BSC

58
Balanced Scorecard Approach Presented by Padarabinda Maharana 10IM60R08

Transcript of BSC

Page 1: BSC

Balanced Scorecard Approach

Presented byPadarabinda Maharana

10IM60R08

Page 2: BSC

Contents

Introduction Evolution of balanced scorecard Representation of balanced scorecard Steps for developing a Balanced

Scorecard Application examples

Page 3: BSC

What is a Balanced Scorecard ?

It is an example of a performance measurement system.

Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth)

to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to

the market (customer) which will eventually lead to higher shareholder value (financial).

Source-“Having Trouble with Your Strategy? Then Map It” by Robert S. Kaplan and David P. Norton - Harvard Business Review

Page 4: BSC

We can say….

Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals

Page 5: BSC

Why the Balanced Scorecard?

Traditional financial measures Inadequate for guiding

and evaluating the future value through investment in customers, suppliers, employees, processes, technology and innovation

Balanced Scorecard Complements

financial measures of past performance with measures of the drivers of future performance.

The objectives and measures of scorecard are derived from an organization’s vision and strategy.

Page 6: BSC

Evolution of Balanced Scorecard?

People and their managers are working so hard to be sure things are done right ,that they hardly have time to decide if they are doing the right things.

Page 7: BSC

Evolution of Balanced Scorecard?

Traditional financial measurement and its Limitations

Not consistent with today’s business realitiesTend to reinforce functional silos Sacrifice long-term thinkingFinancial measures are not relevant to many levels of Organization

Page 8: BSC

Evolution of Balanced Scorecard?

Critical Issues of successful Strategy Implementation Barriers to Implementing Strategy

Vision Barriers (5% of work force understand the strategy)People Barriers (25% of Managers have incentive linked to strategy)Management Barriers (85% of executive team spends less than a hour per month discussing strategy ) Resource Barriers (60% of organization doesn't link budget to strategy )

Source- Balanced Scorecard Collaborative

Page 9: BSC

Evolution of Balanced Scorecard?

What is Needed ?

“A system that balances the historical accuracy of financial numbers with the drivers of future performance, while also assisting organization in implementing their strategies”

Page 10: BSC

Evolution of Balanced Scorecard?

Robert Kaplan and David Norton originated the balanced scorecard approach in the 1980’s. They fully packaged and presented the approach in a 1992 Harvard Business Review article.

The approach was an effort to achieve goal congruence amongst the various strategic measures within an organization.

BSC has been adopted by nearly half of fortune 1000 organizations

Page 11: BSC

Concept of balance

The concept of balance is central to the system and demands balance in the following:

Balance between financial and non-financial

indicators of success in short and long

terms

Balance between external and internal

constituents

Balances performance drivers (leading

indicators) with outcome measures (lagging

indicators)

Page 12: BSC

Measures

How do we know we have achieved it?

Measures

How do we know we have achieved it?

Tactics

What do we need to do?

Tactics

What do we need to do?

Strategy

The game plan?

Strategy

The game plan?

Goals

What do we want to achieve?

Goals

What do we want to achieve?

Mission

Why we exist?

Mission

Why we exist?

Vision

What do we want to be?

Vision

What do we want to be?

COMPETENCIESCOMPETENCIES

VALUESVALUES

What skills do we need

What we believe in

Organization Snapshot

Page 13: BSC

Representation of BSC

BSC as a Measurement System BSC as a Strategic Management

system BSC as a Communication tool Cause and Effect Relationship Balance in the BSC

Page 14: BSC

BSC as a Measurement System

Financial measures- Review of the Past, Lag indicator

Inadequate in addressing the real value-creating mechanismBSC complements these Lags with Lead indicatorWhere are these measures derived?

BSC has four

Page 15: BSC

Perspectives in Balanced Scorecard

If we succeed, how will we look to

our shareholders?

Financial Perspective

To achieve our vision, how must we

look to our customers?

Customer Perspective

To satisfy our customers, which

processes must we excel at?

Internal Perspective

To achieve our vision, how must our

organization learn and improve?

Learning & Growth Perspective

The Strategy

Page 16: BSC

Financial Perspective

The measures in this perspective tell us whether our

strategy execution - which is detailed through

measures chosen in the other perspectives - is leading

to improved bottom line results.

Financial perspective deals with classic lagging

indicators in the. Typical examples include:

profitability, revenue growth, and economic value

added.

Generic measures:

ROI

EVA

how do we perceive our shareholders?

Page 17: BSC

Customer Perspective

Customer perspective of the Scorecard organizations must answer two critical questions:

who are our target customers, and what is our value proposition in serving them.

Generic measuresSatisfactionRetentionMarket & account share

how do we perceive our customers??

Page 18: BSC

Internal Perspective

This identifies the key processes the firm must excel at in order to continue adding value for customers, and ultimately shareholders.

Generic Measures

Quality

Response time

Cost

New product interventions

in what processes should we excel to succeed?

Page 19: BSC

Learning and Growth Perspective

Identification of capabilities, skills and processes that

need to be learnt for achieving the desired measures

or for fulfilling the existing gaps between ‘what is

available’ and ‘what is needed’

Generic measures:

Employee satisfaction

Information system availability

how will we sustain our ability to change and improve?

Page 20: BSC

BSC as a Strategic Management System

Overcoming the vision Barrier through the translation of strategy BSC provides a framework in translating the Org

strategy into Objectives Guide employees action towards the achievement of the

stated direction Cascading the scorecard overcomes the People

barrier Cascading means driving it down into the organization BSC Framework helps to implement strategy that can be

understood and acted upon every level of the firm It creates a line of sight from shop floor employee to the

board room executive

Page 21: BSC

BSC as a Strategic Management System

Strategic Resource Allocation overcomes the Resource barrier BSC framework helps in trade-offs regarding which

initiatives to be funded and which is to defer Strategic learning overcomes the Management

barrier BSC translates vision and strategy into a coherent set of

measures Scorecard results is a starting point for reviewing,

questioning, and learning about the strategy

Page 22: BSC

BSC as a Communication Tool

Why should it be consider a communication tool Translating the strategy and telling its story to all

employees It is the most basic and powerful attribute of the entire

system Provides employee with opportunity to discuss the

assumption underlying the strategy Knowledge management within organization

Page 23: BSC

Cause-and- Effect Linkages are Critical to BSC

Defining and then executing the corporate strategy

By identifying the key drivers of success, executing the strategy and then measuring those drivers, it is possible to develop a strategy that is more robust and execute it more effectively.

Communicating effectivelyBy integrating, analyzing and communicating the right information throughout the organization, employees will be able to make the right business decisions consistent with the organization's strategic goals.

Page 24: BSC

Cause-and- Effect Linkages are Critical to BSC

Quickly identifying the root causes of potential problems and responding proactively

Having a cause-and-effect model of how the performance measures relate to each other provides a list of "likely suspects" to quickly focus diagnostic

efforts and action. Alerting decision-makers about early indicators of

troubleA cause- and-effect model allows organizations to trace the likely downstream effects of performance issues.

Page 25: BSC

Balance in the BSC

Balance between financial and no financial indicators of success

Balance between internal and external constituents of the Organization

Balance between lag and lead indicators of performance

Page 26: BSC

How to Design/Implement Balanced Scorecard?

Phase I: The Strategic Foundation Phase II: Three Critical

Components Phase III: Deployment

Page 27: BSC

Step 1: Strategic Alignment

A clear strategy requires two things Specific objectives that tell people what to

doExample-Over the next six months, delivery times will decrease by 15% through more localized distribution centers.

a set of targets for communicating what is expected

defining market share revenue growth new products introduced

Page 28: BSC

Step 2: Strategic Areas

Before we start designing the Balanced Scorecard, we need a “fence line” of strategic areas.

For most organizations, the strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees

Example - publicly traded corporations will have “shareholder value” as a major strategic area

Shareholder ValueFinancial Revenue Growth

Customer More Customers

Processes Customer Marketing & Service Programs

Learning Support Systems & Personnel

Page 29: BSC

Step 3: Strategic Grids

We will translate the specifics of our strategy into a set of grids

balanced scorecards are structured over four perspectives or layers: Financial Customer Internal Processes Learning and Growth.

Page 30: BSC

FinancialShareholder Value

Grow Revenues

CustomerAcquire More CustomersBecome the Price Leader

Internal Processes

Improve Operational Efficiency

Cost Reduction Program

Knowledge Based System

Reduce Non Core Activities

Learning and Growth

Training - Best practices in cost

management

Database network on operational

performance

Re-align organization

with core competencies

Strategic objectives defined for all four perspectives

Page 31: BSC

Summary of Phase -I

Five Major Milestones – Phase I

1st - Establish a clear strategy (objectives & targets)2nd - Communicate the strategy3rd - Align the organization around the strategy4th - Limit the strategic areas to no more than five5th - Link strategic objectives into grids across four perspectives

Page 32: BSC

Phase II: Three Critical Components Step 4: Measurements

Measurement allows us to quantify our strategic objectives, asking the question: How well are we doing?

Strategic Objective =>

Describe the Measurement =>Define Type / Formula =>

Unit of Measurement =>

Frequency of Measurement =>Assumptions =>Sources =>

Availability => ___ Available ___ Not Available ___ Requires Change

Support Required => ___ IT Support ___ Finance Support ___ Other

Measurement Template

Page 33: BSC

Measurements

Leading indicators- They drive or push final outcomes within the organization

Examples customer contracts executed competitive pricing index employee feedback indicator service response time time spent with customers.

Page 34: BSC

Measurements

The other side of measurement is looking back, historical type measurements that show us a final outcome or result.

Lagging indicators Examples

Financial type measurements return on equity sales growth economic value added

Non-financial type measurements production breakeven customer retention employee productivity index

Page 35: BSC

Measurements

Customer

Perspective

Lagging Indicators are desired results:

Customer Satisfaction Customer Retention Market Share

Leading Indicators – Value Attributes to Customers:

Quality Time Price Image Reputation

Cause Effect Relationship between Leading and Lagging Indicators

Page 36: BSC

Measurements

The Internal Process Perspective Pre Delivery Results => Innovative Processes that meet

customer needs, provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced.

Delivery Results => Operations that produce and deliver products and services to customers. Example of Leading Indicator => Delivery Response Time to Customer.

Post Delivery Results => Value added services provided to customers once products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint.

Page 37: BSC

The Learning and Growth Perspective will emphasize three result categories: Employees, Systems, and Organization

Results for Employees => Employee satisfaction, productivity, and retention. Example of Leading Indicator => Percentage of Key Personnel Turnover.

System Results => Engaging to the end user, accessibility, and quality of information. Example of Leading Indicator => Percentage of employees who have on-line access.

Results for the Organization => Climate for change, strong leadership, empowering the workforce, and other motivating factors. Example of Leading Indicator => Number of Employee Suggestions.

Page 38: BSC

Measurements

Page 39: BSC

Step 5: Targets

We must drive behavioral changes within the organization if we expect to execute strategy.

This requires establishing a target for each measurement within the Balanced Scorecard.

Targets are designed to stretch and push the organization in meeting its strategic objectives.

For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established.

Page 40: BSC

Adding Measurements and Targets to the Balanced Scorecard

Perspectives Objectives Measurements Targets

2002 2003

FinancialMaximum Returns

Utilization of AssetsRevenue Growth

Return on EquityUtilization Rates

% Change in Revenues

12% 7%

+11%

13% 8%

+11%

CustomerCustomer Retention

Customer ServiceCustomer Relations

Retention %Survey Rating

% Self Initiated Calls

75%85%35%

75%88%40%

Internal Processes

Fast Delivery Effective Service

Optimal CostResource Utilization

Turnaround Time1st Time Resolvement

% cost of salesProductivity Indicator

15m68%66%77%

14m69%64%80%

Learning & Growth

High Skill LevelsEmployee SatisfactionOutstanding Leaders

Skill set ratioSurvey Index

5 point ranking

65%75%4.5

68%77%4.8

Page 41: BSC

Step 6: Programs

The final design step is to close the loop and put specific programs in place to make everything happen.

Examples Quality improvement programs Marketing initiatives Enterprise resource planning Customer relation’s management Supply chain management.

Page 42: BSC

Compare Programs with Strategic Objectives for Strategic Impact

Instructions: List all strategic objectives for each perspective in the Balanced Scorecard. Plot any program that helps achieve a strategic objective.

Programs

Global Market Program

Leadership Building

Quality Control Review

IT Complaint Tracking

Prod Yield System

Asian Production Plant

Customer Management

Knowledge System

Community Awareness

Employee Rotation

Enterprise Planning

Strategic Objectives

F1: Maximum Return on Equity

F2: Positive Economic Value Added

F3: 15% Revenue Growth

F4: 5% Reduction in Production Cost

C1: Secure 1% market share in Asia

C2: Obtain competitive pricing

C3: Develop new market partnerships

C4: Integrate service process w/customer

P1: Improve production workflows

P2: Flawless manufacturing

P3: Expand knowledge distribution

P4: Integrate financial / production

P5: Link processes to customer inputs

L1: Engage workforce into the business

L2: Expand leadership capacities

L3: Become a customer driven culture

Page 43: BSC

Phase III: Deployment Factors that influence implementation of the Balanced

Scorecard Time required to develop a balanced scorecard Availability of data and resources for building the

Balanced Scorecard Degree of support from upper level management

Attributes of a company for successfully implementing BSC A strong commitment from the top to the Balanced

Scorecard. A process for transforming strategies into balanced

scorecards. A cross-functional process for moving strategy down into

the lower parts of the organization

Page 44: BSC

Transformation a Company

Strategic Planning Strategic ThinkingA formal structured process of researching and analyzing the competition in an effort to identify strengths, weaknesses, opportunities, and threats.

A natural and intuitive process of seeing through the competition, anticipating future trends, and comprehending future changes required for the organization.

The ultimate payoff – going from strategic planning to strategic thinking

Page 45: BSC

Electronics Company

Customer Quality Number of Defects

Price Competitive ComparisonDelivery Number of On time DeliveriesShipments Sales GrowthNew Products Number of new products to

supportSupport Customer Satisfaction Survey

Internal Efficiency in manufacturing Cycle TimeNew product introductions Rate of new introductionsNew product success Number of ordersSales penetration Actual vs. PlanNew businesses Number of new businesses each

yearInno-vation Technology leadership Product performance

benchmarkingCost leadership Quarterly Manufacturing OverheadMarket leadership Market share (all markets)Research & Development Number of new products

Finan-cial Sales Annual growth rateCost of Sales Annual trend lineProfitability Return on capital employedProsperity Cash flows

Employee Competitive Salaries Local area comparisonsOpportunity Satisfaction ratingCitizenship Contributions to community

Balanced Scorecard Example – Electronics Company

Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997

Page 46: BSC

Food Ingredients CompanyFinancial Capture additional industry growth Comparison to industry growth

Maintain base business / continue to be preferred supplier to customer

Volume trend line / gross margin

Expand into global markets Ratio of domestic to international salesCommercialize new ingredients and services that are profitable

Percent of sales from launched products / gross profit from new products

Custo-mer Lowest cost supplier Total cost relative to competitionProducts and services customized to meet local needs

% of products in R & D in test phase

Customer satisfaction Customer surveysInternal Maintain low cost base Total cost relative to competition

Maintain consistent production First pass success rateContinue to improve distribution efficiency

Percent of perfect orders

Build capability to screen profitable products and services

Change in economic value

Integrate acquisitions Revenues per salary dollarLearning Link strategy to reward system Net income per dollar of variable pay

Foster culture that supports innovation and growth

Annual assessments / Quarterly reviews

Develop competencies critical to overall gaps that must be filled

Percentage of competency deployment filled on tracking matrix

Source: Applying the Balanced Scorecard to Small Companies by Chee W. Chow, Kamal M. Haddad, and James E. Williamson - Management Accounting, August 1997

Balanced Scorecard Example – Food Ingredients Company

Page 47: BSC

1st Generation BSC

Issues regarding selection Filtering -Organizations typically had

access to many more measures than were needed to populate the Balanced Scorecard

Clustering-deciding which measures should appear in which perspectives.

Gave a way for 2nd generation BSC

Page 48: BSC

2nd Generation BSC

Issues were dealt through numerical correlation

2nd Generation Balanced Scorecard design processes

assume that interpretation and individual understanding

of the Vision/Mission statement or strategic plan on

which the Balanced Scorecard is based, is shared among

the management team in question, but it does not

include any specific activities or design components to

ensure that such is the case.

Page 49: BSC

3rd Generation BSC

3rd Generation Balanced Scorecard model is based on a refinement of 2nd Generation

It focuses on validation of strategic objective selection and target setting.

Destination statement: A description, ideally including quantitative detail, of what the organization (or part of organization managed by the Balanced Scorecard users) is likely to look like at an agreed future date.

Typically the destination statement is sub-divided into descriptive categories that serve a similar purpose (but may have different labels) to the ‘perspectives’ in 1st and 2nd Generation Balanced Scorecards.

Page 50: BSC
Page 51: BSC

Softwares available for BSC

Balanced Scorecard Designer Cognos 8 Business Intelligence Microsoft Office Business Scorecard Manager ActiveStrategy Enterprise (ASE) Cognos® Metrics Manager Strategy2Act   Executive Dashboard Scoreboard Prodacapo Balanced Scorecard QPR ScoreCard

Page 52: BSC

Softwares for BSC

Comshare MPC™ Corporater Balanced Scorecard suite CorVu5 Crystal Decisions Balanced Scorecard Solution Bizzscore® Dolphin Navigator System InsightVision Nexance Performance Management Pilot’s Performance Management Solution

Page 53: BSC

Beware ?

Strategy = Doing the right things

Operations = Doing things right

Change = Doing things differently

BSC = Strategy + Operations + Change

Page 54: BSC

Beware ?

BSC = Strategy + Operations + Change

SUCCESS = Effective, Well Executed Strategy

+ Efficient Operations + Meaningful Change

Page 55: BSC

References Banker, R.D., Chang, H. and Pizzini, M.J. (2004) .The

balanced scorecard: judgmental effects of performance measures linked to strategy, The Accounting Review, Vol. 79(1) :1-23

Brewer,P.C,Davis,S. and Albright,T.(2005).Building a successful balanced scorecard program,Cost Management; Jan/Feb,vol-19(1) ABI/INFORM Global,28.

Ghosh, S. and Mukherjee, S.(2006).Measurement of corporate performance through balanced scorecard: an overview , Vidyasagar University Journal of Commerce, Vol. 11:64-67.

Kaplan, R. S. and Norton, D. P. (1992).The Balanced Score-card—Measures That Drive Performance, Harvard Business Review, January–February :71–79.

Kaplan, R. S., Norton, D. P.(1996). The Balanced Score-card, Boston: Harvard Business School Press.

Page 56: BSC

Kaplan, R. S. and Norton, D. P. (1996).The Balanced Scorecard : Translating Strategy Into Action, Harvard Business School Press, 1996.

Kaplan, R.S. and Norton, D.P. (1996a) .Using the balanced

scorecard as a strategic management system, Harvard Business

Review, Vol. 74(1) :75-85

Kaplan, R. S. and Norton, D. P.(2004).Strategy Map : Converting Intangible Assets into Tangible Outcomes, HBS Press.

Kaplan, R. S. and Norton, D. P.(2006) .Alignment : Using the Balanced Scorecard to Create Corporate Synergies, HBS Press.

Page 57: BSC

Niven,P. R.(2008).Balanced Scorecard Step-by-step for Government and Nonprofit Agencies,Second Edition,John Wiley & Sons, Inc., Hoboken, New Jersey.

Kaplan, R. S. and Norton, D. P. (2001). The Strategy-Focused Organization : How Balanced Scorecard Companies Thrive in the New Business Environment, Harvard Business School Press

Smith,R. F.(2007) .Management and the Balanced Scorecard

Using Processes as Strategic Drivers, John Wiley & Sons, Inc., Hoboken, New Jersey

Balanced Scorecard Basics.(2008), Balanced Scorecard Institute. 2008

Page 58: BSC

Thank

You