The Balanced Scorecard

This Powerpoint presentation describes the fundamental elements of the management tool known as the Balanced Scorecard. It covers the fundamental building blocks of Balanced Scorecard, It's important, it's relation to strategy, a case study using this approach and how BSC can be used in improving quality, time and throughput of a company.

1. SCORECARD
The

2. Presented By:
Faraaz Nasir Hossain 19156
Md. Jubayer 19169
Sonjit Biswas 19184
AmimulEhsan 19111

3. Outline of the Session
Module 1: Basics Of Balanced Scorecard
Module 2: Four perspectives of Balanced Scorecard
Module 3: Strategy and Balanced Scorecard
Module 5: BSC: Quality, Time and Theory Of Constraints
Module 4: Chemical Bank : Implementing the Balanced Scorecard

4. Module 1: Basics of Balanced Scorecard

5. The Balanced Scorecard
TheBalancedScorecardtranslatesanorganization’smissionandstrategyintoacomprehensive
setofperformancemeasuresthatprovidestheframeworkforastrategicmeasurementand
managementsystem(KaplanandNorton,1996).
Anapproachtotheprovisionofinformationtothemanagementtoassistwithstrategicpolicy
formulationandachievement.Itemphasizestheneedtoprovidetheuserwithasetofinformation
whichaddressesallrelevantareasofperformanceinanobjectiveandunbiasedfashion.The
informationprovidedmayincludebothfinancialandnon-financialelementsandcoverareassuch
asprofitability,customersatisfaction,internalefficiencyandinnovation(CharteredInstituteof
ManagementAccountants,2005).
TheBalancedScorecard(BSC)wasdevelopedtocommunicatethemultiple,linkedobjectivesthat
companiesmustachievetocompeteonthebasisofcapabilitiesandinnovation,notjusttangible
physicalassets(KaplanandAtkinson,2001).

6. The Balanced Scorecard
BalancedScorecard(BSC)isbornfromtherichhistoryofmeasurementandservesthesamepurposeto
businessasthetimepieceservedtheancientmariners.
BSCattemptstomovebusinessesfrommonitoringtomeasurement;frommeasurementtomanagement
andfrommanagementtodirectionsetting.
1.Monitoring:Theartandscienceofobservingemployeebehaviorandcoaching.
2.Measurement:Theartandscienceofgauging,usingnumbersandmetrics,performancetoatask.
3.Management:Theartandscienceofmotivating,coaching,andenablingindividualsandteamsinthe
achievementofanobjective.
4.Directionsetting:Theartandscienceofdiscoveringstrategicdirectionsthatareuniqueand
differentiatinginthemarketplace,communicatingthistoalllevelsintheorganizationintheformthat
theycanidentifyandco-relatetheirday-to-dayactionstothegoals.

7. The Balanced Scorecard
Direction Setting
Management
Measurement
Monitoring

8. The Balanced Scorecard As an Aid
BalancedScorecardoffersabroadandoverarchingskintothestructuralarchitectureofthe
business.Thishelpstoidentifybusinessblindspots.
Thestrengthofaresilientorganizationcomesfromitsabilitytochangeitsstrategicthrustand
reflectitinactionsandcorrespondingperformancemeasures.Thisconnectionbetween
strategy,strategicthrusts,andactivitiescanbeachievedusingBSC.
OneofthegreatestchallengesthatBSCsolvesismisalignmentbetweenthestrategyandthe
realworkbeingperformed.BSCavoidsthestrategicparadoxinwhichtheCEOthinksthe
strategyisworkinginactionwheninactuality,thestrategyandtherealwork,asdefinedbythe
activitiesoftheorganization,arenotworkinginconcert.
BalancedScorecardframeworkfocusesonuncoveringthemainnonfinancialdriversofthe
business,alongwiththeeconomicsofthebusiness.BalancedScorecardshowsthewaytomake
strategyactionable.Asaframeworkforaction,itcanbeupdatedandcreatesarenewable
methodologyandframework.

9. Characteristics of Balanced Scorecard
Balancesfinancialandnon-financialmeasures
Balancesshortandlong-termmeasures
Balancesperformancedrivers(leadingindicators)withoutcomemeasures(laggingindicators)
Leadstostrategicfocusandorganizationalalignment.

10. The Building Blocks of BSC
MissionStatements
VisionStatements
Values
Strategy
KeyPerformanceIndicator
StrategyMap
MeasuresTargets
Initiative
Outcomes

11. Mission Statement
MissionStatements:Missionstatementsare“enduringstatementsofpurposethatdistinguishone
businessfromothersimilarfirms.Amissionstatementidentifiesthescopeofafirm’soperationsin
productandmarketterms”.
Missionstatementsliveinalmosteveryorganization.Whilestrategyistheuniquewayan
organizationgoestomarket,missiondefinesthetaskathandthattheorganizationisassigned.
Itaddressesthebasicquestionthatfacesallmanagers:“Whatisourbusiness?”
Amissionstatementnotonlybroadlychartsthefuturedirectionofanorganizationbutitalsoservesasa
constantremindertoitsemployeesofwhytheorganizationexistsandwhatthefoundersenvisioned
whentheyputtheirfameandfortune(andnames)atrisktobreathelifeintotheirdreams.
Missions are essential part of the Balanced Scorecard for organizations as they are important to the drive
of an organization.

12. Vision Statement
Vision Statement: “What We Want to Be”.
Vision is a dream or picture of the future that draws us—no pulls us into the future (Lucas, 1997).
It is the picture of what an organization believes the future can be. It details the world better for the use
of the organizations tools, products, and services. Vision statements show everyone what the world can
be.
Vision statements are:
Significantly motivating
A selling document
A communications tool used to solicit members and stakeholders
A driving dream of the way things can be

13. Values
•Values –“What’s Important to Us”.
•Values guide the entire process of objective setting, goal acquisition, and strategy deployment. In
fact, the key elements of mission, vision, and values drive the entire success of any organization.
•Values are ever changing and stand the test of time. They can sustain an organization or make it
extinct.
•Organizations have taken value statements to heart and have found that any endeavor it performs is
dependent on not just the end, but also the means to that end and values guide this value.
•values drive the how of business while the mission sets the target.

14. Strategy
“Know your enemy and
know yourself and you
can fight a hundred
battles without
disaster”.
-Art of War (Sun Tzu)

15. Strategy
Strategy: “The Game Plan”
“Thestrategyisnottheconsequenceofplanningbuttheopposite,itsstarting
point”(Mintzberg,1978).
Theessenceofstrategyisthescienceandartofdevisingplanstowinovercustomersandother
stakeholders.
Webster’sdefines strategy as:
Thescienceandartofemployingthepolitical,economic,psychological,andmilitaryforcesofa
nationoragroupofnationstoaffordthemaximumsupporttoadoptedpoliciesinpeaceandwar.
Thescienceandartofmilitarycommandexecutedtomeettheenemyincombatunder
advantageousconditions.
Acarefulplanormethod.
Theartofdevisingoremployingplansorstratagemstowardagoal.

16. Strategy
Essential Elements of Strategy:
SunTzustatesthatifyouknowyourenemyandyourself,thenyoucansustaina
hundredbattles.
Threeessentialelementsofstrategy:
1.Knowyourself
2.Knowyourenemy
3.Knowthecustomers

17. Strategy
1.Know yourself:
Your unique attributes are displayed by what you do best.
Your strategic positioning is displayed by where you fit in the
marketplace in the minds of your customers and buyers.
Know the value that stakeholders will pay for.

18. Strategy
2.Know your enemy:
Understand their strengths and weaknesses
Know where they are headed and how they plan to take on the
market.
Know how their leadership thinks.
Know what they cannot change—that is, how they view their world,
their personality, the unique way in which they interact with
customers, the way they build products or services.

19. Strategy
3.Know your Customer:
Know what customers value disproportionately.
Understand the segments and details of where your future buyers
reside.
Recognize that customers are not companies, they are people within
these companies.
Users of your product are not necessarily the ones who pay for the
products.

20. KPI, Strategy Map, Measures, Targets, Initiative and
Outcome
KeyPerformanceIndicator:KeyPerformanceIndicators(KPIs)arethecritical(key)indicatorsof
progresstowardanintendedresult.KPIsprovidesafocusforstrategicandoperationalimprovement,createan
analyticalbasisfordecisionmakingandhelpfocusattentiononwhatmattersmost.
StrategyMap:Thestrategymapprovidesaframeworkthatlinksbothtangibleandintangibleassetsto
shareholdervaluecreationthroughfourinterrelatedperspectives.Itisageneral,logicalandcomprehensive
architecturefordescribingthestrategyframework.
Measuresareusedtotrackorganizationalperformances.
Targetsarethedesiredlevelofperformanceforeachmeasure.
Initiativeareprojectsthathelpreachone’sdesiredtarget.
Outcomesaretheexpectedresultsanorganizationdesires,

21. The Building Blocks of BSC
Mission –Why
We Exist
Vision –What
We Want to Be
Values –What’s
Important to Us
Strategy :
Our Game Plan
Strategy Map :
Translate the
Strategy
Balanced
Scorecard :
Measure and Focus
Strategic
Outcomes
Satisfied
Shareholders
Delighted Customers
Excellent Processes
Motivated Workforce

22. Module 2: Four perspectives of Balanced Scorecard

23. Four perspectives of Balanced Scorecard
TheBalancedScorecardconsistsoffourinterrelatedquadrants,eachcontaining
measuresforadistinctperspective.Theseperspectivesare:
1.FinancialPerspective
2.CustomerPerspective
3.InternalprocessesPerspective
4.learningandgrowthPerspective
Thesefourperspectivesaredesignedtocoverthewholeofthe
organization'sactivities,bothinternallyandexternally,currentand
future.

24. Four perspectives of Balanced Scorecard

25. Financial Perspective
•The financial perspective is a key factor of any performance measurement system
because an organization's financial performance is fundamental to its success.
•In for profit companies, the financial perspective is the main objective (ultimate
goal) –without having to sacrifice the interests of other relevant stakeholders
(community, environment, government, etc.)
•In the financial perspective, the strategic goal is the long-term shareholder value.
This goal is driven by two factors, namely : revenue growth and cost efficiency.

26. Financial Perspective
Long-term Shareholder
Value
Revenue Growth
Improve Cost Structure
Increase Asset Utilization
Cost Efficiency
Expand Revenue
Opportunities
Enhance Customer Value

27. Financial Perspective
The financial perspective addresses the following questions:
What are the financial targets?
What drives these targets?
What kind of profit and revenue to achieve?
In a nonprofit organization, what budget guides the organization?

28. Financial Perspective
Measures that are typically used in this perspective are:
For-Profit Companies
Not for-Profit Companies
Revenue
Profitmargin
Grossmargin
Costofgoodssold
Costofservices
Expensetargets
Riskadjustedreturnoncapital
Cashflow
Debttoequityratio
EBITDA
Earnings
Budgetshortfalls
Expensetargets
Allocationfromdonors
Allocationfromlegislatures
Costtodeliverservice
Taxdollars/county

29. Customer Perspective
This perspective is very instrumental, because without customers, how can a company
survive?
In the customer perspective of the BSC, managers identify the customer and market
segments in which the business unit will compete and the measures of the business unit’s
performance in these targeted segments.
Often, the customer perspective is viewed as the set of objectives the organization must
achieve to gain customer acquisition, acceptance, and perpetuation.
Customer perspective covers the following strategic objectives:
1.Customer acquisition
2.Customer retention
3.Customer profitability
4.Market share
5.Customer satisfaction

30. Customer Perspective
Price Availability BrandServiceQuality
Customer Acquisition
Customer Satisfaction
Customer Retention Customer Profitability
Market Share

31. Customer Perspective
The Customer perspective addresses the following questions:
What is your target market?
Who are/is your customer(s)?
Who do they call our customers?
Who do I compete against to gain the customer?
What value does the existing customer of the organization perceive?
If the organization disappeared, who would miss us? What will they
do?

32. Customer Perspective
Often, the customers of today may not be the desired customers of tomorrow. As the audience of
customers mature, what they desire in the organization changes also. What do your customers
value?
Value proposition is the emotional, physical and symbolic residue derived by a customer once this
individual or organization purchases the product or service for a price.Value Proposition makes a
strategy truly unique
Three common value proposition attributes are:
1.Product and service attributes
2.Customer Relationship
3.Image and reputation
Using Balanced Scorecard unique value propositions can be linked to core outcome measures.

33. Customer Perspective
Customer Perspective: Linking Unique Value Propositions to Core Outcome Measures

34. Customer Perspective
Sample Customer Perspective Measures Are:
•Brandequitymeasures
•Marketshare
•Shareofmind
•Totalavailablemarket
•Totalaccessiblemarket
•Customerretention
•Customersatisfaction
•Customerattrition
•Averagesellingprice
•Lifetimevalueofcustomer
•Salesperemployee
•Customerprofitabilitybychannelbyproduct
•Designwin(numberofwinsperyear)

35. Internal processes Perspective
Intheinternalbusinessprocessperspective,executivesidentifythecriticalinternalprocessesinwhichtheorganizationmust
excel.
Thecriticalinternalbusinessprocessesenablethebusinessunitto:
1.Deliverthevaluepropositionsthatwillattractandretaincustomersintargetedmarketsegments.
2.Satisfyshareholderexpectationsofexcellentfinancialreturns.
Thisperspectivereflectstheprocessesinkeybusinessthatshouldbeoptimizedinordertomeettheneedsofthecustomers.
Theinternalbusinessprocessmeasuresarefocusedontheinternalprocessthatwillhavethegreatestimpactoncustomer
satisfactionandachievingtheorganization’sfinancialobjectives.
Therearefourmainstrategicobjectivesinthisperspective,namely:
1.InnovationProcess
2.OperationProcess
3.Postsalesservices
•CustomerManagementProcess
•RegulatoryandSocialprocess

36. Internal processes Perspective
Processes that
create new
products and
services
•New Ideas
•R&D Portfolio
•Design/ Develop
•Launch
•Identify Market
Innovation
Processes
Processes that
improve
communities and
the environment
•Environment
•Safety & Health
•Employment
•Community
Regulatory
and Social
Processes
Processes that
produce and
deliver products
and services
•Supply
•Production
•Distribution
Operations
Management
Processes
Processes that
enhance customer
value
•Selection
•Acquisition
•Retention
•Growth
Customer
Management
Processes

37. Internal processes Perspective
CommonInternalbusinessprocessperspectivemeasuresinclude:
•Patentsfiledinengineering
•Productlifecyclemeasures:
1.Meantimebetweenfailuresofexistingproducts
2.Spectoprototypecycle
3.Bug-countonrelease
4.Weighteddefectcount
•Activity-basedcostsofmajorcontributingactivitiesandoutputs
•Inventoryturns
•Numberofnewproductsinpipeline
•R&Dpipelinefornewproducts
•Numberofreturns
•Percentageclaimsratio(insurancecompany)

38. Learning and Growth Perspective
Thisperspectiveshowsusthatgoodhumanresourcedevelopmentsystem,organizationalsystem
andinformationsystemformsasolidfoundationforimprovingcompanyperformance.
Thisperspectiveincludesstafftrainingandattitudestoorganizationalculturerelatedtoboth
individualandcorporateself-improvement.Thisquadrantrecognizesthatinaknowledgeworker
organization,peoplearethegreatestresource.KaplanandNortonfocusuponthefactthat'learning'
ismorethan'training'.
This perspective reflects the capability that a company should have, namely:
1.Human Capital
2.Organization Capital
3.Information Capital

39. Learning and Growth Perspective
Human Capital Organization Capital Information Capital
•Skills
•Knowledge
•Attitude
•Systems
•Database
•Networks
•Culture
•Leadership
•Organization Development

40. Learning and Growth Perspective
Common metrics in this perspective measures include:
•Trainingbylevel
•Retentionnumbers
•Redeploymentpercent
•Forcedandunforcedattrition
•One-on-oneinterviewsperemployee
•Employeeandvendorsatisfaction
•Paybenchmarks
•Rankings
•Six-monthperformanceafterhire
•Promotionfromwithin
•Personaldevelopmentplancreation

41. Sample Goals Using Four Perspectives
Thefollowingtableshowshypothesizedlistofgoalsorstrategicthemesforafor-profitemerging
organizationservingtheutilityindustry.

42. The Four perspectives Combined
The Four perspectives of BSC
together translates Vision and
Strategy for the organization to
implement.

44. The Four perspectives Combined
Harmonizes the use of both
financial and non-financial
resources of an organization.

45. The Four perspectives Combined

46. The Four perspectives Combined
“Cascading” strategy from top level
to all levels of an organization.

47. The Four perspectives Combined
“Cascading” performance measures utilizing the Balanced Scorecard
methodology.
This process should be viewed as a communication process rather
than a method of control.
Obviously, the exact way that measures will flow down through the
organization will be partially dependent on the specific nature of the
corporate hierarchy.

48. The Four perspectives Combined

49. The Four perspectives Combined
Thereareanumberofkeyconsiderationsforsuccessfullycascadingacompany-wideBalancedScorecard
capabilitythroughoutanorganization:
Eachorganizationshouldgothroughaprocessofcreatingacorporatevision,themes,objectives,
andmeasures
Vision,themes,objectives,andmeasuresshouldcascadeintotheorganization(thatis,Corporateto
DivisiontoBusinessUnit)
TheBalancedScorecardshouldstopatthepointwherestrategyisnolongerarticulated
Thebestpossiblemeasuresformonitoringthestrategicmeasuresofeachorganization,division,or
businessunitshouldbeidentified

50. The Four perspectives Combined
Sincetheprocessofcascadingstrategydownthroughtheorganizationissuchafundamentalelementof
theBalancedScorecardprocess,organizationsmustensurethattheyhavearecurringprocessinplaceat
eachleveltoenableit.

51. The Four perspectives: Are they sufficient?
ThefourperspectiveoftheBalancedScorecardshouldbeconsideredatemplate,notastraitjacket.
Nomathematicaltheoremexiststhatjustifythatthefourperspectivesarebothnecessaryand
sufficient.
Companiesrarelyusefewerthanfourperspectives,butdependingonindustrycircumstancesanda
businessunit’sstrategy,oneormoreadditionalperspectivesmaybeneeded.

52. Module 3: Strategy and Balanced Scorecard

53. Strategic Paradox
Therearetwoformsofstrategicparadoxinstrategyformulationandexecution:
Mistakenlyviewingstrategyasoperationaleffectiveness.
Mistakenlyassumingthatstrategyandactionsinanorganizationarealwaysaligned.
AccordingtoProfessorMichaelPorter,operationaleffectivenessisperformingsimilaractivitiesbetterthan
rivals,whilestrategicpositioningisperformingdifferentactivitiesorperformingsimilaractivities
differently.
Whenorganizationsdoanythingthatappearstobeacompetitiveadvantageusingoperationaleffectiveness,
othersoftenfollow.
“Thetroublewithforgingahighwayisthatifyouareright,imitatorswillfollow.Thenyouarebackinto
protectingyourbaseandbecomesubjecttoconventionalwisdom.”(KimandMauborgne,2005).
ProfessorPorteremphasizesthatbenchmarkingonlymakescompaniessimilar.Porteremphasizesthevalue
ofstrategicpositioningoveroperationaleffectiveness.

54. Strategic Paradox
•Strategyformulatedwithnoregardtostrengthsandweaknessesincapabilityisblindstrategy.The
truepowerofstrategycanonlybeexpressedinworkperformed.
•Therealchallengeseemstobe,notonlystrategyformulation,butalsotheabilitytocreatean
operationalframeworktoexecutethestrategy.
•Thebusinessworldisguidedbychange.Andchangecanaffectbusinessmodelsdrastically.
•Sticking to a good looking strategy when strategic variableschange can be dangerous. Forcompanies to
be effective, they must have as much ability to change their strategy as to formulate one.
•Strategywithoutstrategicalignmenttokeyorganizationalactivitiesrendersorganizationsimpotent.
•Thestrengthofaresilientorganizationcomesfromitsabilitytochangeitsstrategicthrustandreflectit
inactionsandcorrespondingperformancemeasures.

55. Strategic Paradox
•A Paradox Map compares where resources should be emphasized to achieve the strategy of the
company against what work iscurrentlybeing performed.
Paradox Map
Leader in direct consumer marketing
Align with larger player
Dominate in customer service
Emphasis as per executive leadership impression and
direction
Real emphasis of resources

56. Avoiding Strategic Paradox
ToAvoidsuchstrategicparadoxesactionsofcompaniesmust
bealignedwithstrategiesdeveloped.
BSCavoidsthestrategicparadoxbylinkingoverallstrategyto
dailyactivitiesofanorganization.
BalancedScorecardfunctionsasabridgebetweenstrategyand
it’simplementation.

57. Where does the BSC fit?
Balanced Scorecard bridges the gap between strategy and it’s
implementation.

58. Linking BSC to a Single Strategy
ThemultiplemeasuresonaproperlyconstructedBalancedScorecardshouldconsistofalinked
seriesofobjectivesandmeasuresthatarebothconsistentandmutuallyreinforcing.
BalancedScorecardshouldbeviewedasaninstrumentationforasinglestrategy.
Theintegratedsystemofscorecardmeasuresshouldincorporatethecomplexsetofcause-and-effect
relationshipsamongthecriticalvariables-includingleads,lagsandfeedbackloops-thatdescribethe
trajectory,theflightplanofthestrategy.
Twoimportantelements:
1.Cause-and-effectRelationships
2.PerformanceDrivers

59. Cause-and-effect Relationship
Whentryingtounderstandanythingcomplex,wetendtobreakideasintotheircontributingparts.In
computerscience,thebreakingoftasksdowntosmallercompositionsiscalledstructured
decomposition.
AtIntelcorporation,forexample,complextasksarebrokendownintoobjectivesandkeyresultsso
thateveryteammembercanunderstandthethingstodo,theirowners,andwhattheresultsofthe
objectivesare.
Astrategyisasetofhypothesesaboutcauseandeffect.
Themeasurementsystemshouldmaketherelationships(hypotheses)amongobjectives(and
measures)inthevariousperspectivesexplicitsothattheycanbemanagedandvalidated.
Thechainofcauseandeffectshouldpervadeallfourperspectivesofabalancedscorecard.
AproperlyconstructedBalancedScorecardshouldtellthestoryofthebusinessunit’sstrategy.It
shouldidentifyandmakeexplicitthesequenceofhypothesesaboutthecause-and-effect
relationshipsbetweenoutcomemeasuresandtheperformancedriversofthoseoutcomes.

60. Cause-and-effect Relationship
Four perspectives of Balanced Scorecard:
1. Financial perspective [Return on capital employed/Economic value added]
2. Customer perspective [Customer loyalty]
[On-time delivery]
3. Internal business process perspective[Process quality, Process cycle time]
4.Learning and growth perspective [Employee skills]

61. Strategy Mapping
WithBalancedScorecard,theartofunderstandingtherelationshipamongallkeyperspectivesis
doneusingstrategymapping—atechniqueofdrawingtheintricaterelationshipsofcauseandeffect
amongallperspectivesandtheircontributingparts.
AStrategyMapisagenericformatfordescribingstrategyinconcreteterms.
StrategymappingisatoolcreatedbyBalancedScorecard(BSC)pioneersRobertSKaplanand
DavidPNorton.Itallowsorganizationstodescribeandcommunicatetheirstrategies.Strategymaps
alsoserveasanappropriatebasisforthedevelopmentoffinancialandnon-financialBalanced
Scorecardmeasuresthatcanbeusedtomonitorstrategyexecutionandperformance.
TheStrategyMappingmethodologytranslateshigh-levelstrategicvisionintomeasures,andensures
alignmentofobjectivesthroughouttheorganization.
Strategymapscanbeusedasastandalonetooltodepictanorganization'sstrategy.However,their
realvalueiswhentheyareusedaspartofasystematicstrategicmanagementprocessthataligns
organizationalandindividualtargetsandinitiativeswithadefinedmissionanddesiredstrategic
outcomes.

62. Strategy Mapping
StrategyMapsbeginwithseveralexplicitstrategicthemesandthenbreaksthesethemesdownintoa
seriesoftacticalobjectives.Eachoftheseobjectivesismappedtobothastrategicthemeanda
Scorecardperspective(forexample,customer,financial,process,learningandgrowth).Eachofthe
objectivesontheStrategyMapisrelatedtoeachotherinawebofcauseandeffectrelationships.
Thiscreatesacoherentandholisticviewofthetacticalobjectivesneededtosupportthestrategic
themes.Eachtacticalobjectivethenhasameasure(ormeasures)assignedtoitandthispopulatesthe
performancemeasuresfoundintheBalancedScorecard.
TheuseoftheStrategyMapcanbeaverypowerfultoolenablingmanagerstoworkthroughwhich
performancemeasuresactuallysupporttheirstatedstrategyandthereforeshouldformthebasisfor
theirBalancedScorecard.Italsoensuresthatperformancemeasuresselectedarecomplementaryto
eachotherviacauseandeffectrelationships.
ThecreationofStrategyMapsguardsagainstmanymanagers’automaticinclinationstopopulate
theirScorecardswithahodgepodgeofexistingmeasures.TheBalancedScorecardisnota
repositoryforaselectionofexistingkeyperformanceindicators.Itisafocusedinstrumenttoplan,
measure,andtrackthesuccessfulexecutionofstrategy.TherigoroususeofStrategyMapsisakey
techniqueinaccomplishingthis.

63. Strategy Mapping
Strategy Mapping is a Six-Step Process. The steps are:
1.Specify an overriding objective.
2.Choose the value proposition.
3.Choose the financial strategies.
4.Choose the customer strategies.
5.Execute through the internal perspective strategies.
6.Plan the learning and growth strategies.
Steps 1 through 4 of the strategy mapping process address the question, “What do we want to
accomplish?”
Steps 5 and 6 address the question, “How do we plan to accomplish our objectives?”

64. Strategy Mapping

65. Strategy Mapping
Themajorstrategiesfortheorganizationalunitarelistedacrossthetop
whilethevariousBalancedScorecardperspectivesarelistedalongthe
lefthandside.Thiscreatestwooftheessentialelementsofasuccessful
StrategyMap:theexplicitformulationofstrategyandtheuseof
multipleperspectives.Inordertoactuallyconstructthemap,managers
mustworkthroughacauseandeffectchainthatoriginatesfromthe
strategicthemesandflowsthrougheachofthetacticalstrategic
objectivesthatsupportit.Eachtacticalobjectiveinturnhasatleastone
performancemeasureassignedtoit.

66. Strategy Mapping

67. Performance Drivers
Agoodbalancedscorecardshouldalsohaveamixofoutcomemeasuresandperformance
measures.Outcomemeasureswithoutperformancedriversdonotcommunicatehowthe
outcomesaretobeachieved.Theyalsodonotprovideanearlyindicationaboutwhetherthe
strategyisbeingimplementedsuccessfully.
Conversely,performancedriversalonewithoutoutcomemeasuresmayenablethebusinessunit
toachieveshorttermoperationalimprovements.Buttheywillfailtorevealwhetherthe
operationalimprovementshavebeentranslatedintoexpandedbusinesswithexistingandnew
customersandeventually,intoenhancedfinancialperformance.
Agoodbalancedscorecardshouldhaveanappropriatemixofoutcomeandperformancedrivers
ofthebusinessunit’sstrategy.Inthisway,thescorecardtranslatesthebusinessunit’sstrategy
intoalinkedsetofmeasuresthatdefineboththelongtermstrategicobjectivesandthe
mechanismsforachievingthoseobjectives.

68. Module 4: Chemical Bank : Implementing the Balanced
Scorecard

69. Case Analysis: Chemical Bank : Implementing
the Balanced Scorecard
TherestructuringofChemicalBankwiththemergerofChemicalBankandtheManufacturersHanover
Corporationhastransformedtheprocessesinwhichthecompany’sstrategiesareimplemented.Inorderto
createtheshareholdersvalue(orprofits),thecompanymustseektoincreaserevenueandreduce
expensesthroughvariousperspectives:financial,customer,internal-process,andlearning-and-growth.
Withthehelpoftheseperspectives,thecompanycancreatethebalancedscorecard(BSC)andhaveadeeper
understandingofitsstrategiesinbothfinancialandnonfinancialaspects.TheBSCtranslatesan
organizationsmissionandstrategyintoasetofperformancemeasuresthatprovidestheframework
forimplementingitsstrategy.Itaddsthreeperspectives:customer,business-process,andlearning-and-
growthtothetraditionalfinancialperspective.Thefinancialperspectivemayhelpacompanyensure
whethershort-termgoalsaresatisfied,butitisnotenoughtocapturetheentireprocess.Thus,theother
perspectivesareincludedtoprovidenonfinancialobjectives.Theseobjectivesareusedtomeasurethe
processesandresultsofeachmanager’sperformance,anddecisionrightsarethenallocatedaccordingly
usingdriversandresponsibilitycenters.AnotherreasonfortheBSCimplementationistotiecompensationto
thenonfinancialaspectsaswellasthefinancialaspectstoencompasstheperformancefactorsoverwhich
managershavecontrol.
Klein, S. K. (1995). Chemical bank: Implementing the balanced scorecard. Harvard Business Review .
Prakash (2017). A study on chemical bank case: implementing the balanced scorecard

70. Why does Chemical’s Retail Bank, a financial institution with the bulk of its inputs
and outputs denominated in financial terms, need measures other than
financial to motivate and evaluate its performance?
Retailbankinghasemphasizedefficientcollectionsandprocessingofdeposits.Theservicesbank
providedwereverylimited.However,thecustomers’preferenceanddemandhavechanged,requiring
bankstoprovidebroaderproductandserviceline.Forthatreasons,Chemical’sRetailBankshould
findwaystodevelopnewrelationshipswithitscustomers.Itmustshiftitsimagefromaproviderof
anarrowsetofbankingservicetobecomingafinancialadvisorandserviceproviderfortargeted
customergroups.Becauseofthiscomplexcompetitivemarket,nonfinancialBSCmeasuresaremore
suitableforChemical’sRetailBank.Itcanhelpmanagertrackandmotiveperformanceofalllevelsof
thecompanyeasily.
Howeverfinanciallacksofspecificobjectivesandcannotreflectbusinessstrategyinthisnew
competitiveenvironmentinthelongrun,anditisnotagoodwaytomotivateandevaluatethe
performanceofChemical’sRetailBank.Whenthebankusesmeasuresotherthanfinancialtomotivate
andevaluateitsperformance,itwillbemoreefficientbecauseofspecificobjectivesandmanagement
system,whichhelpTheChemicalimplementcustomer-centeredstrategy.

71. What does Mike Hegarty want to accomplish
with the BSC?
Atyear-end1991,theprocesshadbegunwiththemergerofChemicalBankandtheManufacturersHanover
Corporation.Beforethismerger,MichaelHegartywasheadoftheRetailBankDivisionofChemicalBanking
Corporation.Hewasoverseeingthistransformation.
Herealizedthatcompanieswouldfacemorecompetitorsandchangesinthefuture.ByusingBalanced
Scorecard,MichaelHegartywantedtotransformthebankintoamarket-focusedorganizationthatwouldbe
thefinancialserviceproviderofchoicetotargetedcustomergroupssuccessfully.
Hiscompanywasfacingbusinessculturecombination,meanstwocompanies,whichhavedifferentbusiness
objectivesandmanagementmethodsneedtoworktogether,hewantedtouseBalancedScorecardtosoften
thesechanges.
TheBSCcanhelpalllevelsofthecompanybetterunderstandthekeydriversofthebusiness.The
performanceofthecompanywillbetrackedeasilyandspecifically.ByusingtheBSC,MikeHegarty
wantedthecompanyadaptsandinnovatestoensuresuccessinthiscompetitivemarketandachievesthe
plannedobjectives.

72. Comment on the BSC implementation process at Chemical’s Retail
Bank. What are the enabling conditions for a successful BSC project?
AveryimportantpartoftheBSCisthemanagersoutsidethetopleveloftheorganization
implementingtheBSC.TheChemicalBankdidwellconsultingwithmanagersduringthebuildingof
theinitialBSC.ThisiskeyinthesuccessoftheinitialimplementationofaBSC.Unfortunately
ChemicalBankdidnotdirectlydistributetheirBSCtoalloftheiremployees,whichisan
essentialsteptofullutilizationofaBSC.Everyoneworkingatacorporationknowsthatthegoalis
toincreaserevenue.Evenwithoutthecompletedmeasurementmetrics,theemployeesstillneedto
knowwhytheyarebeinginstructedindifferentmethodsinordertoseethebigpictureclearly.Dueto
thispotentialmisunderstanding,employeesmaynothavethefullunderstandingoftheimplicationsof
newactionsthattheBSCgeneratesforrevenuegenerationandleadtotheseincreasedrevenues.
Thisisaperfectexampleofemployeesneedingtoknowwhytheyarebeingtoldtodosomethingand
whytheBSCneedstobefullyknownbyallemployees.Althoughitwouldbeidealtosellthe
employeesontheBSC,managementwasabletomotivatethesalesforcewithoutthebigpictureby
gettingthemtofirstrealizetheywereseriousandthensecondlybybackingthisupwithrealresults.

73. Questions to be addressed:
(a)Name and evaluate the major strategic themes of the BSC at Chemical’s Retail Bank.
(b)Classify the strategic objectives according to the strategic themes.

74. (a) Name and evaluate the major strategic themes of the BSC at
Chemical’s Retail Bank.
Answer:TheChemicalBankhasidentifiedthreecorestrategicideasfromtheirformerstrategies,
whichareshiftingthecustomer/profitmix,improvingproductivity,andenablethe
organization.Shiftingthecustomermixwillleadtobetterprofitmixandthischange
wouldbebroughtonbythetraininginitiativesforemployeesaswellasbetter
understandingofcustomersegments.Resultingfromtheseeffortswillalsoallowtimeto
beusedmoreproductivelyasaresultofnewefficiencyfromtraining.Alloftheseare
enablingfactorsfortheorganization.

75. Answer:Itemsthatfallundereachheadingarestrategicobjectiveswitheachitemisaspecific
actionpointinwhichimprovementofeachitemwillleadtooneofthestrategicthemeswhich
constitutetheBSC
(b) Classify the strategic objectives according to the strategic themes.

76. Vision &
Strategy
Make the market
Create the product
Distribute & service
Differentiators
Essentials
Strategic information assets
Re-skilling
Accountability & reward linkage
Focus our resources
Return on spending
Reduce cost
Increase revenue
Reduce risk
FINANCIAL
INTERNAL
BUSINESS
PROCESS
LEARNING &
GROWTH
CUSTOMER
OVERVIEW OF BALANCED SCORECARD

77. Provide a detailed evaluation of the strategy maps of
the BSC at Chemical Bank.
Thevariousstrategymapsarealltiedandlinkedtogethertocontributetoabetterunderstandingandfulfillmentof
thecompanyvision.Withregardstofinance,chemicalbank’sBSCillustratesthattheobjectiveistoimprove
theprofitabilityofthebankwhileatthesametimekeepingtheriskfactorrelativelylow.Thisisdoneby
followingthevarioustrendsinthemarketandadaptingvariousproductsandfinancestrategiestowardsthat
objective.Themanagersweresmartenoughtonoticethevarioussegmentsthatwereforminginthecustomer-based
marketanddecidedtofocusonanumberoftheminordertogetcompetitiveadvantageinthesemarkets.
Thesemarketsegmentsaretheresultofchangingtrendsinthewaycustomerswanttocarrytheirfinancial
activitiesaswellastheirneedsandasaresult,thebankhadtodevelopastrategywherebyitdevelopsmore
productswithvaryingcharacteristicsinordertosatisfyeachsegmentandfullyfulfilltheirneeds.Internally,
thefocuswhichusedtobedirectedsolelytowardssaleactivitieshasbeendirectednowtowardsresearchand
innovationtooasaresultofthenewstrategyinplace.Theaimistostudythemarketandbetterunderstandthe
customerinordertodeliverthemthebestproductinthebestwaypossible.Andthisistiedtothelearningand
growthobjectivesonthebalancescorecardwhereitwouldbenecessarytoprovideallstaffnewtrainingand
guidethemtowardsthenewstrategybeingputinplacesothestaffcanbetterfocusonsaidstrategytofoster
growthinthecompany.

78. What are the strengths and weaknesses of the BSC
built at the bank?
TheBSCbuiltatthebankhadanumberofstrengths,oneofthembeingthefactthatitforcedthebanktoexamineitself
inamorecompetitivemarket.Itmorespecificallyprovidedamorecohesivestrategywiththemanufacturersat
HanoverCorporationgiventhemergerthathadrecentlyoccurred.Aspointedoutbytheheadofthebank,theBSC
helpedimprovecommunicationandreinforcestrategywhendealingwiththelargestaffofabout8000peopleatthe
bank.Itgaveeveryonemeasuresthatneededtobefollowedrigorouslyinordertoboostperformancewhileatthe
sametimeclarifyingandcommunicatingtheoverallvisionofthebank.TheBSCemphasizedfocusonsomeessential
measuresandstrategicobjectivessuchasqualitydeliveryofproductsandservicestocustomers.Inaddition,ithelped
developacause-effectrelationshipbetweenobjectivesandmeasures,whichtomanagementinparticular,isvery
beneficialandfacilitatesachievingstrategicaims.
Howevertherearesomeweaknessestoalsodenounce.Whilethescorecardwasgoodintheoryandclearlylaidout,it
wasnotreviewedadequately,hadnotbeenimplementedcorrectly,andemployeeswerenotfamiliarwithit.Undersaid
scorecard,customerrepresentativeshadtoexpandtheirskillsinordertobetteradvicethecustomers.However,thisalso
carriedarequirement,whichwasfortheBSCtobeproperlycommunicatedtotherepresentatives,whichwasnotdone.
TheBSC,infact,wasonlybeingexperiencedby27top-levelmanagers.Clearly,thiswasaweaknessinthescorecard
andhadtochange.Indeed,theyexperiencedproblemswithanumberoftheirmeasures,suchascustomerretention.
Clearly,theobjectives,whichhadbeenwelldefinedunderthevariousperspectives,wouldsuffer.

79. Why Balanced Scorecards Sometimes Fail ?
WhiletheBalancedScorecardisanimportanttoolformanagementtohelpinlongtermstrategy,thereareafewcommon
pitfallsthatshouldbeavoided.Thethreemostprevalentpitfallsare:identifyinggoalsanddriversthatarenotactionable
orcritical,topmanagementhastobecommittedtoseetheBSCbeingsuccessfulandtheBSChastobecommunicated
throughouttheorganizationfromtoptobottom.AcommonmistakeinBSCimplementationisidentifyingmeasuresthat
cannotbeactedupon.Someofthesemeasuresaretoobroadordonotreachtheheartoftheissue.LeeWilsondescribesa
situationatChemicalBankdemonstratingthisproblem.Oneofthelargegoalsofthecompanywastohavequalitycustomer
service.However,theirinternalmeasurethataggregatedcustomerservicedataonlyalertedthecompanyofthecustomer
serviceissuewithoutdescribingwhyorhowtofixit.
AnothercommonpitfallfortheBSCprojectisnothavingamanagementteambeingfullycommittedtoseeingthe
Balancedscorecardsucceed.Attheendoftheday,“measuresdon’tmanage”,andacompanyneedstohavemanagement
thatwillcommittoseeingtheBSCsucceed.
ThelastpitfallcompaniesfallintowhenimplementingtheBSCisfailingtoeffectivelycommunicatethestrategy
throughoutthecompanydowntoeverylastemployee.Byknowingthecommonpitfalls,companiescanworktoavoid
themandusethebalancedscorecardinthewayitwasintended,andyieldimpressiveresults.
 Murby & Gould (2005) . Effective performance management with the balanced scorecard, The chartered institute of management accounting

80. RELATIONSHIP OF BSC TO OTHER ORGANIZATIONAL
IMPROVEMENT INITIATIVES:
TheBSCemergedinthe1990sjustastwootherapproaches—activity-basedcostingandshareholder
valuemanagement—werebeingadvocatedasmeasurementsystemstohelpmanagersimprove
organizationalperformance.Thethreeapproachesdonotcompetewitheachother;infacttheyare
highlycompatibleandwhileeachcanbeimplementedindependentlyoftheothers,organizationswill
getthegreatestbenefitfromintegratingallthree.
ShareholderValueManagement:
WithinthefinancialperspectiveoftheBSC,theshareholdervaluemetricisdecomposedintothesub-objectives
ofcostreduction,improvedassetproductivity,andrevenuegrowth.Customerobjectivesdefinethestrategyfor
revenuegrowth.Italsohelpsexecutivesmanagethetrade-offsbetweenshorttermproductivityimprovements
andlong-termsustainablerevenuegrowth.

81. Activity-Based Costing
Activity-basedcosting(ABC)wasdevelopedtocorrectanotherdefectinfinancialsystems—the
inabilityoftraditionalcostingsystemstoidentifythedriversofindirectandsupportcosts.
•OperationalLinkageThefirstlinkagebetweenABCandtheBSCoccursintheoperationalmeasures
oftheBSC’sinternalprocessperspective.Threeparameters—cost,quality,andtime—usuallydefine
theoperatingperformanceofanyprocess.
•CustomerProfitabilityLinkageAsecondlinkageoccurswhenanABCmodelisusedtomeasurethe
profitabilityofindividualcustomers(KaplanandCooper1998,Chapter10).TheBSCcustomer
perspectivetypicallyincludescustomeroutcomemeasuressuchasacquisition,satisfaction,retention,
accountshare,andmarketshare.
•BudgetingLinkageAthirdlinkageariseswhentheABCmodelisusedforactivity-basedbudgeting:
WiththeBSCprovidingthemanagementprocessfordefiningthestrategicbudget,andactivity-based
budgetingusedtodeveloptheoperationalbudget.managershavepowerfulanalytictoolsfortheir
budgetingprocesses.

82. •Total Quality Management
Manycompaniesalsoengageinqualityinitiatives.ThecausallinkagesinaBSCstrategymapenhance
qualityprogramsbyarticulatingthetwowaysthatprocessimprovementscanlinktostrategicoutcomes.
First,qualityimprovementsintheinternalperspectiveshouldimproveoneormoreoutcomemeasuresin
thecustomerperspective;second,qualityimprovementscanleadtocostreduction,anoutcomeinthe
financialperspective.TheBSCenablesmanagerstodescribehowtheyexpecttotranslatequality
improvementsintohigherrevenues,fewerassets,lesspeople,andlowerspending.
KaplanandNorton(2001)TransformingtheBalancedScorecardfromPerformanceMeasurementtoStrategicManagement:PartII157,AccountingHorizonsVol.15
No.2pp.147–160

83. Module 5: BSC: Quality, Time and Theory Of Constraints

84. Thismoduledescribeshowabalancedscorecardapproachhelpsmanagersand
managementaccountantsimprovequality,customer-responsetime,andthroughput.
Thismodulewillbepresentedinthreeparts:
PartOne:Qualityasacompetitivetool
PartTwo:Timeasacompetitivetool
PartThree:TheoryofconstraintsandThroughputcontributionanalysis

85. Big Picture
Quality as a Competitive
Tool
Time as a Competitive
Tool
Theory of constraints &
Bottleneck Operation
Throughput contribution
Financial measures
Customer measures
Internal Business process
measures
Learningand growth
measures

86. Two Basic Aspects ofQuality
Design quality—refers to how closely the characteristicsofaproductorservicemeetthe needs and
wants ofcustomers
Conformancequality—referstotheperformanceof a product or service relative to its design and product
specifications
Part One: Quality as a Competitive Tool

87. Quality andFailure
Actual
Performance
Design
Specifications
Customer
Satisfaction
Conformance
Quality
Failure
Design
Quality
Failure
Quality as a Competitive Tool

88. Costs of Quality
Preventioncosts—costsincurredtoprecludetheproductionofproductsthatdonotconformto
specifications
Appraisalcosts—costsincurredtodetectwhichoftheindividualunitsofproductsdonotconformto
specifications
Internalfailurecosts—costsincurredondefectiveproductsbeforetheyareshippedtocustomers
Externalfailurecosts—costsincurredondefectiveproductsaftertheyhavebeenshippedto
customers
Quality as a Competitive Tool

89. Exercise: 19-16 (Cost of quality)
(From Horngren)
CostenInc.,producescellphoneequipment.JessicaTolmy,Costen’s
president,decidedtodevotemoreresourcestotheimprovementof
productqualityafterlearningthathercompanyhadbeenrankedfourth
inproductqualityina2008surveyofcellphoneusers.Costen’squality-
improvementprogramhasnowbeeninoperationfortwoyears,andthe
reportshownherehasrecentlybeenissued.

90. Required:
Foreachperiod,calculatetheratioofeachCOQcategoryto
revenuesandtototalqualitycost.
Basedontheresultsofrequirement1,wouldyouconclude
thatCosten’squalityprogramhasbeensuccessful?Preparea
shortreporttopresentyourcase.

91. Part Two: Time as a Competitive Tool
Customer response time and on time performance
Time drivers and costs of time
Relevant revenues and costs of time

92. Customer response time and on time performance:
Customerresponsetimeishowlongittakesfromthetimeacustomerplacesanorderfora
productorservicetothetimetheproductorserviceisdeliveredtothecustomer.
Receipttime
Manufacturingcycletime
Deliverytime
Manufacturing cycle efficiency (MCE)is an important measure of internal business process performance.
Performance measures are found on the balanced scorecards of the companies as we know.
MCE = (Value-added manufacturing time / Manufacturing cycle time)
Or,
MCE = (Value-added time / Throughput time)
Time as a Competitive Tool

93. On-timeperformanceisdeliveryofaproductorservicebythetimeitis
scheduledtobedelivered.
Forexample,commercialairlinesgainloyalpassengersasaresultofconsistent
on-timeservice.Butthereisatrade-offbetweenacustomer’sdesireforshorter
customer-responsetimeandbetteron-timeperformance.
Time as a Competitive Tool

94. Time drivers and costs of time:
Atimedriverisanyfactorthatcausesachangeinthespeedofanactivitywhenthe
factorchanges.
Uncertaintyandbottlenecksasdriversoftime
Uncertaintyaboutwhencustomerswillorderproductsorservices
Bottlenecksduetolimitedcapacity
Time as a Competitive Tool
Relevant revenues and Costs of time:
Revenuesareaffectedbecausecustomersarewillingtopayahigherpriceforfaster
delivery.

95. Exercise: 19-20(From Horngren)
(Quality improvement, relevant costs, relevant revenues)
TechnoPrintmanufacturesandsells20000high
technologyprintingpresseseachyear.Thevariable
andfixedcostsofreworkandrepairareasfollows:

96. AdditionalInformation:
TechnoPrint’scurrentpresseshaveaqualityproblemthatcausesvariationsintheshadeofcolors.Its
engineerssuggestchangingakeycomponentineachpress.Thenewcomponentwillcost$55more
thantheoldone.Inthenextyear,however,TechnoPrintexpectsthatwiththenewcomponentitwill:
1.Save12,875hoursofrework,
2.Save9,000hoursofcustomers,
3.Move200fewerloads,
4.Save7,000hourswarrantyrepairs,and
5.Sellanadditional150printingpresses,foratotalcontributionmarginof$18,00,000.
TechnoPrintbelievesthatevenasitimprovesquality,itwillnotbeabletosaveanyofthefixedcostsof
reworkorrepairs.TechnoPrintusesaoneyeartimehorizonforthisdecision,becauseitplansto
introduceanewpressattheendoftheyear.

97. Required:
1.ShouldTechnoPrintchangetothenewcomponent?
2.Supposetheestimateof150additionalprintingpressessoldisuncertain,whatisthe
minimumnumberofadditionalprintingpressesthatTechnoPrintneedstosellto
justifyadoptingthenewcomponent?

98. Part-Three
Theory of Constraints(TOC)
Throughput contribution analysis(TCA)

99. Managers use cost accounting to help make decisions to reduce a company’s costs and improve
profitability. By eliminating bottlenecks, theory of constraintsincreases the velocity of products
moving through an organization and therefore profit is maximized.
For the sake of completeness, it should be noted that the theory of constraintsand throughput-
contribution analysisis NOTthe only approachused in decision making. Other methods are:
I.standard cost accounting
II.activity based costing
III.marginal costing.
Big Picture

100. Big Picture (Cont.)
Theory of constraints
Throughput
contribution
Bottleneck operation
Financial measures
Customer measures
Internal Business
processmeasures
Learningand growth
measures

101. Definition: theory of constraints
•CIMAOfficialTerminology(2005)‘Atechniquewheretheprimarygoalistomaximizethroughput
whilesimultaneouslymaintainingordecreasinginventoryandoperatingcosts.’
•TheTheoryofConstraintsisamanagementdisciplinewhichprovidesthedeterminationofthe
factorswhichhindersaccompanyreachingitsobjectivesandtheapplicationofnecessarychangesto
removethesefactors.
•TheoryofconstraintsisNOT‘costing’methodasitdoesnotallocatecoststoproductsandservices.
TheTOCapproachcalculatestheproductthroughputastheproduct’ssalespriceminusitsmaterial
costs.Allothercostsaretakenintoaccountseparatelyasoperatingcostsandarenotallocated
directlytotheproducts

102. “A system is strong as
its weakest link”

103. •"a chain is no stronger than its weakest link“
•Improving strong links, does not strength the chain.
•To achieve more of your goal, improve your weakest link.
Definition: theory of constraints (Cont.)

104. Why:theory of constraints
•Improve flow time of product or service through the system
•Increase throughput
•Reduce variation, improve quality
•Low-disruption, sustainable way to change

105. Examples: management problems
•company’s market is shrinking
•losing market to competitors
•cannot get the right people
•cannot produce enough
•delivers too late
•company’s performance is insufficient
•departments donot co-operate

106. Examples: Underlying problems
•Company isnotworking toward its goals
•Company can notcommunicate goalsto stakeholders (i. e., customers,
staffs, investors)
•Without goals:decline and fall

107. Assumptions: theory of constraints
Increasing
throughput
Minimizing
inventory
Decreasing
operating expense
–Better Product
–Lower Price
–Responsiveness to Customer needs

108. Applications: theory of constraints
There are various applications of TOC:
•Operations
•Finance and accounting
•Project management
•Marketing and sales

109. Steps: theory of constraints
TheTOCprocessseekstoidentifytheconstraintandrestructuretherestofthe
organizationaroundit,throughtheuseoftheFiveFocusingSteps:
1. Identify the Constraint
2. Exploit the Constraint
3. Sub ordinate everything to
the Constraint
4. Elevate the Constraint
5. Repeat for the new Constraint

110. Drawbacks: theory of constraints
SpecificcriticismshavebeenleveledatTOCandTCAandarediscussedbelow:
•Theyareshort-termdecisiontools.
•Theymayonlybevalidconceptsifappliedtothetotalityofthesupplychainincluding
management,production,resourcesandsupport
•Dependentoncircumstances,operatingexpensesunderTOCareregardedasfixed,
whichissimplisticintheviewofdetractors.ThereforeTOCisbasicallythesamething
asvariablecosting

111. Vs.
Bottleneck
A bottleneck is any resource
with a capacity equal to or
less than the demand placed
upon it
Constraints
A constraint is anything that
limits a system’s performance,
relative to the system goal

112. AA-110 B-80 C-120
D-120
E-60 F-190
Daily Demand-100 Units
Bottleneck
Bottleneck
Constraints

113. Notethecause-and-effectlinkagesacrossthemeasuresofBalancedScorecard:
Betteremployeetraining(Learning-and-growth-measure)leadstobettermanagement
ofbottleneckoperations(Internal-business-process-measure),whichinturnleadsto
bettercustomerresponsetimes(Customermeasure)andfinallyitleadstohigher
revenues(Financialmeasure).
Bottleneckand Balanced scorecard

114. BottleneckOperation:
Bottlenecksdeterminethethroughputofasupplychain.
Recognizingthisfactandmakingimprovementswillincrease
cashflow.Abottleneckinasupplychainmeanstheresource
thatrequiresthelongesttimeinoperationsofthesupplychain
forcertaindemand.

115. Four Steps in Managing Bottleneck Operations
1.Recognizethatthebottleneckoperationdeterminesthroughputcontributionoftheentiresystem.
2.Identifythebottleneckoperationbyidentifyingoperationswithlargequantitiesofinventorywaitingtobe
workedon.
3.Keepthebottleneckoperationbusyandsubordinateallnonbottleneckoperationstothebottleneck
operation.
4.Takeactionstoincreasetheefficiencyandcapacityofthebottleneckoperation.Theobjectiveisto
increasethedifferencebetweenthroughputcontributionandtheincrementalcostsofincreasingefficiency
andcapacity.

116. Methods to Relieve Bottlenecks
•Eliminateidletimeatthebottleneckoperation.
•Processonlythosepartsorproductsthatincreasethroughputcontribution,notpartsor
productsthatwillremaininfinishedgoodsorsparepartsinventories.
•Shiftproductsthatdonothavetobemadeonthebottleneckoperationto
nonbottleneckprocesses,ortooutsideprocessingfacilities.
•Reducesetuptimeandprocessingtimeatbottleneckoperations.
•Improvethequalityofpartsorproductsmanufacturedatthebottleneckoperation.

117. Whatis'Throughput'
Throughputistheamountofaproductorserviceacompanycanproduce
anddelivertoaclientinaspecificperiodoftime.Businesseswithhigh
throughputlevelscantakemarketshareawayfromlower
throughputfirms,becausetheycanproducethatproductorservicemore
efficientlythantheircompetitors
BreakingDown'Throughput‘
Theideaofthroughputispartofthetheoryofconstraintsinbusiness
management.Theguidingideologyofthetheoryofconstraintsisthata
chainisonlyasstrongasitsweakestlink.Advocatesofthetheory
attempttominimizehowweaklinksaffectacompany'sperformance.
Financial Perspectives: Throughput Contribution
Analysis

118. ThroughputContribution=Revenues–DirectMaterialCOGS
Manufacturing Cycle Efficiency * Process Productivity * Process Quality Yield
=
Throughput
Manufacturing Cycle Efficiency = Value-added processing time / Total time
Process Productivity = Total units / Value-added processing time
Process Quality Yield = Good units / Total units
Therefore,
Throughput = Good units / Total time
Throughput Contribution Analysis (Cont.)

119. •Founded in :1970
•Company Type : Manufacturing
•Product : Semiconductor, Fiber
Optic, Fiber Cable.
Case Study:
theory of constraints

120. 1.How Lucent become more productive ?
2.How Lucent improve their performance ?
3.How Lucent can Increase their profit ?
The Problems
Case Study of Lucent Technologies
Bell Labs Innovations

121. TOC Implementation
Case Study of Lucent Technologies
Bell Labs Innovations

122. Case Study of Lucent Technologies
Bell Labs Innovations

123. Case Study of Lucent Technologies
Bell Labs Innovations

124. Case Study of Lucent Technologies
Bell Labs Innovations

125. Case Study of Lucent Technologies
Bell Labs Innovations

126. Case Study of Lucent Technologies
Bell Labs Innovations

127. Case Study of Lucent Technologies
Bell Labs Innovations

128. Case Study of Lucent Technologies
Bell Labs Innovations

129. Case Study of Lucent Technologies
Bell Labs Innovations

130. Case Study of Lucent Technologies
Bell Labs Innovations

131. Case Study of Lucent Technologies
Bell Labs Innovations

132. Case Study of Lucent Technologies
Bell Labs Innovations

133. Case Study of Lucent Technologies
Bell Labs Innovations

134. Case Study of Lucent Technologies
Bell Labs Innovations

135. Step 1: Identify Constraints

136. Step 2: Squeeze or exploit the constraint
Some options: to exploit
• Shield them from interruptions.
• Limit their WIP.
• Reduce their non value add work.

137. Step 3: Subordinate to the constraint
“Remove all excessive WIP”

138. Step 3: Subordinate to the constraint
Some options: to subordinate
• Limit WIP of upstream to match.
• Upstream do preparation work.
• Upstream improve their quality.
• Pair upstream with constraint staff.

139. Step 4: Elevate the constraint
Some options: to elevate the
constraints
• Improve their tools.
• Improve their environment.
• Improve their team work.
• Hire more people.

140. Step 5: Repeat the process

141. 1. Identify the constraint
2. Exploit the constraint
3. Subordinate all else
4. Elevate the constraint
5. Repeat
Five Focusing Steps: theory of constraints
Get the most out of the constraint,
with only minor changes.
Major changes to the constraint,
Including increasing capacity.

142. AfterImplementingTOC
Throughputfrom:10/Day
Become:14/Day
Case Study of Lucent Technologies
Bell Labs Innovations

143. TOC Result “Lucent”
1.The Product can developed twice Fast
2.The Project can be completed on time
3.Increase in profit
Case Study of Lucent Technologies
Bell Labs Innovations

144. Advanced Management Accounting, Third Edition, Robert S. Kaplan and Anthony A.
Atkinson.
Cost Accounting: A Managerial Emphasis, Thirteenth Edition, Charles T. Horngreen
Nair, M. (2004) Overview, in Essentials of Balanced Scorecard, John Wiley & Sons,
Inc., Hoboken, NJ, USA.
The Balanced Scorecard: Transforming Strategy into Action, Robert S. Kaplan and
David P. Norton
References:

145. Thank You

146. Appendix 1: Frequently
Asked Questions About
Balanced Scorecard

147. 1. What are the benefits of the balanced scorecard approach?
Answer:The benefits of the balanced scorecard have been identified by
many organizations:
Improved organization alignment Improved communications, both
internally and externally
Linked strategy and operations
More emphasis on strategy and organizational results
Integrated strategic planning and management

148. 2. What are the challenges encountered in implementing BSC?
Answer:There are several major challenges to developing and sustaining
the balanced scorecard:
Engaged leadership
Maintaining momentum
Measuring what matters
Not using a disciplined framework to build the system
Mistakenly thinking a scorecard system is a short-term project (it’s
not….it’s a journey)
Not involving a cross-section of the organization in developing the system
Not thinking strategically enough
Not incentivizing desired behavior changes

149. 3. Is the BSC relevant for public sector companies?
Answer:Taxpayers,theultimatecustomersofgovernment,aredemanding
moreaccountabilityfortheuseoftheirfunds.Theywanttoseetangible
resultsfromallgovernmentagencies,atalllevels.IntheU.S.,thisdemandis
reflectedintheGovernmentPerformanceandResultsActof1993,oneof
themostinfluentiallawsaffectinghowtheFederalGovernmentworks.
Morerecently,thePresident'sManagementAgenda,promulgatedbythe
OfficeofManagementandBudget,includeslanguagerequiring
performance-basedscoringandbudgetingofallactivitiesofagenciesin
accordancewithtop-levelstrategies.Thebalancedscorecardistheonly
frameworkreadilyavailablethatcanalignstrategy,performanceand
budgetingtomeettheserequirements.Therefore,governmentagenciesare
increasinglylookingtothebalancedscorecardapproach.

150. 4. Is the BSC relevant for public non profit companies?
Answer:Nonprofitorganizationsarecommittedtoamission,andtheyneed
tofocustheirlimitedresourcesefficientlyinordertoachievemission
effectivenessandvaluefortheirmembersandsponsors.Thebalanced
scorecardsystemhasamultiplefocusonseveralperspectives,including
financialperformance.Foranonprofitorganization,profitisnota
determininggoalofstrategy;butgoodstewardshipisimportant,sothis
perspectiveor“lense”isusedtodescribethefinancialaspectof
performance.Inthiscase,thebalancedscorecardprovidesacomprehensive
frameworkthatwillhelpassociationdirectorsandmanagersbetterdefine
strategies,trackperformance,andprovidedatatoshowtheirvarious
stakeholdergroupshowwelltheyareperformingintermsofmissionvalue
andoutcomes.

151. 5. What is a strategy map and how is it different from a Balanced Scorecard?
Answer:Strategymapisavisualrepresentationoftheorganization’sstrategy.It
identifiesthestrategicobjectivesthatthemanagementteamneedstofocuson,and
thelinkages(cause-effectrelationship)thatexistsbetweenthem.StrategyMapisthe
startingpointfordevelopingtheBalancedScorecard.TheBalancedScorecard
translatestheorganization’sstrategy,asidentifiedinthestrategymap,intoa
comprehensivesetofperformancemeasures,targets,andsetofinitiatives,providing
aframeworkforperformancemanagement.

152. 6. What are the steps in developing a Balanced Scorecard?
Answer:ThestepsintheprocessofdevelopingaBSCareto:
1.Identifythekeyoutcomescriticaltothesuccessoftheorganization.
2.Identifytheprocessesthatleadtotheseoutcomes.
3.Developkeyperformanceindicatorsfortheseprocesses.
4.Developreliabledatacaptureandmeasurementsystems.
5.Developamechanismforreportingthesetotherelevantmanagersandstaff.
6.Enactimprovementprogramstoensurethatperformanceimproves.

153. 7. What are the drawbacks of using a Balanced Scorecard?
Answer:Themaindrawbacksareoutlinedbelow.
TheBSCdoesnotleadtoasingleaggregatesummarycontrol.Thepopularityof
measuressuchasReturnonInvestment(ROI)hasbeenbecausetheyconveniently
summarize‘howthingsaregoing’.
Measuresmaygiveconflictingsignalsandconfusemanagement.Forexample,if
customersatisfactionandfinancialindicatorsarebothfalling,domanagement
sacrificeoneortheother?
Itinvolvessubstantialshiftsincorporateculturetoimplement,suchastheneedto
re-focusonthelongterm.Theorganizationmustalsoberecognizedasasetof
processesratherthanseparatedepartments.
Theapproachisnotaquickfix.Ittakesconsiderablethoughttodevelopan
appropriatescorecard.