Review : Putting the Balanced Scorecard to Work

Kaplan, R. and Norton, D. 1993. Putting the balanced scorecard to work. The performance measurement, management and appraisal sourcebook, pp. 66–79.

The article states that today’s managers realize the impact measures have on performance. But what they don’t realize is that measurement is essential part of the strategy. They may introduce new strategies and innovative operating procedures, but continue to use the same short-term financial indicators. They not only fail to realize the new indictors, but also fail to question whether the old measures are relevant.

The balance scorecard provides with a comprehensive framework that translates company strategic objectives into a set of performance measures. It presents with four different perspectives from which to choose measures: financial, performance for customers, internal processes, and innovative and improvement activities.

Traditionally, companies have their own operational and physical measures for local activities. But these local measures are bottom up and are based on ad hoc processes. On the other hand, the scorecard’s measures are based on organization’s strategic vision and competitive demands. Scorecard, by requiring the organization to concentrate on limited number of indicators, helps them to concentrate on their strategic vision.

Unlike traditional measures, which focus on past successes, the balanced scorecard tries to strike a balance between current and future successes. Also, it tries to strike a balance between external measures, such as operating income and internal measure, such as new product development.

Finally, organizations are typically involved in various initiatives such as: process reengineering, total quality, and employee empowerment, but lack a sense of integration. The process of balanced scorecard development tries to create a focal point of activity where all such activities are integrated.

The balanced scorecard is not a template that can be applied everywhere. Its development is a process that can be applied to different situations, strategies and environment. In addition to organization, their individual units can customize it according to their objectives. Balanced scorecard is very transparent, as by looking at it, one can arrive at a conclusion about business unit’s competitive strategy.

Let’s take example of Rockwater, which is an underwater engineering and construction company. They realized that the competition in their industry has changed dramatically. They observed that the focus in the industry had shifted from low-price competition to long-term partnership based on value creation for the clients. The senior management team of the company created a vision for their company. It was to provide highest standard of safety and quality for their clients. Based on that vision, they also created a strategy, which had five elements, which were further developed into strategic objectives. To make them tangible, they distributed those strategic objectives among the four sets of balanced scorecard performance measures.

If one observes their financial measures, in addition to the measures for short-term results, they added two more measures to overcome the uncertainty of future performance. Regarding the Customer Satisfaction measures, and in response to changing environment, they decided to divide them into those who provide high value and those who are price conscious. This will allow them to create a different set of measures for both kinds of clients. As value-based clients were beginning to bring in more business, and were focus of their strategies, they decided to conduct an annual survey to understand their perceptions of the company. This was in addition to monthly satisfaction and performance ratings they requested from their clients. They felt that such measures gave them direct access to customer and market feedback.

Regarding internal processes at Rockwater, they made a major shift in their thinking. They moved from measuring performance of each functional unit to that of integrated key business processes. This helped individual business units to come out of their silos, and think about product and end-to-end process to deliver them. This helped make the effectiveness of their project performance as their key core competence. Further, the also realized that time spent with prospective client went a long way in building relationship. And it had direct bearing on influencing results. At the same time they wanted that a metric that could be communicated this across the organization. Even though it is an input or process measure, they chose to go ahead with “hours spent with key prospects discussing new work” as a key measure.

With regards to Innovation and Improvement, Rockwater believe that it was something that driving the other three categories. They believed that they would achieve these objectives through innovation of new products and services. This will result in creation of new sources of revenue, and market expansion and diversification. They also stressed on the need for continuous improvement of internal processes. They measured the first objective by the revenue generated from new sources. And the second objective was measured by a continuous improvement index. They felt the need to create an appropriate atmosphere in order to drive these two objectives. A supportive climate of empowered and motivated employees was considered essential.

The picture changes slightly when evaluating the role of balanced scorecard in context of Apple computers. When they went about creating theirs, they wanted to think beyond the short-term measures, such as ROE and market share. For financial perspective they chose shareholder value; for customer perspective, they chose market share and customer satisfaction; for internal process perspective, they chose core competencies; and lastly for improvement and innovation, they stressed on employee attitude.

As their customer base was not homogeneous, they chose to do their own customized survey than to depend on standard market surveys. It is highly noteworthy the core competencies they chose under internal process perspective. What they chose to make their core competencies is the kind of things that are close to their client base. That made a wonderful strategy, and it clearly reflects on their products. To promote the employee commitment and their alignment, they chose to do survey. And in an effort in that direction, they formulated the survey question to convey and assess their knowledge about company strategy. Also, the used the market share as tool to remain attractive to software developers. The inclusion of shareholder value is well thought off, even though it is a result and not a driver of performance. This was done with the idea of replacing the old indicators that didn’t take into account the investment made today, which will generate revenue in future. This helps the unit head of each major organizational unit to assess the impact of their initiatives on company’s new ventures.

These initiatives have helped Apple in many ways: as the balanced scorecard is used primarily as a planning device, instead of monitoring device; and these metrics can be driven both vertically and horizontally.

The move to balanced scorecard at AMD (Advanced Micro Devices) depicts a very contrasting picture. They did execute a quick and smooth transition to balanced scorecard. They already had a clearly defined mission and strategy, and senior management team understood it well. They already had performance measures, which fitted well into a quarterly briefing book’s seven sections. So, the things pretty much remained the same. As a result what they had a repository of information that allowed long-term analysis for performance and planning evaluation. All this looks fine, but it had retrospective outlook, and didn’t seem to lead the change.

It cannot be overemphasised that the development of balanced scorecard helps drive change. Particularly, if two different organizations are merging, it helps bring together the culture and help employee speak same language. The process of developing the balance scorecard comes in handy, when despite apparent consensus on strategy; there is disagreement about how to make it operational. Therefore, it helps them reach a consensus regarding the high priority areas.

Taking example of Analog Devices, it states that the main impact has been to help sustain initiatives where they have been working for years. In contrast, the scorecard isn’t always an instrument for dramatic change. Taking the example of AMD, the development of scorecard didn’t have any dramatic impact because the executives didn’t use it to drive the change. Prior to developing the scorecard, they had already formulated and reached consensus over mission, strategy and key performance indicators. As AMD competes in a narrow segment of the industry, the managers were already familiar with the technology, engineering and the markets. So, what they compiled at the scorecard wasn’t new, but it did allow them to see things from organizational perspective. Therefore, AMDs limited success with the scorecard underscores the point that it delivers dramatic results only when used to drive a change process. That makes it not just a measurement system, but a management system.

Not just the scorecard, but also the kind of measures we are employing is also important. Taking the example of FMC Corporation, as diversified company, the return-on-capital-employed (ROCE) was especially important for them. The move away from return-on-investment to ROCE helped them focus their attention on further growth. From that perspective, it helped them determine business that were doing well, and those that weren’t. It also set them for splitting the company into independent companies, such that each had its own strategy. The take away is that if you want a corporate to change its strategy, then you must change the system of measuring the new strategy.

Balanced scorecard also helped organization step away from measuring only the short-term financial results. The organizations realized that they need a new system of measurement to help manager achieve breakthrough in marketplace. They would need to focus on thing that will bring in long-term values, such as customer service, market position and new product development. They use the balanced scorecard a focus of their discussion about they want to see in future, how to become the most valued supplier etc.

It also entailed giving freedom to division managers to develop their own balanced scorecard. But senior management did give them certain specific guidelines: first, the measures should be objective and quantifiable, and second, they should be output measures, and not process measure. It is believed that focusing on output measures helps managers to understand their industry and strategy, and helps to measure success through specific output.

While building upon the balanced scorecard, one needs to understand that difference between process improvements and the output achieved. Furthermore, one needs to differentiate between benchmarking and scorecard. It is much easier to benchmark a process than an output. That is because each of the output measures are associated with long-term targets. That is what makes a scorecard more strategic.

The managers at FMC didn’t find going for unit wise scorecard as smooth as predicted.

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