BALANCED SCORE CARD

Bahria University Karachi Campus

STRATEGY THE BRIDGE TO THE FUTURE

The Future
Events

Events

Today

The Traditional Measurement

Has always been financial data Financialsshow what happened in the past What is needed in most organizations are factors or steps taken to achieve those financials

An Alternative
The BSC provides alternatives to traditional financial indicator measurement It describes and explains what has to be measured in order to asses the effectiveness of organizational strategies.

A Balanced Scorecard system provides a basis for executing good strategy well and managing change successfully.

Balanced Scorecard (BSC)

Initiated by Robert S. Kaplan, a Professor at HBS and David P. Norton, President of Balanced Scorecard Collaborative/Palladium. They did research by belief that existing performance measurement approaches, primarily relying on financial accounting measures, were becoming obsolete.

Research finding Balanced Scorecard

Strategic Measures That Drive Performance

Balanced Scorecard History

Measurement and Reporting
1992 Articles in Harvard Business Review:

Alignment and Communication

1996

Enterprise-wide Strategic Management

2000

Acceptance and Acclaim:

The Balanced Scorecard Measures that Drive Performance January - February 1992 Putting the Balanced Scorecard to Work September - October 1993 Using the Balanced Scorecard as a Strategic Management System January - February 1996 1996

The Balanced
Scorecard is translated into 18 languages

Selected by Harvard
Business Review as one of the most important management practices of the past 75 years.

2000

BSC: Strategic Measuring for Performance

Four Management Functions :
Planning, Organizing, Leading, Controlling

If you cant measure, you cant managed If you cant measure, you cant improved What gets measure, gets done

Measurement is core of the Balanced

Scorecard

What is BSC?
BSC is a strategic planning and management system which gives a balanced view of organization performance
1. 2. 3. 4. to align business activities to the mission/vision and strategy of the organization Improve internal/external communications Monitors organization performance against strategic goals. Convert non financial performance measures to traditional financial metrics.

RESULT: Transformation of attractive but passive Strategic plan document to Marching Orders

Improved methodology
In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map". With this modified approach, the strategic objectives are typically distributed across a similar set of "perspectives", as is found in the earlier designs, but the design question becomes slightly less abstract.

Four Perspectives of BSC

Financial: What are our shareholders expectations for financial performance? Customer: To each our financial objective, how create value for our customers? Internal Process: What processes must we excel at to satisfy our customers and shareholders? Learning & Growth: How do we align out intangible assetspeople, systems, and cultureto improve the critical processes?
Kaplan and Norton, 2006

Financial Perspective
What is Financial Strategy? [to satisfy shareholders] Productivity strategy
Improve cost structure/yields Increase asset utilization

Growth strategy
Expand revenue opportunities Enhance customer Value

How to reach the financial goals?

Performance Measures in Financial Perspective

Return on investment Economic value added Sales growth rate by segment Percentage revenue from new product, service, or customer Customer and product line profitability Revenue/employee Cost reduction rate Unit cost Payback Return on Capital Employed Working capital ratios

Customer Perspective
Information about market & customer

Customer selection, acquisition, retention & growth

Who are profitable customers? Target Segmentations What do they need? [same as the thing we serve them] Customer Values Propositions (e.g. QSC&V quality, services, cleanliness, and value)

Customer Value Propositions

Best buy or Low total cost: Affordable prices, reliable quality, quick service. Product leadership and Innovation: The cutting edge products or industry leaders. Customer complete solutions: Tailor made for the customer's individual needs and preferences. Lock in or System platform: Lock in strategies exploit high switching costs / industrial standard for the customers making them stick to the organization.

Internal Process Perspective

In order to serve customers need and satisfy other stakeholders, what process the organization need to be excellent.
The nature of the customer value proposition determines the kind of internal processes

How to build excellent process to serve customer and other stakeholders.

Internal Process Perspective

Production Management Processes Customer Management Processes Innovation Processes Regulatory & Social processes

Performance Measures in Internal Process Perspective

Quality Response time Cost Yields Waste Scrap Rework New product introduction Service error rate Product development cycle Hours with customer Time to market

Learning & Growth Perspective

What competencies the organization need in order to obtain or sustain competitiveness?
Competencies Gap Analysis

How to fill the gap between what organization what to be and its current position
Competencies, Employee Satisfaction and Retention Management Information System Corporate Culture and Motivations

Learning & Growth Perspective

Human CapitalEmployees' skills, talent, and
knowledge.

Organization CapitalCulture, leadership,

employee alignment, teamwork, and knowledge management

Information CapitalDatabases, information

systems, network, and technology infrastructure

Performance Measures in Learning & Growth Perspective

Employee satisfaction Employee retention/turnover rate Employee productivity Information system availability Organizational Climate Index Personal Goals Alignment Index Staff development

Strategy Map
A diagram describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationship with each other in the four BSC perspectives. All of the information is contained on one page; this enables relatively easy strategic communication.

Strategy Map
Max. Profit Financial Perspective Inc. Rev. Reduce Cost

Inc. rev New Cust

Cust Acquisition

Inc. rev per Cust

Cust Satisfaction

Customer Perspective

On-time Delivery
Internal Process Perspective Learning & Growth

Relationships/BM

Product Quality

Cust Mgt. Process

Logistic Process/Ino

Production Process

Motivated Culture

Skill/Training

Leadership /IS

Measurements Should:
Translate customer expectations into goals. Evaluate the quality of processes. Track our improvement. Focus our efforts on our customers.

Support our strategies.

Targets
If you dont know where youre going, youre probably not gonna get there. Forrest Gump

Initiatives
Once measures and targets are established, it is the responsibility of management to determine HOW the organization will achieve its goals. Measures are used to determine the effectiveness of strategic initiatives.

BSC Terminology
Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers

Statement of what strategy must achieve and whats critical to its success

How success in achieving the strategy will be measured and tracked

The level of performance or rate of improvement needed

Key action programs required to achieve objectives

Objectives
Internal Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time

Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

Balanced Scorecard Example

Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes More Customers

Objectives

Measurement

Target

Initiative

Profitability More
Customers

Customer Flight Is on Time

Fewer planes Flight is on

time Lowest prices

Market Value Seat Revenue Plane Lease

Cost FAA On Time Arrival Rating Customer Ranking (Market Survey)

30% CAGR 20% CAGR 5% CAGR

#1 #1 Quality
management Customer loyalty program

Lowest Prices

Internal Fast Ground Turnaround

Fast ground
turnaround

On Ground Time 30 Minutes Cycle time On-Time 90% optimization

Departure program 70% yr. 3 90% yr. 5 100%

Learning Ground Crew Alignment

Ground crew
alignment

% Ground crew yr. 1

trained

% Ground crew
stockholders

ESOP Ground crew

training

Linking the Balanced Score card measures to Strategy

3 Principles enable linkage
1. Cause and Effect Relationship 2. Performance Drivers 3. Linkage to financials

Outcomes and Performance drivers

A good Balanced Score Card should have an appropriate mix of outcomes( lagging Indicators) and Performance Drivers ( Leading indicators) that have been customized to the SBUs strategy.

Some of the Indicators of Good Balanced Scorecard

1. Executive Involvement
Strategic decision makers must validate and own the strategy and related measures

2. Cause-and-Effect Relationships

A good Balanced Scorecard will tell the story of your strategy in actionable terms.

Every objective selected should be part of a chain of cause and effect linkages that represent the strategy

3. Balance between outcome and leading measures There should be a balance of outcome
measures and leading measures to facilitate anticipatory management

4. Financial Linkage
Every objective can ultimately be related to financial results

5. Linkage of Initiatives and Measures: Each

initiative should be based on a gap between baseline and target.