Presentation on theme: "Balanced Scorecard Management must consider both financial and operational performance measures Measures should be linked with company goals and strategy."— Presentation transcript:
1 Balanced ScorecardManagement must consider both financial and operational performance measuresMeasures should be linked with company goals and strategyFinancial measures are only one measure among manyUses key performance indicatorsThe balanced scorecard recognizes that management must consider both financial performance measures and operational performance measures when judging the performance of a company and its subunits. These measures should be linked with the company’s goals and its strategy for achieving those goals.The balanced scorecard represents a major shift in corporate performance measurement. Rather than treating financial indicators as the sole measure of performance, companies recognize that they are only one measure among a broader set. Keeping score of operating measures and traditional financial measures gives management a “balanced” view of the organization.Management uses key performance indicators—such as customer satisfaction ratings and revenue growth—to measure critical factors that affect the success of the company.1
2 The Balanced Scorecard The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI.I’m glad we used the balanced scorecard to tell which approachis best.ReduceExpensesIncreaseSalesReduceAssets
3 Examples of critical factors and corresponding KPIs COMPANY GOALSExamples of critical factors and corresponding KPIsCRITICAL FACTORSCustomer satisfactionOperational efficiencyEmployee excellenceFinancial profitabilityAs shown here, key performance indicators (KPIs) are summary performance measures that help managers assess whether or not the company is achieving its goals.KEY PERFORMANCE INDICATORSMarket shareYield rateTraining hoursRevenue growth3
4 Four PerspectivesFinancialCustomerInternal BusinessLearning and GrowthThe balanced scorecard views the company from four different perspectives, each of which evaluates a specific aspect of organizational performance:1. Financial perspective2. Customer perspective3. Internal business perspective4. Learning and growth perspectiveCompanies that adopt the balanced scorecard usually have specific objectives they wish to achieve within each of the four perspectives. Once management clearly identifies the objectives, they develop KPIs that will assess how well the objectives are being achieved. To focus attention on the most critical elements and prevent information overload, management should use only a few KPIs for each perspective.4
5 Financial Perspective How do we look to shareholders?Ultimate goal is to generate income for ownersKPIs:Sales revenue growthGross margin growthReturn on investmentWorking capital usedThe financial perspective helps managers answer the question, “How do we look to shareholders?” The ultimate goal of companies is to generate income for their owners. Therefore, company strategy revolves around increasing the company’s profits through increasing revenue growth and increasing productivity. Companies grow revenue through introducing new products, gaining new customers, and increasing sales to existing customers. Companies increase productivity through reducing costs and using the company’s assets more efficiently. Managers may implement seemingly sensible strategies and initiatives, but the test of their judgment is whether these decisions increase company profits. The financial perspective focuses management’s attention on KPIs that assess financial objectives, such as revenue growth and cost cutting. Some commonly used KPIs include: sales revenue growth, gross margin growth, and return on investment.5
6 Customer Perspective How do customers see us? Top priority for long-term successCustomer concerns:Product priceProduct qualitySales service qualityProduct delivery timeKPIs:Customer satisfactionMarket shareNumber of customers and repeat customersRate of on-time deliveriesThe customer perspective helps managers evaluate the question, “How do customers see us?” Customer satisfaction is a top priority for long-term company success. If customers are not happy, they will not come back. Therefore, customer satisfaction is critical to achieving the company’s financial goals outlined in the financial perspective of the balanced scorecard. Customers are typically concerned with four specific product or service attributes: (1) the product’s price, (2) the product’s quality, (3) the sales service quality, and (4) the product’s delivery time (the shorter, the better). Since each of these attributes is critical to making the customer happy, most companies have specific objectives for each of these attributes.Businesses commonly use KPIs, such as customer satisfaction ratings, to assess how they are performing on these attributes. No doubt you have filled out a customer satisfaction survey. Because customer satisfaction is crucial, customer satisfaction ratings often determine the extent to which bonuses are granted to restaurant managers. Other typical KPIs include percentage of market share, increase in the number of customers, number of repeat customers, and rate of on-time deliveries.6
7 Internal Business Perspective At what business processes must we excel?Three factors:InnovationKPI: Number of new products developedOperationsKPIs:Product efficiency – number of units producedProduct quality – defect ratePost-sales serviceKPIsNumber of warranty claimsAverage wait time on phone for customer serviceThe internal business perspective helps managers address the question, “At what business processes must we excel to satisfy customer and financial objectives?” The answer to this question incorporates three factors: innovation, operations, and post-sales service. All three factors critically affect customer satisfaction, which will affect the company’s financial success.Satisfying customers once does not guarantee future success, which is why the first important factor of the internal business perspective is innovation. Customers’ needs and wants change as the world around them changes. Companies must continually improve existing products and develop new products to succeed in the future. Companies commonly assess innovation using KPIs, such as the number of new products developed or new-product development time.The second important factor of the internal business perspective is operations. Efficient and effective internal operations allow the company to meet customers’ needs and expectations. For example, the time it takes to manufacture a product (manufacturing cycle time) affects the company’s ability to deliver quickly to meet a customer’s demand. Production efficiency (number of units produced per hour) and product quality (defect rate) also affect the price charged to the customer. To remain competitive, companies must be at least as good as the industry leader at those internal operations essential to their business.The third factor of the internal business perspective is post-sales service. How well does the company service customers after the sale? Claims of excellent post-sales service help to generate more sales. Management assesses post-sales service through the following typical KPIs: number of warranty claims received, average repair time, and average wait time on the phone for a customer service representative.7
8 Learning and Growth Perspective How can we continue to improve and create value?Three factors:1) Employee capabilitiesKPIs:Hours of employee trainingEmployee satisfaction and turnoverNumber of employee suggestions implementedDollars per worker on Workers Compensation ExpSales dollars per workerThe learning and growth perspective helps managers assess the question, “How can we continue to improve and create value?” The learning and growth perspective focuses on three factors: (1) employee capabilities, (2) information system capabilities, and (3) the company’s “climate for action.” The learning and growth perspective lays the foundation needed to improve internal business operations, sustain customer satisfaction, and generate financial success. Without skilled employees, updated technology, and a positive corporate culture, the company will not be able to meet the objectives of the other perspectives.First, because most routine work is automated, employees are freed up to be critical and creative thinkers who therefore can help achieve the company’s goals. The learning and growth perspective measures employees’ skills, knowledge, motivation, and empowerment. KPIs typically include hours of employee training, employee satisfaction, employee turnover, and number of employee suggestions implemented.Second, employees need timely and accurate information on customers, internal processes, and finances; therefore, other KPIs measure the maintenance and improvement of the company’s information system. For example, KPIs might include the percentage of employees having online access to information about customers, and the percentage of processes with real-time feedback on quality, cycle time, and cost.Finally, management must create a corporate culture that supports communication, change, and growth.Copyright (c) 2009 Prentice Hall. All rights reserved.8
9 Learning and Growth Perspective 2) System capabilitiesKPIs:Percentage of employees with online access to customer dataPercentage of processes with real-time feedback3) Company’s climate for actionA balance of responsibility and authorityThe learning and growth perspective helps managers assess the question, “How can we continue to improve and create value?” The learning and growth perspective focuses on three factors: (1) employee capabilities, (2) information system capabilities, and (3) the company’s “climate for action.” The learning and growth perspective lays the foundation needed to improve internal business operations, sustain customer satisfaction, and generate financial success. Without skilled employees, updated technology, and a positive corporate culture, the company will not be able to meet the objectives of the other perspectives.First, because most routine work is automated, employees are freed up to be critical and creative thinkers who therefore can help achieve the company’s goals. The learning and growth perspective measures employees’ skills, knowledge, motivation, and empowerment. KPIs typically include hours of employee training, employee satisfaction, employee turnover, and number of employee suggestions implemented.Second, employees need timely and accurate information on customers, internal processes, and finances; therefore, other KPIs measure the maintenance and improvement of the company’s information system. For example, KPIs might include the percentage of employees having online access to information about customers, and the percentage of processes with real-time feedback on quality, cycle time, and cost.Finally, management must create a corporate culture that supports communication, change, and growth.Copyright (c) 2009 Prentice Hall. All rights reserved.9
11 Key Features of Performance Management Is an essential part of organisation strategy:- derived from the mission and vision statements- links the mission and vision, strategy, goals and processes of the organisation
12 Key Features of Performance Management (Continued) Provides quantitative and qualitative information:- assesses non-financial as well as financial criteria- is a decision making tool- provides a standardised and consistent approach
13 Key Features of Performance Management (Continued) Provides a multidimensional focus on people and processes:- is a process not a system- measures processes not functions- needs top-down and bottom-up communication and understanding- enables delegation and empowerment- enhances employee satisfaction
14 Key Features of Performance Management (Continued) Provides both external and internal perspectives:- focuses on customer satisfaction- can be used to benchmark against competitors
15 Key Features of Performance Management (Continued) Continuous Improvement- emphasises causes, promotes self-diagnosis and identifies areas for improvement- promotes effective planning
17 Why Balanced Scorecard? Financial performance measurements no longer adequateFinancial evaluations are reactiveFinancial measures not able to reflect contemporary value creating actionsA Holistic measurement tool formulating an integral part of strategy (cross functional integration)
18 Why Balanced Scorecard? (Continued) Bridges financial measurements and strategyLever to streamline and focus strategyTranslate company strategy into specific measurable objectivesPut strategy not control at the centrePulls people to the overall vision
19 Why Balanced Scorecard? (Continued) It is a framework for creating a set of measures that gives managers a fast and comprehensive view of the business.It is a tool providing all of the critical indicators of a businesses current and future performance.It supplements traditional financial measures with three additional perspectives:
21 Balanced Scorecard - Principles Performance measures are balanced to reflect key areas of corporate activity which will create long term shareholder valuePerformance measurement are designed to monitor value drivers - quality, cycle time and service are key determinants of customer satisfaction which is the ultimate driver
22 Balanced Scorecard - Principles (Continued) Financial measures are used to explicitly include shareholder value calculationsOrganisation learning is specifically measured - ability to change, rate of change and continuous improvements
23 Balanced Scorecard - Principles (Continued) A top-down process is used to directly link vision and strategy - both senior management sponsorship, involvement and commitment, and lower level participation and agreement are all necessaryMeasures must link individual worker performance to overall organisation vision and strategy
25 Balanced Scorecard Value’s Translate business plan into a set of clear measures and targetsAs a reporting tool, will give managers regular feedback on their performance, allowing them to assess their situation and improveProvide a fair, data based, systematic mechanism for setting performance targets and rewarding achievement
26 Balanced Scorecard Value’s (Continued) Allow each business unit to focus on a few high value opportunitiesBe able to pinpoint issues and identify performance improvement opportunitiesProvide a checks and balances system to manage short term performance and strategic implicationsEnsure a comprehensive measurement system, measuring all perspectives of the business
28 What does the Balanced Scorecard measure? ProductInternal ProcessesCustomerInnovation and improvements
29 Vision & Strategy FINANCIAL “Financial Health” INT. BUS. CUSTOMER “Happy Customers”“how should we appear to our customer - to achieve our vision?”LEARNING & I NNOVATION“Happy Employees”“how will we sustain our ability to service, change and improve -to achieve our vision?”INT. BUS.PROCESS“Way of doing things”“what business processes must we excel at - to satisfy our shareholders?”FINANCIAL“Financial Health”“how should we appear to our shareholder - to succeed financially?”
30 Customer PerspectiveDemands that managers translate their general mission statements on customers into specific measures that reflect what really matters to the customer eg.- Lead time- Quality- performance- Service
31 Internal ProcessesInternal measures should stem from the business processes that have the greatest impact on customer satisfaction, e.g.- Factors that effect cycle time- Quality- employee skills- productivity
32 Innovation and learning perspective A company’s ability to innovate, improve and learn, ties directly to the company’s value. Only through the ability to launch new products, create more value for customers and improve operating efficiencies continually can a company penetrate new markets and increase revenue and margins.
33 Financial Perspective Financial performance measures indicates whether the company’s strategy, implementation and execution are contributing to bottom-line improvement e.g.- profitability- growth- shareholder value
34 The Balanced Scorecard is like the dials in an airplane cockpit: It gives managers complex information at a glanceKaplan and Norton
35 How does these measures differ from traditional measurements?
36 How does these measures differ from traditional measurements? Grounded in Organisations Strategic ObjectivesFocus strategic visionProvide balanceEnsure a focus beyond the current year
37 Barriers to Effective Balanced Scorecard Implementation
38 Barriers to effective Balanced Scorecard Implementation Measurements are non quantifiableMeasurements are input rather than output drivenNo buy-in from employees/managementBalanced Scorecard perceived as latest fad.No migration planningNo system to support measurements
39 Barriers to effective Balanced Scorecard Implementation (Continued) No follow-up on operational improvements with another round of actionsStrategies not effectively executedLack or no clear understanding on Balanced Scorecard mechanismPreoccuaption of measurements instead of outputs
41 Balanced Scorecard Benefits Synergy between effortsFocusCross functional integrationCreate customer and supplier partnershipContinuous improvementTeam rather than individual accountabilityAssist managers in understanding interrelationships
42 Balanced Scorecard Benefits (Continued) Tool to measure individual as well as group performanceScientific approach to quantifying strategic objectives
43 Practical Application of the Balanced Scorecard
44 “If you can’t measure it you can’t manage it’’ Kaplan and Norton
45 A Strategic Framework for Action Clarifying and Translating the Vision and StrategyClarifying the visionGaining consensusStrategic Feedback and LearningCommunicating and LinkingArticulating the shared visionSupplying strategic feedbackFacilitating strategy review and learningCommunicating and educatingSetting goalsLinking rewards to performance measuresBalanced ScorecardPlanning and Target SettingSetting targetsAligning strategic initiativesAllocating resourcesEstablishing milestonesKaplan & Norton, 1996
47 Balanced ScorecardTying the Balanced Scorecard Measures to the Strategy for SuccessCompany develops three to five performance measures for each dimensionMeasures should be tied to company strategyBalance among the dimensions is criticalYou get what you measure!
48 How Balance is Achieved in a Balanced Scorecard Performance is assessed across a balanced set of dimensionsBalance quantitative measures with qualitative measuresThere is a balance of backward-looking measures and forward-looking measures
49 Developing a Strategy Map for a Balanced Scorecard A strategy map is a diagram of the relationships of the strategic objectives across the four dimensionsUsed to test the soundness of the strategyIdentifies how strategy is linked to measures on the scorecardCommunicates strategic objectives to employees
50 Keys to a Successful Balanced Scorecard TargetsFor each measure, there should be a target so managers know what they are expected to achieveInitiativesFor each measure, the company must identify actions that will be taken to achieve the targetResponsibilityA particular employee must be given responsibility and held accountable for successfully implementing each initiativeFundingInitiatives must be funded appropriatelyTop Management SupportIt is crucial to have the full support of top management
51 Return on Investment (ROI) Formula Income before interestand taxes (EBIT)ROI =Net operating incomeAverage operating assetsAverage Current & Non Current Assets.
52 Return on Investment (ROI) Formula Regal Company reports the following:Net operating income $ 30,000Average operating assets $ 200,000$30,000$200,000= 15%ROI =
53 Controlling the Rate of Return Three ways to improve ROI . . .ReduceExpensesReduceAssetsIncreaseSales
54 ROI and the Balanced Scorecard The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI.I’m glad we used the balanced scorecard to tell which approachis best.ReduceExpensesIncreaseSalesReduceAssets
55 Criticisms of ROI In the absence of the balanced scorecard, management maynot know how to increase ROI.Managers often inherit manycommitted costs over whichthey have no control.Managers evaluated on ROImay reject profitableinvestment opportunities.
56 As division manager would you Criticisms of ROIAs division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus.The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%.You have an opportunity to invest in a new project that will produce an ROI of 25%.As division manager would youinvest in this project?
57 Criticisms of ROI As division manager, I wouldn’t invest in that project becauseit would lower my pay!
58 Criticisms of ROI Your division before new investment: Net operating income $ 60,000Average operating assets ,000ROI %New investment:Net operating income $ 10,000Average operating assets ,000ROI %Your division after new investment:Net operating income $ 70,000Average operating assets ,000ROI %
59 Criticisms of ROI Gee . . . I thought we were supposed to do what was best for thecompany!
60 Residual Income - Another Measure of Performance Net operating incomeabove some minimumreturn on operatingassets
61 Residual Income Let’s calculate residual income. A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.In the current period the division earns $30,000.Let’s calculate residual income.