Part OnePart One

Introduction to Performance Measurement Introduction to Performance Measurement and the Balanced Scorecardand the Balanced Scorecard

Chapter 1Chapter 1

Performance Measurement and the need for a Performance Measurement and the need for a Balanced ScorecardBalanced Scorecard

From page 11 to page 20From page 11 to page 20

Prepared by: Amira Mohamed ElaminPrepared by: Amira Mohamed Elamin

This part is divided into two main points: This part is divided into two main points:

1.Origins of the Balanced Scorecard

2.What is the Balanced Scorecard.

• Measurement System

• Strategic Management System

• Communication Tool

1. Origins of the Balanced Scorecard

• The Balanced Scorecard was developed by two men, Robert Kaplan, a professor at Harvard University, and David Norton, a consultant also from the Boston area.

• In 1990, Kaplan and Norton led a research study of a dozen companies exploring new methods of performance measurement. The impetus for the study was a growing belief that financial measures of performance were ineffective for the modern business enterprise because they were affecting their ability to create value.

• The group discussed a number of possible alternatives but settled on the idea of a Scorecard featuring performance measures capturing activities from throughout:

1. the organization—customer issues, 2. internal business processes, 3. employee activities, 4. and of course shareholder concerns.

• Kaplan and Norton labeled this new tool the Balanced Scorecard and later summarized the concept in the first of three Harvard Business Review articles, "The Balanced Scorecard-Measures that Drive Performance."

• Over the next four years a number of organizations adopted the Balanced Scorecard and achieved immediate results.

• Kaplan and Norton discovered that these organizations

were not only using the Scorecard to complement financial measures with the drivers of future performance but were also communicating their strategies through the measures they selected for their Balanced Scorecard.

• Kaplan and Norton summarized the concept and the learning to that point in their 1996 book The Balanced Scorecard.

• Since that time the Balanced Scorecard has been adopted by many organizations in the for-profit world, then the Balanced Scorecard has been translated and effectively implemented in both the not-for-profit and public sectors. These organizations have learned that by slightly modifying the Scorecard framework they are able to demonstrate to their constituents the value they provide and the steps they are taking to fulfill their important missions.

2. What Is a Balanced Scorecard?

The Balanced Scorecard can be described as a carefully selected set of measures derived from an organization’s strategy. The measures selected for the Scorecard represent a tool for leaders to use in communicating to employees and external stakeholders the outcomes and performance drivers by which the organization will achieve its mission and strategic objectives.

What is the Balanced Scorecard?

Let’s take a look at each of these Scorecard uses.

Measurement System? Strategic

Management System? Communication

Tool?

The Balanced Scorecard as a Measurement System

The Balanced Scorecard allows an organization to translate its vision and strategies by providing a new framework, one that tells the story of the organization’s strategy through the objectives and measures chosen. Rather than focusing on financial control devices that provide little in the way of guidance for long-term employee decision making, the Scorecard uses measurement as a new language to describe the key elements in the achievement of the strategy.

The use of measurement is critical to the achievement of strategy.

While the Scorecard retains financial measures, it complements them with three other, distinct perspectives:

1. Customer, 2. Internal Processes, 3. and Learning and Growth.

VisionAnd

Strategy

financial objectives measures targets initiatives

Internal business Processobjectives measures targets initiatives

Customerobjectives measures targets initiatives

Learning and Growthobjectives measures targets initiatives

1- Customer Perspective

When choosing measures for the Customer perspective of the Scorecard, organizations must answer two critical questions: 1- Who are our target customers?2- and What is our value proposition in serving them?

Sounds simple enough, but both of these questions offer many challenges to organizations. Most organizations will state that they do in fact have a target customer audience, yet their actions reveal an "all things to all customers" strategy.

This lack of focus will prevent an organization from differentiating itself from competitors.

This perspective will normally include measures widely used today:

• customer satisfaction, • customer loyalty, • market share, • and customer acquisition, for example.

2- Internal Process Perspective

In the Internal Process perspective of the Scorecard, our task is to identify the key processes the firm must excel at in order to continue adding value for customers and, ultimately, shareholders; and develop the best possible measures with which to track our progress.

To satisfy customer and shareholder expectations, you may have to identify entirely new internal processes rather than focusing your efforts on the incremental improvement of existing activities.

Product development, production, manufacturing, delivery, and post sale service may be represented in this perspective. Many organizations rely heavily on supplier relationships and other third-party arrangements to effectively serve customers.

3- Learning and Growth Perspective

The measures in the Learning and Growth perspective of the Balanced Scorecard are really the enablers of the other three perspectives, they are the foundation on which this entire house of a Balanced Scorecard is built.

Once you identify measures and related initiatives in your Customer and Internal Process perspectives, you can be certain of discovering and able to close some gaps between your current organizational infrastructure of employee skills and information systems, and the level necessary to achieve your results and to ensure sustainable performance for the future.

4- Financial Measures

Financial measures are an important component of the Balanced Scorecard, especially in the for-profit world. The measures in this perspective tell us whether our strategy execution, which is detailed through measures chosen in the other perspectives, is leading to improved bottom-line results.

We could focus all of our energy and capabilities on improving customer satisfaction, quality, on-time delivery, or any number of things, but without an indication of their effect on the organization’s financial returns they are of limited value.

The Balanced Scorecard as a Strategic Management System

For many organizations the Balanced Scorecard has evolved from a measurement tool to what Kaplan and Norton have described as a "strategic management system." While the original intent of the Scorecard system was to balance historical financial numbers with the drivers of future value for the firm, as more and more organizations experimented with the concept, they found it to be a critical tool in aligning short-term actions with their strategy.

The Balanced Scorecard as a Communication Tool

There was considerable discussion about the power of the Scorecard in translating the strategy and telling its story to all employees – what might be called communicating.

Q. So why the Balanced Scorecard should be considered a communication tool? A. Simply because it is the most basic and powerful attribute of the entire system. A well - constructed Scorecard describes your strategy and makes the vague and imprecise world of visions and strategies come alive through the clear and objective performance measures you have chosen.

Much has been written in recent years about knowledge management strategies within organizations. We live in the era of the knowledge worker—the employee who, unlike his organizational descendents who relied on the physical assets of the company, owns the means of production: knowledge. There may be no greater challenge facing your organization today than codifying and acting on that knowledge.

employees with the opportunity to discuss the assumptions underlying the strategy, learn from any unexpected results, and dialogue on future modifications as necessary.

Simply understanding the firm’s strategies can unlock many hidden organizational capacities as employees, perhaps for the first time, know where the organization is headed and how they can contribute during the journey.