BALANCED SCORECARD Strategic Management. IHW 2005Balanced Scorecard2 Diffusion of a New Idea “ The...
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Transcript of BALANCED SCORECARD Strategic Management. IHW 2005Balanced Scorecard2 Diffusion of a New Idea “ The...
BALANCED SCORECARD
Strategic Management
IHW 2005 Balanced Scorecard 12
Balanced Score Card
Balanced Scorecard 2IHW 2005
Diffusion of a New Idea
• “The Balanced Scorecard: Measures that Drive Performance” (Robert S. Kaplan and David P. Norton, Harvard Business Review, February 1992)
• About 35% of Fortune 2000 firms have adopted a balanced scorecard, 55% of those firms are very satisfied with it. (R. D. Banker, C. Konstans and S. Janakiraman; January 2000)
Balanced Scorecard 3IHW 2005
Balanced Score Card• A new approach to strategic management
was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton (Balanced Scorecard Collaborative).
• They named this system the 'balanced scorecard'. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.
Balanced Scorecard 4IHW 2005
Balanced Score Card• Kaplan and Norton describe the innovation of
the balanced scorecard as follows:
“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 relation-ships 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."
Balanced Scorecard 5IHW 2005
Evaluation Methods Balanced Scorecard – Four Perspectives
Customer PerspectiveHow should weappear to ourcustomers?
Financial PerspectiveHow should we appear to our shareholders?
Learning and Innovation Perspective
How should we sustain our ability to change and
improve?
Internal BusinessPerspective
At what business practice must we
excel?
VisionAnd
Strategy
Balanced Scorecard 6IHW 2005
Balanced Scorecard
Internal Process Perspective
What business processes are the
value drivers?
Learning & Growth Perspective
Are we able to sustain innovation, change and improvement
Customer Perspective
How do we look to our customers?
Financial Perspective
How do we look to our shareholders?
Vision & Strategy
Balanced Scorecard 7IHW 2005
Balanced Scorecard for a Retailer
Internal Process Perspective
• Service quality• Product quality• Inventory
managementLearning & Growth
Perspective• Information systems• Employee
satisfaction• Employee training
Customer Perspective
• Customer satisfaction
• Customer retention• Market share
Financial Perspective
EVA (Residual Income)Profit per square foot
Vision & Strategy
Balanced Scorecard 8IHW 2005
Balance in the Scorecard
• Balance between financial, customer, internal process and learning perspectives
• Balance between financial and non-financial measures
• Balance between short-term and long-term objectives
* Balance between hard, objective measures and softer, more subjective measures
* Balance between different stakeholders
Balance between strategic and diagnostic measures
Balanced Scorecard 9IHW 2005
Horizontal Balanced Scorecard
Investors
FinancialPerspective
Lenders
FinancialPerspective
Customers
CustomerPerspective
Employees
InternalPerspective
Suppliers
ProcessPerspective
Balance between different stakeholders.
Balanced Scorecard 10IHW 2005
Vertical Balanced Scorecard
Learning and Growth Objectives
Internal Process Objectives
Customer Objectives
Financial Objectives
BALANCED SCORECARD DESIGN
1. Identify strategic objectives for each perspective.An objective is a statement of strategic intent. An objective states how a strategy will be made operational. Application will allow strategic objectives to be aligned with at least one perspective.
2. Associate measures with strategic objectives.A measure is a performance metric that will reflect progress against an objective. A measure must be quantifiable. Leading measures are predictors of future performance, while lagging measures are outcomes. Measure has to be linked with an objective.
3. Assign targets to measures.A target is a quantifiable goal for each measure with a specified time frame.
4. Link strategic objectives in cause and effect relationships (Theme).Objectives are linked to one another through cause and effect relationships. Application should be able to represent the linkages graphically and should able to edit/change as appropriate.
5. List strategic initiatives.Strategic initiatives are action programs that drive performance. The application should allow for setting of strategic initiatives to be linked to at least one objective.
6. View the strategy from four perspectives (Financial, Customer, Internal and Learning).A perspective is a component into which the strategy is decomposed to drive implementation. Other perspective may be added to the typical set or replace based on specific strategic need.
Balanced Scorecard 12IHW 2005
Balanced Score Card
Balanced Scorecard 13IHW 2005
A Balanced Scorecard
”A method for the organization to systematically develop a comprehensive link between its strategy and a coherent set of performance measures.”
“A method for the organization to systematically develop a comprehensive system of planning and control”.(Kaplan and Norton, Harvard Business Review, 1992)
“Is a performance measurement system that translates an organization’s strategy into clear objectives, measures, targets, and initiatives.”(Kaplan and Norton, Harvard Business Review, 1996)
Balanced Scorecard
The balanced scorecard (BSC) provides a framework for selecting multiple performance measures focused on critical aspects of business (Kaplan and Norton 1992).
The essence of the BSC is the articulation of linkages between performance measures and strategic objectives (Kaplan and Norton 1996).
2
Balanced Scorecard 15IHW 2005
Translating Strategy Into Initiatives For each perspective:
Key SuccessFactors
PerformanceMeasures
Targets Initiatives
Strategy
Balanced Scorecard 16IHW 2005
A Strategic Scorecard
• Should include leading indicators Leading indicators: Drivers of long term
value Lagging indicators: Feedback measures
on current performance• Should include outcome measures as well as
measures of the drivers of those outcomes• Should link all measures with the overall
strategy
Balanced Scorecard 17IHW 2005
Diagnostic vs Strategic MeasuresDiagnostic measures Monitor whether the business remains
“in control” Signal when unusual events occur that
require immediate attention Necessary, but not sufficient, for
achieving long term goalsStrategic measures Articulate a strategy designed for
competitive excellence Evaluate strategies based on new
information about competitors, customers, markets, technologies & suppliers
Balanced Scorecard 18IHW 2005
Financial Perspective Customizing Measures for the Growth Stage
• Sales growth rate• Sales in new markets• Sales to new customers• Sales from new products• Investment in product development• Investment in information technology• Investment in employee skills• Investment in new distribution channels
Balanced Scorecard 19IHW 2005
Financial Perspective Customizing Measures for the Sustain Stage
• Return on capital employed• Economic Value Added (EVA)• Operating income/Gross margin• Discounted cash flows• Asset utilization rates• Cost reduction rates• Cost benchmarked against competitors• Customer and product line profitability
Balanced Scorecard 20IHW 2005
Financial Perspective Customizing Measures for the Harvest Stage
• Current cash flows• Payback period• Spending ratios• Throughput ratios• Product line profitability• Negative cash flow customers
Balanced Scorecard 21IHW 2005
Customer Perspective: Strategic Outcome Measures
Market Share
Customer Acquisition
AccountShare
CustomerSatisfaction
CustomerProfitability
CustomerRetention
Financial Objectives
Customer Outcomes
Internal Process Outcome Drivers
Balanced Scorecard 22IHW 2005
Customer Perspective: Unique Value Proposition
CustomerAcquisition
CustomerSatisfaction
CustomerRetention
Value =
Brand EquityUniqueness Functionality Quality Price Time Convenient Trusted Responsive
Product/ServiceAttributes
Image Relationship+ +
Balanced Scorecard 23IHW 2005
Satisfy Customer Needs
Satisfy Customer Needs
The Internal PerspectiveGeneric Service Value Chain Model
Identify Customer Needs
Identify Customer Needs
Innovation Cycle Operations CyclePost-Sale Service Cycle
Efficiency
Effectiveness
Identify the
Market
Create the
Service Offering
Produce the
Services
Deliver the
Services
Service the
Customer
Balanced Scorecard 24IHW 2005
Learning and Growth Perspective
Long Term Success
Employee Skills
Information Systems
Organizational Processes
• Satisfaction• Retention• Training• Capabilities
• Real-time availability• Accuracy• Pervasiveness
• Alignment of incentives with key success factors
• Improvement in key customer and internal processes
Objectives Capability Measures
Balanced Scorecard 25IHW 2005
So, A Balanced Scorecard…
• Is much more than a collection of indicators of key success factors.
• Is a flight simulator, not a dashboard of instrument dials.
• Integrates performance measures with a unique strategy.
• Incorporates cause-and-effect relationships, including leads, lags and feedback loops.
Balanced Scorecard 26IHW 2005
Linking the Balanced Scorecard to Strategy
Financial
Customer
Internal Process
Learning & Growth
Return on Capital Employed
Customer Loyalty
On-time Delivery
Process Quality Process Cycle Time
Employee Skills
A Strategy Is a Set of Hypotheses About Cause and Effect
Customer
Balanced Scorecard 27IHW 2005
Link to Financial Objectives• Balanced scorecard retains a strong
emphasis on financial outcome measures.• Ultimately, causal paths from all
performance measures should be linked to financial objectives.
• Failure to link improvement programs (e.g. TQM, cycle time reduction, reengineering, and employee empowerment) results inevitably in organizations becoming disillusioned about lack of tangible payoffs.
The Balanced Scorecard for The Women’s Store Employed in the Experiment
Measure Target Actual Percent Better than Target
Financial:
1. Sales margins 60% 67.02% 11.70%
2. Sales growth per store 15% 16.75% 11.67%
3. Inventory turnover 6 6.59 9.83%
4. Debt-to-assets ratio < 20% 18.07% 9.65%
Customer:
1. Price relative to competitors’ price +7% 7.79% 11.29%
2. Customer satisfaction rating 80% 88.44% 10.55%
3. Sales per square foot of retail space $30,000 $33,090 10.30%
4. Number of credit card customers per store 8,000 8,911 11.39%
Internal Process:
1. Brand recognition rating 80% 87.60% 9.50%
2. Number of stock-outs < 3 times 2.66 11.33%
3. “Mystery Shopper” audit rating 85% 93.47% 9.96%
4. Time to process customer returns < 4 min. 3.54 11.50%
Learning and Growth:
1. Employee satisfaction 80% 87.96% 9.95%
2. Employee suggestions per year 2.5 times 2.74 9.60%
3. Store computerization 60% 66.24% 10.40%
4. Hours of training invested in brand managers each year
80 hours 89.10 11.38%
Balanced Scorecard 29IHW 2005
Metropolitan Bank’s Strategy• “We must increase our income and revenue by
broadening the services sold to a targeted group of customers.”
• “We cannot continue only receiving deposits and processing checks. Competitive pressure implies that we develop and sell new services such as mutual funds, credit cards and financial advice.”
Balanced Scorecard 30IHW 2005
DevelopSellingSkills
Access toStrategic
Information
AlignPersonal
Goals
Understand Customer
Needs
DevelopNew
Products
Cross-Sell Products
Increase Customer Satisfaction With Our Products
BroadenRevenue Mix
Increase Return toStockholders
Instill a Selling Culture
Financial Perspective
Customer Perspective
Internal Process Perspective
Learning Perspective
Metropolitan Bank: Cause and Effect
Balanced Scorecard 31IHW 2005
Metropolitan Bank’s Balanced Scorecard
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
Balanced Scorecard 32IHW 2005
Why Do We Need a Balanced Scorecard? To Implement Business Strategy!
“Less than 10% of strategies effectively formulated are effectively executed”Fortune
“Business Strategy is now the single most important issue… and will remain so for the next five years”
Business Week
Balanced Scorecard 33IHW 2005
Scorecard Structure
• Scorecard is very context-specific Industry and competitive factors Life-cycle of business unit Business strategy
• It is important to validate cause-effect relationships for each individual business.
Balanced Scorecard 34IHW 2005
To Implement a Balanced ScorecardThe organization must • Define and develop measures for its
primary strategic objectives.• Understand how different business
processes contribute to its strategic objectives.
• Identify the drivers of performance on strategic objectives.
• Develop a set of measures to monitor drivers of strategic objectives.
• Communicate its beliefs about how processes create results.