The Balanced Scorecard

Achieving Success in the

Information Era
 To achieve success in the information era,
companies need more than prudent
investment in physical assets and excellent
management of financial assets and liabilities
 Companies mobilize and create value from
their intangible assets as well as their physical
and financial ones
Intangible Assets

 An organization’s intangible assets include:

 Loyal and profitable customer relationships
 High-quality processes
 Innovative products and services
 Employee skills and motivation
 Databases and information systems
 Some academic scholars and practitioners have
tried to expand the financial model to
incorporate the valuation of intangible assets on
a company’s balance sheet
Measuring Intangible Assets
 Difficulties in placing a reliable financial value on
intangible assets have prevented them from
being recognized on a company’s balance sheet
 Likely to continue to be the case
 Yet these assets are critical for success
 Managers understand that if “you can’t measure it, you
can’t manage it”
 Many managers have searched for a system
that would help them measure and manage the
performance of their intangible, knowledge-
based assets
The Balanced Scorecard

 The Balanced Scorecard (BSC) provides a

system for measuring and managing all aspects
of a company’s performance
 The scorecard balances traditional financial
measures of success, such as profits and return
on capital, with non-financial measures of the
drivers of future financial performance
 The Balanced Scorecard measures
organizational performance across different
perspectives
 Derived from the organization’s vision and strategy
Perspectives
 Four different but linked perspectives are
derived from the organization’s strategy
 Financial: How is success measured by
shareholders?
 Customer: How do we create value for
customers?
 Internal: At what internal processes must we excel
to satisfy customers and shareholders?
 Learning & Growth: What employee capabilities,
information systems, and organizational climate do
we need in order to continually improve internal
processes and customer relationships?
Balanced Measurements

 Rather than rely on a measurement system

that reports only on financial results, the BSC
enables companies to:
 Track financial results
 Simultaneously monitor how they are building the
capabilities for future growth and profitability
 With customers
 With their internal processes
 With their employees and systems
Connecting the Four Perspectives
 A strategy map provides a visual representation of
the linkages in the four perspectives of the BSC
Financial Perspective Return on Investment

Customer Perspective Customer Loyalty

On-Time Delivery

Internal Perspective Process Quality Cycle Time

Learning & Growth

Employees’ Process Improvement Skills
Perspective
Connections (1 of 3)
 Return on investment (ROI) is a widely
recognized measure of financial success
 Accordingly, ROI is included on the scorecard
 But what drives ROI?
 Repeated and expanded sales from existing
customers, the result of a high degree of
loyalty among existing customers, could be
one driver of this financial measure
 Customer loyalty is included on the scorecard
because it is expected to have a strong influence
on ROI
 But how will the organization achieve customer
loyalty?
Connections (2 of 3)
 Analysis of customer preferences may reveal
that on-time delivery (OTD) of orders is highly
valued by customers
 Improved on-time delivery performance is expected
to lead to higher customer loyalty
 So both customer loyalty and OTD are incorporated
into the scorecard’s Customer perspective
 But how will the organization improve OTD?
 The company must excel at internal processes
to achieve exceptional OTD
Connections (3 of 3)
 Short cycle times and high-quality production
processes are two drivers of on-time delivery
 These two parameters are measured in the

Internal perspective
 But how do organizations improve the quality and

reduce the cycle times of their production

processes?
 The company must have skilled production workers,
well-trained in process improvement techniques
 A measure of employees’ skill and capabilities in

process improvement is, therefore, used in the

Learning & Growth perspective
Strategy and the BSC
 A properly constructed Balanced Scorecard tells the
story of the business unit's strategy
 It identifies and makes explicit the hypotheses about
the cause and effect relationships between:
 Outcome measures in the Financial and Customer

perspectives
 E.g., ROI and customer loyalty
 and the performance drivers of those outcomes that
are measured in the Internal and Learning & Growth
perspectives
 Such as zero defect processes, short cycle times, and
skilled, motivated employees
Objectives (1 of 2)
 Are concise statements that articulate what the
organization hopes to accomplish
 Best stated as action phrases
 May include the means and the desired results
 Tell the story of the strategy through the cause-
and-effect relationships in each of the four
balanced scorecard perspectives
 The company’s balanced scorecard would
typically contain an extensive (3-5 sentence)
description of each objective
 The following examples are abbreviated versions
Objectives (2 of 2)
 Typical objectives found in each of the four BSC
perspectives include:
 Increase revenues through expanded sales to existing
customers (Financial perspective)
 Become service oriented (Customer perspective)
 Achieve excellence in order fulfillment through continuous
process improvements (Internal perspective)
 Align employee incentives and rewards with the strategy
(Learning & Growth perspective)
 Even descriptions of a paragraph are insufficient to
give complete clarity to the objective
 Measures describe how success in achieving an objective
will be determined
Measures

 Provide specificity and reduce the ambiguity

that is inherent in word statements
 Specifying exactly how an objective is
measured will give employees a clear focus
for their improvement efforts
 Once the objectives have been translated
into measures, managers select targets for
each measure
 Targets and Initiatives
 Targets establish the level of performance or
rate of improvement required for a measure
 Should be set to represent excellent
performance
 Should, if achieved, place the company as one
of the best performers in its industry
 Even more important would be to choose targets that
create distinctive value for customers and
shareholders
 Finally, managers identify initiatives
 The short-term programs and action plans that will
help achieve the stretch targets established for its
measures
Vision and Mission

 Before determining the objectives and

measures, an organization should already
have a vision and mission statement
 And a general idea of its strategy
 These high-level statements can then be
translated into detailed objectives and
measures
 The exact definitions of vision and mission
can vary, but the following examples should
provide helpful guidelines
Vision
 A concise statement that defines the mid to long-
term (3 - 10 year) goals of the organization
 The vision should be external and market-oriented
and should express, often in colorful or “visionary”
terms, how the organization wants to be perceived
by the world:
“The City of Charlotte will be a model of excellence that puts
its citizens first. Skilled, motivated employees will be known
for providing quality and value in all areas of service. We will
be a platform for vital economic activity that gives Charlotte a
competitive edge in the marketplace. We will partner with
citizens and businesses to make Charlotte a community of
choice for living, working and leisure activities”
Mission Statement
 A concise, internally-focused statement of how the
organization expects to compete and deliver value
to customers
 It often states the reason for the organization’s
existence, the basic purpose towards which its
activities are directed, and the values that guide
employee’s activities:
“The mission of the City of Charlotte is to ensure the delivery
of quality public services that promote the safety, health and
quality of life of its citizens. We will identify and respond to
community needs and focus on the customer through:
 Creating and maintaining effective partnerships
 Attracting and retaining skilled motivated employees
Putting Vision in Action
 The Vision and Mission set the general
direction for the organization
 They are intended to help shareholders, customers,
and employees understand what the company is
about and what it intends to achieve
 But these statements are far too vague to
guide day-to-day actions and resource
allocation decisions
 Companies start to make the statements
operational when they define a strategy of how
the vision and mission will be achieved
What is Strategy?

 The strategy literature is uncommonly diverse

 Different scholars and practitioners have very
different definitions or even understanding about
what strategy is and how it should be defined
 For purpose of this chapter, we adopt the
general framework articulated by Michael
Porter, one of the founders and still an
outstanding leader in the field of the strategy
Strategy According to Porter

 Porter argues that strategy is about selecting

the set of activities in which an organization
will excel to create a sustainable difference
in the marketplace
 The sustainable difference may be to:
 Deliver greater value to customers than competitors
 Provide comparable value at a lower price than
competitors
 He states, “Differentiation arises from both
the choice of activities and how they are
performed”
Building the
Balanced Scorecard

 With this background on establishing high-

level direction for the organization, we now
develop the role for the BSC to provide
needed specificity that makes vision, mission
and strategy statements meaningful and
actionable for employees
 Starting with the Financial perspective of the
scorecard and working successively through the
Customer, Internal, and Learning & Growth
perspectives
Financial Perspective (1 of 2)
 The ultimate objective for profit-maximizing
companies
 Financial performance measures indicate
whether the company's strategy,
implementation, and execution are contributing
to bottom-line improvement
 Financial objectives typically relate to profitability
 For example, operating income and ROI
 A company’s financial performance can be
improved in two ways:
 Revenue growth and increased productivity
Financial Perspective (2 of 2)
 Companies generate revenue growth by:
 Selling new products
 Selling to new customers
 Selling in new markets
 Increased productivity occurs by:
 Lowering direct and indirect expenses
 Enabling a company to produce the same quantity of
outputs while spending less on people, materials, energy,
and supplies
 Utilizing their financial and physical assets more
efficiently
 Reducing the working and fixed capital needed to support
a given level of business
Customer Perspective (1 of 3)
 In this perspective, managers identify the targeted
customer segments in which the business unit
competes and the measures of the business unit's
performance in these targeted segments
 The Customer perspective typically includes several
common measures of the successful outcomes from
a well-formulated and implemented strategy:
 Customer satisfaction  Customer profitability
 Customer retention  Market share
 Customer acquisition  Account share

• Virtually all organizations try to improve these

common customer measures so these measures
by themselves do not describe a strategy
Customer Perspective (2 of 3)
 A strategy identifies specific segments targeted
for growth and profitability
 E.g., Southwest Airlines, targets price-sensitive
customers while Neiman-Marcus targets customers
willing to spend their high disposable incomes
 Companies must also identify the objectives
and measures for the value proposition it
offers customers
Customer Perspective (3 of 3)
 The value proposition is the unique mix of product,
price, service, relationship, and image offered to the
targeted customers
 Defines the company’s strategy
 Should communicate what the company expects to do for its
customers better or differently from its competitors
 Value propositions used successfully by different
companies include:
 “Best buy” or lowest total cost
 Product innovation and leadership
 Complete customer solutions
Internal Perspective (1 of 3)
 Once an organization has a clear picture of its
financial objectives and customer objectives,
it should determine the means by which it will:
 Produce and deliver the value proposition for
customers
 Achieve the productivity improvements for the
financial objectives
 The Internal perspective identifies the critical
processes at which the organization must
excel to achieve its customer, revenue
growth, and profitability objectives
Internal Perspective (2 of 3)

 Organizations perform many different

processes, which may be classified into four
groupings:
 Operating processes
 The basic, day-to-day processes by which companies
produce their existing products and services and deliver
them to customers
 Customer management processes
 Processes by which companies expand and deepen
relationships with targeted customers
Internal Perspective (3 of 3)
 Innovation processes
 Processes by which companies develop new products,
processes, and services, often enabling the company to
penetrate new markets and customer segments
 Regulatory and social processes
 Processes by which companies ensure that they meet or
exceed regulations on business practices
 Managers should identify which of the process
objectives and measures are the most
important for their strategy
 Need to follow a “balanced” strategy and invest in
improving processes in all four groups
Learning & Growth Perspective (1 of 3)
 Identifies objectives for the people, systems,
and organizational alignment that create long-
term growth and improvement
 Managers define the employee capabilities, skills,
technology, and organizational alignment that will
contribute to improving performance in the
measures selected in the first three perspectives
 They learn where they must invest to improve the
skills of their employees, enhance information
technology and systems, and align people to the
company’s objectives
Learning & Growth Perspective (2 of 3)
 The Learning & Growth perspective of the
scorecard identifies how executives mobilize
their intangible assets (human, information,
and organization) to drive improvement in
the internal processes most important for
implementing their strategy
 In general, for companies to develop their
Learning & Growth objectives and measures,
managers examine each of the processes
they selected in the Internal perspective
Learning & Growth Perspective (3 of 3)
 They then determine the factors that enable
that process to be performed in an
outstanding manner so that it can contribute
to the success of the company’s strategy:
 The employee capabilities, knowledge, and skills
 The information systems and databases
 Employee culture, alignment, and knowledge-
sharing
 KPI Scorecards
 Some organizations identify key performance indicators
(KPIs) and classify them into the four BSC perspectives
 KPIs typically are common measures, such as customer
satisfaction, quality, cost, employee satisfaction, and morale
 They are worth striving to achieve but do not reflect a company’s
strategy
 Companies may expand their compensation system to
reward executives for a broader set of performance than
simply short-term financial results based on KPIs
 Not as powerful as selecting measures that can be linked back to
the strategy and that will drive successful strategy implementation
Using BSC to Implement Strategy

 BSC was originally developed to improve

performance measurement, but organizations
learned that measurement has consequences
far beyond reporting on the past
 Measurement creates focus for the future
 The BSC concept evolved during the 1990’s
from a performance measurement system to a
new strategic management system
 BSC focused the entire organization on strategy
implementation
 5 Principles for Becoming Strategy-Focused (1 of
3)
 Organizations achieved their strategic alignment
and focus in different ways, at different paces, and
in different sequences, but they generally followed
a common set of five principles:
1. Translate the Strategy to Operational Terms
 Executive teams often report great benefits from the process of
building the scorecard
2. Align the Organization to the Strategy
– For organizational performance to exceed the sum of its parts, the
strategies of diverse, decentralized units must be linked and
integrated
 5 Principles for Becoming Strategy-Focused ( 2 of
3)

3. Make Strategy Everyone’s Job

 Employees must learn about the strategy and reorient

their day-to-day tasks to contribute to the success of

that strategy
 This is top-down communication about what the
organization is attempting to accomplish, leaving to
employees the challenge and opportunity to perform their
work in new and different ways to help the organization
achieve its strategic objectives
4. Make Strategy a Continual Process
 5 Principles for Becoming Strategy-Focused (3 of
3)

5. Mobilize Leadership for Change

 The single most important condition for success in
becoming truly strategy-focused is ownership and active
involvement of the executive team
 If those at the top are not energetic leaders of the
process, change will not occur and strategy will not be
implemented successfully
Pitfalls (1 of 3)
 As with any new technology or management
tool, not all BSC implementations have been
successful
 Several design factors can lead to problems
and disappointment when applying the BSC
 Too few measures in the scorecard to provide:
 A complete picture of the company’s strategy
 A balance between desired outcomes and the performance
drivers of those outcomes
 Too many measures
 Attention is diffused, and insufficient attention is given to
those few measures that make the greatest impact
Pitfalls (2 of 3)
 The drivers in the Internal and Learning & Growth
perspectives don't link to the desired outcomes in
the Financial and Customer perspective
 E.g., strategy may call for creating innovative solutions for
its customers but the measures in the internal perspective
focus exclusively on operational improvements
 As these design flaws are detected, they can
be easily corrected
 The biggest threat is a poor organizational
process for developing and implementing the
scorecard, seen when:
Pitfalls (3 of 3)
 Senior management is not committed, and the BSC
project is delegated to middle management
 One senior manager builds the scorecard alone
 Senior executives feel that only they need to know and
understand the strategy, and BSC responsibilities don't
filter down
 The BSC is treated as a one-time event that requires the
perfect scorecard for implementation
 BSC is an iterative process
 All BSC’s start with some new measures for which no data
currently exists
 The BSC is treated as a systems project rather than as a
management project
 BSC Summary (1 of 2)
 BSC integrates measures based on strategy
 Retains financial measures of past performance
 Also introduces the drivers of future financial
performance
 The drivers are derived from an explicit and
rigorous translation of the organization's
strategy into tangible objectives and measures
 The new measurement and management
system will have its greatest impact when the
executive team is leading the transformational
processes
 BSC Summary (2 of 2)
 The benefits from BSC are realized as the
organization integrates its new measurement
system into management processes that:
 Cascade the strategy to all organizational units
 Communicate the strategy to all employees
 Align employees’ individual objectives and incentives
to successful strategy implementation
 Integrate the strategy with ongoing management
processes:
 Planning, budgeting, reporting, and management meetings