BALANCED SCORECARD Strategic Management. IHW 2005Balanced Scorecard2 Diffusion of a New Idea “ The Balanced Scorecard: Measures that Drive Performance”

BALANCED SCORECARD

Strategic Management

IHW 2005 Balanced Scorecard 12

Balanced Score Card

Balanced Scorecard 2IHW 2005

Diffusion of a New Idea

• “The Balanced Scorecard: Measures that Drive Performance” (Robert S. Kaplan and David P. Norton, Harvard Business Review, February 1992)

• About 35% of Fortune 2000 firms have adopted a balanced scorecard, 55% of those firms are very satisfied with it. (R. D. Banker, C. Konstans and S. Janakiraman; January 2000)


Balanced Score Card• A new approach to strategic management

was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton (Balanced Scorecard Collaborative).

• They named this system the 'balanced scorecard'. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.


Balanced Score Card• Kaplan and Norton describe the innovation of

the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relation-ships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."


Evaluation Methods Balanced Scorecard – Four Perspectives

Customer PerspectiveHow should weappear to ourcustomers?

Financial PerspectiveHow should we appear to our shareholders?

Learning and Innovation Perspective

How should we sustain our ability to change and

improve?

Internal BusinessPerspective

At what business practice must we

excel?

VisionAnd

Strategy


Balanced Scorecard

Internal Process Perspective

What business processes are the

value drivers?

Learning & Growth Perspective

Are we able to sustain innovation, change and improvement

Customer Perspective

How do we look to our customers?

Financial Perspective

How do we look to our shareholders?

Vision & Strategy


Balanced Scorecard for a Retailer


• Service quality• Product quality• Inventory

managementLearning & Growth

Perspective• Information systems• Employee

satisfaction• Employee training


• Customer satisfaction

• Customer retention• Market share


EVA (Residual Income)Profit per square foot

Vision & Strategy


Balance in the Scorecard

• Balance between financial, customer, internal process and learning perspectives

• Balance between financial and non-financial measures

• Balance between short-term and long-term objectives

* Balance between hard, objective measures and softer, more subjective measures

* Balance between different stakeholders

Balance between strategic and diagnostic measures


Horizontal Balanced Scorecard

Investors

FinancialPerspective

Lenders

FinancialPerspective

Customers

CustomerPerspective

Employees

InternalPerspective

Suppliers

ProcessPerspective

Balance between different stakeholders.


Vertical Balanced Scorecard

Learning and Growth Objectives

Internal Process Objectives

Customer Objectives

Financial Objectives

BALANCED SCORECARD DESIGN

1. Identify strategic objectives for each perspective.An objective is a statement of strategic intent. An objective states how a strategy will be made operational. Application will allow strategic objectives to be aligned with at least one perspective.

2. Associate measures with strategic objectives.A measure is a performance metric that will reflect progress against an objective. A measure must be quantifiable. Leading measures are predictors of future performance, while lagging measures are outcomes. Measure has to be linked with an objective.

3. Assign targets to measures.A target is a quantifiable goal for each measure with a specified time frame.

4. Link strategic objectives in cause and effect relationships (Theme).Objectives are linked to one another through cause and effect relationships. Application should be able to represent the linkages graphically and should able to edit/change as appropriate.

5. List strategic initiatives.Strategic initiatives are action programs that drive performance. The application should allow for setting of strategic initiatives to be linked to at least one objective.

6. View the strategy from four perspectives (Financial, Customer, Internal and Learning).A perspective is a component into which the strategy is decomposed to drive implementation. Other perspective may be added to the typical set or replace based on specific strategic need.


Balanced Score Card


A Balanced Scorecard

”A method for the organization to systematically develop a comprehensive link between its strategy and a coherent set of performance measures.”

“A method for the organization to systematically develop a comprehensive system of planning and control”.(Kaplan and Norton, Harvard Business Review, 1992)

“Is a performance measurement system that translates an organization’s strategy into clear objectives, measures, targets, and initiatives.”(Kaplan and Norton, Harvard Business Review, 1996)

Balanced Scorecard

The balanced scorecard (BSC) provides a framework for selecting multiple performance measures focused on critical aspects of business (Kaplan and Norton 1992).

The essence of the BSC is the articulation of linkages between performance measures and strategic objectives (Kaplan and Norton 1996).

2


Translating Strategy Into Initiatives For each perspective:

Key SuccessFactors

PerformanceMeasures

Targets Initiatives

Strategy


A Strategic Scorecard

• Should include leading indicators Leading indicators: Drivers of long term

value Lagging indicators: Feedback measures

on current performance• Should include outcome measures as well as

measures of the drivers of those outcomes• Should link all measures with the overall

strategy


Diagnostic vs Strategic MeasuresDiagnostic measures Monitor whether the business remains

“in control” Signal when unusual events occur that

require immediate attention Necessary, but not sufficient, for

achieving long term goalsStrategic measures Articulate a strategy designed for

competitive excellence Evaluate strategies based on new

information about competitors, customers, markets, technologies & suppliers


Financial Perspective Customizing Measures for the Growth Stage

• Sales growth rate• Sales in new markets• Sales to new customers• Sales from new products• Investment in product development• Investment in information technology• Investment in employee skills• Investment in new distribution channels


Financial Perspective Customizing Measures for the Sustain Stage

• Return on capital employed• Economic Value Added (EVA)• Operating income/Gross margin• Discounted cash flows• Asset utilization rates• Cost reduction rates• Cost benchmarked against competitors• Customer and product line profitability


Financial Perspective Customizing Measures for the Harvest Stage

• Current cash flows• Payback period• Spending ratios• Throughput ratios• Product line profitability• Negative cash flow customers


Customer Perspective: Strategic Outcome Measures

Market Share

Customer Acquisition

AccountShare

CustomerSatisfaction

CustomerProfitability

CustomerRetention

Financial Objectives

Customer Outcomes

Internal Process Outcome Drivers


Customer Perspective: Unique Value Proposition

CustomerAcquisition

CustomerSatisfaction

CustomerRetention

Value =

Brand EquityUniqueness Functionality Quality Price Time Convenient Trusted Responsive

Product/ServiceAttributes

Image Relationship+ +


Satisfy Customer Needs

Satisfy Customer Needs

The Internal PerspectiveGeneric Service Value Chain Model

Identify Customer Needs

Identify Customer Needs

Innovation Cycle Operations CyclePost-Sale Service Cycle

Efficiency

Effectiveness

Identify the

Market

Create the

Service Offering

Produce the

Services

Deliver the

Services

Service the

Customer


Learning and Growth Perspective

Long Term Success

Employee Skills

Information Systems

Organizational Processes

• Satisfaction• Retention• Training• Capabilities

• Real-time availability• Accuracy• Pervasiveness

• Alignment of incentives with key success factors

• Improvement in key customer and internal processes

Objectives Capability Measures


So, A Balanced Scorecard…

• Is much more than a collection of indicators of key success factors.

• Is a flight simulator, not a dashboard of instrument dials.

• Integrates performance measures with a unique strategy.

• Incorporates cause-and-effect relationships, including leads, lags and feedback loops.


Linking the Balanced Scorecard to Strategy

Financial

Customer

Internal Process

Learning & Growth

Return on Capital Employed

Customer Loyalty

On-time Delivery

Process Quality Process Cycle Time

Employee Skills

A Strategy Is a Set of Hypotheses About Cause and Effect

Customer


Link to Financial Objectives• Balanced scorecard retains a strong

emphasis on financial outcome measures.• Ultimately, causal paths from all

performance measures should be linked to financial objectives.

• Failure to link improvement programs (e.g. TQM, cycle time reduction, reengineering, and employee empowerment) results inevitably in organizations becoming disillusioned about lack of tangible payoffs.

The Balanced Scorecard for The Women’s Store Employed in the Experiment

Measure Target Actual Percent Better than Target

Financial:

1. Sales margins 60% 67.02% 11.70%

2. Sales growth per store 15% 16.75% 11.67%

3. Inventory turnover 6 6.59 9.83%

4. Debt-to-assets ratio < 20% 18.07% 9.65%

Customer:

1. Price relative to competitors’ price +7% 7.79% 11.29%

2. Customer satisfaction rating 80% 88.44% 10.55%

3. Sales per square foot of retail space $30,000 $33,090 10.30%

4. Number of credit card customers per store 8,000 8,911 11.39%

Internal Process:

1. Brand recognition rating 80% 87.60% 9.50%

2. Number of stock-outs < 3 times 2.66 11.33%

3. “Mystery Shopper” audit rating 85% 93.47% 9.96%

4. Time to process customer returns < 4 min. 3.54 11.50%

Learning and Growth:

1. Employee satisfaction 80% 87.96% 9.95%

2. Employee suggestions per year 2.5 times 2.74 9.60%

3. Store computerization 60% 66.24% 10.40%

4. Hours of training invested in brand managers each year

80 hours 89.10 11.38%


Metropolitan Bank’s Strategy• “We must increase our income and revenue by

broadening the services sold to a targeted group of customers.”

• “We cannot continue only receiving deposits and processing checks. Competitive pressure implies that we develop and sell new services such as mutual funds, credit cards and financial advice.”


DevelopSellingSkills

Access toStrategic

Information

AlignPersonal

Goals

Understand Customer

Needs

DevelopNew

Products

Cross-Sell Products

Increase Customer Satisfaction With Our Products

BroadenRevenue Mix

Increase Return toStockholders

Instill a Selling Culture




Learning Perspective

Metropolitan Bank: Cause and Effect


Metropolitan Bank’s Balanced Scorecard

Strategic Objectives

Strategic Measures

Lag Indicators

Lead Indicators

Fin

anci

al Improve Returns to Stockholders

Broaden Revenue Mix

Return on Investment Revenue Mix Revenue Growth

Cu

stom

er Increase Customer Satisfaction

Knowledgeable People Convenient Access Superior Service

Customer Retention Depth of Relation (Sale of

Multiple Products to a Customer)

Customer Satisfaction Survey

Inte

rnal

Understand Our Customers Create Innovative Products Cross-Sell Products

Share of Segment Revenue from New

Products Cross-Sell Ratio

Product Development Cycle

Hours with Customers

Lea

rnin

g

Instill a Selling Culture o Build Strategic Information o Develop Strategic Skills o Align Incentives

Revenue per Employee Employee Satisfaction

Survey

Strategic Information Availability

Strategic Job Coverage Personal Goals Alignment


Why Do We Need a Balanced Scorecard? To Implement Business Strategy!

“Less than 10% of strategies effectively formulated are effectively executed”Fortune

“Business Strategy is now the single most important issue… and will remain so for the next five years”

Business Week


Scorecard Structure

• Scorecard is very context-specific Industry and competitive factors Life-cycle of business unit Business strategy

• It is important to validate cause-effect relationships for each individual business.


To Implement a Balanced ScorecardThe organization must • Define and develop measures for its

primary strategic objectives.• Understand how different business

processes contribute to its strategic objectives.

• Identify the drivers of performance on strategic objectives.

• Develop a set of measures to monitor drivers of strategic objectives.

• Communicate its beliefs about how processes create results.

BALANCED SCORECARD Strategic Management. IHW 2005Balanced Scorecard2 Diffusion of a New Idea “ The Balanced Scorecard: Measures that Drive Performance”

Documents

balanced scorecard approach

balanced scorecard8

scorecard balance

innovation perspective

balanced scorecard2

internal business perspective

traditional financial

subjective measures