Case Analysis Chemical Bank 4332j

Case Analysis: “Chemical Bank: Implementing the Balanced Scorecard” The restructuring of Chemical Bank with the merger of Chemical Bank and the Manufacturers Hanover Corporation has transformed the processes in which the company’s strategies are implemented. In order to create the shareholders’ value (or profits), the company must seek to increase revenue and reduce expenses through various perspectives: financial, customer, internal-process, and learning-and-growth. With the help of these perspectives, the company can create the balanced score card (BSC) and have a deeper understanding of its strategies in both financial and nonfinancial aspects. The BSC “translates an organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy. ”It adds three more perspectives—customer, business-process, and learning-and-growth—to the traditional financial perspective. The financial perspective may help a company ensure whether short-term goals are satisfied, but it is not enough to capture the entire process. Thus, the other perspectives are included to provide nonfinancial objectives. These objectives are used to measure the processes and results of each manager’s performance, and decision rights are then allocated accordingly using drivers and responsibility centers. Another reason for the BSC implementation is to tie compensation to the nonfinancial aspects as well as the financial aspects to encom the performance factors over which managers have control.

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Why does Chemical’s Retail Bank, a financial institution with the bulk of its inputs and outputs denominated in financial , need measures other than financial to motivate and evaluate its performance? Retail banking has emphasized efficient collections and processing of deposits. The

services bank provided were very limited. However, the customers’ preference and demand have changed, requiring banks to provide broader product and service line. For that reasons,

Chemical’s Retail Bank should find ways to develop new relationships with its customers. It must shift its image from a provider of a narrow set of banking service to becoming a financial advisor and service provider for targeted customer groups. Because of this complex competitive market, nonfinancial BSC measures are more suitable for Chemical’s Retail Bank. It can help manager track and motive performance of all levels of the company easily. However financial lacks of specific objectives and cannot reflect business strategy in this new competitive environment in the long run, and it is not a good way to motivate and evaluate the performance of Chemical’s Retail Bank. When the bank uses measures other than financial to motivate and evaluate its performance, it will be more efficient because of specific objectives and management system, which help The Chemical implement customer-centered strategy.

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What does Mike Hegarty want to accomplish with the BSC? At year-end 1991, the process had begun with the merger of Chemical Bank and the

Manufacturers Hanover Corporation. Before this merger, Michael Hegarty was head of the Retail Bank Division of Chemical Banking Corporation. He was overseeing this transformation. He realized that companies would face more competitors and changes in the future. By using Balanced Scorecard, Michael Hegarty wanted to transform the bank into a market-focused organization that would be the financial service provider of choice to targeted customer groups successfully. Because his company was facing business culture combination, means two companies, which have different business objectives and management methods need to work together, he wanted to use Balanced Scorecard to soften these changes. The BSC can help all levels of the company better understand the key drivers of the business. The performance of the company will be tracked easily and specifically. What’s more, in the BSC, Shareholder, Customer, Internal and Leaning& Growth (Exhibit 4), these four performance of drivers, can help the company increases efficiency by motivating the performance of all levels of the

company. By using the BSC, Mike Hegarty wanted the company adapts and innovates to ensure success in this competitive market and achieves the planned objectives.

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Comment on the BSC implementation process at Chemical’s Retail Bank. What are the enabling conditions for a successful BSC project? Only portions of the BSC were implemented initially due to lack of any method to

measure hypothesized results. Thus, they were not able to implement the full BSC at one time which could potentially impair the intended effects of the total realization of the strategy of the brand new BSC. At the same time if the desired effects were not being seen in what was available to the managers then it would help them update the BSC to better tailor the needs and causal effects within the BSC. Additionally a very important part of the BSC is the managers outside the top level of the organization implementing the BSC. The Chemical Bank did well consulting with managers during the building of the initial BSC. This is key in the success of the initial implementation of a BSC. Unfortunately Chemical Bank did not directly distribute their BSC to all of their employees, which is an essential step to full utilization of a BSC. Everyone working at a corporation knows that the goal is to increase revenue. Even without the completed measurement metrics, the employees still need to know why they are being instructed in different methods in order to see the big picture clearly. Due to this potential misunderstanding, employees may not have the full understanding of the implications of new actions that the BSC generates for revenue generation and lead to these increased revenues. When the change was directed at the sales force, they had trouble understanding how the change in performance measurement would effectively improve sales and therefore profits. This is a perfect example of employees needing to know why they are being told to do something and why the BSC needs to be fully known by all employees. With full knowledge of the BSC the

sales force would have had a better ability to provide to management about the success and their abilities in the new goals set for the sales force. The only results the sales force were able to see were actual changes over time such as the increase in product sales The example set in the sales force by its managers is excellent. Although it would be ideal to sell the employees on the BSC, management was able to motivate the sales force without the big picture by getting them to first realize they were serious and then secondly by backing this up with real results.

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(a) Name and evaluate the major strategic themes of the BSC at Chemical’s Retail Bank. (b) Please carefully describe the integration of the ABC concept in the BSC at Chemical’s Retail Bank. (c) Classify the strategic objectives according to the strategic themes. (a) The Chemical Bank has identified three core strategic ideas from their former

strategies on page four, which are shifting the customer/profit mix, improving productivity, and enable the organization. Shifting the customer mix will lead to better profit mix and this change would be brought on by the training initiatives for employees as well as better understanding of customer segments. Resulting from these efforts will also allow time to be used more productively as a result of new efficiency from training. All of these are enabling factors for the organization. (b) ABC was used to determine where true costs where coming from. The bank knew that certain s were more profitable than the others were. However, upon the completion of ABC analysis they discovered that many s not only were unprofitable, but also in fact were a net loss for the bank. By using this newly discovered fact that the BSC could be tailored in order to favor objectives that would take advantage of this newfound knowledge. This

specifically addresses the internal perspective of understanding customer segments that leads towards broadening the profit and customer mix. (c) Shifting the Mix

Improve Productivity

Enable Organization

Differentiators (what is valued by the Focus of resources (aligning Create the Product customer and the value of meeting organization in a way in which new propositions and how to target all strategies are best met) those customers) Essentials (consistency, speed of Reskilling service, elimination of errors)

Make the Market

Market and Sell

ability and Reward Linkage

Strategic Information Assets Focus Resources

Distribute and Service

Items that fall under each heading are strategic objectives with each item is a specific action point in which improvement of each item will lead to one of the strategic themes which constitute the BSC. By meeting these objectives, the BSC will then in turn result in the realization of the themes.

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What are the strengths and weaknesses of the BSC built at the bank? The BSC built at the bank had a number of strengths, one of them being the fact that it

forced the bank to examine itself in a more competitive market. It more specifically provided a more cohesive strategy with the manufacturers at Hanover Corporation given the merger that had recently occurred. As pointed out by the head of the bank, the BSC helped improve communication and reinforce strategy when dealing with the large staff of about 8000 people at the bank. It gave everyone measures that needed to be followed rigorously in order to boost performance while at the same time clarifying and communicating the overall vision of the bank. The BSC emphasized focus on some essential measures and strategic objectives such as quality

delivery of products and services to customers. In addition, it helped develop a cause-effect relationship between objectives and measures, which to management in particular, is very beneficial and facilitates achieving strategic aims. Several new internal processes that could help the organization develop better capabilities had been identified thanks to the BSC. Dave Mooney, who in the case was part of deg the BSC, noted two particular advantages: “The great value of the BSC was that it articulated the key levers of performance and reduced these to a few important drivers.” In addition, “it’s both motivating and obligating. The BSC forced us to stay on track and to follow up”. However there are some weaknesses to also denounce. While the scorecard was good in theory and clearly laid out, it was not reviewed adequately, had not been implemented correctly, and employees were not familiar with it. Under said scorecard, customer representatives had to expand their skills in order to better advice the customers. However, this also carried a requirement, which was for the BSC to be properly communicated to the representatives, which was not done. The BSC, in fact, was only being experienced by 27 top-level managers. Clearly, this was a weakness in the scorecard and had to change. In the newsletter, the executives had promisedthat, "profitability and segment information will be available on-line" so that "branch staff will be able to improve their sales efforts by customer segment or profit score." It remained to be seen if this measure would be successful. Hegarty itted that he had no idea how good his sales force was- the BSC was not evaluating this. In addition, under the BSC, they were only just beginning to rethink training, and would have to find new measures to evaluate it. Indeed, they experienced problems with a number of their measures, such as customer retention. Clearly, the objectives, which had been well defined under the various perspectives, would suffer.

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Provide a detailed evaluation of the strategy maps of the BSC at Chemical Bank.

When banks are facing stiff competition in the market from various players, the BSC proved out to be a very useful tool for chemical bank in developing sound strategic measures as well as objectives. The various strategy maps are all tied and linked together to contribute to a better understanding and fulfillment of the company vision. With regards to finance, chemical bank’s BSC illustrates that the objective is to improve the profitability of the bank while at the same time keeping the risk factor relatively low. This is done by following the various trends in the market and adapting various products and finance strategies towards that objective. The managers were smart enough to notice the various segments that were forming in the customer-based market and decided to focus on a number of them in order to get competitive advantage in these markets. These market segments are the result of changing trends in the way customers want to carry their financial activities as well as their needs and as a result, the bank had to develop a strategy whereby it develops more products with varying characteristics in order to satisfy each segment and fully fulfill their needs. Internally, the focus which used to be directed solely towards sale activities has been directed now towards research and innovation too as a result of the new strategy in place. The aim is to study the market and better understand the customer in order to deliver them the best product possible in the best way possible. And this is tied to the learning and growth objectives on the balance scorecard where it would be necessary to provide all staff new training and guide them towards the new strategy being put in place so the staff can better focus on said strategy to foster growth in the company.

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As a consulting group, prepare 2 suggested strategy maps: (a) a strategy map of objectives and (b) a strategy map of measures of the BSC at Chemical Bank. Please attempt to improve upon the strategic maps provided in the case.

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What pitfalls need to be avoided for a successful BSC project? While the Balanced Scorecard is an important tool for management to help in long term

strategy, there are a few common pitfalls that should be avoided. The three most prevalent pitfalls are: identifying goals and drivers that are not actionable or critical, top management has to to be committed to see the BSC being successful and the BSC has to be communicated throughout the organization from top to bottom. A common mistake in BSC implementation is identifying measures that cannot be acted upon. Some of these measures are too broad or do not reach the heart of the issue. Lee Wilson describes a situation at Chemical Bank demonstrating this problem. One of the large goals of the company was to have quality customer service. However, their internal measure that aggregated customer service data only alerted the company of the customer service issue without describing why or how to fix it. Just knowing there is a problem isn’t good enough. A company needs to have measures that accurately link to a goal and can show areas where the company needs to improve to reach it. These measures need to be critical to reaching the goal and they need to show the company where to improve. Another common pitfall for the BSC project is not having a management team being fully committed to seeing the Balanced scorecard succeed. At the end of the day, “measures don’t manage”, and a company needs to have management that will commit to seeing the BSC succeed. Many managers can get accustomed to the way company life used to be and become reluctant to change to fit the BSC model. This reluctance will travel down through the rest of the employees and be reflected in the outcome of the project. However, a management team showing employees the BSC is not just going to go away is a powerful message that will motivate performance. To be successful, the BSC needs to be communicated. The last pitfall companies fall into when implementing the BSC is failing to effectively communicate the strategy throughout the company down to every last employee. Most companies use the BSC as a way for top

management to narrow down objectives they find critical to value creation. However, to be most effective, everyone in the company needs to know about and understand how their actions can fuel performance for the rest of the organization. By knowing the common pitfalls, companies can work to avoid them and use the balanced scorecard in the way it was intended, and yield impressive results.

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relationship/interaction between management control systems and the implementation of a BSC project. The hardest part of any company strategy is the implementation. To help get the strategy going and to keep it effective, managers use Management Control Systems or MCS. While MCS can be an important management tool, it is most helpful when it is connected to the Balanced Scorecard. The Balanced Scorecard helps the use of Management control systems by providing non-financial aspects to allocating decisions, measuring performance and through linking that performance with compensation. The Balanced Scorecard helps in providing non-financial measures for managers to work towards. Many times, Management Control Systems measure performance of managers through solely financial indicators. This can be helpful to a degree, but may also cause managers to neglect longterm goals in exchange for short term results. Managers won’t understand the impact of a decision on a company in the long term when they are only looking at a financial number. However, if a company identifies non-financial areas that are important to long-term growth for the company, then a manager can work towards improvements in all categories, including financial. A manager needs to be motivated to work towards company growth. They need to know that it benefits them as well. The Balanced Scorecard just provides more avenues for linking a

manager’s compensation to his work. Instead of applying compensation to the bottom line, or some other financial indicator that a manager might not have full control over, a company can link compensation to both financial and non-financial measures that will motivate them to work on all objectives of the company – developing goal congruence. Management Control Systems are a good way to implement a company’s strategy. If the control system is to be used for long-term strategy or for improving the company in nonfinancial objectives, a Balanced Scorecard must be used. In addition, communicating the BSC strategies and measures to all the employers and employees as well as implementing them.