Making balanced scorecard work to implement business strategies at Magic Technology By Neale O’Connor ‘n August 2008, Magic Technology (“Magic”) launched an initiative to implement the balanced scorecard in its organisation, Alan Lo, the chief ex- ecutive officer (“CEO”), oversaw the implementation of the balanced scorecard at the company’s head- quarters, Lo encountered both strategic and execution difficulties during implementation. Yet, such difficul- ties hinted at a more fundamental issue of too many formulated strategic directions inthe first place In late 2009, Lo was in the middle of the execution phase when he considered pushing’ thé design of the balanced scorecard towards the department level. How would the difficulties encountered at the headquarters influence an initiative of departmental design of the balanced scorecard? Magic technology Magic was established in 1994 in Taipei to manufacture electronic components, particularly passive components Magic was a leading manufacturer of electromagnetic interference (“EMI”) components and wire-wound in- ductors. The company had a registered capital (2009) of about NTS250 million. CEO Alan Lo oversaw the company’s headquarters in Taipei and three factories in mainland China (two in Shenzhen and one in Suzhou) with a matrix organization [see Exhibit 1] Electronics industries became more and more spe~ cilic along the value chain [see Exhibit 2]. This value chain began with the raw materials, semi-conductors and components in the upper stream, electronic sys- tems, to the information accessories, photo electronics, Ka Wai Boby Shiu prepared this ease under the supervision of Dr Neale O'Connor for effective or ineffective handling of decision or business processes, communications and consumer electronic products in the lower stream. This value chain of electronic products, however, ‘was founded on the manufacturing of electronic com- ponents, Electronic components included active com- ponents and passive components, Active components were independent components that could perform, calculations and processing functions, eg, integrated circuits and central processing units, Compared to active components, passive components could perform, the functions of moderating electric current and voltage, storing static electricity, preventing elec- tromagnetic interference, and filtering impurities in electric current. Resistors, capacitors and inductors together formed the three main passive components. Magic focused on passive components with the main revenue coming from inductors, which had intense competition in the region In onder to adapt to the changes in the business en- vironment in the region, electronics manufacturers had gradually switched to a globalised business model. This globalised business model involved the offshoring of ‘manufacturing factories and a proactive approach to foreign investments. Magic had followed this globa- lised trend to enter mainland China. However, Lo began to see the business gaps between the company’s headquarters and the three factories in mainland China, and between different departments in Magic. Magic summarised five main business challenges before importing the balanced scorecard, First and foremost, the business strategy process was unclear. The outcomes of previous strategic planning processes, iscusson. This case isnot imended to show {© 2012 by The Asia Case Research Cente, The University of Hong Kong. No pat of this publication may be reproduced or transmitted in any {orm or by any means—elecionic, meckanical, photocopying, reconing, or otherwise (including the internet)—withou the permission of The University of Hong Kong. This material is used by permission of The Asia Case Research Cente at The University of Hong Kong dp:fwww. screorg i). This ase study isa single piece of work. Reproduction of the case study docs not conse fai use under 17 USC § 107 or ‘equivalent provisions in oer laws. "om 30 June 2011 the exchange rate was USS1 = NTS28.795.irene Ce | ee Headquarter Phase SE=SneeOe Department Phase ‘Source: Lo, P.C (2008) “The Difficuies Encountered and Suggestions Related to Implementing the Balanced Scorecard: A Case Study of ‘an EMl Components Designer and Manufacture’, EMBA Dissertation Colege of Commerce, National Chengchi Univers, Taiwan: Magic Technology's website: ntpy/wwwmagiteccomtw; Cormpany interview on 10 March 2011, in which strategies were formed through discussions in ‘meetings, using past experience as the basis for decision ‘making, were not obvious. In addition, there was no ‘mechanism to evaluate the strategy execution, so it was difficult to observe the effectiveness of different strate- ies. Second, the operational execution in the factories was weak. The mainland factories were still construct- ing the standard operating process, and the stability of production quality was not reliable. Third, the perfor- mance checking mechanism had not been completed. ‘The mainland factories had evaluated and tracked the key performance indicators (“KPIs”), but had not con- nected them to performance. The Taiwan headquarters did not have a system of KPIs at all. Fourth, the man- agement systems needed to be strengthened, There were several management systems implemented at Magic, bbut Lo felt that these systems had not been fully implemented and the data had not been systematised, Last but not leas, the product analysis was insufficient Product prices had been set by referring to market prices, and there was no data to support the decisions regarding either internal-made or external-procurement products. These five business challenges drove Lo to start searching for new management systems for Magic. The balanced scorecard was proposed to deal with the first four of the five business challenges: unclear business strategies, weak execution, difficult performance as- sessment and weak management systems for Magic. Preparation phase To start with, Lo and Magic's management team as- sessed the current state and the target state of man- agement in three arcas: strategy formation, strategy execution and performance management. First of all, Magic was not equipped with a relevant existing management and operational mechanism for strategy formation. Lo hoped to construct an in- tegrated structure and logic of strategy formation management, in order to build a more comprehensive strategy formation mechanism. Second, there was nog f= a = cm = 5 i | End User Information (es | Uy [seen “so Source Lo, P. C (2008) "The Difficulties Encountered and Suggestions Related to Implementing the Balanced Scorecard: A Case ‘Study of an EM Components Designer and Manufacturer, EMA Dsertation, College of Commerce, National Chengchi University, Taiwan concrete mechanism for strategy execution, causing issues like the miscommunication of strategy, the lack ‘of management for strategy execution and the reduced effectiveness of strategy. Through the discussion about the strategy map, the design of the balanced scorecard and the subsequent implementation, Lo wanted the top management's strategic thinking to be understood more effectively and accurately by the staff. This was meant to help improve execution and management, thereby allowing senior management to spend more time on strategic thinking. Third, Magic had tried to improve the current state of performance management by importing the KPI system, but this KPT system was, a bottom-up setting, which could easily lose focus in the long term or when Magic expanded. Lo wanted to integrate the KPI system with the balanced scorecard, in order to increase the visibility of the linkage between the KPIs of departments and staff and the business strategy. Under this new structure, it would be easier to resolve the problem about the fairness of the incentive mechanism, With the management objectives borne in mind, Magic set up a project team (o oversee the overall project planning, including expected project aims and benefits, project scope and schedule, project team. formation, and the related training and communication for change management, The project aimed to turn the intangible strategy into a more conerete one, and ac- curately execute strategy management. For the project benefits, it was hoped to build up a management and execution mechanism of strategy formation. This helped form a consensus of Magic's strategy among the staff, and build up the specific execution mechan- ism of the strategy, in order to assist differentBertie BALANCED SCO! August 2008 December 2008 ‘October 2008 January 2009 Aprl2009 July 2009 October 2009, L L L L L foe Panning Phase sign Phase Design Ph & Execution Deparment Pnase Implementation (ao > ‘Communication, Project Management and Knowledge Management| Source:Lo, P.C (2008) “The Diffeuties Encountered and Suggestions Related to Implementing the Balanced Scorecard: Case Study ofan EMI Components Designer and Manufacurer, EMBA Dissertation, Colege of Commerce, Natonal Chengchi University, Tawan, departments to focus on Magie’s overall strategy and to realise the achievement of strategic objectives. Moreover, the project team hoped to connect the ba- anced scorecard to the KPI mechanism for better performance management. The project team set up a project plan to imple- ment the balanced scorecard at the headquarters from August 2008 to August 2009 [see Exhibit 1 and Exhibit 3]. The project was expected to be im- plemented at the headquarters—auditing, sales and ‘marketing, product development (research and devel- opment [“R&D"] and quality control), purchasing, accounting and finance, and human resources—in three phases: preparation before implementation, de- signing the balanced scorecard and executing the ba- lanced scorecard. In late 2009, the implementation ‘would be pushed towards the department level (man. ufacturing and three factories). Because the project scope involved a number of departments in Magic, its implementation had to cause a great amount of change inside Magic, so the project team member selection and operation were very important. After careful consideration, the project team consisted of an overall project leader, a project manager, project members and external consultants [see Exhibit 4]. Moreover, in order to gain the agreement and support from the d partment managers, the project team scheduled a ser- ies of internal learning and training sessions about the conceptual framework of the balanced scorecard, so that the department managers would be more willing to actively participate in and assist with the project implementation. Design phase Lo and the project team based Magic's strategy on the SWOT-Scorecard model and the five forces model. ‘This was the first task because a clear strategy is eri- tical to form the structure of the balanced scorecard before implementation. The formation of the strategy was a long process. To make sure that Magic was heading in the right direction, the team met in a long and iterative discussion process to form a detailed strategy and gather the content to structure the ba. lanced scorecard, The formation of strategy underwent six stages, described as follows. Strategy formation In the first stage of the discussion process, the project team did an internal and external environment analysis, of Magic. This analysis clarified the equipped com- petencies of Magic to assess the parts that required strengthening and supplementation and to shape the future state of Magic. Second, the team used the SWOT-Scorecard question set for a strategy discussion, This SWOT- Scorecard question set integrated the SWOT analysis and the four areas of the balanced scorecard to form a matrix, in which each intersected box contained corresponding questions for team members to answer [see Exhibit 5]. This question set was used to increase the team’s understanding of Magic, but in addition the team found that the less obvious competitors’ situation ‘was better observed through this question set. Thus theTine! Project team member Position and responsibilty Overal Project Leader (CEO 1 Guide the strategic direction of the project and vice-CEO) ‘= Guiding and ruling the important agendas Project Manager = Assist to exclude the encountered obstacles in the implementation process 1» Provide cross-departmental communication and coordination '= Command execution staff to complete related operations according to scheduled progress = Project detailed planning 1» Coordination and control of productivity end progress = Arrange meeting and education taining Project Members 1 Project execution tasks External Consuitants = Guiding of project direction 1» Raise suggestions specifi to the encountered difficulties in the project implementation Project quality control. and regular productivity inspection ‘Source: Lo, PC (2008) “The Dificutes Encountered and Suggestions Related to Implementing the Balanced Scorecard A Case Study of an EMI Components Designer and Manufacture, EMBA Dissertation, College of Commerce, National Chengchi Unversity, Tawan, Perspective Strength Financial Customer Process Leaming and Growth (Own funding is sufficient, with healthy financial structure and relatively low debt ratio Good credit with banks Material procurement advantage in specic markets and vertical integration capabilty Low-priced raw material for testing and importing ‘APL product has high share and importing new products is fast High customer segment understanding and good customer interaction High M/B market understanding helps inrease the NB market entering advantage “Appearance on international renowned brand's vender st can be used to extend to other markets AAPL semi-autornatic manufacturing can reduce costs and increase productvtes Strong R&D capability Granted patents Stable and high retention of core personnel Granted patents can hinder competitors Importing BSC Strong operation capabiity can satisfy customer R&D demand that provides a wider range of services than the competitors Source: Lo, PC (2008) "The Difices Encountered and Suggestions Related ta Implementng the Balanced Scorecard A Case Study of an EMI Components Designer and Manufacturer, EMBA Dissertation, College of Cornmerce, National Chengehi Univesity, Tatwan,strengths insisted on in the beginning did not seem to be unique for Magic in the end. Furthermore, upon the completion of the SWOT-Scorecard, the most im- portant point became how to allocate the existing resources. To first strengthen the advantages, or to first improve the weaknesses? How to make the decision to allocate the existing resources? = Alan Lo, CI of Magic? ‘Thus the discussion turned to exploring the most core issues, what the competitive elements of Magic were, and what the advantages compared with the competitors were, in order to decide the allocation of the existing resources. Third, the team could see the SWOT-Scorecard from multiple perspectives, which could result in a lot of different strategies, but not all of the strategies wet suitable for the current state of Magic. Thus the team needed to have discussions in order to determine the suitable strategic direction, Magic, for example, had the strength of low-priced raw material for testing and importing. On the other hand, it had to respond to the threat of the frequent revisions of labour laws in mainland China, which increased the wage costs, and the threats of products that had low technical entry barriers, high substitutability and high potential to be imitated, Thus the two things together inspired the team to form the strategic direction of automating ex- isting products (Assembly-type plug-in inductor [*APL"] in the motherboard ["M/B"] market, IRON, and the multi-turn loop market) Fourth, up to this step, the team had formed the strategic directions to pursue operational excellence. But these strategic directions were too broad for dif: ferent product series, which had different customers, different sclling methods, different market shares and different life cycles, in order to guide their required execution plan. Thus, the team used a product matrix of industry attractiveness versus company strength to determine specific product strategies. Fifth, based on the strategy analysis results, the team formed and summarised specific product strat gies and determined the priority of different product strategies. According to the SWOT-Scorecard model with the in-depth analysis of each department, the product strategies were further summarised as three parts, First, because the factories had a problem of insufficient productivity, and a lot of original equip- ment manufacturers existed in the market and had different automated equipments, the project team hoped to set up an outsourcing department, This out- sourcing department would make the product cate gories of buying and outwork clear, and would set up a clear outsourcing process. Second, besides con- solidating the existing printed circuit board market, the team hoped to enter the new notebook board ("NB”) ‘market to increase the market share, This was because demand was greater than supply in the NB market, and the team could use existing relationships to enter the market, while there were not many existing Taiwanese factories able to mass produce NB moulding products. This would help push Magic's products into a new market. Third, the team hoped to consolidate and strengthen the existing main product series, and the existing M/B market as well, Strategy map Lastly, the team set up the strategy map to formulate Magic's strategic objectives. The strategy map was a standard structure to describe strategy, using a set of consistent and standard strategic language, for the internal staff to align, focus and integrate their ideas with the four perspectives of the balanced scorecard, such that the strategy could be more concrete for the implementation of the balanced scorecard. The strat- egy map formulated the strategie objectives that would be used in the next stage [see Exhibit 6] Strategic KPI design The project team considered the previous formulated strategic objectives for the design of strategic KPIs in the balanced scorecard, Strategic KPIs were one or several strategic and representing indicators, which emphasised quantifying the formulated strategic objectives and setting up the estimated target value for management, The project team first thought about and designed the related parts of the strategic KPIs, including the KPIs themselves and their formule, frequencies and target values. Then the strategic KPIs were discussed with an external consultant during the learning sessions. During the discussions, it was discovered that some KPIs were repetitive, and these were deleted from the balanced scorecard, Lo, PC, (2009) “The Difficulties Encountered and Suggestions Relsted to Implementing the Balanced Scorecard: A Case Study of an EMI Components Designer and Manufacturer”, EMBA Dissertation, College of Commerce, National Chengehi University, Taiwan,(Stee e en A (cet We Opal cea a rsd mie spare Franca remotes Peds ee aa casoner || Sorecutomertusedsioie’ |) pocmenin: | | sewhiner || Qoeaten 9g (Existing Market) (NB Market) ar oon Oresop | [uewiateteuer] | _opeatn veces |] asucty |] yugStt || rocrenen | |"Mtawsenen'| | Scene ‘Management. eae Management (NB Market) ‘Management caine Tresop ae oe SESE] [newark =ner] [opanton tesenee fasee: Il semarren || REM || Nomen | | nse may Cougs Capabities Copebiies (NB Market) Capabives a € Management IT System Cae eMTo MEE oe | ee come |) Gates Source: Lo, PC (2008) “Te Difcltios Encountered and Suggestions Related to implementing the Balanced Scorecard: Case Study of ‘an EMI Components Designer and Manufacturer’, EMBA Dissertation, Colege of Commerce, National Chengchi University, Tainan ‘Then, the project team connected the formulated strategic objectives and the strategic KPIs together during the design [see Exhibit 7]. One example was entering a new NB market, which was prioritised and ordered as one of the very important short-term stra- tegies. In the customer perspective of the balanced scorecard, the strategic objectives included rapid en- tering of a new market, cost advantages, and quality advantages, The NB products were new products for Magic, so when these strategic objectives were con- nected to the financial perspective, Magic’s financial objective was to “develop new targeted product's revenue”. In the process perspective, its objective was “development management in new market”. This was to achieve a rapid entering of a new market and a cost advantage, such as the rapid importing of R&D and production, and activity-based cost management (ABCM”), Towards the downstream of the learning and growth perspective, the objective was “develop- ‘ment management capability in new market”, Because it had been confirmed that the new product was the SMD Power Choke product series in the new NB ‘market, the learning and growth objective was set to develop the R&D, the production capability and the cost management capability for the SMD Power Choke product series, From this example, it could be seen that, besides the fact that each strategic objective in different perspectives had a casual relationship with each other, each respective KPI in different perspec- tives had a casual relationship with each other for en- tering a new NB market too, Besides, during discussions, the team had difficulty in setting out the calculation formula of KPIs. For the target value, because a lot of KPIs had not been used before, their target values were thus difficult to define.UPI EMAM NES UUE= This quarters start date” and “Creation date <= This quarter's end date" 3. During collection of results, open the DataSysterns ERP Systern "Management column’ in ‘Function, in order to see the ‘Creation Date’ colurm. 2. Count this quarter's old seties' new part number 1 Export the search results to EXCEL, to ‘count new product numbers, 2. Add "Count" column. Add “1” in each propery, EXCEL XCEL ‘0 count new parts. Sum ths item to obtain this uate’ valid number of mass produced R&D products. ‘Source: Lo, P. (2008) “The Dificuties Encountered and Suggestions Related to Implementing the Balanced Scorecard A Case Study of an EMI Components Designer and Manufacture, EVBA Dissertation, Colege of Commerce, National Chengehi Unversity, Talwar, fon the most key strategic KPIs and strategic ob- jectives. Too many directions meant no direction. We should use the strategic KPIs which needed the ‘most attention and which were immediately implementable as our management emphasis. ~ Alan Lo, CEO of Magic? Thus, in order to control and manage the most important strategic KPIs, during the discussions, the project team asked different department managers about which strategic KPIs were the most important and which they were most unwilling to give up. These discussions had produced the strategic KPIs’ collec- tion method, and the operational guide to create different strategic KPIs [see Exhibit 8] Execution phase Lo was aware that a lot of other companies were executing numerous action plans, but those action plans were usually fragmented, in which they had no relationships to the set strategic objectives but competed for limited resources. This inappropriate use Swi. of human resources and financial resources could result in a failure to create a competitive advantage, or even a loss to competitors. If Magic could use the balanced scorecard as a foundation for its management system, cohesion could be formed between different action plans to pursue Magic’s strategic objectives and measurements all together, The action plans, which aimed to achieve strategic objectives, were called strategic action plans. Strategic action plans had ob: vious and close connections to Magic's strategies, and could be connected to the budget and the staffs per formance as well. Because enterprise resources were limited, to ensure that the strategic objectives reflected on the balanced scorecard could be realised and im- plemented, there was @ need to use the strategic action plans, Therefore, the existing action plans needed to be reviewed, in order to clarify their connections with the strategic objectives. Those action plans that did not have a strategic meaning were deleted, while new strategic action plans had to be created for those stra- tegic objectives that lacked support, ‘The project team listed out all the action plans in Magic first in the execution phase. Then, the team used the matching table of strategic objectives against action plans to filter out the strategic action plans. Neweee reko es .ae ION PLAN Weighted Score (Plan A) score (Plan A) Criteria Weighting Explanation Strategicconnedton 45% Have postive influence tothe success| of strategic objectives or not Resource 20% Required key personnel investing time requirement (key and resource pesonne) Demanded 10% Estimated completion tne completion time Dependency 10% The extent of influence from the success of other action plans Total costs 15% Tota costs including human resource and material Total 100% Source o, PC (2008) "The Difficulties Encountered and Suagestions Relate to Implementing the Balanced Scorecard A Case Study of {an EMI Components Designer and Manufacurer, EMBA Dissertation, College of Commerce, National Crengch Unversity, Tawan, Niven, PR (2002) Balanced Scorecard Stap Ly Siep: Maximizing Performance and Maintaining Results, Jahn Wiley & Sons, Hoboken Np. 194, strategic action plans could be added and existing ac~ tion plans could be deleted. However, as a result of the discussion, a total of 10 action plans were filtered out, which would require too many resources for Magic Are these 10 action plans all required to complete within this year? How to make the decision to prioritize and order the action plans? = Alan Lo, 0 of Magic* Thus, the filtered strategic action plans were prioritised and ordered [see Exhibit 9]. The priority and order of the strategic actions plans were de- termined using six weighted criteria, The six weighted criteria covered a wide range of areas, including stra- tegic connections, resource requirements (key person- nel), demanded completion time, dependency and total costs. In addition, in the matching table, each strategic objective was marked with its importance and com. pletion period, and this could help determine the order of strategic action plans as wel For cach strategic action plan, the team made a strategie action plan proposal, detailing the expected benefits, KPIs, responsible departments, team struc- ture and managers, contents and time schedule, and communication plans. These strategic action plan proposals could gui actions at Magic. Lastly, the follow-up implementation actions were to integrate the balanced scorecard into the normal operations at Magic. These implementation actions would develop the management system for the ba- anced scorecard, collect the KPI information, hold the strategy evaluation meetings and push the im- plementation of the balanced scorecard towards the department level. These implementation actions, how- ever, had not been completed in late 2009, ¢ the follow-up implementation Departmental design In late 2009, Lo was in the execution phase when he considered pushing the design of the balanced scor- ecard towards the department level. As a result, Lo and the project team evaluated the early progress of the process at the company's headquarters to investigate the encountered difficulties and the respective solu- tions, This evaluation would make the project team better manage the departmental design of the balanced scorecard in the late execution phase. ‘The evaluation was done for the previous three phases of implementation: preparation before implementation,design of the balanced scorecard, and the early pro- ‘gress of the execution of the balanced scorecard In the preparation phase, the project team en- countered several difficulties in understanding Magic's real requirements, In the beginning, Magic’s managers could only roughly describe their own challenges, but they did not know what the most urgently required ‘management system was for them. Magic's managers were unfamiliar with the balanced scorecard system, and had difficulty understanding why and how this system could deal with their challenges. ‘One other preparation issue was related to the pro: ject’s overall planning. Would the managers need to formulate a strategy, or need to complete some basic foundation and management system, before con: structing the balanced scorecard? How to decide the unit Ievel of implementation of the balanced scor- ecard? Would headquarters need to begin impl mentation first? Furthermore, the managers did not understand the main difficulties associated with im- plementing this system, how to overcome them, and how long it would take (o import this system into Magic as well. In the design phase, there were some problems in preparing the SWOT-Scorecard analysis and the quan- tification of strategic KPIs. For the SWOT-Scorecard analysis, after the completion of the analysis, how should Magic’s existing resources be allocated? Should Magic reinforce the strengths first, or should it improve the weaknesses first? For Magic, what would be emphasised when selecting strategies? How to match the strategic position of different product series into Magic's business portfolio? For the quantification of strategic KPIs, if there were some KPIs currently unobiainable, should the balanced scorecard still continue to be implemented, or should the im- plementation be held until all the KPIs were obtainable? To avoid KPIs being manipulated by employees, it would be better to directly obtain them from the information systems, but should Magic invest in huge costs for setting up information systems for this pur- pose? Furthermore, would the KPIs fail to achieve their functions or to reach their targets, because of little motivation (eg, the KPIs not connected to incentives) or because of the design of the KPIs themselves? In the early execution phase, some problems with the strategic action plans had confused the project team as well. How to closely connect the strategic action plans to the strategic objectives, and what could be counted as a close connection to the strategic objectives? These were the difficulties that could hinder the future departmental design of the balanced scorecard, In late 2009, Lo had to consider some problems with managing the departmental design of the balanced scorecard in the late execution phase, The departmental level often undertook the strategies designed by headquarters, but when the headquarters hhad set up the strategy map and had designed the strategic KPIs in the balanced scorecard, would the departmental level need to set up the strategy map, or just to undertake the strategic KPIs in the balanced scorecard? The departmental level had some important ‘work items that had not appeared in the headquarters’ strategy map. Should these work items be shown on the departmental strategy map, or should just the departmental part of the headquarters’ strategy map be shown on the departmental strategy map? How to connect the departmental strategic KPIs to depart- ‘mental functions that were not strategic?