1/SKW 2007 Balanced Scorecard  Balanced Scorecard - the concept (pl. Strategiczna Karta Wyników) –instrument of strategic management –forces measurement of effects of the strategic activities –forces cohesion in formulating strategy by building casual dependence between aims and activities –describes and explains what should be measured in an organisation –is an alternative for traditional financial systems

2/SKW 2007 Reasons for origination of BSC  Limitations in using financial measures –do not provide full information about elements crucial for competitive advantage –do not encourage managers to think short-term –allow for manipulation in decision-taking –show results of activities taken in the past –do not show the complete picture of the company's development –traditional measures originate from Cost Accounting; do not show where did costs come from –employees do not see the link between their work and measurement systems

3/SKW 2007 Circumstances under which BSC originated  Research projects –1987 – Corporate Scorecard developed by Analog Devices Inc. –1988 – KPMG built for Apple Computer a performance measuring system –1990 – project entitled „Measuring effectiveness in organisations in the future” have begun –project group:  David Norton (Nolan Norton Institute) – project leader  prof. Robert Kaplan (Harvard Business School) – advisor  team of corporate directors from: Advanced Micro Devices, American Standard, Apple Computer, Bell South, Hewlett Packard, Shell Kanada, Cigna, DuPont, General Electric –results were decribed in: Robert S. Kaplan, David P. Norton, The Balanced Scorecard: Translating Strategy into Action, 1996

4/SKW 2007 Remark (1)  Balanced Scorecard of a certain friend – as an impulse to reflect on how we realise our plans... /based on: My Balanced Scorecard, H.R. Friedag, W. Schmidt/  Vision: „Happy and satisfied”  Strategy: „More time for people with whom I share my life and less stress"  Reasons for which activities are undertaken: –family –friends –work –health

5/SKW 2007 Remark (2) ReasonsHow to realisePlanPerformance FamilyTelephones to a wife53,7 Flowers for a wife43 Dinners and suppers together45 Family trips32 Dance/theater22,5 FriendsRoller skates11 Volunteer work at wind surfuring club21 Get-togethers with friends22 WorkTrainings of co-workers21,5 Team meeting43 Work communication days21 Work until 6:30 p.m.21,5 Weekend without a company21 HealthJogging21,5 Work-out / Aerobic42

6/SKW 2007 Remark (3)

7/SKW 2007 Four perspectives of BSC  „Many leaders have their own visions which never become a common vision joining the whole organisation." That which is lacking is a theory which allows us to transform an individual vision into a joint vision” /P. Senge/  Balanced scorecard transforms the mission and strategy into aims and measures grouped according to four different perspectives: 1.Financial perspective 2.Customer perspective 3.Internal processes perspective 4.Development perspective

8/SKW 2007 Balanced scorecard - the model Financial perspective „How should stockholders see us, so that we are thought of as financially successful?” Development perspective „How can we maintain our ability to change and improve effectiveness in order to realise our vision?” Internal processes perspective „What internal processes must we improve so that owners and clients of the firm are satisfied?” Customer perspective „How should customers see us, so that our vision is realised?” VisionandStrategyVisionandStrategy

9/SKW 2007 Casual relation (1)  If we increase the amount and quantity of training then... …. employees will possess a greater knowledge about our product offer  If the employees will possess a greater knowledge about our products then... …. they will increase their selling effectiveness  If the sales effectiveness increases then... …1) sales will increase and 2) operational costs will decrease  If sales will increase and operational costs will decrease then... …profitability will increase

10/SKW 2007 Casual chain ROCE Employees' skills, abilities, competences Employees' skills, abilities, competences Process quality Process duration Timely delivery Customer loyalty Financial perspective Development perspective Internal processes perspective Customer perspective

11/SKW 2007 Gist of the Balanced Scorecard  Measurement system built based on financial and non- financial measures  Measurement system built based on enterprise strategy  Balanced system of: –Results with Leading measures (Lagg Indicators vs. Lead Indicators) –Objective with Subjective measures –Financial with Non-Financial measures –Short-term with Long-term measures –External with Internal measures

12/SKW 2007 Casual relation (2) Financial perspective „How should stockholders see us, so that we are thought of as financially successful?” Development perspectiv „How can we maintain our ability to change and improve effectiveness in order to realise our vision?” Internal processes perspective „What internal processes must we improve so that owners and clients of the firm are satisfied?” Customer perspective „How should customers see us, so that our vision is realised?” Vision, mission, strategy

13/SKW 2007 Financial perspective  Aim from financial perspective: –main aim: to ensure stockholders a rate of return from an investment exceeding their expectations derived from an alternative involvement of capital bearing a similar level of risk  Financial perspective measures whether the company's strategy realises its main aim  Measures (based on financial reports) –return on investment - ROI –economic value added – EVA  Financial strategies: –to reach a required growth and structure of revenues –to reduce costs and increase profitability –to increase utilisation of resources and effectiveness of investments

14/SKW 2007 Example: problems with financial measures

15/SKW 2007 Calculation of ROI Cost of products sold and services rendered Sales, administrative and managerial costs Other operational revenues – other operational costs Operational costs Sales Income from operations Income from operations ROIROI Sales Return on sales Return on sales Return on assets Return on assets Operational assets Cash and cash equivalent Liabilities Inventory and other short- term assets Long-term assets Legal assets Other long-term assets Short-term assets Long-term assets

16/SKW 2007 How to calculate ROI? ROI = Income from operations Assets of operational unit Income from operations SalesSales Assets of operational unit = x = Return on sales x assets

17/SKW 2007 Limitations of utilising ROI  Using ROI to assess the activities has its limitations: –ROI measure is not directly tied to the goal of maximising the value of the enterprise for its owners –ROI used as an assessment measure of managers can lead to incorrect investment decisions –ROI is a short-term assessment measure

18/SKW 2007 EVA ® = Wynik operacyjny – koszt kapitału x zainwestowane środki Economic value added - EVA ®  EVA ® (ang. economic value added) –measure that shows the value that the activities of a given investment center "add" to the value of an enterprise –shows the aim of the activities of an enterprise – maximialisation of its value  Limitations of applying the EVA ®: –short-term measure based on annual data –its use can lead to faulty investment decisions taken by managers interested in short-term benefits  Modifications of EVA ®: –e.g. bonus bank – managers lose motivation to conduct long-term non- income generating projects

19/SKW 2007 EVA ® „Economic value added is based on a notion which we knew for a long time: that what we call profit, money, which are left to service own capital is not commonly a profit. Until an enterprise earns an amount greater than its cost of capital, until then it has a loss. It is unimportant that it pays taxes as it would experience a real profit. An enterprise still gives the economy less than it gets from it in terms of resources. (...) It does not create wealth, but it destroys it.” Peter Drucker

20/SKW 2007 EVA ® in decision-taking (1)  Assets in zł, in 2002 – zł  Liabilities in zł, in 2002 – zł  Cost of capital set at 10% P/L Statement of Gamma Co Sales revenue Cost of goods sold (COGS) Gross income from sales Sales costs Administrative costs Income from sales Other operational income Other operational costs Income from operations

21/SKW 2007 EVA ® in decision-taking (2)  Decrease in ROI: worsening of the effectiveness of the investment center?  Increase in EVA ® : improvement of the effectiveness of the investment center? Return on sales12,29%12,5% Return on assets1,221 ROI15%12,5% EVA ® Calculation 1,5 mln-7mln*10%=0,8 mln2,5mln-16mln*10%=0,9 mln

22/SKW 2007 Financial perspective – types of strategies Increase value for stockholders Revenue growth strategyProductivitystrategy Built franchising Built franchising Increase value for customers Increase value for customers Improve cost structure Improve cost structure Improve utilisation of assets Improve utilisation of assets - revenue from new sources - improve profitability of current customers - lower costs per unit - gradual investment - current assets

23/SKW 2007 Customer perspective  Aims in customer perspective: –increase customer satisfaction and create positive image for the firm –increase customer loyalty and quality of customer services –increase market share  General measures: –market share –maintain customers –gain new customers –customer's satisfaction –customer's profitability  Measures of value offered to customers: –product attributes (goods, services) –customer relations –image and reputation

24/SKW 2007 General measures from customer's perspective Market share reflects the part of the market controlled by the enterprise. Expressed as a number of clients, a value or amount of sales Gain new customers measures in absolute or relative numbers the speed at which the enterprise gains new customers Maintain customers shows in absolute or relative numbers the level at which the enterprise maintains long-term relations with customers Customer's satisfaction describes the customers' satisfaction level depending on specific criteria of added value Customer'sprofitability measures the net profit generated from a customer or market segment taking into account specific costs related to service of that customer

25/SKW 2007 Attributes of generating value for customers Gain customers Customer'ssatisfaction Maintain customers Product attributes (services) Customer relations Image and Reputation Value = ++  quality  price  time  convenience  trust  react to needs  brand

26/SKW 2007 Internal processes perspective  Aims in internal processes perspective: –increase value of the enterprise through innovations –optimalise processes at the operational level –ensure high quality of after-sale services  Measures: –time of process implementation –cost of process implementation –quality of process implementation

27/SKW 2007 Business internal processes perspective  Determined by customer and financial perspectives  Transforms customer's requirements into internal measures  Identifies internal processes needed to achieve the aims  Forces cooperation of various departments

28/SKW 2007 Process perspective – value chain delineate target market delineate target market create product offer (service) create product offer (service) delineate target market delineate target market create product offer (service) create product offer (service) customer service customer service Identify customer needs Satisfy customer needs Innovative processes After-sale processes Operationalprocesses

29/SKW 2007 Development perspective  Aims in the development perspective: –achieve a greater staff potential – human resources –utilise employees' individualism –increase level of motivation, decentralisation, and convergence of aims  Measures: –employee satisfaction, level of stress and conflict –availability of trainings, individual development

30/SKW 2007 Measures in development perspective Results Employee productivity Employee satisfaction Employee turnover Personnel abilities Technological infrastructure Employee involvement Main measures Provisions:

31/SKW 2007 Development and learning perspectives  Ability to innovate and learn directly tied to the value of an enterprise: –development of new products –create value for the customers –process of continuous improvement  Employees' abilities add value  Informational systems are needed to transform information  Employees' motivation Mapa wiedzy (Kto co wie?) Diagram struktury wiedzy Rozwój i wykorzystanie wiedzy (Integracja z modelami procesów) Projects

32/SKW 2007 Basic model of creating Strategy Map Increase value for stockholders Revenue growth strategy Productivity strategy Built franchising Built franchising Increase value for clients Increase value for clients Improve cost structure Improve cost structure Increase utilisation of assets Increase utilisation of assets Product leadership Operational excellence Customer knowledge Employees' competences Increase value for clients by customer management process Increase value for clients by customer management process Achieve operational excellence thanks to logistic process Achieve operational excellence thanks to logistic process Become a worthy enterprise thanks to share in regulatory processes Become a worthy enterprise thanks to share in regulatory processes Technology Organisational culture Financial perspective Development perspective Internal processes perspective Customer perspective Źródło: Kaplan, Norton

33/SKW 2007 Navigational cockpit – strategic management center

Example: Citibank - Performance Evaluation How to effectively assess manager's performance?

Citibank California – assessment of Balanced Scorecard for local managers  Assessment of Jamesa McGarana –worked in banking since 1977 –in Citibanku since 1985 –since 1986 systematically promoted – – branch manager in a financial district of Los Angeles  4 years in a row had impressive profits although the district was greatly competitive  had an opinion of a great manager –difficult clients at James' branch:  individual clients: from very demanding to "common people”  business clients: market segment requiring higher than usual services  Difficulty with James' assessment based on Balanced Scorecard

36/SKW 2007 Introduction of Balanced Scorecard  Financial Measures – financial results  Strategy Implementation – related to company's introduction of corporate strategy  Customer satisfaction  manager of Citibank California thought of this measure as the most significant one from bank's long-term strategy  Control measures – internal controls  People – subjective assessment of employees by the supervisor  Standards – assesses manager's involvement, behaviour based on business ethics

37/SKW 2007 Grading and motivational system:  Grading: –Below par (below the norm) –Par (the norm) –Above par (above the norm)  Motivational system: –Below the norm – -0- bonus –The norm – Bonus of 15-20% of salary –Above the norm – Bonus of 30% of salary, under a condition that the employee does not receive any grade below par

38/SKW 2007 Financial Implementation of strategy Customer satisfation Control People Standards Total mark: James' results:

39/SKW 2007 SummarySummary  The Balanced Scorecard does not require any new knowledge as it relates to daily experiences and its based on them  Every manager must define his aims, plan needed resources, take decisions and implement them  In order to control the results of his actions, he must make them specific and definite, so that he is able to measure their implementation  Strategic Balanced Scorecard creates framework for changes through defining strategic aims  To satisfy the aims specific ways and resources are assigned