Problem Statement:

Is BSC really helps to gain competitive advantage?

INTRODUCTION

Companies today are in the midst of a revolutionary transformation as

Industrial age competition is shifting to Information age competition. The
cut-throat competition that businesses faced in the last two decades has
made them to look for improvement initiatives like Total Quality
Management, Just-in-Time (JIT) systems; Activity based cost management,
Employee empowerment and Re-engineering. Though these initiatives
resulted in enhanced shareholder value, their structure was disjointed and
focused on the short-term survival and growth. The programs centered on
achieving breakthrough performance merely by monitoring and controlling
financial measures of past performance. This collision between the
irresistible force to build long-range competitive capabilities and the
immovable object of the historical-cost financial accounting model has led
to a new blend the Balanced scorecard.

The balanced scorecard is a strategic planning and management system

that is used extensively in business and industry, government, and
nonprofit organizations worldwide to align business activities to the vision
and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic
goals. It was originated by Drs. Robert Kaplan (Harvard Business School)
and David Norton as a performance measurement framework that added
strategic non-financial performance measures to traditional financial
metrics to give managers and executives a more 'balanced' view of
organizational performance. While the phrase BALANCED SCORECARD
was coined in the early 1990s, the roots of the this type of approach are
deep, and include the pioneering work of General Electric on performance
measurement reporting in the 1950’s and the work of French process
engineers (who created the TABLEAU DE BORD – literally, a "dashboard"
of performance measures) in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple
performance measurement framework to a full strategic planning and
management system. The “new” balanced scorecard transforms an
organization’s strategic plan from an attractive but passive document into
the "marching orders" for the organization on a daily basis. It provides a
framework that not only provides performance measurements, but helps
planners identify what should be done and measured. It enables
executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series

of articles and books by Drs. Kaplan and Norton. Recognizing some of the
weaknesses and vagueness of previous management approaches, the
balanced scorecard approach provides a clear prescription as to what
companies should measure in order to 'balance' the financial perspective.
The balanced scorecard is a management system (not only a
measurement system) that enables organizations to clarify their vision
and strategy and translate them into action. It provides feedback around
both the internal business processes and external outcomes in order to
continuously improve strategic performance and results. When fully
deployed, the balanced scorecard transforms strategic planning from an
academic exercise into the nerve center of an enterprise.

In a nutshell, the need to link financial and non-financial measures of

performance and identifying key performance measures led to the
emergence of “Balanced Score Card” approach developed by Norton and
Kaplan (1992) in the U.S. The Balanced score card is defined as “an
approach to the provision of information to management to assist

2
strategic policy formulation and achievement. It emphasized the need to
provide the user with a set of information, which addresses all relevant
areas of performance in an objective and unbiased fashion”.

Kaplan and Norton identified four perspectives representing the

important facets of the organization. These were:

1. Financial perspective (how do we look to shareholders)

2. Customer perspective (how the customer see us)
3. Internal business perspective (what we excel at?)
4. Innovation & Learning perspective (can we continue to improve and
create value)

The idea behind the four perspectives represents a balanced view of any
organization and by creating measures under each of these headings all
the important areas of business would be covered. It is important to note
that the balanced score card itself is just a frame work and it doesn’t say
what the specific measures should be. It is a matter for people within the
organization to decide upon. The set of measures for each organization or
even sections with the organization will be different. Much of the success
of score card depends on how the measures are agreed, the way they are
implemented and how they are acted upon. So the process of designing a
score card is as important as the score card itself.

3
 NEED FOR THE BALANCED SCORECARD
(BSC)
The balanced scorecard is a way of Measuring organizational, business
unit or department success;

• Balancing long and short term actions;

• Balancing different measures of success and
o Financial
o Customer
o Internal Operations
o Human Resource Systems & Development (Learning &
growth)

• A way of tying strategy to measures of action

The Need for the scorecard

The objective of any measurement system should be to motivate all

managers and employees to implement successfully the business units
strategy. Those companies that can translate their strategy into
measurement system will be able to execute their strategy because they
communicate their objectives and their targets. The communication
makes managers and employees focus on the critical drivers enabling
them to align investments, initiatives and actions accomplishing strategic
goals.

Historically, the measurement system for any business has been financial.
Accounting was considered to be the language of business .Innovations in
measuring the financial performance of the industrial age companies
played a vital role in their successful growth. And financial innovations,

4
such as the Return on Investment (ROI) metric, and operating and cash
budgets, were critical to the success of these corporations.

However, an over emphasis on achieving and maintaining short-term

financial results can cause companies to over invest in short-term fixes
and to under invest in long-term value creation, particularly in the
intangible and intellectual assets that generate future growth. The
pressure for short-term financial performance often causes companies to
reduce the resources spent on new product development, process
improvements, human resource development, Information technology,
databases and systems as well as customer and market development. In
the short run, the financial accounting model reports these spending
cutbacks as increases in reported income, even when the reductions have
cannibalized a company’s stock of assets and its capabilities for creating
future economic value. In short, these organizations use the financial and
non-financial performance only for tactical feedback and control of short-
term operations.

Linking Strategy with Performance Measures

The essential thrust of the balanced scorecard is based on the

fundamental proposition that within organizations what gets measured
gets done however, organizations dont always get what they measure. If
measurement, by itself, had that much impact on human behavior, then
anyone that had weighing scales would never get fat.

An appropriate measurement system is one that energizes employees in

the context of what the organization is trying to do. Thus, the logical
starting point for the development of any performance measurement
system for an organization must be a clear statement of mission,
objectives and resultant strategy. An organization’s mission is its basic
function in society and is the reason why the organization exists. Related
to this are the objectives to be achieved and they represent a precise

5
statement of purpose for a specific period. Basically a strategy is a shared
understanding about how the organization’s mission is to be achieved in a
competitive environment. Strategic thinking will focus on customers and
competitors as well as internal capabilities and resources. It will include
reference to the firm’s competitiveness, quality of output and levels of
customer service. In turn, specified performance measures allow all
employees understand what the strategy is and how their performance is
linked to that overall strategy. The relationship between Mission,
Objectives, Strategy and Performance Measures is depicted in Fig.1.

Fig.1

There are at least three reasons why organizations should, and often do,
measure their performance:

1. To align mission, strategy, values and behavior

2. To improve the right things
3. To numerically define the meaning of success

6
4 MAJOR PERSPECTIVES OF A BSC
The aim of the Balanced Scorecard is to direct, help manage and change
in support of the longer-term strategy in order to manage performance.
The scorecard reflects what the company and the strategies are all about.
It acts as a catalyst for bringing in the ‘change’ element within the
organization. This tool is a comprehensive framework which considers the
following perspectives and tries to get answers to the following questions
–

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?

Hence, from the above lines we can say that this tool has considered not
only the financial results to be important but also those factors which
actually drive an organization towards future successes as mentioned
earlier. The tool has given stress on the other areas which are required to
‘balance’ the financial perspective in order to get a total view about the
organizational performance and improve the same. The framework tries to
bring a balance and linkage between the –

(a) Financial and the Non-Financial indicators,

(b) Tangible and the Intangible measures,

(c) Internal and the External aspects and

7
(d) Leading and the Lagging indicators.

 The Learning & Growth Perspective

This perspective includes employee training and corporate cultural

attitudes related to both individual and corporate self-improvement. In a
knowledge-worker organization, people -- the only repository of knowledge
-- are the main resource. In the current climate of rapid technological
change, it is becoming necessary for knowledge workers to be in a
continuous learning mode. Government agencies often find themselves
unable to hire new technical workers, and at the same time there is a
decline in training of existing employees. This is a leading indicator of
'brain drain' that must be reversed. Metrics can be put into place to guide
managers in focusing training funds where they can help the most. In any
case, learning and growth constitute the essential foundation for success
of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also
includes things like mentors and tutors within the organization, as well as
that ease of communication among workers that allows them to readily
get help on a problem when it is needed. It also includes technological
tools.

 The Business Process Perspective

This perspective refers to internal business processes. Metrics based on

this perspective allow the managers to know how well their business is
running, and whether its products and services conform to customer
requirements (the mission). These metrics have to be carefully designed
by those who know these processes most intimately; with our unique
missions these are not something that can be developed by outside
consultants.

8
In addition to the strategic management process, two kinds of business
processes may be identified: a) mission-oriented processes, and b)
support processes. Mission-oriented processes are the special functions of
government offices, and many unique problems are encountered in these
processes. The support processes are more repetitive in nature, and
hence easier to measure and benchmark using generic metrics.

 The Customer Perspective

Recent management philosophy has shown an increasing realization of

the importance of customer focus and customer satisfaction in any
business. These are leading indicators: if customers are not satisfied, they
will eventually find other suppliers that will meet their needs. Poor
performance from this perspective is thus a leading indicator of future
decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in

terms of kinds of customers and the kinds of processes for which we are
providing a product or service to those customer groups.

 The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data.
Timely and accurate funding data will always be a priority, and managers
will do whatever necessary to provide it. In fact, often there is more than
enough handling and processing of financial data. With the
implementation of a corporate database, it is hoped that more of the
processing can be centralized and automated. But the point is that the
current emphasis on financials leads to the "unbalanced" situation with
regard to other perspectives.

There is perhaps a need to include additional financial-related data, such

as risk assessment and cost-benefit data, in this category.

9
 The Four Perspectives: Cause and
Effect Relationship
The four perspectives as mentioned above are highly interlinked. There is
a logical connection between them. The explanation is as follows : If an
organization focuses on the learning and the growth aspect, it is definitely
going to lead to better business processes. This in turn would be followed
by increased customer value by producing better products which
ultimately gives rise to improved financial performance.

A strategy is a set of hypotheses about cause and effect. The chain of

cause-and- effect should pervade all four perspectives of the Balanced
Scorecard therefore a properly constructed Balanced Score Card should
tell the story of the company's strategy.(figure 2)

10
 Figure 2

Performance Drivers

A good Balanced Score Card should also have a mix of outcome measures
(lagging indicators) and performance drivers (leading indicators). Outcome
measures without performance drivers do not communicate how the
outcomes are to be achieved or give an early indication about whether the
strategy is being implemented successfully. Conversely performance

11
drivers without outcome measures (may achieve short term operational
improvements) fail to reveal whether operational improvements have
translated into expanded business with enhanced financial performance.
Example (Figure 3)

Figure 3

A completed organizational score card needs to have the following

components:

 Strategic Themes Identified

 Strategic Objectives Identified
 Measures for the execution of the strategic objectives

12
  Competitive Bench Marks for the measures selected
 Short Term and Long term targets for identified measures
 Initiatives aligned to the Strategic objectives for execution and
review.

Once the organizational score card is prepared and finalized the scorecard
is to be used as an effective method of alignment see (figure 4).
Departmental, Process, and Individual score cards aligned to corporate
score card will translate your strategy to daily management.

Links to Six Sigma

Six Sigma is a unique variability reduction management strategy for

Business improvement. The most powerful aspect of Six Sigma is in the
application of the rigorous DMAIC philosophy to projects to achieve higher
customer satisfaction and Business results. While Six Sigma helps
organizations in elimination of waste in their pursuit to excellence the

13
Balanced Score Card lays the foundation for the implementation of an
effective Six Sigma strategy.

When one attempts to view the evolution of various measurement

systems you could see that Balanced Score Card encompasses Financial,
Strategic and Operational measurements. See (Figure 5).It is clear to
visualize that implementation of Balanced Score Card followed by the
deployment of Six Sigma is a better approach towards Six Sigma
deployment. While the proven statistical tool set of Six Sigma operates at
the operational level the Balanced Score Card provides the rationale for
identification of areas for improvement.

14
BUILDING AND IMPLEMENTING THE
SYSTEM USING A BALANCED
SCORECARD

15
Step One of the scorecard building process starts with an assessment of
the organization’s Mission and Vision, challenges (pains), enablers, and
values. Step One also includes preparing a change management plan for
the organization, and conducting a focused communications workshop to
identify key messages, media outlets, timing, and messengers.

In Step Two, elements of the organization’s strategy, including Strategic

Results, Strategic Themes, and Perspectives, are developed by workshop
participants to focus attention on customer needs and the organization’s
value proposition.

In Step Three, the strategic elements developed in Steps One and Two
are decomposed into Strategic Objectives, which are the basic building
blocks of strategy and define the organization's strategic intent.
Objectives are first initiated and categorized on the Strategic Theme level,
categorized by Perspective, linked in cause-effect linkages (Strategy
Maps) for each Strategic Theme, and then later merged together to
produce one set of Strategic Objectives for the entire organization.

In Step Four, the cause and effect linkages between the enterprise-wide
Strategic Objectives are formalized in an enterprise-wide Strategy Map.
The previously constructed theme Strategy Maps are merged into an
overall enterprise-wide Strategy Map that shows how the organization
creates value for its customers and stakeholders.

In Step Five, Performance Measures are developed for each of the

enterprise-wide Strategic Objectives. Leading and lagging measures are

16
identified, expected targets and thresholds are established, and baseline
and benchmarking data is developed.

In Step Six, Strategic Initiatives are developed that support the Strategic
Objectives. To build accountability throughout the organization, ownership
of Performance Measures and Strategic Initiatives is assigned to the
appropriate staff and documented in data definition tables.

In Step Seven, the implementation process begins by applying

performance measurement software to get the right performance
information to the right people at the right time. Automation adds
structure and discipline to implementing the Balanced Scorecard system,
helps transform disparate corporate data into information and knowledge,
and helps communicate performance information. In short, automation
helps people make better decisions because it offers quick access to
actual performance data.

In Step Eight, the enterprise-level scorecard is ‘cascaded’ down into

business and support unit scorecards, meaning the organizational level
scorecard (the first Tier) is translated into business unit or support unit
scorecards (the second Tier) and then later to team and individual
scorecards (the third Tier). Cascading translates high-level strategy into
lower-level objectives, measures, and operational details. Cascading is the
key to organization alignment around strategy.

Team and individual scorecards link day-to-day work with department

goals and corporate vision. Cascading is the key to organization alignment
around strategy. Performance measures are developed for all objectives
at all organization levels. As the scorecard management system is
cascaded down through the organization, objectives become more
operational and tactical, as do the performance measures. Accountability
follows the objectives and measures, as ownership is defined at each
level. An emphasis on results and the strategies needed to produce results
is communicated throughout the organization.

17
In Step Nine, an Evaluation of the completed scorecard is done. During
this evaluation, the organization tries to answer questions such as, ‘Are
our strategies working?’, ‘Are we measuring the right things?’, ‘Has our
environment changed?’ and ‘Are we budgeting our money strategically?’

THE BSC MODEL

The Model – An Explanation

Hence, from the aforesaid model, it is clear that the following are to be
done so as to utilize the Balanced Scorecard as a strategic management
tool :

1. The major objectives are to be set for each of the perspectives.

18
2. Measures of performance are required to be identified under each of
the objectives which would help the organization to realize the goals set
under each of the perspectives. These would act as parameters to
measure the progress towards the objectives.

3. The next important step is the setting of specific targets around each of
the identified key areas which would act as a benchmark for performance
appraisal.

Hence, a performance measurement system is build around these critical

factors.Any deviation in attaining the results should raise a red signal to
the management which would investigate the reasons for the deviation
and rectify the same.

4. The appropriate strategies and the action plans that are to be taken in
the various activities should be decided so that it is clear as to how the
organization has decided to pursue the pre-decided goals. Because of this
reason, the Balanced Scorecard is often referred to as a blueprint of the
company strategies.

An example will help to understand it better. Some of the objectives

together with a measurement measures are given below.

19
Hence, the above paragraphs show that all the four areas have been given
equal importance in measuring performance level. The measures and the
objectives, however, depend upon the type of business the organization is
in. The financial indicators are complemented by the non-financial ones.
Since, objectives and goals are set for each of the critical success factors
under each of the heads, it brings about a focus on the strategic vision.
Thus, all activities would be directed towards achievement of the longterm
goals which have been set by the top management. The identification of
the key result areas (KRAs) help an organization in moving towards the
right strategic direction. This tool creates a link between objectives,
measures, targets and initiatives. It is, therefore, absolutely clear that the
Balanced Scorecard acts as a focal point for the organisation’s efforts,
designing and communicating priorities to the managers, employees,
investors and the customers.

20
 FEATURES OF A GOOD BALANCED
SCORE CARD:

1. It tells the story of a company’s strategy, articulating a sequence of

cause and effect relationships.
2. It helps to communicate the strategy to all members of the
organization by translating the strategy into coherent and linked set
of understandable and measurable operation targets.
3. A balanced score card emphasizes non-financial measures as a part
of program to achieve future financial performance
4. The balanced score card limits the number of measures identifying
only the most critical areas. The purpose in to focus manager’s
attention on measures that most affect the implementation of
strategy.
5. The balanced score card highlights less than optimal trade offs that
managers may make when they fail to consider operational and
financial measures together.

21
 ADVANTAGES OF BSC
The balanced scorecard tool is being used by several organizations
throughout the world because of certain advantages it has been able to
deliver as below:

 It translates vision and strategy into action.

 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 long-term

goals.

 It aligns everyone within an organization so that all employees

understand how they support the strategy.

 It provides a basis for compensation for performance.

 The scorecard provides a feedback to the senior management if the

strategy is working.
 Focusing the whole organization on the few key things needed to
create breakthrough performance.
 Helps to integrate various corporate programs. Such as: quality, re-
engineering, and customer service initiatives.
 Breaking down strategic measures towards lower levels, so that unit
managers, operators, and employees can see what's required at
their level to achieve excellent overall performance.

22
 DISADVANTAGES OF BSC

• It is not easy to implement this tool because it involves a lot of

subjectivity.

• The tool is much more complex compared to the other tools

• The measures that need to be taken is contingent upon the kind of

environment, industry and the business the organization is in.

• A lot of refinement is still required to be done so that it becomes

understandable to every stakeholder associated with the
organization.

23
 UTILISING THE BALANCED SCORECARD
AS A STRATEGIC MANAGEMENT TOOL

The tool has become a weapon for organizations to identify the pressure
points, conflicting interests, objectives setting, prioritization of objectives,
planning and budgeting. The four main important steps that need to be
taken care of are –

1. Translating the Vision

It is to be remembered that the vision of any organization should be

understood by each and every employee of the organization. If it is
understood by the top management only, then it is definite that the
organization will fail to realize its goals. Hence, before starting with the
strategic implementation process, the organizations needs to be clear
about the reason for its existence, where it wants to see itself after a
certain number of years and properly decide its business definition. The
managers should build a consensus around the organisation’s vision and
strategy. The strategies, in fact, emanate from the vision and mission of
the company which means that a linkage is formed between the strategies
of the different business units and the vision of the organization. The lofty
statements must be translated into an integrated set of objectives and
measures. Thus, by using this tool, the overall strategic objectives for the
company gets clarified which helps to achieve consensus across different
business units on the overall strategic objectives for the company.

2. Communicating and Linking

24
Just communicating the vision and the strategies is not an end in itself.

The strategic goals and the measures to be set in the different areas have
to be decided upon. The long-term strategic goals have to be translated
into both departmental and individual goals which should be aligned to
each other in order to realize the long-term goals. In fact, each and
everyone at different levels in the organizational hierarchy needs to be
educated about the action plans and reasons for accepting the same. The
tool contains three levels of information:

(i) It describes the corporate objectives, measures and the targets

(ii) It helps in deciding the business unit targets and

(iii) It helps in framing the departmental and the individual objectives

which will help in attaining the objectives of the business unit directly
which would lead to the attainment of the corporate goals. The employees
are given the freedom to decide their measures, objectives and the
targets attainment of which would move the organization in the right
strategic direction. Then the compensation level is linked to the
performance level which in reality involves a lot of subjectivity.

3. Business Planning

This step helps in the resource allocation process. One has to keep in mind
that objectives form an important criteria in deciding the quantum of
resources that are required to be allocated to the various departments,
activities and the processes. No strategy can bring successful results to an
organization if the allocation is not in line with what is required to meet
the results. This allocation is dependent on the budgeted estimates which
are decided on the basis of the said

objectives. Hence, through this step the Balanced Scorecard tries to bring
about an integration between strategic planning and the budgeting
exercise. The short-term milestones are also needed to be figured out
which in totality brings about a linkage between strategic goals and the
budgets. This procedure helps in actualizing what has been set by the

25
organization. Thus, this step brings about a shift from the ‘thinking’
exercise to the ‘doing’ stage and the organization tries to achieve the
long-term goals through the short-term actions.

4. Feedback and Learning

The first three steps as mentioned above help in the strategic

implementation process. But, for knowing whether the organization is in a
position to achieve the strategic goals and whether it is in the right track,
the process of feedback and learning is essential. The strategic learning
consists of acquiring knowledge about which way the organization is
moving to, testing whether the premises considered before hold true even
now and finally making adjustments wherever required. The corrective
measures are required so that the necessary rectifications are made
which will help an organization pursue the correct path.

Another point is that an organization gets to know whether the cause-and-

effect relationships among the different perspectives really hold true, to
what extent they are strongly linked and also whether positive results are
being obtained. In case, an organization realizes the existence of a gap in
the cause effect relationships, an immediate correction would be required
so that a positive relationship can be build among the various factors.
Thus, the tool with its specification of the causal relationships between
performance drivers and objectives allows corporate and the business unit
objectives executives to use their periodic review sessions in order to
evaluate the validity of the unit’s strategy and the quality of its execution.
Also, this feedback and learning exercise may force an organization to
change the measures set in each of the perspectives and adopt those,
which if attained would ensure the success of the corporate and the
business strategies.

CONCLUSION

26
The Balanced Scorecard is therefore a very important strategic
management tool which helps an organization to not only measure the
performance but also decide the strategies which are needed to be
adopted so that the long-term goals are achieved. Thus, in other words,
the application of this tool ensures the consistency of vision and action
which is the first step towards the development of a successful
organization. Also, its proper implementation can ensure the development
of competencies within an organization which will help it to develop a
competitive advantage without which it cannot expect to outperform its
rivals.

27
 REFERENCES

www.valuebasedmanagement.net.

http://en.wikipedia.org

www.thebalancedscorecard.com

www.managementhelp.org

ucsfhr.ucsf.edu/files/implementationguide.doc

www.managementparadise.com

www.citehr.com

28