Balanced Scorecard

bal scoreIn engineering management and new product development (NPD), we must measure performance in order to determine success in achieving the goals of a project. Often, performance measures are financial in nature (see Economics of NPD in the Fuzzy Front End, for example).  Financial metrics are, of course, important to evaluate the profitability of projects.  Yet, financial measures alone do not fully demonstrate success of a new product project.

Firms involved with engineering design or innovation efforts must also evaluate performance with metrics that demonstrate success in other ways.  For instance, customer satisfaction is an indication of quality and market share.  Increases in knowledge of the NPD teams may be hard to measure but are invaluable in future innovation efforts and process improvements.  The balanced scorecard is a tool used to capture multiple perspectives of what success means for a company or a project.

What is a Balanced Scorecard?

The balanced scorecard was first proposed by Drs. Robert Kaplan and David Norton in the Harvard Business Review in the 1990s.  At the heart of the balanced scorecard is strategy.  Thus, all performance measures in the balanced scorecard method are evaluating project performance against the ultimate goals of the company.

Providing a strategic framework for planning and implementation, the balanced scorecard considers four elements crucial to long-term innovation success:

  1. Financial perspective,
  2. Customer viewpoint,
  3. Internal business processes, and
  4. Learning and growth.

Financial Perspective

Financial measures of success are well-known and documented.  With the financial perspective aligning with strategy, the firm addresses the question of how they should appear to the shareholder.  NPD projects need to contribute to new revenues for the firm.  The financial perspective validates performance in this arena.

Some select financial metrics specific to NPD projects will include return on investment (ROI), net present value (NPV) of the product portfolio, and revenue growth from new product sales.  Projects should be evaluated and prioritized to maximize the overall value delivered to the firm.

Customer Viewpoint

Ultimately the success of any new product is measured by the customer.  Achieving the firm’s vision indicates how the company should appear to the customer.  However, not customerall customers are the same.

First, the customer perspective must be accounted for in each NPD project.  Using a business model approach, the unique customer value proposition is developed that will demonstrate increased quality, improved service, or reduced price.

Next, the project team and firm must establish categories of customers (segments) that are appropriate targets for the new product.  Each group of customers may have a different need and the NPD team can design product features as necessary to satisfy targeted customer segments.

Finally, many market research tools – both in traditional and social media arenas – are used to measure customer satisfaction for the balanced scorecard.  Some suggested measures include product return rates, market share, and return on R&D capital employed.

Internal Business Processes

At first glance, business process evaluation seems counter-intuitive to measuring overall business or project success.  Most of us consider business processes as added bureaucracy:  fill out a form, wait for approvals, attend meetings, fill out more forms, wait again, repeat, and repeat.  Yet, effective business processes will drive – not hamper – innovation.  Thus, measuring the performance of internal business processes is an indication of how well the firm is implementing its strategy and vision.

Furthermore, internal business processes reflect the efficiency and productivity of decision-making.  Best practices in NPD include using a structured process and portfolio management as decision-making tools.  Effective utilization of these business processes are suggested measures for a balanced scorecard to indicate robust decision-making n an innovation program.  Within the context of the balanced scorecard, this metric addresses the question of at which business process must the firm excel in order to satisfy shareholders and customers?

Learning and Growth

Knowledge and wisdom are notoriously difficult to capture and measure.  Yet, growth in learning is critical to a firm’s long-term innovation success and to its overall business maturity.  While a business can achieve short-term success with a singular focus on financial metrics, its long-term survival depends on learning and growth.

Within a balanced scorecard framework, learning and growth performance address the question of how well the firm can sustain its ability to change and improve.  Learning and growth includes perspectives of employee training and corporate culture related to both individual performance and project team effectiveness.  Learning is an on-going task to maintain skills of today’s knowledge workers.

Some measures of learning and growth for an innovation-focused organization include the number of staff that are NPDP certified percent of employees trained on the firm’s specific NPD process, and number of competencies defined.  Job analysis can be utilized to help train employees in the required skills for new product development.  Cultural impacts of innovation changes should be evaluated and gauged by senior management.

Using a Balanced Scorecard

The balanced scorecard approach is widely utilized across a variety of companies and industries.  Unique to this performance assessment is the link between business strategies and the corporate vision.  Using the framework of a balanced scorecard, a firm examines four key arenas to success:

  1. Financial perspective,
  2. Customer viewpoint,
  3. Internal business processes, and
  4. Learning and growth.

In addition, the balanced scorecard approach can provide early warning indicators to help a firm streamline its engineering management of existing operations as well as reform innovation and NPD efforts.

To learn more about the balanced scorecard, please see Chapter 7 of NPDP Certification Exam Prep” or attend our upcoming 2-day workshop on best practices for New Product Development 12 & 13 October 2016 in Houston, Texas.  Early bird rates expire on 31 July 2016, so act now!

Note that over the next several months, we will be migrating our training business to www.simple-pdh.com while maintaining the consulting business here at www.globalnpsolutions.com.  If you have any questions, please feel free to contact us at 281-280-8717 or info@globlanpsolutions.com.

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