UNIT - 08

Balanced Score Card (BSC)

and other Techniques
 Balanced Scorecard
Introduction –Traditional Financial Measures
1. Till recently, the business enterprises - concentrate on the
evaluation of financial performance.
2. Besides, evaluate physical performance.
3. Therefore, they are using both the physical and financial
yardsticks.
4. For example,
Material Productivity = [Output ÷ Input]
a. Output
b. Input
c. Impact on cost, profit, financial performance
5. RoI = [(Profit ÷ Investment) × 100]
 Traditional Financial Measures – Drawbacks
1. Evaluation of past – after the close of AY – no scope for taking steps
to improve
2. Not able to evaluate the present and future – no prediction power
but only rearview mirror
3. Concentrate on controlling mechanism in isolation – but it should
be a part of whole system – even the lower level employees should
be evaluated – penalize for failure or bonus for o/s
4. The firms should focus on value creation or addition – in ideas,
knowledge of employees, customers, suppliers – traditional system
neglects
5. Traditional system focusing on short-term benefits of cost reduction
at the cost of quality of product – sub-optimization
6. [Market Value of Firm > Market Value of its Assets]. Traditional
Performance Measures concentrate on value of assets but not that of
firm
 Good Performance Measurement System – Features
1. Measure not only the overall performance of
organization but also that of each segment. Because,
[Overall Performance = Performance of its Segments]
2. Customer Focus – customer satisfaction/delight – they
provide business – the system should measure the level of
satisfaction of customers
3. Effective communication of corporate objectives – split into
divisional – communication – delegate powers and provide
facilities – make them accountable – each employee
4. Define who is responsible for what – otherwise confusion,
multiple superiors – no responsibility
5. Transparency in the evaluation of performance
 Balanced Scorecard – Concept, Meaning and Definitions
a. Limitations of Traditional Measures lead to the development of
Balanced Scorecard.
b. The phrase Balanced Scorecard was coined way-back in
1990s. However, its roots are traced to the pioneering work of
General Electric on performance measurement reporting in
1950s and also the work of process engineers of French who
developed the tableau de board meaning dashboard of
performance measures in the early 20th century.
c. As reported in 2010 annual survey undertaken by Bain &
Company, Balanced Scorecard is the most widely adopted
performance management framework.
d. As it attempts to balance the use of financial and non-financial
performance measures to evaluate both the short-run and long-
run performance in a single report, it is called, Balanced
Scorecard.
a. It (i.e., Balanced Scorecard, BSC) is defined as a strategy performance management
tool – a semi-standard structured report, supported by design methods and
automation tools that can be used by manager to keep track of the execution of
activities by the staff within their control and to monitor the consequences arising
from these actions. Balanced Scorecard has become from mere a performance
measurement tool in the early 1990s to an effective strategy execution framework now.
b. Balanced Scorecard is a strategic planning and management system ….. used
extensively in business, industry, ….. worldwide to align business activities to the
vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals. It
translates the organization’s mission and strategy into a set of performance measures.
And these measures provide the framework for implementing strategy. Balanced
Scorecard focuses even on non-financial objectives which a firm has to accomplish to
reach its financial objectives.
c. It (i.e., Balanced Scorecard) is a performance metric used in strategic management
to identify and improve various internal functions and their resulting external
outcomes. The Balanced Scorecard attempts to measure and provide feedback to
organizations in order to assist in implementing strategies and objectives. It is
designed to measure three categories of non-financial performance (viz., learning and
growth, business processes, and customers) besides financial performance.
 Perspectives of Balanced Scorecard
Balanced Scorecard suggests to view and measure the performance of
organizations from four different perspectives as identified and analyzed
below.
Business Process Perspective - also called, internal business process perspective as it focuses
on the internal operations which have a direct impact on the customer perspectives as the internal
operations create value for the customers.
This perspective also influences the financial perspectives by creating and increasing shareholder
value.
However, this perspective enables the managerial personnel to understand how well their firm is
functioning, whether its products or services are in accordance with the customer requirements,
what are the areas in which improvement is needed, how do their process performance compare
with the benchmark set by their main competitors, etc. These aspects should be carefully designed
and implemented by those who have complete knowledge. This perspective consists of three sub-
aspects.
 
a. Innovation Process: As the success of any organization depends upon the new products or
services (if possible unique products or services), this sub-perspective focuses on the creation
of those products and/or services which satisfy the needs of customers more effectively.
b. Operations Process: Production and delivery processes of products and services in such a
way that they satisfy the needs and requirements of customers assume importance. Production
processes should ensure manufacture of the product more effectively and economically
ensuring desired qualities and functional capabilities.
c. After-sales Service: It is necessary to ensure that the necessary services are made available to
customers who purchased the firm’s product. Hence, it is necessary to monitor how quickly
and promptly the firm is attending to the customer service requests.
 
Customer Perspective: The current business environment
demands customer focus and satisfaction for the success of any
organization.

For instance, if the customers are not satisfied with the qualities,
product capabilities, etc., of product of any firm, usually, they start
buying their requirements from other supplier/s whose product
meets their needs and requirements.

Therefore, this perspective suggests to identify the target market

segments, customers, etc., and measuring the performance of the
firm from the point of view customer satisfaction. Hence, it is
necessary to consider, while developing measures from customer
perspective, the kinds of customers, new customers, customer
satisfaction, time devoted for customer calls, etc.
 
Learning and Growth Perspective: It is an established truth that the success of
any organization depends, to a greater extent, upon the human resource. As is
known, in today’s knowledge organizations, the only repository of knowledge is
the human resource.

It is also true that the firms are showing more interest towards mechanization of
production processes and this technological area is undergoing a number of
changes at higher speed. And the employees must be in a position to learn to
work in this changed environment and also to update their knowledge to become
knowledge workers. Hence, the employees must be imparted with adequate
training which is a part of learning. This perspective, therefore, requires the
organizations to excel and achieve superior internal processes creating value for
both the shareholders and customers. It focuses on the following, among others.
 
Measure employee capabilities using their education and skill levels.
Measure the effectiveness of motivation using employee satisfaction, etc.
Measure the capabilities of information system with the help of time for
obtaining feedback, etc.
 
Financial Perspective: This perspective requires including,
a. Measures to measure and evaluate risk assessment,
b. Cost-benefit analysis, etc.,
c. Besides the traditional financial measures of return on
investment, operating income, reduction in costs, increase
in sales units, revenue growth, improvement in
productivities, etc.
 Implementation of Balanced Scorecard
1. Traditionally, corporate performance was measured and evaluated using
only financial performance statistics and all other aspects of performance
were not highlighted.
2. This model suggests measuring, evaluating and managing performance
of organizations using three non-financial perspectives (viz., internal
business process perspective, customer perspective and learning and
growth perspective) besides one traditional financial perspective.
3. It (i.e., Balanced Scorecard) requires the managerial personnel to be
proactive and focus strategically on those factors which ensure the long-
run sustainable success instead of concentrating only on the short-term
financial performance.
4. And it requires recognizing the requirements, needs, expectations, etc., of
three important stakeholder groups of any corporate enterprise (viz.,
shareholders, employees and customers) and to incorporate these
stakeholder groups’ requirements in the performance management
system.
 Implementation of Balanced Scorecard
Successful implementation requires certain preparations - Kaplan and Norton
recommended nine-step procedure.
1. The first step in the implementation of Balanced Scorecard is the
development of a plan for Balanced Scorecard, identify the strategic
elements and plan for change management. It begins with the
comprehensive plan to set the target keeping in mind the vision and mission
statements of the organization.
2. The second step is to finalize the organizational strategy spelling out clearly
the strategic results and themes. Definition and setting of goals and
measures for each of the four perspectives are very essential to implement
Balanced Scorecard. Goals are in the form of targets and measures are in
the form of parameters for measuring the performance. For example, from
the customer perspectives,
a. One of the goals may be, customer satisfaction and
b. Measures are in the form of, reduction in the number of customer
complaints, increase in the number of customer complaints unattended
during a period, increase in repeat sales from the regular customers, etc
3. Overall objectives are split into strategic objectives which act as the
basic building blocks.
4. The fourth step is establishing the cause-effect relationships. In this
regard, strategy map is of much help. Strategy map is in the form of
communication tools which explain clearly how the value is created for
the firm showing clearly the logical linkages between or among
strategic objectives in the form of cause-effect relationship.
5. Development of performance measures is the next step in the
implementation of Balanced Scorecard. In this step, measures for
performance evaluation are developed for each of the strategic
objectives – identification of leading and lagging measures, targets,
benchmarking details are finalized.
6. Once the goals are set and measures are defined clearly, the next step is
the introduction and implementation. This requires the identification of
activities, defining the responsibilities of all levels of management,
costs, setting targets after comprehensive discussion among all
concerned, time frame, etc. Further, they should be communicated to
different departments and levels of management.
7. Next important step is the monitoring and measuring the
performance of different departments - find out whether
the departments are progressing as required, guide and
assist the departments if they need in achieving the
targets, measure the performance continuously, make the
results known to all concerned, etc.
8.Organizational scorecard is cascaded down into
scorecards of units or segments of the firm – from
organizational scorecard (first tier) to scorecards of
support units (second tier) to team and individual
scorecards (third tier).
9. Last step is the evaluation of performance and to take
necessary corrective measures, wherever necessary to
ensure the desired result in future.
Kaizen Costing