Table of Contents Executive Summary Balanced Scorecard Value Chain Strategic Business Model Strategic Business Model Framework

Conclusion

1. Executive Summary

In the modern business world it has become more important than ever to have a viable business model that has been created to suit each individual need of a business and have the strategic management tools to support and sustain the model. This is where the Value chain and Balanced Scorecard plays such a key role in any business environment.

A Value Chain examines the performance and cost of each value-creation activity within an organization. It is a tool that can be used for strategic planning purposes, to identify parts of an organization that provide the best value for customers and shareholders. A Value Chain is often used in conjunction with financial reporting to control cost drivers and identify areas that need improvement. If a company can derive greater value from one of the activities in the Value Chain, they will be able to beat the competition, creating greater value for the shareholder and customer. This is where the Balanced Scorecard is a major asset in terms of strategic planning and control of the firm. The balanced scorecard gives a macro overview of all four aspects of the company (Financial, Customer, Internal Business Processes and Learning and Growth) and ensures that none are neglected to the detriment of another. These two strategic management tools help ensure that the Strategic business model is measured and steered in the right direction.

The Balanced Scorecard The balanced scorecard is a strategic performance management tool that was introduced in 1992 by Robert S. Kaplan and David P.Norton. The scorecard was originally created to supplement traditional financialmeasures with criteria that measuredperformance from three additionalperspectivesthose of customers, internal business processes, and learning and growth (Kaplan & Norton, 1996) The development of the balanced scorecardmethod occurred because many businessorganizations realized that focuson a one-dimensional measure of performance (such as return on investmentor increased profit) was inadequate. Too often, bad strategicdecisions were made in an effort to increase the bottom lineat the expense of other organizational goals. The theory of theBalanced scorecard suggested that rather than the focus, financial performance is the natural outcome of balancingother important goals. These other organizational goals interactto support excellent overall organizational performance. Ifany individual goal is out of balance with other goals, the performanceof the organization as a whole will suffer. The balancedscorecard system also emphasizes articulation ofstrategic targets in support of goals. In addition, measurementsystems are developed to provide data necessary to knowwhen targets are being achieved or when performance is outof balance or being negatively affected. The Kaplan and Norton balanced scorecard looks at acompany from four perspectives: Financial: To succeed financially how should we appear to our shareholders? Internal business processes: To satisfy our shareholders and customerswhat business processes must we excel at? Learning and Growth: To achieve our vision, how will we sustain our ability to change and improve? Customer: To achieve our vision, how should we appear to our customers?

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996): 76.

The Four Perspectives The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives: The Learning & Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem

when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems." The Business Process Perspective This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. The Financial Perspective Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financialrelated data, such as risk assessment and cost-benefit data, in this category.

According to Kaplan and Norton the following benefits can be derived by using a Balanced Scorecard: 1. Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about causeand-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. 2. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. 3. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. 4. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate

performance both internally and externally. 5. Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced
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Scorecard into those units will help to achieve that and link strategy to operations. .

Value Chain A value chain is a series of activities for transforming inputs into outputs that customers value (Dorf & Byers, 2008) In his book, Competitive Advantage (1980) Michael Porter describes the value chain as a systematic approach to examining the development of competitive advantage. He further views the chain as a series of activities that create and build value. They culminate in the total value delivered by an organization. Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). According to Porter (1985), the primary and support activities can be grouped as follows:

Primary Activities
Primary Activity Inbound logistics

Description

All those activities concerned with receiving and storing externally sourced materials, such as goods that are received from suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation to the point where they are needed. The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products). Individual operations could include room service in a hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine. All those activities associated with getting finished goods and services along the supply chain to wholesalers, retailers or the final consumer. Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. All those activities associated with maintaining product performance after the product has been sold. This includes all areas of service such as installation, aftersales service, complaints handling, training and so on.

Operations

Outbound logistics Marketing and sales

Service

Support activities include: Secondary Activity Procurement Description

This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and web-based technologies to achieve procurement aims).

Human Resource

Employees are an expensive and vital resource. An organisation would manage recruitment and s election, training and development, and rewards and

Management

remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy.

Technology Development

Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological developments.

Infrastructure

Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

A Value Chain (Porter, 1985) examines the performance and cost of each valuecreation activity within an organization. It is a tool that can be used for strategic planning purposes, to identify parts of an organization that provide the best value for customers and shareholders. A Value Chain is often used in conjunction with financial reporting to control cost drivers and identify areas that need improvement. If a company can derive greater value from one of the activities in the Value Chain, they will be able to beat the competition, creating greater value for the shareholder and customer.

Porters Value Chain. Adapted from What is Strategy?, 1996

For example: A business may have access to cheaper raw materials (Inbound Logistics) , use a more efficient manufacturingprocess (Operations) or reduce transport and storage costs (Outbound Logistics). These primary activities are in turn supported by a number of secondary activities such as HR Management and Technology. A Business is able to gain a competitive advantage by analyzing each activity in the chain, bench marking the activity against the competition, improving processes, providing better differentiation and reducing costs.

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Strategic Business model According to Dorf and Byers the design of a business is the means for delivering value to customers and earning a profit from that activity. The business design incorporates the selection of customers, its offerings, the tasks it will do by itself and those it will outsource and how it will capture profits. A good business design involves what the company will and will not do and how the firm will create a sound value proposition. The business design answers three key questions: 1) Who is the customer? 2) How are the needs of the customer satisfied? 3) How are the profits captured and the profitability protected? The resulting outcome of the business design process is the business model. The business model is set of planned assumptions about how a firm will create value for all its stakeholders (Magretta, 1999). It further describes the rationale of how an organization creates, delivers, and captures value, either economic, social, or any other forms of value. The process of business model construction is part of business strategy. In theory and practice the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies. Hence, it gives a complete picture of an organization from a high-level perspective. Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects managements hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit (Hill & Jones, 2008)

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Business models are used to describe and classify businesses, but they are also used by managers inside companies to explore possibilities for future development.

Strategic Business Model Framework Meyer (The Fast Path to Corporate Growth, 2007) suggests the following model and views the Strategic Business model as the link between strategy and the financial outcomes.

STRATEGY

STRATEGIC BUSINESS MODEL

Target Markets Target Users Product / Service Strategy Branding Strategy Channel Strategy

FINANCIAL STATEMENTS & OUTCOMES

Proforma P&L Statement of Cash Flows Balance Sheet NPV and Return ROA

???

According to Meyer the following questions are the driving forces of the business model: Are we selling products or services, or a combination? Can we get recurring revenue from the same users? What are our streams of revenue? Is there a production requirement and what do we do in-house versus outside? What is the best channel to achieve market penetration and learning? How much is it going to cost to execute our brand strategy? How quickly can we get to the market?
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What is our path to profitability? Is it a capital intensive or non-intensive business?

By answering these questions a company can establish a business model frame work that will suit their specific need. It is also important to note that there is no concrete Strategic business model that is the same for various different types of businesses. Each business will have its own unique business model based their strategy. This view is also supported by Johnson & Christensen.

Relationship and Differences As powerful strategic management tools the Value Chain and Balanced Scorecard frameworks are linked and interact on each other in a wide circle of business in context. These two strategic management tools are vital in measuring and guiding the Strategic business model of the company. The Value Chain helps strategic managers to make decision on the basis of organizational external environment and internal analysis. This framework is especially valuable for managers to develop and implement long-term strategy for organizations so as to build and maintain competitive advantages in the long run. The Value Chain highlights the explorations of internal analysis of a chain of business activities. It explores the role and contribution of organization's resources corresponding to primary and support activities in a cost-effective way to gain cost advantage. As for the Balanced Scorecard, it emphasizes the evaluation of organizational overall performance by integrating financial measures with other key performance indicators. The Balanced Scorecard can ensure and monitor the executions of strategy made by managers in a set of well-structured measures. Measuring overall performance in organization's balanced scorecard is directly linked to its strategy to make profits in the long run. Introduction In today's dynamic

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and competitive business environment, survival, growth and profitability are the essence goals of all industries

Nowadays the Value Chain and Balanced Scorecard frameworks are currently being adopted as the powerful management tools of choice by many organizations. The essence of these two frameworks is that they can help senior managers to make right decision and build and sustain competitive advantages in the organization level

Conclusion The Value Chain and Balanced Scorecard frameworks are all effective and powerful strategic management tools in current dynamic and competitive environment. The linkage between them is that they are all attached considerable importance for managers in organizations to develop and implement long-term strategy so that sustainable competitive advantages are built and maintained. And these two frameworks are useful tools to make change and adjust strategy to face up with intensive competition in current dynamic marketplace. However, these two respective frameworks have its own particular emphasis which is applied in different directions among the organization. The Value Chain highlights internal analysis of a chain of business activities. As for the Balanced Scorecard, it emphasizes the evaluation of an organization's overall performance to gain cost advantage. All in all, it is important to be aware of the limitations and potential problems as well as the possible benefits of these three approaches, it largely relies on successful implementation by senior managers.

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Bibliography
Dorf, R., & Byers, T. (2008). Technology Ventures - From Idea to enterprise. McGraw - Hill. Hill, C., & Jones, G. (2008). Strategic Management - An Integrated Approach. South - Western. Johnson, M., & Christensen, C. (2008). Seizing the White Space: Business Model Innovation for Growth and Renewal. Kaplan, R., & Norton, D. (1996). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review. Magretta, J. (1999). Managing in the new economy. Harvard Business Review. Meyer, M. (2007). The Fast Path to Corporate Growth. Oxford University Press. Porter, M. (1985). Competitive Advantage. The Free Press. Porter, M. (1996). What is Strategy? Harvard Business Review. Rowe, A. (1994). Strategic Management: A Methodogical Approach. Addison -Wesley.

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