Benchmark, balanced scorecard

8 August 2016

Benchmarking is a management accounting system used to measure performance. Benchmarking can be defined as a process of comparing the products, functions and activities of an organization against other businesses to identify areas for improvement and to implement a program of continuous improvement. Dimensions typically measured are quality, time and cost. ‘Other businesses’ used in making comparison are called best practice companies. They are usually high performers in relation to a particular practice or process.

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Management identifies the best firms in their industry, or in another industry where similar processes exist, and compares the results and processes of those studied (the “targets”) to one’s own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking software can be used to organize large and complex amounts of information.

Software packages can extend the concept of benchmarking and competitive analysis by allowing individuals to handle such large and complex amounts or strategies. Such tools support different types of benchmarking (see above) and can reduce the above costs significantly. Benchmarking improves performance by identifying and applying best demonstrated practices to operations and sales. Managers compare the performance of their products or processes externally with those of competitors and best-in-class companies and internally with other operations within their own firms that perform similar activities.

The objective of Benchmarking is to find examples of superior performance and to understand the processes and practices driving that performance. Companies then improve their performance by tailoring and incorporating these best practices into their own operations—not by imitating, but by innovating. HISTORY Benchmarking is a quality improvement tool. Therefore, we must firstly understand the historical development of quality. There are three historical periods identified as quality approaches : simple quality control systematic process control and quality assurance.

Most researchers and writers agree that 1979 was the emerging point of benchmarking as a useful management tool. Xerox corporation is given credit for first discovering that it would become vital to use benchmarks to compare itself to competitors as well as to reference points within their own organization. At the turn of 1980’s, Xerox’s manufacturing unit decided to compare unit manufacturing costs and features of their copying machines to the one of competitors. Thus began the concepts operational functioning. The early stages of benhcmarking have been quality and feature comparisons.

Recently, as a result from the Xerox initiative benchmarking has developed into what is known as process benchmarking, which refers to comparing performance and practices behind the used measures for the purpose of learning to become better. Spendolini (1992, 30) describes the performance gaps identified at Xerox in relation to its competitors. Therefore, the term competitive benchmarking should be used in this context. Specific standards of measurement in areas such as production costs, cycle time, overhead costs or product features were identified, and the performance of Xerox was ranked

in relation to its chief market rivals for those metrics. Andersen & Pettersen (1996, 8) have analyzed the development of benchmarking in the light of comparison during the last four decades. According to them, efforts in seeking for strategic value have emphasized the following areas for comparison: In the 1960’s new management thinking based on simple financial analysis (this vs. last year). In the 1970’s strategy consultants focused on competitor analysis. In the 1980’s Xerox’s extensive programs that covered performance analysis (time, quality, cost, etc. ) In the 1990’s active process benchmarking (own processes vs.best practices). BENEFITS Firstly, benchmarking helps in improving performance. Organizations will be able to identify areas, systems, or processes for improvements. They they will identify methods of improving operational efficiency and product design —either incremental (continuous) improvements or dramatic (business process reengineering) improvements. Secondly, benchmarking enable organizations to understand relative cost position. It reveals a company’s relative cost position and identifies opportunities for improvement Besides, benchmarking helps companies focus on capabilities critical to building strategic advantage.

Benchmarking also increases the rate of organizational learning. It brings new ideas into the company and facilitates experience sharing. It provides necessary insights to help you understand how your organization compares with similar organizations, even if they are in a different business or have a different group of customers. LIMITATIONS Benchmarking also has their own limitation not only benefits. Henzel (2002) stated that benchmarking requires a significant commitment of resources such as time, people and money, without any guarantee that there will be a cost benefit.

This shows that most companies chose not to benchmark due to the lack of time and resources, Cassell et al. (2001). These are several of limitations of benchmarking. Consultants When the company wants to implement the benchmarking, they need to find the consultant in order to guide the staffs in implementing the benchmarking efficiently and effectively. These consultants have the technical knowledge and experience in efficiently gather and interpret data. Thus, proper analysis and research the background of consultants is needed by the company to acquire the right consultant to implement benchmarking.

A part from that, in order to find consultant, company also need to acquire cost and time. However, this does not require hiring additional staff or expanding roles of current staff. Education and travel When the company has implemented benchmarking, the team that include several staffs need to attend some seminar, workshops, meetings or courses. Thus, this will incur some cost related to education and traveling. This information need to tell among all others staffs who do not attend this seminar, workshops, meeting or courses.

This information is important, to ensure the system for example benchmarking run smoothly and efficiently. It also important when other staffs need help in using this benchmarking, which they only depend to that team rather than people outside the company for example, consultant. Communications One of the most important methods of keeping benchmarking costs low is effective communication. When the managements and the staffs have clear information regarding benchmarking, all jobs can run smoothly without any delay. This clear information also will reduce conflicts and confusion among management and staffs in doing some jobs.

Thus, the company can increase the production and gain more profit. TECHNIQUES Internal benchmarking Refers to comparisons made within the same organization, for example between teams, departments, units and divisions. This internal benchmarking is good since its only access to its own information to determine the best practice. Usually less time and resources are needed and easier to implement since it’s within same organization. For example, when accounting department show good performance, the management might happy with that and want to see thatperformance through entire business operation. Thus, thorough study of accounting department must make and other department must follow accounting department to increase their performance. External benchmarking Is a way measuring performance against outside organization. This basically requires more time and resource in implementing since it use industry standard which not internal resources. For example, when company wants to evaluates its customer service, it will depend on the company in its industry that always receives highest customer services.

Functional benchmarking Is comparing specific business functions amongst at least two different organizations in the same industry or different industry. It is good when the company wants to know functional competitors or leading business to benchmark even in different industry. For example if the company wants to compare between copper mining techniques with coal mining techniques. Generic benchmarking Is the process of comparing activities from unrelated industries. Which comparison make between organization who is totally different.

The advantage of generic benchmarking is the problems of competition do not apply, increasing the access to information and reducing possibility of legal problems. For example Motorola made visit to ‘Domino’s Pizza in order to understand how they managed to guarantee a 30 minute delivery lead time. STEPS In this session, we will be discussing the steps of benchmarking that involved in each phase for implementation. The phases are planning, analysis, integration, action and maturity. Firstly, the organization has to planning the project. They will identify the strategic items in order to select the process to benchmark.

From that the organization can identify customer needs and expectations while can be determine the factors that can make them success. The cost and time frame need also need to be considered. These will help all the planning will be done smoothly and accordingly. Second, by forming team members of benchmarking, it will help to do the task more efficiently. By selecting the person that act as a leader, it significant to instruct what the preparation team members are and visit team needs since they have to get the best solution which involved an analysis in improving the process of the organization done currently if any problems occur.

According to Spendolini (1992, 82-84) has divided benchmarking teams in to three different groups. These are:  Intact work teams. This team operates usually in a single location with all members of the group reporting to the same manager. In these teams the manager may or may not the role of the team leader. Intact work teams are often the customer of their own investigation. Cross-functional, interdepartmental and interorganizational teams. These teams are often structured as task teams or task forces with specific and defined sets of customers.

The individuals selected for these teams are selected for their specific knowledge or skills, but they also act as representatives of their respective departments, locations or divisions. The leader or project manager of these types of teams is usually not the everyday manager of most everyday team members. In many cases, these types of teams are brought together to work on a specific issue or problem. Once their benchmarking investigation is complete the team disbands. Ad Hoc Teams. This type of team represents the ultimate in team flexibility.

An ad hoc team consists of any number of employees who share common interests or responsibilities and they also decide that a benchmarking project on some subject is warranted. Usually the ad hoc team defines this subject and continues to function until the project is complete. Through Karlof & Ostblom’s (1995, 69) experience, that are some considerations which may be useful when selecting individuals for a benchmarking team. People directly involved Mixture of qualifications Prior experience of benchmarking Commitment Knowledge of the organization’s own information channels Ability to work independently

Time to work on a project Creative and analytical ability. In a benchmarking team the skills of individuals are combined in a powerful way to create synergy and to solve organizational problems to respond to opportunities. Third, the function of team members of benchmarking is to collect all the data where they need to show the measurement of current process. Other than that they need to do some research which organization can become a potential benchmarking partners. Once selected the best partners, they will be approach. Next, the company will gather all the data from partners.

According to Innoregio benchmarking, research has identified 7 key characteristics of appropriate performance measures. That are : Need to be directly related to the company strategy Non financial as well as financial measures Vary between locations Need to change over time Need to be simple and easy to use Should provide fast feedback to operators and managers Intended to teach rather than to monitor Fourth, team members should analyze the data that they already collected by comparing all the process done by partners with looking at the gaps of performance of the organization.

Then each of members can take some ideas from it and learned each other. Then, they can come out for the best solutions. Lastly, once the benchmarking team found the solutions, they have to communicate the benchmark findings and gain acceptance to the senior management and employees in order to make an improvement on the present implementation. If it is accepted, the organization has to set new goals, establish new budgets for expected future values on the changing with giving them the relevant trainings. With teamwork and good communication can make them easier to adopt the new procedures of process and responsibility personwill be monitor all the progress. By monitoring, if problem occur on the new levels of performance, problem-solving teams will be investigating. Finally, the benchmarks are re-evaluated and updated according to the performance data. This is to ensure that the organization will meet the performance indicator among other competitors. APPLICATIONS Nowadays, benchmarking is continuously applied among all organizations in the world. For example, based on Innoregio benchmarking, it shows that the benchmarking has started applied in United Kingdom and Europe.

In UK there are also manufacturing databases from Confederation of British Industries which also called CBI. This is for on line assessment of practices and performance of the manufacturing companies. While in Europe, they implement European Foundation for Quality Management Model. This is the role that related to development and integrity. It’s mission is to stimulate and assist all the organizations in Europe to participate in improvement activities in achieve all customers, employees, societies and businesses satisfaction especially in quality for achieving global competitive advantage.

Benchmarking also has been implemented in Malaysia. The body which responsibility is the Malaysia Productivity Corporation (MPC) which was formerly known as the National Productivity Corporation was established in 1962 as a joint project between the United Nations Special Fund and the Federal Government, with the International Labour Organization acting as its executing agency. In 1966, the National Productivity Council (Incorporation) Act No. 19 was passed making the Centre an autonomous body.

It was later amended as the National Productivity Council (Incorporation) (Amendment) Act A305 1975, to cater for expansion of the Centre`s role. This act was subsequently amended as the National Productivity Centre (Incorporation) (Amendment) Act A801 1991. With the Act coming into effect on 1 December 1991, the National Productivity Council became the National Productivity Corporation. Until recently, with effect from 21st February 2008 National Productivity Corporation (NPC) is now officially known as Malaysia Productivity Corporation (MPC).

They provide Malaysian Benchmark System as a guideline to all users to implement benchmark techniques. So it depends on all organization to set up their benchmark as long it is not contradict with a rules and regulations. CONCLUSION Benchmarking is the process of identifying, learning and adapting outstanding practices and processes of any organization in the world in order to help them in improving their performance. It will be done continuously, so it will give fast feedback if any problems occur during the processes implementation.

This is easier to them on focusing on the organization strengthen areas that they need to improve since it give more benefits. Any practice that have been shown by using a systematic process and good judgement and successfully demonstrated to produce will become the best practice and it can be adapted to fit the performance of any organization but all of the organization should be consent that the benchmark that each organization set up must be keep it as confidentiality amongst them unless they are allowed as a benchmark for outsiders.

The balanced scorecard is a tool used to properly strategize and plan company’s activity by measuring financial and non financial performance of a company so that it will always in line with company’s objective, mission and vision. It was originated by Dr. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework in 1992. On that particular time, balance scorecard was specifically used to measure performance where intangible asset was the main concern (Kaplan, 2010).

By years, the function of balanced scorecard has evolved and broadened where it is not only acts as a performance measurement but also acts as a management tool where it helps company in many areas such as clarifying vision and mission, planning activities, improve internal and external communication and so on. Apart from the development in terms of its concept and function, the users of balanced scorecard also has widened by time. In its early time, balanced scorecard was specifically design for private entities where financial performance is their main concern.

When priority has been clarified, the next step is to develop specific objective for that particular perspective where company might want to deliver goods that is lower in cost yet valuable to customer. Then, company has to choose one performance measure to inspect whether company is doing the right move. For an example, company may choose to collect feedback from customer with regards to the products which the company is providing. The next step is to develop target for each performance where company decides that 80% of the feedback from customers must be positive feedback.

After that, company has to narrow down the concept from organization to division or unit so that it is all-aligned and well-performed. Then, company will have to plan activities to implement those chosen strategies. For an example, in terms of production, company might want to reduce the cost of production but not to the extent it will lessen product’s quality. Lastly, company has to closely monitor and manage actual performance with targeted one. If company found out that actual performance is lower that the targeted one, company must identify what is the best action to be taken to correct the issue.

Once company is succeed in attaining its target, company’s profit will directly increase as company is able to produce acceptable product with low cost and also is able to attract more potential buyers as the feedback from existing customers are positive. The figure below is the original framework of balance scorecard that was being introduced by Nolan and Kaplan in the year 1992. BENEFITS OF BALANCED SCORECARD There are several benefits of balanced scorecard that company will be able to enjoy if the system is successfully implemented.

Firstly, it helps to improve company performance not only in terms of financial but managerial. This is because balanced scorecard allows company to not only measure but to monitor organization’s activities effective and efficiently in a sense if it gone below the target, action must be taken to correct it. It suggests that organization should manage its resources wisely so that organization will be able to reduce cost and in the same time gain more profit.

Secondly, balanced scorecard also helps to align key performance measures with strategy at all levels of an organization. When an organization decides to adopt balance scorecard, they need to well look up to each of its divisions and units. This is important to clarify what needs to be done and achieved under that particular division. Thirdly, apart from the above, balanced scorecard also is able to transform an organization’s mission statement and strategic plan from a passive document into the marching orders for the organization on daily basis.

Some organizations don’t really take their mission statements as their main guidance whenever they are conducting activities or implementing strategies. But with balanced scorecard, it sort of taking organization’s mission statement into a whole new level where it does not just coldly stay written on document but also acts as company main guidance in determining company’s strategies. Lastly, with the adopting of balanced scorecard, organization will also be able to pay high focus on each strategy by setting on an objective on each.

By doing so, the management team as well as the employees will know where they are walking into when performing their tasks as the objective has been set up clearly, hence will giving their best to work on the strategies. BALANCED SCORECARD PERSPECTIVES The Balanced Scorecard approach is generally has four perspectives which are financial perspective, internal business process perspective, learning and growth perspective and customer perspective. From the Financial Perspective, it concerned with the shareholder’s view of performance or how we look at our shareholders. Shareholders are concerned with many aspects of financial performance where they measure success by way of looking into some of key areas such as the market share, revenue growth, profit ratio, return on investment, profitability, operating cost management and etc. 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 financial-related data, such as risk assessment and cost-benefit data, in this category. Internal Business Process Perspective is concerned with how are the employees and the company internally by means of accessing the quality of people and 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 according to the mission set by the company. Therefore, we can identify and measure on how well the business is performing, whether the products and services offered meet customer expectations, and the critical processes for satisfying both customers and shareholders. We can also identify what activities in which the firm excels at and in what must it excel in the future, and the internal processes that the company must be improved if it is to achieve its objectives.

These metrics have to be carefully designed by those who know these processes most intimately with our unique missions where these are not something that can be developed by outside consultants. Growth and Learning Perspective is concerned with creating value for the organization that is relates to some issues such as can they continue to improve and create value, in which areas must the organization improve, how can the company continue to improve and create value in the future, and also what should it be doing to make this happen.

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. For example, in a knowledge-worker organization, people (that is 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. The metrics that could be used to measure success in relation to this perspective are number of new products, percentage of sales from new products, amount of training and number of strategic skills learned, and etc. Customer Perspective concerned with what customer expected from the organization. This focuses on the analysis of different types of customers, their degree of satisfaction and the processes used to deliver products and services to customers.

It focus particularly on the area of customer services, new products, new market, customer retention, customer satisfaction, and also what does the organization needs to do to remains that customer’s valued supplier. The metrics that can be used to measure the success in relation to the customer perspective are customer satisfaction index, repeat purchases, market share, number of complaints, returned order, new customer acquisition and other relevant metrics that can be included into it. Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business.

These are leading indicators where whenever the 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.

McDonald’s has adapted the balanced scorecard into its operation that has made it what it is today. By focusing on key areas of the scorecard, McDonald’s can continue to improve and build on its vision and improve customer satisfaction, employee satisfaction, internal business operations and ultimately its financial position. Keeping the balanced scorecard effective in its operations around the globe is the key to McDonald’s success. Focusing on the different areas of the scorecard, McDonald’s can ensure that consistency, productivity and efficiency are always at the forefront of the business.

By maintaining customers and employees who are willing to work hard and are trained in the right areas, McDonald’s will feel comfort in knowing that their vision is being upheld. The balanced scorecard can be a powerful tool in any business. McDonald’s has demonstrated that their balanced scorecard has been a key component to their success and that continued improvements can always be made. Perspective Areas of measurement Financial Profitability ( Increase market share, speed production and delivery time) Sales (Cost leadership, efficiency and consistency) Learning & Growth Knowledge-based Technology

Training and development Investment in employees Internal Business Processes Order-delivery time Production Globalization Customer Number of new customer Retainment of existing customer Speed Pricing Services Quality DRAWBACKS OF BALANCED SCORECARD Cost and Time Balanced scorecard requires several steps and strategies to be taken, definitely it will be costly and time consuming for it to be successfully implemented. Organization has to be very precise on what tool to be used for the strategic planning where it may cost the organization to hire special consultant to determine the best plan to be conducted.

This is because correct tools and measurement require a deep understanding of the process where it can be quite challenging for a small firm to adopt this method. Incomplete Information For a company to adopt balanced scorecard as its performance measurement, company need to have adequate information both internal and external in order to properly strategize the plan and activities to be conducted. The information must be relevant, accurate and complete so that the management will be able to forecast what they need to achieve.

Incorrect information will lead to failure hence incurred the company big loses. Employee Resistance For an effective and efficient conduct of balanced scorecard may require lot of changes depending on the nature and condition of an organization. It might be a problem to the employees to simply change in a quick manner as they are kind of comfortable to the job or tasks they are doing on that particular moment. Thus, to accept such big changes may be a problem for them where there is possibilities that they reluctant to play along in order to successfully adopt this method.

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