Balanced Scorecard - A Primer

Translating Strategy into Operational Terms

Objective
To understand the essence of balanced scorecard.

Strategic Planning Process

Mission
Why we exist

Values Vision

Whats is important for us What we want to Be

Strategy
Our Game Plan

Strategy Map Balanced Scorecard

Measure and Focus Translate the Strategy

Targets and Initiatives Process/ Personal Objectives

What I need to do What we need to do

Strategic Outcomes
Satisfied Shareholders Delighted Customers Efficient & Effective Motivated & Prepared Processes Workforce

Strategy Execution
Successful execution of strategy requires three components
{Breakthrough Results} = {Describe the strategy} + {Manage the Strategy}
Philosophy of the three components is:

We cant manage what we cant measure. We cant measure what we cant describe.

Performance Measurement xW xY xM xI xW xY xG
WHAT YOU MEASURE IS WHAT YOU GET

How We Manage

Financial Measures are the Bread and Butter of Managing

Drawbacks of Using Only Financial Measures: Always looking backwards Neither guarantee or predict future performance Tend to drive short term decisions

Drawbacks of Using Only Financial Measures: Using Only Financial Measures is like steering a Boat by Looking Backwards but thats exactly what organizations do when they rely on financial measures alone

Traditional Method of Performance Measurement

Since late 90s, primarily employees and information technology are becoming important for companys competitive success. Traditional financial measurement systems treated investments in employee capabilities, databases, information systems, customer relationships, quality, processes and innovative products and services as expenses in the period in which they were incurred. No scope for measuring and managing the value created by enhancing the capabilities of an organizations intangible assets.

Results of Research!

1 in 10 organizations execute their strategies successfully

Fortune Magazine, 1998

72% of CEOs believe that executing their chosen strategy is more difficult than developing a good strategy
Malcolm Baldrige CEO Survey, 2002

MAKE STRATEGY A CONTINUAL PROCESS

The Problem:
The Strategic Management Process Is Missing in Most Organizations

STRATEGY

60% of organizations dont link strategy & budgets

update the strategy

Strategic Learning Loop

test the hypotheses

85% of management teams spend less than one hour per month on strategy issues

BALANCED SCORECARD

BUDGET

78% of organizations lock budgets to an annual cycle 20% of organizations take more than 16 weeks to prepare a budget

funding

Management Control Loop PERFORMANCE

reporting

92% of organizations do not report on lead indicators

Input (Resources)

Initiatives & Programs

Output (Results)

Strategy Development or Strategy Execution? Organizations Need Both

Strategic success requires going beyond successful 1 strategy formulation to successful strategy execution

Sound

Strategy Formulation

Missed Opportunity

Strategic Strategic Success Success

Flawed

Doomed From Doomed From The Start The Start

At Risk

Flawed Strategy Execution

Source:
1

Sound

Execution: The Discipline of Getting Things Done, by Larry Bossidy, 2002.

Strategy Execution Challenge

There are generally accepted tools to manage finances, customers, processes, and people. But what about strategy?

Financial Management Tools

EVA Balance Sheets Income Statements Shareholder Value Analysis

Process Management Tools

Six Sigma Supply Chain Integration Cycle Time Reduction TQM

Strategy Management Tools

Customer Management Tools

Customer Satisfaction Measurement Customer Relationship Management Segmentation Analysis One-to-One Marketing

People Management Tools

Core Competencies Knowledge Management Pay for Performance HRIS

The Balanced Scorecard is the vehicle that fills the Strategy Management Gap

The Balanced Scorecard

Financial measures

Internal performance measures

Customer & marketplace measures

Human resource measures

[Adapted from The Balanced Scorecard, by Robert Kaplan and David Norton]

What Is a Balanced Scorecard?

At the highest level, the Balanced Scorecard is A framework that helps organizations translate strategy into operational objectives that drive both behavior and performance.

Balanced Scorecard
The balanced scorecard provides executives with a comprehensive framework that translates a companys vision and strategy into a coherent set of performance measures.

BSC - To Articulate Strategic Hypotheses in Cause-effect Terms

And Realize the Vision

Financial Results

To Drive Financial Success...

Customer Benefits

Needed to Deliver Unique Sets of Benefits to Customers...

Internal Capabilities

To Build the Strategic Capabilities..

Knowledge, Skills, Systems, and Tools

Equip our People...

Balanced Scorecard
FINANCIAL Financial Health
how should we appear to our shareholder - to succeed financially?

CUSTOMER Happy Customers

how should we appear to our customer - to achieve our vision?

Vision & Strategy

INT. BUS. PROCESS Way of doing things

what business processes must we excel at-to satisfy our stakeholders?

LEARNING & GROWTH Happy Employees

how will we sustain our ability to service, change and improve -to achieve our vision?

The Balanced Scorecard

EXTERNAL MEASURES

INTERNAL MEASURES

LAG INDICATORS

PERFORMANCE DRIVERS

Driving Performance Across Different Times Frames

Financial measures short term; Actions taken to improve them show results very quickly. Customer and marketplace measures medium to long term; Actions might take months or years to show tangible results. Internal performance measures medium term; Actions take longer to show results. Learning and Growth measures long term; Actions might take years to show tangible results.

Other Themes of the Balanced Scorecard:

Link to strategy Robust communication Frequent progress reviews

How Do You Build a Balanced Scorecard?

Top management involvement Keep it short and sweet

Four Perspectives of BSC

The BSC translates the mission and strategy into objectives & measures organized into four different perspectives:
Financial Customer Internal business process Learning & growth

Four Perspectives of BSC

Financial perspective is retained as:
Financial performance measures indicate whether a companys strategy, implementation and execution are contributing to bottom line improvement. Financial parameters are lagging indicators.

Four Perspectives of BSC

Customer perspective:
Includes several core or generic measures of the successful outcomes from a wellformulated & implemented strategy. The core outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market share in targeted segment.

Customer & Marketplace Analysis

What do customers think we do especially well? What was our biggest product/ service success? What are our three best facts to sell a new customer? Where could our service improve?

Customer & Marketplace Analysis

What do customers think we do especially well?

Welding on time delivery Customized solution Good quality Service Good infrastructure Pricing Test certificates Design and Development Short time delivery Payment terms Adapting to their wants and requirements at a short notice Maintaining relationship Pricing reduction Quick response Technical support Concept to commissioning of solutions

Training Product demonstrations Assurance Product range Durability Warranty Management Structural integrity Product Features Performance Financial stability

Customer & Marketplace Analysis

What are our three best facts to sell a new customer?

Customized Solution Market Leader Following International Safety Standards Customer base Serviceability Training Experience in line of activity Allow customers to visit Site visits from the team International tie ups Branding Continuous follow up Strong HR team

Customer & Marketplace Analysis

Where could our service improve?
Customer feedback after delivery Manufacturing Lead times Process Cycle Times Product Improvements Quality and Durability

Customer & Marketplace Analysis

What problems do our customers keep telling us about? Where is market headed in 5 years? What 4 customer desires will become requirements? Biggest reasons we miss sales to competitors? Who could start competing with us? What could be the differentiators for the services provided by us.

Four Perspectives of BSC

Internal business process perspective:
Identify the critical internal processes in which the organization must excel. These processes enable the business unit to:
Deliver the value propositions that will attract and retain customers in targeted segments. Satisfy the shareholder expectations of excellent financial returns.

Internal Process SWOT Analysis

What process should we excel? What are the areas where we need reduce wastes? What bottlenecks do we have in our processes? How do we manage them? What efficiencies do our competitors have that we dont? What could we do to adopt these efficiencies?

Internal Process SWOT Analysis

What new methods and technologies may become applicable to our operations in the next five years? What is one process improvement we could implement that would put us ahead of the competition? What internal processes are so inefficient or ineffective that they could become bottlenecks? Which of our internal processes pose significant environmental, health, and safety risks? What do we need to do about them?

Four Perspectives of BSC

Learning and growth perspective:
The first three perspectives reveal the gaps between the existing capabilities of people, systems and procedures and what will be required to achieve breakthrough performance.

Four Perspectives of BSC

Learning and growth perspective:
Identifies the infrastructure that the organization must build to create long term growth and improvement. Organizational learning and growth comes from three sources.
People. Systems. Organizational procedures.

Learning and Growth Analysis

What skills and abilities do we think will be critical three/five years from now? What makes our people better? What employee skills and abilities could be improved? What are the automations and technology initiatives we need to initiate? What are the systems we need to establish?

Cause and Effect Relationships

The measurement system should make the relationships among objectives in various perspectives explicit so that they can be managed and validated. The chain of cause and effect should pervade or encompass all four perspectives of a BSC.

Cause and Effect Relationship

Financial Customer ROCE Dominant Market Share Customer Loyalty World class systems & products World class customer support

Internal/ Business Process Learning and Growth

Competent & Motivated Employees

Strategic Objectives Example

Finance
Grow Business

Achieve Acceptable Returns

Manage Costs

Customer

Increase Customer Satisfaction

Improve Service Efficiency

Internal Process

Employ Safe Working Environment Increase Employee Morale

Increase Productivity

Increase Capacity Utilisation

Learning and Innovation

Achieve Equity Ratios

Develop Employees

Promote Creativity

BSC Terminology
Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers

Statement of what strategy must achieve and whats critical to its success

How success in achieving the strategy will be measured and tracked

The level of performance or rate of improvement needed

Key action programs required to achieve objectives

Objectives
Internal Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time

Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

BSC Objective Dictionary

Once Measures Have Been Selected, They Must Be Defined in Detail to Ensure They Can be Reported in a Consistent, Repeatable Manner

BSC Objective Dictionary

Strategic Objective: Names the objective Measure: Names the measure Measurement Intent: Describes the measure and the reasoning behind its selection as an indicator of progress against this strategic objective. Frequency of Update: Identifies how often it is calculated Units of Measure: Identifies the units in which the measure will be reported

Measurement Definition/Formula: Provides a detailed formula for the calculation of a numerical value for the measure Notes/Assumptions: Clarifies terms in the formula as necessary Highlights key assumptions underlying the formula Measurement Information Is: ___ Currently Available ___ Available With Minor Changes Next Steps: Describes the plan to overcome any deficiencies in getting the required data

Data Elements and Sources: The data elements required to calculate this measure and the source systems, databases, documents, etc. of those data elements

Source For and Approach to Setting Targets: Identifies the report, document, system or individual from which the information will be obtained
Target Setting Responsibility: Person Accountability for Meeting Target: Person Tracking / Reporting Responsibility: Person Measure Availability: date Target: date
2005

Target
Lists numerical targets by year for the various component of the formula where relevant.

2003 Actual
1Q 2Q 3Q 4Q Full Year

2003 Proj.

2004

Strategic Measures Are:

Few enough to achieve focus Representative of a wide range of organizational concerns Clearly defined Revised as needed

Quantitative Selection Process

Are improvements in the measure likely to result in increased sales? Does the measure have broad applicability to all functions in the organization? What resources are available for improving this measure?

Learning and then not acting on what you learn is like plowing and then never planting. - unknown Albert W. Daw Collection