Balanced Scorecard, A Comprehensive Guide
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The balanced scorecard is a management system that helps organizations translate their vision and strategy into actionable objectives, while providing feedback on both internal processes and external outcomes for continuous improvement. It encompasses four key perspectives: financial, customer, internal business processes, and learning and growth, each with specific objectives, measures, targets, and initiatives to align with strategic goals. This framework enhances communication, cooperation, and strategic feedback, ensuring performance metrics are linked to organizational strategies and fostering overall business efficacy.
Balanced Scorecard, A Comprehensive Guide
- 1. Balanced Scorecard A Comprehensive Guide Upendra Kartik
- 2. What is a Balanced Scorecard?
- 3. What is Balanced Scorecard? • 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
- 4. Measurement, Management and Balance Management : The association and synchronization of the activities of an enterprise in accordance with certain defined systems and in achievement of defined objectives. Measurement : A way of monitoring and tracking the progress of strategic objectives • Measurement is a decision support system for management • Measurements are a natural and inherent part of the management process
- 5. What is Balanced Scorecard? • The term “scorecard” signifies quantified performance measures and “balanced” signifies the system is balanced between: • Short-term and long term objectives • Financial and non-financial measures • Lagging and leading indicators • Internal and external performance perspectives
- 6. What is Balanced Scorecard?
- 7. Vision and Strategy Objectives Measures Targets Initiatives FINANCIAL “To succeed financially, how should we appear to our shareholders?” Objectives Measures Targets Initiatives LEARNING AND GROWTH “To achieve our vision, how will we sustain our ability to change and improve?” Objectives Measures Targets Initiatives CUSTOMER “To achieve our vision, how should we appear to our customers?” Objectives Measures Targets Initiatives INTERNAL BUSINESS PROCESS “To satisfy our shareholders and customers, what business processes must we excel at?” The Four Perspectives What is Balanced Scorecard?
- 8. The Evolution of Balanced Scorecard • The concept of the balanced scorecard was first touted in the Harvard Business Review in 1992 in a paper written by Robert S Kaplan and David P Norton. • The paper introduced the idea of focusing on human issues as well as financial ones, and measuring performance across a much wider spectrum than businesses had done before. • Kaplan and Norton published their ideas in full in The Balanced Scorecard: Translating Strategy into Action in 1996 and it became a business bestseller.
- 9. BSC and other Quality Systems • Baldrige subcategories mirror BSC: • Customer-focused results • Financial and market results • Human resource results • Organizational effectiveness • Changes in Baldrige methodology followed soon after Curt Riemann, first Director of Baldrige National Quality Program, attended BSC presentations in early 90s. 9
- 10. BSC, Baldrige and EFQM EFQM criteria: • Leadership (10%) • People (9%) • Policy & strategy (8%) • Partnerships & resources (9%) • Processes (14%) • People results (9%) • Customer results (20%) • Society results (6%) • Key perf. results (15%) Baldrige categories • Leadership (12%) • Human resource focus (8.5%) • Strategic planning (8.5%) • Process management (8.5%) • Customer & market focus (9%) • Information & analysis (8.5%) • Business results (45%) 10
- 11. The Four Perspectives of Balanced Scorecard 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
- 12. • 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 The Four Perspectives of Balanced Scorecard
- 13. Linking the BSC to organizational strategy Vision Mission Business Planning and Strategy Goals and Objectives Balanced Scorecard Corporate Measurement and Reporting System The balanced scorecard is an integral part of business planning and strategy
- 14. Advantages of Balanced Scorecard • Translation of strategy into measurable parameters • Communication of strategy • Alignment of individual goals with strategic objectives • Helps align key performance measures with strategy at all levels of an organization. • Provides management with a comprehensive picture of business operations. • Facilitates communication and understanding of business goals and strategies at all levels of an organization. • Maximized Cooperation - Team members are focused on helping one another succeed. • It provides strategic feedback and learning. • Initiatives are continually measured and evaluated against industry standards
- 15. Company Strategy - Sample
- 16. Example of Balanced Scorecard STRATEGY MAP BALANCED SCORECARD MEASUREMENT PROCESS: MANUFACTURING EXCELLENCE THEME: ROCE > xx%, VOLUME = xx,xxx units OBJECTIVES TARGET ACTION PLAN INITIATIVE BUDGET FINANCIAL PERSPECTIVE Improve Productivity OFFER PRODUCTS & SERVCIES THAT ARE CONSISTENT, TIMELY and LOW-COST Long-Term Shareholder Value ROCE > xx% Grow Revenue CUSTOMER PERSPECTIVE •Operating Cost & Efficiency •Capacity Utilization •Capability Utilization •Brand / Image • Cost/Unit, Efficiency •% Utilization • Monthly Monitoring • Weekly/Monthly Monitoring • Monthly Monitoring • Weekly/Monthly Monitoring •Low Cost Manufacturing •World-Class Quality Standards •World-Class Delivery Timing •Knowledgeable & Skilled Partner •High Customer Satisfaction •Reinforce Brand Image • Man-hour per Unit • Defect per Unit • Sales Delivery • Direct Pass Rate • Market Feedback • Sales Volume • Weekly Monitoring • Daily Monitoring • Daily Monitoring • Daily Monitoring • Weekly Monitoring • Monthly Monitoring Prod. & Sales Mtg. Low Cost World Class ENSURE OPERATIONAL EXCELLENCE WITH INNOVATION AS WELL BEING SOCIALLY RESPONSIBLE INTERNAL PERSPECTIVE Customer Satisfaction Enhance Brand Operational Excellence Process Innovation Alliances with SBUs Socially Responsible •Productivity •Delivery •Continuous Improvement •NPI •Safety & Health •Environment • Cycle Time • Meet Daily Plan • WIP • KAIZEN • ICC • Timely Introduction • Industrial Accident • Commuting Accident • Toxic Waste Disposal • ISO 9002 • Hourly Monitoring • Daily Monitoring • Daily Monitoring • Monthly follow-up • Specific Programmed • Weekly Follow-up • Cross Audits • Defensive Driving • Facility Readiness • Certification STRATEGIC JOB & SYSTEMS LEARNING & GROWTH PERSPECTIVE Skills Info. System •Develop the Necessary Skills •Information Systems Availability • R&D & Development • ALC, Procurement, Financial • Training and Skill Build-up • Set-up, Test and Validation • Trial Prod. • Spare Parts Prod •Warranty Cost t
- 18. What is the 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 shareholder’s perspective. • These financial goals are dependent on the company’s stage in the business life cycle.
- 19. Financial Performance: Business Life Cycle • There are three main stages to this cycle which include: • Growth stage -goal of the company is growth • Sustain stage - the goal of the firm is profitability • Harvest stage - the goal of the firm is cash flow and reduction in capital requirements.
- 20. Linking Financial Objectives to Business Unit Strategy Harvest Sustain Growth • Customer and product line profitability • % unprofitable customers • Cross selling • Customer and product line profitability • Cost reduction • Sales growth rate • % revenue from new customers, products and services
- 21. Strategic Theme for Financial Perspective Financial objectives Revenue growth and Mix Cost Reduction Asset utilization
- 22. Strategic Theme for Financial Perspective Revenue growth and mix. This is mainly about reaching new customers and markets, expanding products and services, introducing new pricing policies etc. Productivity improvement/cost reduction. This may include reduction of indirect costs, sharing common resources with other departments, lowering direct costs. Investment strategy/assets utilization This may include greater utilization of fixes assets base and improving return on investment
- 25. Customer Needs • Who is your customer? • What age, gender, group does our product appeal to? • What services or products do they expect from you? • Do we provide personal services, do your products serve as advertised? • How do you listen to and learn from your customers? • Do we provide feedback calls or emails? • How do you retain and acquire new customers? • Do we use new advertisement and how do we advertise? • How do you meet customers’ needs? • Do we provide help lines and how can we provide help to customers? • How do you measure customer satisfaction and dis-satisfaction? • Do we use surveys to find out how customers feel about us?
- 26. Customer Perspective • Companies identify the customer and market segments in which they have chosen to compete. These segments represent the sources that will deliver the revenue component of the company's financial objectives. • The customer perspective enables companies to align their core customer outcome measures- satisfaction, loyalty, retention, acquisition, and profitability-to targeted customers and market segments. • Customer perspective enables to identify and measure, the value propositions they will deliver to targeted customers and market segments.
- 27. Customer perspective • Market share • Customer retention • Customer acquisition • Customer satisfaction • Specific performance criteria • Defined value proposition • Customer profitability • Profitability by account • Net of any special account-specific expenses 27
- 28. Market Segmentation • Existing and potential customers are not homogeneous. • Customers have different preferences and value the attributes of the product or service differently. • A strategy formulation process, using in-depth market research, should reveal the different market or customer segments, and their preferences like price, quality, functionality, image, reputation, relationship, and service. 28
- 29. Market Segmentation – Example Example of market segmentation, Pioneer Petroleum, a major U.S. refiner and retail marketer of gasoline and automobile lubricants, 1. Road Warriors: 16% of buyers Higher-income middle-aged men who drive 25,000-50,000 miles a year . . . buy premium gasoline with a credit card . . . Purchase sandwiches and drinks from the convenience store . . . will sometimes wash their cars at the carwash. 2. True Blues: 16% of buyers Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular station . . . frequently buy premium gasoline and pay in cash. 3. Generation F3: 27% of buyers Fuel, Food, and Fast: Upwardly mobile men and women-half under 25 years of age-who are constantly on the go . . . drive a lot and snack heavily from the convenience store. 4. Homebodies: 21 % of buyers Usually housewives who shuttle their children around during the day and use whatever gasoline station is based in town or along their route of travel. 5. Price Shoppers: 20% of buyers Generally aren't loyal to either a brand or a particular station, and rarely buy the premium line . . . frequently on tight budgets 29
- 30. 30 Customer Profitability Market Share Customer Retention Customer Acquisition Customer Satisfaction Performance Drivers for Customer Satisfaction
- 31. 31 Performance Drivers for Customer Satisfaction 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, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer Retention Tracks, in absolute or relative terms, 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 segment, after allowing for the unique expenses required to support that customer.
- 32. 32 The Customer Value Proposition Customer Value Proposition Product / service Attributes Image & Reputation Customer Relationship Quality Price Time Functionality
- 33. 33 The Customer Value Proposition . Product and Service Attributes: It encompass the functionality of the product/service, its price, and its quality Customer Relationship: It includes the delivery of the product/service to the customer, including the response and delivery time, and how the customer feels about purchasing from the company. Image and Reputation: It reflects the intangible factors that attract a customer to a company
- 36. Internal Processes • 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 the processes that are key to customers or stakeholders. • Metrics based on Internal processes prospective allow the managers to know how well their business is running and whether its products and services conform to customer requirements • Companies typically develop their objectives and measures for Internal Business Process perspective after formulating objectives and measures for the financial and customer perspectives
- 37. Internal Process Examples • Cost • Throughput • Quality Objective Specific Measure Manufacturing excellence Cycle time, yield Increase design productivity Engineering efficiency Reduce product launch delays Actual launch date vs. plan
- 38. Internal Business Process Value Chain • Most existing performance measurement systems focus on improving existing operating processes. • Balanced Scorecard recommend that managers define a complete internal- process value chain • Traditional performance measurement systems focus on controlling and improving existing responsibility centres and departments.
- 39. Customer Need Identified Identify The Market Create Product / Service Build The Product/ Service Deliver Product / Service Customer Need Satisfied Service the Customer Innovation Process Operations Process Post Sale Process Internal Business Process Value Chain
- 40. Manufacturing Cycle Effectiveness • A metric used by organizations attempting to move to just-in-time production flow processes is manufacturing cycle effectiveness (MCE), defined as: MCE = Processing Time Throughput Time This ratio is less than 1 Throughput Time = Processing Time + Inspection Time + Movement Time + Waiting/Storage Time
- 41. Internal Business Process Perspective Example
- 43. • “How much a company must learn, improve, and innovate to meet objectives.” • Learning & growth must focus on measurable outcomes to move the company forward Learning and Growth Perspective
- 44. • The Learning & Growth Perspective focuses on the intangible assets of an organization, mainly on the internal skills and capabilities of the employees that are required to support the value-creating internal processes. The Learning & Growth Perspective focuses on: • Human Capital-Jobs and people issues • Information Capital- Systems and technology issues • Organization capital- Organizational climate and quality of work-life Learning and Growth Perspective
- 45. Use of the scorecard: • To set objectives • To determine measures • To predict outcomes • To determine initiatives • To gain the big picture
- 46. Key performance indicators include: • Illness rate/days of absence • Employee turnover • Gender/racial ratios • Internal promotion %
- 47. Learning & Growth perspective • Core measurements • Employee productivity • Employee satisfaction • Employee retention • Enablers • Staff competencies • Technology infrastructure • Climate for action/change 47
- 48. Drivers of Learning and Growth 48 = ƒ People Tools Climate, , Organization Learning & Growth Typical Learning & Growth Objectives Skills & Competencies •Engineering skills •Training to required levels •Program Management skills Knowledge & Technology Assets •Technologies •Databases •Experience captured •Best practices Climate for Action •Leadership •Alignment •Results Oriented •Teaming
- 49. A learning & growth example: • Objective: increase internal promotions • Measure: bigger % of in house promotions • Target: +10% in 2 years • Additional classes and training
- 51. • Establish and Communicate strategy • Allocating Resources • Define departmental teams • Setting Individual Goals & Directions • Providing Feed Back System for Implementing BSC
- 52. • Vision & Strategies not actionable • Strategies not linked to departmental and Individual Goals • Strategies not linked to Long term/short term Resource Allocation • Feedback that is tactical not strategic Barriers to effective Implementation of BSC
- 53. •Goal alignments from top to bottom •Education and open communication about strategy •Compensation is linked To Strategy Different Management System for Strategic Implementation Clarifying & Translating The Strategy & Vision Planning & Target Setting Communicating And Linking Strategic Feedback & Learning Balance Scorecard •Stretch targets are established and accepted •Strategic initiatives are clearly identified •Investments are determined by strategy •Annual Budgets are linked to long term planning •The strategy is the reference point for the entire management process •The shared vision is the foundation for strategic planning •Feedback system used to test The hypothesis on which strategy Is based •Team problem solving •Strategy development is a Continuous Process
- 54. Implementing the Balanced Scorecard Task 1. Select the appropriate Organizational Unit Task 2. Identify SBU/Corporate Linkages Task 3. Conduct First Round of Interviews Task 4. Synthesis Session Task 5. Executive Workshop Task 6. Sub Groups Meetings Task 7. Executive Workshop: ii nd Round Task8. Develop Implementation Plan Task 9. Executive Workshop: iii rd Round Task10.Finalize the Implementation Plan
- 56. Upendra Kartik, with 14 years of rich and valuable experience was engaged Leadership roles in Business Management, Organizational Consulting and Quality Management in diversified sectors. He Successfully lead projects in improving productivity, process optimization, and Cost reduction using Six Sigma, Lean and Project Management methodologies in the fields of Education, Insurance, Manufacturing and Healthcare that helped clients to save about $50 Million USD. He created Quality, Leadership, HR and Technology frameworks that are been successfully implemented across 3 organizations around the globe. Highlights: • Managed projects in Education, Healthcare, Insurance and Manufacturing using Lean, Six Sigma, BSC, ISO and EFQM methodologies. • Coached more than 2000+ participants around the globe in many training events and international forums. • Introduced innovative learning tools and services to healthcare and education. • Lead Six Sigma Black Belt projects in Operations, Training, HR and Sales functions. • Established Quality and HR functions in Insurance, Healthcare and Educational sectors. Roles held: EXL Service, Assistant Vice President Saudi Harmony Consulting: Chief Consultant Clientele Served Ministry of Education, KSA Al-Obeikan, KSA Al-wafa Hospital, KSA Bharat Petroleum, IND Wipro ePeripherals, IND National Informatics Centre, IND Larsen & Toubro, IND King Fahad Medical City, KSA About Author
- 57. ThankYou