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Strategic Change
Kaplan & NortonsBalanced Scorecard
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Balanced Scorecard
Developed to measure progress in rates ofcontinuous improvement at Analog Devices.
BSC translates organisational strategy into specificobjectives, measures and targets, which are thenput into effect at all levels of the firm.
Kaplan & Norton, who pioneered the approach,argue that 9 out of 10 strategy implementationsfail; the reason being that managers do not have aset of metrics to get strategy from paper to reality.
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Balanced Scorecard:Balances Strategic and Financial Objectives
Financial Objectives - outcomes focused onimproving the firms financial performance.
Strategic Objectives - outcomes focused onimproving its long-term competitive position.
Unless a firms financial performance is dismal andits survival threatened, the surest path to sustainedfuture profitability and advantage over its rivals isthe relentless pursuit of strategic outcomes.
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Key: Strategic Performance
Firms that achieve better strategic performance achievebetter financial performance. Indicators of the latter arelagging, whereas measures of the former are leading.
The Balanced Scorecard combines both types of indicator. It underlines the need for short- and long-range objectives. It puts the concept of strategic intent centre-stage and
focuses the firm on pursuing aggressive stretch objectives. It underlines the need for objectives at all levels of the firm. It emphasises top-down not bottom-up objective setting.
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Unilever
Strategic & Financial Objectives
Grow annual revenue by 5 to 6%; increaseoperating profit margins from 11 to16%
within 5 years; trim the companys 1,200food, household and personal care productsdown to 400 core brands; focus sales and
marketing efforts on those with potentialto become respected, market-leading globalbrands; and streamline the supply chain.
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Dupont
Financial & Strategic Objectives
Achieve annual revenue growth of 5 to 6% andannual earnings-per-share growth averaging 10%.
Grow per-share profits faster than revenues by a)increasing productivity, b) selling enough newproducts each year that average prices and averagemargins rise, and c) using surplus cash to buy backshares. Sell low-margin textiles and interiors
division (with sales of $6.6 billion and operatingprofits of $114 million); this division makes Lycraand other synthetic fibres for carpets and clothes.
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3MFinancial & Strategic Objectives
Achieve annual growth in earnings per
share of 10% or better; a return onstockholders equity of 20% to 25%; areturn on capital employed of 27% orbetter; and at least 30% of sales fromproducts introduced in the past four years.
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BSC: Implementations
AMD
Apple Canon USA Exxon Mobil
CIGNA Sears UPS
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Balanced Scorecard
Selected Readings Kaplan, R. and Norton, D. (2004): Strategy Maps:
Converting Intangible Assets into Tangible Outcomes.Boston: Harvard Business School Press.
Kaplan, R. and Norton, D. (1996): The BalancedScorecard: Translating Strategy into Action. Boston:Harvard Business School Press.
Kaplan, R. and Norton, D. (1993): Putting theBalanced Scorecard to Work, Harvard BusinessReview,Sep-Oct 1993, 134-147.
Kaplan, R and Norton, D. (1992): The BalancedScorecard - Measures that Drive Performance,Harvard Business Review, Feb-Mar 1992, 71-79.
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Strategy & BSC
Kaplan & Norton adopt the strategy aspositioning perspective, in which firms competeby choosing the market and customer segmentsthe business unit intends to serve, identifying thecritical internal business processes that the unitmust excel at to deliver the value proposition to
customers in the targeted market segments, andselecting the individual and organisationalcapabilities required for internal, customer andfinancial objectives. (Kaplan & Norton, 1996, p.37)
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Aligning Strategy & Scorecard
BSC developed to communicate strategy, to align firmsto new strategies, and to manage those strategies.
Companies quickly came to see it as a means of:
Focusing less on existing processes like costreduction and quality improvements;
Focusing more on strategic processes for generatinggrowth ... through ... customised, value-addedproducts and services ... [provided through] ...processes that must be performed exceptionallywell for an organisations strategy to succeed. (viii)
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Competitive Environment
According to Kaplan & Nortons researchwith leading organisations, it became critical
for firms to start using the BSC in increasinglycompetitive environments, which were drivenby the Information Age from the 1970s.
Sufficient to compete on economies of scale
during the 1950s, 1960s and early-1970s.
Increasingly, manufacturing and service firmsneeded new capabilities to succeed.
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Intangible Capabilities
Capabilities were no longer just tangible.
Increasingly, firms needed intangible capabilities to
introduce innovative products, and to develop andmaintain customer loyalty in target markets through:
Producing high-quality, customised products orservices at low cost with short lead times;
Motivating employees and mobilise their skills toachieve continuous improvements in quality,response times and process capabilities;
Deploying IT, databases and systems.14
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Information Age: Operating Environment
Cross-functional co-ordination within firm
Cross-boundary collaboration withcustomers, suppliers, even competitors
Customised products and global players
Innovation - PLCs shorter than historically,forcing firms to work harder and faster tokeep pace with technological changes.
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Information Age: Operating Environment
Knowledge Workers
all employees must contribute value bywhat they know and by the informationthey can provide. (p.6)
meant moving awayfrom the traditionalemployer / employee divide and towardsinvesting, managing and exploiting theknowledge of every employee.
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Success Factors for Information Age
High quality products and services -
Predictable, responsive processes -
Motivated, skilled employees -
Satisfied, loyal customers -
Yet, many companies continued toconcentrate solely on quarterly andannual financial performance measures
Could there be a more balanced measure?17
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Balanced Scorecard
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What a BSC Measures
BSC keeps financial measures but alsoidentifies value drivers for long-termcompetitive and financial performance
BSC means financial measures are part of theinformation system for all employees:
Management have to understand the keydrivers for long-term competitive success
Employees on the front line must alsounderstand the impact of their decisionsand actions on firms financial performance
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Steps for a BSC
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1. Vision & Strategya) Clarifying the visionb) Translating the strategy
2. Objectives and Measuresa) Communicating with and educating workforceb) Linking rewards to performance measures
3. Plans & Targetsa) Setting targetsb) Aligning strategic initiativesc) Allocating resourcesd) Establishing milestones
4. Strategic Feedback & Learninga) Articulating shared visionb) Providing strategic feedbackc) Facilitating review and learning
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1. Vision & StrategyClarify & Translate
The BSC process begins with seniormanagement translating strategy into
specific, measurable strategic objectives
Financial: emphasise revenue ormarket growth, profits or cash flow
Customer: being explicit abouttarget customers the firm will serveand markets in which it will compete
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Vision & Strategy:Clarify & Translate
Continues with the two remainingdimensions of the scorecard:
Internal Process: doesnt focus on
cost and quality, but on processes (whichmay be entirely new) for breakthroughperformance for customers andshareholders
Learning & Growth: reveals therationale for investing funds in internalprocesses - re-skilling employees, changingorganisational processes and upgrading IT
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2. Objectives & MeasuresCommunicating & Linking
Critical objectives and measures are then communicated toemployees using e.g. boards, video, email and newsletters.
Higher level strategic objectives can then be translated /aligned into lower level operational objectives: Example: implementing an on-time delivery to customers
objective might be translated into:
Reducing setup time on production machinery; Reducing the in-transit times for warehousing; Implementing ship to stock with suppliers, which
might also mean changing poorly performing suppliers.
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3. Plans & TargetsSetting & Aligning
BSC probably has its greatest impact when
deployed to drive organisational change. Senior Management should establish targets
for the scorecard measures five years outthat, if achieved, will transform the firm:
double stock price increase sales 150%
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3. Plans & TargetsSetting & Aligning
With such ambitious financial targets, topmanagement must develop stretch targetsfor Customer Service, Internal Processes,and Learning & Growth.
Customer Service targets should derive
from meeting or beating expectations; andpreferences should be looked at to identifyexpectations for outstanding performance.
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3. Plans & TargetsSetting & Aligning
Internal Processes can be improved bybenchmarking them to best practice.
Changes are cost cutting and strategic, and willtranslate into better financial performance e.g.
Reducing time to order fulfillment;
Achieving a shorter time to market inproduct development processes;
Enhancing employees' capabilities.
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4. Strategic Feedback & LearningArticulating, Providing, Facilitating
Kaplan & Norton consider this to be the mostinnovative and important aspect of the entire
scorecard management process. (p.15)
Management assess whether the SBU isachieving customer targets, internal processand innovation targets, and targets for
employees, systems and procedures.
Managers discuss past results at monthly andquarterly intervals, and whether expectationsfor the future remain on track.
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4. Strategic Feedback & LearningArticulating, Providing, Facilitating
The BSC enables management to
monitor and adjust the implementationof their strategy and make changes ifnecessary.
Managers learn by questioning theirstrategy through a process calledDouble-Loop Learning - a keydistinguishing feature of the BSC.
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4. Strategic Feedback & LearningArticulating, Providing, Facilitating
Double-Loop Learning is wheremanagers question their underlying
assumptions and reflect on [whether]the theory under which they wereoperating [is] consistent with ...evidence ... and experience.
Managers also need to engage in Single-Loop Learning i.e. examine if plannedstrategy is being executed to plan.
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4. Strategic Feedback & LearningArticulating, Providing, Facilitating
Double-Loop Learning is achieved bybuilding a series of cause-and-effect
relationships from the strategy e.g.
How long before improvements inproduct quality and on-time delivery
lead to increased customer businessand higher margins on existing sales,and how large will that effect be?
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Balanced Scorecard
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1. Financial Perspective
Firms can only stay in business by generating areturn on the capital invested, so financial objectives
are, by definition, critical. Kaplan & Norton distinguish three phases in the life
cycle of a Strategic Business Unit, which haveimplications for the measures adopted:
Growing Sustaining Harvesting
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Financial Perspective
Growing Phase
Usually at an early stage in its life cycle, firmneeds large investment for growth e.g.
Developing new products or services Upgrading or building new facilities Improving operating capabilities Improving information systems
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Financial Perspective
Growing Phase
Because a growing company may beoperating at a loss, the appropriatefinancial objectives could include:
Percentage growth rates in revenues;
Sales growth in target markets ortargeted customer groups.
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Financial Perspective
Sustaining Phase Excellent RoI required at this stage
Objective will be to retain or grow marketshare year-on-year
Investments will be targeted to: Expanding capacity
Relieving bottlenecks Continuous improvement
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Financial Perspective
Harvesting Phase
Firms is mature, with minimal investmentsto maintain equipment and capabilities.
Focus now is on harvesting investmentsmade in the previous two phases.
Investments have to have a short paybacktime, to maximise cash flow.
Objectives: maximising cash flow whileminimising working capital requirements.
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Financial Perspective
Risk Objective
Diversification, so as to avoid thepitfalls of putting all eggs in the onebasket, achieved via new products, newmarkets, or new territories.
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Financial Perspective
Overarching
Ultimately, all other measures in theremaining three perspectives of theBSC are linked to financial objectives.
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2. Customer Perspective
Kaplan & Norton argue that thecustomer perspective translates anorganisations mission and strategy onspecific objectives about [its] targetcustomers and market segments that
can be communicated throughout theorganisation. (p.64)
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Customer Perspective
Identifies target customers and marketsegments that will generate revenue to
meet the financial objectives of the firm.
Vital for companies wishing to competesuccessfully in the Information Age to keepin close contact with their customers:
Mission Statements often provideexplicitly for this e.g. Number 1 indelivering value to our customers.
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Customer Perspective
Customer Perspective allows thefirm to:
Align customer acquisition,satisfaction, loyalty, retention andprofitability measures to target
customers.
Identify and measure the valuepropositions to be delivered.
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Customer PerspectiveValue Propositions
Value propositions represent the attributes thatsupplying companies provide, through their productsand services, to create loyalty and satisfaction in
targeted customers. (p.73)
Kaplan & Norton locate them on three dimensions: Product / Service Attributes e.g. quality, price,
functionality, and which the customer values most.
Customer Relationship e.g. product delivery tocustomer, response and delivery times, howcustomers feel about buying from the firm.
Image and Reputation - intangible factors thatattract customers and rely on effective marketing.
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Customer Perspective
Segmentation of markets is critical inthe BSC: a firm cannot be successful by
trying to be all things to all customers. Research should be done at strategy
formulation stage to segment marketsand identify customer preferences on
e.g. price / quality / functionality, imageand reputation, and customer service.
BSC should identify the customerobjectives in each targeted segment.
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Core Measures forCustomer Perspective
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1. Market ShareProportion of product or service in a givenmarket that a business unit sells
2. Customer AcquisitionRate at which a business unit attracts newcustomers or business
3. Customer SatisfactionAssess satisfaction level of customersaround specific performance criteriae.g. quality, service, timeliness
4. Customer RetentionRate at which a business maintainsongoing relationships with its customers
5. Customer
ProfitabilityMay involve droppingunprofitable customers
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Customer PerspectiveLagging Measures
Customer Retention and Satisfaction are laggingmeasures: the damage may already be done by the
time managers and employees find out satisfactionis poor and customers are deserting the firm.
Managers must specify what customers value andchoose the value proposition they will deliver.
Management should then choose from the threeattributes (product/service, customer relationship,image/reputation) that, if satisfied, will allow thecompany to retain and expand its business.
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3. Internal Process Perspective
Here, it is managements responsibility to identifycritical core processes to enable the firm toachieve customer and shareholder objectives.
Usually considered by managers following thefinancial and customer perspectives.
Involves building an internal-process value chain:
Innovation Operations After-Sales Service
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Internal Process Perspectivea) Innovation
Identify new markets.
Identify and develop solutions forcurrent and future customer needs.
Asking what customers will valuetomorrow and how we can innovate tomeet those needs and beat our rivals.
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Internal Process PerspectiveMeasuring Innovation
Suitable Measures:
Percentage of sales from new products
NPIs v plan or v competition Time to next-generation products
Manufacturing process capabilities e.g. doubling
output volume through new technology
Percentage of time that first design meetscustomer functionality test
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Internal Process Perspectiveb) Operations
Stage from taking to building todelivering a customers order.
Critical to have efficiency, consistencyand on-time delivery in this stage.
Traditional measures of cost, qualityand time are suitable and used.
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Internal Process Perspectivec) After-Sales
Adds value to the customer Includes e.g. warranty, return, repair,
replacement, installation, training.
Critical in industries where costlydowntime post-installation is an issue:
MRI Scanners fitted with specialsoftware to alert supplier engineers ofproblems with the equipment (safetyand utilisation issue, in this instance).
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Internal Process PerspectiveAfter-Sales Measures
Response times to calls
Resolution of customer issues Preventative maintenance schedule Efficiency: cost efficiency of the
firms after-sales service
Environment: responsible disposalof hazardous materials
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4. Learning & GrowthPerspective
The Financial, Customer andInternal Process perspectivesidentify where the firm needs toexcel for outstanding performance.
Objectives in the learning andgrowth perspective provide theinfrastructure to achieve this.
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Learning & Growth Perspective
Traditionally, investment in trainingand development was seen as anexpense to be minimised.
BSC views investment in trainingand development, and in systemsand procedures, as critical for thefirms long-term financial growth.
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Learning & Growth Perspective
Kaplan & Norton identify three keycapability areas for attention:
Employee Capabilities Information Systems Capabilities Motivation, Empowerment and
Alignment
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Learning & Growth PerspectiveEmployee Capabilities
Traditional industrial companiesutilised a narrow job design.
Competing in the InformationAge, requires firms to rely moreon front line staff, who are close
to customers and to internalprocesses, for new ideas.
Requires re-skilling and retraining.55
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Learning & Growth PerspectiveEmployee Core Measurements
Satisfaction: employee morale is vital to firmssuccess as it raises productivity and satisfies customers.
Measured using an annual or monthly survey of e.g.
Involvement in decision-making; Access to sufficient information; Recognition of contribution made.
Productivity: revenue per employee should increase
if they are developed and given the means to do the job.
Retention: is facilitated through avoiding unwantedstaff departures, which is made possible by investment inproductivity, which increases employee satisfaction.
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Learning & Growth PerspectiveEnablers of Core Measurements
Employee Re-Skilling Capabilities
Firms doing BSC prioritise training on change agenda.
Information Systems Capabilities
Vital to have fast, accurate, timely for front line staff. Motivation, Empowerment, Alignment
Employees must be empoweredto act utilising their newskills and the new information systems introduced.
Measure by e.g. number of suggestions per employee, ornumber of suggestions implemented (quality); thisreinforces to staff that their opinions are valued.
Ensure departmental and personal objectives are alignedto the BSC e.g. via performance management systems.
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Balanced ScorecardSummary
Financial: growth rates, reduced costs, andincreased shareholder value.
Customer Relationships: knowledge of what thecustomer wants and commitment of what the firmdoes - or must do - to meet or beat expectations.
Business Processes: product or service delivery,customer relationships, innovation, and adherence toenvironmental and regulatory standards.
Learning & Growth: people, leadership, culture,information, and skills
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Balanced Scorecard
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Balanced ScorecardBringing It All Together
The key to the success of the Balanced Scorecard isits simplicity ... seeing an organisation from four keyperspectives ... one driving another. Financial resultsare driven first by people. People with the right skills,motivation and information create effective andefficient processes, which in turn deliver products,
relationships and services that create value for thecustomer. Customer value in turn delivers profit tomeet the organisations financial objectives.Davis
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Balanced ScorecardAnnual Update
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Balanced Scorecard:Success Without Pitfalls(Davis)
Failing to act on deviations
Ignoring local performance
Regarding BSC as inflexible
Failing to evolve the BSC
Falling victim to reification i.e. relying on thescorecard rather than talking to customers andemployees, meaning managers risk taking a falseview of the world and making wrong decisions