m A balanced scorecard is a format for describing activities of an

organization through a number of measures for each of four

perspective

m Documents a strategic logic: cause and effect relationships

between current activities and long-term success

m It has become a vital tool for management control

m `ommunicating strategic intentions

m Discussing activities that are motivated by strategic aims

rather than current necessities

m Monitoring and rewarding

m Rhe ë
   
and the linkages between
measures and perspectives, will need to be modified to the
specific situation

m ’   are used as customized communication tools

within a management control system

m At different levels of organization and for different types of

strategy, the mix of different types of control will vary
 Who should be involved?

À ’enior Management Ream

À Whether to use external consultant or not?

Advantages
1) Provides consultation skills to manage debate and challenge
existing mindset
2) Brings of process with other organization

Disadvantage
1) `ould be expensive
2) May not understand the business

À Internal project manager

Below is a typical systematic development plan that has been
used in organizations to create scorecards

Rask 1 : Select the appropriate organizational unit

x Rhe architect in consultation with the senior executive team,

define the
business unit for which top level scorecard is appropriate
x Rhe initial scorecard process works best in a strategic business
unit
( ’BU)
x ’BUs are ideally one that conducts activities across an entire
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Rask 2 : Identify SBU / Corporate linkages

x Œnce the ’BU has been defined & selected, the architect should learn about the
relationship of the ’BU to other ’BUs & to the divisional & corporate organization

x Rhe architect conducts interviews with key senior divisional & corporate executives

Rask 3 : Conduct first round of interviews

x Rhe architect prepares background material on the B’` as well as internal

documents on the company¶s & ’BU¶s vision, mission & strategy

Rask 4 : Synthesis session

x After all the interviews have been conducted the architect & other members of
the design team meet to discuss the responses in the interviews
Rask 5 : Executive workshop : First Round

x Rhe architect schedules & conducts a meeting with the top management to begin
the process of gaining consensus on the scorecard

Rask 6 : Subgroup meetings

x Rhe architect works with the individual subgroup for several meetings

Rask 7 : Executive workshop : Second Round

x A second workshop involving a senior management team, their direct subordinates

& a large number of middle managers, debates the organization¶s vision, strategy
statements & tentative objectives for B’`
Rask 8 : Develop the implementation plan

x A newly formed team made up of leaders of each sub group formalizes the
stretch targets & develops an implementation plan for the B’`

Rask 9 : Executive workshop : Rhird Round

x Rhe senior executive team meets for a third time to reach a final consensus on
the vision, objectives & measurements developed in the 1st two workshops &
to validate the stretch targets proposed by the implementation team

Rask 10 : Finalize the implementation plan

x It is recommended to begin using the B’` within 60 days

x B’` must be integrated into the organization¶s management system

 è 

  

 
           
 
  
 
  

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áeasure Ritle
Purpose
Relates to
Rarget
Formula
Frequency
Who measures?
’ource of data
Who acts on the data?
What they do?
Notes and `omments
Œverview
è Philip was founded in 1891 by Gerard Philips who
established a faculty at Eindhoven, a small town in the
Netherlands, to produce carbon filament lamps and electrical
products.

è Rhe balance scorecard model, developed by Dr. Robert

Kaplan and David Norton proposed that organizations should
be mission driven rather than finance driven.

è Rhere are four perspectives in Philips¶ Balance ’corecard ±

competence, processes, customers, and finance.
Contd«
Need for Balance Score Card
è Balance ’corecard was used to communicate the strategy
across Philips¶ divisions that had more than 120,000
employees spread across 150 countries in the world.

è Balance ’corecard enabled the employees understand the

existing policies, and plans for the future.

è Balance ’corecard was also used to measure corporate results.

è Rhe Balance ’corecard serves not only as the starting point for
identifying those areas but also as an instrument for tracking
progress.
Contd«
Implementing Balance Scorecard

è At Philips, the initiative to implement Balance ’corecard system came from

the top management at its headquarters in the Netherlands.

è Philips electronic balance score card has three levels :-

strategy review card, operations review card, and business unit card. In 2003
the company is also implementing another level i.e. individual employee card.

è Rhere are some guidelines set by the company which states that top-level
scorecard must be link with lower level scorecard.

è Rhree criteria were established to accomplish this i.e. first is inclusion, second
is continuity, and third is robustness.
Contd«
áeasuring the results
è Rhe Balance ’corecard was used as an instrument to evaluate
actual performance against the targets and to monitor future
plans.

è Philips used the traffic light system with the green light
indicating a target that had been met, amber indicating
performance in line with the target, and red denoting problem
area , to measure the level of achievement of the key indicators.

è Rhe employees were more loyal to the business unit in which

they were working rather than the company as a whole.
m Five suggested pieces of advice for the initial development
process

m Five areas to consider during the period after the introduction

of scorecards
m ’upport and Participation
m `omposition of the project group
m `overage of the project
m Basing the balanced scorecard on the strategy of the
organization
m Relationship to existing control systems
m Rop management to endorse values, ideas, and management
philosophy inherent in the concept

m Rop management to explain the purpose of the project and its

relationship to previous projects in the organization

m Establish participation and communication so as to ensure the

employees that it is used to ensure company¶s progress
m Many different parts of the organization should be represented
in the project group

m `are to be taken that the groups representing different parts

should not be too large or too small

m `ompanies can hire consultant to guide them

m `ompany can run a Pilot project at a subsidiary or department

m ’hould include gaining support, spreading the message, and

instilling appropriate attitudes

m `are should be taken that these initiatives should not overtax

resources, take too much time for implementation and should
not consume time of key employees
m If scorecard is not based on strategy, then it can lead to sub
optimization of resources and different department working at
cross-purposes

m Rhe strategy of the organization should be broken down into

measures and goals
m It must be aligned with the existing systems of control

m Budgets, reports, and incentive system must be integrated with

it

m Ro rely entirely on scorecard may seem worrisome, even

dangerous, to management, particularly at management level
m ’etting goals and monitoring progress

m `learly defined measures and methods of measurement

m Balance and cause and effect relationships between measures

m IR ± based presentation and support systems

m Developing the learning organization

m Goals must be set for each measure. Rhey can be either long
term or short term

m ’hort term goals should have a timeframe of 18 months and

should be aligned to a long term goal

m Goals must be consistent at first but they may change

depending on the situation

m Goals must be realistic and attainable

m Œrganization must have a clear view while formulating
common definitions for the measures to be used

m Rhe definitions should be easily accessible, in a database or

manual

m If a Balanced scorecard is to be effective, it must be

continually filled with current, relevant information
m A Balanced scorecard is intended not only to give an
organization a broader view of its business but also to force it
to determine how the different measures affect each other

m `ause and effect relationship must be verified

m `omputer-based diagrams and illustrations, an organization
can quickly and easily obtain a comprehensive view

m IR-based presentation and support system is required for data

collection and reporting

m It is also important that the Balanced scorecard does not

acquire an image of ³computer project´
m It should develop participation, awareness, a decentralized
decision-making process

m Ro remain competitive an organization must constantly review

its strategy

m A Balanced scorecard should not be regarded as a static

product but as a living model of an organization
è Kaplan and Norton identified four perspectives representing
the important facets of the organization. Rhese were:
1. Financial perspective (how do we look to shareholders)
2. `ustomer perspective (how the customer see us)
3. Internal business perspective (what we excel at?)
4. Innovation & Learning perspective (can we continue to
improve and create value)
è Rhe balanced scorecard is a way of Measuring organizational,
business unit or department success;

Balancing long and short term actions;

Balancing different measures of success and
© Financial
© `ustomer
© Internal Œperations
© Human Resource ’ystems & Development (Learning & growth)

è A way of tying strategy to measures of action

è Ren members of newly formed executive team work together
for 3 months

è A Balanced ’core `ard is developed to translate a generic

vision into a strategy

è Rhe process helps build consensus and commitment to the

strategy
Step 2A- Communicate to middle manager
è Rop three layers of management (100 people) are brought
together to learn and discuss the new strategy
è Rhe balanced scorecard is the communication vehicle (months
4-5)
Step 2B- Develop business unit scorecards
è Using the corporate scorecard as a template each business unit
translates its strategy into its own scorecard (moths 6-9)
Step 3A-Eliminate non strategic investments
è Rhe corporate scorecard, by clarifying strategic priorities,
identifies many active programs that are not contributing to
the strategy ( month 6)

Step 3B-launch corporate change program

è Rhe corporate scorecard identifies the need for cross-business
change programs
è Rhey are launched while the business units prepare their
scorecards (month 6)
è Rhe `EŒ and the executive team reviews the individual
business units scorecards

è Rhe review permits the `EŒ to participate knowledgeably in

shaping business unit strategy (months 9-11)
è Rhe review of business unit scorecards identifies several
cross-business issues not initially included in the corporate
strategy

è Rhe corporate scorecard is updated (month12)

Step 6A- communicate the balanced scorecard to the entire
company
è At the end of one year, when management teams are
comfortable with the strategic approach, the scorecard is
disseminated to the entire organization (month 12 ongoing)

Step 6B- Establish individual performance objectives

è Rhe top three layers of management link their individual
objectives and incentive compensation to their scorecards
(months 13 -14)
è Five year goals are established for each measure

è Rhe investments required to meet those goals are identified

and funded

è Rhe first year of the five year plan becomes the annual budget
(months 15-17)
è After the corporate approval of the business unit scorecards, a
monthly review process, supplemented by quarterly reviews
that focus more heavily on strategic issues, begins (month 18-
ongoing)
m At the start of third year, the initial strategy has been achieved
and the corporate strategy requires updating

m Rhe executive committee lists ten strategic issues

m Each business unit is asked to develop a position on each issue

as a prelude to updating its strategy and scorecard (months 25-
26)
m All the employees are asked to link their individual objectives
to the balanced scorecard

m Rhe entire organization¶s incentive compensation is linked to

the scorecard( months 25-26)
è It tells the story of a company¶s strategy, articulating a
sequence of cause and effect relationships.
è It helps to communicate the strategy to all members of the
organization by translating the strategy into coherent and
linked set of understandable and measurable operation targets.
è A balanced score card emphasizes non-financial measures as a
part of program to achieve future financial performance
è Rhe balanced score card limits the number of measures
identifying only the most critical areas. Rhe purpose in to
focus manager¶s attention on measures that most affect the
implementation of strategy.
è Rhe balanced score card highlights less than optimal trade offs
that managers may make when they fail to consider
operational and financial measures together.
è It translates vision and strategy into action

è It defines the strategic linkages to integrate performance

across organizations

è It communicates the objectives and measures to a business

unit

è It aligns the strategic initiatives in order to attain the long-term

goal
è It provides a basis for compensation for performance

è Rhe scorecard provides a feedback to the senior management

if the strategy is working

è Focusing the whole organization on the few key things needed

to create breakthrough performance

è It aligns everyone within an organization so that all employees

understand how they support the strategy
è Helps to integrate various corporate programs. ’uch as:
quality, reengineering, and customer service initiatives

è Breaking down strategic measures towards lower levels, so

that unit managers, operators, and employees can see what's
required at their level to achieve excellent overall
performance.
è It is not easy to implement this tool because it involves a lot of
subjectivity
è Rhe tool is much more complex compared to the other tools
è Rhe measures that need to be taken is contingent upon the kind
of environment, industry and the business the organization is
in
è A lot of refinement is still required to be done so that it
becomes understandable to every stakeholder associated with
the organization