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Balanced Scorecard Approach
Presented byPadarabinda Maharana
10IM60R08
Contents
Introduction Evolution of balanced scorecard Representation of balanced scorecard Steps for developing a Balanced
Scorecard Application examples
What is a Balanced Scorecard ?
It is an example of a performance measurement system.
Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth)
to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to
the market (customer) which will eventually lead to higher shareholder value (financial).
Source-“Having Trouble with Your Strategy? Then Map It” by Robert S. Kaplan and David P. Norton - Harvard Business Review
We can say….
Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals
Why the Balanced Scorecard?
Traditional financial measures Inadequate for guiding
and evaluating the future value through investment in customers, suppliers, employees, processes, technology and innovation
Balanced Scorecard Complements
financial measures of past performance with measures of the drivers of future performance.
The objectives and measures of scorecard are derived from an organization’s vision and strategy.
Evolution of Balanced Scorecard?
People and their managers are working so hard to be sure things are done right ,that they hardly have time to decide if they are doing the right things.
Evolution of Balanced Scorecard?
Traditional financial measurement and its Limitations
Not consistent with today’s business realitiesTend to reinforce functional silos Sacrifice long-term thinkingFinancial measures are not relevant to many levels of Organization
Evolution of Balanced Scorecard?
Critical Issues of successful Strategy Implementation Barriers to Implementing Strategy
Vision Barriers (5% of work force understand the strategy)People Barriers (25% of Managers have incentive linked to strategy)Management Barriers (85% of executive team spends less than a hour per month discussing strategy ) Resource Barriers (60% of organization doesn't link budget to strategy )
Source- Balanced Scorecard Collaborative
Evolution of Balanced Scorecard?
What is Needed ?
“A system that balances the historical accuracy of financial numbers with the drivers of future performance, while also assisting organization in implementing their strategies”
Evolution of Balanced Scorecard?
Robert Kaplan and David Norton originated the balanced scorecard approach in the 1980’s. They fully packaged and presented the approach in a 1992 Harvard Business Review article.
The approach was an effort to achieve goal congruence amongst the various strategic measures within an organization.
BSC has been adopted by nearly half of fortune 1000 organizations
Concept of balance
The concept of balance is central to the system and demands balance in the following:
Balance between financial and non-financial
indicators of success in short and long
terms
Balance between external and internal
constituents
Balances performance drivers (leading
indicators) with outcome measures (lagging
indicators)
Measures
How do we know we have achieved it?
Measures
How do we know we have achieved it?
Tactics
What do we need to do?
Tactics
What do we need to do?
Strategy
The game plan?
Strategy
The game plan?
Goals
What do we want to achieve?
Goals
What do we want to achieve?
Mission
Why we exist?
Mission
Why we exist?
Vision
What do we want to be?
Vision
What do we want to be?
COMPETENCIESCOMPETENCIES
VALUESVALUES
What skills do we need
What we believe in
Organization Snapshot
Representation of BSC
BSC as a Measurement System BSC as a Strategic Management
system BSC as a Communication tool Cause and Effect Relationship Balance in the BSC
BSC as a Measurement System
Financial measures- Review of the Past, Lag indicator
Inadequate in addressing the real value-creating mechanismBSC complements these Lags with Lead indicatorWhere are these measures derived?
BSC has four
Perspectives in Balanced Scorecard
If we succeed, how will we look to
our shareholders?
Financial Perspective
To achieve our vision, how must we
look to our customers?
Customer Perspective
To satisfy our customers, which
processes must we excel at?
Internal Perspective
To achieve our vision, how must our
organization learn and improve?
Learning & Growth Perspective
The Strategy
Financial Perspective
The measures in this perspective tell us whether our
strategy execution - which is detailed through
measures chosen in the other perspectives - is leading
to improved bottom line results.
Financial perspective deals with classic lagging
indicators in the. Typical examples include:
profitability, revenue growth, and economic value
added.
Generic measures:
ROI
EVA
how do we perceive our shareholders?
Customer Perspective
Customer perspective of the Scorecard organizations must answer two critical questions:
who are our target customers, and what is our value proposition in serving them.
Generic measuresSatisfactionRetentionMarket & account share
how do we perceive our customers??
Internal Perspective
This identifies the key processes the firm must excel at in order to continue adding value for customers, and ultimately shareholders.
Generic Measures
Quality
Response time
Cost
New product interventions
in what processes should we excel to succeed?
Learning and Growth Perspective
Identification of capabilities, skills and processes that
need to be learnt for achieving the desired measures
or for fulfilling the existing gaps between ‘what is
available’ and ‘what is needed’
Generic measures:
Employee satisfaction
Information system availability
how will we sustain our ability to change and improve?
BSC as a Strategic Management System
Overcoming the vision Barrier through the translation of strategy BSC provides a framework in translating the Org
strategy into Objectives Guide employees action towards the achievement of the
stated direction Cascading the scorecard overcomes the People
barrier Cascading means driving it down into the organization BSC Framework helps to implement strategy that can be
understood and acted upon every level of the firm It creates a line of sight from shop floor employee to the
board room executive
BSC as a Strategic Management System
Strategic Resource Allocation overcomes the Resource barrier BSC framework helps in trade-offs regarding which
initiatives to be funded and which is to defer Strategic learning overcomes the Management
barrier BSC translates vision and strategy into a coherent set of
measures Scorecard results is a starting point for reviewing,
questioning, and learning about the strategy
BSC as a Communication Tool
Why should it be consider a communication tool Translating the strategy and telling its story to all
employees It is the most basic and powerful attribute of the entire
system Provides employee with opportunity to discuss the
assumption underlying the strategy Knowledge management within organization
Cause-and- Effect Linkages are Critical to BSC
Defining and then executing the corporate strategy
By identifying the key drivers of success, executing the strategy and then measuring those drivers, it is possible to develop a strategy that is more robust and execute it more effectively.
Communicating effectivelyBy integrating, analyzing and communicating the right information throughout the organization, employees will be able to make the right business decisions consistent with the organization's strategic goals.
Cause-and- Effect Linkages are Critical to BSC
Quickly identifying the root causes of potential problems and responding proactively
Having a cause-and-effect model of how the performance measures relate to each other provides a list of "likely suspects" to quickly focus diagnostic
efforts and action. Alerting decision-makers about early indicators of
troubleA cause- and-effect model allows organizations to trace the likely downstream effects of performance issues.
Balance in the BSC
Balance between financial and no financial indicators of success
Balance between internal and external constituents of the Organization
Balance between lag and lead indicators of performance
How to Design/Implement Balanced Scorecard?
Phase I: The Strategic Foundation Phase II: Three Critical
Components Phase III: Deployment
Step 1: Strategic Alignment
A clear strategy requires two things Specific objectives that tell people what to
doExample-Over the next six months, delivery times will decrease by 15% through more localized distribution centers.
a set of targets for communicating what is expected
defining market share revenue growth new products introduced
Step 2: Strategic Areas
Before we start designing the Balanced Scorecard, we need a “fence line” of strategic areas.
For most organizations, the strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees
Example - publicly traded corporations will have “shareholder value” as a major strategic area
Shareholder ValueFinancial Revenue Growth
Customer More Customers
Processes Customer Marketing & Service Programs
Learning Support Systems & Personnel
Step 3: Strategic Grids
We will translate the specifics of our strategy into a set of grids
balanced scorecards are structured over four perspectives or layers: Financial Customer Internal Processes Learning and Growth.
FinancialShareholder Value
Grow Revenues
CustomerAcquire More CustomersBecome the Price Leader
Internal Processes
Improve Operational Efficiency
Cost Reduction Program
Knowledge Based System
Reduce Non Core Activities
Learning and Growth
Training - Best practices in cost
management
Database network on operational
performance
Re-align organization
with core competencies
Strategic objectives defined for all four perspectives
Summary of Phase -I
Five Major Milestones – Phase I
1st - Establish a clear strategy (objectives & targets)2nd - Communicate the strategy3rd - Align the organization around the strategy4th - Limit the strategic areas to no more than five5th - Link strategic objectives into grids across four perspectives
Phase II: Three Critical Components Step 4: Measurements
Measurement allows us to quantify our strategic objectives, asking the question: How well are we doing?
Strategic Objective =>
Describe the Measurement =>Define Type / Formula =>
Unit of Measurement =>
Frequency of Measurement =>Assumptions =>Sources =>
Availability => ___ Available ___ Not Available ___ Requires Change
Support Required => ___ IT Support ___ Finance Support ___ Other
Measurement Template
Measurements
Leading indicators- They drive or push final outcomes within the organization
Examples customer contracts executed competitive pricing index employee feedback indicator service response time time spent with customers.
Measurements
The other side of measurement is looking back, historical type measurements that show us a final outcome or result.
Lagging indicators Examples
Financial type measurements return on equity sales growth economic value added
Non-financial type measurements production breakeven customer retention employee productivity index
Measurements
Customer
Perspective
Lagging Indicators are desired results:
Customer Satisfaction Customer Retention Market Share
Leading Indicators – Value Attributes to Customers:
Quality Time Price Image Reputation
Cause Effect Relationship between Leading and Lagging Indicators
Measurements
The Internal Process Perspective Pre Delivery Results => Innovative Processes that meet
customer needs, provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced.
Delivery Results => Operations that produce and deliver products and services to customers. Example of Leading Indicator => Delivery Response Time to Customer.
Post Delivery Results => Value added services provided to customers once products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint.
The Learning and Growth Perspective will emphasize three result categories: Employees, Systems, and Organization
Results for Employees => Employee satisfaction, productivity, and retention. Example of Leading Indicator => Percentage of Key Personnel Turnover.
System Results => Engaging to the end user, accessibility, and quality of information. Example of Leading Indicator => Percentage of employees who have on-line access.
Results for the Organization => Climate for change, strong leadership, empowering the workforce, and other motivating factors. Example of Leading Indicator => Number of Employee Suggestions.
Measurements
Step 5: Targets
We must drive behavioral changes within the organization if we expect to execute strategy.
This requires establishing a target for each measurement within the Balanced Scorecard.
Targets are designed to stretch and push the organization in meeting its strategic objectives.
For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established.
Adding Measurements and Targets to the Balanced Scorecard
Perspectives Objectives Measurements Targets
2002 2003
FinancialMaximum Returns
Utilization of AssetsRevenue Growth
Return on EquityUtilization Rates
% Change in Revenues
12% 7%
+11%
13% 8%
+11%
CustomerCustomer Retention
Customer ServiceCustomer Relations
Retention %Survey Rating
% Self Initiated Calls
75%85%35%
75%88%40%
Internal Processes
Fast Delivery Effective Service
Optimal CostResource Utilization
Turnaround Time1st Time Resolvement
% cost of salesProductivity Indicator
15m68%66%77%
14m69%64%80%
Learning & Growth
High Skill LevelsEmployee SatisfactionOutstanding Leaders
Skill set ratioSurvey Index
5 point ranking
65%75%4.5
68%77%4.8
Step 6: Programs
The final design step is to close the loop and put specific programs in place to make everything happen.
Examples Quality improvement programs Marketing initiatives Enterprise resource planning Customer relation’s management Supply chain management.
Compare Programs with Strategic Objectives for Strategic Impact
Instructions: List all strategic objectives for each perspective in the Balanced Scorecard. Plot any program that helps achieve a strategic objective.
Programs
Global Market Program
Leadership Building
Quality Control Review
IT Complaint Tracking
Prod Yield System
Asian Production Plant
Customer Management
Knowledge System
Community Awareness
Employee Rotation
Enterprise Planning
Strategic Objectives
F1: Maximum Return on Equity
F2: Positive Economic Value Added
F3: 15% Revenue Growth
F4: 5% Reduction in Production Cost
C1: Secure 1% market share in Asia
C2: Obtain competitive pricing
C3: Develop new market partnerships
C4: Integrate service process w/customer
P1: Improve production workflows
P2: Flawless manufacturing
P3: Expand knowledge distribution
P4: Integrate financial / production
P5: Link processes to customer inputs
L1: Engage workforce into the business
L2: Expand leadership capacities
L3: Become a customer driven culture
Phase III: Deployment Factors that influence implementation of the Balanced
Scorecard Time required to develop a balanced scorecard Availability of data and resources for building the
Balanced Scorecard Degree of support from upper level management
Attributes of a company for successfully implementing BSC A strong commitment from the top to the Balanced
Scorecard. A process for transforming strategies into balanced
scorecards. A cross-functional process for moving strategy down into
the lower parts of the organization
Transformation a Company
Strategic Planning Strategic ThinkingA formal structured process of researching and analyzing the competition in an effort to identify strengths, weaknesses, opportunities, and threats.
A natural and intuitive process of seeing through the competition, anticipating future trends, and comprehending future changes required for the organization.
The ultimate payoff – going from strategic planning to strategic thinking
Electronics Company
Customer Quality Number of Defects
Price Competitive ComparisonDelivery Number of On time DeliveriesShipments Sales GrowthNew Products Number of new products to
supportSupport Customer Satisfaction Survey
Internal Efficiency in manufacturing Cycle TimeNew product introductions Rate of new introductionsNew product success Number of ordersSales penetration Actual vs. PlanNew businesses Number of new businesses each
yearInno-vation Technology leadership Product performance
benchmarkingCost leadership Quarterly Manufacturing OverheadMarket leadership Market share (all markets)Research & Development Number of new products
Finan-cial Sales Annual growth rateCost of Sales Annual trend lineProfitability Return on capital employedProsperity Cash flows
Employee Competitive Salaries Local area comparisonsOpportunity Satisfaction ratingCitizenship Contributions to community
Balanced Scorecard Example – Electronics Company
Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997
Food Ingredients CompanyFinancial Capture additional industry growth Comparison to industry growth
Maintain base business / continue to be preferred supplier to customer
Volume trend line / gross margin
Expand into global markets Ratio of domestic to international salesCommercialize new ingredients and services that are profitable
Percent of sales from launched products / gross profit from new products
Custo-mer Lowest cost supplier Total cost relative to competitionProducts and services customized to meet local needs
% of products in R & D in test phase
Customer satisfaction Customer surveysInternal Maintain low cost base Total cost relative to competition
Maintain consistent production First pass success rateContinue to improve distribution efficiency
Percent of perfect orders
Build capability to screen profitable products and services
Change in economic value
Integrate acquisitions Revenues per salary dollarLearning Link strategy to reward system Net income per dollar of variable pay
Foster culture that supports innovation and growth
Annual assessments / Quarterly reviews
Develop competencies critical to overall gaps that must be filled
Percentage of competency deployment filled on tracking matrix
Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997
Balanced Scorecard Example – Food Ingredients Company
1st Generation BSC
Issues regarding selection Filtering -Organizations typically had
access to many more measures than were needed to populate the Balanced Scorecard
Clustering-deciding which measures should appear in which perspectives.
Gave a way for 2nd generation BSC
2nd Generation BSC
Issues were dealt through numerical correlation
2nd Generation Balanced Scorecard design processes
assume that interpretation and individual understanding
of the Vision/Mission statement or strategic plan on
which the Balanced Scorecard is based, is shared among
the management team in question, but it does not
include any specific activities or design components to
ensure that such is the case.
3rd Generation BSC
3rd Generation Balanced Scorecard model is based on a refinement of 2nd Generation
It focuses on validation of strategic objective selection and target setting.
Destination statement: A description, ideally including quantitative detail, of what the organization (or part of organization managed by the Balanced Scorecard users) is likely to look like at an agreed future date.
Typically the destination statement is sub-divided into descriptive categories that serve a similar purpose (but may have different labels) to the ‘perspectives’ in 1st and 2nd Generation Balanced Scorecards.
Softwares available for BSC
Balanced Scorecard Designer Cognos 8 Business Intelligence Microsoft Office Business Scorecard Manager ActiveStrategy Enterprise (ASE) Cognos® Metrics Manager Strategy2Act Executive Dashboard Scoreboard Prodacapo Balanced Scorecard QPR ScoreCard
Softwares for BSC
Comshare MPC™ Corporater Balanced Scorecard suite CorVu5 Crystal Decisions Balanced Scorecard Solution Bizzscore® Dolphin Navigator System InsightVision Nexance Performance Management Pilot’s Performance Management Solution
Beware ?
Strategy = Doing the right things
Operations = Doing things right
Change = Doing things differently
BSC = Strategy + Operations + Change
Beware ?
BSC = Strategy + Operations + Change
SUCCESS = Effective, Well Executed Strategy
+ Efficient Operations + Meaningful Change
References Banker, R.D., Chang, H. and Pizzini, M.J. (2004) .The
balanced scorecard: judgmental effects of performance measures linked to strategy, The Accounting Review, Vol. 79(1) :1-23
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Ghosh, S. and Mukherjee, S.(2006).Measurement of corporate performance through balanced scorecard: an overview , Vidyasagar University Journal of Commerce, Vol. 11:64-67.
Kaplan, R. S. and Norton, D. P. (1992).The Balanced Score-card—Measures That Drive Performance, Harvard Business Review, January–February :71–79.
Kaplan, R. S., Norton, D. P.(1996). The Balanced Score-card, Boston: Harvard Business School Press.
Kaplan, R. S. and Norton, D. P. (1996).The Balanced Scorecard : Translating Strategy Into Action, Harvard Business School Press, 1996.
Kaplan, R.S. and Norton, D.P. (1996a) .Using the balanced
scorecard as a strategic management system, Harvard Business
Review, Vol. 74(1) :75-85
Kaplan, R. S. and Norton, D. P.(2004).Strategy Map : Converting Intangible Assets into Tangible Outcomes, HBS Press.
Kaplan, R. S. and Norton, D. P.(2006) .Alignment : Using the Balanced Scorecard to Create Corporate Synergies, HBS Press.
Niven,P. R.(2008).Balanced Scorecard Step-by-step for Government and Nonprofit Agencies,Second Edition,John Wiley & Sons, Inc., Hoboken, New Jersey.
Kaplan, R. S. and Norton, D. P. (2001). The Strategy-Focused Organization : How Balanced Scorecard Companies Thrive in the New Business Environment, Harvard Business School Press
Smith,R. F.(2007) .Management and the Balanced Scorecard
Using Processes as Strategic Drivers, John Wiley & Sons, Inc., Hoboken, New Jersey
Balanced Scorecard Basics.(2008), Balanced Scorecard Institute. 2008
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