08. Dashboards
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Transcript of 08. Dashboards
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Accounting Finance and Control (AFC) Dahboards and (balanced) scorecards
Paolo Maccarrone [email protected]
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The problem
Intrinsic limits of traditional financial indicators (and, consequently, of management reporting based on financial information)
Two main issues:
Too aggregated measures (managers do not have sufficient degree of detail on the current state of the firm, especially on critical issues/areas/projects)
Financial indicators are generraly not able to predict future trends (backwards orientation fail in predicting future performances: whats going to happen in the future years?)
As a result, a lot of organizations gradually increased the set of indicators to be measured and reported to top management its important to define robust criteria to identify these key performance indicators (KPI)
The set of indicators shall:
- Be as more complete as possible, but at the same not too large (limited number of indicators to avoid the risk of information overload)
- Include indicators monitoring both short-term and long-term goals
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Key Performance Indicators (KPI)
Most of them are not financial
Usually quantitative (but some times also qualitative)
Can measure outputs/outcomes of processes/units (throughput, lead time, etc.) and current state of resources (for ex: quality or amount of human/technical resources)
They can measure both (firm) internal and external variables
They can be both lagging and leading indicators: Lagging indicators are typically measure actual/past performances, while leading indicators are important to predict/influence future performances (it can be said that the future value of lagging indicators depends to some extent on the current value of leading indicators). Leading indicators usually are more difficult to measure than lagging ones.
For example: For many of us a personal goal is weight loss. A clear lagging indicator that is easy to measure. You step on a scale and you have your answer. But how do you actually reach your goal? For weight loss there are 2 leading indicators: 1. Calories taken in and 2. Calories burned. These 2 indicators are easy to influence (but hard to measure). When you order lunch in a restaurant the amount of calories is not listed on the menu. And if you are me, you have no clue how many calories you burn on a given day.
The key issue is the identification of KPIs. In the following slides some approaches for the design of strategic dashboards will be illustrated
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Tableu de Bord (TdB)
TdB (Epstein and Manzoni, 1998, Burguignon et al., 2004) was firstly introduced during the 1950s in France
TdB building steps:
starting from the company objectives, then translated in Key (or Critical) Success Factors (KSFs). KSF should be:
- Measurable - Controllable (i.e. which can be influenced by managers deicisions) - Sufficient to achieve strategic goals
Each KSF is then associated to one or more performance indicator(s). KPIs should be:
- deployed into the organisation (assignment of responsibilities)
- Target values must be identified (typically through benchmarking)
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An example: the identification of a set of strategic KPIs in a chemical company
Strategic goal KSFs Key Performance Indicators
Frequency
Increase in sales 1) Keeping market share in mature markets
2) Focus on Far East
A. Number and entity of speditions towards different markets
B. Purchase orders (backlog) in different markets
C. New customers engaged in Far-east markets
monthly quarterly biannual
Cost reduction 1) Exploitation of production capacity
2) Exploitation of knowledge curves
A. Total fixed costs B. Productivity C. Production capacity
saturation D. Non manufacturing
costs incidence E. Percentage of
production scraps F. Unit variable cost
quarterly monthly monthly quanrtelry. monthly monthly
Zero defects program 1) Operations quality 2) Delivery performance
A. N claims B. % late orders
monthly monthly
Increase market offer
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The value based approach: the value tree
NCF
Fixed net investments
Op. Working Capital
CF =net income + Amort/deprecia=on etc
Inventories
Receivables
Other costs
Produc=on costs
Operat. costs
Sales
Disinvestments
Payables
New Investments
Sales from exis=ng products
Sales from new products
Efficiency in raw materials purchasing
Time to market (new products)
N. of new product development processes Service level Customer sa=sfac=on degree Sales people effec=veness Market share in key segments
Internal structure efficiency
Make or buy
Development ac=vi=es
Quality and manpower turnover
Internal Quality Produc=on capacity u=liza=on
Maintenance and turnover
Days payables outstanding (average delay in payiments vs. suppliers)
Logis=cs flow characteris=cs
Plant characteris=cs
Days sales outstanding (average delay of payments by customers)
Expansion and development
Ac=vi=es dismission
Subs=tu=on of existent ac=vi=es
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The balanced scorecard
The balanced scorecard is a particular type of management dashboard
Its most famous peculiarity consists in the 4 areas:
Vision and Strategy
Objectives Measures Targets Initiatives FINANCIAL
To succeed financially, how
should we appear to our shareholders?
Objectives Measures Targets Initiatives LEARNING AND GROWTH
To achieve our vision, how will we sustain our
ability to change and improve?
Objectives Measures Targets Initiatives CUSTOMER
To achieve our vision, how should we
appear to our customers?
Objectives Measures Targets Initiatives INTERNAL BUSINESS PROCESS
To satisfy our shareholders and customers, what
business processes must we excel at?
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The four perspectives
The financial perspective includes traditional (accounting/value based) corporate performance measures:
Profitability (ROE, ROI, Net Operating Income) Cash generation (net cash flow from operations, free cash flow to firm, etc)
or their proxies (ex: EBITDA)
The customer perspective includes performance measures of the output of the organisation and on the effectiveness of market strategy and the quality of value proposition (as perceived by customers):
Product range, product innovation rate, products quality, lead time/delivery time, ecc
Costumer satisfaction survey, etc. The internal process perspective includes measures which look at the efficiency
(and effectiveness) of core business processes (which, in turn, depend heavily on firms competitive strategy)
The learning and growth perspective is instead oriented at measuring the (continuous) learning and innovation capabilities of the company, also through resource and context variables (quality of human/technological resources, business intelligence systems, organisational learning mechanisms, etc 8
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The balanced scorecard characteristics
The rationale: provide (top) managers with a synthetic but nevertheless complete set of KPI of different nature which enable them to have the full control of the organisation (at the same time avoiding the information overloading effect)
Critical issues:
- Selection of the right (i.e. most appropriate) set of measures - Identification of the links and trade offs among different
parameters
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Balance is good?
Rethoric Balance is good
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Reality Balance is irrelevant causality is key
Financial perspective How do we look to our
shareholder?
Customer How do our
customer see us?
Internal process What must we excel
at?
Learning & Growth Perspective
How can we continue to improve?
Vision and Strategy
Improve Returns
Revenue Mix
Product Range
Cross sell
Educate salesforce
Operating efficiency
Delivery Reliability
Reduce lead time
Ideas from Employees
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Strategy Map
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Improve Profitability
Broaden Revenue Mix
Increase Product Range
Cross selling product line
Educate salesforce
Improve Operating Efficiency
Improve Delivery Reliability
Reduce lead time
Ideas from Employees
Financial Perspective
Improve stock control
Customer Perspective
Internal Perspective
Learning Perspective
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Designing appropriate measures
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Improve Profitability
Broaden Revenue Mix
Increase Product Range
Cross selling product line
Educate salesforce
Improve Operating Efficiency
Improve Delivery Reliability
Reduce lead time
Ideas from Employees
Financial Perspective
Improve stock control
Customer Perspective
Internal Perspective
Learning Perspective
Revenues from new products
Margin ???
% of deliveries arriving on time
No of new products per quarter
% of products dual labeled Inventory turnover
Lead time per customer
No of salespeople attending quarterly sessions
No of new ideas implemented per quarter
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Indicators Objectives
FI
C
IP
L&G
2
3 4
5
1 FI
C
IP
L&G
2
3 4
5
1
The identification of KPIs: the underlying logic
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Example - Cockpit of a Balanced Scorecard
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An example of costruction: Luxottica
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Example Monitoring an indicator
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Increase ROCE to xx%
Revenue Growth Strategy
Enhance the Franchise (New
Business Opportunities)
Productivity Strategy
Enhance Customer
Value Improve Cost
Structure Better
Utilization of Assets
A case study: Mobil Strategy Map The Financial perspective
Non-Gasoline Revenue and Margin
Vision To be the best integrated refiner/ marketer in the US by efficiently
delivering unprecedented value to our customers.
ROCE Net Margin (vs. industry)
Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly
Maximize utilization of existing assets and integrate the business to reduce total delivered cost
Introduce new sources of non-gasoline revenue through expanded C-
Store presence
Volume vs. Industry Premium Ratio
Cash Expense (cpg) (vs. industry)
Cash Flow (vs. plan)
Increase profitability of existing customers by selling more premium
brands
Become the industry cost leader in every category
of the supply chain
Maximize utilization of existing assets
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Operational Excellence
(1) Treacy & Wiersema, The Discipline of Market Leaders, Addison Wesley, 1995
Product Leadership Customer Intimacy
Operationally excellent companies deliver a
combination of quality, price, and ease of purchase
that no one else can match
Examples: Costco
McDonalds Dell Computer
Arco
Best Total Cost
A Product leadership companies pushes its
products into the realm of the unknown, the untried,
or the highly desirable
Examples: Sony J&J
Intel
Best Product
A Customer Intimate company builds bonds with
customers; it knows the people it sells to and the
products and services they need
Home Depot
IBM (1960-70) Airborne Express
Mobil
The Customer Perspective: some basic elements of strategic marketing
Different strategies need different value propositions to attract and maintain target customers
Treacy & Wiersema (1) identify three strategies focused on customers Basic idea is to excel in one dimension, maintaining competitive standards on the others
Best Total Solution
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Customer Value Proposition
Customer perspective: the differentiating factors
Product/Service Attribute
Price
Quality
Time
Functionality
Relationships Service
Other Image
Operational Excellence Customer Intimacy Product Leadership
Best combination of price, quality, and ease of purchase
Meets Competition
Meets Competition
Smart Shopper
Value for Money
Unique products and services defines new ground
Meets Competition
Create the Future
Value for Money
Meets Competition
Meets Competition
Meets Competition
Personal service, tailored to produce results for customers and build long term relationships
Trusted Brand
General Requirement Differentiator
Key:
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The customer perspective: the 5 customer segments
Generally higher-income middle-aged men who drive 25,000 to 50,000 miles a year, buy premium gasoline with a credit
card, purchase sandwiches and drinks from the convenience store, will sometimes wash their cars at the car
wash.
Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular
station; frequently buy premium gasoline and pay in cash.
(F3 - Fuel, food, and fast) Upwardly mobile men and women - half under 25 years of age - who are constantly on the go; drive a lot and snack heavily from the convenience store.
Usually housewives who shuttle their children around during the day and use whatever gasoline station is based in
town or along their route of travel.
Generally arent loyal to either a brand or a particular station, and rarely buy the premium line; frequently on tight
budgets; the focus of attention of marketing efforts of gasoline companies for years.
Road Warriors (16%)
True Blues (16%)
Generation F3 (27%)
Homebodies (21%)
Price Shoppers (20%)
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The Customers perspective
Financial
Delight the Consumer
Customer
Win-Win Relationships With Dealers
Continually Delight the Target Consumer Segments by Fulfilling Their Value Propositions
Clean Safe
Quality Product Trusted Brand
General Requirement Differentiators Speedy Purchase Friendly, Helpful
Employees Recognize Loyalty
Share of Segment: RW, TB, F3 Mystery Shopper Rating
Strengthen Dealer and Distributor Relationships
Improve Dealer Profitability
General Requirement Differentiators More Consumer
Products and Services
Help Develop Business Skills
Dealer Profit Growth Distributor Satisfaction
Increase ROCE to xx%
Revenue Growth Strategy Productivity Strategy
ROCE Net Margin (vs. industry)
Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly
Maximize utilization of existing assets and integrate the business to reduce total delivered cost
Non-Gasoline Revenue & Margin
Volume vs. Industry Premium Ratio
Cash Expense (cpg) vs. Industry
Cash Flow
New Sources of Non-Gasoline
Revenue
Increase Customer Profitability through
Premium Brands
Become Industry Cost
Leader
Maximize Use of Existing
Assets
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From customer to internal processes perspective
Shareholders and customers satisfaction are the business strategy results the organization implements the strategy through business processes that constitute their internal value chain
Strategic activities can be clustered in 3-4 key business processes (no more)
Innovation
Process
Marketing R&D
JV/Partnerships
Customer Management
Process
Sales Service
Relationships
Operations
Process
Inbound Logistics Manufacturing
Outbound Logistics Supplier Relations
Regulatory & Society
Health Safety
Environment Social
Customer Satisfaction
Shareholder Satisfaction
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Strategy Innovation Process Customer
Management Process
Operations Process
Invention Product Development Exploitation (Speed to
Market)
Solution Development Customer Service
Relationship Management Advisory Services
Supply-Chain Management Operations Efficiency: Cost
Reduction, Quality, Cycle Time
Product Leadership
Customer Intimacy
Operations Excellence
Strategic Practices Meet Basic Requirements
The link with fundamental market strategies
Strategies should determine business processes characteristics and importance
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Financial
Customer
Internal Refinery Performance Trading Optimization
Inventory Management
Learning & Growth
Return on Capital
Industry Leader in Profitability
Quality Revenue Growth
Lowest Cost at Pump Cash Flow
Asset Strategy
Productivity Strategy Growth Strategy
Share of Segment
Total Gross Profit, Split
Develop New Products &
Services Dealer Margins Alt.
Profit Centers On Spec On Time Lower Mfg. Cost
Lower Terminal Cost
Health, Safety, & Environmental Performance
Core Competencies &
Skills Organization Involvement
Access to Strategic
Information
Mystery Shopper Rating
RW TB F3
The Mobil Case: the strategy map tree
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Competencies
Strategic Skills Training Levels Knowledge
Transfer
Customer Satisfaction
Shareholder Satisfaction Financial Perspective
Innovation Process
Customer Management
Process Operations
Process
Customer Perspective
Internal Process Perspective
Regulatory and Society
Learning & Growth Perspective
Technology
Strategic Systems
Strategic Databases
Strategic Networks
Climate for Action
Strategic Awareness
Morale PersonalAlignment
Strategic Management
Feedback/Review Process
Planning Process Rewards and
Incentives
The learning and growth perspective
The ability to implement strategy is finally linked with the ability to implement the organizations ability to learn, adapt and growth