The Balanced Scorecard: Measures that Drive Performance WordPress.com https://yuiworld.files.wordpress.com › 2012/01 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 ...

1. BALANCED
SCORECARD
Strategic Management
IHW 2005 Balanced Scorecard 12
Balanced Score Card

2. IHW 2005 Balanced Scorecard 2
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)

3. IHW 2005 Balanced Scorecard 3
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.

4. IHW 2005 Balanced Scorecard 4
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 relation-
ships 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."

5. IHW 2005 Balanced Scorecard 5
Evaluation Methods
Balanced Scorecard – Four Perspectives
Customer Perspective
How should we
appear to our
customers?
Financial Perspective
How should we appear
to our shareholders?
Learning and Innovation
Perspective
How should we sustain
our ability to change and
improve?
Internal Business
Perspective
At what business
practice must we
excel?
Vision
And
Strategy

6. IHW 2005 Balanced Scorecard 6
Balanced Scorecard
Internal Process
Perspective
What business
processes are the
value drivers?
Learning & Growth
Perspective
Are we able to sustain
innovation, change
and improvement
Customer Perspective
How do we look to our
customers?
Financial Perspective
How do we look to our
shareholders?
Vision &
Strategy

7. IHW 2005 Balanced Scorecard 7
Balanced Scorecard for a Retailer
Internal Process
Perspective
•Service quality
•Product quality
•Inventory management
Learning & Growth
Perspective
•Information systems
•Employee satisfaction
•Employee training
Customer Perspective
•Customer satisfaction
•Customer retention
•Market share
Financial Perspective
EVA (Residual Income)
Profit per square foot
Vision &
Strategy

8. IHW 2005 Balanced Scorecard 8
Balance in the Scorecard
• Balance between financial,
customer, internal process and
learning perspectives
• Balance between financial and non-
financial 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

9. IHW 2005 Balanced Scorecard 9
Horizontal Balanced Scorecard
Investors
Financial
Perspective
Lenders
Financial
Perspective
Customers
Customer
Perspective
Employees
Internal
Perspective
Suppliers
Process
Perspective
Balance between different stakeholders.

10. IHW 2005 Balanced Scorecard 10
Vertical Balanced Scorecard
Learning and Growth Objectives
Internal Process Objectives
Customer Objectives
Financial Objectives

11. BALANCED SCORECARD DESIGN
1. 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.
2. 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.
3. Assign targets to measures.
A target is a quantifiable goal for each measure with a specified
time frame.
4. 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.
5. 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.
6. 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.

12. IHW 2005 Balanced Scorecard 12
Balanced Score Card

13. IHW 2005 Balanced Scorecard 13
A Balanced Scorecard
”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)
“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)

14. 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

15. IHW 2005 Balanced Scorecard 15
Translating Strategy Into Initiatives
For each perspective:
Key Success
Factors
Performance
Measures
Targets Initiatives
Strategy

16. IHW 2005 Balanced Scorecard 16
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

17. IHW 2005 Balanced Scorecard 17
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

18. IHW 2005 Balanced Scorecard 18
Financial Perspective
Customizing Measures for the Growth Stage
• 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

19. IHW 2005 Balanced Scorecard 19
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

20. IHW 2005 Balanced Scorecard 20
Financial Perspective
Customizing Measures for the Harvest Stage
• Current cash flows
• Payback period
• Spending ratios
• Throughput ratios
• Product line profitability
• Negative cash flow customers

21. IHW 2005 Balanced Scorecard 21
Customer Perspective:
Strategic Outcome Measures
Market
Share
Customer
Acquisition
Account
Share
Customer
Satisfaction
Customer
Profitability
Customer
Retention
Financial Objectives
Customer Outcomes
Internal Process Outcome Drivers

22. IHW 2005 Balanced Scorecard 22
Customer Perspective:
Unique Value Proposition
Customer
Acquisition
Customer
Satisfaction
Customer
Retention
Value =
Brand Equity
Uniqueness Functionality Quality Price Time Convenient Trusted Responsive
Product/Service
Attributes
Image Relationship
+ +

23. IHW 2005 Balanced Scorecard 23
Satisfy
Custome
r Needs
The Internal Perspective
Generic Service Value Chain Model
Identify
Custome
r Needs
Innovation Cycle Operations Cycle
Post-Sale
Service Cycle
Efficiency
Effectiveness
Identify
the
Market
Create
the
Service
Offering
Produce
the
Services
Deliver
the
Services
Service
the
Customer

24. IHW 2005 Balanced Scorecard 24
Learning and Growth Perspective
Long Term
Success
Employee
Skills
Information
Systems
Organizational
Processes
•Satisfaction
•Retention
•Training
•Capabilities
•Real-time availability
•Accuracy
•Pervasiveness
•Alignment of incentives
with key success factors
•Improvement in key
customer and internal
processes
Objectives Capability Measures

25. IHW 2005 Balanced Scorecard 25
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.

26. IHW 2005 Balanced Scorecard 26
Linking the Balanced Scorecard to Strategy
Financial
Customer
Internal Process
Learning & Growth
Return on
Capital Employed
Customer Loyalty
On-time Delivery
Process Quality Process Cycle Time
Employee Skills
A Strategy Is a Set of Hypotheses About Cause and Effect
Customer

27. IHW 2005 Balanced Scorecard 27
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.

28. The Balanced Scorecard for The Women’s Store Employed in the Experiment
Measure Target Actual Percent Better
than Target
Financial:
1. Sales margins 60% 67.02% 11.70%
2. Sales growth per store 15% 16.75% 11.67%
3. Inventory turnover 6 6.59 9.83%
4. Debt-to-assets ratio < 20% 18.07% 9.65%
Customer:
1. Price relative to competitors’ price +7% 7.79% 11.29%
2. Customer satisfaction rating 80% 88.44% 10.55%
3. Sales per square foot of retail space $30,000 $33,090 10.30%
4. Number of credit card customers per store 8,000 8,911 11.39%
Internal Process:
1. Brand recognition rating 80% 87.60% 9.50%
2. Number of stock-outs < 3 times 2.66 11.33%
3. “Mystery Shopper” audit rating 85% 93.47% 9.96%
4. Time to process customer returns < 4 min. 3.54 11.50%
Learning and Growth:
1. Employee satisfaction 80% 87.96% 9.95%
2. Employee suggestions per year 2.5 times 2.74 9.60%
3. Store computerization 60% 66.24% 10.40%
4. Hours of training invested in brand managers each year 80 hours 89.10 11.38%

29. IHW 2005 Balanced Scorecard 29
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.”

30. IHW 2005 Balanced Scorecard 30
Develop
Selling
Skills
Access to
Strategic
Information
Align
Personal
Goals
Understand
Customer
Needs
Develop
New
Products
Cross-Sell
Products
Increase Customer Satisfaction
With Our Products
Broaden
Revenue Mix
Increase Return to
Stockholders
Instill a
Selling Culture
Financial
Perspective
Customer
Perspective
Internal Process
Perspective
Learning
Perspective
Metropolitan Bank: Cause and Effect

31. IHW 2005 Balanced Scorecard 31
Metropolitan Bank’s Balanced Scorecard
Strategic Objectives Strategic Measures
Lag Indicators Lead Indicators
Financial
 Improve Returns to Stockholders
 Broaden Revenue Mix
 Return on Investment
 Revenue Mix
 Revenue Growth
Customer
 Increase Customer Satisfaction
 Knowledgeable People
 Convenient Access
 Superior Service
 Customer Retention
 Depth of Relation (Sale of
Multiple Products to a
Customer)
 Customer Satisfaction
Survey
Internal
 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
Learning
 Instill a Selling Culture
o Build Strategic Information
o Develop Strategic Skills
o Align Incentives
 Revenue per Employee
 Employee Satisfaction
Survey
 Strategic Information
Availability
 Strategic Job Coverage
 Personal Goals Alignment

32. IHW 2005 Balanced Scorecard 32
Why Do We Need a Balanced Scorecard?
To Implement Business Strategy!
“Less than 10% of
strategies effectively
formulated are effectively
executed”
Fortune
“Business Strategy is now the
single most important issue…
and will remain so for the
next five years”
Business Week

33. IHW 2005 Balanced Scorecard 33
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.

34. IHW 2005 Balanced Scorecard 34
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.