BSC - Internal perspective

Once the financial and customer objectives have been established, through the BSC Internal Perspective the company must identify and control the core business processes, the critical internal processes in where the company must excel.

These processes allow the company to

  • Accomplish the shareholder’s objectives: Satisfy them at medium-term (success) and at long-term (prosper)
  • Achieve the customer excellence: Generate competitive advantages that bring added value to the customer and engage them in long-term collaboration agreements. 

The internal process chain value: The core business processes that are part of the chain value must by identified.

In general terms, the chain value comprehends the following main processes:
Internal-business-value-chain
 
1- Innovation: It is a key element in the process of value creation, especially in companies with a large design and development cycles. The company must identify the needs of current future customers and, through innovation and development, provide solutions to these needs.

Furthermore, the innovation becomes the fundamental element not only to satisfy the customer’s needs but also to exceed their expectations. In this way, the innovation provides competitive advantages that will lead to bigger operating margins, longer product life cycles and it is of vital importance when the capacity to reduce production costs in the daily operations is limited, especially in mature markets.

 

 

Innovation consists of two components: 

  • Market identification: The size, customer preferences, target prices for each product. This process also includes studying possible opportunities for emerging needs that can lead to completely new markets. In these cases, the advance presence in the market can give an advantage in brand and leadership.
  • Product/service creation: The information about markets and current and emerging customer preferences are the key inputs for the product design and development process. In this stage, it is important to distinguish between:
Base research: It aims to build new technologies and methods to satisfy emerging markets in a middle and long-term basis.
Applied research: Develops existing technologies with the aim to better satisfy the current and emerging needs in a short-time basis.
 

The cost-benefit analysis on innovation: The cost-benefit relationships in the innovation and development processes are not so obvious as the ones in the manufacturing processes where, through the standards, these conversion is much easier.

Nevertheless, the BSC must also specify the objectives and KPYs for the research and development processes through a balanced set of performance indicators for the research and development projects combined with other innovation measures.
 
Sometimes there might be pressure to reduce the length of the R&D projects and pressure reduce the investment and rise profitability at short-term. Financial measures such as the investment Payback or the Project Break-event Point (point where after having started the project and the product has been introduced to the market, it has generated benefit enough to cover the fixed costs related to the R&D project), must be complemented with other innovation measures and, as far as possible, with reliable calculations of the Net Present Value (NPV) and Internal Tax of Return (ITR) which should cover the whole product lifecycle length. Otherwise, there is a risk of promoting projects with shorter payback time and better short-term cash flows but with lower long-term operating margins and shorter lifecycles than other groundbreaking long-term projects whose initial cash flows might be smaller but with much better NPV.
 

Some examples of indicators related to innovation could be:

-       % of sales of new products

-       Average time to market

-       Product EBITDA / Total development cost.

-       Research costs / Sales.

-       % of products in compliance with specifications.

-       Average number of design reviews per product.

-       Average number of days per product review -à potential sales      

 

 

2 - Operations: After the innovation stage, the next ones in the chain value are operations. The key factors of the operating processes must be determined in accordance with the product specifications with regards to functionality and needs that must satisfy, the engineering specifications and parts specifications.

QFD

Beyond a right control and operating process execution which lead quality products, whose guarantee is taken for granted in mature markets, the BSC determinates the key factors to success, that is, the operational drives that will have effect on customer’s satisfaction or, ultimately, ensure exceeding customer’s expectations.

In other words, the BSC identifies the cause-effect relationships between the daily internal processes and its translation into economic results. That is, which are the distinctive features of each product or service that will lead to accomplish customer’s and shareholder’s expectations?

The excellence in operations (times, productivity, quality) and cost reductions are still important factors, but might not be the only ones. The traditional financial and cost controlling performance measures together with quality, productivity and time performance indicators must be complemented with the correct Key  Performance Indicators (KPI).

 

3 - After-sales service: Within the framework of a waste definition of the concept product or service, the chain value continues with the sales logistics and after-sales service. These post-production processes might become extremely important for what they provide of added value to the final product or service. Therefore, they could very well mean the difference between a standard product supply and a distinct product with bigger added value.

 

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Strategy-and-Four-perspectivce-cascadeThe sole use of internal indicators which refer to production costs, cycle times, performance or quality can lead to small improvements that might not be big enough to achieve competitive advantages or the corporate objectives. The BSC links the internal indicators with the financial and customer indicators. All they must report to two main objectives, the satisfaction of shareholders and the selected customer segment respectively.

In this sequential and vertical process (finance, customer, and internal processes) it is likely that the company needs to consider a process reengineering in lots of its internal areas.  Only significant changes in all processes, in performance, quality, time and costs can lead to achieve sustainable competitive advantages drive the company towards the customer excellence.

The BSC monitors the excellence in the current operating processes (short-term and traditional chain value) with innovation processes (long-term and long chain value) which include entirely new products and services that satisfy the needs of current and new customers.

  

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