Balanced Scorecard

Why Does Business Need a Balanced Scorecard?

If you can’t measure it,

You can’t manage it.

Why Balanced Scorecard?

• An organization’s 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.

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.

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.

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.


• 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.


• 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.

Balanced Scorecard

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

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

SatisfiedShareholders

DelightedCustomers

EffectiveProcesses

Motivated and PreparedWorkforce

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

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.

Mission Statements

• Mission statements are insufficient to guide employee’s day to day actions.

• BSC translates mission and strategy into objectives and measures.

Balanced ScorecardBalanced Scorecard

• 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? Key Performance Indicators Internal

Business Organizational Financial Customer Process Learning Perspective Perspective Perspective Perspective

Critical Success Factors Internal

Business Organizational Financial Customer Process Learning Perspective Perspective Perspective Perspective

Strategic Goals

Strategy

Vision & Mission

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.

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.

What is a Balanced Scorecard?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

Strategic Feedback ProcessStrategic Feedback ProcessA strategic feedback process supports executives decision-making and allows executives to revise strategy as needed

Strategic

Learning

Loop

OrganizationalStrategy

Measurethe

strategy

Update theStrategy

ProblemSolving

Test strategyAnd identify

issues

DetermineTactical

priorities

Balanced ScorecardFinancial Strategic Objective Strategic Measure --Financially Strong --Return on Capital EmployedCUST --Delight the Consumer--Mystery Shopper Rating --Win-Win Relationship –Dealer/Pioneer Gross Profit splitInternal --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 IndexL&G --Motivated & Prepared –Strategic Competency Availability

Operations Planning & Monitoring

BusinessPlans

StrategicInitiatives

BudgetIndividualPerf. Mgmt

Four Scorecard PerspectivesFour 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 PerspectiveTo 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?

Vision And

Strategy

Customer“To achieve our vision, how

should we appear toOur customers?

Objectives, Measures,Targets, Initiatives

Financial“To succeed financially, how should

we appear to our shareholders?”Objectives, Measures, Targets, Initiatives

Learning and Growth“To achieve our vision, how will we

sustain our ability to change and improve?”Objectives, Measures, Targets, Initiatives

Internal Business Process“To satisfy our shareholders

And customers, what Business processes must

We excel at?”Objectives, Measures,

Targets, Initiatives

Translating Vision and Strategy: Four Perspectives

Defining Key Performance Indicators Critical Success Factor KPI (Measures)

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)


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


• Relate to profitability-measures

• Operating income

• Return on capital employed

• Economic value-added

• Rapid sales growth

• Generation of cash flow

Strategic ThemesRevenue and Growth Mix Cost Reduction/ Asset

Productivity Improv. Utilization

Business Growth Sales growth rate by segment Revenue/employee Investment (% of sales)Unit % revenue from new R&D (% of sales)Strategy product, services, and customers

Sustain Share of targeted customers Cost versus competitors' Working capital ratiosand accounts Cost reduction rate Cash-to-cash cycleCross selling Indirect expenses ROCE by key asset categories% revenues from new applications (% of sales) Asset utilization ratesCustomer and Product lineprofitability

Harvest Customer and Product line Unit cost (per unit of Paybackprofitability output, per transaction Throughput% unprofitable customer

Measuring Strategic Financial Themes

Customer Perspective

• Identify the customer and market segments in which the business unit will compete and

• The measures of the business unit’s performance in these targeted segments.

• Includes several core or generic measures of the successful outcomes from a well-formulated and implemented strategy.

Customer Perspective-Core Outcome Measures

• Customer satisfaction

• Customer retention

• New customer acquisition

• Customer profitability

• Market and account share in targeted market

CustomerSatisfaction

Customer Acquisition

CustomerRetention

Customer ProfitabilityAccount

Share

MarketShare

Customer Outcomes


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


• 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


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


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

Internal Business Process Perspective

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

Customer

Need Identif

ied

Identifythe

Market

CreateThe

Product/ServiceOffering

BuildThe

Products/Services

DeliverThe

Products/Services

ServiceThe

Customer

CustomerNee

dSatisfied

InnovationCycle

OperationCycle

Postsales

Service

Cycle

The Internal Value Chain


• 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.


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


• 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.


• 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)


• BSC incorporates innovation processes into the IBP perspective.

• Traditional performance measurement systems focus on the processes of delivering today’s products and services to today’s customers.

• They control and improve existing operations


• 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.


• 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.


• The innovation process -long-wave of value creation

• A more powerful driver of future financial performance than the short-term operating cycle.


• 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.

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.


• Businesses are unlikely to be able to meet their long-term targets for customers and internal processes using today’s technologies and capabilities.

• Intense global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders.


• Organizational learning and growth come from three principal sources:

• People

• Systems

• Organizational procedures.


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


• 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.


• 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.


• 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.


• Organizational procedures can examine alignment of employee incentives with overall organizational success factors

• Measured rates of improvement in critical customer-based and internal processes.

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.

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.

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.

Cause-and-Effect Relationships

• A properly constructed Balanced Scorecard should tell the story of the business unit’s 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.

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 unit’s strategy to the organization.

Performance Drivers

• A good BSC should also have a mix of outcome measures (lagging indicators) and performance drivers (leading indicators) of the business unit’s 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.

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.

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.

Cause & Effect and Lead/Lag Indicators KPI’s

Cause & Effect and Lead/Lag Indicators KPI’s

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

Performance Commitment FrameworkPerformance Commitment FrameworkStructures 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

Performance Commitment FrameworkPerformance Commitment Framework Clearly defined processes for

creating

the proper metrics and targets at all

levels…and links to insure alignment across the organization.

Performance Commitment results in an integrated and streamlined

performance management system.




StrategicAssessment

BalancedScorecard

StrategicFeedback

Business Improvement

Initiatives

Planning&

Budgeting

BusinessPerformance

Reporting

EmployeeDevelopment

IndividualPerformance

Appraisal

Reward System

IndividualGoal

Setting

Strategic CommitmentStrategic CommitmentTranslates 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 organization’s strategy• Provides executives with feedback to make strategic decisions

Strategic CommitmentStrategic CommitmentTranslates 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

Operational CommitmentOperational 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

Operational CommitmentOperational 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

Organizational CommitmentOrganizational 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

Organizational CommitmentOrganizational 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

Balanced Scorecard

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