THE BALANCE SCORECARD

ROBERT S. KAPLAN AND DAVID P. NORTON ‘S

TRANSLATING STRATEGY IN TO ACTION

Robert Kaplan and David Norton first publicized the balanced scorecard in a series of journal articles and published this concept in their book, The Balanced Scorecard.

Introduced in 1992, by Robert Kaplan and David Norton, the balance Scorecard is the most commonly used framework for ensuring that agencies execute their strategies. Today about 70% of the fortune 1000 Companies utilize the balance scorecard to help manage performance

Where it started…..

Developed in the early 1990’s by Dr. Robert Kaplan and David Norton

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

WHAT IS THE BALANCE SCORECARD

BSC translates an organizational mission and

strategy into comprehensive set of performance measures that provides the frame work for strategic measurement and Management system

The Balanced Scorecard:

• Balances financial and non-financial measures

• Balances short and long-term measures

• Balances performance drivers (leading indicators) with outcome measures (lagging indicators)

• Should contain just enough data to give a complete picture of organizational performance… and no more!

• Leads to strategic focus and organizational alignment.

•The Balanced scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action.

•Provides an organization with feedback of both the internal business processes and external outcomes, which allows for continuous improvement of strategic performance and results.

•Nerve center of an enterprise

Why is it important to build a scorecard that communicates a business unit’s strategy?

• The scorecard describes the organization’s vision of the future to the entire organization. It creates shared understanding.• The scorecard creates a holistic model of the strategy that allows all employees to see how they contribute to organizational success. Without such linkage, individuals and departments can optimize their local performance but not contribute to achieving strategic objectives. • The scorecard focuses change efforts. If the right objectives and measures are identified, successful implementation will likely occur, if not investments and initiatives will be wasted.

The balanced scorecard is centered on four performance metrics or perspectives: Customers Internal processes FinancialLearning and growth

When implemented properly, each one of these perspectives contains four subparts consisting of Objectives Measures TargetsInitiatives

Ob

ject

ive

Me

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sCUSTOMER

How do our customers see us?

Ob

ject

ive

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tive

s

LEARNING andGROWTH

Can we continue to improve and create value?

Ob

ject

ive

Me

asu

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tsIn

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tive

sFINANCIAL

How do we look to shareholders?

Ob

ject

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INTERNAL BUSINESSPROCESS

What must we excel at?

Visionand

Strategy

Ob

ject

ive

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sCUSTOMER

How do our customers see us?

Ob

ject

ive

Me

asu

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Ta

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itia

tive

s

LEARNING andGROWTH

Can we continue to improve and create value?

Ob

ject

ive

Me

asu

res

Ta

rge

tsIn

itia

tive

sFINANCIAL

How do we look to shareholders?

Ob

ject

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Me

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INTERNAL BUSINESSPROCESS

What must we excel at?

Visionand

Strategy

Visionand

Strategy

BALANCE SCORECARD PRESPECTIVES

Objectives, Measures, Targets and Initiatives

• Objectives : what the strategy is to achieve in that perspective

• Measures : how progress for that particular objective will be measured

• Targets : refer to the target value that the company seeks to obtain for each measure

• Initiatives : what will be done to facilitate the reaching of the target

FINANCIAL PERSPECTIVE

The financial performance perspective of the balanced scorecard addresses the question of how shareholders view the firm and which financial goals are desired from the shareholder’s perspective.

• In private companies, the financial perspective is the

main objective (ultimate goal) – without having to

sacrifice the interests of other relevant stakeholders

(community, environment, government, etc.)

• In the financial perspective, the strategic goal is the long-

term shareholder value. This goal is driven by two

factors, namely : revenue growth and cost efficiency.

Financial objectives tend to be influenced by the organization's position on the life-cycle curve.

GROWTH HARVESTSUSTAIN

There are three main stages to this cycle which include:

Growth stage -goal of the company is growthAn example of a growth goal would be revenue growth, sales in new market, sales to new customers.

Sustain stage - the goal of the firm is profitabilityMeasures in this stage may include ROE, ROCE, and EVA, cost reduction rates, discounted cash flows.

Harvest stage - the goal of the firm is cash flow and reduction in capital requirements. Current cash flows, payback period, spending ratios, product line profitability.

Strategic themes for the financial perspective

• Revenue Growth and Mix refer to expanding product and service offerings, reaching new customers and markets, changing the product and service mix toward higher value added offerings and repricing products and services.•Cost reduction and productivity improvement refers to efforts to lower the direct costs of products and services, reduce indirect costs and share common resources with other business units.•Asset utilization theme, managers attempt to reduce the working capital levels required to support a given volume and mix of business. Objectives, such as return on employed, return on investment and economic value added, provide overall outcome measures of the success of financial strategies to increase revenues, reduce costs and increase asset utilization.

Revenue Growth and Mix

Cost Reduction / Productivity Improvement

Asset Utilization

Growth Sales growth rate , % revenue from new products, services and customers

increase Revenueproductivity

Investment (% in sales)R&D

Sustain Share of targets customers and accounts,

Cost reduction rates, indirect expenses

Working capital ratios, ROCE

Harvest customer and product line profitability, % unprofitable customers

Unit costs Payback period

Strategic themes for the Financial Perspective

Strategic themes

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CUSTOMER PERSPECTIVE

Customer perspective identifies targeted customer and market segments and measures the organization’s success in these segments.

It measure the level of customer satisfaction, customer retention and market share held by the organization.

The Customer Perspective – Core measures

MarketShare

CustomerRetention

CustomerProfitability

CustomerSatisfaction

CustomerAcquisition

Market share – reflects the proportion of business in a given market ( in terms of number of customers, dollars spent or unit volume sold) that a business unit sells.Customer Acquisition – measures tracks, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business.Customer Retention – the rate at which a business unit retains or maintains ongoing relationships with its customers.Customer Satisfaction – assesses the satisfaction level of customers along specific performance criteria within the value proposition.Customer Profitability – measures the net profit of a customer, or a segments, after allowing for the unique expenses required to support that customer.

Customer value proposition

Customer Acquisition

Customer

Satisfaction

Customer Retention

Value = Product / service

attributes

Image Relationship + +

Brand equity

Convenient Trusted Responsive

Functionality Quality Price Time

There are four broad categories that Kaplan and Norton base the customer perspective around.

Best buyCompanies that supply services and products at low prices and fast service.

Product leadership and innovationCompanies that focus on customer that buy the newest and most advanced cutting edge technology.

Customer complete solutionsCompanies that try to sell things like computers where customers customize them to their liking.

Lock in Companies that will make a product then to buy accessories for that product you have to buy the same brand name because other brands out work with that product.

INTERNAL BUSINESS PROCESS PERSPECTIVE

Internal business process objectives address the question of which processes are the most critical for satisfying customers and shareholders

A firm must concentrate its efforts to excel in these areas

Metrics based on this prospective allow the managers to know how well their business is running and whether its products and services conform to customer requirements

INTERNAL BUSINESS PROCESS

3 sub process

es

Innovation Process

Creating Products/Services & Processes to meet the demand of Customers

Operations Process

Producing & delivering theExisting products that will meet the needs Of Customers

Post sale serviceProcess

Providing service and Support to the customerafter the sale of a product or service

LEARNING AND GROWTH PERSPECTIVE

Learning and Growth Perspective includes measures such as Employee satisfaction, employee retention and skill sets etc. Objectives in learning and growth perspective are drives that encourage implementation of goals set in the financial, customer and internal processes objectives. It identifies the infrastructure that the organization must build to create long term growth and improvement.

Objectives

Long term success

Capability

Employee Skills

Information Systems

Organizational Processes

Measures

SatisfactionRetentionTraining

Capabilities

AccuracyReal time availability

Pervasiveness

Alignment of incentives with key success factors

Improvement in key customer & internal

processes

Balanced Scorecard Measurements

Strategy Map Framework

This framework describes the types of strategic target that should be presented in each perspective, namely the financial perspective, customers, internal business process, and learning & growth perspective

A Strategy Map Describes How An Organization Intends to Create Value For Its Stakeholders 

                                                                                                                                                                                                                                 

Strategy Map Framework

Commercial Industry: Regional Airline

BALANCED SCORECARD AS A MANAGEMENT SYSTEM

• Clarify and translate vision and strategy• Communicate and link strategic objectives and measures• Plan, set targets and align strategic initiatives• Enhance strategic feedback and learning

BSC reviewed regularly to enhance operational decision-making• Success of initiatives assessed based on DATA… not opinions• Leading indicators evaluated to confirm accuracy of assumptions

The BSC is a “Living Document” that requires regular revision of objectives, measures and initiatives:

How are we doing? Are we measuring the right things? What initiatives do we need to get us where we want to go? Have our organizational goals changed?

Clarifying andTranslating the Vision & Strategy

Clarifying the Vision

Gaining Consensus

Communicating & Linking

Comm and Educating

Setting GoalsLinking

Rewards to Performance measures

Strategic Feedback & Learning

Articulating the shared Vision

Supplying Strategic Feedback

Facilitating Strategy review and Learning

BalanceScorecard

Planning & Target Setting

Setting TargetsAligning Strategic

InitiativesAllocating

ResourcesEstablishing

Milestones

Clarifying and Translating the Vision and Strategy

Translating the vision: helping all employees understand how their day-to-day work contributes to long-term goals.The strategy is the reference point the entire management process.The shared vision is the foundation for strategic learning.• clarifying the vision• formulating by Sr. Executives• reaching consensus• sorting out differences• joint accountability

Communicating and Linking

Communicating and linking: disseminating long-term goals both up and down an organizational hierarchy, ensuring that both departmental and individuals objectives are in alignment.

• goal alignment exists from top to bottom• education and open communication about strategy are basis for employee empowerment• compensation is linked to strategy.

There are three distinct mechanisms are used

Communication and education programs. Under it the communication to the board of directors, senior executives and employees for understand the strategies. A consistent and continuing program to educate the organization on the component of strategy as well as reinforcing this education with feedback on actual performance, is the foundation of organizational alignment.

Brochures, newsletters and electronic bulletin boards are the tools of a communication/ education program.

Goal Setting Programs : once a base level of understanding exists, individuals and teams throughout the business unit must translate the higher level strategic objectives in to the personal and team objectives. E.g. an on time delivery objective for the business unit’s customer perspective can be translated in to an objective to reduce setup times at the bottleneck machine or for rapid transfer of orders from one process to the next. In this way local improvement efforts become aligned with overall organizational success factors.

Reward System Linkage : alignment of the organization toward the strategy must ultimately be motivated through the incentive and reward system. Alignment and accountability will clearly be enhanced when individual contributions to achieving scorecard objectives are linked to recognition, promotion and compensation programs.

Planning and Target Setting

Business planning: taking long-term strategy and using it as the basis for how resources and capital are allocated

Four steps are needed to use the scorecard in an integrated long range strategic planning and operational budgeting process.

• Stretch targets are established and accepted• Strategic initiatives are clearly identified• Investments are determined by the strategy• Annual budgets are linked to long range plans

Set stretch targets : managers should set ambitious targets for measures that all employees can accept and buy in to. The cause and effect relationships in the scorecard help identify the critical drivers that will allow breakthrough performance on important outcome measures, particularly financial and customer ones.

Identify and rationalize strategies initiatives : the gaps between the ambitious targets set for scorecard measures and the current performance on those measures enable managers to set priorities for capital investments and action programs intended to close the gaps. Manager eliminate or de- emphasize initiatives that will not have a major impact on one or more scorecard objectives.

Link to annual resource allocation and budgets: managers link 3 to 5 years strategic plan to discretionary expenses and budgeted performance for the upcoming year. These milestones enable them to track the business unit’s trajectory along its strategic journey

Identify critical cross business initiatives : managers identify the initiatives that will deliver benefits to the strategic objectives of other business units or the corporate parent.

Strategic Feedback and Learning

Feedback and learning: the scorecard enables strategic and real-time learning because it measures daily performance and spending in the context of overarching goals, allowing organizations to make necessary changes.

Feedback system used to test the hypotheses on which strategy is basedTeam problem solvingStrategy development is a continuous process

Periodic Review and ChangeTargets-achieved or notPast and future ReviewInformation from allDouble loop learningCause and effect RelationshipValidity and ViabilityStrategy replacement according to outcomes/

performance drivers

An effective strategic learning process has three essential ingredients:

• a shared strategic framework that communicates the strategy and allows each participant to see how his or her activities contribute to achievement of all overall strategy

• a feedback process that collects performance data about the strategy and allows the hypotheses about interrelationships among strategic objectives and initiatives to be tested

• a team problem solving process that analysis and learns from the performance data and then adapts the strategy to emerging conditions and issues

• Goal alignments from top to bottom• Education and open communication about strategy

• Compensation is linked To Strategy

• Feedback system used to test The hypothesis on which strategy Is based

• Team problem solving

• Strategy development is a Continuous Process

•The strategy is the reference point for the entire management process•The shared vision is the foundation for strategic planning

•Stretch targets are established and accepted•Strategic initiatives are clearly identified•Investments are determined by strategy•Annual Budgets are linked to long term planning

Clarifying & translating the vision and strategy

Communicating & linking

Strategic feedback &

learning

Planning & target setting

Balanced

scorecard

Different Management System for Strategic Implementation

Metropolitan Bank’s Strategy

Metro bank is the retail banking division of a major bank with8000 employees, a 30% market share of the region’s core Deposit and accounts and about $1 billion in total revenue. Metro bank implemented the balance scorecard, starting in 1993, to communicate and reinforce a new strategy. To increase income and revenue by broadening the service sold to a targeted group of customers.

Metropolitan Bank: Cause and EffectIncrease Return to

StockholdersBroaden

Revenue Mix

Increase Customer Satisfaction With Our Products

Understand Customer

Needs

Financial Perspective

Customer Perspective

Develop new products

Cross sell products

Internal Process

Perspective

Increase employeeproductivity

DevelopSellingSkills

AlignPersonal

Goals

Access toStrategic

Information

Learningperspective

Strategic Objectives

Strategic Measures

Lag Indicators

Lead Indicators

Fin

anci

al Improve Returns to Stockholders

Broaden Revenue Mix

Return on Investment Revenue Mix Revenue Growth

Cu

stom

er Increase Customer Satisfaction

Knowledgeable People Convenient Access Superior Service

Customer Retention Depth of Relation (Sale of

Multiple Products to a Customer)

Customer Satisfaction Survey

Inte

rnal

Understand Our Customers Create Innovative Products Cross-Sell Products

Share of Segment Revenue from New

Products Cross-Sell Ratio

Product Development Cycle

Hours with Customers

Lea

rnin

g

Instill a Selling Culture o Build Strategic Information o Develop Strategic Skills o Align Incentives

Revenue per Employee Employee Satisfaction

Survey

Strategic Information Availability

Strategic Job Coverage Personal Goals Alignment

Metropolitan Bank’s Balanced Scorecard

Barriers to effective Implementation of BSC

• Vision and Strategy Not Actionable

• Strategy Not Linked to Departmental Team and Individual Goals

• Strategy Not Linked to resource allocation

• Feedback that is Tactical Not strategic

2. Strategy not linked to Departmental team and Individual goals

Personal MBO and incentives

4. Feedback that is Tactical not strategic

Monthly review

1. Vision and strategy not actionable

Strategy and vision

3. Strategy not linked to resource allocation

Financial plan and capital allocation

Budget

Barrier No 1: Vision and strategy not Actionable

Cant be translated into actionCant be acted UponCant be understoodFragmentation & Sub optimization of

effortsLacking consensus & ClarityDifferent AgendasNo integrationNot linked coherently to overall

strategy

Barrier No 2 : Strategy not Linked to Departmental, Team and Individual Goals

• Not translated into Department/ individual Goals • Different Priorities • Failure of Human Resource Management• Disalignment in Goals

Barrier No 3: Strategy not Linked to Resource Allocation

Separate Processes for Long term & Short term Strategic planning

Funding to unrelated prioritiesPoor Monthly ReviewsUnfocused New Mgt TechniquesPoor Integration

Barrier No 4: Feed back not tactically strategic

Bulk of feedback is only financial measures

Little time on strategy implementation & success

No priority to periodic review and meetings

Inadequate informationPoor tactical review process