Chapter 4
Strategy and the Balanced Scorecard
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The Balanced Scorecard
What gets measured gets managed
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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
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Traditional Management Tools
Financial Reports:
P/LBalance
SheetROI-ROCE
Operating Statistics
StrategicPlan
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The Theory of Management
Financial Results
Operating Statistics
StrategicPlan Operations
ManagementControl
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Traditional Management Tools
• Created by different departments
• Reviewed by different managers
• Reviewed in different time frames
• No connection to each other
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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
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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”
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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
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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
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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
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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
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The Four Perspectives
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Financial Strategies
• Grow– Revenue growth
• Sustain– Profitability, ROI, ROCE
• Harvest– Cash flow, working capital
• Risk management– Diversity
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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
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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
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Asset UtilizationInvestment Strategy
• Manage working capital– Accounts payable– Inventory– Accounts receivable
• Improve asset allocation– Sharing of IT, specialized equipment,
buildings
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Risk ManagementThrough Diversity
• Revenue sources
• Market segments
• Customers
• Products
• Asset allocations
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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
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Standard Measures
• Market share
• Customer retention
• Customer acquisition
• Customer satisfaction
• Customer profitability
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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
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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
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Internal Business Process
Create Product/ Service
Identifythe
Market
Build Product/ Service
Deliver
Service
Innovation
OperationsProcess
Post-SaleServices
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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
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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)
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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
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Post-Sale Services
• Warranty and repair
• Billing and collection
• Rapid reliable service contracts
• Feedback on product performance to drive improvement
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Learn and Grow
Results
StaffCompetencies
EmployeeSatisfaction
EmployeeProductivity
EmployeeRetention
Information Technologyand Data
Climate forActions
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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
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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
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Linking Balanced ScorecardMeasures to Strategy
• Cause-and-effect relationship
• Outcomes and performance drivers
• Link to financials
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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
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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
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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
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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
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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
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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%
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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%
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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
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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
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Display Results Graphically
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Sample BSC—Financial
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Revenue
Profitability
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Sample BSC—Customer
0%
20%
40%
60%
80%
100%
120%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Customer Satisfaction
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Sample BSC—Operations
0%
5%
10%
15%
20%
25%
30%
35%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
20
40
60
80
100
120
140
160
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$0
$50
$100
$150
$200
$250
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fast-Track Admitting Percentage
Cost per Unit
Incremental New Admissions
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Sample BSC—Learn and Grow
82%84%86%88%90%92%94%96%98%
100%102%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Six Sigma Training Scores
0%
20%
40%
60%
80%
100%
120%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Customer Service Training Scores
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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
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Feedback and the Strategic Learning Process
Clarifying vision and strategy
Planning andtarget setting
Strategic feedback and learning
Communication andlinking strategy
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Cascading ScorecardsLinking Directly or Influencing Higher-Level Scorecards
Increased patient satisfaction
Higher brand recognition
Clean and timely bills
Corporate
Support (IT)
Line Department(OB)
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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
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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