Balanced Scorecard

Balanced Scorecard - the concept

(pl. Strategiczna Karta Wynikw)
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

1/SKW 2007

Reasons 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

2/SKW 2007

Circumstances 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

3/SKW 2007

Remark (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

Reasons for which activities are undertaken:

Strategy: More time for people with whom I share my life

and less stress"
family
friends
work
health

4/SKW 2007

Remark (2)
Reasons

How to realise

Plan

Performance

Family

Telephones to a wife

3,7

Flowers for a wife

Dinners and suppers together

Family trips

Dance/theater

2,5

Roller skates

Volunteer work at wind surfuring club

Get-togethers with friends

Trainings of co-workers

1,5

Team meeting

Work communication days

Work until 6:30 p.m.

1,5

Weekend without a company

Jogging

1,5

Work-out / Aerobic

Friends

Work

Health

5/SKW 2007

Remark (3)

6/SKW 2007

Four 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

7/SKW 2007

Balanced scorecard - the model

Financial perspective
How should stockholders see us,
so that we are thought of as
financially successful?

Customer perspective
How should customers see us, so
that our vision is realised?

Vision
Vision
and
and
Strategy

Internal processes
perspective

What internal processes must we

improve so that owners and clients
of the firm are satisfied?

Development perspective
How can we maintain our ability to
change and improve effectiveness in
order to realise our vision?

8/SKW 2007

Casual relation (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

9/SKW 2007

Casual chain
Financial perspective

Customer perspective

ROCE

Customer loyalty

Timely delivery

Internal processes
perspective

Development perspective

Process quality

Process duration

Employees' skills,
abilities, competences

10/SKW

Gist of the Balanced Scorecard

Measurement system built based on financial and nonfinancial 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

11/SKW

Casual relation (2)

Vision,
Vision, mission,
mission, strategy
strategy
Financial perspective
How should stockholders see us,
so that we are thought of as
financially successful?

Customer perspective
How should customers see us, so
that our vision is realised?

Internal processes
perspective

What internal processes must we

improve so that owners and clients of
the firm are satisfied?

Development perspectiv
How can we maintain our ability to
change and improve effectiveness
in order to realise our vision?

12/SKW

Financial 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

13/SKW

Example:
problems with financial measures

14/SKW

Calculation of ROI
Cost of products sold and
services rendered

Sales

Sales, administrative and

managerial costs

Operational costs

Income from
operations
Return
on sales

Other operational
revenues other
operational costs

Sales

ROI
ROI

Cash and cash equivalent

Liabilities

Short-term
assets

Return
on assets
Operational
assets

Inventory and other shortterm assets

Long-term assets
Legal assets

Long-term assets

Other long-term assets

15/SKW

How to calculate ROI?

ROI =

Income from operations

Assets of operational unit

Income from operations

Sales

Return on
sales

Sales
Assets of operational unit
Return on
assets

16/SKW

Limitations of utilising 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

17/SKW

Economic value added - 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

EVA = Wynik operacyjny koszt kapitau x zainwestowane rodki

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

18/SKW

EVA

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

19/SKW

EVA in decision-taking (1)

P/L Statement of Gamma Co.
Sales revenue

2001

2002

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

Assets in 2001 - 10 000 000 z, in 2002 20 000 000 z

Liabilities in 2001 - 3 000 000 z, in 2002 4 000 000 z
Cost of capital set at 10%

20/SKW

EVA in decision-taking (2)

2001

2002

Return on sales

12,29%

12,5%

Return on assets

1,22

ROI

15%

12,5%

800 000

900 000

1,5 mln-7mln*10%=0,8 mln

2,5mln-16mln*10%=0,9 mln

EVA

Calculation

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

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

21/SKW

Financial perspective types of strategies

Increase value
for stockholders
Revenue growth
strategy

Built
franchising
- revenue from
new sources

Increase value
for customers
- improve
profitability
of current customers

Productivity
strategy

Improve cost
structure
- lower costs
per unit

Improve
utilisation
of assets
- gradual
investment
- current assets

22/SKW

Customer 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

23/SKW

General measures from customer's

perspective
Market share

reflects the part of the market controlled by the enterprise. Expressed as

a number of clients, a value or amount of sales

Gain new
customers

measures in absolute or relative numbers the speed at which the

enterprise gains new customers

Maintain
customers

shows in absolute or relative numbers the level at which the enterprise

maintains long-term relations with customers

Customer's
satisfaction

describes the customers' satisfaction level depending on specific criteria

of added value

Customer's

measures the net profit generated from a customer or market segment

taking into account specific costs related to service of that customer

profitability

24/SKW

Attributes of generating value for customers

Gain customers

Maintain customers
Customer's
satisfaction

Value =

Product attributes
(services)

quality
price
time

+ Image and Reputation +

brand

Customer relations

convenience
trust
react to needs

25/SKW

Internal 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

26/SKW

Business internal processes perspective

Determined by customer and

financial perspectives

zlecenie
klienta
nadeszo

zlecenie
klienta
wczyta
zlecenie
do systemu

dzia
sprzeday

system
komputerowy

zlecenie
klienta
w systemie

Transforms customer's
requirements into internal measures
kontrola
techniczna

Identifies internal processes needed

to achieve the aims

kontrola
handlowa

decyzj
techniczn
podjto

decyzj
handlow
podjto

opracowa
decyzje

Forces cooperation of various

departments

dzia
sprzeday

informacja
dla klienta
gotowa

27/SKW

Innovative
processes
delineate
target
market

create
product
offer
(service)

Operational
processes
delineate
target
market

create
product
offer
(service)

After-sale
processes
customer
service

Satisfy customer
needs

Identify customer
needs

Process perspective value chain

28/SKW

Development 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

29/SKW

Measures in development perspective

Main measures
Results

Employee
turnover

Employee
productivity

Employee
satisfaction
Provisions:
Personnel
abilities

Technological
infrastructure

Employee
involvement

30/SKW

Development 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

Mapa
wiedzy
(Kto co
wie?)

Diagram struktury
wiedzy

Projects

Rozwj i wykorzystanie wiedzy

(Integracja z modelami procesw)

31/SKW

Basic model of creating Strategy Map

Increase value for
stockholders

Financial perspective
Revenue growth strategy

Built
Built
franchising
franchising

Increase
Increase value
value
for
for clients
clients

Productivity strategy

Improve
Improve cost
cost
structure
structure

Increase
Increase utilisation
utilisation
of
of assets
assets

Customer perspective
Product leadership
Customer knowledge

Operational excellence

Internal processes perspective

Development perspective
rdo: Kaplan, Norton

Increase
Increase value
value for
for clients
clients
by
customer
management
by customer management
process
process

Employees' competences

Achieve
Achieve operational
operational
excellence
excellence thanks
thanks
to
to logistic
logistic process
process

Technology
Technology

Become
Become aa worthy
worthy enterprise
enterprise
thanks
thanks to
to share
share
in
in regulatory
regulatory processes
processes

Organisational
Organisational culture
culture

32/SKW

Navigational cockpit strategic management

center

33/SKW

Example:
Citibank
Evaluation
How -toPerformance
effectively assess manager's
performance?

Citibank California assessment of

Balanced 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

Introduction of Balanced Scorecard

Financial Measures financial results

Strategy Implementation related to company's introduction of corporate

Customer satisfaction

strategy

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

36/SKW

Grading 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

37/SKW

James' results:
Financial
Implementation of strategy
Customer satisfation
Control
People
Standards

Total mark:
38/SKW

Summary

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

39/SKW