TheBalancedScorecard

Compiled from Prentice Hall - Vinay Ravindran

AchievingSuccessinthe InformationEra
Toachievesuccessintheinformationera, companiesneedmorethanprudent investmentinphysicalassetsandexcellent managementoffinancialassetsand liabilities Companiesmobilizeandcreatevaluefrom theirintangibleassetsaswellastheir physicalandfinancialones

Intangible Assets
Anorganizationsintangibleassetsinclude:

Loyalandprofitablecustomerrelationships Highqualityprocesses Innovativeproductsandservices Employeeskillsandmotivation Databasesandinformationsystems

Someacademicscholarsandpractitioners havetriedtoexpandthefinancialmodelto incorporatethevaluationofintangibleassets onacompanysbalancesheet

MeasuringIntangibleAssets
Difficultiesinplacingareliablefinancial valueonintangibleassetshaveprevented themfrombeingrecognizedonacompanys balancesheet

Likelytocontinuetobethecase Managersunderstandthatifyoucantmeasure it,youcantmanageit

Yettheseassetsarecriticalforsuccess

Manymanagershavesearchedforasystem thatwouldhelpthemmeasureandmanage theperformanceoftheirintangible, knowledgebasedassets

The Balanced Scorecard

TheBalancedScorecard(BSC)providesa systemformeasuringandmanagingallaspects ofacompanysperformance Thescorecardbalancestraditionalfinancial measuresofsuccess,suchasprofitsandreturn oncapital,withnonfinancialmeasuresofthe driversoffuturefinancialperformance TheBalancedScorecardmeasures organizationalperformanceacrossdifferent perspectives

Derivedfromtheorganizationsvisionandstrategy

Perspectives
Four different but linked perspectives are derived from the organizations strategy

Financial: How is success measured by shareholders? Customer: How do we create value for customers? Internal: At what internal processes must we excel to satisfy customers and shareholders? Learning & Growth: What employee capabilities, information systems, and organizational climate do we need in order to continually improve internal processes and customer relationships?

Balanced Measurements
Rather than rely on an measurement system that reports only on financial results, the BSC enables companies to:

Track financial results Simultaneously monitor how they are building the capabilities for future growth and profitability With customers With their internal processes With their employees and systems

Connecting the Four Perspectives

A strategy map provides a visual representation of the linkages in the four perspectives of the BSC
Financial Perspective Customer Perspective Return on Investment Customer Loyalty On-Time Delivery Internal Perspective Learning & Growth Perspective Process Quality Cycle Time

Employees Process Improvement Skills

Connections (1 of 3)
Return on investment (ROI) is a widely recognized measure of financial success

Accordingly, ROI is included on the scorecard But what drives ROI?

Repeated and expanded sales from existing customers, the result of a high degree of loyalty among existing customers, could be one driver of this financial measure

Customer loyalty is included on the scorecard because it is expected to have a strong influence on ROI But how will the organization achieve customer loyalty?

Connections (2 of 3)
Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers

Improved on-time delivery performance is expected to lead to higher customer loyalty So both customer loyalty and OTD are incorporated into the scorecards Customer perspective But how will the organization improve OTD?

The company must excel at internal processes to achieve exceptional OTD

Connections (3 of 3)
Short cycle times and high-quality production processes are two drivers of on-time delivery These two parameters are measured in the Internal perspective But how do organizations improve the quality and reduce the cycle times of their production processes? The company must have skilled production workers, well-trained in process improvement techniques A measure of employees skill and capabilities in process improvement is, therefore, used in the Learning & Growth perspective

Strategy and the BSC

A properly constructed Balanced Scorecard tells the story of the business unit's strategy It identifies and makes explicit the hypotheses about the cause and effect relationships between: Outcome measures in the Financial and Customer perspectives E.G., ROI and customer loyalty and the performance drivers of those outcomes that are measured in the Internal and Learning & Growth perspectives Such as zero defect processes, short cycle times, and skilled, motivated employees

Objectives (1 of 2)
Are concise statements that articulate what the organization hopes to accomplish Best stated as action phrases

May include the means and the desired results

Tell the story of the strategy through the causeand-effect relationships in each of the four balanced scorecard perspectives The companys balanced scorecard would typically contain an extensive (3-5 sentence) description of each objective

The following examples are abbreviated versions

Objectives (2 of 2)
Typical objectives found in each of the four BSC perspectives include:

Increase revenues through expanded sales to existing customers (Financial perspective) Become service oriented (Customer perspective) Achieve excellence in order fulfillment through continuous process improvements (Internal perspective) Align employee incentives and rewards with the strategy (Learning & Growth perspective)

Even descriptions of a paragraph are insufficient to give complete clarity to the objective

Measures describe how success in achieving an objective will be determined

Measures
Provide specificity and reduce the ambiguity that is inherent in word statements Specifying exactly how an objective is measured will give employees a clear focus for their improvement efforts Once the objectives have been translated into measures, managers select targets for each measure

Targets and Initiatives

Targets establish the level of performance or rate of improvement required for a measure Should be set to represent excellent performance Should, if achieved, place the company as one of the best performers in its industry

Even more important would be to choose targets that create distinctive value for customers and shareholders The short-term programs and action plans that will help achieve the stretch targets established for its measures

Finally, managers identify initiatives

Vision and Mission

Before determining the objectives and measures, an organization should already have a vision and mission statement

And a general idea of its strategy

These high-level statements can then be translated into detailed objectives and measures The exact definitions of vision and mission can vary, but the following examples should provide helpful guidelines

Vision
A concise statement that defines the mid to long-term (3 - 10 year) goals of the organization The vision should be external and market-oriented and should express, often in colorful or visionary terms, how the organization wants to be perceived by the world:
The City of Charlotte will be a model of excellence that puts its citizens first. Skilled, motivated employees will be known for providing quality and value in all areas of service. We will be a platform for vital economic activity that gives Charlotte a competitive edge in the marketplace. We will partner with citizens and businesses to make Charlotte a community of choice for living, working and leisure activities

Mission Statement
A concise, internally-focused statement of how the organization expects to compete and deliver value to customers It often states the reason for the organizations existence, the basic purpose towards which its activities are directed, and the values that guide employees activities:
The mission of the City of Charlotte is to ensure the delivery of quality public services that promote the safety, health and quality of life of its citizens. We will identify and respond to community needs and focus on the customer through: Creating and maintaining effective partnerships Attracting and retaining skilled motivated employees Using strategic business planning

Putting Vision in Action

The Vision and Mission set the general direction for the organization

They are intended to help shareholders, customers, and employees understand what the company is about and what it intends to achieve

But these statements are far too vague to guide day-to-day actions and resource allocation decisions Companies start to make the statements operational when they define a strategy of how the vision and mission will be achieved

What is Strategy?
The strategy literature is uncommonly diverse

Different scholars and practitioners have very different definitions or even understanding about what strategy is and how it should be defined

For purpose of this chapter, we adopt the general framework articulated by Michael Porter, one of the founders and still an outstanding leader in the field of the strategy

Strategy According to Porter

Porter argues that strategy is about selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace

The sustainable difference may be to: Deliver greater value to customers than competitors Provide comparable value at a lower price than competitors

He states, Differentiation arises from both the choice of activities and how they are performed

Building the Balanced Scorecard

With this background on establishing high-level direction for the organization, we now develop the role for the BSC to provide needed specificity that makes vision, mission and strategy statements meaningful and actionable for employees

Starting with the Financial perspective of the scorecard and working successively through the Customer, Internal, and Learning & Growth perspectives

Financial Perspective (1 of 2)
The ultimate objective for profit-maximizing companies Financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom-line improvement

Financial objectives typically relate to profitability For example, operating income and ROI

A companys financial performance can be improved in two ways:

Revenue growth and increased productivity

Financial Perspective (2 of 2)
Companies generate revenue growth by:

Selling new products Selling to new customers Selling in new markets Lowering direct and indirect expenses Enabling a company to produce the same quantity of outputs while spending less on people, materials, energy, and supplies Utilizing their financial and physical assets more efficiently Reducing the working and fixed capital needed to support a given level of business

Increased productivity occurs by:

Customer Perspective (1 of 3)
In this perspective, managers identify the targeted customer segments in which the business unit competes and the measures of the business unit's performance in these targeted segments The Customer perspective typically includes several common measures of the successful outcomes from a well-formulated and implemented strategy:
Customer satisfaction Customer retention Customer acquisition Customer profitability Market share Account share

Virtually all organizations try to improve these common customer measures so these measures by themselves do not describe a strategy

Customer Perspective (2 of 3)
A strategy identifies specific segments targeted for growth and profitability

E.g., Southwest Airlines, targets price-sensitive customers while Neiman-Marcus targets customers willing to spend their high disposable incomes

Companies must also identify the objectives and measures for the value proposition it offers customers

Customer Perspective (3 of 3)
The value proposition is the unique mix of product, price, service, relationship, and image offered to the targeted customers

Defines the companys strategy Should communicate what the company expects to do for its customers better or differently from its competitors

Value propositions used successfully by different companies include:

Best buy or lowest total cost Product innovation and leadership Complete customer solutions

Internal Perspective (1 of 3)

Once an organization has a clear picture of its financial objectives and customer objectives, it should determine the means by which it will:
Produce and deliver the value proposition for customers Achieve the productivity improvements for the financial objectives

The Internal perspective identifies the critical processes at which the organization must excel to achieve its customer, revenue growth, and profitability objectives

Internal Perspective (2 of 3)
Organizations perform many different processes, which may be classified into four groupings:

Operating processes The basic, day-to-day processes by which companies produce their existing products and services and deliver them to customers Customer management processes Processes by which companies expand and deepen relationships with targeted customers

Internal Perspective (3 of 3)

Innovation processes Processes by which companies develop new products, processes, and services, often enabling the company to penetrate new markets and customer segments Regulatory and social processes Processes by which companies ensure that they meet or exceed regulations on business practices

Managers should identify which of the process objectives and measures are the most important for their strategy

Need to follow a balanced strategy and invest in improving processes in all four groups

Learning & Growth Perspective (1 of 3)

Identifies objectives for the people, systems, and organizational alignment that create long-term growth and improvement

Managers define the employee capabilities, skills, technology, and organizational alignment that will contribute to improving performance in the measures selected in the first three perspectives They learn where they must invest to improve the skills of their employees, enhance information technology and systems, and align people to the companys objectives

Learning & Growth Perspective (2 of 3)

The Learning & Growth perspective of the scorecard identifies how executives mobilize their intangible assets (human, information, and organization) to drive improvement in the internal processes most important for implementing their strategy In general, for companies to develop their Learning & Growth objectives and measures, managers examine each of the processes they selected in the Internal perspective

Learning & Growth Perspective (3 of 3)

They then determine the factors that enable that process to be performed in an outstanding manner so that it can contribute to the success of the companys strategy:

The employee capabilities, knowledge, and skills The information systems and databases Employee culture, alignment, and knowledge-sharing

KPI Scorecards
Some organizations identify key performance indicators (KPIs) and classify them into the four BSC perspectives KPIs typically are common measures, such as customer satisfaction, quality, cost, employee satisfaction, and morale They are worth striving to achieve but do not reflect a companys strategy Companies may expand their compensation system to reward executives for a broader set of performance than simply short-term financial results based on KPIs Not as powerful as selecting measures that can be linked back to the strategy and that will drive successful strategy implementation

BSC in Nonprofits and Government Organizations

The BSC is especially well-suited for nonprofit and government organizations (NPGOs) Their success has to be measured by their effectiveness in providing benefits to constituents

NPGOs cannot be measured primarily by their financial performance

Since nonfinancial measures can assess performance with constituents, the BSC provides the natural performance management system for NPGOs

NPGOs and Strategy

Many NPGOs encountered difficulties in developing their initial BSC, finding that they didnt have a clear strategy

NPGOs thinking has to shift from what it plans to do to what it intends to accomplish

Many NPGOs place their mission objective at the top of their scorecard and strategy map

Cannot use the standard BSC architecture where financial objectives are the ultimate, high-level outcomes to be achieved Also expand the definition of who is the customer

Using BSC to Implement Strategy

BSC was originally developed to improve performance measurement, but organizations learned that measurement has consequences far beyond reporting on the past

Measurement creates focus for the future

The BSC concept evolved during the 1990s from a performance measurement system to a new strategic management system

BSC focused the entire organization on strategy implementation

5 Principles for Becoming Strategy-Focused (1 of 3)

Organizations achieved their strategic alignment and focus in different ways, at different paces, and in different sequences, but they generally followed a common set of five principles: 1. Translate the Strategy to Operational Terms

Executive teams often report great benefits from the process of building the scorecard For organizational performance to exceed the sum of its parts, the strategies of diverse, decentralized units must be linked and integrated

2. Align the Organization to the Strategy

5 Principles for Becoming Strategy-Focused (2 of 3)

3. Make Strategy Everyones Job

Employees must learn about the strategy and reorient their day-to-day tasks to contribute to the success of that strategy This is top-down communication about what the organization is attempting to accomplish, leaving to employees the challenge and opportunity to perform their work in new and different ways to help the organization achieve its strategic objectives

4. Make Strategy a Continual Process

5 Principles for Becoming Strategy-Focused (3 of 3)

5. Mobilize Leadership for Change

The single most important condition for success in becoming truly strategy-focused is ownership and active involvement of the executive team If those at the top are not energetic leaders of the process, change will not occur and strategy will not be implemented successfully

Pitfalls (1 of 3)
As with any new technology or management tool, not all BSC implementations have been successful Several design factors can lead to problems and disappointment when applying the BSC

Too few measures in the scorecard to provide: A complete picture of the companys strategy A balance between desired outcomes and the performance drivers of those outcomes Too many measures Attention is diffused, and insufficient attention is given to those few measures that make the greatest impact

Pitfalls (2 of 3)

The drivers in the Internal and Learning & Growth perspectives don't link to the desired outcomes in the Financial and Customer perspective E.g., strategy may call for creating innovative solutions for its customers but the measures in the internal perspective focus exclusively on operational improvements

As these design flaws are detected, they can be easily corrected The biggest threat is a poor organizational process for developing and implementing the scorecard, seen when:

Pitfalls (3 of 3)

Senior management is not committed, and the BSC project is delegated to middle management One senior manager builds the scorecard alone Senior executives feel that only they need to know and understand the strategy, and BSC responsibilities don't filter down The BSC is treated as a one-time event that requires the perfect scorecard for implementation BSC is an iterative process All BSCs start with some new measures for which no data currently exists The BSC is treated as a systems project rather than as a management project

BSC Summary (1 of 2)
BSC integrates measures based on strategy

Retains financial measures of past performance Also introduces the drivers of future financial performance

The drivers are derived from an explicit and rigorous translation of the organization's strategy into tangible objectives and measures The new measurement and management system will have its greatest impact when the executive team is leading the transformational processes

BSC Summary (2 of 2)
The benefits from BSC are realized as the organization integrates its new measurement system into management processes that:

Cascade the strategy to all organizational units Communicate the strategy to all employees Align employees individual objectives and incentives to successful strategy implementation Integrate the strategy with ongoing management processes: Planning, budgeting, reporting, and management meetings

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