STRATEGY EXECUTION

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TheBalancedScorecardandStrategyMapsAPrimerforManagementTeams.pdf

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The Balanced Scorecard and Strategy Maps

A Primer for Management Teams

Dr. Mark L. Frigo, PhD,CPA The Center for Strategy, Execution, and Valuation

Kellstadt Graduate School of Business DePaul University Chicago, IL (U.S.A.)

The Balanced Scorecard and Strategy Maps The Balanced Scorecard framework and strategy maps provide a way to execute strategy. The six-stage strategy execution system developed by Kaplan and Norton (Kaplan and Norton, The Execution Premium, Harvard Business School Press, 2008) shown below provides an excellent perspective on how performance measures and results are used in executing and refining strategy.

The Kaplan-Norton Management System

DEVELOP THE STRATEGY

•Mission, Value, Vision •Strategic Analysis •Strategy Formulation

ALIGN THE ORGANIZATION •Business Units •Support Units •Employees •Board of Directors

PLAN OPERATIONS •Key process improvement •Sales planning •Resource capacity plan •Budgeting

MONITOR & LEARN

•Strategy Reviews •Operational Reviews

TEST & ADAPT

•Profitability Analysis •Strategy Correlations •Emerging Strategies

Performance measures

Results

Performance measures

Results

4 5

•Strategy Map / Themes •Measures / Targets •Initiative Portfolios •Funding / Stratex

1TRANSLATE THE STRATEGY

6•Strategy map•Balanced Scorecard •Stratex

Strategic Plan

Operating Plan

•Sales Forecast •Resource Requirements •Dashboards •Budgets

EXECUTION Process

Initiative Source: Kaplan and Norton, The Execution Premium (Harvard Business School Press, 2008).

Balanced Scorecard and Performance Measures: The Balanced Scorecard, a performance measurement system that includes financial and non-financial performance measures was developed by Kaplan and Norton (The Balanced Scorecard: Translating Strategy Into Action, Harvard Business School Press, 1996).

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1. What is the Balanced Scorecard? The Balanced Scorecard is a strategic performance measurement and management framework for implementing strategy by translating an organization’s mission and strategy into a set of performance measures. These performance measures are generally in four primary perspectives: Financial, Customer, Internal Business Processes and Learning (Innovation) and Growth.

2. Four Perspectives of the Balanced Scorecard: The four perspectives of the Balanced Scorecard include the following: a. Financial Perspective: This perspective focuses on return on investment and other supporting financial performance measures. Example performance measures include profitability, return on invested capital and revenue growth. b. Customer Perspective: This perspective focuses on customer performance in areas that are most critical to the customer. Example performance measures include customer satisfaction and customer retention. c. Internal Business Processes Perspective: This perspective focuses on operating effectively and efficiently and includes performance measures on cost, quality and time for processes that are critical to the customers. Example performance measures include number of defects and cycle time. d. Learning (Innovation) and Growth Perspective: This perspective focuses on performance measures relating to employees, infrastructure, teaming and capabilities necessary for the internal processes to achieve customer performance and financial results. Example performance measures include employee satisfaction, employee satisfaction, hours of training per employee and information technology expenditures per employee.

Financial PerspectiveFinancial Perspective

Customer PerspectiveCustomer PerspectiveCustomer PerspectiveCustomer Perspective

Innovation and Growth PerspectiveInnovation and Growth Perspective

Internal Bus. Process PerspectiveInternal Bus. Process Perspective

Vision and Strategy

Objectives Measures

Objectives MeasuresObjectives Measures Objectives MeasuresObjectives Measures

Objectives MeasuresObjectives Measures

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3. Components of the Balanced Scorecard: A Balanced Scorecard includes strategic objectives, performance measures, baseline performance, target performance, and supporting strategic initiatives.  Strategic Objectives: A statement of what the strategy must achieve and

what’s critical to its success.  Performance Measures: Describe how success in achieving the strategy will

be measured and tracked.  Baseline Performance: The current level of performance for the

performance measure.  Targets: The level of performance or rate of improvement needed in the

performance measure.  Strategic Initiatives: Key action programs required to achieve strategic

objectives. Strategic Objectives focus on what is to be achieved, Strategic Initiatives focus on how it will be achieved and Performance Measures, Baseline Performance and Targets relate to how it will be measured.

Objectives

• Fast ground turnaround

Statement of what strategy must achieve

and what’s critical to its

success

Target

• 25 Minutes • >90%

The level of performance

or rate of improvement

needed

• Ground Crew Alignment Initiative

Key action plan required

to achieve objectives

InitiativeMeasurement

• On Ground Time • On-Time

Departure

How success in achieving the strategy

will be measured and

tracked

Strategic Theme: Operating Efficiency

Profitability Financial

Innovation

More customers

Ground crew alignment

Low fares

Fewer planes

Customer

Internal

Fast ground turnaround

Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives

Flights on time

Balanced Scorecard 101

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Strategy Maps in the Balanced Scorecard framework are diagrams of the cause- and-effect relationships between strategic objectives. The Value Chain in the Balanced Scorecard framework is the sequence of business processes in which usefulness is added to the products of services of a company and includes the Innovation Process, Operations Process, and Post- sales Process. The value chain is one way to describe the internal process perspective in the Balanced Scorecard and its performance measures. 5. Characteristics of the Balanced Scorecard Characteristic of the Balanced Scorecard include the following:  Strategy-Focused: Performance measures are driven by mission, vision

and strategy  Balanced: Performance measures are “Balanced” in terms of Financial

and Non-Financial measures, Leading and Lagging measures and Internal (internal processes) and External (customer) measures.

 Include Both Financial and Non-financial Measures: Performance measure include traditional financial measures, as well as non-financial measures.

 Cause and Effect Linkages: Performance measures are connected using cause and effect linkages. Performance measures include Performance Drivers (leading indicators) and Outcome Performance Measures (lagging indicators)

 Unique to the Strategy: Performance measures and unique and customized to an organization’s strategy.

6. Strategy Maps and Cause and Effect Linkages Strategy Maps are a diagram of the cause-and-effect relationships between strategic objectives. When looking at Cause and Effect Linkages in the Balanced Scorecard framework, it is important to remember that the classification of performance measures as leading or lagging is not a dichotomy, but rather must be considered as a continuum. For example, customer satisfaction may be a leading indicator (performance driver) leading to return on investment (the lagging indicator or outcome measure). However, customer satisfaction may be a lagging indicator to on-time delivery (the leading indicator).

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Cause and Effect Linkages

Financial Dimension

Customer Dimension

Internal Dimension

Learning and Growth Dimension Training

Customer Satisfaction

ROA Revenue Growth

Number of Rejects

The Balanced Scorecard Template

Strategy Map Measures Objectives Targets

Strategic Theme:

Initiatives (Action Plans)

C us

to m

er Fi

na nc

ia l

In te

rn al

Le ar

ni ng

& G

ro w

Example Balanced Scorecard: The following is a simple example of a Balanced Scorecard. Within each of the four perspectives are key strategic objectives and related performance measures.

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Financial Perspective: Strategic Objective Performance Measure -Increase ROI -Return on Investment (ROI) -Revenue Growth -Percent Growth in Revenue -Increase Profitability -Net Income as a Percentage of Sales Customer Perspective: Strategic Objective Performance Measure -Increase Customer Satisfaction -Customer Satisfaction Ratings -Increase Customer Share -Revenue per Customer -Attract New Customers -Number of New Customers

-Revenue from New Customers Internal Business Processes Perspective: Strategic Objective Performance Measure -Improve On-Time Delivery -Percentage of On-Time Deliveries -Improve Quality Performance -Number of Rejects Learning and Growth Perspective: Strategic Objective Performance Measure -Train Employees on Quality Tools -Hours of Training on Quality Tools -Use Information Systems to Manage On-Time Delivery Status -Percent of employees using System In this example, we can see some possible cause and effect relationships. Increasing the training in quality tools may improve on-time delivery performance which may improve customer satisfaction and therefore increase return on investment. The connection between customer satisfaction and return on investment at some companies is based on the following observation: more satisfied customer pay invoices faster, therefore accounts receivable turnover (a component of return on assets) increases and therefore return on investment increases.

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7. Performance Measures in the Balanced Scorecard Here are examples of performance measures within a Balanced Scorecard framework. We have classified them within the four perspectives of the Balanced Scorecard. Financial Perspective:

• Return on Investment • Economic Profit • Economic Value Added • Cash Flow ROI • Free Cash Flow • Net Income/Sales ratio • Sales/asset ratio • Revenue Growth • Revenue from new products (existing customers) • Revenue from new products (new customers) • Cost of sales %

Customer Perspective:

• Customer Satisfaction • Customer Retention • Customer Acquisition • Percentage of highly satisfied customers • Depth of relationship • Percentage of business from customer referrals • Customer satisfaction with new product/service offerings

Internal Process Perspective:

• On-time Delivery • Cost per Unit • Percentage of late orders • Total cost of quality • Cycle time • Process efficiency • Capacity utilization • Inventory turnover • Lead times (order to delivery) • Percentage of on-time deliveries • Time to resolve customer complaints • Inventory obsolescence • Order backlog • Number of leads/conversion rate • Hours with customers • Time spent with target accounts • Number of new projects based on client input • Number of joint projects

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• Number of technology and products partners • Number of patents • Total time from concept to market • Time from pilot to full production • Manufacturing-process yield • Number of failures, defects and customer returns • Warranty costs • Number of safety incidents

Learning and Growth Perspective:

• Employee satisfaction and engagement • Employee turnover • Employee objectives linked to the Balanced Scorecard • Employee Awareness of the strategy • Percentage of employees trained in Total Quality Management • Number of Six Sigma Black Belts • Performance improvement from employees suggestions • Percentage of ideas and best practices shared across organization • Percentage of R&D employees to total employees • R&D expenditure as a percent to sales revenue

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