define trade offs strategy

The approach to seeking growth also varies from entering new markets to new product development and a number of alternative options. The management team wanted a metric that would clearly communicate to all members of the organization the importance of building relationships with and satisfying customers. As a result of that review, forex risques FMC adopted a growth strategy to complement its strong operating performance. These companies lose sight of the essence of the scorecard: its focus, its simplicity, and its vision. Internal Processes: To develop measures of internal processes, Rockwater executives defined the life cycle of a project from launch (when a customer need was recognized) to completion (when the customer need had been satisfied). It also added a safety index as a means of controlling indirect costs associated with accidents. A small steering committee, intimately familiar with the deliberations and strategic thinking of Apples Executive Management Team, chose to concentrate on measurement categories within each of the four perspectives and to select multiple measurements within each category. Companies like Rockwater can follow a systematic development plan to create the balanced scorecard and encourage commitment to the scorecard among senior and mid-level managers. We had become a high return-on-investment company but had less potential for further growth.

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The scorecard can serve to motivate and evaluate performance. He also developed a strategy to implement the vision. The three key questions to ask here:. Implementing the Balanced Scorecard at FMC Corporation: An Interview with Larry. Advanced Micro Devices: Consolidating Strategic Information Advanced Micro Devices (AMD a semiconductor company, executed a quick and easy transition to a balanced scorecard. Moreover, unlike conventional metrics, the information from the four perspectives provides balance between external measures like operating income and internal measures like new product development. Each division had to perform a strategic analysis to identify its sources of competitive advantage. The facilitator may also interview some principal shareholders to learn about their expectations for the business units financial performance, as well as some key customers to learn about their performance expectations for top-ranked suppliers.

define trade offs strategy

The system would have to focus on measures of customer service, market position, and new products that define trade offs strategy could generate long-term value for the business. The majority of Apples business is organized on a functional basissales, product design, and worldwide manufacturing and operationsso shareholder value can be calculated only for the entire company instead of at a decentralized level. To offset this concern, we designed targets around long-term objectives. Focusing on achieving outputs forces division managers to understand their industry and strategy and help them to quantify strategic success through specific output targets. Customer measures focused on those clients most interested in a high value-added relationship. For the financial perspective, Apple emphasized shareholder value; for the customer perspective, market share and customer satisfaction; for the internal process perspective, core competencies; and, finally, for the innovation and improvement perspective, employee attitudes. Most companies have several divisions, each with its own mission and strategy, whose scorecards cannot be aggregated into an overall corporate scorecard. Does it tie in to the balanced scorecard measurements? As a result, the company is currently experimenting with obtaining quantitative measures of these hard-to-measure competencies. What follows is a typical project profile:. The team believed that spending quality time with key customers was a prerequisite for influencing results. Apple Computer: Adjusting Long-Term Performance Apple Computer developed a balanced scorecard to focus senior management on a strategy that would expand discussions beyond gross margin, return on equity, and market share.

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If we succeed with our vision and strategy, how will we look different to our shareholders and customers? Rockwater, for instance, came into existence after the merger of two different organizations. Chambers sees the scorecard as an invaluable tool to help his company ultimately achieve its mission: to be number one in the industry. It recognized that hours spent with key prospects discussing new work was an input or process measure rather than an output measure. During the workshop, the group debates the proposed mission and strategy statements until a consensus is reached. The first objective was measured by percent revenue from new services and the second objective by a continuous improvement index that represented the rate of improvement of several key operational measures, such as safety and rework. Were the division managers able to develop such output-oriented measures? This role does not eliminate the need for strategic planning. Rockwaters senior management team transformed its vision and strategy into the balanced scorecards four sets of performance measures (see the chart Rockwaters Balanced Scorecard Rockwaters Balanced Scorecard Financial Measures: The financial perspective included three measures of importance to the shareholder. The measure is included to offset the previous emphasis on gross margin and sales growth, measures that ignored the investments required today to generate growth for tomorrow.

Little interplay occurred between the two groups. A new strategy will require a runway to unfold and metrics that measure milestones. Different market situations, product strategies, and competitive environments require different scorecards. And in one of our agricultural machinery businesses, orders come within a narrow time window each year. However, senior executives recognized that measuring performance along these competency dimensions could be difficult. The participants, working in groups, comment on the proposed measures, link the various change programs under way to the measures, and start to develop an implementation plan. The company introduced new benchmarks that emphasized the integration of key internal processes. It already define trade offs strategy had a clearly defined mission, strategy statement, and shared understanding among senior executives about its competitive niche. Similarly, Joseph De Feo, chief executive of Service Businesses, one of the three operating divisions of Barclays Bank, had to transform what had been a captive, internal supplier of services into a global competitor. This balanced set of measures both reveals the trade-offs that managers have already made among performance measures and encourages them to achieve their goals in the future without making trade-offs among key success factors. We used the scorecard as the focal point for the discussion.

In this case, the cycle-time improvements could be tied to specific targets for increased sales and market share. Its the operating performance bridge that corporations have never had. The division can shift to a build-to-order schedule and eliminate the excess inventory caused by building to forecasts. But its main impact today is to help sustain programs that our people have been working on for years. What are the key measurements that will tell us whether were addressing those success factors as planned? What is the value added of a corporate office that concentrates on making division managers accountable for financial results that can be added up across divisions?

define trade offs strategy

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About 95 of those companies that have tried benchmarking have spent a lot of money and have gotten very define trade offs strategy little in return. Employees came from different cultures, spoke different languages, and had different operating experiences and backgrounds. A measurement orientation reinforces concerns about control and a short-term focus. AMDs limited success with the balanced scorecard demonstrates that the scorecard has its greatest impact when used to drive a change process. For instance, one manager reported that while his division had measured many operating variables in the past, now, because of the scorecard, it had chosen 12 parameters as the key to its strategy implementation. Shareholders need to be tolerant of this additional risk and understand the payback period that is anticipated. The Idea in Brief, what makes a balanced scorecard special?

Trade-offs can include a shift in R D allocation or divestiture of a non-strategic asset. It should be the core of the management system, not the measurement system. Seven of these strategic variables were entirely new measurements for the division. The new corporate controller could be an outstanding system administrator, knowledgeable about the various trade-offs and balances, and skillful in reporting and presenting them. Strategists came up with five- and ten-year plans, controllers one-year budgets and near-term forecasts. For example, AMDs scorecard has yet to have a significant impact because company management didnt use it to drive the change process. After an incubation period, management decides that these markets are not a good fit and exits. .

They knew that define trade offs strategy the heightened visibility and transparency of the scorecard took away the internal trade-offs they had gained experience in making. A price index, incorporating the best available intelligence on competitive position, was included to ensure that Rockwater could still retain Tier II customers business when required by competitive conditions. And managers of decentralized production units also already had a significant amount of information about their own operations. Its a lot easier to benchmark a process than to benchmark an output. I think that its important for companies not to approach the scorecard as the latest fad. We want to stimulate a thought process about how to do things differently to achieve the target rather than how to do existing things better. One solution a company can use to achieve growth is to sharpen its focus. The marketing and sales teams send requests for R D to develop innovative products based on insights they have learned. The activity of searching externally for how others have accomplished these breakthrough achievements is called target verification not benchmarking. How often do you envision reviewing a divisions balanced scorecard? The scorecard did enable them to see the breadth and totality of company operations, enhancing their ability to become better managers for the entire company.

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By the Same Authors The companys strategy, however, was to emphasize value-based business. However, because it recognized that its customer base was not homogeneous, Apple felt that it had to go beyond.D. And if the scorecard does indeed provide a transparent vision into a units strategy, then the information, even the measures being used, might be highly sensitive data that could reveal much of value to competitors. In addition, we had to be able to assess, through measurement of their operations, whether or not the divisions were meeting their strategic objectives. The balanced scorecard consolidated and focused these diverse measures into a quarterly briefing book that contained seven sections: financial measures; customer-based measures, such as on-time delivery, lead time, and performance-to-schedule; measures of critical business processes in wafer fabrication, assembly and test. In this interview conducted by Robert.

The balanced scorecard can serve as the focal point for the organizations efforts, defining and communicating priorities to managers, employees, investors, even customers. How do we become more externally focused? By contrast, the measures most companies track are bottom-up: deriving from local activities or ad hoc processes, they are often irrelevant to the overall strategy. Norman Chambers, hired as CEO in late 1989, knew that the industrys competitive world had changed dramatically. De Feo assessed the impact of the scorecard, saying, It helped us to drive major change, to become more market oriented, throughout our organization. At year-end, we rewarded division managers who delivered predictable financial performance. To put it another way, Apple uses the measures to adjust the long wave of corporate performance, not to drive operating changes.

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It also had many performance measures from many different sources and information systems. For example, executives may introduce new strategies and innovative operating processes intended to define trade offs strategy achieve breakthrough performance, then continue to use the same short-term financial indicators they have used for decades, measures like return-on-investment, sales growth, and operating income. In contrast, the shareholder value metric quantifies the impact of proposed investments for business creation and development. Power Associates, a customer-survey company, now works for the computer industry. Implementation A newly formed team develops an implementation plan for the scorecard, including linking the measures to databases and information systems, communicating the balanced scorecard throughout the organization, and encouraging and facilitating the development of second-level metrics for decentralized units. Corporate staff groups were perceived by operating managers as pushing their pet programs on divisions. Evaluate reinvestment options to ensure the proceeds can achieve an adequate rate of return: This is especially important if one of the trade-offs involves divestiture.

Perhaps the corporate controller should take responsibility for all measurement and goal setting, including the systems required to implement these processes. How did the balanced scorecard emerge as the remedy to the limitations of measuring only short-term financial results? In this case, the benefit from cycle-time reductions is a step-function that comes only when the cycle time drops below a critical level. But the problem went even deeper than that. We decided to try a pilot program. Each organization is unique and so follows its own path for building a balanced scorecard. This article also appears define trade offs strategy in: It gets worse if you think of the scorecard as a new measurement system that eventually requires hundreds and thousands of measurements and a big, expensive executive information system. My conversations with financial people in organizations reveal some concern about the expanded responsibilities implied by developing and maintaining a balanced scorecard. You hear about a good idea, several people on corporate staff work on it, probably with some expensive outside consultants, and you put in a system thats a bit different from what existed before. Rockwater management added two financial measures.

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In an effort to increase the growth rate, management decides to commercialize new markets. I think we will ask group managers to review a monthly submission from each of their divisions, but the senior corporate team will probably review scorecards quarterly on a rotating basis so that we can review up to seven or eight division scorecards each month. Rockwaters Strategic Objectives Rockwaters strategic objectives had to be translated into tangible goals and actions. In the words of FMC Corp. Rockwater executives felt that implementing these ratings gave them a direct tie to their customers and a level of market feedback unsurpassed in most industries. The Idea in Practice, linking measurements to strategy is the heart of a successful scorecard development process. Define and communicate the growth strategy: A well-constructed growth strategy enables management to pick optimal funding opportunities. Every time we promoted a new program, people in each division would sit back and ask, How is that supposed to fit in with the six other things were supposed to be doing? Much more than a measurement exercise, the balanced scorecard is a management system that can motivate breakthrough improvements in such critical areas as product, process, customer, and market development. A new measurement system was needed to lead operating managers beyond achieving internal goals to searching for competitive breakthroughs in the global marketplace. The balanced scorecard, first proposed in the January-February 1992 issue of HBR (The Balanced ScorecardMeasures that Drive Performance provides executives with a comprehensive framework that translates a companys strategic objectives into a coherent set of performance measures. Several leading oil companies wanted to develop long-term partnerships with their suppliers rather than choose suppliers based on low-price competition. It wasnt linear, but output seemed to improve each time we improved throughput times.

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Isnt it inconsistent to assess a divisions strategy on a monthly or quarterly basis? However, the investment community has begun to focus on some key metrics of new product performance. What kinds of measures were you using? Today they are used to build business plans and are incorporated into senior executives compensation plans. We have pushed division managers to choose measures that will require them to create change, for example, penetration of key markets in which define trade offs strategy we are not currently represented. If youre going to ask a division or the corporation to change its strategy, you had better change the system of measurement. Identify trade-offs: With limited resources decisions need to be made around finding funding to invest in strategic opportunities. So here we have three businesses, three different processes, all of which could have elaborate systems for measuring quality, cost, and time but would feel the impact of improvements in radically different ways. Rockwaters executives wanted a metric that would communicate the importance of building relationships with customers. Yet we ask that question every day about our line operations. The balanced scorecard is not a template that can be applied to businesses in general or even industry-wide.

Executive Workshop: First Round, the top management team is brought together with the facilitator to undergo the process of developing the scorecard (see the chart Begin by Linking Measurements to Strategy). It complements traditional financial indicators with measures of performance for customers, internal processes, and innovation and improvement activities. It was also not at all clear from our financial reports what progress we were making in implementing long-term initiatives. We were one of the few companies to inflation-adjust our internal financial measures so that we could get a more accurate picture of a divisions economic profitability. The diversity of initiatives, each with its own slogan, created confusion and mixed signals. To help make the shift, the company decided to use the balanced scorecard. At this time, narrowing the choices is not critical, though straw votes can be taken to see whether or not some of the proposed measures are viewed as low priority by the group. How does the role of the controller change as a company shifts its primary measurement system from a purely financial one to the balanced scorecard?

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Senior managers alone will determine whether the scorecard becomes a mere record-keeping exercise or the lever to streamline and focus strategy that can lead to breakthrough performance. Many of the improvement programs under way were emphasizing time, quality, and cost measurements. Customer satisfaction metrics are just being introduced to orient employees toward becoming a customer-driven company. As the queue builds, innovative products roll out at a slower pace and the company risks losing its competitive advantage. Example: Rockwater, an underwater engineering and construction firm, crafted a five-pronged strategy: to provide services that surpassed customers expectations and needs; to achieve high levels of customer satisfaction; to make continuous improvements in safety, equipment reliability, responsiveness, and cost effectiveness;. First of all, we wanted the measures to be objective and quantifiable. Thought of horizontally, the measures can identify how, for example, design and manufacturing contribute to an area such as customer satisfaction. And I think thats an important distinction. But the initial problem was that the management teams ran afoul of both conditions: the measures they proposed tended define trade offs strategy to be nonquantifiable and input- rather than output-oriented.

What led you and them to the balanced scorecard? We still closely examine the monthly and quarterly statistics, but these statistics now relate to progress in achieving long-term objectives and justify the proper balance between short-term and long-term performance. While these five performance indicators have only recently been developed, they have helped Apples senior managers focus their strategy in a number of ways. The summary and aggregate information in the scorecard were neither new nor surprising to them. We had to be sure that each division had a strategy that would give it sustainable competitive advantage. Driving the Process of Change The experiences of these companies and others reveal that the balanced scorecard is most successful when it is used to drive the process of change. But if the build cycle time could be reduced to less than the six-week ordering time window for part or all of the build schedule, then a breakthrough occurs. With the help of the scorecard, the division eventually achieved consensus concerning the highest priority areas for achievement and improvement and identified additional areas that needed attention, such as quality and productivity. Based in Chicago, FMC has worldwide revenues in excess of 4 billion. Enterprise node visualizations, visualize how your portfolios are connected integrating strategy, capability, applications, programs, and projects. How did you launch the scorecard effort at FMC?