Use of Balanced Scorecard in Auto Industry

As defined by the Balanced Scorecard Institute, the balanced scorecard “is a strategic planning and management system used to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals”. The Balanced Scorecard provides information from four different perspectives which can be used to check which activities are in line with the organization goals and which need attention. The four different perspectives are:

• Financial:  To succeed financially, how should the organization appear to its stakeholders?
• Customer: To achieve its vision, how should the organization appear to its customers?
• Internal Business Process: To satisfy shareholders and customers, what business processes must the organization excel at?
• Learning and Innovation: To achieve its vision, how should the organization sustain its ability to change and improve?

FINANCIAL:

Target Cost Achievement

During the design phase, almost 80% of an automobile’s manufacturing cost can be affected. During manufacturing phase, only 20% changes can be done. Hence, setting of target costs and working with suppliers to achieve the targets is a key financial measure of an automotive company.

Capital Efficiency

The automotive industry is a capital-intensive industry and hence companies need to achieve greater returns on their capital investments, to be competitive. Many companies use capital efficiency measures such as net present value (NPV) or internal rate return (IRR). The need is to incorporate these measures into the reporting structure to reinforce the importance of earning back the cost of capital employed and achieving capital efficiency.

Return on Value Added (ROVA)

A typical automobile company does only a part of the manufacturing in-house, and outsources the rest. Outsourcing reduces the cost of manufacturing, but also reduces the value addition in that step. From a shareholder’s perspective, materials are essentially passed to the end customer at cost, and automotive companies can only generate a profit on the value adding processes that remain in-house. Hence, new types of measures, such as ROVA, are needed to identify the value creating processes within a company and hence decide what to outsource and what to manufacture in-house.

CUSTOMER

Product Portfolio

Having a better product mix as compared to competitors is essential for an automotive company’s success today. A product portfolio map is defined by an automaker’s market segments today. It could be based on traditional, demographic or psychographic dimensions. For each segment, internal and competitive measures such as capacity utilization, sales volume, incentives and vehicle profitability need to be measured. These are the segments in which competition occurs, and hence automakers should measure their rank in each segment.

Total cost of ownership

It is not just the buying price which is important for the customer but the total cost of ownership, which includes the buying price of the vehicle, cost of financing, depreciation, insurance, registration, maintenance, fuel, repairs and other costs. Hence automotive companies must measure themselves not only on the selling price of their vehicles but on the total cost of ownership

Customer Satisfaction

When customers purchase their next vehicle, they do not necessarily remember the fit and finish of the new car they got four or five years ago, but their last trip to the repair shop. Hence it is important to measure both initial quality and reliability over the life of the vehicle to gauge customer satisfaction.

INTERNAL BUSINESS PROCESS

Supplier sourced innovation

It is necessary, not just to obtain good quality raw materials from suppliers at right prices but to put innovation through the entire supply chain, to get innovation faster into the market, ahead of competitors. Supply sourced innovation could lead to product innovation as well as cost, quality and delivery improvement.

Cost reduction

Cost reduction is no longer a one-time exercise but a continuous process. Automotive companies that measure cost reduction throughout the supply chain have a greater advantage than companies that measure cost reduction programs as an offline calculation. Traceability of cost reductions to the bottom line is no longer a luxury but an essential capability of performance measurement in the automotive industry.

Outsourcing/supplier risk

Outsourcing of non-core activities may reduce costs and help to focus on core activities, but may also lead to increasing risks. Although automakers are passing warranty and liability claims down to the responsible suppliers wherever possible, negative public opinion and tarnished brand image generally get associated with the company and not suppliers. Hence risk management is an essential part of the Balanced Scorecard.

LEARNING AND INNOVATION

Intellectual Capital

Although companies are focused on retirement and pension payments for their ageing workers, the brain drain that will occur as these skilled workers exit the workforce is of equal importance. Companies must measure the cumulative years of experience in their key processes and find ways to leverage the vast knowledge base before it exits the company.

Innovation

In the automotive industry, customers are always willing to pay a premium for innovation. Both process innovation and product innovation are required to compete and earn a profit. Companies that can bring better quality in the form of new products and new technology to market faster and cheaper become the winners in the automotive industry. It is necessary to measure the speed at which innovation can be converted from ideas to profit.

Category	Measure	Weightage
	Target Cost Achievement	20%
Financial (45%)	Capital Efficiency	15%
	Return on Value Added (ROVA)	10%
	Product Portfolio	10%
Customer (25%)	Total cost of ownership	10%
	Customer Satisfaction	5%
	Cost reduction	10%
Internal Processes (20%)	Supplier sourced innovation	5%
	Outsourcing/supplier risk	5%
Innovation and Learning (10%)	Intellectual Capital	5%
	Innovation	5%

Lessons from Alexander the Great

Recession: The mother of all wrong strategies

Warren Buffet, the legendary investor, remarked in 2003 that providing reckless housing loans is going to be the biggest weapon of financial mass destruction. It has come true.

The real estate boom, which is now the real estate bubble since it has burst, has led to the biggest financial crisis the world has seen since the Great Depression of the 1930's. One thing is certain. This is not an American problem. It is yet to show its full strength. The avalanche is far from over.

First, lets clarify a few things. What does the term sub-prime mean? What does prime mean? Simply put, prime is the ability of the borrower to repay his loans. Sub prime are those who may not be able to repay their loans.

How do banks usually give loans? They would check if the borrower will be able to repay his loan based on certain criteria and documents like salary slips, bank acounts, collaterals( some assets which can be sold by the bank if you do not repay the loan) and sureties.
Now, let me try to explain what exactly happened in the US Sub-Prime crisis.


Fine. I am really sorry for the pathetic daigram I have drawn. I hope its legible atleast to the point of deciphering what is written.

Where did it all start?

Sub prime loans. The real estate boom started around 2001 and lasted till 2006 when it burst. Everyone wanted to be a part of the party. Banks for their part were ready to lend money to those who were sub prime too. That is, people who didnt have salary slips, bank accounts, sureties or collaterals. However, they wont actually own the house till they pay the money back to the banks. These banks are the housing mortgage banks like Freddie Mac, Fannie Mae and Indy Mac all of which are no more. Why did they take this risk of Sub-prime loans? The biggest reason is that real estate was booming. They could sell the houses if the loans are not paid. The other reasons are they could impose higher interest rates and they had to deal with acute competition.

To get a clear understanding, please look into the diagram that I painfully drew.

After the apparent house owner requests for a loan and the loan is granted, the money is paid to the house developer. Where do these banks get their money from? Here is where the Investments Banks, self-proclaimed Masters of the Universe till weeks before, come into the picture. They provide the money to the mortgage banks like Freddie Mac. Lets know the distinction between normal Banks and Investment Banks. IBs generally do not give out loans to anyone. They give out loans only when the borrowers are big companies or in general, when the borrowers borrow really lots of money. Those who invest in IBs are not assured of returns. They may get higher or lower returns. Its a risky business.

IBs have provided the loans to the mortgage banks which has reached the developer. Now, where do the IBs get their money from? Now come the relatively unknown Debt Funds. The Banks in this scheme of things are Washington Mutual which tanked few days back, Citibank, HSBC, our own ICICI and hundreds of companies all over the world. Thats why I said that this problem is not pertinent to the Americans. This problem was created by the Americans and it is going to affect the whole world. Where do these Debt Funs get their money from? From the common man. These include the EPF(Employee Provident Fund), PPF( Public Provident Fund) etc.

All seems to be fine.

Where did the problem start? There would not been any problems if all the people who borrowed repaid. These Sub-prime borrowers naturally defaulted in their payments. They literally packed their bags and left overnight without repaying the money. Now lets see how prices of commodities increase or decrease. It all depends on the supply-demand ratio. If you have a pen and many people ask for it, you ll sell it to the one who pays most(Supply <>

Now, since the borrowers did not repay their money, these banks tried to auction their houses which further increased the supply lessening the price. So, an house mortgaged for 1 crore could be auctioned or sold for only 10 lacs, a 90% loss. So the mortgage banks could not repay the investment banks who inturn could not repay their debts to the debt funds.

So, first, the mortgage banks fell followed by IBs, Lehmann Brothers, Bear Sterns, Meryll lynch etc. Where does AIG come into the picture? It is the American International Group, the largest insurer in the US, and once the 18th largest company in the world. All these IBs had insured with AIG. So AIG had to compensate a lot of companies with billions of dollars. Overnight, it accrued debts of $60billion, which translates to over 240000 crore Rupees. Feel the magnitude?

Next, the Debt Funds which are also banks have started to full, the most notable being Washington Mutual. Many more companies have invested here and the picture will become clearer and worser in the days to come.

So, who are the people insulated from the crisis? The housing developers and those people like Warren Buffet who quit the scene when they sensed danger.

A lot of mistakes have been committed. Can these banks and their CEOs held responsible? Sadly not. Because that is what limited company means. When there is the word limited in the name of the company, it means that the management cannot be held responsible for their actions.