Balance Scorecard and Porter's Five Forces

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Balance Scorecard Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not only financial measures, but also customer, business process, and learning measures. A set of measures that gives top managers a fast but comprehensive view of business 1

Transcript of Balance Scorecard and Porter's Five Forces

Balance Scorecard

• Robert Kaplan and David Norton developed

the Balanced Scorecard, a performance

measurement system that considers not only

financial measures, but also customer,

business process, and learning measures.

• A set of measures that gives top managers a

fast but comprehensive view of business

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• It identifies four key performance measuresas follows

– Customer perspective- How do customer seeus?

– Internal business perspective- what must weexcel at?

– Innovation & learning perspective- can wecontinue to improve & create value?

– Financial perspective- How do we look atshareholders?

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Balance Scorecard

Financial

Customer

Business Process

Learning & Innovation

• The balanced scorecard translates the

organization's strategy into four

perspectives, with a balance between the

following:

– between internal and external measures

– between objective measures and subjective

measures

– between performance results and the drivers

of future results

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• Financial perspective - includes measuressuch as operating income, return on capitalemployed, and economic value added.

• Customer perspective - includes measuressuch as customer satisfaction, customerretention, and market share in target segments.

• Business process perspective - includesmeasures such as cost, throughput, and quality.These are for business processes such asprocurement, production, and order fulfilment.

• Learning & growth perspective - includesmeasures such as employee satisfaction,employee retention, skill sets, etc.

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Department Areas

Finance

Return On Investment Cash Flow Return on Capital Employed Financial Results (Quarterly/Yearly)

Internal Business Processes

Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation

Learning & Growth

Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities

Customer

Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate

Objectives, Measures, Targets, and Initiatives

• Objectives - major objectives to be achieved, for

example, profitable growth.

• Measures - the observable parameters that will be

used to measure progress toward reaching the

objective. For example, the objective of profitable

growth might be measured by growth in net margin.

• Targets - the specific target values for the

measures, for example, +2% growth in net margin.

• Initiatives - action programs to be initiated in order

to meet the objective.

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These can be organized for each

perspective in a table

Objectives Measures Targets Initiatives

Financial

Customer

Process

Learning

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Balanced Scorecard facilitating the

following functions

• Clarifying strategy

• Communicating strategic, objectives

• Planning, setting targets, and aligning

strategic initiatives

• Strategic feedback and learning

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• A Balanced Scorecard should result in:

– Improved processes

– Motivated/educated employees

– Enhanced information systems

– Monitored progress

– Greater customer satisfaction

– Increased financial usage

• The Balanced Scorecard has been applied

successfully to private sector companies, non-

profit organizations, and government agencies.

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Example

• Pantaloon Retail Limited

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• Financial Perspective

• Goals– Financial Growth (25%)

– Increase shareholders wealth

– Increase Profit Margin

– Sales target 1200cr (2015-16)

• Measures– Cost management

– Financial Ratios

– Profit growth 25%

– Sales growth 30%

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• CUSTOMER PERSPECTIVE

• Goals

– Customer Satisfaction

– After Sale services to retain customer

– Market Penetration

• Measures

– Customer retunes and complaints.

– Customer satisfaction surveys.

– Coverage and strength of distribution channel.

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• Business Process (Internal Operation

Perspective):

• Goals

– Reduce Number of defects, amount of rework,

number of returns.

– Increase machine efficiency.

• Measures

– Innovations and Research & Development

– Training to employees

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• Innovation and Learning Perspective

• Goals– Increase Number of new apparel designs.

– Increase R & D output success rate.

– Employee turnover, number of complaints.

– Employee satisfaction and retention.

• Measures– Increase Number of training hours.

– Introduce New Technology

– Employee Welfare

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Porter's Five Forces

• Michael Porter provided a framework

that models an industry as being

influenced by five forces.

• The strategic business manager

seeking to develop an edge over rival

firms can use this model to better

understand the industry context in

which the firm operates

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SUPPLIER POWER THREAT OF

SUBSTITUTES

BUYER POWERTHREAT OF NEW

ENTRANTS

COMPETITIVE RIVALRY

SUPPLIER POWER

• Supplier concentration

• Importance of volume to supplier

• Differentiation of inputs

• Impact of inputs on cost or differentiation

• Switching costs of firms in the industry

• Presence of substitute inputs

• Threat of forward integration

• Cost relative to total purchases in industry

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THREAT OF

SUBSTITUTES

• Switching costs

• Buyer inclination to substitute

• Price-performance trade-off of substitutes

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BUYER POWER

• Bargaining leverage

• Buyer volume

• Buyer information

• Brand identity

• Price sensitivity

• Threat of backward integration

• Product differentiation

• Buyer concentration vs. industry

• Substitutes available

• Buyers' incentives

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THREAT OF

NEW ENTRANTS

• Barriers to Entry– Absolute cost advantages

– Proprietary learning curve

– Access to inputs

– Government policy

– Economies of scale

– Capital requirements

– Brand identity

– Switching costs

– Access to distribution

– Expected retaliation

– Proprietary products

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COMPETITIVE RIVALRY

• Exit barriers

• Industry concentration

• Fixed costs/Value added

• Industry growth

• Intermittent overcapacity

• Product differences

• Switching costs

• Brand identity

• Diversity of rivals

• Corporate stakes

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Example-Paint Industry

• The Indian Paint industry, estimated to be Rs.21,

000 Cr.

• growing at a rate of above 15%

• organized players of the industry cater to about

65%

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• The industry consists of two segments

– Decorative segment -Major segments in decorative

include exterior wall paints, interior wall paints, wood

finishes and enamel and ancillary products such as

primers, putties etc

– account for over 77.3%

– Industrial segment - Three main segments of the

industrial sector include automotive coatings, powder

coatings and protective coatings.

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• Supply: Supply exceeds demand in both thedecorative as well as industrial paints segments,Industry is fragmented.

• Demand: Demands is for decorative paintsdepend on the housing sector and goodmonsoons. Industrial paint demand is linked withuser industries like auto, engineering andcustomer durables.

• Barriers to entry: Brand, distribution network,working capital efficiency, and technology play acrucial role.

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• Bargaining power of suppliers: Price increasesconstrained with the presence of the unorganizedsector for the decorative segment. Sophisticatedbuyers of industrial paints also limit the bargainingpower of suppliers. It is therefore that margins arebetter in the decorative segment.

• Bargaining power of customers: High due toavailability of high choices.

• Competition: In both categories, companies inorganized sector focus on brand building. Higherpricing through product differentiation is alsofollowed as a competitive strategy.

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Model Analysis

• Bargaining power of buyers

– housing requirements, the buyers can be customers

(building contractors who buy in bulk) and end customers

(people who paint/re-paint their house). Customers are

more price sensitive because for them number of options

are available and decisions are made based on qaulity,

price and differentiating factors

– Industrial segment is low margin high revenue business

and buyers of these segments are knowledgeable about

their needs. Therefore, price comparison is done

effectively by the customers

• Thus, Bargaining power of buyer is Medium.

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• Bargaining power of suppliers: The IndianPaint industry is raw material intensive industrywith more than 300 products going into themanufacturing of the final products.

• The raw material can be divided into differentcategories like pigments, additives, solvents,binders etc. Titanium Dioxide is one of the keypigment used in the production of paint and isfacing a global supply shortage. Thus supplier ofthis material has solid bargaining power.

• Thus, Bargaining power of supplier is Medium.

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• Competitive Rivalry: About 80% of organizedmarket is created to by the below four palyers ofIndian Paint Industry. But the current market growthrate can provide ample room of opportunity for allthe players of the industry to flourish.

• However, competition will keep on increasing asmarket will get saturated, but this will take sometime to happen, till then one can keep satisfycustomer need with good margin.

• Also, the presence of unorganized market doesprovide room for competition. Thus, on the wholecompetitive rivalry for the Indian paint industry isLow to Medium.

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• Availability of Substitute: The availability of substituteof very minimal. In the rural areas lime wash isconventionally used substitute for paints. One alternativeoption for decorative walls available today is Wallpaper.Thus, the availability of substitutes in the Indian PaintIndustry is Low to Medium.

• Threat of new entrants: As it has been stated earlierthat the paint market in Indian is dominated by fewplayers, making it difficult for anyone new entering theindustry to compete. Since new technologies are alsoavailable to shorten production life cycle of paint. Thus,Threat to new entrant is Medium.

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