The Abstraction Series

Topic 1Balanced Scorecard

Originated by Dr. Robert Kaplan and David Norton

A Performance Measurement Framework which added non-financial measures to counter balance the effects of Financial performance

Aligns Business Activities to the Vision and Strategy of the Organization

Balanced Scorecard

The Four layers

Problems Balanced scorecard can Solve

Problems that can

be solved

Unclear Vision & Strategy

Non- Alignment of Long Term & Short Term

Goals

Measurement Issues

Communication Gaps

Excessive Focus on Financial

Performance

Non-Availabilit

y of Feedback

The Nine Step Framework

Performance Measures Providing a way to see if the strategy is working

Focus employees' attention on what matters most to success

Allow measurement of accomplishments, not just of the work that is performed

Provide a common language for communication

Explicitly defined terms of owner, unit of measure, collection frequency, data quality, expected value(targets), and thresholds

Ensuring Valid Measurement of the right things

Verifiable Measures to Ensure Data Collection Accuracy

Asking the Right Questions Who are our profitable customers?

Do we pay the most attention to those customers?

Do we know what these customers expect from us now and in the (near) future?

Do we develop the products and services that will keep us in the running?

Do our employees develop the knowledge and skills that the markets (will) ask?

Do we recruit the right people?

Overall Process

Phase 1: The Strategic Foundation

Phase 2: Three Critical Components

Phase 3: Deployment

Phase 1: The Strategic Foundation

Three examples of strategic objectives

Over the next six months, delivery times will decrease by 15% through more localized distribution centers.

By the year 2003, customer turnover will decline by 30% through newly created customer service representatives and pro-active customer maintenance procedures

Operating downtimes will get cut in half by cross training front line personnel and combining all four operating departments into one single Service center

Consists of three steps:- Communicate the Strategy across all Levels- Determine Major Strategic Areas for focussed efforts- Build a Strategic Grid for each Major Strategic Area

Step 1: Strategic Alignment and Communication

Phase 1: Step 1: CommunicateAfter Clearly formulating the Strategy it needs to be effectively Communicated

Stakeholder Group Forms of Communication

Shareholders Press Conference

Division Managers Management Retreat / Presentation

District Managers Site to Site Visits / handouts

Operating Staff Site to Site Visits / handouts

Administrative Staff Site to Site Visits / handouts

Suppliers Personal Contact / Mailing

Distributors Personal Contact / Mailing

Phase 1: Step 2: Strategic AreasStrategic Success Through Fence-Lined Strategic Areas is required for Clear Success Demarcations

Shareholder Value

Financial Revenue Growth

Customer More Customers

Processes Customer marketing & Service Programmes

Learning Support Systems & Personnel

Linking Strategic Goal to a Strategic Area

Strategic Goal By the Year 2014, the company will have most innovative product line of hand held Computers

Strategic Area Product Innovation

Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.

Flowing Strategic Objectives within the Financial Perspective

Shareholder Value

Grow Revenues Operating Revenues

New Sources of Revenues

Increase Customer

ProfitabilityLower Costs High Utilization

of Assets

Linking Customer Objectives to Financial Objectives

FinancialShare Value

Growing More Revenues

CustomerAcquire More Customers

Aggressive Pricing (Value Addition)

Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.

Linking Objectives down to Internal processes

FinancialShare Value

Growing More Revenues

CustomerAcquire More Customers

Aggressive Pricing (Value Addition)

Internal processes

Improve Operational Efficiency

Cost Reduction Programme

Knowledge based System

Reduction in Non-Core Activities

Phase 1: Step 3: Strategic GridsStructuring the Balanced Scorecard on Four Layers i.e. Financial, Customer, Internal Processes and Learning.

Strategic objectives defined for all four perspectives

FinancialShare Value

Growing More Revenues

CustomerAcquire More Customers

Aggressive Pricing (Value Addition)

Internal processes

Improve Operational Efficiency

Cost Reduction Programme

Knowledge based System

Reduction in Non-Core Activities

Learning & Growth

Training – Best Practices in Cost Management

Database Network on Operational Performance

Re-Alignment with focus on Core-Competencies

Phase 2: Three Critical Components Step 4: Measurements• Every Strategic Objective Should be measurable

• Not all can be quantified and measured but it makes evaluation of such objectives difficult

• Some Basic Guidelines:• Measurements Communicate what is

strategically important by linking back to strategic Objectives

Linked

• Measurements are continuous over time, allowing comparisonsRepeatable

• Measurements can be used for establishing targets, leading to future performanceLeading

•Measurements are Reliable, verifiable and accurateAccountable

•Measurements can be derived when neededAvailable

Phase 2: Step 4: Measurements

• Cause Effect Relationship between Leading and Lagging Indicators• Customer perspective

Customer Perspecti

ve

Lagging Indicators are Desired Results

Customer Satisfaction Customer Retention Market Share

Leading Indicators – Value Attributes to Customers

Quality Time Price Image Reputation

Phase 2: Step 4: Measurements

• Internal Process Perspective

Pre-Deliver

y Results

Delivery

Results

Post deliver

y ResultsLeading Indicator:

No. of New Products Introduced

Leading indicator: Delivery Response Time to Customers

Leading Indicator: Cycle Time for Resolving Customer Complaint

Phase 2: Step 4: Measurements

• Learning and Growth Perspective

Results for

Employees

System

Results

Results for the OrganizationLeading Indicator:

Attrition RateLeading Indicator: Centralized database of Employees

Leading Indicator: Number of Employee Suggestions

Phase 2: Step 5: Targets

• Setting Targets Based on Strategic Goals

Current Year Sales Revenues

Goal: A 40% Sales growth in a Span of 3 years

Year 2009 Year 2010 Year 2011

Rs. 1,00,000 Rs. 1,10,000 Rs. 1,22,000 Rs. 1,40,000

Phase 2: Step 5: Targets• Adding Measurements & Targets to the Balanced Scorecard

Perspectives Objectives Measurements

Targets

2009 2010

FinancialMaximum ReturnsUtilization of AssetsRevenue Growth

Return on EquityUtilization Rates% change in Revenues

12%7%11%

13%8%11%

CustomerCustomer RetentionCustomer ServiceCustomer relations

% RetentionSurvey Rating% of self Initiated Calls

75%85%35%

75%88%40%

Internal Processes

Fast deliveryEffective ServiceOptimal CostResource Utilization

Turnaround Time1st Time Resolvement% Cost of SalesProductivity Indicator

15m68%66%77%

14m69%64%80%

Learning & Growth

High Skill LevelsEmployee SatisfactionOutstanding Leaders

Skill Set RatioSurvey index5 Point Ranking

65%75%4.5

68%77%4.8

Phase 2::Step 6: Programmes Sponsored by Upper level Management

Utilizes Designated Leaders and Cross Functional Teams

Consists of Deliverables, Milestones and a Timeline

Requires Resources: Man / Machine / Money / material / Market etc.

Structured Programmes have greater impact on Strategic goals

Phase 3: Deployment Review and Re-alignment

Integration of Other Business Areas with the Strategically improved Areas

Finally linking compensation with the scorecards

Building the Scorecards for the Entire Value Chain i.e. Customers, Production, sales, Innovation and all such elements

Phase 3: Step 7: Best Practices

Easy to Achieve but difficult to maintain because of Perfectionist Goals

Successful companies have developed more tolerance levels

A Consumer Electronics Manufacturing Firm

Consumer Electronics Public Ltd. Company

Customer

Quality Number of Defects

Price Aggressive Pricing

Delivery Number of On-Time Deliveries

Shipments Sales Growth

New products Number of New Products to Support

Support Customer Satisfaction Survey

Internal

Efficiency in Manufacturing Cycle Time

New Product Introductions Rate of New Introductions

New Product Success Number of Orders

Sales Penetration Actual Vs. Planned

New Businesses Volume of Investment in Diversification

A Consumer Electronics Manufacturing Firm

Consumer Electronics Public Ltd. Company

Innovation

Technology Leadership Product Performance Benchmarking

Cost leadership Quarterly Manufacturing Overheads

Market Leadership Market Share (Across All Markets)

Research & Development Number of new products

Financial

Sales Annual Growth Rate

Cost of Sales Annual Trend Line

Profitability Return on capital Employed

Prosperity Cash Flows

Employee

Competitive Salaries Local Area Comparisons

Opportunity Satisfaction Rating

Citizenship Contributions to Community

Questions????

Epstein, Marc, and Jean-François Manzoni. "Implementing Corporate Strategy: From Tableaux de Bord to Balanced Scorecards." European Management Journal , April 1998, pp. 190-203.

"Harvard Business Review Balanced Scorecard Report." Harvard Business Review, 2002 to present (bimonthly).

Kaplan, Robert S., and David P. Norton. Alignment: Using the Balanced Scorecard to Create Corporate Synergies. Harvard Business School Press, 2006.

Kaplan, Robert S., and David P. Norton. "The Balanced Scorecard: Measures That Drive Performance." Harvard Business Review, July 2005, pp. 71-79.

Kaplan, Robert S., and David P. Norton. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press, 2000.

Kaplan, Robert S., and David P. Norton. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Harvard Business School Press, 2004.

References

Niven, Paul R. Balanced Scorecard Diagnostics: Maintaining Maximum Performance. John Wiley & Sons, 2005.

Niven, Paul R. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results, 2d ed. John Wiley & Sons, 2006.

http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

http://www.clickhrd.com/knowledge_base/images/metrus-balance-scorecard.jpg

http://www.strategy2act.com/solutions/bsc_toolkit/9-scorecard-helps-to-solve-full.gif

http://www.exinfm.com/training/pdfiles/course11r.pdf

References