Hwang raw, design and planning of the balanced scorecard a case study rubber in taiwan

Human Systems Management 26 (2007) 217–227 IOS Press 217 Design and planning of the balanced scorecard: A case study Ming-Hon Hwang a,b and Hsin Rau b,∗ a Department b Department of Information Management, Diwan College of Management, Taiwan of Industrial Engineering, Chung Yuan Christian University, Taiwan Abstract In the industrial economy, evaluating company performance based on financial results was good enough However, in the current globalized and highly competitive environment, maintaining long term competitiveness requires companies to engage in overall strategic planning and performance evaluation The balanced scorecard is a tool or method for balancing an organization’s performance and can react to situations where a company’s direction becomes disoriented This approach assists in strategy planning, process management, and performance evaluation from four perspectives, including financial, customer, internal process, and learning and growth Good strategy planning provides companies with a correct management direction, correct process management ensures the efficient execution of plans, and correct performance evaluation illustrates the execution results This study mainly focuses on how a large rubber company in Taiwan utilizes the balanced scorecard in its organization As the technical perspective is important in the rubber keypad industry, besides the four above perspectives, this company has added the technical perspective By introducing this company and its progress in implementing the balanced scorecard, this study hopes to provide other companies, especially rubber companies, with a planning direction and reference for the future implementation of the balanced scorecard Keywords: Balanced scorecard, competitive advantage, performance evaluation Ming-Hon Hwang is a PhD candidate at the Department of Industrial Engineering, Chung-Yuan Christian University, and a senior lecturer at the Department of Information Management, Diwan College of Management, Taiwan His research interests include supply chain management and strategy management Hsin Rau is a Professor of Industrial Engineering Department at Chung-Yuan Christian University, Taiwan He received the PhD degree from UCLA His research interests include e-business and supply chain management He has published many papers in journals and conferences * Corresponding author E-mail: hsinrau@cycu.edu.tw Introduction In the past, companies used economies of scale to produce abundantly standardized products, to acquire customers at the lowest possible price, and to succeed in the industry It was important to obtain a simple method of assessing company financial performance However, given improvements in technology and global market transparency, global companies seem to be competing locally Customers thus have the ability to find products or services with the greatest customer value and purchase them as soon as possible Customer value is the measurement of customers’ feelings towards a company, and comprises the product, service and other intangeables provided by the company Thus, to survive and compete against global competitors, companies have to make a total strategy plan and an operating process The balanced scorecard is a tool or method for balancing organizational performance and can help managers by providing them with early warning and thus facilitating rapid response to a bad company decision During the past ten years, a belief has grown among academics and industry that companies are excessively reliant on financial indi- 0167-2533/07/$17.00  2007 – IOS Press and the authors All rights reserved 218 M.-H Hwang and H Rau / Design and planning of the balanced scorecard cators for performance evaluation, despite this form of evaluation not helping their competitiveness Chow et al [1] pointed out that 80% of large American enterprises wish to change traditional performance evaluation and measurement systems to improve their capacity for strategy execution Johnson and Kaplan [2] noted that in many big companies, managers use short term financial measurements as a basis for decisionmaking, especially earnings per share and profit, to review the effects of each project on those measurements However, investments which are helpful to long term economic development, such as research development, process improvement, and training, have been ignored by managers who are focused on short term financial performance at the expense of long-term competitiveness For example, Xerox was quite successful in leasing copy machines, and their financial reports indicated excellent performance However, the company ignored customer complaints regarding their products and dissatisfaction with pricing, issues which were not reflected in the performance measurement, and the company eventually faced a financial crisis as a result of these issues Hoffecker and Goldenberg [3] believed that short-sighted companies that focus on a single false performance dimension are at risk of suffering from weak company strategy Kaplan and Norton [4] believed traditional financial performance measures were effective in the industrial age, but had been discarded by companies seeking new technologies Managers seek a balance between financial and other performance Christopher [5] emphasized that traditional performance evaluation cannot help teams understand their operations and capacities, or improve their performance These result measures are mostly internal financial indicators, including revenue, gross margin, cost and debts, and few of them include a cross-department index Maisel [6] mentioned that traditional financial performance evaluations cannot be associated with various strategies, creating barriers to strategy execution, competitiveness improvement, and profitability Hoffecker and Goldenberg [3] thought that former performance evaluation methods based on traditional accounting systems cannot provide information about customers and competitors, and losing this important information means losing awareness of market opportunities Zeleny [7] believes that decision making occurs only when additional dimensions, such as an estimated reliability, a judge’s credibility, or the cost of erroneous judgments are brought in Clearly, no one-dimensional or single-criterion de- cision problem can ever exist Other than choosing the tool of measurement, there remains very little to be decided Atkinson et al [8] believed that performance evaluation trends involve improving current financial indicators and non-financial indicators (e.g., customer satisfaction, employee satisfaction, and product failure rate) Zee and Jong [9] observed that traditional evaluations, like regular sales and sales revenues indicate past results rather than future prospects In terms of the analysis of stock holder value, future forecasts should be based on the current status However, the problem is that the financial evaluation is the final result, and can be obtained only after executing different activities In contrast, the balanced scorecard covers areas like customers, internal processes, team innovation, and development progress, and helps in methodically analyzing team activities and tracing the execution results, finally leading the company to financial success Thus, this study focuses on company P, and describes in detail how it integrates the balanced scorecard into its strategy planning The remainder of this paper is organized as follows: Section describes the content of the balance scorecard Section then introduces the case (i.e., Company P) Section explains the implementation of the balance scorecard for Company P Conclusions are finally drawn in Section Content of the balanced scorecard 2.1 Origin The balanced scorecard concept dates back to 1988, when KPMG designed a performance evaluation system for APPLE Later, in 1990, the Nolan Norton Institute sponsored a research project entitled “evaluation of future organization performance”, led by Professor Robert Kaplan of Harvard University as a representative of academia and the CEO of Nolan Norton David Norton as a representative of industry to evaluate the performance of 12 companies The project was completed in December of 1990 and published in the Harvard Business Review in 1992 Norton and Kaplan mentioned the concept of the balanced scorecard, which applies an overall management system covering four perspectives to help managers acquire complete information very quickly, and learn the status of their business The balanced scorecard is a total management system for translating strategy into action, and its core value is achieving the company vision and strategy The key objective is to transform company M.-H Hwang and H Rau / Design and planning of the balanced scorecard strategy into actions to improve competitiveness The four perspectives include the traditional financial indicators and add three non-financial operating indicators, namely the customer perspective, the internal process perspective, and the learning and growth perspective These four perspectives transform an organization’s vision and strategy into a new performance evaluation system with objectives and measures It consolidates individual, departmental, cross-departmental, resources and projects of the company to achieve common objectives, and it associates company strategy, vision, and direction with a strategic performance management system In practice, many companies using the balanced scorecard consider it to be an important management process, being used for individual and team objectives, the salary system, resource allocation, budget estimation and planning, as well as strategy feedback and learning Consequently, the balanced scorecard has been promptly developed as a strategic management system 2.2 Definition Niven [10] thinks that the balanced scorecard is a strategic measurement tool carefully selected by companies, that leaders use to express investment achievements to employees and stakeholders, and to motivate the achievement of objectives He also believes that the balanced scorecard incorporates measurement systems, strategy management tools, and communication tools Chow et al [1] pointed out that the balanced scorecard associates traditional and strategic performance evaluation, and helps a company to achieve objectives such as long term strategy, innovation, and customer values Kaplan and Norton [4] mentioned in the Harvard Business Review that the balanced scorecard is a strategic management tool for the association of company strategy and key performance indexes, seeking a balance between long term and short term objectives, financial and non-financial measurements, external and internal performance perspectives, lagging and leading indicators, as well as subjective and objective perspectives 2.3 Advantages Chow et al [1] believe that the advantage of the balanced scorecard lies in helping companies to integrate strategy, organization framework, and vision into management systems, to translate the long term strategy and innovation of customer value into operational ac- 219 tivities, and to balance the competitiveness and short term fortunes of stockholders via the combination of traditional and modern indicators Martin [11] thinks that traditional performance indicators tend to measure financial and accounting aspects, impacting long term productivity and profits, whereas companies should focus on synthetic indicators like customer reactions, profits, quality, and flexible production selection The balanced scorecard provides measurements of those indicators Berman [12] stated that the balanced scorecard enables companies to focus on necessary management and measurement indicators Moreover, it also enables efficient communication of team objectives, and companies can understand how to achieve strategic success by using the balanced scorecard Berman [12] also believes that companies should include 25 to 60 key performance indicators in the balanced scorecard Additionally, Hanson [13] thinks that the main advantage of the balanced scorecard lies in helping all organization members to cooperate on developing the future of the firm MacStravic [14] mentioned that the balanced scorecard possesses six advantages: (1) An Increase of firm insights in the understanding of customers, (2) Readjustment of internal operations, (3) Stockholder satisfaction, (4) Customer acquisition, (5) Improving customer relationships, (6) Increasing customer loyalty Frigo and Kip [15] pointed out that Motorola has improved in three key areas after using the balanced scorecard, including vision systemization, quality improvement, and execution Therefore, the balanced scorecard is an important tool for providing focus in strategic management Case study of Company P Company P was established in 1972, and has accumulated over 30 years of experience It has built up an excellent technical team, which explains its leading position in producing conductive rubber keypads, and having a global customer-base Products previously produced by Company P include mobile phone parts, computers, calculators, desk phones, remote controls, car remote controls, translators, and fax machines (Fig 1) Company P not only looks to reduce costs and share their profits with clients, but it also stresses product quality, which itself depends on a perfect quality control system Therefore, machines must periodically be reformed, fleshware should be constantly improved regardless of market competition, and efforts must be 220 M.-H Hwang and H Rau / Design and planning of the balanced scorecard Fig Products of Company P Fig The organization of Company P made to continue stressing internal management, improve work efficiency, reduce costs and provide customers with feedback As a good corporate citizen, Company P has important community responsibilities Moreover, its core values include innovation, rapidity, pragmatism, diligence and thrift, described as follows: – Innovation: Aggressive, brave, understanding internal and external changes, able to adapt to changes, continuously looking for improvement and creating new opportunities – Rapidity: Agile, well-executed, efficiently gaining a leading position – Pragmatism: Working effectively and honestly Not being edgy or hypocritical, and seeking to obtain stable progress – Diligence and thrifty: Being diligent and thrifty, concentrating on the business, and making things simple and clear To realize the above values, Company P has designed their organization as shown in Fig The main goal of Company P is to make a profit To achieve this goal Company P extends secondary objectives from this principle Company P has adopted the slogan “20103100” to describe the direction in which they need to go in to achieve their target Company P hopes to bring their company to a new level during the 21st century and to rise to big challenges The slogan has the following meaning: – 2010 stands for the Year 2010 (now is the Year 2006) – 3100 stands for company expectations: (1) To rank among the top three in terms of global market share, (2) To obtain 100 technical patents, (3) To make one billion NTD in sales revenues Company P will work with its current organization and resources, relying on business core values, to achieve the above vision The vision is shown in Fig M.-H Hwang and H Rau / Design and planning of the balanced scorecard 221 Fig Company P vision “20103100” Implementation of the balanced scorecard 4.1 Strategy planning and process Rather than using traditional financial performance indicators based on internal accounting systems, which cannot provide important information about customers and competitors, resulting in lost awareness of market opportunities, Company P helps managers to get complete information to understand the status of their businesses, with the balanced scorecard providing the basis of firm strategic planning Additionally, with the 11 steps of the balanced scorecard developed by Olve et al [16] and the background information of four perspectives developed by Niven (Fig [10]), Company P creates the process of strategy planning (Fig 5) Figure shows that Company P first builds the company vision, which is identified by the management team and agreed on by the entire organization After defining the vision, they must establish accurate objectives for its achievement However, before setting objectives, various factors should first be analyzed Company P uses the inner factors analysis, competitors analysis, and five forces analysis to analyze business operations Furthermore, due to the professionalism of the rubber industry, Company P has added the technical perspective to supplement the four perspectives of the balanced scorecard as a direction for objective setting After objectives are set, the action plans for achieving them needs to be defined If there are no problems during the planning of action plans, the plan execution and performance evaluation step is next; however, if there are problems in the objective setting when defining the action plan, then you have to get back to the objective setting step to reset the objectives Once at the plan execution and performance evaluation step, if there is a problem executing the action plans or doing the performance evaluation, then you have to get back to the action plan definition step to check the original action plan On the contrary, if there are no problems at the plan execution and performance evaluation step, the objectives and action plan set by Company P are alright, and Company P can successfully meet its target 4.2 Inner factors analysis Company P has to perform the inner factors analysis to understand its advantages and weaknesses in order to set correct objectives Company P generates its advantages and weaknesses with the inner factors analysis as follows: Advantages: – Respond to requests for low quantity and diversified products – Strong resources and highly cooperative Weaknesses: – – – – Insufficient technical human resources The appearance of the office building is not good Insufficient research and development Big factories have low intentions of placing orders – Insufficient technical staff causing reluctance to invest – Others have already applied Quality Assurance Systems (e.g., Company A, Company B), and their technical information is stored and made available to the public 222 M.-H Hwang and H Rau / Design and planning of the balanced scorecard Fig Background information of four perspectives [9] Focusing on the weakness of the Company P, this study proposes a solution as follows: – Recruit highly educated new employees and train them to increase their competence – Redecorate the appearance and build a large standardized factory – Train talented staff as R&D specialists, and recruit external researchers – Improve factory scope, technical staff, customer service and satisfaction to increase the possibility of receiving orders from big factories – Employee training Sufficient technical staff can solve the resource problem in company investment – Company P also has a Quality Assurance System which is filed and made available to the public 4.3 Competitors analysis The competitors of Company P are Company A, Company B, and Company C Their advantages and weaknesses compared with Company P are as follows: (1) Company A Their main products are PC film, P + R, Rubber, Soft IC, and films in plastic keypads The advantages of Company A are: – Sufficient resources for technical and market development – Publically listed company, with sufficient financial support – Sufficient capital, with plans for equipment performance improvement and employee training, indicating generally bright prospects The comparisons between Company P and Company A are listed in Table (2) Company B The products of Company B consist of metal rubber coated keypads, double printing keypads, EL lamps, plastic metal domes, plastic films, and mobile phone covers The advantages of Company B are: M.-H Hwang and H Rau / Design and planning of the balanced scorecard 223 Fig Process of strategy planning for Company P Table Comparison between Company P and Company A No Item Company P Company A Number of employees Stock listed Financial support, having plans for equipment performance improvement and employee training, bright prospects Insufficient No Insufficient Good Good Good – Sufficient employees, especially in engineering and R&D – Publically listed company, with full capital support – Stable structure, with irreplaceable advantages in terms of resources – Excellent appearance of the office building, equipment, and technical staff, with consistent orders from big factories – Efficient factory management and decision process The comparisons between Company P and Company B are listed in Table (3) Company C Company C has transformed itself into an electronics company, and their main products are rubber, P + R, bonding, lasers and PC films The comparison between Company P and Company C are listed in Table 4.4 Five forces analysis Considering current resources, organization, team scope, competitive analysis, the admission of Taiwan to the WTO, competition and threats from the rapid growth of China enterprises, and the current international economic situation, this subsection conducts a five forces analysis for Company P This five forces analysis should help to clarify the future direction for Company P and help it identify a correct strategy, reduce risks, and achieve maximum profits, creating a win-win situation Hopefully, Company P can enter a new phase in the 21st century and continue to grow The five forces analysis devised by Porter [17] determines industry profitability or attractiveness based on five competitive forces: threats from potential entries, threats from substitutors, price negotiation power of the buyer, price negotiation power of the supplier, and industry competitors This analytical perspective 224 M.-H Hwang and H Rau / Design and planning of the balanced scorecard Table Comparison between Company P and Company B No Item Company P Company B Number of employees, especially in engineering and R&D Stock listed company, capital supports new projects within budget Stable structure, irreplaceable advantages in resource Excellent appearance, equipments and technic, consistent orders from big factories Efficient factory management Insufficient Not listed Fair structure and resources Insufficient Fair Good Good Good Good Good Fig Strategic map for Company P helps clarify the industry characteristics, which influence competitiveness and profitability in the industry From a strategic point of view, enterprises face competition from competitive forces.This study uses the five forces of Porter for Company P The synthetic analysis is shown in Table 4.5 Strategic map Following the inner factors analysis, competitors analysis, and five forces analysis for Company P, future objectives and action plans can be defined, and Table Comparison between Company P and Company C No Item Company P Company C Technical staff Equipment Capital Insufficient Insufficient Fair Enough Enough Enough the balanced scorecard can be used to evaluate performance The balanced scorecard includes financial, customer, internal process, technical, and learning and growth perspectives Figure shows the strategic map for Company P for the year 2010 M.-H Hwang and H Rau / Design and planning of the balanced scorecard 225 Table Synthetic analysis Price negotiation power Substitute products Substitute level Whom Level Product Substitute Product Level Entry difficulty Category Level Examples Material supplier Partner Customer Middle Strong Weak Touch screen Membrane switch PC film Mobile phone PDA General High High Low Rough Fine Extra work Low High High Remote control, toy, telephone Auto parts Mobile phone, PDA Table 2006 annual objectives for Company P Perspective No Strategy Measurement KPI performance indicator Status (/year) Target (/year) Financial Increase sales sales (new product) Annual growth 25% 50% sales ROI 10% 20% Continuous order rate Customer Customer satisfaction complaint – – Production cycle Delivery rate 90% 95% productivity Production cycle reduction rate Increase personal productivity 20% 40% Number of employees Elimination rate – 2.4 million NTD 2% Improve R&D Patent Quantity 5% 20% Production techniques Technical management New product development Quality Productivity Task follow-up Problem finding and solving Success rate Yield rate Personal productivity Success rate Problems found Solving rate 50% 90% 3750p – 5/month 90% 100% 95% 2% (3825p) 95% 10/month 90% Quit rate 5% 2% Customer loyalty Achievement rate Success rate – 70% 40% 99% 90% 80% Customer Internal Increase customer Customer loyalty satisfaction Customer satisfaction Reasonable cost process Technical Learning and growth Reinforcement of organization Building company Employee satisfaction – 99% 99%