Benchmarking and Balance Scorecard

Benchmarking

The term benchmarking has become fashionable in management culture and is now widely used in board-rooms throughout the UK. Johnson and Scholes, in their book Exploring Corporate Strategy, state that benchmarking involves comparison of competences with best practice including comparison beyond the organisation’s own industry.

This involves a search for best practice and the establishment of benchmarks of performance related to that of best practice. Through benchmarking, organisations can learn about their own business practices and the best practice of others. It therefore requires organisations to:

  • identify what they do and why they do it
  • have knowledge of what the industry does and in particular what competitors do
  • be fully committed to achieving best practice

What then, should an organisation benchmark?

            Any value-adding activity can be benchmarked and an organisation should focus on those:

  • That are central to business strategy
  • Where significant improvement is required without increasing resources
  • Where staff are committed and eager for improvement

There are several types and levels of benchmarking, which are mainly defined by whom an organisation chooses to measure itself against.

      These include:

  • Internal Benchmarks

Comparison between  different departments or functions within an organisation.

  • Competitive Benchmarks:

Comparisons with competitors in the business sector – through inter-firm comparison schemes.

  • Functional Benchmarks:

Comparisons with organisations with similar core activities.

  • Generic Benchmarks:

Comparisons of business functions, irrespective of types of business.

  • Customer Benchmarks:

Comparison of performance with customer perceptions.

            Johnson and Scholes identify three levels of benchmarking as:

  • Resources
  • Competences in separate activities
  • Competences through managing linkages

A measure linked to resources could be revenue per employee. Analysing separate activities may include sales calls per sales person and through managing linkages, overall performance such as profitability.

The benchmarking process has been identified as

  • Planning
  • Analysis
  • Action
  • Review

Planning  includes selecting the activity to be benchmarked, involving fully the staff engaged with that activity and identifying the key stages of the activity relating to inputs, outputs and outcomes. It is important to establish the benchmark to a level of ‘best practice’.

Analysis includes identifying the performance gap and to stimulate ideas how this can be met.

This may include whether new process or methods are required. Implementation concerns the use of an action plan to achieve the improvement or the maintenance of the standards pre-determined. Management should ensure that resources are made available to meet the objectives set.

Monitoring and Review includes monitoring progress against the plan and reviewing the appropriateness of the performance measure.

In practice, businesses establishing benchmarks will use a variety of information sources for their programmes. The most relevant and useful information would be that from a benchmarking partner. Such partnerships can be organised through trade association and inter-firm comparison links.

All organisation can benefit with comparison with others. Ideally, it should be judged against best practice where that may be found.

Benchmarking analysis can thus provide such comparisons of the resources, competences in separate activities and overall competence of the organisation.

            Benchmarking is a powerful tool and for management to accrue full value from its use it requires careful planning and review.

The Balanced Scorecard 

            Performance measurement has been defined as “A process of assessing progress towards achieving pre-determined goals, including information on the efficiencies with which resources are transformed into goods and services (outputs), the quality of those outputs (how well they are delivered to clients and the extent to which the clients are satisfied; (and outcomes (the results of a progress activity compared with it intended purpose)”.

There is a need for a structured methodology to aid the setting of managers’ objectives.

Many organisations use the balanced scorecard framework. The concept was developed by (R Kaplin and D Norton, 1993) at Harvard. It is a device for planning which uses balance rather than a skewed approach, so enabling manager to set a range of targets with appropriate objectives.

The framework translates an organisation’s strategy to set performance indicators across four perspectives: Financial, Customer, Internal Business Process and Learning and Growth.

Financial Perspective 

            This focuses on satisfying shareholder value added and measure would include return on capital employed and return on shareholders’ funds.

 

Customer Perspective

 

            This is an attempt to measure customers’ view of the organisation by measuring customer satisfaction. Examples would include customer satisfaction with timeliness and customer loyalty.

 

Internal Perspective

 

            This aims to measure the organisation’s output in terms of technical excellence and consumer needs. Indicators would include unit costs and total quality measurement.

 

Innovation and Learning Perspective 

            This focuses on the need for continual improvement of existing products and developing new ones to meet customers’ changing needs. A measure would include % of turnover attributable to new products.

 

            The following is a summary of Hockeyskill Ltd accounts for years ended 01, 02 and forecast for year 03; together with  a further analysis of revenue and costs.

 

            From this summary we can develop a series of Performance Indicators relevant to the four perspectives focused in the balanced scorecard.

Summary

            From a financial perspective there is an upward trend in return on investment together with growth in the net profit margin.

            The level of customer support in relation to turnover has been maintained throughout the period under review and there is an encouraging upward trend on customer satisfaction.

            Quality assurance is a significant policy for the future and admin and distribution costs are being controlled.

            Training policy continues to support both quality assurance and customer satisfaction levels.

             New product development continues as a mina focus in strategic development.

 

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