Creating a Balanced Scorecard - (e Chapter 2)

Sound strategy helps to create a position of sustainable competitive advantage in the market place – which should result in superior performance.

1. What are the 3 aspects of performance which are important to consider – from a strategic point of view.
ð Note: Strategy should be assessed by a balance of both customary financial and emerging nonfinancial measures.
ð Economic Profit: the residual income above and beyond normal profit that accrues to owners, deriving from eh prowess of management in planning, supervision and control.
ð Residual income associated with economic profit occurs when a company’s return on equity (ROE) is greater than its cost of equity capital.
ð Normal Profit: may be viewed as the minimum return earned by a company that is necessary y to attract and secure the owners inputs.

2. ROE [Profitability, asset productivity & financial leverage].
3. Why is revenue growth such an important financial indicator for CEOs & Strategists?
4.
ð Revenue growth often occurs at the expense of growth in profitability, since the factors that generally drive up sales (marketing, advertising, investment in product development and sales forces), often add expenses which diminish the bottom line.
ð Common Stock Returns: take into account both the dividends paid by a company to its shareholders as well as increases in prices of shares
ð Market Capitalization: defined as the market value of outstanding shares of stock – also depends on stock price and characterizes the total value of the company.
ð Quantitative & Qualitative Performance – is the key outcome of interest for those studying strategy and managing strategy.
What are the 3 key dimensions of performance which we can use to develop balanced scorecards?
1. Summary measures that reflect the impact of integrated efforts across the entire company
2. Measures that can be compare to competitors
3. Measures that account for longer periods of time.
The current school of thought indicates that companies would be best served by focusing not just on the returns to shareholders but also by paying attention to the needs and requirements of important stakeholders as well. This approach can help create profitable new growth opportunities and strengthen existing franchises.

Are you sure you have a strategy? (Hambrick & Fredrickson)

Framework for Strategy Design – based on 5 elements
[Arenas, vehicles, differentiators, staging & economic logic]

1. What actually constitutes strategy?
2. What are the 5 key elements of strategy?
Arenas: Be specific about where you will be active, what areas/categories you will emphasize. Strategy may be centered on one product or one category or one customer segment
[Product Categories, market segments, geographic regions, core technologies, value creation stages?? Key product or complementary one?

Vehicles: how do you intend to attain a significant business presence in your chosen Arena?
(Joint Ventures, strategic alliances, acquisitions, R&D, Product Development, Marketing, Globalization)?

Differentiators: Image, customization, price, styling, quality, reliability? What is the value proposition?

“Arena’s, Differentiators & Vehicles – constitute the “substance of strategy”.


Staging: Set priorities – what do we do first? What’s the plan of a record? What is the sequence by which we entire a specific arena? How quickly do we move? What’s our time horizon?
[Key influencing factors include: Funding, Urgency – i.e. first mover advantage? achievement of credibility]. Sometimes the pursuit of early wins is also important because it can help build momentum.

Economic Value: How will profits be generated? What’s our biz model and how does it tie in to the other 4 elements? What’s our pricing strategy?
o Economic logic analytics, results in a determination of how profit will be generated. That could happen on the front end, through aggressive pricing, or on the back end by effectively monitoring costs

Note: Strategy is not primarily about planning- it’s about intentional, informed, and integrated choices. The strategy diamond featuring the 5 strategic elements is a basis for creating a well thought out intentional, informed and plan.

Understanding Industry Culture (Michael Porter)

1. What is the essence of the job of a strategist?
2. What are the 5 basic competitive forces of an industry?
 Threat of new entrants
 Bargaining Power of Customers
 Bargaining Power of Suppliers
 Threat of substitutes
 Competition from other players / competitors

3. What are the barriers to entry?
[Supply side economies of scale, Demand side benefits of scale, customer switching costs, capital requirements, restrictive govt policy, unequal access to distribution channels]

4. Power of suppliers:
{Bargaining power prices, shifting costs downstream, limiting quality of goods/services, supplier offers differentiated products, and buyer is dependent on supplier

5. Power of Customers : (corporate customers and consumers)

6. Threat of substitutes: A substitute performs the same or similar functions as an industry’s product =- but by a different means. [Substitutes limit profits and constrain the size of an industry. Some are subject to trends improving price/performance. Substitutes drive fierce competition.

7.
8. Rivalry from competitors: [Price discounting, new product introductions, advertising campaigns, service escalation – different value proposition}
 Intensity of competitive rivalry can undermine an industry’s profit potential. The degree to which this can happen depends first on the bases on which the companies compete and on the intensity with which they do so.
Price is typically the most destructive basis of competition for industry profitability. Price reduction transfers profits from an industry to customer savings in the hands of customers. Price wars are common in cases where there’s not much differentiation, switching costs are similar for all competitors, buyers can shift to different vendors or products, fixed costs are high and marginal cost are low.
Intensity of competition is great where there are numerous competitors, industry growth is slow, exit barriers are high, and rivals are committed to the business
9. What are complements and how do they affect industries?
Note: Effective strategist look for opportunities to alter conditions in complementary industries in their favor, by boosting demand, improving overall structure or advancing a firms standing within its industries.
10. What are the implications of Industry Structure – for strategists
 Industry structure provides a baseline for sizing up a company’s strengths and weaknesses. It guides managers toward possibilities for strategic action – including1. Positioning the company vis-à-vis the current competitive forces, 2, anticipating shifts in the forces and exploiting them, 3., shaping the balance of forces to create a new, more favorable structure or on that favors the company
Industry structure thinking reveals differences in customers, suppliers, substitutes, potential entrants and rivals that demark distinct competitive arenas in which distinct strategies are needed. It’s important to thing structurally about competition.

RIM Case Study

I.How important is it for RIM to grow its pool of software developers?
It’s very important that RIM grow it’s pool of software developers for a number of reasons:

With ’07 revenues up 98% YoY, the current team of 1.400 software engineers are less than 50% of the figure required to drive engineering innovations and technological advances – required to maintain current growth rates and profit margins

Similar to its competitors – RIM’s policy is to maintain its R&D spending as a consistent percentage of total sales. Investment analysts often looked to this number to gauge the sustainability of revenue growth

R&D expenses are often seen as a proxy for new product or service development and therefore used as a key indicator of future revenue potential

II.What are the different options for substantially increasing the number of software developers?

RIM faces 3 key options – in its quest to increase the number of software developers which it can hire

Change or Optimize Hiring Practices
Recruit aggressively from Waterloo and other nation –wide campuses, in Canada. (by expanding its co-op programs to more universities and creating incentives for more students to join the co-op program

Form a global scouting group – dedicated to finding the best talent worldwide and bringing them into RIM (value proposition would be RIM’s org culture, which is very favorable to engineers – and the allure of Waterloo / Canada

RIM can vastly Improve its hiring processes by better managing the qualified pool of candidates who apply for engineering jobs, every year. RIM can utilize online job sites, exec search firms which specialize in technology jobs and even revamp its own career website in order to make its overall hiring experience, more efficient

Grow & Expand Existing Geographies
RIM can expand its existing Product & Tech Devpt facilities, across Canada and the U.S – and actively recruit engineers for those locations.

Increase Acquisitions
Bring has already had some success by bringing in new people through acquisitions. In order to maintain its current rate of innovation and support revenue growth, RIM may need to consider some strategic acquisitions – in geographic locations which attract strong engineering talent. European technology companies offer good opportunities – many eastern European nations have a lot of engineers and these markets are often hard to penetrate because of the nationalistic tendencies of European consumers

Go Global? Not possible – RIM’s technology is too valuable and it may be at risk, if RIM were to allow engineers across south east Asia, to have access to it. RIM could outsource some project mgt and process driven work to Asian subs – but that may not help with the engineering (R&D) problem.

III.
Which option(s) should RIM pursue? Why?

RIM should pursue the following options

1.Change or Optimize Hiring Practices: Clearly there is an opportunity to improve efficiency in the hiring process and capture more talented technologists. This opportunity exists today and does not require significant investment – just some progressive thinking and better organizational structure
Recruit aggressively from Waterloo and other nation –wide campuses, in Canada. (by expanding its co-op programs to more universities and creating incentives for more students to join the co-op program. Expand this initiative to include aggressive recruitment of engineering students at the undergrad and postgraduate level, from U.S & European Universities.

Form a global scouting group – dedicated to finding the best talent worldwide and bringing them into RIM (value proposition would be RIM’s org culture, which is very favorable to engineers – and the allure of Waterloo / Canada ( RIM should Start developing relationships with the top 20 technology universities in Europe, N/America, Asia and Africa)

RIM can vastly Improve its hiring processes by better managing the qualified pool of candidates who apply for engineering jobs, every year. RIM can utilize online job sites, exec search firms which specialize in technology jobs and even revamp its own career website in order to make its overall hiring experience, more efficient

2.Grow & Expand Existing Geographies – (Increase Acquisitions & technology develop partnerships): Strategic acquisitions help RIM solve two key issues – the company can gain almost instant access to new engineering talent – and if the purchase is a strategic one – they can mine the geographic regions where the companies are located, for more talent). RIM can expand its existing Product & Tech Devpt facilities, across Canada and the U.S – and actively recruit engineers for those locations.

Bring has already had some success by bringing in new people through acquisitions. In order to maintain its current rate of innovation and support revenue growth, RIM may need to consider some strategic acquisitions – in geographic locations which attract strong engineering talent. European technology companies offer good opportunities – many eastern European nations have a lot of engineers and these markets are often hard to penetrate because of the nationalistic tendencies of European consumers
IV.
How would you recommend Yach begin to implement the option you recommended? (Be as detailed and specific as possible.)

The Challenge: Yach needs to expand the base of engineers at RIM who would be focused on research, product development of hardware and software applications for the future. Given RIM’s 98% increase in revenue and positive forecast.

First: Yach needs to review his current plans and commitments for R&D and Product Development and determine his priorities for the next 2 years – he must do so, taking in to account RIMs 1st quarter revenue projections of $2.2B and the fact that another $2.2B in revenue from new subscribers, is expected in the next fiscal year.

Next, Yach must immediately determine the level of resources required to maintain the existing RIM infrastructure (hardware - handsets, software and services). Next – he must determine his big bets for the next 2 years and boldly outline the amount of resources he would need in order to accomplish his goals. (1000 new engineers, 2,500, 3,000? (How many of these engineers could be new graduates vs. leaders/experienced technologists who would be thought leaders in the RIM organization

Once Yach has determined the number of engineers required and the mix of youth vs. experience – he can share that vision with Mike and the senior leadership team. Yach should recommend that the company undergo a two tier approach in order to recruit the necessary talent.

Putting Leadership Back Into Strategy

Strategy has been narrowed to a competitive game plan, divorcing it from a firms larger sense of purpose. Sustainable competitive advantage is important, but it’s not (in of itself), a Strategy. Strategy is not just a plan, it’s a way of life for a company. It doesn’t just position a firm in its external landscape, it defines what a firm will bee – what it can be. It’s the CEO’s job to set the strategy, outwit the competition. It’s also his or her greatest opportunity to shape the firm’s future. In order to claim value – firms must first create value “Brandenburger & Nalebuff”. This requires bring something new to the Arena – some new value proposition, some new product or a new way of delivering a service! Bring something customers want that is different from or better than what others are providing. Value Related Questions 1. If your company were shuttered, to whom would it matter and why? 2. Which of your customers would miss you the most, and why? 3. How long would it take for another firm to step into that void? What’s truly distinctive about your value proposition? Purpose should be at the heart of strategy – it should give direction to every part of the firm – from the cooperate office to the loading dock. It should define the nature of the work what must be done. “A business has to have a clear purpose. If the purpose is not crystal clear, people in business will not understand what kind of knowledge is critical and what they have to learn in order to improve performance. A company’s suppose is what makes it distinctive. It what we as a company exist to achieve and what we’re willing and not willing to do to achieve it “ John Browne – former CEO of British Petroleum An organic conception of strategy recognizes that whatever consitutesstrategic advantage will eventually change. Leaders need to recognize the difference between defending a firms added valjue as established at aany given moment and ensuring that a fir is adding value over time. “the need to create and re-create reaons for a company’s continued existience sets the strategies apart from every other individual in the company”

The Balanced Scorecard - Measures That Drive Performance

What you measure is what you get!

Financial Accounting measures such as ROE, ROA and earnings per share - don't provide sufficient insight on how a company is doing with regard to customer satisfaction, innovation or continuous improvement in specific qualitative measures.

Some choose to focus primarily on quantitative metrics, such as financial accounting measures. Others, have said - forget financial measures and improve operational measures such as cycle time and defect rates, financial results will follow.

However - mangers should not have to choose between financial and operational measure - that's the whole concept of creating and maintain a balanced scorecard. The key goal being to help managers focus on a handful of critical measures.

The Balanced Scorecard complements well defined financial measures with operational measures on customer satisfaction, internal processes, organizational culture & innovation.

The balanced scorecard enables manages to look at the business from 4 impt perspectives
[Financial Perspective, Internal Business Perspective, Innovation & Learning Perspective & Customer Perspective]. We use these perspectives to answer 4 key questions about the organization.

1. How do customers see us ? - that's the customer perspective
2. What must we excel at? - Internal business perspective
3. Can we continue to improve and create value? - Innovation and learning perspective
4. How do we look to shareholders? - that's the financial perspective

The balanced scorecard helps managers consider al that important operational measures - together. This is important because even the best objective can be achieved badly. Most companies have mission statements which focus on serving customers/consumers - so the scorecard must reflect that commitment. What are the specific measures which matter to customers and how do we track them through a scorecard.

Customer Concerns: [Time, Quality, Cost (price), Performance and service]
Companies much article goals for the key customer concerns which may impact their businesses and then translate these goals into specific measures.

Some customers hire 3rd party organizations to provide customer evaluations or administer customer service surveys. Benchmarking procedures are yet another technique which companies use to compare their performance against competitors best practices.

To achieve key customer related goals, managers must devise measures which are actionable for their reports, but yet impact the critical measures on the balanced scorecard.

One concern could be that the scorecard information in the balanced scorecard is not timely, reports have to be submitted in time so that managers can analyze insights and come up with recommendations to improve overall performance.

Customer based and internal business measures on the balanced scorecard identify the parameters that the company considers most important of competitive success.

That said, targets keep changing at the external climate becomes more and more competitive. A company's ability to effectively service it's customers , innovate and improve - is key to creating sustainable value for its products, services, and improve operational efficiencies. The targets will help drive continuous improvements in csat and internal biz processes.

Financial Measures have often been criticized because they tend to be backward looking focus - and their inability to reflect contemporary - value creating actions. It's been said that operational efficiencies are much more important indications of success - thank Financial Measures. "one school of thought indicates that making fundamental improvements in operations will result in stronger financials. However, the alleged linkage between improved operating performance and financial success is actually quite tenuous & uncertain.

Operational efficiencies can certainly improve overall quality, but that doesn't necessarily translate to profits. Companies have to put a plan in place to capitalize on improvements in operational achievements. Quality and cycle time improvements can create excess capacity -and companies have to be prepared to either put the excess capacity to work or get rid of it all together. the excess capacity should be used to help boost revenues or eliminating expenses.

Increased efficiencies may result in layoffs or creating new jobs for skilled, flexible employees.

A balanced scorecard will help remind mgrs and executives that quality improvements in cost, performance of services, response times and overall productivity, only benefit the company went they're translated into improved sales and market share, reduced operating expenses or higher asset turnover. The scorecard will establish goals based on vision and strategy for the organization.

By combining the financial, customer, internal process and innovation as well as organizational learning perspectives - balanced scorecards help managers understand inter-relationships between key measures. This leads to improved decision making and problem solving - and helps companies keep looking forward, not backward.

Are You Sure You Have A Strategy?

Strategos: "the art of the general"
You need a strategy: an integrated overarching concept of how the business will achieve its objectives. If a business much have a single, unified strategy, then it must necessarily have parts.

What constitutes a Strategy? A strategy consist of an integrated set of choices - but it's not a catchall for every impt choice an executive faces.

Elements of Strategy: Arena's, Vehicles, Economic Logic, Staging & Differentiators.

Arena's: Where will we be active? What business will we be in? one needs to be very specific about product areas, customer/market segments, geographic areas and core technologies. Products or Services should be targeted to the specific parameters outlined in the chosen Arena
If the plan is to focus on multiple market or customer segments or different geographic areas, product categories e.t.c, the strategy must be outline the level of emphasis which will be placed on each segment.

Vehicles: Once we've outlined the Arena's we must decide how we get to them. How do we get there? What steps do we need to take in order to be competitive in our chosen Arena's. Joint Ventures, Acquisitions, Strategic Alliances or other initiatives? What vehicles will we use to grow/expand and drive towards our goals? how much do we know about each vehicle - or the parameters of the vehicle?

Differentiators: How do we expect to win, in the market place? Our strategy must highlight how we intend to effectively compete in our chosen arena's. What resources do we have available? Any proprietary technology which gives us a competitive advantage? what's our strategic positioning plan? How do we differentiate ourselves from competition? (Brand, Price Points, Customer Services, Quality of product - e.t.c). We must choose / decide how we intend to differentiate and then devise a plan of action to actively differentiate ourselves in our chose arenas.

Staging: We can't do everything at once, or at the same pace? Some initiatives must come first, followed by others. We must lay a strong foundation on which to build modules for the future. If we're looking at a broad arena, which segment do we target first and why? Do we have specific vehicles which compliment certain arena's better than others? If so, we should take that into consideration when planning/staging our strategic initiatives.

Decision about staging are driven by a number of factors - including availability of resources, (human and capital), Urgency is also a factor - perhaps we may have a strategic advantage in one arena, which is time sensitive. Credibility is also a key factor - does our reputation and experience provide certain advantages for us in specific segments or with the use of certain vehicles?

We need to keep things simple - it's often smarter to get some quick early wins and build momentum, rather than try to do too much at once.

Economic Logic: count your costs and model out your revenue / profit potential. Why do certain Arena's seem more attractive than others? What's the benefit of using certain vehicles to reach clearly defined Arena's? Are your Arena's sustainable? Will customers continue to pay high prices for your products/services, or will pricing pressures eat into your bottom line? What's the economic value of your offering, what's your value proposition? Does your "value" allow you to charge premium prices for your products? Is your economic logic rooted in your companies enduring capabilities? Can then enable you to deliver strong revenue and profit growth over an extended period of time? These are the key questions which one needs to address when reviewing this element of a strategic plan.


These 5 Strategic Elements are each critically important. They are important enough to warrant specific, intentional planning. It's clear that we cannot think about any one element in isolation - for each impacts the others and therefore each must be consistent with the others. Each element must support and align with the others.

These 5 elements form the foundational framework on which companies can build org structure, foundational policies, operations programs/processes and other important elements of building an organization.

Key Questions Which Test The Quality of Your Strategy
1. Does your strategy fit with what's going on in the environment?
2. Does your strategy exploit your key resources?
3. Will your envisioned differentiators be sustainable?
4. Are the elements of your strategy internally consistent?
5. Do you have enough resources to pursue this strategy?
6. Is your strategy implementable?

A good strategy is not static - it should be flexible, it should evolve, as your business evolves in response to changing market dynamics, new arena's or new competitive advantages - all of which present interesting opportunities or challenges.

Having a strong strategic framework doesn't mean one maintains a specific approach, one can have multiple options. Ideally, a strategy should have a specific time-span - based on a set of intentional, informed choices.