13a Balanced Scorecard

Strategic Change
Kaplan & Norton’s

Balanced Scorecard
1
Friday 29 April 2011
Balanced Scorecard
• Developed to measure progress in rates of

continuous improvement at Analog Devices.
• BSC translates organisational strategy into specific

objectives, measures and targets, which are then
put into effect at all levels of the firm.
• Kaplan & Norton, who pioneered the approach,

argue that 9 out of 10 strategy implementations
fail; the reason being that managers do not have a
set of metrics to get strategy from paper to reality.
2
Balanced Scorecard
• Thompson, Strickland and Gamble argue that “well-stated

objectives are quantifiable, or measurable, and contain a
deadline for achievement ... The experience of countless
companies and managers teach[es] that precisely spelling out
how much of what kind of performance by when and
then pressing forward with actions and incentives calculated
to help achieve the targeted outcomes will boost a
company’s actual performance. It definitely beats setting
vague targets like “increase profits”, “reduce costs”, “become
more efficient, or “boost sales”, which specify neither how
much nor by when, and then living with whatever results
company personnel deliver.” (‘Crafting & Executing Strategy:
The Quest for Competitive Advantage’, 14th Edition, p.27).
3
Balanced Scorecard:
Balances Strategic and Financial Objectives
• Financial Objectives - outcomes focused on

improving the firm’s financial performance.
• Strategic Objectives - outcomes focused on

improving its long-term competitive position.
• Unless a firm’s financial performance is dismal and

its survival threatened, the surest path to sustained
future profitability and advantage over its rivals is
the relentless pursuit of strategic outcomes.
4
Key: Strategic Performance
• Firms that achieve better strategic performance achieve

better financial performance. Indicators of the latter are
lagging, whereas measures of the former are leading.
• The Balanced Scorecard combines both types of indicator.
• It underlines the need for short- and long-range objectives.
• It puts the concept of strategic intent centre-stage and
focuses the firm on pursuing aggressive stretch objectives.
• It underlines the need for objectives at all levels of the firm.
• It emphasises top-down not bottom-up objective setting.
5
Unilever
Strategic & Financial Objectives
• Grow annual revenue by 5 to 6%; increase

operating profit margins from 11 to16%
within 5 years; trim the company’s 1,200
food, household and personal care products
down to 400 core brands; focus sales and
marketing efforts on those with potential
to become respected, market-leading global
brands; and streamline the supply chain.
6
Dupont
Financial & Strategic Objectives
• Achieve annual revenue growth of 5 to 6% and

annual earnings-per-share growth averaging 10%.
Grow per-share profits faster than revenues by a)
increasing productivity, b) selling enough new
products each year that average prices and average
margins rise, and c) using surplus cash to buy back
shares. Sell low-margin textiles and interiors
division (with sales of $6.6 billion and operating
profits of $114 million); this division makes Lycra
and other synthetic fibres for carpets and clothes.
7
3M
Financial & Strategic Objectives
• Achieve annual growth in earnings per

share of 10% or better; a return on
stockholders’ equity of 20% to 25%; a
return on capital employed of 27% or
better; and at least 30% of sales from
products introduced in the past four years.
8
BSC: Implementations
• AMD
• Apple
• Canon USA
• Exxon Mobil
• CIGNA
• Sears
• UPS
9
Balanced Scorecard
Selected Readings
• Kaplan, R. and Norton, D. (2004): Strategy Maps:
Converting Intangible Assets into Tangible Outcomes.
Boston: Harvard Business School Press.
• Kaplan, R. and Norton, D. (1996): The Balanced
Scorecard:Translating Strategy into Action. Boston:
Harvard Business School Press.
• Kaplan, R. and Norton, D. (1993): “Putting the
Balanced Scorecard to Work”, Harvard Business
Review, Sep-Oct 1993, 134-147.
• Kaplan, R and Norton, D. (1992): “The Balanced
Scorecard - Measures that Drive Performance”,
Harvard Business Review, Feb-Mar 1992, 71-79.
10
Strategy & BSC
• Kaplan & Norton adopt the ‘strategy as

positioning’ perspective, in which firms compete
by “choosing the market and customer segments
the business unit intends to serve, identifying the
critical internal business processes that the unit
must excel at to deliver the value proposition to
customers in the targeted market segments, and
selecting the individual and organisational
capabilities required for internal, customer and
financial objectives.” (Kaplan & Norton, 1996, p.37)
11
Aligning Strategy & Scorecard
• BSC developed to communicate strategy, to align firms

to new strategies, and to manage those strategies.
• Companies quickly came to see it as a means of:
• Focusing less on existing processes like cost

reduction and quality improvements;
• Focusing more on strategic processes for “generating

growth ... through ... customised, value-added
products and services ... [provided through] ...
processes that must be performed exceptionally
well for an organisation’s strategy to succeed”. (viii)
12
Competitive Environment
• According to Kaplan & Norton’s research

with leading organisations, it became critical
for firms to start using the BSC in increasingly
competitive environments, which were driven
by the Information Age from the 1970s.
• Sufficient to compete on economies of scale

during the 1950s, 1960s and early-1970s.
• Increasingly, manufacturing and service firms

needed new capabilities to succeed.
13
Intangible Capabilities
• Capabilities were no longer just tangible.
• Increasingly, firms needed intangible capabilities to

introduce innovative products, and to develop and
maintain customer loyalty in target markets through:
• Producing high-quality, customised products or

services at low cost with short lead times;
• Motivating employees and mobilise their skills to

achieve continuous improvements in quality,
response times and process capabilities;
• Deploying IT, databases and systems.
14
Information Age: Operating Environment
• Cross-functional co-ordination within firm
• Cross-boundary collaboration with

customers, suppliers, even competitors
• Customised products and global players
• Innovation - PLCs shorter than historically,

forcing firms to work harder and faster to
keep pace with technological changes.
15
Information Age: Operating Environment
• Knowledge Workers
• “all employees must contribute value by

what they know and by the information
they can provide”. (p.6)
• meant moving away from the traditional

employer / employee divide and towards
investing, managing and exploiting the
knowledge of every employee.
16
Success Factors for Information Age
• High quality products and services -
• Predictable, responsive processes -
• Motivated, skilled employees -
• Satisfied, loyal customers -
• Yet, many companies continued to

concentrate solely on quarterly and
annual financial performance measures
• Could there be a more balanced measure?

17
Balanced Scorecard
18
What a BSC Measures
• BSC keeps financial measures but also

identifies ‘value drivers’ for long-term
competitive and financial performance
• BSC means financial measures are part of the

information system for all employees:
• Management have to understand the key

drivers for long-term competitive success
• Employees on the front line must also

understand the impact of their decisions
and actions on firm’s financial performance
19
Steps for a BSC
1. Vision & Strategy
a) Clarifying the vision
b) Translating the strategy
2. Objectives and Measures 4. Strategic Feedback & Learning

a) Communicating with and educating workforce a) Articulating shared vision
b) Linking rewards to performance measures b) Providing strategic feedback
c) Facilitating review and learning
3. Plans & Targets

a) Setting targets
b) Aligning strategic initiatives
c) Allocating resources
d) Establishing milestones
20
1. Vision & Strategy
Clarify & Translate
• The BSC process begins with senior

management translating strategy into
specific, measurable strategic objectives
• Financial: emphasise revenue or

market growth, profits or cash flow
• Customer: being explicit about

target customers the firm will serve
and markets in which it will compete
21
Vision & Strategy:
Clarify & Translate
• Continues with the two remaining

dimensions of the scorecard:
• Internal Process: doesn’t focus on

cost and quality, but on processes (which
may be entirely new) for breakthrough
performance for customers and
shareholders
• Learning & Growth: reveals the

rationale for investing funds in internal
processes - re-skilling employees, changing
organisational processes and upgrading IT
22
2. Objectives & Measures
Communicating & Linking
• Critical objectives and measures are then communicated to

employees using e.g. boards, video, email and newsletters.
• Higher level strategic objectives can then be translated /
aligned into lower level operational objectives:
• Example: implementing an on-time delivery to customers
objective might be translated into:
• Reducing setup time on production machinery;
• Reducing the in-transit times for warehousing;
• Implementing ‘ship to stock’ with suppliers, which
might also mean changing poorly performing suppliers.
23
3. Plans & Targets
Setting & Aligning
• BSC probably has its greatest impact when

deployed to drive organisational change.
• Senior Management should establish targets
for the scorecard measures five years out
that, if achieved, will transform the firm:
• double stock price
• increase sales 150%
24
3. Plans & Targets
Setting & Aligning
• With such ambitious financial targets, top

management must develop stretch targets
for Customer Service, Internal Processes,
and Learning & Growth.
• Customer Service targets should derive
from meeting or beating expectations; and
preferences should be looked at to identify
expectations for outstanding performance.
25
3. Plans & Targets
Setting & Aligning
• Internal Processes can be improved by

benchmarking them to best practice.
• Changes are cost cutting and strategic, and will
translate into better financial performance e.g.
• Reducing time to order fulfillment;
• Achieving a shorter time to market in
product development processes;
• Enhancing employees' capabilities.
26
4. Strategic Feedback & Learning
Articulating, Providing, Facilitating
• Kaplan & Norton consider this to be “the most

innovative and important aspect of the entire
scorecard management process”. (p.15)
• Management assess whether the SBU is
achieving customer targets, internal process
and innovation targets, and targets for
employees, systems and procedures.
• Managers discuss past results at monthly and
quarterly intervals, and whether expectations
for the future remain on track.
27
• The BSC enables management to

monitor and adjust the implementation
of their strategy and make changes if
necessary.
• Managers learn by questioning their
strategy through a process called
Double-Loop Learning - a key
distinguishing feature of the BSC.
28
• ‘Double-Loop Learning’ is where

managers “question their underlying
assumptions and reflect on [whether]
the theory under which they were
operating [is] consistent with ...
evidence ... and experience”.
• Managers also need to engage in ‘Single-
Loop Learning’ i.e. examine if planned
strategy is being executed to plan.
29
• ‘Double-Loop Learning’ is achieved by

building a series of cause-and-effect
relationships from the strategy e.g.
• “How long before improvements in
product quality and on-time delivery
lead to increased customer business
and higher margins on existing sales,
and how large will that effect be?”
30
Balanced Scorecard
31
1. Financial Perspective
• Firms can only stay in business by generating a

return on the capital invested, so financial objectives
are, by definition, critical.
• Kaplan & Norton distinguish three phases in the life
cycle of a Strategic Business Unit, which have
implications for the measures adopted:
• Growing
• Sustaining
• Harvesting
32
Financial Perspective
Growing Phase
• Usually at an early stage in its life cycle, firm

needs large investment for growth e.g.
• Developing new products or services
• Upgrading or building new facilities
• Improving operating capabilities
• Improving information systems
33
Growing Phase
• Because a growing company may be

operating at a loss, the appropriate
financial objectives could include:
• Percentage growth rates in revenues;
• Sales growth in target markets or
targeted customer groups.
34
Sustaining Phase
• Excellent RoI required at this stage
• Objective will be to retain or grow market
share year-on-year
• Investments will be targeted to:
• Expanding capacity
• Relieving bottlenecks
• Continuous improvement
• Targets explicitly profitability-related
35
Harvesting Phase
• Firms is mature, with minimal investments

to maintain equipment and capabilities.
• Focus now is on harvesting investments
made in the previous two phases.
• Investments have to have a short payback
time, to maximise cash flow.
• Objectives: maximising cash flow while
minimising working capital requirements.
36
Risk Objective
• Diversification, so as to avoid the

pitfalls of putting all eggs in the one
basket, achieved via new products, new
markets, or new territories.
37
Overarching
• Ultimately, all other measures in the

remaining three perspectives of the
BSC are linked to financial objectives.
38
2. Customer Perspective
• Kaplan & Norton argue that the

customer perspective “translates an
organisation’s mission and strategy on
specific objectives about [its] target
customers and market segments that
can be communicated throughout the
organisation”. (p.64)
39
Customer Perspective
• Identifies target customers and market

segments that will generate revenue to
meet the financial objectives of the firm.
• Vital for companies wishing to compete
successfully in the Information Age to keep
in close contact with their customers:
• Mission Statements often provide
explicitly for this e.g. “Number 1 in
delivering value to our customers”.
40
• Customer Perspective allows the

firm to:
• Align customer acquisition,
satisfaction, loyalty, retention and
profitability measures to target
customers.
• Identify and measure the value
propositions to be delivered.
41
Value Propositions
• “Value propositions represent the attributes that
supplying companies provide, through their products
and services, to create loyalty and satisfaction in
targeted customers”. (p.73)
• Kaplan & Norton locate them on three dimensions:
• Product / Service Attributes e.g. quality, price,
functionality, and which the customer values most.
• Customer Relationship e.g. product delivery to
customer, response and delivery times, how
customers feel about buying from the firm.
• Image and Reputation - intangible factors that
attract customers and rely on effective marketing.
42
• Segmentation of markets is critical in

the BSC: a firm cannot be successful by
trying to be all things to all customers.
• Research should be done at strategy
formulation stage to segment markets
and identify customer preferences on
e.g. price / quality / functionality, image
and reputation, and customer service.
• BSC should identify the customer
objectives in each targeted segment.
43
Core Measures for
1. Market Share
Proportion of product or service in a given
market that a business unit sells
5. Customer
2. Customer Acquisition Profitability 4. Customer Retention
Rate at which a business unit attracts new May involve dropping Rate at which a business maintains
customers or business unprofitable customers ongoing relationships with its customers
3. Customer Satisfaction
Assess satisfaction level of customers
around specific performance criteria
e.g. quality, service, timeliness
44
Lagging Measures
• Customer Retention and Satisfaction are lagging

measures: the damage may already be done by the
time managers and employees find out satisfaction
is poor and customers are deserting the firm.
• Managers must specify what customers value and
choose the value proposition they will deliver.
• Management should then choose from the three
attributes (product/service, customer relationship,
image/reputation) that, if satisfied, will allow the
company to retain and expand its business.
45
3. Internal Process Perspective
• Here, it is management’s responsibility to identify

critical core processes to enable the firm to
achieve customer and shareholder objectives.
• Usually considered by managers following the
financial and customer perspectives.
• Involves building an internal-process value chain:
• Innovation
• Operations
• After-Sales Service
46
Internal Process Perspective
a) Innovation
• Identify new markets.

• Identify and develop solutions for
current and future customer needs.
• Asking what customers will value
tomorrow and how we can innovate to
meet those needs and beat our rivals.
47
Measuring Innovation
• Suitable Measures:
• Percentage of sales from new products
• NPIs v plan or v competition
• Time to next-generation products
• Manufacturing process capabilities e.g. doubling
output volume through new technology
• Percentage of time that first design meets
customer functionality test
48
b) Operations
• Stage from taking to building to

delivering a customer’s order.
• Critical to have efficiency, consistency
and on-time delivery in this stage.
• Traditional measures of cost, quality
and time are suitable and used.
49
c) After-Sales
• Adds value to the customer

• Includes e.g. warranty, return, repair,
replacement, installation, training.
• Critical in industries where costly
downtime post-installation is an issue:
• MRI Scanners fitted with special
software to alert supplier engineers of
problems with the equipment (safety
and utilisation issue, in this instance).
50
After-Sales Measures
• Response times to calls

• Resolution of customer issues
• Preventative maintenance schedule
• Efficiency: cost efficiency of the
firm’s after-sales service
• Environment: responsible disposal
of hazardous materials
51
4. Learning & Growth
Perspective
• The Financial, Customer and

Internal Process perspectives
identify where the firm needs to
excel for outstanding performance.
• Objectives in the learning and
growth perspective provide the
“infrastructure” to achieve this.
52
Learning & Growth Perspective
• Traditionally, investment in training

and development was seen as an
expense to be minimised.
• BSC views investment in training
and development, and in systems
and procedures, as critical for the
firm’s long-term financial growth.
53
• Kaplan & Norton identify three key

capability areas for attention:
• Employee Capabilities
• Information Systems Capabilities
• Motivation, Empowerment and
Alignment
54
Employee Capabilities
• Traditional industrial companies

utilised a narrow job design.
• Competing in the Information
Age, requires firms to rely more
on front line staff, who are close
to customers and to internal
processes, for new ideas.
• Requires re-skilling and retraining.
55
Employee Core Measurements
• Satisfaction: employee morale is vital to firm’s

success as it raises productivity and satisfies customers.
• Measured using an annual or monthly survey of e.g.
• Involvement in decision-making;
• Access to sufficient information;
• Recognition of contribution made.
• Productivity: revenue per employee should increase
if they are developed and given the means to do the job.
• Retention: is facilitated through avoiding unwanted

staff departures, which is made possible by investment in
productivity, which increases employee satisfaction.
56
Enablers of Core Measurements
• Employee Re-Skilling Capabilities

• Firms doing BSC prioritise training on change agenda.
• Information Systems Capabilities

• Vital to have fast, accurate, timely for front line staff.
• Motivation, Empowerment, Alignment
• Employees must be empowered to act utilising their new
skills and the new information systems introduced.
• Measure by e.g. number of suggestions per employee, or
number of suggestions implemented (quality); this
reinforces to staff that their opinions are valued.
• Ensure departmental and personal objectives are aligned
to the BSC e.g. via performance management systems.
57
Balanced Scorecard
Summary
• Financial: growth rates, reduced costs, and

increased shareholder value.
• Customer Relationships: knowledge of what the
customer wants and commitment of what the firm
does - or must do - to meet or beat expectations.
• Business Processes: product or service delivery,
customer relationships, innovation, and adherence to
environmental and regulatory standards.
• Learning & Growth: people, leadership, culture,
information, and skills
58
Balanced Scorecard
59
Balanced Scorecard
Bringing It All Together
• “The key to the success of the Balanced Scorecard is

its simplicity ... seeing an organisation from four key
perspectives ... one driving another. Financial results
are driven first by people. People with the right skills,
motivation and information create effective and
efficient processes, which in turn deliver products,
relationships and services that create value for the
customer. Customer value in turn delivers profit to
meet the organisation’s financial objectives.” Davis
60
Balanced Scorecard
Annual Update
61
“Balanced Scorecard:
Success Without Pitfalls” (Davis)
• Failing to act on deviations
• Ignoring local performance
• Regarding BSC as inflexible
• Failing to evolve the BSC
• Falling victim to “reification” i.e. relying on the

scorecard rather than talking to customers and
employees, meaning managers risk taking a false
view of the world and making wrong decisions
62

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Strategic Change

Kaplan & Norton’s

• Developed to measure progress in rates of

• BSC translates organisational strategy into specific

• Kaplan & Norton, who pioneered the approach,

• Thompson, Strickland and Gamble argue that “well-stated

• Financial Objectives - outcomes focused on

• Strategic Objectives - outcomes focused on

• Unless a firm’s financial performance is dismal and

• Firms that achieve better strategic performance achieve

• Grow annual revenue by 5 to 6%; increase

• Achieve annual revenue growth of 5 to 6% and

• Achieve annual growth in earnings per

• Kaplan & Norton adopt the ‘strategy as

• BSC developed to communicate strategy, to align firms

• Companies quickly came to see it as a means of:

• Focusing less on existing processes like cost

• Focusing more on strategic processes for “generating

• According to Kaplan & Norton’s research

• Sufficient to compete on economies of scale

• Increasingly, manufacturing and service firms

• Capabilities were no longer just tangible.

• Increasingly, firms needed intangible capabilities to

• Producing high-quality, customised products or

• Motivating employees and mobilise their skills to

• Deploying IT, databases and systems.

• Cross-functional co-ordination within firm

• Cross-boundary collaboration with

• Customised products and global players

• Innovation - PLCs shorter than historically,

• “all employees must contribute value by

• meant moving away from the traditional

• High quality products and services -

• Predictable, responsive processes -

• Motivated, skilled employees -

• Satisfied, loyal customers -

• Yet, many companies continued to

• Could there be a more balanced measure?

• BSC keeps financial measures but also

• BSC means financial measures are part of the

• Management have to understand the key

• Employees on the front line must also

2. Objectives and Measures 4. Strategic Feedback & Learning

3. Plans & Targets

• The BSC process begins with senior

• Financial: emphasise revenue or

• Customer: being explicit about

• Continues with the two remaining

• Internal Process: doesn’t focus on

• Learning & Growth: reveals the

• Critical objectives and measures are then communicated to

• BSC probably has its greatest impact when

• With such ambitious financial targets, top

• Internal Processes can be improved by

• Kaplan & Norton consider this to be “the most

• The BSC enables management to

• ‘Double-Loop Learning’ is where

• ‘Double-Loop Learning’ is achieved by

• Firms can only stay in business by generating a

• Usually at an early stage in its life cycle, firm

• Because a growing company may be

• Firms is mature, with minimal investments

• Diversification, so as to avoid the