Balanced Scorecard: Traditional Performance Measurement

equilibrate S hollowcard Traditional Performance note Historic tout ensembley, the eyeshadement remains for telephone line has been pecuniary. Activities of companies were measurable and monitored by the traditional fiscal write up model. However, the extensive, veritable(a) exclusive use of pecuniary measurings in barter has been criticized primarily be pee-pee an overemphasis on achieving and maintaining hornswoggle-term monetary results basis cause companies to over intrust in before long-run fixes and to underinvest in long measure out creation, particularly in the non personal and intellectual as even offs that generate in store(predicate) result.Indeed, the Harvard contrast School Council on Competitiveness roll in 1992 identified the following organized differences amidst coronations do by U. S. corporations and those do in Japan and Ger galore(postnominal) The U. S. system is little supportive of long-term corporate investment because of the ove remphasis on improving short-term returns to capture current sh atomic number 18 prices. The U. S. ystem favors those forms of investment for which returns atomic number 18 most readily measurable this leads to underinvestment in intangible assets carre cardinal and summons instauration, employee skills, guest satisf pull through whose short-term returns ar to a greater extent difficult to measure. Inevitably, as managers be pressured to bearconsistent and splendiferous short-term monetary contracting out, trade-offs are made that limit the search for investments in offshoot opport social social unit of metreies.Even worse, the pressure for short-term monetary mathematical operation can cause companies to deoxidise using up on red-hot product schooling, solve jamments, human resource cookment, entropy technology, data bases, and systems as tumesce as guest and grocery store development. In the short run, the fiscal accounting model reports these s pending cutbacks as subjoins in reported income, even when reductions cast cannibalized a companys stock of assetsand its capabilities for creating prospective economic value.Alternatively, a company could maximize short-term financial results by exploiting guests through high prices or lower religious table service. In the short run, these actions upgrade reported profitability, but the lack of node surety and satisfaction get out put crosswise the company highly vulnerable to rivalrous inroads. The concern with the overemphasis on financial slaying measures has in like manner permeated the U. S. rofessional association of public accountants as a high-level special com armorial bearinging on financial report of the American Institute of Certified Public Accountants reenforce concerns with exclusive reliance on financial reporting for measuring business performance Users focus on the future piece of music nowadayss business reporting focuses on the former(prenomi nal). Although information about the past is a useful indicator of future performance, users also need forward-looking information. The committee acknowledged the importance of reporting on how rise companies are creating value for the future, and recommended colligateing business performance reporting to concerns strategic vision Many users indigence to see a company through the eyes of management to help them recognise managements panorama and promise where management go away lead the company. It went on to say that nonfinancial measurement essential play a key use of goods and run Management should disclose the financial and nonfinancial measurements it uses in managing the business that quantify the effectuate of key activities and events. The committee concluded by recommending that companies adopt a more match and forward-looking glide slope To trifle users ever-changing needs, business reporting moldiness depart more information about designs, opportunities , risks and uncertainties commission more on the factors that create longer-term value, including nonfinancial measures indicating how key business military operationes are execute Origins of the equilibrise S philiacard By the mid-1990s otherwise ar cultivatemental theorists had taken up Kaplan and Nortons work and modified the design regularity of match add-ins, ironing out early(a) flaws.Kaplan and Norton published their ideas in full in The equilibrise notice Translating Strategy into carry through in 1996 and it became a business bestseller. The equilibrize carte du jour Each thought of the equilibrise add-in includes headings, measures of those objectives, betoken values of those measures, and initiatives, be as follows Measures the observable parameters that get out be hire to measure progress toward ambit the objective. For example, the objective of profitable growth power be mensurable by growth in net margin.Targets the specific target values so ught for all(prenominal) of the measures, for example, +2% growth in net margin. Initiatives action programs to be initiated in locate to fulfill the objective and reach the target. The trunkwork for the fit placard is illustrated below physical body 1 fit batting order Framework start out hurl As can be seen from the take up, the objectives and measures of the scorecard are derived from an fundamental laws vision and dodging. The equilibrize scorecard should interpret a business units mission and strategy into tangible objectives and measures.The measures act a balancebetween external measures for shareholders and nodes, and congenital measures if life-sustaining business work ates, innovation, and cultivation and growth. The measures are also balancedbetween the answer measures the results from past efforts and the measures that drive future performance. Lastly, the scorecard is balancedbetween objectives, easily quantified outcome measures and subject ive, slenderly judgmental, performance drivers of the outcome measures.Every measure selected should be part of a link of cause-and-effect relationships that culminate in improving financial performance. The scorecard should tell the story of the strategy, startle with the long-run financial objectives, and then linking them to the rate of actions that moldiness be taken with financial processes, clients, internal processes, and finally employees and system to sustain the desired long-run economic performance. financial stead Table 1 Stages of a line of productss Life turn Table 2 Measuring strategical Financial ThemesRevenue growth and jumble refer to expanding product and service offerings, stretchability new customers and markets, changing the product and service mix toward higher-value-added offerings, and repricing products and function. The bell reduction and productiveness objective refers to efforts to lower the direct be of products and services, reduce indirec t costs, and share commonplace resources with other business units. For the asset workout theme, managers attempt to reduce the working hood levels required to support a condition al-Quran and mix of business.They also puree to obtain greater utilization of their primed(p) asset base, by directing new business to resources currently not utilise to capacity, using scarce resources more efficiently, and disposing of assets that deliver the goods inadequate returns on their market value. tout ensemble these actions enable the business unit to increase the returns earned on its financial and physical assets. client Perspective The customer side addresses the research of how the impregnable is viewed by its customers and how well the firm is serving its targeted customers in order to fill up the financial objectives.In the customer sight of the balanced scorecard, managers separate the customer and market segments in which the business unit will compete and the measures of the business units performance in these targeted segments. These segments playact the sources that will deliver the receipts fate of the companys financial objectives. The customer perspective enables companies to align their core or generic outcome measures to targeted customers and market segments.This core measurement group of outcomes is generic across all kinds of organizations, and is illustrated in the following diagram Figure 2 The Customer Perspective Core Measures fallframe These outcome measures represent the targets for companies marketing, in operation(p), logistics, and product and service development processes. However, these outcome measures have some of the defects of traditional financial measures in that they are follow measures employees will not know how well they are doing with customer satisfaction or customer computer storage until it is too fresh to affect the outcome.Also, the measures do not conduct what employees should be doing in their day-t o-day activities to obtain the desired outcomes. Because of these, managers mustiness also pose what customers in targeted segments value and choose the value proposition they will deliver to these customers. The segment-specific drivers of core customer outcomes represent those factors that are unfavorable for customers to switch to or remain loyal to their suppliers.These attributes are illustrated in the Figure 3 below Figure 3 The Customer honour Proposition drawg drawframe The customer perspective enables business unit managers to articulate the customer and market-based strategy that will deliver top-notch future financial returns. Thus, the customer perspective of the scorecard translates an organizations mission and strategy into specific objectives about targeted customers and market segments that can be communicated passim the organization. inner(a) Business Process Perspective home(a) business process objectives address the question of which processes are most cri tical for red-blooded customers and shareholders. These are the processes in which the firm must concentrate its efforts to excel. Objectives and measures for this perspective are typically genuine afterwards formulating objectives and measures for the financial and customer perspectives to enable companies to focus their internal business process poetic rhythm on those processes that will deliver the objectives established for customers and shareholders.The process of filiation objectives and measures for the internal business process perspective represents one of the sharpest distinctions between the balanced scorecard and traditional performance measurement systems. composition traditional approaches attempt to monitor and improve existing business processes, the scorecard approach usually identifies entirely new processes at which an organization must excel to meet customer and financial objectives.The balanced scorecard internal business process objectives spotlight the processes, several of which may not be currently performing at all, that are most critical for an organizations strategy to succeed. Additionally, while the traditional performance measurement systems focus on the processes of delivering todays products and services to todays customers (short wave of value creation), the balanced scorecard approach is to incorporate innovation processes into the internalbusiness process perspective as illustrated in Figure 3.Figure 3 The Internal Business Process Perspective The Generic Value Chain Model drawframe drawframe drawframe drawframe The innovation process highlights the importance of, first, discloseing the characteristics of market segments that the organization wishes to receive with its future products and services, and, then, designing and developing the products and services that will satisfy those targeted segments.This approach enables the organization to put considerable weight on research, design, and development processes tha t yield new products, services, and markets. Among the measures that can be used in the innovation process are luck of gross revenue from new products, portion of sale from proprietary products, new product introduction versus competitors or versus plan, manufacturing process capabilities, and time to develop attached generation of products.The operations process represents the short wave of value creation in organizations. It starts with receipt of customer order and finishes with auction pitch of the product or service to the customer. This process stresses efficient, consistent, and timely delivery of existing products and services to existing customers. It remains important and organizations should identify the cost, quality, time, and performance characteristics that will enable it to deliver superior products and services to its targeted current customers.The figure out of the total quality management and time-based argument practices of pencil lead Japanese manufactur ers has led many companies to supplement their traditional cost and financial measurements with measurements of operating processes quality, cycle time, and cost. Finally, the postsale service process enables companies to feature, when appropriate, important aspects of service that occur after the purchased product or service has been delivered to the customer such as warranty and repair activities, treatment of defects and returns, and the processing of payments.Measures of performance in the operating processes can also be applied to postsale service process (i. e. time, quality, and cost inflection). Thus, cycle times can measure the speed of response to failures and cost rhythmic pattern can evaluate the efficiency for postsale service processes while first-pass yields can measure what percentage of customer requests are handled with a iodine service call, rather than requiring multiple calls to conclude the problem.Companies that deal with hazardous or environmentally sensi tive chemicals and materials may also aver critical performance measures associated with the safe presidential term of waste and by-products from the production process. learn and ontogenesis Perspective The fourth perspective of the balanced scorecard, learning and growth, addresses the question of how the firm must learn, improve, and innovate in order to meet its objectives. It identifies the infrastructure that the organization must make believe to create long-term growth and improvement.The enablers for learning and growth come primarily from troika sources people or employees, systems, and organizational procedures. The financial, customer, and internal business process objectives on the balanced scorecard will typically show large gaps between the existing capabilities of people, systems, and procedures and what will be required to achieve breakthrough performance. To close these gaps, businesses will have to invest in reskilling employees, enhancing information techn ology and systems, and adjust organizational procedures and routines.Figure 4 The Learning and Growth Measurement Framework drawframe Within this core, the employee satisfaction objective is generally considered the driver of the other 2 measures, employee retention and employee productiveness. It recognizes that employee morale and overall mull satisfaction are preconditions for increasing productivity, responsiveness, quality, and customer service. Companies typically measure employee satisfaction with an yearbook play along, or a rolling survey in which a specified percentage of randomly chosen employees is surveyed each month.Employee retention captures an objective to retain those employees in whom the organization has a long-term interest. The theory implicit in(p) this measure is that the organization is making long-term investments in its employees so that any casteless departures represent a loss in the intellectual capital of the business. Long-term, loyal employees carry the values of the organization, knowledge of organizational processes, and esthesia to the needs of customers. Employee retention is generally measured by percentage of key supply turnover.Employee productivity is an outcome measure of the mass impact from enhancing employee skills and morale, innovation, improving internal processes, and welcome customers. The goal is to relate the payoff produced by employees to the number of employees used to produce that output. The simplest productivity measure is revenue per employee, which represents how much output can be generated per employee. As employees and the organization become more powerful in selling a higher volume and a higher value-added set of products and services, revenue per employee should increase.Linking the Balanced Scorecard Measures to Strategy Uses of the Balanced Scorecard The Balanced Scorecard in the beginning was conceived as an improved performance measurement system. However, it soon became evident that it could be used as a management system to implement strategy at all levels of the organization by facilitating the following functions clarify strategy the translation of strategic objectives into quantitative measures clarifies the management teams understanding of the strategy and helps to develop a coherent consensus.Communicating strategic objectives the Balanced Scorecard can officiate to translate high level objectives into operational objectives and communicate the strategy effectively throughout the organization. Planning, setting targets, and aligning strategic initiatives challenging but achievable targets are set for each perspective and initiatives are certain to align efforts to reach the targets. Strategic feedback and learning executives receive feedback on whether the strategy effectuation is proceeding according to plan and on whether the strategy itself is successful (double-loop learning).These functions have made the Balanced Scorecard an effective management system for the writ of execution of strategy. The Balanced Scorecard has been applied successfully to cliquish sector companies, non-profit organizations, and government agencies as discussed in the succeeding sections. Potential Pitfalls The following are potential pitfalls that should be neutralizeed when implementing the Balanced Scorecard Lack of a well-defined strategy The Balanced Scorecard relies on a well-defined strategy and an understanding of the linkages between strategic objectives and the metrics.Without this foundation, the implementation of the Balanced Scorecard is unlikely to be successful. Using just now lagging measures Many managers believe that they will reap the benefits of the Balanced Scorecard by using a wide range of non-financial measures. However, care should be taken to identify not only lagging measures that secern past performance, but also leading measures that can be used to plan for future performance. Use of generic metrics It usua lly is not sufficient scarce to adopt the metrics used by other successful firms.Each firm should put forth the effort to identify the measures that are appropriate for its own strategy and competitive position. Effectiveness of the Balanced Scorecard (Success Stories) Mobil North America Marketing and cultivation CIGNA Property and Casualty Insurance embrown & Root Energy Services Rockwater family Chemical (Chase) Retail Bank AT Canada, Inc. Zeneca Ag Products North America grey Gardens Citrus University of California, San Diego Duke Childrens Hospital linked Parcel Service Building and Implementing a Balance Scorecard Balanced Scorecard ComponentsFigure 5 The Logic of Balanced Scorecard Strategic Planning drawframe Process of Building a Balanced Scorecard Kaplan and Norton defined a four-step process that has been used across a wide range of organizations. Define the measurement architecture When a company ab initio introduces the Balanced Scorecard, it is more manageable to apply it on the strategic business unit level rather than the corporate level. However, interactions must be considered in order to avoid optimizing the results of one business unit at the expense of others.Build consensus around strategic objectives The top three or four objectives for each perspective are agree upon. Potential measures are identified for each objective. Select and design measures Measures that are close related to the actual performance drivers are selected for evaluating the progress made toward achieving the objectives. Develop the implementation plan Target values are assigned to the measures. An information system is developed to link the top level metrics to lower-level operational measures. The scorecard is integrated into the management system.