The Balanced Scorecard

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The Balanced Scorecard

• Chapter 9

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Objectives (1of 2)

• Understand why managers need a Balanced Scorecard
  to measure and manage intangible assets for value
  creation
• Appreciate the role of strategy maps in
  visualizing the cause-and-effect linkages between
  outcomes in the financial and customer
  perspectives and the drivers of those outcomes
  the value proposition, critical internal
  processes, and human, information, and
  organization capital
• Translate mission, vision, and strategy
  statements into a balanced scorecard

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Objectives (2 of 2)

• Understand how to develop a coherent set of
  Balanced Scorecard objectives, measures, targets,
  and initiatives
• Explain why key performance indicator scorecards
  are not necessarily Balanced Scorecards
• Describe how to use the Balanced Scorecard to
  implement strategy and explain the five
  principles needed to become a strategy-focused
  organization
• Recognize common pitfalls in implementing the
  Balanced Scorecard and suggest ways to avoid the
  pitfalls

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Intangible Assets

• Companies mobilize and create value from their
  intangible assets as well as their physical and
  financial ones
• An organizations intangible assets include
• Loyal and profitable customer relationships
• High-quality processes
• Innovative products and services
• Employee skills and motivation
• Databases and information systems
• Some in academics have tried to expand the
  financial model to incorporate the valuation of
  intangible assets on a companys balance sheet

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Measuring Intangible Assets

• Difficulty in placing a reliable financial value
  on intangible assets has prevented them from
  being recognized on a companys balance sheet
• Likely to continue to be the case
• Yet these assets are critical for success
• Managers understand that if you cant measure
  it, you cant manage it
• Many managers have searched for a system that
  would help them measure and manage the
  performance of their intangible, knowledge-based
  assets

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The Balanced Scorecard (BSC)
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The Balanced Scorecard

• The Balanced Scorecard (BSC) provides a system
  for measuring and managing all aspects of a
  companys performance, including intangibles
• The scorecard balances traditional financial
  measures of success, such as profits and return
  on capital, with non-financial measures of the
  drivers of future financial performance
• The Balanced Scorecard measures organizational
  performance across different perspectives
• Derived from the organizations vision and
  strategy

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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?

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Balanced Measurements

• Rather than rely on a 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

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Connecting the Four Perspectives

• A strategy map provides a visual representation
  of the linkages in the four perspectives of the
  BSC

Financial Perspective
Return on Investment
Customer Perspective
Customer Loyalty
On-Time Delivery
Internal Perspective
Process Quality
Cycle Time
Learning Growth Perspective
Employees Process Improvement Skills
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Connections (1 of 3)

• Return on investment (ROI) is a widely recognized
  measure of financial success
• Accordingly, ROI is included on the scorecard
  under Financial perspective
• 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
  ROI
• 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?

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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

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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

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Strategy and the BSC

• A properly constructed Balanced Scorecard
  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

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Objectives (1 of 2)

• Definition concise statements that articulate
  what the organization hopes to accomplish
• Best stated as action phrases
• A verb followed by an object
• Tell the story of the strategy through the
  cause-and-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

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Objectives (2 of 2)

• Typical objectives found in each of the four BSC
  perspectives include (these are abbreviated)
• 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

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Measures

• Measures describe how success in achieving an
  objective will be determined
• They provide more specific information and reduce
  the ambiguity that is always present in word
  statements
• By 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

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Targets and Initiatives

• Targets establish the level of performance or
  rate of improvement required for a measure
• They should be set to represent excellent
  performance
• They 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
• Finally, managers identify initiatives
• Initiatives are short-term programs and action
  plans that will help achieve the targets
  established for its measures

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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

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Vision

• Definition 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 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

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Mission Statement

• Definition 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

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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

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What is Strategy?

• The strategy literature is uncommonly diverse
• Different scholars have very different
  definitions or even understanding about what
  strategy is and how it should be defined
• For our purposes, we will talk about the general
  framework by Michael Porter, one of the founders
  and still an outstanding leader in the field of
  the strategy

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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

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Building theBalanced Scorecard

• With this background on establishing high-level
  direction for the organization, the role for the
  BSC can be developed 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

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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

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Financial Perspective (2 of 2)

• Companies grow revenue by
• Selling new products
• Selling to new customers
• Selling in new markets
• Increased productivity occurs by
• 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

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Customer Perspective (1 of 3)

• In this perspective, managers identify the
  targeted customer segments in which they compete
  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

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Customer Perspective (2 of 3)

• A strategy identifies specific segments targeted
  for growth and profitability
• 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

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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

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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

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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

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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

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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

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Learning Growth Perspective (2 of 3)

• 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

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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

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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
• 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

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Using the Balanced Scorecard to Implement Strategy
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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

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5 Principles for BecomingStrategy-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
• Translate the Strategy to Operational Terms
• Executive teams often report great benefits from
  the process of building the scorecard
• Align the Organization to the Strategy
• For organizational performance to exceed the sum
  of its parts, the strategies of diverse,
  decentralized units must be linked and integrated

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5 Principles for BecomingStrategy-Focused (2 of
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
• Make Strategy a Continual Process

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5 Principles for BecomingStrategy-Focused (3 of
3)

• 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

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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

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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

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Pitfalls (3 of 3)

• The biggest threat is a poor organizational
  process for developing and implementing the
  scorecard, seen when
• 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
• The BSC is treated as a systems project rather
  than as a management project

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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

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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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End of Chapter 9