Basic Concepts of the Balanced Scorecard

Balance Scorecard

- It was published in 1992 and developed by Robert Kaplan and David Norton
- Permits an organization to create a strategic focus by translating an organizations strategy into
operational objectives and performance measures.
- Is and effective way of implementing and managing a companys strategy.
- There are four different perspective in Balance Scorecard
Financial Perspective
The Customer Perspective
The Internal Business Perspective
The Learning and Growth Perspective
- Within each of the Balanced Scorecard financial, customer, internal process and learning
perspective must define the following
Strategic Objectives- are the major objectives to be achieved (ex. Profitable growth)
Measures- the observable parameters that will be used to measure process toward
teaching the objectives (ex. Objectives of profitable growth might be measured by
growth in net margin)
Targets the specific target values for the measures (ex. +2% growth in net margin)
Initiatives action programs to be initiated in order to meet the objectives

Strategy Translation

- Strategy is defined as:

Choosing the market and customer segments the business unit intends to serve, identifying
the critical internal and business process that the unit must excel at to deliver the value propositions
to customers in the targeted market segments and selecting the individual and organizational
capabilities required for the internal, customer, and financial objectives.

- Strategy Translation means specifying the objectives, measures, targets and initiatives for each
perspective.

Four Different Perspectives in Balance Scorecard

1. The Financial Perspective

- Establishes the long and short-term financial performance objectives expected from the
organizations strategy and simultaneously describes the economic consequences of action
taken in the other three perspectives.
- It has three strategic themes:
Revenue Growth are the percentage of revenue from new products, percentage of
revenue from new applications, percentage of revenues from new customers and
market segments, and profitability by product or customer.
Cost Reduction -is the reducing the cost per unit of product, per customer, or per
distribution channel.
Asset Utilization- improving the asset utilization by measuring the return on
investment and economic value added.
- The following table outlines are example of Financial Metrics
 Basic Concepts of the Balanced Scorecard

Objectives Measures
Growth Revenue Growth
Profitability Return on Equity
Cost Leadership Unit cost

2. Customer Perspective

- Defines the customer and market segments in which the business unit will compete and
describes the way that value is created for customers.
- The objectives and measures are those that are common across all organizations. For example:

Objectives Specific Measures

New Products % of Sales from new products
Responsive supply On time Delivery
To be preferred supplier Share of key accounts
Customer partnerships Number of cooperative efforts

Customer Value- is the difference between realization and sacrifice, where realization is what the
customer receives and sacrifices what is what is given up.
Post- purchase costs- is the cost incurred by the customer after purchase.

3. Process Perspective

- Internal business process perspective describes the internal process needed to provide value for
customers and owners.

Framework of Process Perspective

I. Process Value Chain- is made up of three processes.

a) Innovation Process- anticipates the emerging and potential needs of
customers and creates new product and services to satisfy those needs.
- It is the long-wave value of creation.
b) Operation Process it produces and delivers existing products and services
to customers.
- It is the short- wave of value of creation.
c) Post-Sales Service Process - provides the critical and responsive service to
customers after the product or service has been delivered.

Responsiveness

- The time it takes a company to customer order.

- Two Operational Measures of Responsivenes
a. Cycle Time is the length of time it takes to produce a unit of output from the time
materials are received until the goods is delivered to finished goods inventory.
- Cycle time is the time required to produce a product.
 Basic Concepts of the Balanced Scorecard

b. Velocity-is the number of units of output that can be produced in a given period of time

Value Added Standard Cost per minute can be computed:

=

Manufacturing Cycle Efficiency (MCE) it measures the proportion of manufacturing cycle time
attributable to value added processing.

( + + + + )

4. Learning Growth Perspective

- Defines the capabilities that an organization needs to create long term growth and
improvement.
- Three Major Enabling Factors
a. Employee Capabilities has three core outcome measurements for employee
capabilities are employee satisfaction ratings, employee turnover percentages, and
employee productivity.
b. Employee Attitudes (Motivation, Empowerment, and Alignment) The number
of suggestion per employee and the number of suggestion implemented per
employee are possible measures of motivation and empowerment.
c. Information System Capabilities- it means providing more accurate and timely
information to employees so that they can improve processes and effectively
execute new processes.

Balanced Scorecard as a Strategic Management System

- Balance Scorecard became evident that it could be used as a management system to implement
strategy at all levels of an organization by facilitating the following functions:
1. Clarifying Strategy it is the translation of strategic objectives into quantifiable
measures that clarifies the management teams understanding of the strategy and
helps to develop a coherent consensus.
2. Communicating Strategic Objectives it translates high level objectives into
operational objectives and communicates the strategy effectively throughout the
organization.
3. Planning, setting targets, and aligning strategic initiatives ambitious but
achievable targets are set of each perspective and initiatives are developed to align
efforts to reach the targets.
4. Strategic feedback and Learning executives receives feedback on whether the
strategy implementation is proceeding according to plan and on whether the
strategy itself is developed (Double-loop Learning)
Basic Concepts of the Balanced Scorecard