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

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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

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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

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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

Strategy: More time for people with whom I share my life and less stress"
Reasons for which activities are undertaken:
family

friends
work health
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Remark (2)
Reasons Family How to realise Telephones to a wife Flowers for a wife Dinners and suppers together Family trips Dance/theater Friends Roller skates Volunteer work at wind surfuring club Get-togethers with friends Work Trainings of co-workers Team meeting Work communication days Work until 6:30 p.m. Weekend without a company Health Jogging Work-out / Aerobic Plan 5 4 4 3 2 1 2 2 2 4 2 2 2 2 4 Performance 3,7 3 5 2 2,5 1 1 2 1,5 3 1 1,5 1 1,5 2
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Remark (3)
telephones to wife work-out / aerobic jogging

5 4

flowers for a wife dinners and suppers together

3
weekend without a company

2 1 0

family trips

work until 6:30 p.m.

dance/theater

is aim

work communication days

rollerskates

meetings education

volunteer work at wind surfuring club get-togethers with friends

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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
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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 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?
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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
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Casual chain
Financial perspective

ROCE

Customer perspective

Customer loyalty

Timely delivery

Internal processes perspective

Process quality

Process duration

Development perspective

Employees' skills, abilities, competences

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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

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Casual relation (2)

Vision, mission, 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?
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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

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Example: problems with financial measures

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Calculation of ROI
Cost of products sold and services rendered Sales, administrative and managerial costs Other operational revenues other operational costs Sales Income from Operational costs operations Return on sales Sales ROI

Cash and cash equivalent

Liabilities Short-term assets Operational assets Return on assets

Inventory and other shortterm assets Long-term assets Legal assets Long-term assets

Other long-term assets

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How to calculate ROI?

ROI =

Income from operations Assets of operational unit Sales Assets of operational unit

Income from operations Sales

Return on sales

Return on assets

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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

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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 nonincome generating projects
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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

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EVA in decision-taking (1)

P/L Statement of Gamma Co. Sales revenue Cost of goods sold (COGS) Gross income from sales Sales costs 2001 12 200 000 7 400 000 4 800 000 1 200 000 2002 20 000 000 15 000 000 5 000 000 1 000 000

Administrative costs
Income from sales Other operational income Other operational costs Income from operations

2 000 000
1 600 000 400 000 500 000 1 500 000

1 500 000
2 500 000 400 000 400 000 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%
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EVA in decision-taking (2)

2001 Return on sales Return on assets ROI 12,29% 1,22 15% 800 000 2002 12,5% 1 12,5% 900 000

EVA

Calculation

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

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

Decrease in ROI: worsening of the effectiveness of the investment center? Increase in EVA: improvement of the effectiveness of the investment center?
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Financial perspective types of strategies

Increase value for stockholders Revenue growth strategy Productivity strategy

Built franchising

Increase value for customers - improve

profitability of current customers

Improve cost structure

Improve utilisation of assets - gradual

investment - current assets

- revenue from
new sources

- lower costs
per unit

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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
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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
Customer's satisfaction Customer's profitability

shows in absolute or relative numbers the level at which the enterprise maintains long-term relations with customers

describes the customers' satisfaction level depending on specific criteria of added value

measures the net profit generated from a customer or market segment taking into account specific costs related to service of that customer

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Attributes of generating value for customers

Gain customers
Customer's satisfaction

Maintain customers

Value =

Product attributes (services)

+ Image and Reputation +

brand

Customer relations

quality price time

convenience trust react to needs

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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

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Business internal processes perspective

Determined by customer and financial perspectives Transforms customer's requirements into internal measures Identifies internal processes needed to achieve the aims
kontrola techniczna zlecenie klienta nadeszo zlecenie klienta wczyta zlecenie do systemu dzia sprzeday

system komputerowy zlecenie klienta w systemie

kontrola handlowa

decyzj techniczn podjto

decyzj handlow podjto

Forces cooperation of various departments

opracowa decyzje

dzia sprzeday

informacja dla klienta gotowa

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Process perspective value chain

Innovative processes
delineate target market create product offer (service)

Operational processes
delineate target market create product offer (service)

After-sale processes
customer service

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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

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Measures in development perspective

Main measures Results

Employee turnover

Employee productivity

Employee satisfaction Provisions: Personnel abilities Technological infrastructure Employee involvement

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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
Mapa wiedzy (Kto co wie?) Diagram struktury wiedzy

Employees' abilities add value

Informational systems are needed to transform information

Projects

Rozwj i wykorzystanie wiedzy (Integracja z modelami procesw)

Employees' motivation
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Basic model of creating Strategy Map

Financial perspective
Revenue growth strategy Increase value for stockholders Productivity strategy

Built franchising

Increase value for clients

Improve cost structure

Increase utilisation of assets

Customer perspective
Product leadership Customer knowledge

Operational excellence

Internal processes perspective

Increase value for clients by customer management process

Achieve operational excellence thanks to logistic process

Become a worthy enterprise thanks to share in regulatory processes

Development perspective

Employees' competences

Technology

Organisational culture

rdo: Kaplan, Norton

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Navigational cockpit strategic management center

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Example: Citibank - Performance Evaluation

How to 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

corporate strategy related to company's introduction of

Customer satisfaction
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
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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

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

Standards

Total mark:
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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
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