The striving success of Business Houses

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Businesses houses are continuously striving to be successful amidst the increasingly competitive and constantly changing environments. To achieve that, they must be willing to adopt any processes and accept any benchmarking standards which would help them in not only doing things right but also in doing the right thing.

The bench mark so accepted should be a:

- reference or measurement standard for comparison;

- performance measurement that is the standard of excellence for a specific business; and

- measurable, best-in-class achievement

Competition has become so intense that managers do have less time to respond to market situation. Efficiency in operations and profitability are the key words in driving the organizations today to remain competitive. The rapid technological developments and improvements in communication have forced the manager to deal with a large quantum of data and arrive at the decision, which would produce results comparable to the market standards. This makes the process little too complex. What they perhaps need is some benchmarking indicators to process the data objectively and to come to a conclusion not only correctly but also quickly.

Benchmarking

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Benchmarking is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This then allows organizations to develop plans on how to adopt such best practice, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to challenge their practices. Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness. It helps crack through resistance to change by demonstrating other methods of solving problems than the one currently employed, and demonstrating that they work.

While "Benchmarking" requires the search for those industry best practices that lead to superior performance, its perceived value is as a continuous process of measuring against the best. However, it is only by the change of its current practices and business processes that a business will achieve overall effectiveness through Benchmarking. But to be effective, such change requires effective leadership and decision making.

Benchmarking certainly has its virtues. Comparing production time or the cost of a standard process to that of peer companies can yield important insights about your own efficiencies-and ultimately, competitiveness. But benchmarking also has its limits. When you ignore the differentiated output that internal support or shared services groups provide, such straight-across cost or numeric comparisons become meaningless.

The Balanced Scorecard

The Balanced Scorecard (BSC) is a strategic performance management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy.

By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests. This tool is also being used to address business response to climate change and greenhouse gas emissions.

Organizations were encouraged to measure, in addition to financial outputs, those factors which influenced the financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.

The underlying rationale is that organizations cannot directly influence financial outcomes, as these are "lag" measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise. Organizations should instead also measure those areas where direct management intervention is possible. In so doing, the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. In practice, early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Customer," "Internal Business Processes" and "Learning and Growth."

Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction.

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To deal with this problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not only financial measures, but also customer, business process, and learning measures.

The balanced scorecard translates the organization's strategy into four perspectives, with a balance between the following:

between internal and external measures

between objective measures and subjective measures

between performance results and the drivers of future results

The financial perspective examines if the company's implementation and execution of its strategy are contributing to the bottom-line improvement of the company. It represents the long-term strategic objectives of the organization and thus it incorporates the tangible outcomes of the strategy in traditional financial terms. The three possible stages as described by Kaplan and Norton (1996) are rapid growth, sustain, and harvest. Financial objectives and measures for the growth stage will stem from the development and growth of the organization which will lead to increased sales volumes, acquisition of new customers, growth in revenues etc. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc. Finally, the harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. Some of the most common financial measures that are incorporated in the financial perspective are EVA, revenue growth, costs, profit margins, cash flow, net operating income etc.

Objective

Specific Measure

Growth

Revenue growth

Profitability

Return on equity

Cost leadership

Unit cost

The customer perspective defines the value proposition that the organization will apply to satisfy customers and thus generate more sales to the most desired (i.e. the most profitable) customer groups. The measures that are selected for the customer perspective should measure both the value that is delivered to the customer (value proposition) which may involve time, quality, performance and service, and cost, and the outcomes that come as a result of this value proposition (e.g., customer satisfaction, market share). The value proposition can be centered on one of the three: operational excellence, customer intimacy or product leadership, while maintaining threshold levels at the other two.

Objective

Specific Measure

New products

% of sales from new products

Responsive supply

Ontime delivery

To be preferred supplier

Share of key accounts

Customer partnerships

Number of cooperative efforts

The internal process perspective is concerned with the processes that create and deliver the customer value proposition. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently. These can include both short-term and long-term objectives as well as incorporating innovative process development in order to stimulate improvement. In order to identify the measures that correspond to the internal process perspective, Kaplan and Norton propose using certain clusters that group similar value creating processes in an organization. The clusters for the internal process perspective are operations management (by improving asset utilization, supply chain management, etc), customer management (by expanding and deepening relations), innovation (by new products and services) and regulatory & social (by establishing good relations with the external stakeholders).

Objective

Specific Measure

Manufacturing excellence

Cycle time, yield

Increase design productivity

Engineering efficiency

Reduce product launch delays

Actual launch date vs. plan

The innovation and learning perspective is the foundation of any strategy and focuses on the intangible assets of an organization, mainly on the internal skills and capabilities that are required to support the value-creating internal processes. The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise. These three factors relate to what Kaplan and Norton claim is the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved. This of course will be in the long term, since an improvement in the learning and growth perspective will require certain expenditures that may decrease short-term financial results, whilst contributing to long-term success.

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Objective

Specific Measure

Manufacturing learning

Time to new process maturity

Product focus

% of products representing 80% of sales

Time to market

Time compared to that of competitors

Balanced Scorecard Benefits

Some of the benefits of the Balanced Scorecard system include:

Translation of strategy into measurable parameters.

Communication of the strategy to everybody in the firm.

Alignment of individual goals with the firm's strategic objectives - the BSC recognizes that the selected measures influence the behavior of employees.

Feedback of implementation results to the strategic planning process.

Since its beginnings as a peformance measurement system, the Balanced Scorecard has evolved into a strategy implementation system that not only measures performance but also describes, communicates, and aligns the strategy throughout the organization.

According to the BSC collaborative, there are four barriers to strategic implementation:

Vision barrier. No one in the organization understands the strategies of the organization.

People barrier. Most people have objectives that are not linked to the strategy of the organization.

Resource barrier. Time, energy, and money are not allocated to those things that are critical to the organization. For example, budgets are not linked to strategy, resulting in wasted resources.

Management barrier. Management spends too little time on strategy and too much time on short-term tactical decision making

Benchmarking using Balanced Scorecard

To use BSC and Benchmarking effectively, requires the management to be able to measure and quantify performance across all the marketing based activities involved in getting and retaining business.

Management need to know how much profitable revenue their business makes, whether it is sustainable, where it comes from and what it costs to get it, as well as considering their overall level of gross and net profit. In assessing how the company performance rates against competitors, the CEO will rely on the CMO to provide the best data to use in the Balanced Score Card and for comparison in Benchmarking.

The key to the success of using BSC and Benchmarking, is to use the systems as a guide to help the CMO achieve the objective of maximizing sustainable profitable revenue. Measuring marketing performance is essential for the effective management of all the various business getting and retaining activities. The danger for many businesses is, that in seeking to comply with the requirements of BSC and Benchmarking, they loose sight of their true purpose as a management tools to maintain a self sustaining profitable business, and see compliance as an objective in itself.

We can explore the limits of benchmarking when used to assess the performance of human resources, information technology, finance, and other internal support or shared services groups..

In setting targets for these financial measures, organizations may be tempted to turn to commercial benchmarking services, such as the Hackett Group's Best Practices surveys. Hackett regularly produces a "book of numbers" for finance, IT, and HR organizations. The headline numbers in these surveys indicate a range of expenses, typically measured by the cost of the support department as a percentage of total revenue or the number of full-time-equivalent (FTE) employees per billion dollars of revenue. Hackett presents summary statistics of "world-class" performance (which it does not define in the report) versus average departmental performance, using aggregate financial and personnel metrics.

Measures are constructed by devising suitable metrics that aid target-setting and performance measurement in those areas. For better understanding and management these measures can be broken down to the individual level, group level, business level and then finally aggregated to the corporate level.

Metrics are designed to support strategies. They are carefully selected yardsticks that help in the performance measurement

"Metrics" give numerical standards against which a client's own processes can be compared. Metric benchmarks are of the form:

- finished-product first-pass yield of 97 per cent;

- scrap/rework less than 1 per cent of sales;

- cycle time less than 25 hours;

- customer lead times less than 20 days;

- productivity levels of $150,000 or more per employee; and

- plant-level ROA better than 15 per cent ("Metrics benchmark", available at: www3.best-in-class.com/bestp/domrep.nsf/).

For example, the following can be set of metrics chosen under each perspective, firm as a whole for specified target requirements:

Learning and growth perspective:

- involve the employees in corporate governance;

- inculcate leadership capacities at all levels; and

- become a customer driven culture.

Internal process perspective:

- improve productivity standards;

- eliminating defects in manufacturing;

- provide adequate technical knowledge and skill for all the levels of employees; and

- customer feedbacks to be integrated in the operation.

Financial perspective:

- about 12 per cent return-on-equity to be achieved;

- about 15 per cent revenue growth;

- about 5 per cent reduction in production cost; and

- about 3 per cent reduction in cost of capital.

Customer perspective:

- enhance market share by 5 per cent;

- about 10 per cent increase in export sales;

- obtain competitive pricing;

- increase after sales service outlets by 10 per cent; and

- to conduct face-to-face meeting with customers by organizing customer meets.

BSC not only captures the change in any one measure but also provides insight into the related changes in other perspectives. BSC, therefore helps to have an enlarged vision to the firms management as, each strategic intent will flow across all four perspectives, viz. financial, customer, internal processes, and learning and growth and the necessary impact is captured in those perspectives, respectively, and holds out the promise of improving a company's prospects of more closely matching its management's plans to its strategic goals and objectives.

We argue instead that an internal support unit should follow a customer intimacy (customer solutions) strategy, in which it earns its way by becoming a trusted partner and adviser to business unit executives.

Figure given below, shows a typical set of services that HR, IT, and finance units offer their internal clients. Consider first the HR unit. Can it benchmark the cost of developing competencies of employees in strategic job families to the business unit strategy?1 Of course not. One corporation in a Hackett database might report that it spends 0.2 percent of revenue on employee competency development, whereas your company spends 1.0 percent of revenue on this task. Is your HR group five times as inefficient as the "benchmark" HR group? Obviously, this is an absurd comparison. The HR group that is spending 0.2 percent of revenue is probably producing few employees with the skills required to implement its strategy, whereas your group has raised employee competencies to the highest level in the industry. The goal, then, is not to spend the least on an important differentiating service; it is to produce outcomes from the service that make the enterprise more competitive and much more valuable. The same holds true for leadership development or a performance management process that motivates employees to execute strategy effectively. The value of these programs is measured by the value they create in the enterprise, not by how little is spent on them.

An adequate technology infrastructure and standard transaction applications are usually not considered strategic differentiators for a company. While necessary, these capabilities do not determine competitive success. An IT department that provides only a basic foundation of technology infrastructure and a standard set of application programs may adequately assess its efficiency by comparing its costs and FTE complement to other IT departments that provide only such a basic infrastructure. But if this is all the internal IT group supplies, then the enterprise may soon determine that it can get these services better, faster, and cheaper through an IT outsourcer. The differentiation that an internal IT group offers comes from supplying such capabilities as analytic applications and a decision-support infrastructure that is customized to the business units' strategic needs. Differentiation also comes from being the trusted adviser to business units on how to achieve competitive advantage through leading-edge information technology and applications. If customized analytic and decision-support services and IT partnerships are part of the mission of the IT organization, it will by necessity be spending much more on IT than a supposedly "world-class" IT enterprise featured in a benchmarking database. And so it should, since the value of the differentiating IT group is measured by the increased value it creates for the line businesses, not by its success in reducing the costs of standard IT services.

Strategic Information Technology Portfolio

Analytic and decision support applications

Transaction processing applications

Technology Infrastructure

Strategic HR Service Portfolio

Strategic competency development

Organization and leadership development

Performance management process

Strategic Finance Service Portfolio

Transactions, controls, and processing

External compliance and communication

Planning and decision-support services

The same issue arises with the finance organization. For standard transactional applications, such as accounts receivable, accounts payable, payroll processing, travel expense reporting, and monthly accounting statements, comparing costs against the world's lowest-cost finance processors provides a useful benchmark. The finance group must also provide standard, compliant reporting to shareholders, tax authorities, and regulators, so it would be sensible to benchmark the cost of these standard processes as well, in order to identify opportunities for cost reduction. Few companies, however, attempt to seek competitive advantage by lowering the cost of any of these standard processes. No matter what, these tasks must be done cheaply, reliably, and in a timely fashion. The opportunity for value creation comes when finance professionals partner with line executives to help them better understand the cost, revenue, and profit implications of their decisions. Some finance groups spend more by investing in, say, activity-based cost systems that calculate the profitability of each of the company's thousands of products and customers. Such spending raises their costs above that of finance groups that do not produce such profitability analysis. But the returns from an important analytic application can be ten times its cost. Similarly, finance groups might spend more to upgrade the skills of their professionals so that they become better business partners with line executives. Finance spending as a percentage of revenues will increase, but the profit impact from these partnerships can repay the additional spending many times over.

These examples collectively reveal the dangers of simplistically benchmarking corporate services, especially those that strive to serve a greater strategic purpose than their counterparts in the benchmarking pool. Benchmarking can be informative for standard processes-those processes that are comparable across organizations, and that do not create differentiation and value for the enterprise. However, service units whose goal is to provide differentiated services and to upgrade the skills and capabilities of their professionals will necessarily spend more. They are not less efficient than their low-cost counterparts; rather, they expect to create even more value for their enterprise. Their strategy is fundamentally different.

The cause-and-effect linkages in a service unit's strategy map and Balanced Scorecard will describe how the unit's investment in people, systems, and culture will drive improvement in processes that create specific, tangible value for its internal customers, the business units. Ultimately, the effectiveness test is whether profit-oriented business-unit leaders recognize this value. Should the desire to benchmark remain, a service unit should seek counterparts at other companies that are following roughly the same strategy. They can check each other's strategy maps and scorecards to confirm that they are, in fact, attempting to offer similar services. Through site visits, the benchmarking companies can identify best practices within those processes to learn how to become more efficient and effective in them.

Benchmarking can be beneficial, but it has limitations. Be sure that when you subscribe to a benchmarking service, you limit your comparison to basic, commoditized services. Do not expect to gauge what you spend on differentiating services by comparing your costs to entities that are not offering customized solutions. Spending on differentiated services is more like an investment than an expense-an investment meant to yield benefits that exceed its cost.