“Executing Balanced Scorecard”
FOR COMPETITIVE ADVANTAGE
By
Hemamalini Suresh
Faculty
PSG Institute of Management
© PSG Institute of Management., Mar 2006
All rights reserved. You may make one attributed copy of this material for your own personal use.
For additional information or assistance please contact Hema at (+91) 422-577252 • hemasanjana@yahoo.com • Peelamedu, Coimbatore, TN 641004.
“Executing Balanced Scorecard”- For Competitive Advantage
TABLE OF CONTENTS
1. BALANCED SCORECARD: AN EYE OPENER .................................................................. 3
2. WHAT IS BALANCED SCORECARD? .............................................................................. 4
3. STEPS TO CREATE THE ORGANIZATIONAL BALANCED SCORECARD?......................... 5
4. VISION AND MISSION ................................................................................................... 6
5. DEVELOP AND ALIGN STRATEGIES ............................................................................. 6
6. DEFINE CRITICAL SUCCESS FACTORS ........................................................................ 7
7. CREATE STRATEGY MAP ............................................................................................ 8
8. FORMULATE PERFORMANCE MEASURES AND TARGETS ............................................. 9
9. FORMULATE IMPROVEMENT ACTIONS AND ASSIGN DATA OWNERSHIP ................ 10
10. CONCLUSION ........................................................................................................... 10
11. REFERENCES............................................................................................................ 11
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“Executing Balanced Scorecard”- For Competitive Advantage
1. Balanced Scorecard: An Eye Opener
“Strategy without tactics is the slowest route to victory. Tactics without
strategy is the noise before defeat.” - Sun Tzu
strategy is the difference between organizational success or failure. Excellent Corporate
Executing
management is all about formulating strategy and aligning the overall organization resources for
effective execution. Strategy is possibly the most discussed term on the organizational panorama today
and is a word that seems simple to understand but holds differing meanings to many people. The challenge
of strategy execution is more complex today than ever before. Organizations are facing uncertain highly
competitive markets, an accelerating pace of change, and increased expectations for productivity and
results. For many organizations, these increased demands only lead to greater chaos. However, for a select
few companies, today’s environment leads to great opportunity – as Strategy-Focused Organizations can
focus in on the key drivers of success and execute their strategies for breakthrough results.
Strategy cannot be executed if it cannot be understood, and it cannot be understood if it cannot be
described. This is where the Balanced Scorecard can help. The Balanced Scorecard is a management
methodology that uses a range of performance measures to define business goals and monitor performance
drivers to achieve strategic objectives.
It "uses strategy maps of cause-and-effect linkages to describe how intangible assets get mobilized and
combined with other assets... to create value-creating customer value propositions and desired financial
outcomes."
Scorecards are tools that help remove confusion for employees and aid them to better understand
priorities. It establishes sufficient ownership and accountability. Finally, it measures things that people can
influence. The difference between strategy and operational effectiveness is critical to the deployment of
Balanced Scorecard. What has become crystal clear in recent years is the differentiating competitive
advantage produced when organizations effectively manage and execute their strategy through the use of
the Balanced Scorecard.
The Balanced Scorecard consists of a set of Key Performance Indicators, which represent predictors of
Customer Satisfaction, Operational Performance, Financial Results, and Organizational/Leadership
Effectiveness. Developing and setting effective KPIs can be a lot of hard work to get it right. It requires
long-term commitment and resources. With strategy-linked measures reported through scorecards, the
scorecard immediately explains not only what happened but also where that leads to and why that is
important.
The BSC isn’t just a mixture of key performance indicators that includes financial and non-financial
performance measures. Rather, it’s a system that translates the firm’s vision and strategy into a linked set
of performance measures. These measures must include both outcome measures (the lag indicators), and
the drivers of those outcome measures (the lead indicators).
Strategy maps and scorecards go hand in hand. Once created, they embody the strategic intent of the
organization and communicate to employees and managers both the strategic objectives the organization
intends to meet as well as the critical KPI measures of success for attaining those objectives—be they
strategic, tactical, or operational measures.
This article in a nutshell highlights how the Balanced Scorecard and strategy maps puts strategy – the key
driver of results today – at the center of the management process to achieve competitive advantage.
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“Executing Balanced Scorecard”- For Competitive Advantage
2. What is Balanced Scorecard?
The balanced scorecard (BSC), a technique in strategic management, provides a comprehensive set of
measures used to communicate and evaluate achievement of an organization’s mission and strategy. The
Balanced Scorecard (BSC), first proposed by Robert Kaplan and David Norton, has emerged as an
important strategic management system. The scorecard incorporates four new management processes that
enable managers to link long-term strategic objectives with short-term actions. The first process -translating the vision -- helps the organization build consensus around its vision and strategy. The second
process -- communicating and linking -- facilitates management’s efforts to communicate and link the
firm’s strategy to individual and department goals. The third process -- business planning -- makes it
easier to integrate business and financial plans. The final process -- feedback and learning -- gives an
organization the capacity for strategic learning. The Balanced Scorecard provides executives with a
comprehensive framework that translates a company’s vision and strategy into a coherent set of
performance measures.
The balanced scorecard suggests that we view the organization from four perspectives, and to develop
metrics, collect data and analyze it relative to each of the four perspectives. Organizations can achieve this
"balance" by establishing measures in four quadrants (which can be weighted differently based on
organization priorities) that reflect key objectives.
1. Customers--measures performance against expectations (e.g., satisfaction, retention, acquisition,
and profitability).
2. Financial--measures economic consequences of actions already taken (e.g., income, return on
equity, return on investment, growth, and cash flow).
3. Internal--measures effectiveness, adaptability, and efficiency of internal processes. Such measures
may identify a need for new processes.
4. Innovation and learning--measures employee skills, information exchange, and organizational
procedure.
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“Executing Balanced Scorecard”- For Competitive Advantage
3. Steps to create the Organizational Balanced Scorecard?
Identify Vision and Mission
Develop & Align Strategies
Define Critical Success Factors
Create Strategy Map
Formulate Performance
Measures and Targets
Formulate improvement
Actions and Assign Data
ownership
" The dogmas of the quiet past are inadequate to the stormy
present. The occasion is piled high with difficulty, and we must
rise to the occasion. As our case is new, so we must think anew and
act anew. "
-- Abraham Lincoln
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© 2006 PSG Institute of Management., Peelamedu• Coimbatore, TamilNadu • 641 004• India
“Executing Balanced Scorecard”- For Competitive Advantage
4. Vision and Mission
The Balanced Scorecard process starts with determining or updating the mission and vision, because it is
advisable to clarify the shared view of the organisation’s future direction right from the start.
The mission and vision should reflect the organisation’s values. An organisation’s basic task and purpose
are often expressed in the form of a mission. The organizational mission contains an organization’s
identity and indicates its reason for existing.The mission involves what is perceived as being a shared
view of the organisation’s underlying principle: why do we exist, what we are doing here together For
whom do we exist, Who are our most important stakeholders. The ‘mission statements’ if effectively
articulated can fit the employees of the organization in the right place and steer them towards the common
goal.
A vision is perceived as the most ambitious image where the organisation wants to be in the future. The
vision should be challenging, but not impossible. A good vision provides clear signposts and, by being
clear, facilitates the choice of indicators linked to the strategy. The vision clearly says where are we going,
how do we envision the future, where do we want to be.
Good business leaders create a vision, articulate the vision,
passionately own the vision, and relentlessly drive it to
completion.”
-- Jack Welch
5. Develop and Align Strategies
Every organization should pursue a unique strategy, based on its interpretation of the external and internal
situation. The strategy should involve a view of future challenges in the operating environment and the
sector. This is a long-term view of the objectives and means required to achieve the vision, mission and
values. As well as being an organization’s choice of direction, the strategy can also be seen as being a
procedure aiming to allocate resources to the right targets, prevent threats and make use of emerging
opportunities in line with the approved vision and specific objectives.
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“Executing Balanced Scorecard”- For Competitive Advantage
Companies today need to make abrupt and wholesale changes to corporate strategy to remain viable,
which wasn't the case in the past.
In a Balanced Scorecard process, goals and objectives are set at management group level, after
determining analyses and policies, and are then filtered down to operations or processes, teams and, where
necessary, all the way down to individual level. The effectiveness of the strategy will ripple through all
departments, which can then be used to compare the actual results with expectations.
6. Define Critical Success Factors
Critical Success Factors are elements that are vital for a strategy to be successful.Organizational critical
success factorsw are identified from the organizational vision. A company may use the critical success
factor method as a means for identifying the important elements of their success.They are the factors that
are related to the core competencies, which allow the organization to stand out in the market. A CSF is
some feature of the internal or external environment of an organization that has a major influence on
achieving the organization’s aim. According to John F. Rockart in the Harvard Business Review:
"Critical success factors for any business are the limited number of areas in which results, if they are
satisfactory, will ensure successful competitive performance for the organization."
" For any organization to compete successfully in today’s market,
it must focus on building not only from the outside but from the
inside as well. "
-- David Ulrich and Dale Lake
Critical success factors are both internal and external. For example, comparison of budgets to actual would
be internal while percent of market share would be external. One way to identify critical success factors is
to go through a strategic planning process. A second or complimentary approach is to conduct competitive
intelligence research. Look at the success factors of your competition. Collectively, you will need to
develop a set of critical success factors which serves as the foundation for your performance measurement
system. Consequently, critical success factors are an important link between strategic plans and
performance measurement systems.
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© 2006 PSG Institute of Management., Peelamedu• Coimbatore, TamilNadu • 641 004• India
“Executing Balanced Scorecard”- For Competitive Advantage
7. Create Strategy Map
Strategy maps and scorecards go hand in hand. A strategy map is a visual representation of an
organization's strategy and the processes and systems necessary to implement that strategy. A strategy
map will show employees how their jobs are linked to the organization's overall objectives. The strategy
map is used to develop the Balanced Scorecard A strategy map that describes how an organization creates
value by connecting strategic objectives in explicit cause and effect relationship with each other in the
four BSC objectives (financial, customer, processes, learning and growth). A way to think of this is the
organization’s vision and mission statement answer the questions, “Where do we want to go?” and “Why
are we here?” whereas the strategy map and scorecard answer, “How are we going to get there?” Strategy
map is the key to improve the business performance. . Designing strategy map and creating balanced
scorecard performance metrics that tightly link critical success factors to strategic goals. With a properly
cascaded strategy map, changes in strategy can quickly be mirrored in the measurement system. The
strategy map example from Southwest Airlines’ Balanced Scorecard is as follows:
Strategy Map: Diagram of the
cause-and-effect relationships
between strategic objectives
Strategic Theme:
Operating Efficiency
Financial
Profitability
Increase
Revenue
Lower
Costs
Customer
Flight
is on time
Lowest
prices
Internal
Fast ground
turnaround
Learning
Ground crew
alignment
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“Executing Balanced Scorecard”- For Competitive Advantage
“Objectives are not fate; they are direction. They are not
commands; they are commitments. They do not determine the
future; they are means to mobilize the resources and energies of
the business for the making of the future.”
--Peter F. Drucker
8. Formulate performance measures and targets
Everyone recognize the saying “What you measure is what you get.” Scorecards make it a reality.
Measures drive behavior! Selecting appropriate performance measures is more art than science. A
performance measure is some objective measurement of an aspect of a business that is critical to the
success of that business. Such performance measures are a component of the conceptual scorecard for a
business and can be associated with a number of different business activities. Through continuous
reporting of the actual scores against the KPI targets, an organization is kept on track. The scorecard’s
critical role is that it puts the measures (key performance indicators, or KPIs) in the context of the
strategy. To express the strategy in measurable objectives, the management should balance between
leading and lagging indicators to progress toward the corporate vision. A leading indicator is a measure
that has a causal effect on time-lagging indicators. Leading indicators are valuable to track because merely
sanctioning and reporting them serves to drive behavior—which is the intent. Think of leading indicators
as cumulatively adding power to the alignment and achievement of the overarching strategic objective.
The results of each indicator must be compared to a target. The performance against each measure should
be keyed to challenging but attainable targets. Through continuous reporting of the actual scores against
the KPI targets, an organization is kept on track. To continue with the example from Southwest Airlines’
Balanced Scorecard is as follows:
Statement of what
strategy must
achieve and what’s
critical to its
success
Objectives
• Fast ground
turnaround
How success in
achieving the
strategy will be
measured and
tracked
Measurement
• On Ground Time
• On-Time
Departure
The level of
performance or rate
of improvement
needed
Target
• 30 Minutes
• 90%
“You can't manage what you can't measure – Drucker”
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“Executing Balanced Scorecard”- For Competitive Advantage
9. Formulate Improvement Actions and Assign Data Ownership
After leading and lagging measures are ideally, selected according to the levels of importance of the
strategic objectives corresponding improvement actions plans should be designed properly. While many
organizations have some idea what is important to do, they rarely take the time to plot out who is
responsible, what are the expected results, when the results should be expected, and how will the results
will be achieved. Responsibilities of Data ownership should be properly cascaded down the level and
action plans for achieving targets set should be defined. Active ownership and accountability are critical to
making sure an organization is ready for the changes that accompany executing the Balanced Scorecard.
The forecaster of scorecard success or failure is the ownership of the employees aligned with
improvement actions and thereby aligns to the vision and mission of the organization. The scorecard can
be a powerful change management tool when everyone in the organization feels a sense of ownership and
sees its value.Measurement is the key for the Balanced Scorecard, and Data Ownership down the levels is
the driver of strategy - and ultimately, tool for achievement of Competitive Advantage for the
organization.
“The companies that survive longest are the one’s work out what
they uniquely can give to the world –not just growth or money but
their excellence, their respect for others, or their ability to make
people happy. "
-- Charles Handy
10. Conclusion
The balanced scorecard isn't a one-time activity. It's an ongoing process that begins with defining shortand long-term strategies and deciding what business processes are critical to achieving the goals set by the
organization. The Balanced Scorecard provides an opportunity to open the door to more strategy-focused
management as it explicitly focuses on linkages among business decisions and outcomes; it is intended to
guide strategy development, implementation, and communication. Organizations can move beyond the
traditional practice of focusing on backward-looking financial results by using scorecards and strategy
maps to focus on their organizations' strategic objectives in the areas of learning, growth, innovation and
process. They can focus on leading indicators in all the areas and that ultimately result in the
organization's financial performance. A united and sustained performance is a challenging art of
management. Balanced Scorecard helps in accomplishing this goal for the organizations properly
executing it there by to take proactive lead with Competitive Advantage over their competitors.
“Hence scorecards make strategy everyone’s job.”
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PSG Institute of Management Articles.
© 2006 PSG Institute of Management., Peelamedu• Coimbatore, TamilNadu • 641 004• India
“Executing Balanced Scorecard”- For Competitive Advantage
11. References
1. Dr.Hubert K.Rampersad, Total Performance Scorecard,Butterworth-Heinemann, 2003
2. Nils-Goran Olve,Carl-Johan Petri, Jan Roy, Sofie roy, Making Scorecards Actionable, John Wiley
& Sons Inc,2003
3. Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action;
Harvard Business School Press; 1996.
4. Robert S. Kaplan and David P. Norton, The strategy focused organization, Harvard Business
School Press,2001
5. Kaplan, R.S and Norton, D.P ,“Having trouble with your strategy? Then map it” Harvard Business
Review, September-October, pp167-176,2000
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© 2006 PSG Institute of Management., Peelamedu• Coimbatore, TamilNadu • 641 004• India