BSC - Primer

Balanced Scorecard - A PrimerBalanced Scorecard - A Primer

… Translating Strategy into Operational Terms

ObjectiveObjective

• To understand the essence of balanced scorecard.

Strategic Planning ProcessStrategic Planning Process

MissionWhy we exist

ValuesWhat’s is important for us

VisionWhat we want to Be

StrategyOur Game Plan

Strategy MapTranslate the Strategy

Balanced ScorecardMeasure and Focus

Targets and InitiativesWhat we need to do

Process/ Personal ObjectivesWhat I need to do

Strategic Outcomes

Satisfied Shareholders

Delighted Customers

Efficient & EffectiveProcesses

Motivated & Prepared Workforce

Strategy ExecutionStrategy Execution

• Successful execution of strategy requires three components

{Breakthrough Results} = {Describe the strategy} + {Manage the Strategy}

Philosophy of the three components is:

We can’t manage what we can’t measure. We can’t measure what we can’t describe.

Performance MeasurementPerformance Measurement

W WHAT Y YOU M MEASURE I IS W WHAT Y YOU G GET

How We Manage…How We Manage…

Financial Measures

… are the Bread and Butter of Managing

Drawbacks of Using Only Financial Measures:Drawbacks of Using Only Financial Measures:

• Always looking backwards

• Neither guarantee or predict future performance

• Tend to drive short term decisions

Using Only Financial Measures is like steering a Boat by Looking Backwards…Using Only Financial Measures is like steering a Boat by Looking Backwards…

…but that’s exactly what organizations do when they rely on financial measures alone

Drawbacks of Using Only Financial Measures:Drawbacks of Using Only Financial Measures:

Traditional Method of Performance MeasurementTraditional Method of Performance Measurement

• Traditional financial measurement systems treated investments in employee capabilities, databases, information systems, customer relationships, quality, processes and innovative products and services as expenses in the period in which they were incurred.

• No scope for measuring and managing the value created by enhancing the capabilities of an organization’s intangible assets.

“Since late 90’s, primarily employees and information technology are becoming important for company’s competitive success.”

Results of Research!Results of Research!

1 in 10 organizations execute their strategies

successfully

1 in 10 organizations execute their strategies

successfully

72% of CEOs believe that executing their chosen

strategy is more difficult than developing a good

strategy

72% of CEOs believe that executing their chosen

strategy is more difficult than developing a good

strategy

Fortune Magazine, 1998

Malcolm Baldrige CEO Survey, 2002

Strategic Learning Loop

Initiatives & Programs

test the hypotheses

Output(Results)

reportingManagement Control Loopfunding

Input(Resources)

update the strategy

PERFORMANCE

85% of management teams spend less than one hour per month on

strategy issues

92% of organizations do not report on lead

indicators

60% of organizations don’t link strategy &

budgets

78% of organizations lock budgets to an annual cycle

20% of organizations take more than 16 weeks to

prepare a budget

MAKE STRATEGY A CONTINUAL PROCESSMAKE STRATEGY A CONTINUAL PROCESS

STRATEGY

BALANCED SCORECARD

BUDGET

The Problem: The Strategic Management Process Is Missing in Most Organizations

Strategy Development or Strategy Execution? Organizations Need Both

Strategy Development or Strategy Execution? Organizations Need Both

StrategicStrategic

SuccessSuccess

StrategicStrategic

SuccessSuccess

At RiskAt RiskDoomed FromDoomed From

The StartThe Start

Doomed FromDoomed From

The StartThe Start

Missed

Opportunity

Missed

Opportunity

Str

ateg

y F

orm

ula

tio

n

Flawed Sound

Fla

we

dS

ound

Strategic success requires going beyond successful strategy formulation to successful strategy execution

Source: 1Execution: The Discipline of Getting Things Done, by Larry Bossidy, 2002.

Strategy Execution

1

Strategy Execution ChallengeStrategy Execution Challenge

There are generally accepted tools to manage finances, customers, processes, and people. But what about strategy?

The Balanced Scorecard is the vehicle that fills the Strategy Management Gap

Financial Management Tools

EVA

Balance Sheets

Income Statements

Shareholder Value Analysis

Customer Management Tools

Customer Satisfaction Measurement

Customer Relationship Management

Segmentation Analysis

One-to-One Marketing

Process Management Tools

Six Sigma

Supply Chain Integration

Cycle Time Reduction

TQM

People Management Tools

Core Competencies

Knowledge Management

Pay for Performance

HRIS

Strategy Management Tools

?

The Balanced ScorecardThe Balanced Scorecard

Customer & marketplace measures

Human resource measures

Financial measures

Internal performance measures

[Adapted from The Balanced Scorecard, by Robert Kaplan and David Norton]

What Is a Balanced Scorecard?What Is a Balanced Scorecard?

At the highest level, the Balanced Scorecard is

A framework that helps organizationstranslate strategy into operational

objectives that drive both behavior and

performance.

Balanced ScorecardBalanced Scorecard

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

Knowledge, Skills, Systems, and ToolsKnowledge, Skills, Systems, and Tools

Financial Financial ResultsResults

To Build the Strategic Capabilities..

Needed to Deliver UniqueSets of Benefits to Customers...

To Drive Financial Success...

And Realize the Vision

Equip our People...

Internal Internal CapabilitiesCapabilities

Customer Benefits

BSC - To Articulate Strategic Hypotheses in Cause-effect TermsBSC - To Articulate Strategic Hypotheses in Cause-effect Terms

Vision & Vision & StrategyStrategy

CUSTOMERCUSTOMER

“Happy Customers”

“how should we appear to our customer - to achieve our vision?”

LEARNING &LEARNING &GROWTHGROWTH

“Happy Employees” “how will we sustain our ability to service,

change and improve -to achieve our vision?”

INT. BUS.INT. BUS. PROCESSPROCESS

“Way of doing things”

“what business processes must we excel at-to satisfy our stakeholders?”

FINANCIALFINANCIAL

“Financial Health”

“how should we appear to our shareholder - to succeed financially?”

Balanced ScorecardBalanced Scorecard

The Balanced ScorecardThe Balanced Scorecard

EXTERNALMEASURES

INTERNALMEASURES

LAGINDICATORS

PERFORMANCEDRIVERS

Driving Performance Across Different Times FramesDriving Performance Across Different Times Frames

• Financial measures – short term; Actions taken to improve them show results very quickly.

• Customer and marketplace measures – medium to long term; Actions might take months or years to show tangible results.

• Internal performance measures – medium term; Actions take longer to show results.

• Learning and Growth measures – long term; Actions might take years to show tangible results.

Other Themes of the Balanced Scorecard:Other Themes of the Balanced Scorecard:

• Link to strategy• Robust

communication• Frequent progress

reviews

How Do You Build a Balanced Scorecard?How Do You Build a Balanced Scorecard?

• Top management involvement

• Keep it short and sweet

Four Perspectives of BSCFour Perspectives of BSC

• The BSC translates the mission and strategy into objectives & measures organized into four different perspectives:– Financial– Customer– Internal business process– Learning & growth


• Financial perspective is retained as:– Financial performance measures indicate

whether a company’s strategy, implementation and execution are contributing to bottom – line improvement.

– Financial parameters are lagging indicators.


• Customer perspective:– Includes several core or generic measures of

the successful outcomes from a well-formulated & implemented strategy.

– The core outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market share in targeted segment.

Customer & Marketplace AnalysisCustomer & Marketplace Analysis

• What do customers think we do especially well?

• What was our biggest product/ service success?

• What are our three best facts to sell a new customer?

• Where could our service improve?


• What do customers think we do especially well?

• Welding• on time delivery• Customized solution• Good quality• Service• Good infrastructure• Pricing• Test certificates• Design and Development• Short time delivery• Payment terms• Adapting to their wants and

requirements at a short notice• Maintaining relationship• Pricing reduction• Quick response• Technical support• Concept to commissioning of solutions

• Training• Product demonstrations• Assurance• Product range• Durability• Warranty• Management• Structural integrity• Product Features• Performance• Financial stability


• What are our three best facts to sell a new customer?

• Customized Solution• Market Leader• Following International Safety

Standards• Customer base• Serviceability• Training• Experience in line of activity• Allow customers to visit• Site visits from the team• International tie ups• Branding• Continuous follow up• Strong HR team


• Where could our service improve?

• Customer feedback after delivery• Manufacturing Lead times• Process Cycle Times• Product Improvements – Quality and Durability


• What problems do our customers keep telling us about?

• Where is market headed in 5 years?• What 4 customer desires will become

requirements?• Biggest reasons we miss sales to

competitors?• Who could start competing with us?• What could be the differentiators for the

services provided by us.


• Internal business process perspective:– Identify the critical internal processes in which

the organization must excel. These processes enable the business unit to:

• Deliver the value propositions that will attract and retain customers in targeted segments.

• Satisfy the shareholder expectations of excellent financial returns.

Internal Process SWOT AnalysisInternal Process SWOT Analysis

• What process should we excel? • What are the areas where we need reduce

wastes?• What “bottlenecks” do we have in our

processes? How do we manage them?• What efficiencies do our competitors have

that we don’t? What could we do to adopt these efficiencies?

Internal Process SWOT AnalysisInternal Process SWOT Analysis

• What new methods and technologies may become applicable to our operations in the next five years?

• What is one process improvement we could implement that would put us ahead of the competition?

• What internal processes are so inefficient or ineffective that they could become bottlenecks?

• Which of our internal processes pose significant environmental, health, and safety risks? What do we need to do about them?


• Learning and growth perspective:– The first three perspectives reveal the gaps

between the existing capabilities of people, systems and procedures and what will be required to achieve breakthrough performance.


• Learning and growth perspective:– Identifies the infrastructure that the

organization must build to create long term growth and improvement.

– Organizational learning and growth comes from three sources.

• People.• Systems.• Organizational procedures.

Learning and Growth Analysis Learning and Growth Analysis

• What skills and abilities do we think will be critical three/five years from now?

• What makes our people better?• What employee skills and abilities could

be improved?• What are the automations and technology

initiatives we need to initiate?• What are the systems we need to

establish?

Cause – and – Effect RelationshipsCause – and – Effect Relationships

• The measurement system should make the relationships among objectives in various perspectives explicit so that they can be managed and validated.

• The chain of cause and effect should pervade or encompass all four perspectives of a BSC.

Cause and Effect RelationshipCause and Effect Relationship

R O C E

Dominant Market Share

Customer Loyalty

World class systems & products

World class customer support

Competent & Motivated Employees

Financial

Customer

Internal/ BusinessProcess

Learning and Growth

Strategic Objectives ExampleStrategic Objectives Example

Finance

Customer

Internal Process

Learning and Innovation

IncreaseProductivity

AchieveEquityRatios

IncreaseEmployeeMorale Promote

Creativity

Manage Costs

Improve Service Efficiency

Employ Safe Working

Environment

Achieve Acceptable Returns

Increase Capacity Utilisation

IncreaseCustomerSatisfaction

Grow Business

Develop Employees

Objectives

• Fast ground turnaround

Statement of what strategy must achieve

and what’s critical to its

success

Target

• 30 Minutes• 90%

The level of performance

or rate of improvement

needed

• Cycle time optimization

Key action programs

required to achieve

objectives

InitiativeMeasurement

• On Ground Time• On-Time

Departure

How success in achieving the strategy

will be measured and

tracked

Strategic Theme: Operating Efficiency

ProfitabilityFinancial

Learning

Morecustomers

Ground crew alignment

Lowest prices

Fewer planes

Customer

Internal

Fast ground turnaround

Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives

Flight Is on time

BSC TerminologyBSC Terminology

BSC Objective DictionaryBSC Objective Dictionary

• Once Measures Have Been Selected, They Must Be Defined in Detail to Ensure They Can be Reported in a Consistent, Repeatable Manner

Strategic Objective: Names the objective Measure: Names the measureMeasurement Intent: Describes the measure and the reasoning behind its selection as an indicator of progress against this strategic objective.

Measurement Definition/Formula: Provides a detailed formula for the calculation of a numerical value for the measure

Source For and Approach to Setting Targets: Identifies the report, document, system or individual from which the information will be obtained

Target Setting Responsibility: Person

Tracking / Reporting Responsibility:Person

Measure Availability: dateTarget: date

Frequency of Update: Identifies how often it is calculated

Units of Measure: Identifies the units in which the measure will be reported

Accountability for Meeting Target: Person

Notes/Assumptions: • Clarifies terms in the formula as necessary• Highlights key assumptions underlying the

formula

Measurement Information Is:___ Currently Available___ Available With Minor Changes

Data Elements and Sources: The data elements required to calculate this measure and the source systems, databases, documents, etc. of those data elements

2003 Actual 2003 Proj. 2004 2005

Lists numerical targets by year for the various component of the formula where relevant.

1Q2Q3Q4QFull Year

Target

Next Steps: Describes the plan to overcome any deficiencies in getting the required data

BSC Objective DictionaryBSC Objective Dictionary

Strategic Measures Are:Strategic Measures Are:

• Few enough to achieve focus• Representative of a wide range of

organizational concerns• Clearly defined• Revised as needed

Quantitative Selection ProcessQuantitative Selection Process

• Are improvements in the measure likely to result in increased sales?

• Does the measure have broad applicability to all functions in the organization?

• What resources are available for improving this measure?

Learning and then not acting on what you learn is like plowing and then never planting.

- unknown Albert W. Daw Collection

BSC - Primer

Documents

show tangible results

data elements

show results

financial measures

growth perspective

marketplace analysis

balanced scorecard

customer