Transcript Balanced scorecard

BALANCED SCORECARD
Contents
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Introduction about BSC
Four perspectives
Financial
Customer
Internal business
Learning and growth
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Evaluation of BSC
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Cause and effect relationship
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Performance drivers
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Diagnostic V/S Strategic measures
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Sufficiency of perspectives
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Strategic balance scorecard
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Implementation of SBSC
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Problems faced
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Conclusion
INTRODUCTION
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The Balanced Scorecard Approach has been developed at the
Harvard Business School by Kaplan and Norton in 1992 in an
article by Robert Kaplan and David Norton entitled
"The Balanced Scorecard - Measures that Drive Performance”
Due to the shortcomings of traditional management control
systems, Kaplan and Norton designed the BSC as a result of a
one year research project with 12 companies.
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It works on the principle of “Management By
Objective”
It was developed to communicate the multiple, linked
objectives that companies must achieve .
It translates mission and strategy into objectives and
measures.
This innovative tool is unique in two ways
compared to the traditional performance
measurement tools. They are–
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It considers the financial indices as well the nonfinancial ones in determining the corporate
performance level.
It is not just a performance measurement
is also a performance enhancing tool.
tool but
The framework tries to bring a balance and linkage
between the :
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Financial and the Non-Financial indicators
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Tangible and the Intangible measures
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Internal and the External aspects
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Leading and the Lagging indicators.
Clarifying and Translating
the Vision and Strategy
•Clarifying the vision
•Gaining consensus
Communicating and Linking
•Communicating and educating
•Setting goals
•Linking rewards to performance
measures
Balanced
Scorecard
Planning and Target Setting
•Setting targets
•Aligning strategic initiatives
•Allocating resources
•Establishing milestones
Strategic Feedback and
Learning
•Articulating the shared vision
•Supplying strategic feedback
•Facilitating strategy review and
learning
It is organized into 4 perspectives:1.
Financial Perspective - How do we look at shareholders?
2.
Customer Perspective - How should we appear to our customers?
3.
Internal Business Processes Perspective - What must we excel at?
4.
Learning and Growth Perspective - Can we continue to improve and
create value?
Objectives, Measures, Targets, and
Initiatives
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Objectives: Major objectives to be achieved, for example, profitable
growth.
Measures: The observable parameters that will be used to measure
progress toward reaching the objective. For example, the objective of
profitable growth might be measured by growth in net margin.
Targets: The specific target values for the measures. For example, 7%
annual decline in manufacturing disruptions.
Initiatives: Projects or programs to be initiated in order to meet the
objective.
Financial perspective
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Kaplan and Norton do not disregard the traditional need for
financial data.
It indicates wheather the company strategy, implementation and
execution are contributing to bottom line improvement.
Financial objectives are typically related to Profitability, Rapid sales
growth, Generation of cash flows.
For different stages there are different objectives and
measures:
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Growth: Increased sales volumes, acquisition of new customers, growth in
revenues etc.
Sustain: Calculating the return on investment, the return on capital
employed, etc.
Harvest: Payback periods and revenue volume
Customer perspectives
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Managers identify the customer and market
segments in which business unit will compete and
measures of the business unit’s performance in these
segments.
It includes various core or generic measures of the
successful outcomes from a well formulated and
implemented strategy
Core measures:
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Customer satisfaction
Customer retention
New customer acquisition
Customer profitability
Market and account share
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Strategy becomes unique due to value proposition
the business unit decides to deliver to attract
customers.
Common set of attributes that organizes the value
proposition are
Product and services attributes
Customer relationship
Image and reputation
Customer perspective
Net share
Customer
Acquisition
Customer
Profitability
Customer
Satisfaction
Customer
Retentions
Internal business process perspective
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This perspective show the managers how well their business is running,
and whether its products and services conform to customer requirements.
Executives identify the critical internal processes in which organization
must excel.
It enables the business unit to:
 Deliver value proposition
 Satisfy shareholders expectations of excellent financial returns.
Two kinds of business processes may be identified:
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Mission-oriented processes. Unique ; problems are
encountered in these processes.
Support processes. The support processes are more
repetitive in nature, and hence easier to measure
and to benchmark. Generic measurement methods
can be used.
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Each business unit has its unique set for creating
value for customers. Generic value chain model
encompasses 3 principal business process:
Innovation
Operations
Postal services
Learning and growth perspective
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3.
Identifies the infrastructure that the organization
must build to create long term growth and
improvement.
Organizational learning and growth come from 3
principal sources
People
System
Organizational procedures
Key performance indicators
Financial
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Cash flows
ROI
Financial result
Return on capital employed
Return on equity
Customer
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Customer satisfaction rate
Customer retention rate
Delivery performance to
customers
Internal business
process
Learning and growth
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Number of activities
Opportunity success rate
Accidental ratios
Defect rates
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Investment rate
Illness rate
Employee turnover
Gender ratio
EVALUATION OF BALANCE SCORECARD
ADVANTAGES
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It aligns everyone within an organization so that all
employees understand how they support the strategy.
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It provides a basis for compensation for performance.
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It translates vision and strategy into action.
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It defines the strategic linkages to integrate performance
across organizations.
It communicates the objectives and measures to a business
unit.
It aligns the strategic initiatives in order to attain the longterm goals.
The scorecard provides a feedback to
management if the strategy is working
the
senior
Linking multiple scorecards measures to a
single strategy
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Multiple measures should consist of a linked series of
objectives and measures that should be consistent and
mutually reinforcing.
It should be viewed as the instrumentation for a single
strategy.
It should incorporate the complex set of cause and effect
relationships among the critical variables.
Cause and Effect Relationships
Return on capital employed
Customer loyalty
On-time delivery
Process quality process cycle time
Employee skills
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Properly constructed balance scorecard should tell
the story of the business unit’s strategy.
It should identify and make explicit the sequence of
hypotheses about the cause and effect relationship
between outcome measures and performance
drivers of those outcomes.
Performance drivers
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BSC should have a mix of outcome measures and
performance drivers.
Scorecard translates the business unit’s strategy into a linked
set of measures that define both long term strategic
objectives and the mechanism for achieving those objectives.
Diagnostic V/S Strategic measures
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Diagnostic measures
It monitors whether the business remains “in control”
and signal unusual events.
Strategic measures
It defines a strategy designed for competitive
excellence and future success.
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Diagnostic measures capture vital signs that enable the
company to operate but are not basis for competitive
breakthrough.
Measures of BSC are chosen to direct managers and
employee to those factors for which superb performance can
be expected.
It is subject to extensive and intensive interaction among top
and middle level managers
Are 4 perspective sufficient?
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They should be considered a template, not a straitjacket.
No mathematical theorem exists that 4 perspective are both
necessary and sufficient.
Use depend upon industry circumstances and business unit’s
strategy.
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Some people have concern that these perspective consider
only shareholders and customer perspective
Interest of shareholders through financial perspective and
customer through customer perspective.
Measures for employee, suppliers and community appear on
BSC when there outstanding performance lead to
breakthrough performance.
Sustainability management
with the Balanced Scorecard
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In recent years many corporations have implemented
environmental and/or social management systems (such as
ISO 14000, EMAS or SA 8000) in order to manage and
control sustainability-related issues.
These management systems often fall short in companies’
practice for two reasons.
Management systems are run on the operating level
Management systems are mostly executed separately from
the traditional general management systems
These two problems of sustainability management have been
the motivation for a qualitative research project at
the Institute for Economy and the Environment at the University of
St. Gallen.
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In the project, the management tool and methodology of the
traditional Balanced Scorecard (Kaplan & Norton1997) have
been developed further towards the „Sustainability
Balanced Scorecard“ (SBSC) integrating ecological, social as
well as economic aspects.
The co-operation with six companies has made it possible to
gather valuable experiences when developing and
implementing a SBSC.
Concept of SBSC
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The SBSC-concept is based on the “traditional” Balanced
Scorecard (BSC).
In SBSC fifth perspective is included in order to explicitly
address stakeholders issues.
The SBSC may help to detect important strategic
environmental and/or social objectives of the company, a
single SBU or department and to illustrate causal
relationships between qualitative “soft facts” and the
financial performance.
Implementing SBSC
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In implementing a SBSC strategic, cultural, structural as well as
methodological aspects seem to be most relevant.
Define suitable strategies within a strategic planning process.
From there, strategic goals, key performance indicators as well
as appropriate measures can be deduce Corporate culture
should be considered .
Sustainability-oriented competitive
strategies
Visions, strategies and concrete objectives are difficult to
link to each other because of following reasons:
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Strategies do not exist at all or are at least not explicit.
The strategies are very similar to visions
which are rather broad and not understood by employees.
Lack of support from the strategic development
department.
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Economy and the Environment at the University
of St. Gallen over the past decade, revealed an empirical
body of evidence that sustainability strategies can be
classified according to their strategic orientation (market or
society) and strategic behavior (reactive or proactive)
Strategy “safe” aims at reducing and managing
risks.
Strategies of the type “credible” are tackling
issues of image and reputation.
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The improvement of productivity and efficiency
is possible by implementing the strategy
type “efficient”.
The “innovative” strategy aims at differentiating
corporation’s products and services in
the market.
“Transformative” strategies aim at creating
new markets by shifting existing institutional
frameworks.
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Prashant Desai, senior manager-knowledge management,
Pantaloon Retail India Ltd said that pay per performance
had a lot of subjectivity and the focus was only on rewarding
the employees if he/she met the financial targets. “The crux
is to capture the health of the company holistically taking all
parameters into consideration. Therefore the balanced score
card factors in all considerations which go on to measure the
employees performance,” said Mr Desai. He added that the
Balanced score card aimed at moving into variable pay or
bonuses on the basis of the company’s performance.
Conclusion
“The application of this tool ensures the consistency
of vision and action which is the first step towards
the development of a successful organization.
However, it is not easy to implement this tool
because it involves a lot of subjectivity.”
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