18 the Balance Scorcard and Strategy Maps

8/3/2019 18 the Balance Scorcard and Strategy Maps

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r, Austrolion corporote ond non-corporote (governmenl,- for-profit sector) orgonisotions meosure performonce. : ved ln recent yeors. While, in the post, finonciol-^once meosurement wos the focus, orgonisotions ore-.oected to use o more comprehensive set of performonce,,'es, comprising both finonciol ond nonJinonciol. -'es, to evoluote ond monitor ihe performonce of the- sotion ond i1s divisions, business segmenls' ond indlviduol

ves ond monogers. A formolly derived combinotion of..lres, structured to express o couse-ond-effect relotionship:en specific meosures ond overoll orgonisotlonol.,'ives,'is commonly referred to os o bolonced scorecord. rnced scorecord moy be prepored ot the corporote', rnol ond/or lndivlduol level ond is themed occording to


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thot Qqntos' profits will be increosed by meeting customerservice expeclolions ond improving operoting e{{icienctes ondpunctuolity requirements while operoting oi moximum copocilywith o full contingenl of sloff ond low downlime due to stoffinjury.r

9ss*;** fr*ce this sc*ne se{9ar {e;! tr**k 9*r in 9i:* eh*p?*r inc':3ew The {ormql use o{ {inonciol qnd nonJinonciol meosures.m A bolonced scorecord should be odopted 1o the specific

environment of the orgonisotion.w Incentive plons ore commonly linked to bolonced scoreco.c

performonce.

Finonciol

People/sofety Lost-iime injury (LTI) rote qndserious injury role (SIR)

For corporole ond group executives, group PBT is used; for businessunit monogers, relevont business unit PBT is used.Foctors such os fuel process voriotions ond restructuring cosls oreremoved from the cqlculotion.Skytrox Wodd Airline Awqrds is o globol, independent survey ofqirline stondqrds.For corporole ond group execulives, o combined result is used; forbusiness unit monogers, the relevont business unil meqsure is usedTorgets ot the group level qre improving - the LTI raleby 24ok ond theSIR by 1 9% for lhe 2008-09 yeor.

Profit before tox (PBT)

Unit coslimprovemenl

Net expendilure + Groupovoiloble seot kilomelres

Customerservice

Qontos performonce inSkylrox World Airline AwordsMeosured ogoinst onJimedeporture ond orrivol torgetsOperotionolpunctuolily

x Figurc 1&.3 Bolonced scorecord meosures for Qontos

re ffi*msu*nmg *r6*mEmmf$*m* pmn*$"*"ffi#ffifl#We explored the concept of strategy in chapcer 12. From this discussion) we knou' rha:wharever the organisarional strategy might be, it should be reflected in the manaE.-menr accounting and control system toois in place in the organisation. We will explt-r:rhe specifics of balanced scorecards and strategy maps in subsequent sections. For rh:moment) we need to escablish the importance of the links between strategy, strareg.'maps and balanced scorecards in measuring performance. \[/e know from chapter 1lthat strategy sets rhe future direction of the organisation. Strategy maps take the orga;:-isation's strategy, develop strategic themes linked to that strategy, and develop strates;objecrives wirhin each oF rhe four perspectives commonly used in the balance scorecariThe balanced scorecard details the specific performance metrics that reflect che strategr;objectives. Figure 18.2 illustrates these relationships'

\X/e now explore strategy maps and balanced scorecards in more detail.

Understcnd how finsnci*lcnd non-finqncicl m*csurescre used tra evaluateorgoniscticnal performlnce

x N:lgure 3&.9 Slrotegy,slrolegy mops ond thebolonced scorecord

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ffi *:,TF'-=I". ,1' ,, ,:-,.;i "W t:'straregy maps came ro prominence in 200'{ u'hen Kaplan and Norton published theirbookVt atrg Maps, which focused on linking organisational strategy lo the measuresdeveloped 6. tlr. b"lrt'tced scorecard. As illustrated in figure 18.2, in some ways' strategy-rp, t"."-e the link berween strategy and the balanced scorecard' In Kaplan andNorton's own words:

A strategl' map provides a visual representation of the strategy lt provides asingle-pageui"*ofho*objectivesinthefourperspecdvesrntegrateandconrbinetoguidethesrrategy.Itillustratesthecause-and-effectrelationshipsthatlinkdesired outcomes il th. ..,rto-er and fir-rancial perspectives to outstand'ingperfornlanceincriticalinterrralprocesses-operations.management)custonefmanagement; and in innovation and regulatory/social processes'2

The focus of the strategy map should be to:. provide a iink beru,een"th" org".isation's strategy and the balanced scorecard. i-h".. appropriate) convey the key strategic themes developed from theorganisalion's strategY. .o"rrrr.y rhe organisai.-ior'r', ,rr"r.gic objecdves in the four balanced scorecardp..rp..tiu.r. il't"r. ,r.","gic objectives should reflect hypothesised cause-and-effect relationships represented by a series of if' and 'then' statements'Forexample,thestrategi.ob;..ti.,",developedforthelearningandgrorvthperspecd;e (say, ,if' r.r,. l-pro,r" employee skills) should produce outcomes in theinternal business process p".rp"..i r. (say, 'then' $'e $'i11 reduce lead times) andrhe customer perspeccive irry,-'th.rt' rve tvi1l improve customer satisfaction)' Inevaluating the fin;l balancei scorecard, it is good to check that rhe hypotl-resisedcause-and-effect linkages are cofreclly Put into action through carefullyseiected measures. wl-ien reviewing the final measures, if che cause-and-effectrelationships are l-rarcl to idendfy, the wrong measures have most likely beenput in place. In chis way, che strategy map is a good check on-the usefulnessandappropriatenessolthebalancedscorecardmeasures.Whilesomeresearclrquesr;s .1"i-, about the cause-and-effecc links in balanced scorecards (see, forot-pl., Norreklit3), we can, at a minimum) use strategy maPs to be confidentabour the links between the strategic objectives and the measures in the balancedscorecard.The srrategy map for Hunter New England in figure 18.3 on the next page provides one

example of whar a strategy map could Look like for a not-for-profit entity' organisacionsare likely ro adapt rhe strategy maP to meet their specific needs, so not all strategy mapswill look rhe same. For exaiple, fro- figure L8.3 we can see that Hunter New Englandhas d.eveloped strategic objectives around its specific organisational perspectives:. our people, culture and capability. external partners, internal networking and processes) resource accor-rntability. commttnilies and Patienrs'witi-rin each of these persPectives a number of strategic objeccives have been set' Theseobjecrives provide ,rr.f.ri g.rid,"nce when it comes to setting specific measures within thebalanced scorecard. Beforle leaving this section, it is important to note that the concePtof strategy maps and their use is sti1l evolving. For the momentl we are likel;' to findorganisations using srraregy maPS in a ,turl:Iber of different rvays (as is che case for othercontrol tools).

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urlrl, .r :r -gosursr' :- -: 'neosures thotru 'i- --rollon meosured, '''rtios of dollors,, - - po re budget 1o._ - ,

re Yfum fu*$#ffinffid $##r##{$il{$It is nor new to suggest organisations should measure) manage and monitor perfor-mance using a range of different measures including both financial and non-financial'And"'yet,thisispteciselywhatthebalancedscotecatddoes.originat\ptoposldby rap\an an6Nortor' io t\" ea\ \99\s an1 substque$ {ere\o1t{'rnto a' tu\compiehensive stfateg\c and petlotnance measuiement too\, the ba\ance{ scote-.".i i, used by many organisarions around the world. In understanding the bal-anced scorecard, let's differentiate between financial and non-fi.nancial measures. Inrhe first instance, the distinction may seem straightforward. For example' financialmeasures might be described as having a dollar sign in front of them such as salesor profit, while non-financial measures do not such as market share and customersatisfaction ratings.Managers raditionally relied on financial ltreas$res that provide inFormation meas-ured in dollars or ratios of dollars. Sales, costs or operating income are among thosemeasures usualiy obtained From the financial accounting system, which is designedro report financial measures for the overall organisation, divisions, product lines andd.p"ir-".rts. Financial measl-lres also compare budget to actual results.Non-&nancial rneasures provide performance information that cannot be meas-ured in dollars. Defect rates, throughput time and employee retention are among thenon-financial measLlres used more frequently in recent years to reflect performance thatpromores iong-term financial success. One important issue relating to non-financiaiL.rr.rr., is that they still need to be quantified in some u'ay. For example, cuslomersatisFaction is nor a measure in itself but an important dimension rve rnight like tomeasure. Many enrities do this b)' developing a custolner satisfaction index based onformal feedback mechanisms from customers'Non-financial measures are commonly classified as lead indicators.If the operations towhich the lead indicators refer are managed well, this wiil lead to enhanced performanceas reported in the financial measures) which are common11, classified as lag indicators.A baianced scorecard should comprise a combination of financial and non-financialmeasllres that represenr both lead and lag indicators. In many ways this is what the 'bal-anced' refers to in the title ofthe balanced scorecard'The aim ofthe balanced scorecard is to translate organisational visions and strategiesinto performance objectives and related measures that can be monitored over time. Thebalar1ced scorecard approach l-relps managers more fully integrate strategies throughoutrhe organisarion, anriiipare and prevent possible future problems, and idendfy and takeadvantage oF opporruni ties.

At the heart otth. balanced scorecard is a continuous, strategic analysis of the organ-isation from multiple perspecrives. The most common approach is to use rhe lourperspectives shown in figure 18.4: financial, clrstomer, internal business process, andi."..rir'rg and growrh. Wirhin each perspective, managers and other employees such as...o.,r.rrnt, study rhe organisation and identify linkages with other Perspectives. Forexample, if employees are better trained (under learning and growth), they are morelikel1. co make^ suggesrions that improve customer-related business Processes, such". .ed,r.ir.g the time between receipt of a customer order and product delivery. Ascustomer satisfacrion increases, financial performance is also more likely to increase'Tl-rese analyses help accounranrs and managers idencify the most irnportant perfor-mance objectives - the aspects of operations that must be successful for the organ-isation to achieve its vision. Measures are then developed for the performance objectiveswichin eacl-r perspective to help managers and employees monitor and work towardslong-term goals.

*6"1&PTfiR 3# The bolonced scorecord ond slrolegy mops


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Vision ond slrolegy

A balanced scorecard may be used at various levels within an organisation. Comr.-rrt',we see three main levels. First, an organisational-level balanced scorecard such as a-:,;l,-anced scorecard prepared at the corporate level. A balanced scorecard at this level r','.-:-,ll.,,-rlcaprure corporare-level metrics. Second, balanced scorecards may be prepared at rhe ::'r-sional or segmenr level witl-rin an organisation. Finally, balanced scorecards are 5t'-:5increasingly used ac the individual level. In this case, scorecards are structured ro :e:lr::the environment under tl-re control of individual managers and executives. As er:::':l:in the Qantas scene setter at the start of the chapter) we are also seeing these indi'.:-'-uuscorecards used as a key input co the structure of incentive plans. This link to ince:::"'tplans will be explored further in chapter 19. \X/here the same organisarion uses s---::-cards at all chree levels (that is, corporace, divisional and individual), we would exPe;: ::observe some common threads across the levels sr,rch as the reinforcement of stra:--g,with rhe measures likely to become increasingly specific and local as we move fror :--u.corporale to the individual.Fi r:# ft cB* { &}#t:Ft"}*fi tir** tr ffi d r*i*'f*d frft #ffi sFJ rtrsWhen accountants and managers analyse their entities from a &nancial perspecrirethey identifyr desired financial results, given the organisation's vision. For-profit enr:.;usually have goals of providing owners with some level of return on investmenr. \::;-for-profit enrities rypicatly have financial goals oFmaintaining a certain levei of fina;:;::-liquidiry and srability, accumulating suffi.cient resources for some long-term PurPose- --:gaining maximum efficiency from resources. Financial goals and objectives encou::Jlmanagers to evaluare the effecriveness of their strategies and operacing plans base; :',the economic wellbeing of rhe organisation. They also help employees relate the actiu:-.'.they perform to the entity's fi.nancial outcomes.Financial perspecrive measures are designed to determine an organisation's pro{:r.''towards desired financiai results. In for-profit entities, these measures are usually rela;::to profitability, growth and owner value. Common measures include operating inco::-.return on investment, residual income and economic value-added. In not-for-profit er:::-ties, financial rneasures often include opetating income, cost per service provided. a:-:variances from budgets.

r Figurc 3S.4 Fourperspecllves in o boloncedscorecord

finoncisl perspective omethod of onolysing the enlilYin which monogers ldeniifYdeslred finonciol results, giventhe orgonisotion's vision

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i. :-: Ter perspec*ive o' - - r of onolysing the entity- :^ monogers identify,:-cmers they wonl ond, _: strotegies to ge1 ond,. --:m

rrilr,ii-,: business proeessilBtt-;+ctive o melhod of' -: lhe entily in which::;-s ore concerned wilh-.--:ds ond proctices-. :e the entily 10' . : :rd deliver goods:-:eS

'-. '3.5 Customer-r: , I re choin onolysis

,ilmn "1,v:-,ct cycle the first"= ,clue choin, il is- =: ,','rth processes 10, :_:-:mer needs ond; - _-:cds ond services' .:n- -- lse needs

Innovotion cycle post_solesOperolions cycle service cycle

#ff sf* sffi e r F3# rs p#ct*v* # flt d rm $mfmd ffi:r ##_q {_j rffi ..ffiwhen accountants and, mlnagers anaryse rhe entity from a custorner perspective,they are concerned with identifying rhe cusromers that they *"'rr, ..rJ d.evelopingstrategies to get and keep them. The analysis includes identifying the rargerecl cusltomers' markets and products that are most consistent with rhe organisation,s visionand core competencies. Entities that better meer cusromer needs - creating value forcustomers are also _more likely to generate desired financial results. Thus, this linkconnects the financial and customer perspectives. In assessing customer needs, man-agers consider their.organisational strategies, and exami.r" ih. nature of productsor se^'ices compared to consumer views about trade-offs among price, qualiry andfunctionality.The customer's perspeclive is usuaily evaluated using outcome measures such asmarket share and customer satisfaction. The perform".J. -.rr,r.es used in for-profirand not-for-profit entities are often similar. These measures include cusromer reten-tion and profitability, new customer acquisirion, and market share in a targeted marketsegment or geographical region. Customers are often surveyed to gather informationon their perceptions about and interactions with the enrity. Marker surveys an4 focusgroups are also used to measLrre image and reputation.Hnt*rmm8 furu,sist*sm p#"#flffi$s p#rsp#er$v* rJffid rm{mtmd fl"n##su$"ffi$When accountants and managers analyse tl're organisation from an internal 6usinessprocess petspective' they are concerned with the merhods and practices used inside rheentity to produce and deliver goods and services. one goal of rhis analysis is ro improveprocesses that will increase custolrler satisfaction. Anorher goal is ro improve rheefnciency of operations, which contributes directly to the organiiarion,s financial resulrs.Internal business processes can be analysed using a ,rd.re .llir-r approach. A value charnis the sequence ofbusiness Processes through which value is addei io good, and. services.Analysis of the value chain leads to the idendfication of processes rhar are crirical rothe organisation's success. often, customer-related process., ar" .nlphasised in balancedscorecards because these processes have the greatest impact o.r ..,ra-l-r"a satisfaction andfinanciai success' Figure 18.5 presents a generic customer-oriented value chain includingthree principal internal business processes: the innovation cycle, the operarions.ycl" arrJthe post-sales service cycle.

An alternative to the value chain approach is an operarional audit cond.ucted byinternal auditors. An operational audit is an objectiv. rrri ,yrr"-atic examination of evi-dence ro provide an independent assessment of the performance of an entiry, p.og."-,activity or function. operational ar,rdits provide information to improve accounrabiliwand to faciiitare decision making.Innovation cyele ond rloted meosuresThe first step in the value chain, the innovation cycle, is concerned wirh processesto idendfy customer needs and to design goods and services that meet rhose needs.

CHAPTLR lE The bolonced scorecord ond slrotegy mops 701


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operstiofis cycle lhe secondsiep in the volue choin,it is concerned wilh theproduction ond dellvery ofgoods or services thol oreidentified ond desiqned in theinnovotion cycle

post-soles serviee cycle lhefinol slep in the volue choin, ilconsiders the service providedio customers ofler productdelivery, e.g. providingworronty work, hondlingreturns, correcting defeclscnd collecting ond processingpoymenis

Many entities mistakenly focus their efforts primarily on more efficient producri.--of existing produrcts. Yet goods ancl services musr rreer customer needs. The balance:scorecard encoLrrages managers to establish internal processes that identify cusrorn.:preferences for quaiity, functionality and price, a.rd rlro preclict th. pot..rrirl mar;e-size' Organisations often use market rr.d ..rrto-er research to id.entifv and nurru:"neu' markets, new customers and new needs of current customers. Mr.r"glra Ur"lrrrro.=,completely new products, and also develop new opporrlrnities and markets for exisri:::prod ucrs.^The innovation process also ensures that proposed goods and services are produ;.:efficiently, given the organisation's core conperencie..lo. ""r-ple, entiries use rar{.:coStingandkaizencostingtoreduceproductpricesandimprovequa1iry.

Operotions eyele ond relcted rneasuresThe second step in the value chain, tl're operatioms cyele, is concerned with producr:--*and delivery of goods or services that are idendfied and d.esigned in rhe innovation o.c-:The operations cycle addresses the sl'rort-term wellbeing of Ih" ".rtif-ir u"gi"r-"r.i-.,systems used to accept and process customer orders, anl i, .omplete with delivery ot :i*good or service. Qualiry efficiency, consistency and on-rime d"li.r".y are emphasisec ::-this part of the value chain.Historically, many entities focused on the operations process. cosr conrainme:::goals and cost monitoring methods were often in place at t'he commencement of oi*.,r-ations. Tradidonal financial measures such as standard costs, budge., "r.d u"rlJr.;;, ;;often used to monitor operational performance. This focus soil.ri-", led. ro subop-timal behaviour. For example, etEciency measures creare incenrives ro b"ilJl";";;;:;so that labour and machines are kepr busy. Quality is sacrificecl ro increase efEcier--rExce,ssive inventory' levels and poor quariry r." .oriry to organisations over time. -{s aresult, tradirional measures of operarions may b" o.rly . ,-j1 part of a balanced scc:**card approacir.over the lasr several decades, entities have increasingly competed on qualin- -::,riimely delivery, in addicion to price. For example, oell coirputers'adverrir., ,h" qu;,:=and reliability of its systems as well as its ability to deliver compLrrers wirhin da's :dan order. Measurements of quarity, cycre time and cost rr" d"u.r,"p.a - ,-''o,,i.* ,-rienhance performance in rhese areas. with the growth of interner rd"r, .o-p.ririo;: :,nprice and product cr-rstomisation has intensified. For example, price informarion ab,.-,rrcomPuters and peripl'rerals is rvidelv available on rhe internet,^borh by manufacrl::i:ssuch as Dell ancl Apple anci by reiail sellers. To be comperirive, organisations n:--*{improve their operations processes ro meet or beat their competitors, p.i..rJ qua_::.rand reliability.Entities that specialise in custom products ofren measure the accuracy with u,i::morders are completed and speed of delivery. The specific operaring characreristics icie:::*fied and monitored as performance objectives cleiend on ih" org"anisation,s vision. .l:ecomPetencies and strategies. Managers choose paafoa-.na" -."Lrr", ro monitor orJasisational Progress, rewarding posirive trends in areas that lead ,o ..,rao,,'". ,r"rfr.=""and financial success.Post-soles srvice cyele cnd reloted nnecsrlresThe final step in the value chain, the ;rost-sa-les service cycle, considers the service p:,:-vided to customers after product delivery. Post-sales ,"rrric", include provicling warra-xi:nwork, handling returns, correcting defects and collecting and processing paymenrs. r:addition, when products are highly sophisticated, enriries ofrer'r i.air', rhe Impioye"' ,.-rlwili be using them. Another aspect of the post-sales service cycle is rh. saf. disposa, .-,,,-"hazardous wasres and by-products.

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r': growth*; :^-lty in which:r= ::nCerned With'"i--: success byr -:,r ond beller

For some organisations, posc-sales service is part of a product differentiacion strategy'H;;;; hauJr"c..,r1y focrrs"d on rhe billing and collection lrocesses of post-sales ser-vice. By emphasising accurate coding on pati;nt bills, ilospitals ha'u'e fewer claims deniedby insurers and increase their operaiing revenues. To achieve greater accuracy in coding'lrry frorpirals provide in-depcl-r .-plly." training and hire better-educated employeesin tl-reir billing and collections departments'performance measures fo. .ortt-..-related post-sales service could include aspects ofrhe billing and collecti,ons cycle, such as the iollar amount of bad debts and days inaccounts receivable. In addition, costs for warranty work and rework can be measured'or rhe number of defective products returned or reworkecl can be tracked' Measures forwasre and by-product drsporal could include number of kilograms of rvaste and clean-upcosts.il*e*r'nlffig #ffi# {#r#wfh p*n*p**tiqd* mnd rmlmt*d flffi##sufl##when accountanrs and managers analyse an entiry from a, learning a'ld growthperspecrive, tl-rey are .on...'r.i with. acirieving future success by discovering new andbetter strategies. They also want to improve Jrrrro-.. satisfaction and internal busi-ness process.r, "rrr.,J. at-rt, ",,'ptoyees have sufficient knowledge and expertise' andcheck that inrernal processes supPort exlsting strategies. The learning and growth;;;;pJ;" i, ',.rt.r."ily linked -- ih" .inrernal business process perspective. As man-agers focus on ir1lp.ouir'rg internal business Processes' they also identify opporrunitiesfor enl-rancing rhe capablhties of "^ploy"er, information systems and operating Pro-cedures.-ih.". key areas of interest6 have emerged in the learning and growth persPective:. human capital and employee de.,elopJrenr, which relaces to the skill set, knowledgeand capacities of emPloYees. informatior-r.rpir"l,'-hich relates to the information technology and associatedinfrastructure to suPPort the organisation's strategy. organisarion crpital, *t-ri.n ,.1"t!, to cullure, leadership, alignment of goals,

inJenti.res and strategy, and teamwork'When an organisation frr, .t.ft of the three comPonents aligned with its strategy' Kaplanand. Norton argue rhe organisation Possesses * itlglt degree of organisation readiness'which essentially means i-r. o.g".tir"tion is "dtpt"bl., able to execute slrategy and isread1. fe1 change.

Employee learning and grou,th measures include salisfaction, retention, training andskill development. These #"r.rr., are railored for the type of organisation and industry.To assist in decision making, information systems -.,st ptodttce timely, reliable andaccurate information about customers, comPetitors and oPerations Measures of infor-mation timeliness "r-rd a...rru.y include ,r,r-b.. oF days to close (the amount of time,-n* .trpr., before financial statements are available to managers) and errors per report'over rime, company policies become outdated.. Periodically, these policies need to bea.,alys.dtodeterminewhethertheyarecurrentorshouldbechangedinresponsetonewknor,vledgeortechnoiogies.Aperformancemeasurecouldbethenumberoftimesthatpolicies and procedu..I "r. reviewed over a five-year period..To monitor learning andgrowrh measures, ;;;; performance of op.r"tions is usually used as a baseline anditrrp.orr"-.nts are evaluated over time'clearly, any baianced scorecard developed ml-lst be structured to meet the needs of the"r.tity to*hi.h ir."*.r. Figure 18.6 (a) and (b) overleaf demonstrates tl-re different typesof balanced ,.o.".r.J, thaimight evolve to meel organisational needs' In chapter 20 weexplore the balanced rcor.card"ftrther, particularly as it relates to issues ofsustainabilitymanagement accounting'

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(o) Bolonced scorecord meosures ot Royol Philips ElectronicsTVision ond strotegy

lb) Bolonced scorecord meosures of the Heollh Insuronce Commission (HIC)8

Customer perspectiveCommuniiy solisfoctionMedicol proctitioner sotisfqctionPhormocisi sotisfoctionPrompt processingInternol business processes perspectiveCloim processing occurocyMedicore tronsociions online*Generol proclices onlineGrowth ond development perspectiveStoff sqlisfoction

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90 9372 7592 9193 9398 9850 5086 90

90% cr80% ar90% cr90% o-

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Improverrufllrefleciec r,r2004 surre*'

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r Figure |&.6 Somple:c onced scorecords*lncludes

Medicloims ond internet electronic tronsocfions.tTo be colculoted differenlly from 2002.tiCurrently no lorgel set olthough proctices ore being encourcged 1o move online


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Frepcring n bclsneedsecrecqrd set cfrne{isN.,,res - MountainMlist ErewenyIn the early 1980s, BernardHancock built a small brewerYon his 150-acre ProPerry in theMacedon Ranges. The brewerY,named Mountain Mist BrewerY,was designed with ales in mindand Bernard introduced anumber of cutting-edge andinnovarive technologies to make the well-known, popular pale ale Misty Hopand ochers such as Hazy Heidi, Mountain Maid and Sunny Sherpa. The brew-ery's highest selling pale ale (Misty Hop) is widely recognised as a I'righ-qualityboutiq.,'e beer andls^sold, along with the brewery's other ales, to clubs and res-,",r."nr, around. Australia. All Mountain Mist Brewery ales are distributed in kegs(large concainers) and l2-bortle cartons through its Victorian and national whole-,al""rs. fh" brewery has continued to expand capacity on its site to meet growingconsumer demands.

In 2009, total Australian beer production was 1736 megalitres with totalrevenues of $4406 million. The Australian industry is dominated by four keyplayers - the large narionals including Foster's Group Limited, Lion NathanLi*ited, Coopers Brewery Limited and J Boag & Son which account for 87 percent of induri.y .",r.r-tr.. The industry is becoming less concentrated with LittleCreatures, Coopers and other breweries expanding production._There are also anumber of micro breweries successfully servicing sma1l regional areas, includingMouncain Misr Brewery in Victoria with 3 per cent of industry revenue.9Mountain Mist Brewerfs capaciW is currently running at 52 megalitres ofbeer per annum. Bernard strives to leverage economies of scale, with invest-menr in high-tech brewing equipment and automated packaging machines.Bernard believes the qualiry of his product is lhe most significant influence oncusromer satisfacdon, increased sales and the corporate profile. Bernard claimsrhe main selling feature of his Mountain Mist ales is the use of specialty hopflowers, ,orrr..Jf.o* Tasmania and brewed according co his innovative brewingprocesses. The other major ingredienr, malt, is sourced from barley grown in.rorth.r., parts of Vicroria. The pale malt for Misry Hop is made according tostrict Mountain Mist specifications. Bernard claims that the natural spring waterraken directly from the spring on the Mountain Mist brewery site offers superiortasting q,r"lity that will match, or betceq the quality of any pale ale around theworld.

Bernard's key objectives and strategic intent for Mountain Mist Brewery are:1. to grow proficably with incremental investment into selected markets to

become one of the top six breweries in Australia2. to continuously improve perceived consumer qualiry by improving taste)freshness, package integriry and package apPearance I:_

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to enhance disributor service v'ith better lead times, accurate order filis andlower product damageto continuousiy lower company costs per litre of beer so Mountain Misr canmaintain resources for long-term productivity and success, while ensuring rharproducr quality is nor compromised by cost-cutring iniriarivesto continuously improve business performance through engaging anddeveloping employees to ensure that all employees understand the criricalimportance of quality in all processes and rheir contriburion ro the success ofthe organisation.While Australian boudque beers such as Misty Hop are becoming more promi-nent in the market, overall volume growth for the entire indusry is flat. Theindustry has also been faced with declining levels of consumprion as well asincreased competition from other beverages such as wine and spiritsBernard wants to constrllct a suitable organisational-level balanced scorecardincorporating measures that reflect Mountain Mists' key objectives and strategicintent.Provided below are sample measures suitable for each balanced scorecard per-spective.Flernnciel perspeetive

Strategic objectiveTo reduce the cost per litre ofbeer

producedMeasureCost per litre of beer

To achieve profitable growthparcicularly in new markets Revenue growth in new marketsProfit achieved in new markecsGrow profitably through incrementalinvescment Return on investment

eusfcrner perspecfiveStrategic objectiveImprove customer/consumer

satisfactionMeasure

Customer satisfaction indexBecome one of top six brewers in thecountry Market shareIncrease the number of distribution(customer) outlets Number of new outlersachieved per year

Internol business process perspecti\reStrategic objectiveImprove distribution performance

MeasureDistribucion lead times

Increase order-fill rates andaccu.facy

Order-fill accuracv

Increase productivity Manufacturing cycle timesCost per unit (keq or bottle)Enhance customer relationships

:::- : ','i1r:***r**r:: *e**i"rn'firig, *xf*r:ejlng perf*r'r*cn*.* *1#*#rlf*{fi{}*f {*s"rd $k#i+*{Fy

Percentage of sales in new outlets


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Innovotion end growtlr perspeetive

Develop satisfaction of employees Employee satisfaction indexE*PltY"t '"t"t"tffiinetion rate of manaqers in

Strategic objectiveIncrease emPloYee develoPment

Increase managemen!/emPloYeepart iciPation in 6 nancialplanning ( organisarion-wide

MeasureStaff training hours/participation for:. customer relationship managementitv management

Participatlon rate o agers lnbudgeting and Planning Processes

Usim*th*h*xttgglilffi*#*ffiflffi*mr#cft!*6rtt*$t{fl#tHy#fl}ftt##{3#i'iqlmE1l{}*vnr* *f qr:nt- r:l}Asdetailedinchapterl2,conrrolsystemtoolslikethebalancedscorecard,maybeusedbyorganisacionsindifferentways.TwocommonusesrelateroSimons'sleversofcontrol:diagnosric use and inreracttve use'When a controly';;; cool is used diagnostically' the focus is on the achievementof pre-ser rargers. These targets relate ro measures linked. to organisational straceg'v InSomeways)diagnosticusei*sallabotfimeasure,monitorandfeedback.Thatis,measuretheperformancearoundkeyperformancemecrics'monitorperformanceoutcomesagainsr pte_ser ,"rr..r*"ia-flo*a. r".auack ro managers to focus on achieving targetoerformanceinthenextperiod.Theobjectiveistofo".,,,o,',.theintendedstrategyandtJ:;il.il;;.;. il; ":r.,-prio,, i' ir,1 che intended srratesv is the right one, so'alternative straregies r." "., .ipf"red via the control system 'ool 1it't this case' the bal-'"ff;ffi';'::x'*1 sysrem roor is used interacrively, rhe focus :,11::.r.0 ar using the toolto review srrategy - i"rp i""r with the organisation's strategic uncertainties' Measuresare in place ,rra ,"rg* ie ser in much tl're same way rs *h"r1 the tool is used diagnosti-ca1ly. Howev"., i'-"t"J of tt'i'''g feedback on the pt'fot'.rltttt" metrics to stay on trackas intended, the feedback Process -ty t""f in.a revie* "ttl:rtl*tded strategy' Thismay be largeiy dri"""";;;i. *...rr"ir.iesfaced by an organisarion such as changes inthe regulatory environment or an intense.o-p.titirr. "n,it"'rlt''tt' control system coolssuch as the balanceJ ,.o..."rd can be ,,,"d itt addressing uncertainty' For example'carefuily selected -.;r;;;r;;;;iJ. f."db,.k about uncertainties and ear\ warning signalsio inai.t.. issues u'ith the currenc strategic path'ffi*$t*f sldsg#*Tls" h**n mny slds$#cTtffi *m# the h:*{*n*md ffim#fltrflcx*Balancedscorecard'sprovidetheopporruniryforanorganisationtoarticulateitsstrategr'and mission. w. -o|'ti'.";.:, .J?"i-ri.'r.t"d'am.itt1 core values and beliefs of theorganisation that underpi', i,, ,,.","gy in metric selection and in the targets set.

More.over, rhe process ,r;; ; develop ,r,," ,."*.lri i, tit "iy to reflect the beliel s)/stem of

understandiAtcract and retain qualiry n*ittg of new emPloYees'technical0.".""., ",.i3i1,"i'iil;;i.;;;;;;;; ;;;i;;;;;Develop IT infrastrucrure to N,t-b.. of ttighly engaged employeessupport knowledge sharing (intranet ParticiPation)

*Ft&pTfrg 'BS The bolonced scorecord ond slrolegy mops 707


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the organisation. For example, an organisation with open communication and a cu-:1rcof group consultation is likely to use a collaborative and consultative sryle of bala:r.adscorecard i mplemenrarion.With respect to boundary systems, through the measures used and targers ser, bala:l'dlscorecards are able to articulate the expecred behaviour from managers and emplo.ec:;This is particularly so when balanced scorecards are used on an individual basis- Frmexample, the scene setter at the start of the chapter iliustrates the use of individual *-me-cards r-rsed by Qantas for executives and managers. These individual scorecards u'oruMiheaviiy influence the behavior and decision making of these executives, particularlr- ll'hmscorecard performance is linked to incentives. This, of course, highlighcs the imporra:creof sound metric selection, otherwise the wrong kind of behaviour and decision maiu:ngwould be encouraged.W Stmps frar frrnp$*ffi#ffif$ffi# m hm$mr:tr#d $##reaordThe process of implementing a balanced scorecard is summarised in figure 18.7. Th,emgeneral steps are customised for each entity. Note that these steps focus on the rechl::n:an!aspects of implemenration. A range of behavioural aspects will also influence rhe suc;emor otherwise of the implementation. These include:. toP management support. achieving a management buy-in. use ol-mulriple champions. adequate communication throughout rhe implementation process. use of implementation feedback protocols. organisarion-wide parriciparion.**ruri$y v{s$*n- fr#r# fl#rffip*fmc''te{*m trffid str#t##*ffi$Clarifying the entity's vision, core competencies and strategies is cenrral to rhe balarcCscorecard approach. The vision provides an overall direction for the organisation. -n-:ccore competencies and strategies provide guidance for achieving the organisari.-::iailvision over the long term. To clarify the vision, statements are developed at che ori;:s-isational level and for divisions, product lines or departments. This process leads ro i:s".cussion and consensus, which further clarify an enriry's purpose. Similarly, rhe procesmof clarifying core competencies and strategies helps others understand how to acherethe organisation's vision.&mm$5ass p*r$p##?ivffis'fffi d*ve6mp p#rf#rflft#ffifr# #kljmfltaw*s cnd{'Y1##S{"J6.#$The next scep is to analyse rhe organisation from the four perspectives. This step rra::;lates the organisation's vision and strategies into a set of performance objectives *irh=each perspective. The analyses idencify what the organisation must do well to arrain ::svision, focusing on the linkages between perspectives. The performance objecrives sho'.:.ibe limited to factors that achieve the organisation's vision and strategies.The four perspectives introduced earlier are most commonly used for balanced sco:e-cards. However, different entities define their perspecrives differently. These perspecdr.esdiffer by ownership type (for-profit versus not-for-profit), by industry, by organisarir-::.and by subunit within organisations.For each performance objective, one or more measures are identified to monitor chsorganisation's progress. Corrective action is then taken, as needed. The measures refinancial and non-financial, covering both quanritative and qualitative data. Accoun:-ants are often more comfortable with quantitative measures, such as the average time ic

Expicin how a bqlancedscorecord is impler,'ienf*d

oART 2 Managem*::* *c**r;*"Ffin6, extr*di*g perfer*n*n** n'Fdafifen'leiif #!'?d stfl#?s$y


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complete a customerrs order or the number ofitative data, such as the results of customer andfor some performance objecdves.new customers obtained. However, qual-employee satisfaction surveys' are useful

- 3.7 Sleps in--- 19 o bolonced:--Input measures caprure activiry or effort whereas outcome measures caPture results'

Balanced scorecards fo.rrs o.r th.s" type, of expected links. overall, balanced scorecardsusually contain a range of measures,'with foui to seven per6ormance measures used foreach of the persPectives.fl*s:strru*f tr sts'ffifffi#w g"r$#p 9# rmiyxfmnam ffaat$ss hm?w##ffi yffi##s{"$r'#$As ourlined previously, rhe use of srrategy maps in a balan_ced scorecard framework isa more re."r.t deu.lopmenr. Organisations are abie to confirm the userulness of theirmeasures through construction of " on.-p"ge diagrammatic representation of the linksberween the measures in each of the perspectives. This can occur at a relatively broad levellike the srraregy map of Hunter Ne- England NSW Health in figure 18.3 (page 698), orit might b. -1." specifi.c, showing links between most of the measures'fi*r*rc.t#ni*{}$*- *$mk ?fr:r*rupfu**t fhm m*.64xntismf!mr: mm*J reflmsThe balanced scorecard is usually presented as a top-down plan. High-level exec-utives define rhe vision, .o.. .o-p.rencies and strategies of the organisation, then

CFcAFTEffi lS The bolonced scorecord ond strotegy mops 709


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communicate rhem to divisions and departments. yer success of the balanceicard approach depends on the efforts of individuals rhroughour the enriry. To s:tl're balanced scorecard must be communicated both ,rp a'.rd down the orgal:Linl


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i. r:q,,*;t'*i {i cstr: vt.: t'i *t n *m g * * # r*w*: r*t u* le p I r:y*mnAcrual results are compared to performance targets to determine rvlrether the resultsare berrer or worse thai desired. ih.n significant variances are anaiysed to identify theircauses) leacling ro modifications in futr..J plans. If the balanced scorecard is also used for."-tff.y"" coJpensation, rewards are comPuted and distributed'ff n*,,ui *j * f**d !*i: *.$a, * n d r'*:f i * *r f hr,* hux { m n **d s#4'i r"+;{:.4T r i:$An importanr parr of che balanced scorecard method is the feedback loop that usesresults and experience to refine the process. Managers use their analysis of balancedscorecard. results ro evaluace th" ,t...r, of their sirat"gi"s and operating plans' Thisevaluation leads to revisions in organisations'visions, core comPelencies' strategies and.f..*irrg p1ans. The effectiveness Lf ,h" balanced scorecard is also gauged' Accountants;J"r";;"rs modifi rhe ser of measures to ad.apt to changes in the entity and to pro-vid-e better information over rime. Some measu..i -"y be dropped or changed, and newmeasures maY be added'comprehensive example 2 demonstrates the implementation of a balanced scorecardin a hospital setting.

Implernenting cbelsneed sforees!'dTwo hospitals in a largeregional area have emerg-eficy deParcments, butneirher departmenr is 6nan-cially successful. Becausethe region needs at least oneemergency dePartment, thescate and local governmentsmet with hosPital officialsto determine the bestcourse of action. Both hos-pitals had sPent consider-able time reviewing theirvisions, core comPerenciesand current business strat-.gJr- fh.y agree that only the teaching hospital should continue operaring anemergency d.eparcment. The teaching horpitJ's mission is to provide both high-quality padent care and a learning .J.rrr" -fo. medical students. The teaching hos-pit"t.'".d,anemergencydepartmentsothatmedicalstudentscanPreParemoreihoroughly for careers as GPs and specialists'i"; trir"g"., at the reaching hospital decide to institute a balanced scorecard'They focus h.ra on service in the emergency department' because many more;r;;;.r, will be admitted when the orher hospical closes ics emergency deparr-ment. These managefs believe that new -.trrr.., of effrciency could help ease chetransition.

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The managers are also concerned about the cufrenl losses incurred by the emer+.n.y d.pt.trr:tent. Clinical Processes in the emergency department need to be t'o:hcosi effective and high quality ro maintain the hospitai's rePutation.elerlfy vision" core cornpetencies snd stretesiesA team of hospital adminisrrarors and emergency deparrment employees mee. iodiscuss the bafanced. scorecard implementation' The team decides that the hosp'l-tal's vision, core competencies and strategies also apply to the emergency depart-ment. The hospiral *r.d .-".g".rcy department's patient care goals are lo prorriiehigh-quality ."i" ir-r a timely -rr'r.r". and at a low cost for all patients. The hosprralrrr? "*".g.r-tcy department's teaching goals are co provide a high-qualiry educatiomfor medild inrder-rts, focusing on technological developments and innovacrtpalienl care rreatment'Anclyse perspeefive$ fCI develop performo{rce sbiectives endrnegSL,resThe team decides rhat the standard four perspectives (financial, customer, inremlibusiness process, and learning and growth) are appropriace for analysing rheemergency department's strategies and operations'FrJm a'financial perspective, the hospital needs to at least break even to guaranteeongoing operarion;. TLre controller analyses historical records for the deparrme:rtand. finds thac it has always operated at a loss. Untii last year, research granrs arrdgovernmenr subsidies were uiually enough so that the department broke er-e:rih" fin"n.i"l perspective is important because the department needs finanialresources to continuously updare the equipment and technology needed to proridehigh-quality parienr care. After discussing performance measures, three are chosenthlt ar" identical ro rhose used by the hospital as a whole (see figure 18.8). T\ro ofthe measures are profit margin ratios, which address the emergency department'sabitity to control costs relative to revenues. The operating margin ratio incluriasonly operating costs and revenues, while the excess income margin ratio includes,rorr-op.rari.rg revenue in the form of donations and grants, which typically suppirrhe needed frlnds for expansion or new technology. The third measure addressesreimbursement levels for the emergency department'Next, the team anaiyses the customer Perspective' The hospital outsourcespatient satisfaction surveying, and it monitors average satisfaction by departmenrio fo.,r, on pacienrs' pe.."ir.Jd quality of care. However, the survey results are onlvavailable qorrt".1y. The department wants measures that predict Patient sans-faction and that can be monitored daily. with dmely feedback, problems will t'eidentified and corrected quickly, before too many Patients are unhappy with someaspecr of service. The team decides that most patients would care about the averagedme they wait ro be seen by a doctor. In addition, several qualiry-of-care measurescould be monitored, such as the error rate in medication delivery, time waitingbefore admission to wards and cime for specialist referral' The final list is includedt"*f;]|".*tten analyses the internal business process perspective. The hospital'slong-term goals include managing Patient care and clinical Processes efficientll'ro,,'"irt"i., f,igh quality "r-rd .Jt'tt"itr costs. The team decides thac four aspecrs ofinternal business processes are cricical to rhe emergency department's success' Irthen focuses on identifying measures for those four aspects'


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ColculotionsoRolio of operoting Incomelo operoting revenue.bRotio of operoling plusnon-operoling income tooperoting plus non-operolingrevenues.

K F!S*r* i&"& Bolonced scorecord meosures for lhe leoching hospitol's emergency deporimentFor innovation processes, the team would like co motivate improvemenrs inroutine care such as delivering medications, arranging x-rays and blood. tests, andcleaning and restocking cubicles for quick parienr rurnaround. process improve-

ments include innovative ways to streamline daily routines and to increase parienccomforr. The number of process improvements in routine care will be tracked.clinical processes involve the technical aspects of care giving, such as settingup moniroring equipment and rhen using che information provided. The teamdecides to focus on the rime raken for a padenr to be discharged as a performancemeasure for clinical Processes. In addition to focusing on rhe decision to dischargePatients at an apProPriate lime, tracking this measure will also ericourage nursesto focus on the discharge process. The team believes that time spenr on dischargeinstructions is linked to fuil patient recovery. For exampie, patients are some-times readmitted because rhey become dehydrated ar home. Some medicationsrequire Patients to drink extra amounts of water; if this requiremenr is nor care-fully explained during the discharge instruction process, parienrs do nor recover asquickly and may require readmission.

{ffiSFTg* i& The bolonced scorecord ond strolegy mops 7 I 3


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The ceam considers several possible ways to measure cost containmenf. l-:decides to focus initially on a general measure of cost - the average cost per Fa:--:1:by diagnosis type. This measure can be monicored as frequently as desired, allc'.'.:. "emergency department managers to quickly identify any adverse trends in cc-.: -:also provides away for managers to monitor cost effects when new proceduras ;'rimplemented.The emergency department's managers consider post-treatment service {r-,-:.:needed) to be very important. Service after a patient leaves the centre conrrii-:.:to the qualicy of the patient's care. The team decides to measure this aspecr u.:: :the time spent on discharge instructions. \X/ith more time spent on disch:-,=-.instructions, patients should receive better home care, reducing the probab:,::that they will be readmitted. The team considers measuring the number of r.-.-phone calls made and emails sent with follou.up questions about patient he-::-,:care, but decides that it is more imporrant to focus on instructions before :-..patient goes home.Finally the team focuses on rhe learning and growth perspective. To ma:',-tain and improve the emergency department's reputation for innovarive pal::-itreatment, the team decides to track the number of new treatment procesi:-.developed. Because new technologies and care-giving practices are developed c..:r-tinually, the hospital provides a variety of medical education classes for nurs.'and other department staff. To encourage employees to take advantage of rha,..classes, the team chooses number of hours of training per employee as peri.:-mance measufe.Conrmc"'niesfe, link thr*r.sgh*u* *h* crgcmis*?i*n cnd refineeOnce the team develops a tentative balanced scorecard for the emergency depa::-ment, rhe plan is presented to top hospital administrators and to employees :-rhe department. The administrators consider whether the emergency deparrmer-objectives align with the overall hospital mission, strategies and objectives. The',believe that this scorecard appropriately addresses the hospital mission and prais:sthe team. Employees and medical students also feel that the scorecard helps rhe:::understand how the emergency department's objectives should be carried out.Sstsblisl-r perfer{mene* fsrs?s #nd datisn pg#E}sTl're balanced scorecard team believes that the measures in figure 18.8 are appro-priate for analysis. They ask the accounting department to collect informatio::about last year's operations so they will have baseline information for compariso;rwith future results. The team recommends that management and employees reviesrhe trends each month. After three months, the usefulness of this list of perfor-mance measures will be reassessed and the balanced scorecard can be changeciaccordingly.Figure 18.9 summarises the informarion developed by the accollnting deparr-ment for last year's operations. The hospital's accounting system crackspatient charges for supplies and services by department; however, reimburse-ment is tracked at the hospital 1evel because different payers pay different por-tions of charges, and some patients do not pay due to full reimbursement fromtheir medical insurance provider. Therefore, the patient revenue is assignedto the emergency department based on its average mix of care for Medicare,

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privatelyand themeasure.

insured and otherinformation maYpatienls. As a result, revenue is measured with error',-rot b" of quality high enough for a performance

Overoll deportment finonciol informotion:Pqtient revenueOperoting costs (cost of potient core)Non-oPeroting revenuesNon-oPeroting costs

Informotion on emergency deportment operotionsNumber of potients seen in emergencyTime to be seen by doctor (200 potients)fime woitlng before odmission to word 1200 polients)Time for speciolist referrql {200 potients)Number of medicotion errors

Polient solisfoction survey results for quolity of treoiment coreNumber surveYedAveroge sotisfoction roting i1 to 5 = verY sotisfied)

Other Potient-reloted dotoTotol Potient doYsTime token for dischorge {200 potients)Minutes spent on dischorge instructions

EmploYee-reloted informotionTotol time spent in trolning (hours)Number of emPloYees

Process imProvementNumber of process improvemenis in coreNumber of process improvements in treotment

$5 040 0006 300 000r 500000

300 000

2522 0004 0004 000l0

130J.O

2 1424 0005 040

8753532

The cosr data about parienr care in the emergency departmenr is quite accu-rate,althoughpatientcostsincludefrxedcostallocations.Anychangeinthealiocation bases or merhods reduces comparability of patient cost informationover rime. parienr survey informarion is gathered by the quality and utilisadona"pt.rrn.n,. Although 'ht '""rrl would like daily information about customersatisfaction measures, surveys about patient satisfaction with services provided"r.-giu"nrandomiy't.o20'percentoftheemergencydepartment'spatientsduring the firsc .ht"" dty' of each month' The survey resPonse informationis forwarded to the accounting department on the chird day' The accounringdeparrmenc d,oes nor have timelo ciack this measure more frequentiy. Employeesesrimare rheir time ln training each month. Because they do not always filI outrhe reports, rhey arc.o'l"t'"Jby accounting each month to.update any missingestimares. Time spenc on discharge i.trt.rr.ti.-o.t, for each Patienl will be reportedby discharge nurses using a ttt- io'rn developed by the accounting deparcment'Once a month, t..ottt"J"" will meet with physicians and nurses to determinethenumberandtypeofimproveme,,.t,a.,'d'i,,.'ovalionsintreatmentandcare-giving Processes.

eF!s{,''*1&,sBoloncedscorecorddoloforlheteochinghospitol,semergencydeportmenl

*s"c&Pt'ilft *S The bolonced scorecord ond sirolegy mops 715

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23/30

The balanced scorecard team uses the information in figure 18.9 to calculr'mlast year's performance as shown in figure 18.10. Team members review this in-frmmation and then meet with personnei at the other hospital to collect informancm"bo,rt it, emergency d"p".t-.r-rt. They then determine appropriate benchrn"a:ftr"rrd ".rion plan"s for the emergency department during the transition period"

:nd v',: clon

Finonciql perspeclive performonce meqsuresOperoting morgin rolio:Ooerolino m0rqin

Polient revenueExcess income morgin rotio:Operoting plus non-operoiing income -Operoting plus non-operoting revenueRotio of reimbursemenl to costPotientrevenue $5040000

Operoting morgin 56 300 000Customer perspeclive performonce meqsuresAveroge time to be seen by doclor (minutes)Time token for odmission to word (minutes)Time for speciolist referrol {minules)Medicotion errorsAveroge solisfoction with quolity of treotment coreInternol business process perspecliveInnovotion of ProcessesNumber of process improvements in rouline coreClinicol processes

Time loken for dischorgeCosi contoinmenl

Averoge cost per potieni (Operoting cosls + No of odmissions)Posi-treotment service

Time spenl on dischorge instructions (minutes)leorning ond growih PersPediveNumber of new treotment processes developedAveroge troining hours per employee

* Bisur 1&"is Boseline bolonced scorecord resulls for the teoching hospitol's lroumo centreBecause measures for rhe combined. emergency departments are likely to be dii-ferent from the current cen[re) a rransicion period will be needed to determinerfpr"p.itr" benchmarks' During the transition time' emergency departmenc staff

hired, from the other hospital toln U. introduced lo the scorecard' \X/ithin several-o.rrt r, targecs can be r"t fot every performance measure' and monitoring willU"gi". f"f".iacion from ch" ,.or".triwi11 be evaluated to determine areas in needof i-p.o,r.-enr. In addition, the current balanced scorecard will be re-evaluatedand changed as aPProPriate'

5 040 000 - 6 300 0005 040 000${60 000}

$6 540 000

,sZCI:03"S

2A$2s 000

20

225

IS(

'l?? 2 Monogeffie*? s{es#ntirrg, crrtendirlg perf$nr"l*rtc* '$4$sa.!fsffiefi{ $*d x$-r*t*gy


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": :-.englhsI - =sses oi the- .- ...^rdffi Sfr*rugfhs mmd w*exkmws$#s ruf ?hm hm$mm**ds*mr*crurSimilar to other new accounting techniques, the balanced scorecard has both strengthsand weaknesses.Str'r'**-r6tfumEntities are under increasing pressure to meet customer needs, use resources effi-cienrly, compere effectively under changing conditions, employ new technologiesand operaring methods, and provide a good return to shareholders. These demandsrequire more effective implementation of vision and strategies. The proponents ofthe b"l"rl."d scorecard method argue that it improves performance by helpingorganisarions inregrate their visions and strategies into operations more completely.Many of the advantages of chis approach, already described, afe summarised infigure 18.11.

Communicolion ond linkoges. Encouroges clorificotion ond updoting ofvision ond strotegies. lmproves communicotion ondconsensus throughout the entitY. Links shorlJerm ond long{ermperformonce objectives to the vision ondstrotegies

Guidonce for improvements. Enqbles periodic performonce reviews o{progress towords vision ond strolegies. Leods to improved finonciolperformonce. Helps monogers use operotionol dotofor decision moking

Motivotion. Aligns unit ond individuol gools wilh theorgonisotionol vision ond strotegies. Motivotes employee effort. Reduces optimisolion of subunits ot theexpense of the entilY qs o whole. Promoles oction towqrds ochievingstrotegies

Implementotion is expensive ond time-consumingUncerlointies. Approprioteness of vision ond

strotegies. Accurocy of identified corecompetencies. Best set of performonce objectivesond meosures. Reliobility of scorecord dolo. Reosonobleness of torgets. Doubt obout links omongperspectives

Mistokes in implementolion. Ambiguous or generclly definedobjectives. Informotion systems nol integroted. Insufficient resources. Lock of senior monogement support

. Focusing on inoppropriote objectivesBioses. Monoger selection of fomilior oreosily ottoinoble objectives ondmeosures. Resistonce from units ond individuols. Process viewed os o temporory fod

Moy be inoppropriote for compensotionVision moy nol odequotelY coPturecore vqlues including relotions withregulotors, opprooch towords theenvironment etc.: ll 5llhQThSOllO-s of o bolonced

*FepY*tr T& The bolonced scorecord ond strotegy mops 7 17


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tr#*xkra*****Any method designed to help entities improve management decision making inlweaknesses because the process of management decision making is inherently unc*:No perfect solutions have yet been discovered. Major weaknesses of the balanceci si."rJr.. summarised in figure 18.11. First, the balanced scorecard faces questions aits cosrs and benefirs. Considerable time and effort are needed to develop and irebalanced scorecard. Outside consultants are often employed, and the time inr.oh'aikey managers can be considerable.UncertointiesUncertainry is part of any balanced scorecard. The underlying assumptions are rha:vision and core competencies have been properly identified and that implementa;lonthe organisation's strategies leads to success. However, tire best choices for a visio:set of strategies are ambiguous; managers might incorrectly identify the enclry's sre:relative to competitors. Furchermore, the Process of identifying appropriate perforr:objectives and measures is not straightforward. The balanced scorecard methoc.-';requires managers to identify the most important aspects of operadons, yet the\- .be known with certainty. Once performance objectives are selected, additional u:tainry about the best set oFmeasures arises. Some measures are more reliable than .-rhtmhalthough less-reliable measures can at times address a more relevant asPect of operai"-rmUncertainties about choices of information for a balanced scorecard chailenge =,m-agers and accountants. For example, potential customer satisfaction measures in;rrulbmarket share, number of return cLlstomers) number of new customers, and ratings *msatisfacrion surveys. Although the number of return customers and number oi asmcustomers can be measured with a high degree of accuracy, this information mal- :lil!be as relevant for gauging customer satisfaction as other measures. Market share :r,ilor may nor be reliable, depending on the accuracy of information about total ini::mvsaies. Many factors influence the reliabiliq, of survey ratings, including the survet'desr{Mumerhods for collecting samples and the types of customers surveyed. To decide ol incbest measure, managers and accountants need to weigh the qualiry and reiet'ance cd'information across potential measures.Another uncertainry is rhe best choice for performance targets, including hou'qui;k$ran enriry should be able ro achieve its performance objectives. Low targets ma1' t-al romorivate sufficient effort. High rargets discourage performance when employees Perc.:'itthem as unrealistic.The balanced scorecard also assumes specific linkages among the four perspeci"tsIn particulaq it assumes that improved performance in internal business processes ;::nJin iearning and growth lead to improved customer-related measures. In turn, impro',"e"dcustomer-related measures are assumed to lead to improved financiai performance. Thescassumptions, however, might not hold because of uncertainties abour the measures a:lJaboutlhe interrelationships among aspects of an organisation's activities. Researchcsfound cause-and-effect relationships only between the customer Perspective measures a:.1financial performance measures. Although research studies do not Prove the absence ofllinks, they raise doubts about the linkage that managers and accountants need to consii*.Mistokes in implernentstionAnalysts and consultants poinc out a number of areas where mistakes are often made i:balanced scorecard implementations, leading to poor resulcs. Sometimes performan.-eobjectives are ambiguous or defined too generally, reducing the balanced scorecari'seffectiveness in communicacing the actions needed to achieve the entity's vision and strar-egies. Sometimes the organisation's information systems are not designed adequatelv to

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capture information need,ed. The balanced scorecard. can be expensive toimplement, and

,,,ay faceinadequate resources for designing, implementing, communicating, foilowingthro,rgh on ,.r.r1r, and refining the methodology over dme' Although senior managers,." g#"r.tty involved in rhe inlcial adoption of a balanced scorecard, they may give theprocess inadequate suPPort.Anorher misrake ."Lr", to the selection of inappropriate objectives and relatedmeasures. Author Jim Collins argues that many ..ttiti.t focus on the wrong financialmeasures. His research suggests ,lr, -"r-rtg"rs of rhe best-performing companies oftensucceed because rhey adoil more insightful measures ro monitor cheir businesses' For.""-pt., Gillette shift"d it, fo.r* froi profit per division to profit per customer' Thisshifr ieiped Gillette recognise the importance of repeatable purchases of high-marginp.odrr.t, such as Mach3 razor.artriig"s. Companies where managers failed to adopcli-il".ly insighdul measures were not as successful'10BissesSeveral types of biases reduce the effectiveness of a balanced scorecard' Recent researchsuggests that managers select Performance measures with which they are most familiar -measures thar may not induce behaviour that leads to financiai success'11 In addition'managers have incentives ro choose performance objectives and measures that highlightareas that are strengths instead of tr.", that need improvement. Any organisationalchange is likely co encounter resistance. For example, employees may view the balancedscorecard. as a temporary management whim that Joes not deserve their attention' Theserypes of resistance .r.r p..,r.nr"rhe endry-wide commitment and effort required for bal-anced scorecard success.Other foctorsSome questions surround whether or how the balanced scorecard should be used to.o-p..rrrr. employees. Because of the uncertainties akeady discussed, many employeesp....i r. balanced ,.o.".r.d measures to be unfair for use in compensation calculations'i' irrrr. regarding the use of the balanced scorecard in compensating managers is howio "a.q.rrrJty ,-.Ighr, the measures. some organisationl dgvelog a balanced scorecardi.rd"", ..fl".ting rh; balanced scorecard pe.for-a.tce and linking it to compensation (seechapter 19 for an in-depth discussion of .o-p.nr"tion and reward systems)' In-addition'*"iirrr, or orher formulaic approaches for using balanced scorecard results lead to game-pl#tg and suboptimirttio", to"trary to the purpose of a balanced scorecard'Another criticism ofthe balanced scorecard ippio".h is rhar it does not adequately cap-rure core values, inciuding relations with regulators or apProaches towards the environ-menr. An enriry's .o.. ,riio", are theoretically embedded in its vision and strategies'However, cufrent literature on the balanced scorecard places little emphasis on values'$*{mw vexlu:*him is ?$'le hmlmrreed $fisl"#cffifr"d?Given these perceived weaknesses in the balanced scorecard, some people are inclinedto dismiss chi, -ethodoiogy; they want greater certainry about benefits' However' anymerhod. that manager, .rr."ro heip them-develop and implement business strategies issubjecr to significairt ,..r...t"i.rry. we learned in chapter 1 about the path co higher-qualiq,managementdecisions,presentedagaininfigure18.l2.Higher-qualirydecisionsoccur from use of che foliowing:' higher-qualitY information' higher-qualitY rePorrs. higher-qualiry decision-making processes'

f;L{ApTfiffi 1& The bolonced scorecord ond sirolegy mops 779


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r Figure 18.i? Poth lohigher-quolily monogementdecisionsThe besr questions to ask about the balanced scorecard methodology are u,herhe: u

helps managers and employees throughour the entity make higher-qualiry ds6i5ic,rr{iand whether the benefits from improved decision making exceed rhe cosrs of irner,*.menting and maintaining a balanced scorecard. Is the information in a balanced sc,-iecard of higher quality than the informarion managers previously used? Are balar:cerdscorecard reports more relevant, understandable and available on a timely basis? D..'esuse of the balanced scorecard encourage managers and other employees to be mo,r'cthorough, less biased, more focused, and more srraregic, creative and visionarr'? P;o-ponents of the balanced scorecard methodolo gy arglre that the answer ro each of rhescquestions is 'yes.' They also point out that the balanced scorecard should nor be vienleldas a static formulaic approach. Instead, it must be re-evaluated and refined periodr.=ilrrto provide better information for monitoring and motivaring performance. Perio.focre-evaluation allows managers to eliminate or alter measures rhat do not fit well anc loidentify potential new measures that offset unintended negative effects. As the en;:l-learns, it can do a berter job ofdesigning and using a balanced scorecard. Organisadonsthat fail to engage in continuous improvement are less likely to achieve high-qua-:nresults.

Undersiqnd how financialond n0fiJin0ncial meosuresore used to evalucteorgonisfl iion0l performcnce.

Oulline the role 0f stroiegymops in the bolancedSCOreCCrd process.

A strategy map provides a visual representation of the straregy with a single-page r.ie*'of how objectives in the four balanced scorecard perspectives (financial, cusromer-internal business process, and learning and growth) integrate and combine to guide rhestrategy. It illustrates the cause-and-effect relationships that link desired ourcomes inthe customer and financial perspectives to outstanding performance in critical internal

2 r^da*tg=:e**? *e*+::*;ti*gt x***dFrlpj paa'f*r*r**** *r*ttsurel':rs*f *+S rrl"rf,fe#y


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Derspectlves'r 'r _ -

processes - oPeradons, management' customer managemenl' innovation and regulatory/social processes.The focus oF a srraregy map should be ro:. provide a link betw# *"'otgt"i"t1""-::,'**gy and the balanced scorecard. (where appropriate) convey the key strategic themes developed from the. ::1ffil'::;:x,1T.il",s srraregic objecrives in rhe four balanced scorecard

ffirPoratebothfi.nancia1andnon.financia1performancemeasureSinto organisari.""r -"'Jg""';'": lt:':-: ]..T:::'ii'f:'::::".tJJ::l;:*Tt'r'"t'fiii::;#:1:::.".il:T::ffi; fi;lo ffi'-""" t"""""' tha'c can be monitoredover time.

Innovation cYcleOoerarions cYciePosr-sales service cYcle

eracdvely relates essentially to the pri-mary us e ",.'d p'. p o, J' ;; ;i;;; ;l "l ":'-" *:":li iitlff t?; jl i t;::;;, n ;,i;ffiffI"il:##; ;s;; ;; ;";' wavs' diagno::: :::':,1]"*:* n^easure' lnonxtorand. feedback wh".' *'"'J'til;;;'t' 'g::::::lt:'i::ii:;:'Jt 'n" toor to reviewr;;;l;;;;; ;elp deai with the organisation's strategic uncertalncles

""a 'ntorrgh the metrics useddirect managerial attentio" i'-t th" form of a boundary system'

*b4rAP'!ft 1& The bolonced scorecord ond strotegy mops 721


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Exploin how o boloncedscorecord is implemented

ffiffi&tu#identify fhe strengthsqnd weoknesses of thebqlqnced scorecord.

Communicoiion ond linkogesr Encouroges clorificotion ond updoting ofvision ond strotegies. Improves communicotion ond consensusthroughout the entily. Links shortJerm ond long-term performonceobjeclives to the vision ond strotegies

Guidonce for improvemenlsr Enobles periodic performonce reviews ofprogress towqrds vision ond strotegies

. Leods lo improved finonciol performonce. Helps monogers use operotionol doto fordecision moking

Implementotion is expensive ond time-consumrngUncerloinlies. Approprioteness of vision ond strotegieso Accurocy of identified core competencieso Best sel of performonce objectives ond

meosures. Reliobility of scorecord dolo. Reosonqbleness of torgels. Doubt obout links o.ong perspeciivesMistokes in implemenlotion. Ambiguous or generolly defined

objectivese Informolion systems not integroled. Insufficient resourceso Lock of senior monogement supporl. Focusing on inoppropriole objectives

7 22 F&RT I F+tr


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Motivolion.' O"n.. ,"n ond individuol gools with theorJonisotionol vision ond slrolegies. M6tivotes emPloYee effort. B"Jr."t optimisolion of subunits ol the"*P"nt" oi rhe entitY os o whole. Promoles oction lowords ochieving strotegies

Biosesl'l*"*on"t selection of fomilior or eosilyottoinoble obiectives ond meosures. n"rirton." from units ond individuols. oto."tt viewed os o temPororY fod

MoV be inoppropriote for compensoiion

xff Frqfi'if :'#,fii'F;li15llail**:'';;:mly"trffr:'n:,'r*,:rraregy is ro continu"ittyll-l::f"'::.;;;i;rs.'The enrity operates three sub-unrtsl. *:l*;:sm "T l::ffiT:iT.'.1;: Hr" ;; ;'' i' "'.ry "- b rk" "'r cu r re n'civ p roduces. A Fourth bik. li;;l;;.u.1.p-.nr.i".l;;;'r'a finished design' wirh engineers cur-renrlv working on the oi"t' rt'' tnt't"nt'r"'.ti;ig';;t:" loynioandenong Bikes sellsdirecrty to bike rn.O, "0"'i'.;.;;;;";

t;,;r,.'., r',.?ti" allou s bilce shops ro place orders For

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customised Products'R*iti:ireu(a)DescribetheimplementationcycleforthebalancedscorecardaclvlountDandenongtu)BJf:;ib"therourp:"P::'ll:'^:::T-t":t::::il::::fi:;':"tJ:ffi :".:fi T:nerlormance objecrives for each persPectr'''H:{l',3i1:il#ki: j::}:,fff i::J:;'.',T:'"::?"i:'J'?il1:::il##;or lTrore Potentlala, |:T,"fl ff:?:r lfi cons of implementing a balanced scorecard for Mount

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Dandenong Bikes'tr.p, fb;Plt-"**g a balanced scorecard tor Mounr Dandenong Bikesfr". ng.tr. tg7 orl Page709):i"zi:,:;,i,?;I,",:,1,^:;;lx,i,,a,a,gyg';;,.y:;::;l*nr.'ff ixi:r ar tf1,. i: y:' " :: :?::

"',:;#:i;;H;;; ;"'g" r, s h o uid ar s o. co n s i de rdeveloped its mrssron t , -^.-^ -'^1'.^c ..'.o*"rir' In addition' the manaleveloped its mrssron tt":'^:':^:-'-i',".'.."r"-.rir' h-r addition, lhe managers*ririri a vision sratement 1li t::""]*:t lti ."*o"rencies. nv.., tho.rgh tf,e[:: i: il:'i,T :T:lil: i: : .';;; ;J i:*"::: m ffiT ;::il,*H ?: i i:eed to clatfi Moult.ijanoerrurr5 "-*" *"^-;ers'should review them and revrse;;;;A sPecified its strategies' rhe manr

,r;fr:';;:;::;;:;tod'euetopp*r"*':':i!1:::::'"^:::?K"",,timanasers,t..J .o analyse tr'tt "l'i"'yt i'i'io'-' t"d 'rategies' from each-:l::'" t"tperspectives for the ;il|;;;to'1' n""titial' customer' internal businessnrocess, and rearnrng and growrh.,wi.hir';;:;-f.rrfrr"*' ':tl-"ttd ro idenrilyi :Tji ;; ! : : :i:#i :r ;:.: nt i':,:: ; :; : :' :i, x:l :", ilil :; "' *:"'J " .'the managers must

18 the Balance Scorcard and Strategy Maps

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Transcript of 18 the Balance Scorcard and Strategy Maps