The Balanced Scorecard

The Balanced Scorecard

The Balanced Scorecard; a cause & effect chain 3

Performance Measurement 4

Managing Performance 5

Scorecard Development 7

What does a Good Scorecard look like? 10

Definitions 14

Indicators; examples 16

References 17

July 2000
Second edition
The tables on page 10 - 13 have been modified

2
The Balanced Scorecard;
a cause & effect chain
Businesses use hundreds of indicators to measure what is
going on in their markets, their operations, and their
laboratories. A Business Balanced Scorecard (BBS) focuses
on the factors that are critical for business success and
presents them in a chain of four perspectives.

Competence Processes Customers Financial

en en

Knowledge/Technology Drivers for Value Value, Growth

Leadership/Teamwork Performance propositions Productivity

Financial results depend upon the value that customers perceive

in a company’s products and services, and on the efficiency
and effectiveness of its business processes, which in turn are
dependant upon the competence of the organisation. The BBS
enables us to explore and illustrate the cause and effect
relationships between the four perspectives. The terms “lead
and lag indicators” are used to indicate that the cause and
effect relationships between the perspectives of the scorecard
follow a time sequence.
Indicators earlier in the chain are leading, while indicators
later in the chain are lagging.
For example, delivery performance, as experienced by customers
will have an effect on the future financial performance of the
business because prompt delivery has a perceived value for the
customer. In turn, the capability of the logistics process will
determine the future delivery performance, and the compe-
tence of our resources, human and technological, will deter-
mine the future logistic process capability.
Understanding what drives the present performance is the
basis for deciding how to achieve results in the future.

This pocket guide introduces the concepts of the BBS, and

sets out the way that Philips will use the BBS as an essential
part of BEST.
3
Performance Measurement
A Business Plan is based on assumptions about cause-and-
effect relationships. Performance measurement requires that
implicit assumptions about the way the business creates
value are made explicit. Determining the factors that are
critical for achieving the strategic goals is the essence of the
Balanced Scorecard.

Critical Success Factors

Critical Success Factors (CSFs), sometimes called Value
Drivers, are the business variables that are crucial for creating
value. Determination of the CSFs starts with identifying the
financial and customer CSFs that give a competitive edge.
Process CSFs are process elements that have the greatest
impact on those financial and customer CSFs.
Competence CSFs are the competencies that will deliver the
required process performance, customer satisfaction and
financial results.

Business Model
A business model, showing how CSFs relate to each other,
can be displayed in an Influence Diagram. Such a diagram is
fairly simple at first, like the one illustrated, but becomes
more complex and realistic as the discussion proceeds.

Influence Diagram
Financial Customers Processes

Financial Results

Market Share Customer

Customer
Profitability
Brand Image Satisfaction

Order
Product Fulfillment
Quality Cycle
Time
Competence

Employee PDCA
Motivation Skill

4
Managing Performance
With a measurement system linking short-term actions with
long-term strategy in place, the cornerstone of performance
management has been laid. Expressing the strategy in measur-
able objectives for day-to-day actions enables the organisation
to make sure it is on the right track and to evaluate the rate
of progress toward the vision.
Scorecards are instrumental at each stage of the performance
management process.

1. Business Planning
A Business Balanced Scorecard with targets for key finan-
cial indicators and CSFs is the quantitative expression of
the business strategy. Moreover, because the number of
CSFs is limited (a BBS has a maximum of 24 indicators in
total), the BBS is an essential aid to communicating the
business strategy. Financial indicators are often the same
for all businesses – e.g. EPR, Cash etc. The challenge is to
determine the business-specific CSFs in the other Scorecard
perspectives, for the coming year and total business
planning period.

2. Deployment of Targets
Agreement on the annual operational targets at the top
level of the business is the starting point for deploying
targets through the layers of the organisation. CSF targets
at one level are deployed into objectives for the next level
in the organisation.

3. Implementation
The key indicators are used to monitor implementation of
the business plan. One of the chief benefits of adopting the
Scorecard approach is the focus that it brings to the people
in the whole organisation. The top-level CSFs, when
deployed through the layers of the company indicate
relevant priorities for all employees. Derived goals can be
clearly linked to the overall business strategy.

5
4. Review and Learning
The full benefits of the BBS are realised during perfor-
mance reviews. Assumptions become shared experiences
when the validity of a strategy and the effectiveness of its
execution are evaluated. In a changing environment, this
capacity for promoting organisational learning by testing
assumptions about cause-and-effect relationships, is an
important feature of the BBS.

6
Scorecard Development
A balanced set of indicators, reflecting the strategic priorities
and portraying causes-and-effects is not developed overnight.
The first round of defining a scorecard never produces a per-
fect BBS. A scorecard is never actually finalised. As the busi-
ness and its circumstances change, the CSFs and their indica-
tors will change.

The BBS is constructed during the development of business

strategy as presented in the Strategy Review. This top-level
Scorecard contains the CSFs for the current year and for two
years and four years into the future. The current year
Scorecard is taken as basis for the Operations Review, which
results in a Scorecard with quarterly targets for the budget
year. This current year Scorecard is the guiding document for
the quarterly business reviews.

The development of the BBS is an iterative process;

continually focussing on the key drivers which will lead to
the successful realisation of the goals.

The power of a Scorecard lies in its ability to focus everyone

in the organisation on the business priorities and showing the
network of cause-and-effect relationships. A Balanced
Scorecard translates the business plan into the ‘vital few’ goals
that mark the path to excellence.

Using the BBS begins with the following practical steps:

1. At Business Unit level, identify the Critical Success

Factors for each Scorecard perspective
Development of a BBS begins with consensus in the
business management team on the business strategy and the
CSFs by which the organisation will distinguish itself from
the competition.

The CSFs for the Customer scorecard perspective are

often derived by using a “value map” approach, in which
customer survey data are used to determine the customer

7
 perceived performance relative to the price for competing
products.
A value map can help to determine the performance
priorities for improvement– as perceived by the customer -
and how much improvement is required.

The Process CSFs can now be derived, by resolving how

process improvements can deliver the performance that
satisfies the financial and customer requirements.
Next, the Competence CSFs can be identified, by consider-
ing the technological and human resources which are need-
ed to deliver all other CSFs.

Identification of the Critical Success Factors in each

perspective of the scorecard ensures that all members of the
management team have the same understanding of what is
needed to achieve the business objectives.

2. Determine the Key Indicators

The next step is to define the key indicators that measure
the Critical Success Factors and to represent the assumed
relationships in an ”Influence Diagram.” The team of
managers responsible for the business will ‘brainstorm’ to
explore and agree on the network of relationships. At this
point it is worth grouping the various factors into the four
scorecard perspectives (see diagram on page 3).
Also, it might be useful to quantify the assumptions about
the relationships, e.g.: x % decrease in cycle-time leads to
y % decrease in operating capital and z % increase in cus-
tomer satisfaction. Key indicators in the process perspec-
tive (for example Cycle Time, or Process Survey Score)
are sometimes called “performance drivers” – because a
focus on process indicators drives improvements in the
customer and financial indicators while requiring improve-
ments in competence.

3. Set targets
After identifying the gap between the present performance
and the required performance, targets are set for the current
year, two years and four years into the future - It is good
practice to identify the performance “entitlement” – i.e.

8
 what shareholders are entitled to expect from the business.
This is established by using an iterative process. First, look-
ing at the characteristics of the business – the market size,
the customer base, the brand equity, the innovation capa-
bilities etc., - we can calculate what financial result could
be achieved if performance were excellent. Next, from a
process point of view, we can calculate what financial result
would be achieved if the business processes performed at a
world class level. A management team can now have an
iterative discussion using both these routes to agree upon
the business entitlement. Finally, all targets must be
S.M.A.R.T., Specific, Measurable, Ambitious, Realistic,
and Time phased

4. Deploy objectives
Objectives defined by the business management team have
to be translated into objectives at the next level. A top level
BU Balanced Scorecard is often deployed to a sub-BU
scorecard, where the regional or product group business
strategy is reflected in a BBS for that area of the business.
At site level, the Process CSFs are deployed through the
layers of the organisation, bringing a focus on priorities for

Flag diagram example

Factory Late Shipments
Planning Purchasing Maintenance

Maint.

Repair

Adjust.

all employees. The tools for doing this are the well-known
Policy Deployment, or Hoshin planning approaches. It is
good practice to make the goals at each level visible by
using tools such as Flag Diagrams.

9
What does a Good
Scorecard look like?
There is no such thing as an ideal scorecard because each
scorecard must be tailored to the business. Some principles
however can be illustrated by examples.
The illustrations below are taken from the Lighting BU
Lamps. The first scorecard is a Strategy Review example; the
second is an Operations Review example.
Note: The data is for illustrative purposes only.

Balanced Scorecard - Business Unit X (illustrative data)

Critical Sucess Factor Performance Indicator

EconomicProfit Realised Euro (mln)

Sales Euro (mln)
Financial

Ifo %age of sales

Working capital Turnover speed
Productivity Sales/wagebill
Cashflow Euro (mln)

Market share %age

Delivery performance ICSL
Customers

Customer complaints Max time to closure - d

Sales of new products %age of total sales
Brand index Absolute value - nomin
Survey results Score

BEST Marketing Survey tool score

Processes

BEST Purchasing Survey tool score

BEST Manufacturing Survey tool score
Cycletime reduction %age from last check p
BEST Innovation Survey tool score
Competence

Organisation capability PBE achievement

Leadership assessment Approved action plan
BEST training %age of target group c
QIC participation %age of population

10
 Check Points
Target 2000 Target 2002 Target 2004

180 275 340

2115 2478 2715
14% 16% 19%
5.9 7 7.5
3.5 4.0 4.2
250 380 440

18.8% 20.3% 22.0%

93% 95% 97%
ays 21 14 10
tbd tbd tbd
nal 110 110 110
7.5 8 8.5

3 6 8
3 6 8
4 7 9
point 30 30 30
6 8 9

tbd tbd tbd

Complete Complete Complete
omplete 0% 95% 95%
25% 40% 50%

Below Plan Meeting Plan Meeting Entitlement

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 Balanced Scorecard - Business Unit Y (illustrative data)
Critical Success Factor Performance Indicator

Economic Profit Realised Euro mln

Sales Euro mln
Financial

Ifo %age of sales

Working capital Turnover speed
Productivity Sales wagebill
Cashflow Euro mln

Market share %age

Customers

Delivery performance CSL Customer Service

Partnership Programme %age of sales
Brand index Absolute value
Survey results Score

BEST Marketing Survey tool score

Processes

Purchasing Cost reduction

Cycle time Export days
BEST Innovation
BEST Manufacturing Survey tool score
Competence

Organisation capability PQA 90 achievement

Leadership assessment Approved action plan
BEST training %age of target group c
QIC participation %age of population

Traffic light reporting

Colours are used to indicate how the actual performance
compares with the target and entitlement:
• Green - meeting entitlement
• Yellow - performance is in line with the plan
• Red - performance is below plan

In the Lighting example, the terms target and plan need

some explanation. The column “target” states the expected
performance that can be below what is actually required.
For instance, for some processes, the ’99 Process Survey score
is expected to be below 3. It is therefore reported red
although it is foreseen in the plan.

12
 Check Points
Target Q1 Target Q2 Target Q3 Target Q4

6 12 20 28
109 231 363 500
9.0% 8.7% 9.3% 10.0%
5.5% 6.0% 6.0% 6.5%
4.0 4.2 4.2 4.4
16 20 30 55

10.9% 11.1% 11.2% 11.3%

Level 85% 85% 90% 93%
0% 0% 5% 10%
1.40 1.36 1.33 1.31
7.1 7.2 7.4 7.5

1.5 1.5 3
-0.5% -1.0% -1.5% -2.5%
45 40 37 35
3.0 3.5 3.5 4.0
3.5 4.5 5.0 6.0

0 0 1 3 units
30% 65% Complete
ompleted 45% 70% 90% 90%
10% 15% 15% 20%

Below Plan Meeting Plan Meeting Entitlement

13
Definitions
Business Balanced Scorecard
A Balanced Scorecard presents a limited set (< 24) of causally
connected measurements that reflect the competitive features
of the business.

Critical Success Factors

Critical Success Factors (sometimes called Value Drivers)
are the business variables that are crucial for achieving the
business goals and have the greatest impact on the business.

Key Indicator
A key indicator is the measurement of a Critical Success
Factor or, given multiple measurements, the one measure-
ment that is preferred above others (for instance, Cycle
Time above PPM or Yield)

Improvement Driver
Among the several indicators of a Process CSF, one indicator
can often be identified as key because it indicates and drives
improvement in all indicators. That is the Improvement
Driver. Examples are Cycle Time and Process Survey score

Influence Diagram /
Relationship Diagram/ Affinity Diagram
An Influence Diagram is a visual representation of the
network of cause & effect relationships between indicators.

Target
A target specifies the value of an indicator to be reached by a
given time.

S.M.A.R.T. targets
SMART targets are Specific, Measurable, Ambitious, Realistic,
and Time phased

14
Entitlement
Entitlement is the financial performance that a business
could expect to achieve. It represents a stretch target. It can
be established through analysis of the BBS performance
relationships, and considering how good the business perfor-
mance could be with the business characteristics of the mar-
ket size, the customer base, the brand equity, the innovation
capabilities, etc., and world class process performance.

Process Survey Tools

A process survey tool is an assessment tool for evaluating
process maturity. Aspects or elements of the process are
described in words and/or numbers in a staircase of maturity
levels, to enable a team to assess their maturity level for each
element. The best tools have 10 steps for each element. The
resulting evaluation can be used to plan improvements, and
to compare maturity and ways of working with others.

15
Indicators; examples
Indicators at the level of a business.

Financial Processes
Economic Profit Realised Process Survey Tool Score
Income from Operations % Reduction in
Working Capital Process Cycle Time
Operational Cash Flow Number of Engineering
Inventory Turns Changes
Productivity Capacity Utilisation
Order Response Time
Process Capability (Cpk)

Customers Competence
Ranking in Customer Survey PQA / PBE Score
Market Share Leadership competence
Repeat Order Rate % Patent-protected Turnover
Complaints BEST Training Days/
Brand Index Employee
QIC participation

Indicators below business level

Many business indicators can be deployed to next levels in
the organisation.
Other indicators cannot meaningfully be consolidated and
will only be reported at operational level. For instance: Yield,
Cycle-time, Defects (PPM), Mean Repair Time, Back Orders,
and Incorrect Delivery.

16
References
The Balanced Scorecard; Translating Strategy into Action
Kaplan & Norton; Harvard Business School Press, 1996

Balanced Performance Measurement;

Examples of non-financial indicators
Philips Corporate Quality Bureau, 1997

Website: pww.best.philips.com

17
Second edition
© KONINKLIJKE PHILIPS ELECTRONICS N.V. 2000
July 2000

Philips International B.V.

Corporate Quality Bureau
Eindhoven, The Netherlands
E-mail: ineke.kluijtmans@philips.com
Intranet: pww.best.philips.com

4322 275 21301