Balanced Scorecard (part 2) by Shantonu Dasmahapatra
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The document discusses how to link a balanced scorecard to business strategy through cause-and-effect relationships, performance drivers, and financial outcomes. It emphasizes translating strategic goals to all levels of the organization through communication, linking individual goals to the scorecard, and aligning rewards. Regular strategic reviews using the scorecard can validate strategies and drive continuous improvement.
Balanced Scorecard (part 2) by Shantonu Dasmahapatra
- 1. Linking Balanced Scorecard Measures to StrategyA successful Balanced Scorecard is one that communicates a strategy through an integrated set of financial and non-financial measurements.What important role does the scorecard play to communicate a Business unit’s strategy?The Scorecard describes the organization’s vision of the future to the entire organization and thereby creates a shared understanding.The Scorecard creates a holistic model of the strategy that allows all employees to see how they contribute to organizational success.The Scorecard focuses changed efforts.There are these principles that enable an organization’s Balanced Scorecard to be linked in its strategy. 1. Cause and effect relationship. 2. Performance Drivers 3. Linkage to Financials.
- 2. Cause and effect relationshipA strategy is a set of hypothesis about cause and effect. Cause and effect relationship can be expressed by a sequence of if-then statements.A link between improved sales training of employees and higher profit can be established through the following sequences of hypothesis.If we increase employee training about products, then they will become more knowledgeable about the full range of products they can sell.If employees are more knowledgeable about products, then their sales effectiveness will improve.If their Sales effectiveness improves, then the average margins of the products they sell will increase.Every measure selected for a Balanced Scorecard should have an element of a chain of cause and effect relationship that communicates the measuring of the business units strategy to the organization.
- 3. Outcomes & Performance DriversBalance Scorecard use a lot of outcome measures which reflect goals of many strategies. These outcome measures are lag indicators such as profitability, market share, customer satisfaction, customer retention.
- 4. Linkage to FinancialsIt is easy to become preoccupied with goals related to quality, customer satisfaction, innovation and employee empowerment for their own sake.While these goals can lead to improved business unit performance, they may not if these goals are taken as ends themselves.A Balanced Scorecard must retain a strong emphasis on outcomes, especially financial ones like return on capital on economic value addition.Some organizations fail to link programs (to the quality management, cycle time reduction, re-engineering and employee empowerment). In such organizations, the improvement programs have incorrectly been taken as the ultimate objective. They have not been linked to specific targets for improving customer and eventually financial performance.
- 7. Managing Business StrategyThere are four specific barriers to effective strategy implementation:Vision and strategies are not actionable.Strategies that are not linked to departmental, team and individual goals.Strategies that are not linked to long and short-term resource allocation.Feedback that is tactical, not strategic.
- 9. Barrier 1: Vision & Strategy not actionable Inability to translate vision and strategy into terms that cannot be understood and acted upon.Lacking consensus and clarity, different groups pursue different agendas quality, continuous improvement, re-engineering empowerment – according to their own interpretation of vision and strategy.
- 10. Barrier 2: Strategy not linked to Departmental, Team and Individual goalsThis barrier arises when the long-term requirements of the business unit’s strategy are not translated into goals for departments, teams and individuals.This barrier happens when departmental performance remains focused on meeting the financial budgets established as part of traditional management control process.Can be attributed to failure of HR function to facilitate the alignment of individual and team goals.
- 11. Barrier 3: Strategy not linked to resource allocationFailure to link action program and resource allocation to long-term strategic priorities.Separate processes for long term strategic planning and short-term annual budgeting – leading to capital allocations are often unrelated to strategic priorities.Barrier 4: Strategy not linked to resource allocationThe fourth barrier in implementing strategy is the lack of feedback on how strategy is being implemented and whether it is working.Many management system today provide feedback only about short-term, operational performance and the bulk of this feedback is on financial measures, usually comparing actual results to monthly and quarterly budgets. Little or no time is spent examining indications of strategy implementation and success.
- 12. Achieving Strategic Alignment: From top to BottomAlignment of strategic objectives between all employees of the organization and corporate executives and the Board involves following steps:Communication and education programs.Linking the Balanced Scorecard to team and personal goals.Reward system linkage.
- 13. 1. Communication and Education programsTo be viewed as an internal marketing campaign.Should increase each individual’s understanding of the organization’s strategy and enhance invitation for acting to achieve strategic objectives.Should not only be comprehensive but also periodic.Multiple communication devices can be used, eg: executive announcement, videos, meetings, brochures, newsletter etc.
- 14. 2. Linking Balanced Scorecard to team and personal goalsOrganization’s high-level strategic objective and measures need to be translated into actions that each individual can take to contribute to the organization’s goals.
- 16. Reward Systems linkageFor the scorecard to create the cultural change, incentive compensation must be connected for achievement of scorecard objectives.Alignment and accountability will clearly get enhanced when individual contributions to achieving scorecard objectives are linked to recognition, promotion and compensation program.
- 17. Targets, Resource allocation, Initiatives and BudgetsLong term capital budgets, strategic initiatives and annual discretionary expenses must be directed to achieving ambitious targets for objectives on the business scorecard. Four steps needed for this purpose:Setting of stretch targets,Identification and rationalization of strategic initiatives.Identification of critical cross-benefit initiatives.Link to annual resource allocation and budgets.
- 18. Feedback and the Strategic Learning ProcessCompanies are starting to use the Balanced Scorecard to extend their operational and Management review processes into a single strategic learning process, which extends single loop operational learning to double – loop strategic learning at the management team and SBU level.An effective strategic learning process has these essential ingredients:A shared strategic vision that communicates the strategy and allows each individual to see how his or her activities contribute to achievement of the overall strategy.A feedback process that collects performance data about the strategy and allows the hypothesis about interrelationships among strategic objectives and initiatives.A team problem-solving process that analyses and learns from the performance data and adapts the strategy.
- 19. Shared Strategic frame workHaving a shared vision in an essential starting point for the strategic process because it defines in clear and operational terms, the results that the whole organisation is attempting to achieve.The shared vision and shared performance model, structured around the Balanced scorecard, provides the first element for a strategic learning process.
- 20. Strategic FeedbackA strategic feedback system should be designed to test, validate and modify the hypothesis embedded in a business unit strategy.The cause & effect relationship embodied in a BSC enable executives to establish targets that reflect their forecast about changes in performance Driver’s and associated changes in outcome measures.
- 21. Correlation AnalysisInstead of simply reporting information in each scorecard measure, on an independent; standalone basis, managers can help validate hypothesized cause & effect relationships by measuring the correlation between two or more measures.Correlation among these variables provide powerful confirmation of the business unit strategy.A Company (Eco’ Engineering) discovered that its most satisfied customers were the one’s served by the employees who scored highest in morale. Thus, employee morale was not something that had to be justified for it own sake, it was a necessary ingredient for Eco’s strategy to be successful.
- 23. Team Problem Solving – cross functional TeamsMaintaining a cross functional perspective is an important component of the learning process. In a Company, the team assigned to identify customer needs, (typically a marketing function) had members brought in from operations, Engineering & quality.
- 24. Strategy Review MeetingMost organisation’s periodic review assess whether recent performance is consistent with the short-term operating plan specified in the annual budget. Virtually no time is devoted to reflecting on whether the organisation’s strategy is proceeding as expected.For strategic review meetings to be effective, they should be separated in both time & place from operational review meetings. Strategic reviews seem better suited to a quarterly cycle because strategic factors like market share; customer. Satisfaction; new product introduction may not change meaningfully from month to month.
- 26. Implementing a Balanced Scorecard ProgramThe following steps were followed in National Insurance Company:1. Clarify the vision: Ten members of a newly formed executive team work together for three months. A Balanced Scorecard is developed to translate a generic vision into a strategy that is understood and can be communicated. The Process helps build consensus and commitment to the strategy.2. Communicate to Middle Managers: The top three layers of management (about 100 people) are brought together to learn about and discuss the new strategy. The Balanced Scorecard is the communication vehicle.
- 27. Implementing a Balanced Scorecard Program (Contd..)3. Develop Business Unit Scorecards: Using the corporate scorecard as a template, each business unit translates its strategy into its own scorecard.4. Eliminate Nonstrategic Investments: The corporate scorecard, by clarifying strategic priorities, identifies many active programs that are not contributing to the strategy.
- 28. Implementing a Balanced Scorecard Program (Contd..)5. Launch Corporate Change Programs: The corporate scorecard identifies the need for cross-business change programs. They are launched while the business units prepare their scorecards.6. Review Business Unit Scorecards: The CEO and the executive team review the individual business units scorecards. The review permits the CEO to participate knowledgeably in shaping business unit strategy.
- 29. Implementing a Balanced Scorecard Program (Contd..)7. Refine the Vision: The review of business unit scorecards identifies several cross-business issues not initially included in the corporate strategy. The corporate scorecard is updated.8. Communicate the Balanced Scorecard to the Entire Company: At the end of one year, when the management teams are comfortable with the strategic approach, the scorecard is disseminated to the entire organization.
- 30. Implementing a Balanced Scorecard Program (Contd..)9. Establish Individual Performance Objectives: The top three layers of management link their individual objectives and incentive compensation to their scorecards.10. Update Long-Range Plan and Budget: Five year goals are established for each measure. The Investments required to meet those goals are identified and funded. The first year of the five-year plan becomes the annual budget.
- 31. Implementing a Balanced Scorecard Program (Contd..)11. Conduct Monthly and Quarterly Reviews: After corporate approval of the business unit scorecards, a monthly review process, supplemented by quarterly reviews that focus more heavily on strategic issues, begins.12. Conduct Annual Strategy Review: At the start of the third year, the initial strategy 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.
- 32. Implementing a Balanced Scorecard Program (Contd..)13. 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.