Performance Management Tools: Balanced Scorecard, Ishikawa, Pareto, PRA, FMEA, FTA
Balanced Scorecard
The Balanced Scorecard is primarily a strategic tool meant to show how key performances should be connected to produce the final desired performance. It focuses on desired performances, i.e., what the organization should achieve, and looks at the organization as a bundle of processes.
- Financial Perspective (or the Final Performance): This represents the ultimate results desired by the firm. For most firms, the key priority is the maximization of profits. So: (i) processes should be conducive to this result; (ii) any other performance is an “intermediate step” to achieve this goal. Economic and financial data represent key indicators to describe whether our firm is doing well.
- Customer/Stakeholder Perspective: Customers’ satisfaction is what allows us to sell products and services and thus receive our revenues. Hence, we need to keep track of how our products and services perform.
- Internal Process Perspective: We should look at how we run our business processes to be efficient and produce the outputs desired by our customers.
- Learning and Growth Perspective: We need to make sure that the resources engaged with external and internal processes are managed appropriately.
Ishikawa Diagram
The Ishikawa Diagram is a tool to look at the causes of one good result or bad effect in a process. It involves these steps:
- Identify a relevant effect to analyze.
- See if the study of this effect is relevant to the organization and if there is a high risk of (or reward from) its occurrence. Note: Writing an Ishikawa Diagram can be very time-consuming.
- Map the process to see when and how that positive/negative effect might emerge.
- Start analyzing the causes of that effect. The Ishikawa Diagram reports the primary causes of the effect. Ishikawa himself suggests that primary causes might be related to people, equipment, environment, methods, measurement, and materials.
- Analyze each primary cause in search of the secondary causes. Some causes might be endogenous, i.e., they are under our direct control; some others might be exogenous, i.e., under the control of our competitors, the environment, or customers.
To be reliable, we should: (i) find knowledgeable informants and (ii) use our personal experiences, external evidence, and open dialogue with others to agree on key primary and secondary causes. The Ishikawa Diagram is not able to highlight which causes are more relevant than others (so it does not prioritize – a limitation). However, Pareto analysis does.
Pareto Analysis
Pareto Analysis measures the occurrence of each cause and provides a heuristic criterion to decide where to intervene.
- Identify the desired effect.
- Identify the relevant causes.
- Measure the frequency of each cause and rank the causes using histograms.
- Plot the cumulative graph of frequencies, i.e., the red line in Figure 2.
- Define a heuristic criterion to demark priority causes from the others. The Pareto principle suggests that by addressing a handful of causes, we can drastically decrease the occurrence of an effect.
Limitations: We might want to consider different reasons to prioritize causes rather than the frequency of their occurrence. Like the Ishikawa Diagram, this method looks backward. Like the Ishikawa Diagram, it does not connect the causes with each other or with the effect. The Balanced Scorecard, however, does.
PRA and FMEA
The Preliminary Risk Analysis (PRA) and Failure Mode Effects Analysis (FMEA) calculate the risk of faults in a process. They are useful for identifying cause-effect relationships. They look forward. To reiterate the concepts, while the Ishikawa Diagram asks, “What are the causes of this effect?” PRA and FMEA ask a different question: “What are the effects of this cause?”
For each effect, the PRA: (i) calculates the risk = {probability of occurrence x extent of damages}; and (ii) explores the chain of events leading to that effect.
The FMEA incorporates a small variation: the risk is calculated through the Risk Priority Number (RPN) = {Severity x Occurrence x Detectability}.
Fault Tree Analysis (FTA)
The Fault Tree Analysis (FTA) addresses yet another limitation of the above methods, i.e., it explains the chain of events leading to the final effect. The FTA does two things. First, it connects the causes in a logical order. While the Ishikawa Diagram classifies the causes, the FTA shows if and how they are connected with “AND” or “OR” relationships. Second, it identifies the root causes of an event (basic events that lead to the final effect). The Ishikawa Diagram might be extended to find the “causes of the causes,” but it doesn’t find the basic events leading to the final effect.