Internal Business Process Perspective in the Balanced Scorecard

This perspective focuses on identifying and optimizing internal processes that are crucial for
achieving customer and shareholder objectives. Companies typically develop objectives and
measures for internal processes after defining financial and customer perspectives to ensure
alignment with overall strategic goals.

Key Concepts and Definitions

1. Value Chain for Internal Processes
o A complete internal-process value chain is recommended, encompassing:
▪ Innovation Process: Understanding current and future customer needs to
develop new solutions.
▪ Operations Process: Delivering existing products/services to customers
efficiently.
▪ Post-Sale Service: Enhancing customer satisfaction through value-added
services after purchase.
2. Transition from Traditional Measurement Systems
o Traditional systems focus on controlling individual departments through financial
metrics (e.g., variance analysis).
o Modern systems measure quality, yield, throughput, and cycle time across
departments but are still limited to existing processes.
3. Importance of Cross-Functional Metrics
o Organizations now aim to measure performance across integrated business
processes (e.g., order fulfillment, procurement).
o Key metrics include cost, quality, throughput, and cycle time, promoting more
holistic process improvement.

Strategic Development of New Internal Processes

To achieve ambitious customer and shareholder objectives, organizations often need to go beyond
improving existing processes and develop entirely new ones. This is a core tenet of the Balanced
Scorecard’s top-down approach.
1. Rockwater Case Example
o Problem: Rockwater faced long project closeout cycles, leading to high accounts
receivable and low Return on Capital Employed (ROCE).
 o Solution: Instead of solely optimizing the accounts receivable department,
Rockwater recognized the need for:
▪ Enhanced Customer Communication: Project managers regularly
communicated with customers about progress and ensured mutual
agreement on project completion.
▪ New Internal Process: This continuous communication throughout the
project cycle led to faster payment and a shortened closeout period, aligning
with financial goals to improve ROCE.
2. Anticipating and Influencing Customer Needs
o Goal: Rockwater aimed to become a preferred supplier for Tier 1 customers by
proactively understanding their needs.
o Solution: Rather than conducting one-time surveys, Rockwater developed a new
process where managers continually learn about and anticipate customer needs.
o Outcome: This proactive approach allowed Rockwater to influence customers’
future requirements, creating a competitive advantage by staying ahead of market
trends.

Summary of Key Takeaways

• The internal-business-process perspective in the Balanced Scorecard encourages
organizations to define new processes aligned with financial and customer goals, which
can lead to breakthrough performance.
• New Processes vs. Improving Existing Processes: While improving existing processes
(quality, cost, etc.) is beneficial, it may not yield sustainable competitive advantages. New
processes developed from strategic objectives can better meet customer and shareholder
expectations.
• Practical Examples:
o Rockwater’s Closeout Cycle Improvement: Emphasis on customer satisfaction
and timely project closeouts.
o Anticipating Customer Needs: Managers gained insights into evolving customer
demands, enabling Rockwater to shape market expectations.

Introduction to the Innovation Process

• Definition: The innovation process in a business unit’s value chain includes identifying
and meeting new market demands and designing new products or services. It’s seen as a
long-term wave of value creation, compared to the short-term operating process.
• Importance: Innovation is vital for companies, especially in industries with extended
development cycles, as it drives significant value and cost-saving opportunities.
2. Components of the Innovation Process
• Market Research: Identifies market size, customer preferences, and price points,
including finding untapped "white spaces" or future needs.
o Key Measures: Number of new products developed, success rate for targeted
customer groups, and market research on future customer preferences.
• Product/Service Design and Development: Develops new products to meet the identified
needs, encompassing basic research, applied research, and focused development.
o Key Measures: Effectiveness and efficiency of design, ability to bring new
products to market.

3. Importance of R&D in the Innovation Process

• Shift from Operations Focus: Modern organizations now invest significantly in R&D as
a key area of their value chain. R&D costs often exceed those of production, emphasizing
the need for specific objectives and measures for these processes.
• Measurement Challenges: R&D is harder to measure compared to manufacturing, where
clear standards for outputs exist. The first indicator of R&D success may take years to
appear, making it essential to specify objectives despite measurement challenges.

4. Performance Measures for R&D

• Basic and Applied Research Measures:
o Examples (from AMD): Percentage of sales from new/proprietary products,
comparison of new product introductions versus competitors and plans, and time
for developing the next generation of products.
o Purpose: To communicate the importance of a robust innovation process within
the company.
• Return on R&D (Example from Analog Devices): Measures operating profit over
development cost, emphasizing products that repay their development cost and meet
market demand.

5. Performance Measures for Product Development

• Sequential Processes in Development: Many industries follow a staged approach (e.g.,
pharmaceuticals) that allows measurement at each stage through:
o Yields: Percentage of successful progression to the next stage.
o Cycle Time: Time taken in each stage.
o Costs: Financial resources spent in each stage.
 • First Design Success Rate: Measures success on the first design attempt, reducing costly
redesigns and time-to-market delays.
• Break-Even Time (BET): A metric used by HP to track the time from the start of product
development until enough profit has been made to cover initial investment.
o Key Points: BET encourages efficient and profitable product development, but it’s
better as a behavior signal than an absolute measure due to challenges in
aggregating results and delay in determining BET.

6. Balancing Innovation and Efficiency

• Cycle Time, Cost, and Yield: Balancing these operational measures with innovation is
crucial to avoid focusing only on incremental improvements.
• Innovative Product Measures: Indicators like gross margin from new products and sales
trends can help assess the market impact of genuinely innovative versus incremental
products.

Introduction to the Operations Process

• Definition: The operations process is the short-term value creation wave in organizations,
encompassing steps from receiving a customer order to delivering the product/service to
the customer.
• Focus: Emphasizes efficient, consistent, and timely delivery of existing products and
services to current customers.

2. Characteristics of Operations Processes

• Repetitive Nature: Operations processes are typically repetitive, allowing scientific
management techniques to be applied to improve areas like order processing, vendor
interactions, production, and delivery.
• Traditional Financial Focus: Traditionally, operations processes have been managed
through financial controls such as standard costs, budgets, and variance analyses.

3. Limitations of Traditional Financial Measures

• Inefficiencies Created: Sole reliance on narrow financial metrics like labor and machine
efficiency can lead to:
o Building up inventory unrelated to actual customer demand.
o Chasing lower purchase prices at the expense of quality and timely delivery.
• Cost Accounting Drawbacks: Traditional cost accounting measures are often inadequate
in today’s fast-paced, quality-focused environments, as they do not support high customer
satisfaction or short cycle times.
4. Modern Performance Measures in Operations
• Influence of TQM and Time-Based Competition: Inspired by leading Japanese
manufacturers, companies now incorporate additional metrics beyond financials:
o Quality: Consistency and defect-free product/service delivery.
o Cycle Time: The time it takes from order receipt to delivery.
o Cost: Operational costs beyond initial purchase prices to include delivery, quality,
and process efficiency.

5. Additional Measurements for Operations Process Performance

• Flexibility: The ability to adapt processes and product features to meet specific customer
needs.
• Unique Product/Service Characteristics: Measuring unique attributes that add value,
such as accuracy, speed, size, energy efficiency, and clarity.
• High-Margin Performance Attributes: Identifying attributes that allow high-margin
sales in specific market segments, aiding companies in focusing on characteristics that
differentiate them from competitors.

6. Integration in the Balanced Scorecard

• Internal-Business-Process Perspective: Operations process metrics (quality, cycle time,
cost, flexibility, unique attributes) are integrated into the Balanced Scorecard to provide a
holistic view of performance beyond traditional financial measures.
• Purpose: These expanded metrics allow companies to focus on customer value,
operational efficiency, and profitability in a competitive, high-quality environment.

Introduction to Postsale Service

• Definition: Postsale service includes all activities after a sale, such as warranty service,
repairs, handling returns, and managing payment processes (e.g., credit card
administration).
• Goal: Enhancing customer satisfaction by providing reliable and timely support to solve
issues that arise after purchase.

2. Importance of Effective Postsale Service

• High-Cost Equipment: Companies like Otis Elevator and GE Medical Systems use
postsale service to add value by minimizing downtime for expensive equipment, often
using technology to detect issues early.
 • Customer Satisfaction: For companies such as Acura and Saturn, fast and friendly service
for repairs and maintenance boosts customer loyalty and reputation.

3. Performance Metrics in Postsale Service

• Similar to operations processes, postsale service performance can be measured using:
o Cycle Time: The speed of response to customer issues, from request to resolution.
o Cost Efficiency: The cost of resources used to handle postsale service requests.
o First-Pass Yield: The percentage of issues resolved in a single service call,
reducing the need for multiple follow-ups.

4. Billing and Collection as Part of Postsale Service

• Efficient Payment Processing: Managing invoicing and collections promptly helps
maintain cash flow and reduces outstanding payments.
• Performance Metrics: Time, cost, and quality metrics can be applied to improve billing,
collections, and dispute resolution.

5. Environmental and Safety Measures in Postsale Service

• Hazardous Materials: Companies working with sensitive materials may focus on safe
disposal practices, as these impact community relations and environmental responsibilities.
• Environmental Impact: Reducing waste and scrap from production not only saves costs
but also supports sustainable practices, which are valuable for long-term community
approval.