Strategic Management
BALANCED
SCORECARD
Balanced Score Card
IHW 2005
Balanced Scorecard
12
Diffusion of a New Idea
• “The Balanced Scorecard: Measures
that Drive Performance” (Robert S.
Kaplan and David P. Norton, Harvard
Business Review, February 1992)
• About 35% of Fortune 2000 firms
have adopted a balanced scorecard,
55% of those firms are very satisfied
with it. (R. D. Banker, C. Konstans and S.
Janakiraman; January 2000)
IHW 2005
Balanced Scorecard
2
Balanced Score Card
• A new approach to strategic management
was developed in the early 1990's by
Drs. Robert Kaplan (Harvard Business
School) and David Norton (Balanced
Scorecard Collaborative).
• They named this system the 'balanced
scorecard'. Recognizing some of the
weaknesses and vagueness of previous
management approaches, the balanced
scorecard approach provides a clear
prescription as to what companies should
measure in order to 'balance' the financial
perspective.
IHW 2005
Balanced Scorecard
3
Balanced Score Card
• Kaplan and Norton describe the innovation of
the balanced scorecard as follows:
“The balanced scorecard retains traditional
financial measures. But financial measures tell
the story of past events, an adequate story for
industrial age companies for which investments
in long-term capabilities and customer relationships were not critical for success.
These financial measures are inadequate,
however, for guiding and evaluating the journey
that information age companies must make to
create future value through investment in
customers, suppliers, employees, processes,
technology, and innovation."
IHW 2005
Balanced Scorecard
4
Evaluation Methods
Balanced Scorecard – Four Perspectives
Financial Perspective
How should we appear
to our shareholders?
Customer Perspective
How should we
appear to our
customers?
Vision
And
Strategy
Internal Business
Perspective
At what business
practice must we
excel?
Learning and Innovation
Perspective
How should we sustain
our ability to change and
improve?
IHW 2005
Balanced Scorecard
5
Balanced Scorecard
Financial Perspective
How do we look to our
shareholders?
Customer Perspective
How do we look to our
customers?
Vision &
Strategy
Internal Process
Perspective
What business
processes are the
value drivers?
Learning & Growth
Perspective
Are we able to sustain
innovation, change
and improvement
IHW 2005
Balanced Scorecard
6
Balanced Scorecard for a
Retailer
Financial Perspective
EVA (Residual Income)
Profit per square foot
Customer Perspective
•Customer satisfaction
•Customer retention
•Market share
Vision &
Strategy
Internal Process
Perspective
•Service quality
•Product quality
•Inventory management
Learning & Growth
Perspective
•Information systems
•Employee satisfaction
•Employee training
IHW 2005
Balanced Scorecard
7
Balance in the Scorecard
• Balance between financial,
customer, internal process and
learning perspectives
• Balance between financial and nonfinancial measures
• Balance between short-term and
long-term objectives
 Balance between hard, objective
measures and softer, more
subjective measures
 Balance between different
stakeholders
 Balance between strategic and
diagnostic measures
IHW 2005
Balanced Scorecard
8
Horizontal Balanced Scorecard
Investors
Lenders
Customers
Employees
Suppliers
Financial
Financial
Customer
Internal
Process
Perspective Perspective Perspective Perspective Perspective
Balance between different stakeholders.
IHW 2005
Balanced Scorecard
9
Vertical Balanced Scorecard
Financial Objectives
Customer Objectives
Internal Process Objectives
Learning and Growth Objectives
IHW 2005
Balanced Scorecard
10
BALANCED SCORECARD DESIGN
1.
2.
3.
4.
5.
6.
Identify strategic objectives for each perspective.
An objective is a statement of strategic intent. An objective states
how a strategy will be made operational. Application will allow
strategic objectives to be aligned with at least one perspective.
Associate measures with strategic objectives.
A measure is a performance metric that will reflect progress against
an objective. A measure must be quantifiable. Leading measures
are predictors of future performance, while lagging measures are
outcomes. Measure has to be linked with an objective.
Assign targets to measures.
A target is a quantifiable goal for each measure with a specified
time frame.
Link strategic objectives in cause and effect relationships (Theme).
Objectives are linked to one another through cause and effect
relationships. Application should be able to represent the linkages
graphically and should able to edit/change as appropriate.
List strategic initiatives.
Strategic initiatives are action programs that drive performance.
The application should allow for setting of strategic initiatives to be
linked to at least one objective.
View the strategy from four perspectives (Financial, Customer,
Internal and Learning).
A perspective is a component into which the strategy is
decomposed to drive implementation. Other perspective may be
added to the typical set or replace based on specific strategic need.
Balanced Score Card
IHW 2005
Balanced Scorecard
12
A Balanced Scorecard
“Is a performance measurement system
that translates an organization’s strategy
into clear objectives, measures, targets,
and initiatives.”
(Kaplan and Norton, Harvard Business Review, 1996)
”A method for the organization to
systematically develop a comprehensive link
between its strategy and a coherent set of
performance measures.”
“A method for the organization to
systematically develop a comprehensive
system of planning and control”.
(Kaplan and Norton, Harvard Business Review, 1992)
IHW 2005
Balanced Scorecard
13
Balanced Scorecard
 The balanced scorecard (BSC) provides a
framework for selecting multiple performance
measures focused on critical aspects of business
(Kaplan and Norton 1992).
 The essence of the BSC is the articulation of
linkages between performance measures and
strategic objectives (Kaplan and Norton 1996).
2
Translating Strategy Into Initiatives
For each perspective:
Strategy
Key Success
Factors
Performance
Measures
Targets
IHW 2005
Balanced Scorecard
Initiatives
15
A Strategic Scorecard
• Should include leading indicators
 Leading indicators: Drivers of long term
value
 Lagging indicators: Feedback measures
on current performance
• Should include outcome measures as well as
measures of the drivers of those outcomes
• Should link all measures with the overall
strategy
IHW 2005
Balanced Scorecard
16
Diagnostic vs Strategic Measures
Diagnostic measures
 Monitor whether the business remains
“in control”
 Signal when unusual events occur that
require immediate attention
 Necessary, but not sufficient, for
achieving long term goals
Strategic measures
 Articulate a strategy designed for
competitive excellence
 Evaluate strategies based on new
information
about
competitors,
customers, markets, technologies &
suppliers
IHW 2005
Balanced Scorecard
17
Financial Perspective
Customizing Measures for the Growth Stage
•
•
•
•
•
•
•
•
IHW 2005
Sales growth rate
Sales in new markets
Sales to new customers
Sales from new products
Investment in product development
Investment in information technology
Investment in employee skills
Investment in new distribution channels
Balanced Scorecard
18
Financial Perspective
Customizing Measures for the Sustain Stage
•
•
•
•
•
•
•
•
Return on capital employed
Economic Value Added (EVA)
Operating income/Gross margin
Discounted cash flows
Asset utilization rates
Cost reduction rates
Cost benchmarked against competitors
Customer and product line profitability
IHW 2005
Balanced Scorecard
19
Financial Perspective
Customizing Measures for the Harvest Stage
•
•
•
•
•
•
IHW 2005
Current cash flows
Payback period
Spending ratios
Throughput ratios
Product line profitability
Negative cash flow customers
Balanced Scorecard
20
Customer Perspective:
Strategic Outcome Measures
Financial Objectives
Customer Outcomes
Market
Share
Account
Share
Customer
Acquisition
Customer
Profitability
Customer
Retention
Customer
Satisfaction
Internal Process Outcome Drivers
IHW 2005
Balanced Scorecard
21
Customer Perspective:
Unique Value Proposition
Customer
Acquisition
Customer
Retention
Customer
Satisfaction
Value =
Product/Service
Attributes
+
Uniqueness Functionality Quality Price Time
IHW 2005
Image
Brand Equity
Balanced Scorecard
+
Relationship
Convenient
Trusted
Responsive
22
The Internal Perspective
Generic Service Value Chain Model
Innovation Cycle
Identify
Custome
r Needs
Identify
the
Market
Operations Cycle
Create
the
Service
Offering
Produce
the
Services
Post-Sale
Service Cycle
Deliver
the
Services
Service
the
Customer
Satisfy
Custome
r Needs
Efficiency
Effectiveness
IHW 2005
Balanced Scorecard
23
Learning and Growth Perspective
Objectives
Capability
Measures
Employee
Skills
Long Term
Success
Information
Systems
•Satisfaction
•Retention
Organizational
•Training
Processes
•Capabilities
IHW 2005
Balanced Scorecard
•Real-time availability
•Accuracy
•Pervasiveness
•Alignment of incentives
with key success factors
•Improvement in key
customer and internal
processes
24
So, A Balanced Scorecard…
• Is much more than a collection of indicators
of key success factors.
• Is a flight simulator, not a dashboard of
instrument dials.
• Integrates performance measures with a
unique strategy.
• Incorporates cause-and-effect relationships,
including leads, lags and feedback loops.
IHW 2005
Balanced Scorecard
25
Linking the Balanced Scorecard to Strategy
A Strategy Is a Set of Hypotheses About Cause and Effect
Financial
Return on
Capital Employed
Customer
Customer Loyalty
Customer
On-time Delivery
Internal Process
Learning & Growth
IHW 2005
Process Quality
Process Cycle Time
Employee Skills
Balanced Scorecard
26
Link to Financial Objectives
• Balanced scorecard retains a strong
emphasis on financial outcome measures.
• Ultimately, causal paths from all
performance measures should be linked
to financial objectives.
• Failure to link improvement programs
(e.g. TQM, cycle time reduction,
reengineering, and employee
empowerment) results inevitably in
organizations becoming disillusioned
about lack of tangible payoffs.
IHW 2005
Balanced Scorecard
27
The Balanced Scorecard for The Women’s Store Employed in the Experiment
Percent Better
than Target
Measure
Target
Actual
Financial:
1. Sales margins
2. Sales growth per store
3. Inventory turnover
4. Debt-to-assets ratio
60%
15%
6
< 20%
67.02%
16.75%
6.59
18.07%
11.70%
11.67%
9.83%
9.65%
+7%
80%
$30,000
8,000
7.79%
88.44%
$33,090
8,911
11.29%
10.55%
10.30%
11.39%
Internal Process:
1. Brand recognition rating
2. Number of stock-outs
80%
< 3 times
87.60%
2.66
9.50%
3. “Mystery Shopper” audit rating
4. Time to process customer returns
85%
< 4 min.
93.47%
3.54
Learning and Growth:
1. Employee satisfaction
2. Employee suggestions per year
80%
2.5 times
87.96%
2.74
3. Store computerization
4. Hours of training invested in brand managers each year
60%
80 hours
66.24%
89.10
Customer:
1. Price relative to competitors’ price
2. Customer satisfaction rating
3. Sales per square foot of retail space
4. Number of credit card customers per store
11.33%
9.96%
11.50%
9.95%
9.60%
10.40%
11.38%
Metropolitan Bank’s Strategy
• “We must increase our income and revenue by
broadening the services sold to a targeted
group of customers.”
• “We cannot continue only
receiving deposits and
processing checks.
Competitive pressure implies
that we develop and
sell new services such as
mutual funds, credit
cards and financial advice.”
IHW 2005
Balanced Scorecard
29
Metropolitan Bank: Cause and Effect
Financial
Perspective
Increase Return to
Stockholders
Broaden
Revenue Mix
Customer
Perspective
Increase Customer Satisfaction
With Our Products
Understand
Customer
Needs
Develop
New
Products
Cross-Sell
Products
Learning
Perspective
Instill a
Selling Culture
Develop
Selling
Skills
IHW 2005
Access to
Strategic
Information
Balanced Scorecard
Internal Process
Perspective
Align
Personal
Goals
30
Metropolitan Bank’s Balanced Scorecard
Strategic Objectives
Strategic Measures
Learning
Internal Customer
Financial
Lag Indicators
Lead Indicators
 Improve Returns to Stockholders
 Broaden Revenue Mix
 Return on Investment
 Revenue Mix
 Revenue Growth
 Increase Customer Satisfaction
 Knowledgeable People
 Convenient Access
 Superior Service
 Customer Retention
 Depth of Relation (Sale of
Multiple Products to a
Customer)
 Customer Satisfaction
Survey
 Understand Our Customers
 Create Innovative Products
 Cross-Sell Products
 Share of Segment
 Revenue from New
Products
 Cross-Sell Ratio
 Product Development
Cycle
 Hours with Customers
 Instill a Selling Culture
o Build Strategic Information
o Develop Strategic Skills
o Align Incentives
IHW 2005
 Revenue per Employee
 Employee Satisfaction
Survey
Balanced Scorecard
 Strategic Information
Availability
 Strategic Job Coverage
 Personal Goals Alignment
31
Why Do We Need a Balanced Scorecard?
To Implement Business Strategy!
“Business Strategy is now the
single most important issue…
and will remain so for the
next five years”
Business Week
“Less than 10% of
strategies effectively
formulated are effectively
executed”
Fortune
IHW 2005
Balanced Scorecard
32
Scorecard Structure
• Scorecard is very context-specific
 Industry and competitive factors
 Life-cycle of business unit
 Business strategy
• It is important to validate cause-effect
relationships for each individual business.
IHW 2005
Balanced Scorecard
33
To Implement a Balanced Scorecard
The organization must
• Define and develop measures for its
primary strategic objectives.
• Understand how different business
processes contribute to its strategic
objectives.
• Identify the drivers of performance on
strategic objectives.
• Develop a set of measures to monitor
drivers of strategic objectives.
• Communicate its beliefs about how
processes create results.
IHW 2005
Balanced Scorecard
34