Strategic Management

BALANCED
SCORECARD
Balanced Score Card

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 Diffusion of a New Idea

• “The Balanced Scorecard: Measures

that Drive Performance” (Robert S.
Kaplan and David P. Norton, Harvard
Business Review, February 1992)

• About 35% of Fortune 2000 firms

have adopted a balanced scorecard,
55% of those firms are very satisfied
with it. (R. D. Banker, C. Konstans and S.
Janakiraman; January 2000)

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 Balanced Score Card
• A new approach to strategic management
was developed in the early 1990's by
Drs. Robert Kaplan (Harvard Business
School) and David Norton (Balanced
Scorecard Collaborative).
• They named this system the 'balanced
scorecard'. Recognizing some of the
weaknesses and vagueness of previous
management approaches, the balanced
scorecard approach provides a clear
prescription as to what companies should
measure in order to 'balance' the financial
perspective.

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 Balanced Score Card
• Kaplan and Norton describe the innovation of
the balanced scorecard as follows:

“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 relation-
ships 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."
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 Evaluation Methods
Balanced Scorecard – Four Perspectives

Financial Perspective
How should we appear
to our shareholders?

Internal Business
Customer Perspective
Vision Perspective
How should we
appear to our And At what business
customers? Strategy practice must we
excel?

Learning and Innovation

Perspective
How should we sustain
our ability to change and
improve?

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 Balanced Scorecard
Financial Perspective
How do we look to our
shareholders?

Customer Perspective Internal Process

Vision & Perspective
How do we look to our What business
customers? Strategy processes are the
value drivers?
Learning & Growth
Perspective
Are we able to sustain
innovation, change
and improvement

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 Balanced Scorecard for a
Retailer
Financial Perspective
EVA (Residual Income)
Profit per square foot

Customer Perspective Internal Process

Perspective
•Customer satisfaction Vision & •Service quality
•Customer retention Strategy •Product quality
•Market share •Inventory management

Learning & Growth

Perspective
•Information systems
•Employee satisfaction
•Employee training

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 Balance in the Scorecard
• Balance between financial,
customer, internal process and
learning perspectives
• Balance between financial and non-
financial measures
• Balance between short-term and
long-term objectives
 Balance between hard, objective
measures and softer, more
subjective measures
 Balance between different
stakeholders
 Balance between strategic and
diagnostic measures
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 Horizontal Balanced Scorecard

Investors Lenders Customers Employees Suppliers

Financial Financial Customer Internal Process

Perspective Perspective Perspective Perspective Perspective

Balance between different stakeholders.

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 Vertical Balanced Scorecard

Financial Objectives

Customer Objectives

Internal Process Objectives

Learning and Growth Objectives

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BALANCED SCORECARD DESIGN
1. Identify strategic objectives for each perspective.
An objective is a statement of strategic intent. An objective states
how a strategy will be made operational. Application will allow
strategic objectives to be aligned with at least one perspective.
2. Associate measures with strategic objectives.
A measure is a performance metric that will reflect progress against
an objective. A measure must be quantifiable. Leading measures
are predictors of future performance, while lagging measures are
outcomes. Measure has to be linked with an objective.
3. Assign targets to measures.
A target is a quantifiable goal for each measure with a specified
time frame.
4. Link strategic objectives in cause and effect relationships (Theme).
Objectives are linked to one another through cause and effect
relationships. Application should be able to represent the linkages
graphically and should able to edit/change as appropriate.
5. List strategic initiatives.
Strategic initiatives are action programs that drive performance.
The application should allow for setting of strategic initiatives to be
linked to at least one objective.
6. View the strategy from four perspectives (Financial, Customer,
Internal and Learning).
A perspective is a component into which the strategy is
decomposed to drive implementation. Other perspective may be
added to the typical set or replace based on specific strategic need.
 Balanced Score Card

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 A Balanced Scorecard
“Is a performance measurement system
that translates an organization’s strategy
into clear objectives, measures, targets,
and initiatives.”
(Kaplan and Norton, Harvard Business Review, 1996)

”A method for the organization to

systematically develop a comprehensive link
between its strategy and a coherent set of
performance measures.”

“A method for the organization to

systematically develop a comprehensive
system of planning and control”.
(Kaplan and Norton, Harvard Business Review, 1992)

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 Balanced Scorecard
 The balanced scorecard (BSC) provides a
framework for selecting multiple performance
measures focused on critical aspects of business
(Kaplan and Norton 1992).

 The essence of the BSC is the articulation of

linkages between performance measures and
strategic objectives (Kaplan and Norton 1996).

2
 Translating Strategy Into Initiatives
For each perspective:

Strategy

Key Success Performance

Factors Measures

Targets Initiatives

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 A Strategic Scorecard
• Should include leading indicators
 Leading indicators: Drivers of long term

value
 Lagging indicators: Feedback measures

on current performance
• Should include outcome measures as well as
measures of the drivers of those outcomes
• Should link all measures with the overall
strategy
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 Diagnostic vs Strategic Measures
Diagnostic measures
 Monitor whether the business remains
“in control”
 Signal when unusual events occur that
require immediate attention
 Necessary, but not sufficient, for
achieving long term goals
Strategic measures
 Articulate a strategy designed for
competitive excellence
 Evaluate strategies based on new
information about competitors,
customers, markets, technologies &
suppliers
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 Financial Perspective
Customizing Measures for the Growth Stage
• Sales growth rate
• Sales in new markets
• Sales to new customers
• Sales from new products
• Investment in product development
• Investment in information technology
• Investment in employee skills
• Investment in new distribution channels
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 Financial Perspective
Customizing Measures for the Sustain Stage

• Return on capital employed

• Economic Value Added (EVA)
• Operating income/Gross margin
• Discounted cash flows
• Asset utilization rates
• Cost reduction rates
• Cost benchmarked against competitors
• Customer and product line profitability
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 Financial Perspective
Customizing Measures for the Harvest Stage

• Current cash flows

• Payback period
• Spending ratios
• Throughput ratios
• Product line profitability
• Negative cash flow customers

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 Customer Perspective:
Strategic Outcome Measures
Financial Objectives
Customer Outcomes
Market
Share Customer
Account Profitability
Share

Customer Customer
Acquisition Retention
Customer
Satisfaction

Internal Process Outcome Drivers

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 Customer Perspective:
Unique Value Proposition

Customer Customer
Acquisition Retention
Customer
Satisfaction

Product/Service
Value = Attributes + Image + Relationship

Uniqueness Functionality Quality Price Time Brand Equity Convenient Trusted Responsive

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 The Internal Perspective
Generic Service Value Chain Model
Post-Sale
Innovation Cycle Operations Cycle
Service Cycle

Create Satisfy
Identify Identify the Produce Deliver Service
Custome the Service the the the Custome
r Needs Market Offering Services Services Customer r Needs

Efficiency

Effectiveness

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 Learning and Growth Perspective
Objectives Capability Measures

Employee
Skills

•Real-time availability
Long Term Information •Accuracy
Success Systems •Pervasiveness
•Satisfaction •Alignment of incentives
•Retention
Organizational with key success factors
•Training
Processes •Improvement in key
customer and internal
•Capabilities processes

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 So, A Balanced Scorecard…
• Is much more than a collection of indicators
of key success factors.
• Is a flight simulator, not a dashboard of
instrument dials.
• Integrates performance measures with a
unique strategy.
• Incorporates cause-and-effect relationships,
including leads, lags and feedback loops.
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Linking the Balanced Scorecard to Strategy
A Strategy Is a Set of Hypotheses About Cause and Effect
Return on
Financial Capital Employed

Customer Customer Loyalty

Customer On-time Delivery

Internal Process Process Quality Process Cycle Time

Learning & Growth Employee Skills

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 Link to Financial Objectives
• Balanced scorecard retains a strong
emphasis on financial outcome measures.
• Ultimately, causal paths from all
performance measures should be linked
to financial objectives.
• Failure to link improvement programs
(e.g. TQM, cycle time reduction,
reengineering, and employee
empowerment) results inevitably in
organizations becoming disillusioned
about lack of tangible payoffs.
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 The Balanced Scorecard for The Women’s Store Employed in the Experiment
Measure Target Actual Percent Better
than Target
Financial:
1. Sales margins 60% 67.02% 11.70%
2. Sales growth per store 15% 16.75% 11.67%
3. Inventory turnover 6 6.59 9.83%
4. Debt-to-assets ratio < 20% 18.07% 9.65%

Customer:
1. Price relative to competitors’ price +7% 7.79% 11.29%
2. Customer satisfaction rating 80% 88.44% 10.55%
3. Sales per square foot of retail space $30,000 $33,090 10.30%
4. Number of credit card customers per store 8,000 8,911 11.39%

Internal Process:
1. Brand recognition rating 80% 87.60% 9.50%
2. Number of stock-outs < 3 times 2.66 11.33%
3. “Mystery Shopper” audit rating 85% 93.47% 9.96%
4. Time to process customer returns < 4 min. 3.54 11.50%

Learning and Growth:

1. Employee satisfaction 80% 87.96% 9.95%
2. Employee suggestions per year 2.5 times 2.74 9.60%
3. Store computerization 60% 66.24% 10.40%
4. Hours of training invested in brand managers each year 80 hours 89.10 11.38%
 Metropolitan Bank’s Strategy
• “We must increase our income and revenue by
broadening the services sold to a targeted
group of customers.”
• “We cannot continue only
receiving deposits and
processing checks.
Competitive pressure implies
that we develop and
sell new services such as
mutual funds, credit
cards and financial advice.”
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 Metropolitan Bank: Cause and Effect
Financial
Increase Return to
Perspective
Stockholders

Broaden
Revenue Mix

Customer
Increase Customer Satisfaction Perspective
With Our Products

Understand Develop Internal Process

Cross-Sell Perspective
Customer New
Products
Needs Products

Instill a Learning
Selling Culture Perspective

Develop Access to Align

Selling Strategic Personal
Skills Information Goals

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 Metropolitan Bank’s Balanced Scorecard
Strategic Objectives Strategic Measures

Lag Indicators Lead Indicators

 Improve Returns to Stockholders  Return on Investment

Financial

 Broaden Revenue Mix  Revenue Mix

 Revenue Growth

 Increase Customer Satisfaction  Customer Retention  Customer Satisfaction

Internal Customer

 Knowledgeable People  Depth of Relation (Sale of Survey

 Convenient Access Multiple Products to a
 Superior Service Customer)

 Understand Our Customers  Share of Segment  Product Development

 Create Innovative Products  Revenue from New Cycle
 Cross-Sell Products Products  Hours with Customers
 Cross-Sell Ratio
 Instill a Selling Culture  Strategic Information
o Build Strategic Information  Revenue per Employee Availability
Learning

o Develop Strategic Skills  Employee Satisfaction  Strategic Job Coverage

o Align Incentives Survey  Personal Goals Alignment

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 Why Do We Need a Balanced Scorecard?
To Implement Business Strategy!
“Business Strategy is now the
single most important issue…
and will remain so for the
next five years”

Business Week

“Less than 10% of

strategies effectively
formulated are effectively
executed”
Fortune

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 Scorecard Structure
• Scorecard is very context-specific
 Industry and competitive factors
 Life-cycle of business unit
 Business strategy

• It is important to validate cause-effect

relationships for each individual business.

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 To Implement a Balanced Scorecard
The organization must
• Define and develop measures for its
primary strategic objectives.
• Understand how different business
processes contribute to its strategic
objectives.
• Identify the drivers of performance on
strategic objectives.
• Develop a set of measures to monitor
drivers of strategic objectives.
• Communicate its beliefs about how
processes create results.
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