Balanced Scorecards

Agenda Discuss and describe “balanced scorecards” Multiple performance measures Financial and nonfinancial measures Describe and illustrate “strategy maps” How to link elements of the scorecard to the underlying business model of the organization Takeaway

Performance Measures Goal of the firm is to maximize value (or profit) Easier said than done Giving the manager a profit based bonus contract Assumes the manager knows how to improve profits What actions to take? Will these actions really be effective in improving profits? We need to decompose the problem Smaller and more focused goals and actions These goals and actions combined generate profits

Balanced Scorecard Idea is to consider a system of multiple measures (both financial and nonfinancial) Four “perspectives” Owners (financial) Customers Internal processes Innovation and learning (or growth) For each perspective, goals are linked to measures

Scorecard Perspectives Financial Goals Measures …. …. Customer Internal Goals Measures Goals Measures …. …. …. …. Innovation Goals Measures …. …. Source: Kaplan and Norton (1991)

Financial Perspective Ultimate goal is financial performance Focus here is on for-profit firms Example Goals Example Measures Profitability Return on Investment Growth EPS growth (1, 5, 10 year) Survival Cash flow

Customer Perspective Customer experience is important for firms Example Goals Example Measures Satisfaction Satisfaction index Delivery % late deliveries Improved service Year-over-year complaints

Internal Perspective Efficiency (productivity) important to firms Lean initiatives Example Goals Example Measures Quality Defects Lean operation Inventory turnover Responsiveness Cycle time

Innovation Perspective Organization learning can be important for growth of the firm (and employees) Example Goals Example Measures Innovative New products Leading edge Patents Knowledge Employee competencies

Agenda Discuss and describe “balanced scorecards” Multiple performance measures Financial and nonfinancial measures Describe and illustrate “strategy maps” How to link elements of the scorecard to the underlying business model of the organization Takeaway

Strategy Mapping Financial Grow revenues Control costs Customer Satisfy customers Add customers Internal Improve quality Improve processes Innovation Develop skills Innovate

Takeaway: The Balanced Scorecard Identify key actions to generate profits Measure these actions using the most appropriate financial and non-financial measures Set goals for these measures Link these goals and measures to each other by a “strategy map” Main uses of Balanced Scorecard Information: A guide to better planning and investment decisions A compensation tool to evaluate divisional performance