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The Balanced Scorecard (BSC) is a strategic performance management technique for measuring whether the smaller-scale operational activities of a company matched with its larger-scale objectives in terms of vision and strategy. The focus not only on financial outcomes but also on the operational, marketing and developmental inputs. The Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests.
Organizations were encouraged to measure, in addition to financial outputs, those factors which influenced the financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.
The fact is that organizations cannot directly influence financial outcomes, as these are "lag" measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise. Organizations should also measure those areas where direct management intervention is possible. In so doing, the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. In practice, early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Internal Business Processes", "Learning and Growth" and ââ‚¬Å“Customer".
Traditional financial reporting systems describes an indication to how a firm has performed in the past, but provide a little information about how it might perform in the future. For example, a firm can reduce its level of customer service in order to boost current earnings, but then future earnings can be negatively impacted because to reduced customer satisfaction.
In order to deal with this problem, Robert Kaplan and David Norton provide the Balanced Scorecard, to measure performance that considers not only financial measures, but also business process, learning measures and customer.
So, the balanced scorecard analyse the organization's strategy into four perspectives with the following:
objective measures and subjective measures perspective
internal and external measures perspective
between performance results and the drivers of future results
If the company's implementation and execution of its strategy are contributing to the bottom-line improvement of the company as examine by the financial perspective. It shows the long-term strategic objectives of the organization and thus it incorporates the tangible outcomes of the strategy in traditional financial terms. There are three possible stages sustain, rapid growth, and harvest. Financial objectives and measures for the growth stage will stem from the development and growth of the organization which will lead to increased sales volumes, acquisition of new customers, and growth in revenues etc.The harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc Usually the most common financial measures that are incorporated in the financial perspective are EVA, profit margins, cash flow, revenue growth, costs, net operating income etc.
Objective Specific Measures are Growth Revenue, Return on equity, growth Profitability, Unit cost and Cost leadership.
The customer perspective describes the value proposition that the organization can apply to satisfy customers and thus generate more sales to the most desired or the most profitable customer groups. The value proposition can be cantered on one of the three: operational excellence, customer intimacy or product leadership, while maintaining threshold levels at the other two.
The measures that are selected for the customer perspective should measure both the value that is delivered to the customer (value proposition) which may involve time, quality, performance and service, and cost, and the outcomes that come as a result of this value proposition (e.g., customer satisfaction, market share). Objective Specific Measure New products % of sales from new products Responsive supply On time delivery To be preferred supplier Share of key accounts Customer partnerships Number of cooperative efforts
The internal process perspective is concerned with the processes that create and deliver the customer value proposition. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently. This is for both short-term and long-term objectives as well as incorporating innovative process development in order to stimulate improvement. To identify the measures that correspond to the internal process perspective, Kaplan and Norton propose using certain clusters that group similar value creating processes in an organization. The clusters for the internal process perspective are operations management by improving asset utilization, supply chain management, etc. Customer management by expanding and deepening relations, innovation by new products and services and regulatory & social by establishing good relations with the external stakeholders.
Objective Specific Measure Manufacturing excellence Cycle time, yield Increase design productivity Engineering efficiency Reduce product launch delays Actual launch date vs. plan
The innovation and learning perspective is the foundation of any strategy and focuses on the intangible assets of an organization, mainly on the internal skills and capabilities that are required to support the value-creating internal processes. The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise. These three factors relate to what Kaplan and Norton claim is the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved. This of course will be in the long term, since an improvement in the learning and growth perspective will require certain expenditures that may decrease short-term financial results, whilst contributing to long-term success.
Objective Specific Measure Manufacturing learning Time to new process maturity Product focus % of products representing 80% of sales Time to market Time compared to that of competitors
Balanced Scorecard Benefits
Some of the benefits of the Balanced Scorecard system are-
Translation of strategy into measurable parameters.
Communication of the strategy to everybody in the firm.
Making compatibility between individual goals with the firm's strategic objectives - the BSC recognizes that the selected measures influence the behaviour of employees.
Feedback of implementation result helps the strategic planning process.
Since its beginnings as a performance measurement system, the Balanced Scorecard has evolved into a strategy implementation system that not only measures performance but also describes, communicates, and aligns the strategy throughout the organization.
According to the BSC collaborative, there are four barriers to strategic implementation:
Management spends too little time on strategy and too much time on short-term tactical decision making so Management barrier.
No one in the organization understands about the strategies of the organization. Most people have objectives that are not linked to the strategy of the organization that is called People barrier.
Time, energy, and money are not allocated to those things that are critical to the organization. For example, budgets are not linked to strategy, resulting in wasted resources, it is called Resource barrier.
Benchmarking using Balanced Scorecard
To use BSC and Benchmarking in order to achieve required results, requires the management to be able to measure and quantify performance across all the marketing based activities involved in getting and holding business. Management need to know how much profitable revenue their business makes, where it comes from and what it costs to get it , whether it is sustainable, as well as considering their overall level of gross and net profit. In assessing how the company performance rates against competitors, the CEO will rely on the CMO to provide the best data to use in the Balanced Score Card and for comparison in Benchmarking.
The possibility of success of using BSC and Benchmarking is to use the systems as a guide to help the CMO achieve the objective of maximizing sustainable profitable revenue. Measurement of marketing performance is very crucial for the effective management of all the various business getting and retaining activities. The critical factor for many businesses is, that in seeking to comply with the requirements of BSC and Benchmarking, they lose sight of their true purpose as a management tools to maintain a self sustaining profitable business, and see compliance as an objective in itself.
For better understanding and management the measures can be broken down to the individual level, group level, business level and then finally aggregated to the corporate level.
Metrics are designed to support strategies. They are carefully selected yardsticks that help in the performance measurement
"Metrics" give numerical standards against which a client's own processes can be compared. Metric benchmarks are of the form:
- finished-product first-pass yield of 97 per cent;
- scrap/rework less than 1 per cent of sales;
- cycle time less than 25 hours;
- customer lead times less than 20 days;
- productivity levels of $150,000 or more per employee; and
- plant-level ROA better than 15 per cent ("Metrics benchmark", available at: www3.best-in-class.com/bestp/domrep.nsf/).
For example, the following can be set of metrics chosen under each perspective, firm as a whole for specified target requirements:
Learning and growth perspective:
- involve the employees in corporate governance;
- inculcate leadership capacities at all levels; and
- become a customer driven culture.
Internal process perspective:
- improve productivity standards;
- eliminating defects in manufacturing;
- provide adequate technical knowledge and skill for all the levels of employees; and
- customer feedbacks to be integrated in the operation.
- about 12 per cent return-on-equity to be achieved;
- about 15 per cent revenue growth;
- about 5 per cent reduction in production cost; and
- about 3 per cent reduction in cost of capital.
- enhance market share by 5 per cent;
- about 10 per cent increase in export sales;
- obtain competitive pricing;
- increase after sales service outlets by 10 per cent; and
- to conduct face-to-face meeting with customers by organizing customer meets.
BSC not only captures the change in any one measure but also provides insight into the related changes in other perspectives. BSC, therefore helps to have an enlarged vision to the firms management as, each strategic intent will flow across all four perspectives, viz. financial, customer, internal processes, and learning and growth and the necessary impact is captured in those perspectives, respectively, and holds out the promise of improving a company's prospects of more closely matching its management's plans to its strategic goals and objectives.