INSIGHTS INTO STRATEGY MAPS

Let us summarize the insights that Chipset’s managers gain from using the five tools of structural analysis—strength of ties, orphan objectives, focal points, trigger points, and distinctive objectives. To achieve its financial goals, Chipset needs to delight its customers by improving manufacturing quality and productivity and reducing delivery time to customers, which are the two distinctive objectives that distinguish Chipset from its competitors. The multitude of focal points leading up to these distinctive objectives suggests that it will be difficult for a competitor to successfully compete with Chipset. A number of strong ties lead into improving manufacturing quality and productivity. Chipset’s managers believe that developing employee process skills, enhancing information system capabilities, improving manufacturing controls, and improving manufacturing and business processes will have a strong impact on manufacturing quality and productivity. The links into reducing delivery time to customers are not as strong. Chipset’s managers will have to continue to monitor how well its new order-delivery process is working. On the positive side, it appears that customers care more about quality and cost (strong tie) than they do about delivery time (moderate tie).

Chipset’s managers will use the insights from structural analysis to carefully allocate resources across the different strategic objectives (for example, allocating more resources to improving manufacturing quality and productivity than to reducing delivery time). They do not allocate any resources to orphan objectives and drop follow-up service calls from the strategy map and the balanced scorecard.

Chipset uses the strategy map from Exhibit 13-2 to build the balanced scorecard presented in Exhibit 13-3. The scorecard highlights the four perspectives of performance: financial, customer, internal business process, and learning and growth. The first column presents the strategic objectives from the strategy map in Exhibit 13-2. At the beginning of 2020, the company’s managers specify the strategic objectives, measures, initiatives (the actions necessary to achieve the objectives), and target performance (the first four columns of Exhibit 13-3).

Exhibit 13-3

The Balanced Scorecard for Chipset, Inc., for 2020

Exhibit shows balanced scorecard for Chipset, Inc., for 2020.

Details of Strategic Objectives, Measures, Initiatives, Target Performance, and Actual Performance are as follows:

Financial Perspective: Grow operating income: Operating income from productivity gain: Manage costs and unused capacity:

Target Performance: $1,850,000

Actual Performance: $1,912,500

Financial Perspective: Grow operating income: Operating income from growth: Build strong customer relationships:

Target Performance: $2,500,000

Actual Performance: $2,820,000

Increase shareholder value: Revenue growth:

Target Performance: 9 percent

Actual Performance: 10 percent ((Revenues in 2020 minus Revenues in 2019) divided by Revenues in 2019 equals ($25,300,000 minus $23,000,000) divided by $23,000,000 equals 10 percent.

Customer Perspective:

Increase market share: Market share in communication-networks segment: Identify future needs of customers:

Target Performance: 6 percent

Actual Performance: 7 percent

Increase customer satisfaction: Number of new customers: Identify new target-customer segments:

Target Performance: 1

Actual Performance: 1 (Number of customers increased from seven to eight in 2020)

Increase customer satisfaction: Customer-satisfaction ratings: Increase customer focus of sales organization:

Target Performance: 90 percent of customers give top two ratings

Actual Performance: 87 percent of customers give top two ratings

Internal-Business-Process Perspective

Improve post-sales service: Service response time: Improve customer-service process

Target Performance: Within 4 hours

Actual Performance: Within 3 hours

Improve manufacturing quality and productivity: Yield: Identify root causes of problems and improve quality:

Target Performance: 91 percent

Actual Performance: 92.3 percent

Reduce delivery time to customers: Order-delivery time: Reengineer order-delivery process

Target Performance: 30 days

Actual Performance: 30 days

Meet specified delivery dates: On-time delivery: Reengineer order-delivery process

Target Performance: 97 percent

Actual Performance: 95 percent

Improve manufacturing and business processes: Number of major improvements in manufacturing and business processes: Organize teams from manufacturing and sales to modify processes to specified target levels:

Target Performance: 5

Actual Performance: 5

Improve manufacturing controls: Percentage of processes with advanced controls: Organize R and D or manufacturing teams to implement advanced controls:

Target Performance: 90 percent

Actual Performance: 90 percent

Learning-and-Growth Perspective

Align employee and organization goals: Employee-satisfaction ratings: Employee participation and suggestions program to build teamwork:

Target Performance: 80 percent employees give top two ratings

Actual Performance: 88 percent employees give top two ratings

Empower workforce: Percentage of line workers empowered to manage processes: Have supervisors act as coaches rather than decision makers

Target Performance: 92 percent

Actual Performance: 94 percent

Develop employee process skill: Percentage of employees trained in process and quality management: Employee training programs

Target Performance: 94 percent

Actual Performance: 96 percent

Enhance information system capabilities: Percentage of manufacturing processes with real-time feedback: Improve online and offline data gathering

Target Performance: 93 percent

Actual Performance: 93 percent.

Chipset wants to use the balanced scorecard targets to drive the organization to higher levels of performance. Managers therefore set targets at a level of performance that is achievable yet distinctly better than competitors’. Chipset’s managers complete the fifth column, reporting actual performance at the end of 2020, which allows for a comparison to target performance.

Four Perspectives of the Balanced Scorecard

We next describe the four perspectives and illustrate each one using the measures Chipset’s managers chose to achieve the individual strategic objectives and to implement its overall strategy. When analyzing the scorecard we discuss measures at the bottom of each perspective (the cause) and work our way upward to the top (the effect).

  1. FINANCIAL PERSPECTIVE. This perspective evaluates the profitability of the strategy and the creation of shareholder value. Because Chipset’s key strategic initiatives are cost reduction relative to competitors’ costs and sales growth, the financial perspective focuses on revenue growth and how much operating income results from reducing costs and selling more units of CX1.
  2. CUSTOMER PERSPECTIVE. This perspective identifies targeted customer and market segments and measures the company’s success in these segments. To monitor its customer objectives, Chipset’s managers use (a) market research, such as surveys and interviews, to determine market share in the communication-networks segment, and (b) information about the number of new customers and customer-satisfaction ratings from its customer management systems.
  3. INTERNAL-BUSINESS-PROCESS PERSPECTIVE. This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance. Managers at Chipset determine internal-business-process improvement targets after benchmarking against its main competitors. Benchmarking involves getting information about competitors from published financial statements, prevailing prices, customers, suppliers, former employees, industry experts, and financial analysts. The internal-business-process perspective is composed of three subprocesses:
    • POST-SALES-SERVICE PROCESS: Providing service and support to the customer after the sale of a product or service. Chipset monitors how quickly and accurately it is responding to customer-service requests.
    • OPERATIONS PROCESS: Producing and delivering existing products and services that will meet the needs of customers. Chipset’s strategic objectives are (a) improving manufacturing quality and productivity, (b) reducing delivery time to customers, and (c) meeting specified delivery dates, so it measures yield, order-delivery time, and on-time delivery.
    • INNOVATION PROCESS: Creating products, services, and processes that will meet the needs of customers. This is an important process for companies that follow a ­product-differentiation strategy and must constantly design and develop innovative new products to remain competitive in the marketplace. Chipset’s innovation focuses on improving its manufacturing capability and process controls to lower costs and improve manufacturing quality. Chipset measures innovation by the number of improvements in manufacturing processes and percentage of processes with advanced controls.
  4. LEARNING-AND-GROWTH PERSPECTIVE. This perspective identifies the people and information capabilities necessary for an organization to learn, improve, and grow. These capabilities help achieve superior internal processes that in turn create value for customers and shareholders. Chipset’s learning-and-growth perspective emphasizes three capabilities:
    • Motivation of employees to achieve organizational goals, measured by employee satisfaction, and the level of empowerment, measured by the percentage of manufacturing and sales employees (also called line workers) empowered to manage processes
    • Employee process capabilities, measured by the percentage of employees trained in process and quality management
    • Information-system capabilities, measured by the percentage of manufacturing processes with real-time feedback

The arrows in Exhibit 13-3 indicate the broad cause-and-effect linkages: how gains in the learning-and-growth perspective lead to improvements in internal business processes, which lead to higher customer satisfaction and market share, and finally lead to superior financial performance. The detailed causal linkages within each perspective are described in the strategy map in Exhibit 13-2. Note how the scorecard describes elements of Chipset’s strategy implementation. Worker training and empowerment improve employee satisfaction and lead to manufacturing and business-process improvements that improve quality and reduce delivery time, which, in turn, results in increased customer satisfaction and higher market share. The last column in Exhibit 13-3 indicates that Chipset’s actions have been successful from a financial perspective. Chipset has earned significant operating income from executing its cost-leadership strategy, and that strategy has also led to growth.

To sustain long-run financial performance, a company must strengthen all links across its different balanced scorecard perspectives. For example, Southwest Airlines’ high employee satisfaction levels and low employee turnover (learning-and-growth perspective) lead to greater efficiency and customer-friendly service (internal-business-process perspective) that enhances customer satisfaction (customer perspective) and boosts profits and return on investment (financial perspective).

A major benefit of the balanced scorecard is that it promotes causal thinking as described in the previous paragraph—where improvement in one area causes an improvement in another. Think of the balanced scorecard as a linked scorecard or a causal scorecard. Managers must search for empirical evidence (rather than rely on intuition alone) to test the validity and strength of the various connections. A causal scorecard enables a company to focus on the key drivers that steer the implementation of its strategy. Without convincing links, the scorecard loses much of its value.