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Building an Adaptive Enterprise through Customer Focus
A New Business Framework and Approach
October 27, 1999
2
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors
3
The Sears Transformation Story Provides a Valuable Lesson for Samsung
1886 1945 1982 1992 1997 2000
• Founded in 1886, it essentially starting the retail concept of large department stores with a full line of merchandise and catalog business
• Core competencies: its adaptive ability to understand and serve changing consumer needs
• Grew rapidly reaching $1B in sales in 1945 and $41B by 1985
• Became the dominant U.S. department store
• Created “brand power”
• Became too inward-focused, self-absorbed
• Began diversifiying
• Centralized and bureaucratic policies
• Ignoring new breed of competitors
• Results: Losing market share, financial performance declining, shareholder losing confidence
• Brought in a new CEO
• Embarked on a turnaround program :
- focus on core business
-customer focus
-greater local market focus
- improved cost structure and productivity
-organizational and cultural renewal
• Despite huge success, continue to renew and adapt to changing environment, e.g., the connected economy
• Continue to finetune its customer focus
• Continue to refine its value proposition and go-to-market strategies
Birth Growth Leadership Transformation Continuous RenewalInflection Point
Sears & IndustryIndustry
Sears SearsSears ?
4
Sears Defined the American Retail Industry
Source: Company web site, Hoovers, HBR Sears, Roebuck and Co. Stanford Business School Case, 1997, EY Analysis
• First broad scope retailer offering products not readily available to the general public
• Set the “Gold standard” of retailing in US, offering unheard of money-back guarantees and free trial offers
• Grew rapidly reaching $1B in sales in 1945 ($9B in 1998 dollars) and $41B by 1985 ($63B in 1998 dollars)
• One in five Americans shopped at Sears regularly• Employees were extremely loyal, and were rewarded with the best profit-sharing
programs in the country
• Created the catalog industry in US• Undercut profit margin of the “general store” to save money for consumers
• Created “Brand Power” -- Sears became a household name standing for high quality at a fair price
• Sears developed popular private label brand names including Kenmore appliances, Craftsman Tools and Diehard batteries
“Sears is the paragon of retailers. It is number one, in the United States, and number two, three, four and five” - Fortune Magazine, 1960s
“Sears is the paragon of retailers. It is number one, in the United States, and number two, three, four and five” - Fortune Magazine, 1960s
RetailerRetailer
CatalogCatalog
BrandBrand
5
Success Has Made Sears Complacent, However, and it Grew Out of Touch with the Changing Retail MarketplaceCustomer-distant decision making
• Headquarters controlled stores, yet did not work closely enough with them to understand their environment
• Bulletins were written about every process--employees were not allowed to make any decisions
Distracted
• Owned a conglomerate of unrelated companies including Allstate Insurance, Dean Witter Investments, Coldwell Banker Real Estate & Discover Credit Card
Ignored true competition
• Sears was stuck in the past -- they did not catch on to emerging retailing trends
• Did not see Wal*Mart & K-Mart entering into their retail space
• Considered only JC Penney & Montgomery Wards as its competitors
Misjudged target customers
• Thought its target customers were male
• Targeted advertising and promotions towards men
Ineffective performance management
• Employee compensation did not align with corporate objectives
Confused positioning
• Unfocused response to new competition left Sears with an undefined strategy -- it was not a discounter (e.g., Wal*Mart) or a high end department store (e.g., Nordstrom)
• “We didn’t know if we wanted to be a discounter, a department store, a specialty store or a mass merchant” - Arthur Martinez, CEO
Source: Home Furnishings Network, 9/30/96, EY Analysis
6
($4)
($3)
($2)
($1)
$0
$1
$2
$3
1989 1990 1991 1992
Consequently, by the Early 90’s, Sears Had Lost Its Historically Dominant Position
*S&P Retail Index CAGR from 1990-1992Source: Dow Jones, Bloomberg
($ Billions)
Profit Revenue Indexed Stock Price
($ Billions)
CAGR89-9223%
43%-1%-2%
N/ASears
Wal-mart
JC PenneyK-mart
Dayton-Hudson
$0
$10
$20
$30
$40
$50
$60
1989 1990 1991 1992
CAGR89-9229%
-0.4%
4%
3%10%
Sears
Wal-mart
JC Penney
K-mart
Dayton-Hudson
0
1
2
3
1989 1990 1991 1992
CAGR89-9242%
16%*
12%6%6%2%
Sears
Wal-Mart
JC Penney
K-mart
D-H
S&P Retail Index
In 1992, Sears Hired a New CEO, Arthur Martinez, To Turn Around the CompanyIn 1992, Sears Hired a New CEO, Arthur Martinez, To Turn Around the Company
7
Under Martinez, Sears Embarked on a Three-Phased Transformation Process
Transformation(1993-1997)
Growth(Ongoing)
Source: Harvard Business Review, Sears Roebuck & Co. Turnaround, 1998, Company Web Site, EY Analysis
• Hired a new CEO• Stabilized operations to stop
losses
• Refocused on core business• Created a new corporate vision• Determined target customer and designed value
proposition• Launched new ad campaigns• Instituted a new performance measurement system• Implemented comprehensive corporate wide change
management programs
• Continue to refine value proposition and go-to-market strategies
• Continue to improve transformation programs
• Began a new renewal process incorporating new environment--ecommerce
1992 1993 1994 1995 19961997
Rev
enue
s de
clin
ed 9
% to
$52
b, n
et lo
ss o
f $3.
9 B
Sea
rs m
oved
from
dow
ntow
n C
hica
go to
sub
urba
n H
offm
an E
stat
es
Hire
d ne
w C
EO
Rec
ruite
d ne
w S
enio
r E
xecu
tive
Com
mitt
ee
Beg
an 1
00 d
ays
eval
uatio
n pe
riod
Clo
sed
cata
log
busi
ness
Reo
rgan
ized
aro
und
its a
pplia
nce,
hom
e &
aut
omot
ive
busi
ness
Clo
sed
113
depa
rtm
ent s
tore
s &
red
uced
wor
kfor
ce b
y 50
,000
peo
ple
Iden
tifie
d ta
rget
cus
tom
er a
s a
mid
dle
aged
fem
ale
Hire
d ne
w e
mpl
oyee
s fr
om o
utsi
de S
ears
& th
e in
dust
ry
Beg
an s
ellin
g of
f non
-ret
ail b
usin
esse
s
Beg
an n
ew m
arke
ting
cam
paig
n, “
The
Sof
ter
Sid
e of
S
ears
,” w
hich
was
targ
eted
at w
omen
Exe
cutiv
es’ “
Pho
enix
Tea
m”
crea
ted
Com
mitt
ed to
rem
odel
sto
res
& g
ain
addi
tiona
l sel
ling
floor
spa
ceS
olid
ified
mis
sion
& v
isio
n st
atem
ents
Cre
ated
Tot
al P
erfo
rman
ce In
dica
tor
(TP
I’s)
to m
easu
re a
chie
vem
ent o
f mar
ket f
ocus
str
ateg
y
For
med
Sea
rs U
nive
rsity
to e
duca
te e
xecu
tives
on
busi
ness
pra
ctic
esB
egan
360
° re
view
ing
proc
ess
of a
ll m
anag
ers
Beg
an “
Lear
ning
Map
” pr
ogra
m to
trai
n al
l ass
ocia
tes
abou
t the
nee
d an
d re
ason
for
tran
sfor
mat
ion
Sim
plifi
ed p
olic
y &
red
uced
bur
eauc
racy
by
intr
oduc
ing
“Fre
edom
& O
blig
atio
ns”
TP
I mea
sure
s be
cam
e pa
rt o
f top
200
ass
ocia
tes’
co
mpe
nsat
ion
Beg
an g
oal s
harin
g pr
ogra
m
Beg
an “
Hol
istic
Ret
ailin
g” s
trat
egy
to m
eet t
he n
eeds
of
hom
eow
ners
thro
ugh
a va
riety
of r
etai
l & s
ervi
ce fo
rmat
s
Incr
ease
d nu
mbe
r of
full
line
mal
l sto
res
Dev
elop
ed n
eigh
borh
ood
furn
iture
& h
ardw
are
stor
es
Sta
rted
e-C
omm
erce
thro
ugh
sear
s.co
m
Laun
ch s
econ
d re
volu
tion
Sub
segm
ente
d m
arke
t to
targ
et m
ore
spec
ific
ethn
ic c
usto
mer
seg
men
ts (
e.g.
, His
pani
cs)
Gra
nted
ince
ntiv
es to
all
stor
e-lin
e m
anag
ers
Inte
grat
ed T
PI m
easu
res
into
par
t of a
ll m
anag
er’s
abo
ve
stor
e le
vel c
ompe
nsat
ion
Turnaround(1992)
8
The Transformation Began With a New Vision: A Compelling Place to Shop, Work, and Invest
Employees FinancialResults
Customer
Compelling Place to Shop
Compelling Place to Work
Compelling Place to Invest
Satis
fied
empl
oyee
s in
fluen
ce
the
shop
ping
exp
erie
nce
Loyal customers increase
top line growth
Employees rewarded forperformance
Passion for the customer
Source: EY Analysis
People add value Performance leadership
3 Cs and 3 Ps
9
The Initial Vision Was Then Translated into Specific Objectives and Measures
Employees Financial ResultsCustomer
Source: EY Analysis
• Environment for personal growth and development
• Support for ideas and innovation
• Empowered and involved teams and individuals
• Personal growth and development
• Empowered teams
• Great merchandise at great value
• Excellent customer service from the best people
• Fun place to shop• Customer loyalty
• Customer needs met• Customer satisfaction• Customer retention
• Revenue growth• Superior operating
income growth• Efficient asset
management• Productivity gains
• Revenue growth• Sales per square foot• Inventory turnover• Operating income
margin• Return on assets
Ob
ject
ives
Mea
sure
s
10
Sears Rediscovered Its Target Customer
Management perception of target customer:
• Thought target customers were male
• Targeted advertising and promotions towards males
• Core customer:
female
middle class (annual income of $25,000 - $60,000/yr.)
middle age (24-54 yrs. old)
head of household
mostly mothers
Source: HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis
“This was a big discovery. Unless we made the store more attractive to her, we weren’t going to break out of the box we were in.”
- Arthur Martinez, CEO
Before Discovery
“We had a company run by guys who thought they were in the “dirty fingernails” business of autos and hardware. There was no singular view of Sears target customer.”
- Arthur Martinez, CEO
11
Sears Then Refined Its Value Proposition to Meet the New Target Customer
Product/Services
• Added new departments such as cosmetics and jewelry for women
• Expanded apparel offerings
• Increased national brand products
• Improved underdeveloped sections such as petites
• Increased customer wallet share by offering multiple types of services and products to target customer
Image
• Rolled out the “Softer Side of Sears” advertising campaign, targeting the female customer
• Communicated that Sears is changing--it offers more merchandise than just appliances and hardware
• Renovated fixtures and lighting to give a more classy appearance
Relationship
• Redesigned stores to provide a more contemporary environment
• Expanded selling floor space in stores by redesigning back rooms
• Increased touch points with customers by expanding stores into neighborhoods with hardware and furniture stores
+ +
Source: HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis
Value Proposition
12
Believing That Employees Are an Important Part of the New Strategy, Sears Invested Heavily in Employees
Communicate StrategyHelp Improve Performance
Match Compensation with Performance
Source: HBR Employee-Customer Profit Chain, 1998 ; HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis
Employees
Town Hall Meetings• Held sessions in which all
employees met in small groups of around ten
• Learned about the industry, Sears and why Sears needed to transform
Improved Employee Selection• Developed interview selection
tools to help managers hire employees with the correct skill sets
• Determined new skills and attitudes needed to realize the new vision and revised new hire profiles accordingly
Decision-making/Empowerment• Gave front-line employees more
authority to act on their own discretion to provide more responsive service to customers
Improved Training• Opened Sears University to teach
courses essential for the operation of the transformation
• Courses available to managers and above
Decreased Bureaucracy• Decreased bureaucracy by
eliminating cumbersome policies and replaced with broad guidelines called “Freedoms and Obligations”
Stock purchases• CEO was required to invest five times his
salary in Sears stock, and executive board was expected to invest three times their salary
• Top 200 managers had to purchase their salary in stock
Total Performance Indicators (TPIs)• Compensation based on TPIs initially rolle
d out to top 200 managers• Eventually all managers above store level
had compensation based on TPIs• TPIs were broken down with 1/3 based o
n each of employee, customer & financials
Goal sharing• Associates given the opportunity to earn v
ariable incentive pay based on customer satisfaction
13
To Monitor Progress, Sears Developed a Comprehensive Performance Measurement System
• Defined a balanced portfolio of strategic objectives along three critical and complementary perspectives: employee, customer, and shareholder
• Developed a cause-and-effect model of how those objectives influence each other
• Made sure that the model included drivers of future growth (“leading indicators”)
• Used that model to develop key measures (Total Performance Indicators - TPIs) so that measurement would influence behavior
• Wherever possible, defined a quantitative metric for each TPI, and where possible, confirmed statistical correlations in the cause-and-effect change
• Monitored progress against TPIs using individual and shared goals, and used the results to finetune the list of TPIs
• Linked performances against TPIs to compensation, using both individual and group goals and incentives. Compensation was linked to non-financial as well as financial performance, and the three perspectives were given equal emphasis
• Cascaded compensation link from top management (Phoenix team, then top 200 execs, then down through middle management above store level, and finally to management teams in the stores as the TPIs proved themselves). Goal sharing was tried on a test-basis to cascade compensation links to the salesperson level
Measuring Rewarding
Source: EY Analysis
14
LegendLegend
Sears’ New Performance Metrics Measured Impact of Employee and Customer Satisfaction on Financial Results
Source: HBR Employee-Customer Profit Chain of Sears, 1998; HBR Sears Roebuck & Co. Turnaround, 1998; EY Analysis
Employee-Customer Profit Chain
Focus on Employees Focus on Customers Financial Results
Attitudeaboutthe job
Attitudeabout thecompany
Employeebehavior
Employeeretention
Service-----------
Helpfulness
CustomerImpression
Customerretention
CustomerRecommend-
ations
Return on assets
Operating margin
Revenue growth
Merchandise------------
Value
5 unit increasein employee
attitude surveys
Example:
1.3 unit increasein customer
impression surveys
0.5% unit increasein revenue
growth
DRIVES DRIVES
• Rectangles represent survey information
• Ovals represent hard data
• Shading represents measurements collected in the form of Sears total performance indicators
• Solid arrows represent statistically established correlations
• Dotted arrows represent hypothetical relationships
15
This Intense Effort Has Dramatically Improved Results for Employees, Customers, and Investors
0
1
2
3
92 93 94 95 96 97
Sears
Wal-mart
JC Penney
K-mart
Dayton Hudson
60
61
62
63
64
65
66
67
68
69
70
Dec
94
Mar
95
J un
95
Sep
95
Dec
95
Mar
96
J un
96
Sep
96
Dec
96
Mar
97
J un
97
Scores
Total Performance IndicatorsEmployee Scores2
Share PriceMarket Share
S&P Retail Index
1992 = 1
16
Entered into e-Commerce
• Launched Sears.com
• Focusing on appliances first, then will expand into hardware & tools, lawn & garden, and consumer electronics
• Sears aims to be the definitive online source for the homeowner
Reorganized Executive Office
• Created a chief executive office composed of current CEO Martinez and two finance/merchandise specialists
• Will allow Martinez to focus on full line store needs and reduce the number of people reporting to him
Increased Store Sovereignty
• Shifting more control of stores from headquarters to the local stores, so they can better react to their customers’ individual needs
Altered Store Environment
• Hired one of the country’s top fashion photographers to create displays and specialty shops within the department stores
Despite Success, Sears Continues to Renew itself to Adapt to the Changing Environment, e.g., Connected Economy
Source: Context Magazine The Cyberside of Sears, Sept/Oct 1999, Chicago Tribune 9/19/99, Crain’s Chicago Business 9/6/99, Dow Jones, EY Analysis
17
The Sears Story:
Redefinition of Core Business
Vision
Strategy
Go-to-Market Strategy
Value Propositions
Customer
Pe
rfo
rma
nc
e M
an
ag
em
en
t Pe
rform
an
ce
Ma
na
ge
me
ntEmployee Training & Empowerment
Processes
Knowledge Management
Co
mm
un
ica
tionC
om
mu
nic
ati
on
18
Key Success Factors
Leadership
Complete Internal Alignment
Around Strategy
Tireless Execution
Measurement System
Brand Power Long-Term
Perspective
Customer Focus SEARSSEARS
19
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors
20
XXX Has Achieved Market Leadership in Consumer Electronics Worldwide
Fortune magazine ranks XXX as the #5? consumer electronics company in the worldFortune magazine ranks XXX as the #5? consumer electronics company in the world
Birth Expansion Leadership
Revenue & Profit Growth Market Cap Growth Global Market Share Leadership
21
This Success Was Driven Primarily by Superior Operational Excellence Based on the“Make-and-Sell” Approach
• Organized to produce large quantities of products efficiently and sell them to customers whose needs could be assumed, predicted, and controlled
• Characterized by replaceable parts and economies of scale
• Focus on products and processes
• Emphasis on planning and control
Profits Through Product Sales Volume & Cost Cutting
ServiceDistributeAdvertise/Promote
SellPriceMakeDesignProduct
ProcureR&D
Make Product Sell Product
MarketMarket
22
Fundamental Changes Occurring in the Marketplace Are Requiring Samsung to Redefine its Basis for Competition
Time
?
Birth
Renewal
Growth
Leadership
Decline
Value
New Business ModelNew Business Model
Globalization
Value
ConvergenceInternet
Digital
Virtual Community
eCommerce
Open Standard
Example: GE
80-81 86/87 91/92 99/00
Market Share Leadership Productivity Services and Solutions Digital
Inflection Pt
Business Model
Active Inertia
23
The Connected Society Marks the Transition To a New Era of Human History
Evolution of Business
SocialImplication
DefiningApplication
2000195018601750
Industrial Revolution(Age of Civilization)
Transportation Revolution(Age of National Scale
Transportation)
Information Processing Revolution
(Data Processing Age)
Connected Society Revolution
(Networked Society Age)
STEAMENGINE
URBANIZED AND INDUSTRIAL SOCIETY
LINEARITY&
LIFE CYCLEs
TRANSNATIONALRAILROAD
BLURRING
INTEGRATEDCIRCUIT
ACCELERATIONAND
COMPRESSION
INTERNET AND DIGITAL
COMMUNICATION
GLOBALLY CONNECTED SOCIETY AND
ECONOMY
SYNCHRONICITY
“We are in for a revolution”
Source: E&Y The Leadership ConnectionTM Interviews
REGIONAL SPECIALIZATION AND
INTER-REGIONAL TRAVEL
KNOWLEDGEWORKER-BASED
ECONOMY
24
The Connected Economy Is Characterized by Three Key Forces
Intangibles
Services
Products
Customer
Speed
Connection
Source: Blur, 1998
25
These Three Forces Are Destroying Old Solutions. . .
• Markets and industries will be defined in terms of CUSTOMERS rather than products
• Market power will shift from suppliers toward CUSTOMERS
• More reliance will be placed on flexible, customized marketing and INTANGIBLE elements of the value proposition
• Product life cycles will shorten
• The need to choose between a high volume/low cost strategy and a niche/differentiation strategy will disappear
• Maximizing the number of transactions with the same loyal customer by offering a diverse array of products and services will become increasingly important
• The most productive business strategies will be cooperative, not competitive
• Organizations will rely more on decision teams and parallel information processing and less on individual decision-making and sequential information processing
26
11
. . . Leading to Six Rules for Success in the Connected Society.
Source: E&Y Analysis
Focus on desired customersFocus on desired customers
22 Focus on competenciesFocus on competencies
33 Leverage partnershipsLeverage partnerships
44 Identify differentiatorsIdentify differentiators
55 Create hybrid modelsCreate hybrid models
66 Be flexible and agileBe flexible and agile
27
The New Organizational Premise is “Sense-and-Respond.”
Source: Hackel, Stephen, Adaptive Enterprises, Boston:Havard Business School Press, 1999.
MAKE-AND-SELL
Assumption:Predictable change
Goal:Become an Efficient Enterprise
Missionand Policy
Strategy- objective
- plan
Structurefunctional hierarchy
Command and Controlmanagement
system
A Closed System
SENSE-AND-RESPOND
Assumption:Unpredictable change
Goal:Become an Adaptive Enterprise
Context- purpose and bounds- adptative structure
Coordinationof Capabilities- commitmentmanagement
An Open System
InternalFeedback
ExternalSignals
Ad
apti
ng
28
Transitioning to a Sense-and-Respond Organization Requires a Fundamental Shift
Source: Hackel, Stephen, Adaptive Enterprises, Boston:Havard Business School Press, 1999.
Make-and-SellMake-and-Sell Sense-and-RespondSense-and-RespondContinuum
Mindset behind Strategic Intent
Know-How
Process
Organizational Priority
Profit Focus
Operational Concept and Governance Mechanism
Information Architecture
Information Technology Architecture
Market Leader Criteria
Articulation of Strategy
Business as an efficient mechanism for making and selling offers to defined market segments with predictable needs
Embedded in products
Mass Production
Efficiency and predictability
Profit margins on products and economies of scale
Functional and sequential activity
Functionally managed and optimized
Host-centric: hierarachical top-down command and control mgmt system
Share of products and services
Strategy as plan
Business as an adaptive system for responding to unanticipated requests in unpredictable environments
Embedded in people and processes
Modular customization
Invested in capailities and system
Return on investmens and economies of scope
Networked and paralleled activity and teams
Enterprise management of essential information
Network-centric: shadowing the dynamic network of people and teams
Share of customer spending
Strategy as adaptive business design
29
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors
30
The Primary Business Objective for Samsung Is to Increase the Ultimate Value of the Company
MarketValue
Multiple($)
Time
Full Potential
Typical
Financial Performance
Non-financial Performance
31
The Challenge is to Determine How to Manage Company Resources to Create Maximum Financial Outcomes
=Earnings
Revenues
Revenues
InvestedCapital
MarketValue
Earnings
x x
(ProfitMargin)
(CapitalEfficiency)
(Growth / Reliability)
Financial Performance
MarketValue
Multiple($)
Time
Full Potential
Typical
Non-Financial
32
Increasingly, Investors Take Non-Financial Measures into Account When Valuing Companies
MarketValue
Multiple($)
Time
Full Potential
Typical
Financial
Non-financial
• Nearly 40% (50% for high tech firms) of the market valuation of the average company was missing from its balance sheet (1996 Study)
• Non-financial criteria constitute on average 35% of the investor’s decisions
• The more non-financial measures analysts use, the more accurate are their earnings forecasts
Key Findings from Market Studies
Non-Financial Metrics Investors Value Most
1. Execution of corporate strategy
How well does management:• leverage its skills and experience?• gain employee commitment?• stay aligned with shareholder interests?
2. Quality of strategy• Does management have a vision for the future?• Can it make tough decisions and quickly seize opportunities?• How well does it allocate resources?
3. Ability to innovate• Is the company a trendsetter or a follower?• What is in the R&D pipeline?• How readily does the company adapt to changing technologies and
markets?
4. Ability to attract talented people• Is the company able to hire and retain the very best people?• Does it reward them?• Is it training the talent it will need tomorrow?
5. Market share• Is the company capturing the value of the current market?• Is it well-positioned to expand that value in the future?
6. Quality of executive compensation• Is executive pay tied to strategic goals?• How well is it gauged to the creation of shareholder value?
7. Quality of major processes
8. Research leadership• How well does management understand the link between creating
knowledge and using it?
33
Non-Financial Data Have a Direct Impact on ValuationA one unit improvement in the perception of quality of management could represent a 13.2% price premium on share value
Source: Ernst & Young’s Measures That Matter, 1997
Computer Industry Pharmaceuticals Food Industry Oil and GasNon-Financial Criteria
Quality of Management
Quality of Products andServices
Level of CustomerSatisfaction
Strength of CorporateCulture
Quality of InvestorCommunications
Effectiveness of ExecutiveCompensation Policies
Effectiveness of NewProduct Development
Strength of Market Position
1.4%
1.4%
0.0%
0.0%1.3%
0.3%1.3%
0.0%
7.6%13.2%
2.4%9.6%
0.0%4.8%
0.0%2.1%
0.8%1.8%
0.9%2.5%
0.0%3.2%
3.1%7.1%
2.6%4.9%
0.9%3.9%
0.0%
0.0%3.0%
0.5%2.8%
0.6%2.9%
0.3%
4.2%8.8%
5.8%7.2%
0.0%1.3%
0.0%
0.9%
1.1%
2.5%
5.3%7.3%
3.1%
2.5%
2.7%
1.5%
0.4%1.2%
0.9%1.8%
1.2%
6.1%
4.6%
4.4%
1.6%4.1%
7.3%9.3%
15%0% 15%0% 15%0% 15%0%
% Increase in P/E Ratio given a one-unit change in….
Influence On Price Short Term Long Term
34
Therefore, a Compelling New Business Paradigm Should Focus on Measures That Matter, both Financial and Non-Financial
Stock PriceStock Price
ConstituencyBehaviors
Operating Model
Operating Model
VEM
SYSTEMSKNOWLEDGE
C E S I
Customer Investor
Supplier Employee
• Buy• Price• Etc.
• Buy• Hold• Etc.
• Cost• Stocking• Etc.
• Productivity• Wage• Etc.
TIME
PR
ICE
?
?
Allocation of Time and Money
Allocation of Time and Money
AC
BF
E D
11 44
TIME/MONEY
CAUSAL MODEL
Value Invested
Value Returned
Value Invested
22 33
Management Philosophy/
Point of View
Management Philosophy/
Point of View
Cutomer Focus
55
• Calibrate Stock Value Gap
• Model Profile Constituency/Behaviors that Matter
• Create Causal Model/VE Optimization Capability
• Redesign Enterprise Processes/ Overall Architecture
• Transition Enterprise to a Customer Focus Point of View
35
The New Business Paradigm Development Proceeds with the Following Five Steps
Company VisionCompany Vision
Business Strategy
Business Strategy
Value Propositions
Value Propositions
• Who are we and what do we do?
• Where should we go?
• What are our “promises” to:
– customers
– employees
– partners
– investors
Strategic Operation Model
Strategic Operation Model
• How will we get there?
– Business Structure
– Business System
– Organization Structure
Portfolio of Initiatives
Portfolio of Initiatives
• How will we deliver it?
1
2
3
4
5
36
This Effort Addresses Four of the Five Components
Where should we go? How do we get there? How do we deliver it?
Business Strategy Operating Model Portfolio of Initiatives
• A definition: The intentional choice of where, how, and when to compete…
• …resulting in significant (or largely irreversible) commitments of resources — capital or human
• Effective strategy considers marketplace and internal issues, is fact-based, and owned by those responsible for implementation
Framework which defines internal business structures, processes and systems:
• Implementation initiatives focused on improving current business process performance...
• …while maintaining the benefit of a high-touch environment
• …and enabled by information technology, measurement systems, and infrastructure
• High level business unit structure and process structure design
• Business system definition
• Organization structure
What are our “promises”?
Value Propositions
• Develop comprehensive offering for target customers
• Define compelling reasons:
– for employees to work at Samsung
– for partners to work with Samsung
– for investors to invest in Samsung
37
A Customer Driven Organization Performs Six Key Customer Processes
CustomerStrategy
Custom
er
Behav
iors
Cu
sto
me
r E
con
om
ics
Cu
sto
me
r E
con
om
ics
Outcom
e
Mea
sure
s
Del
ive
ryS
tra
teg
y
Know Who Are Your
Customers
Know W
hat
Your
Custo
mer
s Do
Kno
w W
ha
t Y
our
Cus
tom
ers
A
re W
ort
h
Know W
hat
You C
an
Get B
ack
Decide What to Give Your Customers
Deter
mine
How to
Deli
ver
Under
stand
Your
Relatio
nship
with th
e
Custo
mer
Exc
ha
ng
e V
alu
e w
ith
You
r C
usto
me
rs
Capab
ility
Specifi
catio
ns
OpportunityDesign
OpportunityDesign
Opportunity
Iden
tific
atio
n
Opportunity
Iden
tific
atio
n
Identify Target Customers
Develop Offerings
Define go-to-market
strategy
Fulfill P
romises
Determ
ine Custom
er
Lifetime V
alue
Manage custo
mer
relatio
nship
38
Customer Driven Business Framework
VisionVision BusinessStrategy
BusinessStrategy
Offer Development
Offer Development CommunicationCommunication Service &
Support
Service & Support
Customer Strategy
Competencies
Go-to-Market Strategy
Pricing Channel Promotion
Product Design
Brand Strategy
SCMNPD
Customer CareSalesforce
Ad Campaign
Field Services
Processes
Organization Design
Customer Knowledge Management
Performance Metrics
Val
ue P
ropo
sitio
nD
evel
opm
ent
CRM
Op Model
39
What Will It Look Like When Samsung Has Transformed into a Customer Driven Organization?
Product-Focused Customer-Focused
Product Manager Customer Portfolio Manager
Volume, product profitability, market share, customer satisfaction
Lifetime value, product mix, customer profitability, share of wallet, customer retention
Managed by sales region Managed by customer segment or portfolio of individual customers
ManagerRole
Measures
ManagerialScope
Required Knowledge
•Market growth •Pricing studies•Assessment of competitive landscape•Customer satisfaction•Geographic sales breakdown•Brand perception/perception of quality
•Customer’s Lifetime Value•Customer’s current product portfolio•Customer’s point in lifecycle (customer needs)•Customer’s history with company•Customer’s preferred access channel•Cost to acquire, serve and retain
Source: E&Y Analysis
40
What Will It Look Like When XXX Is Customer-Driven?
Activities and Behaviors
• Value propositions defined by key customers/segments for product/service offerings
• Globally integrated and shared customer knowledge management
• Metrics developed to track degree of customer focus
• Customer-focused measures & targets shared by different functions in XXX value chain
• Customer attraction & retention rates tracked
• Share of wallet defined and tracked for key segments
• Customer profitability captured & used to manage customer portfolio
• Pricing & channel actions are no longer reactive, but based on CRM strategy
• New product/service development includes market research, customer and field input, and cross-functional team approach
Results
• Price parity with leading brands for comparable products
• Brand parity in terms of recognition and positive image
• Increased brand equity reflected in above-average performance of XXX stock relative to peer competitors
• Customer attraction & retention rates increase
• Share of wallet increases for key segments
• Customer profitability increases
• XXX profitability, EVA, and ROA increase
41
Measuring Customer Focus in the New Environment
Adapted from: The Balanced Scorecard, Kaplan & Norton, 1996
Leading Indicators (Drivers): Customer Value Proposition
Customer AcquisitionCustomer Acquisition Customer ProfitabilityCustomer ProfitabilityCustomer RetentionCustomer Retention
Customer SatisfactionCustomer Satisfaction
Market and/or Wallet Share
Market and/or Wallet Share
Lagging Indicators (Outcomes): Customer Response
Lead To
Value to Customer Product/Service Attributes Image Relationship= + +
Functionality Price Time BrandQuality
(Examples of measures:)
(Examples of measures:)
(Brand survey rating)
(Share points)
(% new customers in target segments)
(Fully-costed margin in target segments)
(# of repeat sales in target segments)
(CSI)
(Back order rate)
(Relative price ratio)
(Warranty) claims
After-Sales ServiceExamples of attributes:
(External product ratings)
(Response time, problem
resolution rate)
42
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors
43
Marketing IQ Test
1. Businesses in America were reasonably successful during the 1980s, enjoying real growth in sales of 2 percent or more per year.
2. During the coming decade, marketers will earn more profits from new brands than from existing ones.
3. A high share of market in a product category generally leads to economies of scale that result in a high level of profitability.
4. There is little agreement among marketers about what the hot new concept “brand equity” means.
5, A reasonable way to set the marketing budget is to take last year’s figure and adjust for inflation.
6. Line extensions are a very risky way to introduce new products.
7. Focus group interviews are a serious marketing research tool that a manager can safely use to help make serious marketing decisions.
8. Business today invest more money in finding new customers than in further developing current customers.
9. The most profitable customers of a firm are usually its biggest customers.
10. Big companies generally make their marketing decisions after evaluating many alternatives in terms of profitability.
True FalseDon’t Know
44
Marketing IQ Test (Cont’d)
11. The more appealing a new product concept is to prospective buyers, the more likely it is it will be a success.
12. Every company should strive to hold on to all of its customers.
13. Location is the most important determinant of success for a new retail business.
14. One-hundred percent customer satisfaction is not an intelligent business objectives.
15. Media planners at major advertising agencies know a great deal about the relative effectiveness of print, television, and radio advertising.
16. Because pricing is such an important component in the marketing mix, most big companies have a serious pricing strategy based on pricing research.
17. Nielsen’s television rating service--especially the new “people meter”--provides valid information about the number of people watching a particular television program.
18. Consumer and trade promotional programs tend to be more profitable than advertising.
19. Companies cannot quantify the effects of public relations programs. That's one reason why PR is a less valuable components of the marketing mix than advertising or the sales force.
20. Most marketing and advertising programs usually are measured in terms of their profitability.
True FalseDon’t Know
Total:
45
What is Your Marketing IQ?
If you scored: You are:
150 - 160
130 - 149
110 - 129
90 - 109
70 - 89
50 - 69
30 - 49
11 - 29
1 - 10
A marketing genius
A guru, a maven
An up-and-coming consultant
A seasoned professional
A typical marketer
A death-wish marketer
An incompetent
Dangerous to your company
Guilty of malpractice
46
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors
47
An Operating Model Is the Primary Mechanism for "Operationalizing" Business Strategy
Where should we go? How do we get there? How do we deliver it?
Business Strategy Portfolio of Initiatives
What are our “promises”?
Value Propositions
Operating Model
• Develop comprehensive offering for target customers
• Define compelling reasons:
– for employees to work at Samsung
– for partners to work with Samsung
– for investors to invest in Samsung
48
An Operating Model Is the Primary Mechanism for "Operationalizing" Business Strategy
Where should we go? How do we get there? How do we deliver it?
Business Strategy
Operating Model
Portfolio of Initiatives
Framework which defines internal business structures, processes and systems:
• High level business unit structure and process structure design
• Business system definition
• Organization structure
What are our “promises”?
Value Propositions
49
Operating Models Consist of Three Primary Components
• Identification of business unit structure, organized around customers, markets, products, geographies, etc.
• Delineation of dedicated and shared services across business units
• Preliminary evaluation of profit & loss responsibility, revenue responsibility, and cost centers
• Articulation of “rules of engagement” — A.K.A. “How things really get done”
• Organizational Structure describes at a high level all elements of:
- reporting structures
- roles & responsibilities
- jobs & skills
• Design of an organizational structure that is aligned with the strategy and other operating model components
Business Structure
C h art T it le
Strategic Operating Model
CompetenciesCompetencies
Performance Management
Performance Management
Business Processes
Knowledge Management
Knowledge Management
Sales
Marketing
Call Center (Service)
Billing Operators
Remittance Processing
System Control Center Ops
Generation
Engineering and Construction
Environmental
Regulatory (Lobbying)Legal Services
Human ResourcesFinance
External AffairsBusiness Planning
Administration
One Operating Business Unit
Regulatory (Lobbying)Legal Services
Human ResourcesFinance
External AffairsBusiness Planning
Administration
Engineering
Environmental Compliance
Transaction Management
Regulatory Compliance
Energy Generation Unit (Genco)
Customer Operations Unit (Disco)
Energy Delivery Unit (Transco)
Low Cost Differentiated Services
By-Product (Ash) Management
Maintenance
Operations
Maintenance
Operations
Customer Service
Product Development
Marketing
Sales
11
Business System22
Organization Structure33
• Clearly identified and defined business system components that support the strategy and the high level business structure
Our focus
50
Operating Model Development: Business System
Competencies (Staffing, Training,
Development)
Competencies (Staffing, Training,
Development)
Performance ManagementPerformance Management
Business Processes
Knowledge Management &
Information Systems
Knowledge Management &
Information Systems
Cha
nge
Managem
ent
Business Processes
51
Operating Model Development
Competencies (Staffing, Training,
Development)
Competencies (Staffing, Training,
Development)
Performance ManagementPerformance Management
Business Processes
Knowledge Management &
Information Systems
Knowledge Management &
Information Systems
Cha
nge
Managem
ent
Business Processes
52
Competency Modeling and Assessment Methodology
UniversalUniversal
CompetenCompetencycy
ModelingModeling
ProcessProcess
Job/RoleJob/Role
AssessmenAssessmentt
GapGapAnalysisAnalysis HR LinkHR Link
Tactical Organizational DesignTactical Organizational DesignStage 1 Stage 2 Stage 3 Stage 4
Docu
menta
tion R
evie
w/
Docu
menta
tion R
evie
w/
Curr
ent
Sta
te U
nders
tandin
gC
urr
ent
Sta
te U
nders
tandin
g
LIN
KA
GE
Succession/Succession/Career Career PlanningPlanning
SelectionSelection
Training and Training and DevelopmentDevelopment
Performance Performance AppraisalAppraisal
CompensationCompensation
RecruitmentRecruitment
ValidationValidation
53
Operating Model Development
Competencies (Staffing, Training,
Development)
Competencies (Staffing, Training,
Development)
Performance ManagementPerformance Management
Business Processes
Knowledge Management &
Information Systems
Knowledge Management &
Information Systems
Cha
nge
Managem
ent
Business Processes
54
Operating Model Development
Competencies (Staffing, Training,
Development)
Competencies (Staffing, Training,
Development)
Performance ManagementPerformance Management
Business Processes
Knowledge Management &
Information Systems
Knowledge Management &
Information Systems
Cha
nge
Managem
ent
Business Processes
55
Performance Management is the Vital Link Between a Company’s Ability to Define its Strategy and Implement It.
StrategyVision
PerformanceManagement Execution
Concrete initiatives to operationalize a firm’s strategy
Execution at all levels consistent with strategy
Measurement Motives
What you measure is what you get.
What you measure is what you get.
It’s not what you expect … it’s what
you inspect.
It’s not what you expect … it’s what
you inspect.If you can measure it,
you can manage it.If you can measure it,
you can manage it.
56
Effective Performance Measurement Systems Capture Both Financial and Non-Financial Value Creation
Strategic DecisionsStrategic Decisions
Financial Markets
Investor Estimates of Future Cash Flows
Investor Estimates of Future Cash Flows
Strategy ExecutionStrategy Execution
Capital Allocations
Share Price
Financial Performance Measurement
Non-Financial Performance Measurement
Company
Market Feedback Loop: Measuring Value
Value Creation
57
Performance Measurement Has Become a Highly Effective Management Tool for Aligning Performance With Strategy, Especially in Rapidly Changing Industries
• communicates the company’s strategic vision down through the organization
• provides a management tool for decision-making
• promotes accountability and follow-up
• provides a mechanism for learning and feedback
• promotes alignment of effort up and down the organization
58
The Balanced Scorecard Has Proven to be a Highly Effective Approach for Both Performance Management and Business Transformation
• As of 1999, more than 50% of Fortune 1000 companies had adopted some version of the Balanced Scorecard (BSC).
• The early adopters of the Scorecard in the early 1990’s have reported satisfaction with what the Scorecard accomplished for them.
- About half used the Scorecard to focus and improve their pursuit of already established financial goals (“run a tighter ship”)
- About half used the Scorecard to bring about a more fundamental business or cultural transformation (“turn the ship around”)
- At least half of the companies viewed the Scorecard as a “resounding success,” and nearly all called their efforts generally successful. All believed the Scorecard helped employees focus on strategic priorities and the leading indicators of financial success and better manage their company’s value chain.
• This compares favorably with failure rates between 65% and 80% for business transformation initiatives with a significant information systems component.
Sources: Balanced Scorecard Collaborative, press release dated February 25, 1999, at www.bsccollaborative.com; Sarah Mavrinac and Michael Vitale, “Where Are They Now? Revisiting the Original “Balanced Scorecard” Firms,” Perspectives on Business Innovation (Ernst & Young Center for Business Innovation), Issue 2, p. 29., Gartner Group.
59
A “Good” Scorecard Tells the Story of Your Strategy
A Strategy is a setA Strategy is a setof hypotheses aboutof hypotheses about
cause and effectcause and effect
Criteria for a Good Balanced ScorecardCriteria for a Good Balanced Scorecard
• Cause and Effect Relationships:– Every measure is a link in a chain of cause and
effect linkages that represent the strategy
• Linkage to Financials:– Every measure ultimately ties to financial
results/EVA
• Emphasis on Performance Drivers:– Focus on factors which create long term value– Establish a balance between leading and lagging
indicators
• Measures that create change– Measures which communicate objectives not
prescribe actions– Measures which cause the organization to redefine
a process or change behavior
• Cause and Effect Relationships:– Every measure is a link in a chain of cause and
effect linkages that represent the strategy
• Linkage to Financials:– Every measure ultimately ties to financial
results/EVA
• Emphasis on Performance Drivers:– Focus on factors which create long term value– Establish a balance between leading and lagging
indicators
• Measures that create change– Measures which communicate objectives not
prescribe actions– Measures which cause the organization to redefine
a process or change behavior
60
At a Personal Level, Understand How Their Actions Impact Economic Value
ILLUSTRATIVE
ILLUSTRATIVE
CapitalCapital
ExpenseExpense
ProductionExpense
ProductionExpense
RawMaterials
RawMaterials
OrderingCosts
OrderingCosts
ErrorsErrors
ClericalErrors
ClericalErrors
RevenueRevenue
AbilityAbility
AdministrationExpense
Facilities
Rents/Occupancy ExpenseExpensed Capital
TransportationPeople
Expense
Confidence
NOPATNOPAT
Sales
Marketing
New ProductDevelopment Inputs
EDI
InventorySpoilage
Bad DataErrors
StaffingConstraints
Equipment
TechnicalErrors
Education
Intellectual Aptitude
Reporting
Warehousing
Cost OfCapital
Cost OfCapital
EVA
61
The Balanced Scorecard Is the Most Comprehensive and Flexible Measurement Framework Available and Best Addresses Today’s Challenges in Performance Measurement and Management
A complete Balanced Scorecard has four fundamental components:
The BalancedScorecard
Framework OfComplementary
Business Perspectives
The BalancedScorecard
Framework OfComplementary
Business Perspectives
A Cause-&-EffectModel That ExplainsHow The Company’sStrategic Objectives
Together Create Value
A Cause-&-EffectModel That ExplainsHow The Company’sStrategic Objectives
Together Create Value
Supporting Processes& Infrastructure
To Implement TheScorecard As A
Business Discipline
Supporting Processes& Infrastructure
To Implement TheScorecard As A
Business Discipline
A Set of Key Measures,Targets, and Accounta-
bilities To GuideProgress Toward Those
Objectives
A Set of Key Measures,Targets, and Accounta-
bilities To GuideProgress Toward Those
Objectives
Four perspectives:
•Financial
•Customer
•Business Processes
•People (Organizational Learning and Growth)
The model helps ensure:
•That the underlying busiess vision is shared by the management team and communicable to the organization
•That the set of strategic objectives that form the basis for the Scorecard work together toward the same strategic goals
•That the Scorecard’s various objectives ultimately contribute to improved financial performance
For each strategic objective:
•One or more Key Performance Indicators (KPIs)
•A target for each KPI
•One or more groups or individuals charged with achieving each target
•Where relevant, designated initiatives to help achieve those targets
Process examples:
•Management Review
•Budgeting
•Performance Review
•Compensation
Infrastructure examples:
•Decision support & reporting systems
•Communication
•Training
62
The BSC Links Strategic Objectives to Measurements Across Four Perspectives
Business Process
To satisfy our customers, in which internal business processes must we excel?
Customer
To satisfy our shareholders, what financial objectives must we accomplish?
The StrategyThe Strategy
Financial
To achieve our strategy, which customer needs must we satisfy?
People
To achieve our strategy, how must the people learn and innovate?
The Balanced Scorecard translates the strategy of a firm into statements of “things the firm needs to do well to be successful.” In its standard form, the Balanced Scorecard defines success
across at least four perspectives: Financial, Customer, Business Process, and People.
Most Scorecards also seek a balance between indicators of current growth (often financial and business measures) and indicators of future growth (typically in the “customer” and “people”
perspectives)
Most Scorecards also seek a balance between indicators of current growth (often financial and business measures) and indicators of future growth (typically in the “customer” and “people”
perspectives)
*Based on the original concepts proposed by David Norton and Robert Kaplan in their 1992 Harvard Business Review article
63
The Balanced Scorecard Defines Strategy As a Set of Hypotheses About Cause and Effect
Increase Customer Increase Customer Confidence in Our Confidence in Our Financial AdviceFinancial Advice
Broaden Broaden Revenue Mix Revenue Mix
Improve Improve ReturnsReturns
Understand Understand Customer Customer SegmentsSegments
Cross-Sell Cross-Sell the Product Linethe Product Line
DevelopDevelopthe Offeringthe Offering
AchieveAchieveEmployee Employee
SatisfactionSatisfaction
Improve Improve Customer Customer
InformationInformation Broaden Skills Broaden Skills (Financial (Financial Planner)Planner)
Align Align Reward Reward SystemSystem
Partial Revenue StrategyIllustrative
Illustrative
Illustrative
Illustrative
64
This Cause and Effect Model Ensures That All Measures Ultimately Drive Financial Indicators
Increase Customer Increase Customer Confidence in Our Confidence in Our Financial AdviceFinancial Advice
Broaden Broaden Revenue Mix Revenue Mix
Improve Improve ReturnsReturns
Understand Understand Customer Customer SegmentsSegments
Cross-Sell Cross-Sell the Product Linethe Product Line
DevelopDevelopthe Offeringthe Offering
AchieveAchieveEmployee Employee
SatisfactionSatisfaction
Improve Improve Customer Customer
InformationInformation Broaden Skills Broaden Skills (Financial (Financial Planner)Planner)
AlignAlignReward Reward SystemSystem
PartialRevenueStrategy
Financial Return on Investment Revenue mix Revenue growth
Customer Customer satisfaction
survey Customer retention Depth of relationship Share of segment
Business Processes Product development
cycle Revenue from new
products Hours with customers Cross-sell ratios
People Employee satisfaction Revenue per employee Strategic info
availability Strategic job coverage Personal goals
alignment
65
PeopleContinue to Attract andRetain Highly-Effective
Workforce
Continue to Attract andRetain Highly-Effective
Workforce
Foster Culture ofInnovation and Risk
Taking
Foster Culture ofInnovation and Risk
Taking
Eliminate Silos andCeilings
Eliminate Silos andCeilings
Provide Challenging and Rewarding WorkProvide Challenging and Rewarding Work
Create a Work Environment of Trust, Teamwork, and IntegrityCreate a Work Environment of Trust, Teamwork, and Integrity
Financial
Customer
BusinessProcess
Retailer Push Consumer Pull
“Profitable Share Growth”
“Be Consumer Brand-of-Choiceand Retailer Preferred Supplier”
“Provide HighQuality, EnhancedMargin”
“New Ideas,Good TeamWork”
MaximizeTotal Return
toShareholders
StrategicallyManage Market
Share
StrategicallyManage Market
Share
Meet or ExceedLong-Term
Corporate EarningsGoals
Meet or ExceedLong-Term
Corporate EarningsGoals
AchieveProductivity andCost Advantage
AchieveProductivity andCost Advantage
Enhance Profitabilityof Business Partners
(Wholesaler,Retailer)
Enhance Profitabilityof Business Partners
(Wholesaler,Retailer)
Be Perceived byConsumers as Having the
Best Value
Be Perceived byConsumers as Having the
Best Value
Enhance BrandEquity, esp.BudweiserTrademark
Enhance BrandEquity, esp. XXXTrademark
Ensure and Promote HighProduct Quality and
Freshness as aCompetitive Advantage
Ensure and Promote HighProduct Quality and
Freshness as aCompetitive Advantage
Help PartnersManage Product Mix
and Availability
Help PartnersManage Product Mix
and Availability
Partner withRetailers to Execute
Win/Win/WinActivities
Partner withRetailers to Execute
Win/Win/WinActivities
Strengthen use ofinformation across theextended supply chain,
including 2nd and 3rd tier
Strengthen use ofinformation across theextended supply chain,
including 2nd and 3rd tier
Understand CustomerTrends to Design Targeted
Pricing, Packaging, andAdvertising/Merchandising
Understand CustomerTrends to Design Targeted
Pricing, Packaging, andAdvertising/Merchandising
Maintain Best-in-ClassMaster Scheduling andDistribution Capability
Maintain Best-in-ClassMaster Scheduling andDistribution Capability
Maintain Consistency inProduction and
Procurement Processes
Maintain Consistency inProduction and
Procurement Processes
Develop CreativeProduction Innovations
Develop CreativeProduction Innovations
Maintain Best-in-ClassInnovative Marketing
Capability
Maintain Best-in-ClassInnovative Marketing
Capability
“Manage andMeasure AcrossValue Chain”
Incorporate Leading Edge Decision Support Systems into Effective Decision MakingIncorporate Leading Edge Decision Support Systems into Effective Decision Making
Provide RightProduct/
Package atRight Place,
at RightTime, at
Right Priceand Margin
For example, a Large Beverage Company
66
A XXX Cause-and-Effect Model Should Show How its Strategic Objectives in All Four Perspectives
BusinessProcesses
BusinessProcesses
PeoplePeople
GrowthGrowth
Customer/ Consumer
Customer/ Consumer
Understand & respondto customer needs
Create a knowledge-sharing culture
Reduce inventory& current
assets
Increase unitvolume
Maximize shareholder value
Hire & developcustomer-focused
employees
Make what you sell,don’t sell what you
make
Empower employees to make decisions closer
to the customer
Increase EVA
Increase price relativeto market leader
Increase customeracquisition & share of wallet
Increase customerretention & lifetime value
Build brand equity
Target keycustomer segments
Develop customerknowledge management
infrastructure
Increasesales-to-asset ratio
Illustrative XXX Cause-&-EffectModel
Increase customerprofitability
Measure & rewardcustomer-focused
behavior
Organize aroundthe customer
Leverage R&D todevelop innovative
digital products that ad-dress customer needs
67
A Balanced Scorecard Includes Objectives, Measurements, and Targets That Promote Change
Example:
Owner/Owner/AccountabilityAccountability
Owner/Owner/AccountabilityAccountability
Finance Director CEO Business
Development Manager
Finance Director CEO Business
Development Manager
TargetsTargetsTargetsTargets
Top 10% of FTSE companies each year
RPI + X% annually 25% in three years
Top 10% of FTSE companies each year
RPI + X% annually 25% in three years
MeasurementsMeasurementsMeasurementsMeasurements
% dividend growth Operating Margin Revenue from new
services
% dividend growth Operating Margin Revenue from new
services
BusinessBusinessObjectivesObjectives
BusinessBusinessObjectivesObjectives
Shareholder value Profit New revenue
Shareholder value Profit New revenue
PerspectivePerspectivePerspectivePerspective
ShareholderShareholderRequirementsRequirements
ShareholderShareholderRequirementsRequirements
Marketing Director Business
Development Manager Marketing Director
Marketing Director Business
Development Manager Marketing Director
Number one customer rating
$Xm in five years Number one customer
rating
Number one customer rating
$Xm in five years Number one customer
rating
Value for money Profits from alliances Customer satisfaction
Value for money Profits from alliances Customer satisfaction
Differentiation Strategic alliances Customer service
Differentiation Strategic alliances Customer serviceIndustry/Industry/
CustomerCustomerPositioningPositioning
Industry/Industry/CustomerCustomer
PositioningPositioning
Chief Operating Officer
Research and Development Manager
Marketing Director
Chief Operating Officer
Research and Development Manager
Marketing Director
Best-in-class within five years
Reduced by 50% in two years
60% within one year
Best-in-class within five years
Reduced by 50% in two years
60% within one year
Revenue/work hour Product development
cycle time Number of initiatives
targeted at profitable segments
Revenue/work hour Product development
cycle time Number of initiatives
targeted at profitable segments
Productivity New product
development Segmentation
Productivity New product
development Segmentation
Human Resources Director
Business Development Manager
CEO
Human Resources Director
Business Development Manager
CEO
Treble in three years 10 in five years 20% in two years
Treble in three years 10 in five years 20% in two years
Management span of control
Number of “learning partnerships”
% management time interfacing with customers
Management span of control
Number of “learning partnerships”
% management time interfacing with customers
People policy Alliance
management Customer focus
People policy Alliance
management Customer focus
Business Business ProcessesProcessesBusiness Business ProcessesProcesses
PeoplePeoplePeoplePeople
68
A Properly Designed Process Will Avoid the Common Pitfalls of Most “Home Grown” Balanced Scorecards
Institutionalizing a Dysfunctional Institutionalizing a Dysfunctional ProcessProcess
Institutionalizing a Dysfunctional Institutionalizing a Dysfunctional ProcessProcess
Failing to Articulate Strategic IntentFailing to Articulate Strategic IntentFailing to Articulate Strategic IntentFailing to Articulate Strategic Intent Creating Unbalanced MeasurementCreating Unbalanced MeasurementCreating Unbalanced MeasurementCreating Unbalanced Measurement
Establishing a Rigid Management Establishing a Rigid Management PhilosophyPhilosophy
Establishing a Rigid Management Establishing a Rigid Management PhilosophyPhilosophy
Industry generic, not strategic “Unintegrated’ perspectives What customer values are not def
ined Missing internal, operational link
Industry generic, not strategic “Unintegrated’ perspectives What customer values are not def
ined Missing internal, operational link
Too many measures Unrealistic, unrepeatable Activities instead of measures Misleading All financial
Too many measures Unrealistic, unrepeatable Activities instead of measures Misleading All financial
No executive consensus—not top down
Roll out before completion Tie to incentives prematurely Too many people, too long Lose momentum
No executive consensus—not top down
Roll out before completion Tie to incentives prematurely Too many people, too long Lose momentum
Control, not communication Strategic report vs. strategic
learning agenda For management only
Control, not communication Strategic report vs. strategic
learning agenda For management only
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In Sum, The Balanced Scorecard Determines:
- What is strategically critical
- What needs to be measured
- How it is to be measured
It also links the boardroom to the back office
70
The Balanced Scorecard’s Metrics and Supporting Processes Are Cascaded Down Through The Organization As Far As Needed, Often to the Individual Hourly Worker
Design Scorecard
ImplementScorecard
Cascade Level I: Corporate
Design Scorecard
ImplementScorecard
Cascade Level II: Business Unit
Design Scorecard
ImplementScorecard
Cascade Level n: Dept. or Team
Design Scorecard
ImplementScorecard
Cascade Level n+1: Individual
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XXX Performance Management: Major Tasks to Perform
Objective:
Major Activities:
Results:
Ownership:
DesignXXX-Level
Paper-BasedBalancedScorecard
DesignXXX-Level
Paper-BasedBalancedScorecard
ImplementBasic XXX-Level
Paper-BasedBalancedScorecard
ImplementBasic XXX-Level
Paper-BasedBalancedScorecard
DesignGPM-Level
Paper-BasedBalancedScorecard
DesignGPM-Level
Paper-BasedBalancedScorecard
ImplementBasic GPM-Level
Paper-BasedBalancedScorecard
ImplementBasic GPM-Level
Paper-BasedBalancedScorecard
ExpandProcess Support
for BalancedScorecard
ExpandProcess Support
for BalancedScorecard
Design enterprise-wide Scorecard framework
•Evaluate XXX vision & strategy
•Define short list of strategic objectives
•Develop cause-&-effect model
•Define measures
•Establish targets
•Develop implementation plan
XXX-level Scorecard defined and launched for executive team
XXX President
Implement enterprise-wide Scorecard framework
•Provide additional training
•Integrate use of Scorecard into management review, budgeting, and planning processes for executive team
•Launch “missing measures” program to develop & collect new measures
•Review and refine model, measures, & targets
•Link to executive compensation
•Communicate Scorecard to rest of organization
XXX-level Scorecard fully institutionalized
XXX President
Design Scorecard framework for each GPM
•Apply XXX vision & strategy
•Define short list of strategic objectives
•Develop cause-&-effect model
•Define measures
•Establish targets
•Develop implementation plan
Scorecards defined and launched for each GPM executive team
Global Product Managers
Implement Scorecard framework for each GPM
•Provide additional training
•Integrate use of Scorecard into management review, budgeting, and planning processes for executive team
•Launch “missing measures” program to develop & collect new measures
•Review and refine model, measures, & targets
•Link to executive compensation
•Identify additional IT requirements
XXX-level Scorecard fully institutionalized
Global Product Managers
Establish full support for automated scorecard & complete cascade to rest of XXX
•Develop & implement executive information system to automate Scorecard mgmt. & reporting
•Confirm how far to cascade the Scorecard (level & geography)
•Launch communication & training program
•Complete the cascade
•Fine-tune measures & targets through use
•Link to compensation
Full Balanced Scorecard implementation
Functional & depart-mental managers
Cascade Level I: Cascade Level II:Expanded
Implementation
72
Why Does The Balanced Scorecard Make Sense for XXX?
The Scorecard measures a business’s performance from customer, business process, and employee development perspectives as well as from a financial one.
Until now, XXX has measured itself primarily along financial lines, and to a lesser extent by process measures. However, it now recognizes that it needs to adopt a customer-based perspective, and transform its organization’s and employee’s capabilities to better support a customer focus.
The Scorecard also tries to balance emphasis on drivers of current performance with emphasis on drivers of future growth.
XXX has been very successful recently, but recognizes that it needs to shift its focus to new sources of future growth, and that this will entail changes in how it does business.
The Scorecard is one of the most effective tools available for accomplishing cultural change and business transformation.
XXX realizes that shifting from a product focus to a customer focus will require a fundamental reorientation in company culture, as well as a transformation in the business processes by which XXX develops, positions, and sells its products and responds to its customers’ needs.
The Scorecard is one of the most effective means of communicating a company’s strategic vision down through the ranks of an organization so that each employee understands the strategy and understands how his or her actions should contribute to achieving that vision.
For XXX to become a customer-focused organization, management will have to communicate--continually and consistently--what that will actually mean for day-to-day operations throughout the company.
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Why Does The Balanced Scorecard Make Sense for XXX (continued)?
The Scorecard is holistic: it provides a balanced set of measures for an entire company or business unit, not just for a single initiative or business process.
XXX will need to make changes throughout its entire organization--not just in its marketing process--to focus successfully on its customers. The Scorecard can help each part of the organization understand its role within a customer-driven business.
The Scorecard encourages sharing cross-functional objectives and measures by different groups that need to work together toward a common goal. It discourages distinct parts of an organization from “owning” one key measure and ignoring others as “belonging” to someone else.
To achieve a customer-driven culture in an organization where P&L responsibility is allocated along product lines (GPMs), XXX will need a performance management framework that unites GPMs, Global Marketing, and overseas offices as a team with a common focus on the customer and a shared vision of how to meet customer needs.
The Scorecard assumes that strategic objectives will change over time or need to be fine-tuned, and provides a management review process for doing so.
XXX is entering an era of increased market volatility and shortened strategic planning horizons, and will have to adjust its customer strategy as the connected economy evolves.
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Operating Model Development
Competencies (Staffing, Training,
Development)
Competencies (Staffing, Training,
Development)
Performance ManagementPerformance Management
Business Processes
Knowledge Management &
Information Systems
Knowledge Management &
Information Systems
Cha
nge
Managem
ent
Business Processes
75
Contents
I. The Sears Story
II. Business Imperatives in the Connected Society
III. The New Business Paradigm
IV. Gap Analysis
V. Actions and Implementation Plan
VI. Key Success Factors