Balanced Scorecard......... Project

 

INDEX 1. Theory behind the Balanced Scorecard......................................... Scorecard................................................................ ............................5 .....5

1.1. Background of the Concept of Balanced Scorecard...............................................5 1.2. Balanced Scorecard as Complementary Tool for Management Accounting..........9 1.3. Defining Critical Success Factors and Measures.................................................11 Measures.................................................11 1.4.Balanced Scorecard as a Measurement Tool........................................................23 1.5. Balanced Scorecard as a Strategic Management System ...................................24 2. Constructing Constructing a Balanced Scorecard.................................... Scorecard........................................................... .....................................27 ..............27

2.1. Establishing Strategy by Building up a Balanced Scorecard ...............................30 2.1.1. Clarifying and Translating the Vision and Stra Strategy.................... tegy........................................... ...........................30 ....30 2.1.2. Communicating and Linking Strategic Objectives and Measures........................32 2.1.3. Planning, Setting Targets and Aligning Strategic Initiatives.................................34 2.1.4. Enhancing Strategic Feedback and Learning........................................................36 2.1.5. Conclusions and Recommendations – How Many Measures to Choose?............40 2.2. Testing the Balanced Scorecard ............................................................. ........................................................................... ..............41 41 2.2.1. Analysing Cause Outcomes Performance.............................................. Drivers ...................................................41 2.2.2. Analysing and and Effect....................................... Effect................ ............................................42 .....................42 2.3. Establishing Action Actio n Plan............................................. Plan.................................................................... ..........................................44 ...................44 2.3.1. Setting up Catalytic Mechanisms..........................................................................44 3. Implementing a Balanced Scorecard Scorecard as a Management System...........................46 System...........................46

4 Case Studies on Implementing a Balanced Scorecard..............................................50 4.3 Practical Aspects of Setting up Balanced Scorecard in a Service Company.............75 4.4 Using the Balanced Scorecard at Metro Bank...........................................................78 4.5 Using the Results of a Balanced Scorecard at Sears Company.................................81 5. Conclusions and Recommendations on Implementing a Balanced Scorecard........83 6. Summary.............................. Summary...................................................... ............................................... ............................................................ .......................................85 ..85 Bibliography............................ Bibliography..... .............................................. .............................................. .............................................. ........................................87 .................87

Executive summary

The overall objective of the report is to analyse the use of Balanced Scorecard as a   perf perform ormanc ancee measu measurem rement ent tool tool in the areas areas of genera generall manag managem ement ent and str strate ategic gic management. The Balanced Scorecard may be described as a strategy-driven measurement system that retains traditional financial financial measures, but adds also the perspectives of present and

 

  potential (future) value of a company, namely its customers, suppliers, employees,  processes, technology, and innovation. The purpose is to show that the Balanced Scorecard may be considered as one of the  best remedies in tackling with the questions concerning: •

helping to align key performance measures with overall organisation strategy at all levels of an organisation;

•

linking strategic vision and long-term objectives to short term tactics;

•

directing sophisticated sophisticated and different critical paths of success in the light of strategic management;

•

review of strategic vision in the light of day-to-day operations management.

The concept of the Balanced Scorecard is not yet very familiar in Indi. Therefore, we  paid much effort in describing the theory side of the Balanced S Scorecard corecard and the details of starting up a Balanced Scorecard Scorecard – based management. management. Those aspects constitute two first chapters of the thesis. In the last part, attention is given to day-to-day implementation of Balanced Scorecard usi sin ng

the

exam xample less

of four ca casse

stu tudi diees.

Fin inaall lly y,

som omee

co conc ncllusi usions ons

and

recommendations are drawn based on practical use of the Balanced Scorecard.

Introduction

Darwin had once remarked “survival of the fittest”. It was not a statement in the context of any business organization. The saying, however, holds very true in today’s business sc scena enario rio.. Every Every compan company y has reali realized zed th that at the ones ones wi with th the best best str strat ategi egies es,, best best operations, best people etc. would outperform those who do not have the superior things in place. All assets deserve equal attention. attention. The best organisations organisations will be the ones who would survive the cut-throat competition. The struggle for existence and growth, is indeed very severe for firms in this competitive competitive environment. The fate of organizations

2

 

are are changi changing ng very very fast. fast. Stron Strong g compet competito itors rs are enter entering ing into into indus industri tries es due to the liberalization, privatization and globalization which has formed the buzzword in the economic field. The The life tenure of any organization organization is determined by the strength of the   protective shield it has been able to build around itself which would not only help capitalise on the opportunities but also counter the threats. In this competitive environment, the field of management which is  becoming increasingly popular and relevant is Strategic Management. This is because this subject helps to bring a focus on those actions that should be taken by the management which would ensure the existence, survival and the long-term success of  any organization. The scope of application of this field, however, varies with the   business size. Strategic Management is Managing for the Future or Competing for  theFuturee as had been remarked theFutur remarked by the renowned renowned strategic management management experts,Hamel and Prah Prahala alad. d. As Pete Peterr Druc Drucker ker had warne warned, d, manag managem ement ent “ ha hass no choice choicebut but to anticipate the future, to attempt to mould it, and to balance short-range and long-range goals. The future will not just happen if one wishes hard enough. It requires decisionnow. It imposes risk-now. It requires action-now. It demands allocation of resourcesnow. It requires work-now.” Having understood these things which are applicable to the business in reality, the applicability of strategic management is getting wider – be it a multinational, domestic or even a national player player in the market. In any strategic management process, one of the most important element is the SWOT analysis which means analyzing the environment – both internal and external. The internal environment analysis highlights the areas of strength and weaknesses which the organization has and the external environment environm ent analysis throws light on the opportunities and the threats being offered offered by the various areas of the environment. The most important thing that can ensure the success of any organization is the development of appropriate strategies which would decide the direction the organization will take as it progresses.

Need for Balanced scorecard

We have seen that the there is a very significant need of balanced scorecard in this era of cut-throat competition, as what an organization requires is not just framing the right st strat rateg egies ies,, but also also manag managing ing the same. same. The The impac impactt of the right right str strate ategie giess wi will ll

3

 

automatically be reflected in the results. Moreover, any organization has to understand that it needs to give impetus not only towards the financial results but also towards satisfaction satisfact ion of the customers, development of state-of-the-art technologi technologies es and creation of an enviro environm nment ent of le learn arning ing and growt growth. h. The The Balan Balanced ced Score Scoreca card rd is such such an innovative tool which has considered not just the financial indices but also the nonfinancial indicators as equally critical in determining organizational performance.

In the words of the proponents of this tool “ the Balanced Scorecard retains traditional measures. But, financial measures tell the story of past events, an adequate story for industrial age companies for which investment in long-term capabilities and customer cust omer relatio relationshi nships ps were were not critica criticall for success. success. These financia financiall measure measuress are inadequa inad equate te however however,, for guiding guiding and evaluati evaluating ng the journey journey that informatio information n age companies must make to create future value through investment in customers, suppliers, employees, processes, technologies and innovation.” These words give the idea behind the development of this framework. Today’s businesses require a better understanding of their customers (both existing and potential ) and their needs, better streamlined  processes  process es and highly skilled people for ensuring future survival and sustainable sustainable growth. This shows that the focus of action has rightly considered the non-financial aspects apart from the financial indices. This tool is the end result of sustained efforts to find an ideal tool to measure performance and provide a link to strategy and action. The decisions about the future actions form the key to success of any enterprise in this fastchanging business environment.

4

 

1. Theor Theory y behind behind the the Balanc Balanced ed Scor Scoreca ecard rd 1.1. Background Background of the Concept Concept of Balanced Balanced Scorecard Scorecard

Throughout the history of contemporary management theories starting from the ones that were introduced by the intrusion of the mass production in the beginning of the 20 th century and until today, all the gurus of management have been trying to find uniform solutions on more efficient allocation and use of very limited resources available to  businesses. Those paths in seeking the Holy Grail of operational efficiency have brought up several new management theories. In the dawn of the century, Frederick W. Taylor established the very concepts of  resource allocation in his   Principles of Scientific Management . In 1920-ies it went around assembly line and motion studies as the first experience from systematic mass  production had given theorists quite a lot of materials to be analysed from the point of  view of using traditional blue-collar employees more efficiently. In the 1930-ies, the main topic was motivation of employees, as it turned out that human nature does not enable to work long hours on a repetitive tasks without without frustration level getting so high enough to diminish productivity. In the 1940-ies and 1950-ies, the first statistical and li linea nearr metho methods ds were were intro introduc duced ed in trying trying to measu measure re logis logistic ticss of th thee opera operatio tions ns management manageme nt and its implications to overall company success in financial-analys financial-analysis is side. In th thee begin beginnin ning g of 19801980-ies ies,, partly partly becaus becausee of introd introduc uctio tion n of elect electron ronic ic data data  p proc rocess essing ing equipm equipment ent and quick quick devel developm opment ent of co comp mpute uters, rs, the whole whole array array of  management manageme nt techniques were initiated. initiated. The particular particular reasons for the vast development of the new theories were catalysed mainly by ever growing competition generated through more systematic use of computers, and of course also by rapid growth of the importance of human capital. Today’s companies are in the midst of a revolutionary transformation. Industrial age competit comp etition ion is shifting shifting to informa information tion age competi competition tion.. During During the industri industrial al age, roughly from 1850 to about 1975, companies succeeded by how well they could capture the benefits from economies of scale and scope. Technology mattered, but, ultimately, success accrued to companies that could embed the new technology into physical physical assets that offered efficient, mass production of standard products. During the industrial age,

5

 

the financial control systems were developed in major companies to facilitate and monitor efficient allocations of financial and physical capital. A summary financial measure such as return-on-capital-employed (ROCE) could both direct a company’s internal capital to its most productive use and monitor the efficiency by which operating divisions used financial and physical capital to create value for shareholders. The emergence of the information era, however, in the last decades of the 20 th century, has made obsolete many of the fundamental assumptions assumptions of industrial industrial age competition. competition. The information age environment for both manufacturing and service organisations requires new capabilities for competitive success. The ability of a company to mobilise mobilise and exploit its intangible assets has become far more decisive than investing and managing tangible, physical assets. Industriall age companies Industria companies created a sharp distinction between two groups of employees. employees. The intellectual elite – managers and engineers – used their analytical skills to design  p prod roduc ucts ts and proce processe sses, s, se selec lectt an and d mana manage ge custom customers ers,, an and d su super pervis visee day-to day-to-d -day ay operations. The second group was composed of the people who actually produced the  products and delivered the services. This direct labour work force was a principal factor  of production, which performed its tasks under supervision of the first group. Today automation and productivity have increased the number of people performing analytic function func tions: s: engineer engineering, ing, marketi marketing, ng, managem management ent and administ administrati ration. on. Therefo Therefore, re, the   people are more viewed as problem solvers, not as variable costs. In other words, information age has brought about the concept of knowledge management. Thee sh Th shif iftt to su succ cces essf sful ul kn know owle ledg dgee mana manage geme ment nt ha hass in intr trod oduc uced ed a va vari riet ety y of  improvement initiatives: •

Just-in-time,

•

Total quality management,

•

Lean enterprise,

•

Business process re-engineering,

•

Time-based competition,

•

Customer-focused organisation,

6

 

•

Activity-based cost management,

•

Employee empowerment,

•

Living company, company,

and so on. Some of those programmes have meant in practice real breakthrough and improvement, others have proven to be in the best case just a short-time disturbance, but in the worst cases total failures resulting in disarray or even bankruptcy of a particular  company. The main reason for that lies in five main implementation problems: 1) current current performan performance ce measuremen measurementt systems systems are based based on the tradition traditional al financial financial accounting model, which does not enable to objectively analyse information-age companies; 2) if some non-fina non-financia nciall performan performance ce measurem measurement ent even is made, made, it is solely solely based on employees’ tactical performance, not on strategic performance; 3) majority majority of manageme management nt and employe employeee salary-base salary-based d motivation motivation schemes schemes are only short-run profit oriented, that does not enable to align towards long-run goals; 4) overal overalll compan company y strat strategy egy is not closely closely linked linked to or organ ganisa isati tiona onall and persona personall improvement programmes; and 5) strate strategy gy is not general generally ly linked linked to resour resource ce al alloc locati ation, on, which which result resultss in under under-financing some of the crucial parts of organisation’s development. As for today, superior financial performance and efficiency in production are just not enough to gain sufficient competitive advantage, but more and more attention needs to  be paid to intangible sides of business. For at least 15 years, the leading management journals have published articles about ho how w to bu buil ild d up a mech mechan anis ism m th that at woul would d en enab able le to co cont ntro roll al alll th thee as aspe pect ctss of a company’s performance. One of the most versatile tools for that purpose is Balanced Scorecard. The long-term success of any organization is determined by the capabilities and the competencies it has developed. Today’s businesses require a better understanding of  th their eir custom customers ers (both (both existi existing ng an and d potent potential ial ) and th their eir needs, needs, bette betterr st strea reaml mline ined d  processes  process es and highly skilled people for ensuring future survival and sustainable sustainable growth.

7

 

This shows that the focus of action has rightly considered the non-financial aspects apart from the financial indices.

This innovative tool “Balanced Scorecard” Scorecard” developed by Robert S Kaplan and David P   Nort Norton on in 1992 1992 is unique unique in two two ways ways compar compared ed to the tr tradi aditio tional nal perfor performa mance nce measurement tools. They are :-

(i)

It considers the financial indices as well the non-financial ones in determining the corporate performance level and

(i (ii) i)

It is is not not just just a perfor performa manc ncee meas measure ureme ment nt tool tool but is also also a perfo performa rmanc ncee management system

The aim of the Balanced Scorecard is to direct, help manage and change in support of  the longer-term strategy in order to manage performance. The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the ‘change’ element within the organization.

Balanced Scorecard uses a balanced measurement system that comprises of “the old” financial side and four “new” perspectives of: 1. Financi Financial al Perspe Perspectiv ctivee - How do do we look look at shareho shareholder lders? s? 2. Custome Customerr Perspect Perspective ive - How shoul should d we appear appear to our custom customers ers?? 3. Internal Internal Busine Business ss Processe Processess Perspecti Perspective ve - What must must we excel excel at? 4. Learn Learning ing and Growt Growth h Persp Perspect ective ive - Can Can we continu continuee to improv improvee and create create value?.

Hence, from the above lines we can say that this tool has considered not only the finan financia ciall re resul sults ts to be import importan antt but al also so those those factor factorss which which actual actually ly drive drive an organization towards future successes as mentioned earlier. The tool has given stress on the other areas which are required to ‘balance’ the financial perspective in order to get a

8

 

total view about the organiz organizational ational performance performance and improve the same. The framework  tries to bring a balance and linkage between the –  (a) Financial Financial and the the Non-Financial Non-Financial indicators, indicators, (b) Tangible and and the Intangible Intangible measures, measures, (c) Internal and the External aspects and (d) Leading and the Lagging indicators.

Thee next Th next sub-ch sub-chapt apter erss wi will ll descri describe be the main main fe featu atures res of the Bala Balance nced d Score Scorecar card d compared to traditional management systems. 1.2. Balanced Scorecard Scorecard as Complementary Complementary Tool Tool for Management Accounting Accounting

Historically, accounting has been the one and only language of business, the prime mechanism for communicating the results of business operations. Although financial measurement matters, it today alone does not give sufficient guiding and evaluating grounds for organisation’s success. To illustrate this topic, the following example may be analysed. Xerox was through the mid-1970s virtually a monopoly on plain paper copiers business. Xerox did not sell its machines – it leased them and earned revenues on every copy made on these machines. Sales and profits from leasing and supporting services like  paper and toner were large and growing. However, customers, apart from concern about high copying costs, for which no alternative was available, were disgruntled about the high breakdow breakdown n rates rates and malfunc malfunction tionss of these these expensiv expensivee machine machines. s. Rather Rather than redesign the machines so that they would break down less frequently, frequently, Xerox executives saw an opportunity to enhance their financial results even further. They permitted direct  purchase of their machines, and then established an extensive field service force as a separate demand for its services, this division soon was a substantial contributor to Xerox’ss profit growth. Thus all the financial Xerox’ financial indicators – sales and profit growth, return on investment – were signalling a highly successful strategy. But customers were still unhappy and surly. They did not want their supplier to excel at having a superb field service force. They wanted cost-efficient machines that did not

9

 

 break down. When competitors were able to offer comparable machines that did not  break down, Xerox’s dissatisfied and disloyal customers embraced them. This lead Xerox, one of the most successful U.S. U.S. companies throughout 1955 to 1975 to nearly a failure. Only under a new CEO did the company make a remarkable turnaround in the 1980s by supporting significant investments into quality improvement initiatives. Only financia financiall measures measures are inadequa inadequate te for guiding guiding and evaluati evaluating ng organis organisatio ation’ n’ss success. They are lagging indicators that capture the value created or destroyed by managers’ actions in the most recent accounting period. Several Sev eral analys analyses es have expresse expressed d their their concern concern with with an overemp overemphasi hasiss on financia financiall measures of today’s corporate performance. Some of the outcomes of the analyses might be recited here. Current system is less supportive to long-term investments,  because it favours forms of investment for which returns are most readily measurable; th this is le leads ads to under under-i -inve nvestm stment ent in in intan tangi gible ble assets assets such such as pr produ oduct ct and proces processs innovation, employee skill, customer satisfaction, whose short-term returns are more difficult to measure. The system also allows companies with very strong asset bases (such as in natural resources, resources, consumer goods companies with strong brand names etc) to operate inefficiently without fully exploiting their undervalued assets, as long as short-term earnings are satisfactory. In today’s business world financial results still remain important, but there is a growing recognition recogniti on that non-financial non-financial measures are better indicators of the ultimate health of an organisation. Steven M. Hronec has noted, that those non-financial measures should include cost, quality and time. He defines those measures at an organisational level, a  process level and an individual level. The second most important school of theory is the Balanced Scorecard, which adds to the financial set the following components as information age companies must create future fut ure value value throug through h in inves vestm tment ent in custom customer ers, s, suppl supplier iers, s, emplo employe yees, es, proces processe ses, s, technology, and innovation. The objectives and measures of Balanced Scorecard have to  be derived from an organisation’s vision and strategy. The objectives and measures view organis org anisatio ational nal performa performance nce from four perspect perspectives ives:: financia financial, l, custome customer, r, internal internal  b busi usines nesss proces process, s, and learn learning ing and gr growt owth. h. These These four four perspe perspecti ctives ves provi provide de the

10

 

framework framewor k for the Balanced Scorecard (see Figure - The Main Framework Framework of Balanced Scorecard). Scorecard ). From Balanced Scorecard, managers can measure how business units create value for  current and future customers and how they must enhance internal capabilities and the in inves vestm tment ent in people people,, syst systems ems,, and pr proce ocedur dures es necess necessary ary to improv improvee the future future  performance. Some recent theories have tried to merge the main features of both the Balanced Scor Scoreca ecard rd and variou variouss appli applicat cation ionss of fi finan nanci cial al ac accou counti nting ng that that ar aree ground grounded ed on activity-based-costing.

1.3.

Defining Critical Success Factors and Measures

Four perspectives 1. Financi Financial al Perspect Perspective ive - How How do we we look at share sharehold holders? ers?

From From all the measu measurem rement ent perspe perspecti ctives ves of a Balan Balanced ced Score Scorecar card, d, the finan financia ciall  perspective  perspect ive needs to be introduced the least as the main financial measurement measurement systems have been analysed during the past years very thoroughly. The particul particular ar financia financiall perform performance ance measure measuress for any Balance Balanced d Scoreca Scorecard rd should should de defi fine ne lo long ng-r -run un fina financ ncia iall ob obje ject ctiv ives es fo forr th thee or orga gani nisa sati tion on.. Whil Whilee most most of th thee organisations would emphasise profitability objectives, other possibilities may also be considered. Businesses with many products in the early stage of their life cycle can stress rapid growth objectives, objectives, and mature businesses may emphasise maximising cash flow.   Norton Norton and Kaplan Kaplan recomme recommend nd to simplify simplify the financia financiall perspect perspective ive measurem measurement ent selection pool to identify first the organisation’s stage, which would mainly be one of  the three: 1. “rapid “rapid growth” growth” organi organisati sations ons - are at the early stage stagess of their life life cycle. cycle. They They may have to make considerable investments to develop and enhance new products and

11

 

serv servic ices es,, to co cons nstr truc uctt and and ex expa pand nd pr prod oduc ucti tion on fa faci cili liti ties es,, to bu buil ild d op oper erat atin ing g capabilities, capabiliti es, to invest in system s ystems, s, infra-structure, infra-structure, and distribution distribution networks that will support relationships, and to nurture and develop customer relationships. 2. “sustain” organisations organisations – organisations organisations that that still attract investment investment and reinvestme reinvestment, nt,  but are required to earn excellent returns on their invested capital. These businesse businessess are expected to maintain their existing market share and perhaps grow it somewhat. Investme Inve stment nt projects projects

will will be more directed directed to relieving relieving bottlenecks bottlenecks,, expandin expanding g

capacity, and enhancing continuous improvement. 3. “harves “harvest” t” organisa organisation tionss - have reached reached a mature mature phase of their their life cycle, cycle, where where the company wants to harvest the investments made in the earlier to stages. These   businesses no longer warrant significant investment – only enough to maintain equipment and capabilities, not to expand or build new capabilities. Any investment  project will have to have very short and definite payback periods. The main goal is to maximise cash flow back to the organisation. The financial objectives for businesses in each of these three stages are quite different. Financial objectives in the growth stage will emphasise sales growth; sales in new markets and to new customers; sales from new products and services; maintaining adequate spending levels for product and process development, systems, employee capabili capa bilities ties;; and establis establishme hment nt of new marketi marketing, ng, sales, sales, and distribu distribution tion channels channels.. Fi Fina nanc ncia iall ob obje ject ctiv ives es in th thee su sust stai ain n stag stagee will will emph emphas asis isee tr trad adit itio iona nall fina financ ncia iall measurements, such as return on capital employed, operating income, and gross margin. Investment projects for businesses in the sustain category will be evaluated by standard, discounted cash flow, capital budgeting analyses. Some companies will employ newer  financial metrics, such as economic value added and shareholder value. These metrics all represen representt the classic classic financial financial objecti objective-ve---ear -earn n excellen excellentt returns returns on the capital capital  provided to the business. Thee fina Th financ ncia iall ob obje ject ctiv ives es for for th thee ha harv rves estt bu busi sine ness sses es will will st stre ress ss ca cash sh flow flow.. Any Any in inves vestm tment entss must must have have imme immedia diate te and certai certain n cash cash paybac paybacks. ks. The goal goal is not to maximise return on investment, which may encourage managers to seek additional investment investme nt funds based on future return projections. Virtually Virtually no spending will be done

12

 

for research or development or on expanding capabilities, because of the short time remaining in the economic life of business units in their "harvest" phase. Some of the objectives together with a measurement measures Objectives

Measures

Survive

Cash flow

Prosper

Increase in market share

Profitability

Return on equity

Cost leadership

Unit Cost

2. Customer Customer Persp Perspecti ective ve - How should should we we appear appear to our custome customers? rs? The customer perspective addresses the question of how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet the financia fina nciall objecti objectives. ves. General Generally ly,, customer customerss view the firm in terms terms of time, time, quality quality,,  performance, and cost. Most customer objectives fall into one of those four categories. In the customer customer perspective of the Balanced Scorecard, managers identify the customer  and market segments in which the business unit will compete and the measures of the  business unit's performance in these targeted segments. The customer perspective typically includes several generic measures of the successful outcomes outc omes from a well-f well-formu ormulat lated ed and impleme implemented nted strategy strategy.. The generic generic outcome outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability profitability,, and market and account share in targeted targeted segments. While these measures may appear to be generic across all types of organisations, they should be customised to the targeted customer groups from whom the business unit expects its greatest growth and profitability to be derived.

Market and Account Share

Market share, especially for targeted customer segments, reveals how well a company is  penetrating a desired market. For example, a company may temporarily be meeting

13

 

saless growth sale growth objectiv objectives es by retainin retaining g customer customerss in non-tar non-targete geted d segment segments, s, but not increasing its share in targeted segments. The measure of market share with targeted customerss would balance a pure financial signal (sales) to indicate whether an intended customer strategy is yielding expected results. When companies have targeted particular customers or market segments, they can also use a second market-share market-share type measure: measure: the account share of those customers' business (some refer to this as the share of the "customers' wallet"). The overall market share measure based on business with these companies could be affected by the total amount of business these companies are offering in a given period. That is, the share of business with these targeted customers could be decreasing decreasing because these customers are offering offering less business to all their suppliers. Companies can measure-customer by customer or  segment by segment-how much of the customers' and market segments' business they are receiving. Such a measure provides a strong focus to the company when trying to dominate its targeted customers' purchases of products or services in categories that it offers.

Customer Retention

Clearly, a desirable way for maintaining or increasing market share in targeted customer  segments is is to retain existing existing customers customers in those segments. segments. Research Research on the service  profit chain has demonstrated the importance of customer retention.6 Companies that can can readi readily ly id ident entify ify all of th their eir custom customers ers-fo -forr examp example le,, indust industria riall compan companies ies,, distributors and wholesalers, newspaper and magazine publishers, computer on-line service companies, banks, credit card companies, and long-distance telephone supplierscan readily measure customer retention from period to period. Beyond just retaining customers, many companies will wish to measure customer loyalty by the percentage growth of business with existing customers.

Customer Acquisition

Companies seeking to grow their business will generally have an objective to increase their customer base in targeted segments. The customer acquisition measure tracks, in

14

 

absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer acquisition could be measured by either the number of  new customers or the total sales to new customers in these segments. Companies such as th those ose in the credit credit and charg chargee ca card rd busine business ss,, magaz magazin inee subscr subscript iptio ions, ns, ce cellu llula lar  r  telephone service, cable television, television, and banking and other financial services solicit new customers through broad, often expensive, marketing efforts. These companies could examine the number of customer responses to solicitations and the conversion ratenumber of actual new customers divided by number of prospective inquiries. They could cou ld measu measure re solic solicita itatio tion n cost cost per new custom customer er ac acqui quired red,, an and d the ra ratio tio of new customer revenues per sales call or per dollar of solicitation expense.

Customer Satisfaction

Both customer retention and customer acquisition are driven from meeting customers' needs. Customer satisfaction measures provide feedback on how well the company is doing. The importance of customer satisfaction probably can not be over-emphasised. Recent research has indicated that just scoring adequately on customer satisfaction is not sufficient for achieving high degrees of loyalty, retention, and profitability. Only when customers rate their buying experience experience as completely completely or extremely satisfying satisfying can the company count on their repeat purchasing behaviour.

Customer Profitability

Succ Su cceed eeding ing in th thee core core custom customer er measu measures res of share, share, re reten tenti tion, on, acquis acquisit ition ion,, and satisfaction, however, does not guarantee that the company has profitable customers. Obviously, one way to have extremely satisfied customers (and angry competitors) is to sell products and services at very low prices. Since customer satisfaction and high marke ma rkett sh share are are thems themsel elves ves only only a means means to achiev achievin ing g higher higher finan financi cial al re retur turns, ns, companies will probably wish to measure not just the extent of business they do with customer cust omers, s, but the profitab profitabilit ility y of this business business,, particul particularly arly in targete targeted d customer  customer  segments. Activity Activity-based -based cost (ABC) systems permit companies companies to measure individual individual and aggregate customer profitability. Companies should want more than satisfied and happy customers; they should want profitable customers. A financial measure, such as

15

 

customer profitability, can help keep customer-focused organisations from becoming customer-obsessed. The customer customer profitab profitabili ility ty measure measure may reveal reveal that certain certain targete targeted d custome customers rs are unprofitable. This is particularly likely to occur for newly acquired customers, where the considerable sales effort to acquire a new customer has yet to be offset from the margins earned by selling products and services to the customer. In these cases, lifetime  profitability becomes the basis for deciding whether to retain or discourage currently unprofitable customers.  Newly acquired customers can still be valued, even if currently unprofitable, because of  their growth potential. But unprofitable customers who have been with the company for  many years will likely require explicit action to cope with their incurred losses.

Beyond the Core: Measuring Customer Value Propositions

Cust Cu stome omers rs'' value value propos proposit ition ionss re repre presen sentt the att attrib ribute utess that that supply supplying ing compan companies ies   provide provide,, through through their their products products and services services,, to create create loyalty loyalty and satisfac satisfaction tion in targeted customer segments. The value proposition is the key concept for understanding the drivers of the core measurements of satisfaction, acquisition, retention, and market and account share. For example, customers could value short lead times and on-time delivery. They could value a constant stream of innovative products and services. Or  they could value a supplier able to anticipate their needs and capable of developing new  products and approaches to satisfy those emerging needs. While value propositions vary across industries, and across different market segments within industries, Kaplan and Norton have observed a common set of attributes that organises the value propositions in all of the industries where we have constructed scorecards. These attributes are organised into three categories. •

Product/Service Attributes

•

Customer Relationship

•

Image and Reputation

16

 

Product and service attributes encompass the functionality of the product/service, its  price, and its quality. The image and reputation dimension enables a company to proactively define itself for its customers. The customer relationship dimension includes the delivery of the product/service product/service to the customer, customer, including the response and delivery time dimension, and how the customer feels about the experience of purchasing from the company co mpany.. In summary, the customer perspective enables business unit managers to articulate their  unique customer and market-based strategy that will deliver superior future financial returns. Some of the objectives together with a measurement measures Objectives N   ew products

Measures % of sales from newer products

Customer relationship

% of retained customers

Responsive supply

On time Delivery

3. Internal Business Processes Processes Perspective Perspective - What What must must we excel at? at? Internal business process objectives address the question of which processes are most critical for satisfying customers and shareholders. These These are the processes in which the firm must concentrate its efforts to excel. In the internal business process perspective, executives identify the critical internal  processes  process es in which the organisation organisation must excel. The critical internal business processes enable the business unit to deliver on the value propositions of customers in targeted market segments, and satisfy shareholder expectations of excellent financial returns. The measures should be focused on the internal processes that will have the greatest impact on customer satisfaction and achieving the organisation’s financial objectives. The internal business process perspective reveals two fundamental fundamental differences between traditi trad itional onal and the Balance Balanced d Scoreca Scorecard rd approach approaches es to perform performance ance measure measuremen ment. t. Traditional approaches attempt to monitor and improve existing business processes.

17

 

They may go beyond just financial measures of performance by incorporating quality and time-based metrics. But they still focus on improving existing processes. The Balanced Scorecard approach, however, will usually identify entirely new processes at which the organisation must excel to meet customer and financial objectives. The in inter terna nall busin busines esss proces processs object objective ivess highli highlight ght the proces processes ses most most critic critical al for the organisation’s strategy to succeed. The second departure of the Balanced Scorecard approach is to incorporate innovation   process processes es into the internal internal busines businesss process process perspect perspective. ive. Tr Tradit aditiona ionall performa performance nce measurement systems focus on the processes of delivering today's products and services to today's customers. They attempt to control and improve existing operations - the short wave of value creation. But the drivers of long-term financial succes successs may require the organisation to create entirely new products and services that will meet the emerging needs of current and future customers. The innovation process-the long-wave of value creations, for many companies, a more powerful creations, powerful driver of future financial performance than the short-term operating cycle. But managers do not have to choose between these two vital internal processes. The internal business process perspective of the Balanced Scorecard incorporates objectives and measures for both the long-wave innovation cycle as well as the short-wave operations cycle.

Some of the objectives together with a measurement measures

Objectives

Measures

Manufacturing excellence

Cycle time per unit

Safety incidence index

Number of accidents

Increase design productivity

Engineering efficiency

Reduce Product launch delays

Actual launch date vs. Plan

4. Learning and Growth Perspective - Can we continue to improve and create value?.

18

 

Learning and growth metrics address address the question of how the firm must learn, improve, and innovate in order to meet its objectives. Much of this perspective is employeecentered. Thee fourth Th fourth Bala Balance nced d Score Scorecar card d persp perspect ectiv ive, e, Learn Learning ing an and d growt growth, h, id ident entif ifies ies th thee in infra frastr struct ucture ure that that the or orga ganis nisati ation on must must build build to creat createe lo longng-ter term m gr growt owth h and improvement. The customer and internal business process perspectives identify the factors most critical for current and future success. Businesses are unlikely to be able to meet me et their their long-t long-term erm ta targ rgets ets for custom customers ers and inter internal nal proce process sses es us using ing today today's 's technologies technologi es and capabilities. capabilities. Also, intense global competition competition requires that companies cont contin inua uall lly y impr improv ovee th thei eirr ca capa pabi bili liti ties es fo forr de deli live veri ring ng va valu luee to cust custom omer erss an and d shareholders. Organisational learning and growth come from three principal sources: people, systems, and organisational procedures. The financial, customer, and internal business process objectives on the Balanced Scorecard will typically reveal large gaps between existing capabilities of people, systems, and procedures and what will be required to achieve targets for breakthrough performance. To close these gaps, businesses will have to invest in re-skilling employees, enhancing information technology and systems, and aligning organisational procedures and routines. These objectives are articulated in the learni lea rning ng and growt growth h persp perspect ectiv ivee of the Balan Balanced ced Score Scorecar card. d. As in th thee custom customer  er   perspective,  perspect ive, employee-based employee-based measures measures include a mixture of generic outcome measuresemploye empl oyeee satisfac satisfaction tion,, employe employeee retentio retention, n, employe employeee training training,, and employe employeee skillsskillsalong with specific drivers of these generic measures, such as detailed indexes of  specific spec ific skills skills required required for the new competi competitive tive environm environment. ent. Informa Information tion systems systems capabilities capabilit ies can be measured by real-time real-time availability of accurate customer and internal   process information to front-line employees. Organisational procedures can examine alignmen alig nmentt of employe employeee incentiv incentives es with with overall overall organis organisatio ational nal success success factors, factors, and measured rates of improvement in critical customer-based and internal processes.

Some of the objectives together with a measurement measures

19

 

 

Objectives

 

Measures

Technology leadership

Time to develop newer products

Manufacturing learning

Time to new process maturity

Product focus

% of products representing 80% of sales

The Four Perspectives: Cause and Effect Relationship The four perspectives as mentioned above are highly interlinked. There is a logical connection between between them. The explanation is as follows : If an organization organization focuses on the learning and the growth aspect, it is definitely going to lead to better business  processes. This in turn would be followed by increased customer value by producing  better products which ultimately gives rise to improved financial performance.  

Figure : The Cause and Effect relationships among the four perspectives

20

 

1.3 The Balanced Scorecard Model

Explanation:Follow Fol lowing ing steps are to be taken taken so as to utilize utilize the Balanced Balanced Scorecard Scorecard as a strategi strategicc management tool: 1. The major major object objectives ives are are to be set for each each of the the perspecti perspectives. ves.

2. Meas Measur ures es of pe perf rfor orma manc ncee ar aree re requ quir ired ed to be id iden enti tifi fied ed un unde derr ea each ch of th thee Objectives which would help the organization to realize the goals set under each of the perspectives. These would act as parameters to measure the progress towards the objectives.

3. The The next next importa important nt step is the settin setting g of specifi specificc target targetss ar aroun ound d ea each ch of the identified identifie d key areas which would act as a benchmark for performance appraisal. Hence, a performance measurement system is build around these critical factors. Any An y de devi viat atio ion n in at atta tain inin ing g th thee re resu sult ltss sh shou ould ld ra rais isee a re red d si sign gnal al to th thee management which would investigate the reasons for the deviation and rectify the same.

4. The appropriate appropriate strategies strategies and the action action plans plans that are are to be taken taken in the the various activities should be decided so that it is clear as to how the organization has decided to pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is often referred to as a blueprint of the company strategies.

21

 

Figure - The Main Framework of Balanced Scorecard

  To

succeed

financially,

how

should

we

appear

to

our

shareholders?Financial ObjectivesMeasuresTargetsInitiatives

Vision

  To achieve our vision, how should we appear to our

and

customers?

  To satisfy our shareholders and customers, what business processes

must

we

excel

at? Internal

ProcessObjectivesMeasuresTargetsInitiatives

Customer ObjectivesMeasuresTargetsInitiatives

  To achieve our vision, how will we sustain our ability to change

and

improve?Learning

and

GrowthObjectivesMeasuresTargetsInitiatives

 

1.4.Balanced Scorecard as a Measurement Tool

To illustrate the use of today’s main measurement tools, Kaplan and Norton bring the following example: Imagine entering the cockpit of a modern jet aeroplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot? Q: I am surprised to see you operating the plane with only a single instrument. What does it measure? A: Airspeed. I am really working on airspeed this flight. Q: That’ good. Airspeed Airspeed certainly seems important. But what about altitude? altitude? Would Would an altimeter be helpful? A: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I

Business

have to concentrate on proper airspeed. Q: But I notice you do not even have a fuel gauge. Wouldn’t that be useful? A: You are right; fuel is significant, but I cannot concentrate on doing too many things well at the same time. So on this flight I’m focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate concentrate on fuel consumption consumption in the next set of flights. We suspect that you would not board the plane after this discussion. Even if the pilot did an except exception ional al job on ai airsp rspeed eed,, yo you u would would be worri worried ed about about collid colliding ing wi with th ta tall ll mountains or running low on fuel. Clearly, such a conversation is a fantasy since no  pilot would dream of guiding a complex vehicle like a jet aeroplane through crowded air spaces with only a single instrument. Skilled pilots are able to process information from a large number of indicators to naviga nav igate te their their aircra aircraft. ft. Yet navig navigati ating ng today today's 's or organ ganis isati ations ons th throu rough gh compl complex ex competitive environments is at least as complicated as flying a jet. Why should we  believe that executives need anything less than a full battery of instrumentation for  guiding guid ing their their companie companies? s? Managers Managers,, like pilots, pilots, need instrume instrumentat ntation ion about about many

 

aspects of their environment and performance to monitor the journey toward excellent future outcomes.

The Balanced Scorecard provides managers with the thorough instrumentation they need to navigate to future competitive success. Today, organisations are competing in complex environments environments so that an accurate understanding of their goals and the methods for attaining those goals is vital. The Balanced Scorecard translates an organisation’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The Balanced Scorecard enables companies to track financial results while simultaneously monitoring  progress in building the capabilities and acquiring the intangible assets they need for  future growth. Finally, it has to be mentioned that the Balanced Scorecard is not just a measurement sy syst stem em,, bu butt com compr pris ises es a who hole le ne new w way of lo look okin ing g at bu busi sine ness ss.. Duri During ng th thee

implementation of a Balanced Scorecard, it requires so many improvement efforts throughout the organisation that it might be called a whole new management system.

1.5. Balanced Scorecard as a Strategic Management System

However, is there anything new about a call for a "balanced" set of measures? While virtually all organisations do indeed have financial and non-financial measures, many use th their eir non-fi non-finan nanci cial al measu measure ress for local local improv improveme ements nts,, at their their fr front ont-li -line ne and customer-facing operations. Senior managers use aggregate financial measures as if  these measures could summarise adequately the results of operations performed by their  lower and midlevel employees. These organisations are using their financial and nonfinancial performance measures only for tactical comments and control of short-term operations. The Balanced Scorecard emphasises that financial and non-financial measures must be  part of the information system for employees at all levels of the organisation. Front-line employees must understand the financial consequences of their decisions and actions; senior seni or executiv executives es must understand understand the drivers drivers of long-ter long-term m financia financiall success. success. The objectives and measures for the Balanced Scorecard are more than a somewhat ad hoc

24

 

collection of financial and non-financial performance measures; they are derived from a top-down process driven by the mission and strategy of the business unit. The Balanced Balanced Scorecard should translate a business unit's mission and strategy into tangible objectives and meas measure ures. s. The The measu measures res re repre presen sentt a balan balance ce betwe between en exter external nal measu measures res fo for  r  sharehol shar eholders ders and customer customers, s, and internal internal measure measuress of critical critical business business processe processes, s, innovation, and learning and growth. The measures are balanced between outcome measures-the results from past efforts-and the measures that drive future performance. Moreove Mor eover, r, the scorecar scorecard d is balanced balanced between between objecti objective, ve, easily easily quantif quantified ied outcome outcome measures and subjective, somewhat judgmental, performance drivers of the outcome measures. Thee Bala Th Balanc nced ed Scor Scorec ecar ard d is more more th than an a ne new w meas measur urem emen entt syst system em.. In Inno nova vati tive ve companies use the scorecard as the central, organising framework for their management   processes (see Figure Figure - Balanced Balanced Scorecard Scorecard as a Strateg Strategic ic Framewor Framework k for Action Action). ). Companies can develop an initial Balanced Scorecard with narrow objectives: to gain clarification, consensus, and focus on their strategy, and then to communicate that

st strat rategy egy th throu rougho ghout ut the or orga ganis nisati ation. on. The The real real po powe werr of the Balan Balance ced d Score Scorecar card, d, however, occurs when it is transformed from a measurement system to a management system. The four main steps in building up a strategy using the Balanced Scorecard are: 1. clarify clarifying ing and and transla translating ting visio vision n and strat strategy egy 2. communic communicati ating ng and linking linking strateg strategic ic objecti objectives ves and measure measuress 3. planning planning,, setting setting targets targets,, and aligning aligning strategic strategic initiat initiatives ives 4. enhancin enhancing g strate strategic gic feedback feedback and learning learning..

During the next chapter, the author is going to go through step-by-step in construction of a manageable Balanced Scorecard.

25

 

Figure - Balanced Scorecard as a Strategic Framework for Action

Clarifying and Translating the Vision and Strategy Clarifying the vision Gaining concensus Communication and Linking Communicating and educating Setting goals Linking rewards to performance measures

Balanced Scorecard

Planning and Target Setting Setting targets Aligning strategic initiatives Allocating resources Establishing milestones

Strategic feedback and learning Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning

 

2. Const Construc ructin ting g a Balance Balanced d Score Scorecar card d

One of the possible ways to go through all the steps of construction of successfully operating Balanced Scorecard might be shortly described as seen on . 1. First, members of the organisati organisation on would have have to identify identify a vision. Everybody Everybody in the organisation has to agree upon one single goal where the organisation has to be heading. 2. Then organisation organisation’’s management management has to recognise the the strategies strategies that will will tell how how to reach the vision. 3. Then the perspec perspective tivess have to be identifi identified. ed. In some business businesses, es, not necessar necessarily ily all four are relevant. In some areas, additional perspectives need to be measured. •

Financial perspective (how do we look to our shareholders?)

•

•

Customers perspective (how do we look to our customers?) Internal business process perspective (what processes do we have to be good at?)

•

Learning and growth perspective (how will we sustain our ability to improve and change?)

4. Then critic critical al success success factors factors for all the perspe perspectiv ctives es have to be found found out. Example: Example: for customers we have to deliver on time, financially we have to be cost-efficient, on the development side we have to produce X amount of new ideas every week etc. 5. After After the critical critical success success factors factors are in place, place, they have to be measured measured somehow somehow,, therefore all the measurement systems have to be figured out. 6. The next next step is to go through through appraisal appraisal of the establi established shed draft draft Balance Balanced d Scorecard Scorecard to iden identi tify fy whet whethe herr it woul would d star startt meas measur urin ing g th thee ri righ ghtt th thin ings gs an and d as assi sist st th thee managementt to steer the organisation managemen organisation to the right direction. It might be advisable to establish a test field to simulate simulate how the Balanced Scorecard Scorecard would start to respond to the actions taken.

 

7. Based Based on the prepar preparato atory ry work work the detail detailed ed action action plans plans should should be cr creat eated ed and  proper reporting systems have to be established to start operation of the Balanced Scorecard. 8. Final Finally ly,, it has to be remem remember bered ed that the Bala Balance nced d Score Scoreca card rd is not a “f “fini inishe shed d  product”. It has to be amended, improved improved and changed whenever there is a need for  the organisation to change something in its vision or strategic goals. The following chapter describes how to manage the construction of the Balanced Scorecard step-by-step. It has to be borne in mind, that the actual set-up of a particular particular Balanced Scorecard may vary from organisation to organisation because of very close linkages to particular  establishment’s main functions, vision and strategy. For public non-profit organisations, for instance, it would be necessary to replace financial part of the section of Balanced Scorecard with employee empowerment perspective. Some other organisations may need to add additional features to their Balanced Scorecard.

28

 

Figure - Creating a Balanced Scorecard

1. Identify Vision

2. Identify Strategies

Define vision for the organisation/ entity

Which strategies shall we follow? Which areas shall we focus on?

3. Identify Perspectives

In which perspectives do we have to be good at?

Success4. Identify Factors Critical of the Perspectives

What do we have to do well to manage in the framework of those perspectives?

5. Identify Measures

6. Evaluate

7. Create Action Plans

8. Follow up and Manage

What should we measure at each of those perspectives?

How do we evaluate our scorecard?

Which actions should we undertake to reach our targets?

How do we follow up, update and maintain our scorecard?

 

2.1. Establishing Strategy Strategy by Building Building up a Balanced Balanced Scorecard Scorecard

2.1.1.Clarifying and Translating the Vision and Strategy

As each organisation is unique and so follows its own path for building a Balanced Scorecard. Scorecar d. From the management management point of view it is also not particularly for foreseen eseen – it might mi ght be se sett up using using the stand standard ard projec projectt manag manageme ement nt te techn chniq iques ues (prepa (preparat ration ion-interviews-worksh interview s-workshops-implem ops-implementationentation-reviews reviews)) or be managed by a special unit that is co-ordinating the overall implementation. It is to be remembered that the vision of any organization should be understood by each and every employee of the organization. If it is understood by the top management only, then it is definite that the organization will fail to realize its goals. Hence, before starting with the strategic implementation process, the organizations needs to be clear  about the reason for its existence, where it wants to see itself after a certain number of 

30

 

ye years ars and proper properly ly decide decide its bu busin siness ess de defin finit ition ion.. The The manag managers ers should should bu build ild a consensus around the organisation’s vision and strategy. The strategies, in fact, emanate from the vision and mission of the company which means that a linkage is formed  between the strategies of the different different business units and the vision of the organization. The lo The lofty fty state stateme ments nts must must be tr trans anslat lated ed into into an integr integrate ated d set of objec objectiv tives es and meas me asure ures. s. The The fir first st task task in buildi building ng up th thee Bala Balance nced d Score Scorecar card d is cl clari arify fying ing and translating company’s vision and strategic goals.Thus, by using this tool, the overall strategic objectives for the company gets clarified which helps to achieve consensus across different business units on the overall strategic objectives for the company. The overall purpose of the strategic management is to find a single priority long-term go goal al whic which h woul would d se serv rvee as a ba basi siss in re reso sour urce ce al allo loca cati tion on an and d or orga gani nisa sati tion onal al development. developm ent. According According to the Balanced Scorecard methodology, methodology, the first item that the senior executives of a particular company should consider is the financial goal. Thee execu Th executiv tivee team team may decid decidee wheth whether er to head head for re reven venue uess or marke markett growt growth, h,  profitability or cash flow generation.

31

 

The ABC of the strategic management suggests that there should be a structure to strategy stra tegy developm development ent that managers managers should should follow follow.. One systemi systemised sed possibil possibility ity of  strategic management tools is the acronym MOST (Mission, Objectives, Strategy and Tactics actics). ). First First,, strate strategis gists ts shoul should d choose choose a missi mission on – a long-t long-ter erm m purpos purposee for th thee organisation. Then they should define short- and mid-term objectives that will move the organisation on a path towards the mission. A strategy can then be developed to achieve th thee obje objecti ctives ves using using shortshort-te term rm operat operatin ing g decis decision ions, s, in other other word wordss – tactic tactics, s, to implement the strategy. But the process of developing a winning strategy is much more messy, experimental, and iterative than those simple models foresee. For example, to build up a Balanced Scor Scoreca ecard’ rd’ss custom customer er-pe -pers rspec pecti tive, ve, a compan company’ y’ss top execut executiv ives es may ag agree ree upon upon  providing  providi ng superior service to its customers. As such, the vision is quite straightforward straightforward and easy to understand for everybody. In formulating the customer objective to the Balanced Scorecard, however, it might become clear, that each executive has a totally different understanding on A) what a superior service is, and B) who are the specific clients that it is going to be targeted at. The executives may thereafter decide, who is the most desirable customer segment to the company and which area of services it might be offered. After the organisation has established its financial and customer objectives, it then identifies the strategic objectives and measures for its internal business processes area. This must be done in close co-operation with middle-level or operations managers to ensure that the processes are in line with current possibilities of resource allocation. The final link to be envisaged is learning and growth perspective, which reveals the rationale for investments in training employees, in information information technology and system s ystemss that deal with research and development. 2.1.2.Communicating 2.1.2.Communicat ing and Linking Strategic Objectives and Measures Measures

Just communicating the vision and the strategies is not an end in itself. The strategic goals and the measures to be set in the different areas have to be decided upon. The long-term strategic goals have to be translated into both departmental and individual goals which should be aligned to each other in order to realize the long-term goals. In

32

 

fact, each and everyone at different levels in the organizational hierarchy needs to be educated about the action plans and reasons for accepting the same. The tool contains three levels of information : (i (i))

It des descr crib ibes es the the cor corpo pora rate te obj objec ecti tive ves, s, mea measu sure ress and and the the tar targe gets ts

(i (ii) i)

It he help lpss in in dec decid idin ing g the the bu busi sine ness ss un unit it ta targ rget etss and and

(iii) It helps in framing the departmental and the individual objectives which will help in attaining the objectives of the business unit directly which would lead to the attainment attainme nt of the corporate goals. The employees are given the freedom to decide their  measures, objectives and the targets attainment of which would move the organization in the right strategic direction. Then the compensation level is linked to the performance level which in reality involves a lot of subjectivity.

The task is to inform all levels of the organisation organisation about about the initiative of establishing establishing th thee Balan Balance ced d Score Scorecar card. d. The The commu communic nicat ation ion se serve rvess threethree-fol fold d goal. goal. It fo forw rward ardss information to all employees about the critical objectives that must be accomplished if  an organisation’s strategy is to succeed. Second, the employees need to analyse what changes need to be made in current management of the customer relations, internal  business processes, and knowledge management. For example, a strategic initiative to reduce product delivery might be translated into a Balanced Scorecard objective to reduce set-up times at a specific machine, or to a goal for rapid transfer of orders from one process to next, or fully entering into just-in-time concept. In this way, local improvem impr ovement ent efforts efforts become become aligned aligned with overall overall organis organisatio ational nal success success factors. factors. Thirdly, it encourages dialogue back from business unit to executive teams, not just about the sole implementation of the strategy but about the continuous future strategy development. At the fi final nal stage stage of th thee commu communic nicat ation ion and li linka nkage ge proces process, s, every everybod body y in th thee organisation should understand the business unit’s long-term goals, as well as the strategy for achieving these goals. Thee main Th main ai aim m of th thee co comm mmun unic icat atio ion n an and d li link nkin ing g in init itia iati tive ve is to le lett th thee midd middle le management define their internal business processes. For example: to satisfy the goal of 

33

 

increasing the market share by 20 per cent we need to bring x new products to the mark ma rket et wi with th a ta targ rget eted ed mark market etin ing g ca camp mpai aign gn.. The The se seco cond nd ai aim m is to le lett midd middle le management establish its learning and growth objectives. For example: to increase the market share, we have to train our sales people and increase productivity by establishing a Research and Development department. Throughout communicating and linking phase, it is worth paying attention also to the question on how to link salary bonus system or other motivation systems to the achievement of goals. It might be recommended that the Balanced Scorecard could be used as a single basis for bonus system. For example, sixty per cent of bonuses of  middle management might be based on financial measures (such as profit, return on investment) investme nt) and the rest of the bonuses might be based on customer satisfaction, satisfaction, partner  satisfaction or productivity or turnover of its subordinates. Individuals at business unit level should have formulated local actions that contribute to achieving overall company’s objectives. All the organisational efforts and initiatives should be aligned to the needed change  processes,  process es, as the ideal corporate strategy strategy should be set up bearing in mind the principle that every decision has to support the achievement of strategic objectives. All other  decisions are either wrong or irrelevant. 2.1.3.Planning, Setting Targets and Aligning Strategic Initiatives

The third management task to do is to drive organisational change. The executive executive team should establish targets for the Balanced Scorecard measures that will transform the company. The targets should represent a discontinuity in the performance of business units. In other words, the goals to be set have to be so-called BHAG-s (big, hairy, audacious goal). One might dream of making his brand more popular than Coke, another aspires to create the most lucrative Web site in cyberspace. To achieve such ambitions financial or customer or trademark objectives, managers must identify stretch ta targ rgets ets for th their eir cu custo stome merr, intern internal al-bu -busin siness ess-pr -proce ocess ss,, and learni learning ng and growt growth h ob obje ject ctiv ives es.. Thes Thesee ta targ rget etss ca can n co come me from from se seve vera rall so sour urce ces. s. It is poss possib ible le to us usee  benchmarking, brainstorming etc.

34

 

This step helps in the resource allocation process. One has to keep in mind that objectives form an important criteria in deciding the quantum of resources that are required to be allocated to the various departments, activities and the processes. No strategy can bring successful results to an organization if the allocation is not in line with what is required to meet the results. This allocation is dependent on the budgeted estimates which are decided on the basis of the said objectives. Hence, through this step the Balanced Scorecard tries to bring about an integration between strategic planning and the budgeting exercise. The short-term short-term milestones are also needed to be figured out which in totality brings about a linkage between strategic goals and the budgets. This  procedure helps in actualizing what has been set by the organization. Thus, this step  brings about a shift from the ‘thinking’ exercise to the ‘doing’ stage and the organization tries to achieve the long-term goals through the short-term actions. Once targets are established, managers can align their strategic quality, response time and re-engin re-engineeri eering ng initiati initiatives ves for achievi achieving ng the breakthr breakthrough ough objecti objectives. ves. Thus, the Balanced Scorecard provides the front-end justification, as well as focus and integration for continuous improvement, re-engineering, and transformation programmes. To distinct from simple slogans of business re-engineering re-engineering and other management fads, it has to be kept in mind that all those initiatives have to be analysed and identified whether they are critical to company’s strategic success. It is a way of continuous series of cause-and-effect work embodied with the Balanced Scorecard, those capabilities eventually have to become translated into the overall strategy. Company may have to tackle with a series of serious constraints in doing so.   Many organisations may encounter usual problems that they have established vision and strategic objectives but to fulfil them they are unable to find particular methods. By using Balanced Scorecard in close connection with budgetary process, it can be assured that all the tasks that are necessary to achieve objectives will also receive the necessary funding. The Balanced Scorecard also enables a fundamental change in letting the organisation to integrate its strategic planning with its annual budgeting process. At the time when a  business establishes 3-5 year stretch targets for the strategic measures, managers may also forecast milestones for each measure during the next fiscal year.

35

 

The second possibility is to monthly analyse all the operations and their accordance to fulfilment of strategies and responding funding. Overall, the initiative should achieve that: •

long-term outcomes are quantified;

•

mechanisms for fulfilment those outcomes are identified and possess the necessary financing and

•

short-term milestones milestones have been set for the financial and non-financial non-financial measures of  the Balanced Scorecard.

It might be advisable to analyse the possibilities possibilities of using various catalytic mechanisms to drive performance of the company. 2.1.4.Enhancing 2.1.4.Enhancin g Strategic Feedback and Learning

The first three steps as mentioned above help in the strategic implementation process. But, for knowing whether the organization organization is in a position to achieve the strategic goals and whether it is in the right track, the process of feedback and learning is essential. The strategic learning consists of acquiring knowledge about which way the organization organization is moving to, testing whether the premises considered before hold true even now and finally making adjustments wherever wherever required. The corrective measures are required so that the necessary rectifications are made which will help an organization pursue the correct path. Anoth An other er point point is that that an or orga ganiz nizati ation on gets gets to know know wheth whether er the causecause-and and-ef -effec fectt relationships among the different perspectives really hold true, to what extent they are st stron rongly gly linked linked and also also whethe whetherr posi positiv tivee re resul sults ts are being being obtain obtained. ed. In case, case, an organ organiza izatio tion n reali realizes zes the ex exist isten ence ce of a gap in th thee ca cause use ef effec fectt re relat latio ionsh nship ips, s, an immediate correction would be required so that a positive relationship can be build amon am ong g th thee va vari riou ouss fa fact ctor ors. s. Thus Thus,, th thee to tool ol with with it itss sp spec ecif ific icat atio ion n of th thee ca caus usal al relation rela tionship shipss between between performa performance nce drivers drivers and objecti objectives ves allows allows corporat corporatee and the  business unit objectives executives to use their periodic review sessions in order to evaluate the validity of the unit’s strategy and the quality of its execution. Also, this feedback and learning exercise may force an organization organization to change the measures set in

36

 

each of the perspectives perspectives and adopt those, which if attained would ensure the success of  the corporate and the business strategies.

The last management process embeds the Balanced Scorecard in a strategic learning framework. This process might be considered the most innovative and most important aspec aspectt of th thee entire entire Bala Balance nced d Score Scorecar card d manag managem ement ent proces process. s. This This provi provides des th thee capability for organisational learning at all levels. Managers in organisations today do not have a procedure to receive feedback about their strategy and to test the hypotheses on which the strategy is based. The Balanced Scorecard enables them to monitor and adjust the implementation of their strategy, and, if necessary, to make fundamental changes in the strategy itself. One of the main distinctive qualities of the Balanced Scorecard is to give constant response about achievement achievement of strategic and short-term objectives. objectives. Some ten years ago, it was customary to do strategic decisions about once in three months. As today’s  business environment is so rapidly changing, it is necessary to take strategic decisions in fact, every day to safeguard the flexibility to changes in the market. First, it makes possible to rephrase so-called shared vision, where the opinions of all the le level velss of the or orga ganis nisati ation on could could be taken taken accoun accountt in defini defining ng str strat ategi egicc goals goals an and d methods on achieving those. Second, it gives continuous strategic response to the managing team. By foreseeing short-term milestones, it might be necessary to amend long-term strategy’s timeline and contents, as the latter may be either too optimistic or too pessimistic. Third, it speeds up the process of finding the cause-and-effect relationships between different Balanced Scorecard components. For example: working morale may have a very ver y str strong ong impac impactt on cli client ent sa satis tisfac facti tion, on, which which co could uld be unkno unknown wn for the senior  senior  management. manageme nt. This in turn may lead to discovery of new cause-and-effect cause-and-effect relationships. relationships. For example: between client satisfaction rate and the speediness speediness of submitting submitting invoices. Finding all kinds of correlations definitely helps to clarify and improve the content of  strategic goals and tactical steps. To be more specific, the goal of the process is to establish an ongoing and continuous impro im provem vement ent cy cycle cle,, whic which h starts starts wi with th th thee fi first rst proces processs in the Figure Figure

- Balance Balanced d

37

 

Scorecard as a Strategic Framework for Action. Action . The first step is the clarification of a shared vision that the entire organisation wants to achieve. The use of measurement as a language helps translate complex and frequently nebulous concepts concepts into a more precise form for m that that can gain gain consen consensus sus among among se senio niorr ex execu ecuti tives ves.. The The commu communic nicati ation on an and d alignment process, the second process in the Figure 2, mobilises all individuals into actions directed at attaining organisational objectives. The emphasis on cause and effect in constructing a scorecard scorecard introduces introduces dynamic systems thinking. It enables individuals in various parts of an organisation to understand how the pieces fit together, how their  role influences others and, eventually, the entire organisation. The planning, target setting, and strategic initiative process – the third process in the Figure 2 – defines specific, quantitative performance goals for the organisation across a balanced set of  outcomes and performance drivers. A comparison of the desired performance goals with current levels establishes the performance gap that strategic initiatives can be designed to close. Thus the Balanced Scorecard not only measures, but also even fosters change. The first three critical management management processes are vital for implementing implementing a strategy, strategy, but they alone would not be adequate in the real world. Thus Th us th thee learni learning ng and growth growth initia initiativ tivee ha hass to be carrie carried d out in order order to en ensur suree continuo cont inuous us improvem improvement. ent. That kind of continuo continuous us improvem improvement ent may remind remind also Deming’s so-called Plan-Do-Check-Act cycle. Please look at Figure – Possible Steps to Go Around the Balanced Scorecard for more detailed description.

38

 

Figure – Possible Steps to Go Around the Balanced Scor Scorecard ecard

1 5 9

Clarifying and Translating the Vision and Strategy Clarifying the vision Gaining concensus

8 4

Communication and Linking Communicating and educating Setting goals Linking rewards to performance measures

10 Balanced Scorecard

Strategic feedback and learning Articulating the shared vision Supplying strategic feedback Facilitating strategy review and learning

2 6

Planning and Target Setting Setting targets Aligning strategic initiatives Allocating resources Establishing milestones

7 3

 

2.1.5.Conclusions and Recommendations – How Many Measures to Choose?

After the measures have been set for all the perspectives, the organisat organisation ion may face the  problem of having either too little or too many items to measure. To illustrate this  problem, the author would like to cite Norton and Kaplan. Many aspects of our bodily functions must perform within narrow operating parameters if we are to survive. If our body temperature departs from a normal 1-2deg window (away from 37degrees Celsius) or if our blood pressure drops too low or escalates too high, we have a serious problem for our survival. In such circumstances, all our energies (and those of skilled medical professionals) are mobilised to restore these parameters  back to their normal levels. But we don't devote enormous energy to optimising our    body temperature and blood pressure. Being able to control our body temperature to within 0.01deg of the optimum will not be one of the strategic success factors that will determine whether we become a chief executive of a company, a senior partner in an international consulting firm, or a tenured full professor at a major university. Other 

factors are much more decisive in determining whether we achieve our unique personal and profess professiona ionall objectiv objectives. es. Are body temperat temperature ure and blood blood pressure pressure importan important? t? Absolutely. Should these measurements fall outside certain control limits, we have a majo ma jorr proble problem m that that we must must att attend end to an and d so solve lve immedi immediate ately ly.. But But whil whilee these these measurements are necessary, they are not sufficient for the achievement of our long-run goals. Similarly Simila rly,, corporations corporations should have hundreds, perhaps thousands, thousands, of measures that they can monitor to ensure that they are functioning as expected and that will signal when correctivee action must be taken. But these are not the drivers of businesses' competitive correctiv succes suc cess. s. Such Such measu measures res ca captu pture re th thee ne neces cessar sary y "hygi "hygiene ene factor factors" s" th that at en enabl ablee the compa com pany ny to operat operate. e. Thes Thesee meas measure uress should should be monit monitore ored d diagno diagnost stica ically lly wi with th deviations from expectations noted rapidly; in effect, management by exception. The outcome and performance driver measures on the Balanced Scorecard should be the subje sub jects cts of intens intensive ive and extens extensive ive in inter teract action ionss among among senior senior and middl middle-l e-leve evell managers as they evaluate strategies based on new information about competitors, customers, customer s, markets, technologies, and suppliers. Unlike the strategic measures selected for inclusion on the Balanced Scorecard, diagnostic measures are not the basis for 

 

competitive breakthroughs. As one executive remarked, after he had implemented his first Balanced Scorecard: "Our division had always measured hundreds of operating variables. In building a Balanced Scorecard, we chose 12 measures as the key to implementing our strategy. Of  these 12 measures, seven were entirely new measurements for the division." Choosing the right measures and right number of measures is definitely one of the most crucial parts in building up a Balanced Scorecard. Usually the set of 15-25 measures is identified identifie d as optimal, as for a single person in an organisation organisation 6-8 measures to follow is the maximum ceiling. In the case that the organisation uses an IT system to follow the develo dev elopm pment entss accord according ing to the Balan Balanced ced Score Scorecar card, d, the number number may also also ri rise se accordingly.. But it is impossible to give an optimum, for this is also up to the specifics accordingly of a particular establishment. 2.2. Testing the Balanced Balanced Scorecard Scorecard

2.2.1.Analysing Outcomes and Performance Drivers

All Balanced Scorecards use certain generic measures. These generic, or core outcome, measures reflect the common goals of many strategies, as well as similar structures across industries and companies. The generic measures include profitability, market share, customer satisfaction, customer retention, and employee skills. The drivers of    performance are the ones that tend to be unique for a particular business unit. The  performance  perform ance drivers reflect the uniqueness of the business unit's strategy: the drivers of    profitability, the market segments in which the unit chooses to compete, the value  propositions delivered to customers in the targeted market segments, and the particular  internal processes and learning and growth capabilities that enable the financial and customer objectives to be achieved. A good good Bala Balanc nced ed Scor Scorec ecar ard d sh shou ould ld ha have ve a mix mix of core core ou outc tcom omee meas measur ures es and and   per perfo form rman ance ce dr driv iver ers. s. Outc Outcom omee meas measur ures es with withou outt pe perf rfor orma manc ncee dr driv iver erss do no nott communicate how the outcomes are to be achieved. They also do not provide an early indication about whether the strategy is being implemented successfully.

41

 

Conversely Converse ly,, performance drivers (such as cycle times and part-per million defect rates) wi with thout out outcom outcomee measu measures res may enable enable th thee bu busin sines esss unit unit to achiev achievee sh short ort-te -term rm operationall improvements, but will fail to reveal whether the operational operationa operational improvements have been translated into expanded business with existing and new customers-and, eventually, into enhanced financial performance. A good Balanced Scorecard should have an appropriate mix of core outcome measures and the performance drivers of these outcomes. 2.2.2.Analysing Cause and Effect

A strategy is a set of hypotheses about cause and effect. Cause and effect relationships can be expressed by a sequence of if-then statements. For example, the organisation can establish a link between improved improved sales training of employees to higher profits through the following sequence of hypotheses. If organisation increases employee training about  products, then they will become more knowledgeable about the full range of products they can sell. If employees are more knowledgeable about products, then their sales

effecti eff ectivene veness ss will improve. improve. If their their sales sales effecti effectivene veness ss improves improves,, then the average average margins of the products they sell will increase. A properly constructed Scorecard should tell the story of the business unit's strategy. The measurement system should make the relationships relationships (hypotheses) among objectives (and measures) in the various perspectives explicit so that they can be managed and validated. The chain of cause and effect should pervade all four perspectives of a Balanced Scoreca Sco recard. rd. For example example,, return return on capital capital employ employed ed (ROCE) (ROCE) may be an outcome outcome measure in the financial perspective. The driver of this financial measure could be repeat and expanded sales from existing customers, the result of a high degree of loyalty among existing customers. So, customer loyalty gets put on the Scorecard (in the Customer perspective) because it is expected to have a strong influence on ROCE. How will the organisation achieve customer loyalty? Analysis of customer preferences may reveal that on-time delivery (OTD) of orders is highly valued by customers. Thus, improved OTD is expected to lead to higher customer loyalty which, in turn, is expected to lead lead to hi highe gherr fi finan nanci cial al perfor performa mance nce.. So both both cu custo stome merr loyalt loyalty y and OTD OTD ar aree incorporated into the customer perspective of the Scorecard.

42

 

The process continues by asking what internal processes must the company excel at to achieve exceptional on-time-delivery. on-time-delivery. To achieve improved OTD, the business may need to achieve short cycle times in operating processes and high-quality internal   processes, both factors that could be Scorecard measures in the internal perspective. And how do organisations improve the quality and reduce the cycle times of their  internal processes? By training and improving the skills of their operating employees, an objective that would be a candidate for the learning and growth perspective. In a very similar vein, recent work in the service profit chain has emphasised the causal relationships relations hips among employee employee satisfaction, satisfaction, customer satisfaction, customer loyalty, loyalty, market share, and, eventually, financial performance. Steps included in the Phase of Testing the Results of BSC Implementation

Testing phase of BSC implementation holds its unique position in the overall BSC concept. Again as applicable for other processes, it should too be instigated with a

focu focuse sed d ap appr proa oach ch to even eventu tual ally ly co comp mple lete te it su succ cces essf sful ully ly.. The The Tes esti ting ng ph phas asee encompasses of a 3-step process to be followed by the businesses as mentioned below as mentioned below: 

Preparations prior to initiating the testing phase. The hypotheses underlying the BSC havee to be explo hav explored red to the maxim maximum um ex exten tentt possib possible. le. Bette Betterr formu formula latio tion n and implementation of strategy is achieved by proceeding with this step.



Determining Determi ning the results of parameters parameters of Balanced Balanced Scorecard. This step of the result testing phase of BSC implementation aimed at calculating the actual results of the company and comparing it with the values of parameters. Divergence in the results are found out which finally enables the company to know what its current position is and where it wants to be in the future. Devising the ways to correct the performance of the BSC is also done in this step.



Updating the core elements of Balanced Scorecard. The core elements of BSC comprises of the objectives, objectives, strategies, measures and targets. Time Time to time update is what is invariably required for efficient usage of the balanced scorecard. Changes in the business environment may call for updating the core elements to help the

43

 

company in staying focus towards the achievement of end goals. Updating is also required when the company requires improving the understanding of its employees regarding the BSC concept.

2.3. Establish Establishing ing Action Action Plan 2.3.1.Setting up Catalytic Mechanisms

After the process of initial setting up the Balanced Scorecard, Scorecard, it is advisable to establish establish various catalytic mechanisms to drive organisation’s performance towards achieving the strategic goals. One of the possible examples to be analysed is 99-year-old 99-year-old Californian based company Granite Rock, that sells crushed gravel, concrete, sand, and asphalt. Twelve years ago, when wh en brothe brothers rs Bruce Bruce and Steve Steve Woolper oolpertt become become co-pre co-presid sident ents, s, they they gave gave their  their 

company a goal to provide total customer satisfaction and achieve a reputation for  service that met or exceeded that of Nordstrom, the upscale department store that is world famous for delighting its customers. They instituted a radical new policy called “short pay.” The bottom of every Granite Rock invoice reads, “If you are not satisfied for any reason, do not pay us for it. Simply scratch out the line item, write a brief note about the problem, and return a copy of this invoice along with your check for the balance.” To put the radical nature of short pay in  perspective, imagine paying for airline tickets after the flight and having the power to short pay depending on your travel experience. In the years since it was instituted, instituted, short pay has had a profound and positive impact on Granite Rock. It serves as a warning system, providing hard-to-ignore feedback about the quality of service and products. It impels managers to relentlessly track down the root causes of problems in order to prevent repeated short payments. It also signals to employees employ ees and customers customers alike that Granite Rock is serious about customer satisfaction in a way that goes far beyond slogans. More Mo reov over er,, it ha hass ha had d su succ cces ess, s, as ha hass be been en wide widely ly re repo port rted ed.. The The co comp mpan any y ha hass consistently gained market share in a commodity business. It has won the prestigious

44

 

Malc Ma lcol olm m Bald Baldri rige ge Nati Nation onal al Qual Qualit ity y Award ward in 19 1992 92.. In addi additi tion on,, it itss fina financ ncia iall  performance has significantly improved from razor-thin margins to ratios above 10 per  cent. The above however was just a single good example on how it is worthwhile to sometimes consider unorthodox ideas to better satisfy the needs of the customers.

Malcolm Baldrige

Leadership Human Resource Capital

Balanced Scorecard

Learning

&

Growth

Learning

&

Growth

Business Results

Measurements

and

Process Management

Internal

Strategic Planning

Strategy Map

Customer Focus Strategic Planning

Stak St akeh ehol olde der r / Cust Custom omer er

Process

Perspective

45

 

3. Implementi Implementing ng a Balanced Balanced Score Scorecard card as as a Manageme Management nt System System

Step 1. Examine company before Balanced Scorecard Implementation

1. The SWOT Analysis.

Objec tives .   SWOT Analysis. Objectives •

Learning. SWOT analysis offers and opportunity to observe the operations of 

the organization in the light of internal and external factors, both favorable and unfavorable. This eases the process of making out what pays and what does not.

46

 

•

Planning. When one gets to know the problematic areas of the step taken, back-

up plans plans ca can n be arrang arranged ed before beforehan hand. d. This This would would defini definitel tely y decrea decrease se the  possible hindrances of the path. •

measures, one can also put Reaping Benefits. In addition to having contingency measures, in place systems to extract maximum from the opportunity that lies ahead.

•

Integrating external and internal factors . Analyzing the picture from both

  perspectives, one can align pieces so as to be able to convert challenges to opportunities to make the most of strengths.

It has to be mentioned that it is fairly simple to create just a scorecard, but to create a manageable Balanced Scorecard is a completely different thing. Some examples of the failure to introduce the Balanced Scorecard have been linked to the fact that the executives have viewed the Balanced Scorecard as simply a measurement system, not as

a new new way to manag managee the busine business. ss. Measur Measurem ement ent as such such is indeed indeed a power powerful ful motivational and evaluation tool, but the measurement framework in the Balanced Scorecard should be deployed to develop a new management system. Using the Balanced Scorecard as a management system enables it to overcome the deficiency of most of the measurement systems – it enables to implement and receive feedback about organisation’s strategy. A test of whether a Balanced Scorecard Scorecard truly communicates both the outcomes and the  performance drivers of a business unit's strategy is its sensitivity and transparency. One division president reported reported to his parent company's president when he turned in his first Balanced Scorecard: "In the past, if you had lost my strategic planning document on an airplane and a competitor found it, I would have been angry but I would have gotten over it. In reality, it wouldn't have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but, again, it wouldn't have been that big a deal. This Balanced Scorecard, however, communicates my strategy so well, that a competitor seeing this would be able to block the strategy and cause it to become ineffective."

47

 

3.1 Advantages of Using The Balanced Scorecard Scorecard

This tool is being used by several organizations throughout the world because of certain advantages this scorecard has been able to deliver which are cited below :

1. It transl translates ates vision vision and and strategy strategy into actio action. n. 2. It defines defines the the strategic strategic linkages linkages to integrate integrate performan performance ce across across organizatio organizations. ns. 3. It commun communicat icates es the object objectives ives and and measures measures to a busine business ss unit. unit. 4. It aligns aligns the strategic initiatives initiatives in order to to attain attain the long-term goals. 5. It aligns aligns everyone everyone within an organization organization so that all employee employeess understand understand how they support the strategy. 6. It provide providess a basis basis for compen compensati sation on for perfo performan rmance. ce. 7. The scorecard scorecard provides provides a feedback to the senior senior management management if the strategy is

working.

3.2 Potential Potential Pitfalls Pitfalls

It is said that 50% of the Fortune 1000 companies have adopted the balance scorecard methodology into their system. The balance scorecard technique helps in identifying the areas and products that are financially viable and successful. This helps the management in deciding their long term strategy with the various customers

Introducing the system without having any objective in mind is a major cause for the failure in reaping the advantages of this system. The objectives that are to be achieved must be well defined and communicated to all the parties involved in the attainment of  the same. The attainment of the strategy is possible by having a well drafted strategy map which contains a set of objectives that must be arrived at to attain the overall objectiv obje ctives es of the company company.. A badly badly designed designed strategy strategy map results results in a confusin confusing g scorecard

48

 

As the business world is highly volatile the strategy must incorporate the changes in the fast moving world. The company must be capable of taking the advantage of the opportunities that open up before them. This calls for the changes in the existing system. The major step to welcome the change must be taken by the top management. The scorecard technique if is to be successful requires the full support and the commitment of all levels of the management hierarchy. But in most cases the top management delegates the task to other members leading to the failure in the implementation. The cost and time taken for the deployment deployment of the balanced scorecard is generally high. It is said that the total amount of time for the initialisation of the first step takes about two to three months and the complete deployment will take about 26 months to start functioning. As the employees have to be educated on the changes in the system and must be made efficient efficient to meet the challenges. The system calls for continuous training which takes up a great deal of cost and money. money. The failure to have an on-going training

facility to make the employees adept to exploit the opportunities opportunities as and when necessary makes it ineffective. However, if successfully implemented, the scorecard can create a higher return of income and a lower amount of waste. The successful implementation of the scorecard depends on the knowledge of the employees about the advantages of having it installed. The implementation is possible only with the support for the system from all the employees involved in the actual functioning of the business. To be useful the scorecard must incorporate all the strategies of all the divisions of the   business and it must not be biased to any particular division. In most cases the involvement from all active divisions is absent, thereby making it ineffective. The scorecard requires the company to incorporate all the changes in the outside world which have a direct impact on the company functions. This makes it difficult to conform to the existing planning and budgets allocated.

The implementation of the balanced scorecard is a challenging work for which the support of all the employees is vital to make it productive.

49

 

The following are potential pitfalls that should be avoided when implementing the Balanced Scorecard:

•

Lack of a well-defined strategy: The Balanced Scorecard relies on a welldefin defined ed strat strategy egy and an under understa standi nding ng of the linka linkages ges betwe between en str strat ategi egicc objectives and the metrics. Without this foundation, the implementation of the Balanced Scorecard is unlikely to be successful.

•

Using only lagging measures: Many managers believe that they will reap the   benefits of the Balanced Scorecard by using a wide range of non-financial measures.. However, measures However, care should be taken to identify not only lagging measures that describe past performance, but also leading  measures that can be used to  plan for future performance.

•

Use of generic metrics: It usually is not sufficient simply to adopt the metrics used by other successful firms. Each firm should put forth the effort to identify

the measures that are appropriate for its own strategy and competitive position.

4

Case Case Studie Studiess on Imple Implemen mentin ting g a Balanc Balanced ed Scor Scorec ecard ard

4.1 BUILDING AND IMPLEMENTING A BALANCED SCORECARD CASE STUDY :STUDY :- UNUM CORPORATION

Summary

Disability and special risk insurer UNUM Corporation has used a balanced scorecard to drive the company towards its strategic vision. Crucially, the five-year scorecard was devised to meet specific performance targets to the year 1998. A near-obsessive focus on internal internal communi communicati cations ons and an innovati innovative ve compens compensatio ation n scheme scheme have proved proved intrinsic to the company’s success.

50

 

Introduction

Headquartered in Portland, Maine, USA, UNUM Corporation provides disabi dis abilit lity y and spe specia ciall ris risk k ins insura urance nce so solut lution ions s to in indiv dividu idual als s and busi bu sine ness sses es.. UN UNUM UM (w (whi hich ch me mean ans s ‘o ‘one ne’’ in La Lati tin) n) ha has s ab abou outt 72 7200 00 employees and operations in the US, Canada, the UK, the Pacific Rim, Europe, Bermuda and Latin America. Reporting total revenues of $4,076,700 in 1997 and net income of $37 $370.3 0.3 mi milli llion, on, the com compan pany’s y’s sub subsi sidia diarie ries s inc includ lude e UN UNUM UM Li Life fe Insurance Company of America, First UNUM Life Insurance Company; Commercial Life Insurance Company; Duncanson & Holt, Inc; Colonial Companies, Inc and Colonial Life & Accident Insurance Company. ‘61592’ Corporate Goal

Founded in 1848 with the principle to ‘find a better way’ UNUM was listed on the New York Stock Exchange in November 1986. At that tim time th the e co comp mpan any, y, un unde derr th the e di dirrec ecti tion on of ch chai airrman an and d ch chie ief  f  executive James Orr III, set its first corporate-wide goal, articulated as 61592 - to earn six dollars a share with 15 per cent return on equity by 19 1992 92.. Th This is wa was s ac achi hiev eved ed on one e ye year ar ah ahea ead d of sc sche hedu dule le,, larg largel ely y because, as Eileen Farrar, vice president, human resources, states, “We have a highly committed and motivated workforce who saw the 61592 goal as a powerful rallying point.”

Setting ‘Balanced’ Goals

With ith the the go goal al ac achi hiev eved ed,, an and d rec ecog ogni nizi zing ng the the po powe werr of go goal als s as mechanisms for breakthrough performance improvement, James Orr and an d his his te team am se sett ou outt to de deve velo lop p ne new w go goal als s for for the the corp corpor orat atio ion. n. However, this time there would be a significant difference in how the goals would be focused and articulated. Farrar explains:

51

 

“By 1991 we had, through growth and acquisitions become a much more complex organization organiz ation and the chairman recognized recognized that a single focus on a financial result would  be difficult to communicate effectively and would not reflect the diverse challenges of  the corporation. Consequently he decided that we needed a set of goals that would be meaningful to all employees, that would focus their energies on improving customerfacing performance performance and would improve further shareholder returns. In short, he wanted a balanced set of measures that would reflect the interests of all UNUM’s stakeholder  groups.”

 To achieve this, Orr created an organizing team of 13 senior managers from throughout the corporation to develop this new set of ‘balanced’ goals and measures. Says Farrar:

“The “T he chairm chairman an told told th thee team team that that he wante wanted d financ financial ial,, custom customer er,, emplo employe yeee and

 productivity  producti vity targets, gave it a budget and, most importantly, importantly, his whole-hearted support. He made it clear that this was absolutely vital for the long-term success and growth of  the company.” company.”

Over the next eight months, the team educated itself on the balanced scorecard and on the business challenges then and how these may develop through to 1998 (the 150th anniversary of the company). Farrar commented that this was an intense time as the team did not leave their regular jobs. Rather it met about twice a month and kept in constant contact through internal communication mechanisms such as Lotus Notes.To design the scorecard sub-committees were set up for each focus area, owned by a  particular function, for example HR owned the ‘people’ perspective. This subcommittee sought input from employees throughout the organization and a draft set of goals and measures were tested at all levels of the company. Although some outside experts, such as the well-known academic David Garvin of Harvard University, were used to facilitate several of the early meetings, it was the team itself which owned the process and chose the final set of interlocking goals and measures, which were rolled out into the organization in 1993.

52

 

Corporate Vision

Before presenting UNUM’s balanced scorecard it is worth pointing out that, as with all the best practice companies profiled for this Report, UNUM’s strategic goals and measures are to support a clearly defined and me meani aningf ngful ul cor corpor porate ate vis vision ion.. As sha shall ll be ex expla plaine ined d lat later, er, the corporation has a specific vision statement for each of its four scorecard perspectives. UNUM’s corporate vision is, ‘We will achieve leadership in our businesses.’ Although a generic statement which could be applied to any company in any market, UNUM supports this statement with a clear description of what this vision means to UNUM. It says: Leadersh ership ip does not necessar necessarily ily mean mean a dominan dominantt market market share. share. Rather Rather,, we will “Lead

achieve leadership in areas that are meaningful and important to our business and the market (eg profitability, quality, reputation). “Wee wi “W will ll fo focus cus our busine business ss on sp speci ecial al ri risksk-rel relie ievin ving g pr produ oduct ctss for whic which h we can establish and sustain profitable positions. Development Development of these products will be driven  by the needs of the customer, in both domestic and international markets.” As well as

Leadership, Leadershi p, UNUM’s vision has three other elements. F First, irst, ‘We will be a

pr prod oduc ucts ts-of -offe ferred

co comp mpan any’ y’..

Su Supp ppor orti ting ng

this this

are are

ex expl plan anat ator ory y

statements such as: • “Developing products that meet customer needs and leveraging our expertise and an d str stren engt gths hs.. Ou Ourr pr prod oduc uctt de deve velo lopm pmen entt ef effo fort rts s wi will ll fo focu cus s on providing providin g the right solutions.

• “Developing our products in a high quality and efficient manner utilizing existing and new channels.”

53

 

Seco Se cond nd,, th ther ere e is a visi vision on of wh what at UN UNUM UM wi will ll ‘be ‘be kn know own n fo for’ r’.. Th This is includes: • Superior knowledge, expertise and risk management. • Being responsive to the needs of customers and intermediaries. • Being reliable, dependable and trustworthy. • Providing the right solutions to current emerging needs.

And An d fina finall lly, y, UN UNUM UM’s ’s visi vision on incl includ udes es ‘W ‘We e wi will ll be a we well ll-m -man anag aged ed company’.  The definition of which is:

• Con Consis sisten tently tly gr growi owing ng pr profi ofits, ts, eff effici icient ent cos cost-s t-stru tructu cture re,, le leade adersh rship ip returns retur ns and financially sound. • Anticipating, shaping and effectively responding to relevant external

forces and events. • Making decisions in the best llong-term ong-term inter interests ests of our stakeholders. • Planning well, making clear and sound business decisions.

The Power of Corporate Values

Furthermore, within UNUM, corporate values play a key part in creating a culture where employees are motivated towards achieving breakthrough business performance.  These values are clearly articulated and disseminated to all employees. 1.We take pride in ourselves and the organization’s leadership position. • Acting with integrity and high ethical standards. • Ac Achi hiev evin ing g lead leader ersh ship ip in pe perf rfor orma manc nce, e, the the co comm mmun unit ity y an and d the the industry. • Setting and meeting individual goals consistent with business goals, and owning our individual perform performance. ance. • Being motivated and excited about the organization.

54

 

• Believing in what we are doing. • Emphasizing the positives, celebrating successes and strengths, and con stantly striving to impro improve ve our performan performance. ce. • Delivering results.

2. We value and respect people. • Dealing with each other as individuals and treating each other as we would like to be treated. • Developing people to their fullest potential. • Working together in a common endeavour; recognizing each other as important elements to the success of the whole.

• Having a common understanding of each other’s roles and how we fit with corporate objectives.

• Collaboration with each other and having a sense of team. • Recognizing and accepting differences among people, but sharing the same values.

3. We value customers. • Building long-term relationships with our customers and intermediaries. • Maintaining a strong orientation to service and the customer. • Delivering what we promise.

4. We value communication. • Communicating clearly, consistently, consistently, and openly with everyone we dealwith. • Building an environm environment ent that encourages open communication, partici pation, honesty and candour. • Listening.

55

 

Balanced Scorecard

UNUM’s balanced scorecard consists of four perspectives: • UNUM people • Operating effectiveness • Customer satisfaction • Shareholder value. Each Ea ch pe pers rspe pect ctiv ive e ha has s a visi vision on,, qu quan anti tita tati tive ve me meas asur ure e an and d go goal al.. Cruc Cr ucia iall lly y – an and d wh what at mak akes es th the e UN UNUM UM sc scor orec ecar ard d a pa part rtic icul ular arly ly powerful strategic implementation framework - the scorecard aims to focus the organization onto time-sensitive achievements. Therefore two of th the e go goa als de defi fin ne mea eas sura rabl ble e res esul ults ts by 199 998, 8, an and d th the e

scorecard scorecar d itself is referred to as ‘Goals 1998’. Says Farrar, “Specifying a year by which we reach our goals worked well for the 61592 goal beca be caus use e it ga gave ve em empl ploy oyee ees s so some meth thin ing g de defi fini nite te to aim aim for, for, so it seemed sensible to take the same approach.” UNUM’s balanced scorecard is shown below .UNUM Balanced Scorecard UNUM people

Vision: We will have the mind of a customer and the pride of an owner. Quantifiable measure: A benchmark survey will integrate the company’s employee surveys into a tool for gauging progress. Goal:

56

 

Ourr go Ou goal al is to im impr prov ove e an annu nual ally ly on the the sc scor ore e es esta tabl blis ishe hed d by the the benchmark survey. In addition, we will monitor our progress towards the goal on an ongoing basis through formal and informal gathering of  employee opinions. Operating effectiveness

Vision: We will increase customer value by rethinking, improving and streamlining our business processes. Quantifiable measure: Operating costs will grow grow at no more than one-half the rate of the top line. Goal:

By 1998, our total operating costs ratio will be reduced by approximately one-third.

Customer satisfaction

Vision: UNUM will provide the best value in offerings matched to customers’ needs in the mark markets ets we choose to serve. Quantifiable measure: Each Ea ch UN UNUM UM ar area ea wi with th an ex exte tern rnal al cu cust stom omer er ch chai ain n wi will ll de deve velo lop p a customer value measurement measurement tool. It will be aimed at determining our cust cu stom omer ers’ s’ as asse sess ssme ment nt of th the e ov over eral alll va valu lue e of ou ourr pr prod oduc ucts ts an and d services. Goal:

57

 

We will continually improve our customers’ perception of the value of  UNUM’s offerings so that the number of customers who DO NOT rate UNUM as ‘very good’ will have declined by 40 per cent when we compile our final measurement in 1998. Shareholder value

Vision: We will deliver consistently superior long-term value to UNUM shareholders. Quantifiable measure: Shareholder value will be measured in terms of total return - ie dividends plus share price appreciation. Goal:

We will achieve a total return that consistently places UNUM among the top 125 companies listed on the Standard & Poor’s 500.

Internal Communications

An absolute prerequisite, according to Farrar, for achieving corporate goals and for making the scorecard meaningful to all employees is investing significant energy and time into employee communications. communications. Farra arrarr be beli liev eves es th that at im impl plem emen enti ting ng a sc scor orec ecar ard d is a pr proc oces ess s of  relentless communication and education, and it must be explained in ways that make sense within the context of the employee’s own working environment. environment. At a corporate level, the company has defined exactly what it means by each of 

58

 

its scorecard perspective visions. Starting with, ‘We will have the mind of a customer and the pride of an owner’ as the vision for the UNUM people perspective, the company has communicated throughout the organization that this requires UNUM employees to:

• think like a customer • be interested in results • discover better ways • live by our word • continuously grow and learn • strive together towards our goals • feel accomplished and recognized

• value differences • master change • share and listen. UNUM UN UM is rea eali lizi zing ng th this is in a nu numb mber er of way ays. s. Fir irst st,, th ther ere e is th the e benchmark survey which measures employees’ perception of whether these behaviours are indeed being ‘lived’ within the organization. The goal being to increase the number of employees who agree that these behaviours are being practised at UNUM and decrease the number of  employees who disagree or who are not sure that these behaviours are part of daily life at UNUM. Second Sec ond,, em emplo ployee yees s wit within hin UN UNUM UM Am Ameri erica ca dev develo eloped ped a tru trust st workshop which focused on what barriers existed within the work unit or company to stop employees trusting managers. This identified the key issues and the findings were shared throughout the organization. A 360 degree apprai app raisal sal sys system tem,, thr throug ough h whi which ch ma manag nagers ers ar are e app apprai raised sed by, for

59

 

example, their direct reports as well as their superiors, helps further ensure managers are aligned to corporate behaviours.

1998 Goals Stock Option Plan

Howeve How ever, r, per perhap haps s the mo most st pow powerf erful, ul, and inn innova ovativ tive, e, veh vehicl icle e by which employees are encouraged to ‘have the mind of a customer and the pride of an owner,’ and indeed focus their minds squarely onto achieving the 1998 goals, is UNUM’s ‘1998 Goals Stock Option Plan’. The 1998 Goals Stock Option Plan was launched in January 1995. Each UNUM employee was provided with a stock option grant of  $18 per share to purchase 300 UNUM shares once the grant was vested (a decreasing

number of shares has been provided to employees hired post-launch).  The date of vesting of the 1998 Global Stock Option Plan will depend on the level of progress UNUM has made on its 1998 goals. In the event of the 1998 goals not being met, vesting of the 1998 Goal Stock Option Plan will automatically occur nine years after the grant date. Farrar commented, “This has really helped employees to think like owners. Financial Financial results are disseminated to all employees quarterly, and how the plan works has been clearly explained.” One communication medium for this is ‘Knowing Your Options: a guide for employees to UNUM’s 1998 Goals Stock Option Plan’ which outlines how the plan works and offers employees a telephone number and email address for further information. Far arrar rar fee feels ls tha thatt as own owners ers of UN UNUM, UM, emp employ loyees ees can bet better ter contribute to and

60

 

share in UNUM’s success by better understanding how the business works - how UNUM makes money, and how the money is invested to grow the company company..

A furt furthe herr co com mpe pens nsat atio ion n mec echa hani nism sm us used ed to fo focu cus s em empl ploy oyee ees’ s’ attention onto the 1998 goals is the annual bonus, part of which is for achievement against annual goals and part for progress against the 1998 19 98 go goal als. s. To ma mak ke th the e visi vision on of the the op oper erat atin ing g ef effe fect ctiv iven enes ess s pers pe rspe pect ctiv ive e

(‘W (‘We

wi will ll

incr increa ease se

cu cust stom omer er

va valu lue e

by

rethi ethink nkin ing, g,

impr im provi oving ng and str stream eamli linin ning g our bus busine iness ss proce process sses’ es’)) me meani aningf ngful, ul, UNUM has communicated throughout the organization an outline of  how emp employ loyees ees can con contri tribut bute e to att attain aining ing thi this s goa goal. l. Sta Statem tement ents s in incl clud ude: e: ‘Ben ‘Bendi ding ng Ov Over er Ba Back ckwa warrds ds’, ’, wh whic ich h information informa tion pack the company explains as:

wi with thin in a

co corp rpor orat ate e

Says Farrar:

“This is how we achieved the 61592 goal one year ahead of schedule! And, it’s  precisely the way we will meet our operating effectiveness goal and each of our ‘98 goals.We will succeed only with the commitment of every member of the UNUM team. And, we will look to each other - every UNUM employee – for leadership and creativity in improving our operating processes. “When we talk about operating effectiveness, effectiveness, we are not just talking about taking costs out, but deploying money and resources in the most effective way and constantly comparing our performance against that of our competitors.”

Chairman’s Involvement

 To contribute to this perspective, and indeed the other perspectives, the chairman regularly charges teams to focus on developing some area of best practice, for example within disability insurance, in order to loo ook k at ho how w be bes st th thiis area can be im impr prov oved ed and to shar are e

61

 

informati infor mation on thr througho oughout ut the org organiz anization ation.. This is jus justt one way that  James Orr demonstrates leadership and personal involvement in the Goals 98 programme. He also holds an annual chairman’s review, in whic wh ich h he mee eets ts wi with th a gr grou oup p of em empl ploy oyee ees s rep eprres esen enti ting ng ea each ch oper op erat atin ing g co com mpa pany ny or func functi tion on to di disc scus uss s ho how w th the e em empl ploy oyee ees s percei per ceive ve progr progress ess tow towar ards ds the goa goals ls.. Em Emplo ployee yees s are are dra drawn wn from from different organizational levels each year and, says Farrar, are encouraged to speak candidly. The chai ch airm rman an ha has s al also so ar arti ticu cula late ted d a se sett of qu ques esti tion ons s wh whic ich h ar are e us used ed throughout the organization to ensure that the 1998 strategic goals remain the key focus of employees. These include:

Overall  • What is the overall level of understanding of the ‘98 goals within the

organization? • What are the benchmarks for the planned progress towards towards the ‘98 goals within the organiza organization? tion? • What are additional enterprise-wide support needs? • What are the ‘best practices’ which can be shared with other UNUM organizations?

People goal  • What actions are being taken, and what are the results? What are the challenges to employee understanding? • What What ar are e th the e me meas asur ures es us used ed to as asse sess ss the the pr prog ogrres ess s be betw twee een n corporate surveys (real-time metrics)? • What is the composition of agreement/disagreement statements, and how is this being addressed?

Customer satisfaction

62

 

• What are the current dynamics of the market place? How is this changing UNUM’s customer needs and satisfaction? • Ho How w is th the e ‘v ‘voi oice ce of th the e cu cust stom omer er’’ be bein ing g he hear ard? d? Wh What at are are the the measurements measur ements used to track customer satisfaction? • What efforts are under way to better understand customer needs and provide ‘best value’?

Operating effectiveness •

What steps are being taken to grow the top line?

•

What are the key processes being worked on?

•

•

Why were they selected? How do curren currentt efforts enhance value from the customer’s perspective? What sharing/leveraging of strengths is taking place across the

What sharing/leveraging of strengths is taking place across the enterprise? •

What economies of scale are being realized?

Shareholder value • Discuss return on equity target trends if appropriate.  The chairman’s belief in the scorecard was clearly shown in UNUM’s Annual Ann ual Repo eport rt 199 1997 7 whe where re,, in his let letter ter to the sh shar areho eholde lders, rs, he outlin out lined ed progr progress ess aga agains instt eac each h of the sco scorreca ecard rd per perspe specti ctives ves.. For example, regarding regarding the customer satisfaction perspective, he said: “19 1997 97 was a yea earr of pr prof ofou oun nd lea earrni nin ng fo forr ou ourr or org gan aniizati ation on,, parti par ticul cularl arly y in ter terms ms of ser servin ving g our cus custom tomers ers.. We kno know w it is not enough to keep our customers merely satisfied. To keep customers coming back, to remain competitive, we must earn customers’ loyalty. “I “In n fa fact ct,, cust custom omer er loya loyalt lty y is on one e of the the gr grea eate test st gr grow owth th le leve vers rs avai av aila labl ble e

to

UN UNUM UM..

For

exa xam mpl ple, e,

typi typica call

lo long ng-t -ter erm m

di disa sabi bili lity ty

63

 

customers create twice as much value for our organization in the second five years they are with UNUM than in the first five years.... “As a result of these learnings, and in support of our 1998 Customer Satisfaction Goal, UNUM employees focused on further developing the ‘Mind of a Customer’ in 1997, and the results were outstanding.What started out as an experiment - to reach out to our customers through our new Customer. Loyalty and Satisfaction Center - turned into a tremendous success and a critical lever for accelerating growth. Customer satisfaction is articulated within UNUM as: • putting our customers first in all that we do • listening carefully to find out what they really want

• anticipating what they need • Meeti Meeting, ng, even exc exceedin eeding g their needs and expecta expectations tions in all of our contacts and with all of our products and services.

The Money Machine

For the shareholder value perspective UNUM has communicated to all employees what investors are looking for and why this perspective perspective is important. important. By making Shareholder  Shareholder  Value a goal, they have given investors, stockbrokers and financial analysts a ‘yardstick’   by which UNUM’s progress toward its other stated goals can be measured. Their  attitude is that companies that meet their goals win favour with investors and therefore enjoy a more favourable capital position. To commun communicat icatee the scorecar scorecard d holisti holisticall cally y UNUM’ UNUM’ss finance finance function function has designed an easy to understand presentation entitled ‘Money Machine’ Machine’,, which includes a textual explanation of how UNUM makes money and a graphic that walks through the

64

 

whole organization process from sales to customers to the payment of shareholder  dividends. Says Farrar, “The money machine shows where opportunities for making  profit exist and, importantly, people can see themselves in that continuum.” Deployment

For deployment of the corporate scorecard, each operating unit is charged with finding its own way to achieving the strategic goals. Farrar maintains that: “It is up to the management of each company to decide on the most effective way to move that company towards strategic goals. At unit level, it is the responsibility of the manager to roll the unit’s unit’s goals back to company and corporate goals. However, However, annual  business goals will not be accepted unless they represent progress towards our corporate goals.” Alignment is further ensured through UNUM’s performance contracts, all of 

which, from the chairman down, have the same categories as the corporate scorecard. Says Farrar: “Individual “Indivi dual objectives support the scorecard goals, so you can see the line of sight from empl em ploy oyee ee pe perf rfor orma manc ncee  performance.”

th thro roug ugh h

un unit it,,

co comp mpan any y

an and d

ul ulti tim mat atel ely y

to co corp rpor orat atee

Strategic Successes

So, given the amount of time and energy expended on the 1998 goals, the million dollar question is has UNUM succeede succeeded d against these goals? At At the time of writing this case study, the company was still assessing its final position. However clues can be found within the UNUM 1997 Annual report. To quote James Orr: “We continue to make solid progress to our 1998 goals - goals that have served UNUM well over the past five years. Because of these aggressive goals,UNUM is closer than ever to its vision - and ultimate goal - of world leadership in disability and special risk  insurance.

65

 

“We exceeded our overall ‘People’ goal target in 1997, aimed at creating a work  environment environm ent for all UNUM employees that supports superior business results. A And nd our  UNUM America business again received national recognition for progress in this area during 1997. Examples of plaudits that UNUM America has received, include being voted within the: • 100 best companies to work for in America by Fortune magazine

• 10 100 0 be best st co com mpa pani nies es for for wo work rkin ing g mo moth ther ers s by Work Working ing Moth Mother  er  magazine • top 30 family-fri family-friendly endly companies by Business Week magazine Week magazine • top 50 employers by Equal Opportunity magazine.” Opportunity magazine.” Orr continued: “...We met our Operating Effectiveness goal ‘rule of thumb’ of growing

the top line at twice the rate or more of operating expenses. On a cumulative basis, we have improved our operating cost structure by 22 per cent over our 1992 base year, moving towards our 1998 target of 33 per cent... “...Regarding our five-year annualized rate of return measured in our Shareholder Value goal, we were ranked in the second quartile of the Standard & Poor’s 500 at year end 1997, short of the top-quartile perf pe rfor orma manc nce e

th that at

is

ou ourr

ta tarrge get. t.W We

ha have ve,,

ho howe weve ver, r,

de deli live verred

exceptional returns over the past 10 years, with an annualized total return retur n of 30.2 per cent, ranking us 39th of the 4 457 57 current Standar Standard d& Poor’s 500 companies with 10-year stock histories. “And, we continue to ma make ke sol solid id pr progr ogress ess tow towar ards ds our Cu Custo stome merr Sat Satis isfac factio tion n goa goall progress that is reflected in our 1997 results.While we are still below our target for this goal, our work in this area has been, again, a source of significant learning and opportunity for f or UNUM.” Also at the time of writing a leadership team had been created to coordinate the creation of a new set of corporate goals.

66

 

Says Farrar: “We “W e wi will ll cer certai tainly nly con contin tinue ue us using ing the ba balan lanced ced sco score recar card. d. It is an excellent way to focus attention on creating value for shareholders and indeed all stakeholder groups.”

And as Orr said: “.. ...A .As s we de deve vellop ou ourr ne nex xt set of go goal als s we wil illl see eek k way ays s to accele acc elerat rate e our pr progr ogress ess,, gr grow ow our com compan pany y by bui buildi lding ng lon long-t g-ter erm m relat elatio ions nshi hips ps

wi with th.. ...o .our ur

sh shar areh ehol olde ders rs,,

by

co cont ntin inui uing ng

to

bu buil ild d

shareholder value.We made great progress in 1997, but we know we are capable of more in 1998 and beyond.”

Conclusion

Accor Ac cordin ding g to Far arrar rar,, the fiv five-y e-year ear ex exper perien ience ce of us using ing a bal balanc anced ed scorecard has revealed a number of key learning points. Not least that as the 1998 goals were such long-term goals, the company had to work hard to consta con stantl ntly y bal balanc ance e sho shortrt-ter term m and lon long-t g-ter erm m goa goals ls and to cle clearl arly y communicate to employees any trade-offs. She believes management management mus ustt be vigi vigillant in exp xpllaini aining ng how de deci cis sio ions ns tod oday ay,, such as acquisitions, new product launches or exiting businesses businesses,, impact longterm goals. If you do not do this, she believes, it can cause a lot of  confusion within the organization. She maintains that there are three things a company must get right if it is to succeed with a balanced scorecard: “1. First First and foremost it is critical to be clear about what the company believes is important to measure and why it believes this.

“2. Understand that the goal is itself a vehicle for getting somewhere. For example, example, we didn’t say that meeting these four goals would make us the global leader, we said it would make us a stronger company

67

 

and significantly closer to that vision. So don’t confuse means and ends.

“3. Engage all levels of the organization in defining the goals and align the organization behind the goals.” . Key Learning Points

Finally, UNUM’s success with its balanced scorecard has been the result of getting a number of fundamental things right. These include: 1. The balanced scorecard built on the success of UNUM’s ‘61592’ corporate goal, but was designed to reflect changes to the organization organizati on and a new set of business challenges challenges..

2. The chairman James Orr was totally committed to creating the balanced scorecard and has been personally involved in building the original scorecard scorecard and in continually communicating its importance to stakeholder groups.

3. Senior managers within UNUM owned the process of building the corporate scorecard and used external help only for facilitating early meetings. 4. UNUM drafted a clearly defined and meaningful corporate vision statement.

5. The scorecard was designed to meet specific time-sensitiv time-sensitive e goals.This made the scorecard tangible to all employees and proved a catalyst for breakthrough improvements.

6. The reason behind the scorecar scorecard d perspective goals and measures were clearly explained to employees.

68

 

7. The company had a near obsessive focus on internal communications.

8. An innovative compensation programme entitled the 1998 Goals Stock Option Plan proved a powerful mechanism for aligning individual performance performance with corporate goals.

9. All individual perform performance ance contracts, ffrom rom the chairman down, reflect the scorecar scorecard’s d’s four perspectives.

4.2 Balanced Scorecard Implementation at “Philips”

The case examines the implementation implementation of Balanced Scorecard in the Netherlands-based Netherlands-based

Royal Philips NV. During the late 1990s, rapid changes in the external environment necessitated Philips to make its operations flexible, innovative and value adding. This led the company to introduce a program called Business Excellenc Excellencee through Speed and Teamwork (BEST) in July 1999. Several tools were used in BEST, and one such tool wass the Balanc wa Balanced ed Scor Scoreca ecard. rd. There There were were four four perspe perspecti ctive vess in Phili Philips' ps' Bala Balance nced d Scorecard - competence, processes, customers, and finance.

Aim of BSC Strategy in Philips NV “Our aim for adopting the balanced scorecard solution is to consistently communicate  strategy deep down into Philips' 80 businesses and support more than 10,000 managers with wit h to tools ols to turn turn strat strategy egy into into action action by sharin sharing g knowl knowledg edge, e, align aligning ing ac actio tions, ns, monitoring progress and learning." 

-“Peter Geelen of Philips Corporate Control”

69

 

About Philips 

Philips was founded in 1891 by Gerard Philips in a small town of Netherland.



In early 1900s Gerard's company emerged as one of the largest producers and marketers of carbon-filament lamps.



Focus was to lay emphasis on research just after the inception.



It also established its marketing companies in the US and France before the First World War.



Philips Electronics Electronics later diversified in Health and Well-being company, focused on

improving people’s lives through timely innovations.





Philips began the mass production of consumer goods like TVs, VCRs, DVD  players, and fax.

X-ray radiation radiation and radio reception was the key area of philips and they protected it through patents.

PHILIPS…..Today



Global leader across its healthcare, lighting and lifestyle portfolio.



It has four product product divisions divisions: Consumer Electronics Electronics;   Domesti Domesticc Applianc Appliances es &  Personal Care; Lighting and Medical Systems.

70

 



Philips Consumer Electronics is the third largest consumer electronics company in the development of digital television systems and compact disc applications.



It has diversified in the Medical Systems became a global leader in the growing medical devices and diagnostic industry as well.

Company was witnessing a dismal financial performance during the 1990s basically due to following reasons

•

Change in External environment.

•

Duee to high Du high manuf manufact acturi uring ng co costs sts,, the produc products ts could could not be price priced d competitively.

•

Entry En try of Asian Asian manuf manufac actur turers ers li like: ke: LG, LG, Samsu Samsung ng in the electr electroni onics cs  business .

So it’s it’s quite quite obvious obvious that there was a Need Need to bring flexibility flexibility in the processe processess and innovation in the organization…! Strategic Moves of Philips Philips embarked on an improvement program:The program was called Business Excellence through Speed and Teamwork ( BEST). “BEST” was a company-wide initiative aimed at achieving excellence in every aspect of   business at Philips. Philips used several tools and approaches as a part of BEST. Some of these were 

Philips Business Excellence Model (PBE)



Process Survey Tools (PST) and



Balanced Scorecard.

71

 

The Balanced Scorecard was used to communicate communicate the strategy across across Philips' divisions that had more than 120,000 employees spread across 150 countries in the world. The Balanced Scorecard enabled the employees understand the existing policies, and plans for the future. The initiative to implement Balanced Scorecard came from the top management. The top management, and all the divisions identified the critical success factors that were important to create value and they were grouped under four perspectives :– 

Implementation



CSF’s were identified in every department, divisions with the help of Quality department at philips.



Perfor formance

indicators

are

measurement of performance.

the

yardsticks

that

help

in



  Traffi Traffic c ligh lightt sys system tem

whic which h incl include ude red red,, gre green en and am amber ber lig light  ht 

exemplify the degree of progress made in each dimension. 

Implementing Implementin g a global balanced scorecard helped philips: •

In articulating and communicating their strategy

•

Measuring the drivers of their performance

•

Detecting the superiority of one strategy over another.

More than 50 percent of the Fortune 1000 companies use a version of  Balance score card making it a widely used tool



 The balanced scorecard of Philips has four ca card rd levels.  The levels in decreasing order are: •

Strategy review card

•

Operations review card

•

Business unit card

72

 

•

Individual employee card

Lower card levels m must ust align with scorecard goals in upper card levels.

Critical Success Fa Factors ctors 

Competency



Processes



Customers



Financial

Competency Fa Factors ctors 

Knowledge



 Technology



Leadership



 Teamwork

Indicators –  

Organizational Development IT support.

Process Factors 

Drivers for perform performance ance

Indicators – 

Operational excellen excellence ce

73

 

Customers Factors 

Value proposition

Indicators – 

Customer Delight



Employee satisfaction.

Financial Factors 

Value



Growth



Productivity

Indicators –



Profitable Revenue



Growth.

TRAFFIC LIGHT SYSTEM

•

Green Light – target had been achieved

•

Amber Light – performance in with the target

•

Red Light – problem area.

Key results of BSC Strategy in Philips: •

Enabled employees understand the existing policies and future plans.

•

Succeeded in focusing in the diverse set of measur measures. es.

74

 

•

Commitment Commitm ent and initiative of top management made it a big hit in all the subsidiaries subsidiaries and in various li line ne of businesses.

•

Empl Em ploy oyee ees s be beca cam me mor ore e lo loya yall an and d star starte ted d taki taking ng pa part rt in organisation.

4.3 Practical Aspects of Setting up Balanced Scorecard Scorecard in a Service Company

After the initial phase of building the Balanced Balanced Scorecard, a company also has to use it. One of the mistakes mistakes companies make is during the implementation implementation phase by coming up with a list of measures of what they could measure instead of what they should be

measuring. If a company thinks about what it needs to achieve to be successful in the eyes of its shareholders, clients and internal stakeholders, that will yield operational activities that the organisation needs to do well to achieve those strategies. To make the Balanced Scorecard work, companies must comprehend the importance of  its four basic perspectives.

The financial perspective

This perspective tends to be the cornerstone of an organisation’s strategy. It includes such measures of profitability as cash flow, quarterly sales growth and operating income  by division, increased market share, and return on equity. “There’s a fairly standard, two-legged structure that may be observed over the years," sayss Laura say Laura Down Downin ing, g, vice vice presid president ent of th thee Mass Massach achuse usetts tts-ba -based sed consul consulti ting ng firm firm Balanced Score Card Collaborative Inc. "The first leg is the revenue-growth strategy, where companies try to determine how hey’re going to grow the top line of the   business." Typical methods for accomplishing a revenue-growth strategy are adding new products to broaden the franchise and branching out into new businesses.

75

 

The other leg of the financial perspectiv perspectivee is a productivity strategy strategy that usually includes two components: basic expense management and effective asset utilisation. "The natural inclination is to focus on the financial perspective because people are more comfortable and familiar with it," says Downing. "Companies will tend to incorporate more financial measures than are really necessary. But ultimately, at the end of the day, all measures play out into cash flow." The non-financial perspectives are predictive of a company’s future financial success. However How ever,, they give organis organisatio ations ns an opportun opportunity ity to react react to internal internal and external external influences before detrimental activities affect financial measures.

The customer perspective

This Th is compon component ent of the Balan Balance ced d Scor Scoreca ecard rd inclu includes des su such ch meas measure uress as custom customer  er 

response time, on-time delivery, and market share and product reliability. The customer perspective can be divided into three major measures: •

Product attributes, a measure of how the product works its functionality and its  price.

•

Customer service, an evaluation of how the company works with customers and whether it takes a high-touch or high-tech approach.

•

Image an examination of the product’s reputation.

Thee custom Th customer er perspe perspecti ctive ve tends tends to get lit littl tlee att attent ention ion becaus becausee meas measuri uring ng such such intangibles, as customer satisfaction and customer loyalty is difficult. However, this  perspective is important.

The internal business perspective

This aspect of the Balanced Scorecard focuses on quality, time and efficiency measures such as head count, inventory and manufacturing lead time to determine what key  processes meet the needs of the customer and financial perspectives.

76

 

To start building the internal perspective, a company typically needs to build a value chain by defining its value-creating activities and separating those activities from any type of organisational structure - in other words, thinking outside the box about the added value the company brings to customers. "We’ve observed four major themes in the internal perspective," Downing says. The first first theme theme is innova innovatio tion. n. Compan Companie iess must must determ determine ine wheth whether er they they need need to seek  seek   partnerships with other organisations, how much they need to spend on research and development, and how they can find other creative ways to increase revenue. The second theme targets customer management. Companies need to look at how they can  better work with their customers and how they can improve customer service. "The third theme is operational operational excellence, excellence, a look at an organisation’s organisation’s supply chain," Downing says. "You need to find a way to manage inbound and outbound logistics. Just optimising that angle alone can be a major differentiator."

The fourth theme involves regulatory factors that can come into play for certain types of   business. This theme is particularly important in heavily regulated businesses such as financial services or public utilities.

The learning-and-growth perspective

The most frequently overlooked of the four perspectives, this aspect of the Balanced Scorecard should be of paramount importance to companies with a strategy of finding new revenue sources and expanding into new markets. It measures such factors as the number of new products a company launches and the length of time generating leading-edge products takes. Why does learning and growth often get short shrift? "Companies already have the financials down pat, and there’s been this customer-focus fad — perhaps to the extreme  — which has lasted for several years," Downing says. "It’s just been in the last couple of ye years ars that that pe peopl oplee have have even even start started ed to ask how how th they ey can ap apply ply technol technologi ogical cal advancements to help them in their business."

77

 

Until now, the scorecard approach has helped companies translate business strategy into appropriate actions. The Balanced Scorecard can not only translate strategy, but also help hel p defin definee it and, and, in some some ca cases ses,, create create it. Rathe Ratherr than than a cy cycli clica cal, l, eventevent-dr drive iven n  p phen henom omeno enon, n, the scorec scorecard ard evalua evaluati tion on can becom becomee a pr proce ocess ss that that contin continuou uously sly determines areas in which the company can improve. As an organisation considers the four perspectives, it should ask whether it needs to address any cultural issues. Often when companies try to implement a new strategy, they need a cultural change to reflect the new strategy. If a company can say, "This cultural issue must change so that this process can be enacted so that customers will be happy so that we’ll make more money," the need for cultural change becomes tangible. 4.4 Using the Balanced Scorecard Scorecard at Metro Metro Bank 

Metro Bank was the retail banking division of two major banks. The agendas of the two

 parents had never been fully rationalised into a single vision. A Att the same time, without having achieved a synthesis or consensus on an operating style and strategy for the Metro Bank, its managers had launched a major transformation programme in order to  b bee more more in inno nova vati tive ve and and to cr crea eate te a ba bank nk ta tail ilor ored ed for for th thee twen twenty ty-f -fir irst st ce cent ntur ury y. Unfortunately, the transformation programme had gone wild, leaving the bank with more than 70 different action programmes, each competing for management time and resources. Metro Bank had 30% market share of the core deposit accounts of the region but with deregulation, increased competition, and a lower interest rate environment, income from these retail accounts could no longer be sustained. A strategic review revealed excessive reliance on these accounts and a cost structure that could no longer profitably serve 80% of the bank's retail customers. Metro embarked upon a two-pronged Balanced Scorecard-based strategy to deal with these problems: •

Revenue Growth Strategy - Reduce the volatility of earnings by broadening the sources of revenue with additional products for current customers.

78

 

•

Producti Prod uctivity vity Strate Strategy gy - Improve Improve operatin operating g efficie efficiency ncy by shiftin shifting g non-prof non-profitab itable le customers to more cost-effective channels of distribution (e.g., electronic banking instead of personal banking).

In the process of developing a Balanced Scorecard at Metro, these two strategies were translated into objectives and measures in the four perspectives. Particular emphasis was placed on understanding and describing the cause and effect relationships relationships on which the strategy was based. The financial objectives were clear: broaden the revenue mix. Strategically, this meant that Metro would focus on its current customer base, identify the customers who would be likely candidates for a broader range of services, and then sell an expanded set of financial products and services to these targeted customers. When customer objectives were analysed, however, however, Metro's Metro's executives executives determined determined that its targeted customers customers did not view the bank, or their banker, as the logical source for a  broader array of products such as mutual funds, credit cards, and financial advice. The

executives concluded that if the bank's new strategy were to be successful, they must shift customers' perception of the bank from that of a transactions processor of checks and deposits to a financial adviser. Having identified identified the financial objective, objective, Broaden Revenue Mix, and the new customer  valuee proposi valu proposition tion dictated dictated by the financia financiall objecti objective, ve, Increase Increase Targete argeted d Custome Customers rs Confidence in our Financial Advice, the scorecard design process then focused on the internal activities that had to be mastered for the strategy to succeed. Three cross business processes were identified: Understand Customers, Customers, Develop New Products and Serv Service ices, s, and Cros Cross-S s-Sell ell Mult Multipl iplee Produ Products cts and Servi Services ces.. Each Each of these these busine business ss  processes would have to be redesigned to reflect the demands of the new strategy. The se selli lling ng proces process, s, fo forr ex exam ample ple,, had histor historica ically lly been been domina dominated ted by instit instituti utiona onall advertising of the bank's services. Good advertising plus good location brought the customerss to the banks. The branch personnel were reactive, helping customers to open customer accounts and to provide ongoing service. The bank did not have a selling culture. In fact, fact, one study study indica indicated ted that that only only 10% of a sa sales lesper person son's 's time time was was spent spent wi with th customers. A major reengineering program was initiated to redefine the sales process. Thee goal Th goal of th thee pr proce ocess ss was was to create create a re relat lation ionshi ship-s p-sell ellin ing g approa approach ch where where the salesperson became more of a financial advisor. Two measures of this process were

79

 

included incl uded on the Balance Balanced d Scoreca Scorecard. rd. The Cross-S Cross-Sell ell Ratio-t Ratio-the he average average number number of   products sold to a household-measured household-measured selling effectiveness. effectiveness. This "lag indicator" would tell whether the new process was working. The second measure, Hours Spent With Customers, Customer s, was included to send a signal to salespersons salespersons throughout the organisation of  the new culture required by the strategy. A relationshi relationship-ba p-based sed sales sales approach approach could could not work work unless unless face-toface-to-face face time time with with customers increased. Hours Spent with Customers therefore was a "lead indicator" for  the success of this piece of the strategy. The internal objectives led naturally to a final set of factors to implement the Revenue Growth strategy. The learning and growth component of the scorecard identified the need for salespersons to undergo a major role change. This role change would require a  broader set of skills (e.g., a financial counsellor with broad knowledge of the product line), improved access to information (e.g., integrated customer files), and realignment

of the incentive systems to encourage the new behaviour. The lead indicators focused on the major changes that had to be orchestrated in the work force: •

•

•

the upgrading of the skill base and qualified people-Strategic Job Coverage Ratio; the the ac acce cess ss to in info form rmat atio ion n te tech chno nolo logy gy to tool olss and and da data ta-S -Str trat ateg egic ic In Info form rmat atio ion n Availability Ratio; and The realignment of individual goals and incentives to reflect the new prioritiesPersonal Goal Alignment.

The "lag indicators" included a productivity measure, Average Sales per Salesperson, as well as the attitudes of the work force as measured by an Employee Satisfaction Survey. The result of the Balanced Balanced Scorecard in the Metro Bank is the following. following. By clarifying the strategic objectives, it was able to create consensus and teamwork among all the senior executives, regardless of which functional organisation they represented. Further, the Balanced Scorecard created a vehicle to set priorities, to consolidate and to integrate the many change programmes currently under way. The result was a much more manageable set of strategic initiatives, all focused on achieving specific objectives.

80

 

4.5 Using the Results of a Balanced Balanced Scorecard Scorecard at Sears Company Company

Sears radically improved profitability using the Balanced Scorecard’s four perspectives. Howe Ho wever ver,, short shortly ly after after Sear Sears’ s’ imple impleme menta ntati tion on of the standa standard rd Scor Scoreca ecard, rd, Quin Quinn n discovered that maintaining the company’s increased shareholder value would require moree change. mor change. For Sears, Sears, sustaini sustaining ng the Balance Balanced d Scorecar Scorecard’ d’ss initial initial improvem improvements ents required senior management to alter the company’s overall vision and incorporate a new  perspective into the company’s Scorecard. "You can’t look at the Scorecard as just helping you pull a bunch of strategic levers. You have to be willing to go through cultural change," says Quinn, who retired from Sears in 1996 after a 26-year career with the company. "If you’re messing around with cultural change, you have to ask yourself whether you’re ready to fire some of your senior team if they’re not willing to behave differently differently.. Really changing senior management causes some discomfort."

Quinn Qu inn was was vice vice presi presiden dentt of quali quality ty when when he in intro troduc duced ed Sear Searss to the Balan Balanced ced Scorecard concept in late 1992. Sears had a net loss of almost $4 billion that year, but the company posted the largest profit in its history in 1993. After the company’s financial rebound, rebound, Quinn lost most of the audience for his idea. It soon became clear to him that a small group of people had caused the company’s turnaround and that diff differe erent nt long-t long-term erm measu measures res would would have have to be ta taken ken in order order to su susta stain in Sears Sears’’ renaissance. As a result of this realisation, Quinn began holding visioning sessions in early 1994 wi with th the or orga ganis nisati ation’ on’ss top 100 execut executive ives. s. In of off-s f-sit itee threethree-day day se sessi ssions ons,, Sears Sears’’ corporate managers developed a list of the company’s five-year objectives. In addition to examining needed internal changes, the group discussed methods for aligning itself  more with what was happening outside the company. "We spent all of 1994 developing our Balanced Scorecard with our top people," Quinn says. "Most organisations aren’t willing to pay that price. We had the top 100 people si sitti tting ng th throu rough gh custom customer er focus focus gr group oups, s, digest digesting ing al alll the data data and readin reading g all the literature to the point that we almost had a palace revolt." Initially, Quinn formed task forces around the four basic perspectives of the Balanced Scorecard. Each group was asked to define "world-class status" in the area of its

81

 

 perspective, identify Sears’ obstacles to achieving world-class status in that area, and design metrics for measuring the company’s progress in the area. The task forces moved forward with the following initiatives: The customer task force was determined to get a firsthand assessment of how well the company was listening to its clientele. "Satisfaction or your money back" had been a Sears mantra since the company’s inception in the 1890s, but the group was sceptical about whether senior management and frontline employees employees were doing everything they could to increase customer satisfaction. Some stores had trouble keeping merchandise in stock. Customers Customers frequently complained about being unable to find sales associates and rated Sears’ quality of overall service as poor. To learn more about Sears’ customer-service challenges, the task force held 80 focusgroup sessions with customers around the country. As a result of its findings, the customer task force set four goals: offering the right merchandise at competitive prices;