Managing Strategy with the Balanced Scorecard: How to Convert Strategic Planning into Action?
To understand and discover why the Balanced Scorecard has been hailed as one of the 75 most influential business ideas of the 20th century. To learn the critical elements of the Balanced Scorecard and explore how strategy can be managed and executed using the Balanced Scorecard. The implications of the linkage between strategy and operations are also the outcomes of the research that is discussed in this paper.
Three frogs are sitting on a fence and one decides to jump off, so how many are left? The answer: still three, as one has simply decided to jump, but hasn't actually taken the leap. There is a gap the size of the Grand Canyon between decision and action, and nowhere is the gulf larger than strategy formation and the actual implementation of that strategy. Perhaps the greatest ongoing struggle in modern organizations is the challenge of strategy execution with estimates suggesting a meager 10% of companies rising to the task. Using the Balanced Scorecard, thousands of organizations around the globe have overcome the discouraging odds of strategy implementation by focusing on what is critical to success, alignment from top to bottom, and informed resource allocation decisions. As the tool has evolved over the past 15 years from measurement system to communication tool to strategic management system, organizations have begun to link the Balanced Scorecard to a variety of processes that, while disparate in nature, combine to drive the management and implementation of strategy, producing greater returns and breakthrough results. (Paul Niven, Senolosa, Group Strategist, Seminar on Strategic Alignment, 18th January 2006).
The balanced scorecard: It can help your organization!!!
It 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 communications, and monitor organizational performance against strategic goals by translating high level organizational strategy into something that employees can understand and act upon. An effectively implemented balanced scorecard can help an organization in many ways;
- Increase focus on strategy and results instead of tasks.
- Break down communication silos between departments.
- Better understanding and reaction to customer needs.
- Improve organizational performance by measuring what matters. Help leaders make better decisions based on leading performance indicators instead of lagging financial data.
- Help leaders' budget time and resources more effectively.
- Help leaders and employees prioritize the work they do.
Research Aims & Objectives
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 communications, and monitor organization performance against strategic goals. It was originated by Drs. 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. 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 1950's 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 organization's 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 Drs. Kaplan and 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.Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:
The Learning & Growth Perspective
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 knowledge -- 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. 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.
The Business Process Perspective
This perspective refers to internal business processes. 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.
The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. 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. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.The Financial Perspective
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. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.Strategy Mapping
Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain.Research Methodology
A detailed concentric individual research spanning across many corporate websites, research journals, conceptual text books on balance scorecard, interviews of experts from the internet, the Harvard business review magazines and some insights from 4 different corporate leaders within the organization who have implemented/ steered through the process of establishing successful scorecards at Nissan, Commercial Bank International & AW Rostamani Group in the UAE.
Discussion:Why Implement a Balanced Scorecard?
This paper describes the changes to the definition of the Balanced Scorecard that have occurred since it became popular as a performance measurement framework. The paper concludes that in order to minimize risk of failure and avoid constraining and inflexible applications that merely serve as elaborate performance reporting systems as opposed to effective strategic management systems, Balanced Scorecard application need to reflect ideas of information asymmetry and the understanding of strategic control processes within organizations. This paper describes the changes to the definition of the Balanced Scorecard that have occurred since it became popular as a performance measurement framework. The paper concludes that in order to minimize risk of failure and avoid constraining and inflexible applications that merely serve as elaborate performance reporting systems as opposed to effective strategic management systems, Balanced Scorecard application need to reflect ideas of information asymmetry and the understanding of strategic control processes within organizations.
Balanced Scorecards, when developed as strategic planning and management systems, can help align an organization behind a shared vision of success, and get people working on the right things and focusing on results. A scorecard is more than a way of keeping score.....it is a system, consisting of people, strategy, processes, and technology. One needs a disciplined framework to build the scorecard system. This article is the first in a series describing how to build and implement a balanced scorecard system using a systematic step-by-step model.
"Balanced Scorecard" means different things to different people. At one extreme, a measurement-based balanced scorecard is simply a performance measurement framework for grouping existing measures into categories, and displaying the measures graphically, usually as a dashboard. The measures in these systems are usually operational, not strategic, and are used primarily to track production, program operations and service delivery (input, output, and process measures).
At the other extreme, the balanced scorecard is a robust organization-wide strategic planning, management and communications system. These are strategy-based systems that align the work people do with organization vision and strategy, communicate strategic intent throughout the organization and to external stakeholders, and provide a basis for better aligning strategic objectives with resources. In strategy-based scorecard systems, strategic and operational performance measures (outcomes, outputs, process and inputs) are only one of several important components, and the measures are used to better inform decision making at all levels in the organization. In strategy-based systems, accomplishments and results are the main focus, based on good strategy executed well. A planning and management scorecard system uses strategic and operational performance information to measure and evaluate how well the organization is performing with financial and customer results, operational efficiency, and organization capacity building. Performance measurement balanced scorecards are not very interesting, and add little business intelligence to help an organization chart strategic direction and measure the progress of strategic execution. Balanced scorecards built with the goal of "organizing the measures we have" hardly justify
the energy it takes to build them. We'll start our balanced scorecard journey not from performance measures but from the results we want the organization to accomplish. In other words, we'll start with the end in mind, not with the measures we currently have. One of Stephen Covey's quotes captures the essence of our journey: "People and their managers are working so hard to be sure things are done right, that they hardly have time to decide if they are doing the right things."
Doing the right things and doing things right is a balancing act, and requires the development of good business strategies (doing the right things) and efficient processes and operations to deliver the programs, products and services (doing things right) that make up the organization's core business.
While there are differences in development and implementation of scorecard systems for private, public and nonprofit organizations, the disciplined process of strategic discovery used to develop scorecard systems has more similarities than differences, so the framework we will describe applies equally well to different types of organizations, as well as to different size organizations. We have applied the framework to businesses, nonprofits, and government organizations with less than 10 employees to organizations with more than 100,000. Developing a balanced scorecard system is like putting a puzzle together, where different pieces come together to form a complete mosaic. In the balanced scorecard, the "pieces" are strategic components that are built individually, checked for "fit" against other strategic components, and assembled into a complete system. The major components of a balanced scorecard system are shown in the table below, and summarized briefly in the paragraphs that follow. Future newsletter articles will explore each of the major system components and describe how each piece of the puzzle is build and connected to other pieces.
Conclusion: Mobilizing the organization for the strategic change
Clarifying the vision is necessary for building the consensus and commitment to the strategy. Then a proper communication program has to be established to educate and create awareness among employees, so that they can start translating corporate scorecards into departmental/ functional scorecards, later into individual performance measures so that entire organization is orchestrated by the gradual influx of a promising performance culture. To let the employees focus and invest on their efforts, periodic monthly/ quarterly reviews have to take place to discuss these agreed measures of performance and manage those for us. Thus escalating the performance system from a monitoring one to a managing one.
- R.S. Kaplan, Analog Devices: Half Life Metric, HBS Case Study #9-190-061, 1990.
- Paul Niven, book on Balanced Scorecard Diagnostics released in April 2005, pages 45 and 46.
- www.senolosa.com, published white paper authority of Paul Niven in January 2006.
- www.balancescorecard.org, published article written by Howard Rohm, President & CEO of the Balance Scorecard Institute article on nine steps to success with BSC in March 1997.
- Gary Hamel & C.K. Prahalad, Professors in Strategic Management in Wharton Business School published article on American Institute of Management Journal, Feb 2004 under International Business.
- Inbavanan G, Organization Development Expert in LinkedIn OD Group Community on Criticality of Balance Scorecard to Organizations Today. Published for common use in August 2009, but actually released in April 2008.
- References on Balance Scorecard in www.businessballs.com and www.explorehr.org.
- Translating Strategy into Action, The Balance Scorecard book published by Robert Kaplan and David Norton in 1996, the first authoritative literature on Balance Scorecard; published by Harvard Business Press, Massachusetts.
- H.Itami, Mobilizing Invisible Assets (Cambridge-Mass), New York - Harper Business, 1993.
- R. Simons, Levers of Control: How managers use innovative control systems to drive strategic renewal; published by Boston HBS, 1995, page 20-23.
- The AICPA Special Committee on Financial Reporting, Improving Business Reporting - A Customer Focus: Meeting the information needs of the Investors & Creditors, 1994, 9-10; released in New York.
- Organizational Learning II: Theory, Method & Practice, Addison-Wesley, 1996, 75-107.
- Rockwater Balance Scorecard Implementation, available as internet resource in the BSI website under the topic BSC Success Stories, 2000.
- References also from corporate houses within UAE - Nissan Middle East FZE (developed BSC under the guidance of Cedar Consulting). Commercial Bank International with the help of Internal Strategic, Planning & Quality Department. While AW Rostamani Group used co-sourcing from Strategic Enterprise Management Arabia and Internal Project Management team under the CEO Michelle Ayat.