Balanced Scorecard

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Balanced Scorecard

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Title: Balanced Scorecard

1
Balanced Scorecard
Dr. Nancy Mangold California State University,
Hayward
2
Why Does Business Need a Balanced Scorecard?

If you cant measure it,
You cant manage it.

3
Why Balanced Scorecard?

An organizations measurement system strongly
affects the behavior of people both inside and
outside the organization.
If companies are to survive and prosper in
information age competition, they must use
measurement and management systems derived from
their strategies and capabilities.

4
Why Balanced Scorecard?

Unfortunately, many organizations espouse
strategies about customer relationships, core
competencies, and organizational capabilities
while motivating and measuring performance only
with financial measures.

5
Historical Measurement System

Historically, the measurement system for business
has been Financial
Accounting has been called the language of
business
Managers are pressured to deliver consistent and
excellent short-term financial performance.

6
Financial Measurement

Trade-offs are made that limit the search for
investments in growth opportunities.
Under pressure for short-term financial
performance, companies reduce spending on
new product development
process improvements
human resource development
information technology, data bases, and system
customer and market development.

7
Financial Measurement

In the short-run, a company could maximize
short-term financial results by exploiting
customers through high prices or lower service.
In the short-run, these actions enhance reported
profitability.
But the lack of customer loyalty and satisfaction
will leave the company highly vulnerable to
competitive inroads.

8
Financial Measurement

Financial measures are inadequate for guiding and
evaluating organizations through competitive
environments.
They are lagging indicators that fail to capture
much of the value that has been created or
destroyed by managers actions in the most recent
accounting period.

9
Balanced Scorecard

BSC provides executives with a comprehensive
framework that translates a companys vision and
strategy into a coherent set of performance
measures

10
Translating a Mission into Desired Outcomes
Vision (What we want to be)
Mission (Why we exist)
Strategy (Our game plan)
Balanced Scorecard (Implementation and focus)
Strategic Initiatives (What we need to do)
Personal Objectives (What I need to do)
Strategic Outcomes
Satisfied Shareholders
Delighted Customers
Effective Processes
Motivated and Prepared Workforce
11
Mission Statements

Communicate fundamental values and beliefs to all
employees
Addresses core beliefs and identifies target
markets and core products
Should be Inspirational
Supplies energy and motivation to the organization

12
Mission Statements

Rockwater (an undersea construction company) CEO
led a two-month effort among senior executives
and project managers to develop a detail mission
statement.
A project manager from a drilling platform asked
What am I supposed to do?
How should I behave each day to deliver on our
mission statement?
There is a large void between the mission
statement and employees day-to-day actions.

13
Mission Statements

Mission statements are insufficient to guide
employees day to day actions.
BSC translates mission and strategy into
objectives and measures.

14
Balanced Scorecard
Key Performance Indicators
Internal Business Organizational
Financial Customer Process
Learning Perspective Perspective
Perspective Perspective

Where is the organization going?
How do we get there
What are the strategic goals
for which we are striving?
What do we need to do well
to achieve these strategic
goals
How do we measure
how well we are doing?

Critical Success Factors Internal
Business
Organizational Financial Customer Process
Learning Perspective
Perspective Perspective Perspective
Strategic Goals
Strategy
Vision Mission
15
Balance Scorecard

The scorecard provides a framework, a language,
to communicate mission and strategy.
It uses measurement to inform employees about the
drivers of current and future success.

16
Balanced Scorecard

By articulating
the outcomes the organization desires and
the drivers of those outcomes,
Senior executives hope to channel the energies,
the abilities, and the specific knowledge of
people throughout the organization toward
achieving the long-term goal.

17
What is a Balanced Scorecard?

A Strategic Management System that includes
a set of Cause Effect relationship assumptions
linking key indicators and strategy
a set of targets for each one of the key
indicators linked to a compensation system
a strategic feedback loop

18
Strategic Feedback Process

A strategic feedback process supports executives
decision-making and allows executives to revise
strategy as needed
Strategic
Learning
Loop

Organizational Strategy
Update the Strategy
Measure the strategy
Problem Solving
Balanced
Scorecard Financial Strategic Objective
Strategic Measure --Financially
Strong --Return on Capital Employed CUST
--Delight the Consumer--Mystery Shopper Rating
--Win-Win Relationship
Dealer/Pioneer Gross Profit split Internal
--Safe Reliable --Manufacturing
Reliability Index --Competitive
Supplier --Days Away from Work Rate
--Good Neighbor --Laid Down Cost vs.
Best --Quality
Competitive Reliable Supply
--Environmental Index
--Quality Index LG --Motivated Prepared
Strategic Competency Availability
Test strategy And identify issues
Determine Tactical priorities
Operations Planning Monitoring
Business Plans
Strategic Initiatives
Budget
Individual Perf. Mgmt
19
Four Scorecard Perspectives

Financial Perspective
To succeed financially, how should we appear to
our internal and external shareholders?
Customer Perspective
To achieve our financial goals, how should we
appear to our customers?
Process Perspective
To satisfy our shareholders and customers, at
which internal business processes must we excel?
Learning and Growth Perspective
To achieve our vision, how will we improve the
skills of our human resources, increase the
effectiveness of our business processes and
sustain our ability to change?

20
Translating Vision and Strategy Four Perspectives
Financial To succeed financially, how should we
appear to our shareholders? Objectives,
Measures, Targets, Initiatives
Internal Business Process To satisfy our
shareholders And customers, what Business
processes must We excel at? Objectives,
Measures, Targets, Initiatives
Customer To achieve our vision, how should we
appear to Our customers? Objectives,
Measures, Targets, Initiatives
Vision And Strategy
Learning and Growth To achieve our vision, how
will we sustain our ability to change and
improve? Objectives, Measures, Targets,
Initiatives
21
Defining Key Performance Indicators
Critical Success Factor
KPI (Measures)
Financial Exceed Shareholders Financial Covenants Increase cash flow by product/service Revenue from accessories, operations Return on Capital Employed(ROCE) Cash flow by product(by product)
Customer Increase customer awareness of LBC and its products/services Brand recognition survey ( recognition) Number of awards for accessories ( of awards)
Internal Business Process Advertise through direct mail, magazines, trade show, internet Customer hit rate in Southeastern US ( of leads) Customer hit rate ( of leads)
Organizational Learning Build customer database Create internal website for marketing and sales Number of awards for best website Outsource programming needs to reduce costs (progress cost) Customer database ( progress cost) Internet website ( progress cost) Build intranet site ( progress costs)
22
Financial Perspective

Financial performance measures indicate whether a
companys strategy, implementation, and execution
are contributing to bottom-line improvement.

23
Financial Perspective

Relate to profitability-measures
Operating income
Return on capital employed
Economic value-added
Rapid sales growth
Generation of cash flow

24
Measuring Strategic Financial Themes
25
Customer Perspective

Identify the customer and market segments in
which the business unit will compete and
The measures of the business units performance
in these targeted segments.
Includes several core or generic measures of the
successful outcomes from a well-formulated and
implemented strategy.

26
Customer Perspective-Core Outcome Measures

Customer satisfaction
Customer retention
New customer acquisition
Customer profitability
Market and account share in targeted market

27
Market Share
Customer Profitability
Account Share
Customer Outcomes
Customer Retention
Customer Acquisition
Customer Satisfaction
28
Customer Perspective

Measures of value propositions that the company
will deliver to customers in targeted market
segments.

29
Customer Perspective

The segment specific drivers of core customer
outcomes represent factors critical for customers
to switch to or remain loyal to their suppliers
Short lead-time
On-time delivery
A constant stream of innovative products and
services

30
Customer Perspective

A supplier able to anticipate their emerging
needs and capable of developing new products and
approaches to satisfy those needs.

31
Customer Perspective

Enables business unit managers to articulate the
customer and market-based strategy that will
deliver superior future financial returns.

32
Internal Business Process Perspective

Identify the critical internal processes in which
the organization must excel.

33
The Internal Value Chain
Postsales Service Cycle
Operation Cycle
Innovation Cycle
Customer Need Identified
Customer Need Satisfied
Identify the Market
Create The Product/ Service Offering
Build The Products/ Services
Deliver The Products/ Services
Service The Customer
34
Internal Business Process Perspective

These processes enable the business unit to
Deliver the value propositions that will attract
and retain customers in targeted market segments,
Satisfy shareholder expectations of excellent
financial returns.

35
Internal Business Process Perspective

Focus on the internal processes that will have
the greatest impact on customer satisfaction and
achieving an organizations financial objectives.

36
Internal Business Process Perspective

Two fundamental differences between the
traditional and the BSC approaches to performance
measurement.
Traditional approaches attempt to monitor and
improve existing business processes.
Focus on improvement of existing processes.

37
Internal Business Process Perspective

BSC approach usually identify entirely new
processes at which an organization must excel to
meet customer and financial objectives.
It must develop a process to anticipate customer
needs or one to deliver new services that target
customers value. (processes not currently
performing)

38
Internal Business Process Perspective

BSC incorporates innovation processes into the
IBP perspective.
Traditional performance measurement systems focus
on the processes of delivering todays products
and services to todays customers.
They control and improve existing operations

39
Internal Business Process Perspective

Short-wave of value creation from.
Receipt of an order from an existing customer for
an existing product (or service).
Ends with the delivery of the product to the
customer.
Value created from producing, delivering, and
servicing this product and the customer at a cost
below the price it receives.

40
Internal Business Process Perspective

The drivers of long-term financial success may
require an organization to create entirely new
products and services that will meet the emerging
needs of current and future customers.

41
Internal Business Process Perspective

The innovation process -long-wave of value
creation
A more powerful driver of future financial
performance than the short-term operating cycle.

42
Internal Business Process Perspective

The ability to develop a multiyear
product-development process.
The ability to reach entirely new categories of
customers.
May be more critical for future economic
performance than managing existing operations
efficiently, consistently and responsively.

43
Learning and Growth Perspective

Identifies the infrastructure that the
organization must build to create long-term
growth and improvement.
Customer and IBP perspectives identify the
factors most critical for current and future
success.

44
Learning and Growth Perspective

Businesses are unlikely to be able to meet their
long-term targets for customers and internal
processes using todays technologies and
capabilities.
Intense global competition requires that
companies continually improve their capabilities
for delivering value to customers and
shareholders.

45
Learning and Growth Perspective

Organizational learning and growth come from
three principal sources
People
Systems
Organizational procedures.

46
Learning and Growth Perspective

BSC approaches will reveal large gaps between the
existing capabilities of people, systems and
procedures and what will be required to achieve
breakthrough performance.

47
Learning and Growth Perspective

To close these gaps, businesses will have to
invest in reskilling employees, enhancing
information technology and system, and aligning
organizational procedures and routines.
These objectives are articulated in the learning
and growth perspective of the Balanced Scorecard.

48
Learning and Growth Perspective

Employee-based measures along with specific
drivers of these generic measures
Employee satisfaction
Employee retention
Employee training
Employee skills-indexes of the particular skills
required for the new competitive environment.

49
Learning and Growth Perspective

Information system capabilities.
Measured by real-time availability of accurate,
critical customer and internal process
information to employees on the front lines of
decision making and actions.

50
Learning and Growth Perspective

Organizational procedures can examine alignment
of employee incentives with overall
organizational success factors
Measured rates of improvement in critical
customer-based and internal processes.

51
Balanced Scorecard

Translates vision and strategy into objectives
and measures across a balanced set of
perspectives
The scorecard includes measures of desired
outcomes as well as processes that will drive the
desired outcomes for the future.

52
Linking Multiple Scorecard Measures to a Single
Strategy

Balanced Scorecards are more than collections of
critical indicators or key success factors.
The multiple measures on a properly constructed
BSC should consist of a linked series of
objectives and measures that are both consistent
and mutually reinforcing.

53
Linking Multiple Scorecard Measures to a Single
Strategy

BSC should incorporate the complex set of cause
and effect relationships among the critical
variables, including leads, lags and feedback
loops, that describe the trajectory the flight
plan of the strategy.
The linkages should incorporate both
cause-and-effect relationships, and mixtures of
outcomes measures and performance drivers.

54
Cause-and-Effect Relationships

A properly constructed Balanced 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
relationships between outcome measures and the
performance drivers of those outcomes.

55
Cause-and-Effect Relationships

Every measure selected for a BSC should be an
element in a chain of cause-and-effect
relationships that communicates the meaning of
the business units strategy to the organization.

56
Performance Drivers

A good BSC should also have a mix of outcome
measures (lagging indicators) and performance
drivers (leading indicators) of the business
units strategy.
Outcome measures without performance drivers do
not communicate how the outcomes are to be
achieved.
They do not provide an early indication about
whether the strategy is being implemented
successfully.

57
Performance Drivers

Outcome measures without performance drivers do
not communicate how the outcomes are to be
achieved.
They do not provide an early indication about
whether the strategy is being implemented
successfully.

58
Performance Drivers

Performance drivers (cycle time, PPM defect
rates) without outcome measures may enable the
business unit to achieve short-term operational
improvements, but will fail to reveal whether the
operational improvements have been translated
into expanded business with existing and new
customers and to enhanced financial performance.

59
Cause Effect and Lead/Lag Indicators
KPIs
Financial Return on Investment (ROI) Cash flow by product ( by product) Revenue from accessories and operations Lag Lag Lag
Customer Brand recognition survey ( recognition) Number of awards for accessories Customer satisfaction survey (new boats, lease, resale) Lag Lag Lag
Internal Business Process Customer hit rate (no. of leads) Boat resales ( of total revenues) Market analysis (Competitors price vs. LBC) Leases for new boats ( of total revenue) Service and product quality standards met (new boats, lease, resale) Costs expenses ( by product/service by dept.) Cycle time per service offering New high end boat sales ( of total revenue) Lead Lag Lead Lag Lead Lag Lag Lag
Organizational Learning Customer database ( advanced cost) Internet website ( advanced cost) Outsource programming needs Number of awards Leasing program with banks ( advanced costs) Pipeline of new product ideas (no. of ideas) Activity Based Costing Analysis ( advanced costs) Training hours by employee for each function Lead Lead Lead Lead Lead Lead Lead Lead
60
Performance Commitment Framework

Structures and links those elements that provide
direction, information, and motivation across the
organization.
Framework

Strategic Commitment Operational
Commitment Organizational Commitment
Strategic Objectives Critical Success
Factors Performance Metrics Targets
and Budgets Improvement Initiatives
Goal Setting Performance Evaluation
Information Delivery
61
Performance Commitment Framework

Clearly defined processes for
creating
the proper metrics and targets at all
levelsand links to insure alignment
across the organization.
Performance Commitment results in
an integrated and streamlined
performance management system.

Strategic Commitment
Strategic Assessment
Balanced Scorecard
Strategic Feedback
Organizational Commitment
Operational Commitment
Employee Development
Business Improvement Initiatives
Planning Budgeting
Individual Goal Setting
Individual Performance Appraisal
Business Performance Reporting
Reward System
62
Strategic Commitment