Balance Score Card

PPT 14 -1
10-2

Learning Objective

Understand how to
construct and use a
balanced scorecard.

PPT 14 -2
 The Balanced Scorecard
The balanced scorecard translates an
organizations mission and strategy into a
comprehensive set of performance measures.
The balanced scorecard does not focus solely on
achieving financial objectives.
It highlights the nonfinancial objectives that an
organization must achieve in order to meet its
financial objectives.

PPT 14 -3
10-4

The Balanced Scorecard

Consists of an integrated set of performance

measures that are derived from and support a
companys strategy.

Financial Customers

Performance
measures
Internal Learning
business and growth
processes
PPT 14 -4
10-5

The Balanced Scorecard

Performance Measures
Financial What are our
Has our financial financial goals?
performance improved?

Customer What customers do Vision

we want to serve and
Do customers recognize that how are we going to and
we are delivering more value? win and retain them? Strategy

Internal Business Processes What internal busi-

Have we improved key business ness processes are
processes so that we can deliver critical to providing
more value to customers? value to customers?

Learning and Growth

PPT 14 -5
Are we maintaining our ability
to change and improve?
 The Balanced Scorecard Flowchart

Internal Learning
Financial Customer Business &
Process Growth

PPT 14 -6
 Financial Perspective

The financial perspective have three

strategic themes:
Revenue Growth

Cost Reduction

Asset Utilization

PPT 14 -7
 Summary of Objectives and Measures:
Financial Perspective
Objectives Measures
Revenue Growth:
Increase the number of new products Percentage of revenue from new products
Create new applications Percentage of revenue from new
applications
Develop new customers and markets Percentage of revenue from new sources
Adopt a new pricing strategy Product and customer profitability

Cost Reduction:
Reduce unit product cost Unit product cost
Reduce unit customer cost Unit customer cost
Reduce distribution channel cost Cost per distribution channel

Asset Utilization:
Improve asset utilization Return on investment
Economic value added PPT 14 -8
 Summary of Objectives and Measures:
Customer Perspective
Objectives
Core:
Increase market share
Increase customer retention
existing customers
Increase customer acquisition
Increase customer satisfaction
Increase customer profitability
Performance Value:
Decrease price
Decrease postpurchase costs
Improve product functionality
Improve product quality
Increase delivery reliability
Improve product image and reputation
Measures
Market share (percentage of market)
Percentage growth of business from
Percentage of repeating customers
Number of new customers
Ratings from customer surveys
Customer profitability
Price
Postpurchase costs
Ratings from customer surveys
Percentage of returns
On-time delivery percentage
Aging schedule
Ratings from customer surveys PPT 14 -9
 Summary of Objectives and Measures:
Process Perspective
Objectives Measures
Innovation:
Increase the number of new products Number of new products vs.
planned
Increase proprietary products Percentage revenue from
proprietary products
Decrease new product development time Time to market (from start to finish)

Operations:
Increase process quality Quality costs
Output yields
Percentage of defective units
Increase process efficiency Unit cost trends
Output/input(s)
Decrease process time Cycle time and velocity
PPT 14 -10
MCE
 Summary of Objectives and Measures:
Process Perspective (continued)

Objectives Measures

Postsales Service:
Increase service quality First-pass yields
Increase service efficiency Cost trends
Output/input
Decrease service time Cycle time

PPT 14 -11
 Summary of Objectives and Measures:
Learning and Growth Perspective
Objectives Measures
Increase employee capabilities Employee satisfaction ratings
Employee turnover percentages
Employee productivity
(revenue/employee)
Hours of training
Strategic job coverage ratio (percentage
of critical job requirements filled)
Increase motivation and alignment Suggestions per employee
Suggestions implemented per employee
Increase information systems capabilities Percentage of processes with real-
time feedback capabilities
Percentage of customer-facing
employees with on-line access to
PPT 14 -12
customer and product information
 Features of a Good
Balanced Scorecard

Tells the story of a firms strategy, articulating a

sequence of cause-and-effect relationships:
the links among the various perspectives that
describe how strategy will be implemented

PPT 14 -13
10-14

The Balanced Scorecard

A balanced scorecard should have measures

that are linked together on a cause-and-effect basis.

If we improve Then Another desired

one performance performance measure
measure . . . will improve.

The balanced scorecard lays out concrete

actions to attain desired outcomes.
PPT 14 -14
 Features of a Good
Balanced Scorecard
Helps communicate the strategy to all members of the
organization by translating the strategy into a coherent
and linked set of understandable and measurable
operational targets
Must motivate managers to take actions that eventually
result in improvements in financial performance
Limits the number of measures, identifying only the
most critical ones
Highlights less-than-optimal tradeoffs that managers
may make when they fail to consider operational and
financial measures together
PPT 14 -15
 Balanced Scorecard
Implementation Pitfalls
Managers should not assume the cause-and-
effect linkages are precise: they are merely
hypotheses
Managers should not seek improvements across
all of the measures all of the time
Managers should not use only objective
measures: subjective measures are important as
well
PPT 14 -16
 Balanced Scorecard
Implementation Pitfalls

Managers must include both costs and benefits of

initiatives placed in the balanced scorecard:
costs are often overlooked
Managers should not ignore nonfinancial
measures when evaluating employees
Managers should not use too many measures

PPT 14 -17
 Evaluating Strategy
Strategic Analysis of Operating Income 3 parts:
Growth Component measures the change in
operating income attributable solely to the
change in the quantity of output sold between
the current and prior periods
Price-Recovery Component measures the
change in operating income attributable solely
to changes in prices of inputs and outputs
between the current and prior periods
Productivity Component measures the change
in costs attributable to a change in the quantity
of inputs between the current and prior periods
PPT 14 -18
10-19

The Balanced Scorecard for

Individuals
The entire organization Each individual should
should have an overall have a personal
balanced scorecard. balanced scorecard.

A personal scorecard should contain measures that can be

influenced by the individual being evaluated and that
support the measures in the overall balanced scorecard.
PPT 14 -19
10-20

The Balanced Scorecard and

Compensation
Incentive compensation should be linked to
balanced scorecard performance measures.

PPT 14 -20
10-21

The Balanced Scorecard An Example

Profit
Financial
Contribution per car

Number of cars sold

Customer
Customer satisfaction
with options

Internal
Business Number of Time to
options available install option
Processes

Learning Employee skills in PPT 14 -21

and Growth installing options
10-22

The Balanced Scorecard An Example

Profit

Contribution per car

Number of cars sold

Customer satisfaction Results

with options Satisfaction
Increases
Strategies
Increase Number of Time to
Options options available install option Time
Decreases

Increase Employee skills in PPT 14 -22

Skills installing options
10-23

The Balanced Scorecard An Example

Profit

Contribution per car

Results
Cars sold
Number of cars sold Increase

Customer satisfaction Satisfaction

with options Increases

Number of Time to
options available install option

Employee skills in PPT 14 -23

installing options
10-24

The Balanced Scorecard An Example

Profit Results
Contribution
Contribution per car Increases

Number of cars sold

Customer satisfaction Satisfaction

with options Increases

Number of Time to Time

options available install option Decreases

Employee skills in PPT 14 -24

installing options
10-25

The Balanced Scorecard An Example

Profit Profits
If number Increase
of cars sold Contribution per car Contribution
Increases
and contribution
per car increase, Cars Sold
Number of cars sold Increases
profits
increase. Results
Customer satisfaction
with options

Number of Time to
options available install option

Employee skills in PPT 14 -25

installing options
End of Week

PPT 14 -26