The Balanced Scorecard: Linking Operations To Strategy

The Balanced Scorecard
Linking Operations to Strategy
Information for Guiding Operations
Decisions cannot be based solely on financial

information
Much quantitative information cannot be reduced

to monetary amounts
Much information cannot be quantified
Much information provides feedback but not

guidance
Criticisms of Traditional Measures
Lack of relevance
Many measures are interesting, but not useful
Market share, revenue, etc.
Trends may be useful
Measures may be poorly designed or collected
Customer satisfaction, employee morale, etc.
Goals are arbitrarily determined, beyond the

ability of the system
3
Lack of vision
Short-term focus impedes decisions with long lead

times or long-term payoffs
Focus on what is currently being done, not what

should be done
Fail to consider the overall organization
Promote detrimental outcomes
Short-term thinking
Local optimization
Manipulation of operations or measures
Well-intentioned but detrimental actions
The numbers these systems generate often fail to support

the investments in new technologies and markets that are
essential for successful performance in global markets
Eccles, p. 28
5
Signs of an Ineffective Performance

Measurement System
Performance is acceptable on all dimensions

except profit
Measures are not aligned with strategy
Measures do not reflect critical success factors
Competitive price, but customers do not buy
Functionality or quality may be more important to

the customers
6

Measurement System
No one notices if the measures are not

produced
Not using them anyway
Irrelevant
Redundant
Questionable
Managers debate the meaning of the

measures
Measures are confusing

7

Measurement System
Share price is lethargic despite solid financial

performance
Measures are backward looking
Share price reflects future expectations
The market expects that current performance will not

continue

Measurement System
Have not changed the measures or targets in

a long time
Obsolete, easily met, do not foster change
Corporate strategy has changed
Measures become irrelevant
Performance measurement and guidance tool
Balance between
Measures of current performance and long-term

competitive abilities
Feedback and guidance
Financial and non-financial measures
10
Four aspects of firm performance
Financial
Internal business processes
Customer
Innovation and learning
Some entities may use more or less than four perspectives

depending on their unique situations
11
Financial perspective
How is the company doing financially?
Traditional financial measures
Operating income
Cash flow
Revenue growth
Stock price
Etc.
12
Internal business perspective
At what must the company excel currently?
Manufacturing or service excellence
Backlogs
Cycle time
Quality
New product or service introductions
Etc.
13
Customer perspective
How do our customers view the company?
Responsiveness to customer desires
Market share
Customer satisfaction
Customer retention
Customers perception of the company and its products
Etc.
14
Innovation and learning perspective
Can the company continue to create value?
Technological leadership
Research and development
Employee training
Employee satisfaction
Investments in new technologies
Etc.
15
The four perspectives are interrelated
Not a random collection of measures
Emphasizes the synergies and relationships

existing within the company and with its customers
Innovation and learning results in better products

and internal processes which please customers
which then results in positive financial results
Strategy map
16
Designing a Balanced Scorecard
Step 1: Develop company strategy
Measures must relate to the strategy
Reflecting the critical success factors
Measures must be interrelated
Must understand how the perspectives influence each

other
Organization-wide view replaces local focus
17
Step 2: Determine critical success factors

(goals)
What must be achieved to survive, or what will

cause the company to fail if it is not achieved?
Determine success factors for each of the four

perspectives
Limit the number to items that are critical, not just

interesting
18
Step 3: Determine the activities that drive the

achievement of the critical goals
Must understand the linkages between the

activities and the goals
Will this activity help us achieve the desired goal?
19
Step 4: Develop metrics to evaluate

performance
Provide feedback and also indicate problem areas
Metrics may be financial, non-financial, trends,

surrogates, internally or externally gathered, etc.
Should include leading and lagging measures
May not be exact
20

Strategy
Critical
Success
Factors
Activities
Measures
Fedex
Strategy produce superior financial returns by providing high valueadded supply chain, transportation, business and related services
CSFs stock price growth, on-time delivery
Activities increase operating income by reducing fuel usage, deliver
packages to central sorting facility by midnight
Measures - fuel usage, acquisition of, or commitments to acquire, more
fuel efficient planes, percent of packages arriving late
21
Not a quick process
May take months to accomplish
Thought and analysis of strategy, critical success

factors, activities, metrics
How do the pieces fit together?
22
Requires teamwork and collaboration
Different perspectives and expertise are required
No one individual has a complete view of the

organization
Greater participation produces greater buy-in
Employees have a sense of ownership in the resulting

scorecard
More likely to use the scorecard to guide their decisions

23
Implementing a Balanced Scorecard
Initiative must start with senior management
Understanding of overall strategy
Authority to make strategic decisions
Commitment level will determine success or failure
The project may fail if senior management does not show

continued interest and support in the design process
The scorecard will be ignored if management does not

promote its use for performance evaluation and guidance
24
Link to databases and information system
Modify information system if necessary to collect

and report the metrics
What data is available? What is not available?
How should it be collected? How often?
The scorecard should determine what data is collected
The data available should not determine the scorecard
Determine reporting procedures
Who gets the information? How is it reported? How

often is it reported?
25
Communicate to employees
What is being measured
Why it is being measured
What is expected of the employees
How to use the information
Develop scorecards for lower levels
Want the employees to understand what they

must do to support the level above
26
Periodic reviews
The scorecard must evolve with the company
Has company strategy changed?
Are the critical success factors still valid?
Are the activities still valid?
Are the metrics still valid?
27
The Road to Disaster
Senior management is not committed
Lack of consensus
No one else will be
Lack of commitment
Poor use of consultants
Provide expertise, but cannot take over the project

without employee input
28
Failure to communicate to employees
Risks business as usual
Lack of push down
Lower levels continue to operate as before
The scorecard cannot stay in the boardroom
29
Carve it in stone
It will not ever be perfect
Poorly designed scorecard
Will not see strategic improvements even if

individual measures show progress
The activities are not linked to strategy
30
The Scorecard as a Change Agent
The scorecard should be used to guide future

operations and decisions
Four steps
Translate the strategy into action
Communicating and linking
Business planning
Feedback and learning

31
Translating the strategy into action
Strategy must be reduced to a set of quantifiable

goals and measures that can be operationalized
We want to be the best will not do
Communicating and linking
Strategy must be communicated to all levels
Lower levels are the foundation on which the rest of the

organization is built
32
Business planning
Integrate the financial plan with the business plan
Use the scorecard to allocate resources to critical

activities
Assures critical activities receive adequate resources
Avoids the short-term spending mentality
Feedback and learning
Monitor short-term results to determine if progress

is being made toward long-term goals
May need to refine the scorecard

33
Analysts Top 10 List
Ernst and Young study of financial analysts

use of non-financial measures
Improves earnings forecasts
35% of a companys valuation is attributable to

non-financial information
34
The Top 10
Ability of the company to execute its strategy
Credibility of management
Does the company do what it says it will do?
The quality of the strategy
Will managements vision create future value?
35
Innovativeness
How readily does the company adapt to changing

technologies and markets?
Ability to attract and retain talented people
Market position
How quickly can the company realize sales, profits and

cash flow from products introduced in the prior three
years?
How strong is the companys brand?

36
Management experience
What skills and experiences does the management

team bring to the organization?
What is their success rate in similar situations?
Executive compensation
Are compensation policies aligned with strategy?
How many executives have their pay tied to value

creation?
37
Quality of major processes
How well does the company execute its strategy?
Does it have plans and processes that enable it to adapt

to changing market conditions?
Research leadership
How well does the management understand the link

between creating knowledge and using it?
R&D budget as a percent of sales, profits and cash flow
38

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The Balanced Scorecard

Linking Operations to Strategy

Information for Guiding Operations

Decisions cannot be based solely on financial

Much quantitative information cannot be reduced

Much information cannot be quantified

Much information provides feedback but not

Criticisms of Traditional Measures

Many measures are interesting, but not useful

Market share, revenue, etc.

Trends may be useful

Measures may be poorly designed or collected

Customer satisfaction, employee morale, etc.

Goals are arbitrarily determined, beyond the

Criticisms of Traditional Measures

Short-term focus impedes decisions with long lead

Focus on what is currently being done, not what

Fail to consider the overall organization

Criticisms of Traditional Measures

Promote detrimental outcomes

Manipulation of operations or measures

Well-intentioned but detrimental actions

The numbers these systems generate often fail to support

Signs of an Ineffective Performance

Performance is acceptable on all dimensions

Measures are not aligned with strategy

Measures do not reflect critical success factors

Competitive price, but customers do not buy

Functionality or quality may be more important to

Signs of an Ineffective Performance

No one notices if the measures are not

Not using them anyway

Managers debate the meaning of the

Measures are confusing

Signs of an Ineffective Performance

Share price is lethargic despite solid financial

Measures are backward looking

Share price reflects future expectations

The market expects that current performance will not

Signs of an Ineffective Performance

Have not changed the measures or targets in

Obsolete, easily met, do not foster change

Corporate strategy has changed

Measures become irrelevant