Internal-Business-Process Perspective

For the internal business process perspective, managers identify the processes that are most
critical for achieving customer and shareholder objectives. Companies typically develop their
objectives and measures for this perspective after formulating objectives and measures for the
financial and customer perspectives. Most organizations existing performance measurement
system focus on improving existing operating processes. For the balanced scorecard, we
recommend that managers define a complete internal process value chain that starts with the
innovation process identifying current and future customers’ needs and developing new solutions
for these needs proceeds through the operations process, delivering existing products and services
to existing customers and ends with post sale service offering services after the sale that add to the
value customers receive from a company’s product and service offering.
All companies are new attempting to improve quality, reduce cycle times, increase yields,
and maximize throughput and lower costs for their business processes. Therefore, an exclusive
focus on improving the cycle time, throughput, quality, and cost of existing processes may not lead
to unique competencies. unless one can outperform competitors across the board on all business
process, in quality time, productivity, and cost, such improvements will facilitate survival, but will
not lead to distinctive and sustainable competitive advantage.
The Internal-Business-Process Perspective
Each business has a unique set of processes for creating value for customers and producing
financial results. This model encompasses three principal business processes:
 Innovation
 Operations
 Post sale service
In the innovation process, the business unit researches the emerging or latest needs of
customers and then creates the products or services that will meet these needs. The operations
process, the second major step in the generic internal value chain, is where existing products and
services are produced and delivered to customers. This process has historically been the focus of
most organizations’ performance measurement systems. The third major step in the internal value
chain is service to the customer after the original sale or delivery of a product or service. All this
activities add value to targeted customers’ use of the company’s product and service offerings.
The Innovation Process
Some formulations of a business unit’s value chain treat research and development as a
support process, not a primary element in the value creation process. In fact, in our early writings
on the balanced scorecard, we also separated the innovation process from the internal business
process perspective. The importance of the innovation process led us to modify our “geography”
of the balanced scorecard so that the innovation process could be recognized as an integral part of
the internal-business process perspective.
 Think of the innovation process as the long wave of value creation in which companies
first identify and nurture new markets, new customers, and the engineering and latent needs of
existing customers. Then, continuing in this long wave of value creation and growth, companies
design and develop the new products and services that enable them to reach the new markets and
customers and to satisfy customers’ newly identified needs. The operation process, in contrast,
represents the short wave of value creation, in which companies deliver existing products and
services to existing customers.
Information on markets and customers provides the input for the actual product/services design
and development processes, the second step in the innovation processes. During this step, the
organization’s research and development group:
 Performs basic research to develop radically new products and services for delivering value
to customers
 Performs applied research to exploit existing technology for the next generation of products
and services
 Makes focused development efforts to bring new products and services to market
Measures for Basic and Applied Research
AMD many measures of its Balanced scorecard on the innovation process. Among the
measures it used were:
 Percentage of sales from new products
 Percentage of sales from proprietary product
 New product introduction versus competitors; also new product introduction versus plan
 Manufacturing process capabilities
 Time to develop next generation of products
Measures for Product Development
Despite the inherent uncertainty in many products development activities, consistent
patterns can be found that can be exploited in measurement process. An electronic company did a
root cause analysis of the high time and cost of its new product development process. The analysis
revealed that the number one cause for long time to market of new devices was products that failed
to function properly the first time they were designed and hence had to be redesigned and retested
often several times.
Break Even Time (BET) brings together in a single measure three critical elements in an
effective and efficient product development process. First, for the company to BET on its R&D
process, its investment in the product development process must be recovered. Second, BET
stresses profitability. And third, BET is denominated in time.
The Operations Process
The operation process represents the short wave of value creation in organizations. It starts
with receipt of a customer order and finishes with delivery of the product or service to the
customer. This process stresses efficient, consistent, and timely delivery of existing products and
services to existing customers. Existing operations tend to be repetitive so that scientific
management techniques can be ready applied to control and improve customer order receipt and
processing and vendor, production and delivery processes.
Post sale Service
Post sale services includes warranty and repair activities, treatment of defects and returns,
and the processing of payments, such as credit card administration. Companies attempting to meet
their targeted customers’ expectations for superior post sale services can measure their
performance by applying some of the same time, quality and cost metrics, described for operating
processes, to their post-sale service processes.
Specific Internal-Business-Process Perspectives Kenyon Stores
Kenyon stores is a multibillion dollar retailer of clothing. Kenyon senior executives an
aggressive goal for sale growth of 150% over five years. They intended to achieve this ambitious
goal by providing:
1. A premium brand image
2. Great fashion, design, and quality merchandise at an attractive price, and
3. Quick, efficient service and excellent product availability.
Kenyon also identified five critical internal-business process:
1. Brand management
2. Fashion leadership
3. Sourcing leadership
4. Merchandise availability
5. Memorable shopping experience
Brand Management
Within brand management process, Kenyon identified four subjectivies:
1. Brand concept definition
2. Category dominance
3. Positioning strategy
4. Store concept definition
 These subjectivies were directed at building a concept and loyalty among targeted
customers. The measures selected for these subjectivies were:
1. Market share in selected categories
2. Brand recognition
3. New accounts
Fashion Leadership
Fashion leadership was defined as providing targeted customer segments with fashionable
merchandise that supported the brand and influenced customers’ buying habits. Fashion leadership
focused on effectively using information to choose fashions that would meet customers’
expectations in key clothing categories.
Sourcing Leadership
Sourcing leadership stressed development and management of the supplier base so that
desired volumes and mix of high quality merchandise could be rapidly produced and delivered.
Merchandise Availability
Merchandise availability related to a “perfect inventory” objective in which customer
satisfactions, sales and gross margin would be achieved by buying the right quantities of
merchandise in the right colors and sizes and stocking the right stores with appropriate assortment
in advance of customer demands.
Memorable Shopping Experience
This measure occupied a position in both the customers and the internal business process
perspective. In addition to this customized measure, Kenyon solicited feedback from customers, a
score on customers’ satisfaction with their shopping experiences was included in this subjective.
Summary
In the internal business process perspective, managers identify the critical processes at
which they must excel if they are to meet the objectives of shareholders and of targeted customer
segments. Conventional performance measurement systems focus only on monitoring and
improving cost, quality, and time-based measures of existing business process
Appendix: Operations Process-Time, Quality, and Cost Measurement.
Process Time Measurement
Many customers value highly short lead times, measured as the time elapsed from when
they place an order until the time when they receive the desired product or services. The start of
the cycle can correspond to the time when:
1. Customer order is received
2. Customer order or production batch is scheduled
3. Raw materials are ordered for the order of production batch
 4. Raw materials are received
5. Production on the order or batch is initiated
Similarly the end of the cycle can correspond to the time when:
1. Production of the order or the batch has been completed
2. Order or batch is in finished goods inventory, available to be shipped
3. Order is shipped
4. Order is received by the customers
A metric used by many organizations attempting to move to just-in-time production flow processes
is manufacturing cycle effectiveness (MCE) defined as:
𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑡𝑖𝑚𝑒
𝑀𝐶𝐸 =
𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝑡𝑖𝑚𝑒
This ratio is less than 1 because:
𝑡ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝑡𝑖𝑚𝑒 = 𝑝𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑡𝑖𝑚𝑒 + 𝑖𝑛𝑠𝑝𝑒𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 + 𝑚𝑜𝑣𝑒𝑚𝑒𝑛𝑡 𝑡𝑖𝑚𝑒 + 𝑤𝑎𝑖𝑡𝑖𝑛𝑔 𝑡𝑖𝑚𝑒

Process Quality Measurement

Almost all organizations today have quality initiatives and quality programs in place.
Measurement is a central part of any such program, so organizations are already familiar with a
variety of process quality measurements:
 Process part per million defect rates
 Yields
 Waste
 Scrap
 Rework
 Returns
 Percentage of processes under statistical process control
The index include such items as:
 Long waiting times
 Inaccurate information
 Access denied or delayed
 Request or transaction not fulfilled
 Financial loss for customer
 Customer not treated as valued
 Ineffective communication
Process Cost Measurement
Amidst all the attention to process time and process quality measurements, one might lose
sight of the cost dimension of processes. Traditional cost accounting systems measure the expenses
and effeciencies of individual tasks, operations or departments. But these systems fail to measure
costs at the process level. Typically, processes like order fulfillment, purchasing, or production
planning and control use resources and activities form several responsibility centers.