Prepared by: Rasha El Hagrassy

Creating Cause-and-Effect Linkages 1. Develop objectives and measures for each of the four perspectives.  The business process perspective.  The learning and growth perspective.  The customer perspective.  The financial perspective. 2. Create a description of your strategy from those, or completely new, objectives and measures.

The balanced scorecard is about translation of:

Conducting “Objectives and Measures Generation Sessions”

Tips for the meeting Before the meeting During the meeting After the meeting Distribute materials in advance Logistics Prepare the room Opening the meeting Capturing ideas Gathering flip charts & typing materials Documenting cause & effect relationships for review.

Refining Your Objectives Developing objectives.Hold a follow-up sessions.Voting by team on the objectives to be included BSc. Objectives review to ensure consistency with mission, values, vision & successful execution of strategy.

performance measures—the heart of the balanced scorecard Performance measures are the tools we use to determine whether we are meeting our objectives and moving toward the successful implementation of our strategy. Standards used to evaluate and communicate performance against expected results. 1.They function as a tool to drive desired action 2.Provide all employees with direction in how they contribute to the organization’s overall goals. 3.Supply management with a tool in determining overall progress toward strategic goals. The ability to define and agree upon measures as the biggest barrier to developing your performance measurement system. The distinction between lagging and leading measures is our starting point.

Lagging and Leading Measures of Performance Lag indicators: represent the consequences of actions previously taken Lead indicators: the measures that lead to—or drive—the results achieved in the lagging indicators. Examples: sales, market share considered lagging indicators. What drives each of these lagging indicators? Sales (lag indicator) may be driven by hours spent with customers (lead indicator). Market share (lag indicator) may be driven by brand awareness (lead indicator). BSc should contain a mix of leading and lagging indicators. 1. Lagging indicators without performance drivers fail to inform how results will be achieved. 2. Leading indicators may signal key improvements throughout the organization, but on their own they do not reveal whether these improvements are leading to improved customer and financial result.

LagLead Definition Measures focusing on results at the end of a time period, normally characterizing historical performance. Measures that “drive” or lead to the performance of lag measures, normally measuring intermediate processes and activities. Examples Market share Sales Employee satisfaction Hours spent with customers Proposals written Absenteeism Advantages Normally easy to identify and capture Predictive in nature, and allow the organization to make adjustments based on results Issues Historical in nature and do not reflect current activities; lack predictive power May prove difficult to identify and capture; often new measures with no history at the organization The balanced scorecard should contain a mix of lag & lead measures of performance

MEASURES FOR THE FINANCIAL PERSPECTIVE Scorecard practitioners consider financial measures the most important component of the Scorecard. o Cascading financial measures to lower levels. o All employees demonstrate how their day-to-day activities contribute to overall strategy & goals. o Ultimately influencing financial returns. Financial measures should be part of any Balanced Scorecard in: 1.Private enterprise. 2.Not-for-profit organization. 3.Public-sector organization. All measures selected to appear in your Balanced Scorecard should link together in a chain of cause- and-effect relationships that tell the story of your strategy. The measures in the financial perspective help to lay the groundwork for the selection of measures in each of the other three perspectives.

As we develop linked measures in the customer, internal process, and employee learning and growth perspectives, we must ensure that their inclusion will lead to improved financial results and the implementation of our strategy. We could focus all of our energy and capabilities on improving customer satisfaction, quality, on- time delivery, or any number of things, but without an indication of their effect on the organization’s financial returns, they alone are of limited value. Choosing Financial Measures Most organizations choose financial measures related to three areas: 1. Growth. 2. Profitability. 3. Value creation.

Commonly Used Financial Measures Commonly Used Financial Measures Total assets Total assets per employee Profits as a % of total assets Return on net assets Return on total assets Revenues/total assets Gross margin Net income Profit as a % of sales Profit per employee Revenue Revenue from new products Revenue per employee Return on equity (ROE) Return on capital employed (ROCE) Return on investment (ROI) Economic value added (EVA) Market value added (MVA) Value added per employee Compound growth rate Dividends Market value Share price Shareholder mix Shareholder loyalty Cash flow Total costs Credit rating Debt Debt to equity Times interest earned Days sales in receivables Accounts receivable turnover Days in payables Days in inventory Inventory turnover ratio