13a Balanced Scorecard

8/6/2019 13a Balanced Scorecard

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Strategic Change

Kaplan & NortonsBalanced Scorecard

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Friday 29 April 2011


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Balanced Scorecard

Developed to measure progress in rates ofcontinuous improvement at Analog Devices.

BSC translates organisational strategy into specificobjectives, measures and targets, which are thenput into effect at all levels of the firm.

Kaplan & Norton, who pioneered the approach,argue that 9 out of 10 strategy implementationsfail; the reason being that managers do not have aset of metrics to get strategy from paper to reality.

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Balanced Scorecard:Balances Strategic and Financial Objectives

Financial Objectives - outcomes focused onimproving the firms financial performance.

Strategic Objectives - outcomes focused onimproving its long-term competitive position.

Unless a firms financial performance is dismal andits survival threatened, the surest path to sustainedfuture profitability and advantage over its rivals isthe relentless pursuit of strategic outcomes.

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Key: Strategic Performance

Firms that achieve better strategic performance achievebetter financial performance. Indicators of the latter arelagging, whereas measures of the former are leading.

The Balanced Scorecard combines both types of indicator. It underlines the need for short- and long-range objectives. It puts the concept of strategic intent centre-stage and

focuses the firm on pursuing aggressive stretch objectives. It underlines the need for objectives at all levels of the firm. It emphasises top-down not bottom-up objective setting.

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Unilever

Strategic & Financial Objectives

Grow annual revenue by 5 to 6%; increaseoperating profit margins from 11 to16%

within 5 years; trim the companys 1,200food, household and personal care productsdown to 400 core brands; focus sales and

marketing efforts on those with potentialto become respected, market-leading globalbrands; and streamline the supply chain.

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Dupont

Financial & Strategic Objectives

Achieve annual revenue growth of 5 to 6% andannual earnings-per-share growth averaging 10%.

Grow per-share profits faster than revenues by a)increasing productivity, b) selling enough newproducts each year that average prices and averagemargins rise, and c) using surplus cash to buy backshares. Sell low-margin textiles and interiors

division (with sales of $6.6 billion and operatingprofits of $114 million); this division makes Lycraand other synthetic fibres for carpets and clothes.

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3MFinancial & Strategic Objectives

Achieve annual growth in earnings per

share of 10% or better; a return onstockholders equity of 20% to 25%; areturn on capital employed of 27% orbetter; and at least 30% of sales fromproducts introduced in the past four years.

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BSC: Implementations

AMD

Apple Canon USA Exxon Mobil

CIGNA Sears UPS

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Balanced Scorecard

Selected Readings Kaplan, R. and Norton, D. (2004): Strategy Maps:

Converting Intangible Assets into Tangible Outcomes.Boston: Harvard Business School Press.

Kaplan, R. and Norton, D. (1996): The BalancedScorecard: Translating Strategy into Action. Boston:Harvard Business School Press.

Kaplan, R. and Norton, D. (1993): Putting theBalanced Scorecard to Work, Harvard BusinessReview,Sep-Oct 1993, 134-147.

Kaplan, R and Norton, D. (1992): The BalancedScorecard - Measures that Drive Performance,Harvard Business Review, Feb-Mar 1992, 71-79.

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Strategy & BSC

Kaplan & Norton adopt the strategy aspositioning perspective, in which firms competeby choosing the market and customer segmentsthe business unit intends to serve, identifying thecritical internal business processes that the unitmust excel at to deliver the value proposition to

customers in the targeted market segments, andselecting the individual and organisationalcapabilities required for internal, customer andfinancial objectives. (Kaplan & Norton, 1996, p.37)

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Aligning Strategy & Scorecard

BSC developed to communicate strategy, to align firmsto new strategies, and to manage those strategies.

Companies quickly came to see it as a means of:

Focusing less on existing processes like costreduction and quality improvements;

Focusing more on strategic processes for generatinggrowth ... through ... customised, value-addedproducts and services ... [provided through] ...processes that must be performed exceptionallywell for an organisations strategy to succeed. (viii)

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Competitive Environment

According to Kaplan & Nortons researchwith leading organisations, it became critical

for firms to start using the BSC in increasinglycompetitive environments, which were drivenby the Information Age from the 1970s.

Sufficient to compete on economies of scale

during the 1950s, 1960s and early-1970s.

Increasingly, manufacturing and service firmsneeded new capabilities to succeed.

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Intangible Capabilities

Capabilities were no longer just tangible.

Increasingly, firms needed intangible capabilities to

introduce innovative products, and to develop andmaintain customer loyalty in target markets through:

Producing high-quality, customised products orservices at low cost with short lead times;

Motivating employees and mobilise their skills toachieve continuous improvements in quality,response times and process capabilities;

Deploying IT, databases and systems.14



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Information Age: Operating Environment

Cross-functional co-ordination within firm

Cross-boundary collaboration withcustomers, suppliers, even competitors

Customised products and global players

Innovation - PLCs shorter than historically,forcing firms to work harder and faster tokeep pace with technological changes.

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Information Age: Operating Environment

Knowledge Workers

all employees must contribute value bywhat they know and by the informationthey can provide. (p.6)

meant moving awayfrom the traditionalemployer / employee divide and towardsinvesting, managing and exploiting theknowledge of every employee.

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Success Factors for Information Age

High quality products and services -

Predictable, responsive processes -

Motivated, skilled employees -

Satisfied, loyal customers -

Yet, many companies continued toconcentrate solely on quarterly andannual financial performance measures

Could there be a more balanced measure?17



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Balanced Scorecard

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What a BSC Measures

BSC keeps financial measures but alsoidentifies value drivers for long-termcompetitive and financial performance

BSC means financial measures are part of theinformation system for all employees:

Management have to understand the keydrivers for long-term competitive success

Employees on the front line must alsounderstand the impact of their decisionsand actions on firms financial performance

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Steps for a BSC

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1. Vision & Strategya) Clarifying the visionb) Translating the strategy

2. Objectives and Measuresa) Communicating with and educating workforceb) Linking rewards to performance measures

3. Plans & Targetsa) Setting targetsb) Aligning strategic initiativesc) Allocating resourcesd) Establishing milestones

4. Strategic Feedback & Learninga) Articulating shared visionb) Providing strategic feedbackc) Facilitating review and learning



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1. Vision & StrategyClarify & Translate

The BSC process begins with seniormanagement translating strategy into

specific, measurable strategic objectives

Financial: emphasise revenue ormarket growth, profits or cash flow

Customer: being explicit abouttarget customers the firm will serveand markets in which it will compete

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Vision & Strategy:Clarify & Translate

Continues with the two remainingdimensions of the scorecard:

Internal Process: doesnt focus on

cost and quality, but on processes (whichmay be entirely new) for breakthroughperformance for customers andshareholders

Learning & Growth: reveals therationale for investing funds in internalprocesses - re-skilling employees, changingorganisational processes and upgrading IT

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2. Objectives & MeasuresCommunicating & Linking

Critical objectives and measures are then communicated toemployees using e.g. boards, video, email and newsletters.

Higher level strategic objectives can then be translated /aligned into lower level operational objectives: Example: implementing an on-time delivery to customers

objective might be translated into:

Reducing setup time on production machinery; Reducing the in-transit times for warehousing; Implementing ship to stock with suppliers, which

might also mean changing poorly performing suppliers.

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3. Plans & TargetsSetting & Aligning

BSC probably has its greatest impact when

deployed to drive organisational change. Senior Management should establish targets

for the scorecard measures five years outthat, if achieved, will transform the firm:

double stock price increase sales 150%

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With such ambitious financial targets, topmanagement must develop stretch targetsfor Customer Service, Internal Processes,and Learning & Growth.

Customer Service targets should derive

from meeting or beating expectations; andpreferences should be looked at to identifyexpectations for outstanding performance.

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Internal Processes can be improved bybenchmarking them to best practice.

Changes are cost cutting and strategic, and willtranslate into better financial performance e.g.

Reducing time to order fulfillment;

Achieving a shorter time to market inproduct development processes;

Enhancing employees' capabilities.

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4. Strategic Feedback & LearningArticulating, Providing, Facilitating

Kaplan & Norton consider this to be the mostinnovative and important aspect of the entire

scorecard management process. (p.15)

Management assess whether the SBU isachieving customer targets, internal processand innovation targets, and targets for

employees, systems and procedures.

Managers discuss past results at monthly andquarterly intervals, and whether expectationsfor the future remain on track.

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The BSC enables management to

monitor and adjust the implementationof their strategy and make changes ifnecessary.

Managers learn by questioning theirstrategy through a process calledDouble-Loop Learning - a keydistinguishing feature of the BSC.

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Double-Loop Learning is wheremanagers question their underlying

assumptions and reflect on [whether]the theory under which they wereoperating [is] consistent with ...evidence ... and experience.

Managers also need to engage in Single-Loop Learning i.e. examine if plannedstrategy is being executed to plan.

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Double-Loop Learning is achieved bybuilding a series of cause-and-effect

relationships from the strategy e.g.

How long before improvements inproduct quality and on-time delivery

lead to increased customer businessand higher margins on existing sales,and how large will that effect be?

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Balanced Scorecard

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1. Financial Perspective

Firms can only stay in business by generating areturn on the capital invested, so financial objectives

are, by definition, critical. Kaplan & Norton distinguish three phases in the life

cycle of a Strategic Business Unit, which haveimplications for the measures adopted:

Growing Sustaining Harvesting

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Financial Perspective

Growing Phase

Usually at an early stage in its life cycle, firmneeds large investment for growth e.g.

Developing new products or services Upgrading or building new facilities Improving operating capabilities Improving information systems

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Growing Phase

Because a growing company may beoperating at a loss, the appropriatefinancial objectives could include:

Percentage growth rates in revenues;

Sales growth in target markets ortargeted customer groups.

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Sustaining Phase Excellent RoI required at this stage

Objective will be to retain or grow marketshare year-on-year

Investments will be targeted to: Expanding capacity

Relieving bottlenecks Continuous improvement

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Harvesting Phase

Firms is mature, with minimal investmentsto maintain equipment and capabilities.

Focus now is on harvesting investmentsmade in the previous two phases.

Investments have to have a short paybacktime, to maximise cash flow.

Objectives: maximising cash flow whileminimising working capital requirements.

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Risk Objective

Diversification, so as to avoid thepitfalls of putting all eggs in the onebasket, achieved via new products, newmarkets, or new territories.

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Overarching

Ultimately, all other measures in theremaining three perspectives of theBSC are linked to financial objectives.

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2. Customer Perspective

Kaplan & Norton argue that thecustomer perspective translates anorganisations mission and strategy onspecific objectives about [its] targetcustomers and market segments that

can be communicated throughout theorganisation. (p.64)

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Customer Perspective

Identifies target customers and marketsegments that will generate revenue to

meet the financial objectives of the firm.

Vital for companies wishing to competesuccessfully in the Information Age to keepin close contact with their customers:

Mission Statements often provideexplicitly for this e.g. Number 1 indelivering value to our customers.

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Customer Perspective allows thefirm to:

Align customer acquisition,satisfaction, loyalty, retention andprofitability measures to target

customers.

Identify and measure the valuepropositions to be delivered.

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Customer PerspectiveValue Propositions

Value propositions represent the attributes thatsupplying companies provide, through their productsand services, to create loyalty and satisfaction in

targeted customers. (p.73)

Kaplan & Norton locate them on three dimensions: Product / Service Attributes e.g. quality, price,

functionality, and which the customer values most.

Customer Relationship e.g. product delivery tocustomer, response and delivery times, howcustomers feel about buying from the firm.

Image and Reputation - intangible factors thatattract customers and rely on effective marketing.

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Segmentation of markets is critical inthe BSC: a firm cannot be successful by

trying to be all things to all customers. Research should be done at strategy

formulation stage to segment marketsand identify customer preferences on

e.g. price / quality / functionality, imageand reputation, and customer service.

BSC should identify the customerobjectives in each targeted segment.

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Core Measures forCustomer Perspective

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1. Market ShareProportion of product or service in a givenmarket that a business unit sells

2. Customer AcquisitionRate at which a business unit attracts newcustomers or business

3. Customer SatisfactionAssess satisfaction level of customersaround specific performance criteriae.g. quality, service, timeliness

4. Customer RetentionRate at which a business maintainsongoing relationships with its customers

5. Customer

ProfitabilityMay involve droppingunprofitable customers



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Customer PerspectiveLagging Measures

Customer Retention and Satisfaction are laggingmeasures: the damage may already be done by the

time managers and employees find out satisfactionis poor and customers are deserting the firm.

Managers must specify what customers value andchoose the value proposition they will deliver.

Management should then choose from the threeattributes (product/service, customer relationship,image/reputation) that, if satisfied, will allow thecompany to retain and expand its business.

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3. Internal Process Perspective

Here, it is managements responsibility to identifycritical core processes to enable the firm toachieve customer and shareholder objectives.

Usually considered by managers following thefinancial and customer perspectives.

Involves building an internal-process value chain:

Innovation Operations After-Sales Service

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Internal Process Perspectivea) Innovation

Identify new markets.

Identify and develop solutions forcurrent and future customer needs.

Asking what customers will valuetomorrow and how we can innovate tomeet those needs and beat our rivals.

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Internal Process PerspectiveMeasuring Innovation

Suitable Measures:

Percentage of sales from new products

NPIs v plan or v competition Time to next-generation products

Manufacturing process capabilities e.g. doubling

output volume through new technology

Percentage of time that first design meetscustomer functionality test

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Internal Process Perspectiveb) Operations

Stage from taking to building todelivering a customers order.

Critical to have efficiency, consistencyand on-time delivery in this stage.

Traditional measures of cost, qualityand time are suitable and used.

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Internal Process Perspectivec) After-Sales

Adds value to the customer Includes e.g. warranty, return, repair,

replacement, installation, training.

Critical in industries where costlydowntime post-installation is an issue:

MRI Scanners fitted with specialsoftware to alert supplier engineers ofproblems with the equipment (safetyand utilisation issue, in this instance).

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Internal Process PerspectiveAfter-Sales Measures

Response times to calls

Resolution of customer issues Preventative maintenance schedule Efficiency: cost efficiency of the

firms after-sales service

Environment: responsible disposalof hazardous materials

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4. Learning & GrowthPerspective

The Financial, Customer andInternal Process perspectivesidentify where the firm needs toexcel for outstanding performance.

Objectives in the learning andgrowth perspective provide theinfrastructure to achieve this.

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Learning & Growth Perspective

Traditionally, investment in trainingand development was seen as anexpense to be minimised.

BSC views investment in trainingand development, and in systemsand procedures, as critical for thefirms long-term financial growth.

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Learning & Growth Perspective

Kaplan & Norton identify three keycapability areas for attention:

Employee Capabilities Information Systems Capabilities Motivation, Empowerment and

Alignment

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Learning & Growth PerspectiveEmployee Capabilities

Traditional industrial companiesutilised a narrow job design.

Competing in the InformationAge, requires firms to rely moreon front line staff, who are close

to customers and to internalprocesses, for new ideas.

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Learning & Growth PerspectiveEmployee Core Measurements

Satisfaction: employee morale is vital to firmssuccess as it raises productivity and satisfies customers.

Measured using an annual or monthly survey of e.g.

Involvement in decision-making; Access to sufficient information; Recognition of contribution made.

Productivity: revenue per employee should increase

if they are developed and given the means to do the job.

Retention: is facilitated through avoiding unwantedstaff departures, which is made possible by investment inproductivity, which increases employee satisfaction.

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Learning & Growth PerspectiveEnablers of Core Measurements

Employee Re-Skilling Capabilities

Firms doing BSC prioritise training on change agenda.

Information Systems Capabilities

Vital to have fast, accurate, timely for front line staff. Motivation, Empowerment, Alignment

Employees must be empoweredto act utilising their newskills and the new information systems introduced.

Measure by e.g. number of suggestions per employee, ornumber of suggestions implemented (quality); thisreinforces to staff that their opinions are valued.

Ensure departmental and personal objectives are alignedto the BSC e.g. via performance management systems.

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Balanced ScorecardSummary

Financial: growth rates, reduced costs, andincreased shareholder value.

Customer Relationships: knowledge of what thecustomer wants and commitment of what the firmdoes - or must do - to meet or beat expectations.

Business Processes: product or service delivery,customer relationships, innovation, and adherence toenvironmental and regulatory standards.

Learning & Growth: people, leadership, culture,information, and skills

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Balanced Scorecard

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Balanced ScorecardBringing It All Together

The key to the success of the Balanced Scorecard isits simplicity ... seeing an organisation from four keyperspectives ... one driving another. Financial resultsare driven first by people. People with the right skills,motivation and information create effective andefficient processes, which in turn deliver products,

relationships and services that create value for thecustomer. Customer value in turn delivers profit tomeet the organisations financial objectives.Davis

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Balanced ScorecardAnnual Update

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Balanced Scorecard:Success Without Pitfalls(Davis)

Failing to act on deviations

Ignoring local performance

Regarding BSC as inflexible

Failing to evolve the BSC

Falling victim to reification i.e. relying on thescorecard rather than talking to customers andemployees, meaning managers risk taking a falseview of the world and making wrong decisions

13a Balanced Scorecard

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