The Balanced Scorecard: Measurement and Management in the Information Age

A Simple Analogy Airplane example Managers need many tools to monitor performance Future success depends on this information

The Balanced Scorecard (BSC) Provides managers with goals and methods to attain these goals Translates an organization’s mission and strategy into a comprehensive set of performance measures Places emphasis on financial objectives

Increased Competition End of Industrial Age Old performance measures (ex. ROCE) are not as useful anymore Government deregulation Increased emphasis on intangible assets Customer relations Innovative products Use of information technology

New Operating Environment Cross-functions Integrated business operations Increases efficiency Links to customers and suppliers Wal-Mart uses scanners that automatically reorder when inventory is low Customer segmentation Globalization

New Operating Environment (cont.) Innovation New products or services Improvement in products or services Knowledgeable employees Shift away from industrial age hierarchy Shift towards having analytical employees as opposed to just blue-collar workers

Improvement Initiatives Total quality management (TQM) Activity-based costing (ABC) Customer-focused organizations Employee empowerment Reengineering

Financial Accounting Model Traditional model cannot be used in the information age because it does not precisely valuate intangible and intellectual assets (i.e. employee skills, technology, etc.) Although difficult to measure, these assets are becoming more important in the information age and are critical for the future success of the company

Financial Measures Financial measures alone are backward looking and an inadequate measure of the future of the company The balanced scorecard and financial measures together must guide a company to create value through investment The mission/vision of a company sets the objectives of the balanced scorecard

Kaplan and Norton’s BSC

The Balanced Scorecard Financial “To succeed financially, how should we appear to our shareholders?” Customer “To achieve our vision, how should we appear to our customers?” Internal Business Process “To satisfy our shareholders and customers, what business processes must we excel at?” Learning and Growth “To achieve our vision, how will we sustain our ability to change and improve?”

The Balanced Scorecard It expands the set of business unit objectives beyond summary financial measures. Corporate executives can measure how their business units create value for current and future customers. It captures the critical value-creation activities created by skilled, motivated organizational participants.

The Balanced Scorecard as a Management System Many organizations use their non-financial measures for local improvements. These organizations are using their financial and non-financial data for tactical feedback and control of short-term operations. The Balanced Scorecard emphasizes that this data must be part of the information system for employees at all levels (front-line employees to Senior executives).

The Balanced Scorecard as a strategic management system Clarify and translate vision and strategy Communicate and link strategic objectives and measures Plan, set targets, and align strategic initiatives Enhance strategic feedback and learning

Clarify and translate vision and strategy To set financial goals, the team must consider what to emphasize and be specific about what market segments it will compete in. Gain consensus of top executives. Identify objectives and measures for its internal business process.

Clarify and translate vision and strategy (cont.) Learning and growth objectives reveals rationale behind significant investments. The process of building a Balanced Scorecard clarifies the strategic objectives and identifies the critical drivers. The Balanced Scorecard also contributes to the solution of the problem.

Communicate and link strategic objectives and measures The Balanced Scorecard’s objectives and measures are communicated throughout the organization by different medias. The Balanced Scorecard also helps to gain commitment to a business unit’s strategy. Everyone in the organization should understand the business unit’s long-term goals and the strategy for achieving these goals.

Targeting balanced scorecard The balanced scorecard is most effective when used to drive organizational change It should look to set targets that would transform a company within three to five years. The targets should represent a discontinuity in business unit performance, for example: Public company target could be doubling or more of the stock price An electronics company target could be growing at a rate double the expected growth rate.

Targeting balanced scorecard (cont.) Managers must identify stretch targets for their customer, internal-business-process, and learning and growth objectives. For example, customer stretch targets could come from meeting or exceeding customer expectations. Benchmarking is used to verify company targets and prevent the company from trailing in strategic measures

Alignment of strategic quality, response time, and reengineering initiatives to achieve objectives Balanced scorecard provides the front-end justification: focus and integration for continuous improvement, reengineering, and transformation programs. Unlike conventional reengineering programs, reengineering program should not only focus on cost savings, but also look at other measures as dramatic time reductions in order fulfillment, shorter time-to-make in product development, and enhanced employee capabilities.

Integration of strategy and budgeting process Balanced scorecard also allows company to integrate its strategy with its annual budgeting process. When a company sets its 3-5 year long strategic plan, it also forecasts annual milestones-meaning how far along they expect themselves to be in a year of the whole plan. This helps company achieve short-term milestones providing specific targets for assessing progress in the near term.

Enhance strategic feedback and learning Final management process- “embedding the Balanced Scorecard in a strategic learning framework- most important of the scorecard management process. Balanced scorecard allows managers to monitor, adjust, receive feedback, or even make fundamental changes with regards to its strategy. Near-term milestones allow managers to examine closely whether the business is achieving its targets, and managers use those to review past and learn about the future.

Three steps to enhance strategic feedback and learning Clarification of a shared vision –allows precise form of concepts senior executives can gain consensus on Communication and alignment-directs all individuals into actions attaining organizational objectives The planning, target setting, and strategic initiative process- defines specific, quantitative performance goals that could be used to compare desired goals and current level.

Change of management processes in today’s information age The top down command and control model ensures operational and management control system where strategic plan established by senior executives are carried out by employees. This process of establishing a vision and strategy, communication and linking the vision and strategy, and aligning actions and initiatives is a single-loop feedback, which does not involve questioning whether the plan is desirable or appropriate If the planned trajectory changes, it is treated as defects, and actions are taken place to bring the organization back onto the intended path This way is, although with the best intention, inappropriate for the strategies for information age organizations. Today’s information age organizations operate in more turbulent environments where managers need to receive feedback about more complicated strategies.

Quality Control In constantly shifting environments, new strategies capitalizing on opportunities or countering threats that were not anticipated is needed, and these ideas frequently come from managers farther down the organization Need double-loop learning. Need not only feedback about whether the plan is executed, but also if the plan in actuality is consistent and valid with the current situation. Balanced scorecard, based on cause-and –effect relationships that includes estimates of the response time and magnitudes of the linkages among the scorecard measures. With such linkages among scorecard measure, monitoring can take the form of hypothesis testing.

Summary Information age companies will succeed by investing in and managing their intellectual assets. Traditional financial accounting model does not motivate or measure the success in the short run. The balanced scorecard integrates measures derived from strategy, retaining past financial performance measure, and introducing the drivers of future financial process. Moreover, balanced scorecard is used as the central, organizing framework for a management processes.

Summary (cont.) Clarify and gain consensus about strategy Communicate strategy throughout the organization Align departmental and personal goals to the strategy Link strategic objectives to long-term targets and annual budgets Identify and align strategic initiatives Perform periodic and systematic strategic review Obtain feedback to learn about and improve strategy