Operational Excellence

Lecture – IV (02.03.2024)

Muhammad Hashim Hussain Shah

MSSE, MSPM.
PMP ® (PMI), RMP®, ACP®, SCM®, CPM®, LCM®
 REMEMBER !!!

 The most valuable and least used

WORD in a
Professional's vocabulary is "NO".

 The most valuable and least used

PHRASE in a Professional's vocabulary is
"I don't know".
 Measuring and Assessing
Operational Performance
 Key Performance Indicators (KPIs)
 Measurable metrics used to track and evaluate the effectiveness
of operational processes and activities.
 Benchmarking
 Comparing operational performance against industry standards
or best practices to identify areas for improvement
 Balanced Scorecard
 A strategic management tool that aligns operational activities
with the organization's vision and strategy.

MBAO 6030 Human Resource Management

 BALANCED
SCORECARD
 THE BALANCED SCORECARD

Purpose of Balanced Scorecard:

A method of implementing a business strategy by

translating it into a set of performance measures
derived from strategic goals that allocate rewards to
executives and managers based on their success at
meeting or exceeding the performance measures.
 THE BALANCED SCORECARD
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

1. Focus on traditional financial accounting measures such
as ROA, ROE, EPS gives misleading signals to executives
with regards to quality and innovation. It is important
to look at the means used to achieve outcomes such as
ROA, not just focus on the outcomes themselves.
 THE BALANCED SCORECARD
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

2. Executive performance needs to be judged on success at
meeting a mix of both financial and non-financial
measures to effectively operate a business.
 THE BALANCED SCORECARD
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

3. Some non-financial measures are drivers of financial
outcome measures which give managers more control to
take corrective actions quickly.
(Example: controls in jet cockpit for pilot)
 THE BALANCED SCORECARD
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

4. Too many measures, such as hundreds of possible cost
accounting index measures, can confuse and distract an
executive from focusing on important strategic
priorities. The balanced scorecard disciplines an
executive to focus on several important measures that
drive the strategy.
 THE BALANCED SCORECARD
(Source: Kaplan & Norton, 1996)

Balanced Scorecard Perspectives

1. Financial: How do we look to our Shareholders?

2. Customer: How do our Customers See Us?
3. Internal Business Process: What should we do that is
Excellent?
4. Employee and Organization Innovation and Learning: Can
we continue to Improve and Add Value?
Balanced Scorecard
Chain of Causality of Performance Measures
(Source: Kaplan & Norton, 1996)

Drivers Moderators Outcomes

(leadTimes
Cycle indicators) (lag indicators)
Customer ROA
Satisfaction
EVA
 Customer order
fulfillment EPS
 Product assembly
cycle time
Quality Manufacturing
 Defect rate Unit Costs
 Scrap rate
Balanced Scorecard
Chain of Causality of Performance Measures
(Source: Kaplan & Norton, 1996)

Drivers Moderators
Outcomes
(lead indicators)(lag indicators)
Employee Employee
Growth in
Satisfaction Retention Rate Revenues

Employee Product and

Suggestions Process Innovations
Financial Measures & the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

 Financial measures are outcomes that represent the

executive’s success at achieving strategic performance
goals

 Financial measures are influenced by the Stage of the

Life Cycle which reflects different strategic priorities
Financial Measures & the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Life Cycle Stage

Growth Sustain/Maturity Harvest/Decline

Sales Growth ROCE Cash Flow
Revenue EVA Reduce Unit
Productivity Costs

Generate new Obtain

Earn excellent
accounts & immediate
increase market return on capital payback on
share invested investments from
cash cow
Customer Measures & the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Different Customer Models Relevant Customer Metrics

Business Business Inventory cycle time
Quality defect rate

Business Distributor/Dealer Customer

Distributor satisfaction
Customer satisfaction
Distributor price margin
Customer Measures & the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Different Customer Models Relevant Customer Metrics

Business Customer Customer order fulfillment
cycle time
Customer satisfaction
Customer price margin
Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)
Internal Business Process Measures

 Quality  Order Fulfillment

 Yield  Procurement
 Throughput  Repair service
 Cycle time quality/downtime
  Warranty quality
Cost efficiency
Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)
Model of Internal Business Process Logistics

Customer Innovation Operations Post-Sale Customer

Need Process Process Service Need Satisfied
Identified Process

Identify Create Build Deliver Service

Market Product Product Product to the
Customer

• Development • Quality • Delivery • Service

Relevant Cycle Time Defects Cycle Satisfaction
Metrics: • MCE Time
Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Manufacturing Cycle Effectiveness (MCE)

Processing Time
MCE = Throughput Time

Throughput Time = Processing time + inspection time +

movement time +
waiting/storage time

MCE 0, implies inefficient process

MCE 1, implies less wasted time, greater
efficiency
Employee and Organization Capabilities
for Innovation and Learning Measures
(Kaplan & Norton, 1996)

What are employee and organization capabilities for

innovation and learning measures?
 Represent ways to improve the other 3 scorecard
outcomes or measures.
 They nurture the other 3 areas
Employee and Organization Capabilities
for Innovation and Learning Measures
(Kaplan & Norton, 1996)
Learning Measures
Employee Measures
 Employee skill levels
 Employee satisfaction
 Employee retention (certification rate)
 Employee productivity  # suggestions per employee
 Employee learning curve (time
to reach acceptable level of
output or quality)
Balanced Scorecard: Causal
Relationships
Strategy

Internal Customer Financial

Process T1 T2
T0

Learning
T3
 Balanced Scorecard:
Cascading Goals
Customer # Employee
Satisfaction Suggestions ROCE
Corporate Corporate Corporate

SBU SBU SBU

Retail Store Department

Team
Incentive Compensation for Executives with
the Balanced Scorecard

 Executive Bonus Pool is designed as a percentage of

Base Salary
 The bonus pool represents potential earnings from
the bonus for an executive if all performance
measures are achieved
 Partial success with meeting performance measures
results in the allocation of a bonus representing a
lesser amount of the total potential bonus.
 Example: The bonus pool for a CEO equals 100
percent of salary. Range of bonus equals 0 to 100
percent of salary depending on success of CEO
performance.
 Example: Automobile Company Balanced
Scorecard Reward Matrix for Bonus

CategoryMeasure Weighting
Financial (50%) EVA 25%
Unit Profit 15%
Market Growth 10%
Customer (20%) Customer satisfaction survey 10%
Dealer satisfaction survey 10%
Internal (20%) Above average rank on
Process industry quality survey…… 10%
Decrease in dealer
delivery cycle time……….. 10%
Innovation (10%) Suggestions/employee 5%
and Learning Emp. satisfaction survey 5%
The Balanced Scorecard

Critical Thinking Questions

1. What happens to the balanced scorecard when the
strategy changes? (example: moving from a “growth” to
an “extract profits” strategy)
2. How should resistance by executives or managers to new
measures be handled?
3. What if executives or managers sub-optimize and only
focus on categories in the reward matrix with the
largest payoff – such as EVA and Customer Satisfaction?