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  • 1. The BALANCED SCORECARD Robert S. Kaplan Harvard Business School© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 1
  • 2. What Is a Balanced Scorecard? A Measurement System? A Management System? A Management Philosophy?© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 2
  • 3. Translating Vision and Strategy: Four Perspectives FINANCIAL “To succeed Objectives Measures Targets Initiatives financially, how should we appear to our shareholders?” CUSTOMER INTERNAL BUSINESS PROCESS“To achieve our Objectives Measures Targets Initiatives “To satisfy our Objectives Measures Targets Initiativesvision, how Vision and shareholdersshould we and customers,appear to our Strategy what businesscustomers?” processes must we excel at?” LEARNING AND GROWTH “To achieve our Objectives Measures Targets Initiatives vision, how will we sustain our ability to change and improve?” © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 3
  • 4. The Balanced Scorecard Focuses on Factors that Create Long-Term Value• Traditional financial reports look backward – Reflect only the past: spending incurred and revenues earned – Do not measure creation or destruction of future economic value• The Balanced Scorecard identifies the factors that create long-term economic value in an organization, for example: – Customer Focus: satisfy, retain and acquire customers in targeted segments – Business Processes: deliver the value proposition to targeted customers • innovative products and services • high-quality, flexible, and responsive operating processes • excellent post-sales support Customers – Organizational Learning & Growth: • develop skilled, motivated employees; • provide access to strategic information Processes People • align individuals and teams to business unit objectives .© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 4
  • 5. The Four Perspectives Apply to Mission Driven As Well As Profit Driven Organizations Profit Driven Mission Driven• What must we do to satisfy our Financial Perspective • What must we do to satisfy our financial shareholders? contributors? • What are our fiscal obligations?• What do our customers expect from Customer Perspective • Who is our customer? us? • What do our customers expect from us?• What internal processes must we Internal Perspective • What internal processes must we excel excel at to satisfy our shareholder and at to satisfy our fiscal obligations, our customer? customers and the requirements of our mission?• How must our people learn and Learning & Growth • How must our people learn and develop develop skills to respond to these and Perspective skills to respond to these and future future challenges? challenges? Answering these questions is the first step to develop a Balanced Scorecard © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 5
  • 6. The Balanced Scorecard Framework Is Readily Adapted to Non-Profit and Government Organizations The Mission "If we succeed, how ”To achieve our vision, will we look to our how must we look to financial donors?” our customers?” “To satisfy our customers, financial donors and mission, what business processes must we excel at?" “To achieve our vision, how must our people learn, communicate, and work together?” The Mission, rather than the financial / shareholder objectives, drives the organization’s strategy© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 6
  • 7. The City of Charlotte Corporate-level Linkage ModelCustomer Perspective Availability of Increase Improve Maintain Promote Reduce Strengthen Safe, Perception Service Competitive Economic Crime Neighborhoods Convenient of Safety Quality Tax Rates Opportunity TransportationFinancial Accountability Perspective Expand Maintain Maximize Grow Tax Non-City AAA Benefit/Cost Base Funding RatingInternal Process Perspective Promote Secure Increase Community Streamline Increase Promote Funding/ Improve Positive Based Customer Infrastructure Business Service Productivity Contacts Problem Interactions Capacity Mix Partners SolvingLearning and GrowthPerspective Enhance Achieve Knowledge Close Positive Management Skills Gap Employee Capabilities Climate © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 7
  • 8. Why are Companies Adopting a Balanced Scorecard?• Change current customers” The Revenue Growth Strategy “Improve stability by broadeni ng the sources of rev enue fro m Increase Customer Confidenc e Our Advice Broaden Revenue Mix in Financi al Improve Returns Improve Operating Efficiency The Productivity Strategy “Improve operating efficiency by s hifting c ustomers to more cost- effective channels of distribution” Increase Customer Satisfaction Through Superi or Execution Financial Perspective Customer Perspective Internal Perspective Understand Develop Cross-Sel l Shift to Provide Mini mize Customer New the Product Appropriate Rapid ProblemsFormulate and communicate a new strategy Segments Products Line Channel Response Increase Employee Productivity Learning Perspective Develop Access to Align Strategic Strategic Personal Skills Information Goalsfor a more competitive environment•GrowthIncrease revenues, not just cut costs andenhance productivity• ImplementFrom the 10 to the 10,000. Every employeeimplements the new growth strategy in theirday-to-day operations © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 8
  • 9. Why Do We Need a Balanced Scorecard? To Implement Business Strategy!“Business Strategy is now thesingle most important issue…and will remain so for the nextfive years” Business Week “Less than 10% of strategies effectively formulated are effectively executed” Fortune© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 9
  • 10. Our Research Has Identified Four Barriers to Strategic Implementation The Vision Barrier Only 5% of the work force understands the strategy The People Barrier The Management Barrier 9 of 10 companies 85% of executive teams spend less Only 25% of managers have incentives linked to strategy fail to execute than one hour per month strategy discussing strategy 60% of organizations don’t link budgets to strategy The Resource Barrier Today’s Management Systems Were Designed to Meet The Needs of Stable Industrial Organizations That We’re Changing Incrementally You Can’t Manage Strategy With a System Designed for Tactics© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 10
  • 11. Balanced Scorecard “Early Adaptors” Have Executed Their Strategies Reliably and Rapidly 1995 #1 in profitabilityMobil 1993 #6 in profitability 1996 #1 in profitability(USM&R) 1997 #1 in profitability Profit Stock $275M loss 1994 $15M $74 1993 1995 $60M $114 Stock Price = $59 1996 $80M $146 Property & Casualty 1997 $98M $205 #1 in growth Losing 1993 1996 and moneyBrown & Root Engineering profitability(Rockwater) 1994 Profits = $8x 1993 Profits = $x 1995 Profits = $13x Retail Bank 1996 Profits = $19x© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 11
  • 12. The BSC “Early Adaptors” Have Executed Their Strategies Reliably and Rapidly Beat the Odds Fast 9 of 10 companies 2 to 3 years to achieve fail to execute their breakthrough results strategies The Solution Was Already There • The BSC helped create focus and alignment to unlock the organization’s “hidden assets”© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 12
  • 13. Question: How can complex organizations Answer: achieve results like this in such short periods of time? Alignment! The Balanced Scorecard process allows an organization to align and focus all its resources on its strategy BUSINESS UNITS EXECUTIVE TEAM STRATEGY HUMAN RESOURCES INFORMATION TECHNOLOGY BUDGETS AND CAPITAL INVESTMENTS© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 13
  • 14. How Do They Do It? The Seven Ingredients of Highly Successful Balanced Scorecard Programs 1. A Process to Mobilize the Organization and Lead Ongoing Change 2. Scorecards That Describe the Strategy 3. Linking Scorecard to Create an Organization Alignment 4. Continuous Communication to Empower the Workforce 5. Aligning Personal Goals, Incentives, and Competencies With the Strategy 6. Aligning Resources, Budgets and Initiatives With the Strategy 7. A Feedback Process That Encourages Learning and Experience Sharing© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 14
  • 15. The Ingredients of Highly Successful Balanced Scorecard Programs1. Leadership From the Top 4. Make Strategy a Continuous – Create the Climate for Change Process – Create a Common Focus for – Strategic Feedback That Encourages Change Activities Learning – Rationalize and Align the Formulate – Executive Teams Manage Strategic Organization Themes – Testing Hypotheses, Adapting, and Learning Communicate STRATEGY Navigate2. Make Strategy Everyone’s Job 3. Unlock and Focus Hidden Assets – Comprehensive Communication to Execute – Reengineer Work Processes Create Awareness – Create Knowledge Sharing Networks – Align Goals and Incentives – Integrate Budgeting with Strategic Planning – Align Resources and Initiatives © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 15
  • 16. A Good Balanced Scorecard Tells the Story of Your Strategy • Every measure is part of a chain of cause and effect linkages • A balance exists between outcome measures and the performance drivers or desired outcomes© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 16
  • 17. The Problem: Most of Today’s Feedback Systems Are “Controls” Oriented Variance Detected Correction Applied Management Feedback & Control Loop© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 17
  • 18. Strategic Learning – Some Basic Concepts… Replacing the budget with the Balanced Scorecard is a step in the right direction… Pioneer’s Balanced Scorecard FINANCIAL Strategic Objectives Strategic Measures  Financially Strong  Return on Capital Employed   CUST Delight the Consumer Mystery Shopper Rating  Win-Win Relationship  Dealer / Pioneer Gross Profit Split  Safe & Reliable  Manufacturing Reliability Index  Days Away from Work Rate INTERNAL  Competitive Supplier  Laid Down Cost vs. Best corrections  Good Neighbor Competitive Ratable Supply  Environmental Index result  Quality  Quality Index L&G  Motivated & Prepared  Strategic Competency Availability Performance Initiatives & Programs input output It creates strategic focus but not strategic learning© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 18
  • 19. Strategic Feedback Creates Strategic Learning The Strategy Improve Returns Financial Improve Perspective FOLLOW-UP Broaden Operating Revenue Mix Efficiency Increase Customer Confidence in Our Financial Advice Increase Customer Satisfaction Through Superior Execution Customer Perspective ACTION Internal “Closing the loop” Perspective Understand Develop New Cross-Sell the Shift to Provide Minimize Customer Products Product Line Appropriate Rapid Problems Segments Channel Response update Increase Employee Productivity Learning Perspective THE the Develop Strategic Skills Access to Strategic Information Align Personal Goals MANAGEMENT strategy strategic learning MEETING loop “Team Problem Pioneer’s Balanced Scorecard Solving” FINANCIAL Strategic Objectives Strategic Measures  Financially Strong  Return on Capital Employed  Delight the Consumer  Mystery Shopper Rating CUST  Win-Win Relationship  Dealer / Pioneer Gross Profit Split  Safe & Reliable  Manufacturing Reliability Index  Days Away from Work Rate INTERNAL  Competitive Supplier  Laid Down Cost vs. Best Competitive Ratable Supply results  Good Neighbor  Environmental Index INSIGHT  Quality  Quality Index  Motivated & Prepared  Strategic Competency Availability HARVESTING L&G reallocate “Testing hypotheses and capturing priorities operational control loop learning” Performance dialog Initiatives & Programs© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 19
  • 20. A New Structure for Corporate Governance– Executive Team Takes Responsibility for Managing the Strategic Cross-Functional Themes Case Study: Board of Directors Telecomm CEO Strategic Themes New Business Professional Strategic Business & Process Development Management Growth Council Roundtable System Traditional Organization Units Commercial Retail Strategic Human COO CFO Services Services Planning Resources© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 20
  • 21. The Ingredients of Highly Successful Balanced Scorecard Programs1. Leadership From the Top 4. Make Strategy a Continuous – Create the Climate for Change Process – Create a Common Focus for – Strategic Feedback That Encourages Change Activities Learning – Rationalize and Align the Formulate – Executive Teams Manage Strategic Organization Themes – Testing Hypotheses, Adapting, and Learning Communicate STRATEGY Navigate2. Make Strategy Everyone’s Job 3. Unlock and Focus Hidden Assets – Comprehensive Communication to Execute – Reengineer Work Processes Create Awareness – Create Knowledge Sharing Networks – Align Goals and Incentives – Integrate Budgeting with Strategic Planning – Align Resources and Initiatives © 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 21
  • 22. Not all Environments are Appropriate for a Balanced Scorecard • Balanced Scorecard must be driven from the top: – CEO/COO as sponsor – Executive leadership team commitment • A clear sense of purpose is required to: – Drive change – Clarify and gain consensus about strategy – Build a senior executive team – Focus the organization: align programs and investments – Integrate cross-functionally – Educate and empower the organization • The dynamics of the senior executive team will determine whether the Balanced Scorecard becomes a strategic management system© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 22
  • 23. Key Pitfalls to Avoid Process Philosophy• Middle management task force • Measurement to control; not to• Not driven by senior executive communicate team • Management dictating actions• Only one or a few individuals vs. employee improvisation to involved achieve desired outcomes• Too long a development • For management only, not process (allowing the “best” to shared with all employees be the enemy of the “good”)• Delay introduction because of missing measurements• Static not dynamic process• Treating the BSC as an EIS© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 23
  • 24. THE BALANCED SCORECARD MANAGEMENT SYSTEM Significant results can be achieved in relatively short periods of time... STRATEGY Implement a framework to align and focus the organization from top to bottom on its strategy ALIGNMENT Identify the related key change initiatives required KNOWLEDGE BASE INSIGHTS to realize the strategy and mobilize the PERFORMANCE PERFORMANCE organization LEVERAGE Create feedback processes at all levels to evaluate progress against strategy, monitor and LEARNING manage issues and priorities, and measure performance and contribution to the business.© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 24
  • 25. Balanced Scorecard ReferencesBook: The Balanced Scorecard: Measures that Drive PerformanceHBR Articles (Jan-Feb. „92; Sept-Oct „93; Jan-Feb „96)Cases: (Mobil, Chemical Bank, Charlotte, Citibank, Wells Fargo)Videos: Measuring Corporate PerformanceCD-ROM Simulation: “Balancing Your Corporate Scorecard”• Phone: (800) 668-6780 or (617) 496-1449• Fax: (617) 495-6985• Internet: www.hbsp.harvard.edu© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 25
  • 26. For Further Information Visit Our Website Our Mission: “To facilitate the worldwide awareness, use, enhancement and integrity of the Balanced Scorecard as a value-added management process” www.bscol.comTel: (USA) 781.259.3737 Publications Research Training Conferences Networking Implementation© 1999 The Balanced Scorecard Collaborative and Robert S. Kaplan. All rights reserved. 26

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