Strategy Implementation: Balance Scorecard & Monte Carlo Simulation

Presenters
Nisha Chittilapilly B003
Kamakhya Narayan B011

Deepika Patel B021

Varad Gokhale B008

Paresh Padhi B040

Ruchi Saboo B023

Balance Scorecard
Developed in the early 1990s by Drs. Robert Kaplan and David Norton. The balance scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into actions.

Contd
The balanced scorecard methodology builds on some key concepts of previous management ideas such as Total Quality Management (TQM), including customerdefined quality, continuous improvement, employee empowerment, and primarily --- measurement based management and feedback.

The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomes of business strategies. This creates a double-loop feedback" process in the balanced scorecard

Characteristics
Its a top- down reflection of the companys mission strategy It is forward-looking It integrates external and internal measures It helps you focus

The Strategy Focused Organization

Mission
Vision Strategies

What we do
What we aspire to be How we accomplish our goals

Measures

Indicators of our progress

Environmental Scan Strengths Opportunities A Model for Strategic Planning Values Weaknesses Threats

Mission & Vision

Strategic Issues Strategic Priorities Objectives, Initiatives, and Evaluation

The Strategy Focused Organization

The Five Principles
Translate the strategy to operational terms. Align the organization to the strategy Make strategy everyones job. Make strategy a continual process. Mobilize change through executive leadership

The Balanced Scorecard and The Big Picture

Activity Based Costing Economic Value Added Forecasting Benchmarking Market Research Best Practices Six Sigma Statistical Process Control Reengineering ISO 9000 Total Quality Management Empowerment Learning Organization Self-Directed Work Teams Change Management

Strategic Planning Mission and Vision Balanced Scorecard

Strategic Direction Create Environment For Change

Strategic Performance Management System

Communicate Strategies Define Objectives Implement BSC

Balanced Scorecard Measure Performance Improve Processes

Linking it all together.

Evaluate and Adjust Continuous Improvement Redefine Initiatives

Contd..
The Balanced Scorecard model suggests that we view the organization from 4 perspectives.

Then Develop metrics, collect data and analyze it relative to each of these perspectives

4 Business Perspectives Questions

Financial What must we do to create sustainable economic value? Internal Business Process To satisfy our stakeholders, what must be our levels of productivity, efficiency, and quality? Learning and Growth How does our employee performance management system, including feedback to employees, support high performance? Customer What do our customers require from us and how are we doing according to those requirements?

Financial Perspective
In Private companies, the financial perspective is the main objective (ultimate goal) without having to sacrifice the interest of other relevant stakeholders (community, environment, government, etc.)

In the financial perspective, the strategic goal is the long-term shareholder value. This goal is driven by two factors, namely: revenue growth and cost efficiency

Strategic Objectives in Financial

Long-term Shareholder Value

Cost Efficiency Improved Cost Structure Increase Asset Utilization

Revenue Growth Expand Revenue Opportunities Enhance Customer Value

Customer Perspective
This perspective is very instrumental, because without customers, how can a company survive?
Customer perspective covers the following elements: Customer acquisition Customer retention Customer profitability Market share Customer satisfaction

Strategic Objectives in Customer

Customer Retention Customer Profitability Customer Satisfaction

Market Share

Customer Acquisition

Price

Quality

Service

Availability

Brand

Internal Process Perspective

This perspective reflects the process in key business that should be optimized in order to meet the needs of the customers. There are four main themes in this perspective, namely: Operations Management Process Customer Management Process Innovation Process Regulatory and social Process

Strategic Objective in Internal Process

Operations Management Processes

Customer Management Processes

Innovation Processes

Regulatory and Social Processes

Processes that produce and deliver products and services

Processes that enhance customer value

Selection

Processes that create new products and services

New ideas R & D Portfolio Design/Develop Launch

Processes that improve communities and the environment

Environment Safety & health Employment community

Supply Production Distribution

Acquisition
Retention Growth

Learning & Growth Perspective

This perspective shows us that good human resource development system, organizational system and information system forms a solid foundation for the improving company performance.
This perspective reflects the capability that a company should have namely: Human Capital Organization Capital Information Capital

Strategic Objective in Internal Process

Human Capital Skills Organization Capital Culture Leadership Organization Development Information Capital System Database Network

Knowledge
Attitude

Strategy Map

Balanced Scorecard Measurements

Companies using Balance Scorecard

Half of major companies in the US, Europe and Asia
50% of large US firms 44% of organizations in North America 26% in Germany, Switzerland, and Austria Widest use of the BSC approach can be found in the US, the UK, Northern Europe and Japan.

"The problem is that not everything that counts can be counted, and not everything that can be counted counts."

---Albert Einstein

Why Need a Balanced Scorecard?

The Source of Value Has Shifted From Tangible to Intangible Assets

percentage of market value related to

Intangible Assets Tangible Assets

32%

68% 80%

68%

32% 20%

1985

1995

2010

Source: Ocean Tomo. Components of S&P500 companies MV

Value Creation: Intangible Assets

Training Service Quality Customer Confidence Customer Retention

Revenue

Information Technology

Intangible Assets Do Not Have A Direct Impact on Financial Results They Have Second- or Third-Order Impacts Conventional approach to managing financial & operational indicators insufficient Balanced Approach to Strategy Implementation should includes focus on customer/stakeholder & learning, growth & innovation Understanding & managing/leveraging inter-relationships between the above areas necessary for value creation

Measure
Need balanced scorecard to measure How you have been doing (lagging indicator) How well you are doing (current indicator) How well you can expect to do in future (leading indicator)

Balanced Scorecard : Synonym for Managing Performance

Balanced Scorecards key theme is not about Measurement as the term would outwardly convey Its about

Value creation - Execution of Strategy

Balanced Scorecard Framework

The Importance of Alignment

Complete Framework Strategy Agency Department Objectives Measures

Team/ Individual

Use of Balanced Scorecard

Balanced Scorecard can be used for:
deciding what the key drivers of performance are refocusing and stimulating activity on these key business drivers drawing attention to goals and targets creating a culture of achievement noticing in advance any trends affecting the business so that changes can be made in good time

Benefits of incorporating Balanced Scorecard

Consensus on the strategy at executive level. Communicates strategy to the organization. Translates strategy into meaningful goals. Employees identify themselves with goals. Personal targets linked to strategy. Processes focus to achieve strategic goals. Periodic reporting of status of strategic goals. Drives investment / budget decisions.

Shortcomings of Balanced Scorecard

Suppliers are excluded.

Regulators are ignored.

Community and environmental issues are missing. Competitors are ignored.

As A Strategic Management System

Corner stone of the new strategic management system Links current actions with tomorrow goals. Balanced Scorecards are used as the roadmap for creating the Strategic Management System or our IRPS (Information Resource Planning System)

Gap Exists Between Mission-Vision-Strategy and Employees Everyday Actions

MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan

TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

Gap Exists Between Mission-Vision-Strategy and Employees Everyday Actions

MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

As A Strategic Management System

BSC binds short-term activities to long-term objectives with the following four processes: 1. Translating the Vision 2. Communicating and linking 3. Business Planning

4. Feedback and learning

As A Strategic Management System Translating The Vision:

Four Perspectives :

Financial
Customers Internal Business Processes Learning & Growth

As A Strategic Management System

As A Strategic Management System

How a company builds a Strategic Management System

1 2A 2B 3A 3B 4 5 Clarify the Vision Communicate to middle managers Develop business unit scorecards Eliminate non-strategic investments Launch corporate change programs Review business unit scorecards Refine the Vision

How a company builds a Strategic Management System

6A 6B 7 8 9 10 Communicate the BSC to the entire company Estd individual performance objectives Update long-range plan and budget Conduct monthly and quarterly reviews Conduct annual strategy review Link everybody performance to the balanced scorecard

Implementation of Balance Scorecard

Phase 1: Preparation Phase

Phase 2: Develop Strategy

Phase 3: Build Balance Scorecard Phase 4: Implement Scorecard

Implementation of Balance Scorecard

Phase 1: Preparation Phase

Brainstorming w.r.t vision and core values Developing current strategy in line with them

Phase 2: Develop Strategy

Strategic Maps key strategic objectives Assigning responsibility to achieve those initiatives

Implementation of Balance Scorecard

Phase 3: Build Balance Scorecard

SMART Goals: Specific Measurable Achievable Realistic Time-bound

Implementation of Balance Scorecard

Phase 4: Implement Scorecard

Balance Scorecard broken into departmental scorecard Micro-managing the activities and their monitoring

How a company builds a Strategic Management System

Industry Information Technology (IT) Case study on 3 Taiwanese Software Companies A, B, C

Full length research paper available on African Journal on Business Management, Volume 5 dated 4 January, 11 Also Available online at http://www.academicjournals.org/ AJBM

Case Study Written By

Der Jang Chi
(Department and Graduate School of Accounting, Chinese Culture University, Taiwan)

Hsu Feng Hung (Department of Business Administration, National ChengChi University, Taiwan)

Software Industry size in Taiwan

Year

1995

2005

2006

Value in million US$

1250

5000

5500

Methodology Adopted
3 companies namely Company A, Company B & Company C taken for study purpose out of top 10 in Taiwan (By Annual Revenues rankings) Company A Implemented Balanced Scorecard Methodology (Since 2004) Data collection 2003 / Observations taken 2006 Company B & C Not implemented Balanced Scorecard methodology

Conceptual Framework

Comparison
1982 . software development . Process improvement . Enterprise Resources Planning (ERP) Major Businesses . System application . e-training, . Information safety . Technical R&D Branches in Taiwan Branches in China Employees (Only in Taiwan) Employees (Including China) Annual Revenues in USD millions (Only in Taiwan) Annual Revenues in USD millions (Including China) 6 18 900 1900 Particulars Year of Establishment Company A Company B 1980 Company C 1985 . software R & D . software design and R & D . Enterprise Resource Planning . Enterprise Process . Enterprise Process Reengineering Reengineering . System application . e-training . e-training . Supply Chain Management . Information safety protection .Information safety protection 10 15 850 1800 5 12 700 1600

160

150

120

500

470

360

BSC strategic focus

Vision of Company A
To become the top one in Taiwan,

To stand in the international community,

And Be a globally renowned brand in the software industry

 SWOT ANALYSIS
STRATEGY MAP CAUSE & EFFECT DIAGRAM

SWOT ANALYSIS

STRENGTH
The functions of the package software developed are comprehensive and considerably humanized, along with rather attractive prices The software and network facility installed by Company A for its clients/customers provides reasonable prices and high stability The R&D competence of the R&D Department of Company A is extremely strong, hard to duplicate by fellow competitors

STRENGTH Continued.

The corporate culture of Company A is very active and innovative The market share of Company A is high (about 10%)

WEAKNESS
The selling and administrative expenses ratio (about 38%) is slightly higher than 32% of the other main competitors The academic record of employees above graduate school (about 9%) is slightly lower than 11%, the average level of other main competitors

OPPORTUNITY
The strengthening of e commerce of corporations incurs drastic increases of demand in both software and hardware Active development of the market in China and the market demand in China is large Considerable rise in added value for products.

THREAT
Increase of the imported foreign package software causes market competition to be intense Many new domestic suppliers participate in market competition

Many existing domestic customers have migrated to China that they may turn to the products of other competitors in the China market

STRATEGY MAP

Strategies of Company A
Maintain an innovative corporate culture Reduce selling and administrative expenses ratio Increase the ratio of employees with educational record above graduate school More active launchings in China and other international markets Increase the product added value to increase profitability and product competency

BSC: Four Perspectives

1. Financial perspective

Sales Growth Rate

S and A Exp. Ratio

Product profitability

BSC: Four Perspectives

2. Customer perspective

Number of customer complaints Customer satisfaction Market share growth

BSC: Four Perspectives

3. Internal Business Flow perspective

Work achievement rate Product delivery delay rate Production cost ratio Comprehensive and humanized level of product functions Product stability

BSC: Four Perspectives

4. Learning & Growth perspective
Employee satisfaction Employee resignation rate Employee short-term advanced study ratio ** Employee long-term advanced study ratio *** Ratio of training cost (expense) account for total expense

10 Golden Rules for Implementing BSC

1. There are no standard solutions: all business differ

2. Top management support is essential

3. Strategy is the starting point 4. Limited and balanced number of objectives and measures

5. No in-depth analyses up front, but refine and learn by doing

6. Take a top-down approach 7. It is not a systems issue, but systems are an issue

8. Consider delivery systems at the start

9. Consider the effect of performance indicators on behavior 10.Not all measures can be quantified

BALANCED SCORECARD FOR COMPANY A

Financial Perspective

Customer Perspective

Internal Business Perspective

Learning & Growth Perspective

Take Away Points

High concern & Full support from top management Training across all levels in Company A SWOT Analysis, Strategy Map, Cause & Effect Analysis Clear communication to all employees Linking BSC with Appraisal system (Incentive Schemes to sales team, Marketing Team) Feedback given during BSC Implementation

Monte Carlo Simulation

What is a Monte Carlo simulation?

Monte Carlo simulation is a technique used to understand the impact of risk and uncertainty in financial, project management, cost, and other forecasting models. Monte Carlo simulation is a versatile method for analyzing the behavior of some activity, plan or process that involves uncertainty. Its core idea is to use random samples of parameters or inputs to explore the behavior of a complex system or process.

What is a Monte Carlo simulation?

The Monte Carlo method provides approximate solutions to a variety of mathematical problems by performing statistical sampling experiments on a computer. The key feature of a Monte Carlo simulation is that it can tell you based on how you create the ranges of estimates how likely the resulting outcomes are. When a model is based on ranges of estimates, the output of the model will also be a range.

History of Monte Carlo Method

The Monte Carlo method was invented by scientists working on the atomic bomb in the 1940s, who named it for the city in Monaco famed for its casinos and games of chance. The first economical calculations were made in the early 1950s.

History of Monte Carlo Method

It became widely used in the 1960s by oil prospecting companies. The powerful computers developed during the 1980s made it possible to make less costly calculations using Monte Carlo. The first widely available computer program came in the late 1980s, it was @RISK followed by Crystal Ball.

Stochastic variable?
Stochastic variables are built on random numbers The random numbers are guided by a mathematical function The mathematical expressions used for stochastic variables are determined by parameters set by the creator of the simulation model Example: Binomial function has two parameters N and p. N is the maximum possible number of events and p is the probability for each event to occur.

Deterministic v. Stochastic
Deterministic Fixed Data 7% Fixed Outcomes $1,200,00

Stochastic Variable data

M onthly S a v ings
500 Trials
.09 4

Variable Outcomes
Forecast: Scenario A Retirement Portfolio Frequency Chart 6 Outliers
47

.07 1

3 5 .2 5

.04 7

2 3.5

.02 4

1 1 .7 5

M e an = $6 46,19 8 .00 0 0 $3 00,00 0 $5 25,00 0 $7 50,00 0 D o l l a rs $9 75,00 0 $ 1 ,2 0 0 , 0 0 0

3 5 0 .0 0

4 2 5 .0 0

5 0 0 .0 0

5 7 5 .0 0

6 5 0 .0 0

How Monte Carlo works?

Use data to inform the choice of input distributions for model parameters The choice of input distribution should always be based on all information (both qualitative and quantitative) available for a parameter

Data

Expert knowledge

How Monte Carlo works?

In selecting a distributional form, the risk assessor should consider the quality of the information in the database & ask a series of questions like:
Is there any mechanistic basis for choosing a distributional family? Is the shape of the distribution likely to be dictated by physical or biological properties or other mechanisms? Is the variable discrete or continuous? What are the bounds of the variable? Is the distribution skewed or symmetric? If the distribution is thought to be skewed, in which direction? What other aspects of the shape of the distribution are known?

How Monte Carlo works?

Random Number Generated

Distributions Sampled

Output Value Calculated

How Monte Carlo works?

When the simulation is complete, we have a large number of results from the model, each based on random input values. These results are used to describe the likelihood, or probability, of reaching various results in the model.

Example
How many ways to roll two dice?
6+1 5+1 4+1 3+1 2+1 1+1 2 1+2 3 17% 2+2 1+3 4 3+2 2+3 1+4 5 42% 4+2 3+3 2+4 1+5 6 5+2 4+3 3+4 2+5 1+6 7 58% 6+2 5+3 4+4 3+5 2+6 8 6+3 5+4 4+5 3+6 9 89% 6+4 5+5 4+6 10 6+5 5+6 11 6+6 12

100%

36 unique combinations. What is the probability or rolling 4 or less? 6 or less?

Where Monte Carlo simulations can be used?

It can be used to understand the impact of uncertainty, and develop plans to mitigate or otherwise cope with risk
uncertain or variable market demand, fluctuating costs, variation in a manufacturing process, effects of weather on operations, investment in stocks, developing a new drug, The number of people coming into a store A budget The possible outcome of a market drilling an oil well and many more.

Advantages of Monte Carlo Method

Complex mathematics can be included with no extra difficulty Widely accepted technique Model behavior can be investigated with ease Changes can be made quickly & compared with previous models Distributions of the model's variables can be precisely defined

Advantages of Monte Carlo Method

Sensitivities, Correlations & other inter dependencies can be modeled Computer does all of the work required Commercially available software - @Risk, CrystalBall Level of mathematics required to perform a Monte Carlo Simulation is quite basic Greater levels of precision achieved by increasing number of iterations

Mathematical statistics functions most common in Monte Carlo

Probability distribution function Random number generator Sampling rule Normal distribution Binomial distribution Poisson distribution Uniform distribution Cumulative distribution Discrete distribution

Demonstration
Task: To estimate the total time a 3-stages construction project will take to complete. The stages have to be done one after the other, so the total time for the project will be the sum of the three stages. All the

times are in months.

Demonstration (cont.)
Basic Forecasting Model: Create a single estimate for each of the three stages of the project.
Task Time Estimate

Stage 1 Stage 2 Stage 3 Total

5 Months 4 Months 5 Months 14 Months

Thus this model gives us a result for the total time to complete the project = 14 months.

Demonstration (cont.)
Problem with the current model: Unknown RISK The outcome is based on three estimates, each of which is an unknown value. It might be a good estimate, but this model can't tell us anything about risk. How likely is it that the project will be completed on time?

Demonstration (cont.)
Monte Carlo Simulation Model: Create 3 estimates for each of the three stages of the project.

For each task, we estimate the minimum and maximum expected time (based on our experience, or expertise, or historical information) and use these with the most likely estimate that was used in the Basic Forecasting Model.

Demonstration (cont.)
Forecasting Model Using Range Estimates:
Task Stage 1 Stage 2 Stage 3 Total Minimum 4 Months 3 Months 4 Months 11 Months Most Likely 5 Months 4 Months 5 Months 14 Months Maximum 7 Months 6 Months 6 Months 19 Months

Now, there is a range of possible outcomes. The project might be completed in as little as 11 months, or as long as 19 months.

Demonstration (cont.)
Working of Monte Carlo Simulation: Generate values randomly for each of the tasks. Calculate the total time to complete the project. The simulation will be run 500 times. Based on the results of the simulation, describe some of the characteristics of the risk in the model. To test the likelihood of a particular result, we count how many times the model returned that result in the simulation. In this case, we want to know how many times the result was less than or equal to particular number of months.

Demonstration (cont.)
Results of a Monte Carlo Simulation:
Time 12 Months 13 Months 14 Months 15 Months 16 Months 17 Months 18 Months 1 30 140 223 88 17 1 Results Cumulative % of Total (out of 500) (Rounded) 1 0% 31 171 394 482 499 500 6% 34% 79% 96% 100% 100%

Demonstration (cont.)
Probability of Completion Within Specified Time (Months)

Demonstration (cont.)
Conclusion: Out of 500 trials using random values, the total time was 14 months or less in only 34% of the cases. In other words, there is only a 34% chance about 1 out of 3 that any individual trial will result in a total time of 14 months or less. On the other hand, there is a 79% chance that the project will be completed within 15 months. Further, the model demonstrates that it is extremely unlikely, in the simulation, that we will ever fall at the absolute minimum or maximum total values.

How Reliable Is It?

Like any forecasting model, the simulation will only be as good as the estimates you make. It's important to remember that the simulation only represents probabilities and not certainty. Nevertheless, Monte Carlo simulation can be a valuable tool when forecasting an unknown future.

Conclusion
Monte Carlo Model demonstrates the risk and uncertainty. Each uncertain variable is modeled by a probability distribution rather than a single value. It enables to calculate the combined impact of the various uncertainties present in the model, in order to determine a probability distribution of the possible outcomes. Having more information about risk at the beginning means we can make a better plan for going forward.

Q And A Session
1. What is the balanced scorecard? 2. What are the four perspectives? 3. What are the benefits of the balanced scorecard approach? 4. What challenges will anybody encounter trying to develop and deploy a balanced scorecard system?

Q And A Session
5. Is the balanced scorecard relevant to private-sector companies? 6. Is the balanced scorecard relevant to government agencies? 7. Is the balanced scorecard relevant to nonprofit organizations? 8. Few examples where Monte Carlo is being used.

THANK YOU