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Balanced Scorecard Model

Balanced Scorecard Model. Financial Perspective. Learning & Growth Perspective. Customer Perspective. Internal Business Process Perspective. Balanced Scorecard Components. Financial Perspective Customer Perspective Internal Business Process Perspective Learning and Growth Perspective.

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Balanced Scorecard Model

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  1. Balanced Scorecard Model Financial Perspective Learning & Growth Perspective Customer Perspective Internal Business Process Perspective STRATEGIC COST MANAGEMENT - SPRING 2009

  2. Balanced Scorecard Components • Financial Perspective • Customer Perspective • Internal Business Process Perspective • Learning and Growth Perspective STRATEGIC COST MANAGEMENT - SPRING 2009

  3. The Measures • Approximately 5-7 per section • Link the measures…cause & effect • Include outcomes and drivers • Strategic measures become part of the bal. scorecard; control system measures become “critical success factors” (or everyday measures) STRATEGIC COST MANAGEMENT - SPRING 2009

  4. Balanced Scorecard Success • Employee level • Link with Compensation • Include leading and lagging indicators STRATEGIC COST MANAGEMENT - SPRING 2009

  5. Features of a Good Balanced Scorecard • It tells a story. • It helps communicate a strategy. • It preserves a financial focus. • It provides for metric focus. • It highlights sub-optimal tradeoffs. STRATEGIC COST MANAGEMENT - SPRING 2009

  6. Balanced Scorecard Pitfalls • Failure to allow the scorecard to evolve. • Emphasizing across the board improvement. • Focus on only objective measures. • Failure to focus on both costs and benefits. • Failure to include non-financial measures in evaluating employees. STRATEGIC COST MANAGEMENT - SPRING 2009

  7. Economic Value-added AnalysisEVA® • Measurement Alternative for Shareholder Value • Elements STRATEGIC COST MANAGEMENT - SPRING 2009

  8. A Little Bit of History • Residual income measures have been around for over 100 years in academic literature. • Stern Stewart & Co. introduced the formal concept of EVA® about 10 years ago. • Fortune Magazine put EVA® on the map in a September 1993 article. • A whole slew of offspring have followed. • SVA from Andersen Consulting • Other variations of Economic Value Added STRATEGIC COST MANAGEMENT - SPRING 2009

  9. EVA™ Testimonials • “Only EVA® gives a real picture of value creation. Accounting benchmarks just don’t do the job.” Robert Boldt, Calpers. • EVA® correlates better with stock performance than EPS. Fortune Magazine study. STRATEGIC COST MANAGEMENT - SPRING 2009

  10. EVA® Benefits • Objective evaluation • Easy tool for strategic decision support • Common shareholder & management focus • Consistent measurement tool • Improves on-going operating decisions • Provides basis for common incentive-pay STRATEGIC COST MANAGEMENT - SPRING 2009

  11. EVA® Risks • May be subjective in implementation. • Singular reliance on EVA® may be misleading. STRATEGIC COST MANAGEMENT - SPRING 2009

  12. Sources of Capital -Debt -Equity Capital Buys “Stuff” “Stuff” Generates Income Let’s Define EVA® When the Cost of Capital is less than the Operating Income from that Capital, you create EVA®!!! STRATEGIC COST MANAGEMENT - SPRING 2009

  13. EVA® Elements • Cost of Debt Financing • Cost of Equity Financing • Components of Capital • Adjusted Net Operating Income STRATEGIC COST MANAGEMENT - SPRING 2009

  14. Cost of Debt Financing • Interest Expense • After-tax Impact • Consider all Debt, Excluding A/P STRATEGIC COST MANAGEMENT - SPRING 2009

  15. Cost of Equity Financing • Shareholder Hurdle Rate • Price Appreciation • Dividend Rate • “Six Percentage Point” Rule STRATEGIC COST MANAGEMENT - SPRING 2009

  16. Components of Capital • Net Working Capital • Net Long-lived Tangible Assets • R & D Spending • Employee Development Spending STRATEGIC COST MANAGEMENT - SPRING 2009

  17. Adjusted Net Operating Income • Substitute R&D and Employee Development Costs with Annual Amort. • Use Net Income from Continuing Operations • Adj. Net Op. Income Minus Cost of Financing Equals Economic Value Added STRATEGIC COST MANAGEMENT - SPRING 2009

  18. EVA® Uses • Planning Tool • Business Unit Evaluation • Incentive Compensation Base • Merger and Acquisition Analysis • Capital Asset Analysis STRATEGIC COST MANAGEMENT - SPRING 2009

  19. Corporate Examples • CSX • Quaker Oats STRATEGIC COST MANAGEMENT - SPRING 2009

  20. Ways to Raise EVA® • Increase Profits • Reduce Capital Spending • Reduce Investment in Working Capital • Increase High-margin Capital Investments STRATEGIC COST MANAGEMENT - SPRING 2009

  21. EVA® Implementation • Top management buy-in • Make it a way of life • Implement Gradually • Keep it Simple • Train the users STRATEGIC COST MANAGEMENT - SPRING 2009

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