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Balanced Scorecard Approach

Presented by Padarabinda Maharana 10IM60R08

Contents
    

Introduction Evolution of balanced scorecard Representation of balanced scorecard Steps for developing a Balanced Scorecard Application examples

What is a Balanced Scorecard ?




It is an example of a performance measurement system.

Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth) to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to the market (customer) which will eventually lead to higher shareholder value (financial). Source-

Having Trouble with Your Strategy? Then Map It by Robert S. Kaplan and David P. Norton - Harvard Business Review

We can say .
Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals

Why the Balanced Scorecard?




Traditional financial measures


Inadequate for guiding and evaluating the future value through investment in customers, suppliers, employees, processes, technology and innovation

Balanced Scorecard
Complements financial measures of past performance with measures of the drivers of future performance. The objectives and measures of scorecard are derived from an organization s vision and strategy.

Evolution of Balanced Scorecard?




People and their managers are working so hard to be sure things are done right ,that they hardly have time to decide if they are doing the right things.

Evolution of Balanced Scorecard?


Traditional financial measurement and its Limitations
Not consistent with today s business realities Tend to reinforce functional silos Sacrifice long-term thinking Financial measures are not relevant to many levels of Organization

Evolution of Balanced Scorecard?




Critical Issues of successful Strategy Implementation Barriers to Implementing Strategy


Vision Barriers (5% of work force understand the strategy) People Barriers (25% of Managers have incentive linked to strategy) Management Barriers (85% of executive team spends less than a hour per month discussing strategy ) Resource Barriers (60% of organization doesn't link budget to strategy )

Source- Balanced Scorecard Collaborative

Evolution of Balanced Scorecard?




What is Needed ? A system that balances the historical accuracy of financial numbers with the drivers of future performance, while also assisting organization in implementing their strategies

Evolution of Balanced Scorecard?




Robert Kaplan and David Norton originated the balanced scorecard approach in the 1980 s. They fully packaged and presented the approach in a 1992 Harvard Business Review article. The approach was an effort to achieve goal congruence amongst the various strategic measures within an organization. BSC has been adopted by nearly half of fortune 1000 organizations

Concept of balance


The concept of balance is central to the system and demands balance in the following:
Balance between financial and non-financial indicators of success in short and long terms Balance between external and internal constituents Balances performance drivers (leading indicators) with
outcome measures (lagging indicators)

Organization Snapshot
Vision
What do we want to be?

VALUES What we believe in

Mission
Why we exist?

Goals
What do we want to achieve?

Strategy
The game plan?

COMPETENCIES What skills do we need

Tactics
What do we need to do?

Measures
How do we know we have achieved it?

Representation of BSC
    

BSC as a Measurement System BSC as a Strategic Management system BSC as a Communication tool Cause and Effect Relationship Balance in the BSC

BSC as a Measurement System


Financial measures- Review of the Past, Lag indicator
Inadequate in addressing the real value-creating mechanism BSC complements these Lags with Lead indicator Where are these measures derived?


BSC has four

Perspectives in Balanced Scorecard


Financial Perspective

The Strategy
If we succeed, how will we look to our shareholders?

Customer Perspective To achieve our vision, how must we look to our customers?

Internal Perspective To satisfy our customers, which processes must we excel at?

Learning & Growth Perspective

To achieve our vision, how must our organization learn and improve?

Financial Perspective
how do we perceive our shareholders?

The measures in this perspective tell us whether our strategy execution - which is detailed through measures chosen in the other perspectives - is leading to improved bottom line results.

Financial perspective deals with classic lagging indicators in the. Typical examples include: profitability, revenue growth, and economic value added.

Generic measures:
ROI EVA

Customer Perspective


Customer perspective of the Scorecard organizations must answer two critical questions:
who are our target customers, and what is our value proposition in serving them.

how do we perceive our customers??

Generic measures
Satisfaction Retention Market & account share

Internal Perspective
in what processes should we excel to succeed?

This identifies the key processes the firm must excel at in order to continue adding value for customers, and ultimately shareholders. Generic Measures
Quality Response time Cost New product interventions

Learning and Growth Perspective


how will we sustain our ability to change and improve?

Identification of capabilities, skills and processes that need to be learnt for achieving the desired measures or for fulfilling the existing gaps between what is available and what is needed

Generic measures:
Employee satisfaction Information system availability

BSC as a Strategic Management System




Overcoming the vision Barrier through the translation of strategy


BSC provides a framework in translating the Org strategy into Objectives Guide employees action towards the achievement of the stated direction

Cascading the scorecard overcomes the People barrier


Cascading means driving it down into the organization BSC Framework helps to implement strategy that can be understood and acted upon every level of the firm It creates a line of sight from shop floor employee to the board room executive

BSC as a Strategic Management System




Strategic Resource Allocation overcomes the Resource barrier


BSC framework helps in trade-offs regarding which initiatives to be funded and which is to defer

Strategic learning overcomes the Management barrier


BSC translates vision and strategy into a coherent set of measures Scorecard results is a starting point for reviewing, questioning, and learning about the strategy

BSC as a Communication Tool




Why should it be consider a communication tool


Translating the strategy and telling its story to all employees It is the most basic and powerful attribute of the entire system Provides employee with opportunity to discuss the assumption underlying the strategy Knowledge management within organization

Cause-and- Effect Linkages are Critical to BSC


Defining and then executing the corporate strategy
By identifying the key drivers of success, executing the strategy and then measuring those drivers, it is possible to develop a strategy that is more robust and execute it more effectively.

Communicating effectively
By integrating, analyzing and communicating the right information throughout the organization, employees will be able to make the right business decisions consistent with the organization's strategic goals.

Cause-and- Effect Linkages are Critical to BSC


Quickly identifying the root causes of potential problems and responding proactively
Having a cause-and-effect model of how the performance measures relate to each other provides a list of "likely suspects" to quickly focus diagnostic efforts and action.

Alerting decision-makers about early indicators of trouble


A cause- and-effect model allows organizations to trace the likely downstream effects of performance issues.

Balance in the BSC


Balance between financial and no financial indicators of success Balance between internal and external constituents of the Organization Balance between lag and lead indicators of performance

How to Design/Implement Balanced Scorecard?


Phase I: The Strategic Foundation Phase II: Three Critical Components Phase III: Deployment

  

Step 1: Strategic Alignment




A clear strategy requires two things


Specific objectives that tell people what to do
Example-Over the next six months, delivery times will decrease by 15% through more localized distribution centers.

a set of targets for communicating what is expected


defining market share revenue growth new products introduced

Step 2: Strategic Areas




Before we start designing the Balanced Scorecard, we need a fence line of strategic areas. For most organizations, the strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees Example - publicly traded corporations will have shareholder value as a major strategic area
Shareholder Value Financial Revenue Growth
Customer Processes Learning More Customers Customer Marketing & Service Programs Support Systems & Personnel

Step 3: Strategic Grids




We will translate the specifics of our strategy into a set of grids balanced scorecards are structured over four perspectives or layers:
Financial Customer Internal Processes Learning and Growth.

Strategic objectives defined for all four perspectives Shareholder Value Financial Grow Revenues Acquire More Customers Customer Become the Price Leader Improve Operational Efficiency Internal Cost Reduction Knowledge Reduce Non Processes Program Based System Core Activities
Learning and Growth Training - Best practices in cost management Database network on operational performance Re-align organization with core competencies

Summary of Phase -I
Five Major Milestones Phase I

1st - Establish a clear strategy (objectives & targets) 2nd - Communicate the strategy 3rd - Align the organization around the strategy 4th - Limit the strategic areas to no more than five 5th - Link strategic objectives into grids across four perspectives

Phase II: Three Critical Components


Step 4: Measurements


Measurement allows us to quantify our strategic objectives, asking the question: How well are we doing?
Measurement Template

Strategic Objective => Describe the Measurement =>


Define Type / Formula =>

Unit of Measurement => Frequency of Measurement => Assumptions =>


Sources =>

Availability => Support Required =>

___ Available ___ Not Available ___ Requires Change ___ IT Support ___ Finance Support ___ Other

Measurements


Leading indicators- They drive or push final


outcomes within the organization Examples customer contracts executed competitive pricing index employee feedback indicator service response time time spent with customers.

Measurements


The other side of measurement is looking back, historical type measurements that show us a final outcome or result. Lagging indicators
Examples
Financial type measurements
  

return on equity sales growth economic value added production breakeven customer retention employee productivity index

Non-financial type measurements


  

Measurements

Cause Effect Relationship between Leading and Lagging Indicators

Customer Perspective

Lagging Indicators are desired results:

Customer Satisfaction

Customer Retention

Market Share

Leading Indicators Value Attributes to Customers:

Quality

Time

Price

Image

Reputation

Measurements



The Internal Process Perspective


Pre Delivery Results => Innovative Processes that meet customer needs, provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced. Delivery Results => Operations that produce and deliver products and services to customers. Example of Leading Indicator => Delivery Response Time to Customer. Post Delivery Results => Value added services provided to customers once products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint.

The Learning and Growth Perspective will emphasize three result categories: Employees, Systems, and Organization Results for Employees => Employee satisfaction, productivity, and retention. Example of Leading Indicator => Percentage of Key Personnel Turnover. System Results => Engaging to the end user, accessibility, and quality of information. Example of Leading Indicator => Percentage of employees who have on-line access. Results for the Organization => Climate for change, strong leadership, empowering the workforce, and other motivating factors. Example of Leading Indicator => Number of Employee Suggestions.

Measurements

Step 5: Targets


We must drive behavioral changes within the organization if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organization in meeting its strategic objectives.
For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established.

Adding Measurements and Targets to the Balanced Scorecard


Perspectives Objectives Measurements Targets

2002
12% 7% +11% 75% 85% 35% 15m 68% 66% 77% 65% 75% 4.5

2003
13% 8% +11% 75% 88% 40% 14m 69% 64% 80% 68% 77% 4.8

Financial

Maximum Returns Utilization of Assets Revenue Growth Customer Retention Customer Service Customer Relations Fast Delivery Effective Service Optimal Cost Resource Utilization High Skill Levels Employee Satisfaction Outstanding Leaders

Return on Equity Utilization Rates % Change in Revenues Retention % Survey Rating % Self Initiated Calls Turnaround Time 1st Time Resolvement % cost of sales Productivity Indicator Skill set ratio Survey Index 5 point ranking

Customer

Internal Processes

Learning & Growth

Step 6: Programs


The final design step is to close the loop and put specific programs in place to make everything happen. Examples
Quality improvement programs Marketing initiatives Enterprise resource planning Customer relation s management Supply chain management.

Compare Programs with Strategic Objectives for Strategic Impact


Leadership Building Quality Control Review Global Market Program

Instructions: List all strategic objectives for each perspective in the Balanced Scorecard. Plot any program that helps achieve a strategic objective.
Strategic Objectives F1: Maximum Return on Equity F2: Positive Economic Value Added F3: 15% Revenue Growth F4: 5% Reduction in Production Cost C1: Secure 1% market share in Asia C2: Obtain competitive pricing C3: Develop new market partnerships C4: Integrate service process w/customer P1: Improve production workflows P2: Flawless manufacturing P3: Expand knowledge distribution P4: Integrate financial / production P5: Link processes to customer inputs L1: Engage workforce into the business L2: Expand leadership capacities L3: Become a customer driven culture

Enterprise Planning

Community Awareness Employee Rotation

Asian Production Plant Customer Management Knowledge System

IT Complaint Tracking Prod Yield System

Programs

Phase III: Deployment




Factors that influence implementation of the Balanced Scorecard Time required to develop a balanced scorecard Availability of data and resources for building the Balanced Scorecard Degree of support from upper level management

Attributes of a company for successfully implementing BSC


A strong commitment from the top to the Balanced Scorecard. A process for transforming strategies into balanced scorecards. A cross-functional process for moving strategy down into the lower parts of the organization

Transformation a Company
The ultimate payoff going from strategic planning to strategic thinking
Strategic Thinking

Strategic Planning

A formal structured process of researching and analyzing the competition in an effort to identify strengths, weaknesses, opportunities, and threats.

A natural and intuitive process of seeing through the competition, anticipating future trends, and comprehending future changes required for the organization.

Balanced Scorecard Example


Quality

Electronics Company
Number of Defects

Electronics Company

Customer

Price Delivery Shipments New Products Support Efficiency in manufacturing New product introductions New product success Sales penetration New businesses Technology leadership Cost leadership Market leadership Research & Development Sales Cost of Sales Profitability Prosperity Competitive Salaries Opportunity Citizenship

Competitive Comparison Number of On time Deliveries Sales Growth Number of new products to support Customer Satisfaction Survey Cycle Time Rate of new introductions Number of orders Actual vs. Plan Number of new businesses each year Product performance benchmarking Quarterly Manufacturing Overhead Market share (all markets) Number of new products Annual growth rate Annual trend line Return on capital employed Cash flows Local area comparisons Satisfaction rating Contributions to community

Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997

Emplo Finanyee cial

Inno-vation

Internal

Balanced Scorecard Example

Food Ingredients Company

Food Ingredients Company


Capture additional industry growth Maintain base business / continue to be preferred supplier to customer Expand into global markets Commercialize new ingredients and services that are profitable Lowest cost supplier Products and services customized to meet local needs Customer satisfaction Maintain low cost base Maintain consistent production Continue to improve distribution efficiency Build capability to screen profitable products and services Integrate acquisitions Link strategy to reward system Foster culture that supports innovation and growth Develop competencies critical to overall gaps that must be filled Financial Comparison to industry growth Volume trend line / gross margin Ratio of domestic to international sales Percent of sales from launched products / gross profit from new products Total cost relative to competition % of products in R & D in test phase Customer surveys Total cost relative to competition First pass success rate Percent of perfect orders Change in economic value Revenues per salary dollar Net income per dollar of variable pay Annual assessments / Quarterly reviews Percentage of competency deployment filled on tracking matrix

Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997

Learning

Internal

Customer

1st Generation BSC




Issues regarding selection


Filtering -Organizations typically had access to many more measures than were needed to populate the Balanced Scorecard Clustering-deciding which measures should appear in which perspectives.

Gave a way for 2nd generation BSC

2nd Generation BSC




Issues were dealt through numerical correlation

2nd Generation Balanced Scorecard design processes assume that interpretation and individual understanding of the Vision/Mission statement or strategic plan on which the Balanced Scorecard is based, is shared among the management team in question, but it does not include any specific activities or design components to ensure that such is the case.


3rd Generation BSC




3rd Generation Balanced Scorecard model is based on a refinement of 2nd Generation It focuses on validation of strategic objective selection and target setting.
Destination statement: A description, ideally including quantitative detail, of what the organization (or part of organization managed by the Balanced Scorecard users) is likely to look like at an agreed future date. Typically the destination statement is sub-divided into descriptive categories that serve a similar purpose (but may have different labels) to the perspectives in 1st and 2nd Generation Balanced Scorecards.

Softwares available for BSC


         

Balanced Scorecard Designer Cognos 8 Business Intelligence Microsoft Office Business Scorecard Manager ActiveStrategy Enterprise (ASE) Cognos Metrics Manager Strategy2Act Executive Dashboard Scoreboard Prodacapo Balanced Scorecard QPR ScoreCard

Softwares for BSC


        

Comshare MPC Corporater Balanced Scorecard suite CorVu5 Crystal Decisions Balanced Scorecard Solution Bizzscore Dolphin Navigator System InsightVision Nexance Performance Management Pilot s Performance Management Solution

Beware ?

BSC = Strategy + Operations + Change

Strategy = Doing the right things Operations = Doing things right Change = Doing things differently

Beware ?
BSC = Strategy + Operations + Change

SUCCESS

= Effective, Well Executed Strategy + Efficient Operations + Meaningful Change

References


Banker, R.D., Chang, H. and Pizzini, M.J. (2004) .The balanced scorecard: judgmental effects of performance measures linked to strategy, The Accounting Review, Vol. 79(1) :1-23 Brewer,P.C,Davis,S. and Albright,T.(2005).Building a successful balanced scorecard program,Cost Management; Jan/Feb,vol-19(1) ABI/INFORM Global,28. Ghosh, S. and Mukherjee, S.(2006).Measurement of corporate performance through balanced scorecard: an overview , Vidyasagar University Journal of Commerce, Vol. 11:64-67. Kaplan, R. S. and Norton, D. P. (1992).The Balanced Scorecard Measures That Drive Performance, Harvard Business Review, January February :71 79. Kaplan, R. S., Norton, D. P.(1996). The Balanced Score-card, Boston: Harvard Business School Press.

Kaplan, R. S. and Norton, D. P. (1996).The Balanced Scorecard : Translating Strategy Into Action, Harvard Business School Press, 1996. Kaplan, R.S. and Norton, D.P. (1996a) .Using the balanced scorecard as a strategic management system, Harvard Business Review, Vol. 74(1) :75-85 Kaplan, R. S. and Norton, D. P.(2004).Strategy Map : Converting Intangible Assets into Tangible Outcomes, HBS Press. Kaplan, R. S. and Norton, D. P.(2006) .Alignment : Using the Balanced Scorecard to Create Corporate Synergies, HBS Press.

Niven,P. R.(2008).Balanced Scorecard Step-by-step for Government and Nonprofit Agencies,Second Edition,John Wiley & Sons, Inc., Hoboken, New Jersey. Kaplan, R. S. and Norton, D. P. (2001). The Strategy-Focused Organization : How Balanced Scorecard Companies Thrive in the New Business Environment, Harvard Business School Press Smith,R. F.(2007) .Management and the Balanced Scorecard Using Processes as Strategic Drivers, John Wiley & Sons, Inc., Hoboken, New Jersey Balanced Scorecard Basics.(2008), Balanced Scorecard Institute. 2008

Thank You