Balance Scorecard and Porter's Five Forces

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  1. 1. Balance Scorecard 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. A set of measures that gives top managers a fast but comprehensive view of business 1
  2. 2. It identifies four key performance measures as follows Customer perspective- How do customer see us? Internal business perspective- what must we excel at? Innovation & learning perspective- can we continue to improve & create value? Financial perspective- How do we look at shareholders? 2
  3. 3. 3 Balance Scorecard Financial Customer Business Process Learning & Innovation
  4. 4. 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 4
  5. 5. Financial perspective - includes measures such as operating income, return on capital employed, and economic value added. Customer perspective - includes measures such as customer satisfaction, customer retention, and market share in target segments. Business process perspective - includes measures such as cost, throughput, and quality. These are for business processes such as procurement, production, and order fulfilment. Learning & growth perspective - includes measures such as employee satisfaction, employee retention, skill sets, etc. 5
  6. 6. 6 Department Areas Finance Return On Investment Cash Flow Return on Capital Employed Financial Results (Quarterly/Yearly) Internal Business Processes Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation Learning & Growth Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities Customer Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate
  7. 7. Objectives, Measures, Targets, and Initiatives Objectives - major objectives to be achieved, for example, profitable growth. Measures - the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin. Targets - the specific target values for the measures, for example, +2% growth in net margin. Initiatives - action programs to be initiated in order to meet the objective. 7
  8. 8. These can be organized for each perspective in a table Objectives Measures Targets Initiatives Financial Customer Process Learning 8
  9. 9. Balanced Scorecard facilitating the following functions Clarifying strategy Communicating strategic, objectives Planning, setting targets, and aligning strategic initiatives Strategic feedback and learning 9
  10. 10. A Balanced Scorecard should result in: Improved processes Motivated/educated employees Enhanced information systems Monitored progress Greater customer satisfaction Increased financial usage The Balanced Scorecard has been applied successfully to private sector companies, non- profit organizations, and government agencies. 10
  11. 11. Example Pantaloon Retail Limited 11
  12. 12. Financial Perspective Goals Financial Growth (25%) Increase shareholders wealth Increase Profit Margin Sales target 1200cr (2015-16) Measures Cost management Financial Ratios Profit growth 25% Sales growth 30% 12
  13. 13. CUSTOMER PERSPECTIVE Goals Customer Satisfaction After Sale services to retain customer Market Penetration Measures Customer retunes and complaints. Customer satisfaction surveys. Coverage and strength of distribution channel. 13
  14. 14. Business Process (Internal Operation Perspective): Goals Reduce Number of defects, amount of rework, number of returns. Increase machine efficiency. Measures Innovations and Research & Development Training to employees 14
  15. 15. Innovation and Learning Perspective Goals Increase Number of new apparel designs. Increase R & D output success rate. Employee turnover, number of complaints. Employee satisfaction and retention. Measures Increase Number of training hours. Introduce New Technology Employee Welfare 15
  16. 16. Porter's Five Forces Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates 16
  17. 17. 17 SUPPLIER POWER THREAT OF SUBSTITUTES BUYER POWER THREAT OF NEW ENTRANTS COMPETITIVE RIVALRY
  18. 18. SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry 18
  19. 19. THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance trade-off of substitutes 19
  20. 20. BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives 20
  21. 21. THREAT OF NEW ENTRANTS Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products 21
  22. 22. COMPETITIVE RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes 22
  23. 23. Example-Paint Industry The Indian Paint industry, estimated to be Rs.21, 000 Cr. growing at a rate of above 15% organized players of the industry cater to about 65% 23
  24. 24. The industry consists of two segments Decorative segment -Major segments in decorative include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc account for over 77.3% Industrial segment - Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. 24
  25. 25. Supply: Supply exceeds demand in both the decorative as well as industrial paints segments, Industry is fragmented. Demand: Demands is for decorative paints depend on the housing sector and good monsoons. Industrial paint demand is linked with user industries like auto, engineering and customer durables. Barriers to entry: Brand, distribution network, working capital efficiency, and technology play a crucial role. 25
  26. 26. Bargaining power of suppliers: Price increases constrained with the presence of the unorganized sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment. Bargaining power of customers: High due to availability of high choices. Competition: In both categories, companies in organized sector focus on brand building. Higher pricing through product differentiation is also followed as a competitive strategy. 26
  27. 27. Model Analysis Bargaining power of buyers housing requirements, the buyers can be customers (building contractors who buy in bulk) and end customers (people who paint/re-paint their house). Customers are more price sensitive because for them number of options are available and decisions are made based on qaulity, price and differentiating factors Industrial segment is low margin high revenue business and buyers of these segments are knowledgeable about their needs. Therefore, price comparison is done effectively by the customers Thus, Bargaining power of buyer is Medium. 27
  28. 28. Bargaining power of suppliers: The Indian Paint industry is raw material intensive industry with more than 300 products going into the manufacturing of the final products. The raw material can be divided into different categories like pigments, additives, solvents, binders etc. Titanium Dioxide is one of the key pigment used in the production of paint and is facing a global supply shortage. Thus supplier of this material has solid bargaining power. Thus, Bargaining power of supplier is Medium. 28
  29. 29. Competitive Rivalry: About 80% of organized market is created to by the below four palyers of Indian Paint Industry. But the current market growth rate can provide ample room of opportunity for all the players of the industry to flourish. However, competition will keep on increasing as market will get saturated, but this will take some time to happen, till then one can keep satisfy customer need with good margin. Also, the presence of unorganized market does provide room for competition. Thus, on the whole competitive rivalry for the Indian paint industry is Low to Medium. 29
  30. 30. Availability of Substitute: The availability of substitute of very minimal. In the rural areas lime wash is conventionally used substitute for paints. One alternative option for decorative walls available today is Wallpaper. Thus, the availability of substitutes in the Indian Paint Industry is Low to Medium. Threat of new entrants: As it has been stated earlier that the paint market in Indian is