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The Balance Scorecard

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on 20 June 2013

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Transcript of The Balance Scorecard

Introduction &

Business Strategy
How an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives
Performance measures to evaluate success
What are some ways that management can gauge whether or not an employee, a division, or the whole company is effectively accomplishing the stated objectives?
Traditional performance evaluation methods
Kaplan & Norton, 1992
A complement, not a replacement to traditional financial measures
BSC is used to articulate & communicate strategy, and help to align individual, organizational, and cross-departmental initiatives to achieve a common goal.
Comprehensive framework that can translate a company’s vision and strategy into a coherent and linked set of performance measures.
Evolution of the BSC
Four main perspectives: Financial, Customer, Internal-business process, and Learning and Growth
Not a strategy formulation tool, but an implementation and communication tool
Holistic strategy model
Not a generic template that can be applied to businesses in general or even industry-wide
Who is using the BSC?
Initial Processes
Steps in Implementation
Characteristics of an Effective Balance Scorecard
Commitment and Leadership from top management
Conduct interviews
Proposals for objectives of all 4 perspectives (Financial, Customer, Internal Business Process, and Learning & Growth)
Team to meet and discuss responses
Prioritized list
Consensus on the objectives
Use the information previously required
Senior management divided into 4 groups each one assigned a perspective
include lower-level management and key functional managers
ID measures and sources of information for each measure (data)
Groups will finalize the scorecard objectives, measures, targets, and initiatives to achieve the targets
Managers confirm that employees understand the Balance Scorecard and its processes
FINAL Balance Scorecard communicated to ALL employees
Communicates the company strategy
Communicates the strategy to all employees of the company (making sure it is measurable and understandable).
Motivate managers (leading to financial improvement) *For-profit companies
IDs the most critical measures creating focus
Highlights effectiveness that would have gone unrecognized
Compare actual-target
Problems in strategy implementation will be evident in
Learning & Growth
Internal Business Processes
If good performance in the following areas did not improve Financial and Customer
Relationships were not correctly ID (implementation was a success)
Strategy leads to operating income increases
Example Background
Strategy Map
Unintended Consequences
"If you don't know where you are going, any road will get you there."
-Lewis Carroll
Balanced Scorecard approach forces managers to develop a thoughtful and relevant strategy
Chipset, Inc.
Maker of linear integrated circuit devices used in modems and communication networks
Specifically, they produce a single, high-specialized microchip
Intense price competition, difficult to enter market, bargaining power of customers and suppliers is high
They have adopted a cost leadership approach
Can successful initiatives actually move us further from our objectives?
Is the underlying cause-and-effect relationship correct? Is it complete?
Pros and Cons
Gives a full picture of whether the company is meeting its performance objectives
Unlike accounting which is concerned with control. BSC is focused on strategy and vision
Allows a company to evaluate performance not only in the short-run, but also in the long-run
Requires that the needs of all stakeholders are met (ex. customers, employees)
Only give performance based on four dimensions, which may not be sufficient by itself
Must use the appropriate metric for the right situation or analysis is useless
Must have qualified personnel with knowledge of the BSC
Must keep up to date, companies are dynamic and your BSC may not be (Quarterly)
Costly to implement(ex. consultants, training)
Non-financial measures, customer satisfaction and employee attitude are lagging measures
Resistance from managers and other employees who do not agree with implementation (incentives)
The Balance Scorecard
"By limiting the scorecard's exposure, an organization loses the opportunity for widespread organization engagement and alignment."
Take Heed of These...
Preciseness of cause-effect relationship
Continue to gather data to support hypothesis (EVOLVE)
Improvement across the board
Cost-benefit analysis
Using objective measures only
Use subjective as well (analyze correctly)
Ignoring nonfinancial measures during evaluation
How aligned are employee incentives and organization goals?
Need to develop ways to bridge gap so that all are working towards same goal through education and training.
Are improvements being made in the customer-based goals that were set?
Train employees and management to better understand how success is achieved.
Are the company’s internal processes effective for the overall goal and how can the company work towards this through learning and growth.
Organizational Procedures
How up to date is the company’s IT system?
Can we collect data needed for accurate customer analysis?
Can employees receive internal process information quickly?
Three main sources of Learning and Growth
Organizational Procedures
Learning-and-Growth Perspective
Need for additional technology and skill to compete long-term.
Growth of a global economy presents need to remain current with industry competitors.
Customer and IBP perspectives reveal critical factors of success.
Customer, IBP, and Financial should identify where gaps in current capabilities lie.
Learning-and-Growth Perspective
Book Definition – This perspective identifies the capabilities the organization must excel at to achieve superior internal processes that in turn create value for customers and shareholders
Learning-and-Growth Perspective
Reveals market penetration.
How much of sales are from targeted and untargeted segments?
How much share of each segment does the company have?
What is being done to encourage segmented marketing and deeper market penetration?
Market and Account Share in Targeted Segments
How profitable are the current customers?
Are the customers that are being targeted potentially profitable?
Customers with low profitability must be evaluated for potential growth to decide on retention.
Does the company monitor this statistic and what is being done to increase profitability?
Customer Profitability
Growth of the company through new customers.
How are the managers working to attract new customers and increase reach?
Advertising, solicitation, and detailed tracking of revenues and expenses of new customers to monitor success rate.
New Customer Acquisition
How do customers feel about the company?
Directly affects loyalty, retention, and profitability.
Surveys of customer perception of the company and experience dealing with the company can generate measurements of this.
Customer Satisfaction
Generic Outcome Measurements
Customer Satisfaction
Customer Retention
New Customer Acquisition
Customer Profitability
Market and Account Share in Targeted Segments
Customer Perspective
Book Definition – This perspective identifies targeted customer and market segments and measures the company’s success in these segments.
Customer Perspective
Can be divided into three sub-processes:
Innovation process
Creation of products, services and processes that will meet the needs of customers
Operations process
Producing and delivering existing products and services that will meet the needs of customers
Post-sales process
Provide services and support after sales
Internal Business Process
Metrics have to be carefully designed to meet business requirements.
Focus on processes that have greatest impact .
Identify new processes at which the organization will excel
Deliver on value propositions of customers in targeted market segment.
Internal Business Process
Book Definition – This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance.
Internal-Business-Process Perspective
Three business strategies
Revenue growth and mix
Cost reduction and productivity improvement
Asset utilization and investment strategy
Measures will vary depending on strategy
Financial Perspective
Financial objectives also differ at each stage
Rapid growth
Emphasis on growth, new markets and customers, sales from new products and services, establishment of new markets and distribution channels
ROCE, operating income, gross margin
Evaluate projects using DCF, capital budget analysis
EVA and shareholder value
Emphasis is on cash flow
No spending on R&D and expansion
Financial Perspective
Current emphasis on finance lead to an “unbalanced” situation with other perspectives
Profitability and financial objectives possible
Perspective may depend on the stage the company is in the life cycle
Rapid growth
Sustain stage
Mature stage
Financial Perspective
Book Definition – This perspective evaluates the profitability of the strategy and the creation of shareholder value.
Financial Perspective
Learning-and-Growth Perspective
Internal-Business-Process Perspective
Financial Perspective
Customer Perspective
Vision and Strategy
Employees of the company are their key resource.
Measurements to monitor employees.
Employee Satisfaction
Employee Retention
Employee Training
Employee Skills
Learning-and-Growth Perspective
Internal-Business-Process Perspective
Financial Perspective
Customer Perspective
Vision and Strategy
Keeping customers within the company.
Increased profits with repeat purchasing.
How can the company encourage customers to be loyal to the brand.
Customer Retention
Learning-and-Growth Perspective
Internal-Business-Process Perspective
Financial Perspective
Customer Perspective
Vision and Strategy
Learning-and-Growth Perspective
Internal-Business-Process Perspective
Financial Perspective
Customer Perspective
Vision and Strategy
The Four Perspectives
Balanced Scorecard
Balanced Scorecard
Is this a well-designed balanced scorecard? That is, does it contain the five features previously mentioned?
Could anything be added to improve it?
Evaluating the Success of Strategy
The ability to know at any point in the implementation, whether the strategy is working and if not, why?
Establishes goals and assumes people will adopt the behavior to accomplish these goals. This pulls people toward an overall vision.
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