BALANCED SCORECARD

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BALANCED SCORECARD
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Contents

• Introduction about BSC
• Four perspectives
• Financial
• Customer
• Internal business
• Learning and growth
• Evaluation of BSC
• Cause and effect relationship
• Performance drivers

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• Diagnostic V/S Strategic measures
• Sufficiency of perspectives
• Strategic balance scorecard
• Implementation of SBSC
• Problems faced
• Conclusion

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INTRODUCTION

• The Balanced Scorecard Approach has been
  developed at the Harvard Business School by
  Kaplan and Norton in 1992 in an article by Robert
  Kaplan and David Norton entitled
• "The Balanced Scorecard - Measures that Drive
  Performance
• Due to the shortcomings of traditional management
  control systems, Kaplan and Norton designed the
  BSC as a result of a one year research project
  with 12 companies.

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• It works on the principle of Management By
  Objective
• It was developed to communicate the multiple,
  linked objectives that companies must achieve .
• It translates mission and strategy into
  objectives and measures.

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• This innovative tool is unique in two ways
  compared to the traditional performance
  measurement tools. They are
• It considers the financial indices as well the
  non-financial ones in determining the corporate
  performance level.
• It is not just a performance measurement tool
  but is also a performance enhancing tool.

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• The framework tries to bring a balance and
  linkage between the
• Financial and the Non-Financial indicators
• Tangible and the Intangible measures
• Internal and the External aspects
• Leading and the Lagging indicators.

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• It is organized into 4 perspectives-
• Financial Perspective - How do we look at
  shareholders?
• 2. Customer Perspective - How should we
  appear to our customers?
• 3. Internal Business Processes Perspective -
  What must we excel at?
• 4. Learning and Growth Perspective - Can we
  continue to improve and create value?

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Objectives, Measures, Targets, and Initiatives

• Objectives Major objectives to be achieved, for
  example, profitable growth.
• Measures The observable parameters that will be
  used to measure progress toward reaching the
  objective. For example, the objective of
  profitable growth might be measured by growth in
  net margin.
• Targets The specific target values for the
  measures. For example, 7 annual decline in
  manufacturing disruptions.
• Initiatives Projects or programs to be initiated
  in order to meet the objective.

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Financial perspective

• Kaplan and Norton do not disregard the
  traditional need for financial data.
• It indicates wheather the company strategy,
  implementation and execution are contributing to
  bottom line improvement.
• Financial objectives are typically related to
  Profitability, Rapid sales growth, Generation of
  cash flows.

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• For different stages there are different
  objectives and measures
• Growth Increased sales volumes, acquisition of
  new customers, growth in revenues etc.
• Sustain Calculating the return on investment,
  the return on capital employed, etc.
• Harvest Payback periods and revenue volume

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Customer perspectives

• Managers identify the customer and market
  segments in which business unit will compete and
  measures of the business units performance in
  these segments.
• It includes various core or generic measures of
  the successful outcomes from a well formulated
  and implemented strategy

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Core measures

• Customer satisfaction
• Customer retention
• New customer acquisition
• Customer profitability
• Market and account share

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• Strategy becomes unique due to value proposition
  the business unit decides to deliver to attract
  customers.
• Common set of attributes that organizes the value
  proposition are
• Product and services attributes
• Customer relationship
• Image and reputation

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Customer perspective
Customer Profitability
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Internal business process perspective

• This perspective show the managers how well their
  business is running, and whether its products and
  services conform to customer requirements.
• Executives identify the critical internal
  processes in which organization must excel.
• It enables the business unit to
• Deliver value proposition
• Satisfy shareholders expectations of excellent
  financial returns.

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• Two kinds of business processes may be
  identified
• Mission-oriented processes. Unique problems are
  encountered in these processes.
• Support processes. The support processes are more
  repetitive in nature, and hence easier to measure
  and to benchmark. Generic measurement methods can
  be used.

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• Each business unit has its unique set for
  creating value for customers. Generic value chain
  model encompasses 3 principal business process
• Innovation
• Operations
• Postal services

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Learning and growth perspective

• Identifies the infrastructure that the
  organization must build to create long term
  growth and improvement.
• Organizational learning and growth come from 3
  principal sources
• People
• System
• Organizational procedures

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Key performance indicators

• Financial
• Cash flows
• ROI
• Financial result
• Return on capital employed
• Return on equity

• Customer
• Customer satisfaction rate
• Customer retention rate
• Delivery performance to customers

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• Internal business process
• Number of activities
• Opportunity success rate
• Accidental ratios
• Defect rates

• Learning and growth
• Investment rate
• Illness rate
• Employee turnover
• Gender ratio

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EVALUATION OF BALANCE SCORECARD

• ADVANTAGES
• It aligns everyone within an organization so that
  all employees understand how they support the
  strategy.
• It provides a basis for compensation for
  performance.
• It translates vision and strategy into action.

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• It defines the strategic linkages to integrate
  performance across organizations.
• It communicates the objectives and measures to a
  business unit.
• It aligns the strategic initiatives in order to
  attain the long-term goals.
• The scorecard provides a feedback to the senior
  management if the strategy is working

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Linking multiple scorecards measures to a single
strategy

• Multiple measures should consist of a linked
  series of objectives and measures that should be
  consistent and mutually reinforcing.
• It should be viewed as the instrumentation for a
  single strategy.
• It should incorporate the complex set of cause
  and effect relationships among the critical
  variables.

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Cause and Effect Relationships

• Return on capital employed
• Customer loyalty
• On-time delivery
• Process quality process cycle time
• Employee skills

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• Properly constructed balance scorecard should
  tell the story of the business units strategy.
• It should identify and make explicit the sequence
  of hypotheses about the cause and effect
  relationship between outcome measures and
  performance drivers of those outcomes.

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Performance drivers

• BSC should have a mix of outcome measures and
  performance drivers.
• Scorecard translates the business units strategy
  into a linked set of measures that define both
  long term strategic objectives and the mechanism
  for achieving those objectives.

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Diagnostic V/S Strategic measures

• Diagnostic measures
• It monitors whether the business remains in
  control and signal unusual events.
• Strategic measures
• It defines a strategy designed for competitive
  excellence and future success.

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• Diagnostic measures capture vital signs that
  enable the company to operate but are not basis
  for competitive breakthrough.
• Measures of BSC are chosen to direct managers and
  employee to those factors for which superb
  performance can be expected.
• It is subject to extensive and intensive
  interaction among top and middle level managers

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Are 4 perspective sufficient?

• They should be considered a template, not a
  straitjacket.
• No mathematical theorem exists that 4 perspective
  are both necessary and sufficient.
• Use depend upon industry circumstances and
  business units strategy.

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• Some people have concern that these perspective
  consider only shareholders and customer
  perspective
• Interest of shareholders through financial
  perspective and customer through customer
  perspective.
• Measures for employee, suppliers and community
  appear on BSC when there outstanding performance
  lead to breakthrough performance.

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Sustainability managementwith the Balanced
Scorecard
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• In recent years many corporations have
  implemented environmental and/or social
  management systems (such as ISO 14000, EMAS or SA
  8000) in order to manage and control
  sustainability-related issues.
• These management systems often fall short in
  companies practice for two reasons.
• Management systems are run on the operating level
• Management systems are mostly executed separately
  from the traditional general management systems

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• These two problems of sustainability management
  have been the motivation for a qualitative
  research project at
• the Institute for Economy and the Environment at
  the University of St. Gallen.
• In the project, the management tool and
  methodology of the traditional Balanced Scorecard
  (Kaplan Norton1997) have been developed further
  towards the Sustainability
• Balanced Scorecard (SBSC) integrating
  ecological, social as well as economic aspects.
• The co-operation with six companies has made it
  possible to gather valuable experiences when
  developing and implementing a SBSC.

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Concept of SBSC

• The SBSC-concept is based on the traditional
  Balanced Scorecard (BSC).
• In SBSC fifth perspective is included in order to
  explicitly address stakeholders issues.
• The SBSC may help to detect important strategic
  environmental and/or social objectives of the
  company, a single SBU or department and to
  illustrate causal relationships between
  qualitative soft facts and the financial
  performance.

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Implementing SBSC

• In implementing a SBSC strategic, cultural,
  structural as well as methodological aspects seem
  to be most relevant.
• Define suitable strategies within a strategic
  planning process. From there, strategic goals,
  key performance indicators as well as appropriate
  measures can be deduce Corporate culture should
  be considered .

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Sustainability-oriented competitivestrategies

• Visions, strategies and concrete objectives
  are difficult to link to each other because of
  following reasons
• Strategies do not exist at all or are at least
  not explicit.
• The strategies are very similar to visions
• which are rather broad and not understood
  by employees.
• Lack of support from the strategic development
  department.

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• Economy and the Environment at the University
• of St. Gallen over the past decade, revealed
  an empirical body of evidence that sustainability
  strategies can be classified according to their
  strategic orientation (market or society) and
  strategic behavior (reactive or proactive)
• Strategy safe aims at reducing and managing
• risks.
• Strategies of the type credible are tackling
• issues of image and reputation.

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• The improvement of productivity and efficiency
• is possible by implementing the strategy
• type efficient.
• The innovative strategy aims at differentiating
• corporations products and services in
• the market.
• Transformative strategies aim at creating
• new markets by shifting existing
  institutional frameworks.

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• Prashant Desai, senior manager-knowledge
  management,
• Pantaloon Retail India Ltd said that pay per
  performance
• had a lot of subjectivity and the focus was
  only on rewarding the employees if he/she met the
  financial targets. The crux is to capture the
  health of the company holistically taking all
  parameters into consideration. Therefore the
  balanced score card factors in all considerations
  which go on to measure the employees
  performance, said Mr Desai. He added that the
  Balanced score card aimed at moving into variable
  pay or bonuses on the basis of the companys
  performance.

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Conclusion

• The application of this tool ensures the
  consistency of vision and action which is the
  first step towards the development of a
  successful organization. However, it is not easy
  to implement this tool because it involves a lot
  of subjectivity.

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• THANK YOU.