1. The Balanced Scorecard and strategy maps BUS106 Lecture #2 Prepared by Anne Abraham University of Western Sydney

2. Connections to future topics Environmental Cost Management Financial Measures Quality Cost Reporting Performance Evaluation

3. Strategy and the Balanced Scorecard What is Strategy? A long term plan to achieve the organisation’s objectives What is your strategy? objectives and plan to achieve them How do you know if you are achieving it? measures, feedback

4. STRATEGY & PERFORMANCE EVALUATION Performance objectives motivate employees to carry out strategies and plans Well-aligned performance objectives for individual parts contribute toward the overall goals of the entity Communication Focus resources Manage interdependencies

5. Limitations of financial measures Financial measures may have the following limitations Incomplete Promote a short term view No guidance for investment

6. MEASURING ORGANISATIONAL PERFORMANCE Financial measures (Like ROI, RI, EVA) –Provide information measured in dollars or ratios –Use data obtained from the accounting system –Compare budget and actual results Non-financial measures provide performance information that cannot be measured in dollars

7. Multidimensional performance evaluation No single measure provides a complete picture of performance A combination of measures Is often used to help monitor and motivate performance Is usually more consistent with an entity’s long-term goals than financial methods alone

8. Prepared by Anne Abraham, University of Western Sydney8 MEASURING ORGANISATIONAL PERFORMANCE Strategy maps Articulate organisational strategy through strategic themes and strategic objectives within the four perspectives of the balanced scorecard Balanced scorecard Uses the strategic objectives developed in the strategy map to communicate performance metrics within each of the four perspectives of financial, customer, internal business process, and learning and growth Organisational strategy e.g., low cost, product differentiation, blue-ocean (organisational specifics may build on these generic strategies) Objective Plan Measure

9. 9 STRATEGY MAPS A strategy map provides a visual representation of organisational strategy The focus of the strategy map should be to: – link strategy and the balanced scorecard – convey key strategic themes – convey objectives in the four balanced scorecard perspectives

10. 10 STRATEGY MAPS continued Organisations adapt strategy maps to meet specific needs - not all strategy maps look the same! Strategic objectives will be developed around specific organisational perspectives

11. 11 THE BALANCED SCORECARD The balanced scorecard (BSC) incorporates both financial and non-financial performance measures Translates organisational visions and strategies into performance objectives and related measures that can be measured over time

12. 12 THE BALANCED SCORECARD continued Financial measures: provide information measured in dollars or ratios of dollars, and also compare budget to actual results – Commonly classified as lag indicators Non-financial measures: information that cannot be measured in dollars – Commonly classified as lead indicators

13. 13 THE BALANCED SCORECARD continued The approach has four perspectives: – Financial – Customer – Internal business process – Learning and growth Based on the strategy, managers identify linkages between perspectives

14. 14 Financial perspective and related measures The financial perspective: desired financial results given the entity’s vision Financial goals – Managers evaluate the effectiveness of their strategies and operating plans – Employees relate their activities to financial outcomes

15. 15 Financial perspective and related measures continued Common financial perspective measures include – Operating income – Return on investment – Residual income – Economic value-added – Cost per service provided – Variances from budget

16. 16 Customer perspective and related measures Analysis from a customer perspective is concerned with – Identifying desired customers – Developing strategies to get and keep them Analysis includes identifying targeted – Customers – Markets – Products

17. 17 Customer perspective and related measures continued financial results are generated by creating value for customers Usually evaluated using – Outcome measures such as market share and customer satisfaction – Performance measures such as customer retention and profitability, new customer acquisition and market share in a targeted market

18. 18 Internal business process perspective and related measures The Internal business process perspective is concerned with methods and practices used inside an entity to produce and deliver goods and services Goals of this analysis are to improve – Processes that will increase customer satisfaction – Efficiency of operations which contributes directly to financial results

19. 19 Post-sales service cycle Internal business process perspective and related measures continued Customer-oriented value chain analysis Deliver products and services Identify customer preferences Identify customer needs Design products and services Provide customer service Build products and services Satisfied customers Innovation cycleOperations cycle

20. 20 Learning and growth perspective and related measures The learning and growth perspective is concerned with – Achieving future success by discovering new and better strategies – Improving customer satisfaction – Improving internal business processes – Ensuring employees have sufficient knowledge and expertise – Checking that internal processes support existing strategies

21. 21 The balanced scorecard and the levers of control — using the balanced scorecard diagnostically or interactively Diagnostic use Focus is on achievement of pre-set targets – Measure performance around key performance metrics – Monitor performance outcomes against pre-set targets – Provide feedback to managers to focus on achieving target performance in the next period

22. 22 Interactive use Focus on reviewing strategy to deal with uncertainties such as an intense competitive environment – The Feedback process may result in a review of the intended strategy – Carefully selected measures provide feedback about uncertainties and early warning signals to indicate issues with the current strategic path The balanced scorecard and the levers of control — using the balanced scorecard diagnostically or interactively continued

23. 23 Belief systems, boundary systems and the balanced scorecard Belief systems Measures and targets communicate fundamental core values and beliefs Boundary systems Specify expected behaviour and minimum levels of acceptable performance

24. 24 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD Strengths 1. Communication and linkages – clarification and updating vision and strategy – communication and consensus – Links short term performance and long-term performance objectives to vision and strategies

25. 25 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD continued 2. Guidance for improvements – Enables periodic performance reviews of progress towards vision and strategies – Leads to improved financial performance – Helps managers use operational data for decision making

26. 26 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD continued 3. Motivation – Aligns unit and individual goals with organisational vision and strategies – Motivates employee effort – Reduces optimisation of subunits at the expense of the entity as a whole – Promotes action towards achieving strategies

27. 27 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD continued Weaknesses 1. Implementing is expensive and time consuming 2. Uncertainties – Appropriateness of vision and strategies – Accuracy of identified core competencies – Best set of performance objectives and measures – Reliability of scorecard data – Reasonableness of targets – Doubt about links among perspectives

28. 28 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD continued 3. Mistakes in implementation – Ambiguous or generally defined objectives – Information systems not integrated – Insufficient resources – Lack of senior management support – Focusing on inappropriate objectives 4. Biases – Manager selection of familiar or easily attainable objectives and measures – Resistance from units and individuals – Process viewed as a temporary fad

29. 29 STRENGTHS AND WEAKNESSES OF THE BALANCED SCORECARD continued 5. May be inappropriate for compensation 6. Vision may not adequately capture core values including approach towards external stakeholder and the environment

31. The strategic importance of sustainability As antecedant: social and environmental performance are determinants of financial performance As moderating variable: financial performance weighed against social and environment RISK As outcome: economic/ environmental/ social performance equally important, but independent Separate ScorecardSeparate PerspectiveIntegrated Measures

32. Direct Financial Implications Affects financial performance and position –Costs: Operating costs Insurance costs Fines and compliance costs –Revenues New income streams Reputation –Price premium –Negative impression Customers –Government and corporate customers requirements

33. Financial Performance Return on Equity (%) Revenue Growth (%) Net Profit Margin (%) Production Cost Reduction (%) Customer Perspective Customer retention (%) Price per Kg Customer Satisfaction Market Share (%) Internal Processes Quality (independent rating) Improvements Implemented Employee Productivity Capacity Utilisation (%) Learning and Growth Employee satisfaction (survey) Employee Suggestions Employee turnover (%) Employee training (Hrs) Environmental Toxicity of air emissions Toxicity of water emissions Energy efficiency Accidental release of untreated waste

34. Sustainability Balanced Scorecard Environmental Performance Toxicity of water emissions Percentage of materials used that are recycled input materials Energy efficiency Total water withdrawal Emissions of ozone-depleting substances by weight Description of activities, products or services on biodiversity Labour practices and Decent Work Total workforce by employment contract, region, gender Return to work and retention rates after parental leave, by gender Average hours of training per year by gender and employee category Human Rights % of investment agreements that include clauses incorporating human rights Total number of incidents of discriminations and corrective actions taken Operations and suppliers identified as having significant risk for incidents of child labour. Economic Performance Direct economic value generated and distributed Proportion of senior management hired from the local community Infrastructure investments and services provided for public benefit

35. Homework For the tutorial next week complete the performance evaluations for the Chemico Plants (NSW I and NSWII) Make a record of your evaluations so you can discuss them in the tutorial. Ch 14: 14.5, 14.6, 14.38