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Analog Devices: 1986-1991

The First Balanced Scorecard©

by

Arthur M. Schneiderman

Appendices

The Kaplan Connection

Background

One day, in the fall of 1986, Jerry Fishman poked his head into my office and said "Art, I want you to start up a Manufacturing Council."  Analog had a tradition of using functionally based Councils, the oldest and most prestigious being the Technology Council, as a vehicle for cross-divisional learning.  Up until this point, manufacturing had been Analog's neglected child.  It was viewed almost as a necessary evil required to provide products and revenue to feed our technologist's appetites.  But early on in our Strategic Planning exercise, it became apparent that Manufacturing Excellence would be a key to our future success.  The Manufacturing Council was to be the driver for that transformation.

Our first meeting was held in December, 1986.  In attendance were the Operations Managers from all manufacturing sites world-wide.  I was the Chairman and continued in that role until the appointment of our first VP of Worldwide Manufacturing in 1989.  The principal agenda item was to establish the Council's Charter.  Among the highlights of that kickoff meeting were the unanimous view that the QA/QC managers be included as full members on the Council.  As one Operations Manager put it, "We're a team, I can't imagine doing anything in manufacturing without Gene's (the QC manager) involvement."   The other noteworthy Charter mandate was that I arrange for outside experts to come in from time-to-time and spend a day with the Council at our quarterly meetings.  It was hoped that their new ideas would help stimulate our manufacturing renaissance. 

The first expert that I invited was Dick Schonberger, the author of several classic books on Japanese Manufacturing Techniques.  Others included Bob Slade (manufacturing cycle time reduction) and Joe Juran (TQM).  Juran's visit proved so successful that after some pleading on my part he agreed to come back to for a repeat performance for a larger audience.  The next expert was Bob Kaplan and the subject was Activity Based Costing, but this requires a little explanation.

In mid-1987, I was asked to help resolve a controversy over the location of our next major IC assembly facility.  Three locations were competing for the facility: Japan, The Philippines and Ireland.  Each provided detailed comparative cost estimates to show that they were the low cost choice.  Senior management was unable to choose between the analyses because each chose a different set of assumptions, not surprisingly the ones that would put them in the best light.  I was asked to come up with the "right answer".

I concluded that to do so would likely jeopardize my role as facilitator of Analog's TQM implementation.  It was important that I not be perceived by the organization as taking sides in any partisan issue.  So instead, I put together a handwritten presentation on how I would structure the analysis and introduced some basic ABC considerations.  The structure proved interesting to all concerned and so I was asked to help the three sites complete an analysis using this costing structure.  

Seeking Help on ABC

I felt that some outside support would be helpful in validating my approach.  A quick trip to the bookstore led me to the book Relevance Lost, by Tim Johnson and Bob Kaplan.  I distributed copies of the book to the members of the Manufacturing Council.  Johnson and Kaplan's message "resonated" with Analog's manufacturing community, so under their auspicious I contacted Bob in January of 1989 and invited him to give a one day seminar on ABC at one of our Council meetings.  The activities of the Manufacturing Council were now getting significant attention in other ADI communities, so at the request of our VP of finance, and with the Manufacturing Council's blessings, I invited the General Manager's and the Finance Council to Bob's presentation.

In preparation for the seminar, I met with Bob on February 28, 1989 at his HBS office to review what we were doing in our QIP efforts.  The materials I showed him at that meeting, and subsequently sent him in hard copy, were similar to my January 1989 APICS/Babson presentation.  I also included a slide on our scorecard deployment methodology as well as several screen shots from our online system.  I reviewed with him Analog's Corporate Scorecard and how we used the half-life method for setting our long and short term goals.  But it was the half-life method, not the scorecard that initially got Bob's attention.  He asked me if I would be interested in letting him write an HBS case on my half-life method and its application at Analog.  Ray and Jerry left the decision to me and so I enthusiastically agreed to Bob's request.

Bob's ABC seminar occurred on March 23, 1989 and was well received.  The ABC seed had been planted and although there was no organized attempt to start a major ABC effort, I'm sure that it did influence the thinking of people for future citing decisions, new accounting systems to support world-wide product line management, and strategic product-line profitability analysis as well as product pricing decisions.

Analog Devices - The Half-Life Method

Bob started his preparation of the Analog Devices case on July 13, 1989 with a site visit to our largest manufacturing facility located in Wilmington, MA.  He was accompanied by his students Kirin Verma and Chris Ittner.  John Shank of Dartmouth College had approached me about a chapter he was writing in a book that he was co-authoring for FEMA and to conserve our staff time, and with Bob's approval, he carried out his interviews concurrently with Bob's.  The first version of the case was published on March 16, 1990 followed by a teaching note on November 27, 1990 and a case revision on July 12, 1991.

I was honored to be present at the inaugural use of the case at the HBS Advanced Management  Program (AMP) on April 17, 1990.  Over the succeeding years, I've attended many classroom uses of the case, not only at the HBS but also Babson College, Boston University,  Carnegie Mellon, Duke, UNC, Sloan, University of Chicago, and Wharton.  I always found the students observations to be provocative and I've learned a lot from them.  In hindsight, my only regret is that Bob didn't choose to name the case:  Analog Devices, The Balanced Scorecard Method.  If that had happened, others may have written this history.

The Nolan-Norton Studies

The next key event was an invitation by Bob to come to a meeting of a Nolan-Norton study group on performance measurement in which he was involved.  Nolan-Norton was a part of KPMG.  Participants in the study, entitled "Measuring Performance in the Organization of the Future," were Advanced Micro-Devices, American Standard, Apple Computer, Bell South, GIGNA, Conner Peripherals, Cray Research, Dupont, EDS, GE, HP, and Shell Canada.  Bob and I teamed in a pair of presentations; his, in part, on the HBS Analog Case and mine on the Analog story.  This occurred on July 19, 1990.  Unfortunately, I was only able to stay for our two presentations because of other ADI commitments.  Apparently, the presentations were a hit.  

The Executive Summary of the study was published some time in 1991 and included materials from Bob's and my presentations.  One display in the Executive Summary was used to demonstrate the linkage between performance measurement and the organization's strategy and vision.

Comparison of these two displays (the Analog slide was part of my presentation at Nolan-Norton) demonstrates clearly that Analog's earliest scorecard implementation met their early test for an effective linkage to strategy.

The interest generated by Analog's corporate scorecard prompted a second Nolan-Norton study in which the participants implemented balanced scorecards within their respective organizations.  This study provided the basis for the first Kaplan-Norton HBR article, which appeared in the January-February, 1992 issue.  Although that article did make brief mention of Analog's use of the half-life method, and described the experiences of an anonymous "NYSE electronics company" (that was us!), it did not describe Analog's pioneering work on the first balanced scorecard.  Nor did an article by Larry Maisel, then of KPMG, who was also part of the Nolan-Norton study.  He published the study results in the Summer 1992 issue of the Journal of Cost Management in an article entitled "Performance Measurement: The Balanced Scorecard Approach."

Kaplan recognized that his experience with ABC and the balanced scorecard could be generalized into a model which he called "innovation action research."   So removing his consultant's hat and donning his scholar's cap, he described the origins of the balanced scorecard in two academic articles published in 1994 and 1998: 

“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."

Quoted from: "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.

Page 99-101: “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 ..., 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. …

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

I've included for completeness all references to Analog in the publications of Kaplan and Norton (see Kaplan-Norton references to Analog).

I'm unaware of any major elements of the current theory of the balanced scorecard that were missing from Analog's pre-Kaplan scorecard process.  Certainly, there were weaknesses in our execution of that process, but I'm sure that that is true of all scorecard implementations.  One of my hopes is that readers of this article will provide their constructive criticism of our effort.  With that feedback, we will all be contributing to the scorecard's refinement.

It is interesting that in both the Nolan Norton final report and the Maisel's JCM article, the slide that I showed indicating the linkage between our strategic goals and our performance measures was used as the example for the subsequent classification system which is still used today by BSC advocates.  However, since the focus of our communications up to that point had been on my Half-Life Method, I think that their understanding of how we developed and used our balanced scorecard was at best incomplete.  For example, although financial measures appeared first on our scorecard, we viewed all of Analog's primary stakeholders as "equals".  We did however recognize that our stockholders, many of them Analog employees were perhaps first among equals.  But from a logic perspective, our scorecard reflected our greatest performance gaps considering the needs of all our constituents.

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©1999-2006, Arthur M. Schneiderman  All Rights Reserved

Last modified: August 13, 2006