Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins—in short, grow and thereby increase shareholder value. Its manufacturing improvement measure focuses on new products; the goal is to achieve stability in the manufacturing of new products rather than to improve manufacturing of existing products.
Like many other companies, ECI uses the percent of sales from new products as one of its innovation and improvement measures. If sales from new products are trending downward, managers can explore whether problems have arisen in new product design or new product introduction. In addition to measures on product and process innovation, some companies overlay specific improvement goals for their existing processes. For example, Analog Devices, a Massachusetts-based manufacturer of specialized semiconductors, expects managers to improve their customer and internal business process performance continuously.
The company estimates specific rates of improvement for on-time delivery, cycle time, defect rate, and yield. These targets emphasize the role for continuous improvement in customer satisfaction and internal business processes. Typical financial goals have to do with profitability, growth, and shareholder value.
Answer the Tough Questions
ECI stated its financial goals simply: to survive, to succeed, and to prosper. Survival was measured by cash flow, success by quarterly sales growth and operating income by division, and prosperity by increased market share by segment and return on equity.
Should they pay attention to short-term financial measures like quarterly sales and operating income? Many have criticized financial measures because of their well-documented inadequacies, their backward-looking focus, and their inability to reflect contemporary value-creating actions. Shareholder value analysis SVA , which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more forward looking.
But SVA still is based on cash flow rather than on the activities and processes that drive cash flow. Some critics go much further in their indictment of financial measures. They argue that the terms of competition have changed and that traditional financial measures do not improve customer satisfaction, quality, cycle time, and employee motivation. In their view, financial performance is the result of operational actions, and financial success should be the logical consequence of doing the fundamentals well.
In other words, companies should stop navigating by financial measures. By making fundamental improvements in their operations, the financial numbers will take care of themselves, the argument goes. Assertions that financial measures are unnecessary are incorrect for at least two reasons.
Set Your Sales Targets
Let us demonstrate rather than argue this point. In the s, a chemicals company became committed to a total quality management program and began to make extensive measurements of employee participation, statistical process control, and key quality indicators. Using computerized controls and remote data entry systems, the plant monitored more than 30, observations of its production processes every four hours. The department managers and operating personnel who now had access to massive amounts of real-time operational data found their monthly financial reports to be irrelevant.
But one enterprising department manager saw things differently.
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He created a daily income statement. Each day, he estimated the value of the output from the production process using estimated market prices and subtracted the expenses of raw materials, energy, and capital consumed in the production process. The daily financial report gave operators powerful feedback and motivation and guided their quality and productivity efforts. The department head understood that it is not always possible to improve quality, reduce energy consumption, and increase throughput simultaneously; tradeoffs are usually necessary.
He wanted the daily financial statement to guide those tradeoffs. The operators were empowered to make decisions that might improve quality, increase productivity, and reduce consumption of energy and materials. That feedback and empowerment had visible results.
When, for example, a hydrogen compressor failed, a supervisor on the midnight shift ordered an emergency repair crew into action. Previously, such a failure of a noncritical component would have been reported in the shift log, where the department manager arriving for work the following morning would have to discover it.
The midnight shift supervisor knew the cost of losing the hydrogen gas and made the decision that the cost of expediting the repairs would be repaid several times over by the output produced by having the compressor back on line before morning. The department proceeded to set quality and output records.
Over time, the department manager became concerned that employees would lose interest in continually improving operations. The operators continued to improve the production process. With this innovation, it was easy to see where process improvements and capital investments could generate the highest returns.
Over the three-year period between and , a NYSE electronics company made an order-of-magnitude improvement in quality and on-time delivery performance. Did these breakthrough improvements in quality, productivity, and customer service provide substantial benefits to the company? Unfortunately not.
The Four Perspectives in a Balanced Scorecard
The considerable improvements in manufacturing capabilities had not been translated into increased profitability. Slow releases of new products and a failure to expand marketing to new and perhaps more demanding customers prevented the company from realizing the benefits of its manufacturing achievements.
The operational achievements were real, but the company had failed to capitalize on them. The disparity between improved operational performance and disappointing financial measures creates frustration for senior executives. This frustration is often vented at nameless Wall Street analysts who allegedly cannot see past quarterly blips in financial performance to the underlying long-term values these executives sincerely believe they are creating in their organizations.
But the hard truth is that if improved performance fails to be reflected in the bottom line, executives should reexamine the basic assumptions of their strategy and mission. Not all long-term strategies are profitable strategies. But that view is not necessarily correct. Even an excellent set of balanced scorecard measures does not guarantee a winning strategy. Quality and cycle-time improvements can create excess capacity. Managers should be prepared to either put the excess capacity to work or else get rid of it. The excess capacity must be either used by boosting revenues or eliminated by reducing expenses if operational improvements are to be brought down to the bottom line.
As companies improve their quality and response time, they eliminate the need to build, inspect, and rework out-of-conformance products or to reschedule and expedite delayed orders. Eliminating these tasks means that some of the people who perform them are no longer needed. Companies are understandably reluctant to lay off employees, especially since the employees may have been the source of the ideas that produced the higher quality and reduced cycle time.
Layoffs are a poor reward for past improvement and can damage the morale of remaining workers, curtailing further improvement. But companies will not realize all the financial benefits of their improvements until their employees and facilities are working to capacity—or the companies confront the pain of downsizing to eliminate the expenses of the newly created excess capacity.https://orabfivi.tk
The balanced scorecard: a new challenge | Emerald Insight
Once you've built your balanced scorecard, QuickScore will automatically generate your strategy map. You can even tweak its appearance by moving and resizing colored bubbles. Now you can see how well everything is performing at a glance. The Balanced Scorecard is a management system. It also helps you choose the right things to measure so that you can reach those goals. A strategy map is a diagram that shows your organization's strategy on a single page. The fastest way to bring your Balanced Scorecard to life.
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