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Linking Balanced Scorecard to Strategy

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Jose Pallares

on 24 November 2012

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Transcript of Linking Balanced Scorecard to Strategy

CONCEPT PRACTICAL APPLICATIONS OF BALANCED SCORED CARD Practical applications 4 PERSPECTIVES OF THE BALANCE SCORECARD METRO BANK

Metro´s scorecard describes a system of cause and effect relationships incorporating a mix of leading and lagging indicators, all of which eventually point to improving future financial performance Linking Balanced Scorecard to Strategy (R. Kaplan, D. Norton) California Management Review Jose Pallares and Ana Esparrago Strategy tool created in 1987 to control and monitor activities Regards 4 different perspectives Comprises both financial and non-financial measures These measures must provide a clear representation of the organization L/T strategy Financial Customer Int. Bus. Processes 2 3 Learning & Growth 1 4 Financial Customer Internal Business Processes Learning & Growth Main Stages of a Business Rapid Growth (sales growth, new markets, customers, products) Sustain Stage (traditional fin. measurements, emphasize shareholder value and value added) Mature Stage (maximize cash flow by no spending) Financial themes to reach business strategies Revenue Growth and Mix (expand product offerings) Cost reduction and productivity (lower direct and indirect costs, share resources) Asset utilization (reduce the working and physical capital levels) Generic Outcome Measures Market and Account Share (how well is a company penetrating the market) Customer Retention (customer loyalty) Customer Acquisition (rate at which a business unit attracts new customers) Customer Satisfaction (how well the company is doing) Customer Profitability (ABC systems) Value Propositions Is the key for understanding the drivers of the core measurements There are some common attributes (product/service, customer relationship, and image and reputation) Summary: The customer perspective enables business units managers to articulate a market-based strategy that will deliver superior future financial returns Executives identify the critical processes in which the organization must excel Traditional approach vs. New approach Highlights the processes most critical for the organization's strategy to suceed Includes objectives for the long-wave innovation cycle and short-wave operations cycle Identifies the infra-structure that the organization must build to create L/T growth and improvement Comes from three principal sources: people, systems and organizational procedures Employee-based measures include a mixture of generic outcome measures (satisfaction, retention, training and skills) along with specific drivers of these measures (detailed indexes of specific skills) TABLEU BOARD A dashboard of key indicators of organizational success BALANCED SCORE CARD The balanced scorecard is constructed of a linked series objectives and measures that are both consistent and mutually reinforcing because of a difference with tableu. Like a flight simulator the score should incorporate the complex set of cause – and- effect relation among the critical variables like leads, lags and feedback loops the describe the trajectory of the strategy

The chain of cause and effect should pervade all four perspectives of a balanced scorecard: financial, customer, internal business processes, and learning and growth. Cause and Effect Relationships BSC COMPOSITION AND THE LINKING WITH FINANCIALS Strategic VS diagnostic measures We know that a strategy is set of hypothesis about cause and effect, thus a properly constructed BSC should tell the story of the bunits unit ´s strategy. The measurement system should make the relationship, the hypothesis, among objectives in the varios perspectives explicit so that they can manage and validated.
In conclusion, the chain of cause and effect should pervade all four perspective of a BSC PRACTICE 1
According to cause and effect concept, we can explain that:
“The organization can establish a link between improved sales training of employees to higher profits through the following sequence of hypothesis”:
-If we increase employee training about products, then they will become more knowledgeable about the full range of products they can sell;
-The more knowledgeable are employees about products, the more effective they will be in sales.
If their sales effectiveness improves, the average margins of the product they sell will increase. According to the four perspectives of a Balanced Scorecard, we can expose:
“Return on capital employed (ROCE) may outcome measure in the financial perspective. This financial measure results in a high degree of loyalty among existing customers. So, customer loyalty is on the scorecard because it is expected to have a strong influence. Therefore, we could have a problem if we don´t know how to achieve customer loyalty.
Analysis of customer preferences may reveal on-time delivery (OTD) of orders as highly valued by customers. Thus, improved OTD is expected to lead to higher customer loyalty which in turn is expected to lead to higher financial performance. So both customer loyalty and OTD are incorporated into the customer perspective o the scorecard. The process must the company excel al to achieve exceptional on-time-delivery. To improve OTD, the business may need to achieve short cycle times operating processes and high quality internal processes both factors that could be Scorecard measures in the internal perspective Use certain generic measures (outcome), reflect the common goals of many strategies, as a similar industries across industries and companies. Generic measures:
Profitability.
Market share
customer satisfacton
customer retention
employee skills Drivers of permance are the one that tend to be unique for a particular business unit´s strategy. Drivers:
PROFITABILITY
Market segments
particular internal processes
Learning and growth capabilitiesfinancial and customer objectives. A good balanced scorecard should have an appropriate mix of core outcome measures and the performance drivers of these outcomes PRACTICE 3
A suitable explanation of the importance of good mix outcome and drivers is this example which shows sensitivity and transparency of BSC
Once division president reported to his parent company´s president when he turned in his first Balanced scorecard:
“In the past, if you had lost my strategic planning document on an airplane and competitor found it. I would have been angry but I would have gotten over it. In reality, it wouldn´t have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but again it wouldn´t have been that a big deal. This balanced scorecard however communicates my strategy so well, that competitor seeing this would be able to block the strategy and cause it to become ineffective” A balanced scorecard must place emphasis on financial outcomes, like sakes growth, return on-capital- employed or economic value added. Many managers have failed to link such as programsto future financial performance ( Reenginering and employee empowerment) For such organizations, the programs have not been linked to specific targets for improving customer and, eventually financial performance. The inevitable result is that such organizations eventually become dillusioned about the lack of tangible payoffs from such efforts.
Causal chain of performnce drivers and outcomes Executives shuould established short term targets that reflect their best forecast about the lags and impacts between changes in performance drivers and the associated changes in one or more measures THEORY OF BUSINESS Examples of that link:
What is the impact of 10 percent improvements in on time delivery on customer satisfaction The advantage of BSC is that can be captured in a systems dymanic model that provides a comprehensie , quantified model of a business value creation process.
The relationship between drivers and out comes, monthly reviews become oportunities to learn aboyt the validity of the strategy and how well it is being executed. IN CONCLUSION...... In summary Balanced Scorecard is more than a collection of financial and non financial measurements. It is a translation of the business unit´s strategy into a linked set of measures that define both the long term strategic objectives as well as the mechanisms for achieving obtaining feedback on those objectives Consider the each of the four perspectives in the balanced Scorecard can require between four and seven separate measures, thus creating a scorecard with up to 25 measures. With that conclusion, are 25 measures too many?

The answer to the question is NO! The Balanced Scorecard is not a replacement for an organization´s day to day measurement system. The measures on the scorecard are chosen directly to the attention of managers and employees on those factors expected to lead to competitive breakthroughs for the organization. The balanced scorecard should be viewed as the instrumentation for a single strategy. When the scorecard is viewed as the manifestation of a single strategy them the number of measures on the scorecard becomes irrelevant. Our experience indicates that the companies can indeed formulate and communicate their strategy with an integrated system of approximately two dozen measures. Diagnostic measures : Measures that monitor whether the business remains "in control" and are able to signal when unusual events ocurring that require immediate attention.

Strategic measures: define strategy for competitive excellence. The outcome and performance driver measures on the balanced Scorecard should be the subjects of extensible and intensive interactions among senior and middle level managers as they evaluate strategies based on new information about competitors, customers or markets

necessary/ sufficient In conclusion.... National Insurance
Executives concurred that the Balanced Scorecard has been a major part of their turnaround strategy and near-term success. The Balanced scorecard by providing short term indicators of long term outcomes has become National Insurance´s guidance system to the future.
  Thanks for your attention! Q&A CONCLUSIONS The scorecard describes the vision of the future for the entire organization. If the vision is wrong, the fact that it is executed well becomes irrelevant.

The scorecard creates share understanding. It creates a holistic model of strategy that allows all employees to see how they can contribute to organization success.

The scorecard focuses change efforts. If the right led indicators are identified, investments and initiatives will drive desired long term outcomes.

The scorecard permits organized learning at the executive level. By making the cause and effect hypothesis among objectives and measures explicit business can test their strategy and adapt as they learn.
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