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Excerpts from Kaplan-Norton Writings

relating to

Analog's Balanced Scorecard

 

The origins of the balanced scorecard at Analog Devices has been cited in many of the writings of Kaplan and Norton.  The last article provides the most extensive description.  For completeness, I've tried to include all references to Analog in each of them. 

 

CHRONOLOGICAL INDEX

First HBR article - 1992

Second HBR article - 1993

Essay in HBSP book - 1994

First Kaplan-Norton book - 1996

Article in JMAR - 1998

 

Excerpts from HBR-1 (1992):

“The Balanced Scorecard – Measures That Drive Performance,” Robert S. Kaplan and David P. Norton, Harvard Business Review, January-February 1992, pg 71-79.

Page 76-77:

Analog Devices, a Massachusetts-based manufacturer of specialized semiconductors, expects managers to improve their customer and internal business process performance continuously. The company estimates specific rates of improvement for on-time delivery, cycle time, defect rate, and yield. …

…Over the three-year period between 1987 and 1990, a NYSE electronics company made an order-of-magnitude improvement in quality and on-time delivery performance. Outgoing defect rate dropped from 500 parts per million to 50, on-time delivery improved from 70% to 96%, and yield jumped from 26% to 51 %. Did these breakthrough improvements in quality, productivity, and customer service provide substantial benefits to the company? Unfortunately not. During the same three-year period, the company's financial results showed little improvement, and its stock price plummeted to one-third of its July 1987 value. The considerable improvements in manufacturing capabilities had not been translated into increased profitability. Slow releases of new products and a failure to expand marketing to new and perhaps more demanding customers prevented the company from realizing the benefits of its manufacturing achievements. The operational achievements were real, but the company had failed to capitalize on them. …

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Excerpts from HBR-2 (1993):

“Putting the Balanced Scorecard to Work,” Robert S. Kaplan and David P. Norton, Harvard Business Review, September-October, 1993, pg 134-147.

Page 142:

Analog Devices, a semiconductor company, served as the prototype for the balanced scorecard and now uses it each year to update the targets and goals for division managers. Jerry Fishman, president of Analog, said, "At the beginning, the scorecard drove significant and considerable change. It still does when we focus attention on particular areas, such as the gross margins on new products. But its main impact today is to help sustain programs that our people have been working on for years." Recently, the company has been attempting to integrate the scorecard metrics with hoshin planning, a procedure that concentrates an entire company on achieving one or two key objectives each year. Analog's hoshin objectives have included customer service and new product development, for which measures already exist on the company's scorecard. …

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Excerpted from the HBSP Book (1994):

"Companies as Laboratories," Robert S. Kaplan, The Relevance of a Decade, Essays to mark the first ten years of the Harvard Business School Press,” edited by Paula Barker Duffy, Harvard Business School Press, Boston, Massachusetts, 1994, pg 179-182. ISBN 0-87584-576-2.

“The second operational control opportunity arose from a request from Art Schneiderman, the vice president of quality and productivity, at Analog Devices, to deliver a talk on activity-based costing. As I responded to this request, I began to realize that I had more to learn from Art than he did from me. I agreed to deliver the ABC talk, but part of the deal was for me to visit Art at an Analog plant. This visit led to the case Analog Devices: The Half-Life Method, which documented the metric for continuous improvement that Schneiderman had developed for Analog. The half-life metric provided short-term feedback to employees about their rate of progress in achieving long-term goals requiring orders-of-magnitude improvement in production processes.

The visit and case-writing process, however, also documented a Corporate Scorecard that senior executives at Analog were using to evaluate the company's overall performance. The Corporate Scorecard included, in addition to several traditional financial measures, some metrics on customer performance (principally related to lead times and on-time delivery), internal processes (yield, quality, and cost), and new product development (innovation). Many of these measures were subjected to aggressive improvement targets derived from Schneiderman's continuous improvement half-life metric. The significance of Analog's Corporate Scorecard, however, did not become apparent until another project emerged.

In late 1989, the Nolan, Norton Company, an information technology consulting firm, formed a multi-client research project on performance measurement. I was invited to serve as a consultant to this effort. The project attracted about a dozen clients who met on a bimonthly basis throughout 1990. At the first meeting, I presented my newest casesTexas Eastman and Analog Devices. Analog's Corporate Scorecard captured the interest of the participants who, throughout the year, experimented with the scorecard in their organizations. The concept proved successful in many of the pilot sites and became the prime output from the year-long research project. David Norton, who had served as the project leader and facilitator, collaborated with me in writing up these experiences for a Harvard Business Review article. 21 "

21Robert Kaplan and David Norton, “The Balanced Scorecard: Measures That Drive Performance,” Harvard Business Review, January-February 1992, pp. 71-79. 22

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Excerpted from Book-1 (1996):

Translating Strategy into Action – The Balanced Scorecard, Robert S. Kaplan and David P. Norton, Harvard Business School Press, Boston, Massachusetts 1996, ISBN 0-87584-641-3

Preface, pg. vii-xi:

"THE ORIGINS OF THIS BOOK can be traced back to 1990 when the Nolan Norton Institute, the research arm of KPMG, sponsored a one-year multicompany study, “Measuring Performance in the Organization of the Future.” The study was motivated by a belief that existing performance measurement approaches, primarily relying on financial accounting measures, were becoming obsolete. The study participants believed that reliance on summary financial-performance measures were hindering organizations’ abilities to create future economic value. David Norton, CEO of Nolan Norton, served as the study leader and Robert Kaplan as an academic consultant. Representatives from a dozen companies[i]manufacturing and service, heavy industry and high-techmet bi-monthly throughout 1990 to develop a new performance-measurement model.

Early in the project, we examined recent case studies of innovative performance-measurement systems. One, the Analog Devices case,[ii] described an approach for measuring rates of progress in continuous improvement activities. The case also showed how Analog was using a newly created "Corporate Scorecard" that contained, in addition to several traditional financial measures, performance measures relating to customer delivery times, quality and cycle times of manufacturing processes, and effectiveness of new product developments. Art Schneiderman, then vice president of quality improvement and productivity at Analog Devices, came to one meeting to share his company's experiences with the scorecard. A variety of other ideas were presented during the first half of the study, including shareholder value, productivity and quality measurements, and new compensation plans, but the participants soon focused on the multidimensional scorecard as offering the most promise for their needs.

The group discussions led to an expansion of the scorecard to what we labeled a “Balanced Scorecard,” organized around four distinct perspectives-financial, customer, internal, and innovation and learning. The name reflected the balance provided between short- and long-term objectives, between financial and nonfinancial measures, between lagging and leading indicators, and between external and internal performance perspectives. Several participants experimented with building prototype Balanced Scorecards at pilot sites in their companies. They reported back to the study group on the acceptance, the barriers, and the opportunities of the Balanced Scorecard. The conclusion of the study, in December 1990, documented the feasibility and the benefits from such a balanced measurement system."

Page 36:

…"Some companies operate within only a single industry. Indeed, some of the early applications of the Balanced Scorecard were for companies in particular niches of the semiconductor industry, like Advanced Micro Devices (AMD) and Analog Devices, or in a particular segment of the computer industry, like Apple Computer. These companies developed Balanced Scorecards that were also Corporate Scorecards (the term used at Analog Devices). Most corporations, however, are sufficiently diverse that constructing a corporate-level scorecard may be a difficult first task." …

Page 46:

…"In addition to these five companies, we also draw upon the experience of Analog Devices and FMC Corporation, which were early adopters of the Balanced Scorecard." …

Page 93:

… For most companies today, having multiple measurements for cross-functional and integrated business processes represents a significant improvement over their existing performance measurement systems. Indeed, this is the goal we set for ourselves when we launched, back in 1990, a one-year performance measurement project with a dozen companies. This project, building on the experience of Analog Devices and other companies, led to our formulation of the Balanced Scorecard as a new corporate measurement system.5…

 

Page 101

Analog Devices, also in the semiconductor business, uses a measure of the return to R&D: the ratio of operating profit before taxes over a five year period to total development cost. This metric can be measured in aggregate for all new products that have been introduced, as well as applied on a product-by-product basis. Using, as a performance measure, the ratio of operating profit to development cost signals to design and development engineers that the goal of the R&D activity is not just technically sophisticated and innovative devices, but devices that have a market potential that will more than repay their development costs. …

Page 137

The tangible outcome from successfully implemented employee suggestions does not have to be restricted to expense savings. Organizations can also look for improvements, say in quality, time, or performance, for specific internal and customer processes. The half-life metric (see Figure 6-5), developed by Art Schneiderman when he was vice president of quality improvement and productivity at Analog Devices, measures the length of time required for process performance to improve by 50%.' The half-life metric can be applied to any process metric (such as cost, quality, or time) that the organization wants to reduce to zero. Examples of such metrics are late deliveries, number of defects, scrap, and absenteeism. The metric can even be applied to the "waste" time in process cycle times and new product-development times.

The half-life metric assumes that when TQM teams are successfully applying formal quality improvement processes, they should be able to reduce defects at a constant rate (see table below). For example, suppose the organization has identified on-time delivery as a critical customer objective. Currently, the business unit may be missing promised delivery dates on 30% of orders. If its goal is to reduce the missed delivery percentage to 1 % over a four-year (48-month) period, a 30-fold improvement, it can reach (actually exceed) this target by a continuous improvement process that reduces missed deliveries by 50% every nine months, as shown below:

Month

Missed Delivery %

0

30

9

15

18

7.5

27

3.8

36

1.9

45

1

Figure 6-5 The Half-Life Metric

By establishing the rate at which defects are expected to be eliminated from the system, managers can validate whether they are on a trajectory that will yield the desired performance over the specified time period. While the Chinese proverb tells us that a voyage of a 1,000 miles starts with a single step, a continuous improvement metric, like the half-life, tells us whether we are stepping in the correct direction, and at a rate that will enable us to reach our ambitious target in the requisite time period.

To use the half-life metric as an outcome measure for employee suggestions and involvement in process improvement, a company should:

§      identify the process metrics where it wants process improvements,

§      estimate the half-lives expected for these processes, and

§      construct an index that will report the percentage of processes that are improving at the rate specified by the estimated half-lives.

Measuring the number of suggestions successfully implemented and the rate of improvements actually occurring in critical processes are good outcome measures for the organizational and individual alignment objective. These measures indicate that employees are actively participating in organizational improvement activities. …

Page 165

…A company's total measurement system should not encourage suboptimization along any single measure or perspective. Designers should attempt to anticipate the suboptimization that might occur for a given metric on the Balanced Scorecard, and provide supplemental metrics that discourage achieving the primary scorecard objective in undesirable ways. Rather than clutter up the scorecard with additional, nonstrategic measures, companies can use diagnostic measures to balance the strategic measures on the scorecard. As a specific example, Analog Devices, a prototype company for the Balanced Scorecard,4 wanted to offset the temptation to achieve high OTD through long-lead-time quotes. Therefore, in addition to OTD, Analog measured the difference between the promised delivery date and the customer's requested delivery date. It also measured the percentage of time it could not commit to the customer's requested delivery date. It could also have used a diagnostic measure like inventory turns ratio to offset the temptation to achieve excellent OTD performance by carrying lots of inventory. The off-scorecard diagnostic measures like inventory turns and the difference between customer requested delivery dates and quoted delivery dates enable managers to detect when improved on-time delivery performance has been achieved by undesirable actions. …

4Robert S. Kaplan, “Analog Devices, Inc.: The Half-Life System,” 9-190-061 (Boston: Harvard Business School, 1990) and A. Schneiderman, “Metrics for the Order Fulfillment Process: Parts I and II,” Journal of Cost Management (Summer 1996, Fall 1996).

NOTES

[i] The companies included Advanced Micro Devices, American Standard, Apple Computer, Bell South, CIGNA, Conner Peripherals, Cray Research, DuPont, Electronic Data Systems, General Electric, Hewlett-Packard, and Shell Canada.

[ii] R. S. Kaplan, "Analog Devices: The Half-Life Metric," Harvard Business School Case #9-190-061, 1990.  

 

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Excerpted from JMAR (1998):

Innovation Action Research: Creating New Management Theory and Practice, Robert S. Kaplan, Journal of Management Accounting Research, Vol. 10, 1998, pg. 89-118.

Page 99-101

“…For the balanced scorecard, the initial idea also came somewhat serendipitously, but also not completely by accident. The need for improved performance measurement systems had been widely recognized during the 1980s. Many articles, books and conferences documented the limita­tions of relying solely on financial signals for improving business perform­ance. The adoption of total quality management, just‑in‑time production systems and synchronous manufacturing all created a demand for im­proved performance measures that would support companies' continuous improvement initiatives. Therefore, much work had already occurred by 1990, the time when the balanced scorecard concept initially emerged (Berliner and Brimson 1987; Howell et al. 1987; Kaplan 1990b). Much of the need for improved operational performance measurements had been satisfied by measures such as part‑per‑million defect rates, yields, cost of nonconformance, process cycle times, manufacturing cycle effectiveness, throughput times, customer satisfaction, customer complaints and em­ployee satisfaction. What remained missing was a theory for how the myr­iad of nonfinancial performance measures now being used on the factory floor could be reconciled with and achieve comparable status to the finan­cial measures that still dominated the agenda of senior company executives.

Fortunately (again), a skilled practitioner, Arthur Schneiderman of Analog Devices, contacted me to assist his company with launching an activity-based costing project. In our initial conversation, I learned that he had developed an innovative approach, the half-life system, to measure the rate of improvement of his company's TQM program. As part of my research agenda (see step 1 in exhibit 1), I asked for and received approval to visit Analog Devices and write a case about their initiatives. During my visit, I learned that Schneiderman had also developed and implemented a corporate scorecard that senior executives were using to evaluate the company's overall performance and rate-of-improvement. The corporate scorecard included, in addition to several traditional financial measures, some metrics on customer performance (principally operational measures related to lead times and on time delivery), internal processes (yield, quality and cost) and new product development (innovation). This corporate scorecard, evolved, as we shall see, into what came to be called the balanced scorecard. …

… by teaching the Analog Devices case to executives, I learned quickly that Analog's corporate scorecard was of much more interest to them than the half-life method, the original focus of the case. …

 … even more initial learning came from testing the ideas directly with a set of companies that participated in a yearlong project on performance measurement with the Nolan, Norton & Co. The project attracted senior financial and planning executives from a dozen companies who met on a bi-monthly basis throughout 1990. Analog's corporate scorecard captured the interest of the participants. Throughout the year, they experimented with it in their organizations and reported back to us on the results. The concept proved successful in many of the pilot sites and turned out to be the prime output from the year-long research project. In the process, the original corporate scorecard, which focused mostly on operational improvements (on lead times, delivery performance, manufacturing quality and cycle times) had become transformed into a much more strategic organizational performance measurement system, characterized by four identifiable perspectives (financial, customer, internal business process and innovation and growth). …

Page 109:

… The balanced scorecard implementations being done at the end of 1995, as integrated strategic management systems, were far more advanced than the initial formulation, as a complementary nonfinancial measurement system, at Analog Devices or the companies described in our initial article (Kaplan and Norton 1992). In six years (1990-1995), Norton and I had made three cycles around the knowledge creation cycle. The half-life of improvement of the balanced scorecard knowledge base was much shorter than for activity-based costing. …

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Last modified: August 13, 2006