Balanced Scorecard

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Balanced Scorecard
Dr. Nancy Mangold California State University,
Hayward
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Why Does Business Need a Balanced Scorecard?

• If you cant measure it,
• You cant manage it.

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Why Balanced Scorecard?

• An organizations measurement system strongly
  affects the behavior of people both inside and
  outside the organization.
• If companies are to survive and prosper in
  information age competition, they must use
  measurement and management systems derived from
  their strategies and capabilities.

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Why Balanced Scorecard?

• Unfortunately, many organizations espouse
  strategies about customer relationships, core
  competencies, and organizational capabilities
  while motivating and measuring performance only
  with financial measures.

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Historical Measurement System

• Historically, the measurement system for business
  has been Financial
• Accounting has been called the language of
  business
• Managers are pressured to deliver consistent and
  excellent short-term financial performance.

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Financial Measurement

• Trade-offs are made that limit the search for
  investments in growth opportunities.
• Under pressure for short-term financial
  performance, companies reduce spending on
• new product development
• process improvements
• human resource development
• information technology, data bases, and system
• customer and market development.

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Financial Measurement

• In the short-run, a company could maximize
  short-term financial results by exploiting
  customers through high prices or lower service.
• In the short-run, these actions enhance reported
  profitability.
• But the lack of customer loyalty and satisfaction
  will leave the company highly vulnerable to
  competitive inroads.

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Financial Measurement

• Financial measures are inadequate for guiding and
  evaluating organizations through competitive
  environments.
• They are lagging indicators that fail to capture
  much of the value that has been created or
  destroyed by managers actions in the most recent
  accounting period.

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Balanced Scorecard

• BSC provides executives with a comprehensive
  framework that translates a companys vision and
  strategy into a coherent set of performance
  measures

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Translating a Mission into Desired Outcomes
Vision (What we want to be)
Mission (Why we exist)
Strategy (Our game plan)
Balanced Scorecard (Implementation and focus)
Strategic Initiatives (What we need to do)
Personal Objectives (What I need to do)
Strategic Outcomes
Satisfied Shareholders
Delighted Customers
Effective Processes
Motivated and Prepared Workforce
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Mission Statements

• Communicate fundamental values and beliefs to all
  employees
• Addresses core beliefs and identifies target
  markets and core products
• Should be Inspirational
• Supplies energy and motivation to the organization

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Mission Statements

• Rockwater (an undersea construction company) CEO
  led a two-month effort among senior executives
  and project managers to develop a detail mission
  statement.
• A project manager from a drilling platform asked
• What am I supposed to do?
• How should I behave each day to deliver on our
  mission statement?
• There is a large void between the mission
  statement and employees day-to-day actions.

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Mission Statements

• Mission statements are insufficient to guide
  employees day to day actions.
• BSC translates mission and strategy into
  objectives and measures.

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Balanced Scorecard
Key Performance Indicators
Internal Business Organizational
Financial Customer Process
Learning Perspective Perspective
Perspective Perspective

• Where is the organization going?
• How do we get there
• What are the strategic goals
• for which we are striving?
• What do we need to do well
• to achieve these strategic
• goals
• How do we measure
• how well we are doing?

Critical Success Factors Internal
Business
Organizational Financial Customer Process
Learning Perspective
Perspective Perspective Perspective
Strategic Goals
Strategy
Vision Mission
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Balance Scorecard

• The scorecard provides a framework, a language,
  to communicate mission and strategy.
• It uses measurement to inform employees about the
  drivers of current and future success.

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Balanced Scorecard

• By articulating
• the outcomes the organization desires and
• the drivers of those outcomes,
• Senior executives hope to channel the energies,
  the abilities, and the specific knowledge of
  people throughout the organization toward
  achieving the long-term goal.

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What is a Balanced Scorecard?

• A Strategic Management System that includes
• a set of Cause Effect relationship assumptions
  linking key indicators and strategy
• a set of targets for each one of the key
  indicators linked to a compensation system
• a strategic feedback loop

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Strategic Feedback Process

• A strategic feedback process supports executives
  decision-making and allows executives to revise
  strategy as needed
• Strategic
• Learning
• Loop

Organizational Strategy
Update the Strategy
Measure the strategy
Problem Solving
Balanced
Scorecard Financial Strategic Objective
Strategic Measure --Financially
Strong --Return on Capital Employed CUST
--Delight the Consumer--Mystery Shopper Rating
--Win-Win Relationship
Dealer/Pioneer Gross Profit split Internal
--Safe Reliable --Manufacturing
Reliability Index --Competitive
Supplier --Days Away from Work Rate
--Good Neighbor --Laid Down Cost vs.
Best --Quality
Competitive Reliable Supply
--Environmental Index
--Quality Index LG --Motivated Prepared
Strategic Competency Availability
Test strategy And identify issues
Determine Tactical priorities
Operations Planning Monitoring
Business Plans
Strategic Initiatives
Budget
Individual Perf. Mgmt
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Four Scorecard Perspectives

• Financial Perspective
• To succeed financially, how should we appear to
  our internal and external shareholders?
• Customer Perspective
• To achieve our financial goals, how should we
  appear to our customers?
• Process Perspective
• To satisfy our shareholders and customers, at
  which internal business processes must we excel?
• Learning and Growth Perspective
• To achieve our vision, how will we improve the
  skills of our human resources, increase the
  effectiveness of our business processes and
  sustain our ability to change?

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Translating Vision and Strategy Four Perspectives
Financial To succeed financially, how should we
appear to our shareholders? Objectives,
Measures, Targets, Initiatives
Internal Business Process To satisfy our
shareholders And customers, what Business
processes must We excel at? Objectives,
Measures, Targets, Initiatives
Customer To achieve our vision, how should we
appear to Our customers? Objectives,
Measures, Targets, Initiatives
Vision And Strategy
Learning and Growth To achieve our vision, how
will we sustain our ability to change and
improve? Objectives, Measures, Targets,
Initiatives
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Defining Key Performance Indicators
Critical Success Factor
KPI (Measures)
Financial Exceed Shareholders Financial Covenants Increase cash flow by product/service Revenue from accessories, operations Return on Capital Employed(ROCE) Cash flow by product(by product)
Customer Increase customer awareness of LBC and its products/services Brand recognition survey ( recognition) Number of awards for accessories ( of awards)
Internal Business Process Advertise through direct mail, magazines, trade show, internet Customer hit rate in Southeastern US ( of leads) Customer hit rate ( of leads)
Organizational Learning Build customer database Create internal website for marketing and sales Number of awards for best website Outsource programming needs to reduce costs (progress cost) Customer database ( progress cost) Internet website ( progress cost) Build intranet site ( progress costs)
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Financial Perspective

• Financial performance measures indicate whether a
  companys strategy, implementation, and execution
  are contributing to bottom-line improvement.

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Financial Perspective

• Relate to profitability-measures
• Operating income
• Return on capital employed
• Economic value-added
• Rapid sales growth
• Generation of cash flow

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Measuring Strategic Financial Themes
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Customer Perspective

• Identify the customer and market segments in
  which the business unit will compete and
• The measures of the business units performance
  in these targeted segments.
• Includes several core or generic measures of the
  successful outcomes from a well-formulated and
  implemented strategy.

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Customer Perspective-Core Outcome Measures

• Customer satisfaction
• Customer retention
• New customer acquisition
• Customer profitability
• Market and account share in targeted market

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Market Share
Customer Profitability
Account Share
Customer Outcomes
Customer Retention
Customer Acquisition
Customer Satisfaction
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Customer Perspective

• Measures of value propositions that the company
  will deliver to customers in targeted market
  segments.

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Customer Perspective

• The segment specific drivers of core customer
  outcomes represent factors critical for customers
  to switch to or remain loyal to their suppliers
• Short lead-time
• On-time delivery
• A constant stream of innovative products and
  services

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Customer Perspective

• A supplier able to anticipate their emerging
  needs and capable of developing new products and
  approaches to satisfy those needs.

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Customer Perspective

• Enables business unit managers to articulate the
  customer and market-based strategy that will
  deliver superior future financial returns.

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Internal Business Process Perspective

• Identify the critical internal processes in which
  the organization must excel.

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The Internal Value Chain
Postsales Service Cycle
Operation Cycle
Innovation Cycle
Customer Need Identified
Customer Need Satisfied
Identify the Market
Create The Product/ Service Offering
Build The Products/ Services
Deliver The Products/ Services
Service The Customer
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Internal Business Process Perspective

• These processes enable the business unit to
• Deliver the value propositions that will attract
  and retain customers in targeted market segments,
• Satisfy shareholder expectations of excellent
  financial returns.

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Internal Business Process Perspective

• Focus on the internal processes that will have
  the greatest impact on customer satisfaction and
  achieving an organizations financial objectives.

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Internal Business Process Perspective

• Two fundamental differences between the
  traditional and the BSC approaches to performance
  measurement.
• Traditional approaches attempt to monitor and
  improve existing business processes.
• Focus on improvement of existing processes.

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Internal Business Process Perspective

• BSC approach usually identify entirely new
  processes at which an organization must excel to
  meet customer and financial objectives.
• It must develop a process to anticipate customer
  needs or one to deliver new services that target
  customers value. (processes not currently
  performing)

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Internal Business Process Perspective

• BSC incorporates innovation processes into the
  IBP perspective.
• Traditional performance measurement systems focus
  on the processes of delivering todays products
  and services to todays customers.
• They control and improve existing operations

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Internal Business Process Perspective

• Short-wave of value creation from.
• Receipt of an order from an existing customer for
  an existing product (or service).
• Ends with the delivery of the product to the
  customer.
• Value created from producing, delivering, and
  servicing this product and the customer at a cost
  below the price it receives.

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Internal Business Process Perspective

• The drivers of long-term financial success may
  require an organization to create entirely new
  products and services that will meet the emerging
  needs of current and future customers.

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Internal Business Process Perspective

• The innovation process -long-wave of value
  creation
• A more powerful driver of future financial
  performance than the short-term operating cycle.

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Internal Business Process Perspective

• The ability to develop a multiyear
  product-development process.
• The ability to reach entirely new categories of
  customers.
• May be more critical for future economic
  performance than managing existing operations
  efficiently, consistently and responsively.

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Learning and Growth Perspective

• Identifies the infrastructure that the
  organization must build to create long-term
  growth and improvement.
• Customer and IBP perspectives identify the
  factors most critical for current and future
  success.

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Learning and Growth Perspective

• Businesses are unlikely to be able to meet their
  long-term targets for customers and internal
  processes using todays technologies and
  capabilities.
• Intense global competition requires that
  companies continually improve their capabilities
  for delivering value to customers and
  shareholders.

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Learning and Growth Perspective

• Organizational learning and growth come from
  three principal sources
• People
• Systems
• Organizational procedures.

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Learning and Growth Perspective

• BSC approaches will reveal large gaps between the
  existing capabilities of people, systems and
  procedures and what will be required to achieve
  breakthrough performance.

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Learning and Growth Perspective

• To close these gaps, businesses will have to
  invest in reskilling employees, enhancing
  information technology and system, and aligning
  organizational procedures and routines.
• These objectives are articulated in the learning
  and growth perspective of the Balanced Scorecard.

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Learning and Growth Perspective

• Employee-based measures along with specific
  drivers of these generic measures
• Employee satisfaction
• Employee retention
• Employee training
• Employee skills-indexes of the particular skills
  required for the new competitive environment.

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Learning and Growth Perspective

• Information system capabilities.
• Measured by real-time availability of accurate,
  critical customer and internal process
  information to employees on the front lines of
  decision making and actions.

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Learning and Growth Perspective

• Organizational procedures can examine alignment
  of employee incentives with overall
  organizational success factors
• Measured rates of improvement in critical
  customer-based and internal processes.

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Balanced Scorecard

• Translates vision and strategy into objectives
  and measures across a balanced set of
  perspectives
• The scorecard includes measures of desired
  outcomes as well as processes that will drive the
  desired outcomes for the future.

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Linking Multiple Scorecard Measures to a Single
Strategy

• Balanced Scorecards are more than collections of
  critical indicators or key success factors.
• The multiple measures on a properly constructed
  BSC should consist of a linked series of
  objectives and measures that are both consistent
  and mutually reinforcing.

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Linking Multiple Scorecard Measures to a Single
Strategy

• BSC should incorporate the complex set of cause
  and effect relationships among the critical
  variables, including leads, lags and feedback
  loops, that describe the trajectory the flight
  plan of the strategy.
• The linkages should incorporate both
  cause-and-effect relationships, and mixtures of
  outcomes measures and performance drivers.

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Cause-and-Effect Relationships

• A properly constructed Balanced Scorecard should
  tell the story of the business units strategy.
• It should identify and make explicit the sequence
  of hypotheses about the cause-and-effect
  relationships between outcome measures and the
  performance drivers of those outcomes.

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Cause-and-Effect Relationships

• Every measure selected for a BSC should be an
  element in a chain of cause-and-effect
  relationships that communicates the meaning of
  the business units strategy to the organization.

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Performance Drivers

• A good BSC should also have a mix of outcome
  measures (lagging indicators) and performance
  drivers (leading indicators) of the business
  units strategy.
• Outcome measures without performance drivers do
  not communicate how the outcomes are to be
  achieved.
• They do not provide an early indication about
  whether the strategy is being implemented
  successfully.

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Performance Drivers

• Outcome measures without performance drivers do
  not communicate how the outcomes are to be
  achieved.
• They do not provide an early indication about
  whether the strategy is being implemented
  successfully.

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Performance Drivers

• Performance drivers (cycle time, PPM defect
  rates) without outcome measures may enable the
  business unit to achieve short-term operational
  improvements, but will fail to reveal whether the
  operational improvements have been translated
  into expanded business with existing and new
  customers and to enhanced financial performance.

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Cause Effect and Lead/Lag Indicators
KPIs
Financial Return on Investment (ROI) Cash flow by product ( by product) Revenue from accessories and operations Lag Lag Lag
Customer Brand recognition survey ( recognition) Number of awards for accessories Customer satisfaction survey (new boats, lease, resale) Lag Lag Lag
Internal Business Process Customer hit rate (no. of leads) Boat resales ( of total revenues) Market analysis (Competitors price vs. LBC) Leases for new boats ( of total revenue) Service and product quality standards met (new boats, lease, resale) Costs expenses ( by product/service by dept.) Cycle time per service offering New high end boat sales ( of total revenue) Lead Lag Lead Lag Lead Lag Lag Lag
Organizational Learning Customer database ( advanced cost) Internet website ( advanced cost) Outsource programming needs Number of awards Leasing program with banks ( advanced costs) Pipeline of new product ideas (no. of ideas) Activity Based Costing Analysis ( advanced costs) Training hours by employee for each function Lead Lead Lead Lead Lead Lead Lead Lead
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Performance Commitment Framework

• Structures and links those elements that provide
  direction, information, and motivation across the
  organization.
• Framework

Strategic Commitment Operational
Commitment Organizational Commitment
Strategic Objectives Critical Success
Factors Performance Metrics Targets
and Budgets Improvement Initiatives
Goal Setting Performance Evaluation
Information Delivery
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Performance Commitment Framework

• Clearly defined processes for
  creating
• 
  the proper metrics and targets at all
• 
  levelsand links to insure alignment
  across the organization.
• Performance Commitment results in
  an integrated and streamlined
  performance management system.

Strategic Commitment
Strategic Assessment
Balanced Scorecard
Strategic Feedback
Organizational Commitment
Operational Commitment
Employee Development
Business Improvement Initiatives
Planning Budgeting
Individual Goal Setting
Individual Performance Appraisal
Business Performance Reporting
Reward System
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Strategic Commitment

• Translates strategy into tangible objectives and
  metrics and enables strategic decisions

• How does Strategic Commitment implement strategy?
• Creates a balanced set of measures which can
  be
• used to manage the business
• Focuses the organization on strategy by
• communicating priorities
• Assists groups and individuals in
  understanding
• how they contribute to the organizations
  strategy
• Provides executives with feedback to make
  strategic
• decisions

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Strategic Commitment

• Translates strategy into tangible objectives and
  metrics and enables strategic decisions

• Why is Strategic Commitment important?
• A common understanding of strategy is required
  to
• ensure alignment of action
• Without information management decisions are a
  
• guessing game
• Lack of communication of priorities creates
  conflict
• Research has shown a strong correlation
  between
• employee motivation and the knowledge of how
  an
• employee contributes to the organization as a
  whole

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Operational Commitment

• Aligns strategy with operating plans and budgets
  and enables operating decisions

• How does Operational Commitment implement
• strategy?
• Aligning budgets and business plans with
• strategy and initiatives
• Creating financial targets that reflect
  strategic
• priorities
• Reporting progress against strategic measures

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Operational Commitment

• Aligns strategy with operating plans and budgets
  and enables operating decisions

• Why is operational Commitment important?
• Strategically important priorities must
  receive
• the appropriate level of resources
• Target modeling clarifies the level of
  resources
• that are available up-front to set
  expectations and
• eliminate the need for time consuming budget
• iterations
• Ability to make decisions based on accurate
  and
• timely strategic information increases the
  quality
• of operating decisions

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Organizational Commitment

• Aligns strategy with team and individual goals
  and provides the basis for rewards

• How does Organizational Commitment implement
• strategy?
• Creates individual goals which support team
  goals
• Ensures that employee development is focused on
• strategically important business issues
• Evaluates employees on their performance in
• support of strategy

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Organizational Commitment

• Aligns strategy with team and individual goals
  and provides the basis for rewards

• Why is Organizational Commitment Important?
• Customer satisfaction is directly linked to
• employee satisfaction
• Measurement and linkage to rewards of
  employees
• creates strong motivation
• Employees with clear expectations and feedback
• are more productive