Balanced Scorecard

Balanced Scorecard Basics

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic nonfinancial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the Tableau de Bord literally, a "dashboard" of performance measures) in the early part of the 20th century. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996): 76.

Perspectives
The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives: The Learning & Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems." The Business Process Perspective This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet

their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. The Financial Perspective Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

Strategy Mapping
Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows).

The balanced scorecard (BSC) is a strategic performance management tool

The four perspectives

The 1st Generation design method proposed by Kaplan and Norton was based on the use of three non-financial topic areas as prompts to aid the identification of non-financial measures in addition to one looking at Financial. Four "perspectives" were proposed:[22]

Financial: encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?" Customer: encourages the identification of measures that answer the question "How do customers see us?" Internal business processes: encourages the identification of measures that answer the question "What must we excel at?" Learning and growth: encourages the identification of measures that answer the question "Can we continue to improve and create value?". Areas Return On Investment Cash Flow

Department Finance

Return on Capital Employed Financial Results (Quarterly/Yearly) Internal Business Processes Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate

Learning & Growth

Customer

What are the Key Benefits of using Balanced Scorecards? Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include: 1. Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally. Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure

2.

3.

4.

5.

that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. Better Organisational Alignment well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation

Conclusion The idea of the Balanced Scorecard is simple but extremely powerful if implemented well. As long as you use the key ideas of the BSC to (a) create a unique strategy and visualise it in a cause-and-effect map, (b) align the organisation and its processes to the objectives identified in the strategic map, (c) design meaningful key performance indicators and (d) use them to facilitate learning and improved decision making you will end up with a powerful tool that should lead to better performance.

Introduction Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). Linking Value Chain Analysis to Competitive Advantage What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. Primary Activities Primary value chain activities include: Primary Activity Inbound logistics Operations Description

All those activities concerned with receiving and storing externally sourced materials The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)

Outbound logistics Marketing and sales Service

All those activities associated with getting finished goods and services to buyers

Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.) All those activities associated with maintaining product performance after the product has been sold

Support Activities Support activities include: Secondary Activity Procurement Description

This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business

Human Resource Management Technology Development Infrastructure

Activities concerned with managing information processing and the development and protection of "knowledge" in a business Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

What Does Value Chain Mean? A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers.

Primary Activities.
Inbound Logistics.
Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation.

Operations.
This is where goods are manufactured or assembled. Individual operations could include room service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine.

Outbound Logistics.
The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer.

Marketing and Sales.

In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix.

Service.
This includes all areas of service such as installation, after-sales service, complaints handling, training and so on.

Support Activities.
Procurement.
This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and web-based technologies to achieve procurement aims).

Technology Development.

Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological developments.

Human Resource Management (HRM).

Employees are an expensive and vital resource. An organisation would manage recruitment and s election, training and development, and rewards and remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy.

Firm Infrastructure.
This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.

Porter's Value Chain

The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits. Most organisations engage in hundreds, even thousands, of activities in the process of
SWOT - Strengths | SWOT Weaknesses | SWOT Opportunities | SWOT Threats

Value Chain

What Does Value Chain Mean? A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers.

Read more: http://www.investopedia.com/terms/v/valuechain.asp#ixzz1XANRYRsB

Primary Activities.
Inbound Logistics.
Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation.

Operations.
This is where goods are manufactured or assembled. Individual operations could include room service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine.

Outbound Logistics.
The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer.

Marketing and Sales.

In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix.

Service.
This includes all areas of service such as installation, after-sales service, complaints handling, training and so on.

Support Activities.
Procurement.
This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and web-based technologies to achieve procurement aims).

Technology Development.
Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological developments.

Human Resource Management (HRM).

Employees are an expensive and vital resource. An organisation would manage recruitment and s election, training and development, and rewards and remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy.

Firm Infrastructure.
This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.

Porter's Value Chain

The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits. Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form. According to Porter (1985), the primary activities are: 1. Inbound Logistics - involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs. 2. Operations - are all the activities required to transform inputs into outputs (products

and services). 3. Outbound Logistics - include all the activities required to collect, store, and distribute the output. 4. Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase. 5. Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered. Secondary activities are: 1. Procurement - is the acquisition of inputs, or resources, for the firm. 2. Human Resource management - consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel. 3. Technological Development - pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs. 4. Infrastructure - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

References

Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York. Rowe, Mason, Dickel, Mann, Mockler; "Strategic Management: a methodological approach". 4th Edition, 1994. Addison-Wesley. Reading Mass.