The Balanced Scorecard

March 24, 2023

 What is Strategy?

Strategy describes how an organization matches

its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.
 What is Strategy?

What is the focus of industry analysis?

Competitors

Potential entrants into the market

Equivalent products

Bargaining power of customers

Bargaining power of input suppliers

Basic Strategies

1. Product differentiation

2. Cost leadership
 The Balanced Scorecard

The scorecard measures an organization’s

performance from four perspectives:

1. Financial

2. Customer

3. Internal business processes

4. Learning and growth

 Performance Management II:
The Balanced Scorecard

The Balanced Scorecard concept involves creating a set

of measurements for four strategic perspectives.

These perspectives include: 1) financial, 2) customer, 3)

internal business process and 4) learning and growth.

The idea is to develop between four and seven

measurements for each perspective.

March 24, 2023

March 24, 2023
March 24, 2023
 Perspective Generic Measurements

Financial   Return of Capital Employed, Economic value added, Sales growth, Cash flow

Customer   Customer satisfaction, retention, acquisition, profitability, market share

  Includes measurements along the internal value chain for:

 Innovation - measures of how well the company identifies the customers’ future needs.
Internal business process
 Operations - measures of quality, cycle time, and costs.

 Post sales service - measures for warranty, repair and treatment of defects and returns.

  Includes measurements for:

Learning and growth  People - employee retention, training, skills, morale.

 Systems - measure of availability of critical real time information needed for front line employees.
March 24, 2023
What do you try to Balance?

An important part of the balanced scorecard concept is the emphasis on

establishing a balance between four types of measurements. These types of
measurements include:
1) Short term and Long term,

2) External (for shareholders and customers) and Internal (for critical business
processes, innovation, and learning and growth),

3) Leading indicators (outcomes desired and performance drivers) and

Lagging indicators (outcomes),

4) Objective measures (e.g., financial) and Subjective measures (e.g., many

non-financial). See the Exhibit below (item 7) for the idea.

5) How Should the BSC Be Used?

Kaplan and Norton also emphasize that "the balanced scorecard should be
used as a communication,
March 24, 2023 informing, and learning system, not as a
controlling system."
 Perspectives Goals Objectives Measurements

Customer Continuously improve customer satisfaction. Decrease lead time.* Average lead time.*

Increase on time delivery. Percentage of deliveries on time.

Reduce customer complaints. Number of customer complaints.

Internal Business Continuously improve business processes. Decrease cycle time** Average cycle time.**

Increase quality. Number of defects and number of items

reworked.

Increase productivity. Average output per employee.

Innovation & Learning Continuously develop and deliver new Increase sales of new products and services Percentage of sales obtained from new products
innovative products & services. & services.

Reduce development time. Average time from initial design to production.

Financial Continuously improve financial performance. Decrease costs. Average unit costs.

Increase sales growth Growth rate in sales.

Increase market share Company's market share.

March 24, 2023 Increase return on investment. Return on investment.

 Performance Management II:
The Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

1. Focus on traditional financial accounting measures such
as ROA, ROE, EPS gives misleading signals to
executives with regards to quality and innovation. It is
important to look at the means used to achieve
outcomes such as ROA, not just focus on the outcomes
themselves.

March 24, 2023

 Performance Management II:
The Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

2. Executive performance needs to be judged on
success at meeting a mix of both financial and
non-financial measures to effectively operate a
business.

March 24, 2023

 Performance Management II:
The Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

3. Some non-financial measures are drivers of
financial outcome measures which give
managers more control to take corrective
actions quickly.
(Example: controls in jet cockpit for pilot)

March 24, 2023

 Performance Management II:
The Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard

4. Too many measures, such as hundreds of possible cost
accounting index measures, can confuse and distract an
executive from focusing on important strategic priorities. The
balanced scorecard disciplines an executive to focus on several
important measures that drive the strategy.

March 24, 2023

 Performance Management II:
The Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Balanced Scorecard Perspectives

1. Financial: How do we look to our Shareholders?
2. Customer: How do our Customers See Us?
3. Internal Business Process: What should we do that is
Excellent?
4. Employee and Organization Innovation and Learning: Can we
continue to Improve and Add Value?

March 24, 2023

The Balanced Scorecard Is A Bridge To
Close That Gap
Strategy Is a Step In a Continuum
MISSION
Why we exist
VALUES
What’s important to us
VISION
What we want to be
STRATEGY
Our game plan
BALANCED SCORECARD
Implementation & Focus
STRATEGIC INITIATIVES
What we need to do
PERSONAL OBJECTIVES
What I need to do

STRATEGIC OUTCOMES

Satisfied Delighted Efficient and Effective Motivated & Prepared

SHAREHOLDERS CUSTOMERS PROCESSES WORKFORCE
The Strategy Focused
Organization

Mission: What we do

Vision: What we aspire to be

Strategies: How we accomplish our goals

Measures: Indicators of our progress

 Environmental Scan

Strengths Weaknesses

A Model Opportunities Threats

for
Strategic Values
Planning
Mission &
Vision

Strategic Issues
Strategic Priorities
Objectives, Initiatives, and Evaluation
 The Goal of Alignment

Poor Organizational Alignment

Vision &
Goals

Good Organizational Alignment

Vision &
Goals
 Perspectives
• GOALS & PERFORMANCE MEASURES
– Financial perspective
• How do we look to shareholders?
– Customer perspective
• How do customers see us?
– Internal Business perspective (BPR)
• What must we excel at?
– Innovation & Learning perspective
• Can we continue to improve & create value?
 Example:
anonymous semiconductor company
• FINANCIAL perspective
GOALS MEASURES
Survive Cash flow
Succeed Quarterly sales
Growth
Operating income by division
Prosper Increase in market share
Increase in Return on Equity
 CUSTOMER perspective
GOALS MEASURES
New products % sales from new products
% sales from proprietary products
Responsive On-time delivery
supply (customer definition)
Preferred Share of key accounts’ purchases
suppliers Ranking by key accounts
Customer # of cooperative engineering
partnerships efforts
INTERNAL BUSINESS perspective
GOALS MEASURES
Technology Benchmark vs. competition
capability
Manufacturing Cycle time
excellence Unit cost
Yield
Design Silicon efficiency
productivity Engineering efficiency
New product Schedule: Actual vs. Planned
innovation
 INNOVATION & LEARNING
perspective
GOALS MEASURES
Technology Time to develop next generation
leadership
Manufacturing Process time to maturity
learning
Product focus % products equalling 80% of
sales
Time to market New product introduction vs.
competition
 Learning & Growth for
Employees
GOALS
Increase employee process ownership Employee survey scores
Improve information flows
Increase employee identification of
potential supply chain disruptions
RISK-RELATED GOALS
Increase employee awareness
Increase supplier accountability
Increase employee awareness of
supply chain risks & other enterprise
risks
MEASURES
Changes in information reports
Frequencies across supply chain
partners
Compare actual disruptions with
reports of potential disruption drivers
Number of employees attending risk
management training
Supplier contract provisions on risk
Number of departments participating in
supply chain risk identification &
assessment workshops
 Internal Business Processes
GOALS
Reduce waste across supply chain
Shorten time from start to finish
Achieve unit cost reductions
RISK-RELATED GOALS
Reduce probability & impact of threats
Identify specific tolerances for key
processes
Reduce number of exchanges of
supply chain risks to other enterprise
processes
MEASURES
Pounds of scrap
Time from raw material purchase to
product/service delivery to customer
Unit costs per product/service
delivered
% of target costs achieved
Number of employees attending risk
management training
Number of process variances
exceeding specified acceptable risk
tolerances
Extent of risks realized in other
functions from supply chain process
risk drivers
 Customer Satisfaction
GOALS
Improve product/service quality
Improve timeliness of product/service
delivery
Improve customer perception of value
RISK-RELATED GOALS
Reduce customer defections
Monitor threats to product/service
reputation
Increase customer feedback
MEASURES
Number of customer contact points
Time from customer order to delivery
Customer scores of value
Number of customers retained
Extent of negative coverage of quality
in press
Number of completed customer
surveys about delivery comparisons to
other providers
 Financial Performance
GOALS
Higher profit margins
Improved cash flows
Revenue growth
RISK-RELATED GOALS
Reduce threats from price competition
Reduce cost overruns
Reduce costs outside the supply chain Warranty claims incurred
from supply chain processes
MEASURES
Profit margin by supply chain partner
Net cash generated over supply chain
Increase in customers & sales per
customer
% annual return on supply chain
assets
Number of customer defections due to
price
Surcharges paid
Holding costs incurred
Overtime charges applied
Legal costs paid
Sales returns processed
Perspectives of Performance

1. Financial

2. Customer

3. Internal business process

4. Learning and growth

Financial Perspective

Objective:

Increase shareholder value

Measures:

Increase in operating income

 Financial Perspective

Target Actual
Initiatives:
Performance Performance
Manage costs and
$2,000,000 $2,100,000
unused capacity
Build strong customer
$3,000,000 $3,420,000
relationships
Build strong customer
6% 6.48%
relationships
Customer Perspective

Objectives:

Increase market share

Increase customer satisfaction

Measures:

Market share in communication

networks segment

Customer satisfaction survey

 Customer Perspective

Target Actual
Initiatives:
Performance Performance
Identify future needs
6% 7%
of customer
Identify new target
7 8
customer segments
Increase customer focus
90% give top 87% give top
of sales organization two ratings two ratings
 Internal Business
Process Perspective
Objectives:

Improve manufacturing
quality and productivity

Meet specified delivery dates

Measures:

Yield

On-time delivery
 Internal Business
Process Perspective

Target Actual
Initiatives:
Performance Performance
Identify problems and
78% 79.3%
improve quality
Reengineer order
92% 90%
delivery process
Learning and Growth Perspective

Objectives:

Align employee and

organization goals

Improve manufacturing processes

Measures:

Employee satisfaction survey

Improvements in process controls

Learning and Growth Perspective

Target Actual
Initiatives:
Performance Performance
Employee 80% of 88% of
participation and employees employees
suggestion program give top give top
to build teamwork two ratings two ratings
Organize R&D/
manufacturing teams 5 5
to modify processes
 Aligning the Balanced
Scorecard to Strategy

Different strategies call for different scorecards.

What are some of the financial

perspective measures?

Operating income

Revenue growth

Cost reduction is some areas

Return on investment
 Aligning the Balanced
Scorecard to Strategy

What are some of the customer

perspective measures?

Market share

Customer satisfaction

Customer retention percentage

Time taken to fulfill customers requests

 Aligning the Balanced
Scorecard to Strategy

What are some of the internal business

perspective measures?

Innovation Process:

Manufacturing capabilities

Number of new products or services

New product development time

Number of new patents

 Aligning the Balanced
Scorecard to Strategy
Operations Process:

Yield

Defect rates

Time taken to deliver product to customers

Percentage of on-time delivery

Setup time

Manufacturing downtime
Aligning the Balanced
Scorecard to Strategy

Post-sales service:

Time taken to replace or repair

defective products

Hours of customer training for

using the product
 Aligning the Balanced
Scorecard to Strategy

What are some of the learning and growth

perspective measures?

Employee education and skill level

Employee satisfaction scores

Employee turnover rates

Information system availability

Percentage of processes with advanced controls

Pitfalls When Implementing
a Balanced Scorecard

What pitfalls should be avoided when

implementing a balanced scorecard?

1. Don’t assume the cause-and-effect

linkages to be precise.

2. Don’t seek improvements across

all measures all the time.

3. Don’t use only objective measures

on the scorecard.
 Pitfalls When Implementing
a Balanced Scorecard
4. Don’t fail to consider both costs and benefits
of initiatives such as spending on information
technology and research and development.

5. Don’t ignore nonfinancial measures when

evaluating managers and employees.

6. Don’t use too many measures.

 Balanced Scorecard
Chain of Causality of Performance Measures
(Source: Kaplan & Norton, 1996)

Drivers Moderators
(lead indicators) (lag indicators)
Cycle Times Customer ROA
Satisfaction
 Customer order EVA
fulfillment
 Product assembly EPS
cycle time

Quality Manufacturing
 Defect rate Unit Costs
 Scrap rate
March 24, 2023
 Balanced Scorecard
Chain of Causality of Performance Measures
(Source: Kaplan & Norton, 1996)

Drivers Moderators
Outcomes
(lead indicators) (lag indicators)
Employee Employee
Growth in
Satisfaction Retention Rate Revenues
Employee Product and
Suggestions Process Innovations

March 24, 2023

 Financial Measures & the Balanced
Scorecard
(Source: Kaplan & Norton, 1996)

• Financial measures are outcomes that represent the

executive’s success at achieving strategic performance
goals

• Financial measures are influenced by the Stage of the

Life Cycle which reflects different strategic priorities

March 24, 2023

 Financial Measures & the Balanced
Scorecard
(Source: Kaplan & Norton, 1996)
Life Cycle Stage

Growth Sustain/Maturity Harvest/Decline

Sales Growth ROCE Cash Flow
Revenue Reduce Unit
EVA Costs
Productivity

Generate new Obtain

accounts & immediate
Earn excellent
increase market payback on
share return on capital investments from
invested cash cow

March 24, 2023

 Customer Measures & the Balanced
Scorecard (Source: Kaplan & Norton, 1996)
Different Customer Models Relevant Customer Metrics
Business Business Inventory cycle time
Quality defect rate

Business Distributor/Dealer Customer

Distributor satisfaction
Customer satisfaction
Distributor price margin

March 24, 2023

 Customer Measures & the Balanced
Scorecard (Source: Kaplan & Norton, 1996)
Different Customer Models Relevant Customer Metrics
Business Customer Customer order fulfillment cycle time
Customer satisfaction
Customer price margin

March 24, 2023

 Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Internal Business Process Measures

• Quality • Order Fulfillment

• Yield • Procurement
• Throughput • Repair service
• Cycle time quality/downtime
• Cost efficiency • Warranty quality

March 24, 2023

 Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Model of Internal Business Process Logistics

Customer Innovation Operations Post-Sale Customer
Need Process Process Service Need Satisfied
Identified Process
Identify Create Build Deliver Service to
Market Product Product Product the
Customer

• Development • Quality • Delivery • Service

Relevant Cycle Time Defects Cycle Satisfaction
Metrics:
Time
• MCE
March 24, 2023
 Internal Business Process Measures
and the Balanced Scorecard
(Source: Kaplan & Norton, 1996)

Manufacturing Cycle Effectiveness (MCE)

Processing Time
MCE =
Throughput Time

Throughput Time = Processing time + inspection time +

movement time + waiting/storage time

MCE 0, implies inefficient process

MCE 1, implies less wasted time, greater efficiency
March 24, 2023
 Employee and Organization Capabilities
for Innovation and Learning Measures
(Kaplan & Norton, 1996)

What are employee and organization

capabilities for innovation and learning
measures?
• Represent ways to improve the other 3
scorecard outcomes or measures.
• They nurture the other 3 areas

March 24, 2023

 Employee and Organization Capabilities
for Innovation and Learning Measures
(Kaplan & Norton, 1996)

Employee Measures Learning Measures

 Employee satisfaction
• Employee skill levels
 Employee retention
(certification rate)
 Employee productivity
• # suggestions per
employee
• Employee learning curve
(time to reach acceptable
level of output or quality)

March 24, 2023

 Balanced Scorecard: Causal
Relationships
Strategy

Internal Customer Financial

Process T1 T2
T0

Learning
T3
March 24, 2023
 Balanced Scorecard: Cascading
Goals
Customer # Employee
Satisfaction Suggestions ROCE
Corporate Corporate Corporate

SBU SBU SBU

Retail Store Department

Team
March 24, 2023
 Incentive Compensation for Executives with the
Balanced Scorecard

• Executive Bonus Pool is designed as a percentage of

Base Salary
• The bonus pool represents potential earnings from the
bonus for an executive if all performance measures are
achieved
• Partial success with meeting performance measures
results in the allocation of a bonus representing a lesser
amount of the total potential bonus.
• Example: The bonus pool for a CEO equals 100 percent
of salary. Range of bonus equals 0 to 100 percent of
salary depending on success of CEO performance.
March 24, 2023
 Example: Automobile Company Balanced Scorecard Reward
Matrix for Bonus

Category Measure Weighting

Financial (50%) EVA 25%
Unit Profit 15%
Market Growth 10%
Customer (20%) Customer satisfaction survey10%
Dealer satisfaction survey 10%
Internal (20%) Above average rank on
Process industry quality survey…… 10%
Decrease in dealer
delivery cycle time……….. 10%
Innovation (10%) Suggestions/employee 5%
and Learning Emp. satisfaction survey 5%

March 24, 2023

 The Balanced Scorecard
Critical Thinking Questions
1. What happens to the balanced scorecard when
the strategy changes? (example: moving from a
“growth” to an “extract profits” strategy)
2. How should resistance by executives or
managers to new measures be handled?
3. What if executives or managers sub-optimize and
only focus on categories in the reward matrix with
the largest payoff – such as EVA and Customer
Satisfaction?
March 24, 2023
 Tailoring to the specific organizational/unit realities, needs and
challenges - government procurement service example

FINANCIAL
- Optimum Cost Efficiency of
Purchasing Operations;
Cost Reasonableness of INTERNAL BUSINESS
Actions PROCESSES
- Acquisition Excellence
- Most Effective Use of
Contracting Approaches
CUSTOMER MISSION - Streamlined Processes
- Customer Satisfaction VISION - On-Time Delivery
- Effective Service/Partnership STRATEGY - Supplier Satisfaction
- Socio-economics

LEARNING AND
GROWTH
- Access to Strategic Information
- Employee Satisfaction
- Organization Structured for
Continuous Improvement
- Quality Workforce

Source: USA, Department of Energy Procurement System

 What do we balance

• Financial versus Non-financial measures

• Tangible versus Intangible assets
• Long-term versus Short-term Goals
• Internal versus External Perspective
• Performance Drivers versus Outcomes

Cause-effect relationships hypotheses

 Example of the Basic Building Blocks of the Strategy
and displaying the strategy’s cause-effect hypotheses
Financial Perspective 1. The economic model of
Return on key levers driving financial
Revenue
Investment
Productivity performance
Strategy Strategy

Sources of Growth Sources of Productivity

Customer Perspective 2. The value proposition of

Value Proposition
target customers
Relatio-
Price Quality Time Function Image
ship

Internal Process Perspective

3. The value chain of core
“Build the “Make the “Deliver the “Service
business processes
Brand” Sale” Product” Exceptionally”

Learning & Growth Perspective 4. The critical enablers of

Staff Climate for
performance improvement,
Competencies + Technology
Infrastructure + Action change and learning

Source: Presentation of Balanced Scorecard Collaborative

 Making the strategy’s hypotheses explicit:
the Strategy Map

“A strategy map for a Balanced Scorecard

makes explicit the strategy’s hypotheses. Each
measure of a Balanced Scorecard becomes
embedded in a chain of cause-and-effect logic
that connects the desired outcomes from the
strategy with the drivers that will lead to the
strategic outcomes.”
The Strategy-Focused Organization by Kaplan and Norton 2001
 Strategy Maps –
A Better Way to Communicate Strategy

Executive consensus and Educate and Communicate:

accountability:
Build awareness and
Building the map eliminates understanding of organization
ambiguity and clarifies strategy across the
responsibility. workforce.

Promote Transparency:
Ensure Alignment:
Communicate with and
Each sub-unit and individual educate constituents, partners,
link their objectives oversight bodies, and the
to the map. general public.

Source: "Using Balanced Scorecard Technology to Create Strategy-Focused Public Sector Organizations", Robert S.
Kaplan, April 21, 2004, pg. 20
 Kaplan and Norton's Generic Strategy Map template
Please keep in mind that the positioning of a perspective on the template
does not in any way indicate the relative importance of the perspective.

The Generic Strategy Map template

has to customized to the organization’s/department's/unit's particular strategy
A Strategy Map Represents How the Organization Creates Value

Productivity Strategy Growth Strategy

Long-Term
Financial Shareholder Value
Perspective
Improve Cost Increase Asset Expand Revenue Enhance
Structure Utilization Opportunities Customer Value

Customer Value Proposition

Customer
Price Quality Availability Selection Functionality Service Partnership Brand
Perspective
Product / Service Attributes Relationship Image

Operational Management Customer Management Innovation Regulatory and Social

Processes Processes Processes Processes
Internal •Supply •Selection •Opportunity ID •Environment
Perspective •Production •Acquisition •R&D Portfolio •Safety and Health
•Distribution •Retention •Design/Develop •Employment
•Risk Management •Growth •Launch •Community

Human Capital
Learning and Information Capital
Growth
Perspective Organization Capital
Culture Leadership Alignment Teamwork

Source: Kaplan R. S. & Norton D. P.,2004,Strategy Maps: Converting intangible assets into tangible outcomes,
HBR
 Sample Strategy Map: Consumer Bank
“Our success comes from…
Financial

F2 - Maximize F3 - Grow non- F1 - Achieve sustainable double- F4 - Manage financial

traditional traditional digit net income growth resources for maximum
revenue sources revenue sources risk-adjusted return

…enduring value-added relationships…

Customer

C1 - “Understand me and C2 - “Give me C3 - “Appreciate me, and

C4 - “Be involved
give me the right convenient access to get things done easily,
in my communities.”
information and advice.” the right products.” quickly, and right.”

…which is all about great products and personal service…

Innovation Customer Partnerships Operational Excellence

Communicate the full value Consistently deliver the full Provide premium service to
proposition value proposition delight and retain valuable
Internal Process

customers
Migrate customers to the right
channel
Broaden offering through Maximize efficiency and quality
internal & external partnerships of business processes
Identify and recognize high-
potential relationships

Develop attractive new products Segment markets and target Focus on the critical few
& services prospects activities

…delivered by a motivated & prepared work force.”

Learning and
Growth

L1 - “We develop, L2 - “I’m developing L3 - “We understand L4 - “We have the

recognize, retain, and the skills I need to the strategy and know information and tools we
hire great people.” succeed.” what we need to do.” need to do our jobs.”
Strategy Map example: Diagram of the
BSC Terminology
cause-and-effect relationships
between strategic objectives Extending the Map into Objectives,
Measurements, Targets and Initiatives
Strategic Theme: Statement of How success
Operating Efficiency what strategy in achieving The level of Key action
Financial
must achieve the strategy performance programs
Profitability and what’s will be or rate of required to
critical to its measured and improvement achieve
More success tracked needed objectives
Fewer planes
customers

Customer
Flight Lowest
Is on time prices

Objectives Measurement Target Initiative

Internal
• Fast ground • On Ground Time • 30 Minutes • Cycle time
Fast ground turnaround • On-Time • 90% optimization
turnaround Departure

Learning

Ground crew
alignment

Based on : Presentation of Balanced Scorecard Collaborative

 Horizontal and Vertical Alignment !!!

The Organizational Framework

Strategy Objectives Measures

Strategic
Business
Unit (SBU)
Department

Team/
Individual

Ensure Alignment:
Each sub-unit and individual link their objectives to the map.