Balanced scorecard Magdalena Forfa Inno Marathon February 27

Balanced scorecard Magdalena Forfa Inno. Marathon February 27 th 2014

Imagine entering the cockpit of modern jet airplane and seeing only a single tool there. How would you feel about boarding the plane after the following conversation with the pilot? C: I`m surprised to see you operating the plane with only a single tool. What does it measure? P: Airspeed. I`m really working on airspeed during this flight. C: That`s good. Airspeed certainly seems important. But what about altitude? Wouldn`t an altimeter be helpful? P: I have worked on the altitude for the last few flights and I`ve got pretty good at it. Now I have to concentrate on the proper air speed. C: But I notice you don`t even have a fuel gauge. Wouldn`t that be useful? P: You`re right; fuel is significant, but I can`t concentrate on doing too many things well at the same time. So during this flight I`m focusing on air speed. Once I get to be excellent at air speed, as well as altitude, I intend to concentrate on fuel consumption during the next flight. You wouldn`t board the plane after this discussion Skilled pilots are able to process information from a large number of indicators to navigate their aircraft. Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward excellent future outcomes (sic!).

The long-term success of any organization is determined by the capabilities and the competencies it has developed. Today’s businesses require a better understanding of their customers (both existing and potential) and their needs, better streamlined processes and highly skilled people for ensuring future survival and sustainable growth. This shows that the focus of action has rightly considered the non-financial aspects apart from the financial indices.

One of the most important skills of the modern enterprise is its ability to quickly and efficiently develop and implement its strategy for action. One of the tools that is used to implement the strategy of the company is Balanced Scorecard.

What is the Balanced Scorecard? 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.

The balanced scorecard helps an organization transform its strategic plan from a passive document into a set of “marching orders”. It provides a framework that identifies critical performance measures that help managers identify what should be done. It helps executives to truly execute their business strategies.

“Balanced Scorecard” is innovative tool which was developed by Robert S Kaplan and David P Norton in 1992. It is unique in two ways compared to the traditional performance measurement tools. They are: 1. It considers the financial indices as well as the nonfinancial ones in determining the corporate performance level. 2. It is not just a performance measurement tool but is also a performance management system. The aim of the Balanced Scorecard is to direct, help manage and change in support of the longer-term strategy in order to manage performance. The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the ‘change’ element within the organization.

The Balanced Scorecard translates mission and strategy into objectives and measures, organized into four different perspectives: 1. financial 2. customer 3. internal business process 4. learning and growth. The scorecard provides a framework, a language, to communicate mission and strategy; it uses measurement to inform employees about the drivers of current and future success. By articulating the outcomes the organization desires and the drivers of those outcomes, senior executives hope to channel the energies, the abilities, and the specific knowledge of people throughout the organization toward achieving the longterm goals.

Strategy Mapping Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective enables the organization to improve its Internal Process perspective. Objectives which in turn enable the organization to create desirable results in the Customer and Financial perspectives.

Initiatives Targets Measures Learning and Growth To achieve our vision, how will we sustain our ability to change and improve? Initiatives Targets Vision and strategy Measures Objectives Internal Business Processes To satisfy our shareholders and customers, what business processes must we excel at? Initiatives Targets Measures Objectives Targets Initiatives To achieve our vision, how should we appear to our customers? Measures Objectives Customer To succeed financially, how should we appear to our shareholders Objectives Financial

Financial Perspective The BSC retains the financial perspective since financial measures are valuable in summarizing the readily measurable economic consequences of actions already taken. Financial performance measures indicate whether a company's strategy, implementation, and execution are contributing to bottom-line improvement. Financial objectives typically relate to profitability measured, for example, by operating income, return-on-capital employed, or, more recently, economic value-added. Alternative financial objectives can be rapid sales growth or generation of cash flow.

Customer Perspective In the customer perspective of the Balanced Scorecard, managers identify the customer and market segments in which the business unit will compete and the measures of the business unit's performance in these targeted segments. This perspective typically includes several core or generic measures of the successful outcomes from a wellformulated and implemented strategy. The core outcome measures include: Øcustomer satisfaction, Øcustomer retention, Ønew customer acquisition, Øcustomer profitability, Ømarket Øaccount share in targeted segments.

Customer Perspective But the customer perspective should also include specific measures of the value propositions that the company will deliver to customers in targeted market segments. The segment- specific drivers of core customer outcomes represent those factors that are critical for customers to switch to or remain loyal to their suppliers. For example, customers could value short lead times and on-time delivery. Or a constant stream of innovative products and services. Or a supplier able to anticipate their emerging needs and capable of developing new products and approaches to satisfy those needs. The customer perspective enables business unit managers to articulate the customer and market-based strategy that will deliver superior future financial returns.

lnternal-Business-Process Perspective In the internal-business-process perspective, executives identify the critical internal processes in which the organization must excel. These processes enable the business unit to: . deliver the value propositions that will attract and retain customers in targeted market segments, and satisfy shareholders’ expectations of excellent financial returns. The internal-business-process measures focus on the internal processes that will have the greatest impact on customer satisfaction and achieving an organization's financial objectives. The internalbusiness-process perspective reveals two fundamental differences between the traditional and the BSC approaches to performance measurement. Traditional approaches attempt to monitor and improve existing business processes. They may go beyond financial measures of performance by incorporating quality and time-based metrics. But they still focus on improvement of existing processes. The scorecard approach, however, will usually identify entirely new processes at which an organization must excel to meet customer and financial objectives. For example, a company may realize that it must develop a process to anticipate customer needs or one to deliver new services that target customer’s value.

The Internal-Business-Process Value-Chain Perspective Design Develop Time-to-market Operations Make Market Supply Chain Business Processes Innovation Process Operations Process -product design -product development -manufacturing -marketing -postsale service Service Customer Need Satisfied Customer Need Identified Innovation

Learning and Growth Perspective The fourth perspective of the Balanced Scorecard, learning and growth, identifies the infrastructure that the organization must build to create long-term growth and improvement. The customer and internal-business-process perspectives identify the factors most critical for current and future success. Businesses are unlikely to be able to meet their long-term targets for customers and internal processes using today's technologies and capabilities. Also, intense global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders. Organizational learning and growth come from three principal sources: Øpeople, Øsystems, Øorganizational procedures.

Learning and Growth Perspective 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. "

Learning and Growth Perspective The financial, customer, and internal-business-process objectives on the Balanced Scorecard typically will reveal large gaps between the existing capabilities of people, systems, and procedures and what will be required to achieve breakthrough performance. To close these gaps, businesses will have to invest in re-skilling employees, enhancing information technology and systems, and aligning organizational procedures and routines. These objectives are articulated in the learning and growth perspective of the Balanced Scorecard. As in the customer perspective, employee-based measures include a mixture of generic outcome measures--employee satisfaction, retention, training, and skills-along with specific drivers of these generic measures, such as detailed, business-specific indexes of the particular skills required for the new competitive environment. Information systems capabilities can be measured by real-time availability of accurate, critical customer and internal process information to employees on the front lines of decision making and actions. Organizational procedures can examine alignment of employee incentives with overall organizational success factors, and measured rates of improvement in critical customerbased and internal processes.

Communicating and Linking 1. communicating and educating 2. setting goals 3. linking rewards to performance measures Planning and target setting 1. setting targets 2. aligning startegic initatives 3. alocating resources 4. esatblishing milestones Balanced Scorecard Clarifying and Translating the Vision and Strategy 1. clarifying the vision 2. gaining consensus Strategic feedback and Learning 1. articulating the shared vision 2. supplying strategic feedback 3. faciliating strategy review and learning

Cause-and-Effect Relationships Financial ROCE (return on capital employed) Customer Loyality Customer On-time Delivery Internal/Business Process Learning and Growth Process Quality Process Cycle Time Employee Skills

Case study no. 1 Description of business The company is organizationally separate business unit hardware manufacturer based in the United States of America. Parent company evaluates its business units based on ROI. The company deals with production scanners, printers and mobile phones. Currently, they are planning to introduce innovative office multifunction devices (scanner, fax, printer and photocopier in one). The management also sees the opportunity to sharply reduce production costs by introducing a modular design allowing machines to use the same components in many devices (such as printers, fax, copier and multifunction device will have the same print engine). Selected by the management measures for BSC financial perspective at the enterprise level: No. Target Measure 1 definitely improve the outcomes of the company net profit 2 Increase market share MFPs gain on sale of MFPs 3 reduce production costs Net profit of the company Task: Estimate measures selected by the management of the company. If you think that the chosen measure is not appropriate, suggest an alternative.

Solution of the case study no. 1 No. Target Wrong Measure Approprite mesure 1 definitely improve the outcomes of the company net profit The adopted measure is not appropriate. The selected measure should reflect the purpose of the owner, who is here presented as to maximize ROI 2 Increase market share MFPs gain on sale The adopted measure is not appropriate. of MFPs It measures the profit on new products, which are in the early stages of the life cycle mostly yield loss. In the case of new products to market is important mainly dynamics of revenue. 3 reduce production costs net profit of the company The adopted measure is not appropriate. High costs due to the small enterprise standardization of products. A measure of estimating the effectiveness of the company in this area should focus on increasing the share of standard components.

Case study no. 2 The company is engaged in manufacturing of office multifunction devices (scanner, fax, printer and photocopier in one). The following two sections describe the situation of the company: a) Confidence functioning Confidence MFP operation is very important. Nothing annoys a customer more than paper jam or a problem with the ink, especially ifthe only way to solve the problem is the manufacturer's service. b) Copy Quality The quality of the initial copy was a very important factor for competitiveness, but is now seen as obvious. Its failure means marginalization on the market. The quality of copying of the enterprise products is comparable to competitors. Grade enterprise map section: Customer perspective Definitely increase the quality of the copy Increase the reliability of the multifunctional equipment internal Perspective Standardize, modularize and simplify products Improve internal customer orientation Actively develop client counseling

Case study no. 2 Customer perspective Definitely increase the quality of the copy Increase the reliability of the multifunctional equipment internal Perspective Standardize, modularize and simplify products Improve internal customer orientation Actively develop client counseling

Solution of the case study no. 2 Such a purpose as "definitely improve the quality of copies" should not be on the company strategy map. The quality in the long run isn`t the way to gain a competitive advantage. The company also reached a level comparable to that of other competitors.

Advantages of Using The Balanced Scorecard This tool is being used by several organizations throughout the world because of certain advantages this scorecard has been able to deliver the following : 1. It translates vision and strategy into action. 2. It defines the strategic linkages to integrate performance across organizations. 3. It communicates the objectives and measures to a business unit. 4. It aligns the strategic initiatives in order to attain the long-term goals. 5. It aligns everyone within an organization so that all employees understand how they support the strategy. 6. It provides a basis for compensation of performance. 7. The scorecard provides a feedback to the senior management if the strategy is working.

To summarize idea about the balanced scorecard It doesn`t actually matter a lot what tool you use, how many perspectives you have and what consulting company has designed KPIs (Key Perfomance Indicator) for you. What matters is if you actually use the Balanced Scorecard daily and if it helps to improve your results.

10 key facts about Balanced Scorecard 1. Balanced Scorecard includes 4 perspectives 2. KPIs (Key Performance Indicators) in Balanced Scorecard are placed in certain perspectives (also called categories) 3. In Balanced Scorecard each KPI and category has its own weight, e. g. relevant importance 4. The biggest challenge when company implements the Balanced Scorecard is employees motivation 5. Several scorecards can be combined into “cascading” scorecard 6. Strategy map is a visualization of the company strategy is a part of Balanced Scorecard 7. The goal of the Balanced Scorecard is to link strategy to action 8. When designing the Balanced Scorecard it is important to involve top managers and live-level employees 9. More than 80% of companies already tried Balanced Scorecard in some form 10. Update your Balanced Scorecard regularly to keep it focused on your business goals

Literature 1. Robert S. Kaplan, David P. Norton, The Balanced Scorecard: Translating Strategy into Action, President and Fellows of Harvard College, USA, 1996. 2. http: //www. balancedscorecard. org/BSCResources/A boutthe. Balanced. Scorecard/tabid/55/Default. aspx 3. Gertruda K. Świderska, Rachunek kosztów i rachunkowość zarządcza. Definicje, podsatwowe problemy, pytania testowe i zadania sytuacyjne z rozwiązaniami, SKw. P, Warszawa, 2008.