Implementing Balanced Scorecard Business Essay - Free Essay Example

Sample details Pages: 16 Words: 4742 Downloads: 10 Date added: 2017/06/26 Category Business Essay Type Analytical essay Did you like this example? INTRODUCTION: Balanced Scorecard Companies today are in the midst of a revolutionary transformation as Industrial age competition is shifting to Information age competition. The cut-throat competition that businesses faced in the last two decades has made them to look for improvement initiatives like Total Quality Management, Just-in-Time (JIT) systems; Activity based cost management, Employee empowerment and Business process Re-engineering. Though these initiatives resulted in enhanced shareholder value, their structure was disjointed and focused on the short-term survival and growth. Don’t waste time! Our writers will create an original "Implementing Balanced Scorecard Business Essay" essay for you Create order These programs were centered on achieving breakthrough performance merely by monitoring and controlling financial measures of past performance. This collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has led to a new blend the balanced scorecard. It was originated by Dr. Robert Kaplan (Harvard Business School) and David Norton  as a performance measurement framework  that  added strategic  non-financial performance measures to traditional financial metrics to  give managers and executives a  more balanced view of organizational performance. The balanced scorecard is a strategic planning and management system that is used  extensively in business and industry, government, and nonprofit organizations worldwide  to align business activities to the vision and strategy of the organization, improve internal and external com munications, and monitor organization performance against strategic goals.   While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the Tableau de Bord literally, a dashboard of performance measures) in the early part of the 20th century. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the marching orders for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. This   new approach to strategic management was  first detailed in a series of  articles  and books  by Robert S.  Kaplan and David P. Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to balance the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. In a nutshell, the need to link financial and non-financial measures of performance and identifying key performance measu res led to the emergence of Balanced Score Card approach developed by Norton and Kaplan (1992) in the US. The Balanced score card is defined as an approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasized the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased fashion. Kaplan and Norton identified four perspectives representing the important facets of the organization. These were: Financial perspective (how do we look to shareholders?) Customer perspective (how the customers see us?) Internal business perspective (what we excel at?) Innovation Learning perspective (can we continue to improve and create value?) The idea behind the four perspectives represents a balanced view of any organization and by creating measures under each of these headings all the important areas of business would be covered. It is important to no te that the balanced score card itself is just a frame work and it doesnt say what the specific measures should be. It is a matter for people within the organization to decide upon. The set of measures for each organization or even sections with the organization will be different. Much of the success of scorecard depends on how the measures are agreed, the way they are implemented and how they are acted upon. So the process of designing a score card is as important as the score card itself. Facts about Balanced Scorecard More than 50 percent of large enterprises use some type of a balanced scorecard according to study by Cranfield University According to Balanced Scorecard Collaborative 95% of typical workforce does not understand its organizations strategy 90% of organizations fail to execute their strategies successfully 86% of executive teams spend less than one hour per month discussing strategy 70% of organizations do not link middle management incentives to strategy 60% of organizations do not link strategy to budgeting According to Balanced Scorecard Forum 80% of organizations using balanced scorecard reported improvements in operating performance 66% of these organizations reported an increase in profits According to Bain Co About 70 percent of organizations had at least partially implemented a balanced scorecard by 2006. 50 percent of Fortune 1,000 companies are using the balanced scorecard According to Microsoft Business Intelligence Conference 30% of companies think that the most important to their company today is performance management WHY DOES A BUSINESS NEED A BALANCED SCORECARD (BSC)? Any successful business or organization in this world rests upon multiple pillars; out of that following four are the most important and critical. Financial Customer Internal Processes People (Learning and Innovation and Growth) The balanced scorecard is a way of Measuring organizational, business unit or department success; Balancing long and short term actions; Measurement of; Financial Perspective: How well do we mange our resources? Customer Perspective: How do customers see us? Internal Operations: Are we productive and effective? Employees and Learning Perspective: How do our employees feel? A way of tying strategy to measures of action What Does Balanced Mean? Each indicator or category on a Balanced Scorecard has its own weight-that is, a number which shows its relative importance.   These weights tell you which goals, indicators, and tasks are most important or most valuable to the company.   You will also take these weights into account when you calculate the total performance of your Balanced Scorecard. The Need for the scorecard Measurement matters: If you cant measure it, you cant manage it. An organizations measurement system strongly affects the behavior of people both inside and outside the organization. The ultimate aim of any measurement system should be to motivate all managers and employees to implement successfully the business units strategy and improve performance. Those companies that can translate their strategy into measurement system will be able to execute their strategy because they communicate their objectives and their targets. The communication makes managers and employees focus on the critical drivers enabling them to align investments, initiatives and actions accomplishing strategic goals. Historically, the measurement system for any business has been financial. Accounting was considered to be the language of business .Innovations in measuring the financial performance of the industrial age companies played a vital role in their successful growth. And financial innovations, such as the Return on Investment (ROI) metric, and operating and cash budgets, were critical to the success of these corporations. However, an over emphasis on achieving and maintaining short-term financial results can cause companies to over invest in short-term fixes and to under invest in long-term value creation, particularly in the intangible and intellectual assets that generate future growth. The pressure for short-term financial performance often causes companies to reduce the resources spent on new product development, process improvements, human resource development, Information technology, databases and systems as well as customer and market development. In short, these organizations use the financial and non-financial performance only for tactical feedback and control of short-term operations. Use of scorecard helps the management to get a holistic picture of overall business scenario covering both financial as well as non-financial measures. Linking Strategy with Performance Measures The essential thrust of the balanced scorecard is based on the fundamental proposition that within organizations what gets measured gets done however; organizations do not always get what they measure. If measurement, by itself, had that much impact on human behaviour, then anyone that had weighing scales would never get fat. An appropriate measurement system is one that energizes employees in the context of what the organization is trying to do. Thus, the logical starting point for the development of any performance measurement system for an organization must be a clear statement of mission, objectives and resultant strategy. An organizations mission is its basic function in society and is the reason why the organization exists. Related to this are the objectives to be achieved and they represent a precise statement of purpose for a specific period. Basically a strategy is a shared understanding about how the organizations mission is to be achieved in a competitive environment. Strategic thinking will focus on customers and competitors as well as internal capabilities and resources. It will include reference to the firms competitiveness, quality of output and levels of customer service. In turn, specified performance measures allow all employees understand what the strategy is and how their performance is linked to that overall strategy. The relationship between Mission, Objectives, Strategy and Performance Measures is depicted in the Figure 1. All the measures are interlinked with each other and hence, should not be looked at in isolation. There are following reasons why organizations should, and often do, measure their performance: To align mission, strategy, values and behaviour To improve the important parameter To numerically define the meaning of success To measure the success WHO SHOULD BE INVOLVED? Looking at the pyramid of the management systems, building and rolling out of BSC should be a top down approach. Whole of the senior management team needs to be involved because we are measuring the business as a whole. The balanced scorecard puts the strategy in the centre and not the control. Thus, by leaving someone out we not only lose their input, but we also lose the commitment and support from that part of the business. If the senior management is not involved the initiative will be perceived as being unimportant. Cascading For the BSC to be effective in facilitating the execution of strategy, it needs to be cascaded throughout the organization. Cascading requires the participation of managers at all levels of the organization to translate the strategy and articulate the relevance of strategic objectives to each department, team and individual. Cascading can and should result in the alignment (or connectivity) of the corporate, departmental, and individual levels of the organization. It is important to remember that strategy is communicated from top to bottom (executives to frontline employees) and that execution begins with the individual. How to Begin: To create the right environment for success following are the steps which one needs to follow. Obtain Clarity and consensus about vision and strategy Set focus Define scope along with roles and responsibility Communicate and educate the organization Set Strategic targets Align program and investments Build feedback systems MEASURING BUSINESS STRATEGY Companies using the BALANCED SCORECARD as the cornerstone of a new strategic management system have two tasks: First, they must build the scorecard, and second they must use the scorecard. The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the change element within the organization. This tool is a comprehensive framework which considers the following perspectives and tries to get answers to the following questions 1. Financial Perspective How do we look at shareholders? 2. Customer Perspective How should we appear to our customers? 3. Internal Business Processes Perspective What must we excel at? 4. Learning and Growth Perspective Can we continue to improve and create value? The aim of the Balanced Scorecard is to direct, help manage and change in support of the longer-term strategy in order to manage performance. Generic measures that any organizations scorecards, has are following: Perspective Generic Measures Financial Return on Investment, Economic Value Added Customer Satisfaction, Retention, market and account share Internal Quality, Response time, Cost and Introduction of New products /services Learning and Growth Employee satisfaction and Information system availability Hence, from the above lines we can say that this tool has considered not only the financial results to be important but also those factors which actually drive an organization towards future successes as mentioned earlier. The tool has given stress on the other areas which are required to balance the financial perspective in order to get a total view about the organizational performance and improve the same. The framework tries to bring a balance and linkage between the parameters. The Financial Perspective Balanced scorecard encourages business units link their financial objectives to corporate strategy. Financial objectives represent the long term goal of the organization: to provide superior returns based on the capital invested in the unit. Balanced scorecard can make the financial objectives explicit and customize financial objectives to business units in different stages of their growth and life cycle. Linkage to financial objectives recognize that the long-run goal for the business is to generate financial returns to investors, and all the strategies, programs and initiatives should enable the business unit to achieve its financial objectives. Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the unbalanced situation with regard to other perspectives. To link financial objectives to business unit strategy at various stages from aggressive market growth to consolidation to liquidation can be considered, however, for simplification following stages are considered: Growth Sustain Harvest A compilation of these stages is summarized in the table below. Measuring Strategic Financial Themes Strategic Financial Themes Revenue and Growth Mix Cost Reduction/Productivity Improvement Asset Utilization Business Unit Strategy Growth Sales growth rate by segment, percentage revenue from new product, services and customers Revenue/employee Investment (Percentage of sales) RD (Percentage of sales) Sustain Share of targeted customers and accounts Cross selling Percentage revenues from new applications Customer and product line profitability Cost versus competitors cost reduction rates Indirect expenses (Percentage of sales) Working capital ratios (Cash to Cash cycle) ROCE by key asset categories Asset utilization rates Harvest Customer and product line profitability Percentage unprofitable customers Unit costs (per unit of output, per transaction) Payback Throughput The Customer Perspective Many companies today have a corporate mission that focuses on the customer. To be number one in delivering value to customers is a typical mission statement. How a company performs from its customers perspective has become, therefore, a priority for top management. Customers concerns tend to fall into four categories: Time, Quality, performance and service, and Cost. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. To put the balance scorecard to work, companies should articulate goals for time, quality, performance and services and then translate these goals into specific me asures. Customer Perspective core measures are Market Share Proportion of business in a given market Customer Acquisition Rate at which business units attracts/wins new customers or business Customer Retention Rate at which business a unit retains or ongoing relationship. Customer Satisfaction Assesses the satisfaction level of customers along specific performance criteria Customer Profitability Net profit to customer The Internal Business Process Perspective Customer-based measures are very important, but they must be translated into measures of what the company must do internally to meet its customers expectations. After all, excellent customer performance derives from processes, decisions and actions occurring throughout an organization. Hence internal business processes are very important and critical for any organization. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-orient ed processes are the core functions the organization which has a direct link with the objective of the organization and many unique problems are encountered in these processes. The support processes are more repetitive in nature and hence easier to measure and benchmark using generic metrics. Internal business process value chain mainly covers three principles: Innovation Identify the need and create product/service offering Operation Build the product/service and Deliver them Post-sale Service Service the customer The Learning Growth Perspective A companys ability to innovate, improve and learn ties directly to the companys value. That is only through launching new products/services, add/create more value to customers and improve operating efficiencies. This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people the only repository of know ledge are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Many agencies often find themselves unable to hire new technical workers, and at the same time there is a decline in training of existing employees. This is a leading indicator of brain drain that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that learning is more than training; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools. Study has shown that there are three principle categories for the learning and growth p erspective: Employee capabilities Information system capabilities Motivation, empowerment and alignment The learning and growth measurement framework The Four Perspectives: Cause and Effect Relationship The four perspectives as mentioned above are highly interlinked. There is a logical connection between them. The explanation is as follows: If an organization focuses on the learning and the growth aspect, it is definitely going to lead to better business processes. This in turn would be followed by increased customer value by producing better products which ultimately gives rise to improved financial performance. A strategy is a set of hypotheses about cause and effect. The chain of cause-and- effect should pervade all four perspectives of the Balanced Scorecard therefore a properly constructed Balanced Score Card should tell the story of the companys strategy. FEATURES OF A GOOD BALANCED SCORE CARD: It tells the story of a companys strategy, articulating a sequence of cause and effect relationships. 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. A balanced score card emphasizes non-financial measures as a part of program to achieve future financial performance The balanced score card limits the number of measures identifying only the most critical areas. The purpose in to focus managers attention on measures that most affect the implementation of strategy. The balanced score card highlights less than optimal trade offs that managers may make when they fail to consider operational and financial measures together. Feasibility study for Implementation of BSC at vertical level Company Profile Larsen Toubro Limited (LT) is a US$ 9.8 Billion, technology-driven engineering and construction conglomerate and one of the largest companies in Indian private sector, with additional interests in manufacturing, services and information technology. LT Integrated Engineering Services is a Strategic Business Unit of Larsen Toubro Limited, dedicated to providing design and engineering solutions to various industries such as Automobile, Aerospace, Construction Off Highway, Machinery, Medical Devices, Industrial Products, Marine, Consumer Electronics, Minerals Metals, Consumer Packaged Goods, Pharmaceuticals, Oil Gas as well as other Process Industries. LT IES end-to-end services involve product design, analysis, prototyping testing, embedded system design, production engineering, plant engineering, buildings factories design, asset information management sourcing support using cutting-edge CAD / CAM / CAE technology. With a pedigree of engineering and manufacturing exc ellence of Larsen Toubro Group that spans seven decades, strong expertise with cutting-edge technologies and state-of-the-art infrastructure, LT IES has successfully partnered with leading organizations across the globe to meet their business objectives. A vibrant workforce of multi-skilled engineering professionals operates from our seven development centres in India and twenty offices worldwide to help our customers accomplish the most challenging time-critical technical and business objectives. IES Vertical structure Vision To be in Top 3 engineering service provider in India Mission To provide engineering solutions using cutting edge PLM technologies to help our customers achieve their objectives of innovation, cost reduction and faster time-to-market. Corporate Objective Revenue USD 200 Mn in 3 years. I am part of Truck and Off-Highway vertical. Hence, This project is carried out for Truck and Off highway vertical. At vertical level soon after the change in management in year 2009, we did a deep dive in various areas of business and we found following results. Scenario Before 1 year. Loss making accounts PBIT out of control. Ad-hoc approach. Lack of coordination between Marketing and Delivery teams. Lack of Role clarityRole DefinitionKPI at various levels. Identity crisis at Middle Management level (T1/T2). Technical vs. Business leaders. Career paths not defined. Junior staff does not have many role models in Technical leaders. Leaders with good communication+ Soft skills are seen getting recognized. No clear definition of success of projects. This has motivated us to find out the reasons as well as suggest possible solutions to improve the situations. Our new vertical head is a very engaged leader who has guided this entire project of seeing feasibility of using Balanced scorecard to analyse the situation and improve by pressing the right buttons. Building a Balanced scorecard In our vertical we took following steps to build balanced scorecard. Building a core team Representative from Top Management Team of 10 Account Managers Team of 10 Project Manager Team of 20 Team Leader and Members Specify strategic objectives Choose strategic measures Develop implementation plan Define KPIs for each perspective Linking of the KPIs with Roles Design templates Measurement Definition Each perspective Measurement Summary Lag Lead Comparison Review Feedback The team was lead by vertical head while defining the strategic objectives. Hence, we had a direction as well commitment from the top management. We are developing the systems which is based on KPI, as based on various discussion it has been observed from the voice of the team that for an individual, KPI could be defined as effective measurement indicators, which present one of the activities of the company, and this is also important the strategic goals achievem ent. During review meetings of the building the scorecard we discussed several KPIs considering perspectives of BSC. Some these are listed in the table below. While deciding appropriate KPIs at different level, we also did brain storming on Lagging and leading indicators. Most of financial KPIs are actually lagging indicators. Hence, managers are not able to receive up to date information from lagging indicators. That is why they are not able to monitor these processes directly. Lagging indicators present the performance of the overall systems work and there are lots of factors that influence on them. These metrics show the results and effects of management actions that already have been applied. Leading KPIs are the metrics that refer to the current and future effects. Oppositely to lagging indicators, leading ones are linked with managers decisions directly. After a decision is taken, it could be resulted in changing the performance of activity, that leading indicator sho w. Lagging indicators are needed to be used as a tool to manage the companys future which is actually one of the most important goals of building the Balanced Scorecard for our vertical. Cause and effect relations between KPIs Since it is very important to have cause and effect relationship between KPIs, While building a map of KPIs for the departments and the individuals per their roles and responsibility it was aimed to prevent the KPIs to be mixed up and present conflicting information. We worked on the logic of preventing the map of KPIs to be overloaded by the quantity of measures needs to be understood by top management. We made sure that function relations between indicators exist and can be presented in a way of mathematical formulas. While distributing the KPIs to different roles, We also worked on the linkage of the KPIs and role, to define them clearly at the same to see a direct relation of an individuals performance to the objective of the organization. Balanced Scorecard at Vertical Level Objectives and Measurement KPI at Vertical Level Measurement at Account Level Measurement at Project Level ADVANTAGES OF BSC The balanced scorecard tool is being used by several organizations throughout the world because of certain advantages it has been able to deliver as below: It translates vision and strategy into action. It defines the srategic linkages to integrate performance across organizations. It communicates the objectives and measures to a business unit. It aligns the strategic initiatives in order to attain the long-term goals. It aligns everyone within an organization so that all employees understand how they support the strategy. It provides a basis for compensation for performance. The scorecard provides a feedback to the senior management if the strategy is working. Focusing the whole organization on the few key things needed to create breakthrough performance. Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service initiatives. Breaking down strategic measures towards lower levels, so that unit managers, operat ors, and employees can see whats required at their level to achieve excellent overall performance. LIMITATIONS OF BSC It is not easy to implement this tool because it involves a lot of subjectivity. The tool is much more complex compared to the other tools The measures that need to be taken are contingent upon the kind of environment, industry and the business the organization is in. A lot of refinement is still required to be done so that it becomes understandable to every stakeholder associated with the organization. CONCLUSION The tool has become a weapon for organizations to identify the pressure points, conflicting interests, objectives setting, prioritization of objectives, planning and budgeting. The four main important steps that need to be taken care of are Translating the vision Communicating and Linking Business Planning Learning and Feedback The Balanced Scorecard is therefore a very important strategic management tool which helps an organization to not only measure the performance but also decide the strategies which are needed to be adopted so that the long-term goals are achieved. Thus, in other words, the application of this tool ensures the consistency of vision and action which is the first step towards the development of a successful organization. Also, its proper implementation can ensure the development of competencies within an organization which will help it to develop a competitive advantage without which it cannot expect to outperform its rivals. References Sources of Information: 1) The Balanced Scorecard Translating the Strategy into action By Robert S. Kaplan David P. Norton 2) Balanced Scorecard In a week, By Mike Bourne Pippa Bourne 3) The Fifth Discipline, The art and Practice of Learning organization, By Peter M. Senge 4) https://www.thebalancedscorecard.com 5) https://www.thepalladiumgroup.com This report is integral part of my Executive Management program at S.P. Jain Institute of management. Analysis recommendations provided in this report are purely based on my personal understanding does not constitute views of any company or Agency. Brijesh Dave