Transcript The Balanced Scorecard Chapter 9

The Balanced Scorecard
Chapter 9
Achieving Success in the
Information 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
Process Quality
Learning & Growth
Perspective
Employees’ Process Improvement Skills
Cycle Time
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 causeand-effect relationships
• Extensive (3-5 sentence) description of each
objective
Objectives
• Typical objectives found in each of the four BSC
perspectives include:
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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 longterm (3 - 10 year) goals of the organization
• The vision should be external and marketoriented 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 the
Balanced 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
Customer Perspective
• 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
Customer Perspective
• The value proposition is the unique mix of
product, price, service, relationship, and image
offered to the targeted customers
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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:
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“Best buy” or lowest total cost
Product innovation and leadership
Complete customer solutions
Internal Perspective
•
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
Internal Perspective
• 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
Internal Perspective
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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
Learning & Growth Perspective
• 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
Learning & Growth Perspective
•
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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
Learning & Growth 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 knowledgesharing
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
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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 Becoming
Strategy-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
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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:
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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