Strategic Planning and the Balanced Scorecard

Henry Schwarzbach, Ph.D. University of Rhode Island

What is a Strategy?

Strategy describes how an organization matchesits own capabilities with the opportunities in themarketplace to accomplish its overall objectives.The process for developing strategy can be either a formal strategic management process or if can be informal and “on the fly.” Informal strategic planning is often employed when: the stakeholders cannot agree on objectives; there is a lack of planning expertise: the environment is too turbulent for long term planning; the organization is not given the authority to conduct strategic planning.

Basic Strategies for any organization

1. Product differentiation/ NicheHow can our firm provide a better product for our customers?

2. Cost leadershipHow can our firm provide services to our customersat a lower cost than our competitors?

The essence of the strategic planning process is determining how to design and implement one the these twobasic strategies, given the firm’s strengths and weaknesses, opportunities and threats. The Balanced Scorecard framework helps to link the strategic design, implementation, and performance evaluation.

Steps in Classical Formal Strategic Planning

Define the mission , customers/stakeholders, Goals and objectives, shared values, and visionAnalyze the firm’s strengths and weaknesses,

opportunities and threats

Identify the current strategiesEvaluate the current strategies with respect to the

SWOT analysis identifying critical issues

Define strategic alternativesSelect the best strategic alternatives

Implement the strategy and monitor performance

Strategy and Porter’s Five Forces Model

When designing strategy must consider five forces:

Competitors – other firmssPotential entrants into the marketEquivalent products/services –

Bargaining power of customers Bargaining power of input suppliers, including

employees, regulators and the community

External Analysis

Port Strategy and the Balanced Scorecard

The BSC Model focuses on:1.Strategies for Learning and Growth2. Strategies for Adding Customer Value 3.Strategies for internal business processes

4.Financial Strategies

Survey Results on Current Status of Strategic Planning in U.S. and Korean

Ports Do ports have formal Mission Statements? Our survey found…

Yes, 76% of U.S. Ports Yes, 54.5% of Korean ports

Do ports have formal strategic planning systems? Survey found….Yes, 51.5% of U.S. portsYes, only 36.4% Korean ports

SWOT Analysis - strengths, weaknesses, opportunities, and threats.Over 70% of U.S. and Korean ports with formal strategic planning conduct SWOT analysis

Satisfaction with current Strategic Planning Process5.56 out of a possible 7 for U.S. ports4.25 out of a possible 7 for Korean ports

Status of the Balanced ScorecardIn the Port Industry

Our survey asked port managers about the BalancedScorecard and we found:

1. Very few ports in the U.S. and none in Korea are using the balanced scorecard? This is not surprising since most U.S. port managers are not familiar with the balanced scorecard and neither are those in Korea.

2. The few ports in the U.S. that we found using the Balanced Scorecard were very satisfied with it so far.

The Balanced Scorecard

The basic premise of the balanced scorecard is, “managers do what is measured.” Thus we need to develop performance measures that signify accomplishment of our strategies. The measures should flow directly from the strategies. Kaplan and Norton who originated the BSC recommend four perspectives

1.Customer/Stakeholder2. Internal Business Process3. Financial 4. Learning and growth

Linking The Balanced Scorecard to Strategy I

CustomerWho do we define as our

customer? How do we create value for our customer?Financial

How do we add value for customers while controlling

costs? How do we raise the funds necessary to support operations.?

How do we enable ourselves to grow and change, meeting

ongoing demands?

Employee Learning & Growth

To satisfy customers while meeting budgetary constraints, at what

business processes must we excel?

Internal Process

Strategy

Mission

Linking The Balanced Scorecard to Strategy II

Customer

Increase value to the customersFinancial

Increase revenue, control costs, cover the cost of

capital, attract investment capital, manage cash flow

Increase employee and information system capabilities

Employee Learning & Growth

Develop new products, better understand the

customer needs, increase customer value, lower cost, improve effectiveness and efficiency of key processes

Internal Process

Strategy

Achieve Objectives

Linking The Balanced Scorecard to Strategy II

Financial

Learning and Growth

Internal Process

Strategic Initiatives for Product/Process Differentiationand cost leadership drive the model

Strategic Initiatives

Customer objectives

Developing A Model Balanced Scorecard for a Port

Objective 1: Attract more cruise ships

Measures: 1. Cruise ship passenger visits 2. Cruise ship fees earned 3. Economic impact of cruise ship tourism

Customer Perspective

Strategic initiative: Develop a promotional marketing program and promote to cruise ship lines.

Financial Perspective

Initiatives: TargetPerformance

ActualPerformance

Sell Surplus Property

Improve collection procedures

$2,000,000Lower day’sreceivables

to 30

$2,100,000

32 days

Internal BusinessProcess Perspective

Initiatives: TargetPerformance

ActualPerformance

Expand cargo dock

Add improved cargo Handling equipment

1200 ft of dock

25 TEU loaded/Unloaded per hr.

1100 ft of dock

26 TEU perHr.

Learning and Growth PerspectiveObjectives:

Align employee andorganization goals

Measures: Employee satisfaction survey

Finance department evaluation

Improve MIS cash forecasting capability

Learning and Growth Perspective

Initiatives: TargetPerformance

ActualPerformance

Employeeparticipation and

suggestion programto build teamwork

Add Peoplesoft cashForecasting module

80% ofemployees

give toptwo ratings

Average rating of 9 out

of 10

88% ofemployees

give toptwo ratings

Average Rating 5

Aligning the BalancedScorecard to Strategy

Different strategies call for different scorecards.What are some of the financial

perspective measures?Operating income/Return on investment

Revenue/ Revenue growth/Revenue from new initiatives

Cost reduction is some areas/cost per TEU movedMeasures of economic impact in the community or region

Aligning the BalancedScorecard to Strategy

What are some of the customerperspective measures?

Market shareCustomer satisfaction

Customer retention percentageTime taken to fulfill customers requests

Community satisfaction/Environmental Impact

Aligning the BalancedScorecard to Strategy

What are some of the internal businessperspective measures?

Ship ServicingCargo Handling capabilities

On time serviceDowntime

Warehousing/storage

Aligning the BalancedScorecard to Strategy

What are some of the learning and growthperspective measures?

Employee education and skill levelEmployee satisfaction scores

Employee turnover ratesInformation system availability

Percentage of processes with advanced controls

Continuous Port Strategic Management with the Balanced Scorecard

Scan External Environment for opportunities and

threats

Develop a strategic intelligence systemStrategy Implementation

Implement required changes in operations to effect revised strategic

initiatives Adjust the mission, vision,

strategies, and BSC Measures and targets for changes in the

Internal and External environment

Strategy Development

Collect and report data on BSC measures and compare to targets

Internal Reporting on BSC performance

Strengths of theBalanced Scorecard

1. Links strategy to mission to implementation and performance2. Allows goal alignment throughthe organization.3. Provides a means to evaluate strategic planning.3. Provides a vehicle for communicating mission, vision and strategies.

Pitfalls When Implementinga Balanced Scorecard

What pitfalls should be avoided whenimplementing a balanced scorecard?

1. Don’t assume the cause-and-effectlinkages to be precise.

2. Don’t seek improvements acrossall measures all the time.

3. Don’t use only objective measureson the scorecard.

Pitfalls When Implementinga Balanced Scorecard

4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.

5. Don’t ignore nonfinancial measures whenevaluating managers and employees.

6. Don’t use too many measures.

Pitfalls When Implementinga Balanced Scorecard

7. Maintain flexibility to add new measures for emergent strategies. Watch out for excessive centratization and rigidity.8. Complexity adds cost. Keep it as simple as possible. Consider the cost versus the benefit of when selecting BSC measures. 9. Garbage in, garbage out. Insure that reliable data can be collected for all measures.