BALANCED SCORECARDBALANCED SCORECARD

A CONCEPT AND A METHOD TO HELP US IN OUR DISCUSSIONS WHERE OUR BUSINESS SHOULD BE HEADING.

THE MAJOR ISSUE: THE NEED FOR THE MANY ORGANIZATIONS (COMPANIES) IS TO DEVELOP THEIR CAPABILITIES TO PROSPER IN THE FUTURE. THIS WILL PRODUCE NO PROFITS IN THE CURRENT YEAR, ONLY COSTS.

TRADITIONAL STYLE TO PREPARE FOR THE FUTURE WAS TO DEVELOP DEPARTMENTS AND THROUGH REQUIREMENTS OF CENTRALIZED AUTHORIZATION FOR CAPITAL EXPENDITURES.

MODERN STYLE TO PREPARE FOR THE FUTURE IS ABOUT INVESTING IN COMPETENCE, CULTIVATING CUSTOMER RELATIONSHIPS, AND CREATING DATA BASES.

MUCH OF THIS WORK IS DONE ELSEWHERE IN THE ORGANIZATION THAN AT HEADQUARTERS.THESE ARE THE FUNDAMENTAL REASONS WHY ORGANIZATIONS (COMPANIES) REQUIRE A BALANCED SCORECARD.

IN A BALANCED SCORECARD, OUTCOME MEASURES ARE COMBINED WITH MEASURES THAT DESCRIBE RESOURCES SPENT OR ACTIVITIES PERFORMED.

PROFIT IS AN OUTCOME MEASURE THAT SHOULD BE COMBINED WITH OTHER PERFORMANCE DRIVERS. THESE MESAURES ARE INTERRELATED.

TRADITIONAL MANAGEMENT CONTROL

FURNISHES MISLEADING INFORMATION FOR DECISION-MAKING.FAILS TO CONSIDER THE REQUIREMENTS OF TODAY’S ORGANIZATION AND STRATEGY.ENCOURAGES SHORT-TERM THINKING AND SUBOPTIMIZATION.

PLAYS SECOND FIDDLE TO THE REQUIREMENTS OF FINANCIAL ACCOUNTING.PROVIDES MISLEADING INFORMATION FOR COST ALLOCATION AND CONTROL OF INVESTMENTS.FURNISHES ABSTRACT INFORMATION TO EMPLOYEES.PAYS LITTLE ATTENTION TO THE BUSINESS ENVIRONMENT.MAY GIVE MISLEADING INFORMATION.

SCORECARD – RECORD OR PROCESS?

SCORE: AS A NOUN “A RECORD OF POINTS MADE (AS IN A GAME)” AND AS A VERB “TO ASSIGN OR GRADE” IN THE MERRIAM-WEBSTER DICTIONARY.

BALANCED SCORECARD: THE GRADING SHOULD REFLECT A BALANCE AMONG SEVERAL IMPORTANT ELEMENTS OF PERFORMANCE.

THE TERM “BALANCED” INDICATE A BALANCE BETWEEN A PROFIT AND A MARKET APPROACH TO CONTROL THROUGH THE USE OF OTHER MEASURES SUCH AS KNOWLEDGE, THE TRUST OF CUSTOMERS AND EMPLOYEES, AND THE QUESTION OF WHAT FUTURE BUSINESS TO BE IN.

THE IDEA OF THE SCORECARD IS TO DESCRIBE THE ESSENTIAL INGREDIENTS OF BUSINESS SUCCESS.

ALTHOUGH FINANCIAL MEASURES ARE ULTIMATELY THE PARAMOUNT AT A COMPANY OPERATING IN A MARKET ECONOMY, OTHERS ARE KNOWN AS “LEADING INDICATORS”.

THESE ARE EARLY SIGNALS OF FACTORS, WHICH WILL BE REFLECTED IN FINANCIAL PERFORMANCE UNTIL MUCH LATER.

ROBERT KAPLAN & DAVID NORTON WORKED IN A NUMBER OF COMPANIES TO DEVELOP MEASURES OF PERFORMANCE IN THE “ORGANIZATION OF THE FUTURE”.

THE FOUR PERSPECTIVES WHICH COMPRISE THEIR BASIC MODEL ARE THE FOLLOWING:

THE FOUR PERSPECTIVES WHICH COMPRISE THEIR BASIC MODEL ARE THE FOLLOWING:

THE FOUR PERSPECTIVES WHICH COMPRISE THEIR BASIC MODEL ARE THE FOLLOWING:

•TO SUCCEED FINANCIALLY, HOW SHOULD WE LOOK TO OUR SHARE-HOLDERS?

•TO SUCCEED WITH OUR VISION, HOW SHOULD WE LOOK TO OUR CUSTOMERS?

•TO SATISFY OUR SHAREHOLDERS AND CUSTOMERS, AT WHAT INTERNAL BUSINESS PROCESSES MUST WE EXCEL?

•TO SUCCEED WITH OUR VISION, HOW SHALL WE SUSTAIN OUR CAPACITY TO LEARN AND TO GROW?

•AN EXPLICIT VISION AND STRATEGY UNDERLIE ALL FOUR PERSPECTIVES.

•STRATEGIC AIMS, MEASURES, SPECIFIC GOALS, AND ACTION PLANS ARE FORMULATED FOR EACH PERSPECTIVE.

•A TOP TO BOTTOM APPROACH OF STRATEGY

•KAPLAN & NORTON DESCRIBE THE BALANCED SCORECARD PROCESS AS A CYCLE. MEASURES DESCRIBE WHAT IS ACHIEVED (OUTCOMES) OR WHAT AFFECTS OUTCOMES (PERFORMANCE DRIVES).

EXAMPLE

EXAMPLE

INTERRELATED AND INTEGRATED AND INTERACTING OBJECTIVE EXAMPLE

CAN BE USED IN FUNCTIONAL LEVEL AS WELLEXAMPLE

BALANCED SCORE CARD DASH BOARDS – BALANCED SCORE CARD MUST BE AUTOMATED AND MUST ACT AS BUSINESS INTELLIGENCE TOOL EXAMPLE (ALSO SEE BIMSER’S PRESENTATION)

BALANCED SCORE CARD DASH BOARDS – BALANCED SCORE CARD MUST BE AUTOMATED AND MUST ACT AS BUSINESS INTELLIGENCE TOOL EXAMPLE (ALSO SEE BIMSER’S PRESENTATION)

BALANCED SCORE CARD EXAMPLE - QFD

THE PIONEERING IDEAS OF KAPLAN & NORTON IN REGARD TO THE BALANCED SCORECARD CONCEPT ARE THE FOLLOWING:

•A COMPANY STRUCTURE FOR COMMUNICATING STRATEGY.

FROM VISION TO ACTION PLAN

•THE REQUIREMENT THAT WE DISCUSS THE CAUSE-AND-EFFECT RELATIONSHIPS AMONG DIFFERENT FACTORS AND THAT WE ARTICULATE THE STRATEGIC HYPOTHESES UNDERLYING OUR COURSE OF ACTION.

•A SYSTEMATIC PROCEDURE FOR CONDUCTING THESE DISCUSSIONS, SO THAT THEY REPLACE TRADITIONAL PLANNING AND CONTROL OF AN ALMOST PURELY FINANCIAL NATURE.

•VIEWING THE COMPANY FROM DIFFERENT PERSPECTIVES AND IN DIFFERENT TIME DIMENSIONS PROVIDES A UNIQUE UNDERSTANDING OF THE BUSINESS AS A WHOLE.

ALTERNATIVE MODELS

• MAISEL’S BALANCED-SCORECARD MODEL

•THE PERFORMANCE PYRAMID

•EP2M

THE PROCESS OF BUILDING A BALANCED SCORECARD

•STRATEGY DEVELOPMENT

•MANAGEMENT CONTROL SYSTEMS

•SYSTEMS AND INFORMATION TECHNOLOGY DEVELOPMENT

•THE LEARNING ORGANIZATION

FROM VISION TO ACTION PLAN

•THE VISION

•PERSPECTIVES

•STRATEGIC AIMS

•CRITICAL SUCCESS FACTORS

•STRATEGIC MEASURES

•ACTION PLAN

FROM VISION TO ACTION PLAN

FROM VISION TO ACTION PLAN

FROM VISION TO ACTION PLAN

FROM VISION TO ACTION PLANEXAMPLE

FROM VISION TO ACTION PLANEXAMPLE

•THE CONCEPT OF SCORECARD IS NO GUARANTEE OF A SUCCESSFUL STRATEGY AND VISION.

•THE GREAT STRENGTH OF THE CONCEPT LIES IN THE VERY PROCESS OF BUILDING THE SCORECARD.

•IT IS AN EFFECTIVE WAY TO EXPRESS THE COMPANY’S STRATEGY AND VISION IN TANGIBLE TERMS AND TO GATHER SUPPORT FOR IT THROUGHOUT THE ORGANIZATION.

THE STEPS IN BUILDING THE PROCESS

1. DEFINE THE INDUSTRY, DESCRIBE ITS DEVELOPMENT AND THE ROLE OF THE COMPANY.

2. ESTABLISH/CONFIRM THE COMPANY’S VISION.3. ESTABLISH THE PERSPECTIVES.4. BREAK THE VISION DOWN ACCORDING TO EACH

PERSPECTIVE AND FORMULATE OVERALL STRATEGIC AIMS.

5. IDENTIFY CRITICAL FACTORS FOR SUCCESS.6. DEVELOP MEASURES, IDENTIFY CAUSES AND EFFECTS

AND ESTABLISH A BALANCE.7. ESTABLISH THE COMPREHENSIVE SCORECARD.8. BREAKDOWN OF THE SCORECARD AND MEASURES BY

ORGANIZATIONAL UNIT.9. FORMULATE GOALS.10. DEVELOP AN ACTION PLAN.

REFERENCES:

PERFORMANCE DRIVERS, Nils-Göran Olve, Jan Roy and Magnus Wetter, John Wiley & Sons, Chichester, 1999.

BALANCED SCORECARD, Robert S. Kaplan & David P. Norton, Harvard Business School Press, 1996.