Balanced Scorecard

Balanced Scorecard - the concept
(pl. Strategiczna Karta Wyników)
– instrument of strategic management
– forces measurement of effects of the strategic activities
– forces cohesion in formulating strategy by building casual
dependence between aims and activities
– describes and explains what should be measured in an
organisation
– is an alternative for traditional financial systems
1/SKW 2007
Reasons for origination of BSC

Limitations in using financial measures
– do not provide full information about elements crucial for
competitive advantage
– do not encourage managers to think short-term
– allow for manipulation in decision-taking
– show results of activities taken in the past
– do not show the complete picture of the company's development
– traditional measures originate from Cost Accounting; do not show
where did costs come from
– employees do not see the link between their work and
measurement systems
2/SKW 2007
Circumstances under which BSC originated

Research projects
– 1987 – Corporate Scorecard developed by Analog Devices Inc.
– 1988 – KPMG built for Apple Computer a performance measuring
system
– 1990 – project entitled „Measuring effectiveness in organisations in
the future” have begun
– project group:
 David Norton (Nolan Norton Institute) – project leader
 prof. Robert Kaplan (Harvard Business School) – advisor
 team of corporate directors from: Advanced Micro Devices, American
Standard, Apple Computer, Bell South, Hewlett Packard, Shell Kanada,
Cigna, DuPont, General Electric
– results were decribed in: Robert S. Kaplan, David P. Norton, The
Balanced Scorecard: Translating Strategy into Action, 1996
3/SKW 2007
Remark (1)

Balanced Scorecard of a certain friend – as an impulse to
reflect on how we realise our plans...
/based on: My Balanced Scorecard, H.R. Friedag, W. Schmidt/



Vision: „Happy and satisfied”
Strategy: „More time for people with whom I share my life
and less stress"
Reasons for which activities are undertaken:
– family
– friends
– work
– health
4/SKW 2007
Remark (2)
Reasons
How to realise
Plan
Performance
Family
Telephones to a wife
5
3,7
Flowers for a wife
4
3
Dinners and suppers together
4
5
Family trips
3
2
Dance/theater
2
2,5
Roller skates
1
1
Volunteer work at wind surfuring club
2
1
Get-togethers with friends
2
2
Trainings of co-workers
2
1,5
Team meeting
4
3
Work communication days
2
1
Work until 6:30 p.m.
2
1,5
Weekend without a company
2
1
Jogging
2
1,5
Work-out / Aerobic
4
2
Friends
Work
Health
5/SKW 2007
Remark (3)
telephones to wife
work-out / aerobic
5
flowers for a wife
4
jogging
dinners and suppers together
3
2
weekend without a company
family trips
1
0
work until 6:30 p.m.
dance/theater
work communication days
is
aim
rollerskates
meetings
volunteer work at wind surfuring club
education
get-togethers with friends
6/SKW 2007
Four perspectives of BSC

„Many leaders have their own visions which never become a
common vision joining the whole organisation."
That which is lacking is a theory which allows us to transform an
individual vision into a joint vision”
/P. Senge/

Balanced scorecard transforms the mission and strategy into
aims and measures grouped according to four different
perspectives:
1. Financial perspective
2. Customer perspective
3. Internal processes perspective
4. Development perspective
7/SKW 2007
Balanced scorecard - the model
Financial perspective
„How should stockholders see us,
so that we are thought of as
financially successful?”
Customer perspective
„How should customers see us, so
that our vision is realised?”
Vision
and
Strategy
Internal processes
perspective
„What internal processes must we
improve so that owners and clients
of the firm are satisfied?”
Development perspective
„How can we maintain our ability to
change and improve effectiveness in
order to realise our vision?”
8/SKW 2007
Casual relation (1)

If we increase the amount and quantity of training then...
…. employees will possess a greater knowledge about our product
offer

If the employees will possess a greater knowledge about our products
then...
…. they will increase their selling effectiveness

If the sales effectiveness increases then...
…1) sales will increase and 2) operational costs will decrease

If sales will increase and operational costs will decrease then...
…profitability will increase
9/SKW 2007
Casual chain
ROCE
Financial perspective
Customer perspective
Customer loyalty
Timely delivery
Internal processes
perspective
Development perspective
Process quality
Process duration
Employees' skills,
abilities, competences
10/SKW 2007
Gist of the Balanced Scorecard



Measurement system built based on financial and nonfinancial measures
Measurement system built based on enterprise strategy
Balanced system of:
– Results with Leading measures
(Lagg Indicators vs. Lead Indicators)
– Objective with Subjective measures
– Financial with Non-Financial measures
– Short-term with Long-term measures
– External with Internal measures
11/SKW 2007
Casual relation (2)
Vision, mission, strategy
Financial perspective
„How should stockholders see us,
so that we are thought of as
financially successful?”
Customer perspective
„How should customers see us, so
that our vision is realised?”
Internal processes
perspective
„What internal processes must we
improve so that owners and clients of
the firm are satisfied?”
Development perspectiv
„How can we maintain our ability to
change and improve effectiveness
in order to realise our vision?”
12/SKW 2007
Financial perspective

Aim from financial perspective:
– main aim: to ensure stockholders a rate of return from an investment
exceeding their expectations derived from an alternative involvement of
capital bearing a similar level of risk


Financial perspective measures whether the company's strategy
realises its main aim
Measures (based on financial reports)
– return on investment - ROI
– economic value added – EVA

Financial strategies:
– to reach a required growth and structure of revenues
– to reduce costs and increase profitability
– to increase utilisation of resources and effectiveness of investments
13/SKW 2007
Example:
problems with financial measures
14/SKW 2007
Calculation of ROI
Cost of products sold and
services rendered
Sales
Sales, administrative and
managerial costs
Operational costs
Income from
operations
Return
on sales
Other operational
revenues – other
operational costs
Sales
ROI
Cash and cash equivalent
Liabilities
Short-term
assets
Return
on assets
Operational
assets
Inventory and other shortterm assets
Long-term assets
Legal assets
Long-term assets
Other long-term assets
15/SKW 2007
How to calculate ROI?
ROI =
=
Income from operations
Assets of operational unit
Income from operations
Sales
=
Return on
sales
x
x
Sales
Assets of operational unit
Return on
assets
16/SKW 2007
Limitations of utilising ROI

Using ROI to assess the activities has its limitations:
– ROI measure is not directly tied to the goal of maximising the
value of the enterprise for its owners
– ROI used as an assessment measure of managers can lead
to incorrect investment decisions
– ROI is a short-term assessment measure
17/SKW 2007
Economic value added - EVA®

EVA® (ang. economic value added)
– measure that shows the value that the activities of a given investment
center "add" to the value of an enterprise
– shows the aim of the activities of an enterprise – maximialisation of its
value
EVA® = Wynik operacyjny – koszt kapitału x zainwestowane środki

Limitations of applying the EVA®:
– short-term measure based on annual data
– its use can lead to faulty investment decisions taken by managers
interested in short-term benefits

Modifications of EVA®:
– e.g. bonus bank – managers lose motivation to conduct long-term nonincome generating projects
18/SKW 2007
EVA®
„Economic value added is based on a notion which we knew for a long
time: that what we call profit, money, which are left to service own
capital is not commonly a profit. Until an enterprise earns an amount
greater than its cost of capital, until then it has a loss. It is unimportant
that it pays taxes as it would experience a real profit. An enterprise still
gives the economy less than it gets from it in terms of resources. (...) It
does not create wealth, but it destroys it.”
Peter Drucker
19/SKW 2007
EVA® in decision-taking (1)
P/L Statement of Gamma Co.
Sales revenue



2001
2002
12 200 000
20 000 000
Cost of goods sold (COGS)
7 400 000
15 000 000
Gross income from sales
4 800 000
5 000 000
Sales costs
1 200 000
1 000 000
Administrative costs
2 000 000
1 500 000
Income from sales
1 600 000
2 500 000
Other operational income
400 000
400 000
Other operational costs
500 000
400 000
Income from operations
1 500 000
2 500 000
Assets in 2001 - 10 000 000 zł, in 2002 – 20 000 000 zł
Liabilities in 2001 - 3 000 000 zł, in 2002 – 4 000 000 zł
Cost of capital set at 10%
20/SKW 2007
EVA® in decision-taking (2)
2001
2002
Return on sales
12,29%
12,5%
Return on assets
1,22
1
ROI
15%
12,5%
800 000
900 000
1,5 mln-7mln*10%=0,8 mln
2,5mln-16mln*10%=0,9 mln
EVA ®
Calculation


Decrease in ROI: worsening of the effectiveness of the
investment center?
Increase in EVA®: improvement of the effectiveness of the
investment center?
21/SKW 2007
Financial perspective – types of strategies
Increase value
for stockholders
Revenue growth
strategy
Built
franchising
- revenue from
new sources
Increase value
for customers
- improve
profitability
of current customers
Productivity
strategy
Improve cost
structure
- lower costs
per unit
Improve
utilisation
of assets
- gradual
investment
- current assets
22/SKW 2007
Customer perspective

Aims in customer perspective:
– increase customer satisfaction and create positive image for the firm
– increase customer loyalty and quality of customer services
– increase market share

General measures:
– market share
– maintain customers
– gain new customers
– customer's satisfaction
– customer's profitability

Measures of value offered to customers:
– product attributes (goods, services)
– customer relations
– image and reputation
23/SKW 2007
General measures from customer's
perspective
Market share
reflects the part of the market controlled by the enterprise. Expressed as a
number of clients, a value or amount of sales
Gain new
customers
measures in absolute or relative numbers the speed at which the
enterprise gains new customers
Maintain
customers
shows in absolute or relative numbers the level at which the enterprise
maintains long-term relations with customers
Customer's
satisfaction
describes the customers' satisfaction level depending on specific criteria
of added value
Customer's
measures the net profit generated from a customer or market segment
taking into account specific costs related to service of that customer
profitability
24/SKW 2007
Attributes of generating value for customers
Gain customers
Maintain customers
Customer's
satisfaction
Value =
Product attributes
(services)
quality
price
time
+ Image and Reputation +
brand
Customer relations
convenience
trust
react to needs
25/SKW 2007
Internal processes perspective

Aims in internal processes perspective:
– increase value of the enterprise through innovations
– optimalise processes at the operational level
– ensure high quality of after-sale services

Measures:
– time of process implementation
– cost of process implementation
– quality of process implementation
26/SKW 2007
Business internal processes perspective

Determined by customer and
financial perspectives
zlecenie
klienta
nadeszło
zlecenie
klienta
w czytać
zlecenie
do systemu



dział
sprzedaży
system
komputerow y
Transforms customer's requirements
into internal measures
Identifies internal processes needed
to achieve the aims
Forces cooperation of various
departments
zlecenie
klienta
w systemie
kontrola
techniczna
kontrola
handlow a
decyzję
techniczną
podjęto
decyzję
handlow ą
podjęto
opracow ać
decyzje
dział
sprzedaży
informacja
dla klienta
gotow a
27/SKW 2007
Process perspective – value chain
Innovative
processes
delineate
target
market
create
product
offer
(service)
Operational
processes
delineate
target
market
create
product
offer
(service)
After-sale
processes
customer
service
28/SKW 2007
Development perspective

Aims in the development perspective:
– achieve a greater staff potential – human resources
– utilise employees' individualism
– increase level of motivation, decentralisation, and
convergence of aims

Measures:
– employee satisfaction, level of stress and conflict
– availability of trainings, individual development
29/SKW 2007
Measures in development perspective
Main measures
Results
Employee
turnover
Employee
productivity
Employee
satisfaction
Provisions:
Personnel
abilities
Technological
infrastructure
Employee
involvement
30/SKW 2007
Development and learning perspectives

Ability to innovate and learn directly tied
to the value of an enterprise:
– development of new products
– create value for the customers
– process of continuous improvement



Mapa
wiedzy
(Kto co
wie?)
Diagram struktury
wiedzy
Employees' abilities add value
Informational systems are needed to
transform information
Projects
Rozwój i wykorzystanie wiedzy
(Integracja z modelami procesów)
Employees' motivation
31/SKW 2007
Basic model of creating Strategy Map
Increase value for
stockholders
Financial perspective
Revenue growth strategy
Built
franchising
Productivity strategy
Increase value
for clients
Improve cost
structure
Increase utilisation
of assets
Customer perspective
Product leadership
Customer knowledge
Operational excellence
Internal processes perspective
Development perspective
Źródło: Kaplan, Norton
Increase value for clients
by customer management
process
Employees' competences
Achieve operational
excellence thanks
to logistic process
Technology
Become a worthy enterprise
thanks to share
in regulatory processes
Organisational culture
32/SKW 2007
Navigational cockpit – strategic management
center
33/SKW 2007
Example:
Citibank - Performance Evaluation
How to effectively assess manager's performance?
Citibank California – assessment of
Balanced Scorecard for local managers

Assessment of Jamesa McGarana
–
worked in banking since 1977
–
in Citibanku since 1985
–
since 1986 systematically promoted
–
1992 - 1996 – branch manager in a financial district of Los Angeles
 4 years in a row had impressive profits although the district was greatly
competitive

had an opinion of a great manager
– difficult clients at James' branch:
 individual clients: from very demanding to "common people”
 business clients: market segment requiring higher than usual services

Difficulty with James' assessment based on Balanced Scorecard
Introduction of Balanced Scorecard

Financial Measures

Strategy Implementation
– financial results
– related to company's introduction of
corporate strategy

Customer satisfaction
 manager of Citibank California thought of this measure as the most significant one
from bank's long-term strategy

Control measures – internal controls

People – subjective assessment of employees by the supervisor

Standards – assesses manager's involvement, behaviour based on
business ethics
36/SKW 2007
Grading and motivational system:

Grading:
– Below par (below the norm)
– Par (the norm)
– Above par (above the norm)

Motivational system:
– Below the norm – -0- bonus
– The norm – Bonus of 15-20% of salary
– Above the norm – Bonus of 30% of salary,
under a condition that the employee does not
receive any grade below par
37/SKW 2007
James' results:
Financial
Implementation of strategy
Customer satisfation
Control
People
Standards
Total mark:
38/SKW 2007
Summary





The Balanced Scorecard does not require any new
knowledge as it relates to daily experiences and its based
on them
Every manager must define his aims, plan needed
resources, take decisions and implement them
In order to control the results of his actions, he must make
them specific and definite, so that he is able to measure
their implementation
Strategic Balanced Scorecard creates framework for
changes through defining strategic aims
To satisfy the aims specific ways and resources are
assigned
39/SKW 2007