The Balanced Scorecard : A Strategic Implementation Tool

Pawan Kumar BCA,MBA(IT),MBA,UK Assistant Professor-HR and Systems Kohinoor Business School Center for Management & Research,Khandala pawan.kumar@kohinoor.ac.in
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Executing Strategy...Is the greatest challenge for organizations
• Vision only 5% of workforce gets it! People 25% of managers have incentives linked to strategy Management 85% of executive teams spend less than 1 hour/mo discussing strategy Resource 60% of organizations don’t link budgets to strategy •

Strategic Execution
• Bad execution, not bad strategy is the cause of 70% of CEO failures • Execution is not just tactics—it is a discipline and a system

The 40:30:20 Rule
Gary Hamel and C.K Prahalad often ask senior managers three 1.questions:What percentage of your time is spent on issues
external to the company versus internal issues? 2. Of the time spent looking outward, what percentage is spent considering how the world could be different in 5 or 10 years time, as opposed to worrying about short to medium term tactics? 3. Of the time spent looking outward and forward, what percentage is spent in consultation with colleagues, where the objective is to build a shared, well tested view of the future, as opposed to a personal view?

Unsustainable Cost Cutting Unsustainable Revenue growth Unsustainable growth in Shareholder Returns Unsustainable Consolidation .If management is only spending 2.4% of its time focusing on the future. then it tends to be condemned to pursue the following actions to cope with competitiveness problems.

Challenges in Executing Strategy .

Challenges in Executing Strategy .

measures a company's performance from four major perspectives. customer. and systems that your employees will need (their learning and growth) to innovate and build the right strategic capabilities and efficiencies (the internal processes) that deliver specific value to the market (the customers). financial.Balanced Scorecard • The balanced scorecard. . balanced scorecards tell you the knowledge. which will lead to higher shareholder value (the financials). internal process. skills. • The Balanced Scorecard provides a comprehensive framework that can translate a company’s strategic intent into a linked set of performance measures. • Briefly summarized. and learning and growth.

Balanced Scorecard • The Balanced Scorecard emphasizes the importance of measuring business performance from the perspective of strategic implementation. • Senior managers tend to pay far too much attention to the financial dimensions of performance and not enough attention to the driving forces behind those results.e. rather than relying solely on financial results. • Financial measures are lagging indicators i. backward looking. They are designed to rectify or .

Strategy Maps • Unfortunately. • Without clearer and more detailed information. it's no wonder that many companies have failed in executing their strategies. they give employees only limited descriptions of what they should do and why those tasks are important. many top executives are trying to do just that when attempting to implement then business strategies. • After all. how can people carry out a plan that they don't fully understand? .

• Strategy maps provide such a tool. collaborative fashion toward the company's desired goals. • They give employees a clear line of sight into how their jobs are linked to the overall objectives of the organization. .Strategy Maps • Organizations need tools for communicating both their strategy and the processes and systems that will help them implement that strategy. enabling them to work in a coordinated.

starting with the destination and then charting the routes that will lead there”. Kaplan and Norton (2000) point out that “the best way to build strategy maps is from the top down. are central to plotting the “routes” that will lead to the “destination”. 2000) • • . From a strategy implementation point of view. Strategic decisions associated with the “customer perspective”. the “internal process perspective”.” (Kaplan and Norton.Strategy Maps • From a strategy formulation point of view. “the key to executing strategy is to have people understand the strategy – including the crucial but perplexing processes by which intangible assets will be converted into tangible outcomes. and the “learning and growth perspective”. Strategy maps can help chart this difficult terrain.

• . services. Strategy maps can depict Objectives for revenue growth Targeted customer markets in which profitable growth will occur Value propositions that will lead to customers doing more business and at higher margins The key role of innovation and excellence in products.Strategy Maps • The maps provide a visual representation of a company's critical objectives and the crucial relationships among them that drive organizational performance. and processes and The investments required in people and systems to generate and sustain the projected growth.

THE FOUR PERSPECTIVES OF THE STRATEGY MAP: The Financial Perspective The Customer Perspective The Internal Process Perspective The Learning & Growth Perspective .

Strategic Intent Improve Shareholder Value Customer value propositio n Internal Process Perspecti ve Build the franchise through innovations Learning and Growth Perspective .

I: Strategy Map: Financial Perspective Improve Shareholder Value Denominator Management Productivity Strategy • Improve the cost structure • Improve the use of assets Numerator Management Revenue Growth Strategy • Revenue from new sources • Customer Profitability .

Denominator Management Denominator Management is a necessary but not a sufficient condition for successfully competing for the future. what is needed as well is effective Numerator Management .

The Seven Questions of Numerator Management (a) (b) (c) (d) (e) (f) (g) How could we increase sales to the same customers with the same product mix? How could we extend the business by selling existing products to new customers? How could we grow by introducing new products and services? How could we expand sales by developing better delivery systems for customers? How and where could we expand into new geographic areas? How much could we grow by changing the industry structure through acquisitions or alliances? What opportunities are there outside existing industry boundaries? .

II: Strategy Map: Customer Perspective .

The customer value proposition defines how the organization will differentiate itself from competitors to attract and retain customers. The customer value proposition is crucial because it helps an organization connect its internal processes to improved outcomes with its customers. as well as deepen relationships with them.The core of any business strategy is the customer value proposition. . Although a clear definition of the customer value proposition is the single most important step in developing a strategy. approximately ¾ of executive teams do not have consensus about this basic information.

Customer Value Proposition Strategies price time qualit selecti y on Smart shoppe r service relations Customer Trusted brand time Functionality Best in class .

the value proposition is chosen from among three differentiators: Operational excellence (for example.Customer Value Proposition • • • Typically. and Product Leadership (for example Intel and Sony) Companies strive to excel in one of the three areas while maintaining threshold standards in the other two. • • . McDonald's and Dell Computer) Customer intimacy (for example IBM in the 1960s and 1970s). By identifying its customer value proposition. a company will then know which classes and types of customers to target.

performance .Operational Excellence: • competitive pricing • product quality and selection • speedy order fulfillment • on-time delivery Customer Intimacy: • customer service • relationships Product Leadership: • Functionality .features .

Translating Vision Perspectives and Strategy: Four .

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which fall into four high-level processes:  Build the franchise by innovating with new products and services and by penetrating new markets and customer . • The internal process perspective captures these critical organizational activities.Internal Process Perspective • Once an organization has a clear picture of its customer and financial perspectives • It can then determine the means by which it will achieve the differentiated value proposition for customers and the productivity improvements to reach its financial objectives.

.  and become a good corporate citizen by establishing effective relationships with external stakeholders.Internal Process Perspective  Achieve operational excellence by improving supply chain management. the cost. and cycle time of internal processes. quality. asset utilization.

For example • The organization can establish a link between improved sales training of employees to higher profits through the following sequence of hypotheses: .Cause and Effect Relationships • A strategy is a set of hypotheses about cause and effect. • Cause and effect relationships can be expressed by a sequence of if-then statements.

then the average margins of the products they sell will increase. then they will become more knowledgeable about the full range of products they can sell. If employees are more knowledgeable about products.Cause and Effect Relationships If we increase employee training about products. . If their sales effectiveness improves. then their sales effectiveness will improve.

Cause and Effect Relationships • A properly constructed Scorecard should tell the story of the business unit's strategy. • The measurement system should make the relationships among objectives (and measures) in the various perspectives explicit so that they can be managed and validated. .

return on capital employed (ROCE) may be a outcome measure in the financial perspective. . customer loyalty gets put on the Scorecard (in the Customer perspective) because it is expected to have a strong influence on ROCE. the result of a high degree of loyalty among existing customers. • The driver of this financial measure could be repeat and expanded sales from existing customers.Linking the Balanced Scorecard to Strategy The chain of cause and effect should pervade all four perspectives of a Balanced Scorecard • For example. • So.

• So both customer loyalty and OTD are incorporated into the customer perspective of the Scorecard. is expected to lead to higher financial performance. in turn. • Thus.Linking the Balanced Scorecard to Strategy But how will the organization achieve customer loyalty? • Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers. improved OTD is expected to lead to higher customer loyalty which. .

• To achieve improved OTD. both factors that could be Scorecard measures in the internal perspective. And how do organizations improve the quality and reduce the cycle times of their internal processes? • By training and improving the skills of their operating employees. an objective that would be a candidate for the learning and growth .Linking the Balanced Scorecard to Strategy • The process continues by asking what internal processes must the company excel at to achieve exceptional on-time-delivery. the business may need to achieve short cycle times in operating processes and high-quality internal processes.

Linking the Balanced Scorecard to Strategy .

and The corporate culture needed to support an organization's strategy. and customer relationships. the organization must determine how it will satisfy the requirements from critical internal processes. the differentiated value proposition.  Although executive teams readily acknowledge the importance of the learning and growth perspective.Learning and Growth Perspective  The foundation of any strategy map is the learning and growth perspective. .  Specifically. they generally have trouble defining the corresponding objectives.  These objectives enable a company to align its human resources and information technology with its strategy. which defines the    Core competencies and skills The technologies.

Assessment Centres characteristics • last for a period of a few days • consist of a series of exercises (simulations and work sample tests) • participants’ performance is assessed by trained assessors (the ratio of assessors to • participants are usually high-performers who are evaluated for higher-level jobs participants is very high) .

typically: • • • • • communications (written & oral) leadership & human relations planning problem solving decision-making .Selection Methods Assessment Centres characteristics • participants are evaluated on various dimensions of managerial performance.

written & oral. analyse and present business situations .Selection Methods Assessment Centres most frequently used exercises: • leaderless group situation assesses leadership ability and communication skills • case analysis candidates provide a. analysis of an actual business situation (case) assesses ability to understand.

Selection Methods Assessment Centres validity higher for hierarchical advancement than for job performance validity increases when • multiple predictors are used • assessors are psychologists and not managers • peer evaluations are used along with assessors’ evaluations .

Selection Methods Assessment Centres participants’ reactions stressful. but generally accepted by participants and considered as beneficial experience even by those who are not promoted .

Summary • The Balanced Scorecard A robust tool – but keep it simple! Makes strategy tangible –everyone’s job! Tracks what’s important Measurement-lead management Provides feedback for short-term corrections and long-term learning .

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