Balanced Scorecard Thesis

Estonian Business School BBA programme
Overview of Construction and Implementation of Balanced Scorecard
Bachelor Theses
Written by: Marko Rillo
Promotor: Ruth Alas
Tallinn 2000
Kaitsmisele lubatud 2000. a.
ppetooli juhataja vi juhendaja
Olen koostanud bakalaureuset iseseisvalt. Kik t koostamisel kasutatud teiste autorite td, phimttelised seisukohad, kirjandusallikatest ja mujalt prinevad andmed on viidatud.
Marko Rillo
Executive summary........................................................................................................4 1. Theory behind the Balanced Scorecard....................................................................5 1.1. Background of the Concept of Balanced Scorecard...............................................5 1.2. Balanced Scorecard as Complementary Tool for Management Accounting..........8 1.3. Balanced Scorecard as a Measurement Tool........................................................13 1.4. Balanced Scorecard as a Strategic Management System ....................................14 2. Constructing a Balanced Scorecard.........................................................................18 2.1. Establishing Strategy by Building up a Balanced Scorecard ...............................21 2.1.1. Clarifying and Translating the Vision and Strategy.....................................21 2.1.2. Communicating and Linking Strategic Objectives and Measures................22 2.1.3. Planning, Setting Targets and Aligning Strategic Initiatives........................24 2.1.4. Enhancing Strategic Feedback and Learning...............................................25 2.2. Defining Critical Success Factors and Measures..................................................29 2.2.1. Financial Perspective....................................................................................29 2.2.2. Customer Perspective....................................................................................30 2.2.3. Internal Business Process Perspective..........................................................34 2.2.4. Learning and Growth Perspective................................................................35 2.2.5. Conclusions and Recommendations How Many Measures to Choose?....36 2.3. Testing the Balanced Scorecard ...........................................................................37 2.3.1. Analysing Outcomes and Performance Drivers ...........................................37 2.3.2. Analysing Cause and Effect...........................................................................38 2.4. Establishing Action Plan.......................................................................................39 2.4.1. Setting up Catalytic Mechanisms..................................................................39 3. Implementing a Balanced Scorecard as a Management System...........................41 3.1. Case Studies on Implementing a Balanced Scorecard..........................................42 3.1.1. Practical Aspects of Setting up Balanced Scorecard in a Service Company42 3.1.2. Using the Balanced Scorecard at Metro Bank..............................................45 3.1.3. Using the Results of a Balanced Scorecard at Sears Company....................47 3.2. Conclusions and Recommendations on Implementing a Balanced Scorecard.....50 4. Summary....................................................................................................................52 Bibliography..................................................................................................................54 Resmee Tasakaalustatud hindemaatriksi koostamine ja kasutamine................56
Executive summary The overall objective of the thesis is to analyse the use of Balanced Scorecard 1 as a performance measurement tool in the areas of general management and strategic management. The Balanced Scorecard may be described as a strategy-driven measurement system that retains traditional financial measures, but adds also the perspectives of present and potential (future) value of a company, namely its customers, suppliers, employees, processes, technology, and innovation. The purpose is to show that the Balanced Scorecard may be considered as one of the best remedies in tackling with the questions concerning: helping to align key performance measures with overall organisation strategy at all levels of an organisation; linking strategic vision and long-term objectives to short term tactics; directing sophisticated and different critical paths of success in the light of strategic management; review of strategic vision in the light of day-to-day operations management.
The concept of the Balanced Scorecard is not yet very familiar in Estonia. Therefore, the author pays very much effort in describing the theory side of the Balanced Scorecard and the details of starting up a Balanced Scorecard based management. Those aspects constitute two first chapters of the thesis. In the third chapter, attention is given to day-to-day implementation of Balanced Scorecard using the examples of three case studies. Finally, some conclusions and recommendations are drawn based on practical use of the Balanced Scorecard.
The concept of the Balanced Scorecard was introduced in series of articles by Messrs. Robert S. Kaplan
and David P. Norton. Robert S. Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the Harvard Business School in Boston, Massachusetts. David P. Norton is the founder and president of Renaissance Solutions, a consulting firm in Lincoln, Massachusetts.
1. Theory behind the Balanced Scorecard 1.1. Background of the Concept of Balanced Scorecard Throughout the history of contemporary management theories starting from the ones that were introduced by the intrusion of the mass production in the beginning of the 20 th century and until today, all the gurus of management have been trying to find uniform solutions on more efficient allocation and use of very limited resources available to businesses. Those paths in seeking the Holy Grail of operational efficiency have brought up several new management theories. In the dawn of the century, Frederick W. Taylor established the very concepts of resource allocation in his Principles of Scientific Management2. In 1920-ies it went around assembly line and motion studies 3 as the first experience from systematic mass production had given theorists quite a lot of materials to be analysed from the point of view of using traditional blue-collar employees more efficiently. In the 1930-ies, the main topic was motivation of employees4, as it turned out that human nature does not enable to work long hours on a repetitive tasks without frustration level getting so high enough to diminish productivity. In the 1940-ies and 1950-ies, the first statistical and linear methods were introduced in trying to measure logistics of the operations management and its implications to overall company success in financial-analysis side.5 In the beginning of 1980-ies, partly because of introduction of electronic data processing equipment and quick development of computers, the whole array of management techniques were initiated. The particular reasons for the vast development of the new theories were catalysed mainly by ever growing competition generated through more systematic use of computers, and of course also by rapid growth of the importance of human capital.
Published in 1911. The works that describe the best those applications are written by father of contemporary scientific
management Frederick W. Taylor, psychologists Frank and Lillian Gilbrecht and practising manager Henry Ford.
4
Hereby referring to the works by Elton Mayo. Works by George B Dantzig and others.
Todays companies are in the midst of a revolutionary transformation. Industrial age competition is shifting to information age competition. During the industrial age, roughly from 1850 to about 1975, companies succeeded by how well they could capture the benefits from economies of scale and scope. 6 Technology mattered, but, ultimately, success accrued to companies that could embed the new technology into physical assets that offered efficient, mass production of standard products. During the industrial age, the financial control systems were developed in major companies to facilitate and monitor efficient allocations of financial and physical capital. 7 A summary financial measure such as return-on-capital-employed (ROCE) could both direct a companys internal capital to its most productive use and monitor the efficiency by which operating divisions used financial and physical capital to create value for shareholders. The emergence of the information era, however, in the last decades of the 20 th century, has made obsolete many of the fundamental assumptions of industrial age competition. The information age environment for both manufacturing and service organisations requires new capabilities for competitive success. The ability of a company to mobilise and exploit its intangible assets has become far more decisive than investing and managing tangible, physical assets.8 Industrial age companies created a sharp distinction between two groups of employees. The intellectual elite managers and engineers used their analytical skills to design products and processes, select and manage customers, and supervise day-to-day operations. The second group was composed of the people who actually produced the products and delivered the services. This direct labour work force was a principal factor of production, which performed its tasks under supervision of the first group. Today automation and productivity have increased the number of people performing analytic
6
Chandler, A. D. Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge,
Massachusetts: Harvard University Press, 1990).

7
Chandler, A. D. Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge,
Massachusetts: Harvard University Press, 1977) and Johnson, T. H. and Kaplan R. S, Relevance Lost: The Rise and Fall of Management Accounting (Boston: Harvard Business School Press, 1987).
8
Itami, H. Mobilizing Invisible Assets (Cambridge, Massachusetts: Harvard University Press, 1990),
referred through Kaplan, Robert S. and Norton, David P. Translating Strategy into Action The Balanced Scorecard, Harvard Business School Press, Boston, 1996, p. 3.
functions: engineering, marketing, management and administration. Therefore, the people are more viewed as problem solvers, not as variable costs. In other words, information age has brought about the concept of knowledge management. The shift to successful knowledge management has introduced a variety of improvement initiatives: Just-in-time, Total quality management, Lean enterprise, Business process re-engineering, Time-based competition, Customer-focused organisation, Activity-based cost management, Employee empowerment, Living company,
and so on9. Some of those programmes have meant in practice real breakthrough and improvement, others have proven to be in the best case just a short-time disturbance, but in the worst cases total failures resulting in disarray or even bankruptcy of a particular company. The main reason for that lies in five main implementation problems10: 1) current performance measurement systems are based on the traditional financial accounting model, which does not enable to objectively analyse information-age companies; 2) if some non-financial performance measurement even is made, it is solely based on employees tactical performance, not on strategic performance;
Theories by Tai-ichi Ohno, W. E. Deming, Arie de Geus and many more authors. As adapted from Kaplan, Robert S. and Norton, David P. Translating Strategy into Action The
10
Balanced Scorecard, Harvard Business School Press, Boston, 1996, pp 6-40 and p. 193.
3) majority of management and employee salary-based motivation schemes are only short-run profit oriented, that does not enable to align towards long-run goals; 4) overall company strategy is not closely linked to organisational and personal improvement programmes; and 5) strategy is not generally linked to resource allocation, which results in underfinancing some of the crucial parts of organisations development. As for today, superior financial performance and efficiency in production are just not enough to gain sufficient competitive advantage, but more and more attention needs to be paid to intangible sides of business. For at least 15 years, the leading management journals have published articles about how to build up a mechanism that would enable to control all the aspects of a companys performance. One of the most versatile tools for that purpose is Balanced Scorecard.11 Introduced in the beginning of 1990-ies by Robert S. Kaplan and David P. Norton, the Balanced Scorecard uses a balanced measurement system that comprises of the old financial side and three new perspectives of: business processes (operational efficiency); growth and learning (knowledge management); customers (satisfaction and image of company to outside partners).
The next sub-chapters will describe the main features of the Balanced Scorecard compared to traditional management systems. 1.2. Balanced Scorecard as Complementary Tool for Management Accounting Historically, accounting has been the one and only language of business, the prime mechanism for communicating the results of business operations. Although financial
11
Which was introduced in series of articles by Messrs. Robert S. Kaplan and David P. Norton. Robert S.
Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the Harvard Business School in Boston, Massachusetts. David P. Norton is the founder and president of Renaissance Solutions, a consulting firm in Lincoln, Massachusetts.
measurement matters, it today alone does not give sufficient guiding and evaluating grounds for organisations success. To illustrate this topic, the following example may be analysed. Xerox was through the mid-1970s virtually a monopoly on plain paper copiers business. Xerox did not sell its machines it leased them and earned revenues on every copy made on these machines. Sales and profits from leasing and supporting services like paper and toner were large and growing. However, customers, apart from concern about high copying costs, for which no alternative was available, were disgruntled about the high breakdown rates and malfunctions of these expensive machines. 12 Rather than redesign the machines so that they would break down less frequently, Xerox executives saw an opportunity to enhance their financial results even further. They permitted direct purchase of their machines, and then established an extensive field service force as a separate demand for its services, this division soon was a substantial contributor to Xeroxs profit growth. Thus all the financial indicators sales and profit growth, return on investment were signalling a highly successful strategy. But customers were still unhappy and surly. They did not want their supplier to excel at having a superb field service force. They wanted cost-efficient machines that did not break down. When competitors were able to offer comparable machines that did not break down, Xeroxs dissatisfied and disloyal customers embraced them. This lead Xerox, one of the most successful U.S. companies throughout 1955 to 1975 to nearly a failure. Only under a new CEO did the company make a remarkable turnaround in the 1980s by supporting significant investments into quality improvement initiatives.13 Only financial measures are inadequate for guiding and evaluating organisations success. They are lagging indicators that capture the value created or destroyed by managers actions in the most recent accounting period. Several analyses have expressed their concern with an overemphasis on financial measures of todays corporate performance. Some of the outcomes of the analyses
12
Juran, Joseph M., Made in U.S.A.: A Renaissance in Quality, Harvard Business Review, Jul-Aug 1993,
p. 45.
13
Ibid.
might be recited here.14 Current system is less supportive to long-term investments, because it favours forms of investment for which returns are most readily measurable; this leads to under-investment in intangible assets such as product and process innovation, employee skill, customer satisfaction, whose short-term returns are more difficult to measure. The system also allows companies with very strong asset bases (such as in natural resources, consumer goods companies with strong brand names etc) to operate inefficiently without fully exploiting their undervalued assets, as long as short-term earnings are satisfactory.15 In todays business world financial results still remain important, but there is a growing recognition that non-financial measures are better indicators of the ultimate health of an organisation. Steven M. Hronec16 has noted, that those non-financial measures should include cost, quality and time. He defines those measures at an organisational level, a process level and an individual level. The second most important school of theory is the Balanced Scorecard, which adds to the financial set the following components as information age companies must create future value through investment in customers, suppliers, employees, processes, technology, and innovation. The objectives and measures of Balanced Scorecard have to be derived from an organisations vision and strategy. The objectives and measures view organisational performance from four perspectives: financial, customer, internal business process, and learning and growth. These four perspectives provide the framework for the Balanced Scorecard (see Figure 1 - The Main Framework of Balanced Scorecard17). From Balanced Scorecard, managers can measure how business units create value for current and future customers and how they must enhance internal capabilities and the investment in people, systems, and procedures necessary to improve the future performance.
14
Porter, Michael E. Capital Disadvantage: Americas Failing Capital Investment System , Harvard
Business Review , Sept-Oct 1992, p. 73.

15
Ibid. In his book Vital Signs.
16
10
Some recent theories have tried to merge the main features of both the Balanced Scorecard and various applications of financial accounting that are grounded on activity-based-costing. For more information about those developments, it is recommended to visit a valuable resource on this issue the Internet site The Scorecard Authority Websites for Management Insights at address http://www.bettermanagement.com/bscauthority
11
Figure 1 - The Main Framework of Balanced Scorecard17

To succeed financially, how should we appear to our shareholders?
FinancialObjectivesMeasuresTargetsInitiatives
To achieve our vision, how should we appear to our customers? CustomerObjectivesMeasuresTargetsInitiatives
Vision and Strategy
To satisfy our shareholders and customers, what business processes must we excel at?Internal Business ProcessObjectivesMeasuresTargetsInitiatives
To achieve our vision, how will we sustain our ability to change and improve? Learning and GrowthObjectivesMeasuresTargetsInitiatives
17
From: Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 76.
1.3. Balanced Scorecard as a Measurement Tool To illustrate the use of todays main measurement tools, Kaplan and Norton bring the following example: Imagine entering the cockpit of a modern jet aeroplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot? Q: I am surprised to see you operating the plane with only a single instrument. What does it measure? A: Airspeed. I am really working on airspeed this flight. Q: That good. Airspeed certainly seems important. But what about altitude? Would an altimeter be helpful? A: I worked on altitude for the last few flights and Ive gotten pretty good on it. Now I have to concentrate on proper airspeed. Q: But I notice you do not even have a fuel gauge. Wouldnt that be useful? A: You are right; fuel is significant, but I cannot concentrate on doing too many things well at the same time. So on this flight Im focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of flights. We suspect that you would not board the plane after this discussion. Even if the pilot did an exceptional job on airspeed, you would be worried about colliding with tall mountains or running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of guiding a complex vehicle like a jet aeroplane through crowded air spaces with only a single instrument. Skilled pilots are able to process information from a large number of indicators to navigate their aircraft. Yet navigating today's organisations through complex competitive environments is at least as complicated as flying a jet. Why should we believe that executives need anything less than a full battery of instrumentation for
guiding their companies? Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward excellent future outcomes.18
The Balanced Scorecard provides managers with the thorough instrumentation they need to navigate to future competitive success. Today, organisations are competing in complex environments so that an accurate understanding of their goals and the methods for attaining those goals is vital. The Balanced Scorecard translates an organisations mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The Balanced Scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.19 Finally, it has to be mentioned that the Balanced Scorecard is not just a measurement system, but comprises a whole new way of looking at business. During the implementation of a Balanced Scorecard, it requires so many improvement efforts throughout the organisation that it might be called a whole new management system. 1.4. Balanced Scorecard as a Strategic Management System However, is there anything new about a call for a "balanced" set of measures? While virtually all organisations do indeed have financial and non-financial measures, many use their non-financial measures for local improvements, at their front-line and customer-facing operations. Senior managers use aggregate financial measures as if these measures could summarise adequately the results of operations performed by their lower and midlevel employees. These organisations are using their financial and nonfinancial performance measures only for tactical comments and control of short-term operations.
18
Kaplan, Robert S. and Norton, David P. Translating Strategy into Action The Balanced Scorecard ,
Harvard Business School Press, Boston, 1996, p. 1.

19
Kaplan, Robert S. and Norton, David P., Translating Strategy into Action The Balanced Scorecard
(Boston: Harvard Business School Press, 1996), p. 52.
14
The Balanced Scorecard emphasises that financial and non-financial measures must be part of the information system for employees at all levels of the organisation. Front-line employees must understand the financial consequences of their decisions and actions; senior executives must understand the drivers of long-term financial success. The objectives and measures for the Balanced Scorecard are more than a somewhat ad hoc collection of financial and non-financial performance measures; they are derived from a top-down process driven by the mission and strategy of the business unit. The Balanced Scorecard should translate a business unit's mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between outcome measures-the results from past efforts-and the measures that drive future performance. Moreover, the scorecard is balanced between objective, easily quantified outcome measures and subjective, somewhat judgmental, performance drivers of the outcome measures.20 The Balanced Scorecard is more than a new measurement system. Innovative companies use the scorecard as the central, organising framework for their management processes (see Figure 2 - Balanced Scorecard as a Strategic Framework for Action22). Companies can develop an initial Balanced Scorecard with narrow objectives: to gain clarification, consensus, and focus on their strategy, and then to communicate that strategy throughout the organisation. The real power of the Balanced Scorecard, however, occurs when it is transformed from a measurement system to a management system. The four main steps in building up a strategy using the Balanced Scorecard are: 1. clarifying and translating vision and strategy 2. communicating and linking strategic objectives and measures 3. planning, setting targets, and aligning strategic initiatives 4. enhancing strategic feedback and learning.21
20
15
During the next chapter, the author is going to go through step-by-step in construction of a manageable Balanced Scorecard.
21
16
Figure 2 - Balanced Scorecard as a Strategic Framework for Action22
Clarifying and Translating the Vision and Strategy Clarifying the vision Gaining concensus
Communication and Linking Communicating and educating Setting goals Linking rewards to performance measures
Balanced Scorecard
Strategic feedback and learning Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning
Planning and Target Setting Setting targets Aligning strategic initiatives Allocating resources Establishing milestones
22
From: Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 77.
2. Constructing a Balanced Scorecard One of the possible ways to go through all the steps of construction of successfully operating Balanced Scorecard might be shortly described as seen on Figure 3 - Creating a Balanced Scorecard.23 1. First, members of the organisation would have to identify a vision. Everybody in the organisation has to agree upon one single goal where the organisation has to be heading. 2. Then organisations management has to recognise the strategies that will tell how to reach the vision. 3. Then the perspectives have to be identified. In some businesses, not necessarily all four are relevant. In some areas, additional perspectives need to be measured. Financial perspective (how do we look to our shareholders?) Customers perspective (how do we look to our customers?) Internal business process perspective (what processes do we have to be good at?) Learning and growth perspective (how will we sustain our ability to improve and change?) 4. Then critical success factors for all the perspectives have to be found out. Example: for customers we have to deliver on time, financially we have to be cost-efficient, on the development side we have to produce X amount of new ideas every week etc. 5. After the critical success factors are in place, they have to be measured somehow, therefore all the measurement systems have to be figured out. 6. The next step is to go through appraisal of the established draft Balanced Scorecard to identify whether it would start measuring the right things and assist the management to steer the organisation to the right direction. It might be advisable to establish a test field to simulate how the Balanced Scorecard would start to respond to the actions taken.
23
Slightly modified version of the model taken from QPR internet portal at address
http://www.qprservices.com/
7. Based on the preparatory work the detailed action plans should be created and proper reporting systems have to be established to start operation of the Balanced Scorecard. 8. Finally, it has to be remembered that the Balanced Scorecard is not a finished product. It has to be amended, improved and changed whenever there is a need for the organisation to change something in its vision or strategic goals. The following chapter describes how to manage the construction of the Balanced Scorecard step-by-step. It has to be borne in mind, that the actual set-up of a particular Balanced Scorecard may vary from organisation to organisation because of very close linkages to particular establishments main functions, vision and strategy. For public non-profit organisations, for instance, it would be necessary to replace financial part of the section of Balanced Scorecard with employee empowerment perspective. Some other organisations may need to add additional features to their Balanced Scorecard.
19
Figure 3 - Creating a Balanced Scorecard24

Define vision for the organisation/ entity
1. Identify Vision
2. Identify Strategies
Which strategies shall we follow? Which areas shall we focus on?
3. Identify Perspectives
In which perspectives do we have to be good at?
4. Identify Critical Success Factors of the Perspectives
What do we have to do well to manage in the framework of those perspectives?
5. Identify Measures
What should we measure at each of those perspectives?
6. Evaluate
How do we evaluate our scorecard?
7. Create Action Plans
Which actions should we undertake to reach our targets?
8. Follow up and Manage
How do we follow up, update and maintain our scorecard?
24
Slightly modified
version of
the
chart
taken from
QPR
internet
portal
at
address
http://www.qprservices.com/
2.1. Establishing Strategy by Building up a Balanced Scorecard 2.1.1. Clarifying and Translating the Vision and Strategy As each organisation is unique and so follows its own path for building a Balanced Scorecard. From the management point of view it is also not particularly foreseen it might be set up using the standard project management techniques (preparationinterviews-workshops-implementation-reviews) or be managed by a special unit that is co-ordinating the overall implementation. The first task in building up the Balanced Scorecard is clarifying and translating companys vision and strategic goals.25 The overall purpose of the strategic management is to find a single priority long-term goal which would serve as a basis in resource allocation and organisational development.26 According to the Balanced Scorecard methodology, the first item that the senior executives of a particular company should consider is the financial goal. The executive team may decide whether to head for revenues or market growth, profitability or cash flow generation. The ABC of the strategic management suggests that there should be a structure to strategy development that managers should follow. One systemised possibility of strategic management tools is the acronym MOST (Mission, Objectives, Strategy and Tactics).27 First, strategists should choose a mission a long-term purpose for the organisation. Then they should define short- and mid-term objectives that will move the organisation on a path towards the mission. A strategy can then be developed to achieve the objectives using short-term operating decisions, in other words tactics, to implement the strategy.
25
Kaplan, Robert S. and Norton, David P., Putting the Balanced Scorecard to Work , Harvard Business
Review, Sept-Oct 1993, p. 138.

26
Alas, Ruth, Strateegiline juhtimine (Tallinn, Klim, 1997), p. 7. Campbell, Andrew and Alexander, Marcus, Whats Wrong with Strategy Harvard Business Review,
27
Nov-Dec 1997, p. 42-46.
21
But the process of developing a winning strategy is much more messy, experimental, and iterative than those simple models foresee. For example, to build up a Balanced Scorecards customer-perspective, a companys top executives may agree upon providing superior service to its customers. As such, the vision is quite straightforward and easy to understand for everybody. In formulating the customer objective to the Balanced Scorecard, however, it might become clear, that each executive has a totally different understanding on A) what a superior service is, and B) who are the specific clients that it is going to be targeted at. The executives may thereafter decide, who is the most desirable customer segment to the company and which area of services it might be offered. After the organisation has established its financial and customer objectives, it then identifies the strategic objectives and measures for its internal business processes area. This must be done in close co-operation with middle-level or operations managers to ensure that the processes are in line with current possibilities of resource allocation. The final link to be envisaged is learning and growth perspective, which reveals the rationale for investments in training employees, in information technology and systems that deal with research and development.28 2.1.2. Communicating and Linking Strategic Objectives and Measures The next task is to inform all levels of the organisation about the initiative of establishing the Balanced Scorecard. The communication serves three-fold goal. It forwards information to all employees about the critical objectives that must be accomplished if an organisations strategy is to succeed. Second, the employees need to analyse what changes need to be made in current management of the customer relations, internal business processes, and knowledge management. For example, a strategic initiative to reduce product delivery might be translated into a Balanced Scorecard objective to reduce set-up times at a specific machine, or to a goal for rapid transfer of orders from one process to next, or fully entering into just-in-time concept. In this way, local improvement efforts become aligned with overall organisational success factors. Thirdly, it encourages dialogue back from business unit to executive teams, not just
28
(Boston: Harvard Business School Press, 1996) p. 11-12.
22
about the sole implementation of the strategy but about the continuous future strategy development. At the final stage of the communication and linkage process, everybody in the organisation should understand the business units long-term goals, as well as the strategy for achieving these goals. The main aim of the communication and linking initiative is to let the middle management define their internal business processes. For example: to satisfy the goal of increasing the market share by 20 per cent we need to bring x new products to the market with a targeted marketing campaign. The second aim is to let middle management establish its learning and growth objectives. For example: to increase the market share, we have to train our sales people and increase productivity by establishing a Research and Development department. Throughout communicating and linking phase, it is worth paying attention also to the question on how to link salary bonus system or other motivation systems to the achievement of goals. It might be recommended that the Balanced Scorecard could be used as a single basis for bonus system. For example, sixty per cent of bonuses of middle management might be based on financial measures (such as profit, return on investment) and the rest of the bonuses might be based on customer satisfaction, partner satisfaction or productivity or turnover of its subordinates. Individuals at business unit level should have formulated local actions that contribute to achieving overall companys objectives.29 All the organisational efforts and initiatives should be aligned to the needed change processes, as the ideal corporate strategy should be set up bearing in mind the principle that every decision has to support the achievement of strategic objectives. All other decisions are either wrong or irrelevant.30
29

30
Drucker, Peter F., Management: Tasks, Responsibilities and Practices (New York: Harper & Row,
1985), pp. 640-641.
23
2.1.3. Planning, Setting Targets and Aligning Strategic Initiatives The third management task to do is to drive organisational change. The executive team should establish targets for the Balanced Scorecard measures that will transform the company. The targets should represent a discontinuity in the performance of business units. In other words, the goals to be set have to be so-called BHAG-s (big, hairy, audacious goal). One might dream of making his brand more popular than Coke, another aspires to create the most lucrative Web site in cyberspace. 31 To achieve such ambitions financial or customer or trademark objectives, managers must identify stretch targets for their customer, internal-business-process, and learning and growth objectives. These targets can come from several sources. It is possible to use benchmarking, brainstorming etc. Once targets are established, managers can align their strategic quality, response time and re-engineering initiatives for achieving the breakthrough objectives. Thus, the Balanced Scorecard provides the front-end justification, as well as focus and integration for continuous improvement, re-engineering, and transformation programmes. To distinct from simple slogans of business re-engineering and other management fads, it has to be kept in mind that all those initiatives have to be analysed and identified whether they are critical to companys strategic success. It is a way of continuous series of cause-and-effect work embodied with the Balanced Scorecard, those capabilities eventually have to become translated into the overall strategy. Company may have to tackle with a series of serious constraints in doing so. 32 Many organisations may encounter usual problems that they have established vision and strategic objectives but to fulfil them they are unable to find particular methods. By using Balanced Scorecard in close connection with budgetary process, it can be assured that all the tasks that are necessary to achieve objectives will also receive the necessary funding.
31
Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms Harvard Business
Review, Jul-Aug 1999, p. 71.

32
On the use of those methods and technologies, refer to Dettmer, William H. Breaking the Constraints
to World-Class Performance (Milwaukee, Wisconsin: ASQ Quality Press, 1998), pp. 14-102.
24
The Balanced Scorecard also enables a fundamental change in letting the organisation to integrate its strategic planning with its annual budgeting process. At the time when a business establishes 3-5 year stretch targets for the strategic measures, managers may also forecast milestones for each measure during the next fiscal year. The second possibility is to monthly analyse all the operations and their accordance to fulfilment of strategies and responding funding. Overall, the initiative should achieve that: long-term outcomes are quantified; mechanisms for fulfilment those outcomes are identified and possess the necessary financing and short-term milestones have been set for the financial and non-financial measures of the Balanced Scorecard. It might be advisable to analyse the possibilities of using various catalytic mechanisms to drive performance of the company.33 2.1.4. Enhancing Strategic Feedback and Learning The last management process embeds the Balanced Scorecard in a strategic learning framework. This process might be considered the most innovative and most important aspect of the entire Balanced Scorecard management process. This provides the capability for organisational learning at all levels. Managers in organisations today do not have a procedure to receive feedback about their strategy and to test the hypotheses on which the strategy is based. The Balanced Scorecard enables them to monitor and adjust the implementation of their strategy, and, if necessary, to make fundamental changes in the strategy itself.34 One of the main distinctive qualities of the Balanced Scorecard is to give constant response about achievement of strategic and short-term objectives. Some ten years ago,
33
Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms Harvard Business
Review, Jul-Aug 1999, pp. 71-. See also Chapter Setting up Catalytic Mechanisms on page 39 of the thesis for more information.
34
25
it was customary to do strategic decisions about once in three months. As todays business environment is so rapidly changing, it is necessary to take strategic decisions in fact, every day to safeguard the flexibility to changes in the market. First, it makes possible to rephrase so-called shared vision, where the opinions of all the levels of the organisation could be taken account in defining strategic goals and methods on achieving those. Second, it gives continuous strategic response to the managing team. By foreseeing short-term milestones, it might be necessary to amend long-term strategys timeline and contents, as the latter may be either too optimistic or too pessimistic. Third, it speeds up the process of finding the cause-and-effect relationships between different Balanced Scorecard component. For example: working morale may have a very strong impact on client satisfaction, which could be unknown for the senior management. This in turn may lead to discovery of new cause-and-effect relationships. For example: between client satisfaction rate and the speediness of submitting invoices. Finding all kinds of correlations definitely helps to clarify and improve the content of strategic goals and tactical steps. To be more specific, the goal of the process is to establish an ongoing and continuous improvement cycle, which starts with the first process in the Figure 2 - Balanced Scorecard as a Strategic Framework for Action22. The first step is the clarification of a shared vision that the entire organisation wants to achieve. The use of measurement as a language helps translate complex and frequently nebulous concepts into a more precise form that can gain consensus among senior executives. The communication and alignment process, the second process in the Figure 2, mobilises all individuals into actions directed at attaining organisational objectives. The emphasis on cause and effect in constructing a scorecard introduces dynamic systems thinking. It enables individuals in various parts of an organisation to understand how the pieces fit together, how their role influences others and, eventually, the entire organisation. The planning, target setting, and strategic initiative process the third process in the Figure 2 defines specific, quantitative performance goals for the organisation across a balanced set of outcomes and performance drivers. A comparison of the desired performance goals with current levels establishes the performance gap that strategic initiatives can be designed
26
to close. Thus the Balanced Scorecard not only measures, but also even fosters change. The first three critical management processes are vital for implementing a strategy, but they alone would not be adequate in the real world. Thus the learning and growth initiative has to be carried out in order to ensure continuous improvement. That kind of continuous improvement may remind also Demings so-called Plan-Do-Check-Act cycle.35 Please look at Figure 4 Possible Steps to Go Around the Balanced Scorecard37 for more detailed description.36
35
W. Edwards Deming. Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management
36
System, Harvard Business Review, Jan-Feb 1996, p. 79.
27
Figure 4 Possible Steps to Go Around the Balanced Scorecard37
1 5 9
Communication and Linking Communicating and educating Setting goals Linking rewards to performance measures
Clarifying and Translating the Vision and Strategy Clarifying the vision Gaining concensus
8 4
Strategic feedback and learning Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning
10
Balanced Scorecard
2 6
Planning and Target Setting Setting targets Aligning strategic initiatives Allocating resources Establishing milestones
7 3
37
Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 79.
2.2. Defining Critical Success Factors and Measures 2.2.1. Financial Perspective From all the measurement perspectives of a Balanced Scorecard, the financial perspective needs to be introduced the least as the main financial measurement systems have been analysed during the past years very thoroughly. The particular financial performance measures for any Balanced Scorecard should define long-run financial objectives for the organisation. While most of the organisations would emphasise profitability objectives, other possibilities may also be considered. Businesses with many products in the early stage of their life cycle can stress rapid growth objectives, and mature businesses may emphasise maximising cash flow. Norton and Kaplan recommend to simplify the financial perspective measurement selection pool to identify first the organisations stage, which would mainly be one of the three: 1. rapid growth organisations - are at the early stages of their life cycle. They may have to make considerable investments to develop and enhance new products and services, to construct and expand production facilities, to build operating capabilities, to invest in systems, infra-structure, and distribution networks that will support relationships, and to nurture and develop customer relationships. 2. sustain organisations organisations that still attract investment and reinvestment, but are required to earn excellent returns on their invested capital. These businesses are expected to maintain their existing market share and perhaps grow it somewhat. Investment projects will be more directed to relieving bottlenecks, expanding capacity, and enhancing continuous improvement. 3. harvest organisations38 - have reached a mature phase of their life cycle, where the company wants to harvest the investments made in the earlier to stages. These businesses no longer warrant significant investment only enough to maintain
38
Kaplan, Robert S. and Norton, David P., Linking the Balanced Scorecard to Strategy, California
Management Review, Fall 1996, pp. 54-55.
equipment and capabilities, not to expand or build new capabilities. Any investment project will have to have very short and definite payback periods. The main goal is to maximise cash flow back to the organisation. The financial objectives for businesses in each of these three stages are quite different. Financial objectives in the growth stage will emphasise sales growth; sales in new markets and to new customers; sales from new products and services; maintaining adequate spending levels for product and process development, systems, employee capabilities; and establishment of new marketing, sales, and distribution channels. Financial objectives in the sustain stage will emphasise traditional financial measurements, such as return on capital employed, operating income, and gross margin. Investment projects for businesses in the sustain category will be evaluated by standard, discounted cash flow, capital budgeting analyses. Some companies will employ newer financial metrics, such as economic value added and shareholder value. These metrics all represent the classic financial objective---earn excellent returns on the capital provided to the business. The financial objectives for the harvest businesses will stress cash flow. Any investments must have immediate and certain cash paybacks. The goal is not to maximise return on investment, which may encourage managers to seek additional investment funds based on future return projections. Virtually no spending will be done for research or development or on expanding capabilities, because of the short time remaining in the economic life of business units in their "harvest" phase.39 2.2.2. Customer Perspective In the customer perspective of the Balanced Scorecard, managers identify the customer and market segments in which the business unit will compete and the measures of the business unit's performance in these targeted segments. The customer perspective typically includes several generic measures of the successful outcomes from a well-formulated and implemented strategy. The generic outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market and account share in targeted segments. While these measures may appear to be generic across all types of organisations, they should be
39
Ibid, p. 56
30
customised to the targeted customer groups from whom the business unit expects its greatest growth and profitability to be derived.
Market and Account Share Market share, especially for targeted customer segments, reveals how well a company is penetrating a desired market. For example, a company may temporarily be meeting sales growth objectives by retaining customers in non-targeted segments, but not increasing its share in targeted segments. The measure of market share with targeted customers would balance a pure financial signal (sales) to indicate whether an intended strategy is yielding expected results. When companies have targeted particular customers or market segments, they can also use a second market-share type measure: the account share of those customers' business (some refer to this as the share of the "customers' wallet"). The overall market share measure based on business with these companies could be affected by the total amount of business these companies are offering in a given period. That is, the share of business with these targeted customers could be decreasing because these customers are offering less business to all their suppliers. Companies can measure-customer by customer or segment by segment-how much of the customers' and market segments' business they are receiving. Such a measure provides a strong focus to the company when trying to dominate its targeted customers' purchases of products or services in categories that it offers.
Customer Retention Clearly, a desirable way for maintaining or increasing market share in targeted customer segments is to retain existing customers in those segments. Research on the service profit chain has demonstrated the importance of customer retention.6 Companies that can readily identify all of their customers-for example, industrial companies, distributors and wholesalers, newspaper and magazine publishers, computer on-line service companies, banks, credit card companies, and long-distance telephone supplierscan readily measure customer retention from period to period. Beyond just retaining
31
customers, many companies will wish to measure customer loyalty by the percentage growth of business with existing customers.
Customer Acquisition Companies seeking to grow their business will generally have an objective to increase their customer base in targeted segments. The customer acquisition measure tracks, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer acquisition could be measured by either the number of new customers or the total sales to new customers in these segments. Companies such as those in the credit and charge card business, magazine subscriptions, cellular telephone service, cable television, and banking and other financial services solicit new customers through broad, often expensive, marketing efforts. These companies could examine the number of customer responses to solicitations and the conversion ratenumber of actual new customers divided by number of prospective inquiries. They could measure solicitation cost per new customer acquired, and the ratio of new customer revenues per sales call or per dollar of solicitation expense.
Customer Satisfaction Both customer retention and customer acquisition are driven from meeting customers' needs. Customer satisfaction measures provide feedback on how well the company is doing. The importance of customer satisfaction probably can not be over-emphasised. Recent research has indicated that just scoring adequately on customer satisfaction is not sufficient for achieving high degrees of loyalty, retention, and profitability. Only when customers rate their buying experience as completely or extremely satisfying can the company count on their repeat purchasing behaviour.
Customer Profitability Succeeding in the core customer measures of share, retention, acquisition, and satisfaction, however, does not guarantee that the company has profitable customers. Obviously, one way to have extremely satisfied customers (and angry competitors) is to
32
sell products and services at very low prices. Since customer satisfaction and high market share are themselves only a means to achieving higher financial returns, companies will probably wish to measure not just the extent of business they do with customers, but the profitability of this business, particularly in targeted customer segments. Activity-based cost (ABC) systems permit companies to measure individual and aggregate customer profitability. Companies should want more than satisfied and happy customers; they should want profitable customers. A financial measure, such as customer profitability, can help keep customer-focused organisations from becoming customer-obsessed. The customer profitability measure may reveal that certain targeted customers are unprofitable. This is particularly likely to occur for newly acquired customers, where the considerable sales effort to acquire a new customer has yet to be offset from the margins earned by selling products and services to the customer. In these cases, lifetime profitability becomes the basis for deciding whether to retain or discourage currently unprofitable customers. Newly acquired customers can still be valued, even if currently unprofitable, because of their growth potential. But unprofitable customers who have been with the company for many years will likely require explicit action to cope with their incurred losses.
Beyond the Core: Measuring Customer Value Propositions Customers' value propositions represent the attributes that supplying companies provide, through their products and services, to create loyalty and satisfaction in targeted customer segments. The value proposition is the key concept for understanding the drivers of the core measurements of satisfaction, acquisition, retention, and market and account share. For example, customers could value short lead times and on-time delivery. They could value a constant stream of innovative products and services. Or they could value a supplier able to anticipate their needs and capable of developing new products and approaches to satisfy those emerging needs. While value propositions vary across industries, and across different market segments within industries, Kaplan and Norton have observed a common set of attributes that
33
organises the value propositions in all of the industries where we have constructed scorecards. These attributes are organised into three categories.40 Product/Service Attributes Customer Relationship Image and Reputation
Product and service attributes encompass the functionality of the product/service, its price, and its quality. The image and reputation dimension enables a company to proactively define itself for its customers. The customer relationship dimension includes the delivery of the product/service to the customer, including the response and delivery time dimension, and how the customer feels about the experience of purchasing from the company. In summary, the customer perspective enables business unit managers to articulate their unique customer and market-based strategy that will deliver superior future financial returns.41 2.2.3. Internal Business Process Perspective In the internal business process perspective, executives identify the critical internal processes in which the organisation must excel. The critical internal business processes enable the business unit to deliver on the value propositions of customers in targeted market segments, and satisfy shareholder expectations of excellent financial returns. The measures should be focused on the internal processes that will have the greatest impact on customer satisfaction and achieving the organisations financial objectives. The internal business process perspective reveals two fundamental differences between traditional and the Balanced Scorecard approaches to performance measurement. Traditional approaches attempt to monitor and improve existing business processes. They may go beyond just financial measures of performance by incorporating quality and time-based metrics. But they still focus on improving existing processes. The Balanced Scorecard approach, however, will usually identify entirely new processes at
40
Management Review, Fall 1996, p. 62.

41
Ibid.
34
which the organisation must excel to meet customer and financial objectives. The internal business process objectives highlight the processes most critical for the organisations strategy to succeed. The second departure of the Balanced Scorecard approach is to incorporate innovation processes into the internal business process perspective. Traditional performance measurement systems focus on the processes of delivering today's products and services to today's customers. They attempt to control and improve existing operations - the short wave of value creation. But the drivers of long-term financial success may require the organisation to create entirely new products and services that will meet the emerging needs of current and future customers. The innovation process-the long-wave of value creations, for many companies, a more powerful driver of future financial performance than the short-term operating cycle. But managers do not have to choose between these two vital internal processes. The internal business process perspective of the Balanced Scorecard incorporates objectives and measures for both the long-wave innovation cycle as well as the short-wave operations cycle. 2.2.4. Learning and Growth Perspective The fourth Balanced Scorecard perspective, Learning and growth, identifies the infrastructure that the organisation must build to create long-term growth and improvement. The customer and internal business process perspectives identify the factors most critical for current and future success. Businesses are unlikely to be able to meet their long-term targets for customers and internal processes using today's technologies and capabilities. Also, intense global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders. Organisational learning and growth come from three principal sources: people, systems, and organisational procedures. The financial, customer, and internal business process objectives on the Balanced Scorecard will typically reveal large gaps between existing capabilities of people, systems, and procedures and what will be required to achieve targets for breakthrough performance. To close these gaps, businesses will have to invest in re-skilling employees, enhancing information technology and systems, and aligning organisational procedures and routines. These objectives are articulated in the
35
learning and growth perspective of the Balanced Scorecard. As in the customer perspective, employee-based measures include a mixture of generic outcome measuresemployee satisfaction, employee retention, employee training, and employee skillsalong with specific drivers of these generic measures, such as detailed indexes of specific skills required for the new competitive environment. Information systems capabilities can be measured by real-time availability of accurate customer and internal process information to front-line employees. Organisational procedures can examine alignment of employee incentives with overall organisational success factors, and measured rates of improvement in critical customer-based and internal processes. 2.2.5. Conclusions and Recommendations How Many Measures to Choose? After the measures have been set for all the perspectives, the organisation may face the problem of having either too little or too many items to measure. To illustrate this problem, the author would like to cite Norton and Kaplan.42 Many aspects of our bodily functions must perform within narrow operating parameters if we are to survive. If our body temperature departs from a normal 1-2deg window (away from 37degrees Celsius) or if our blood pressure drops too low or escalates too high, we have a serious problem for our survival. In such circumstances, all our energies (and those of skilled medical professionals) are mobilised to restore these parameters back to their normal levels. But we don't devote enormous energy to optimising our body temperature and blood pressure. Being able to control our body temperature to within 0.01deg of the optimum will not be one of the strategic success factors that will determine whether we become a chief executive of a company, a senior partner in an international consulting firm, or a tenured full professor at a major university. Other factors are much more decisive in determining whether we achieve our unique personal and professional objectives. Are body temperature and blood pressure important? Absolutely. Should these measurements fall outside certain control limits, we have a major problem that we must attend to and solve immediately. But while these measurements are necessary, they are not sufficient for the achievement of our long-run goals.
42
36
Similarly, corporations should have hundreds, perhaps thousands, of measures that they can monitor to ensure that they are functioning as expected and that will signal when corrective action must be taken. But these are not the drivers of businesses' competitive success. Such measures capture the necessary "hygiene factors" that enable the company to operate. These measures should be monitored diagnostically with deviations from expectations noted rapidly; in effect, management by exception. The outcome and performance driver measures on the Balanced Scorecard should be the subjects of intensive and extensive interactions among senior and middle-level managers as they evaluate strategies based on new information about competitors, customers, markets, technologies, and suppliers. Unlike the strategic measures selected for inclusion on the Balanced Scorecard, diagnostic measures are not the basis for competitive breakthroughs. As one executive remarked, after he had implemented his first Balanced Scorecard: "Our division had always measured hundreds of operating variables. In building a Balanced Scorecard, we chose 12 measures as the key to implementing our strategy. Of these 12 measures, seven were entirely new measurements for the division."43 Choosing the right measures and right number of measures is definitely one of the most crucial parts in building up a Balanced Scorecard. Usually the set of 15-25 measures is identified as optimal, as for a single person in an organisation 6-8 measures to follow is the maximum ceiling. In the case that the organisation uses an IT system to follow the developments according to the Balanced Scorecard, the number may also rise accordingly. But it is impossible to give an optimum, for this is also up to the specifics of a particular establishment. 2.3. Testing the Balanced Scorecard 2.3.1. Analysing Outcomes and Performance Drivers All Balanced Scorecards use certain generic measures. These generic, or core outcome, measures reflect the common goals of many strategies, as well as similar structures across industries and companies. The generic measures include profitability, market
43
Kaplan, Robert S. and Norton, David P., Implementing the Balanced Scorecard at FMC Corporation:
An Interview with Larry Brady, Harvard Business Review, Sept-Oct 1993, pp. 143-145.
37
share, customer satisfaction, customer retention, and employee skills. The drivers of performance are the ones that tend to be unique for a particular business unit. The performance drivers reflect the uniqueness of the business unit's strategy: the drivers of profitability, the market segments in which the unit chooses to compete, the value propositions delivered to customers in the targeted market segments, and the particular internal processes and learning and growth capabilities that enable the financial and customer objectives to be achieved. A good Balanced Scorecard should have a mix of core outcome measures and performance drivers. Outcome measures without performance drivers do not communicate how the outcomes are to be achieved. They also do not provide an early indication about whether the strategy is being implemented successfully. Conversely, performance drivers (such as cycle times and part-per million defect rates) without outcome measures may enable the business unit to achieve short-term operational improvements, but will fail to reveal whether the operational improvements have been translated into expanded business with existing and new customers-and, eventually, into enhanced financial performance. A good Balanced Scorecard should have an appropriate mix of core outcome measures and the performance drivers of these outcomes. 2.3.2. Analysing Cause and Effect A strategy is a set of hypotheses about cause and effect. Cause and effect relationships can be expressed by a sequence of if-then statements. For example, the organisation can establish a link between improved sales training of employees to higher profits through the following sequence of hypotheses. If organisation increases employee training about products, then they will become more knowledgeable about the full range of products they can sell. If employees are more knowledgeable about products, then their sales effectiveness will improve. If their sales effectiveness improves, then the average margins of the products they sell will increase. A properly constructed Scorecard should tell the story of the business unit's strategy. The measurement system should make the relationships (hypotheses) among objectives (and measures) in the various perspectives explicit so that they can be managed and validated.
38
The chain of cause and effect should pervade all four perspectives of a Balanced Scorecard. For example, return on capital employed (ROCE) may be an outcome measure in the financial perspective. The driver of this financial measure could be repeat and expanded sales from existing customers, the result of a high degree of loyalty among existing customers. So, customer loyalty gets put on the Scorecard (in the Customer perspective) because it is expected to have a strong influence on ROCE. How will the organisation achieve customer loyalty? Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers. Thus, improved OTD is expected to lead to higher customer loyalty which, in turn, is expected to lead to higher financial performance. So both customer loyalty and OTD are incorporated into the customer perspective of the Scorecard. The process continues by asking what internal processes must the company excel at to achieve exceptional on-time-delivery. To achieve improved OTD, the business may need to achieve short cycle times in operating processes and high-quality internal processes, both factors that could be Scorecard measures in the internal perspective. And how do organisations improve the quality and reduce the cycle times of their internal processes? By training and improving the skills of their operating employees, an objective that would be a candidate for the learning and growth perspective. In a very similar vein, recent work in the service profit chain has emphasised the causal relationships among employee satisfaction, customer satisfaction, customer loyalty, market share, and, eventually, financial performance.44 2.4. Establishing Action Plan 2.4.1. Setting up Catalytic Mechanisms After the process of initial setting up the Balanced Scorecard, it is advisable to establish various catalytic mechanisms to drive organisations performance towards achieving the strategic goals.45
44

45
The following examples about catalytic mechanisms are taken from Collins, Jim, Turning Goals into
Results: The Power of Catalytic Mechanisms Harvard Business Review, Jul-Aug 1999, pp. 71-82.
39
One of the possible examples to be analysed is 99-year-old Californian based company Granite Rock, that sells crushed gravel, concrete, sand, and asphalt. Twelve years ago, when brothers Bruce and Steve Woolpert become co-presidents, they gave their company a goal to provide total customer satisfaction and achieve a reputation for service that met or exceeded that of Nordstrom, the upscale department store that is world famous for delighting its customers. They instituted a radical new policy called short pay. The bottom of every Granite Rock invoice reads, If you are not satisfied for any reason, do not pay us for it. Simply scratch out the line item, write a brief note about the problem, and return a copy of this invoice along with your check for the balance. To put the radical nature of short pay in perspective, imagine paying for airline tickets after the flight and having the power to short pay depending on your travel experience. In the years since it was instituted, short pay has had a profound and positive impact on Granite Rock. It serves as a warning system, providing hard-to-ignore feedback about the quality of service and products. It impels managers to relentlessly track down the root causes of problems in order to prevent repeated short payments. It also signals to employees and customers alike that Granite Rock is serious about customer satisfaction in a way that goes far beyond slogans. Moreover, it has had success, as has been widely reported. The company has consistently gained market share in a commodity business. It has won the prestigious Malcolm Baldrige National Quality Award in 1992. In addition, its financial performance has significantly improved from razor-thin margins to ratios above 10 per cent.46 It is obvious that Estonian business culture is not yet up to standards to try to implement Short Pay principle in some of our companies, as it might lead such a company to a bankruptcy fairly quickly. The above however was just a single good example on how it is worthwhile to sometimes consider unorthodox ideas to better satisfy the needs of the customers.
46
Ibid.
40
3. Implementing a Balanced Scorecard as a Management System It has to be mentioned that it is fairly simple to create just a scorecard, but to create a manageable Balanced Scorecard is a completely different thing. Some examples of the failure to introduce the Balanced Scorecard have been linked to the fact that the executives have viewed the Balanced Scorecard as simply a measurement system, not as a new way to manage the business. Measurement as such is indeed a powerful motivational and evaluation tool, but the measurement framework in the Balanced Scorecard should be deployed to develop a new management system. 47 Using the Balanced Scorecard as a management system enables it to overcome the deficiency of most of the measurement systems it enables to implement and receive feedback about organisations strategy. A test of whether a Balanced Scorecard truly communicates both the outcomes and the performance drivers of a business unit's strategy is its sensitivity and transparency. One division president reported to his parent company's president when he turned in his first Balanced Scorecard: "In the past, if you had lost my strategic planning document on an airplane and a competitor found it, I would have been angry but I would have gotten over it. In reality, it wouldn't have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but, again, it wouldn't have been that big a deal. This Balanced Scorecard, however, communicates my strategy so well, that a competitor seeing this would be able to block the strategy and cause it to become ineffective."48
47
(Boston: Harvard Business School Press, 1996), pp. 272-273.

48
41
3.1. Case Studies on Implementing a Balanced Scorecard 3.1.1. Practical Aspects of Setting up Balanced Scorecard in a Service Company After the initial phase of building the Balanced Scorecard, a company also has to use it. One of the mistakes companies make is during the implementation phase by coming up with a list of measures of what they could measure instead of what they should be measuring. If a company thinks about what it needs to achieve to be successful in the eyes of its shareholders, clients and internal stakeholders, that will yield operational activities that the organisation needs to do well to achieve those strategies. To make the Balanced Scorecard work, companies must comprehend the importance of its four basic perspectives. The financial perspective This perspective tends to be the cornerstone of an organisations strategy. It includes such measures of profitability as cash flow, quarterly sales growth and operating income by division, increased market share, and return on equity. Theres a fairly standard, two-legged structure that may be observed over the years," says Laura Downing, vice president of the Massachusetts-based consulting firm Balanced Score Card Collaborative Inc. "The first leg is the revenue-growth strategy, where companies try to determine how heyre going to grow the top line of the business." Typical methods for accomplishing a revenue-growth strategy are adding new products to broaden the franchise and branching out into new businesses.49 The other leg of the financial perspective is a productivity strategy that usually includes two components: basic expense management and effective asset utilisation. "The natural inclination is to focus on the financial perspective because people are more comfortable and familiar with it," says Downing. "Companies will tend to incorporate more financial measures than are really necessary. But ultimately, at the end of the day, all measures play out into cash flow."
49
The following is based on an interview referred through internet address in the Business Finance
Magazine http://www.businessfinancemag.com/.
42
The non-financial perspectives are predictive of a companys future financial success. However, they give organisations an opportunity to react to internal and external influences before detrimental activities affect financial measures. The customer perspective This component of the Balanced Scorecard includes such measures as customer response time, on-time delivery, and market share and product reliability. The customer perspective can be divided into three major measures: Product attributes, a measure of how the product works its functionality and its price. Customer service, an evaluation of how the company works with customers and whether it takes a high-touch or high-tech approach. Image an examination of the products reputation.
The customer perspective tends to get little attention because measuring such intangibles, as customer satisfaction and customer loyalty is difficult. However, this perspective is important. The internal business perspective This aspect of the Balanced Scorecard focuses on quality, time and efficiency measures such as head count, inventory and manufacturing lead time to determine what key processes meet the needs of the customer and financial perspectives. To start building the internal perspective, a company typically needs to build a value chain by defining its value-creating activities and separating those activities from any type of organisational structure - in other words, thinking outside the box about the added value the company brings to customers. "Weve observed four major themes in the internal perspective," Downing says. The first theme is innovation. Companies must determine whether they need to seek partnerships with other organisations, how much they need to spend on research and development, and how they can find other creative ways to increase revenue. The second theme targets customer management. Companies need to look at how they can better work with their customers and how they can improve customer service.
43
"The third theme is operational excellence, a look at an organisations supply chain," Downing says. "You need to find a way to manage inbound and outbound logistics. Just optimising that angle alone can be a major differentiator." The fourth theme involves regulatory factors that can come into play for certain types of business. This theme is particularly important in heavily regulated businesses such as financial services or public utilities. The learning-and-growth perspective The most frequently overlooked of the four perspectives, this aspect of the Balanced Scorecard should be of paramount importance to companies with a strategy of finding new revenue sources and expanding into new markets. It measures such factors as the number of new products a company launches and the length of time generating leading-edge products takes. Why does learning and growth often get short shrift? "Companies already have the financials down pat, and theres been this customer-focus fad perhaps to the extreme which has lasted for several years," Downing says. "Its just been in the last couple of years that people have even started to ask how they can apply technological advancements to help them in their business." Until now, the scorecard approach has helped companies translate business strategy into appropriate actions. The Balanced Scorecard can not only translate strategy, but also help define it and, in some cases, create it. Rather than a cyclical, event-driven phenomenon, the scorecard evaluation can become a process that continuously determines areas in which the company can improve. As an organisation considers the four perspectives, it should ask whether it needs to address any cultural issues. Often when companies try to implement a new strategy, they need a cultural change to reflect the new strategy. If a company can say, "This cultural issue must change so that this process can be enacted so that customers will be happy so that well make more money," the need for cultural change becomes tangible.
44
3.1.2. Using the Balanced Scorecard at Metro Bank50 Metro Bank was the retail banking division of two major banks. The agendas of the two parents had never been fully rationalised into a single vision. At the same time, without having achieved a synthesis or consensus on an operating style and strategy for the Metro Bank, its managers had launched a major transformation programme in order to be more innovative and to create a bank tailored for the twenty-first century. Unfortunately, the transformation programme had gone wild, leaving the bank with more than 70 different action programmes, each competing for management time and resources. Metro Bank had 30% market share of the core deposit accounts of the region but with deregulation, increased competition, and a lower interest rate environment, income from these retail accounts could no longer be sustained. A strategic review revealed excessive reliance on these accounts and a cost structure that could no longer profitably serve 80% of the bank's retail customers. Metro embarked upon a two-pronged Balanced Scorecard-based strategy to deal with these problems: Revenue Growth Strategy - Reduce the volatility of earnings by broadening the sources of revenue with additional products for current customers. Productivity Strategy - Improve operating efficiency by shifting non-profitable customers to more cost-effective channels of distribution (e.g., electronic banking instead of personal banking). In the process of developing a Balanced Scorecard at Metro, these two strategies were translated into objectives and measures in the four perspectives. Particular emphasis was placed on understanding and describing the cause and effect relationships on which the strategy was based. The financial objectives were clear: broaden the revenue mix. Strategically, this meant that Metro would focus on its current customer base, identify the customers who would be likely candidates for a broader range of services, and then sell an expanded set of financial products and services to these targeted customers. When customer objectives were analysed, however, Metro's executives determined that
50
As adapted from Kaplan, Robert S. and Norton, David P., Translating Strategy into Action The
Balanced Scorecard (Boston: Harvard Business School Press, 1996), pp. 110-112, 294-310.
45
its targeted customers did not view the bank, or their banker, as the logical source for a broader array of products such as mutual funds, credit cards, and financial advice. The executives concluded that if the bank's new strategy were to be successful, they must shift customers' perception of the bank from that of a transactions processor of checks and deposits to a financial adviser. Having identified the financial objective, Broaden Revenue Mix, and the new customer value proposition dictated by the financial objective, Increase Targeted Customers Confidence in our Financial Advice, the scorecard design process then focused on the internal activities that had to be mastered for the strategy to succeed. Three crossbusiness processes were identified: Understand Customers, Develop New Products and Services, and Cross-Sell Multiple Products and Services. Each of these business processes would have to be redesigned to reflect the demands of the new strategy. The selling process, for example, had historically been dominated by institutional advertising of the bank's services. Good advertising plus good location brought the customers to the banks. The branch personnel were reactive, helping customers to open accounts and to provide ongoing service. The bank did not have a selling culture. In fact, one study indicated that only 10% of a salesperson's time was spent with customers. A major reengineering program was initiated to redefine the sales process. The goal of the process was to create a relationship-selling approach where the salesperson became more of a financial advisor. Two measures of this process were included on the Balanced Scorecard. The Cross-Sell Ratio-the average number of products sold to a household-measured selling effectiveness. This "lag indicator" would tell whether the new process was working. The second measure, Hours Spent With Customers, was included to send a signal to salespersons throughout the organisation of the new culture required by the strategy. A relationship-based sales approach could not work unless face-to-face time with customers increased. Hours Spent With Customers therefore was a "lead indicator" for the success of this piece of the strategy. The internal objectives led naturally to a final set of factors to implement the Revenue Growth strategy. The learning and growth component of the scorecard identified the need for salespersons to undergo a major role change. This role change would require a
46
broader set of skills (e.g., a financial counsellor with broad knowledge of the product line), improved access to information (e.g., integrated customer files), and realignment of the incentive systems to encourage the new behaviour. The lead indicators focused on the major changes that had to be orchestrated in the work force: the upgrading of the skill base and qualified people-Strategic Job Coverage Ratio; the access to information technology tools and data-Strategic Information Availability Ratio; and the realignment of individual goals and incentives to reflect the new prioritiesPersonal Goal Alignment. The "lag indicators" included a productivity measure, Average Sales per Salesperson, as well as the attitudes of the work force as measured by an Employee Satisfaction Survey. The result of the Balanced Scorecard in the Metro Bank is the following. By clarifying the strategic objectives, it was able to create consensus and teamwork among all the senior executives, regardless of which functional organisation they represented. Further, the Balanced Scorecard created a vehicle to set priorities, to consolidate and to integrate the many change programmes currently under way. The result was a much more manageable set of strategic initiatives, all focused on achieving specific objectives. 3.1.3. Using the Results of a Balanced Scorecard at Sears Company51 Sears radically improved profitability using the Balanced Scorecards four perspectives. However, shortly after Sears implementation of the standard Scorecard, Quinn discovered that maintaining the companys increased shareholder value would require more change. For Sears, sustaining the Balanced Scorecards initial improvements required senior management to alter the companys overall vision and incorporate a new perspective into the companys Scorecard. "You cant look at the Scorecard as just helping you pull a bunch of strategic levers. You have to be willing to go through cultural change," says Quinn, who retired from Sears in 1996 after a 26-year career with the company. "If youre messing around with cultural change, you have to ask yourself whether youre ready to fire some of your
51
The following is based on an interview referred through Internet address in the Business Finance
Magazine http://www.businessfinancemag.com/.
47
senior team if theyre not willing to behave differently. Really changing senior management causes some discomfort." Quinn was vice president of quality when he introduced Sears to the Balanced Scorecard concept in late 1992. Sears had a net loss of almost $4 billion that year, but the company posted the largest profit in its history in 1993. After the companys financial rebound, Quinn lost most of the audience for his idea. It soon became clear to him that a small group of people had caused the companys turnaround and that different long-term measures would have to be taken in order to sustain Sears renaissance. As a result of this realisation, Quinn began holding visioning sessions in early 1994 with the organisations top 100 executives. In off-site three-day sessions, Sears corporate managers developed a list of the companys five-year objectives. In addition to examining needed internal changes, the group discussed methods for aligning itself more with what was happening outside the company. "We spent all of 1994 developing our Balanced Scorecard with our top people," Quinn says. "Most organisations arent willing to pay that price. We had the top 100 people sitting through customer focus groups, digesting all the data and reading all the literature to the point that we almost had a palace revolt." Initially, Quinn formed task forces around the four basic perspectives of the Balanced Scorecard. Each group was asked to define "world-class status" in the area of its perspective, identify Sears obstacles to achieving world-class status in that area, and design metrics for measuring the companys progress in the area. The task forces moved forward with the following initiatives: The customer task force was determined to get a firsthand assessment of how well the company was listening to its clientele. "Satisfaction or your money back" had been a Sears mantra since the companys inception in the 1890s, but the group was sceptical about whether senior management and frontline employees were doing everything they could to increase customer satisfaction. Some stores had trouble keeping merchandise in stock. Customers frequently complained about being unable to find sales associates and rated Sears quality of overall service as poor.
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To learn more about Sears customer-service challenges, the task force held 80 focusgroup sessions with customers around the country. As a result of its findings, the customer task force set four goals: offering the right merchandise at competitive prices; providing superb customer service by hiring, training and retaining the best employees; building customer loyalty; and making Sears a fun place to shop. The internal business task force held 26 employee focus groups and studied extensive data on employee attitudes and behaviour. Each Sears employee was asked to complete a 70-question opinion survey every other year. The internal business task force found that repeatedly employees responded with the clear message that they were interested in the companys success and were proud to work for Sears. The task force also learned that two dimensions of employee satisfaction attitude toward the job and toward the company had a greater effect on employee loyalty and behaviour toward customers than all the other dimensions put together. The financial task force focused on shareholder return and tried to determine what path Sears should take to be in the top 25 percent of Fortune 500 companies. The learning-and-growth task force conducted outside benchmarking launched a research project into the nature of change and suggested an effort to generate 1 million ideas from employees. Ultimately, Sears managers added a fifth perspective to the companys Balanced Scorecard. This perspective was designed to measure overall company values, and it, too, was assigned to a task force. The values task force used employee surveys to identify six core values that Sears employees felt strongly about: honesty, integrity, respect for the individual, teamwork, trust and customer focus. The task force determined that Sears corporate culture was too paternal in nature and didnt value people as much as it should. The task force decided that performance should count more in employee appraisals than effort. Quinn says these task-force findings showed the company why change was needed. "In 1992," he notes, "our customer satisfaction was below the industry average and 16 percentage points behind our leading competitor." By 1996, Sears customer service was above the industry average. In addition, an independent study of 203 companies
49
found that in 1996 Sears made the second-highest improvement in customer satisfaction. "Theres an appeal to the Balanced Scorecard on two fronts," Quinn adds. "First, its logical that those four perspectives go together for most people. Second, theres a blending of Scorecard and performance management the whole idea is that the better the measurement system I put in place, the more accountable I can hold someone." 3.2. Conclusions and Recommendations on Implementing a Balanced Scorecard From the possible research resources from Internet and major international business journals, it was possible to identify that throughout the world has the Balanced Scorecard received very warm welcome among numerous very prestigious companies. To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.52 During the interview with Mr. Tiit Elenurm, managing director of Estonian-based consulting company EM-International, it was identified that so far the applications of Balanced Scorecard and related instruments are not yet familiar to Estonian companies. The personal experience of the author is shortly the following. The Balanced Scorecard is definitely a useful tool to renew an organisations mission and strategic objectives. Multilevel analysis of organisational strategy helps to identify possible shortcomings and flaws of existing objectives. Second, the Balanced Scorecard has proven its usefulness also as a two-way communications tool that enables to pass information more easily to all the members of an organisation, as every members task in formulating the core business information is certainly much higher than in the case of centralised strategic management systems. At the same time, the Balanced Scorecard simplifies the analysis of monthly performance review and compares the results of the review with strategic objectives.
52
Kaplan, Robert S. and Norton, David P., Knowing the Score, Financial Executive, Nov-Dec 1996, p.
33.
50
Third, it turns the activities of an organisation much more efficient as its every member is more aware and committed to the strategy. In the end, it avoids performing many tasks that are not in line with objectives and members start to diminish less important assignments that do not contribute to goals. As one of negative impacts of the Balanced Scorecard it may be noted slowing down of some strategic planning processes, because discussions on so many levels of management undoubtedly takes some time. The second problem is increasing time constraints, because some increase in bureaucracy and increase in reporting. However, to diminish those backlogs it is definitely recommended to use an information-technology based solution in implementing Balanced Scorecard. During the completion of the thesis, the author managed to find at least four different software providers, who have started to actively develop, market and sell their software solutions for better management of the Balanced Scorecard. It might also be recommended to start building up the Balanced Scorecard together with the implementation of some ISO- or EFQM-based quality management systems. The preparatory process for all of those initiatives is largely the same, which may diminish significantly the project implementation time and end in better results.
51
4. Summary The overall objective of the thesis was to analyse the use of Balanced Scorecard as a performance measurement tool in the areas of general management and strategic management. The Balanced Scorecard may be described as a strategy-driven measurement system that retains traditional financial measures, but adds also the perspectives of present and potential (future) value of a company, namely its customers, suppliers, employees, processes, technology, and innovation. By its nature the four-fold division of the Balanced Scorecard into the perspectives of a) financial, b) internal business processes, c) learning and growth, and d) clients, has nothing especially new. Internal business processes have been targeted by several quality management systems. Learning and growth has been analysed by a few trends under knowledge management. Clients also have been subject to several kinds of statistical and non-statistical researches. The main objective of the Balanced Scorecard is to bring those different perspectives together into an uniform system that would enable to measure them in a balanced way that is derived from the strategic objectives of an organisation. Author goes through detailed steps in implementing the Balanced Scorecard in an organisation and during that tour he advises on practical questions which may arise in implementing the Balanced Scorecard for the first time. In authors opinion, the Balanced Scorecard methodology may be regarded as the most practical management tool since the SWOT analysis. Therefore, the companies who are willing to remain competitive during todays shift from industrial age business to information age business will have to start consider implementing the Balanced Scorecard. From the possible research resources from Internet and major international business journals, it was possible to identify that throughout the world has the Balanced Scorecard received very warm welcome among numerous very prestigious companies. To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.
52
Especially Estonian companies would have to try to acquire more information about the Balanced Scorecard and its possible implementation schemes in order to get competitive advantages in the European Union and world markets. The author finds that the Balanced Scorecard is definitely a useful tool to renew an organisations mission and strategic objectives. Multilevel analysis of organisational strategy helps to identify possible shortcomings and flaws of existing objectives. To diminish some backlogs that might be encountered during implementation of the Balanced Scorecard it is definitely recommended to use an information-technology based solution in implementing Balanced Scorecard. During the completion of the thesis, the author managed to find at least four different software providers, who have started to actively develop, market and sell their software solutions for better management of the Balanced Scorecard. It might also be recommended to start building up the Balanced Scorecard together with the implementation of some ISO- or EFQM-based quality management systems. The preparatory process for all of those initiatives is largely the same, which may diminish significantly the project implementation time and end in better results. The author found in the thesis show that the Balanced Scorecard may be considered as one of the best remedies in tackling with the questions concerning: linking strategic vision and long-term objectives to short term tactics; directing sophisticated and different critical paths of success in the light of strategic management; efficient performance measurement; review of strategic vision in the light of day-to-day operations management.
53
Bibliography 1. Alas, Ruth, Strateegiline juhtimine (Tallinn, Klim, 1997). 2. The Scorecard Authority Websites for Management Insights at address http://www.bettermanagement.com/bscauthority (last accessed by the author in 14th of April 2000). 3. Campbell, Andrew and Marcus Alexander, Whats Wrong with Strategy? Harvard Business Review, Nov-Dec 1997. 4. Chandler, A. D. Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Massachusetts: Harvard University Press, 1990). 5. Chandler, A. D. Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Massachusetts: Harvard University Press, 1977). 6. Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms Harvard Business Review, Jul-Aug 1999. 7. Dettmer, William H. Breaking the Constraints to World-Class Performance (Milwaukee, Wisconsin: ASQ Quality Press, 1998). 8. Downing, Laura, vice president of the Massachusetts-based consulting firm Balanced Score Card Collaborative Inc. Interview over internet address in the Business Finance Magazine http://www.businessfinancemag.com/ 9. Drucker, Peter F., Management Challenges for the 21st Century (New York: Harper Business, 1999). 10. Drucker, Peter F., Management: Tasks, Responsibilities and Practices (New York: Harper & Row, 1985). 11. Elenurm, Tiit, manager of EM-International. Interview conducted in 31 st of March 2000. 12. Johnson, T. H. and Robert S. Kaplan, Relevance Lost: The Rise and Fall of Management Accounting (Boston: Harvard Business School Press, 1987). 13. Juran, Joseph M., Made in U.S.A.: A Renaissance in Quality, Harvard Business Review, Jul-Aug 1993.
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14. Kaplan, Robert S., Devising a Balanced Scorecard Matched to Business Strategy, Planning Review, Sept-Oct 1994. 15. Kaplan, Robert S. and David P. Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan-Feb 1992. 16. Kaplan, Robert S. and David P. Norton, Implementing the Balanced Scorecard at FMC Corporation: An Interview with Larry Brady, Harvard Business Review, SeptOct 1993. 17. Kaplan, Robert S. and David P. Norton, Knowing the Score, Financial Executive, Nov-Dec 1996. 18. Kaplan, Robert S. and David P. Norton, Linking the Balanced Scorecard to Strategy, California Management Review, Fall 1996. 19. Kaplan, Robert S. and David P. Norton, Putting the Balanced Scorecard to Work, Harvard Business Review, Sept-Oct 1993. 20. Kaplan, Robert S. and David P. Norton, Strategic Learning and the Balanced Scorecard. Strategy and Leadership, Sept-Oct 1996. 21. Kaplan, Robert S. and David P. Norton, Translating Strategy into Action The Balanced Scorecard (Boston: Harvard Business School Press, 1996). 22. Kaplan, Robert S. and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996. 23. Kurtzman, Joel, Is Your Company off Course? Now You can Find Out Why, Fortune, 17th of February, 1997. 24. Quinn, Rick , former vice president of quality, Sears, Roebuck & Co. Interview over internet address in the Business Finance Magazine http://www.businessfinancemag.com/
55
Resmee Tasakaalustatud hindemaatriksi koostamine ja kasutamine Bakalaureuset eesmrk oli analsida tasakaalustatud hindemaatriksi kasutamist strateegilise juhtimise ja ldjuhtimise lhenemine valdkonnas. Harvardi Peamine likooli phjus, miks ja tasakaalustatud hindemaatriksi professorite
konsultantide Robert S. Kaplani ja David P. Nortoni poolt loodi, seisnes selles, et kuni 1980-date aastateni kasutusel olnud finantsnitajatel baseeruvad mtmisssteemid ei andnud adekvaatset pilti organisatsiooni edukuse tegelikust seisust. Tasakaalustatud hindemaatriks ongi definitsiooni kohaselt strateegiale orienteeritud tegevuse mtmisssteem, mis analsib lisaks mineviku tegevuse edukusele viitavatele traditsioonilistele rahalistele nitajatele (nt kasum ja varade tootlus) ka organisatsiooni kesoleva hetke ning tuleviku nitajaid. Viimased seonduvad enamasti klientide, allhankijate, ttajate, riprotsesside, tehnoloogiate ja uuendustega. Oma olemuselt ei ole tasakaalustatud hindemaatriksi tinglikus nelikjaotuses, mis koosneb a) rahalisest-, b) sisemiste riprotsesside-, c) ppimise ja arengu- ning d) klientideperspektiivist, iseenesest midagi uut. Sisemiste riprotsessidega tegelevad varasemate teooriate raames phjalikumalt kikvimalikud kvaliteedissteemid, ppimise ja arengu osasid on analsitud teadmusjuhtimise erinevates suundades ning kliente on samuti uuritud erinevate ksitluste ja statistiliste analside kigus. Tasakaalustatud hindemaatriksi lesandeks ongi tuua kik need erinevad
organisatsiooni tegevust analsivad nitajad kokku htsesse ssteemi ning mta neid tasakaalustatult, organisatsiooni strateegilistest eesmrkidest lhtuvalt. Ts analsitakse tasakaalustatud hindemaatriksi rakendamisega seonduvaid detaile ning antakse nu rakendamisel tekkivate ksimuste lahendamiseks praktiliste nidete varal. Autor soovitab tnapevases informatsiooni- ning teabehiskonna keskses rikeskkonnas konkurentsieelise silitamiseks firmadel hakata kasutama tasakaalustatud hindekaardi metodoloogiaid, mis annavad varasemast adekvaatsema pildi organisatsiooni tegevuse eesmrgiprasusest. Maailma juhtivates majandusajakirjades on viimaste aastate jooksul mainitud, et see on juba kasutusele vetud paljudes globaalsetes organisatsioonides: Chase Manhattan, Hewlett-Packard, IBM, FMC Corporation, Mobil, Shell, Sears, Texaco on ainult lhike osa nimekirjast, mis tieneb
56
iga pevaga.53 Kahtlemata peaksid selle temaatikaga tegelema aktiivselt ka Eesti firmad, sest saabuv liitumine Euroopa Liiduga raskendab praegust konkurentsi veelgi. Autori enese kogemus tst tasakaalustatud hindemaatriksi rakendamisel viks lhidalt kokku vtta jrgmiselt. Kahtlemata vib seda lugeda kasulikuks vahendiks, mille abil tpsustada organisatsiooni missiooni ja strateegilisi eesmrke. Lisaks aitab selle rakendamisel lbi viidav mitmetasandiline organisatsiooni protsesside anals identifitseerida vimalikke puudujke olemasolevates eesmrkides. Teiseks on tasakaalustatud hindemaatriks testanud ka enese kasulikkust strateegiate kommunikatsioonivahendina, kuna erinevalt tsentraliseeritud strateegilise planeerimise ssteemidest on peaaegu iga organisatsiooni liige on kohustatud snastama mingi osa organisatsiooni tegevuse strateegilistest ja taktikalistest eesmrkidest ning nende seostest organisatsiooni missiooniga. Kahtlemata aitab see kanda ellu ka teist eesmrki nimelt garanteerida seda, et kik organisatsiooni liikmed oleksid organisatsiooni strateegiast paremini teadlikud ning sellele orienteeritud. Lppkokkuvttes aitab see vhendada nende tegevuste osakaalu, mis ei aita otseselt kaasa organisatsiooni eesmrkide saavutamisele ja on seega ebaefektiivsed. Kolmandaks lihtsustab tasakaalustatud hindemaatriks tunduvalt levaadet
operatiivjuhtimise erinevatest osadest. Rakenduse negatiivsete aspektidena viks vlja tuua loomulikult strateegilise planeerimise teatud protsesside tunduva aeglustumise, sest niivrd mitmetel tasanditel toimuvad diskussioonid strateegiate snastamise osas kahtlemata vtavad rohkem aega. Teine ajaga seonduv negatiivne mju on mnevrra suurenev brokraatia, mis paraku kaasneb kikide ssteemide puhul, mis on kuidagiviisi hendatud suureneva aruandlusega. Samas on vimalik neid negatiivseid mjusid vhendada juhul, kui maatriks ehitatakse les infotehnoloogilise lahendusena ning selle abil on vimalik peaaegu reaalajas vaadelda muutusi organisatsiooni tegevuses. Kesoleva vitekirja kirjutamise ajal nnestus autoril leida vhemalt nelja erineva tarkvarafirma poolt pakutavaid kohtvrgul
53
Kaplan, Robert S. and Norton, David P., Knowing the Score, Financial Executive, Nov-Dec 1996, p.
33.
57
vi internetil rajanevaid tarkvaralahendusi, mille abil on tasakaalustatud hindemaatriksi haldamist organisatsioonis vimalik tunduvalt lihtsustada. Teine otsene soovitus seoses tasakaalustatud hindemaatriksi kasutuselevtuga on see, et seda on soovitatav hakata rakendama koos ISOvi EFQM-il phineva kvaliteedissteemiga, kliendihaldusprojektiga ning living company kontseptsiooniga. Phjus on selles, et olemuselt kasutab tasakaalustatud hindemaatriks oma erinevates perspektiivides priski palju lalnimetatud mistete meetodeid, mistttu nende rakenduste paralleelne kasutuselevtt vhendab suuresti ajakulu ning lppkokkuvttes annab ka paremaid tulemusi. Autor leidis oma bakalaureusets, et tasakaalustatud hindemaatriksit vib lugeda heks parimaks vahenditest, millega lahendada alljrgnevaid ksimusi: siduda omavahel strateegilisi, pikaajalisi eesmrke lhiajaliste operatiivjuhtimise sammudega; juhtida erinevaid kriitilisi edutegureid strateegilise juhtimise metodoloogia valguses; hinnata t tulemuste efektiivsust; anda igapevaste juhtimisotsuste kaudu hinnangut strateegilistele eesmrkidele.
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Balanced Scorecard Thesis

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Estonian Business School BBA programme

Overview of Construction and Implementation of Balanced Scorecard

Written by: Marko Rillo

Promotor: Ruth Alas

Kaitsmisele lubatud 2000. a.

ppetooli juhataja vi juhendaja

Massachusetts: Harvard University Press, 1990).

Business Review , Sept-Oct 1992, p. 73.

Ibid. In his book Vital Signs.

Figure 1 - The Main Framework of Balanced Scorecard17

To achieve our vision, how should we appear to our customers? CustomerObjectivesMeasuresTargetsInitiatives

Vision and Strategy

Harvard Business School Press, Boston, 1996, p. 1.

(Boston: Harvard Business School Press, 1996), p. 52.

(Boston: Harvard Business School Press, 1996), p. 9.

(Boston: Harvard Business School Press, 1996), p. 10.

Figure 2 - Balanced Scorecard as a Strategic Framework for Action22

Figure 3 - Creating a Balanced Scorecard24

Which strategies shall we follow? Which areas shall we focus on?

In which perspectives do we have to be good at?

4. Identify Critical Success Factors of the Perspectives

What do we have to do well to manage in the framework of those perspectives?

What should we measure at each of those perspectives?

How do we evaluate our scorecard?

7. Create Action Plans

Which actions should we undertake to reach our targets?

8. Follow up and Manage

How do we follow up, update and maintain our scorecard?

Review, Sept-Oct 1993, p. 138.

Nov-Dec 1997, p. 42-46.

(Boston: Harvard Business School Press, 1996) p. 11-12.

(Boston: Harvard Business School Press, 1996), p. 13.

1985), pp. 640-641.

Review, Jul-Aug 1999, p. 71.

(Boston: Harvard Business School Press, 1996), p. 15.

System, Harvard Business Review, Jan-Feb 1996, p. 79.

Figure 4 Possible Steps to Go Around the Balanced Scorecard37

Management Review, Fall 1996, pp. 54-55.

Management Review, Fall 1996, p. 62.

Management Review, Fall 1996, p. 67.

Management Review, Fall 1996, p. 63.

(Boston: Harvard Business School Press, 1996), pp. 272-273.

Management Review, Fall 1996, p. 64.

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