1. Strategy Stat: Government involvement in your industry
2. Question: Using the Balanced Scorecard – What is the Balanced Scorecard and why use it?
3. Question: Running Strategy Reviews – How do I run an effective Strategy Review?
4. Visiting Strategy Leader: Daryl VanderWilt – Strengthen Rural Iowa

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Performance Measurements for Success

Traditional financial measures – ROI, net profit, sales growth, and market share – fail to capture the true picture of a firm’s value propositions because they focus on the past. They tell the story of what has happened to the organization. They explain the results of past transactions and disregard what the future benefits could be. Traditional financial measures are only part of the information that managers need to successfully guide their organizations through highly competitive marketplaces.

During the 1990s, two Harvard professors and consultants – Kaplan and Norton, devised a tool, the Balanced Scorecard, to rectify the deficiencies in relying primarily on traditional financial measures. A Balanced Scorecard allows better measurement of a firm’s capabilities to create long-term value by identifying the key drivers of this value. The drivers are then translated into four categories of measures- customer, internal/operational, innovation/learning, and financial. The financial measures are typically focused on short-term results; while the other three categories are coupled to future oriented activities needed to successfully sustain the enterprise.

Obviously financial health is critical for any business organization- cash in the bank is necessary to pay the bills. However, many managers become nearsighted as a result of this requirement and believe that by making fundamental improvements in their operations, the financial numbers will resolve themselves. This is an utter fallacy. For example, if a firm has a goal of increasing net profit from 10% to 13% for the current fiscal year, there are a number of interrelated factors that must be in place to succeed. Possibly customer satisfaction must be enhanced to increase the number of customers or increase the loyalty of existing customers. May be the product/service’s defect level must be decreased to boost customer satisfaction? So if the manager waits until the end of the fiscal year to determine if he/she was successful, there will be a “history” lesson on the events of the past period. However, if the defect rate is currently monitored or customer returns observed, the manager can make mid-course corrections to the firm’s strategy in order to accomplish the goal of increasing net profit. In other words, the manager should develop and monitor measures of drivers of that net profit goal.

As such, managers should develop strategic measures that are specifically tied to their firms’ unique strategy. There is not a “one size fits all” Balanced Scorecard. The following is the basic categorization for balanced measures of firm performance.

I. Financial perspective-how do we look to investors? Measures that indicate whether the company’s strategy, implementation, and execution are contributing to bottom line improvement.

• Cash flow
• Sales growth
• Market share
• ROE

II. Customer perspective-how do customers see us? Customer concerns in four categories.

1. Time-measures time required for company to meet customers’ needs.
2. Quality-defect level as sent to customers.
3. Performance-how company’s products/services contribute to creating value for its customers.
4. Cost-not just price of goods/services, but what does it “cost” the customer when he finally uses it.

III. Internal/Operational perspective-what must be excelled at?

• Business processes that have the greatest impact on customer satisfaction.
• What competencies are needed to maintain market leadership?

IV. Innovation/Learning perspective-can we continue to improve and create value?

• Ability to innovate, improve, and learn ties directly to company’s value.
• Launch new products.
• More value for customers.
• Penetration of new markets.

Caution- a balanced performance measurement tool is not a collection of disparate financial and non-financial measures. It is more than supplementing traditional financial measures with non-financial measures. It is a process of developing interrelated measures, some leading and some lagging, that uniquely depicts a firm’s strategy in attempting to create competitive advantage.

A scorecard:

• focuses manager’s attention on a handful of measures that are critical for the firm’s success.
• is a way to clarify, simply, and then operationalize the mission and vision of the organization.

(Excerpted from Robert Kaplan and David Norton (1992), Harvard Business Review, January-February, pages 71 to 79 and (1996), California Management Review, Fall v39n1, pages 53 to 79.)

What is the Balanced Scorecard?

The balanced scorecard institute certainly has a lot to say about the use and value of the balanced scorecard. One of the problems, however, is that the information can get rather detailed, and make for a rather poor quick reference. This particular site does a nice job of presenting a concise overview, and also offers links to an interesting perspectives section on each of the four major points.

(Excerpted from Robert S. Kaplan and David P. Norton (1993), Harvard Business Review, September-October, p.34-147, (1992), Harvard Business Review, January-February, p.71 to 79 and (1996), California Management Review, Fall v39n1, p.53-79.)

The balanced scorecard is:

1. a measurement system that provides a comprehensive framework that translates a company’s strategic objectives into a coherent set of performance measures
2. a management systems that can motivate breakthrough improvements.

A balanced scorecard is both a general measurement system to incorporate non-financial measures with traditional financial ones, as well as a central management system to motivate breakthrough competitive performance in implementing a company’s strategic vision. It is a process of developing interrelated measures, some leading and some lagging, that uniquely depicts a firm’s strategy in attempting to create competitive advantage.

It is the translation of a business strategy into a linked set of measures that define both the long-term strategic objectives, as well as the mechanisms for achieving and obtaining feedback on those objectives. A balanced scorecard:

1. Focuses manager’s attention on a handful of measures that are critical for the firm’s success.
2. Is a way to clarify, simply, and then operationalize the mission and vision of the organization.

Performance Measurements for Success

The scorecard functions as the cornerstone of a company’s current and future success. Traditional financial measures – ROI, net profit, sales growth, and market share – fail to capture the true picture of a firm’s value propositions because they focus on the past. They tell the story of what has happened to the organization. They explain the results of past transactions and disregard what the future benefits could be. Traditional financial measures are only part of the information that managers need to successfully guide their organizations through highly competitive marketplaces.

Get Balanced. Four Critical Areas

During the 1990s, two Harvard professors and consultants – Kaplan and Norton, devised a tool, the Balanced Scorecard, to rectify the deficiencies in relying primarily on traditional financial measures. A Balanced Scorecard allows better measurement of a firm’s capabilities to create long-term value by identifying the key drivers of this value. The drivers are then translated into four categories of measures- financial, customer, internal business processes, innovation and learning. The financial measures are typically focused on short-term results; while the other three categories are coupled to future oriented activities needed to successfully sustain the enterprise. The information from the four perspectives provides balance between external measures like operating income and internal measures like new product development. It provides a balanced picture of current operating performance as well as the drivers of future performance.

Measure Areas that Lead

Obviously financial health is critical for any business organization- cash in the bank is necessary to pay the bills. However, many managers become nearsighted as a result of this requirement and believe that by making fundamental improvements in their operations, the financial numbers will resolve themselves. This is an utter fallacy. For example, if a firm has a goal of increasing net profit from 10% to 13% for the current fiscal year, there are a number of interrelated factors that must be in place to succeed.

Possibly customer satisfaction must be enhanced to increase the number of customers or increase the loyalty of existing customers. May be the product/service’s defect level must be decreased to boost customer satisfaction? So if the manager waits until the end of the fiscal year to determine if he/she was successful, there will be a “history” lesson on the events of the past period. However, if the defect rate is currently monitored or customer returns observed, the manager can make mid-course corrections to the firm’s strategy in order to accomplish the goal of increasing net profit. In other words, the manager should develop and monitor measures of drivers of that net profit goal.

The Balanced Scorecard at a Glance

Managers should develop financial and non-financial measures that are specifically tied to their firms’ unique strategy. There is not a “one size fits all” Balanced Scorecard. The Balanced Scorecard provides executives with a comprehensive framework that can translate a company’s vision and strategy into a coherent and linked set of performance measures. The measures should include both outcome measures and the performance drivers of those outcomes.

Rather than using the Balanced Scorecard as a traditional control and performance measurement system, it is being used as a measurement and management system to implement a company’s strategic vision. It is being used to articulate and communicate the strategy of the business; to help align individual, organizational, and cross-departmental initiatives to achieve a common goal; and as a communication, information, and learning system. Thus, the measures must provide a clear representation of the organization’s long-term strategy for competitive success.

Generic Strategic Measures for the Four Perspectives

The Balanced Scorecard should be viewed as the instrumentation for a single strategy. Strategic measures are those that define a strategy designed for competitive excellence. Properly constructed scorecards contain a unity of purpose since all the measures are directed toward achieving an integrated strategy.

Financial Perspective How do we look to investors?

The financial performance measure will vary based upon the long-run objective and strategy of a business in the growth, sustain, or harvest stage. In general companies use the following three categories to achieve their business strategy:

• Revenue growth and mix
• Cost reduction/ Productivity improvement
• Asset utilization/ Investment strategy

Measures that indicate whether the company’s strategy, implementation, and execution are contributing to bottom line improvement are the following:

• Cash flow
• Sales growth
• Market share
• ROE
• ROCE – return on capital employed
• Economic value added

Customer Perspective How do customers see us?

In customer perspective, the company measures the business performance in targeted segments. In general, customer concerns can be grouped into the following four categories.

1. Time-measures time required for company to meet customers’ needs.
2. Quality-defect level as sent to customers.
3. Performance-how company’s products/services contribute to creating value for its customers.
4. Cost-not just price of goods/services, but what does it “cost” the customer when he finally uses it.

Measures are customized to the targeted customer groups from which the business expects growth and profitability. The following are customer measures:

• Market share
• Account share – the account share of those customers’ business
• Customer retention – retaining existing customers, customer loyalty, percentage of growth due to existing customers
• New customer acquisition – number of new customers, total sales to new customers, number of customer responses to solicitations and the conversion rate, solicitation cost per new customer acquired
• Customer satisfaction – provides feedback on how well the company is doing. It customer’s complete buying experience. It includes uniqueness, functionality, quality, price, time
• Customer profitability – measures not only the extent of business they do with the customers, but the profitability of the business in the targeted customer segment. This financial measure can help keep customer-focused organizations from becoming customer-obsessed.

Internal Business Perspective What must be excelled at?

The internal business process perspective identifies the most critical internal processes for the organization’s strategy to succeed. The internal perspective examines the following process categories:

Innovation Cycle

• Identify the market
• Create the service offering

Operations Cycle

• Build the services
• Deliver the services

Post-sale Service Cycle

• Service the customer

Measures should be focused on…

• Business processes that have the greatest impact on customer satisfaction, such as factors that affect process cycle time, process quality, employee skills, and productivity.
• Business processes that achieve the organizations financial objective.
• Core competencies and processes that are needed to maintain market leadership.

Learning and growth perspective Can we continue to improve and create value?

The learning and growth perspective identifies the infra-structure that the organization must build to create long-term growth and improvement. Ability to innovate, improve, and learn ties directly to company’s value. Organizational learning and growth can be categorized into three main areas:

• People
• Systems
• Organizational procedures

In order to achieve business objectives, companies most like will have to invest in re-skilling employees, enhancing information technology and systems, and aligning organizational procedures and routines.

The following are measures for people, systems and organizational procedures:

People

• Employee satisfaction
• Employee retention
• Employee training
• Employee skills

Systems

• Real-time availability of accurate customer and internal process information to front-line employees
• Ability to launch new products
• Ability to create more value for customers
• Ability to penetrate new markets

Organizational procedures

• Alignment of employee incentives with overall organizational success factors
• Rates of improvement in critical customer-based and internal processes

Examples of Measures Building a Health Care Strategic Balanced Scorecard Framework (Kaplan & Norton conference promotion materials)

Financial

• Patient revenue
• Funding and contributions
• Cost management

Customer

• Patients
• Referring physicians
• Payers
• Community
• Academics

Internal Processes

• Planning
• Innovation
• Relationship management
• Care delivery
• Operations efficiency

Learning & Personal Development

• Recruiting, training, retaining
• Cultural values
• Tools, knowledge, information

Relationship between Measures and Performance Drivers

A Balanced Scorecard should have a mix of outcome measures and performance drivers. Outcome measures without performance drivers do not communicate how the outcomes are to be achieved. Conversely, performance drivers without outcome measures may fail to reveal whether the improvement have resulted in expanded business and enhanced financial performance.

The chain of cause and effect should pervade all four perspectives of a Balanced Scorecard. Additionally, all aspects of the measures on a Scorecard should be linked to specific targets for improving customer, and eventually, financial performance. For example, the return on capital employed (ROCE) may be a outcome measure in the financial perspective. The driver of this could be repeat and expanded sales from existing customers due to on-time delivery (OTD). Thus, customer loyalty and OTD are listed under the customer perspective. To achieve OTD, the company may need to achieve short cycle time in operating processes and high-quality internal processes. Thus both factors are listed under internal perspective. In order for processes to improve, employees skills will need to improve, which is thus listed under learning and growth perspective. For another example: refer to Exhibit 8 – National Insurance: Lag and Lead Indicators (Kaplan and Norton, “Linking the Balanced Scorecard to Strategy,” 1996)

You should be able to look at your measures and infer the business strategy the company is intending to use to get to breakthrough performance. What are you doing that’s unique? Your measures should address which customers you’re going after; which market segments are you attacking; what you have to do exceptionally well to get penetration and share into those markets and those segments; and what kind of new product developments do you need to deliver to achieve long-term value for your customers and shareholders. You should feel really upset if a competitor gets hold of your scorecard.

It is important to build a scorecard that accurately reflect the business strategy. The scorecard:

Describes the vision of the future for the entire organization. It creates shared understanding. It focuses change efforts. It permits organized learning at the executive level.

IMPLEMENTING THE STRATEIG PLAN VIA BALANCED SCORECARD

The real benefit comes from making the scorecard the cornerstone of the way you run the business. Imagine an organization in which everyone understands the strategy and his or her role in executing it. A high performance workforce prepared and motivated to achieve the results. An organization so agile that strategy can be tested and adapted in a continual process of feedback, learning, and innovation. Where all resources are aligned toward a unified strategy view. This new management model is called the Strategy-Focused Organization (SFO). (Kaplan & Norton promotional brochure)

Kaplan and Norton present a SFO framework that describes the five principles that organizations use to achieve breakthrough performance. The principles transform the Balance Scorecard from a measurement to a leadership and management system. Each SFO principles actively support the roles of leadership and management.

• Translate the strategy to operational terms
• Align the organization to the strategy
• Make strategy everyone’s job
• Make strategy a continual process
• Mobilize change through executive leadership

Rockwater, an undersea construction company, did a correlation study between employees attitudes and customer satisfaction. What they discovered is that the customers in the top quintile of satisfaction were being served by employees in the top quintile of satisfaction as measured by the attitude survey.

Software: Dialog Strategy 2.0

The Dialog Strategy 2.0 software system, available for free from the Dialog Software website at http://www.dialogsoftware.com, is used to help design and implement a Balanced Scorecard strategy. The version that is available for free on the company’s website has limited features with more advanced versions available for $199 and $399.

The website of the company has limited information on the program, but the free version of the program does come with an extensive instruction manual. The interface of the program is not intuitive, but it does include an example of an organization that may benefit from implementing a Balanced Scorecard strategy. A screenshot of the interface is on the following page.

Even with its faults, the program would be helpful for anyone trying to implement or trying to learn the Balanced Scorecard. For most organizations, however, the commercial versions with the additional features would probably be more beneficial.

balancedscorecard.org

What is a balanced scorecard?

• This portion describes the management system of the balanced scorecard measurement. It provides a diagram indicating the four areas of score card: The learning and growth, businesss process, customer, and financial perspectives
• This portion of the web site also discussed that the balanced scorecard builds to the total quality management ideas
• Double-Loop feed back is also discussed which focuses on both the process outputs and the outcomes of the business strategy
• Discussion of outcome metrics: “You can’t improve what you can’t measure”
• Management by fact discussion, analysis of factual data allows for a clear view of the company from multiple angles.

The learning and growth perspective

• Knowledgeable people are an organizations main resource. Thus mentoring and training are very important

The business process perspective

• Mission oriented process
• Support process

The customer perspective

• Customers must be analyzed for the types of services and products being provided to them and there satisfaction of them.

The financial perspective

• Risk assessment
• Cost-benefit
• To much emphasis on financial data can lead to an unbalanced scorecard

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Your company’s performance management system is not just about annual reviews and bonuses, it is essential to implementing your corporate strategy. With many organizations currently tightening their belts and demanding high performance, how can you make sure that your system is optimized for results? An answer lies in using the balanced scorecard.

Many organizations struggle with performance management because their system consists of little more than a form managers use to conduct annual employee evaluations. This doesn’t work because performance management should be an ongoing conversation between supervisors and employees that supports the accomplishment of strategic objectives. Rather than only considering the process once a year, managers should be using it year-long to set clear objectives, evaluate results and deliver continual feedback to employees about their performance.

What a great performance management system does:

• Illustrate how employee’s job contributes to the success of the organization by linking work efforts with company’s mission, vision and objectives
• Helps employee know what needs to be done to be successful on the job by focusing attention on setting clear performance expectations (results + actions & behaviors)
• Focuses department on what needs to get done and provides a solid rationale for eliminating unnecessary work though the use of objectives, standards, and performance metrics
• Gives employees a clear path for growth by defining job-mastery and career development goals as part of the process
• Enables employees to quickly identify problems and change course of project or work assignment through regular check-in discussions, which include status updates, coaching and feedback
• Shifts focus from performance as an annual event and sets it as an ongoing process by basing performance evaluations on the summary of check-ins & status updates

(UC Berkeley)

So, how do you make sure that’s happening in your organization?

First, an organization’s strategic plan must give high priority to performance management, since their employees are the ones actually implementing the tactics necessary to achieve corporate objectives. A powerful tool for crafting a strategy that takes this into account is the Strategy Map, part of the Balanced Scorecard concept.

Popularized by Robert S. Kaplan and David P. Norton through a series of articles in the Harvard Business Review as well as their popular 1996 book by the same name, The Balanced Scorecard is a strategic planning and reporting methodology that takes a company’s objectives and splits them between 4 equally important perspectives: Financial, Customer, Operational, People. Organizational objectives then cascade down those four perspectives, giving the company a clear path of implementation.

Following the strategy map, the financial perspective is at the top and contains objectives that contribute to the bottom line. Next, the customer perspective supports those goals with objectives that lead to meeting customer needs which drive increased sales. Operational goals are needed in place to better meet the customer needs, and finally the people perspective contains the objectives that support the operational goals.

For example, a lawn care business may have a corporate vision to become the most sought after landscaper in their region. That could lead to a financial objective to increase sales. In order to increase sales, an objective must be placed in their customer perspective that includes being seen as providing the most superior customer service. This would cascade down to creating an operational objective to grow their customer service department by 6 employees. Their people perspective would then need an objective to train an additional 4 reps.

How the Balanced Scorecard Keeps you on Track

With objectives cascading down throughout the four perspectives of the map, a strategy is considered “balanced.” The Scorecard portion consists of leading and lagging metrics that the company, or even departments and individuals can be evaluated on to determine whether they are on track. By forcing executives to put as much thought into performance management as the financial objectives of the organization and tying performance management goals all the way up to the mission and vision of the company the strategy map solves the performance dilemma.

Once a scorecard is in place to manage performance, employees see how their job makes a difference to your company by illustrating how their tasks contribute to departmental goals, which drive financial accomplishments that push the company closer to its vision. This lays the foundation for clear performance expectations and the elimination of ambiguity concerning employee priorities. With a complete scorecard in place, employees know where they stand, and can easily determine what areas they can contribute to the success of an organization’s strategy. Employee evaluations and status reports, now focused on the results of the scorecard give supervisors and employees structure for evaluation and coaching, and help keep everyone informed.

A tool that brings strategy and performance management all together

Fortunately, tools like MyStrategicPlan exist to guide executives in crafting a balanced corporate strategy as well as manage performance management on a regular basis. Based on the balanced scorecard and strategy map, MyStrategicPlan enables any organization, regardless of size and budget, to build their comprehensive plan in a matter of weeks (or even days) and monitor implementation all year long.

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Your scorecard is used to measure and manage your strategic plan.

Ask: What are the key performance measures you can track in order to monitor whether you are achieving your goals?

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We’ve always been big proponents of the Balanced Scorecard and believe it should drive overall strategy. It is an excellent management tool, and many organizations say the scorecard is the foundation of their measurement and management systems. In fact, we created our online strategic planning system, MyStrategicPlan, based on the Balanced Scorecard framework. By setting goals in the four key areas that all organizations must excel in to succeed, you create a balanced and holistic strategy.

• Financial or mission: When you provide value to your customers, you achieve your financial or mission goals.
• Customer: If you want to generate additional revenue, you need to provide value to your customers.
• Internal/operational process: In order to provide value to your customers, you must have the internal business process to create that value.
• Employee/people: (centered on learning and innovation): In order for your business processes to function, you need people who are skilled and knowledgeable.

Maintaining this same kind of focus is also key for each perspective. You should develop at least one long-term strategic objective but no more than five for each area. If you develop too many at the beginning, your plan may become unwieldy. Likewise, sharing too many goals with your people can often be as dangerous as sharing no goals.

Don Moyer, writing for the Harvard Business Review, likens this effect to peanut butter, “The more you spread it, the thinner it gets.” He suggests choosing a single, clearly articulated objective or a goal relatively narrow in scope that can be easily distilled. Consider an objective that embodies your organization’s central purpose or a goal that focuses on meeting a higher standard for a single product. Either of these can be well-defined and measurable and serve to galvanize an organization.

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