Internal Processes Perspective of the Balanced Scorecard

Some believe that “Internal Business Processes” is one of the most important perspectives of a strategy map. The objectives from this perspective are related to the business systems that insure the operation and stability of any business.

In this article I will:

  • Focus on generic strategies and their representation in Internal perspective;
  • Give a framework to find and map appropriate objectives,
  • Discuss indicators that can be used, and
  • Do an exercise for cascading of some top level business objectives down to the individual scorecards.

Generic strategies on Internal BSC perspective

Before we start, it is a good idea to show the position of Internal perspective on the strategy map. This perspective explains how the company is going to satisfy customer needs, and meet financial goals; specifically:

  • What new business systems does a company need to develop?
  • What existing processes does a company need to excel?

Logically, on the strategy map we put this perspective below Finance, and Customer perspectives.

Projection of the generic strategies

In the previous article we discussed 3 generic strategies that company can focus on. These strategies help a lot to start strategy description and formulate possible objectives for Internal perspective.

Product Leadership Strategy

As the name of this strategy implies, the objectives within are focused on:

  • Developing new products;
  • Innovating existent products;
  • Improving speed to market.

Projection of product leadership strategy on internal perspective

For example, an objective can be formulated as “Develop X function in ABC product in order to satisfy the N need of a customer and achieve certain financial goal.” Here we actually have two parts:

  • The first one formulates the objective,
  • The second one explains how an objective is going to influence a customer value.

On the strategy map the second part is not normally expressed verbally, instead it’s better to use visual cause-and-effect links.

Connection with Learning perspective

Innovation challenge first appears not on the technological, but on the learning level. Before a company’s engineers can develop some innovative function, they need to understand what those innovations might be and how they are linked with the customer value. In the Balanced Scorecard one can formalize these research objectives on the Learning perspective.

The objectives related to the product leadership might be presented in a form of vague goals, as without the details one won’t be able to come up with a development plan and specifications. So this goal stays vague until the company gathers enough information to understand what exactly is required by the market.

An example of linking Internal and Learning perspectives

Customer Intimacy Strategy

This generic strategy implies that a company improves business systems that affect customer experience, such as:

  • Customer relationship management systems (for example company’s activity in social medias);
  • Customer support service (can be a call center that handles customer queries);
  • Customer interaction (the way a company listens to its customers when innovating);

Projection of customer intimacy strategy on internal BSC perspective

There is no such a thing as a “correct” strategy 

Strategy and respective business goals are tailored according to the vision of founder/CEO. If most companies are listening to the customers, it doesn’t mean that yours needs to follow their strategy, probably your solution to solving the same challenges will be completely different.

Let’s take Apple as an example: “Apple’s approach to innovation is definitely not user-driven: It does not listen to users, but makes proposals to them.” says Roberto Verganti (“Steve Jobs and Management by Meaning”, Harvard Business Review, 2011).

  • Ask yourself: how exactly you are going to listen to your customers? Will you do it in Apple’s style?

Make sure your objectives are detailed enough

Needless to say, all objectives need to be detailed enough. If there are no details, then those are not objectives, but are only vague goals, or business dreaming. For example, top manager might formulate one of the objectives as “Update a website to engage customers better.” This objective by itself doesn’t provide enough details, we still need to answer questions like:

  • What is an engaging website?
  • What information do your visitors expect to find?
  • What is the best technical means to deliver necessary information to the customers?

To answer these questions a company’s managers need to research the topic:

  • The objective is tightly connected with objectives in Customer and Learning perspective.
  • More details about an objective are formulated when we do a cascading (see the paragraph below).

Operational Excellence Strategy

To focus on this strategy managers need to formalize objectives related to operational excellence. These questions will help:

  • What can a company do to decrease operation costs and cycle time?
  • How do companies define operational efficiency? What can they do to improve it?
  • How can a company ensure high standards of quality and delivery time?
  • How can a company optimize their supply chain?
  • How can a company scale business operations?

Projection of operational excellence strategy on internal perspective

The connection to the customer value

As always, the most important question is:

“How are these improvements  connected to the customer value?”

For example, decreasing the Time to market might be important for the end customer. Imagine a situation, when a customer comes up with some new requirements and your company is able to present a working prototype in a week, not in half a year.

Another example is decreasing defect rate from 0,001 to 0,0001%. This objective might be really challenging for your business, but will not increase actual customer value, as a lower defect rate might not form  part of perceived product quality.

All generic strategies will be on your map

Most likely, you will have on your map objectives for all of these generic strategies. That’s correct, as you need to be doing well in all of the areas.

Should a company’s strategy be focused on one of the generic strategies?

Michael Porter in his works implies that there should be such a focus. A classic example is the McDonalds Company with their focus on operations.

The question is about the time frame of such a focus. One strategy might work for you for a long time, or you might want to choose “Product Leadership” as a focus strategy for this year and develop business systems necessary to improve and maintain the quality of your product. For the next year you might actively work on improving customer engagement.

Other internal strategies

You might have other objectives that you might want to keep outside these generic strategies. For example, if you are in the software business one of the important internal strategies involves objectives from Intellectual Property (IP) domain:

  • How do you protect and manage your IP?
  • How do you formalize relationship between partners and sub contractors?
  • How do you comply with regulations in different countries?

Reflect the most important objectives of your business on the strategy map. To ensure this, I suggest to start your analysis with creating a map of the existent business processes. You will find some guidance on this below.

How to come up with specific objectives

Before you start adding objectives onto your Balanced Scorecard, I recommend that you describe the processes that you already have. You’ll need to map your innovation, product development, and customer service processes.

Here is a check list to use:

  • Identifying market. How does your company learn about new opportunities and customer needs?
  • Build product or service. How does your company develop the product?
  • Product market delivery. How does your company deliver the product to the market?
  • Customer support. How does your company provide customer support?

Checklist to come up with new business objectives

Once you have a visual picture of your process it’s a good idea to connect the steps of the process with customer value. You need to analyze the steps from the process map by asking questions like:

  • Why do we do this? How is the customer value created?
  • What will be valued by the customer in a new product, support service, marketing?
  • How can our innovations can be compared with what our competitors offer?

After this exercise you will be prepared to start formalizing your internal objectives on the strategy map.

An example of indicator and formulated business objective

In an ideal world all objectives on the strategy map are accompanied by a pair of leading and lagging measures. That is what authors of the Balanced Scorecard framework recommend, but in the most cases finding good measures (especially leading ones) is a tough task, so companies don’t use measures at all or use generic ones.

Let’s take for example “Update a website to engage visitors better” objectives. To define appropriate indicators we need to ask:

  • How to measure the drivers of the successful website design (leading indicators), and
  • How to measure the results of the design (lagging indications).

Lagging and leading KPIs on business scorecard

As for the lagging indicators one of the popular is “Bounce rate,” that shows the number of visitors that left the website. Most web marketing experts however recommend to use Adjusted Bounce Rate that will take into account the time spend on the website.

What about leading indicator? What can we measure to guaranty that the new website will be engaging and user-friendly?

Until we have a better idea, a generic indicator would work: for example something like Website Team Experience Score.

Let’s assume that we will calculate this score by  taking into account the experience of team members in the product, in the web design, and in achieving user experience excellence.  It is obvious, that this indication is based on personal opinion and might be nothing new, but a formalization of this subjective estimation.

Formulated business objective

We have a business objective with aligned indicators now:

  • Business objective: Update a website to engage visitors better.
  • Leading metric: Website team experience score, %
  • Lagging metric: Adjusted Bounce Rate, %

On the one hand, this objective is connected with a Customer and Finance perspective: if we could achieve this objective, then we could get our customers and prospects more engaged. The shift in the behavior of the customers might result in a better product awareness and possibly attract even more prospects from search engines.

On the other hand, this objective implies some specific objectives in Learning & Growth perspective. For example, a company might need to understand customer profile and requirements better by analyzing a customer’s behavior on the website. This would help to create a customer behavioral model and support it better with an updated design.

That is how this example objective looks on the management level. What about the department and employee level? This objective need to be translated to the involved departments and persons who will work on the objective. Let’s discuss the cascading process.

Cascading for internal objectives

Cascading procedure is the same for all perspectives of the Balanced Scorecard. It’s important to remember that we need to cascade not only a business objective, but the measures associated with it. Here is how cascading can be done for the above mentioned objective.

Top Level Managers Level:

  • Business objective: Provide customers with better experience online
  • Leading metric: Website team experience score, %
  • Lagging metric: Customer engagement survey, %

Internal business objectives cascading

Website Team Level:

  • Business objective: Update a website to better engage visitors.
  • Leading metric: Marketing specialist involvement, hours
  • Leading metric: Web designer involvement, hours
  • Lagging metric: Adjusted Bounce Rate, %
  • Lagging metric: Engaging website content, # of pages

Marketing Specialist Level:

  • Business objective: Prepare visitor model and provide engaging content.
  • Leading metric: Time spend on the analysis of current user behavior, hours
  • Leading metric: The number of customer iteration points defined, #
  • Lagging metric: Adjusted Bounce Rate, %
  • Lagging metrics: Marketing texts written, # of pages

Example: Adjusted bounce rate KPI in BSC Designer

Web designer Level:

  • Business objective: Update a website to the high quality platform that will take into account latest recommendations by Google
  • Leading metric: Website quality score according to the internal checklist, score
  • Lagging metric: Adjusted Bounce Rate, %
  • Lagging metric: Web pages according to the established standards, %

As you can see, this cascading exercise actually helps to crystallize relatively vague business goal “Provide customers with better experience online” with some specific details. In the real case it must be polished during the discussion between a company’s marketing and web design experts on the one side and top management on the other.

A final word

Having a well developed strategy map will help you to understand better your current business, support strategy discussion and execution in your company.

Here is your step-by-step guide for Internal perspective:

  1. Map your current business processes; Analyze how your business systems influence customer value;
  2. Review 3 generic strategies and their respective objectives;
  3. Add objectives specific for your business to the Internal perspective; Make sure you can track cause-and-effect connections between Customer and Internal perspective;
  4. Add appropriate leading and lugging indicators;
  5. Form a strategy discussion team and cascade your scorecard to the department and individual levels;
Download the project of BSC Designer that was discussed in this article. To open the project you will need to download BSC Designer PRO.
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Feel free to share your thoughts and best practices about Internal perspective of the Balanced Scorecard in the comments below.

Other perspectives of the Balanced Scorecard

Aleksey Savkin is a business performance expert at BSC Designer. His areas of expertise are Balanced Scorecard, KPIs, Business Performance Management. Aleksey is the author of a number of articles and books on Balanced Scorecard.

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