1/SKW 2007

Balanced ScorecardBalanced ScorecardBalanced ScorecardBalanced Scorecard

Balanced Scorecard - the concept

(pl. Strategiczna Karta Wyników)

– instrument of strategic management

– forces measurement of effects of the strategic activities

– forces cohesion in formulating strategy by building casual dependence between aims and activities

– describes and explains what should be measured in an organisation

– is an alternative for traditional financial systems

2/SKW 2007

Reasons for origination of BSCReasons for origination of BSCReasons for origination of BSCReasons for origination of BSC

Limitations in using financial measures– do not provide full information about elements crucial for

competitive advantage

– do not encourage managers to think short-term

– allow for manipulation in decision-taking

– show results of activities taken in the past

– do not show the complete picture of the company's development

– traditional measures originate from Cost Accounting; do not show where did costs come from

– employees do not see the link between their work and measurement systems

3/SKW 2007

Circumstances under which BSC originatedCircumstances under which BSC originatedCircumstances under which BSC originatedCircumstances under which BSC originated

Research projects – 1987 – Corporate Scorecard developed by Analog Devices Inc.

– 1988 – KPMG built for Apple Computer a performance measuring system

– 1990 – project entitled „Measuring effectiveness in organisations in the future” have begun

– project group: David Norton (Nolan Norton Institute) – project leader prof. Robert Kaplan (Harvard Business School) – advisor team of corporate directors from: Advanced Micro Devices, American

Standard, Apple Computer, Bell South, Hewlett Packard, Shell Kanada, Cigna, DuPont, General Electric

– results were decribed in: Robert S. Kaplan, David P. Norton, The Balanced Scorecard: Translating Strategy into Action, 1996

4/SKW 2007

RemarkRemark (1) (1)RemarkRemark (1) (1)

Balanced Scorecard of a certain friend – as an impulse to reflect on how we realise our plans...

/based on: My Balanced Scorecard, H.R. Friedag, W. Schmidt/

Vision: „Happy and satisfied”

Strategy: „More time for people with whom I share my life and less stress"

Reasons for which activities are undertaken:

– family

– friends

– work

– health

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RemarkRemark (2) (2)RemarkRemark (2) (2)

Reasons How to realise Plan Performance

Family Telephones to a wife 5 3,7

Flowers for a wife 4 3

Dinners and suppers together 4 5

Family trips 3 2

Dance/theater 2 2,5

Friends Roller skates 1 1

Volunteer work at wind surfuring club 2 1

Get-togethers with friends 2 2

Work Trainings of co-workers 2 1,5

Team meeting 4 3

Work communication days 2 1

Work until 6:30 p.m. 2 1,5

Weekend without a company 2 1

Health Jogging 2 1,5

Work-out / Aerobic 4 2

6/SKW 2007

RemarkRemark (3) (3)RemarkRemark (3) (3)

0

1

2

3

4

5telephones to wife

flowers for a wife

dinners and suppers together

family trips

dance/theater

rollerskates

volunteer work at wind surfuring club

get-togethers with friendseducation

meetings

work communication days

work until 6:30 p.m.

weekend without a company

jogging

work-out / aerobic

is

aim

7/SKW 2007

Four perspectives of BSCFour perspectives of BSCFour perspectives of BSCFour perspectives of BSC

„Many leaders have their own visions which never become a common vision joining the whole organisation."

That which is lacking is a theory which allows us to transform an individual vision into a joint vision”

/P. Senge/

Balanced scorecard transforms the mission and strategy into aims and measures grouped according to four different perspectives:

1. Financial perspective

2. Customer perspective

3. Internal processes perspective

4. Development perspective

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Balanced scorecardBalanced scorecard - - the the modelmodelBalanced scorecardBalanced scorecard - - the the modelmodelFinancial perspectiveFinancial perspective

„How should stockholders see us, so that we are thought of as

financially successful?”

Development perspectiveDevelopment perspective

„How can we maintain our ability to change and improve effectiveness in

order to realise our vision?”

Internal processes Internal processes perspectiveperspective

„What internal processes must we improve so that owners and clients

of the firm are satisfied?”

Customer perspectiveCustomer perspective

„How should customers see us, so that our vision is realised?”

VisionVisionand and

StrategyStrategy

VisionVisionand and

StrategyStrategy

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Casual relationCasual relation (1) (1)Casual relationCasual relation (1) (1)

If we increase the amount and quantity of training then...

…. employees will possess a greater knowledge about our product offer

If the employees will possess a greater knowledge about our products then...

…. they will increase their selling effectiveness

If the sales effectiveness increases then...

…1) sales will increase and 2) operational costs will decrease

If sales will increase and operational costs will decrease then...

…profitability will increase

10/SKW 2007

Casual chain Casual chain Casual chain Casual chain

ROCEROCE

Employees' skills, abilities, competences

Employees' skills, abilities, competences

Process qualityProcess quality Process durationProcess duration

Timely deliveryTimely delivery

Customer loyaltyCustomer loyalty

Financial perspectiveFinancial perspective

Development perspectiveDevelopment perspective

Internal processes Internal processes perspectiveperspective

Customer perspectiveCustomer perspective

11/SKW 2007

Gist of the Balanced ScorecardGist of the Balanced ScorecardGist of the Balanced ScorecardGist of the Balanced Scorecard

Measurement system built based on financial and non-financial measures

Measurement system built based on enterprise strategy

Balanced system of:

– Results with Leading measures (Lagg Indicators vs. Lead Indicators)

– Objective with Subjective measures

– Financial with Non-Financial measures

– Short-term with Long-term measures

– External with Internal measures

12/SKW 2007

Casual relation Casual relation (2)(2)Casual relation Casual relation (2)(2)

Financial perspectiveFinancial perspective

„How should stockholders see us, so that we are thought of as

financially successful?”

Development perspectivDevelopment perspectiv

„How can we maintain our ability to change and improve effectiveness

in order to realise our vision?”

Internal processes Internal processes perspectiveperspective

„What internal processes must we improve so that owners and clients of

the firm are satisfied?”

Customer perspectiveCustomer perspective

„How should customers see us, so that our vision is realised?”

Vision, mission, strategyVision, mission, strategyVision, mission, strategyVision, mission, strategy

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Financial perspectiveFinancial perspectiveFinancial perspectiveFinancial perspective

Aim from financial perspective:– main aim: to ensure stockholders a rate of return from an investment

exceeding their expectations derived from an alternative involvement of capital bearing a similar level of risk

Financial perspective measures whether the company's strategy realises its main aim

Measures (based on financial reports) – return on investment - ROI

– economic value added – EVA

Financial strategies:– to reach a required growth and structure of revenues

– to reduce costs and increase profitability

– to increase utilisation of resources and effectiveness of investments

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ExampleExample: : problems with financial measuresproblems with financial measuresExampleExample: : problems with financial measuresproblems with financial measures

15/SKW 2007

Calculation of ROICalculation of ROICalculation of ROICalculation of ROICost of products sold and services rendered Cost of products sold and services rendered

Sales, administrative and managerial costs Sales, administrative and managerial costs

Other operational revenues – other operational costs

Other operational revenues – other operational costs

Operational costsOperational costs

Sales Sales

Income from

operations

Income from

operations

ROIROIROIROISales Sales

Return

on sales

Return

on sales

Return

on assets

Return

on assets

Operational assets

Operational assets

Cash and cash equivalentCash and cash equivalent

Liabilities Liabilities

Inventory and other short-term assetsInventory and other short-term assets

Long-term assets Long-term assets

Legal assets Legal assets

Other long-term assets Other long-term assets

Short-term assets

Short-term assets

Long-term assets Long-term assets

16/SKW 2007

How to calculate ROIHow to calculate ROI??How to calculate ROIHow to calculate ROI??

ROI = Income from operationsIncome from operationsAssets of operational unitAssets of operational unit

Income from operationsIncome from operationsSalesSales

SalesSalesAssets of operational unitAssets of operational unit

= x

= Return on Return on salessales

x Return onReturn onassetsassets

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Limitations of utilisingLimitations of utilising ROI ROILimitations of utilisingLimitations of utilising ROI ROI

Using ROI to assess the activities has its limitations:

– ROI measure is not directly tied to the goal of maximising the value of the enterprise for its owners

– ROI used as an assessment measure of managers can lead to incorrect investment decisions

– ROI is a short-term assessment measure

18/SKW 2007

EVA® = Wynik operacyjny – koszt kapitału x zainwestowane środki

Economic value addedEconomic value added - EVA - EVA®® Economic value addedEconomic value added - EVA - EVA®®

EVA® (ang. economic value added)

– measure that shows the value that the activities of a given investment center "add" to the value of an enterprise

– shows the aim of the activities of an enterprise – maximialisation of its value

Limitations of applying the EVA®:

– short-term measure based on annual data

– its use can lead to faulty investment decisions taken by managers interested in short-term benefits

Modifications of EVA®:

– e.g. bonus bank – managers lose motivation to conduct long-term non-income generating projects

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EVAEVA®®EVAEVA®®

„Economic value added is based on a notion which we knew for a long

time: that what we call profit, money, which are left to service own

capital is not commonly a profit. Until an enterprise earns an amount

greater than its cost of capital, until then it has a loss. It is unimportant

that it pays taxes as it would experience a real profit. An enterprise still

gives the economy less than it gets from it in terms of resources. (...) It

does not create wealth, but it destroys it.”

Peter Drucker

20/SKW 2007

EVAEVA®® in decision-takingin decision-taking (1) (1)EVAEVA®® in decision-takingin decision-taking (1) (1)

Assets in 2001 - 10 000 000 zł, in 2002 – 20 000 000 zł

Liabilities in 2001 - 3 000 000 zł, in 2002 – 4 000 000 zł

Cost of capital set at 10%

P/L Statement of Gamma Co. 2001 2002

Sales revenue 12 200 000 20 000 000

Cost of goods sold (COGS) 7 400 000 15 000 000

Gross income from sales 4 800 000 5 000 000

Sales costs 1 200 000 1 000 000

Administrative costs 2 000 000 1 500 000

Income from sales 1 600 000 2 500 000

Other operational income 400 000 400 000

Other operational costs 500 000 400 000

Income from operations 1 500 000 2 500 000

21/SKW 2007

EVAEVA®® in decision-takingin decision-taking (2) (2)EVAEVA®® in decision-takingin decision-taking (2) (2)

Decrease in ROI: worsening of the effectiveness of the investment center?

Increase in EVA®: improvement of the effectiveness of the investment center?

2001 2002

Return on sales 12,29% 12,5%

Return on assets 1,22 1

ROI 15% 12,5%

EVA ®800 000 900 000

Calculation 1,5 mln-7mln*10%=0,8 mln 2,5mln-16mln*10%=0,9 mln

22/SKW 2007

Financial perspectiveFinancial perspective – – types of strategiestypes of strategiesFinancial perspectiveFinancial perspective – – types of strategiestypes of strategies

Increase value Increase value for stockholders for stockholders

Revenue growth Revenue growth strategystrategy

ProductivityProductivitystrategystrategy

Builtfranchising

Builtfranchising

Increase value for customers

Increase value for customers

Improve coststructure

Improve coststructure

Improve utilisation of assets

Improve utilisation of assets

- revenue from new sources

- improve profitability

of current customers

- lower costs per unit

- gradual investment

- current assets

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Customer perspectiveCustomer perspectiveCustomer perspectiveCustomer perspective

Aims in customer perspective:– increase customer satisfaction and create positive image for the firm

– increase customer loyalty and quality of customer services

– increase market share

General measures:– market share

– maintain customers

– gain new customers

– customer's satisfaction

– customer's profitability

Measures of value offered to customers:– product attributes (goods, services)

– customer relations

– image and reputation

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General measures from customer's General measures from customer's perspective perspective General measures from customer's General measures from customer's perspective perspective

Market shareMarket sharereflects the part of the market controlled by the enterprise. Expressed as a number of clients, a value or amount of sales

Gain new Gain new customerscustomers

measures in absolute or relative numbers the speed at which the enterprise gains new customers

Maintain Maintain customerscustomers

shows in absolute or relative numbers the level at which the enterprise maintains long-term relations with customers

Customer's Customer's satisfactionsatisfaction

describes the customers' satisfaction level depending on specific criteria of added value

Customer's Customer's

profitabilityprofitability

measures the net profit generated from a customer or market segment taking into account specific costs related to service of that customer

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Attributes of generating value for customersAttributes of generating value for customersAttributes of generating value for customersAttributes of generating value for customers

Gain customersGain customers

Customer's Customer's satisfactionsatisfaction

Maintain customersMaintain customers

Product attributesProduct attributes((servicesservices))

Customer relationsCustomer relationsImage and ReputationImage and ReputationValue = + +

qualitypricetime

convenience trustreact to needs

brand

26/SKW 2007

Internal processes perspectiveInternal processes perspectiveInternal processes perspectiveInternal processes perspective

Aims in internal processes perspective:

– increase value of the enterprise through innovations

– optimalise processes at the operational level

– ensure high quality of after-sale services

Measures:

– time of process implementation

– cost of process implementation

– quality of process implementation

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Business internal processes perspectiveBusiness internal processes perspectiveBusiness internal processes perspectiveBusiness internal processes perspective

Determined by customer and financial perspectives

Transforms customer's requirements into internal measures

Identifies internal processes needed to achieve the aims

Forces cooperation of various departments

zlecenieklienta

nadeszło

wczytaćzlecenie

do systemu

zlecenieklienta

w systemie

kontrolatechniczna

kontrolahandlowa

decyzjętechniczną

podjęto

decyzjęhandlowąpodjęto

opracowaćdecyzje

informacjadla klienta

gotowa

działsprzedaży

działsprzedaży

zlecenieklienta

systemkomputerowy

28/SKW 2007

Process perspectiveProcess perspective – – value chainvalue chainProcess perspectiveProcess perspective – – value chainvalue chain

delineate target market

delineate target market

create product

offer(service)

create product

offer(service)

delineate target market

delineate target market

create product

offer(service)

create product

offer(service)

customer service

customer service

Iden

tify

cu

sto

mer

nee

ds

Sat

isfy

cu

sto

mer

nee

ds

Innovative Innovative processesprocesses

After-sale After-sale processesprocesses

Operational Operational

processes processes

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Development perspectiveDevelopment perspectiveDevelopment perspectiveDevelopment perspective

Aims in the development perspective:

– achieve a greater staff potential – human resources

– utilise employees' individualism

– increase level of motivation, decentralisation, and convergence of aims

Measures:

– employee satisfaction, level of stress and conflict

– availability of trainings, individual development

30/SKW 2007

Measures in development perspective Measures in development perspective Measures in development perspective Measures in development perspective

Results

Employee productivity

Employee satisfaction

Employee turnover

Personnel abilities

Technological infrastructure

Employee involvement

Main measures

Provisions:

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Development and learning perspectivesDevelopment and learning perspectivesDevelopment and learning perspectivesDevelopment and learning perspectives

Ability to innovate and learn directly tied to the value of an enterprise:– development of new products

– create value for the customers

– process of continuous improvement

Employees' abilities add value

Informational systems are needed to transform information

Employees' motivation

Mapawiedzy(Kto co wie?)

Diagram strukturywiedzy

Rozwój i wykorzystanie wiedzy(Integracja z modelami procesów)

Projects

32/SKW 2007

Basic model of creating Strategy MapBasic model of creating Strategy MapBasic model of creating Strategy MapBasic model of creating Strategy MapIncrease value forIncrease value for

stockholdersstockholders

Revenue growth strategyRevenue growth strategy Productivity strategyProductivity strategy

Builtfranchising

Builtfranchising

Increase value for clients

Increase value for clients

Improve coststructure

Improve coststructure

Increase utilisation of assets

Increase utilisation of assets

Product leadership

Operational excellence

Customer knowledge

Employees' competencesEmployees' competences

Increase value for clients by customer management

process

Increase value for clients by customer management

process

Achieve operational excellence thanks to logistic process

Achieve operational excellence thanks to logistic process

Become a worthy enterprisethanks to share

in regulatory processes

Become a worthy enterprisethanks to share

in regulatory processes

TechnologyTechnology Organisational cultureOrganisational culture

Financial perspectiveFinancial perspective

Development perspective Development perspective

Internal processes perspectiveInternal processes perspective

Customer perspectiveCustomer perspective

Źródło: Kaplan, Norton

33/SKW 2007

Navigational cockpitNavigational cockpit – – strategic management strategic management centercenterNavigational cockpitNavigational cockpit – – strategic management strategic management centercenter

ExampleExample::Citibank - Performance EvaluationCitibank - Performance Evaluation

How to effectively assess manager's performance?

Citibank California – Citibank California – assessment of assessment of Balanced Scorecard for local managersBalanced Scorecard for local managersCitibank California – Citibank California – assessment of assessment of Balanced Scorecard for local managersBalanced Scorecard for local managers

Assessment of Jamesa McGarana– worked in banking since 1977

– in Citibanku since 1985

– since 1986 systematically promoted

– 1992 - 1996 – branch manager in a financial district of Los Angeles

4 years in a row had impressive profits although the district was greatly competitive

had an opinion of a great manager

– difficult clients at James' branch: individual clients: from very demanding to "common people” business clients: market segment requiring higher than usual services

Difficulty with James' assessment based on Balanced Scorecard

36/SKW 2007

Introduction of Balanced ScorecardIntroduction of Balanced ScorecardIntroduction of Balanced ScorecardIntroduction of Balanced Scorecard

Financial Measures – financial results

Strategy Implementation – related to company's introduction of corporate strategy

Customer satisfaction manager of Citibank California thought of this measure as the most significant

one from bank's long-term strategy

Control measures – internal controls

People – subjective assessment of employees by the supervisor

Standards – assesses manager's involvement, behaviour based on business ethics

37/SKW 2007

Grading and motivational systemGrading and motivational system::Grading and motivational systemGrading and motivational system::

Grading:– Below par (below the norm)

– Par (the norm)

– Above par (above the norm)

Motivational system:– Below the norm – -0- bonus

– The norm – Bonus of 15-20% of salary

– Above the norm – Bonus of 30% of salary, under a condition that the employee does not receive any grade below par

38/SKW 2007

Financial

Implementation of strategy

Customer satisfation

Control

People

Standards

Total mark:

JamesJames' results' results::JamesJames' results' results::

39/SKW 2007

SummarySummarySummarySummary

The Balanced Scorecard does not require any new knowledge as it relates to daily experiences and its based on them

Every manager must define his aims, plan needed resources, take decisions and implement them

In order to control the results of his actions, he must make them specific and definite, so that he is able to measure their implementation

Strategic Balanced Scorecard creates framework for changes through defining strategic aims

To satisfy the aims specific ways and resources are assigned