Balanced Scorecard MA. DESIREE D. BELDAD, Ph.D. FEBRUARY 9, 2012
IMAGINE ENTERING THE COCKPIT of a modern jet airplane and seeing only a single instrument there. How do you feel about boarding the plane after the following conversation with the pilot?
How would you feel about this? I m surprised to see you operating the plane with only a single instrument. What does it measure? That s good. Airspeed certainly seems important. But what about altitude? Wouldn t an altimeter be helpful? Airspeed. I m really working on airspeed in this flight.
How would you feel about this? But I notice, you don t even have a fuel gauge. Wouldn t that be useful? I worked on altitude for the last few flights and I ve gotten pretty good on it. Now, I have to concentrate on proper air speed.
How would you feel about this? Yikes! You re right; fuel is significant, but I can t customize on doing too many things well at the same time. So, on this flight, I m focusing on airspeed. Once I get to be excellent at air speed, as well as altitude, I intend to concentrate on fuel consumption on the next set of flights.
Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward excellent future outcomes.
Kaplan & Norton compare the balanced scorecard to the dials and indicators in an airline cockpit. For the complex task of flying an airplane, pilots need detailed information about fuel, air speed, altitude, bearing and other indicators that summarize the current and predicted environment.
The Balanced Scorecard Enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.
The Balance Scorecard A measurement system A strategic management system A communication tool
The BSC as a Measurement System
A Measurement System Financial Measures: tell the story of past events, an adequate story for industrial age companies for which investments in longterm capabilities and customer relationships were not critical for success.
A Measurement System The BSC complements financial measures of past performance with measures of the drivers of future performance.
THE BALANCED SCORECARD AS A MANAGEMENT SYSTEM The Balanced Scorecard Provides a Framework to Translate a Strategy into Operational Terms Source: Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review
The BSC as a Strategic Management System
A Strategic Management System The BSC emphasizes that financial and non- financial measures must be part of the information system for employees at all levels of the organization. Front-line employees must understand the financial consequences of their decisions and actions. Senior executives must understand the drivers of long-term financial success.
Balanced Scorecard should translate a business unit s mission and strategy into tangible objectives and measures. Mission Why We Exist Vision What We Want to Be Values What s Important to Us? Strategy Our Game Plan Strategy Map: Translate the Strategy Balanced Scorecard: Measure and Focus Strategic Outcomes Satisfied Shareholders Delighted Customers Excellent Processes Motivated Workforce
BSC Measures Represent a balance between: External Measures: for shareholders and customers Internal Measures: Critical Business Processes, Innovation and Learning and Growth.
BSC Measures Represent a balance between: The Outcome Measures: the results from the past efforts. Measures that drive future performance.
BSC Measures Represent a balance between: Objective, easily quantified outcome measures Subjective, somewhat judgmental, performance drivers of outcome measures.
The Balance Scorecard Balances financial and non-financial measures Balances short and long-term measures Balances performance drivers (leading indicators) with outcome measures (lagging indicators) Leads to strategic focus and organizational alignment.
The Balanced Scorecard fills the void that exists in most management systems the lack of a systematic process to implement and obtain feedback about strategy. -- Robert Kaplan & David Norton [ The Balanced Scorecard, Harvard Business School Press, 1996]
The underlying basis for the Balanced Scorecard is very simply stated: One of the most dangerous forms of human error is forgetting what one is trying to achieve. Measurement motivates -- David Norton -- Paul Nitze
THE BALANCED SCORECARD AS A STRATEGIC FRAMEWORK FOR ACTION The strategy is the reference point for the entire management process. The shared vision is the foundation for strategic learning. Clarify and Translate the Vision and Strategy Communicate and Link Communicate and educate Set goals Link rewards to performance measures Clarify the vision Gain consensus BALANCED SCORECARD Plan and Set Targets Set targets Align strategic initiatives Allocate resources Establish milestones Strategic Feedback and Learning Articulate the shared vision Supply strategic feedback Facilitate strategy review and learning Source: Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review
A Properly Constructed BSC Articulates the theory of business Should be based on a series of cause-and-effect relationships derived from the strategy, including estimates of response times and magnitudes of the linkages among the scorecard measures.
A Properly Constructed BSC The process of data gathering, hypothesis testing, reflection, strategic learning and adaptation is fundamental to the successful implementation of the business strategy.
IMPORTANCE OF BALANCED SCORECARD Summarizes business plan in a one-page structure. Forces one to consider more than financial targets, i.e., how one is going to achieve those targets. Prepares one to create action plans (what, who, when) next. Used as a communication, informing and learning system, not a controlling system Recommended 12 16 corporate measures for management focus.
TIE IN TO EMPLOYEE PERFORMANCE Measure the results of employees at work Measure behaviors, actions, or processes Use balanced measures at the organizational level, and share results with Supervisors, teams and employees Balancing the measures used in employee performance plans managers provide the information needed to align employee performance plans with organization goals the performance picture becomes complete
Financial Perspective Financial performance measures: indicate whether a company s strategy, implementation, and execution are contributing to bottom-line improvement. Financial objectives: serve as the focus for the objectives and measures in all the other scorecard perspectives.
Strategic Themes: Financial Perspective Revenue Growth and Mix: Expanding product and service offerings reaching new customers and new markets Changing the product and service mix toward high value-added offerings Re-pricing the products and services New products, applications, customers and markets, relationships, product and service mix, pricing strategy
Strategic Themes: Financial Perspective Cost Reduction/Productivity Improvement: Efforts to lower the costs of products and services Reduce indirect costs Share common resources with other businesses Increase revenue productivity, reduce unit costs, improve channel mix & reduce operating costs
Customer Perspective Enables business unit (bu) managers to articulate the customer and market-based strategy that will deliver superior future financial returns. Managers: identify the customer and market segments in which the bu will compete and the measures of the bu s performance in these targeted segments.
Customer Perspective Core outcome measures:
Internal-Business-Process Perspective Executives: identify the critical internal processes in which the organization must excel. These processes enable the business to: Deliver the value propositions that will attract and retain customers in targeted market segments, and Satisfy shareholder expectations of excellent financial returns.
The Internal Scorecard and Linkages Financial Measures Gross Sales Quality Revenue Growth Gross Profit Customer Measures Share of Market Segment Guest Satisfaction Survey Mystery Guest Survey Guest Satisfaction: Product/Service Attributes Image Experience Agent Satisfaction: Agent Profitability Improved Agent Quality Enhanced Value Agent Profit Agent Survey Internal Measures Investment in New Products/ Services Acceptance Rate of new Products/Services New products/services ROI Develop Products/ Services Innovative Products/Services Product/Service Improvements Product/Service Quality Assurance Develop the Agent/ Accounts Management Team Agent/AE Quality Program Agent/AE Selection Program Profit Potential per product/ store Agent Quality Index Quality Improvement Rate Understand the Guests Understand the Agents
Learning and Growth Perspective Identifies the infrastructure that the organization must build to create long-term growth and improvement. Principal sources: Specific Drivers People: re-skilling employees Detailed specific indices of the particular skills required for the new competitive environment. Systems: enhancing IT and systems Real-time availability of accurate, critical customer and internal process information to employees on the front lines of decision making and actions. Procedures: aligning organizational procedures and routines Alignment of employee incentives with overall organizational success factors, and Measured rates of improvement in critical customer-based and internal processes.
Learning and Growth Perspective Three Principal Categories: Employee Capabilities Information System Capabilities Motivation, empowerment and alignment
CORPORATE BSC FORM C O R P O R A T E BALANCED SCORECARD ACTION PLAN For Fiscal Year Form No. Business Perspective KEY RESULT AREAS (KRAs) OBJECTIVE / S KPIs PROGRAMS/ PROJECTS/ ACTIVITIES DELIVERABLES / OUTPUTS SCHEDULE CHAM PION (S)
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