chapter 4 power points edited

Chapter 4

Strategy and the Balanced Scorecard

The Balanced Scorecard

What gets measured gets managed

What’s on Your Desk Today?

Urgent operatingproblems

Employee turnover—recruiting

Last year’s initiative

This year’s new initiative

40 e-mailsand 10 voice mails

Financial performancepressure

Traditional Management Tools

Financial Reports:

P/LBalance

SheetROI-ROCE

Operating Statistics

StrategicPlan

The Theory of Management

Financial Results

Operating Statistics

StrategicPlan Operations

ManagementControl

Traditional Management Tools

• Created by different departments

• Reviewed by different managers

• Reviewed in different time frames

• No connection to each other

The Problem • Poor linkage of strategic plan to operations

and expected financial results; strategies are not “actionable”

• Strategies are not linked to departmental, team, and individual goals

• Strategies are not linked to both long-term and short-term resource allocation

• Feedback is tactical, not strategic (e.g., focuses on financial reporting only)

• The result—poor execution and long-term outcomes

Kaplan and Norton

• Study in 1990—“Measuring Performance in Companies”

• Balance– Financial, customer, internal, innovation, and

learning– Short-term and long-term objectives– Financial and nonfinancial measures– Leading and lagging indicators– Internal and external performance

• Aligning measures with strategy• Developing a “theory of the company”

Balanced Scorecard as a Strategic Management System

• Clarify and translate vision and strategy

• Communicate and link strategic objectives and measures

• Plan, set targets, and align strategic initiatives

• Enhance strategic feedback and learning

Balanced Scorecard in Healthcare

• Highly complex environment

• Multi-stakeholder leadership

• Resists change

• Catastrophic failure difficult to anticipate

• Excellent strategic management tool

• Use increasing in many healthcare organizations

Elements of the Balanced Scorecard

• Mission and vision• Perspectives

– Financial– Customer– Internal business process– Learning and growing

• Linking measures to strategy• Structure and strategy• Strategic alignment—top to bottom• Targets, resources, initiatives, and budgets• Feedback and the strategic learning process

Mission and Vision:Some Balanced Scorecard Examples

• Achieve financial strength• Develop reputation/brand• Grow the business• Be able to demonstrate operational excellence• Form strategic alliances, especially with

physicians• Develop IT infrastructure to improve continuity of

care Source: Inamdar and Kaplan, Journal of Healthcare Management, May/June 2002

The Four Perspectives

Financial Strategies

• Grow– Revenue growth

• Sustain– Profitability, ROI, ROCE

• Harvest– Cash flow, working capital

• Risk management– Diversity

Revenue Growth and Mix

• New products (e.g., HP and 3M)

• New applications for existing products

• New customers and markets

• New relationships—partnerships

• New product and service mix

• New prices

Cost Reduction—Productivity

• Increase revenue/employee

• Reduce unit cost

• Improve channel mix—how customers use products or services (e.g., online reservations for air travel)

• Reduce overhead—sales, marketing,general and administrative

Asset UtilizationInvestment Strategy

• Manage working capital– Accounts payable– Inventory– Accounts receivable

• Improve asset allocation– Sharing of IT, specialized equipment,

buildings

Risk ManagementThrough Diversity

• Revenue sources

• Market segments

• Customers

• Products

• Asset allocations

Customers—Market Segmentation

• What is the key value proposition to be delivered to the targeted market segment?

• Healthcare market segment examples:– Patient with chronic illnesses (e.g., diabetes)– Obstetric care– Sports medicine– Cancer– Emergency care

Standard Measures

• Market share

• Customer retention

• Customer acquisition

• Customer satisfaction

• Customer profitability

The Value Proposition

• Product and service attributes– Low price, leading edge, or high performance, etc. – Time: quick, slow

• Customer relationship– Customer intimate (e.g., Nordstrom) or not

(e.g., HP)– Integrated supply chain relationship

• Image and reputation

Hospital Example

• Market segment: pregnant women ages 18–35

• Product attributes– Quick access– Warm, welcoming facilities

• Customer relations– Strong relationships with nurses, midwifes, and

doctors• Image

– High-quality care– Excellent referrals and transport for high risk

Internal Business Process

Create Product/ Service

Identifythe

Market

Build Product/ Service

Deliver

Service

Innovation

OperationsProcess

Post-SaleServices

Innovation

• Identify the market– What benefits will customers value in

tomorrow’s market?– How can we innovate to deliver these

benefits?

• Create the product– Basic research– Applied research– New product to market

Measures forProduct Development

• Percentage of sales from new products• Percentage of sales from proprietary products• New product introductions• Time to develop new products• Time to break even

(development cost = accumulated profit)

Operations Process

• Process optimization in a stable environment

• Statistical process control

• Rapid prototyping

• Six Sigma

• Quality function deployment and Lean

• Real-time simulation and control

Post-Sale Services

• Warranty and repair

• Billing and collection

• Rapid reliable service contracts

• Feedback on product performance to drive improvement

Learn and Grow

Results

StaffCompetencies

EmployeeSatisfaction

EmployeeProductivity

EmployeeRetention

Information Technologyand Data

Climate forActions

Measures ofEmployee Satisfaction

• Involvement with decisions• Recognition for doing a good job• Access to sufficient information to do the job

well• Active encouragement of creativity and

initiative• Support for staff-level functions• Overall satisfaction with the organization

Drivers ofLearning and Growing

• Reskilling– Level and intensity of reskilling– Number of employees involved

• Information systems capabilities• Motivation, empowerment, alignment

– Suggestions and involvement in decisions– Team performance and rewards– Personal alignment and rewards

Linking Balanced ScorecardMeasures to Strategy

• Cause-and-effect relationship

• Outcomes and performance drivers

• Link to financials

Cause-and-Effect Relationships

• A strategy is set of hypotheses about cause and effect (“if, then” statements—e.g., “If the wait time in the emergency department is lowered, then the patient will be more satisfied.”)

• Every measure selected for a Balanced Scorecard should be an element of a chain of cause-and-effect relationships that communicates the organization’s strategy

Outcomes andPerformance Drivers

• Outcome indicators– Lag– Tend to be generic– Examples: profitability, market share, customer

satisfaction• Performance drivers

– Predict the future– Are specific to strategy– Examples: emergency room wait time, remodeling on

time lines• Need equal mix of both types• Suggested maximum is 5 per quadrant or 20

Link to Financials

• Financial goals are topmost in Balanced Scorecard

• Each other strategy eventually needs to link to financial goals

• Causal pathways need to be clear and quantitative, if possible

• Some healthcare organizations make the customer/patient topmost

Strategy Maps and Initiatives• Strategic method of execution • Set of linked initiatives

– Can be small action or major project– “If, then” statements – Links to top quadrant results (finance, customer)

• Initiatives can become formal project• Metrics

– Leading– Lagging– Dates

Finance

Business Processes

Learning and Growth

Customers

General Balanced Scorecard

Provide employees with skills, tools, and motivation

Improve marketing and customer service

Improve operations

Improve financial results

Finance

Business Processes

Learning and Growth

Customers

Emergency Department (ED) Balanced Scorecard

Learn Lean process improvement tools:Goal = complete by December 1

Measure market share:Goal = 5% increase

Measure patient wait time:Goal: <30 minutes

Do project on patient flow—make changes:Goal = value stream increased by 30%

Increase net revenue of ED product line:Goal = 10%

Finance

Business Processes

Learning and Growth

Customers

Obstetric (OB) Service Balanced Scorecard

Customer service training:Goal = complete by July 1

Measure market share:Goal = 5% increase

Measure patient satisfaction (facilities):Goal: >90%

Remodel OB suite: Goal = complete by November 1

Increase net revenue of OB product line:Goal = 10%

Contract for emergency transportation:Goal = complete by November 1

Begin tours and survey:Goal = patient satisfaction >90%

Measure patient satisfaction (perceived clinical quality):Goal: >90%

Measure patient satisfaction (high touch):Goal: >90%

Learning and Growth

Customers

Rotated General Balanced Scorecard

Provide employees with skills, tools, and motivation

Improve availability of financial resources

Improve operations

Improved patient results and satisfaction

Finance

Business Processes

Targets, Resources, Initiatives, and Budgets

• Set stretch targets

• Identify strategic initiatives

• Identify critical cross-organization initiatives

• Link to annual resource allocation and budgets

• Remember to maintain critical monitoring systems for nonstrategic operations

Display Results Graphically

Sample BSC—Financial

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Revenue

Profitability

Sample BSC—Customer

Customer Satisfaction

Sample BSC—Operations

Fast-Track Admitting Percentage

Cost per Unit

Incremental New Admissions

Sample BSC—Learn and Grow

82%84%86%88%90%92%94%96%98%

100%102%

Six Sigma Training Scores

Customer Service Training Scores

Project Selection (Niven)

Criteria Weight Project A Points

Project A Score

Project B Points

Project B Score

Link to strategy 45% 7 3.15 1 0.45

Financial gain 15% 5 0.75 10 1.5

Project cost 10% 5 0.5 10 1.0

Key personnel required

10% 8 0.8 10 1.0

Time to complete 10% 8 0.8 10 1.0

Affects other projects

10% 3 0.3 10 1.0

Total 6.3 5. 95

Feedback and the Strategic Learning Process

Clarifying vision and strategy

Planning andtarget setting

Strategic feedback and learning

Communication andlinking strategy

Cascading ScorecardsLinking Directly or Influencing Higher-Level Scorecards

Increased patient satisfaction

Higher brand recognition

Clean and timely bills

Corporate

Support (IT)

Line Department(OB)

Does the Strategy Work?

• Double loop learning– Can you achieve the initiative’s goals (control

loop)?– If not, what other initiative can achieve the

strategic goals (secondary loop)?– Control loop—weekly; strategic (secondary) loop

—quarterly• Tools

– Statistical tools (e.g., correlation analysis)– Anecdotal reporting– Peer review– Team review and problem solving

Implementation

• Link scorecards at corporate and departmental level

• Use scorecards to communicate strategy implementation

• Link cross-departmentally• Link to budgets• Monitor all operating statistics—may

be basis for new initiatives

End of Chapter 4

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