Balanced Scorecard

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Balanced Scorecard
Using the Balance Scorecard as a
Strategic Management System

This document explains the Balanced Scorecard business framework and how to
use it as a strategic management system. It includes instructional slides explaining
the methodology, in addition to examples and slide templates. Topics include the
Four Processes, Four Perspectives, Personal Scorecard, and Strategic Learning.

November 27, 2012
ORIGINAL PROJECT DETAILS
http://pptlab.com/ppt/HBR-Using-the-Balanced-Scorecard-as-a-Strategic-Management-System-19

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presentation design service. Get consulting-quality
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As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.

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Contents

 Overview 4

 Four Processes 11

– Translating the Vision 12

– Communicating and Linking 14

– Business Planning 15

– Feedback and Learning 16

 Examples and Templates 18


Contents

 Overview

 Four Processes

– Translating the Vision

– Communicating and Linking

– Business Planning

– Feedback and Learning

 Examples and Templates


The Balanced Scorecard takes a “balanced” approach to strategic
management—combining both financial and non-financial perspectives
Executive Summary

The Balanced Scorecard (BSC) is a strategy performance management tool—a semi-standard
structured report, supported by proven design methods and automation tools, that can be used by
managers to keep track of the execution of activities by the staff within their control and to monitor the
consequences arising from these actions. It was developed by Robert Kaplan and David Norton.
The BSC approach takes a “balanced” approach by supplementing traditional financial measures with 3
key non-financial areas:
• A company’s relationship with its customers;
• Its key internal business processes; and
• Its learning and growth.

Financial Customer Financial Customer
Measures Relationships Measures Relationships
VS
Internal Learning and Internal Learning and
Processes Growth Processes Growth

TRADITIONAL SCORECARD BALANCED SCORECARD

This approach enables companies to track financial results, while simultaneously monitoring progress
in building the capabilities and acquiring the intangible assets they need for future growth.
Source: 2GC Balanced Scorecard Usage Survey, Using the Balanced Scorecard as a Strategic Management System, Kaplan and Norton (2005)


Companies should use the BSC approach as its new strategic management
system
Overview – New Strategic Management System

1. Clarify and update the overall corporate The BSC provides a
strategy framework for managing
Companies should use the 2. Communicate strategy throughout the the implementation of
Balanced Scorecard as a company strategy, while also
foundation to an 3. Align departmental and individual goals allowing the strategy
integrated and iterative with the strategy itself to evolve in
strategic management 4. Link strategic objectives to long-term response to changes in
targets and annual budgets the company’s
system to perform the
following functions: 5. Identify and align strategies initiatives competitive, market, and
6. Conduct periodic performance reviews to technological
learn about and improve strategy environments.

Source: Using the Balanced Scorecard as a Strategic Management System, Kaplan and Norton (2005)


Four management processes tie short-term activities to long-term
objectives
Overview – Four Processes

The Balanced Scorecard relies on 4 key management processes to tie
short-term activities with long-term objectives:

1 2
Translating the Communicating and
Vision Linking

3 4
Feedback and
Business Planning
Learning



This diagram illustrates the iterative process among the four processes
Four Processes – Framework Diagram

1 Translating the Vision

• Clarifying the vision
• Gaining consensus

2 Communicating and Linking 4 Feedback and Learning

• Communicating and educating • Articulating the shared vision
Balanced
• Setting goals • Supplying strategic feedback
Scorecard
• Linking rewards to performance • Facilitating strategy review and
measures learning

3 Business Planning

• Setting targets
• Aligning strategic initiatives
• Allocating resources
• Establishing milestones


BSC allows for the strategic vision to be translated and communicated to
the organization—and assists in the business planning process
Four Processes – Description

1 • By tying visions and missions statements to measurable scorecard, the Balanced Scorecard
Translating the forces management to come to agreement on how to operationalize their lofty visions into
metrics
Vision
• This also helps build a consensus around the organization’s vision and strategy

• The scorecard becomes a communication tool as it is distributed up and down the
2 organization—in fact, as the scorecard is passed down the organization, the overarching
Communicating and strategic objectives and measures and translated into objectives and measures appropriate
Linking to each particular group
• Tying these targets to individual performance and compensation systems creates “personal
scorecards”

3 • For most organizations, the business planning processes of strategic planning and
budgeting are two separate procedures—the Balanced Scorecard approach forces
Business Planning companies to integrate the two processes
• This ensures financial budgets support strategic goals—moreover, organizations can identify
the most influential non-financial drivers of the financial objectives and set milestones to
gauge progress of these drivers

4 • The Balanced Scorecard provides a mechanism for strategic feedback and review—it allows
Feedback and for continual strategic refinements

Learning • Information that can be tracked by the scorecard for this include feedback on products, new
learnings about internal processes, and technological discoveries



BSC measures the organization’s performance against 4 perspectives
Overview – Four Perspectives

The BSC approach evaluates and measures an organization’s performance
across 4 perspectives—1 financial and 3 non-financial

To success
1 2
To achieve our
financially, how vision, how should
should we appear we appear to our
to our
shareholders?
Financial Customer customers?

Measures Relationships

To satisfy our To achieve our
shareholders and
customers, what
3 4 vision, how will we
sustain our ability
processes must
we excel at?
Internal Business Learning and to change and
improve?
Processes Growth


Contents

 Overview

 Four Processes







1 2 Communication
Translating
Translating the Vision “translates” the vision the Vision and Linking
3 4 Feedback and
statement into operational terms Business
Planning Learning

Translating the Vision

OVERVIEW EXAMPLES

 This first process helps management build a • Metro Bank is the result of a merger
consensus around the company’s vision • The executive team thought it had reached agreement on the new organization’s
and strategy
overall strategy: “to provide superior service to targeted customers”
 It allows the company to translate vague
visionary statements (e.g. “best in class,” • While formulating the measurements of the customer-perspective section of the
“number one supplier”) into operational Balanced Scorecard, it became apparent that although the 25 senior executives
terms that provide useful guidance to action agreed on the words of the strategy, each one had a different definition of the
at the lower levels “superior service” and a different image of the “targeted customers”
 In order for employees to act on the vision • The Balanced Scorecard creation process forced the 25 execs to clarify the
and strategy statements, those statements meaning of the strategy statement—they developed scorecard measures for the
must be expressed as a set of integrated
specific products and services that should be delivered to customers in the
and cohesive set of objectives and
measures that describe the long-term targeted segments, as well as for the relationship the bank should build with
drivers of success customers in each segment
• The scorecard also highlighted gaps in employees’ skills and in information
systems that the bank would have to close in order t deliver the selected value
propositions to targeted customers

Often, a large gap exists between the mission statement and employees’ knowledge of
how their day-to-day actions contribute to the company’s vision.



1 2 Communication
Translating
Translating the vision involves measuring against the Vision and Linking
3 4 Feedback and
4 perspectives Business
Planning Learning

Translating the Vision – Four Perspectives
FINANCIAL MEASURES
“To success Objectives Measures Targets Initiatives
financially, how
should we appear
to our
shareholders?”

CUSTOMER RELATIONSHIPS INTERNAL BUSINESS PROCESSES
“To achieve our vision, how should we appear to “To satisfy our shareholders and customers,
our customers?” what business processes must we excel at?”

Objectives Measures Targets Initiatives Objectives Measures Targets Initiatives
Translating the
Vision

LEARNING AND GROWTH
“To achieve our Objectives Measures Targets Initiatives
vision, how will we
sustain our ability
to change and
improve?”


1 2 Communication
Translating
Communicating and Linking ties objectives from all the Vision and Linking
3 4 Feedback and
levels of the company to its long-term goals Business
Planning Learning

Communicating and Linking

OVERVIEW EXAMPLES

 This second process allows management to • One company involved 3 layers of management in the creation of its Balanced
communicate its strategy up and down the Scorecard—the senior execs formulated the financial and customer objectives; the
organization and link it to departmental and next two levels of management were then responsible for formulating the internal
individual objectives business process and learning-and-growth objectives that would drive
 The scorecard ensures all levels of the achievement of the financial and customer goals
organization understand the long-term
• For instance, knowing the importance of satisfying customers’ expectations of on-
strategy and that both departmental and
individual objectives are aligned with it time delivery, the broader group identified several internal businesses (e.g. order
processing, scheduling, fulfillment) in which the company had to excel
 To align employee’s individual
performances with the overall corporate • Note: broad participation takes longer, but offers several advantages: 1)
strategy, BSC users generally engage in 3 information from a larger number of managers if incorporated into the internal
activities: 1) communication and educating, objectives; 2) management gain a better understanding of the company’s long-
2) setting goals, and 3) linking rewards to
term objectives; 3) broad participation builds a stronger commitment to achieving
performance measures
those goals
• Pioneer Petroleum uses its scorecard as the sole basis for calculating incentive
compensation—it ties 60% of bonuses to 4 financial indicators (ROC, profitability,
cash flow, operating cost) and 40% on indicators of customer satisfaction, dealer
satisfaction, employee satisfaction, and environmental responsibility

This phase not only allows employees at all levels to understand how they contribute to
the company’s long term goals—but also tie their performance incentives to these goals.



1 2 Communication
Translating
Business Planning integrates the company’s business the Vision and Linking
3 4 Feedback and
and financial plans Business
Planning Learning

Business Planning

OVERVIEW EXAMPLES

 Most companies have separate processes • Shortly after the merger, Metro Bank launched 70+ different initiatives—these
for strategic planning and for resource initiatives were intended to produce a more competitive and successful institution,
allocation and budgeting—this third process but they were not adequately integrated into the overall strategy
enables companies to integrate their
business and financial plans • After building their BSC, the company’s managers dropped many of these
initiatives (e.g. marketing effort directed at individuals with high net worth) and
 A separate resource-allocation and
budgeting process run by finance sets consolidated others into initiatives that were better aligned with the company’s
financial numbers that generally bear little strategic objectives
relation to the targets in the strategic plan • Once the strategy is defined and the drivers are identified, the scorecard
 Also, companies often undertake numerous, influences managers to concentrate on improving or re-engineering those
diverse initiatives that don’t integrate well to processes most critical to the organization’s strategic success—this is how a
achieve the company’s strategic goals scorecard most clearly links and aligns action with strategy
 When using the Balanced Scorecard’s
measures as the basis for resource
allocation and priority setting, management
can undertake and coordinate only those
initiatives that the company toward its long-
term strategic objectives

The final step in linking strategy to actions is to establish specific short-term
targets—i.e. milestones—for the BSC measures.



1 2 Communication
Translating
Feedback and Learning allows the company for the Vision and Linking
3 4 Feedback and
strategic learning and double-loop learning Business
Planning Learning

Feedback and Learning

OVERVIEW EXAMPLES

 The fourth process gives organizations the • A CEO of an engineering company said: “With the Balanced Scorecard, I can
capacity for strategic learning continually test my strategy. It’s like performing real-time research.”
 In addition to purely budgeted financial • Most companies today operate in a turbulent competitive environment with
goals, a Balanced Scorecard at the center complex strategies that, though valid when launched, may lose their validity as
of a company’s management systems market conditions change—the BSC framework gives management the ability to
allows management to monitor short-term
results from the three additional know at any point in its implementation whether the strategy they have formulated
perspectives—1) customers, 2) internal is, in fact, working and if not, why not
business processes, and 3) learning and • Budget reviews and financially based management tools do not allow this, as they
growth—and evaluate strategy under the
address performance from only the financial perspective; also, they do not involve
light of recent performance
strategic learning
 In other words, the scorecard enables
companies to modify their strategies to
reflect real-time learning

BSC allows a company for “double-loop learning” (learning that produces a change in
people’s assumptions about cause-and-effect relationships).



1 2 Communication
Translating
The Balanced Scorecard supplies 3 elements that are the Vision and Linking
3 4 Feedback and
essential to strategic learning Business
Planning Learning

Feedback and Learning – Elements to Strategic Learning

Balanced
Scorecard

1 2 3
• The scorecard articulates the • The scorecard supplies the essential • The scorecard facilitates the strategy
company’s shared vision—defining in strategic feedback system review that is essential to strategic
clear and operational terms the results • A strategic feedback system should be learning
that the company, as a team, is trying able to test, validate, and modify the • With its specification of the causal
to achieve hypotheses embedded in a business relationships between performance
• It communicates a holistic model that unit’s strategy—by establishing drivers and objectives, the scorecard
links individual efforts and milestones within the business allows executives to use the
accomplishments to business unit planning process, management is company’s periodic review sessions to
objectives forecasting the relationship between evaluate the validity of the business
changes in performance drivers and unit’s strategy and quality of its
the associates changes in one or more execution
specific goals



Contents

 Overview

 Four Processes







This 26-month timeframe portrays how a company can adopt BSC as its
strategic management system …
Example – BSC Strategic Management Process (1 of 3)

Communication to middle Develop business unit Refine the vision. The
management. The top scorecards. Using the review of business unit
three layers of corporate scorecard as a scorecards identifies
management (100 people) template, each business several cross-business
are brought together to unit translates its strategy issues not initially included
learn about and discuss the into its own scorecard. in the corporate strategy.
new strategy. The The corporate scorecard is
Balanced Scorecard is the updated.
communication vehicle.

MONTHS

1 2 3 4 5 6 7 8 9 10 11 12

Clarify the vision. Ten members Eliminate non-strategic investments. The Review business unit
of a newly formed exec team work corporate scorecard, by clarifying strategic scorecards. The CEO and
together for 3 months. A Balanced priorities, identifies many programs that are the exec team review the
Scorecard is developed to not contributing to the overarching strategy. individual business units’
translate a generic vision into a scorecards. The review
strategy that is understood and Launch corporate change programs. The permits the CEO to
can be communicated. The corporate scorecard identifies the need for participate knowledgeably
process helps build consensus cross-business change programs. They are in shaping business unit
and commitment to the strategy. launched while the business units prepare strategy.
their scorecards.



… By year 2, we see BSC has now become a routine part of the strategic
management process

This step is performed on a regular
Communicate the Update long-range plan
schedule. The BSC is now a routine
BSC to the company. and budget. Five-year part of the management process.
At the end of year one, goals are established for
when the management each measure. The
teams are comfortable investments required to meet
with the strategic those goals are identified
approach, the and funded. The first year of
scorecard is distributed the 5-year plan becomes the
to the entire company. annual budget.

13 14 15 16 17 18 19 20 21 22 23 24

Establish individual Conduct monthly and quarterly reviews. After corporate approval of the
performance objectives. The top business unit scorecards, a monthly review process, supplemented by
3 layers of management link their quarterly reviews that focus more heavily on strategic issues, begins. This is
individual objectives and incentive an ongoing process.
compensation to their scorecards.




Conduct annual strategy review. At the
start of the third year, the initial strategy part of the management process.
has been achieved and the corporate
strategy requires updating. The executive
committee lists ten strategic issues.
Each business unit is asked to develop a
position on each issue as a prelude to
updating its strategy and scorecard.

25 26 27 28 … … … … … … … …

Link everyone’s performance to the
Balanced Scorecard. All employees are
asked to link their individual objectives to
the Balanced Scorecard. The entire
organization’s incentive compensation is
linked to the scorecard.



An example of a Personal Scorecard—note how it contains both financial
and non-financial objectives
Example – Personal Scorecard
CORPORATE OBJECTIVES
 Double our corporate value in 5 years Name:

 Increase our earnings by an average or 20% per year Location:
 Achieve an internal rate of return 2% above the cost of capital

Team/Individual Objectives
Corporate Targets Scorecard Measures Business Unit Targets
and Initiatives
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 1.

Financial
100 120 160 180 220 Earnings in ($ USD MM) 2.
100 420 220 230 235 Net cash flow
100 85 80 75 72 Overhead and operating expenses 3.
Operating
10 78 75 73 70 Production costs per barrel 4.
100 95 93 90 85 Development costs per barrel
Team/Individual Measures Targets 5.
1.
2.
3.
4.
5.


This diagram illustrates how measures from the Four Perspectives are
interlinked and drive each other
Example – Linking Measures from Four Perspectives

(+) FINANCIAL

Return on
(–) Accounts Capital Employed
Receivable

CUSTOMER Operating
Expense (–)
Customer
Satisfaction

(+)
INTERNAL
BUSINESS
PROCESSES

(+) Rework

LEARNING
AND GROWTH
Employees’ (–)
Suggestions

Employees’
Morale (+)



BSC Implementation 2-Year Timeline Template
Template – BSC Implementation Timeline (1 of 2)

Communication to middle Develop business unit Refine the vision.
management. scorecards..

MONTHS

1 2 3 4 5 6 7 8 9 10 11 12

Clarify the vision. Eliminate non-strategic investments. Review business unit
scorecards.

Launch corporate change programs.


BSC Implementation 2-Year Timeline Template
Template – BSC Implementation Timeline (2 of 2)

Communicate the Update long-range plan
BSC to the company. and budget. part of the management process.

13 14 15 16 17 18 19 20 21 22 23 24

Establish individual Conduct monthly and quarterly reviews.
performance objectives.


Personal Scorecard Template
CORPORATE OBJECTIVES
 Name:

 Location:


Team/Individual Objectives
Corporate Targets Scorecard Measures Business Unit Targets
and Initiatives
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 1.

Financial

2.

Operating
3.

Team/Individual Measures Targets 4.
1.
2.
3. 5.
4.
5.


PPT Lab (www.pptlab.com) is the only crowdsourced
presentation design service. Get consulting-quality
presentations at a fraction of the cost!
www.PPTLab.com
support@pptlab.com Each month, we will create well over 50 slides of for our members.
As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.


Balanced Scorecard

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