The Balanced Scorecard: Superfactory Excellence Program™

THE BALANCED SCORECARD
SUPERFACTORY EXCELLENCE PROGRAM™

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© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 1

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“One of the most dangerous forms of
human error is forgetting what one is
trying to achieve.”
– Paul Nitze

OUTLINE
1. Introduction to the Balanced Scorecard

 What is it?
 Why do it?
2. Balanced Scorecard Fundamentals

 The Four Perspectives
 Measures, Targets and Initiatives
 Roles and Responsibilities
3. Using the Balanced Scorecard as a Management System

4. Issues and Challenges with the Balanced Scorecard
5. Implementing the Balanced Scorecard

WHAT IS IT?
Definition:
The Balanced Scorecard is a management tool that provides stakeholders with a

comprehensive measure of how the organization is progressing towards the
achievement of its strategic goals.

WHAT IS IT?
The Balanced Scorecard:
 Balances financial and non-financial measures
 Balances short and long-term measures
 Balances performance drivers (leading indicators) with outcome measures (lagging indicators)
 Should contain just enough data to give a complete picture of organizational performance… and
no more!
 Leads to strategic focus and organizational alignment.

WHAT IS IT?
 Origins
 Multi-company research from 1990's undertaken by R. Kaplan & D. Norton aimed
at developing alternatives to purely financially based performance management
tools (e.g. budgets)
 Early Scorecard experimentation at Analogy Devices Inc. documented from 1987"
 Purpose
 Originally a performance measurement tool
 Now a strategic communication and performance measurement framework
 Underlying philosophy includes:
 The importance of clear communication of goals and priorities
 The benefits of learning & team-working

The Balanced Scorecard
Why do it?
• To achieve strategic objectives.

• To provide quality with fewer resources.
• To eliminate non-value added efforts.
• To align customer priorities and expectations with the customer.
• To track progress.
• To evaluate process changes.
• To continually improve.
• To increase accountability.

WHY DO IT?
It works!
In just 90 days, Sandia Labs was able to redirect $190,000 in savings by dropping
initiatives that didn’t fit their overall strategy.
“The BSC has forced our management team to focus beyond financial measures…
too often in the past we would get sucked into short-term thinking.”
“The BSC dramatically improved our data analysis… we don’t overreact nearly as
much as we used to.”

The Strategy Focused
Organization
Mission – What we do
Vision – What we aspire to be
Strategies – How we accomplish our goals
Measures – Indicators of our progress

STRATEGIC LEADERSHIP
 Clear sense of direction:

 Where is the organization headed?
 Profound understanding of the business model:
 Is the organization doing all the things it needs to be doing?
 Ability to focus and prioritize:
 Striking the balance between long-term development and short-term operational
pressures
 Agility: flexibility driven by learning:
 Incorporating new knowledge in the strategic and operational planning processes

MANAGEMENT PROCESS LINKAGES
The management process of
discovering, defining and implementing
business activities that will result in a
value-enhanced future of the firm
Business
Strategy
Business
Processes
Performance Stakeholder
Measurement Value
A business process is a
System collection of linked business Propositions
A management process that activities that enable or
deliver goods, services, Descriptions of the “give and
is used to monitor business
information or money get” relationships between
activities and thereby
the firm and each of its
facilitate
© achievement
2004 SUPERFACTORY™. of the
ALL RIGHTS RESERVED.
stakeholders, relative to
firm’s objectives
alternatives
Environmental Scan
Strengths Weaknesses
Opportunities Threats
A Model for
Values
Strategic
Planning
Mission &
Vision
Strategic Issues
Strategic Priorities
Objectives, Initiatives, and Evaluation
The Strategy Focused Organization
The Five Principles
1. Translate the strategy to operational terms.

2. Align the organization to the strategy.
3. Make strategy everyone’s job.
4. Make strategy a continual process.
5. Mobilize change through executive leadership
Source: The Strategy Focused Organization, Norton & Kaplan

STRATEGY VS OPERATIONAL EXCELLENCE
 Strategy creates fit among a firms activities

 The success of strategy depends on doing many things well, not just a few
 All things that are done well must operate within a close knit system
 If there is no fit, there is no strategy
 Without fit management becomes the search for operational excellence
 Improving operational excellence is necessary but it is not the same as strategy
 Managing fit is “strategic management”

STRATEGY VS OPERATIONAL EXCELLENCE
 Operational effectiveness involves continual improvement that have no trade off

opportunities
 The operational effectiveness agenda is the proper place for constant change,
flexibility, and relentless efforts to achieve best practices
 The strategic agenda is the place for making clear tradeoffs and strengthening the
fit between the business components
 Strategy involves the continual search for ways to reinforce and extend a firms
position and the delivery of value

 Focuses on a few measurements

 Reflects mission and strategies
 Provides a quick, but comprehensive, picture of the organization’s health

TWO PRIMARY APPLICATIONS OF BSC
Since its introduction two distinct applications have emerged:
 Strategic Balanced Scorecards;

 Focus on what the organisation is trying to achieve
 Work out what needs to happen to achieve it
 Monitor whether it is achieved
 Operational Scorecards;
 Identify the most important processes to be monitored
 Define which aspects of the process to monitor
 Agree on what is considered best practice

PERFORMANCE MEASUREMENT PRINCIPLES
 Value creation is the objective

 Performance measurement is systematic
 Measurement supports business strategy
 Sound logic underlies each performance measure
 80:20 rule applies to measure selection
 Measures performance of both business and management processes

PERFORMANCE MEASUREMENT PRINCIPLES
 Performance standards are externally driven

 A measurement culture exists
 Clear rationale for incentive compensation
 Management encourages open communication of results
 Measurement system is simple to use

THE INCREASING SOPHISTICATION OF
CORPORATE PERFORMANCE MEASUREMENT
Value-linked measurements for
business strategy, stakeholder
needs, process attributes and the
business environment
Sophistication
of Balanced scorecard
Measurement Economic value added
Systems
Quality-related operating measures
Activity-based costing
Operating measures
Traditional accounting measures

Time
 Ties performance measures to corporate strategy

 “Balance” includes
 short & long term objectives
 financial and non-financial measures
 external & internal measures
 various perspectives
 Purposes of the balanced scorecard include
 clarify & translate vision & strategy
 communicate & link strategic objectives & measures
 plan, set targets & align strategic initiatives
 enhance strategic feedback & learning

ELEMENTS OF THE SCORECARD
 Perspectives
 Strategic Objectives
 Metrics
 Targets

THE BALANCED SCORECARD LINKS
PERFORMANCE MEASURES How do we look to shareholders?
Financial Perspective
Goals Measures
How do customers see us? What must we excel at?

Internal Business
Customer Perspective Perspective
Goals Measures Goals Measures
Learning and Innovation

Perspective
Goals Measures
Can we continue to improve

and create value?
© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED.
THE SCORECARD MEASURES ARE “BALANCED” INTO
FOUR AREAS
 The user perspective

 The finance perspective
 The internal process perspective
 The learning and future perspective

RATIONALE FOR THE BSC:
GETTING CONTROL OF THE DATA
 Focus
 Balance
 Assessment
 Intelligibility

CHOOSING METRICS
--REFLECTING VALUES
 What is important?
 What are we trying to accomplish?

CHOOSING METRICS
--BEING PRACTICAL
 Use existing measures when possible

 Use sampling
 Collect data centrally
 Minimize work by front line

THE SCORECARD IN PRACTICE
 Experimentation and adaptation

 Varied staff reaction
 Responding to budget problems
 Revision of mission and goals

BALANCED SCORECARD VARIATIONS
 The constituent scorecard
 Focused on major stakeholders
 Incomplete description of corporate strategy
 Fails to identify drivers to achieve goals
 The key performance indicator scorecard
 An outgrowth of the quality movement
 Array of measure categories
 No cause and effect relationships among measures
 The strategy scorecard
 Focuses the organization on its strategy
 Show how each measure fits in a cause/effect sequence that drives high-level strategy
outcomes
 Strategy map approach offers logic for measure development

THE BALANCED SCORECARD AND THE BIG
PICTURE
•Activity Based Costing

•Economic Value Added
•Forecasting
Strategic •Benchmarking
Planning •Market Research
•Best Practices
Mission
•Six Sigma
and
Vision •Statistical Process Control
•Reengineering
Balanced •ISO 9000
Scorecard •Total Quality Management
•Empowerment
•Learning Organization
•Self-Directed Work Teams
© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED.
•Change Management 31
Strategic Direction
Create Environment Strategic Performance Management System
For Change
Communicate Strategies
Define Objectives
Implement BSC
Balanced Scorecard
Measure Performance
Improve Processes
Linking it all together…. Evaluate and Adjust

Continuous Improvement
Redefine Initiatives
The Balanced Scorecard
FINANCIAL/REGULATORY
CUSTOMER
To satisfy our constituents,
To achieve our vision,
what financial & regulatory
what customer needs must
objectives must
we serve?
we accomplish?
INTERNAL
To satisfy our customers and
stakeholders, in which business
processes must we excel?
LEARNING & GROWTH

To achieve our goals, how
must we learn, communicate
and grow?
Customer Perspective
To achieve our vision, what customer needs

must we serve?
Possible Performance Measures
o Customer Satisfaction (Average)

o Satisfaction Gap Analysis (Satisfaction vs.
Level of Importance)
o Satisfaction Distribution (% of each area scored)

Financial / Regulatory Perspective
To satisfy our constituents, what financial and

regulatory objectives must we accomplish?

o Cost / Unit
o Unfunded Requirements or Projects
o Cost of Service
o Budget Projections and Targets

Internal Perspective
To satisfy our customers, in which business processes must we excel?
o Cycle Time
o Completion Rate
o Workload and Employee Utilization
o Transactions per employee
o Errors or Rework

Learning and Growth
To achieve our goals and accomplish core activities, how must we learn, communicate
and work together?
o Employee Satisfaction
o Retention and Turnover
o Training Hours and Resources
o Technology Investment

BSC REPRESENTATION METHODS
 “Traditional” BSC
 Four levels
 Bubbles, but no connecting lines of a map (too confusing)
 Some partitioning of functions on a horizontal scale
 There are other way to represent the BSC
 Simple lists with metrics and goals
 Quadrants with everything on one page
 A popular way is to list the objectives in a table, with metrics
 Assign portfolios of projects
 Cascade the Scorecard down to the functional manager level
 Tie “every thing” to an objective even the level of effort projects

WHY MEASURE?
• To determine how effectively and efficiently the process or service satisfies the
customer.
• To identify improvement opportunities.
• To make decisions based on FACT and DATA

MEASUREMENTS
• Translate customer expectations into goals.
• Evaluate the quality of processes.
• Track our improvement.
• Focus our efforts on our customers.
• Support our strategies.

TARGETS
“If you don’t know where you’re going, you’re probably not gonna get there.”
Forrest Gump

TARGETS
• Targets need to be set for all measures
• Should have a “solid basis”
• Give personnel something for which to aim
• If achieved will transform the organization
• Careful not to develop measures/targets in

a fragmented approach:
i.e. Asking people to increase customer satisfaction has to be backed up with the knowledge, tools, and means to achieve
that target.

SETTING THE TARGETS
 Specific targets indicating full success, partial success, and failure

 Targets that are challenging, but not impossible

INITIATIVES
 Once measures and targets are established, it is the responsibility of

management to determine HOW the organization will achieve its goals.
 Measures are used to determine the effectiveness of strategic initiatives.

THE LEADERSHIP TEAM
 Develops the division’s vision, strategy and goals

 Develops organizational objectives and targets
 Provides leadership, endorsement and vision for the project
 Clears barriers to scorecard progress

THE CORE TEAM
 Drafts the strategy map and scorecard
 Works with employees to develop measures supporting strategic objectives
 Works with the Leadership Team to plan and implement the Balanced Scorecard
in the FAS Division

THE BALANCED SCORECARD AS A
MANAGEMENT SYSTEM
 BSC reviewed regularly to enhance operational decision-making

 Success of initiatives assessed based on DATA… not opinions
 Leading indicators evaluated to confirm accuracy of assumptions

THE BALANCED SCORECARD AS A
MANAGEMENT SYSTEM
 The BSC is a “Living Document” that requires regular revision of objectives,

measures and initiatives:
 How are we doing?
 Are we measuring the right things?
 What initiatives do we need to get us where we want to go?
 Have our organizational goals changed?

Advantages to this Approach
 Simple to Use and Understand

 Based on Vision and Strategy
 Multidimensional
 Quantitative and Qualitative Measures
 Current and Future
 Provides Measurement of and Method for Improving our Services
 Ties QI initiatives together
 Serves as a Communication Tool

THE BALANCED SCORECARD STRATEGY MAP
Improve Shareholder Value
Financial
Perspective Revenue Growth Strategy Shareholder Value Productivity Strategy
ROCE
Build the Franchise Increase Customer Value Improve Cost Structure Improve Asset Utilization
New Revenue Sources Customer Profitability Cost per Unit Asset Utilization
Product Leadership
Customer Intimacy
Customer Value Proposition Operational Excellence
Customer Product/Service Attributes Relationship Image

Perspective Relation-
Function- ships Brand
Service
ality
Price Quality Time
“Increase “Achieve “Be a Good

“Build the Corporate Citizen”
Internal Customer Value” Operational
Frnchise”
(Customer Excellence” (Regulatory and
Perspective (Innovation Environmental
Management (Operational
Processes) Processes)
Processes) Processes)
A Motivated and Prepared Workforce

Learning &
Growth Strategic Competencies Strategic Technologies Climate for Action
Perspective
Source: Kaplan & Norton, The Strategy Focused Organization

INCREASING POPULARITY OF THE
BALANCED SCORECARD
 Connects performance measurement to strategic success

 Places emphasis on the importance of all stakeholders, not just investors
 Encourages consideration of linkages among performance measures in all areas of
the firm, and among all levels in the hierarchy
 Recognizes the need for some measures which comment of preparedness for
future success

PROJECT MANAGEMENT AND THE BSC
 Traditional view of a “project”

 Defined start and end
 Defined resources, cost, and delivered value
 Customer, technology,
 Balanced Scorecard view of a “project”

 What objective of the strategy does this project support?
 If the project were implemented, what goals would be fulfilled?
 When will the cost of the project be earned back by a specific objective in the strategy.
 These questions and their answers are also found in project portfolio management.

WHAT THE BSC DOES WELL
 Link to strategy/overall purpose

 Concept of goal alignment
 Integrates evaluation with management
 Coverage of organizational performance aspects
 A “big picture” snapshot (plus access to details)
 Adapts nicely between for-profit & non-profit
 A nice blend of “common to all” aspects (helps with benchmarking) and
elements that are tailored to the organization (helps with relevance)
 Marketing!!

POTENTIAL PROBLEMS WITH THE BSC
 Excessive centralization & rigidity

 Top-down works best when expertise is at the top
 Bottom-up/flexible works best for knowledge work
 High level of (heavily quantitative) detail - substantial set-up costs (time &
money)
 Low system agility - difficult to keep pace with turbulent business environments

 Deals with meeting shareholder & customers’ needs, but ignores employees’
needs
 Testing strategic cause-and-effect assumptions = run some correlations?!
 Weak on unintended outcomes—lack of an open-ended element
 Any room here for emergent strategy?

 Some of the goals are hard to create metrics for

 “Manage requirements?”
 Who get to say we’re managing requirements?
 The customer wording is too soft at times, since the metrics for satisfaction are hard
to come by in our environment
 “Strategically deploy services”
 This is a tautology
 “Deliver solutions on schedule”
 This is easy, and having a program office makes it easier
 “Keep my systems running”
 This can be measured everyday

 Lack of time for the decision makers to focus on strategy

 Having strategy sessions on a continuous basis is difficult
 Running the business seems to come first
 Confusion between operational efficiency and strategy
 This is a continual problem
 Always ask “do I have options?” if so then it’s strategy
 Difficulty in creating well defined metrics and connecting them to deliverables
 Scalar metrics with defined “units of measure”
 Cascading the objectives down to the staff that can deliver the results
 This is the hardest and where there is the most resistance

 Once the strategy has been defined, loosing the picture focus and delving into the
details
 Continuous re-visiting of the strategy to test the hypothesis
 Adjusting metrics and measures to increase the confidence in the hypothesis tests
 Becoming enamored with the “pretty pictures, charts and graphs”
 The real measure is the improvement in the operational effectiveness of the
organization.
 This is the other half of strategy that needs to be delivered as well if not better
 Facing the reality that this is much harder than it looks
 Strong convictions are needed to overcome objections
 In the end delivery of the results MUST be done

IMPLEMENTING BSC
 Designing and rolling out a any kind of Balanced Scorecard makes little sense if it
is not used to trigger behavioral change
 Nothing will be achieved if everybody continues doing what they have always done
 For maximum effect, the Balanced Scorecard can be used to form the centre of
an organization's strategic management system
 Scorecards then help secure strategic alignment of goals, initiatives, people, processes
and systems throughout an organization

IMPLEMENTING BSC
 The individuals and teams should:
 Be committed to making the scorecard process work across all levels of the
organization
 By-in has to be gained up and down the organization
 Keeping the commitment is a full time job
 Seek to close any gaps that open in the process in the same way they manage their
daily activities
 Make BSC a “project” like any other
 Plans, budget, and deliverables
 Understand that without the commitment and dedication, not only will Balanced
Scorecard fail, the underlying business process will suffer as well.

IMPLEMENTING BSC
 The scorecard should:

 Measure performance against goals
 Determine if the goals are appropriate
 Determine if the strategy or measures should be changed
 Provide direct measurable outcomes traceable to the actions of individuals and teams
 These measures and metrics should
 Have scalar units of measure: dollars, defects/1000, percentiles, etc.
 Have metrics that are first order derivatives from the work process: quality, response time,
budget compliance
 Have independent variables that can be controlled which are connected to the dependent
variables

IMPLEMENTING BSC
 Don’t reinvent the wheel—dig into the lessons learned from related approaches
 Management By Objectives (MBO)/ goal-based evaluation
 Multi-level needs assessment/ organizational diagnosis
 Theory-based evaluation/ linkage research
 Return On Investment (ROI)/ utility analysis

IMPLEMENTING BSC
 Add the employee’s perspective

 They represent most organizations’ greatest source of value
 Don’t go into (quantitative) detail on everything - increase flexibility/agility
 Keep some things at “big picture” level
 Build in qualitative/mixed method rating systems
 Leave some aspects of performance open
 Allow creativity, innovation, and serendipity

IMPLEMENTING BSC
 Balanced Scorecards used at the center of the strategic management process

effectively address the key challenge of most organizations - the need to identify,
pursue and achieve strategic goals
 They support
 A clear sense of direction
 A profound understanding of the business model
 An ability to focus and prioritize
 Organizational agility

Suggested Readings
Kaplan, Robert and Norton, Edward. The Balanced Scorecard.

Harvard Business Publishing, 1998
Kaplan, Robert and Norton, Edward. The Strategy-Focused Organization.

Harvard Business Publishing, 2001
Buckingham, Marcus and Coffman, Curt. First, Break All the Rules
The Gallup Organization, 1999
Brown, Mark. Keeping Score. Mark Graham Brown, 1996

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THE BALANCED SCORECARD

SUPERFACTORY EXCELLENCE PROGRAM™

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 1

 Current contact information can be found at: www.superfactory.com

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 2

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 3

1. Introduction to the Balanced Scorecard

2. Balanced Scorecard Fundamentals

3. Using the Balanced Scorecard as a Management System

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 4

The Balanced Scorecard is a management tool that provides stakeholders with a

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 5

The Balanced Scorecard:

 Balances financial and non-financial measures

 Balances short and long-term measures

 Leads to strategic focus and organizational alignment.

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 6

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 7

• To achieve strategic objectives.

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 8

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 9

Vision – What we aspire to be

Strategies – How we accomplish our goals

Measures – Indicators of our progress

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 10

 Clear sense of direction:

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 11

The Five Principles

1. Translate the strategy to operational terms.

Source: The Strategy Focused Organization, Norton & Kaplan

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 14

 Strategy creates fit among a firms activities

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 15

 Operational effectiveness involves continual improvement that have no trade off

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 16

 Focuses on a few measurements

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 17

Since its introduction two distinct applications have emerged:

 Strategic Balanced Scorecards;

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 18

 Value creation is the objective

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 19

 Performance standards are externally driven

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 20

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 21

 Ties performance measures to corporate strategy

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 22

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 23

How do customers see us? What must we excel at?

Goals Measures Goals Measures

Learning and Innovation

Can we continue to improve

 The user perspective

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 25

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 26

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 27

 Use existing measures when possible

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 28

 Experimentation and adaptation

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 29

© 2004 SUPERFACTORY™. ALL RIGHTS RESERVED. 30

•Activity Based Costing

Linking it all together…. Evaluate and Adjust