1 The Balanced Scorecard Michael L. Werner University of Miami Coral Gables, Florida.

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The Balanced ScorecardThe Balanced Scorecard

Michael L. WernerMichael L. WernerUniversity of MiamiUniversity of MiamiCoral Gables, FloridaCoral Gables, Florida

FAAE 2004 FAAE 2004 ▪▪ Michael L. WernerMichael L. Werner ▪▪ University of Miami University of Miami 22

What is Business Success?What is Business Success?

Solid financial performance?Solid financial performance?

Can solid financial performance beCan solid financial performance beachieved if managers focus solelyachieved if managers focus solelyon financial measures of success?on financial measures of success?


Balanced Scorecard Balanced Scorecard Refocuses Management Refocuses Management

Financial perspectiveFinancial perspective

Customer perspectiveCustomer perspective

Internal perspectiveInternal perspective

Learning and Growth perspectiveLearning and Growth perspective



Developed in 1992 by Developed in 1992 by Robert Kaplan and Robert Kaplan and

David NortonDavid Norton

Originally developed as a Originally developed as a measurement toolmeasurement tool

Also helps companies manage and Also helps companies manage and implement strategyimplement strategy


PopularityPopularity

Employed by half of Global 1000Employed by half of Global 1000(According to Bain & Company)(According to Bain & Company)

““One of the most powerful One of the most powerful management ideas ever”management ideas ever”

(Harvard Business Review)(Harvard Business Review)

Most requested and #1 in sales atMost requested and #1 in sales atHarvard Business PublishingHarvard Business Publishing


Kaplan and Norton’s Kaplan and Norton’s PremisePremise

“…“…exclusive reliance on financial exclusive reliance on financial measures in a management system measures in a management system

was causing organizations to do was causing organizations to do the wrong things.”the wrong things.”



Based on corporate strategyBased on corporate strategy

A balanced plan for businessA balanced plan for business

More than a financial planMore than a financial plan

(Robert Kaplan and David Norton)(Robert Kaplan and David Norton)


The Trouble with StrategyThe Trouble with Strategy

It is unlikely that a poor It is unlikely that a poor strategy is the problemstrategy is the problem

Generally, the problem is Generally, the problem is implementing strategyimplementing strategy

Even if strategy is Even if strategy is communicated, employees communicated, employees may not know what to do.may not know what to do.


Question?Question?

Even if we communicate the strategy,Even if we communicate the strategy,will employees really act?will employees really act?

The balanced scorecard can helpThe balanced scorecard can helpcommunicate the company’s strategycommunicate the company’s strategy

and will also encourage employeesand will also encourage employeesto act to achieve it.to act to achieve it.


How can the How can the Balanced Scorecard help?Balanced Scorecard help?


Four Distinct PerspectivesFour Distinct Perspectives

FinancialFinancialperspectiveperspective

CustomerCustomerperspectiveperspective

InternalInternalperspectiveperspective

Learning andLearning andgrowth perspectivegrowth perspective

StrategyStrategy


Translating a Mission into Translating a Mission into Desired OutcomesDesired Outcomes

MissionMission

Core ValuesCore Values

VisionVision

StrategyStrategy

Balanced ScorecardBalanced Scorecard

ObjectivesObjectives

Strategic InitiativesStrategic Initiatives

Strategic OutcomesStrategic OutcomesMotivated and PreparedMotivated and Prepared

WorkforceWorkforceEffective Effective Processes Processes

DelightedDelightedCustomersCustomers

SatisfiedSatisfiedShareholdersShareholders

Adapted fromAdapted fromKaplan, Kaplan, NortonNorton


For Each PerspectiveFor Each Perspective

Objectives (Goals)Objectives (Goals)

MeasuresMeasures

TargetsTargets

InitiativesInitiatives


Simple Form and Simple Form and RelationshipsRelationships

Source:Source:Kaplan, Kaplan, NortonNorton


ObjectivesObjectives

Concise statements that articulate Concise statements that articulate what the organization what the organization hopes to accomplishhopes to accomplish

Each tied to the company’s Each tied to the company’s strategystrategy


MeasuresMeasures

Descriptions of how success in Descriptions of how success in achieving objectives will achieving objectives will

be measuredbe measured

Each tied to the company’s Each tied to the company’s objectivesobjectives


TargetsTargets

Level of performance or rate Level of performance or rate of improvement desired of improvement desired

for each measurefor each measure

Each tied to one of the company’s Each tied to one of the company’s measuresmeasures


InitiativesInitiatives

Short-term programs and actionsShort-term programs and actions that will help achieve the that will help achieve the

established targetsestablished targets

Each tied to company Each tied to company objectives and measuresobjectives and measures


Financial PerspectiveFinancial Perspective

Overall objective:Overall objective:To succeed financiallyTo succeed financially


Core Financial MeasuresCore Financial Measures

ROI/EVAROI/EVA

ProfitabilityProfitability

Revenue growth/mixRevenue growth/mix

Cost reductionCost reduction


Customer PerspectiveCustomer Perspective

Overall objective:Overall objective:To achieve our vision of howTo achieve our vision of how

the company shouldthe company shouldappear to customersappear to customers


Core Customer MeasuresCore Customer Measures

Market shareMarket share

Customer acquisitionCustomer acquisition

Customer retentionCustomer retention

Customer profitabilityCustomer profitability

Customer satisfactionCustomer satisfaction


Internal PerspectiveInternal Perspective

Overall objective:Overall objective:To excel at having superior businessTo excel at having superior business

processes to satisfyprocesses to satisfyshareholders and customersshareholders and customers


Internal Perspective Internal Perspective MeasuresMeasures

Process quality measuresProcess quality measuresTime to process an orderTime to process an order

Number of ReturnsNumber of ReturnsDefect ratesDefect ratesYield ratiosYield ratiosLead-timesLead-times

Waste, scrap, and reworkWaste, scrap, and rework


Learning and GrowthLearning and GrowthPerspectivePerspective

Overall objective:Overall objective:To sustain the ability to change and improveTo sustain the ability to change and improve

(Employee capabilities are a key(Employee capabilities are a keyingredient to this objective.)ingredient to this objective.)


Core Learning and Core Learning and Growth MeasuresGrowth Measures

Employees trained per month Employees trained per month

Employee retentionEmployee retention

Employee productivityEmployee productivity

Development and research measuresDevelopment and research measures

Number of training programsNumber of training programs


Examples of InitiativesExamples of Initiatives

New maintenance programNew maintenance program

Upgrade selected equipmentUpgrade selected equipment

Establish performance benchmarksEstablish performance benchmarks

New training programNew training program

Establish frequent purchase programEstablish frequent purchase program


Next: An example to help Next: An example to help students understand howstudents understand howthe Balanced Scorecard the Balanced Scorecard

worksworks


A Balanced ScorecardA Balanced ScorecardExampleExample

Large camera storeLarge camera store

25,000 square feet25,000 square feet

$10+ million in sales$10+ million in sales

Profits unacceptably lowProfits unacceptably low

Industry changing due to technologyIndustry changing due to technology


Basic Business StrategyBasic Business Strategy

FinancialFinancial

We will ensure that we use our resources and people to maintain financial success.We will ensure that we use our resources and people to maintain financial success. CustomerCustomer

We will meet or exceed our customers’ current and future expectations and We will meet or exceed our customers’ current and future expectations and requirements with high quality products, reasonable prices and superior service.requirements with high quality products, reasonable prices and superior service.

InternalInternalWe will provide high quality on-time imaging products and services and provide an We will provide high quality on-time imaging products and services and provide an

efficient and effective means to deliver them in a high quality fashion. efficient and effective means to deliver them in a high quality fashion.

Learning and GrowthLearning and GrowthWe will attract and retain high caliber people and promote an environment We will attract and retain high caliber people and promote an environment

that develops their interpersonal, business and technical skills and knowledge. that develops their interpersonal, business and technical skills and knowledge. We will strive to develop and maintain the best sourcing for our products. We will strive to develop and maintain the best sourcing for our products.

We will strive to be aware and on the cutting edge of imaging and business technology. We will strive to be aware and on the cutting edge of imaging and business technology.


Achieve the strategy? Achieve the strategy? How do we get there?How do we get there?

With a mapWith a map

A strategy mapA strategy map


Strategy Map – ObjectivesStrategy Map – Objectives

Financial SuccessFinancial Success

Customers impressed Customers impressed with quality productswith quality products

and servicesand services

Leading edge Leading edge production capabilitiesproduction capabilities

Trained Trained workforceworkforce

Attract new customersAttract new customersRetain customersRetain customers

On-time products and servicesOn-time products and services

Well functioning Well functioning facilitiesfacilities

On cutting edge On cutting edge of technologyof technology Best product sourcingBest product sourcing

FinancialFinancial

CustomerCustomer

InternalInternal

LearningLearningand Growthand Growth


Strategy Map – Measures and Strategy Map – Measures and TargetsTargets

Operating incomeOperating incomeIncrease gross marginIncrease gross margin

Amount of operating expensesAmount of operating expenses

Number of new customersNumber of new customersNo. of returning new customersNo. of returning new customersNumber of customer complaintsNumber of customer complaints

Number of items per invoiceNumber of items per invoice

Number of rejected printsNumber of rejected printsPercent of late ordersPercent of late orders

New products and servicesNew products and services

Amount of employee trainingAmount of employee trainingAmount of technology trainingAmount of technology training

Sales from new product sourcingSales from new product sourcing

TBDTBDIncrease by 20%Increase by 20%

ZeroZeroIncrease by 30% Increase by 30%

1%1%0%0%

10% Increase10% Increase

1 Session per month1 Session per month1 Session per month1 Session per month

Increase by 30%Increase by 30%

FinancialFinancial

CustomerCustomer

InternalInternal


$100,000$100,000Increase by 5%Increase by 5%

MaintainMaintain

MeasuresMeasures TargetsTargets


Strategy Map – InitiativesStrategy Map – Initiatives

New Price Comparison ReportNew Price Comparison Report

Monthly sales promotionsMonthly sales promotionsNew Frequent Customer Sales ProgramNew Frequent Customer Sales Program

Employee sales and product training programEmployee sales and product training program

Operator and lab training programOperator and lab training programDaily services backlog reportDaily services backlog report

New products and services programNew products and services program

Employee training programEmployee training programTechnology training programTechnology training program

Three purchasing tripsThree purchasing trips

FinancialFinancial

CustomerCustomer

InternalInternal



Employee RewardsEmployee Rewards

Operating income Operating income

Returning new customersReturning new customersCustomer complaintsCustomer complaints

Number of items per invoiceNumber of items per invoice

Rejected printsRejected printsLate ordersLate orders

New products and servicesNew products and services

Employee trainingEmployee trainingTechnology trainingTechnology training

Sales from new product sourcingSales from new product sourcing

Increase by 20%Increase by 20%ZeroZero

Increase by 30% Increase by 30%

1%1%0%0%


1 per month1 per month1 per month1 per monthIncrease 30%Increase 30%

FinancialFinancial

CustomerCustomer

InternalInternal


$100,000$100,000 20% of 20% of net incomenet income


Employee RewardsEmployee Rewards$25,000 Equally to Five Managers$25,000 Equally to Five Managers

Sales Price Comparison ReportSales Price Comparison Report

Monthly sales promotionsMonthly sales promotionsFrequent Customer Sales ProgramFrequent Customer Sales ProgramReturning new customersReturning new customersCustomer complaintsCustomer complaintsNumber of items per invoiceNumber of items per invoice

Rejected printsRejected printsLate ordersLate ordersNew products and servicesNew products and services

Employee trainingEmployee trainingTechnology trainingTechnology trainingSales new prod. sourcingSales new prod. sourcingThree purchasing tripsThree purchasing trips

1 per month1 per monthFunctioningFunctioning

Increase by 20%Increase by 20%ZeroZero

Increase by 30% Increase by 30%

1%1%0%0%


1 per month1 per month1 per month1 per monthIncrease 30%Increase 30%

33

FinancialFinancial

CustomerCustomer

InternalInternal


MonthlyMonthly 10%10%

10%10%05%05%05%05%10%10% 10%10%

00%00%10%10%05%05%

10%10%10%10%05%05%10%10%

Measure or InitiativeMeasure or Initiative TargetTarget WeightWeight


Employee RewardsEmployee Rewards$25,000 Equally to Five Managers$25,000 Equally to Five Managers

Sales Price Comparison ReportSales Price Comparison Report

Monthly sales promotionsMonthly sales promotionsFrequent customer sales programFrequent customer sales programReturning new customersReturning new customersCustomer complaintsCustomer complaintsNumber of items per invoiceNumber of items per invoice

Rejected printsRejected printsLate ordersLate ordersNew products and servicesNew products and services

Employee trainingEmployee trainingTechnology trainingTechnology trainingSales new prod. sourcingSales new prod. sourcingThree purchasing tripsThree purchasing trips

$ 2,500$ 2,5000000

2,5002,5002,5002,500

$ 0$ 02,5002,500

00

$ 2,500$ 2,5002,5002,500

002,5002,500

FinancialFinancial

CustomerCustomer

InternalInternal


$ 0$ 0NoNo

YesYesNoNoNoNoYesYes YesYes

YesYesYesYesNoNo

YesYesYesYesNoNoYesYes

Measure or InitiativeMeasure or Initiative Bonus AmountBonus AmountGreen?Green?

10%10%

10%10%05%05%05%05%10%10%

10%10%

00%00%10%10%

5%5%

10%10%10%10%05%05%10%10%

WeightWeight

TotalTotalNumber of managersNumber of managersAmount per managerAmount per manager

$17,500$17,500 55$ 3,500$ 3,500

TotalTotal


Total Balanced Scorecard Total Balanced Scorecard Employee IncentivesEmployee Incentives

(Assuming Net Income of $115,000)(Assuming Net Income of $115,000)

Net incomeNet incomeBonus percentageBonus percentageTotal net income bonusTotal net income bonusNet income bonus per manager Net income bonus per manager Number of managersNumber of managersMeasures and initiatives bonus Measures and initiatives bonus Total bonus per manager Total bonus per manager Number of managersNumber of managersTotal bonuses Total bonuses

$115,000 $115,000 2020%%

$ 23,000 $ 23,000 55

$ 4,600 $ 4,600 $ 3,500$ 3,500 $ 8,100 $ 8,100

55 $40,500 $40,500

3939

Next: Moving Beyond Next: Moving Beyond

the the

Company’s Overall Company’s Overall

ScorecardScorecard


Departmental and Personal Departmental and Personal ScorecardsScorecards

Each department develops its ownEach department develops its ownscorecard based on thescorecard based on the

company’s overall scorecard.company’s overall scorecard.

Each employee develops his or herEach employee develops his or herscorecard based on the company’sscorecard based on the company’s

and department’s scorecard.and department’s scorecard.


Departmental and Personal Departmental and Personal ScorecardsScorecards

Scorecards must be closely aligned withScorecards must be closely aligned withoverall company goals and objectives.overall company goals and objectives.

Each objective must be aligned.Each objective must be aligned.

Each measure must be aligned.Each measure must be aligned.


Each PerspectiveEach PerspectiveMust be AddressedMust be Addressed

Set objectives for each perspective.Set objectives for each perspective.

Set basis for measurement for each objectiveSet basis for measurement for each objective..

This allows managers and employees toThis allows managers and employees tofocus on the success of each perspective.focus on the success of each perspective.

It also keeps them from focusing onIt also keeps them from focusing onone perspective while neglecting another.one perspective while neglecting another.


Implementing theImplementing theBalanced ScorecardBalanced Scorecard

The push to implement mustThe push to implement mustcome from top management.come from top management.

Managers must buy in.Managers must buy in.

It takes 15 to 36 monthsIt takes 15 to 36 monthsin large organizations.in large organizations.


Possible Pitfalls of the Possible Pitfalls of the Balanced ScorecardBalanced Scorecard

Senior management not committedSenior management not committed

One senior manager tries to build the scorecard aloneOne senior manager tries to build the scorecard alone

Scorecard responsibilities don’t filter downScorecard responsibilities don’t filter down

The solution is overdesigned, The solution is overdesigned, or scorecard treated as a one-time eventor scorecard treated as a one-time event

The balanced scorecard is treated as a systems projectThe balanced scorecard is treated as a systems projectAnthony Atkinson, Robert Kaplan, S. Mark YongAnthony Atkinson, Robert Kaplan, S. Mark Yong


Suggested ReadingSuggested Reading

The Balanced Scorecard, Robert S. KaplanThe Balanced Scorecard, Robert S. Kaplanand David P. Norton, HBS Pressand David P. Norton, HBS Press

The Strategy-Focused Organization, The Strategy-Focused Organization, Kaplan and Norton, HBS PressKaplan and Norton, HBS Press

The Balanced Scorecard Step by StepThe Balanced Scorecard Step by StepPaul R. Niven, John Wiley & SonsPaul R. Niven, John Wiley & Sons


Suggested ReadingSuggested Reading

Just out this year: Just out this year: Strategy Maps: Converting Intangible Strategy Maps: Converting Intangible

Assets into Tangible Outcomes,Assets into Tangible Outcomes,Robert S. KaplanRobert S. Kaplan

and David P. Norton, HBS Pressand David P. Norton, HBS Press


Suggested Internet SurfingSuggested Internet Surfing

The Balanced Scorecard Collaborative at The Balanced Scorecard Collaborative at www.bscol.comwww.bscol.com

The Balanced Scorecard Institute at The Balanced Scorecard Institute at www.balancedscorecard.orgwww.balancedscorecard.org

Free basic online presentation by Paul Niven Free basic online presentation by Paul Niven www.bettermanagement.com/seminars/www.bettermanagement.com/seminars/

seminar.aspx?LibraryID=6199seminar.aspx?LibraryID=6199


Suggested Internet SurfingSuggested Internet Surfing

Free netconferences Free netconferences are also available atare also available at

The Balanced Scorecard Collaborative The Balanced Scorecard Collaborative

www.bscol.com/education/conferences/www.bscol.com/education/conferences/netconferences/netconferences/

Generally on the fourth ThursdayGenerally on the fourth Thursdayof each month at 11:00 A.M. ET.of each month at 11:00 A.M. ET.

Next netconference: October 28, 2004Next netconference: October 28, 2004

4949

Thank YouThank You

Comments?Comments?Questions?Questions?


Beyond the ScopeBeyond the Scope

The slides that follow provide The slides that follow provide additional insight into the additional insight into the

balanced scorecard. balanced scorecard.


Handling InitiativesHandling Initiatives

Inventory current initiativesInventory current initiatives

Map them to BCS ObjectivesMap them to BCS Objectives

Eliminate nonstrategic initiativesEliminate nonstrategic initiatives

Add new initiativesAdd new initiatives

Prioritize remaining initiativesPrioritize remaining initiatives


Five Principles of Strategy-Five Principles of Strategy-Focused OrganizationsFocused Organizations

Principle 1: Translate the strategy to operational termsPrinciple 1: Translate the strategy to operational terms

Principle 2: Align the organization to the strategyPrinciple 2: Align the organization to the strategy

Principle 3: Make strategy everyone’s jobPrinciple 3: Make strategy everyone’s job

Principle 4: Make strategy a continual processPrinciple 4: Make strategy a continual process

Principle 5: Mobilize leadership for changePrinciple 5: Mobilize leadership for changeAnthony Atkinson, Robert Kaplan, S. Mark YongAnthony Atkinson, Robert Kaplan, S. Mark Yong



Select an architect and form a taskforce.Select an architect and form a taskforce.

Develop business strategiesDevelop business strategies

Determine where businessDetermine where businessunits fit into the big picture.units fit into the big picture.

Hold meetings, workshops,Hold meetings, workshops,and synthesis sessions.and synthesis sessions.



Select and design measures.Select and design measures.

Establish targetsEstablish targets

Establish initiativesEstablish initiatives

Build a consensus aroundBuild a consensus aroundstrategic objectives.strategic objectives.


The Balanced Scorecard and aThe Balanced Scorecard and aNew Management ProcessesNew Management Processes

New management processesNew management processesmay result from implementingmay result from implementing

the balanced scorecard.the balanced scorecard.


New Management ProcessesNew Management Processes

1. Translating the vision1. Translating the vision

2. Communicating and linking2. Communicating and linking

3. Business planning3. Business planning

4. Feedback and learning4. Feedback and learning


1. Translating The Vision1. Translating The Vision

To build a consensus around theTo build a consensus around theorganization’s vision and strategyorganization’s vision and strategy

To express the vision in terms of an integrated To express the vision in terms of an integrated set of objectives, measures and initiativesset of objectives, measures and initiatives

Must be agreed upon by all senior executivesMust be agreed upon by all senior executives


2. Communicating and 2. Communicating and LinkingLinking

Communicates the strategy upCommunicates the strategy upand down in the organizationand down in the organization

Links strategy to departmental objectivesLinks strategy to departmental objectives

Links strategy to individual objectivesLinks strategy to individual objectives

Expands on performance measures thatExpands on performance measures thatfocus only on financial performancefocus only on financial performance


2. Communicating and 2. Communicating and LinkingLinking

A way to ensure that all levelsA way to ensure that all levelsof the organization understandof the organization understand

the strategythe strategy

A way to ensure that departmentA way to ensure that departmentand individual objectives areand individual objectives are

aligned with the strategyaligned with the strategy

Links rewards to performance measuresLinks rewards to performance measures


3. Business Planning3. Business Planning

Enables companies to integrateEnables companies to integratetheir business and financial planstheir business and financial plans

Various independent changeVarious independent changeprograms difficult to integrateprograms difficult to integrate

However when goals are set and However when goals are set and coordinated using the balanced scorecardcoordinated using the balanced scorecard

meaningful priorities can be set.meaningful priorities can be set.

Resources allocated accordinglyResources allocated accordingly


4. Feedback and Learning4. Feedback and Learning

Expands on the traditional financial focusExpands on the traditional financial focus

Can monitor results from three more perspectivesCan monitor results from three more perspectives

Can evaluate strategy in light ofCan evaluate strategy in light ofperformance in all four areasperformance in all four areas

Modify strategy to reflect real-time learningModify strategy to reflect real-time learningas opposed to modifying strategy duringas opposed to modifying strategy during

the annual strategic plan meetingthe annual strategic plan meeting


New Management ProcessesNew Management Processes

Translating theTranslating thevisionvision

CommunicatingCommunicatingand linkingand linking

BusinessBusinessplanningplanning

Feedback andFeedback andlearninglearning

BalancedBalancedscorecardscorecard



The balanced scorecard is more thanThe balanced scorecard is more thana performance measurement technique.a performance measurement technique.

Innovative CEOs used the balance scorecardInnovative CEOs used the balance scorecardnot only to clarify and communicate strategy,not only to clarify and communicate strategy,

but also to manage strategy.but also to manage strategy.

They are using the measurement focusThey are using the measurement focusof the scorecard to accomplishof the scorecard to accomplishcritical management processes.critical management processes.



Clarify and translate vision and strategyClarify and translate vision and strategy

Communicate and link strategicCommunicate and link strategicobjectives and measuresobjectives and measures

Plan, set targets, and alignPlan, set targets, and alignstrategic initiativesstrategic initiatives

Enhance strategic feedback and learningEnhance strategic feedback and learning

Kaplan/NortonKaplan/Norton

6565

The EndThe EndIf you have questions or comments If you have questions or comments

regarding this presentation,regarding this presentation,please feel free to contact Mike Werner atplease feel free to contact Mike Werner at

[email protected]@miami.edu or by phone at 305-321-1139 or by phone at 305-321-1139

..

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1 The Balanced Scorecard Michael L. Werner University of Miami Coral Gables, Florida.

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