Balanced Scorecard

An operations strategy cannot be successful without proper co-ordination with other functional departments of the organization. There may be contradicting objectives between the various functional strategies in certain situations.

The task of developing a comprehensive strategy for a firm that integrates the finance, marketing and operations function is complex Kaplan and Norton have developed a generic strategy map template that they use in consulting work. The template is a starting point for the strategy design process

When properly constructed, the strategy map will portray an integrated and logical description of how the strategy will be accomplished

Financial Perspective
Whether companies use return on investment, return on capital employed or some other value based metric as the high level financial objective, they have two basic strategies for driving financial performance: growth and productivity

The growth strategy focuses on developing new sources of revenue or profitability It generally has two components:
 

Build the franchise Increase customer value

The productivity strategy features the execution of operational activities in support of existing customers They focus on cost reduction and efficiency It has two components:
 

Improve cost structure Improve asset utilization

The productivity strategy yields results quicker than the growth strategies. Kaplan and Norton suggest a balanced approach to ensure that cost and asset reductions do not compromise a companys growth opportunities

Customer Perspective
Customer perspective is the heart of the corporate strategy design process and defines how growth will be achieved There are three ways in which a company can differentiate itself in the marketplace
  

Product leadership Customer intimacy Operational excellence

Internal Perspective
This perspective defines the business processes and the specific activities that the organization must master to support the customer value proposition The essence of strategy is in the activitieschoosing to perform activities differently or to perform different activities than rivals

There are four sets of business processes

   

Product leadership Customer intimacy Operational excellence Regulatory and environmental excellence

Learning and Growth Perspective

This defines the intangible assets needed to enable activities and customer relationships to be performed at high levels of performance There are three principal categories:
  

Strategic competencies Strategic technologies Climate for action

Learning and growth strategies are important for long term development of the firm It is vitally important that a firm align human resources, information technology, corporate climate and research activities with requirements from the strategic business processes and customer differentiation strategy

Kaplan and Norton have developed their concept of the Balanced Scorecard to tell how well an integrated strategy is being executed.

The Balanced Scorecard was introduced by Robert S. Kaplan and David P. Norton in 1992 Emerged from the study Measuring Performance in the Organization of the Future conducted in the early 1990s. Most performance measures rely heavily on financial accounting measures

The study was motivated by the belief that these performance measurements were getting obsolete. Kaplan and Norton developed a framework for integration and performance measurement which included strategic, operational and financial measures

According to Kaplan and Norton, financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. ..(contd)

These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.

The balanced scorecard is a concept for measuring whether the activities of a company are meeting its objectives in terms of vision and strategy. It focuses not only on financial outcomes but also on the human issues The balanced scorecard helps to provide a more comprehensive view of a business which in turn helps organizations to act in their best long-term interests.

The strategic management system helps managers focus on performance metrics while balancing financial objectives with customer, process and employee perspectives. Measures are often indicators of future performance.

The balanced scorecard is a management system (not only a measurement system) It enables organizations to clarify their vision and strategy and to translate them into action.

It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise

Balanced Scorecard is simply a concise report featuring a set of measures that relate to the performance of an organization. By associating each measure with one or more expected values (targets), managers of the organization can be alerted when organizational performance is failing to meet their expectations.

The BSC enables an organization to translate the companys vision and strategy into implementation working from four perspectives
   

Customer perspective Internal business process perspective Learning and growth perspective Financial perspective

The balanced scorecard provides answers to four basic questions

   

How do customers see us (customer perspective) What must we excel in (internal perspective) Can we continue to improve and create value (learning and growth perspective) How do we look to shareholders (financial perspective)

From the financial perspective, the scorecard helps in systematic scrutiny of key financial criteria that the company must achieve to maintain its standing in the corporate world

The customer perspective aids the process of translating strategic statements to specific measures that really matter to the customer, such as quality and delivery time.

The internal perspective focuses attention on critical internal operations that are needed to satisfy customer requirements and help in identifying and building the necessary competencies for competitive success.

The learning and growth perspective emphasizes the need to look further into the future , thereby helping to break away from a short term focus.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

Internal Business Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these processes. The support processes are more repetitive in nature, and hence easier to measure and benchmark using generic metrics.

Learning and Growth Perspective

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode.

Government agencies often find themselves unable to hire new technical workers, and at the same time there is a decline in training of existing employees. This is a leading indicator of 'brain drain' that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledgeworker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems." One of these, the Intranet, will be examined in detail later in this document.

Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data.

With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.