993

1994

Target

Financially Strong

Safe & Reliable

On Spec On Time

Reward our shareholders by providing a superior long-term return which exceeds that of our peers.

Maintain a leadership position in safety while keeping our refineries fully utilized.

Provide quality products supported by quality business processes that are on time and done right the first time.

USM&R Days Away From Work

ROCE • Income divided

12%

by capital

allocations.

Quality Index

• Composite of incidents of: - product off spec

8%

employed including all

Manufacturing Reliability Index

- order shipped late

7%

- business process errors - customer complaints 1993

1994

Target

1993

1994

Target

1993 Target

1994

1993

- cost of rework.

1994

Delight the Customer

Competitive Supplier

Motivated & Prepared

Understand our consumers’ needs better than anyone and offer them products and services which exceed their expectations.

Provide product to our terminals at a cost equal to or better than the competitive market maker.

Develop and value teamwork and the ability to think Mobil, act locally.

Mystery Shopper • The Mystery

Laid-down Cost • Our cost to deliver

Shopper program

product to the

rates how well

terminal vs.

each of our

lowest cost

stations is

provider.

delivering the “best buying

Climate Survey • Survey of employees to measure how people perceive the Mobil workplace environment.

Target

™ Employee Innovations: Mobil Speedpass

Making Strategy Everyone’s Job Creating a Climate to Support Strategic Change 1

2

3

Create Strategic Awareness

Align Personal Objectives

Align Incentive Compensation

• Insure that each individual has sufficient understanding of the strategy (You can’t execute what you don’t understand) • Insure that each individual knows where he or she fits into the overall game plan

• Reinforce desired behavior and increase intensity of awareness

Ultimately, Team and Individual Goals and Objectives Are Aligned to the Strategy

A performance model provides the framework for cascading and aligning personal goals Customer Example

A personal scorecard focuses individuals on the part of the performance model they can impact

Financial Example Corporate Parent

• Customer

Division

Satisfaction

• Customer

Corporate Measures

• Operating Margin

retention

1994

1995

100

120

160

180

250 • Earnings

100

450

200

210

225 • Net Cash Flow

100

85

80

75

• On time

delivery

• Variable Costs • Mfg Overhead

Shift Supervisor

• First Pass Yield • Schedule

• Scrap

rate • Labor/ Unit

Adherence

• Line

Availability

• Schedule

adherence

100

•

75

73

70

100

97

93

90

100

105

108

109

1994

1995

Financial

70

• Overhead & Operating Expense

64

• Overhead & Operating Costs

82

• Finding & Development Costs

Individual Goals

Business Unit Measures 1993

Operating

Targets

• Variable Costs • Period Expenses

Plant Manager

1997

Targets

• Operating Margin

VP of Opns

1996

Balanced Scorecard

1993

1996

1997

And Near Term Action Steps

Targets

1.

Targets

2.

110 • Total Annual Production (Indexed: 1993=100)

Corporate Objectives Double our value in 10 years.

Individual Measures

3.

1. 2.

•

Increase our earnings by an average of 20% a year

•

Achieve an internal rate of return 2% above the 3. cost of capital.

•

Reduce our overhead & operating costs by a further 30% by 1997.

•

Reduce our 5-year average finding & development costs by 20%.

•

Reach the top quartile of industry profitability by 1997.

•

Increase production by 10% by 1997.

4.

4. 5.

If we can achieve all these Name: business objectives, we will be Location: a top quartile competitor

5.

Making Strategy Everyone’s Job Creating a Climate to Support Strategic Change 1

2

3

Create Strategic Awareness

Align Personal Objectives

Align Incentive Compensation

• Insure that each individual has sufficient understanding of the strategy (You can’t execute what you don’t understand) • Insure that each individual knows where he or she fits into the overall game plan

• Reinforce desired behavior and increase intensity of awareness

Mobil USM&R Incentive Plan Poor

Average

Best-in Industry

Base Pay

90%

90%

90%

Corporate Award (Return-on-Capital, Earnings Growth)

0-1

3-6

10

0

5-8

20

91%

98-104%

120%

USM&R/SBU M&R (30%) SBU (70%) Total Pay (% of Market)

Linking Compensation to the Balanced Scorecard

Experience with successful BSC users indicates that linking the BSC to incentive compensation is essential to success Executive Perspectives “People got that scorecard out and did the calculations to see how much money they were going to get. We could not have got the same focus on the scorecard if we didn’t have the link to pay.” Brian Baker, Mobil

“It would be hard to get people to accept a totally different way of measurement - which the BSC is - if you don’t reinforce that change through incentive compensation.” Gerry Isom, CIGNA

Supported by Research Mercer survey of compensation practices in 214 companies (1999)

• 88% of responding companies consider the use of balanced scorecard measures linked to reward systems to be effective.

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

EXECUTIVE LEADERSHIP

BALANCED SCORECARD

ORGANIZATION ALIGNMENT

• • • •

Corporate Role Corporate - SBU SBU - Shared Services External Partners

• • • • •

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture CONTINUAL PROCESS

• Linked to Budgeting • Linked to Operational Improvements

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• Management Meetings

• Feedback System • Learning Process

Making Strategy a Continual Process Imbed the Strategy in Ongoing Management Processes

with Planning and Budgeting

• Establish stretch targets; Select initiatives, Align operational improvement programs (TQM, Six Sigma, Activity Based Management); Allocate resources to projects

Introduce the New Reporting System

• Develop systems for data collection, analysis, and reporting

1 Integrate Strategy

2

3 Conduct the New Management Meeting

• Open discussion of performance shortfalls; team problem-solving; adapting and learning

Mobil NAM&R: Setting Targets and Performance Factors Business Group Variable Pay Opportunity . . . . . . Variable Pay Percent

Performance Factor

Qualitative

20

1.25

BEST IN CLASS

1.20

Well

1.15

Average

1.12

Objective:

1.09 1.06

Above Average

1.03 7

1.00

Average

0.90 0.80 1

0.75

How to think about performance factors:

Below Average

External Benchmark 1.00 means target equals the average of competition 1.25 means target equals the top of the competitive group Subjective:

Internal Benchmark 1.00 means the difficulty of the dive is average

Achieving Stretch Target Performance May Require

• • • • • •

Strategic Initiatives Capital Investments New Products/Services New Customers New Regions New Partners

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

EXECUTIVE LEADERSHIP

BALANCED SCORECARD

ORGANIZATION ALIGNMENT

• • • •

Corporate Role Corporate - SBU SBU - Shared Services External Partners

• • • • •

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture CONTINUAL PROCESS

• Linked to Budgeting • Linked to Operational Improvements

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• Management Meetings • Feedback System • Learning Process

Using the BSC to Link Strategy to Operationa Management Activity-Based Costing • Cost of Internal Processes • Customer Profitability Shareholder Value • Explicit Value Proposition • Path for Revenue Growth Strategy

Quality Programs • Link to Customer and Financial Outcomes • Identify New Processes; Set Priorities • Integrated Strategic Management Approa

BSC Adds to Total Quality Programs

• Explicit Causal Links from Operational

Improvements to a Customer-Based Value Proposition

• Explicit Linkages to Productivity Enhancements and Financial Outcomes

• Identify Entirely New Processes for Improvement • Set Priorities among Processes to Improve

The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY

• • • • •

Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives

EXECUTIVE LEADERSHIP

BALANCED SCORECARD

ORGANIZATION ALIGNMENT

• • • •

Corporate Role Corporate - SBU SBU - Shared Services External Partners

• • • • •

CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture CONTINUAL PROCESS

EVERYONE’S JOB

• Strategic Awareness • Goal Alignment • Linked Incentives

• Linked to Budgeting • Linked to Operational Improvements • Management Meetings

• Feedback System • Learning Process

Reporting and Feedback: Monthly Scorecard Summary Maximize Shareholder Value

l a i c n a n i F

Meet or Exceed Commitments

Manage Investment Base Customer Satisfaction and Loyalty

r e m to s u C

Service Quality

th w o r G & g n i n r a e L

n O tiy r o i r P

Reliability and Cost Excellence

Competitive Price

Reputation, Brand and Trust

ty fe a S

s e s s e c o r P l a n r te n I

e iv e rraattiv t t s s u IIllllu

Favorably Positioned for Success in a Competitive Environment

Develop, Acquire and Retain Profitable Supply Positions

Profitably Acquire, Retain and Manage Customers

Legend

Priority on Safety and Environmental Excellence

Develop, Acquire and Retain Needed Skills

Above target On Track (within limits) Significantly below target Data Not Available

Effectively Manage Risks

Promote Innovation and Best Practices Sharing

Promote Diversity

Live Co Values (common version)

Regulatory and Legislative Compliance

The New Management Meeting: Strategic Learning Replaces Control The Shift In Focus (At City of Charlotte) Control

Is the project… on-time? on-budget?

Learning

What is the impact of the project on… – neighborhoods – jobs – transportation

Effective Strategic Management Is Based Upon a “Double Loop” Learning Approach The Strategy Financial Perspective

Strategic Feedback That Encourages Learning

Customer Perspective

Internal Perspective

update the strategy

Learning Perspective

incorporate learning

Strategic Learning Loop

t s u C

corrections

l a n r te n I

G & L

Strategic Objectives

Return of Capital Employed

Delight the Consumer

Mystery Shopper Rating

Win-Win Relationship

Dealer/Pioneer Gross Profit Split

Safe & Reliable

Manufacturing Reliability Index Days Away from Work Rate

Competitive Supplier

Laid Down Cost vs. Best

Motivated & Prepared

Strategic Competency Availability

Competitive Ratable Supply

strategies

result

Operational Control Loop Performance

input

Initiatives & Programs

• Assess changes in • Identify emerging

Strategic Measures

Financially Strong

about your strategy the environment

Balanced Scorecard l a i c n a n i F

• Test hypotheses

output

Store 24 Introduced an Innovative Strategy to Build Customer Intimacy: “Ban Boredom” GROWTH

PRODUCTIVITY

Sales Growth*

Gross Profit $ / Labor $

Financial Perspective

ROI

EBITDA

ROCD* EBITA*

Gross Profit Gross Profit Growth* New Concepts

Net gross profit from concepts