1

• Management must consider both financial and operational performance measures

• Measures should be linked with company goals and strategy

• Financial measures are only one measure among many

• Uses key performance indicators

1

2

The Balanced Scorecard

The balanced scorecard provides managers with a roadmap that indicates how the company

intends to increase its ROI.

IncreaseIncreaseSalesSales

ReduceReduceExpensesExpenses

ReduceReduceAssetsAssets

I’m glad we used thebalanced scorecard

to tell which approachis best.

I’m glad we used thebalanced scorecard

to tell which approachis best.

3

COMPANY GOALS

CRITICAL FACTORS

KEY PERFORMANCE

INDICATORS

Examples of critical factors and corresponding KPIs

Operational

efficiency

Employee excellenc

e

Financial profitabilit

y

Market share

Yield rateTraining

hoursRevenue growth

Customer satisfaction

3

44

5

• How do we look to shareholders?–Ultimate goal is to generate income for owners

• KPIs: –Sales revenue growth–Gross margin growth–Return on investment–Working capital used

5

6

• How do customers see us?– Top priority for long-term success

• Customer concerns:– Product price– Product quality– Sales service quality– Product delivery time

• KPIs:– Customer satisfaction– Market share– Number of customers and repeat customers– Rate of on-time deliveries

6

7

• At what business processes must we excel?• Three factors:

– Innovation • KPI: Number of new products developed

– Operations• KPIs:

– Product efficiency – number of units produced– Product quality – defect rate

– Post-sales service• KPIs

– Number of warranty claims– Average wait time on phone for customer service

7

8

• How can we continue to improve and create value?

• Three factors:–1) Employee capabilities

• KPIs:– Hours of employee training– Employee satisfaction and turnover– Number of employee suggestions implemented– Dollars per worker on Workers Compensation Exp– Sales dollars per worker

Copyright (c) 2009 Prentice Hall. All rights reserved. 8

9

–2) System capabilities• KPIs:

– Percentage of employees with online access to customer data– Percentage of processes with real-time feedback

–3) Company’s climate for action– A balance of responsibility and authority

Copyright (c) 2009 Prentice Hall. All rights reserved. 9

10

Key Features of Performance Management

11

Key Features of Performance Management

• Is an essential part of organisation strategy:

- derived from the mission and vision statements

- links the mission and vision, strategy, goals and processes of the organisation

12

Key Features of Performance Management (Continued)

• Provides quantitative and qualitative information:

- assesses non-financial as well as financial criteria

- is a decision making tool

- provides a standardised and consistent approach

13

Key Features of Performance Management (Continued)

• Provides a multidimensional focus on people and processes:

- is a process not a system - measures processes not functions - needs top-down and bottom-up

communication and understanding - enables delegation and empowerment - enhances employee satisfaction

14

Key Features of Performance Management (Continued)

• Provides both external and internal perspectives:

- focuses on customer satisfaction

- can be used to benchmark against competitors

15

Key Features of Performance Management (Continued)

• Continuous Improvement

- emphasises causes, promotes self-diagnosis and identifies areas for improvement

- promotes effective planning

16

Why Balanced Scorecard ?

17

Why Balanced Scorecard?

• Financial performance measurements no longer adequate

• Financial evaluations are reactive

• Financial measures not able to reflect contemporary value creating actions

• A Holistic measurement tool formulating an integral part of strategy (cross functional integration)

18

• Bridges financial measurements and strategy

• Lever to streamline and focus strategy

• Translate company strategy into specific measurable objectives

• Put strategy not control at the centre

• Pulls people to the overall vision

Why Balanced Scorecard? (Continued)

19

Why Balanced Scorecard? (Continued)

• It is a framework for creating a set of measures that gives managers a fast and comprehensive view of the business.

• It is a tool providing all of the critical indicators of a businesses current and future performance.

• It supplements traditional financial measures with three additional perspectives:

20

Balanced Scorecard - Principles

21

Balanced Scorecard - Principles

• Performance measures are balanced to reflect key areas of corporate activity which will create long term shareholder value

• Performance measurement are designed to monitor value drivers - quality, cycle time and service are key determinants of customer satisfaction which is the ultimate driver

22

Balanced Scorecard - Principles (Continued)

• Financial measures are used to explicitly include shareholder value calculations

• Organisation learning is specifically measured - ability to change, rate of change and continuous improvements

23

Balanced Scorecard - Principles (Continued)

• A top-down process is used to directly link vision and strategy - both senior management sponsorship, involvement and commitment, and lower level participation and agreement are all necessary

• Measures must link individual worker performance to overall organisation vision and strategy

24

Balanced Scorecard Value’s

25

Balanced Scorecard Value’s

• Translate business plan into a set of clear measures and targets

• As a reporting tool, will give managers regular feedback on their performance, allowing them to assess their situation and improve

• Provide a fair, data based, systematic mechanism for setting performance targets and rewarding achievement

26

Balanced Scorecard Value’s (Continued)

• Allow each business unit to focus on a few high value opportunities

• Be able to pinpoint issues and identify performance improvement opportunities

• Provide a checks and balances system to manage short term performance and strategic implications

• Ensure a comprehensive measurement system, measuring all perspectives of the business

27

What does the Balanced Scorecard measure?

28

What does the Balanced Scorecard measure?

• Product

• Internal Processes

• Customer

• Innovation and improvements

29

Vision & Vision & StrategyStrategy

CUSTOMERCUSTOMER

“Happy Customers”

“how should we appear to our customer - to achieve our

vision?” LEARNING & LEARNING &

I NNOVATION I NNOVATION “Happy Employees” “how will we sustain our ability to

service, change and improve -

to achieve our vision?”

INT. BUS.INT. BUS. PROCESSPROCESS

“Way of doing things”

“what business processes must we excel at - to satisfy our

shareholders?”

FINANCIALFINANCIAL

“Financial Health”

“how should we appear to our shareholder - to succeed financially?”

30

Customer Perspective

• Demands that managers translate their general mission statements on customers into specific measures that reflect what really matters to the customer eg.

- Lead time

- Quality

- performance

- Service

31

Internal Processes

• Internal measures should stem from the business processes that have the greatest impact on customer satisfaction, e.g.

- Factors that effect cycle time

- Quality

- employee skills

- productivity

32

Innovation and learning perspective

• A company’s ability to innovate, improve and learn, ties directly to the company’s value. Only through the ability to launch new products, create more value for customers and improve operating efficiencies continually can a company penetrate new markets and increase revenue and margins.

33

Financial Perspective

• Financial performance measures indicates whether the company’s strategy, implementation and execution are contributing to bottom-line improvement e.g.

- profitability

- growth

- shareholder value

34

The Balanced Scorecard is like the dials in an airplane cockpit: It gives managers complex information at a glance

Kaplan and Norton

35

How does these measures differ from traditional measurements?

36

How does these measures differ from traditional measurements?

• Grounded in Organisations Strategic

Objectives

• Focus strategic vision

• Provide balance

• Ensure a focus beyond the current year

37

Barriers to Effective Balanced Scorecard Implementation

38

Barriers to effective Balanced Scorecard Implementation

• Measurements are non quantifiable

• Measurements are input rather than output driven

• No buy-in from employees/management

• Balanced Scorecard perceived as latest fad.

• No migration planning

• No system to support measurements

39

• No follow-up on operational improvements with another round of actions

• Strategies not effectively executed

• Lack or no clear understanding on Balanced Scorecard mechanism

• Preoccuaption of measurements instead of outputs

Barriers to effective Balanced Scorecard Implementation (Continued)

40

Balanced Scorecard Benefits

41

Balanced Scorecard Benefits

• Synergy between efforts

• Focus

• Cross functional integration

• Create customer and supplier partnership

• Continuous improvement

• Team rather than individual accountability

• Assist managers in understanding interrelationships

42

Balanced Scorecard Benefits (Continued)

• Tool to measure individual as well as group performance

• Scientific approach to quantifying strategic objectives

43

Practical Application of the Balanced Scorecard

44

“If you can’t measure it you can’t manage it’’

Kaplan and Norton

45

Clarifying and Translating the Vision

and Strategy

Strategic Feedback and Learning

Planning and Target Setting

Communicating and Linking

• Communicating and educating

• Setting goals• Linking rewards to

performance measures

• Clarifying the vision• Gaining consensus

• Articulating the shared vision

• Supplying strategic feedback

• Facilitating strategy review and learning

• Setting targets• Aligning strategic

initiatives• Allocating resources• Establishing milestones

Balanced Balanced ScorecardScorecard

Kaplan & Norton, 1996

A Strategic Framework for Action

46

MPT Strategy

Learning & Growth perspective

•Develop employees•Motivate employees

Customer & Stakeholderperspective

•Satisfy customers•Retain customers

Process perspective

• Increase efficiency•Provide high quality Portservice

Financial perspective

•Satisfy Stakeholders

Strategy linked to Balanced Scorecard

47

Balanced Scorecard• Tying the Balanced Scorecard Measures to

the Strategy for Success– Company develops three to five performance

measures for each dimension– Measures should be tied to company strategy– Balance among the dimensions is critical

• You get what you measure!

48

How Balance is Achieved in a Balanced Scorecard

• Performance is assessed across a balanced set of dimensions

• Balance quantitative measures with qualitative measures

• There is a balance of backward-looking measures and forward-looking measures

49

Developing a Strategy Map for a Balanced Scorecard

• A strategy map is a diagram of the relationships of the strategic objectives across the four dimensions

• Used to test the soundness of the strategy• Identifies how strategy is linked to measures on

the scorecard• Communicates strategic objectives to

employees

50

Keys to a Successful Balanced Scorecard

• Targets – For each measure, there should be a target so managers know

what they are expected to achieve

• Initiatives– For each measure, the company must identify actions that will

be taken to achieve the target

• Responsibility– A particular employee must be given responsibility and held

accountable for successfully implementing each initiative

• Funding– Initiatives must be funded appropriately

• Top Management Support– It is crucial to have the full support of top management

51

Return on Investment (ROI) Formula

ROI = ROI = Net operating incomeNet operating incomeAverage operating assets Average operating assets

Average Current & Non Current Assets.Average Current & Non Current Assets.

Income before interestand taxes (EBIT)

Income before interestand taxes (EBIT)

52

Return on Investment (ROI) Formula

Regal Company reports the following:Regal Company reports the following:

Net operating income $ 30,000Net operating income $ 30,000

Average operating assets $ 200,000Average operating assets $ 200,000

$30,000 $200,000

= 15%15%ROI =

53

Controlling the Rate of ReturnThree ways to improve ROI . . .Three ways to improve ROI . . .

IncreaseIncreaseSalesSales

ReduceReduceExpensesExpenses ReduceReduce

AssetsAssets

54

ROI and the Balanced Scorecard

The balanced scorecard provides managers with a roadmap that indicates how the company

intends to increase its ROI.

IncreaseIncreaseSalesSales

ReduceReduceExpensesExpenses

ReduceReduceAssetsAssets

I’m glad we used thebalanced scorecard

to tell which approachis best.

I’m glad we used thebalanced scorecard

to tell which approachis best.

55

Criticisms of ROIIn the absence of the balancedscorecard, management may

not know how to increase ROI.

Managers often inherit manycommitted costs over which

they have no control.

Managers evaluated on ROImay reject profitable

investment opportunities.

56

Criticisms of ROI• As division manager at Winston, Inc., your

compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus.

• The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%.

• You have an opportunity to invest in a new project that will produce an ROI of 25%.

As division manager would you As division manager would you invest in this project?invest in this project?

57

Criticisms of ROIAs division manager,I wouldn’t invest in

that project becauseit would lower my pay!

58

Your division before new investment:Net operating income $ 60,000Average operating assets 200,000ROI 30%

New investment:Net operating income $ 10,000Average operating assets 50,000ROI 20%

Your division after new investment:Net operating income $ 70,000Average operating assets 250,000ROI 28%

Criticisms of ROI

59

Criticisms of ROIGee . . .

I thought we weresupposed to do what

was best for the company!

60

Residual Income - Another Measure of Performance

Net operating incomeabove some minimum

return on operatingassets

61

Residual Income

• A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.

• In the current period the division earns $30,000.

Let’s calculate residual income.Let’s calculate residual income.

62

Residual Income (EVA)

Operating assets 100,000$ Required rate of return × 20%Required return 20,000$

Operating assets 100,000$ Required rate of return × 20%Required return 20,000$

Actual return 30,000$ Required return (20,000) Residual income 10,000$

Actual return 30,000$ Required return (20,000) Residual income 10,000$

63

Motivation and Residual Income

Residual income encourages managers to Residual income encourages managers to make profitable investments that wouldmake profitable investments that would

be rejected by managers using ROI.be rejected by managers using ROI.

64

Your division before new investment:Net operating income $ 60,000Average operating assets 200,000ROI 30%

Operating assets 200,000$ Required rate of return × 15%Required return 30,000$

Operating assets 200,000$ Required rate of return × 15%Required return 30,000$

Actual return 60,000$ Required return (30,000) Residual income 30,000$

Actual return 60,000$ Required return (30,000) Residual income 30,000$

65

Your division after new investment:Net operating income $ 70,000Average operating assets 250,000ROI 28%

Operating assets 250,000$ Required rate of return × 15%Required return 37,500$

Operating assets 250,000$ Required rate of return × 15%Required return 37,500$

Actual return 70,000$ Required return (37,500) Residual income 32,500$

Actual return 70,000$ Required return (37,500) Residual income 32,500$

An increase of $2,500 in residual income!!