BALANCE SCORECARD Introduction In this completive world where techniques are change in nights, it s very hard for an organization to stay on one technique to grow business. To maintain the business performance management use different tool for to track progress of business by the help of a mix of financial and non-financial measures. One such system was created by Art Schniderman in 1987 at Analog Devices, a mid-sized semi-conductor company, the Analog devices Balanced Score Card (BSC). Which is now recognised as a First Generation BSE design. Dr. Robert S. Kaplan in conjunction with David P. Norton did a research study on Balance Scorecard in 1990, during the study they described the work of Art Schneiderman on performance measurement and public an article in 1992 with detail of this Balance Scorecard design. This article is not only paper on the topic published in early 1992 but this paper war a popular success, and quickly followed by second in 1993. In 1996, the two authors published a book The Balance Scorecard. These articles and the first book spread knowledge of the concept widely, and has led to Kaplan and Norton being seen as the creators of the concept. What is Balance Scorecard? Balance Scorecard is a tool of strategic management to monitor the performance of all or a part of an organization. It gives a framework helps the planners to identify what should be done and measured. In other words it is a management tool which use a combination of financial and non-financial measures to execute and monitor the organizational strategy. It is designed to translate vision a strategy into objectives and measures across four balanced perspectives: Financial: How do we look to our Shareholders? Customers: How do our Customers see us? Internal Business Process: What should we do that is excellent? Learning and Growth: Can we continue to improve and add value? Hence, by study the above lines we can say that this tool has considered not only the financial results to be important but also other factors which drives an organization toward future successes as mentioned earlier. This tool focus on those areas which are required to be balanced and get a view about the organizational performance and improve the same.
The framework tries to bring a balance and linkage between these measures:- Financial and Non-Financial; Tangible and the Intangible; Internal and the external aspects; Leading and lagging indicators. Balanced Scorecard focusing on the importance of measuring business performance from the strategic implementation perspective, rather than relying solely on financial results. Firm should be engaged in a two-step process if firm want to achieve strategy alignment. First the managers should understand the detail of how value is created in their firm. After this they can design a measurement system on their understanding. First step focusing two dimensions of the strategy implementation process namely causal and breadth flow. Breadth refers towards those facts which companies must study more than just financial results as outcomes of strategy implementation. Causal flow refers toward the series of linkages between financial and non-financial determinants of firm performance. This will help managers to understand why certain financial results are the way they are. Second point is the design of measurement system. This involve attaching metrics to the financial and non-financial determinants. The BSC identify four key perspectives that directly and completely define strategy measurement and analysis. They include financial perspective, customer perspective, internal processes perspective and finally learning growth perspective that is the leading indicator. The second step is communication, top management that has done the analysis should communicate their findings and decisions with middle and front-line managers, who also communicate it to other employees. By this way, everyone in organization will aware and can participate in the strategy implementation process. This also helps in allocation of resources and guides employees decisions. The BSC model recognises the importance of both tangible and intangible assets and of financial and non-financial measures. It focus on connections among the firm s customers, employees, technology, operations and places an important role for HR. leading and lagging indicators differences will highlights by BSC framework. Lagging indicator include financial metrics. Leading indicators are unique for each firm. They include process cycle time, customer satisfaction and employee strategic focus. These indicators assess the status of key success factors that drive implementation of the firm s strategy. Use of Balanced Scorecard 1. Update or clarify a business strategy; 2. Link objectives to long term targets;
3. Find out the key elements of the business strategy; 4. Incorporate strategic objectives into resource allocation processes; 5. Compare performance of geographically diverse business units; 6. Increase company-wide understanding of corporate vision and strategy Success Factors and Measures of BSC There are four perspectives: 1. Financial Perspective How do we look at shareholders? Financial perspective is the main financial measurement system which have been analysed during the past years very thoroughly. Financial performance measures for any BSC define as long-run financial objective of an organization. Most of the organizations emphasis on profitability objectives and other possibilities may also be consider. At early stage of life cycle businesses can stress on rapid growth objectives and mature businesses may focus on maximising cash flow. Norton and Kaplan recommend to simplify the financial perspective measurement selection pool to identify first the organization s stare, which would mainly be one of the three: Rapid Growth- these organization are at early stages of their life cycle. They may have to consider investments to develop and enhance new goods and services, on production facilities, on operating capabilities, invest in system, infrastructure, and distribution networks that will support relationships. Sustain- These organization still attract investment and reinvestment in organization, but required to come with excellent returns on their invested capitals. These businesses maintain their existing market share and perhaps grow it somewhat. Investment projects are more directed to expending capacity, and focus on continuous improvement. Harvest- These organization will reached at maturity phase of life cycle, where companies want to harvest their investments which are made at earlier stages. Investment project are directed towards maintain the equipment and capabilities of business, not to expend capabilities. Time periods of investment project is very short and definite payback. The main goal is to maximize the cash flow back to the organization. In each of these stages, financial objective of businesses is quite different. At growth stage objective is sales growth, sales in new markets, sales to new customers, sales from new goods and services. Financial objective at sustain stage is traditional financial measurements, such as return on capital, operating income and gross margin. Financial objectives for the harvest businesses will focus on cash flow. Any investments must have immediate and certain cash paybacks.
Some objectives with measures Objective Measures Survive Cash Flow Prosper Increase in Market Share Profitability Return on Equity Cost leadership Unit Cost 2. Customer Perspective How should we appear to our customers? This perspective addresses the question of how the firm is viewed by its customers and how well the firm will served its targeted customers in order to meet the financial objectives. Customers view towards the firms, generally in the terms of time, quality, performance, and cost. Most customer objectives fall into these above mentioned four categories. In this perspective, managers identify the customer s and market segments in which the business unit will complete and measures the performances in these targeted segments. Normally customer perspective includes several generic measures of successful outcomes from a well-formulated and implemented strategy. Genetic outcome measures include customer retention, customer profitability, new customer acquisition, customer satisfaction and market and account share in targeted segments. May be these measures appear to be generic in all types of organizations, they customized to the targeted customer groups which gives business unit its expected growth and profitability.
Market and Account Share: Market share will give information to company that how well they penetrating a desired market. For example, temporarily sales growth of a company meet the objectives by retaining customer in non-targeted segments, but in targeted segments its share is not increasing. The measure of market share with targeted customers would balance a pure financial sales to indicate whether an intended strategy is yielding expected results. Companies can use a second market-share type measure: account share of customers business, when they targeted particular market segments or customers. In a given time period, business with these company could be affected by the amount of business they offering, market share measure is based on this. Share of business with these targeted customer will be decrease is customers are offering less business to all their suppliers. Customer Retention: A way of maintaining or increasing market share in targeted customer segments is to retain the existing buyers in those segments. Companies that can quickly and without difficulty identify all of their customers, for example- distributors and wholesalers, industrial companies, newspaper and magazine publishers, banks, credit card companies, computer on-line service companies, and long-distance telephone suppliers- can quickly and without difficulty measure customer retention from period to period. Many companies will measure customer loyalty also by the percentage growth of business with existing customers. Customer Acquisition: All companies want to grow their business with an objective to increase their customer s number in their targeted segments. Customer measure tracks, in absolute or relative terms at which rate a business unit attracts or get new customers or business opportunities. It could be measured by either the total sales to new customers or the number of new customers in these segments. Customer satisfaction: Earlier both customer retention and acquisition are based on meeting customer s needs. Customer satisfaction measure provide views of customer on how well the company is doing. Recent research shows that for achieving high degrees of loyalty, retention, and profitability, just scoring adequately on customer satisfaction is not sufficient. Company
count repeat purchasing behaviour of customers only when they will rate their buying experience as completely or extremely satisfied. Customer Profitability: Succeeding in all other core customer measures it is not necessary that company has profitable customers. To get customer extremely satisfied organization need to sell products and services at very low prices. Achieving higher financial returns, customer satisfaction and high market share are most important for an organization. To measure individual and aggregate customer profitability Activity-based cost systems is useful for companies. Companies want mort satisfied and happy customers, they also want profitable customers. Customer profitability can help to keep customer-focused organizations from becoming customer-obsessed. In summary, customer perspective help managers to articulate there unique customer and market-based strategy that will deliver superior future financial returns. Some objectives with measures Objectives Measures New Product Customer Relationship % of sales from new product % of retained customer Responsive Supply On time Delivery 3. Internal Business Processes Perspective: What must we excel at? Internal business process objectives address the question of which processes are most critical for satisfying customers and shareholders. By these processes firms must concentrate its efforts to excel.
In this perspective, executives identify the critical processes in which the organization must excel. The critical processes enable the business unit to perform on the value propositions of customers in targeted market segments, and satisfied expectations of shareholders of excellent financial returns. The main focus of measures on the internal processes that will give greatest impact on customer satisfaction and achieving the financial objectives of organizations. This internal business process perspective reveals on fundamental differences between balanced scorecard approaches and traditional approaches to performance measurement. Metrics which are based on this internal business process perspective allow the managers to know how well their business is running, and its products and services conform to customer requirements. In summary, internal business processes perspective help manager to get manufacturing excellence, increased design productivity, safety standards etc. by getting this, they also get more customer satisfaction. Some objectives with measures Objectives Manufacturing Excellence Safety incidence Index Increased Design Productivity Increased Product Launch Days Measures Cycle Time per Unit Number of Accidents Engineering Efficiency Actual Launch Days Vs. Plan 4. Learning and Growth Perspective: Can we continue to improve and create value? This metrics address the question of how the firm must learn, improve, and innovate in order to meet its objectives. This perspective is employee centred. It identifies the infrastructure by which organization can create long-term growth and improvement. There are three principle sources by which organizational learning and growth come:
People; Systems; Organizational Procedures. People are the main resource of an organization. In the current climate of organization where technology will change daily, it is necessary for worker to be in continuous learning mode and continues change in system and procedure keep organization in learning mode. The objective of firms is to always be technological leader, manufacture leader and be product focused. By learning and growth prospective firm can achieve their objectives. In summary, we can say that by following learning and growth perspective manager will take organization as technology leader, manufacturing leader and the company mainly focus on its products by which the product quality will also improve. Some Objective with Measures Objectives Measures Technology Leadership Time to develop new product Manufacturing learning Time to new process Maturity Product Focus % of product Representing sales Four perspective cause and effects relationship This four perspective are highly interlink with each, everyone is responsible for each change in organization. We can explain this as if an organization mainly focus on learning and growth aspect, than organization definitely going to lead to better business processes. This will help in increase customer value by producing better products which finally help in improvement of financial performance.
The Balance Scorecard Model These following steps are to be taken for utilize the balance Scorecard in a form of strategic management tool: 1) Set major objectives for each of the perspectives. 2) Performance measures are required should be identified under each of the objectives, which help the organization to realize the goals set under each perspective. This can also act as parameters to measure the progress toward the objectives of perspectives. 3) Another important step is setting of targets. Setting of specific targets form each of identified major area which would act as a benchmark for performance appraisal. By this, around these critical factors a performance measurement system is build. 4) Appropriate strategies and the action plans which are made for various activities should be decided so that it s clear as how an organization has decided to pursue the pre- decided goals. Because of this, the Balance Scorecard is referred to as a blueprint of the organizational strategies.
By Diagram:
To construct and implement a Balanced Scorecard, Manager should: Articulate the business s vision and strategy; Identify the performance categories that best link the business s vision and strategy to its results; Establish objectives that support the business vision and strategy; Develop effective meaningful standards and measures, establishing short-term and long-term targets; Create appropriate budgeting, tracking, communicate, and reward systems; Collect and analyse performance of employee and compare result with desired performance; Take action to close unfavourable gaps.