The Balanced Scorecard

The Balanced Scorecard

Chapter 9

Achieving Success in theInformation Era

• To achieve success in the information era, companies need more than prudent investment in physical assets and excellent management of financial assets and liabilities

• Companies mobilize and create value from their intangible assets as well as their physical and financial ones

Intangible Assets

• An organization’s intangible assets include: Loyal and profitable customer relationships High-quality processes Innovative products and services Employee skills and motivation Databases and information systems

Measuring Intangible Assets• Difficulties in placing a reliable financial value on

intangible assets have prevented them from being recognized on a company’s balance sheet

• These assets are critical for success• Managers have searched for a system that would

help them measure and manage the performance of their intangible, knowledge-based assets

The Balanced Scorecard

• The Balanced Scorecard (BSC) provides a system for measuring and managing all aspects of a company’s performance

• The scorecard balances traditional financial measures of success, such as profits and return on capital, with non-financial measures of the drivers of future financial performance

• The Balanced Scorecard measures organizational performance across different perspectives

Perspectives• Four different but linked perspectives are derived

from the organization’s strategy Financial: Customer Internal Learning & Growth

Balanced Measurements

• The BSC enables companies to: Track financial results Monitor how they are building the capabilities

for future growth and profitability• With customers• With their internal processes• With their employees and systems

Connecting the Four Perspectives • A strategy map provides a visual representation of the

linkages in the four perspectives of the BSC

Financial Perspective Return on Investment

Customer Perspective Customer Loyalty

On-Time Delivery

Internal Perspective

Learning & Growth Perspective

Process Quality Cycle Time

Employees’ Process Improvement Skills

Connections• Return on investment (ROI) is a widely

recognized measure of financial success• Repeated and expanded sales from existing

customers, the result of a high degree of loyalty among existing customers, could be one driver of this financial measure

Connections

• Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers

• The company must excel at internal processes to achieve exceptional OTD

Connections

• Short cycle times and high-quality production processes are two drivers of on-time delivery

• The company must have skilled production workers, well-trained in process improvement techniques A measure of employees’ skill and

capabilities in process improvement is used in the Learning & Growth perspective

Strategy and the BSC

• A BSC tells the story of the business unit's strategy

• A BSC identifies and makes explicit the hypotheses about the cause and effect relationships between: Outcome measures in the Financial and

Customer perspectives Performance drivers of those outcomes in the

Internal and Learning & Growth perspectives

Objectives• Concise statements that articulate what the

organization hopes to accomplish• Action phrases• Tell the story of the strategy through the cause-

and-effect relationships • Extensive (3-5 sentence) description of each

objective

Objectives

• Typical objectives found in each of the four BSC perspectives include: Increase revenues through expanded sales to

existing customers (Financial perspective) Become service oriented (Customer perspective) Achieve excellence in order fulfillment through

continuous process improvements (Internal perspective)

Align employee incentives and rewards with the strategy (Learning & Growth perspective)

Measures

• Provide specificity and reduce the ambiguity that is inherent in word statements

• Specifying exactly how an objective is measured will give employees a clear focus for their improvement efforts

• Once the objectives have been translated into measures, managers select targets for each measure

Targets and Initiatives• Targets establish the level of performance or rate

of improvement required for a measure Should be set to represent excellent

performance Should, if achieved, place the company as one of

the best performers in its industry• Initiatives are the short-term programs and action

plans that will help achieve the stretch targets established for its measures

Vision and Mission

• Before determining the objectives and measures, an organization should already have a vision and mission statement High-level statements that can then be

translated into detailed objectives and measures

Vision• A concise statement that defines the mid to long-

term (3 - 10 year) goals of the organization• The vision should be external and market-

oriented and should express, often in colorful or “visionary” terms, how the organization wants to be perceived by the world:

Vision

“The City of Charlotte will be a model of excellence that puts its citizens first. Skilled, motivated employees will be known for providing quality and value in all areas of service. We will be a platform for vital economic activity that gives Charlotte a competitive edge in the marketplace. We will partner with citizens and businesses to make Charlotte a community of choice for living, working and leisure activities”

Mission Statement

• A concise, internally-focused statement of how the organization expects to compete and deliver value to customers

• It often states the reason for the organization’s existence, the basic purpose towards which its activities are directed, and the values that guide employee’s activities:

Mission Statement

“The mission of the City of Charlotte is to ensure the delivery of quality public services that promote the safety, health and quality of life of its citizens. We will identify and respond to community needs and focus on the customer through: • Creating and maintaining effective

partnerships • Attracting and retaining skilled motivated

employees• Using strategic business planning”

Putting Vision in Action

• The Vision and Mission set the general direction for the organization They are intended to help shareholders,

customers, and employees understand what the company is about and what it intends to achieve

• Companies start to make the statements operational when they define a strategy of how the vision and mission will be achieved

What is Strategy?

• Strategy is about selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace

• “Differentiation arises from both the choice of activities and how they are performed” (Porter)

Building theBalanced Scorecard

• The role for the BSC is to provide needed specificity that makes vision, mission and strategy statements meaningful and actionable for employees

Financial Perspective

• The ultimate objective for profit-maximizing companies

• Financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom-line improvement

• A company’s financial performance can be improved in two ways:

Financial Perspective• Companies generate revenue growth by:

Selling new products Selling to new customers Selling in new markets

• Increased productivity occurs by: Lowering direct and indirect expenses Utilizing their financial and physical assets

more efficiently

Customer Perspective

• Identify the targeted customer segments in which the business unit competes and the measures of the business unit's performance in these targeted segments

• This perspective typically includes several common measures of the successful outcomes from a well-formulated and implemented strategy:

Customer satisfaction

Customer retention Customer acquisition

Customer profitability Market share Account share


• A strategy identifies specific segments targeted for growth and profitability

• Companies must also identify the objectives and measures for the value proposition it offers customers


• The value proposition is the unique mix of product, price, service, relationship, and image offered to the targeted customers Defines the company’s strategy Communicate what the company expects to do for its

customers better or differently from its competitors

• Value propositions used successfully by different companies include: “Best buy” or lowest total cost Product innovation and leadership Complete customer solutions


• Means by which the organization will: Produce and deliver the value proposition for

customers Achieve the productivity improvements for the

financial objectives• The Internal perspective identifies the critical

processes at which the organization must excel to achieve its customer, revenue growth, and profitability objectives


• Organizations perform many different processes, which may be classified into four groupings: Operating processes

• Day-to-day processes by which companies produce their existing products and services and deliver them to customers

Customer management processes• Processes by which companies expand

relationships with targeted customers


Innovation processes• Processes by which companies develop

new products, processes, and services, Regulatory and social processes

• Processes by which companies ensure that they meet or exceed regulations on business practices


• Identifies objectives for the people, systems, and organizational alignment that create long-term growth and improvement Define the employee capabilities, skills,

technology, and organizational alignment that will contribute to improving performance in the measures selected in the first three perspectives

Identify investments needed to improve the skills of employees, enhance information technology and systems, and align people to the company’s objectives


• Identifies how executives mobilize their intangible assets to drive improvement in the internal processes most important for implementing their strategy

• Examines each of the processes they selected in the Internal perspective


• Determine the factors that enable that process to be performed in an outstanding manner so that it can contribute to the success of the company’s strategy:

Employee capabilities, knowledge, and skills Information systems and databases Employee culture, alignment, and knowledge-

sharing

KPI Scorecards• Some organizations identify key performance

indicators (KPIs) and classify them into the four BSC perspectives KPIs typically are common measures, such as

customer satisfaction, quality, cost, employee satisfaction, and morale

• Companies may expand their compensation system to reward executives for a broader set of performance than simply short-term financial results based on KPIs

BSC in Nonprofits and Government Organizations

• The BSC is especially well-suited for nonprofit and government organizations (NPGOs)

• Their success has to be measured by their effectiveness in providing benefits to constituents

• Since nonfinancial measures can assess performance with constituents, the BSC provides the natural performance management system for NPGOs

NPGOs and Strategy• Many NPGOs encountered difficulties in

developing their initial BSC, finding that they didn’t have a clear strategy

• Many NPGOs place their mission objective at the top of their scorecard and strategy map Cannot use the standard BSC architecture where

financial objectives are the ultimate, high-level outcomes to be achieved

Using BSC to Implement Strategy

• BSC was originally developed to improve performance measurement, but organizations learned that measurement has consequences far beyond reporting on the past

• The BSC concept evolved during the 1990’s from a performance measurement system to a new strategic management system

5 Principles for BecomingStrategy-Focused

• Organizations achieved their strategic alignment and focus in different ways, at different paces, and in different sequences, but they generally followed a common set of five principles:

1. Translate the Strategy to Operational Terms

2. Align the Organization to the Strategy

3. Make Strategy Everyone’s Job

4. Make Strategy a Continual Process

5. Mobilize Leadership for Change

Pitfalls

• Design factors can lead to problems when applying the BSC Too few measures in the scorecard to provide:

• A complete picture of the company’s strategy• A balance between desired outcomes and the

performance drivers of those outcomes Too many measures:

• Attention is diffused, and insufficient attention is given to those few measures that make the greatest impact

The drivers in the Internal and Learning & Growth perspectives don't link to the desired outcomes in the Financial and Customer perspective

Pitfalls

• The biggest threat is a poor organizational process for developing and implementing the scorecard: Senior management is not committed, and the BSC

project is delegated to middle management One senior manager builds the scorecard alone Senior executives feel that only they need to know and

understand the strategy, and BSC responsibilities don't filter down

The BSC is treated as a one-time event that requires the perfect scorecard for implementation

The BSC is treated as a systems project rather than as a management project

BSC Summary

• BSC integrates measures based on strategy Retains financial measures of past performance Introduces the drivers of future financial

performance• The drivers are derived from an explicit and

rigorous translation of the organization's strategy into tangible objectives and measures

BSC Summary

• The benefits from BSC are realized as the organization integrates its new measurement system into management processes that: Communicate the strategy to all employees and

organizational units Align employees’ individual objectives and

incentives to successful strategy implementation Integrate the strategy with ongoing management

processes

Documents

The Balanced Scorecard