THE BALANCE SCORECARD ROBERT S. KAPLAN AND DAVID P. NORTON S Prepared by Aida Toleubayeva

Robert Kaplan and David Norton first publicized the balanced scorecard in a series of journal articles and published this concept in their book, The Balanced Scorecard. Introduced in 1992, by Robert Kaplan and David Norton, the balance Scorecard is the most commonly used framework for ensuring that agencies execute their strategies. Today about 70% of the fortune 1000 Companies utilize the balance scorecard to help manage performance Where it started…..

Developed in the early 1990s by Dr. Robert Kaplan and David Norton "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation." David Norton Robert Kaplan

WHAT IS THE BALANCE SCORECARD BSC translates an organizational mission and strategy into comprehensive set of performance measures that provides the frame work for strategic measurement and Management system

The Balanced Scorecard: Balances financial and non-financial measures Balances short and long-term measures Balances performance drivers (leading indicators) with outcome measures (lagging indicators) Should contain just enough data to give a complete picture of organizational performance… and no more! Leads to strategic focus and organizational alignment.

The Balanced scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action. Provides an organization with feedback of both the internal business processes and external outcomes, which allows for continuous improvement of strategic performance and results. Nerve center of an enterprise

Why is it important to build a scorecard that communicates a business units strategy ? The scorecard describes the organizations vision of the future to the entire organization. It creates shared understanding. The scorecard creates a holistic model of the strategy that allows all employees to see how they contribute to organizational success. Without such linkage, individuals and departments can optimize their local performance but not contribute to achieving strategic objectives. The scorecard focuses change efforts. If the right objectives and measures are identified, successful implementation will likely occur, if not investments and initiatives will be wasted.

The balanced scorecard is centered on four performance metrics or perspectives: Customers Internal processes Financial Learning and growth When implemented properly, each one of these perspectives contains four subparts consisting of Objectives Measures Targets Initiatives

BALANCE SCORECARD PRESPECTIVES

Objectives, Measures, Targets and Initiatives Objectives : what the strategy is to achieve in that perspective Measures : how progress for that particular objective will be measured Targets : refer to the target value that the company seeks to obtain for each measure Initiatives : what will be done to facilitate the reaching of the target

FINANCIAL PERSPECTIVE The financial performance perspective of the balanced scorecard addresses the question of how shareholders view the firm and which financial goals are desired from the shareholders perspective. In private companies, the financial perspective is the main objective (ultimate goal) – without having to sacrifice the interests of other relevant stakeholders (community, environment, government, etc.) long- term shareholder value revenue growthcost efficiency.In the financial perspective, the strategic goal is the long- term shareholder value. This goal is driven by two factors, namely : revenue growth and cost efficiency.

Financial objectives tend to be influenced by the organization's position on the life-cycle curve. GROWTH HARVEST SUSTAIN

There are three main stages to this cycle which include: Growth stage -goal of the company is growth An example of a growth goal would be revenue growth, sales in new market, sales to new customers. Sustain stage - the goal of the firm is profitability Measures in this stage may include ROE, ROCE, and EVA, cost reduction rates, discounted cash flows. Harvest stage - the goal of the firm is cash flow and reduction in capital requirements. Current cash flows, payback period, spending ratios, product line profitability.

Strategic themes for the financial perspective Revenue Growth and Mix refer to expanding product and service offerings, reaching new customers and markets, changing the product and service mix toward higher value added offerings and repricing products and services. Cost reduction and productivity improvement refers to efforts to lower the direct costs of products and services, reduce indirect costs and share common resources with other business units. Asset utilization theme, managers attempt to reduce the working capital levels required to support a given volume and mix of business. Objectives, such as return on employed, return on investment and economic value added, provide overall outcome measures of the success of financial strategies to increase revenues, reduce costs and increase asset utilization.

Revenue Growth and Mix Cost Reduction / Productivity Improvement Asset Utilization GrowthSales growth rate, % revenue from new products, services and customers increase Revenue productivity Investment (% in sales) R&D SustainShare of targets customers and accounts, Cost reduction rates, indirect expenses Working capital ratios, ROCE Harvestcustomer and product line profitability, % unprofitable customers Unit costsPayback period Strategic themes for the Financial Perspective Strategic themes Business unit strategy

CUSTOMER PERSPECTIVE Customer perspective identifies targeted customer and market segments and measures the organizations success in these segments. It measure the level of customer satisfaction, customer retention and market share held by the organization.

The Customer Perspective – Core measures Market Share Customer Retention Customer Profitability Customer Satisfaction Customer Acquisition

Market share – reflects the proportion of business in a given market ( in terms of number of customers, dollars spent or unit volume sold) that a business unit sells. Customer Acquisition – measures tracks, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer Retention – the rate at which a business unit retains or maintains ongoing relationships with its customers. Customer Satisfaction – assesses the satisfaction level of customers along specific performance criteria within the value proposition. Customer Profitability – measures the net profit of a customer, or a segments, after allowing for the unique expenses required to support that customer.

Customer value proposition Customer Acquisition Customer Satisfactio n Customer Retention Value = Product / service attributes Image Relationship + + Brand equity Convenient Trusted Responsive Functionality Quality Price Time

There are four broad categories that Kaplan and Norton base the customer perspective around. Best buy Companies that supply services and products at low prices and fast service. Product leadership and innovation Companies that focus on customer that buy the newest and most advanced cutting edge technology. Customer complete solutions Companies that try to sell things like computers where customers customize them to their liking. Lock in Companies that will make a product then to buy accessories for that product you have to buy the same brand name because other brands out work with that product.

INTERNAL BUSINESS PROCESS PERSPECTIVE Internal business process objectives address the question of which processes are the most critical for satisfying customers and shareholders A firm must concentrate its efforts to excel in these areas Metrics based on this prospective allow the managers to know how well their business is running and whether its products and services conform to customer requirements

INTERNAL BUSINESS PROCESS 3 sub processes Innovation Process Creating Products/ Services & Processes to meet the demand of Customers Operations Process Producing & delivering the Existing products that will meet the needs Of Customers Post sale service Process Providing service and Support to the customer after the sale of a product or service

LEARNING AND GROWTH PERSPECTIVE Learning and Growth Perspective includes measures such as Employee satisfaction, employee retention and skill sets etc. Objectives in learning and growth perspective are drives that encourage implementation of goals set in the financial, customer and internal processes objectives. It identifies the infrastructure that the organization must build to create long term growth and improvement.

Objectives Long term success Capability Employee Skills Information Systems Organizational Processes Measures Satisfaction Retention Training Capabilities Accuracy Real time availability Pervasiveness Alignment of incentives with key success factors Improvement in key customer & internal processes

Balanced Scorecard Measurements

Strategy Map Framework This framework describes the types of strategic target that should be presented in each perspective, namely the financial perspective, customers, internal business process, and learning & growth perspective

A Strategy Map Describes How An Organization Intends to Create Value For Its Stakeholders Strategy Map Framework

Commercial Industry: Regional Airline

BALANCED SCORECARD AS A MANAGEMENT SYSTEM Clarify and translate vision and strategy Communicate and link strategic objectives and measures Plan, set targets and align strategic initiatives Enhance strategic feedback and learning BSC reviewed regularly to enhance operational decision-making Success of initiatives assessed based on DATA… not opinions Leading indicators evaluated to confirm accuracy of assumptions The BSC is a Living Document that requires regular revision of objectives, measures and initiatives: How are we doing? Are we measuring the right things? What initiatives do we need to get us where we want to go? Have our organizational goals changed?

Clarifying and Translating the Vision & Strategy Clarifying the Vision Gaining Consensus Communicating & Linking Comm and Educating Setting Goals Linking Rewards to Performance measures Strategic Feedback & Learning Articulating the shared Vision Supplying Strategic Feedback Facilitating Strategy review and Learning Balance Scorecard Planning & Target Setting Setting Targets Aligning Strategic Initiatives Allocating Resources Establishing Milestones

Clarifying and Translating the Vision and Strategy Translating the vision: helping all employees understand how their day-to-day work contributes to long-term goals. The strategy is the reference point the entire management process. The shared vision is the foundation for strategic learning. clarifying the vision formulating by Sr. Executives reaching consensus sorting out differences joint accountability

Communicating and Linking Communicating and linking: disseminating long-term goals both up and down an organizational hierarchy, ensuring that both departmental and individuals objectives are in alignment. goal alignment exists from top to bottom education and open communication about strategy are basis for employee empowerment compensation is linked to strategy.

There are three distinct mechanisms are used Communication and education programs. Under it the communication to the board of directors, senior executives and employees for understand the strategies. A consistent and continuing program to educate the organization on the component of strategy as well as reinforcing this education with feedback on actual performance, is the foundation of organizational alignment. Brochures, newsletters and electronic bulletin boards are the tools of a communication/ education program.

Goal Setting Programs : once a base level of understanding exists, individuals and teams throughout the business unit must translate the higher level strategic objectives in to the personal and team objectives. E.g. an on time delivery objective for the business units customer perspective can be translated in to an objective to reduce setup times at the bottleneck machine or for rapid transfer of orders from one process to the next. In this way local improvement efforts become aligned with overall organizational success factors. Reward System Linkage : alignment of the organization toward the strategy must ultimately be motivated through the incentive and reward system. Alignment and accountability will clearly be enhanced when individual contributions to achieving scorecard objectives are linked to recognition, promotion and compensation programs.

Planning and Target Setting Business planning: taking long-term strategy and using it as the basis for how resources and capital are allocated Four steps are needed to use the scorecard in an integrated long range strategic planning and operational budgeting process. Stretch targets are established and accepted Strategic initiatives are clearly identified Investments are determined by the strategy Annual budgets are linked to long range plans

Set stretch targets : managers should set ambitious targets for measures that all employees can accept and buy in to. The cause and effect relationships in the scorecard help identify the critical drivers that will allow breakthrough performance on important outcome measures, particularly financial and customer ones. Identify and rationalize strategies initiatives : the gaps between the ambitious targets set for scorecard measures and the current performance on those measures enable managers to set priorities for capital investments and action programs intended to close the gaps. Manager eliminate or de- emphasize initiatives that will not have a major impact on one or more scorecard objectives.

Link to annual resource allocation and budgets: managers link 3 to 5 years strategic plan to discretionary expenses and budgeted performance for the upcoming year. These milestones enable them to track the business units trajectory along its strategic journey Identify critical cross business initiatives : managers identify the initiatives that will deliver benefits to the strategic objectives of other business units or the corporate parent.

Strategic Feedback and Learning Feedback and learning: the scorecard enables strategic and real-time learning because it measures daily performance and spending in the context of overarching goals, allowing organizations to make necessary changes. Feedback system used to test the hypotheses on which strategy is based Team problem solving Strategy development is a continuous process

Periodic Review and Change Targets-achieved or not Past and future Review Information from all Double loop learning Cause and effect Relationship Validity and Viability Strategy replacement according to outcomes/ performance drivers

An effective strategic learning process has three essential ingredients: a shared strategic framework that communicates the strategy and allows each participant to see how his or her activities contribute to achievement of all overall strategy a feedback process that collects performance data about the strategy and allows the hypotheses about interrelationships among strategic objectives and initiatives to be tested a team problem solving process that analysis and learns from the performance data and then adapts the strategy to emerging conditions and issues

Goal alignments from top to bottom Education and open communication about strategy Compensation is linked To Strategy Feedback system used to test The hypothesis on which strategy Is based Team problem solving Strategy development is a Continuous Process The strategy is the reference point for the entire management process The shared vision is the foundation for strategic planning Stretch targets are established and accepted Strategic initiatives are clearly identified Investments are determined by strategy Annual Budgets are linked to long term planning Clarifying & translating the vision and strategy Communicating & linking Strategic feedback & learning Planning & target setting Balanced scorecar d Different Management System for Strategic Implementation

Metropolitan Banks Strategy Metro bank is the retail banking division of a major bank with 8000 employees, a 30% market share of the regions core Deposit and accounts and about $1 billion in total revenue. Metro bank implemented the balance scorecard, starting in 1993, to communicate and reinforce a new strategy. To increase income and revenue by broadening the service sold to a targeted group of customers.

Metropolitan Bank: Cause and Effect Increase Return to Stockholders Broaden Revenue Mix Increase Customer Satisfaction With Our Products Understand Customer Needs Financial Perspective Customer Perspective Develop new products Cross sell products Internal Process Perspective Increase employee productivity Develop Selling Skills Align Personal Goals Access to Strategic Information Learning perspectiv e

Metropolitan Banks Balanced Scorecard

Barriers to effective Implementation of BSC Vision and Strategy Not Actionable Strategy Not Linked to Departmental Team and Individual Goals Strategy Not Linked to resource allocation Feedback that is Tactical Not strategic

2. Strategy not linked toDepartmental team andIndividual goals Personal MBO and incentives 4. Feedback that isTactical not strategic Monthly review 1. Vision and strategy not actionable Strategy and vision 3. Strategy not linked to resource allocation Financial plan and capital allocation Budget

Barrier No 1: Vision and strategy not Actionable Cant be translated into action Cant be acted Upon Cant be understood Fragmentation & Sub optimization of efforts Lacking consensus & Clarity Different Agendas No integration Not linked coherently to overall strategy

Barrier No 2 : Strategy not Linked to Departmental, Team and Individual Goals Not translated into Department/ individual Goals Different Priorities Failure of Human Resource Management Disalignment in Goals

Barrier No 3: Strategy not Linked to Resource Allocation Separate Processes for Long term & Short term Strategic planning Funding to unrelated priorities Poor Monthly Reviews Unfocused New Mgt Techniques Poor Integration

Barrier No 4: Feed back not tactically strategic Bulk of feedback is only financial measures Little time on strategy implementation & success No priority to periodic review and meetings Inadequate information Poor tactical review process