B sc dari kun m

No.45 April 1, 2002

Building Performance Measurement
Systems with the
Balanced Scorecard Approach

Toru MORISAWA

NRI Papers No. 45
April 1, 2002

Building Performance Measurement Systems
with the Balanced Scorecard Approach
Toru MORISAWA

I Using the Balanced Scorecard to Effectively Achieve Value-Based Management
1 What is the Balanced Scorecard (BSC)?
2 The Essence of the BSC
3 Penetration State for BSC in Japanese Companies
II Recent BSC Evolution
1 Transition from the First to the Third Generation
2 What is a Strategy Map?
III Changing the Performance Measurement Systems: The Kansai Electric Power
Example
1 Profile of the Company and its Organization
2 Background to the Implementation of the Performance Linked Contract
3 Evaluation by Outside Consultants
4 Building a Strategy Map
5 Results of Reform and Future Issues
IV Requirements for Successfully Reforming Performance Measurement Systems
Using the BSC
1 Selecting a Solution by Understanding the Total Picture of Management
Issues
2 Commitment by Management to Realize Reform
3 A Cross-function Team Consisting of Planning and Personnel Functions
4 Expectations for Future Reform at Kansai Electric Power

T he Balanced Scorecard (BSC) methodology has come in for increased attention and grow-
ing popularity among Japanese companies. Indeed, the fact that it has been applied to
reforms undertaken by a large number of companies during the past several years has con-
tributed to the rapid development of the BSC concept itself. For example, Kansai Electric Power
Co., Inc. has been implementing a PDCA (Plan, Do, Check and Action) management cycle to
increase the value of the company through a system of what is called a “Performance Linked
Contract” between division managers and senior officials covering a diverse set of performance
objectives. Concurrently, the company is also promoting reform by changing its organizational
climate through the joint efforts of division managers and top executives. This example by
Kansai Electric Power is bringing broader attention to the kind of reform that takes into account
the third generation of BSC thinking, and which is advocated by the author and others in this
field.
According to the results of BSC consultations by NRI (Nomura Research Institute, Ltd.), the
requirements for successful reform can be summarized in the following three points: (1)
adopting a problem-solving approach that does not rely on “tools”; (2) ensuring a commitment
by management; and (3) creating a cross-functional team that incorporates such functions as
corporate planning and personnel administration.

Copyright 2002 by Nomura Research Institute, Ltd. 1

NRI Papers No. 45 April 1, 2002

The approach in which control is attempted through
I Using the Balanced an analysis of the numerical elements in financial
Scorecard to Effectively Achieve performance indicators (e.g., ROE is defined as the
product of the ratio of profit to sales, the asset turnover
Value-Based Management ratio and financial leverage, and each is analyzed
according to its constituent elements) by the tools (such
1 What is the Balanced Scorecard (BSC)? as the ROE and EVA “trees”) often used in promoting
value-based management is likewise totally
Many scholars and observers of the corporate scene insufficient. As the elements included in these trees are
have long advocated value-based management. This still indices of short-term results, they represent only
refers to managing a business to increase corporate sluggish financial management even if they are
value by considering financial indicators that reflect the realized.
cost of capital for the entire company—such as ROE Essentially, those who have the real responsibility
(return on equity) and EVA (economic value added)— and authority for financial performance such as ROE
in addition to the more traditional indicators such as and EVA are limited to only a handful of executives at
financial and accounting profits. But there are two the highest level of the organization. Most supervisors
major barriers that need to be overcome before man- and general employees are responsible for only a part
agement with the ultimate objective of increasing of a firm’s financial performances (such as sales, costs
corporate value can permeate the smallest units of an or inventory levels). Moreover, evaluating the
organization and affect the daily activities of its performance of administrative and support departments
employees. for which it is difficult to quantify numerical
The first obstacle is the lack of sound foundations and achievements cannot be made on the basis of financial
the limits of control if management is based on financial indicators alone.
indicators only. This is because current financial The second barrier is that general employees have
performance are essentially no more than the outcomes only a limited understanding of such concepts as the
of a number of business activities carried out in the past. cost of capital and corporate value. Regardless of what-
Hence pursuing results alone is nothing but reactive ever instructions they receive to “improve EVA,” they
management. can rarely understand how this relates to their own

Figure 1. Basic Concept of the Balanced Scorecard

Financial

Objectives

“To succeed financially, Measures
how should we appear
to our shareholders?” Targets

Initiatives

Customer Internal Business Process

Objectives Objectives
Vision “To satisfy our
“To achieve our vision, Measures shareholders and Measures
how should we appear
and
customers, what
to our customers?” Targets
Strategy business processes Targets
must we excel at?”
Initiatives Initiatives

Learning and Growth

Objectives

“To achieve our vision, Measures
how will we sustain our
ability to change and Targets
improve?”
Initiatives

Source: Prepared by NRI based on Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard
Business Review, January and February 1996.

Building Performance Measurement Systems with the Balanced Scorecard Approach



work and what actions they must take to help achieve the BSC approach on the basis of that experience can
such goals. To identify improvements in activities and be summarized in five points (see Figure 2):
operations that will lead to an increase in EVA, it is (1) Achieving a balance among short-term, medium-
necessary to create a link between final financial per- term and long-term management objectives through
formance and the daily performance indicators of a diverse measurement of performances.
general employees. (2) Creating a sense of understanding by establishing
One solution to these problems is the business man- non-financial quantitative indicators (a process
agement method called the Balanced Scorecard (BSC), index) other than financial indicators.
which was developed in the early 1990s by Professor (3) Eliminating vagueness by keeping to quantitative
Robert S. Kaplan of the Harvard Business School and indicators.
Dr. David P. Norton. While the ultimate objective of (4) Promoting organizational learning through a
the BSC approach focuses on financial performance repeated cycle of hypothesis verification (i.e.,
(i.e., the financial perspective), it broadly defines “per- hypothesis at the start of the term, correction at the
formance” as diverse non-financial outcomes such as end of a term, and feedback for the next term’s
the customer’s perspective, the internal perspective, plan).
and the learning and growth perspective (see Figure 1). (5) Providing a common strategic communication
Stable financial performances in the medium to longer platform linking the heads and members of the
term can be expected by means of a thorough quantifi- organization.
cation of indicators showing the degree to which
objectives for each organizational unit have been The first point reflects the definition of the BSC con-
accomplished and effective communication established cept itself, and one that was clearly asserted by
with the smallest units within the organization. In addi- Professor Kaplan. Meanwhile, the second emphasizes
tion, this enables employees to recognize their that the results of important efforts leading to future
objectives in relation to the accomplishment of the final profits should be seen as a “performance” by expand-
financial performance, and allows them to identify ing the over-simplified interpretation of performance
effective actions for increasing the corporate value. based solely on profit. Through this kind of diverse
interpretation of organizational performance, the per-
2 The Essence of the BSC formance of support departments and cost centers that
was difficult to measure in the past can be clearly
In the past several years, NRI has supported the intro- defined.
duction of the BSC framework at more than 20 The third point indicates that not all indicators used
Japanese companies. What we consider the essence of to measure performance necessarily need be financial

Figure 2. Essential Elements of the BSC

Performance measurement, control index
Strategic objectives
Performance indicators Leading indicators

Financial
“Management “Key performance “Operational
(1) Short-term, Customers measures” that can indicators” measures” (3) “Quantification”
medium-term, be understood by used to determine understandable by of all measures
and long-term Internal heads of organizational an organization’s
balance business processes organizations performance members

Learning and Growth

(2) Creation of a sense
of understanding based
on non-financial and
quantitative indicators

Head of the (5) Common strategic Members of the
organization communication platform organization

(4) “Organizational learning” by applying
the hypothesis verification cycle

Source: Nomura Research Institute.




indicators, but they do all need to be quantifiable. This work process, and in upgrading the skills of the
makes it possible to avoid the establishment of organization’s members.
qualitative and vague objectives such as “Tackle XXX In the past, communication of this type was often
to the full extent” or “Strive for XXX.” The implicit or limited to informal occasions at Japanese
performance measurement system as outlined in the companies—daily conversations, chats while standing
BSC are derived from the following perception: “What around the tea wagon, and “nomunication”(socializing
kind of measures can we adopt to evaluate whether or while having a drink). While the BSC concept does not
not our performance was fully achieved?” totally deny this business climate itself, it supplies the
In addition, the fourth point shows the directional data for more effective communication. This last point
flow of a series of links (the relationship of cause and means that the BSC framework meets the past adminis-
effect) such as the leading indicators based on trative style and climate of the Japanese workplace and
performance indicators that are derived from strategic is readily acceptable.
objectives. The repetition of the cycle of hypothesis
verification for these links is nothing but the building- 3 Penetration State for BSC in Japanese
up of organizational know-how by finding key Companies
performance indicators that are most effective in
measuring the performance of that organization. In The BSC methodology has now started to make
other words, this aspect of the BSC is knowledge inroads among typical European and American compa-
management for organizational achievement, which nies as well as a number of Japanese companies. Ricoh
itself has been attracting attention recently. Co., Ltd., Takara Shuzo Co., Ltd., Itoham Foods Inc., and
What is shown in the fifth point explicitly promotes Kansai Electric Power Co., Inc. have also been cited in a
communication concerning performance that has Japanese study for their effective use of the framework
traditionally been implicit between the head and (see Shinichi Shibayama, et al, Jissen [Practical]
members of the organization in Japanese companies. Balanced Scorecard, Nihon Keizai Shimbun, Inc., 2001).
Strategic objectives are most often described in words In addition to the firms above, the BSC approaches intro-
and expressions used by executives, which are often duced by Skandia Life Insurance Co. (Japan), Ltd.,
incomprehensible at the worker level. For their part, Philips Japan, Ltd. NCR Japan, Ltd., Oki Electric
workers clearly understand the details involved in daily Industry Co., Ltd. and Nippon Becton Dickinson Co.,
work processes and operations at the workplace. Ltd., etc., have also been widely reported in the media.
However, the head of the organization frequently lacks Until several years ago, there was considerable
the same level of understanding as the members. If speculation and concern as to whether a framework
people at these different layers of management can such as the BSC that emphasizes “quantification and a
communicate explicitly on the progress of clear statement” could be accepted, and whether
organizational performance and the hypothesis of the measures of performance and leading indicators could
link on an identical BSC, this would be very effective be verified quantitatively at Japanese companies. But it
in terms of achieving the desired performance, is now apparent that the stage of research and
enabling the head of an organization to understand the examination has been completed and that Japanese

Figure 3. BSC Evolution

First Generation Second Generation Third Generation

Time

BSC as a system for BSC as a management BSC as a framework for
evaluating performance system organizational change

Major constituent
elements
• Performance measures • Organizational learning at the • Steps for change in
• Breakdown of strategy end of a term organization
• Four perspectives • Identifying and solving • Strategy map
• Strategic objectives, operational problems • Strategy pattern and stream
performance indicators, + • Feedback for the next term’s plan + • Strategic communication
leading indicators, • Building-up organizational • Integration of budget and
key performance indicators knowledge personnel plan
(KPI) • Company-wide PDCA • Change of organizational
• Performance-linked management cycle climate
compensation

Note: PDCA = Plan, Do, Check and Action.
Source: Nomura Research Institute.




Figure 4. Mobil NAM&R’s Strategy Map

Increase ROCE to 12%
Revenue Growth Strategy IROCE Productivity Strategy
INet Margin (vs. industry)
Financial Increase Customer
Perspectives New Sources of Become Industry Maximum Use of
Nongasoline Revenue Profitability through
Cents Leader Existing Assets
Premium Brands
INongasoline Revenue IVolume vs. Industry ICash Expense
ICash Flow
and Margin IPremium Ratio (Cost per Gallon) vs. Industry

“Delight the Consumer” “Win-Win Dealer Relations”
Basic Differentiators
IClean
Customer ISafe Friendly, More Consumer Help Develop
Perspective IQuality Speedy Purchase Helpful Employees Recognize Loyalty
Products Business Skills
Product
ITrusted Brand

IMystery Shopper Rating IShare of Segment IDealer Profit Growth IDealer Satisfaction

“Build the Franchise” “Increase Customer Value” “Achieve Operational Excellence” “Be a Good Neighbor”

Create
Understand Best-in-Class Improve Hardware Improve Inventory Improve
Nongasoline
Consumer Franchise Performance Management Environmental,
Products and
Segments Teams IInventory Health and
Internal Services IYield Gap Levels IRun-Out Rate Safety
Perspective IUnplanned Downtime
INew Product ROI IShare of Target IDealer Quality
Rating Industry IEnvironmental
INew Product Segment Cost Leader Incidents
Acceptance Rate On Spec, On time
IActivity Cost vs. ISafety Incidents
IPerfect Orders Competition

A Motivated and Prepared Workforce
Climate for Action Competencies Technology
Learning
and • Functional Excellence
• Aligned • Process Improvement
Growth • Leadership Skills
• Personal Growth • Y2K
Perspective • Integrated View

IPersonal Scorecard
IEmployee Feedback IStrategic Skill Coverage Ratio ISystems Milestones

Notes: ABC = activity-based costing; QCD = quality, cost, and delivery; ROCE = return on capital employed; ROI = return on investment, Y2K = year 2000
problem.
Source: Prepared by NRI based on the data of Professor Robert S. Kaplan.

companies have already entered the phase of putting “tool for performance measurement.” Namely, the BSC
BSC methodologies into actual practice. Moreover, a was seen as a method to recognize and correctly
Japanese-type BSC model is starting to emerge. measure the performance of an organization. Calling
this the BSC’s first generation, its important constituent
elements include the breakdown of a strategy along
II Recent BSC Evolution four perspectives (i.e., financial, customer, internal, and
learning and growth), strategic objectives, performance
1 Transition from the First to the Third indicators, leading indicators, key performance
Generation indicators, and a compensation system linked to
performance, etc. The BSC of this generation took the
Since its development in the early 1990s, the BSC most fundamental form, and needed to undergo a
concept has been verified from a number of different transition in moving to the next stage.
angles. As it has been put into practice, it has But we do know that the first generation is only one
sometimes been improved by managers in various facet of the BSC. In fact, many companies that
industries as well as by consultants and management introduced the BSC methodology have started to realize
scholars. This process has left a clear trail marking the that the method demonstrates not only the effect of the
major evolution in BSC applications, as outlined in the framework, but also includes additional functions to
framework shown in Figure 3. correctly evaluate the achievement of specific
When the BSC concept was developed, Professor organizations while continuing the PDCA cycle through
Kaplan and his associates initially positioned it as a the BSC. Specifically, by analyzing in detail the gap




between the evaluated organizational objectives for map, strategic communication, strategy focus, and
performance and the actual results, they have started to change in the organizational climate. As this strategy
recognize the causes of unsatisfactory performances, map is a very important method for understanding the
identifying and solving operational problems, reflecting reforms of Kansai Electric Power, it is therefore
the previous term’s details in the next BSC, and explained below.
identifying problems with the skill-building ability of the
organization’s head. 2 What is a Strategy Map?
This is the stage at which the BSC can function as
the core of a management system in company-wide A strategy map is a diagram that gives a two-dimension
PDCA cycle, and is appropriately called the second depiction of the operations (functions) and strategy of
generation of the BSC approach. In reality, the best- an organization. The map shows financial objectives as
practice companies of the first generation such as a final goal, with the strategic objectives from each of
Ricoh and Takara Shuzo have already shifted to this four perspectives connected to each other by arrows
stage, and have begun attaining additional BSC indicating links. All objectives are shown in connection
outcomes. with the financial performance (see Figure 4, as a case
The BSC framework has continued to develop. As representing the Mobil North America Marketing and
described in the latest book by Professor Kaplan and Refining Division of Mobil Oil Corporation). This
his associates (The Strategy Focused Organization, strategy map includes the following important elements
Harvard Business School Press, 2001), the BSC has (characteristics), which were not found in the format of
been greatly improved as a more universal framework the former scorecards:
of organizational change. Additional elements that are
not found in the first and second generations include • The links and flow in a series of strategic
methods called the “strategy map,” which describes the objectives up to ultimate objectives of financial
strategic system of an organization as a map, “strategic performance are clearly visible.
communication,” which communicates the organiza- • As a result, a group of initiatives that are too broad
tional strategy of executives to general employees and mutually unrelated to form a clear strategic
based on that map, and “change in the organizational flow are excluded from the strategy map after
climate,” which aims at activating supervisors and gen- sorting and consolidation.
eral employees through strategic communication.
The case of Kansai Electric Power that is introduced Which should be selected: the scorecard-type BSC
in this article is positioned as the first example in Japan or the map-type BSC? The answer is either, depending
of a third-generation challenge by making the most of on the critical points of the problems facing the busi-
factors for management reform such as the strategy ness management of a company or organization. One

Figure 5. Units for Measuring Performance at Kansai Electric Power

Electric business Unit for entering into a
(president) Performance Linked Contract
(Branch, branch office, center)
Shared service

Nuclear power Thermal power Hydraulic power Electric power transmission Distribution and sale
generation generation generation and transformation of electric power
(Nuclear business (Thermal business (Electric system business (Electric system business (Customer department
general manager) general manager) general manager) general manager) general manager)

Small
Water Pumping hydraulic
system Branch Baseline Load line
systems

Tokai and Hokuriku branches Branch office
Wakasa branch Thermal center (Water system, (Small hydraulic systems,
<Branch manager> <Head of center> branch electric source line) load line, distribution and sales)
<Branch manager> <Branch office manager>

Nuclear power station Thermal power station Power station Power station Business office

Source: Prepared by NRI based on Kansai Electric Power data.




can never say which method is better. If the focusing sales). In addition, competition with other energy
(narrowing-down) of strategies and the clarification of sources as well as dispersed power resources has inten-
links are recognized as a problem, the map-type BSC is sified. Like other power companies, Kansai Electric
more appropriate. Where the desired emphasis is given Power has an urgent need to further reduce costs and
to performance measurement and a brief reporting of use its assets more efficiently.
the results, the scorecard type is suitable. The organization of Kansai Electric Power adopts a
matrix structure with value-chain business divisions
(power generation, transmission, distribution, and
III Changing the Performance sales) and a branch, branch office and thermal center-
Measurement Systems: The type organization that divides territories by region. The
organizations of the power generation division, branch
Kansai Electric Power Example and thermal center (the Wakasa branch, thermal center,
and the Tokai and Hokuriku branches) constitute a rela-
1 Profile of the Company and its Organization tionship that provides for easy linkage. On the other
hand, other branch offices have two or three related
Kansai Electric Power Co., Ltd. is the second largest business divisions at the head office, such as transmis-
electric power company in Japan. For the fiscal year sion and transformation, distribution, and sales, which
ending on March 31, 2001, it registered ¥2,581.4 thereby allow matrix problems to remain. For example,
billion in revenues, reported ¥7,212.5 billion in assets, certain group and division leaders have two direct
and had 25,988 employees. Sales of electricity totaled superiors in the form of a business division manager
142,852 million KWh. Figure 5 shows the “unit for and a branch office manager.
measuring performance,” which is the unit applied in While Kansai Electric Power has not solved this
the performance Linked Contract that Kansai Electric matrix problem completely, it has promoted reform
Power has adopted. through the Performance Linked Contract since 1999
With the phased deregulation of the Electric Utility to achieve a performance measurement system that is
Law that has long protected the power industry through more transparent and understandable than that in the
regional monopolies and the general costing method, past. Under this system, branches, branch offices, and
Kansai Electric and other domestic power companies thermal centers are positioned clearly as profit centers.
have been facing a situation since the late 1990s in The company aims to produce a schema in which the
which they have to compete or cooperate with new- heads of the above organizations reach an agreement
comers and third-party suppliers in various value-chain with management on the shared objectives for each
fields (power generation, transmission, distribution, term, and are then evaluated and compensated in accor-

Figure 6. Series of Steps for Implementation of the Performance Linked Contract

Area of reform 1998.4 1999.4 2000.4 2001.4

Trial at a pilot Recognition of issues
branch office • Improvement of related Full-scale application
systems (Budgeting, etc.) • Strategic improvements by
perfecting functions to work
New business out plan
management cycle • Making explicit measurement
• Formulating a more
• Systems such as budgeting
detailed PDCA
Provisional application to support autonomous
management cycle
Analyzing the activities
• Creating an index system
current status of
the business
management
Trial
System for system and Application of preliminary
measuring performance drafting a vision system (Identifying actual
for implementa- Development of performance)
tion preliminary system
Development Understanding Application of full-scale
of plans, actual system (Identifying actual
etc. performance performance, drafting a plan)
Examination of method to Development of full-scale
develop full-scale system system
Managerial Measuring
accounting performance





dance with the extent to which the objectives are Characteristic of this approach, the subject of reform
achieved. was not defined in a narrow sense as simply a perfor-
The Kansai Electric reform case, known as the mance measurement and compensation system. Instead
Performance Linked Contract using the BSC, is the it covered the business management system in a broad
most spectacular among the over 20 cases NRI has sup- sense that included related management systems such
ported in the past. It has positioned the BSC concept at as budgeting and the MIS providing managerial
the core of its business management system. Other accounting data. This approach made it possible to ini-
peripheral systems are matched to it, and the organiza- tiate sweeping reforms of the entire PDCA scheme
tional climate change is made clearly visible through without simply introducing patchwork modifications or
up-front strategic communication between the heads of management indices.
organizations and management. The following outlines In an attempt to start a provisional application of a
the actual case of Kansai Electric Power. new business management cycle between 1999 and
2000, the company carefully examined the index sys-
2 Background to the Implementation of the tem for performance measures. From the beginning,
Performance Linked Contract there was a shared recognition that the ultimate goal of
the company was to continue to pursue improved cor-
The reform grew out of an analysis of the current state porate value. For that purpose, Kansai Electric Power
of the business management system and the drafting of designed a performance indicator known as PCA (prof-
a vision for the program conducted in 1998. The vision its after costs of assets), a unique EVA index positioned
was developed on the basis of a series of self-evalua- as a management measure for the entire company.
tions that pointed to the need to reform the business The company also developed motivation indicators
management system then in use. That system was and evaluation indicators that are closely related to the
found to have shortcomings in terms of identifying out- daily work of employees at various sites, in addition to
comes, measuring systems and budgeting procedures in indicators on the efficiency of assets and financial
preparation for the coming era of free competition (see soundness (hereinafter collectively referred to as profit
Figure 6). indicators), together with PCA. Specific examples of the

Figure 7. Former Management Reforms: Problems and Solutions
Problems Concepts of reform Solution
Problem (1)
The standardized indicators for performance
measure as designated by the head office From “commitment based on
cannot fully reflect the specific business standardized indicators” to
circumstances (such as the competitive and “commitment based on original
market environments) of each sector. In the strategic objectives and
first place, the key initiatives for each sector performance indicators”
do not match the indicators of performance
measure.

Problem (2)
The links among important initiatives are
unclear. The logic (story) must be clarified From “disconnected story” to
concerning how the ultimate objectives of “linked story”
financial performance can be attained based
on a series of measures. New business
management system derives
maximum leverage
from the BSC strategy map
Problem (3)
The key initiatives that are proposed are
all-purpose in nature, and are not prioritized From “all-purpose initiative” to
so that the heads of organizations can “focused initiative”
commit to them.

Problem (4) From “impossible given the
Within PPG, profitability and public interest, public interest” to “how to
in particular, are seen as a trade-off. retain a balance”





motivation indicators include preventing power supply environment) of each sector (i.e., branches, branch
and transmission events, jobs handled by direct shops, offices, and thermal centers). In the first place, the
reductions in the days required for regular inspections, major initiatives of each sector do not match the
declines in the number of accidents, and the incidence of indicators of performance measure.
problems within three months of completing construc- (2) The links among the major initiatives for each
tion work. These indicators supplement those for sector are unclear. The logical story is not clarified
performance measurements that are determined by the with respect to how the ultimate objectives of
head office through a bottom-up approach, and play a financial performance can be attained based on a
role in raising the morale of employees at the workplace. series of initiatives.
The framework of the profit indicators and the moti- (3) The key initiatives cited are too diverse as well as
vation indicators is consolidated and organized into too general, and are not prioritized. This makes it
three characteristics (profitability, public interest, and difficult for the heads of organizations to commit to
growth potential, hereinafter known as “PPG”) based them.
on subsequent discussions and examination. Rather (4) Within the PPG framework, profitability and public
than seeing the profit and motivation indicators as a interest, in particular, are seen as a trade-off
group of separate indicators, this shifts the approach to (antinomy).
one that links performance measurements to a better
appreciation of the company’s ultimate mission— With respect to the first point, the provisional
namely, improving profitability, ensuring public application called for each sector to select and agree on
interest, and maintaining growth potential. In a sense, performance measures applicable to each location from
this is an unprecedented development that focuses the among the indicators for each sector designated by the
eye on the element of “balance” in the BSC. reform team. This method involved two major
Notwithstanding any improvements in the perfor- problems. One was the fact that each sector could not
mance measurement system, however, no real benefits emphasize the strategy and key initiatives adopted by
of reform can be expected unless the heads of organiza- each sector because the head of the sector was more
tions commit themselves to accomplishing their concerned about measures than strategy. And another
objectives by activating the new system. Given the was the difficulty of reflecting a flexible strategy and
awareness of this problem, Kansai Electric Power key initiatives by each sector due to the low flexibility
made the daring decision to call the performance mea- of measures established by the executive office. This
surement system a Performance Linked Contract. This was the result of limitations in the choice of measures
name reflects the desire of management and the reform under the company’s K-MAX managerial accounting
team to create an operating principle that clearly spells systems. The reform team turned to the method known
out how the participants (those covered by the contract) as the BSC strategy map as a means of resolving these
will be measured (using the evaluation indicators and problems, and decided to drastically change the
criteria) based on performance (the details of the con- paradigm from the Performance Linked Contract
tract), and compensated (compensation linked to driven by measures to a Performance Linked Contract
performance). based on a series of systematic strategic objectives plus
the ensuing measures.
3 Evaluation by Outside Consultants With respect to the second point, while plausible
measures that take into account the management condi-
The reform team engaged NRI as consultants to accel- tion of each sector were shown, it remained unclear
erate the reforms by incorporating the BSC framework, how these measures would flow towards the final finan-
which it had been examining for several years as part cial performance. The reform team decided to deal with
of its Performance Linked Contract. The details of this problem as well by deriving maximum advantage
NRI’s support were broadly divided into two areas: (1) from the element called “linkage among strategic objec-
an objective evaluation of the reforms carried out by tives” included in the strategy map. Namely, they
Kansai Electric Power to date, and specific advice on established a firm rule that every key initiative needed
any suggested changes in track; and (2) support for some link to the ultimate performance objective of
working out a strategy map—strategic objectives and increasing corporate value. If an initiative did not link
the performance index system—for business divisions, to this objective, it should not be included in strategic
the entire company, branches, branch offices, and ther- objectives no matter how important it may be.
mal centers. This outside evaluation yielded four key What is shown in the third point closely reflected a
points for consideration (Figure 7). perennial problem that had long plagued the
(1) The standardized indicators for performance development of policies at all Kansai Electric Power
measurement as designated by the head office sites. Each sector worked out an annual plan every year
cannot fully reflect specific business circumstances and submitted it to head office. These plans consisted
(such as the competitive environment and market of four sections: the management environment, basic




policy, annual policy, and objectives. In particular, the work took about three months to complete. In the first
volume of data dealing with the annual policy and step, strategy maps for business divisions (for example
objectives involved a massive input that often entailed business divisions such as nuclear power, thermal
several dozen pages outlining problems and power, hydraulic power, transmission, distribution, and
improvement initiatives at the workplace level in each sales) were prepared and then consolidated into a strat-
sector (some branch offices described their initiatives egy map of the entire company by comparing them
in several hundred sentences). with the company’s management policy.
The reform team and management decided to replace As the next step, the reformers adopted a method
the “concept for the development of comprehensive whereby branches, branch offices and thermal centers
policies” with a new approach: “agreed strategic objec- worked out their own strategy maps (subject to the
tives and commitment on focused measures.” The strategy map of the entire company and that of the
reformers managed to overcome what resistance did business division having jurisdiction over them). Strict
emerge from various sectors and the new tack was consistency among the strategy maps for a business
accepted. division, the entire company, a branch, a branch office
The problem brought to light in the fourth point was and a thermal center was not addressed at that stage.
handled by returning to the basic BSC concept. Rather, priority was given to the accurate preparation
Whenever key initiatives were about to be proposed on and description of a strategy map for each profit
the basis of the PPG framework, a trade-off argu- center.
ment—such as sacrificing profitability to preserve the Branches, branch offices, and thermal centers
public interest (i.e., energy security and equality in worked out their strategy maps in a workshop format.
energy supplies)—was invariably put forward. If a pub- This first involved a joint meeting to explain the
lic interest perspective were to emerge, it could have workshop approach that consisted of planning
worked as a loophole that would hinder a determined personnel from the 11 branches and branch offices that
attempt to improve financial performance. would prepare strategy maps. With the support of NRI
The reform team closed that loophole, and intention- consultants, the reform team explained in detail the
ally avoided using the public interest perspective so as purpose of the reform, how to solve problems within
to concentrate the awareness of the heads of organiza- the context of the current business management
tions on balancing competing interests to increase system, the basic BSC concept, and the procedures for
long-term corporate value. In short, the focus was on preparing a strategy map.
how to attain financial performance objectives (based Several branch office personnel were already thor-
on approaches that considered both customer and busi- oughly familiar with the BSC, and they provided their
ness process perspectives) while maintaining the public full support from the beginning. While some branch
interest objective as well. The team then redefined the office staff offered vague resistance to the strategic
diverse axes to map out a strategy based on the original focus and the clear link with financial performance
four BSC criteria. based on objective rationale. But the reform team
Using these techniques, the reform team paid requested that they prepare the first draft of the strategy
particular attention to the BSC strategy map and tried map for each branch office with the understanding that
to solve the company’s problems one by one by fine- individual obstacles and difficulties would be examined
tuning the Performance Linked Contract. What should at the workshop. The team clearly conveyed to all par-
be noted here are the specific concepts of reform that ticipants that the strategy maps would be positioned as
were embraced. These included: (1) a move from a trial (exercise), and not as an official performance
measures to strategic objectives; (2) the establishment measure.
of links rather than disconnects; and (3) a shift from the The first workshop was held within an interval of
mindset that saw things as impossible given the public several weeks. Eleven branches and branch offices
interest to one that focused on how to retain a balance. were divided into three groups based on their charac-
This made clear to management and the heads of teristics, and three to four branch offices met together
organizations in each sector what provisional elements at each workshop. The person who prepared the strate-
of the Performance Linked Contract would be retained, gy map for each branch office explained its details at
and what elements would be subject to a change in the workshop, following which NRI consultants, the
course. This became a critical turning point in reform team, the branch office staff, and personnel
accelerating the reforms and making them successful. from other branch offices discussed how to position the
strategic objectives one by one. The general flow of the
4 Building a Strategy Map discussions followed the course shown below.

The next task for the reform team was to work out an (1) The competitive business environment of branch
actual strategy map for each sector that would be used offices was examined through SWOT (Strengths,
for the full-scale application starting in 2001. This Weaknesses, Opportunities and Threats) analyses.




Figure 8. Branch Office Strategy Maps

Increase in corporate value
Financial Perspective

NPCA

Establishment of Initiatives to create
Rising sales in each market a low-cost structure through an optimal level of
cost curtailment facilities
NEnergy for potential demand NCost of electricity sold NFCF
Customer Perspective

Provision of optimal level
of energy to customers
through IPP generation

NPercentage of the company’s customers with
IPP generation to total customers with IPP
generation
Business Process Perspective

Development of
optimum level of ×××
for customers
NNumber of ×××
implementations
Quickly finding
potential customers of IPP
generation (introduction,
replacement)
NOperational rates for
customer facilities
Human Resource

Perspective
and Reform

Enhancement of ability for
comprehensive proposal through ×××

NLevel of attaining objectives

Notes: (1) Double frames indicate a strategic objective based on the entire company’s strategic objectives; (2) FCF = free cash flow; PCA = profits after
capital costs.
Source: Compiled by NRI based on Kansai Electric Power data.

(2) The final financial objectives and key initiatives for draft represented a strategy map with a high level of
branch offices were clarified. completion (see Figure 8). Moreover, as a result of a
(3) The linking of a series of strategic objectives to self-review process upon completing the series of
attain the financial performance objectives was workshops, the reform team was able to confirm that
verified. the workshops had created the following intangible
(4) Performance indicators to evaluate the degree to assets in addition to the tangible assets of the strategy
which the strategic objectives are met were maps.
verified.
(5) In a series of brainstorming sessions, participants • A “meeting ground” for direct strategic
tried to see if they could find any possible communication between the reform team and
alternatives for strategic objectives and branch managers and staff
performance indicators. • A common recognition of the importance of
(6) All members formed a consensus as to the level of “focusing” strategies by making financial
completion of a final strategy map (balance, flow of objectives the main axis
strategy, number of strategic objectives and perfor- • A shared understanding about the future direction
mance indicators, and points for improvement of business management system reform
concerning linkage before the next workshop). • Improvement and mobilization of the competence
to set up objectives for branch managers and staff
Each workshop took about six hours (the strategy who participated in the workshops
maps for two branch offices were discussed at each
session). These maps were then formulated on a step- Those managers who participated in the strategy
by-step basis through second and third drafts. The third map workshops offered the following thoughts.




Figure 9. Performance Linked Contract

President Branch Manager
Performance Linked Contract between
the president and branch manager for Year 2 Contracted Date :

Measures Objectives (criteria) Allocated Points Actual Achieved Rate Points Obtained
PCA ¥ 250 ¥ 104.8% 307
Energy for potential demand kWh 100 kWh 88.0% 88
Cost of electricity sold ¥ /kWh 50 ¥ /kWh 92.0% 46
Percentage of company’s customers % 70 % 115.05% 70
Strategic objectives

with IPP generation to total customers
with IPP generation

• • • • • •
• • • • • •
• • • • • •
• • • • • •
• • • • • •
Subtotal 750 714
service standard

Customer service index 90 100 90 100.0% 100
• • • • • •
• • • • • •
Universal

• • • • • •
Subtotal 250 250

Total 1,000 964

Scores on Scores adjusted by Details of score
contracted measures senior management adjustments Total score Evaluation

964 ___ ___ 964 B

Source: Compiled by NRI from Kansai Electric Power data.

“The link between each performance indicator and Contract” that is entered into between management
management strategy has become clear to me, and I and the head of the organization in question (see
think that a convincing agreement can be made. Figure 9).
Moreover, with the addition of process-related
measures as well as result-related measures, I think that 5 Results of Reform and Future Issues
steady efforts at the workplace will pay off in medium-
to long-term results.” With respect to the reformed Performance Linked
“I think it is good because the key strategy adopted Contract under the new system that started in 2001,
by branch managers has been clarified. The past annual Kansai Electric Power confirmed the following results
plan of branch offices was all-purpose and included as of December 2001.
daily operations. This did not make the strategy clear.”
“The workshops were good, because I could under- (1) The BSC strategy map made it possible to build a
stand the situation at other divisions and the way in strategy system that closely reflects the
which they differed from my own division.” circumstances unique to each division and branch
“I felt that the BSC would become a powerful tool office. The result is focused and not a statement of
for communication between management and division all-purpose objectives.
managers.” (2) The four perspectives were organically connected,
“Our company has hardly ever taken the approach of and the link with measures for the final financial
focusing on strategies. I felt that using the BSC objectives became clear.
(strategy map) tool could embody a new management (3) The importance of entering into contracts based on
idea to selectively distribute management resources to “strategic objectives and performance indicators”
strategic businesses.” rather than “standardized indicators” was
In addition, working out the strategy maps enabled reconfirmed.
the reform team to derive strategic objectives and (4) Resistance at the workplace was tempered by
measures for their performance that are particularly modifying agreements to include “routine work” as
important for determining organizational performance, “standard objectives,” as these tended to be dropped
and led to the development of an “Performance Linked from strategy maps.




Interview with Toyokazu Misono, this, we needed to give a logical explanation to those people
Manager, Operations Group about the good elements and those elements that needed to be
Planning Office changed in existing hoshin management by carefully collecting
Kansai Electric Power Co., Ltd. data from the workplace. This required considerable effort. But I
think we were ultimately able to effectively and consistently
(NRI) What were the origins of the series of reforms to the integrate the hoshin management and the BSC.
Performance Linked Contract?
(NRI) When it comes to members of the reform team, what
(Mr. Misono) The reforms had their origins in a project for considerations were on your mind or what difficulties did you
analyzing the current state of the business management system, face?
which was carried out in 1998. The business management
system at the time was considered inadequate for making (Mr. Misono) We had no particular difficulties because the
accurate management judgments quickly in an environment of members had promoted reforms on a similar theme together
intensifying competition following the adoption of deregulation with me for many years. But the reforms would have been
measures in the Electric Utility Law. We needed an autonomous meaningless unless they could get to front-line employees at the
and decentralized type of decision-making mechanism and actual workplace in the future. Therefore, we thought about how
organizational structure that would be able to respond flexibly to the team could take a comprehensive approach by putting the
changes in the environment. The new organizations also needed emphasis on the actual workplace (business-related organiza-
timely administrative accounting data. We also recognized again tions such as head office divisions, branches, branch offices,
the need for a performance measurement system based on a thermal centers, and business offices). Indeed, the understanding
results-oriented principle that befits a decentralized and cooperation of those at the workplace were indispensable in
organization. From this background, a series of business the process of obtaining results for this phase.
management system reforms was commenced.
(NRI) How do you evaluate the role and contributions of NRI
(NRI) Does that mean that the reforms did not originally aim at consultants in the reform?
introducing the BSC?
(Mr. Misono) What I appreciated most was the fact that the NRI
(Mr. Misono) That’s right. The BSC framework was merely an consultants fully understood the depths of the internal conditions
excellent tool that took shape as we moved forward on the at our company, and never failed to see the true nature of
reform continuum. We had already made repeated independent problems and maintain a professional approach in dealing
attempts to measure achievements from multi-faceted approach- flexibly with those aspects for which we could not give logical
es and to find indices that would stimulate financial explanations based on theoretical ideals. I think the reason this
performance. We ultimately adopted the strategy map method reform was able to reflect a practical condition was because of
advocated by NRI because it was effective at that point in time this stance. They set very high standards in the many examples
in solving various issues that we could not resolve internally. presented at each meeting, as well as in the design and operating
We saw the BSC as a means for us, and not an end in itself. methods of the workshops.

(NRI) What were the issues on which you worked the hardest (NRI) Finally, what are your opinions about the results to date
and took the most pains to promote during this phase of the and future issues?
reforms?
(Mr. Misono) While the reforms will continue to percolate
(Mr. Misono) I think there were two key points. The first was through our system for a long time, I think that the great
the response of those around us to the development of strategies achievement of this phase is that the basic framework of the
that dared to move away from the axis of “public interest,” on prototype for value-based management at Kansai Electric Power
which electric power companies place their primary emphasis. has been determined. The skeleton of a business management
We felt that we had to avoid illogical and emotional resistance, system with the ultimate goal of creating corporate value has been
such as “the BSC cannot be used as a tool as it lacks a public completed in feasible form. But many issues still remain. In
interest axis.” But that anxiety was needless. As a result of particular, we must develop a method to verify the numerical
examining many strategy maps at workshops, we were able to criteria of performance measures that are needed to actually apply
verify that objectives that were set forth from a public interest to the Performance Linked Contract. In addition, we have to push
perspective in the past can be fully reflected in the perspectives towards an evolution of the current system, aiming at a truly
of the customer or internal business process. This meant that the consolidated business management system that also involves
objective of the public interest was not the ultimate goal in itself, group companies for the future. While there are many issues, I
but was positioned as a requirement that had to be met in order think we are on the right course. The scheme under which the
to attain the ultimate objective of creating corporate value. The company can promote reform has also been established. I am
second point was how to convert the paradigm for the imple- confident that it will become best practice for the management of
mentation of the broad initiatives that had been taken before. For a Japanese utility in the future.



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