The Balanced Scorecard: Measurement and Management in the Information Age

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The Balanced ScorecardMeasurement and
Management in the Information Age
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A Simple Analogy

• Airplane example
• Managers need many tools to monitor performance
• Future success depends on this information

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The Balanced Scorecard (BSC)

• Provides managers with goals and methods to
  attain these goals
• Translates an organizations mission and strategy
  into a comprehensive set of performance measures
• Places emphasis on financial objectives

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Increased Competition

• End of Industrial Age
• Old performance measures (ex. ROCE) are not as
  useful anymore
• Government deregulation
• Increased emphasis on intangible assets
• Customer relations
• Innovative products
• Use of information technology

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New Operating Environment

• Cross-functions
• Integrated business operations
• Increases efficiency
• Links to customers and suppliers
• Wal-Mart uses scanners that automatically reorder
  when inventory is low
• Customer segmentation
• Globalization

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New Operating Environment (cont.)

• Innovation
• New products or services
• Improvement in products or services
• Knowledgeable employees
• Shift away from industrial age hierarchy
• Shift towards having analytical employees as
  opposed to just blue-collar workers

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Improvement Initiatives

• Total quality management (TQM)
• Activity-based costing (ABC)
• Customer-focused organizations
• Employee empowerment
• Reengineering

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Financial Accounting Model

• Traditional model cannot be used in the
  information age because it does not precisely
  valuate intangible and intellectual assets (i.e.
  employee skills, technology, etc.)
• Although difficult to measure, these assets are
  becoming more important in the information age
  and are critical for the future success of the
  company

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Financial Measures

• Financial measures alone are backward looking and
  an inadequate measure of the future of the
  company
• The balanced scorecard and financial measures
  together must guide a company to create value
  through investment
• The mission/vision of a company sets the
  objectives of the balanced scorecard

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Kaplan and Nortons BSC
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The Balanced Scorecard

• Financial
• To succeed financially, how should we appear to
  our shareholders?
• Customer
• To achieve our vision, how should we appear to
  our customers?
• Internal Business Process
• To satisfy our shareholders and customers, what
  business processes must we excel at?
• Learning and Growth
• To achieve our vision, how will we sustain our
  ability to change and improve?

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The Balanced Scorecard

• It expands the set of business unit objectives
  beyond summary financial measures.
• Corporate executives can measure how their
  business units create value for current and
  future customers.
• It captures the critical value-creation
  activities created by skilled, motivated
  organizational participants.

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The Balanced Scorecard as a Management System

• Many organizations use their non-financial
  measures for local improvements.
• These organizations are using their financial and
  non-financial data for tactical feedback and
  control of short-term operations.
• The Balanced Scorecard emphasizes that this data
  must be part of the information system for
  employees at all levels (front-line employees to
  Senior executives).

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The Balanced Scorecard as a strategic management
system

1. Clarify and translate vision and strategy
2. Communicate and link strategic objectives and
   measures
3. Plan, set targets, and align strategic
   initiatives
4. Enhance strategic feedback and learning

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Clarify and translate vision and strategy

• To set financial goals, the team must consider
  what to emphasize and be specific about what
  market segments it will compete in.
• Gain consensus of top executives.
• Identify objectives and measures for its internal
  business process.

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Clarify and translate vision and strategy (cont.)

• Learning and growth objectives reveals rationale
  behind significant investments.
• The process of building a Balanced Scorecard
  clarifies the strategic objectives and identifies
  the critical drivers.
• The Balanced Scorecard also contributes to the
  solution of the problem.

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Communicate and link strategic objectives and
measures

• The Balanced Scorecards objectives and measures
  are communicated throughout the organization by
  different medias.
• The Balanced Scorecard also helps to gain
  commitment to a business units strategy.
• Everyone in the organization should understand
  the business units long-term goals and the
  strategy for achieving these goals.

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Targeting balanced scorecard

• The balanced scorecard is most effective when
  used to drive organizational change
• It should look to set targets that would
  transform a company within three to five years.
• The targets should represent a discontinuity in
  business unit performance, for example
• Public company target could be doubling or more
  of the stock price
• An electronics company target could be growing at
  a rate double the expected growth rate.

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Targeting balanced scorecard (cont.)

• Managers must identify stretch targets for their
  customer, internal-business-process, and learning
  and growth objectives. For example, customer
  stretch targets could come from meeting or
  exceeding customer expectations.
• Benchmarking is used to verify company targets
  and prevent the company from trailing in
  strategic measures

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Alignment of strategic quality, response time,
and reengineering initiatives to achieve
objectives

• Balanced scorecard provides the front-end
  justification focus and integration for
  continuous improvement, reengineering, and
  transformation programs.
• Unlike conventional reengineering programs,
  reengineering program should not only focus on
  cost savings, but also look at other measures as
  dramatic time reductions in order fulfillment,
  shorter time-to-make in product development, and
  enhanced employee capabilities.

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Integration of strategy and budgeting process

• Balanced scorecard also allows company to
  integrate its strategy with its annual budgeting
  process.
• When a company sets its 3-5 year long strategic
  plan, it also forecasts annual milestones-meaning
  how far along they expect themselves to be in a
  year of the whole plan.
• This helps company achieve short-term milestones
  providing specific targets for assessing progress
  in the near term.

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Enhance strategic feedback and learning

• Final management process- embedding the Balanced
  Scorecard in a strategic learning framework- most
  important of the scorecard management process.
• Balanced scorecard allows managers to monitor,
  adjust, receive feedback, or even make
  fundamental changes with regards to its strategy.
• Near-term milestones allow managers to examine
  closely whether the business is achieving its
  targets, and managers use those to review past
  and learn about the future.

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Three steps to enhance strategic feedback and
learning

• Clarification of a shared vision allows precise
  form of concepts senior executives can gain
  consensus on
• Communication and alignment-directs all
  individuals into actions attaining organizational
  objectives
• The planning, target setting, and strategic
  initiative process- defines specific,
  quantitative performance goals that could be used
  to compare desired goals and current level.

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Change of management processes in todays
information age

• The top down command and control model ensures
  operational and management control system where
  strategic plan established by senior executives
  are carried out by employees.
• This process of establishing a vision and
  strategy, communication and linking the vision
  and strategy, and aligning actions and
  initiatives is a single-loop feedback, which does
  not involve questioning whether the plan is
  desirable or appropriate
• If the planned trajectory changes, it is treated
  as defects, and actions are taken place to bring
  the organization back onto the intended path
• This way is, although with the best intention,
  inappropriate for the strategies for information
  age organizations. Todays information age
  organizations operate in more turbulent
  environments where managers need to receive
  feedback about more complicated strategies.

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Quality Control

• In constantly shifting environments, new
  strategies capitalizing on opportunities or
  countering threats that were not anticipated is
  needed, and these ideas frequently come from
  managers farther down the organization
• Need double-loop learning. Need not only
  feedback about whether the plan is executed, but
  also if the plan in actuality is consistent and
  valid with the current situation.
• Balanced scorecard, based on cause-and effect
  relationships that includes estimates of the
  response time and magnitudes of the linkages
  among the scorecard measures.
• With such linkages among scorecard measure,
  monitoring can take the form of hypothesis
  testing.

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Summary

• Information age companies will succeed by
  investing in and managing their intellectual
  assets.
• Traditional financial accounting model does not
  motivate or measure the success in the short run.
• The balanced scorecard integrates measures
  derived from strategy, retaining past financial
  performance measure, and introducing the drivers
  of future financial process.
• Moreover, balanced scorecard is used as the
  central, organizing framework for a management
  processes.

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Summary (cont.)

• Clarify and gain consensus about strategy
• Communicate strategy throughout the organization
• Align departmental and personal goals to the
  strategy
• Link strategic objectives to long-term targets
  and annual budgets
• Identify and align strategic initiatives
• Perform periodic and systematic strategic review
• Obtain feedback to learn about and improve
  strategy