CHAPTER 7: The Balanced Scorecard: A  Set to represent excellent performance, and if achieved,

position the company as one of the best performers of the

Tool to Implement Strategy industry
 Choose targets that create distinctive value for customers
and shareholders
The Balanced Scorecard

■ Translates the organization's mission and strategy into a set Four Perspectives of the Balanced Scorecard
of performance measures that provides a framework for
implementing strategy. 1. Financial Perspective – measures of profitability and market
value among others, as indicators of how well the firm satisfies
■ It is used to measure the company's health or performance. its owners and shareholders.
■ The scorecard measures organization's performance from This perspective views organizational financial
four perspectives: financial, customer, internal processes, performance and the uses of financial resources.
and learning and growth.
We need to focus on two points:
■ Strategic information using critical success factors such as
 Is the company achieving its financial goals?
growth in sales and earnings, cash flow, stock price, market
share, product quality, customer satisfaction, and growth
 How well the strategies and operations contribute to
improving financial health?
opportunities provides a road map for a firm to chart its
competitive course and serves as a benchmark for a Well, now the question is how we can measure the output
competitive success. of the financial perspective?
these data always past focused, we need to gather two types
■ To emphasize the importance of using strategic information,
of data.
both financial and nonfinancial, accounting reports of a 1. Historical Data: How did we do last month, last week,
firm's performance are now often based on critical success last year, and so on.
factors in different dimensions. 2. Current Data: How we are doing right now, Today?
For instance,
■ Financial performance measures - summarize the results of 1. our net profit for the year versus last year
past actions and are important to a firm's owners, creditors, 2. Our sales revenue this year versus last year
employees and so forth. These measures of corporate performance are based on history
and also vary from organization to organization.
■ Nonfinancial performance measures - concentrate on current
activities which will be drivers of future financial As the BSC is holistic approach, any key objectives that is
performance. related to company's financial health and the performance may
include in this perspective as given below:
a. Cost Saving and Efficiencies [Specified Goals:
Reduced production cost 10% by 2021]
b. Profit Margins [increase operational profit Margins]
c. Revenue Sources [adding new revenue
channels/department/products]
In the end,
 Are you making money?
 Are your investors happy?
If yes, then be happy...
The financial health of your organization may be the indicators
of your past decisions but still incredibly important.

' Money keeps the company alive ' and the financial
perspective focus solely on this.

Exhibit 1. Financial Objectives and Measures

Objectives Measures
Increased Shareholder’s  Return on capital employed (ROCE)
Figure 1. Four Perspectives of BSC Value  Economic value added
 Market-to-book ratio
Improved cost structure  Cost per unit, benchmarked against
Balanced Scorecard Objectives, Measures and Targets competitors
 General, selling & admin. expenses per
I. Objectives: unit of output or as % of sales
 Develop word statements of strategic objectives that describe Increased aset utilization  Sales/aset ratio
 Inventory turnover ratio
what it is attempting to accomplish with its strategy  % capacity utilization
 Select measures for each objective-measures represent a Enhance existing customer  % growth in existing customer’
quantitative indicator of how performance on a strategic level will value business
be assessed- objectives are written as action phrases (a verb  % revenue growth
followed by an object) and may include the means and the desired Expand revenue  Revenue % from new products
results opportunities  Revenue % from new customers
 Typical objectives: increase revenues through expanded sales to
existing costumers (financial)
II. Measures: 2. Customer Satisfaction – measures of quality service and low
 Describe in more precise terms how success in achieving an cost, among others, as indicators of how well the firm satisfies its
objective will be determined - reduces ambiguity customers.
 Powerful tool for communicating clearly what the company
means We all know that the 'Customer is the king of market’ and
in its word statements of strategic objectives, mission and vision that's why we need to ensure that we have satisfied customer
III. Targets: group in market.
 a target establishes the level of performance or rate of
Each organization serves a specific need in the market and
improvement required for a measure
this is done with a target group in mind. There are many points
to focus like the Quality, Price, Service, and acceptable Margins
on the products and/or services. The organization always try to
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meet customers' expectation in the market and that's why any Deliver excellent post sales  Revenue from maintenance, repair and
organization need to keep eyes on the market and ready to adapt services logistic services
changes quickly. Develop personalized  # of sole –sourced contracts
relationships  Client retention
The existence of alternatives (competitors) has a huge influence
on customers' expectations and we need to focus on overall 3. Internal Business Processes – measures of the efficacy and
market trends to build satisfied buyers in the market. effectiveness with which the firm produces the product or
service.

This perspective views various organizational processes and

the efficiency of the particular process.

1. from this view, the question should be asked what

internal processes have added values within the
organization and what activities need to carry in the
organization (In all three perspectives).
2. The internal Process perspective looks at how
smoothly your business is running (Here, Efficiency is
important)
3. It's all about,
 Reducing waste,
 Speeding process/ production
 Doing more with less
Figure 2. Customer Objectives for Three-Value Propositions
We need to focus on three points:
This perspective answers the question:  Is the company improving the critical process?
"How attractive should we appear to our customers?"  Are there any obstacles standing between ideas and
execution?
In short we need to focus on three points-  How quickly you can adapt to changing business
 Target Group in Market conditions?
 Expectation of the Customers This perspective answers the question:
 Our Competitors "what process we must excel at to satisfy our
after focusing on these points definitely, we will able to lure shareholders/financial Backers and customers?"
maximum potential customers in the market.
Exhibit 3. Process Objectives and Measures
Exhibit 2. Customer Outcome Objectives and Measures Objectives Measures
Operations Management
Objectives Measures Improve cost, quality and cycle  Supplier scorecard ratings: quality,
Achieve customer  Customer satisfaction in targeted times of operating (production) delivery, cost
satisfaction and loyalty segments processes  Cost per unit of output
 % repeat customers  Product and process defect rates
 % growth in revenue from exisitng  Product cycle times
customers
Improve aset utilization  Lead times, from order to delivery
 Willingness to recommend
 Capacity utilization %
Acquire new customers  # of new customers acquired  Equipment reliability, % availability
 Cost per new customer acquired
Customer Management
 % of sales to new customer
Acquire new customers  % leads converted
Improved market share  Market share in targeted customer
 Cost per new customer acquired
segments
Satisfy and retain customer  Time to resolve concern or complaint
Enhanced customer  # or % of unpredictable customers
 # of referenceable customers (willing
profitability
to recommend)
Generate growth with  # of products and services per
Value propositon: unique mix of product performance, quality, price, customers customer
quality, availability, ease of purchase, service, relationship and image  Revenue or margin from post-sale
they offer for the targeted costumers services
Innovation
Exhibit 3. Customer Value Proposition Objectives and Measures Develop innovative products  # of fundamental new ideas entering
Objectives Measures and services product development
Low Total Cost Achieve excellence in research  # patient applications filed or patents
Be a low cost supplier  Price, relative to competitors and development processes earned
 Customer’s cost of ownership  Total product development time:
Deliver consistent high quality  # of returns, Peso value of returns from idea to market
 # and % of customer complaints  Product development cost vs. budget
 # of incidents of warranty and field I. Regulatory and Social
service repairs Improve environmental , health  # of environmental and safety
Provide speedy, easy purchase  % on-time delivery and safety performance incidents
 Customer lead time (from order to  Days absent from work
delivery) Enhance reputation as “good  Employee diversity indeks
 % of perfect orders (right product, neighbor”  # of employees from disadvantaged
right quantity, delivered on time) communities
Product Leadership
Offer high-performance  Customer innovation rating
products  Competitive product performance 4. Innovation and Learning – measures of the firm’s ability
(speed, size, accuracy, energy to develop and utilize human resources to meet the strategic
consumption) goals now and into the future.
Be first to market with new  # of products that are 1st to market
products This perspective answers the questions: "How can we sustain our
Customer Solutions ability to achieve our chosen strategy?"
Provide customized solution  # of customers with profiled
preferences Three Components:
Sell multiple products and  # of products and services per
services to customers customer
 # of clients above P__ million annual I. Human Resources:
sales strategic competency availability: employees have the
appropriate mix of skills, talent and know-how

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 II. Information Technology:
strategic information availability: systems and applications
contribute to effective strategy executions
III. Organizational Culture and Goal Alignment
culture and climate: employees have an awareness and
understanding of the shared vision, strategy, cultural values
goal alignment: employee goals and incentives are aligned with
the strategy
knowledge sharing: employees and teams share best practices
and other knowledge relevant to strategy execution
Features of a Good Balanced Scorecard
1. The balanced scorecard should tell the story of a company’s
strategy by articulating a sequence of cause-and-effect
relationships.
2. It helps to communicate the strategy to all members if of the
organization by translating the strategy into a coherent and
linked set to understandable and measurable operational
targets.
3. In for-profit companies, the balanced scorecard places strong
emphasis on financial objectives and measures.
4. The balanced scorecard should focus only on key measures
to be used by identifying only the most critical ones.
5. The scorecard should highlight suboptimal tradeoffs that
managers may make when they failed to consider
operational and financial measure together.
Pitfalls in Implementing a Balanced Scorecard
1. Don’t assume the cause-and-effect linkages are precise.
2. Don’t seek improvements across all of the measures all of
the time.
3. Don’t use only objective measures in the balanced scorecard.
4. Don’t fail to consider both costs and benefits of initiatives
before including these objectives in the balanced scorecard.
5. Don’t ignore nonfinancial measures when evaluating
managers and employees.
6. Don’t use too many measures.
Barriers to Effective Use
- Senior management is not committed
- Responsibilities don’t filter down
- Solution is overdesigned or the scorecard is a one-time
event
- BSC treated as a system or consulting project
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Evaluating The Success of a Strategy
Assume the following operating incomes:
Year 2019 Year 2020
Revenues:
(1,000,000×P26) P26,000,000
(1,100,000×P24) P26,400,000
Expenses:
Materials 4,050,000 3,631,320
Other 16,000,000 16,000,000
Operating income P5,950,000 P6,768,680
How can the increase in operating income of P818,680 be evaluated?
Growth Component
Revenue effect of growth component (favorable/unfavorable) =
(Actual units of output sold in 2020 - Actual units of output sold in
2019) x Output price in 2019
Cost effect of growth component (favorable/unfavorable)* =
(Actual units of input or capacity that would have been used in 2019
to produce year 2020 output assuming the same input-output
relationship that existed in 2019 - Actual units or capacity to produce
2019 output) x Input prices in 2019
*the cost effect must be tested for all cost item
Price-Recovery Component
Revenue effect of price-recovery component
(favorable/unfavorable) = (Output price in 2020 – Output price in
2019) × Actual units of output sold in 2020
Cost effect of price-recovery component (favorable/unfavorable) =
(Input prices in 2020 – Input prices in 2019) x Actual units of inputs
or capacity that would have been used to produce year 2020 output
assuming the same input-output relationship that existed in 2019
*the cost effect must be tested for all cost item
Productivity Component
Productivity component = (Actual units of inputs or capacity to
produce year 2020 output - Actual units of inputs or capacity that
would have been used to produce year 2020 output assuming the same
input-output relationship that existed in 2019) x Input prices in 2020
Internal Business Processes Performance
Delivery cycle time – The amount of time from when an order is
received from a customer to when the completed order is shipped is
called delivery time cycle.
Throughput (Manufacturing Cycle) time – The amount of time
required to turn raw materials into completed products is called
throughput time or manufacturing cycle time. It is made up of process
time, inspection time, move time, and queue time.
Process time – The amount of time work is actually done on the
product.
Inspection time – The amount of time spent ensuring that the product
is not defective.
Move time – The time required to move material or partially
completed products from workstation to workstation.
Queue time – The amount of time a product spends waiting to be
worked, to be moved, to be inspected, or to be shipped.
Manufacturing Cycle Efficiency – Through concerted effort to
eliminate the non-value-added activities of inspecting, moving, and
queuing to reduce their throughput time to only a fraction of previous
level.
Manufacturing Cycle Efficiency Formula
MCE = Value Added Time (or Process Time)
Manufacturing Cycle Time
where:
Manufacturing cycle time = Process time + Inspection time + Move
time + Queue time
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