INDEX Executive summary........................................1 Introduction............................................... ..........................................................2 Need for Balanced Scorecard.................................................. ...............................3 1. Theory behind the Balanced Scorecard .................................................4 1.1. Background of the Concept of Balanced Scorecard .........................................4 1.2.Balanced Scorecard as Complementary Tool for Management Accounting....... 8 1.3. Defining Critical Success factor and Measures ..............................10 1.5. Balanced Scorecard model…………………………………........................20 1.6. Balanced Scorecard as a Measurement Tool.................................................22 1.7. Balanced Scorecard as a Strategic Management System …………………….43 2. Constructing a Balanced Scorecard…………………………………………....26 2.1 Establishing Strategy by building up balanced scorecard........................................29 2.1.1.Clarifying and Translating the Vision and Strategy………………………...........29 2.1.2.Communicating and Linking Strategic Objectives and Measures 31 2.1.3.Planning, Setting Targets and Aligning Strategic Initiatives.............................................33 2.1.4.Enhancing Strategic Feedback and Learning.........35 2.1.5. Conclusions and Recommendations- How Many Measures to Choose?.......39
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1.6. Balanced Scorecard as a Measurement Tool.................................................22
1.7. Balanced Scorecard as a Strategic Management System …………………….43
2. Constructing a Balanced Scorecard…………………………………………....26
2.1 Establishing Strategy by building up balanced scorecard........................................29
2.1.1.Clarifying and Translating the Vision and Strategy………………………...........29 2.1.2.Communicating and Linking Strategic Objectives and Measures.........................312.1.3.Planning, Setting Targets and Aligning Strategic Initiatives.................................332.1.4.Enhancing Strategic Feedback and Learning.........................................................352.1.5. Conclusions and Recommendations- How Many Measures to Choose?.......39
2.2. Testing the Balanced Scorecard 40
2.2.1.Analysing Outcomes and Performance Drivers....................................................40 2.2.2.Analysing Cause and Effect..................................................................................41 2.3.Establishing Action Plan..........................................................................................43 2.3.1.Setting up Catalytic Mechanisms..........................................................................43
3. Implementing a Balanced Scorecard as a Management System.......................45
4.Case Studies on Implementing a Balanced Scorecard.................................................494.1 Balanced scorecard in UNUM corporation.....................................................49
4.2 Balanced scorecard in PHILIPS.....................................................................66
4.3 Practical Aspects of Setting up Balanced Scorecard in a Service Company .....72
4.4 balanced scorecard in Metro Bank..................................................................75
4.5 Balanced scorecard in Sears company.............................................................77
5. Conclusions and Recommendations on Implementing a Balanced Scorecard............80
• Anticipating, shaping and effectively responding to relevant external
forces and events.
• Making decisions in the best long-term interests of our stakeholders.
• Planning well, making clear and sound business decisions.
The Power of Corporate Values
Furthermore, within UNUM, corporate values play a key part in creating a culture where employees are motivated towards achieving breakthrough business performance.These values are clearly articulated and disseminated to all employees.
1.We take pride in ourselves and the organization’s leadership position.
• Acting with integrity and high ethical standards.
• Achieving leadership in performance, the community and the
industry.
• Setting and meeting individual goals consistent with business goals,
and owning our individual performance.
• Being motivated and excited about the organization.
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• Believing in what we are doing.
• Emphasizing the positives, celebrating successes and strengths,
and con stantly striving to improve our performance.
• Delivering results.
2. We value and respect people.
• Dealing with each other as individuals and treating each other as we
would like to be treated.
• Developing people to their fullest potential.
• Working together in a common endeavour; recognizing each other
as important elements to the success of the whole.
• Having a common understanding of each other’s roles and how we
fit with corporate objectives.
• Collaboration with each other and having a sense of team.
• Recognizing and accepting differences among people, but sharing
the same values.
3. We value customers.
• Building long-term relationships with our customers and
intermediaries.
• Maintaining a strong orientation to service and the customer.
• Delivering what we promise.
4. We value communication.
• Communicating clearly, consistently, and openly with everyone we
dealwith.
• Building an environment that encourages open communication,
partici pation, honesty and candour.
• Listening.
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Balanced Scorecard
UNUM’s balanced scorecard consists of four perspectives:
• UNUM people
• Operating effectiveness
• Customer satisfaction
• Shareholder value.
Each perspective has a vision, quantitative measure and goal.
Crucially – and what makes the UNUM scorecard a particularly
powerful strategic implementation framework - the scorecard aims to
focus the organization onto time-sensitive achievements. Therefore
two of the goals define measurable results by 1998, and the
scorecard itself is referred to as ‘Goals 1998’. Says Farrar, “Specifying
a year by which we reach our goals worked well for the 61592 goal
because it gave employees something definite to aim for, so it
seemed sensible to take the same approach.”
UNUM’s balanced scorecard is shown below
.UNUM Balanced Scorecard
UNUM people
Vision:
We will have the mind of a customer and the pride of an owner.
Quantifiable measure:
A benchmark survey will integrate the company’s employee surveys into a tool for gauging progress.
Goal:
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Our goal is to improve annually on the score established by the
benchmark survey. In addition, we will monitor our progress towards
the goal on an ongoing basis through formal and informal gathering of
employee opinions.
Operating effectiveness
Vision:
We will increase customer value by rethinking, improving and streamlining our business processes.
Quantifiable measure:
Operating costs will grow at no more than one-half the rate of the top line.
Goal:
By 1998, our total operating costs ratio will be reduced by approximately one-third.
Customer satisfaction
Vision:
UNUM will provide the best value in offerings matched to customers’ needs in the markets we choose to serve.
Quantifiable measure:
Each UNUM area with an external customer chain will develop a
customer value measurement tool. It will be aimed at determining our
customers’ assessment of the overall value of our products and
services.
Goal:
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We will continually improve our customers’ perception of the value of
UNUM’s offerings so that the number of customers who DO NOT rate
UNUM as ‘very good’ will have declined by 40 per cent when we
compile our final measurement in 1998.
Shareholder value
Vision:
We will deliver consistently superior long-term value to UNUM shareholders.
Quantifiable measure:
Shareholder value will be measured in terms of total return - ie dividends plus share price appreciation.
Goal:
We will achieve a total return that consistently places UNUM among the top 125 companies listed on the Standard & Poor’s 500.
Internal Communications
An absolute prerequisite, according to Farrar, for achieving corporate
goals and for making the scorecard meaningful to all employees is
investing significant energy and time into employee communications.
Farrar believes that implementing a scorecard is a process of
relentless communication
and education, and it must be explained in ways that make sense
within the context of the employee’s own working environment.
At a corporate level, the company has defined exactly what it
means by each of
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its scorecard perspective visions. Starting with, ‘We will have the
mind of a customer and the pride of an owner’ as the vision for the
UNUM people perspective, the company has communicated
throughout the organization that this requires UNUM employees to:
• think like a customer
• be interested in results
• discover better ways
• live by our word
• continuously grow and learn
• strive together towards our goals
• feel accomplished and recognized
• value differences
• master change
• share and listen.
UNUM is realizing this in a number of ways. First, there is the
benchmark survey which measures employees’ perception of whether
these behaviours are indeed being ‘lived’ within the organization. The
goal being to increase the number of employees who agree that these
behaviours are being practised at UNUM and decrease the number of
employees who disagree or who are not sure that these behaviours
are part of daily life at UNUM.
Second, employees within UNUM America developed a trust
workshop which
focused on what barriers existed within the work unit or company to
stop employees trusting managers. This identified the key issues and
the findings were shared throughout the organization. A 360 degree
appraisal system, through which managers are appraised by, for
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example, their direct reports as well as their superiors, helps further
ensure managers are aligned to corporate behaviours.
1998 Goals Stock Option Plan
However, perhaps the most powerful, and innovative, vehicle by
which employees are encouraged to ‘have the mind of a customer
and the pride of an owner,’ and indeed focus their minds squarely
onto achieving the 1998 goals, is UNUM’s ‘1998 Goals Stock Option
Plan’. The 1998 Goals Stock Option Plan was launched in January
1995. Each UNUM employee was provided with a stock option grant of
$18 per share to
purchase 300 UNUM shares once the grant was vested (a decreasing
number of shares has been provided to employees hired post-launch).
The date of vesting of the 1998 Global Stock Option Plan will depend
on the level of progress UNUM has made on its 1998 goals. In the
event of the 1998 goals not being met, vesting of the 1998 Goal Stock
Option Plan will automatically occur nine years after the grant date.
Farrar commented, “This has really helped employees to think like
owners. Financial results are disseminated to all employees quarterly,
and how the plan works has been clearly explained.”
One communication medium for this is ‘Knowing Your Options: a
guide for
employees to UNUM’s 1998 Goals Stock Option Plan’ which outlines
how the plan works and offers employees a telephone number and e-
mail address for further information.
Farrar feels that as owners of UNUM, employees can better
contribute to and
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share in UNUM’s success by better understanding how the business
works - how UNUM makes money, and how the money is invested to
grow the company.
A further compensation mechanism used to focus employees’
attention onto the 1998 goals is the annual bonus, part of which is for
achievement against annual goals and part for progress against the
1998 goals. To make the vision of the operating effectiveness
perspective (‘We will increase customer value by rethinking,
improving and streamlining our business processes’) meaningful,
UNUM has communicated throughout the organization an outline of
how employees can contribute to attaining this goal. Statements
include: ‘Bending Over Backwards’, which within a corporate
information pack the company explains as:
Says Farrar:
“This is how we achieved the 61592 goal one year ahead of schedule! And, it’s
precisely the way we will meet our operating effectiveness goal and each of our ‘98
goals.We will succeed only with the commitment of every member of the UNUM team.
And, we will look to each other - every UNUM employee – for leadership and creativity
in improving our operating processes.
“When we talk about operating effectiveness, we are not just talking about taking costs
out, but deploying money and resources in the most effective way and constantly
comparing our performance against that of our competitors.”
Chairman’s Involvement
To contribute to this perspective, and indeed the other perspectives,
the chairman regularly charges teams to focus on developing some
area of best practice, for example within disability insurance, in order
to look at how best this area can be improved and to share
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information throughout the organization. This is just one way that
James Orr demonstrates leadership and personal involvement in the
Goals 98 programme. He also holds an annual chairman’s review, in
which he meets with a group of employees representing each
operating company or function to discuss how the employees
perceive progress towards the goals. Employees are drawn from
different organizational levels
each year and, says Farrar, are encouraged to speak candidly. The
chairman has also articulated a set of questions which are used
throughout the organization to ensure that the 1998 strategic goals
remain the key focus of employees. These include:
Overall
• What is the overall level of understanding of the ‘98 goals within the organization?
• What are the benchmarks for the planned progress towards the ‘98 goals within the organization?
• What are additional enterprise-wide support needs?
• What are the ‘best practices’ which can be shared with other UNUM organizations?
People goal
• What actions are being taken, and what are the results? What are
the challenges to employee understanding?
• What are the measures used to assess the progress between
corporate surveys (real-time metrics)?
• What is the composition of agreement/disagreement statements,
and how is this being addressed?
Customer satisfaction
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• What are the current dynamics of the market place? How is this
changing UNUM’s customer needs and satisfaction?
• How is the ‘voice of the customer’ being heard? What are the
measurements used to track customer satisfaction?
• What efforts are under way to better understand customer needs
and provide ‘best value’?
Operating effectiveness
What steps are being taken to grow the top line?
What are the key processes being worked on?
Why were they selected? How do current efforts enhance value from the customer’s perspective?
What sharing/leveraging of strengths is taking place across the enterprise?
What economies of scale are being realized?
Shareholder value
• Discuss return on equity target trends if appropriate.
The chairman’s belief in the scorecard was clearly shown in UNUM’s
Annual Report 1997 where, in his letter to the shareholders, he
outlined progress against each of the scorecard perspectives. For
example, regarding the customer satisfaction perspective, he said:
“1997 was a year of profound learning for our organization,
particularly in terms of serving our customers. We know it is not
enough to keep our customers merely satisfied. To keep customers
coming back, to remain competitive, we must earn customers’
loyalty.
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“In fact, customer loyalty is one of the greatest growth levers
available to UNUM. For example, typical long-term disability
customers create twice as much value for our organization in the
second five years they are with UNUM than in the first five years....
“As a result of these learnings, and in support of our 1998 Customer
Satisfaction Goal, UNUM employees focused on further developing the
‘Mind of a Customer’ in 1997, and the results were outstanding.What
started out as an experiment - to reach out to our customers through
our new Customer.
Loyalty and Satisfaction Center - turned into a tremendous success
and a critical
lever for accelerating growth.
Customer satisfaction is articulated within UNUM as:
• putting our customers first in all that we do
• listening carefully to find out what they really want
• anticipating what they need
• Meeting, even exceeding their needs and expectations in all of our
contacts
and with all of our products and services.
The Money Machine
For the shareholder value perspective UNUM has communicated to all employees what
investors are looking for and why this perspective is important. By making Shareholder
Value a goal, they have given investors, stockbrokers and financial analysts a
‘yardstick’ by which UNUM’s progress toward its other stated goals can be measured.
Their attitude is that companies that meet their goals win favour with investors and
therefore enjoy a more favourable capital position.
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To communicate the scorecard holistically UNUM’s finance function has
designed an easy to understand presentation entitled ‘Money Machine’, which includes
a textual explanation of how UNUM makes money and a graphic that walks through the
whole organization process from sales to customers to the payment of shareholder
dividends. Says Farrar, “The money machine shows where opportunities for making
profit exist and, importantly, people can see themselves in that continuum.”
Deployment
For deployment of the corporate scorecard, each operating unit is charged with finding
its own way to achieving the strategic goals.
Farrar maintains that:
“It is up to the management of each company to decide on the most effective way to
move that company towards strategic goals. At unit level, it is the responsibility of the
manager to roll the unit’s goals back to company and corporate goals. However, annual
business goals will not be accepted unless they represent progress towards our corporate
goals.”
Alignment is further ensured through UNUM’s performance contracts, all of
which, from the chairman down, have the same categories as the corporate scorecard.
Says Farrar:
“Individual objectives support the scorecard goals, so you can see the line of sight from
employee performance through unit, company and ultimately to corporate
performance.”
Strategic Successes
So, given the amount of time and energy expended on the 1998 goals, the million
dollar question is has UNUM succeeded against these goals? At the time of writing this
case study, the company was still assessing its final position. However clues can be
found within the UNUM 1997 Annual report.
To quote James Orr:
“We continue to make solid progress to our 1998 goals - goals that have served UNUM
well over the past five years. Because of these aggressive goals,UNUM is closer than
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ever to its vision - and ultimate goal - of world leadership in disability and special risk
insurance.
“We exceeded our overall ‘People’ goal target in 1997, aimed at creating a work
environment for all UNUM employees that supports superior business results. And our
UNUM America business again received national recognition for progress in this area
during 1997. Examples of plaudits that UNUM America has received, include being
voted within the:
• 100 best companies to work for in America by Fortune magazine
• 100 best companies for working mothers by Working Mother magazine
• top 30 family-friendly companies by Business Week magazine
• top 50 employers by Equal Opportunity magazine.”
Orr continued:
“...We met our Operating Effectiveness goal ‘rule of thumb’ of
growing the top line at twice the rate or more of operating expenses.
On a cumulative basis, we have improved our operating cost structure
by 22 per cent over our 1992 base year, moving towards our 1998
target of 33 per cent...
“...Regarding our five-year annualized rate of return measured in our
Shareholder Value goal, we were ranked in the second quartile of the
Standard & Poor’s 500 at year end 1997, short of the top-quartile
performance that is our target.We have, however, delivered
exceptional returns over the past 10 years, with an annualized total
return of 30.2 per cent, ranking us 39th of the 457 current Standard &
Poor’s 500 companies with 10-year stock histories. “And, we continue
to make solid progress towards our Customer Satisfaction goal -
progress that is reflected in our 1997 results.While we are still below
our target for this goal, our work in this area has been, again, a
source of significant learning and opportunity for UNUM.”
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Also at the time of writing a leadership team had been created to co-
ordinate the creation of a new set of corporate goals.
Says Farrar:
“We will certainly continue using the balanced scorecard. It is an
excellent way to focus attention on creating value for shareholders
and indeed all stakeholder groups.”
And as Orr said:
“...As we develop our next set of goals we will seek ways to
accelerate our progress, grow our company by building long-term
relationships with...our shareholders, by continuing to build
shareholder value.We made great progress in 1997, but we know we
are capable of more in 1998 and beyond.”
Conclusion
According to Farrar, the five-year experience of using a balanced
scorecard has
revealed a number of key learning points. Not least that as the 1998
goals were such long-term goals, the company had to work hard to
constantly balance short-term and long-term goals and to clearly
communicate to employees any trade-offs. She believes management
must be vigilant in explaining how decisions today, such as
acquisitions, new product launches or exiting businesses, impact
long-term goals. If you do not do this, she believes, it can cause a lot
of confusion within the organization. She maintains that there are
three things a company must get right if it is to succeed with a
balanced scorecard:
“1. First and foremost it is critical to be clear about what the company
believes is important to measure and why it believes this.
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“2. Understand that the goal is itself a vehicle for getting somewhere.
For example, we didn’t say that meeting these four goals would make
us the global leader, we said it would make us a stronger company
and significantly closer to that vision. So don’t confuse means and
ends.
“3. Engage all levels of the organization in defining the goals and
align the organization behind the goals.”
.
Key Learning Points
Finally, UNUM’s success with its balanced scorecard has been the
result of getting a number of fundamental things right. These include:
1. The balanced scorecard built on the success of UNUM’s ‘61592’
corporate goal, but was designed to reflect changes to the
organization and a new set of business challenges.
2. The chairman James Orr was totally committed to creating the
balanced scorecard and has been personally involved in building the
original scorecard and in continually communicating its importance to
stakeholder groups.
3. Senior managers within UNUM owned the process of building the
corporate scorecard and used external help only for facilitating early
meetings.
4. UNUM drafted a clearly defined and meaningful corporate vision
statement.
5. The scorecard was designed to meet specific time-sensitive
goals.This made the scorecard tangible to all employees and proved a
catalyst for breakthrough improvements.
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6. The reason behind the scorecard perspective goals and measures
were clearly explained to employees.
7. The company had a near obsessive focus on internal
communications.
8. An innovative compensation programme entitled the 1998 Goals
Stock Option Plan proved a powerful mechanism for aligning
individual performance with corporate goals.
9. All individual performance contracts, from the chairman down,
reflect the scorecard’s four perspectives.
4.2 Balanced Scorecard Implementation at “Philips”
The case examines the implementation of Balanced Scorecard in the Netherlands-based
Royal Philips NV. During the late 1990s, rapid changes in the external environment
necessitated Philips to make its operations flexible, innovative and value adding. This
led the company to introduce a program called Business Excellence through Speed and
Teamwork (BEST) in July 1999. Several tools were used in BEST, and one such tool
was the Balanced Scorecard. There were four perspectives in Philips' Balanced
Scorecard - competence, processes, customers, and finance.
Aim of BSC Strategy in Philips NV
“Our aim for adopting the balanced scorecard solution is to consistently communicate
strategy deep down into Philips' 80 businesses and support more than 10,000 managers
with tools to turn strategy into action by sharing knowledge, aligning actions,
monitoring progress and learning."
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-“Peter Geelen of Philips Corporate Control”
About Philips
Philips was founded in 1891 by Gerard Philips in a small town of Netherland.
In early 1900s Gerard's company emerged as one of the largest producers and
marketers of carbon-filament lamps.
Focus was to lay emphasis on research just after the inception.
It also established its marketing companies in the US and France before the First
World War.
Philips Electronics later diversified in Health and Well-being company, focused on
improving people’s lives through timely innovations.
Philips began the mass production of consumer goods like TVs, VCRs, DVD
players, and fax.
X-ray radiation and radio reception was the key area of philips and they protected it
through patents.
PHILIPS…..Today
Global leader across its healthcare, lighting and lifestyle portfolio.
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It has four product divisions: Consumer Electronics; Domestic Appliances &
Personal Care; Lighting and Medical Systems.
Philips Consumer Electronics is the third largest consumer electronics company in
the development of digital television systems and compact disc applications.
It has diversified in the Medical Systems became a global leader in the growing
medical devices and diagnostic industry as well.
Company was witnessing a dismal financial performance during the 1990s basically due
to following reasons
Change in External environment.
Due to high manufacturing costs, the products could not be priced
competitively.
Entry of Asian manufacturers like: LG, Samsung in the electronics
business.
So it’s quite obvious that there was a Need to bring flexibility in the processes and
innovation in the organization…!
Strategic Moves of Philips
Philips embarked on an improvement program:-
The program was called Business Excellence through Speed and Teamwork (BEST).
“BEST” was a company-wide initiative aimed at achieving excellence in every aspect of
business at Philips. Philips used several tools and approaches as a part of BEST. Some
of these were
Philips Business Excellence Model (PBE)
Process Survey Tools (PST) and
Balanced Scorecard.
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The Balanced Scorecard was used to communicate the strategy across Philips' divisions
that had more than 120,000 employees spread across 150 countries in the world. The
Balanced Scorecard enabled the employees understand the existing policies, and plans
for the future. The initiative to implement Balanced Scorecard came from the top
management.
The top management, and all the divisions identified the critical success factors that
were important to create value and they were grouped under four perspectives :–
Implementation
CSF’s were identified in every department, divisions with the help
of Quality department at philips.
Performance indicators are the yardsticks that help in
measurement of performance.
Traffic light system which include red, green and amber light
exemplify the degree of progress made in each dimension.
Implementing a global balanced scorecard helped philips:
• In articulating and communicating their strategy
• Measuring the drivers of their performance
• Detecting the superiority of one strategy over another.
More than 50 percent of the Fortune 1000 companies use a version of
Balance score card making it a widely used tool
The balanced scorecard of Philips has four card levels.
The levels in decreasing order are:
Strategy review card
Operations review card
Business unit card
Individual employee card
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Lower card levels must align with scorecard goals in upper card levels.
Critical Success Factors
Competency
Processes
Customers
Financial
Competency Factors
Knowledge
Technology
Leadership
Teamwork
Indicators –
Organizational Development
IT support.
Process Factors
Drivers for performance
Indicators –
Operational excellence
Customers Factors
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Value proposition
Indicators –
Customer Delight
Employee satisfaction.
Financial Factors
Value
Growth
Productivity
Indicators –
Profitable Revenue
Growth.
TRAFFIC LIGHT SYSTEM
• Green Light – target had been achieved
• Amber Light – performance in with the target
• Red Light – problem area.
Key results of BSC Strategy in Philips:
• Enabled employees understand the existing policies and future
plans.
• Succeeded in focusing in the diverse set of measures.
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• Commitment and initiative of top management made it a big hit
in all the subsidiaries and in various line of businesses.
• Employees became more loyal and started taking part in
organisation.
4.3 Practical Aspects of Setting up Balanced Scorecard in a Service Company
After the initial phase of building the Balanced Scorecard, a company also has to use it.
One of the mistakes companies make is during the implementation phase by coming up
with a list of measures of what they could measure instead of what they should be
measuring. If a company thinks about what it needs to achieve to be successful in the
eyes of its shareholders, clients and internal stakeholders, that will yield operational
activities that the organisation needs to do well to achieve those strategies.
To make the Balanced Scorecard work, companies must comprehend the importance of
its four basic perspectives.
The financial perspective
This perspective tends to be the cornerstone of an organisation’s strategy. It includes
such measures of profitability as cash flow, quarterly sales growth and operating income
by division, increased market share, and return on
equity.
“There’s a fairly standard, two-legged structure that may be observed over the years,"
says Laura Downing, vice president of the Massachusetts-based consulting firm
Balanced Score Card Collaborative Inc. "The first leg is the revenue-growth strategy,
where companies try to determine how hey’re going to grow the top line of the
business." Typical methods for accomplishing a revenue-growth strategy are adding
new products to broaden the franchise and branching out into new businesses.
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The other leg of the financial perspective is a productivity strategy that usually includes
two components: basic expense management and effective asset utilisation.
"The natural inclination is to focus on the financial perspective because people are more
comfortable and familiar with it," says Downing. "Companies will tend to incorporate
more financial measures than are really necessary. But ultimately, at the end of the day,
all measures play out into cash flow."
The non-financial perspectives are predictive of a company’s future financial success.
However, they give organisations an opportunity to react to internal and external
influences before detrimental activities affect financial measures.
The customer perspective
This component of the Balanced Scorecard includes such measures as customer
response time, on-time delivery, and market share and product reliability.
The customer perspective can be divided into three major measures:
Product attributes, a measure of how the product works its functionality and its
price.
Customer service, an evaluation of how the company works with customers and
whether it takes a high-touch or high-tech approach.
Image an examination of the product’s reputation.
The customer perspective tends to get little attention because measuring such
intangibles, as customer satisfaction and customer loyalty is difficult. However, this
perspective is important.
The internal business perspective
This aspect of the Balanced Scorecard focuses on quality, time and efficiency measures
such as head count, inventory and manufacturing lead time to determine what key
processes meet the needs of the customer and financial perspectives.
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To start building the internal perspective, a company typically needs to build a value
chain by defining its value-creating activities and separating those activities from any
type of organisational structure - in other words, thinking outside the box about the
added value the company brings to customers.
"We’ve observed four major themes in the internal perspective," Downing says. The
first theme is innovation. Companies must determine whether they need to seek
partnerships with other organisations, how much they need to spend on research and
development, and how they can find other creative ways to increase revenue. The
second theme targets customer management. Companies need to look at how they can
better work with their customers and how they can improve customer service.
"The third theme is operational excellence, a look at an organisation’s supply chain,"
Downing says. "You need to find a way to manage inbound and outbound logistics. Just
optimising that angle alone can be a major differentiator."
The fourth theme involves regulatory factors that can come into play for certain types of
business.
This theme is particularly important in heavily regulated businesses such as financial
services or public utilities.
The learning-and-growth perspective
The most frequently overlooked of the four perspectives, this aspect of the Balanced
Scorecard should be of paramount importance to companies with a strategy of finding
new revenue sources and expanding into new markets.
It measures such factors as the number of new products a company launches and the
length of time generating leading-edge products takes.
Why does learning and growth often get short shrift? "Companies already have the
financials down pat, and there’s been this customer-focus fad — perhaps to the extreme
— which has lasted for several years," Downing says. "It’s just been in the last couple
of years that people have even started to ask how they can apply technological
advancements to help them in their business."
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Until now, the scorecard approach has helped companies translate business strategy into
appropriate actions. The Balanced Scorecard can not only translate strategy, but also
help define it and, in some cases, create it. Rather than a cyclical, event-driven
phenomenon, the scorecard evaluation can become a process that continuously
determines areas in which the company can improve.
As an organisation considers the four perspectives, it should ask whether it needs to
address any cultural issues. Often when companies try to implement a new strategy,
they need a cultural change to reflect the new strategy. If a company can say, "This
cultural issue must change so that this process can be enacted so that customers will be
happy so that we’ll make more money," the need for cultural change becomes tangible.
4.4 Using the Balanced Scorecard at Metro Bank
Metro Bank was the retail banking division of two major banks. The agendas of the two
parents had never been fully rationalised into a single vision. At the same time, without
having achieved a synthesis or consensus on an operating style and strategy for the
Metro Bank, its managers had launched a major transformation programme in order to
be more innovative and to create a bank tailored for the twenty-first century.
Unfortunately, the transformation programme had gone wild, leaving the bank with
more than 70 different action programmes, each competing for management time and
resources.
Metro Bank had 30% market share of the core deposit accounts of the region but with
deregulation, increased competition, and a lower interest rate environment, income from
these retail accounts could no longer be sustained. A strategic review revealed excessive
reliance on these accounts and a cost structure that could no longer profitably serve 80%
of the bank's retail customers.
Metro embarked upon a two-pronged Balanced Scorecard-based strategy to deal with
these problems:
Revenue Growth Strategy - Reduce the volatility of earnings by broadening the
sources of revenue with additional products for current customers.
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Productivity Strategy - Improve operating efficiency by shifting non-profitable
customers to more cost-effective channels of distribution (e.g., electronic banking
instead of personal banking).
In the process of developing a Balanced Scorecard at Metro, these two strategies were
translated into objectives and measures in the four perspectives. Particular emphasis was
placed on understanding and describing the cause and effect relationships on which the
strategy was based. The financial objectives were clear: broaden the revenue mix.
Strategically, this meant that Metro would focus on its current customer base, identify
the customers who would be likely candidates for a broader range of services, and then
sell an expanded set of financial products and services to these targeted customers.
When customer objectives were analysed, however, Metro's executives determined that
its targeted customers did not view the bank, or their banker, as the logical source for a
broader array of products such as mutual funds, credit cards, and financial advice. The
executives concluded that if the bank's new strategy were to be successful, they must
shift customers' perception of the bank from that of a transactions processor of checks
and deposits to a financial adviser.
Having identified the financial objective, Broaden Revenue Mix, and the new customer
value proposition dictated by the financial objective, Increase Targeted Customers
Confidence in our Financial Advice, the scorecard design process then focused on the
internal activities that had to be mastered for the strategy to succeed. Three cross-
business processes were identified: Understand Customers, Develop New Products and
Services, and Cross-Sell Multiple Products and Services. Each of these business
processes would have to be redesigned to reflect the demands of the new strategy. The
selling process, for example, had historically been dominated by institutional
advertising of the bank's services. Good advertising plus good location brought the
customers to the banks. The branch personnel were reactive, helping customers to open
accounts and to provide ongoing service. The bank did not have a selling culture. In
fact, one study indicated that only 10% of a salesperson's time was spent with
customers. A major reengineering program was initiated to redefine the sales process.
The goal of the process was to create a relationship-selling approach where the
salesperson became more of a financial advisor. Two measures of this process were
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included on the Balanced Scorecard. The Cross-Sell Ratio-the average number of
products sold to a household-measured selling effectiveness. This "lag indicator" would
tell whether the new process was working. The second measure, Hours Spent With
Customers, was included to send a signal to salespersons throughout the organisation of
the new culture required by the strategy.
A relationship-based sales approach could not work unless face-to-face time with
customers increased. Hours Spent with Customers therefore was a "lead indicator" for
the success of this piece of the strategy.
The internal objectives led naturally to a final set of factors to implement the Revenue
Growth strategy. The learning and growth component of the scorecard identified the
need for salespersons to undergo a major role change. This role change would require a
broader set of skills (e.g., a financial counsellor with broad knowledge of the product
line), improved access to information (e.g., integrated customer files), and realignment
of the incentive systems to encourage the new behaviour. The lead indicators focused on
the major changes that had to be orchestrated in the work force:
the upgrading of the skill base and qualified people-Strategic Job Coverage Ratio;
the access to information technology tools and data-Strategic Information
Availability Ratio; and
The realignment of individual goals and incentives to reflect the new priorities-
Personal Goal Alignment.
The "lag indicators" included a productivity measure, Average Sales per Salesperson, as
well as the attitudes of the work force as measured by an Employee Satisfaction Survey.
The result of the Balanced Scorecard in the Metro Bank is the following. By clarifying
the strategic objectives, it was able to create consensus and teamwork among all the
senior executives, regardless of which functional organisation they represented. Further,
the Balanced Scorecard created a vehicle to set priorities, to consolidate and to integrate
the many change programmes currently under way. The result was a much more
manageable set of strategic initiatives, all focused on achieving specific objectives.
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4.5 Using the Results of a Balanced Scorecard at Sears Company
Sears radically improved profitability using the Balanced Scorecard’s four perspectives.
However, shortly after Sears’ implementation of the standard Scorecard, Quinn
discovered that maintaining the company’s increased shareholder value would require
more change. For Sears, sustaining the Balanced Scorecard’s initial improvements
required senior management to alter the company’s overall vision and incorporate a new
perspective into the company’s Scorecard.
"You can’t look at the Scorecard as just helping you pull a bunch of strategic levers.
You have to be willing to go through cultural change," says Quinn, who retired from
Sears in 1996 after a 26-year career with the company. "If you’re messing around with
cultural change, you have to ask yourself whether you’re ready to fire some of your
senior team if they’re not willing to behave differently. Really changing senior
management causes some discomfort."
Quinn was vice president of quality when he introduced Sears to the Balanced
Scorecard concept in late 1992. Sears had a net loss of almost $4 billion that year, but
the company posted the largest profit in its history in 1993. After the company’s
financial rebound, Quinn lost most of the audience for his idea. It soon became clear to
him that a small group of people had caused the company’s turnaround and that
different long-term measures would have to be taken in order to sustain Sears’
renaissance.
As a result of this realisation, Quinn began holding visioning sessions in early 1994
with the organisation’s top 100 executives. In off-site three-day sessions, Sears’
corporate managers developed a list of the company’s five-year objectives. In addition
to examining needed internal changes, the group discussed methods for aligning itself
more with what was happening outside the company.
"We spent all of 1994 developing our Balanced Scorecard with our top people," Quinn
says. "Most organisations aren’t willing to pay that price. We had the top 100 people
sitting through customer focus groups, digesting all the data and reading all the
literature to the point that we almost had a palace revolt."
Initially, Quinn formed task forces around the four basic perspectives of the Balanced
Scorecard. Each group was asked to define "world-class status" in the area of its
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perspective, identify Sears’ obstacles to achieving world-class status in that area, and
design metrics for measuring the company’s progress in the area. The task forces moved
forward with the following initiatives:
The customer task force was determined to get a firsthand assessment of how well the
company was listening to its clientele. "Satisfaction or your money back" had been a
Sears mantra since the company’s inception in the 1890s, but the group was sceptical
about whether senior management and frontline employees were doing everything they
could to increase customer satisfaction. Some stores had trouble keeping merchandise in
stock. Customers frequently complained about being unable to find sales associates and
rated Sears’ quality of overall service as poor.
To learn more about Sears’ customer-service challenges, the task force held 80 focus-
group sessions with customers around the country. As a result of its findings, the
customer task force set four goals: offering the right merchandise at competitive prices;
providing superb customer service by hiring, training and retaining the best employees;
building customer loyalty; and making Sears a fun place to shop.
The internal business task force held 26 employee focus groups and studied extensive
data on employee attitudes and behaviour. Each Sears employee was asked to complete
a 70-question opinion survey every other year. The internal business task force found
that repeatedly employees responded with the clear message that they were interested in
the company’s success and were proud to work for Sears. The task force also learned
that two dimensions of employee satisfaction — attitude toward the job and toward the
company — had a greater effect on employee loyalty and behaviour toward customers
than all the other dimensions put together.
The financial task force focused on shareholder return and tried to determine what path
Sears should take to be in the top 25 percent of Fortune 500 companies.
The learning-and-growth task force conducted outside benchmarking launched a
research project into the nature of change and suggested an effort to generate 1 million
ideas from employees.
Ultimately, Sears managers added a fifth perspective to the company’s Balanced
Scorecard. This perspective was designed to measure overall company values, and it,
too, was assigned to a task force.
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The values task force used employee surveys to identify six core values that Sears
employees felt strongly about: honesty, integrity, respect for the individual, teamwork,
trust and customer focus. The task force determined that Sears’ corporate culture was
too paternal in nature and didn’t value people as much as it should. The task force
decided that performance should count more in employee appraisals than effort.
Quinn says these task-force findings showed the company why change was needed. "In
1992," he notes, "our customer satisfaction was below the industry average and 16
percentage points behind our leading competitor." By 1996, Sears’ customer service
was above the industry average. In addition, an independent study of 203 companies
found that in 1996 Sears made the second-highest improvement in customer
satisfaction.
"There’s an appeal to the Balanced Scorecard on two fronts," Quinn adds. "First, it’s
logical that those four perspectives go together for most people. Second, there’s a
blending of Scorecard and performance management — the whole idea is that the better
the measurement system I put in place, the more accountable I can hold someone."
5. Conclusions and Recommendations on Implementing a Balanced Scorecard
From the possible research resources from Internet and major international business
journals, it was possible to identify that throughout the world has the Balanced
Scorecard received very warm welcome among numerous very prestigious companies.
To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC
Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.
During the interview with Mr. Tiit Elenurm, managing director of Estonian-based
consulting company EM-International, it was identified that so far the applications of
Balanced Scorecard and related instruments are not yet familiar to Estonian companies.
Our personal experience is shortly the following.
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The Balanced Scorecard is definitely a useful tool to renew an organisation’s mission
and strategic objectives. Multilevel analysis of organisational strategy helps to identify
possible shortcomings and flaws of existing objectives.
Second, the Balanced Scorecard has proven its usefulness also as a two-way
communications tool that enables to pass information more easily to all the members of
an organisation, as every member’s task in formulating the core business information is
certainly much higher than in the case of centralised strategic management systems. At
the same time, the Balanced Scorecard simplifies the analysis of monthly performance
review and compares the results of the review with strategic objectives.
Third, it turns the activities of an organisation much more efficient as its every member
is more aware and committed to the strategy. In the end, it avoids performing many
tasks that are not in line with objectives and members start to diminish less important
assignments that do not contribute to goals.
As one of negative impacts of the Balanced Scorecard it may be noted slowing down of
some strategic planning processes, because discussions on so many levels of
management undoubtedly takes some time. The second problem is increasing time
constraints, because some increase in bureaucracy and increase in reporting.
However, to diminish those backlogs it is definitely recommended to use an
information-technology based solution in implementing Balanced Scorecard. During the
completion of the thesis, the author managed to find at least four different software
providers, who have started to actively develop, market and sell their software solutions
for better management of the Balanced Scorecard.
It might also be recommended to start building up the Balanced Scorecard together with
the implementation of some ISO- or EFQM-based quality management systems. The
preparatory process for all of those initiatives is largely the same, which may diminish
significantly the project implementation time and end in better results.
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6. Summary
The overall objective of the thesis was to analyse the use of Balanced Scorecard as a
performance measurement tool in the areas of general management and strategic
management.
The Balanced Scorecard may be described as a strategy-driven measurement system
that retains traditional financial measures, but adds also the perspectives of present and
potential (future) value of a company, namely its customers, suppliers, employees,
processes, technology, and innovation.
By its nature the four-fold division of the Balanced Scorecard into the perspectives of a)
financial, b) internal business processes, c) learning and growth, and d) clients, has
nothing especially new. Internal business processes have been targeted by several
quality management systems. Learning and growth has been analysed by a few trends
under knowledge management. Clients also have been subject to several kinds of
statistical and non-statistical researches.
The main objective of the Balanced Scorecard is to bring those different perspectives
together into an uniform system that would enable to measure them in a balanced way
that is derived from the strategic objectives of an organisation.
Author goes through detailed steps in implementing the Balanced Scorecard in an
organisation and during that tour he advises on practical questions which may arise in
implementing the Balanced Scorecard for the first time.
In author’s opinion, the Balanced Scorecard methodology may be regarded as the most
practical management tool since the SWOT analysis. Therefore, the companies who are
willing to remain competitive during today’s shift from industrial age business to
information age business will have to start consider implementing the Balanced
Scorecard. From the possible research resources from Internet and major international
business journals, it was possible to identify that throughout the world has the Balanced
Scorecard received very warm welcome among numerous very prestigious companies.
To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC
Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.
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Especially Estonian companies would have to try to acquire more information about the
Balanced Scorecard and its possible implementation schemes in order to get competitive
advantages in the European Union and world markets.
The author finds that the Balanced Scorecard is definitely a useful tool to renew an
organisation’s mission and strategic objectives. Multilevel analysis of organisational
strategy helps to identify possible shortcomings and flaws of existing objectives.
To diminish some backlogs that might be encountered during implementation of the
Balanced Scorecard it is definitely recommended to use an information-technology
based solution in implementing Balanced Scorecard. During the completion of the
thesis, the author managed to find at least four different software providers, who have
started to actively develop, market and sell their software solutions for better
management of the Balanced Scorecard.
It might also be recommended to start building up the Balanced Scorecard together with
the implementation of some ISO- or EFQM-based quality management systems. The
preparatory process for all of those initiatives is largely the same, which may diminish
significantly the project implementation time and end in better results.
The author found in the thesis show that the Balanced Scorecard may be considered as
one of the best remedies in tackling with the questions concerning:
linking strategic vision and long-term objectives to short term tactics;
directing sophisticated and different critical paths of success in the light of strategic
management;
efficient performance measurement;
review of strategic vision in the light of day-to-day operations management.
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Bibliography
Kaplan, Robert S. and Norton, David P., “Putting the Balanced Scorecard to Work”,Harvard Business Review on Measuring Corporate Performance, 1998 Edition,
We have used these websites for refrence in order to prepare this report