Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

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What is the Balanced Scorecard?

Note: We request to please review the case study as guided for better

comprehension regards to BSC and HR Scorecard linkage of Measures,

targets & initiatives discussed during sessions!

The balanced scorecard is:

1. a measurement system that provides a comprehensive framework that

translates a company’s strategic objectives into a coherent set of

performance measures

2. a management systems that can motivate breakthrough

improvements.

A balanced scorecard is both a general measurement system to incorporate

non-financial measures with traditional financial ones, as well as a central

management system to motivate breakthrough competitive performance in

implementing a company’s strategic vision. It is a process of developing

interrelated measures, some leading and some lagging, that uniquely depicts

a firm’s strategy in attempting to create competitive advantage.

It is the translation of a business strategy into a linked set of measures that

define both the long-term strategic objectives, as well as the mechanisms for

achieving and obtaining feedback on those objectives. A balanced

scorecard:

1. Focuses manager’s attention on a handful of measures that are critical

for the firm’s success.

2. Is a way to clarify, simply, and then operationalize the mission and

vision of the organization.

Performance Measurements for Success

The scorecard functions as the cornerstone of a company’s current and

future success. Traditional financial measures – ROI, net profit, sales growth,

and market share – fail to capture the true picture of a firm’s value

propositions because they focus on the past. They tell the story of what has

happened to the organization. They explain the results of past transactions

and disregard what the future benefits could be. Traditional financial

measures are only part of the information that managers need to successfully

guide their organizations through highly competitive marketplaces.

Get Balanced. Four Critical Areas

During the 1990s, two Harvard professors and consultants – Kaplan and

Norton, devised a tool, the Balanced Scorecard, to rectify the deficiencies in

relying primarily on traditional financial measures. A Balanced Scorecard

allows better measurement of a firm’s capabilities to create long-term value

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

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by identifying the key drivers of this value. The drivers are then translated into

four categories of measures- financial, customer, internal business processes,

innovation and learning. The financial measures are typically focused on

short-term results; while the other three categories are coupled to future

oriented activities needed to successfully sustain the enterprise. The

information from the four perspectives provides balance between external

measures like operating income and internal measures like new product

development. It provides a balanced picture of current operating

performance as well as the drivers of future performance.

Measure Areas that Lead

Obviously financial health is critical for any business organization- cash in the

bank is necessary to pay the bills. However, many managers become

nearsighted as a result of this requirement and believe that by making

fundamental improvements in their operations, the financial numbers will

resolve themselves. This is an utter fallacy. For example, if a firm has a goal of

increasing net profit from 10% to 13% for the current fiscal year, there are a

number of interrelated factors that must be in place to succeed.

Possibly customer satisfaction must be enhanced to increase the number of

customers or increase the loyalty of existing customers. May be the

product/service’s defect level must be decreased to boost customer

satisfaction? So if the manager waits until the end of the fiscal year to

determine if he/she was successful, there will be a “history” lesson on the

events of the past period. However, if the defect rate is currently monitored

or customer returns observed, the manager can make mid-course

corrections to the firm’s strategy in order to accomplish the goal of increasing

net profit. In other words, the manager should develop and monitor measures

of drivers of that net profit goal.

The Balanced Scorecard at a Glance

Managers should develop financial and non-financial measures that are

specifically tied to their firms’ unique strategy. There is not a “one size fits all”

Balanced Scorecard. The Balanced Scorecard provides executives with a

comprehensive framework that can translate a company’s vision and

strategy into a coherent and linked set of performance measures. The

measures should include both outcome measures and the performance

drivers of those outcomes.

Rather than using the Balanced Scorecard as a traditional control and

performance measurement system, it is being used as a measurement and

management system to implement a company’s strategic vision. It is being

used to articulate and communicate the strategy of the business; to help

align individual, organizational, and cross-departmental initiatives to achieve

a common goal; and as a communication, information, and learning system.

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

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Thus, the measures must provide a clear representation of the organization’s

long-term strategy for competitive success.

Generic Strategic Measures for the Four Perspectives

The Balanced Scorecard should be viewed as the instrumentation for a single

strategy. Strategic measures are those that define a strategy designed for

competitive excellence. Properly constructed scorecards contain a unity of

purpose since all the measures are directed toward achieving an integrated

strategy.

I) Financial Perspective How do we look to investors?

The financial performance measure will vary based upon the long-run

objective and strategy of a business in the growth, sustain, or harvest stage. In

general companies use the following three categories to achieve their

business strategy:

Revenue growth and mix

Cost reduction/ Productivity improvement

Asset utilization/ Investment strategy

Measures that indicate whether the company’s strategy, implementation,

and execution are contributing to bottom line improvement are the

following:

Cash flow

Sales growth

Market share

ROE

ROCE – return on capital employed

Economic value added

II) Customer Perspective How do customers see us?

In customer perspective, the company measures the business performance in

targeted segments. In general, customer concerns can be grouped into the

following four categories.

1. Time-measures time required for company to meet customers’ needs.

2. Quality-defect level as sent to customers.

3. Performance-how company’s products/services contribute to creating

value for its customers.

4. Cost-not just price of goods/services, but what does it “cost” the

customer when he finally uses it.

Measures are customized to the targeted customer groups from which the

business expects growth and profitability. The following are customer

measures:

Market share

Account share – the account share of those customers’ business

Customer retention – retaining existing customers, customer loyalty,

percentage of growth due to existing customers

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

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New customer acquisition – number of new customers, total sales to

new customers, number of customer responses to solicitations and the

conversion rate, solicitation cost per new customer acquired

Customer satisfaction – provides feedback on how well the company is

doing. It customer’s complete buying experience. It includes

uniqueness, functionality, quality, price, time

Customer profitability – measures not only the extent of business they

do with the customers, but the profitability of the business in the

targeted customer segment. This financial measure can help keep

customer-focused organizations from becoming customer-obsessed.

III) Internal Business Perspective What must be excelled at?

The internal business process perspective identifies the most critical internal

processes for the organization’s strategy to succeed. The internal perspective

examines the following process categories:

Innovation Cycle

Identify the market

Create the service offering

Operations Cycle

Build the services

Deliver the services

Post-sale Service Cycle

Service the customer

Measures should be focused on…

Business processes that have the greatest impact on customer

satisfaction, such as factors that affect process cycle time, process

quality, employee skills, and productivity.

Business processes that achieve the organizations financial objective.

Core competencies and processes that are needed to maintain

market leadership.

IV) Learning and growth perspective Can we continue to improve and

create value?

The learning and growth perspective identifies the infra-structure that the

organization must build to create long-term growth and improvement. Ability

to innovate, improves, and learns ties directly to company’s value.

Organizational learning and growth can be categorized into three main

areas:

People

Systems

Organizational procedures

In order to achieve business objectives, companies most like will have to

invest in re-skilling employees, enhancing information technology and

systems, and aligning organizational procedures and routines.

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

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The following are measures for people, systems and organizational

procedures:

People

Employee satisfaction

Employee retention

Employee training

Employee skills

Systems

Real-time availability of accurate customer and internal process

information to front-line employees

Ability to launch new products

Ability to create more value for customers

Ability to penetrate new markets

Organizational procedures

Alignment of employee incentives with overall organizational success

factors

Rates of improvement in critical customer-based and internal

processes

Examples of Measures Building a Health Care Strategic Balanced Scorecard

Framework (Kaplan & Norton conference promotion materials)

Financial

Patient revenue

Funding and contributions

Cost management

Customer

Patients

Referring physicians

Payers

Community

Academics

Internal Processes

Planning

Innovation

Relationship management

Care delivery

Operations efficiency

Learning & Personal Development

Recruiting, training, retaining

Cultural values

Tools, knowledge, information

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

to HR Score Card

HR Edge Training and Management Services |www.hredge.in

Balance Score Card: Perspective’s Measures, Focus Targets and Initiatives Aligning

to HR Score Card

HR Edge Training and Management Services |www.hredge.in

Relationship between Measures and Performance Drivers

A Balanced Scorecard should have a mix of outcome measures and

performance drivers. Outcome measures without performance drivers do not

communicate how the outcomes are to be achieved. Conversely,

performance drivers without outcome measures may fail to reveal whether

the improvement has resulted in expanded business and enhanced financial

performance.

The chain of cause and effect should pervade all four perspectives of a

Balanced Scorecard. Additionally, all aspects of the measures on a

Scorecard should be linked to specific targets for improving customer, and

eventually, financial performance. For example, the return on capital

employed (ROCE) may be a outcome measure in the financial perspective.

The driver of this could be repeat and expanded sales from existing

customers due to on-time delivery (OTD). Thus, customer loyalty and OTD are

listed under the customer perspective. To achieve OTD, the company may

need to achieve short cycle time in operating processes and high-quality

internal processes. Thus both factors are listed under internal perspective. In

order for processes to improve, employees skills will need to improve, which is

thus listed under learning and growth perspective. For another example: refer

to Exhibit 8 – National Insurance: Lag and Lead Indicators (Kaplan and

Norton, “Linking the Balanced Scorecard to Strategy,” 1996)

You should be able to look at your measures and infer the business strategy

the company is intending to use to get to breakthrough performance. What

are you doing that’s unique? Your measures should address which customers

you’re going after; which market segments are you attacking; what you

have to do exceptionally well to get penetration and share into those

markets and those segments; and what kind of new product developments

do you need to deliver to achieve long-term value for your customers and

shareholders. You should feel really upset if a competitor gets hold of your

scorecard.

It is important to build a scorecard that accurately reflects the business

strategy. The scorecard: Describes the vision of the future for the entire

organization. It creates shared understanding. It focuses change efforts. It

permits organized learning at the executive level.