The BALANCED SCORECARD

Strategic Management
• By the 1980s, many executives were convinced
that traditional measures of financial
performance didn’t let them manage
effectively and wanted to replace them with
operational measures.
• Arguing that executives should track both
financial and operational metrics, Robert
Kaplan and David Norton suggested four sets
of parameters.
• First, how do customers see your company?
Find out by measuring
– lead times,
– quality,
– performance and service, and
– costs.
• Second, what must your company excel at?
Determine the processes and competencies
that are most critical, and specify measures,
such as
– cycle time,
– quality,
– employee skills, and
– productivity,
to track them
• Third, can your company continue to improve
and create value?
– Monitor your ability to launch new products,
– Create more value for customers, and
– Improve operating efficiencies.
• Fourth, how has your company done by its
shareholders?
– Measure cash flow,
– quarterly sales growth,
– operating income by division, and
– increased market share by segment and return on
equity.
• What you measure is what you get. Senior executives
understand that their organization’s measurement system
strongly affects the behavior of managers and employees.
• Executives also understand that traditional financial
accounting measures like return on investment and earnings
per share can give misleading signals for continuous
improvement and innovation—activities today’s
competitive environment demands.
• The traditional financial performance measures worked well
for the industrial era, but they are out of step with the skills
and competencies companies are trying to master today.
• As managers and academic researchers have
tried to remedy the inadequacies of current
performance measurement systems, some
have focused on making financial measures
more relevant.
• Others have said, ‘‘Forget the financial
measures; improve operational measures like
cycle time and defect rates. The financial
results will follow.’’
• But managers should not have to choose
between financial and operational measures.
• Senior executives do not rely on one set of
measures to the exclusion of the other. They
realize that no single measure can provide a
clear performance target or focus attention on
the critical areas of the business.
• Managers want a balanced presentation of
both financial and operational measures.
• Balanced scorecard - a set of measures that gives top
managers a fast but comprehensive view of the business. It
includes
• financial measures
– that tell the results of actions already taken. And it complements
the financial measures with
• operational measures on
– customer satisfaction,
– internal processes, and
– the organization’s innovation and improvement activities
operational measures that are the drivers of future financial
performance.
 Factors Examples
Department Areas
Finance Revenues, Net Profit
Cash Flow
Return on Investment, POCE
Customer Delivery performance to customer
Quality performance for customer
Customer satisfaction rate
Customer percentage of market
Customer retention rate
Internal Business Process Number of activities per function
Duplicate activities across functions
Process Alignment
Process Automation
Learning & Growth The correct level of expertise
Employee turnover
Job satisfaction
Training/learning opportunities
• Think of the balanced scorecard as the dials and indicators
in an airplane cockpit.
• For the complex task of navigating and flying a plane, pilots
need detailed information about many aspects of the
flight. They need information on fuel, airspeed, altitude,
bearing, destination, and other indicators that summarize
the current and predicted environment.
• Reliance on one instrument can be fatal.
• Similarly, the complexity of managing an organization
today requires that managers be able to view performance
in several areas at once.
• The balanced scorecard allows managers to look at
the business from four important perspectives.
• It provides answers to four basic questions:
– How are we doing financially ? (financial perspective)
– How do customers see us? (customer perspective)
– What must we excel at? (internal business perspective)
– Can we continue to improve and create value?
(innovation and learning perspective)
What Balanced Scorecards do:
• Articulate the business's vision and strategy
• Identify the performance categories that best link the business's vision and
strategy to its results (e.g., financial performance, operations, innovation,
employee performance)
• Establish objectives that support the business's vision and strategy
• Develop effective measures and meaningful standards, establishing both
short-term milestones and long-term targets
• Ensure companywide acceptance of the measures
• Create appropriate budgeting, tracking, communication, and reward systems
• Collect and analyze performance data and compare actual results with
desired performance
• Take action to close unfavorable gaps
Companies use Balanced Scorecards to:
• Clarify or update a business's strategy
• Link strategic objectives to long-term targets and annual
budgets
• Track the key elements of the business strategy
• Incorporate strategic objectives into resource allocation
processes
• Facilitate organizational change
• Compare performance of geographically diverse business units
• Increase companywide understanding of the corporate vision
and strategy
 Strategy Map Objectives KPI Target Initiatives

Financial Increased profit Return on 15%

perspective Investment

Customer Customer loyalty Customer 4 (scale of 0 -5)

perspective Satisfaction
Index

Internal Business Better quality of Number of Zero defects • Total Quality

Process products & returned Management
perspective services products • Automation
Number of
complaints
Learning & Improved Employees 4 (scale of 0 -5) • Training
Growth employees skill Competencies • Productivity
perspective & productivity Index incentives
 Assignment for Next Week
• Do a paper on Balanced Scorecard
– The conceptual aspects
– The implementation in a company