Performance Management
Performance Management
Week 12
The Balanced Scorecard
Drury – Chapter 23
1
The Balanced Scorecard
Strategic management accounting
•Late 1980s – traditional management
accounting critized for not contributing to
new business approaches and
competitive environment
•Strategic management accounting introduced
as a way forward
•Provide information for strategy formulation
and managing strategy implementation
2
The Balanced Scorecard
Strategic management accounting
•Attention given to integrated framework of
performance measurement – to clarify,
communicate, and manage strategy
•Recent development – emphasize and seek
to incorporate performance measurement
within the strategic management process
3
The Balanced Scorecard
Balanced Scorecard - Back-ground
•Prior to 1980s, management accounting
control systems only focus on financial
measures of performance
•Information in monetary terms – motivated
managers to focus more on cost
reduction – ignored important variables
necessary to compete in the competitive
environment.
•Variables such - product quality, delivery
reliability, after sales services, customer4
satisfaction – ignored by traditional PM
The Balanced Scorecard
Back-ground (cont)
•In the 1980s, state of confusion, with increase
in importance in non-financial variables to
compete successfully – no standards
•Need to link financial and non-financial PM
•The Balanced Scorecard was created by
Kaplan and Norton in 1992, refined along
the way
•Formulated a set of non-financial measures to
provide top management a fast but
comprehensive view of the organizational
5
The Balanced Scorecard
Back-ground (cont)
•Variables designed to answer the following:
•How do customers see us?
The customer perspective
•What must we excel at?
The internal business process perspective
•Can we continue to improve and create value?
The learning and growth perspective
•How do we look to shareholders?
The financial perspective
6
The Balanced Scorecard
Back-ground (cont)
#
•Aims:
•Provide a comprehensive framework for
•Translating firm’s strategic objectives into
•A coherent set of performance measures (PM)
•How?
•Each firm to express major goals for each of the 4
perspectives and
•Translate these goals into specific PM
•Each firm must decide its critical PM
•Choice will vary over time, but must link to its
7
strategy
The Balanced Scorecard
8
© 2000 Colin Drury
The Balanced Scorecard
As a Strategic Management System
•Objectives of the Balanced Scorecard are:
•Derived from a top-down process
•Driven by the mission and strategy of the business
unit
•Translate mission & strategy into a linked set of
measures that define both
•Long-term strategic objectives and
•Mechanisms for achieving such objectives
9
The Balanced Scorecard
As a Strategic Management System (cont)
•Objectives of the Balanced Scorecard are: (cont)
•Performance Measures to incorporate a balance
between:
•external measures relating to customers and
•internal measures relating to critical business
process, innovation, and learning
•A balance between outcome measures (past
effort results) & measures that drive future
performance
10
The Balanced Scorecard
As a Strategic Management System (cont)
•Objectives of the Balanced Scorecard are: (cont)
•Successful implementation (Kaplan & Norton):
•Clarify and translate vision and strategy into
specific objectives, and identify critical
drivers of the strategic objectives
•Communicate and link strategic objectives &
measures
•Employees to translate high level objectives
into local objectives that support the SBU’s
global strategy
11
The Balanced Scorecard
As a Strategic Management System (cont)
•Objectives of the Balanced Scorecard are: (cont)
•Successful implementation (Kaplan & Norton):
•Plan, set targets, and align strategic initiatives
•Targets should be 3-5 year period, on yearly
basis for control
•Enhance strategic feedback and learning
•Allowing managers to monitor and make
adjustments (even changes to strategy)
12
#
The Balanced Scorecard
As a Strategic Management System (cont)
•Balanced Scorecard : Example
•Financial perspective:
•Goal/objective: increase shareholder value
•Measure: Increase profit thru sales growth
•Target performance: $100B
•Actual performance: $95B
•Customer perspective:
•Goal: Increase market share
•Measure: Market share of product X
•Target performance: 20%
•Actual performance: 21%
13
#
The Balanced Scorecard
As a Strategic Management System (cont)
•Balanced Scorecard : Example
#
•Internal business process perspective:
•Goal/objective: improve product X quality
•Measure: quality index/yield
•Target performance: 98 %
•Actual performance: 97 %
•Learning and growth perspective:
•Goal: improve process skills
•Measure: % of employees trained in quality
management
•Target performance: 90%
14
•Actual performance: 92%
The Balanced Scorecard
(1) The financial perspective
•Evaluates the profitability of the firm’s strategy
•Example: cost reduction strategy: measures ROI
resulting from such cost reduction strategy
•Typical measures include ROI, RI (residual income)
and EVA (economic value added)
•Other objectives: revenue growth, cost reduction
and asset utilization.
15
The Balanced Scorecard
(1) The financial perspective
#
• Argument: by focusing on other perspectives,
financial measures will take care of themselves.
•Financial success = doing the fundamentals
well
•Kaplan: needed – provide feedback on
“improved” financial performance
•Summarises the economic consequences of
strategy implementation
•Typical objectives:
•Increase ROI by say 20%
•Increase sales by say 100%
16
The Balanced Scorecard
(2) The customer perspective
Identifies targeted market segments &
measures the firm’s success in
these segments
•Identify customer & market segments
(both existing & potential)
•Develop performance measures to
track unit’s ability level
•Measures relate to customer loyalty, &
strategy outcome
17
The Balanced Scorecard
(2) The customer perspective (cntd)
Market share
•Population of sales in a specific
market that the firm obtains
•Can be measured in:
•Sales revenue
•Unit sales
•Number of customers
•Measure of market penetration
•Estimates of market size is required
18
The Balanced Scorecard
(2) The customer perspective (cont)
Market share
•Major contribution:
•Indicates if adopted strategy lead to
expected results in the targeted
market segment
•Possible: sales growth objectives
achieved temporarily from nontargeted segments
19
The Balanced Scorecard
(2) The customer perspective (cont)
Customer retention & loyalty
•One way to maintain or increase market
share in targeted customer segment
•Can be measured as:
•Average duration of a customer relationship
•No of new customers referred by existing
ones
•Valuable feedback: find out where they have
gone, and why
20
The Balanced Scorecard
(2) The customer perspective (cont)
Customer acquisition
•Can be measured by:
•No of new customers
•Total sales to new customers
•No of new customers in % of prospective
inquiries
•Ratio of new customers per sales call
21
The Balanced Scorecard
(2) The customer perspective (cont)
Customer satisfaction
•Use questionnaire surveys & customer
response cards
•Can be measured by:
•Examine letters of complaints
•Feedback from sales reps
•Use of mysterious shoppers
•Limitation: only measure attitudes, but not
22
actual buying behaviour
The Balanced Scorecard
(2) The customer perspective (cont)
Customer profitability
•Satisfied customer must be profitable customers
•Above only measure means to achieve customer
profitability, not outcome
•Analyse profitability by segment,
•Identify unprofitable segment
•To apply life-cycle profitability analysis for
decision on retention or abandoning customers
•On unprofitable customers:
•Change their buying behaviour to cut costs or
23
increase price – otherwise to drop them
The Balanced Scorecard
(2) The customer perspective (cont)
Value propositions (Kaplan)
•Product attributes to create loyalty &
satisfaction
•3 categories:
•Product / service attributes
•Include features, price, & quality
•Customer relationship
•Include delivery, buying experience
•Image & reputation
•Include intangible factors
24
The Balanced Scorecard
(2) The customer perspective (cont)
Value propositions (Kaplan) (cont)
•3 dimensions of measurement:
•Time-based measures
•Speedier response
•lead time use to measure customers’
expectations
•100% on-time delivery
•no of late delivery as performance driver
for customer satisfaction & retention
25
•Reduce time taken to bring new product to market
The Balanced Scorecard
(2) The customer perspective (cont)
Value propositions (Kaplan) (cont)
•3 dimensions of measurement:
•Quality
•Quality delivered to and received by the
customer
•Measures include:
•Defective units delivered
•No of customers complaints
•Returns & warranty claims
26
•surveys
The Balanced Scorecard
(2) The customer perspective (cont)
#
Value propositions (Kaplan) (cont)
•3 dimensions of measurement:
•Price
•Concern by customers whether low cost or
differentiated strategy
•Reporting mechanism comparing prices
with competitors
•For “bidding” process, % of bids accepted
indicates price competitiveness
27
The Balanced Scorecard
(3) The internal business perspective
Focuses on internal operations that:
•enhances customer perspective by creating
value for customers and
•enhances financial perspective by increasing
shareholder value
•example: strategy to improve internal process
target after benchmarking against
competitors
•3 sub-processes:
•Innovation process
•Operation process
•Post sales process
28
The Balanced Scorecard
(3) The internal business perspective
3 principal internal business processes:
(a) innovation process
•Creates products, services, and processes
that will meet the needs of customers
•Include new markets, new customers,
emerging / latent needs of existing customers
•Continuous R & D creating innovative
products /services provides companies
with competitive advantage
29
•R & D getting more important in value chain
The Balanced Scorecard
(3) The internal business perspective (cont)
3 principal internal business processes:
(a) innovation process (cont)
•measures (Kaplan) include:
•% of sales from new products
•New product introduction v competitors, & v
plan
•Time to develop next generation of the
products
•No of key items firm is 1St or 2nd to market
•Break-even time (time from development to
30
launch) with enough pay-back
The Balanced Scorecard
(3) The internal business perspective (cont)
#
3 principal internal business processes:
(c) Post sales service processes
•Provides service and support to customers
after sales
•Includes warranty & repair activities,
treatment of defects & returns
•Measures on response to customers
31
The Balanced Scorecard
(4) The learning perspective
Stress importance of investing for the future in
other areas (not assets, R & D,)
•Identify infrastructure needed for long term
growth
•Infrastructure includes people, systems,
organizational procedures
•Kaplan’s 3 principal categories:
•Employee capabilities
•Information system capabilities
•Motivation, empowerment, alignment 32
The Balanced Scorecard
(4) The learning perspective (cont)
(A) Employee capabilities
•3 core measurement outcomes:
•Employee satisfaction
•Consider driver of the other 2
•Pre-condition to up customer satisfaction
•Measured thru survey, index by dept
•Employee retention
•Measured by annual % of resigned key
staff
•Employee productivity
33
•Measured by sales per employee
The Balanced Scorecard
(4) The learning perspective (cont)
(B) Information system capabilities
•Employees required effective information for
effective decision making
•Measures of strategic information availability
include:
•% of processes with:
•Real time quality
•Cycle time
•% of customer-facing employees with on-line
information
•Measures seek to provide indication of availability
of internal process info to front-line
34
employees
The Balanced Scorecard
(4) The learning perspective (cont)
#
(C) Motivation, empowerment & alignment
•Measure of motivated & empowered employees –
no of suggested improvements per employee
•Performance driver for employee and
organizational alignment – whether they
have goals aligned with company objectives
•Outcome measures:
•% of employees with personal goals aligned to
the balanced scorecard
•% of employees who achieve personal goals
35
The Balanced Scorecard
Aligning the Balanced Scorecard
•Different strategies call for different scorecards
•Some common measures found on company
scorecards:
•Financial perspective
•Operating income, revenue growth, revenues from
new products, gross margin %, cost reductions in
key areas, economic value added, ROI
•Customer Perspective
•Market share, customer satisfaction, customer
retention %, time taken to fulfil customers’ request,
36
no of customer complaints
The Balanced Scorecard
Aligning the Balanced Scorecard
(cont)
•Internal Business Process Perspective
•Innovative process: manufacturing capabilities, no of
new products, new product development times, no of
new patents
•Operations process: yield, defect rates, time taken to
deliver products to customers, % of on-time
deliveries, average time taken to manufacture orders,
set-up time, manufacturing downtime
•Post-sales services: time taken to replace or repair
defective products, hours of customer training for
using the product
37
The Balanced Scorecard
Aligning the Balanced Scorecard (cont)
#
•Learning and growth perspective
•Employee education and skill levels, employee
satisfaction score, employee turnover rates,
information system availability, % of processes with
advanced control, % of employee suggestions
implemented, % of compensation based on individual
& team incentives
38
Sample Balanced Scorecard A:
Financial Perspective
Objective:
Increase shareholder value
Measures:
Increase in operating income
39
Sample Balanced Scorecard A:
Financial Perspective
Initiatives:
Manage costs and
unused capacity
Build strong customer
relationships
Build strong customer
relationships
Target
Actual
Performance Performance
$2,000,000
$2,100,000
$3,000,000
$3,420,000
6%
6.48%
40
Sample Balanced Scorecard B:
Customer Perspective
Objectives:
Increase market share
Increase customer satisfaction
Measures:
Market share in communication
networks segment
Customer satisfaction survey
41
Sample Balanced Scorecard B:
Customer Perspective
Initiatives:
Target
Actual
Performance Performance
Identify future needs
6%
7%
of customer
Identify new target
7
8
customer segments
Increase customer focus 90% give top 87% give top
of sales organization two ratings two ratings
42
Sample Balanced Scorecard C: Internal
Business Process Perspective
Objectives:
Improve manufacturing
quality and productivity
Meet specified delivery dates
Measures:
Yield
On-time delivery
43
Sample Balanced Scorecard C: Internal
Business Process Perspective
Initiatives:
Identify problems and
improve quality
Reengineer order
delivery process
Target
Actual
Performance Performance
78%
79.3%
92%
90%
44
Sample Balanced Scorecard D:
Learning and Growth Perspective
Objectives:
Align employee and
organization goals
Improve manufacturing processes
Measures:
Employee satisfaction survey
Improvements in process controls
45
Sample Balanced Scorecard D:
Learning and Growth Perspective
Initiatives:
Employee
participation and
suggestion program
to build teamwork
Organize R&D/
manufacturing teams
to modify processes
Target
Actual
Performance Performance
80% of
88% of
employees
employees
give top
give top
two ratings two ratings
5
5
46
Pitfalls When Implementing
a Balanced Scorecard
What pitfalls should be avoided when
implementing a balanced scorecard?
1. Don’t assume the cause-and-effect
linkages to be precise.
2. Don’t seek improvements across
all measures all the time.
3. Don’t use only objective measures
on the scorecard.
47
Pitfalls When Implementing
a Balanced Scorecard (cntd)
4. Don’t fail to consider both costs and benefits
of initiatives such as spending on information
technology and research and development.
5. Don’t ignore nonfinancial measures when
evaluating managers and employees.
6. Don’t use too many measures.
48