The Balanced Scorecard at Philips Electronics

By Andra Gumbus and Bridget Lyons

Strategic Finance

It's used to align company vision, focus employees on how they fit into the big picture,
and educate them on what drives the business
!hen a management tool becomes popular, it"s only logical to #uestion whether it"s a fad
or the future $ne performance measurement tool%the balanced scorecard &BS'(%has
broad appeal Appro)imately *+, of Fortune -,+++ companies in .orth America and
about /+, in 0urope use a version of the BS', according to a recent survey by Bain 1
'o 2he number of software and consulting firms currently providing BS'3related
products and services supports these statistics But do companies thin4 the BS' is here to
stay5 6hilips 0lectronics does 2his worldwide conglomerate has gathered its more than
7*+,+++ employees in -*+ countries around the card because it sees this tool as the future
%not a trendy tool 2he 4ey benefit for 6hilips8 9anagement can streamline the
complicated process of running a comple) international company with diverse product
lines and divisions :ere"s how it cascades throughout the organi;ation
2he drive to implement the balanced scorecard at 6hilips 0lectronics came from the top
down%as a directive from the Board of 9anagement in 0urope to all 6hilips divisions
and companies worldwide 2he directive went to each of the companies and their #uality
departments, with the effort in the medical division headed by the <uality Steering
'ommittee that reports to the president of 6hilips 9edical Systems &Later we"ll loo4
specifically at the e)periences of the 6hilips 9edical Systems .orth America &69S.A((
6hilips 0lectronics has used the balanced scorecard to align company vision, focus
employees on how they fit into the big picture, and educate them on what drives the
business An essential aid to communicating the business strategy, the BS' wor4s as a
vehicle to ta4e 4ey financial indicators and create a #uantitative e)pression of the
business strategy In fact, 6hilips 0lectronics" management team uses it to guide the
#uarterly business reviews worldwide in order to promote organi;ational learning and
continuous improvement
The Road to Implementation
6hilips" underlying belief in creating their balanced scorecard is that understanding what
drives present performance is the basis for determining how to achieve future results
!ith this understanding in mind, 6hilips designed the scorecard to provide a shared
understanding of the organi;ation"s strategic policies and vision of the future 2heir
operating principle in the design was to determine factors that were critical for achieving
the company"s strategic goals
2he tool has helped 6hilips 0lectronics focus on factors critical for their business success
and align hundreds of indicators that measure their mar4ets, operations, and laboratories
2he business variables crucial for creating value, which are 4nown as the four critical
success factors &'SFs( on the 6hilips 0lectronics BS', are8
Competence &4nowledge, technology, leadership, and teamwor4(,
Processes &drivers for performance(,
Customers &value propositions(, and
Financial &value, growth, and productivity(
:ere"s how these critical success factors came to life at the company
2op3level scorecard criteria are the driving determinant for lower3level scorecard criteria
6hilips wanted to ma4e implicit assumptions about the way the business creates value
e)plicitly through 'SFs In other words, the goal was to translate assumed relationships
such as customer satisfaction and product sales into critical success factors to measure
performance 2o do so, they identified which financial and customer 'SFs give a
competitive edge, and then they determined the process 'SFs that have the greatest
impact on the financial and customer 'SFs giving the company that edge 'ompetence
'SFs deliver re#uired process, customer, and financial results
2o e)press the strategy in measurable ob=ectives, the team established a performance
management system that measures progress toward the corporate vision 2his system
lin4s short3term actions with long3term strategy so employees understand how their day3
to3day activities help achieve the company"s stated goals
In order to focus employees on the few vital goals and business priorities, the BS'
cascades down throughout the organi;ation 2op management initially deployed the BS'
by setting annual operational targets, which were brought down through organi;ational
layers as goals for the divisions worldwide and ob=ectives at the business unit level By
deploying top3level 'SFs throughout the organi;ation, goals can be clearly lin4ed to the
business strategy as well as to all employees
2he 6hilips 0lectronics balanced scorecard has three levels 2he highest is the strategy
review card, ne)t is the operations review card, and the third is the business unit card In
addition, the plan is to implement another level of the card%the individual employee
card%in 7++>
2he corporate #uality department created specific guidelines for metric lin4age for the
entire company 2hese guidelines state that all top3level scorecard critical success factors
for which the department is responsible must lin4 metrically to lower3level cards 2hree
criteria were established to accomplish this 2he first is inclusion8 2op3level 'SFs must
be addressed by lower3level 'SFs to achieve top3level metric goals 2he second is
continuity8 'ritical success factors must be connected through all levels, and lower3level
measurements shouldn"t have longer cycle times than higher3level measurements 2he
third criterion is robustness8 9eeting lower3level 'SF goals must assure that higher3level
'SF goals will be met or surpassed Goals in all card levels align with goals in the ne)t
level above, and goals become fewer and less comple) as you drill down through the
organi;ation
The BSC at Work in the Business Units
At the business unit level, critical success factors were developed for each of the four
perspectives of the card%competence, processes, customers, and financial 2hey
established guidelines for the deployment of 'SFs at lower levels in the company, stating
that departments must select 'SFs for which the department has a ma=or control
responsibility 2hese 'SFs%4ey BS' indicators%monitor the implementation of the
business strategy
2he management team of each business unit reached consensus on which 'SFs
distinguish the business unit from the competition 2hey used a value map to derive
customer critical success factors by analy;ing customer survey data that reflected
perceived performance relative to the price for competing products 6rocess 'SFs were
derived by determining how process improvements can deliver customer re#uirements
'ompetence 'SFs were identified by determining what human resources and
competencies were re#uired to deliver the other three perspectives of the card Standard
financial reporting metrics were used as financial 'SFs
2he ne)t step was for each business unit to determine 4ey indicators at the business unit
level that measure critical success factors Assumptions about relationships between
processes and results were #uantified and performance drivers determined
2argets were then set based on the gap between present performance and desired
performance for the current year plus two and four years in the future 2he criteria8
2argets must be specific, measurable, ambitious, realistic, and time3phased 2argets are
derived from an analysis of mar4et si;e, customer base, brand e#uity, innovation
capability, and world3class performance
0)amples of indicators at the business unit level include8
In cascading the card down from the organi;ational level to the business unit level, si)
4ey indicators consistently came to the forefront for all business units8
6rofitable revenue growth,
'ustomer delight,
0mployee satisfaction,
?rive to operational e)cellence,
$rgani;ational development,
I2 support
2hese si) 4ey drivers relate to each other as well as to the balanced scorecard"s four
critical success factors $rgani;ational development and I2 support drive the competence
perspective@ customer delight and employee satisfaction drive the customer perspective@
operational e)cellence drives the process perspective@ and profitable revenue growth
drives the financial perspective And each #uarter the BS' metrics are used as the
reporting format for the review of each business unit"s performance
Successes and 'hallenges
Although there are many successful implementations at the 6hilips companies, let"s loo4
at the implementation of the balanced scorecard at 6hilips 9edical Systems .orth
America &69S.A( It served as an alignment tool to focus on their strategic intent to
become a A- billion company by the year 7++-
It simultaneously guided a cultural change effort to increase accountability for results
0ventually the BS' is e)pected to replace the monthly accountability calls to the field
office where sales are reported against forecasted numbers Another success for the card
within this division is the creation of an operational scorecard for action planning and
trac4ing results in real3time8 ?ata are automatically transferred from internal reporting
systems and fed into the online BS' report, which is immediately accessible and contains
the new results An upcoming enhancement to customer service and satisfaction reporting
will be the automatic feed of data gathered by the Gallup $rgani;ation into the online
BS' report in a similar fashion
Finally, implementing the card responded to common #uestions raised in the annual
employee motivation survey, such as B:ow does what I do every day fit into the bigger
picture of the company5C 2he balanced scorecard enables employees to understand
e)actly what they need to do on a daily basis in order to impact results
'hris Farr, former vice president of #uality and regulatory at 69S.A and who was
responsible for the BS', says that companies must get buy3in to the metrics and share
measures #uarterly with all employees in order to succeed B9anagement must give full
access to their employees,C Farr says B2he metrics must be shared and visibleC
2o share the metrics with employees, 6hilips 0lectronics uses traffic3light reporting to
indicate how the actual performance compares with the target Green indicates meeting
target, yellow indicates in3line performance, and red warns that performance is below
target 2he visibility of results using a traffic3light model means ease3of3use with #uic4,
easily recogni;able metrics
Farr said the balanced scorecard"s primary strength is gaining the commitment and
participation of management and employees regarding company ob=ectives B0mployees
have helped to create measures that are meaningful to customers and to the business,C he
says BIn this process, employees have analy;ed what ma4es the business successful and
gained a greater understanding of the business enterpriseC
$ther strengths include8
2he BS' promotes the sharing of best practices and creates a communication system
worldwide 0ach element of the card has an owner whom employees can contact to share
success strategies and product fi)es BS' fosters communication, collaboration, and
problem solving
2he BS' supports a company"s cultural change to a learning organi;ation by creating a
common 4nowledge base If a metric is in the red ;one, the employee can #uic4ly access
how to fi) potential problems and avoid repeating others" mista4es, saving time and
money in problem solving
2he BS' represents an enhancement to the current BDellow 6agesC in use at 6hilips $ut
of a total wor4force of more than 7*+,+++, roughly 77,+++ employees have chosen to
share pro=ect 4nowledge and interests on a voluntary basis using the 6hilips Dellow
6ages 0mployees wor4ing on similar pro=ects can communicate successes and pitfalls
using the Dellow 6ages on the employee intranet 2he BS' ta4es the concept further with
a defined owner accountable for each element on the card
$ther lessons 6hilips 0lectronics learned include8
Software for use in capturing and transferring data to a BS' in real time should be
selected carefully and researched fully prior to implementing the balanced scorecard
A balance must be reached to maintain visibility for employee access while maintaining
confidentiality of company results that are sensitive and proprietary
In trying to determine employee3level performance indicators, the team learned that many
critical success factors can"t be directly impacted by employees
Fad or Future
2he use of a balanced scorecard as a strategic tool represents an opportunity for an
e)ecutive team to align their company to the strategic intent Since the BS' represents a
fundamental change in how an organi;ation is measured and held accountable for results,
it also poses threats to an established corporate culture and has potential wea4nesses if it
isn"t e)ecuted properly Det the balanced scorecard is a powerful strategic tool%not the
latest management fad%for strategic planning, goal setting, goal alignment, and
measurement .o other tool provides the ability to balance all aspects crucial to business
performance in 7++7 and beyond