An organisation needs to prepare for the future to ensure long term survival and profitability. Balanced scorecard concepts provide a structured approach to deciding where the organization is heading (its strategies), what is needed to get there and what has to measured and controlled now to ensure that it stays on course to deliver the desired outcome in the future.
Assume the company wants to be the largest producer of product X in the country. In order for that to happen one of the companies strategies is to increase turnover.
From a financial perspective an increase in turnover of 15% on last year is required. This is the financial objective and can be measured monthly.
Who provides that turnover? – the customers, so what has to be done as far as the customers are concerned for the company to achieve the strategy: customers must receive their deliveries in full and on time. This is the customer objective and can be measured monthly as: per cent delivered in full and on time.
Internally the company does activities or processes e.g. filling orders, purchasing, production planning & control. These processes start with receipt of a customer order and finishes with the delivery of product or service to the customer. What has to be done as far as the processes are concerned for the company to achieve the strategy: Appoint a new sales person. This is the process objective and can be measured as: date salesman appointed. Another process objective could be: To enter all orders into the production planning system promptly. This can be measured as Number of orders entered within 24 hours.
What infrastructure changes are needed to ensure that the strategy is accomplished. To install a new XYZ widget maker. This is the innovations objective and can be measured as the date it is achieved.
Balanced scorecard model
The balanced scorecard starts with a long term vision. Strategies that will make the vision a reality are decided upon. Each strategy is then assigned one or several objectives into each of the key perspectives that the company wants to consider. These are typically finance, customer, process and innovation.
The sequence of actions that must be taken in each of the perspectives to achieve the strategy is decided. The day-to day operations are monitored and controlled. With balanced scorecard the entire company is involved in discussions. Knowledge and suggestions are drawn from those actually doing the job as well as the senior executives.
The basis of scorecard is that the perspectives are interconnected. Financial objectives cannot be achieved at the expense of the other perspectives.
The main elements of a balanced scorecard are:-
- A vision of where the company is heading, or what role its in the future will be.
The vision is the long-term status the organisation is attempting to achieve.
“Where are we going?”
“How do we see ourselves in the future?”
It is stated so that owners and employees can share and be guided by the organisation’s view of its future.
To be recognised as a world leader amongst …
To have graduates with excellent employment opportunities
To have an international reputation for the quality of its …
To be the country’s leader in …
To be the most successful organisation in the business of …
- A mission statement to justify its existence
The mission is a statement of what the organisation is doing over the next 3 to 5 years.
“What are we here to do?”
To deliver quality products and services to customers on time profitability.
To provide education that develops people for employment.
- Strategies on how to achieve the vision in a defined period of time.
Each scorecard strategy is examined from each of the scorecard perspectives – Financial, Customer, Internal processes & Innovation. A perspective is the aspect from which the strategies are viewed. i.e. how should we appear to the shareholders?, how should we appear to the customers?. To satisfy shareholders & customers what business processes must we improve?. How will the ability to change & improve be sustained or how will the infrastructure be provided to enable the objectives of the other 3 perspectives to be achieved?.
Each perspective contains:
- Objectives. The objectives define what will be done to achieve a strategy. These objectives take into account each of the perspectives, so a typical four perspective balance score card model would have any number of financial objectives, customer objectives,process objectives and innovation objectives for each strategy. The perspectives are not limited to just the four above but that is normally sufficient.
To measure progress, a means of monitoring is required and to accomplish this we need scorecard or performance metrics
- Targets and measures. Each objective has a target so that there is a basis for comparison of results over the duration of the project. Which measurements will be used to monitor progress towards each objective must be determined.
- A method for rating the results relative to the target to enable analysis of progress. Are we on target, below target, above target etc.
Measurements are both financial and non-financial.
Measurements could be completion dates, percentages etc
Strategies, Objectives and Measures are not always of equal importance so a weighting system is used to designate their level of importance.
Balance scorecard implementation
Start with a plan. Introducing it into the organization is the next step. How well this is done will ultimately determine success or failure. Everyone in the organization should understand * What the goal is. * What changes need to made, where and when they will occur. * What is needed from each person in terms of performance, as well as the relationship between their performance and overall success.
What each department will contribute?. How, when & by whom?. A good starting point is an organizational chart for a clear picture on who works where, who supervises whom etc.
Each objective is assigned someone with the ultimate responsibility for the objective, usually a person in the senior ranks of the relevant department. Responsibility for the different tasks is cascaded down the chain of the chart hierarchy so that all staff relevant to the objective know when, where, how and what needs to be done and who will be their direct supervisor.
The next stage in the implementation process is the actual progress measurements taken at defined intervals. These measurements are then compared to target and analysed at all levels i.e. staff member, department & organization. If all is not going to plan the problem area is soon traced through the hierarchy to find who & what is letting down the team. Is the department rating below target?. If so which part of that department is recording the below target rating? Which staff members are involved? Why was the target not met. What else can we do to ensure that the next performance rating will be positive.
Changes can be made at any stage along the way. e.g. a target might have been set unrealistically high, a new measure might be needed etc.
Balanced scorecard is a management system for implementing strategy while balancing concerns about financial performance with concern for other aspects of performance.
Balanced scorecard management and control
Traditional management techniques tend to focus on financial outcomes. This can lead to short term strategies that do not give due consideration to improving the internal processes of the business, and hence lost business. For example, there may be new technology available that, with an investment now, will lead to substantial financial benefits later. Implementing new technology may require different skill requirements from the staff, so consideration should be given to improving skill levels. Are the existing customers going to be around to sustain the growth of the business in the future? What strategies should be implemented to grow the desirable segment of the market? The balanced scorecard is the tool of choice for organizations to manage and control their future.
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