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Balanced Scorecard

Balanced Scorecard- the concept

(pl. Strategiczna Karta Wynikw)

instrument of strategic management

forces measurement of effects of the strategic activities

forces cohesion in formulating strategy by building casualdependence between aims and activities

describes and explains what should be measured in an

organisation is an alternative for traditional financial systems

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Reasons for origination of BSC

Limitations in using financial measures

do not provide full information about elements crucial forcompetitive advantage

do not encourage managers to think short-term

allow for manipulation in decision-taking show results of activities taken in the past

do not show the complete picture of the company's development

traditional measures originate from Cost Accounting; do not showwhere did costs come from

employees do not see the link between their work andmeasurement systems

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Circumstances under which BSC originated

Research projects 1987 Corporate Scorecard developed by Analog Devices Inc.

1988 KPMG built for Apple Computer a performance measuringsystem

1990 project entitled Measuring effectiveness in organisations inthe future have begun

project group: David Norton (Nolan Norton Institute) project leader prof. Robert Kaplan (Harvard Business School) advisor team of corporate directors from: Advanced Micro Devices, American

Standard, Apple Computer, Bell South, Hewlett Packard, Shell Kanada,Cigna, DuPont, General Electric

results were decribed in: Robert S. Kaplan, David P. Norton, TheBalanced Scorecard: Translating Strategy into Action, 1996

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Remark (1)

Balanced Scorecard of a certain friend as an impulse toreflect on how we realise our plans...

/based on: My Balanced Scorecard, H.R. Friedag, W. Schmidt/

Vision: Happy and satisfied Strategy: More time for people with whom I share my life

and less stress"

Reasons for which activities are undertaken:

family friends

work

health

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Remark (2)

Reasons How to realise Plan Performance

Family Telephones to a wife 5 3,7

Flowers for a wife 4 3

Dinners and suppers together 4 5

Family trips 3 2

Dance/theater 2 2,5

Friends Roller skates 1 1

Volunteer work at wind surfuring club 2 1

Get-togethers with friends 2 2

Work Trainings of co-workers 2 1,5

Team meeting 4 3Work communication days 2 1

Work until 6:30 p.m. 2 1,5

Weekend without a company 2 1

Health Jogging 2 1,5

Work-out / Aerobic 4 2

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Remark (3)

0

1

2

3

4

5

flowers for a wife

dinners and suppers together

family trips

dance/theater

rollerskates

volunteer work at wind surfuring club

get-togethers with friendseducation

meetings

work communication days

work until 6:30 p.m.

eekend without a company

jogging

work-out / aerobic

is

aim

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Four perspectives of BSC

Many leaders have their own visions which never become acommon vision joining the whole organisation."

That which is lacking is a theory which allows us to transform anindividual vision into a joint vision

/P. Senge/

Balanced scorecard transforms the mission and strategy intoaims and measures grouped according to four differentperspectives:

1. Financial perspective

2. Customer perspective

3. Internal processes perspective

4. Development perspective

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Balanced scorecard - the model

Financial perspective

How should stockholders see us,so that we are thought of as

financially successful?

Development perspective

How can we maintain our ability tochange and improve effectiveness in

order to realise our vision?

Internal processesperspective

What internal processes must weimprove so that owners and clients

of the firm are satisfied?

Customer perspective

How should customers see us, sothat our vision is realised?

Visionand

Strategy

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Casual relation (1)

If we increase the amount and quantity of training then...

. employees will possess a greater knowledge about our productoffer

If the employees will possess a greater knowledge about our productsthen...

. they will increase their selling effectiveness

If the sales effectiveness increases then...

1) sales will increase and 2) operational costs will decrease

If sales will increase and operational costs will decrease then...

profitability will increase

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Casual chain

ROCE

Employees' skills,abilities, competences

Process quality Process duration

Timely delivery

Customer loyalty





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Gist of the Balanced Scorecard

Measurement system built based on financial and non-financial measures

Measurement system built based on enterprise strategy

Balanced system of:

Results with Leading measures(Lagg Indicators vs. Lead Indicators)

Objective with Subjective measures

Financial with Non-Financial measures

Short-term with Long-term measures

External with Internal measures

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Casual relation (2)


How should stockholders see us,so that we are thought of as

financially successful?

Development perspectiv

How can we maintain our ability tochange and improve effectiveness

in order to realise our vision?


What internal processes must weimprove so that owners and clients of

the firm are satisfied?

Customer perspectiveHow should customers see us, so

that our vision is realised?

Vision, mission, strategy

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Aim from financial perspective: main aim: to ensure stockholders a rate of return from an investment

exceeding their expectations derived from an alternative involvement ofcapital bearing a similar level of risk

Financial perspective measures whether the company's strategy

realises its main aim Measures (based on financial reports)

return on investment - ROI

economic value added EVA

Financial strategies:

to reach a required growth and structure of revenues

to reduce costs and increase profitability

to increase utilisation of resources and effectiveness of investments

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Example:problems with financial measures

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Calculation of ROI

Cost of products sold andservices rendered

Sales, administrative andmanagerial costs

Other operationalrevenues otheroperational costs

Operational costs

Sales

Income from

operations

ROISales

Return

on sales

Return

on assets

Operationalassets

Cash and cash equivalent

Liabilities

Inventory and other short-

term assets

Long-term assets

Legal assets

Other long-term assets

Short-termassets

Long-term assets

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How to calculate ROI?

ROI = Income from operationsAssets of operational unit

Income from operationsSales

SalesAssets of operational unit

= x

=Return on

sales xReturn on

assets

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Limitations of utilising ROI

Using ROI to assess the activities has its limitations:

ROI measure is not directly tied to the goal of maximising thevalue of the enterprise for its owners

ROI used as an assessment measure of managers can leadto incorrect investment decisions

ROI is a short-term assessment measure

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EVA= Wynik operacyjnykoszt kapitau x zainwestowane rodki

Economic value added - EVA

EVA

(ang. economic value added) measure that shows the value that the activities of a given investment

center "add" to the value of an enterprise

shows the aim of the activities of an enterprise maximialisation of itsvalue

Limitations of applying the EVA:

short-term measure based on annual data

its use can lead to faulty investment decisions taken by managersinterested in short-term benefits

Modifications of EVA:

e.g. bonus bank managers lose motivation to conduct long-term non-income generating projects

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EVA

Economic value added is based on a notion which we knew for a long

time: that what we call profit, money, which are left to service own

capital is not commonly a profit. Until an enterprise earns an amount

greater than its cost of capital, until then it has a loss. It is unimportant

that it pays taxes as it would experience a real profit. An enterprise still

gives the economy less than it gets from it in terms of resources. (...) It

does not create wealth, but it destroys it.

Peter Drucker

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EVAin decision-taking (1)

Assets in 2001 - 10 000 000 z, in 200220 000 000 z

Liabilities in 2001 - 3 000 000 z, in 20024 000 000 z

Cost of capital set at 10%

P/L Statement of Gamma Co. 2001 2002

Sales revenue 12 200 000 20 000 000

Cost of goods sold (COGS) 7 400 000 15 000 000

Gross income from sales 4 800 000 5 000 000

Sales costs 1 200 000 1 000 000

Administrative costs 2 000 000 1 500 000

Income from sales 1 600 000 2 500 000

Other operational income 400 000 400 000

Other operational costs 500 000 400 000

Income from operations 1 500 000 2 500 000

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EVAin decision-taking (2)

Decrease in ROI: worsening of the effectiveness of theinvestment center?

Increase in EVA: improvement of the effectiveness of theinvestment center?

2001 2002

Return on sales 12,29% 12,5%

Return on assets 1,22 1

ROI 15% 12,5%

EVA800 000 900 000

Calculation 1,5 mln-7mln*10%=0,8 mln 2,5mln-16mln*10%=0,9 mln

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Financial perspective types of strategies

Increase valuefor stockholders

Revenue growth

strategy

Productivity

strategy

Builtfranchising

Increase valuefor customers

Improve coststructure

Improveutilisation

of assets

- revenue fromnew sources

- improveprofitability

of current customers

- lower costsper unit

- gradualinvestment

- current assets

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Aims in customer perspective: increase customer satisfaction and create positive image for the firm

increase customer loyalty and quality of customer services

increase market share

General measures: market share

maintain customers

gain new customers

customer's satisfaction

customer's profitability Measures of value offered to customers:

product attributes (goods, services)

customer relations

image and reputation

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General measures from customer'sperspective

Market sharereflects the part of the market controlled by the enterprise. Expressed as anumber of clients, a value or amount of sales

Gain newcustomers

measures in absolute or relative numbers the speed at which theenterprise gains new customers

Maintaincustomers

shows in absolute or relative numbers the level at which the enterprisemaintains long-term relations with customers

Customer'ssatisfaction

describes the customers' satisfaction level depending on specific criteriaof added value

Customer's

profitability

measures the net profit generated from a customer or market segmenttaking into account specific costs related to service of that customer

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Attributes of generating value for customers

Gain customers

Customer's

satisfaction

Maintain customers

Product attributes(services)

Customer relationsImage and ReputationValue = + +

qualitypricetime

conveniencetrustreact to needs

brand

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Internal processes perspective

Aims in internal processes perspective:

increase value of the enterprise through innovations

optimalise processes at the operational level

ensure high quality of after-sale services

Measures:

time of process implementation

cost of process implementation quality of process implementation

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Business internal processes perspective

Determined by customer andfinancial perspectives

Transforms customer's

requirements into internal measures

Identifies internal processes neededto achieve the aims

Forces cooperation of variousdepartments

zlecenieklienta

nadeszo

wczytazlecenie

do systemu

zlecenieklienta

w systemie

kontrolatechniczna

kontrolahandlowa

decyzjtechnicznpodjto

decyzjhandlowpodjto

opracowadecyzje

informacjadla klienta

gotowa

dziasprzeday

dziasprzeday

zlecenieklienta

systemkomputerowy

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Process perspective value chain

delineatetargetmarket

createproduct

offer(service)

delineatetargetmarket

createproduct

offer(service)

customerservice

Innovativeprocesses

After-saleprocesses

Operational

processes

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Aims in the development perspective:

achieve a greater staff potential human resources

utilise employees' individualism

increase level of motivation, decentralisation, andconvergence of aims

Measures:

employee satisfaction, level of stress and conflict

availability of trainings, individual development

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Measures in development perspective

Results

Employee

productivity

Employeesatisfaction

Employee

turnover

Personnelabilities

Technologicalinfrastructure

Employeeinvolvement

Main measures

Provisions:

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Development and learning perspectives

Ability to innovate and learn directly tiedto the value of an enterprise:

development of new products

create value for the customers

process of continuous improvement

Employees' abilities add value

Informational systems are needed totransform information

Employees' motivation

Mapawiedzy(Kto cowie?)

Diagram strukturywiedzy

Rozwj i wykorzystanie wiedzy(Integracja z modelami procesw)

Projects

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Basic model of creating Strategy MapIncrease value for

stockholders

Revenue growth strategy Productivity strategy

Builtfranchising

Increase valuefor clients

Improve coststructure

Increase utilisationof assets

Product leadership

Operational excellence

Customer knowledge

Employees' competences

Increase value for clientsby customer management

process

Achieve operationalexcellence thanksto logistic process

Become a worthy enterprisethanks to share

in regulatory processes

Technology Organisational culture



Internal processes perspective


rdo: Kaplan, Norton

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Navigational cockpit strategic managementcenter

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Example:

Citibank - Performance Evaluation

How to effectively assess manager's performance?

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Citibank California assessment ofBalanced Scorecard for local managers

Assessment of Jamesa McGarana

worked in banking since 1977

in Citibanku since 1985

since 1986 systematically promoted

1992 - 1996 branch manager in a financial district of Los Angeles

4 years in a row had impressive profits although the district was greatly

competitive

had an opinion of a great manager

difficult clients at James' branch:

individual clients: from very demanding to "common people

business clients: market segment requiring higher than usual services

Difficulty with James' assessment based on Balanced Scorecard

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Introduction of Balanced Scorecard

Financial Measures financial results

Strategy Implementation related to company's introduction ofcorporate strategy

Customer satisfaction manager of Citibank California thought of this measure as the most significant one

from bank's long-term strategy

Control measures internal controls

People subjective assessment of employees by the supervisor

Standards assesses manager's involvement, behaviour based onbusiness ethics

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Grading and motivational system:

Grading:

Below par (below the norm)

Par (the norm)

Above par (above the norm)

Motivational system:

Below the norm -0- bonus

The norm Bonus of 15-20% of salary

Above the norm Bonus of 30% of salary,under a condition that the employee does notreceive any grade below par

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Financial

Implementation of strategy

Customer satisfation

Control

People

Standards

Total mark:

James' results:

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Summary

The Balanced Scorecard does not require any newknowledge as it relates to daily experiences and its basedon them

Every manager must define his aims, plan needed

resources, take decisions and implement them In order to control the results of his actions, he must make

them specific and definite, so that he is able to measuretheir implementation

Strategic Balanced Scorecard creates framework forchanges through defining strategic aims

To satisfy the aims specific ways and resources areassigned

Documents

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