Week 12

1
Week 12

• Strategy
• and the
• Balanced Scorecard

2
The Balanced Scorecard

• To achieve success in the information era,
  companies need more than prudent investment in
  physical assets or excellent management of
  financial assets and liabilities.

• Companies mobilize and create value from their
  intangible assets as well as their physical and
  financial ones.

3
The Balanced Scorecard

• In some ways, the intangible assets are the
  more important ones for a firm

• Loyal and profitable customer relationships
• High-quality processes
• Innovative products and services
• Employee skills and motivation
• Databases and information systems.

4
The Balanced Scorecard

• The difficulties in placing a reliable value on
  intangible assets prevents them from being
  recognized on the balance sheet.

• Because the accounting model currently does not
  capture knowledge-based assets, what is needed is
  a system that would help managers measure and
  manage the performance of such assets.

5
The Balanced Scorecard
6
The Balanced Scorecard

• The Balanced Scorecard (BSC) provides a system
  for measuring and managing all aspects of a
  companys performance.

• The BSC balances traditional financial measures
  of success, such as profits and return on
  capital, with non-financial measures of the
  drivers of future financial performance.

7
The Balanced Scorecard

• The BSC measures organizational performance
  across different perspectives derived from the
  organizations strategy.

• Financial How is success measured by
  shareholders?
• Customer How do we create value for customers?
• Internal At what internal processes must we
  excel to satisfy customers and shareholders?

8
The Balanced Scorecard

• The BSC measures organizational performance
  across different perspectives derived from the
  organizations strategy.

• Learning Growth What employee capabilities,
  information systems, and organizational climate
  do we need in order to continually improve
  internal processes and customer relationships?

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The Balanced Scorecard
How do we lookto the owners?
How can wecontinually learn,grow, and improve?
In which internalbusiness processes must we
excel?
How do we lookto customers?
10
The Balanced Scorecard

• A strategy map provides a visual representation
  of the linkages in the four perspectives of the
  BSC.

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The Balanced Scorecard
Financial Perspective
Return on Investment
Customer Perspective
Customer Loyalty
On-Time Delivery
Internal Perspective
Process Quality
Cycle Time
Learning Growth Perspective
Employees Process Improvement Skills
12
The Balanced Scorecard

• A properly constructed BSC tells the story of the
  business unit's strategy.

• It should capture the cause and effect
  relationships between
• Outcome measures in the financial and customer
  perspectives gt e.g., ROI and customer loyalty.

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The Balanced Scorecard

• A properly constructed BSC tells the story of the
  business unit's strategy.

• It should capture the cause and effect
  relationships between
• The performance drivers of those outcomes that
  are measured in the internal and learning
  growth perspectives gt e.g., zero defect
  processes, short cycle times, and skilled,
  motivated employees.

14
The Balanced Scorecard

• Before determining the objectives and measures,
  an organization must articulate its vision and
  mission statements.

• A concise statement that defines the mid- to
  long-term (3 to 10 year) goals of the
  organization.
• A concise, internally-focused statement of how
  the organization expects to compete and deliver
  value to customers

15
The Balanced Scorecard

• The Vision and Mission set the general direction
  for the organization.

• But these statements are far too vague to guide
  day-to-day actions and resource allocation
  decisions.
• Companies start to make the statements
  operational when they define a strategy of how
  the vision and mission will be achieved.

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The Balanced Scorecard

• Typical strategies of the four BSC perspectives
  include

• Financial Increase revenues through expanded
  sales to existing customers.
• Customer Become or remain service oriented.
• Internal Achieve excellence in order fulfillment
  through continuous process improvements.
• Learning Growth Align employee incentives and
  rewards with the strategy.

17
Building The Balanced Scorecard

• Financial Perspective

• This is the ultimate objective for
  profit-oriented entities.
• Financial objectives typically relate to
  profitability gt e.g., operating income and ROI.
• An entitys financial performance can be improved
  by either increasing revenues or increasing
  productivity.

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Building The Balanced Scorecard

• Financial Perspective

• Revenue growth comes from
• Selling new products
• Selling to new customers
• Selling in new markets.

19
Building The Balanced Scorecard

• Financial Perspective

• Increased productivity comes from
• Lowering direct and indirect expenses (spend
  less, produce the same quantity)
• Utilizing assets more efficiently (reduce working
  and fixed capital needed to sustain operations)

20
Building The Balanced Scorecard

• Customer Perspective

• Identify the targeted customer segments and the
  measures of the business units performance
• Customer acquisition
• Customer satisfaction
• Customer retention
• Customer profitability
• Market share
• Account share

21
Building The Balanced Scorecard

• Customer Perspective

• The value proposition is the unique mix of
  product, price, service, relationship, and image
  offered to the targeted customers
• Defines the companys strategy.
• Communicates what the company expects to do for
  its customers better or differently from its
  competitors.

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Building The Balanced Scorecard

• Internal Perspective

• Identifies the critical processes at which the
  organization must excel to achieve its customer,
  revenue growth, and profitability objectives.

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Building The Balanced Scorecard

• Internal Perspective

• Organizations perform many different processes,
  which may be classified into four groupings
• Operating
• Customer management
• Innovation and
• Regulatory and social.

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Building The Balanced Scorecard

• Internal Perspective

• Operating processes The basic, day-to-day
  processes which produce existing products and
  services and deliver them to customers.
• Customer management processes The processes by
  which the firm expands and deepens relationships
  with targeted customers.

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Building The Balanced Scorecard

• Internal Perspective

• Innovation processes The processes by which the
  firm develops new products, processes, and
  services.
• Regulatory and social processes The processes
  which ensure the firm meets or exceeds any
  business regulations.

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Building The Balanced Scorecard

• Learning Growth Perspective

• Identifies objectives for the people, systems,
  and organizational alignment that create
  long-term growth and improvement.

27
Building The Balanced Scorecard

• Learning Growth Perspective

• Enables management to learn where they must
  invest to improve
• Employee capabilities, knowledge, and skills
• Information systems and databases
• Employee culture, alignment, and
  knowledge-sharing.

28
Key Performance Indicator Scorecards

• Some organizations identify key performance
  indicators (KPIs) and classify them into the four
  BSC perspectives

• KPIs are typically common measures such as
  customer satisfaction, quality, cost, employee
  satisfaction, and morale.
• KPI measures are often simplified gt e.g.,
  employee turnover rates.

29
Key Performance Indicator Scorecards

• Some organizations identify key performance
  indicators (KPIs) and classify them into the four
  BSC perspectives

• Improving KPI measures does not always ensure
  achieving long-term strategy.
• A compensation system based on KPIs is not as
  powerful as one that selects measures that can be
  linked back to the firms long-term strategy.

30
Strategy and the Balanced Scorecard
Source Adapted from Kaplan, R.S. Norton, D.P.
1992. The balanced scorecard Measures that drive
performance. Harvard Business Review, 69(1)
71-79.
31
Strategy and the Balanced Scorecard
Source Adapted from Kaplan, R.S. Norton, D.P.
1992. The balanced scorecard Measures that drive
performance. Harvard Business Review, 69(1)
71-79.
32
Strategy and the Balanced Scorecard
Source Adapted from Kaplan, R.S. Norton, D.P.
1992. The balanced scorecard Measures that drive
performance. Harvard Business Review, 69(1)
71-79.
33
Strategy and the Balanced Scorecard
Source Adapted from Kaplan, R.S. Norton, D.P.
1992. The balanced scorecard Measures that drive
performance. Harvard Business Review, 69(1)
71-79.
34
Pitfalls in Designing BSCs

• Several design factors can lead to problems and
  disappointment when applying the BSC.

• Too few measures in the scorecard can lead to
  incomplete measurement of company strategies.
• Too many measures can lead to information
  overload, with insufficient attention being given
  to the most important measures.

35
Pitfalls in Designing BSCs

• Several design factors can lead to problems and
  disappointment when applying the BSC.

• The scorecard measures dont correspond with
  long-term strategy
• Long-term strategy may call for creating
  innovative solutions for customers, but the
  performance measurements focus exclusively on
  operational improvements.

36
Pitfalls in Designing BSCs

• The biggest threat is a poor organizational
  process for developing and implementing the
  scorecard

• Senior management is not committed, and the BSC
  project is delegated to middle management.
• One senior manager builds the scorecard alone.
• The BSC is treated as a systems project rather
  than as a management project.

37
Pitfalls in Designing BSCs

• The biggest threat is a poor organizational
  process for developing and implementing the
  scorecard

• Senior executives feel that only they need to
  know and understand the strategy, and BSC
  responsibilities don't filter down.
• The BSC is treated as a one-time event that
  requires the perfect scorecard for implementation.

38
The Future

• The balanced scorecard was originally developed
  to improve performance measurement, but
  organizations discovered that measurement has
  consequences far beyond reporting on the past.

• The BSC concept of the 1990s evolved from a
  performance measurement system to a new strategic
  management system.

39
The Future

• Organizations will achieve their strategic
  alignment and focus in different ways, at
  different paces, and in different sequences, but
  they generally follow these five principles.

• Translate the Strategy to Operational Terms
• Align the Organization to the Strategy
• Make Strategy Everyones Job.
• Make Strategy a Continual Process
• Mobilize Leadership for Change.