Balanced Scorecards

Assignment on Balanced Scorecard

Bangladesh University of Business & Technology

Submitted to:

Mr.Md. Moinul Islam MuradLecturerDepartment of ManagementBangladesh University of Business & Technology (BUBT)

Submitted by:

Student Name Student ID No.

Md. Sohanul Haque 09102101214Section : VIntake : 21st

Program : BBASemester : Spring 2013Bangladesh University of Business & Technology

Submission Date : May 25, 2013

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Course Title: Strategic Business and Policies Course No. : MGT- 405


Abstract

Starting in the early 1990s, Robert S. Kaplan and David P. Norton advocated a “balanced scorecard” translating an organization’s mission and existing business strategy into specific strategic objectives that could be linked in cause and effect relationships and measured operationally. The balanced scorecard stressed the few critical drivers of future organizational performance – capabilities, resources, and business processes – and the results of those drivers – outcomes for customers and the growth and profitability of the organization. Specific objectives were linked in cause and effect relationships derived from the strategy, measured, and communicated to the organizational members for strategy implementation. Many public, private, and not-for-profit organizations

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Assignment on Balanced Scorecardhave adopted the scorecard as part of their strategic management approach. A company should achieve its goal by using a systemic approach where different perspectives should be taken into account: financial, customer, process and learning. In a manufacturing system we may have distinct production scenarios such as: variable demand, backlogs, breakdowns which make the situation harder. Different production and control techniques, push, pull hybrid, etc... can be applied to manage the system in an appropriate way using measures or indicators that tell us if the company behavior is the desired one. In this paper a framework (resembling the balance scorecard) is presented showing different scenarios by combining these with different production control techniques while recording the value of several key indicators: financial, non-financial, manufacturing, etc... A balanced choice of techniques and measures should be made to provide the firm with tools to improve its competitiveness.

O bjectives of Balance scorecard

Deriving goal from current strategic plan Measuring achievement of objectives with ratios Increasing focus on strategy and results Focusing on the driver’s key to future performance Improving communication of the organization’s Vision and Strategy

Keywords of Balanced Scorecard

Balanced scorecard, financial and non financial measures, performance measurement, strategic management tool, standardization, judgmental effects, multidivisional firms.

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Table of Contents

C o n t e n t s

1. What is a balanced scorecard? 52. Why Use a Balanced Scorecard?

63. Business Perspectives Balanced Scorecards

7-94. The tasks to be fulfilled by the balanced scorecard

10-125. The principles of the balanced scorecard

12- 14 6. Differences in the practical application of the balanced scorecard

15-167. Implementation of the balanced scorecard

17-188. Six Sigma and Balanced Scorecard

199. Key Implementation Success Factors

1910. Scorecard Potential Pitfalls & Criticisms

2011. Balanced Scorecard Benefit Re-Cap

2012. Conclusion and recommendations for controllers

21-22

Reference 23

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TOPICPAGES


1.What is a balanced scorecard?

The balanced scorecard originally came into being at the beginning of the 1990s as a tool for implementing strategies in day to day business. Two Americans – Robert S. Kaplan and David P. Norton – developed the idea. “Translate strategy into action” was their motto. Their approach could not be simpler.

The balanced scorecard is a strategic planning and management system used to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.

A Balanced Scorecard approach is to take a holistic view of an organization and co-ordinate MDIs so that efficiencies are experienced by all departments and in a joined-up fashion.

To embark on the Balanced Scorecard path an organization first must know (and understand) the following:

The company's mission statement

The company's strategic plan/vision

Then

The financial status of the organization

How the organization is currently structured and operating

The level of expertise of their employees

Customer satisfaction level

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2.Why Use a Balanced Scorecard? Improve organizational performance by measuring what matters.

Increase focus on strategy and results.

Align organization strategy with workers on a day-to-day basis.

Focus on the driver’s key to future performance.

Improve communication of the organization’s Vision and Strategy.

Prioritize Projects / Initiatives.

The Organization will become more “strategically focused” over the next ten years given the recent policy directive issued by BSP (Budget & Strategic Planning).

Need more balanced approach to looking at performance, both tactical and strategic.

Improve communication of the organization’s Vision and Strategy.

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3.Business Perspectives Balanced Scorecards The Balanced Scorecard acts as a measurement system strategy management system and communication tool for the entire organization. An integrated framework for describing strategy through the use of linked performance measures in four balanced perspectives:

1. Financial2. Internal business processes3. Learning & Growth (human focus, or learning and development)4. Customer

Financial

Core Financial Measures

Return on Investment/Economic Value-Added

Profitability

Revenue Growth

Cost Reduction/Productivity

Customer

Core Customer Measures

Market Share

Customer Retentions

Customer Acquisition

Customer Satisfaction

Employee Growth and Learning

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Core Learning and Growth Measures

Employee Satisfaction

Employee Retention

Employee Productivity

Internal Processes

Core Measures are developed by each organization for their unique processes. Process will be in support of stated objectives. An Organization must monitor the effectiveness of key processes the organization must excel at in order to continue adding value for customers.

Fig. 1 Balanced scorecard according to Kaplan/Norton with 4 future perspectives

Each of the four perspectives is inter-dependent - improvement in just one area is not necessarily a recipe for success in the other areas.

Balanced scorecard - factors examples

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Department Areas

Finance Return On Investment Cash Flow Return on Capital Employed Financial Results (Quarterly/Yearly)

Internal Business Processes

Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation

Learning & Growth Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities

Customer Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market

4.The tasks to be fulfilled by the balanced scorecard

While using the balanced scorecard we want to transform strategies into action. That is its real mission. This is how this concept is to overcome the serious weak point of many others: the fact that strategic objectives are not embedded in day to day business life.

Defining objectives The balanced scorecard fulfills its mission mainly because it gives our objectives a clear structure. In most cases this is usually done by drawing up a “strategic matrix”, which can help us to choose from amongst a wide variety of possible actions those that appear to be the most strategically justified.

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The mission statement and main objective form the “single roof” under which we wish to place all our activities. These should be derived from the philosophy and culture of the business to the greatest possible extent and describe a business’ purpose (mission) and target orientation (vision) for a clearly defined period (strategic horizon) (cf. also the “Strategische Planung”[Strategic Planning] statement of business).The mission statement and main objective should help us answer the question: “Why are we a business and what sort of a business are we?”In this context we want to use the mission statement to show which image primarily customers should have of us:

o What could induce customers also in the future to spend their money on our services?

o Who is actually to be our customers in the future?o What are our customers' criteria of success (the benefit that they gain

from it) – with reference to the services offered by us? And with the main objective we want to make it clear primarily to the employees in the company what we consider to be the potential, which is crucial for our sustainability in the near future and which we wish to develop. Using the development areas / perspectives we describe the most important potentials (possibilities and capabilities) to be developed for shaping our future. In this context we should not have a schematic approach, but rather take into account the specific conditions of our business. This already begins at the stage of identifying the development areas / perspectives. Who is the customer of a pharmaceutical company for example: the patient? The physician? the pharmacist? the health insurance fund? Here it can be useful to define four “customers” or “partner areas (perspectives)” to properly capture strategic goals.

Measuring achievement of objectives with ratios Designing an option matrix for strategically goal- oriented actions is only one aspect dealt with by the balanced scorecard. The other consists in the consistent application of relevant ratios in order to be able to measure the achievement of objectives. “You can’t manage what you can’t measure!”

In this context there are two different points of reference: On the one hand, we are dealing with the concrete actions of the

stakeholders. We want to get from a given ACTUAL state to a desired TARGET state.

Concrete action requires concrete goals. General targets such as “12.8% return on capital employed” do not help much here. Firstly, because most managers and employees cannot understand them and secondly because such targets do not say anything about the concrete actions that are needed to fulfills them.

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In these terms the balanced scorecard requires more specific ratios that are directly linked to particular activities in order to guide the actions of people involved in the processes of producing and marketing goods and services. Here the ratios predominantly support communication on the effective organization of joint work.

However, using specific ratios alone to manage concrete processes is not enough. In today’s work sharing world we normally use many resources together with others. These can be raw materials, money or ” just” time, which we devote to particular tasks. Decisions about the distribution of these means – especially if these are scarce resources –are taken by people who are not directly involved in the processes subject to change: top management teams of a group, supervisory boards, bankers or analysts, for example.

And due to the fact that these persons are not involved in the processes – their responsibility is focused on the distribution of resources and not on their concrete consumption – they need reports, which are as clear as possible, so that they can get an idea of the course and outcomes of our actions and take decisions on that basis. In this context the balanced scorecard predominantly requires ratios linked to the use and utilization of the applied means as well as comparison (benchmarking) with other business units. The actual, concrete actions are not the main focus here.

The effectiveness of the ratios of a balanced scorecard depends on a large extent on how far they successfully deal with both aspects. Only when we combine both aspects do we obtain a universal tool for shaping the sustainability of our business.

5.The principles of the balanced scorecard The following principles should be followed when drawing up and implementing a balanced scorecard:

Consistent focus on objectives Consistent focus on objectives – with reference to putting goals into practice – primarily means that we understand and take into account the difference between operational and strategic action.

We generally associate operational with short-term and strategic with long-term. Operational matters must be dealt with immediately, strategic issues can wait. Unfortunately, this is a fallacy.Operational and strategic matters are not questions of time scale. Both have something to do with the potentials that are available to us.

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Operational issues refer to the utilization of the available potentials, e.g. completing orders. Tangible results are the outcome, which in most cases result in money inflow.

Strategic issues mean developing new capacities, which will result in money inflows (hopefully!) in the future. In this context only an inflow of potentials takes place, not yet a cash flow (cf. also the statement

“Wertorientierte Unternehmensführung” [Value- oriented business management].

Consequently, we should only use operational ratios, such as turnover, profit or utilization of capital to measure the goals of strategic initiatives if we are aware of the associated incongruities.

Balanced involvement of all stakeholders Objectives are put into practice by people– not by ratios! In this context all the major forces in a company should be integrated into the definition of goals and their implementation in a balanced way by means of a balanced scorecard.However, in order to prevent the situation where the numerous actions of the often wide variety of people result in chaos, the stakeholders need specific, that is, measurable objectives that facilitate their co-operation. Ratios, which facilitate a defined setting of goals help with this. These are ratios, which are designed in such a way that we can use them to measure the course of actions or outcomes with reference to the targeted goals.We refer to this approach as the “OAR principle” (Objective – Action –Ratio). The OAR principle does not only apply to actions in the narrower sense of the term. It applies to each set goal within the scope of the balanced scorecard – strategic themes, development areas / perspectives, actions and projects. Due to the need to define measurable ratios we have no choice but to be specific about what we want.

Combining simple structures

Combining simple structures first and foremost means: remaining understandable. It is not much use to us to reflect the complexity of the real world as closely as possible if the models created on this basis can only be understood by a handful of experts. If we want to take people with us on our strategic and operational path then we have to make ourselves understood. For this purpose we need simple, clear structures, even if “simple” means also simplification and- consequently- lack of precision. As the saying goes “It’s better to be 60% correct than 100% misunderstood!

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Transparency with ratios Here emphasis is placed on the word “transparency”. However, in this context we should differentiate for what purpose and for whom the transparency is intended:

With respect to actions it is predominantly a question of translating the set goals into concrete terms. Thus first and foremost this refers to “inward transparency” – transparency for the persons carrying out the actions.

And it is also about self -controlling. This is because these are our own, jointly selected objectives, the achievement of which we wish to measure using corresponding ratios. Such ratios must be understandable, specific and easy to follow for the business team.

With respect to the distribution of the available resources first of all it is a question of the story that we wish to tell “external” partners about our actions. Ratios can lend credibility to these stories. Thus in this context the main emphasis is on “outward transparency” - on being understood by people that do not directly experience the events within the organization or the organizational unit.

At this point we should pay attention to the specific tasks of these people. They mostly take decisions about the division of commonly used resources, such as time and capital. They therefore need ratios that make a comparison between the various “entitled parties” possible in order to facilitate decision making.

Concentrating on the essentials Concentration consists in the art of focusing one’s attention on one point. Therefore, concentrating on the essentials means leaving out what is less important or postponing it. The problem is not determining the main focus points, but rather deciding what is to be left out. Having the real courage to concentrate has a decisive impact on the success of a balanced scorecard! The balanced scorecard is thus not only a tool that generates additional costs. Concentrating on the essentials also makes it possible to save resources.

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6. Differences in the practical application of the balanced scorecard

In practice there are many types of balanced scorecards. The differences can basically be linked to three criteria:

6.1 How is the balanced scorecard linked with the company’s strategy? The name “balanced scorecard” is often equated with a system of ratios. When applied in practice it usually leads to a mere grouping of operational and strategic ratios – particularly with respect to software solutions. Such approaches are in conflict with Kaplan / Norton’s original idea: “Balanced scorecards should not only be collections of financial and non-financial ratios– integrated into four perspectives. The best balanced scorecards reflect an organization’s strategy.” However, it is only possible to reflect strategies if an organization have them! Consequently a balanced scorecard which does not build upon a major strategy only has a slightly clarifying effect. We can avoid this if we formulate a strategy before a balanced scorecard is drawn up before or during this process. If considerable time is required, this is a point in favour of formulating the strategy in advance. A factor supporting the linking with the balanced scorecard is the specific impression of our strategy that we gain in this way.

6.2 How are people involved in developing strategies and in their implementation? “Translate strategy into action” – this is the task of the balanced scorecard as originally formulated by Kaplan / Norton: the practical implementation of strategy on a day to day basis and developing potentials as our daily task. In this context it is obvious that this depends on how people concerned are involved in the process. And here cases of application in practice differ considerably. The range stretches from the strict setting of strategic guiding principles by the “boss” or a very narrow circle of selected managers to an open dialogue on individual and common objectives and translating them into a strategy supported by all participants. At one extreme the balanced scorecard is integrated into an environment characterized by hierarchical structures and tends to be reduced to a strategic planning and control system. At the other extreme the balanced scorecard forms a framework for organizing open structures around a common goal.

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6.3 How is the balanced scorecard integrated into overall business operations and reporting? The balanced scorecard as a strategic system of ratios is often attributed to controlling. In this way it extends the palette of controlling tools already available, however, it does not serve as a central leadership tool for management. In this context there are seriously intended “solutions” – using the balanced scorecard to “calculate” the future. For this purpose mathematical links are constructed between the ratios for the actions, the so-called “critical” success factors and the main objective. This can lead to dangerous illusions,

o because we can actually extrapolate sales, turnover and cost figures or can model with detailed scenarios, however, we cannot use this to understand the development of the potentials, which are needed;

o because we quickly lose sight of the fact that each calculation is based on assumptions, which are hidden behind coefficients and constants and whose plausibility and constancy are normally not verified;

o because in conventional mathematical models we assume that there are linear correlations between cause and effect and thus we do not even begin to sufficiently comprehend the detailed complexity of a changing organization; without even mentioning the delays in terms of time and space;

o because computer calculations simulate an apparent accuracy and objectivity, which is not provided.

7.Implementation of the balanced scorecard The practical benefits of a balanced scorecard are largely influenced by the extent to which its structure corresponds to the character of the business. Companies of technical profile with a traditional function- oriented organization (for example: businesses in raw resources industry) need a more hierarchically structured balanced scorecard, whilst technologically

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advanced, knowledge- oriented companies (for example: information and communications industry) would rather benefit from structures that are oriented to the needs of intellectual capital.

Implementing the Balanced Scorecard system company-wide should be the key to the successful realization of the strategic plan/vision.

A Balanced Scorecard should result in:

Improved processes

Motivated/educated employees

Enhanced information systems

Monitored progress

Greater customer satisfaction

Increased financial usage

There are many software packages on the market that claim to support the usage of Balanced Scorecard system.

For any software to work effectively it should be:

Compliant with your current technology platform

Always accessible to everyone - everywhere

Easy to understand/update/communicate

Feedback is essential and should be ongoing and contributed to by everyone within the organization.

And it should be borne in mind that Balanced Scorecards do not necessarily enable better decision-making!

The balanced scorecard in more process oriented businesses

In more process-oriented, technology-rich businesses intellectual capital is the focus of attention. It is produced by:

the people operating within the company (the knowledge and skills of the 　 employees as well as the culture of interpersonal relationships)

the people associated with the company (the type of relationships with our 　 partners (customers, suppliers, investors, etc.) and- in consequence access　to their knowledge and skills),

the company’s structures (to link up the possibilities and capabilities of the　company and the knowledge of people with the capacities of

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the 　 machinery / means of production, raw materials, communications devices　and organizational structures), and

the social resources deployed by the company (e.g. the public education 　 system, the Internet or the environment, which also represent potentials　for us).

Intellectual capital is constantly gaining importance as a factor in our global economy. Financial capital on its own is no longer the engine of growth, but also knowledge and the ability to apply it. Against this background the personal goals of people involved form the starting point for a company’s or an organization’s balanced scorecard.

Figure: Strategy Map

8.Six Sigma and Balanced Scorecard An approach that combines the targeted performance indicators of a Balanced Scorecard with the statistical rigor of Six Sigma can be used to effectively focus an organization on the achievement of strategic goals – in essence, creating the ultimate "management cockpit." Adopting this structured approach to planning, managing and monitoring improvement brings cohesion to conflicting constituencies and builds confidence in proposed process improvements. In turn, this confidence can have a measurable impact on the organization by accelerating the implementation of change, often viewed as a delicate balance between cost, quality and efficiency.

• One of the crucial elements of the project charter in the define phase of a Six Sigma project is the selection of project metrics.

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• Project metrics selected should reflect the voice of the customer (customer needs), as well as ensure that the internal metrics selected by the organization are achieved.

• Metrics selected should be simple and straightforward and meaningful. Metrics selected should create a common language among diverse team members.

9.Key Implementation Success Factors

Obtaining executive sponsorship and commitment Involving a broad base of leaders, managers and employees in

scorecard development Choose the right Scorecard Champion Beginning interactive (two-way) communication first Viewing the scorecard as a long-term journey rather than a short-term

project Getting outside help if needed

10. Scorecard Potential Pitfalls & Criticisms

Lack of a well Defined Strategy The balanced scorecard relies on a well defined strategy and

understanding of linkages between strategic objections and metrics. Without this foundation the implementation could fail.

Too much focus on the lagging measures Focusing on only the lagging measures may cause a lack of

priority or opportunity for the leading measures. Use of Generic Metrics

Don’t just copy metrics from another firm. Identify the measures that apply to your strategy and competitive position.

Self-serving managers Managers whose goal is to achieve a desired result in order to

obtain a bonus or other self reward.

11. Balanced Scorecard Benefit Re-Cap

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Helps align key performance measures with strategy at all levels of an organization

The methodology facilitates communication and understanding of business goals and strategies at all levels of an organization

Strategic initiatives that follow "best practices" methodologies that cascade through the entire organization

Transforms an organization’s mission statement and strategic plan from a passive document into the "marching orders" for the organization on a daily basis.

It enables executives to truly execute their strategies by identifying what should be done and measured.

12. Conclusion and recommendations for controllers

The Balanced Scorecard is a management system used to focus and prioritize management energy toward achieving both short and long term organizational goals and with the ability to give early warning signals for midcourse correction

If the balanced scorecard is successfully integrated into day to day business life, it can be developed into a comprehensive and universal tool. It is a tool that provides all activities with a strategic framework and ensures more clarity and consistency for all parties involved to help them in formulating, communicating and implementing their strategy. It supports implementation,　which makes it possible to understand strategic action in terms of it being a　daily task and to realize it as such, as well as to link it with operational action.

　　　　 In line with this, Kaplan / Norton place their balanced scorecard within the　 framework of an overarching concept of “the strategy- focused organization”. 　 This impacts its content as both a management and a controlling system:

Design your balanced scorecard on the basis of a communicated strategy 　 – and at the same time use the balanced scorecard to communicate your 　 strategy. Make it clear to management in advance how much the　effectiveness of the balanced scorecard tool depends on its being　embedded in strategy.

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Design your balanced scorecard jointly with all major forces within a company. These do not only include the entire management team, but also innovative “lateral thinkers”, members of the works council or “friends　of the family”, who bring less “company insider’s blindness”, but instead　“the view from outside”.

Design your balanced scorecard using your own ideas and those of your　colleagues. In this context moderated workshops and external help can be　useful during implementation. However, the content and the “emotion” 　 should always come from the stakeholders themselves. This is because 　 they will have to live with the consequences – the external party will no 　 longer be around once they have finished their assignment.

Design your balanced scorecard in line with the specific circumstances of 　 your business. Success is born out of the combination of quality and 　 acceptance. Therefore, design your balanced scorecard so that it can be 　 accepted by all the parties involved. This also includes convincing the 　 management of the advantages of the balanced scorecard tool. The 　balanced scorecard will make more rapid inroads into day to day business　life, the more concretely it is understood and experienced as a practical competitive advantage.

Design your balanced scorecard in clear structures with respect to goals,　the choice of appropriate actions, the organization of practical work and　 reports. The balanced scorecard tool can only display the effectiveness　that you anticipate from it if there is the interplay of the various structures.　So pay attention to transparency.

Design your balanced scorecard with the courage to be consistent. Transparency only makes sense if it leads to decisions. Therefore use your balanced scorecard in such a way that decisions can be taken and implemented. Here this is a matter of decisions about changing your company as well as distributing the resources needed for this purpose. And take into consideration the fact that decision makers must understand　what they are supposed to decide upon. You also have to take into 　 account that people that take decisions about concrete actions operate　within a different context to those that have to decide about the division of　jointly used resources.

Design your balanced scorecard so that it can be integrated into your management and controlling system as seamlessly as possible. This includes project management and controlling just as well as flexible

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planning and budgeting and the relevant strategic and operational reports.　 In this context ensure that the ratios in your reports do not become self 　 evident and a formal shell. The balanced scorecard is more than a 　measurement system. However, ratios can force us to say what is to be 　 achieved in concrete terms, as these are measurable outcomes. And if 　 these are linked with accountability, they foster practical action in terms of　mutual objectives.

Design your balanced scorecard with enduring patience; as all experience　to date teaches: the introduction of a balanced scorecard is relatively easy 　 to follow; however, living with the balanced scorecard is a complex,　continual process. In this process you should not link the ratios with the　incentive system too early. For this first of all sufficient experience and　above all trust in the balanced scorecard are needed.

Design your balanced scorecard so that there is enough time for communication, as only this can serve as a learning basis for the company　and the basis for business success.

References

1. www.wikipedia.com2. www.Balanced Scorecard.com3. www.bsc.com.pdf4. Operation Management for Competitive Advantage

(Jacods)

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Balanced Scorecards