The Balanced Scorecard

Chapter 9

Achieving Success in the Information Era

To achieve success in the information era, companies need more than prudent investment in physical assets and excellent management of financial assets and liabilities Companies mobilize and create value from their intangible assets as well as their physical and financial ones

Intangible Assets
An organizations intangible assets include:

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

Measuring Intangible Assets

Difficulties in placing a reliable financial value on intangible assets have prevented them from being recognized on a companys balance sheet These assets are critical for success Managers have searched for a system that would help them measure and manage the performance of their intangible, knowledge-based assets

The Balanced Scorecard

The Balanced Scorecard (BSC) provides a system for measuring and managing all aspects of a companys performance The scorecard balances traditional financial measures of success, such as profits and return on capital, with non-financial measures of the drivers of future financial performance The Balanced Scorecard measures organizational performance across different perspectives

Perspectives
Four different but linked perspectives are derived from the organizations strategy Financial: Customer Internal Learning & Growth

Balanced Measurements
The BSC enables companies to: Track financial results Monitor how they are building the capabilities for future growth and profitability With customers With their internal processes With their employees and systems

Connecting the Four Perspectives

A strategy map provides a visual representation of the linkages in the four perspectives of the BSC
Financial Perspective

Return on Investment
Customer Loyalty On-Time Delivery

Customer Perspective

Internal Perspective

Process Quality

Cycle Time

Learning & Growth Perspective

Employees Process Improvement Skills

Connections
Return on investment (ROI) is a widely recognized measure of financial success Repeated and expanded sales from existing customers, the result of a high degree of loyalty among existing customers, could be one driver of this financial measure

Connections
Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers The company must excel at internal processes to achieve exceptional OTD

Connections
Short cycle times and high-quality production processes are two drivers of on-time delivery The company must have skilled production workers, well-trained in process improvement techniques A measure of employees skill and capabilities in process improvement is used in the Learning & Growth perspective

Strategy and the BSC

A BSC tells the story of the business unit's strategy A BSC identifies and makes explicit the hypotheses about the cause and effect relationships between: Outcome measures in the Financial and Customer perspectives Performance drivers of those outcomes in the Internal and Learning & Growth perspectives

Objectives
Concise statements that articulate what the organization hopes to accomplish Action phrases Tell the story of the strategy through the causeand-effect relationships Extensive (3-5 sentence) description of each objective

Objectives
Typical objectives found in each of the four BSC perspectives include:

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

Measures
Provide specificity and reduce the ambiguity that is inherent in word statements Specifying exactly how an objective is measured will give employees a clear focus for their improvement efforts Once the objectives have been translated into measures, managers select targets for each measure

Targets and Initiatives

Targets establish the level of performance or rate of improvement required for a measure Should be set to represent excellent performance Should, if achieved, place the company as one of the best performers in its industry Initiatives are the short-term programs and action plans that will help achieve the stretch targets established for its measures

Vision and Mission

Before determining the objectives and measures, an organization should already have a vision and mission statement High-level statements that can then be translated into detailed objectives and measures

Vision
A concise statement that defines the mid to longterm (3 - 10 year) goals of the organization The vision should be external and marketoriented and should express, often in colorful or visionary terms, how the organization wants to be perceived by the world:

Vision
The City of Charlotte will be a model of excellence that puts its citizens first. Skilled, motivated employees will be known for providing quality and value in all areas of service. We will be a platform for vital economic activity that gives Charlotte a competitive edge in the marketplace. We will partner with citizens and businesses to make Charlotte a community of choice for living, working and leisure activities

Mission Statement
A concise, internally-focused statement of how the organization expects to compete and deliver value to customers It often states the reason for the organizations existence, the basic purpose towards which its activities are directed, and the values that guide employees activities:

Mission Statement
The mission of the City of Charlotte is to ensure the delivery of quality public services that promote the safety, health and quality of life of its citizens. We will identify and respond to community needs and focus on the customer through: Creating and maintaining effective partnerships Attracting and retaining skilled motivated employees Using strategic business planning

Putting Vision in Action

The Vision and Mission set the general direction for the organization They are intended to help shareholders, customers, and employees understand what the company is about and what it intends to achieve Companies start to make the statements operational when they define a strategy of how the vision and mission will be achieved

What is Strategy?
Strategy is about selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace Differentiation arises from both the choice of activities and how they are performed (Porter)

Building the Balanced Scorecard

The role for the BSC is to provide needed specificity that makes vision, mission and strategy statements meaningful and actionable for employees

Financial Perspective
The ultimate objective for profit-maximizing companies Financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom-line improvement A companys financial performance can be improved in two ways:

Financial Perspective
Companies generate revenue growth by: Selling new products Selling to new customers Selling in new markets Increased productivity occurs by: Lowering direct and indirect expenses Utilizing their financial and physical assets more efficiently

Customer Perspective
Identify the targeted customer segments in which the business unit competes and the measures of the business unit's performance in these targeted segments This perspective typically includes several common measures of the successful outcomes from a well-formulated and implemented strategy:
Customer satisfaction Customer retention Customer acquisition Customer profitability Market share Account share

Customer Perspective
A strategy identifies specific segments targeted for growth and profitability Companies must also identify the objectives and measures for the value proposition it offers customers

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 Communicate what the company expects to do for its customers better or differently from its competitors

Value propositions used successfully by different companies include:

Best buy or lowest total cost Product innovation and leadership Complete customer solutions

Internal Perspective
Means by which the organization will: Produce and deliver the value proposition for customers Achieve the productivity improvements for the financial objectives The Internal perspective identifies the critical processes at which the organization must excel to achieve its customer, revenue growth, and profitability objectives

Internal Perspective
Organizations perform many different processes, which may be classified into four groupings: Operating processes Day-to-day processes by which companies produce their existing products and services and deliver them to customers Customer management processes Processes by which companies expand relationships with targeted customers

Internal Perspective

Innovation processes Processes by which companies develop new products, processes, and services, Regulatory and social processes Processes by which companies ensure that they meet or exceed regulations on business practices

Learning & Growth Perspective

Identifies objectives for the people, systems, and organizational alignment that create long-term growth and improvement Define the employee capabilities, skills, technology, and organizational alignment that will contribute to improving performance in the measures selected in the first three perspectives Identify investments needed to improve the skills of employees, enhance information technology and systems, and align people to the companys objectives

Learning & Growth Perspective

Identifies how executives mobilize their intangible assets to drive improvement in the internal processes most important for implementing their strategy Examines each of the processes they selected in the Internal perspective

Learning & Growth Perspective

Determine the factors that enable that process to be performed in an outstanding manner so that it can contribute to the success of the companys strategy: Employee capabilities, knowledge, and skills Information systems and databases Employee culture, alignment, and knowledgesharing

KPI Scorecards
Some organizations identify key performance indicators (KPIs) and classify them into the four BSC perspectives KPIs typically are common measures, such as customer satisfaction, quality, cost, employee satisfaction, and morale Companies may expand their compensation system to reward executives for a broader set of performance than simply short-term financial results based on KPIs

BSC in Nonprofits and Government Organizations

The BSC is especially well-suited for nonprofit and government organizations (NPGOs) Their success has to be measured by their effectiveness in providing benefits to constituents Since nonfinancial measures can assess performance with constituents, the BSC provides the natural performance management system for NPGOs

NPGOs and Strategy

Many NPGOs encountered difficulties in developing their initial BSC, finding that they didnt have a clear strategy Many NPGOs place their mission objective at the top of their scorecard and strategy map

Cannot use the standard BSC architecture where financial objectives are the ultimate, high-level outcomes to be achieved

Using BSC to Implement Strategy

BSC was originally developed to improve performance measurement, but organizations learned that measurement has consequences far beyond reporting on the past The BSC concept evolved during the 1990s from a performance measurement system to a new strategic management system

5 Principles for Becoming Strategy-Focused

Organizations achieved their strategic alignment and focus in different ways, at different paces, and in different sequences, but they generally followed a common set of five principles: 1. Translate the Strategy to Operational Terms 2. Align the Organization to the Strategy 3. Make Strategy Everyones Job 4. Make Strategy a Continual Process 5. Mobilize Leadership for Change

Pitfalls
Design factors can lead to problems when applying the BSC

Too few measures in the scorecard to provide: A complete picture of the companys strategy A balance between desired outcomes and the performance drivers of those outcomes Too many measures: Attention is diffused, and insufficient attention is given to those few measures that make the greatest impact The drivers in the Internal and Learning & Growth perspectives don't link to the desired outcomes in the Financial and Customer perspective

Pitfalls
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 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 The BSC is treated as a systems project rather than as a management project

BSC Summary
BSC integrates measures based on strategy Retains financial measures of past performance Introduces the drivers of future financial performance The drivers are derived from an explicit and rigorous translation of the organization's strategy into tangible objectives and measures

BSC Summary
The benefits from BSC are realized as the organization integrates its new measurement system into management processes that: Communicate the strategy to all employees and organizational units Align employees individual objectives and incentives to successful strategy implementation Integrate the strategy with ongoing management processes