INDEX

1. Theory behind the Balanced Scorecard.....................................................................5

1.1. Background of the Concept of Balanced Scorecard...............................................5
1.2. Balanced Scorecard as Complementary Tool for Management Accounting..........9
1.3. Defining Critical Success Factors and Measures.................................................11
1.4.Balanced Scorecard as a Measurement Tool........................................................23
1.5. Balanced Scorecard as a Strategic Management System ...................................24
2. Constructing a Balanced Scorecard.........................................................................27
2.1. Establishing Strategy by Building up a Balanced Scorecard ...............................30
2.1.1. Clarifying and Translating the Vision and Strategy...............................................30
2.1.2. Communicating and Linking Strategic Objectives and Measures........................32
2.1.3. Planning, Setting Targets and Aligning Strategic Initiatives.................................34
2.1.4. Enhancing Strategic Feedback and Learning........................................................36
2.1.5. Conclusions and Recommendations – How Many Measures to Choose?............40
2.2. Testing the Balanced Scorecard ...........................................................................41
2.2.1. Analysing Outcomes and Performance Drivers ...................................................41
2.2.2. Analysing Cause and Effect...................................................................................42
2.3. Establishing Action Plan.......................................................................................44
2.3.1. Setting up Catalytic Mechanisms..........................................................................44
3. Implementing a Balanced Scorecard as a Management System...........................46
4 Case Studies on Implementing a Balanced Scorecard..............................................50
4.3 Practical Aspects of Setting up Balanced Scorecard in a Service Company.............75
4.4 Using the Balanced Scorecard at Metro Bank...........................................................78
4.5 Using the Results of a Balanced Scorecard at Sears Company.................................81
5. Conclusions and Recommendations on Implementing a Balanced Scorecard........83
6. Summary....................................................................................................................85
Bibliography..................................................................................................................87

Executive summary

The overall objective of the report is to analyse the use of Balanced Scorecard as a
performance measurement tool in the areas of general management and strategic
management.

The Balanced Scorecard may be described as a strategy-driven measurement system

that retains traditional financial measures, but adds also the perspectives of present and
potential (future) value of a company, namely its customers, suppliers, employees,
processes, technology, and innovation.

The purpose is to show that the Balanced Scorecard may be considered as one of the
best remedies in tackling with the questions concerning:

• helping to align key performance measures with overall organisation strategy at all
levels of an organisation;

• linking strategic vision and long-term objectives to short term tactics;

• directing sophisticated and different critical paths of success in the light of strategic
management;

• review of strategic vision in the light of day-to-day operations management.

The concept of the Balanced Scorecard is not yet very familiar in Indi. Therefore, we
paid much effort in describing the theory side of the Balanced Scorecard and the details
of starting up a Balanced Scorecard – based management. Those aspects constitute two
first chapters of the thesis.

In the last part, attention is given to day-to-day implementation of Balanced Scorecard

using the examples of four case studies. Finally, some conclusions and
recommendations are drawn based on practical use of the Balanced Scorecard.

Introduction

Darwin had once remarked “survival of the fittest”. It was not a statement in the context
of any business organization. The saying, however, holds very true in today’s business
scenario. Every company has realized that the ones with the best strategies, best
operations, best people etc. would outperform those who do not have the superior things
in place. All assets deserve equal attention. The best organisations will be the ones who
would survive the cut-throat competition. The struggle for existence and growth, is
indeed very severe for firms in this competitive environment. The fate of organizations

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are changing very fast. Strong competitors are entering into industries due to the
liberalization, privatization and globalization which has formed the buzzword in the
economic field. The life tenure of any organization is determined by the strength of the
protective shield it has been able to build around itself which would not only help
capitalise on the opportunities but also counter the threats.
In this competitive environment, the field of management which is
becoming increasingly popular and relevant is Strategic Management. This is because
this subject helps to bring a focus on those actions that should be taken by the
management which would ensure the existence, survival and the long-term success of
any organization. The scope of application of this field, however, varies with the
business size. Strategic Management is Managing for the Future or Competing for
theFuture as had been remarked by the renowned strategic management experts,Hamel
and Prahalad. As Peter Drucker had warned, management “ has no choicebut to
anticipate the future, to attempt to mould it, and to balance short-range and long-range
goals. The future will not just happen if one wishes hard enough. It requires decision-
now. It imposes risk-now. It requires action-now. It demands allocation of resources-
now. It requires work-now.”
Having understood these things which are applicable to the business in
reality, the applicability of strategic management is getting wider – be it a multinational,
domestic or even a national player in the market. In any strategic management process,
one of the most important element is the SWOT analysis which means analyzing the
environment – both internal and external. The internal environment analysis highlights
the areas of strength and weaknesses which the organization has and the external
environment analysis throws light on the opportunities and the threats being offered by
the various areas of the environment. The most important thing that can ensure the
success of any organization is the development of appropriate strategies which would
decide the direction the organization will take as it progresses.

Need for Balanced scorecard

We have seen that the there is a very significant need of balanced scorecard in this era
of cut-throat competition, as what an organization requires is not just framing the right
strategies, but also managing the same. The impact of the right strategies will

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automatically be reflected in the results. Moreover, any organization has to understand
that it needs to give impetus not only towards the financial results but also towards
satisfaction of the customers, development of state-of-the-art technologies and creation
of an environment of learning and growth. The Balanced Scorecard is such an
innovative tool which has considered not just the financial indices but also the non-
financial indicators as equally critical in determining organizational performance.

In the words of the proponents of this tool “ the Balanced Scorecard retains
traditional measures. But, financial measures tell the story of past events, an adequate
story for industrial age companies for which investment 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, technologies and innovation.” These words give the idea behind
the development of this framework. Today’s businesses require a better understanding
of their customers (both existing and potential ) and their needs, better streamlined
processes and highly skilled people for ensuring future survival and sustainable growth.
This shows that the focus of action has rightly considered the non-financial aspects
apart from the financial indices. This tool is the end result of sustained efforts to find an
ideal tool to measure performance and provide a link to strategy and action. The
decisions about the future actions form the key to success of any enterprise in this fast-
changing business environment.

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1. Theory behind the Balanced Scorecard

1.1. Background of the Concept of Balanced Scorecard

Throughout the history of contemporary management theories starting from the ones
that were introduced by the intrusion of the mass production in the beginning of the 20 th
century and until today, all the gurus of management have been trying to find uniform
solutions on more efficient allocation and use of very limited resources available to
businesses. Those paths in seeking the Holy Grail of operational efficiency have brought
up several new management theories.

In the dawn of the century, Frederick W. Taylor established the very concepts of
resource allocation in his Principles of Scientific Management. In 1920-ies it went
around assembly line and motion studies as the first experience from systematic mass
production had given theorists quite a lot of materials to be analysed from the point of
view of using traditional blue-collar employees more efficiently. In the 1930-ies, the
main topic was motivation of employees, as it turned out that human nature does not
enable to work long hours on a repetitive tasks without frustration level getting so high
enough to diminish productivity. In the 1940-ies and 1950-ies, the first statistical and
linear methods were introduced in trying to measure logistics of the operations
management and its implications to overall company success in financial-analysis side.
In the beginning of 1980-ies, partly because of introduction of electronic data
processing equipment and quick development of computers, the whole array of
management techniques were initiated. The particular reasons for the vast development
of the new theories were catalysed mainly by ever growing competition generated
through more systematic use of computers, and of course also by rapid growth of the
importance of human capital.

Today’s companies are in the midst of a revolutionary transformation. Industrial age

competition is shifting to information age competition. During the industrial age,
roughly from 1850 to about 1975, companies succeeded by how well they could capture
the benefits from economies of scale and scope. Technology mattered, but, ultimately,
success accrued to companies that could embed the new technology into physical assets
that offered efficient, mass production of standard products. During the industrial age,

5
the financial control systems were developed in major companies to facilitate and
monitor efficient allocations of financial and physical capital. A summary financial
measure such as return-on-capital-employed (ROCE) could both direct a company’s
internal capital to its most productive use and monitor the efficiency by which operating
divisions used financial and physical capital to create value for shareholders.

The emergence of the information era, however, in the last decades of the 20 th century,
has made obsolete many of the fundamental assumptions of industrial age competition.
The information age environment for both manufacturing and service organisations
requires new capabilities for competitive success. The ability of a company to mobilise
and exploit its intangible assets has become far more decisive than investing and
managing tangible, physical assets.

Industrial age companies created a sharp distinction between two groups of employees.
The intellectual elite – managers and engineers – used their analytical skills to design
products and processes, select and manage customers, and supervise day-to-day
operations. The second group was composed of the people who actually produced the
products and delivered the services. This direct labour work force was a principal factor
of production, which performed its tasks under supervision of the first group. Today
automation and productivity have increased the number of people performing analytic
functions: engineering, marketing, management and administration. Therefore, the
people are more viewed as problem solvers, not as variable costs. In other words,
information age has brought about the concept of knowledge management.

The shift to successful knowledge management has introduced a variety of

improvement initiatives:

• Just-in-time,

• Total quality management,

• Lean enterprise,

• Business process re-engineering,

• Time-based competition,

• Customer-focused organisation,

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• Activity-based cost management,

• Employee empowerment,

• Living company,

and so on. Some of those programmes have meant in practice real breakthrough and
improvement, others have proven to be in the best case just a short-time disturbance, but
in the worst cases total failures resulting in disarray or even bankruptcy of a particular
company. The main reason for that lies in five main implementation problems:

1) current performance measurement systems are based on the traditional financial

accounting model, which does not enable to objectively analyse information-age
companies;

2) if some non-financial performance measurement even is made, it is solely based on

employees’ tactical performance, not on strategic performance;

3) majority of management and employee salary-based motivation schemes are only

short-run profit oriented, that does not enable to align towards long-run goals;

4) overall company strategy is not closely linked to organisational and personal

improvement programmes; and

5) strategy is not generally linked to resource allocation, which results in under-

financing some of the crucial parts of organisation’s development.

As for today, superior financial performance and efficiency in production are just not
enough to gain sufficient competitive advantage, but more and more attention needs to
be paid to intangible sides of business.

For at least 15 years, the leading management journals have published articles about
how to build up a mechanism that would enable to control all the aspects of a
company’s performance. One of the most versatile tools for that purpose is Balanced
Scorecard.

The long-term success of any organization is determined by the capabilities and the
competencies it has developed. Today’s businesses require a better understanding of
their customers (both existing and potential ) and their needs, better streamlined
processes and highly skilled people for ensuring future survival and sustainable growth.

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This shows that the focus of action has rightly considered the non-financial aspects
apart from the financial indices.

This innovative tool “Balanced Scorecard” developed by Robert S Kaplan and David P
Norton in 1992 is unique in two ways compared to the traditional performance
measurement tools. They are :-

(i) It considers the financial indices as well the non-financial ones in

determining the corporate performance level and

(ii) It is not just a performance measurement tool but is also a performance

management system

The aim of the Balanced Scorecard is to direct, help manage and change in support of
the longer-term strategy in order to manage performance. The scorecard reflects what
the company and the strategies are all about. It acts as a catalyst for bringing in the
‘change’ element within the organization.

Balanced Scorecard uses a balanced measurement system that comprises of “the old”
financial side and four “new” perspectives of:

1. Financial Perspective - How do we look at shareholders?

2. Customer Perspective - How should we appear to our customers?

3. Internal Business Processes Perspective - What must we excel at?

4. Learning and Growth Perspective - Can we continue to improve and create

value?.

Hence, from the above lines we can say that this tool has considered not only the
financial results to be important but also those factors which actually drive an
organization towards future successes as mentioned earlier. The tool has given stress on
the other areas which are required to ‘balance’ the financial perspective in order to get a

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total view about the organizational performance and improve the same. The framework
tries to bring a balance and linkage between the –

(a) Financial and the Non-Financial indicators,

(b) Tangible and the Intangible measures,

(c) Internal and the External aspects and

(d) Leading and the Lagging indicators.

The next sub-chapters will describe the main features of the Balanced Scorecard
compared to traditional management systems.

1.2. Balanced Scorecard as Complementary Tool for Management Accounting

Historically, accounting has been the one and only language of business, the prime
mechanism for communicating the results of business operations. Although financial
measurement matters, it today alone does not give sufficient guiding and evaluating
grounds for organisation’s success.

To illustrate this topic, the following example may be analysed.

Xerox was through the mid-1970s virtually a monopoly on plain paper copiers business.
Xerox did not sell its machines – it leased them and earned revenues on every copy
made on these machines. Sales and profits from leasing and supporting services like
paper and toner were large and growing. However, customers, apart from concern about
high copying costs, for which no alternative was available, were disgruntled about the
high breakdown rates and malfunctions of these expensive machines. Rather than
redesign the machines so that they would break down less frequently, Xerox executives
saw an opportunity to enhance their financial results even further. They permitted direct
purchase of their machines, and then established an extensive field service force as a
separate demand for its services, this division soon was a substantial contributor to
Xerox’s profit growth. Thus all the financial indicators – sales and profit growth, return
on investment – were signalling a highly successful strategy.

But customers were still unhappy and surly. They did not want their supplier to excel at
having a superb field service force. They wanted cost-efficient machines that did not

9
break down. When competitors were able to offer comparable machines that did not
break down, Xerox’s dissatisfied and disloyal customers embraced them. This lead
Xerox, one of the most successful U.S. companies throughout 1955 to 1975 to nearly a
failure. Only under a new CEO did the company make a remarkable turnaround in the
1980s by supporting significant investments into quality improvement initiatives.

Only financial measures are inadequate for guiding and evaluating organisation’s
success. They are lagging indicators that capture the value created or destroyed by
managers’ actions in the most recent accounting period.

Several analyses have expressed their concern with an overemphasis on financial

measures of today’s corporate performance. Some of the outcomes of the analyses
might be recited here. Current system is less supportive to long-term investments,
because it favours forms of investment for which returns are most readily measurable;
this leads to under-investment in intangible assets such as product and process
innovation, employee skill, customer satisfaction, whose short-term returns are more
difficult to measure. The system also allows companies with very strong asset bases
(such as in natural resources, consumer goods companies with strong brand names etc)
to operate inefficiently without fully exploiting their undervalued assets, as long as
short-term earnings are satisfactory.

In today’s business world financial results still remain important, but there is a growing
recognition that non-financial measures are better indicators of the ultimate health of an
organisation. Steven M. Hronec has noted, that those non-financial measures should
include cost, quality and time. He defines those measures at an organisational level, a
process level and an individual level.

The second most important school of theory is the Balanced Scorecard, which adds to
the financial set the following components as information age companies must create
future value through investment in customers, suppliers, employees, processes,
technology, and innovation. The objectives and measures of Balanced Scorecard have to
be derived from an organisation’s vision and strategy. The objectives and measures view
organisational performance from four perspectives: financial, customer, internal
business process, and learning and growth. These four perspectives provide the

10
framework for the Balanced Scorecard (see Figure - The Main Framework of Balanced
Scorecard).

From Balanced Scorecard, managers can measure how business units create value for
current and future customers and how they must enhance internal capabilities and the
investment in people, systems, and procedures necessary to improve the future
performance.

Some recent theories have tried to merge the main features of both the Balanced
Scorecard and various applications of financial accounting that are grounded on
activity-based-costing.

1.3. Defining Critical Success Factors and Measures

Four perspectives
1. Financial Perspective - How do we look at shareholders?

From all the measurement perspectives of a Balanced Scorecard, the financial

perspective needs to be introduced the least as the main financial measurement systems
have been analysed during the past years very thoroughly.

The particular financial performance measures for any Balanced Scorecard should
define long-run financial objectives for the organisation. While most of the
organisations would emphasise profitability objectives, other possibilities may also be
considered. Businesses with many products in the early stage of their life cycle can
stress rapid growth objectives, and mature businesses may emphasise maximising cash
flow.

Norton and Kaplan recommend to simplify the financial perspective measurement

selection pool to identify first the organisation’s stage, which would mainly be one of
the three:

1. “rapid growth” organisations - are at the early stages of their life cycle. They may
have to make considerable investments to develop and enhance new products and

11
 services, to construct and expand production facilities, to build operating
capabilities, to invest in systems, infra-structure, and distribution networks that will
support relationships, and to nurture and develop customer relationships.

2. “sustain” organisations – organisations that still attract investment and reinvestment,

but are required to earn excellent returns on their invested capital. These businesses
are expected to maintain their existing market share and perhaps grow it somewhat.
Investment projects will be more directed to relieving bottlenecks, expanding
capacity, and enhancing continuous improvement.

3. “harvest” organisations - have reached a mature phase of their life cycle, where the
company wants to harvest the investments made in the earlier to stages. These
businesses no longer warrant significant investment – only enough to maintain
equipment and capabilities, not to expand or build new capabilities. Any investment
project will have to have very short and definite payback periods. The main goal is
to maximise cash flow back to the organisation.

The financial objectives for businesses in each of these three stages are quite different.
Financial objectives in the growth stage will emphasise sales growth; sales in new
markets and to new customers; sales from new products and services; maintaining
adequate spending levels for product and process development, systems, employee
capabilities; and establishment of new marketing, sales, and distribution channels.
Financial objectives in the sustain stage will emphasise traditional financial
measurements, such as return on capital employed, operating income, and gross margin.

Investment projects for businesses in the sustain category will be evaluated by standard,
discounted cash flow, capital budgeting analyses. Some companies will employ newer
financial metrics, such as economic value added and shareholder value. These metrics
all represent the classic financial objective---earn excellent returns on the capital
provided to the business.

The financial objectives for the harvest businesses will stress cash flow. Any
investments must have immediate and certain cash paybacks. The goal is not to
maximise return on investment, which may encourage managers to seek additional
investment funds based on future return projections. Virtually no spending will be done

12
for research or development or on expanding capabilities, because of the short time
remaining in the economic life of business units in their "harvest" phase.

Some of the objectives together with a measurement measures

Objectives Measures
Survive Cash flow
Prosper Increase in market share
Profitability Return on equity

Cost leadership Unit Cost

2. Customer Perspective - How should we appear to our customers?

The customer perspective addresses the question of how the firm is viewed by its
customers and how well the firm is serving its targeted customers in order to meet the
financial objectives. Generally, customers view the firm in terms of time, quality,
performance, and cost. Most customer objectives fall into one of those four categories.

In the customer perspective of the Balanced Scorecard, managers identify the customer
and market segments in which the business unit will compete and the measures of the
business unit's performance in these targeted segments.

The customer perspective typically includes several generic measures of the successful
outcomes from a well-formulated and implemented strategy. The generic outcome
measures include customer satisfaction, customer retention, new customer acquisition,
customer profitability, and market and account share in targeted segments. While these
measures may appear to be generic across all types of organisations, they should be
customised to the targeted customer groups from whom the business unit expects its
greatest growth and profitability to be derived.

Market and Account Share

Market share, especially for targeted customer segments, reveals how well a company is
penetrating a desired market. For example, a company may temporarily be meeting

13
sales growth objectives by retaining customers in non-targeted segments, but not
increasing its share in targeted segments. The measure of market share with targeted
customers would balance a pure financial signal (sales) to indicate whether an intended
strategy is yielding expected results.

When companies have targeted particular customers or market segments, they can also
use a second market-share type measure: the account share of those customers' business
(some refer to this as the share of the "customers' wallet"). The overall market share
measure based on business with these companies could be affected by the total amount
of business these companies are offering in a given period. That is, the share of business
with these targeted customers could be decreasing because these customers are offering
less business to all their suppliers. Companies can measure-customer by customer or
segment by segment-how much of the customers' and market segments' business they
are receiving. Such a measure provides a strong focus to the company when trying to
dominate its targeted customers' purchases of products or services in categories that it
offers.

Customer Retention

Clearly, a desirable way for maintaining or increasing market share in targeted customer
segments is to retain existing customers in those segments. Research on the service
profit chain has demonstrated the importance of customer retention.6 Companies that
can readily identify all of their customers-for example, industrial companies,
distributors and wholesalers, newspaper and magazine publishers, computer on-line
service companies, banks, credit card companies, and long-distance telephone suppliers-
can readily measure customer retention from period to period. Beyond just retaining
customers, many companies will wish to measure customer loyalty by the percentage
growth of business with existing customers.

Customer Acquisition

Companies seeking to grow their business will generally have an objective to increase
their customer base in targeted segments. The customer acquisition measure tracks, in

14
absolute or relative terms, the rate at which a business unit attracts or wins new
customers or business. Customer acquisition could be measured by either the number of
new customers or the total sales to new customers in these segments. Companies such
as those in the credit and charge card business, magazine subscriptions, cellular
telephone service, cable television, and banking and other financial services solicit new
customers through broad, often expensive, marketing efforts. These companies could
examine the number of customer responses to solicitations and the conversion rate-
number of actual new customers divided by number of prospective inquiries. They
could measure solicitation cost per new customer acquired, and the ratio of new
customer revenues per sales call or per dollar of solicitation expense.

Customer Satisfaction

Both customer retention and customer acquisition are driven from meeting customers'
needs. Customer satisfaction measures provide feedback on how well the company is
doing. The importance of customer satisfaction probably can not be over-emphasised.
Recent research has indicated that just scoring adequately on customer satisfaction is
not sufficient for achieving high degrees of loyalty, retention, and profitability. Only
when customers rate their buying experience as completely or extremely satisfying can
the company count on their repeat purchasing behaviour.

Customer Profitability

Succeeding in the core customer measures of share, retention, acquisition, and

satisfaction, however, does not guarantee that the company has profitable customers.
Obviously, one way to have extremely satisfied customers (and angry competitors) is to
sell products and services at very low prices. Since customer satisfaction and high
market share are themselves only a means to achieving higher financial returns,
companies will probably wish to measure not just the extent of business they do with
customers, but the profitability of this business, particularly in targeted customer
segments. Activity-based cost (ABC) systems permit companies to measure individual
and aggregate customer profitability. Companies should want more than satisfied and
happy customers; they should want profitable customers. A financial measure, such as

15
customer profitability, can help keep customer-focused organisations from becoming
customer-obsessed.

The customer profitability measure may reveal that certain targeted customers are
unprofitable. This is particularly likely to occur for newly acquired customers, where
the considerable sales effort to acquire a new customer has yet to be offset from the
margins earned by selling products and services to the customer. In these cases, lifetime
profitability becomes the basis for deciding whether to retain or discourage currently
unprofitable customers.

Newly acquired customers can still be valued, even if currently unprofitable, because of
their growth potential. But unprofitable customers who have been with the company for
many years will likely require explicit action to cope with their incurred losses.

Beyond the Core: Measuring Customer Value Propositions

Customers' value propositions represent the attributes that supplying companies

provide, through their products and services, to create loyalty and satisfaction in
targeted customer segments. The value proposition is the key concept for understanding
the drivers of the core measurements of satisfaction, acquisition, retention, and market
and account share. For example, customers could value short lead times and on-time
delivery. They could value a constant stream of innovative products and services. Or
they could value a supplier able to anticipate their needs and capable of developing new
products and approaches to satisfy those emerging needs.

While value propositions vary across industries, and across different market segments
within industries, Kaplan and Norton have observed a common set of attributes that
organises the value propositions in all of the industries where we have constructed
scorecards. These attributes are organised into three categories.

• Product/Service Attributes

• Customer Relationship

• Image and Reputation

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 Product and service attributes encompass the functionality of the product/service, its
price, and its quality. The image and reputation dimension enables a company to pro-
actively define itself for its customers. The customer relationship dimension includes
the delivery of the product/service to the customer, including the response and delivery
time dimension, and how the customer feels about the experience of purchasing from
the company.

In summary, the customer perspective enables business unit managers to articulate their
unique customer and market-based strategy that will deliver superior future financial
returns.

Some of the objectives together with a measurement measures

Objectives Measures

New products % of sales from newer products

Customer relationship % of retained customers

Responsive supply On time Delivery

3. Internal Business Processes Perspective - What must we excel at?

Internal business process objectives address the question of which processes are most
critical for satisfying customers and shareholders. These are the processes in which the
firm must concentrate its efforts to excel.

In the internal business process perspective, executives identify the critical internal
processes in which the organisation must excel. The critical internal business processes
enable the business unit to deliver on the value propositions of customers in targeted
market segments, and satisfy shareholder expectations of excellent financial returns.
The measures should be focused on the internal processes that will have the greatest
impact on customer satisfaction and achieving the organisation’s financial objectives.

The internal business process perspective reveals two fundamental differences between
traditional and the Balanced Scorecard approaches to performance measurement.
Traditional approaches attempt to monitor and improve existing business processes.

17
 They may go beyond just financial measures of performance by incorporating quality
and time-based metrics. But they still focus on improving existing processes. The
Balanced Scorecard approach, however, will usually identify entirely new processes at
which the organisation must excel to meet customer and financial objectives. The
internal business process objectives highlight the processes most critical for the
organisation’s strategy to succeed.

The second departure of the Balanced Scorecard approach is to incorporate innovation

processes into the internal business process perspective. Traditional performance
measurement systems focus on the processes of delivering today's products and services
to today's customers. They attempt to control and improve existing operations - the
short wave of value creation. But the drivers of long-term financial success may require
the organisation to create entirely new products and services that will meet the emerging
needs of current and future customers. The innovation process-the long-wave of value
creations, for many companies, a more powerful driver of future financial performance
than the short-term operating cycle. But managers do not have to choose between these
two vital internal processes. The internal business process perspective of the Balanced
Scorecard incorporates objectives and measures for both the long-wave innovation
cycle as well as the short-wave operations cycle.

Some of the objectives together with a measurement measures

Objectives Measures

Manufacturing excellence Cycle time per unit

Safety incidence index Number of accidents

Increase design productivity Engineering efficiency

Reduce Product launch delays Actual launch date vs. Plan

4. Learning and Growth Perspective - Can we continue to improve and create value?.

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Learning and growth metrics address the question of how the firm must learn, improve,
and innovate in order to meet its objectives. Much of this perspective is employee-
centered.

The fourth Balanced Scorecard perspective, Learning and growth, identifies the
infrastructure that the organisation must build to create long-term growth and
improvement. The customer and internal business process perspectives identify the
factors most critical for current and future success. Businesses are unlikely to be able to
meet their long-term targets for customers and internal processes using today's
technologies and capabilities. Also, intense global competition requires that companies
continually improve their capabilities for delivering value to customers and
shareholders.

Organisational learning and growth come from three principal sources: people, systems,
and organisational procedures. The financial, customer, and internal business process
objectives on the Balanced Scorecard will typically reveal large gaps between existing
capabilities of people, systems, and procedures and what will be required to achieve
targets for breakthrough performance. To close these gaps, businesses will have to
invest in re-skilling employees, enhancing information technology and systems, and
aligning organisational procedures and routines. These objectives are articulated in the
learning and growth perspective of the Balanced Scorecard. As in the customer
perspective, employee-based measures include a mixture of generic outcome measures-
employee satisfaction, employee retention, employee training, and employee skills-
along with specific drivers of these generic measures, such as detailed indexes of
specific skills required for the new competitive environment. Information systems
capabilities can be measured by real-time availability of accurate customer and internal
process information to front-line employees. Organisational procedures can examine
alignment of employee incentives with overall organisational success factors, and
measured rates of improvement in critical customer-based and internal processes.

Some of the objectives together with a measurement measures

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 Objectives Measures

Technology leadership Time to develop newer products

Manufacturing learning Time to new process maturity

Product focus % of products representing 80% of sales

The Four Perspectives: Cause and Effect Relationship

The four perspectives as mentioned above are highly interlinked. There is a logical
connection between them. The explanation is as follows : If an organization focuses on
the learning and the growth aspect, it is definitely going to lead to better business
processes. This in turn would be followed by increased customer value by producing
better products which ultimately gives rise to improved financial performance.

Figure : The Cause and Effect relationships among the four perspectives

20
1.3 The Balanced Scorecard Model

Explanation:-
Following steps are to be taken so as to utilize the Balanced Scorecard as a strategic
management tool:

1. The major objectives are to be set for each of the perspectives.

2. Measures of performance are required to be identified under each of the

Objectives which would help the organization to realize the goals set under each
of the perspectives. These would act as parameters to measure the progress
towards the objectives.

3. The next important step is the setting of specific targets around each of the
identified key areas which would act as a benchmark for performance appraisal.
Hence, a performance measurement system is build around these critical factors.
Any deviation in attaining the results should raise a red signal to the
management which would investigate the reasons for the deviation and rectify
the same.

4. The appropriate strategies and the action plans that are to be taken in the various
activities should be decided so that it is clear as to how the organization has
decided to pursue the pre-decided goals. Because of this reason, the Balanced
Scorecard is often referred to as a blueprint of the company strategies.

21
Figure - The Main Framework of Balanced Scorecard

To succeed financially, how should we appear to our

shareholders?FinancialObjectivesMeasuresTargetsInitiatives

To achieve our vision, how should we appear to our Vision To satisfy our shareholders and customers, what business
customers? and processes must we excel at?Internal Business
Strategy
CustomerObjectivesMeasuresTargetsInitiatives ProcessObjectivesMeasuresTargetsInitiatives

To achieve our vision, how will we sustain our ability to

change and improve?Learning and
GrowthObjectivesMeasuresTargetsInitiatives
 1.4.Balanced Scorecard as a Measurement Tool
To illustrate the use of today’s main measurement tools, Kaplan and Norton bring the
following example:

Imagine entering the cockpit of a modern jet aeroplane and seeing only a single
instrument there. How would you feel about boarding the plane after the following
conversation with the pilot?

Q: I am surprised to see you operating the plane with only a single instrument. What
does it measure?

A: Airspeed. I am really working on airspeed this flight.

Q: That’ good. Airspeed certainly seems important. But what about altitude? Would an
altimeter be helpful?

A: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I
have to concentrate on proper airspeed.

Q: But I notice you do not even have a fuel gauge. Wouldn’t that be useful?

A: You are right; fuel is significant, but I cannot concentrate on doing too many things
well at the same time. So on this flight I’m focusing on airspeed. Once I get to be
excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption in
the next set of flights.

We suspect that you would not board the plane after this discussion. Even if the pilot did
an exceptional job on airspeed, you would be worried about colliding with tall
mountains or running low on fuel. Clearly, such a conversation is a fantasy since no
pilot would dream of guiding a complex vehicle like a jet aeroplane through crowded
air spaces with only a single instrument.

Skilled pilots are able to process information from a large number of indicators to
navigate their aircraft. Yet navigating today's organisations through complex
competitive environments is at least as complicated as flying a jet. Why should we
believe that executives need anything less than a full battery of instrumentation for
guiding their companies? Managers, like pilots, need instrumentation about many
aspects of their environment and performance to monitor the journey toward excellent
future outcomes.

The Balanced Scorecard provides managers with the thorough instrumentation they
need to navigate to future competitive success. Today, organisations are competing in
complex environments so that an accurate understanding of their goals and the methods
for attaining those goals is vital. The Balanced Scorecard translates an organisation’s
mission and strategy into a comprehensive set of performance measures that provides
the framework for a strategic measurement and management system. The Balanced
Scorecard enables companies to track financial results while simultaneously monitoring
progress in building the capabilities and acquiring the intangible assets they need for
future growth.

Finally, it has to be mentioned that the Balanced Scorecard is not just a measurement
system, but comprises a whole new way of looking at business. During the
implementation of a Balanced Scorecard, it requires so many improvement efforts
throughout the organisation that it might be called a whole new management system.

1.5. Balanced Scorecard as a Strategic Management System

However, is there anything new about a call for a "balanced" set of measures? While
virtually all organisations do indeed have financial and non-financial measures, many
use their non-financial measures for local improvements, at their front-line and
customer-facing operations. Senior managers use aggregate financial measures as if
these measures could summarise adequately the results of operations performed by their
lower and midlevel employees. These organisations are using their financial and non-
financial performance measures only for tactical comments and control of short-term
operations.

The Balanced Scorecard emphasises that financial and non-financial measures must be
part of the information system for employees at all levels of the organisation. Front-line
employees must understand the financial consequences of their decisions and actions;
senior executives must understand the drivers of long-term financial success. The
objectives and measures for the Balanced Scorecard are more than a somewhat ad hoc

24
collection of financial and non-financial performance measures; they are derived from a
top-down process driven by the mission and strategy of the business unit. The Balanced
Scorecard should translate a business unit's mission and strategy into tangible objectives
and measures. The measures represent a balance between external measures for
shareholders and customers, and internal measures of critical business processes,
innovation, and learning and growth. The measures are balanced between outcome
measures-the results from past efforts-and the measures that drive future performance.
Moreover, the scorecard is balanced between objective, easily quantified outcome
measures and subjective, somewhat judgmental, performance drivers of the outcome
measures.

The Balanced Scorecard is more than a new measurement system. Innovative

companies use the scorecard as the central, organising framework for their management
processes (see Figure - Balanced Scorecard as a Strategic Framework for Action).
Companies can develop an initial Balanced Scorecard with narrow objectives: to gain
clarification, consensus, and focus on their strategy, and then to communicate that
strategy throughout the organisation. The real power of the Balanced Scorecard,
however, occurs when it is transformed from a measurement system to a management
system.

The four main steps in building up a strategy using the Balanced Scorecard are:

1. clarifying and translating vision and strategy

2. communicating and linking strategic objectives and measures

3. planning, setting targets, and aligning strategic initiatives

4. enhancing strategic feedback and learning.

During the next chapter, the author is going to go through step-by-step in construction
of a manageable Balanced Scorecard.

25
Figure - Balanced Scorecard as a Strategic Framework for Action

Clarifying and
Translating the
Vision and Strategy
Clarifying the vision
Gaining concensus

Communication and Linking Strategic feedback and learning

Communicating and educating Articulating the shared vision
Balanced
Setting goals Supplying strategic feedback
Scorecard
Linking rewards to performance Facilitating strategy review and
measures learning

Planning and Target Setting

Setting targets
Aligning strategic initiatives
Allocating resources
Establishing milestones
2. Constructing a Balanced Scorecard
One of the possible ways to go through all the steps of construction of successfully
operating Balanced Scorecard might be shortly described as seen on .

1. First, members of the organisation would have to identify a vision. Everybody in the
organisation has to agree upon one single goal where the organisation has to be
heading.

2. Then organisation’s management has to recognise the strategies that will tell how to
reach the vision.

3. Then the perspectives have to be identified. In some businesses, not necessarily all
four are relevant. In some areas, additional perspectives need to be measured.

• Financial perspective (how do we look to our shareholders?)

• Customers perspective (how do we look to our customers?)
• Internal business process perspective (what processes do we have to be good at?)
• Learning and growth perspective (how will we sustain our ability to improve
and change?)

4. Then critical success factors for all the perspectives have to be found out. Example:
for customers we have to deliver on time, financially we have to be cost-efficient, on
the development side we have to produce X amount of new ideas every week etc.

5. After the critical success factors are in place, they have to be measured somehow,
therefore all the measurement systems have to be figured out.

6. The next step is to go through appraisal of the established draft Balanced Scorecard
to identify whether it would start measuring the right things and assist the
management to steer the organisation to the right direction. It might be advisable to
establish a test field to simulate how the Balanced Scorecard would start to respond
to the actions taken.
7. Based on the preparatory work the detailed action plans should be created and
proper reporting systems have to be established to start operation of the Balanced
Scorecard.

8. Finally, it has to be remembered that the Balanced Scorecard is not a “finished

product”. It has to be amended, improved and changed whenever there is a need for
the organisation to change something in its vision or strategic goals.

The following chapter describes how to manage the construction of the Balanced
Scorecard step-by-step.

It has to be borne in mind, that the actual set-up of a particular Balanced Scorecard may
vary from organisation to organisation because of very close linkages to particular
establishment’s main functions, vision and strategy. For public non-profit organisations,
for instance, it would be necessary to replace financial part of the section of Balanced
Scorecard with employee empowerment perspective. Some other organisations may
need to add additional features to their Balanced Scorecard.

28
Figure - Creating a Balanced Scorecard

1. Identify Vision Define vision for the organisation/ entity

Which strategies shall we follow?

2. Identify Strategies
Which areas shall we focus on?

In which perspectives do we have to be good

3. Identify Perspectives
at?

4. Identify Critical What do we have to do well to manage in the

Success Factors of the
Perspectives
framework of those perspectives?

What should we measure at each of those

5. Identify Measures
perspectives?

6. Evaluate How do we evaluate our scorecard?

Which actions should we undertake to reach

7. Create Action Plans
our targets?

8. Follow up and How do we follow up, update and maintain

Manage our scorecard?
2.1. Establishing Strategy by Building up a Balanced Scorecard

2.1.1.Clarifying and Translating the Vision and Strategy

As each organisation is unique and so follows its own path for building a Balanced
Scorecard. From the management point of view it is also not particularly foreseen – it
might be set up using the standard project management techniques (preparation-
interviews-workshops-implementation-reviews) or be managed by a special unit that is
co-ordinating the overall implementation.

It is to be remembered that the vision of any organization should be understood by each

and every employee of the organization. If it is understood by the top management only,
then it is definite that the organization will fail to realize its goals. Hence, before
starting with the strategic implementation process, the organizations needs to be clear
about the reason for its existence, where it wants to see itself after a certain number of

30
years and properly decide its business definition. The managers should build a
consensus around the organisation’s vision and strategy. The strategies, in fact, emanate
from the vision and mission of the company which means that a linkage is formed
between the strategies of the different business units and the vision of the organization.
The lofty statements must be translated into an integrated set of objectives and
measures. The first task in building up the Balanced Scorecard is clarifying and
translating company’s vision and strategic goals.Thus, by using this tool, the overall
strategic objectives for the company gets clarified which helps to achieve consensus
across different business units on the overall strategic objectives for the company.

The overall purpose of the strategic management is to find a single priority long-term
goal which would serve as a basis in resource allocation and organisational
development. According to the Balanced Scorecard methodology, the first item that the
senior executives of a particular company should consider is the financial goal.

The executive team may decide whether to head for revenues or market growth,
profitability or cash flow generation.

31
The ABC of the strategic management suggests that there should be a structure to
strategy development that managers should follow. One systemised possibility of
strategic management tools is the acronym MOST (Mission, Objectives, Strategy and
Tactics). First, strategists should choose a mission – a long-term purpose for the
organisation. Then they should define short- and mid-term objectives that will move the
organisation on a path towards the mission. A strategy can then be developed to achieve
the objectives using short-term operating decisions, in other words – tactics, to
implement the strategy.

But the process of developing a winning strategy is much more messy, experimental,
and iterative than those simple models foresee. For example, to build up a Balanced
Scorecard’s customer-perspective, a company’s top executives may agree upon
providing superior service to its customers. As such, the vision is quite straightforward
and easy to understand for everybody. In formulating the customer objective to the
Balanced Scorecard, however, it might become clear, that each executive has a totally
different understanding on A) what a superior service is, and B) who are the specific
clients that it is going to be targeted at. The executives may thereafter decide, who is the
most desirable customer segment to the company and which area of services it might be
offered.

After the organisation has established its financial and customer objectives, it then
identifies the strategic objectives and measures for its internal business processes area.
This must be done in close co-operation with middle-level or operations managers to
ensure that the processes are in line with current possibilities of resource allocation.

The final link to be envisaged is learning and growth perspective, which reveals the
rationale for investments in training employees, in information technology and systems
that deal with research and development.

2.1.2.Communicating and Linking Strategic Objectives and Measures

Just communicating the vision and the strategies is not an end in itself. The strategic
goals and the measures to be set in the different areas have to be decided upon. The
long-term strategic goals have to be translated into both departmental and individual
goals which should be aligned to each other in order to realize the long-term goals. In

32
fact, each and everyone at different levels in the organizational hierarchy needs to be
educated about the action plans and reasons for accepting the same. The tool contains
three levels of information :

(i) It describes the corporate objectives, measures and the targets

(ii) It helps in deciding the business unit targets and

(iii) It helps in framing the departmental and the individual objectives which will
help in attaining the objectives of the business unit directly which would lead to the
attainment of the corporate goals. The employees are given the freedom to decide their
measures, objectives and the targets attainment of which would move the organization
in the right strategic direction. Then the compensation level is linked to the performance
level which in reality involves a lot of subjectivity.

The task is to inform all levels of the organisation about the initiative of establishing
the Balanced Scorecard. The communication serves three-fold goal. It forwards
information to all employees about the critical objectives that must be accomplished if
an organisation’s strategy is to succeed. Second, the employees need to analyse what
changes need to be made in current management of the customer relations, internal
business processes, and knowledge management. For example, a strategic initiative to
reduce product delivery might be translated into a Balanced Scorecard objective to
reduce set-up times at a specific machine, or to a goal for rapid transfer of orders from
one process to next, or fully entering into just-in-time concept. In this way, local
improvement efforts become aligned with overall organisational success factors.
Thirdly, it encourages dialogue back from business unit to executive teams, not just
about the sole implementation of the strategy but about the continuous future strategy
development.

At the final stage of the communication and linkage process, everybody in the
organisation should understand the business unit’s long-term goals, as well as the
strategy for achieving these goals.

The main aim of the communication and linking initiative is to let the middle
management define their internal business processes. For example: to satisfy the goal of

33
increasing the market share by 20 per cent we need to bring x new products to the
market with a targeted marketing campaign. The second aim is to let middle
management establish its learning and growth objectives. For example: to increase the
market share, we have to train our sales people and increase productivity by establishing
a Research and Development department.

Throughout communicating and linking phase, it is worth paying attention also to the
question on how to link salary bonus system or other motivation systems to the
achievement of goals. It might be recommended that the Balanced Scorecard could be
used as a single basis for bonus system. For example, sixty per cent of bonuses of
middle management might be based on financial measures (such as profit, return on
investment) and the rest of the bonuses might be based on customer satisfaction, partner
satisfaction or productivity or turnover of its subordinates.

Individuals at business unit level should have formulated local actions that contribute to
achieving overall company’s objectives.

All the organisational efforts and initiatives should be aligned to the needed change
processes, as the ideal corporate strategy should be set up bearing in mind the principle
that every decision has to support the achievement of strategic objectives. All other
decisions are either wrong or irrelevant.

2.1.3.Planning, Setting Targets and Aligning Strategic Initiatives

The third management task to do is to drive organisational change. The executive team
should establish targets for the Balanced Scorecard measures that will transform the
company. The targets should represent a discontinuity in the performance of business
units. In other words, the goals to be set have to be so-called BHAG-s (big, hairy,
audacious goal). One might dream of making his brand more popular than Coke,
another aspires to create the most lucrative Web site in cyberspace. To achieve such
ambitions financial or customer or trademark objectives, managers must identify stretch
targets for their customer, internal-business-process, and learning and growth
objectives. These targets can come from several sources. It is possible to use
benchmarking, brainstorming etc.

34
This step helps in the resource allocation process. One has to keep in mind that
objectives form an important criteria in deciding the quantum of resources that are
required to be allocated to the various departments, activities and the processes. No
strategy can bring successful results to an organization if the allocation is not in line
with what is required to meet the results. This allocation is dependent on the budgeted
estimates which are decided on the basis of the said objectives. Hence, through this step
the Balanced Scorecard tries to bring about an integration between strategic planning
and the budgeting exercise. The short-term milestones are also needed to be figured out
which in totality brings about a linkage between strategic goals and the budgets. This
procedure helps in actualizing what has been set by the organization. Thus, this step
brings about a shift from the ‘thinking’ exercise to the ‘doing’ stage and the organization
tries to achieve the long-term goals through the short-term actions.

Once targets are established, managers can align their strategic quality, response time
and re-engineering initiatives for achieving the breakthrough objectives. Thus, the
Balanced Scorecard provides the front-end justification, as well as focus and integration
for continuous improvement, re-engineering, and transformation programmes.

To distinct from simple slogans of business re-engineering and other management fads,
it has to be kept in mind that all those initiatives have to be analysed and identified
whether they are critical to company’s strategic success. It is a way of continuous series
of cause-and-effect work embodied with the Balanced Scorecard, those capabilities
eventually have to become translated into the overall strategy. Company may have to
tackle with a series of serious constraints in doing so.

Many organisations may encounter usual problems that they have established vision and
strategic objectives but to fulfil them they are unable to find particular methods. By
using Balanced Scorecard in close connection with budgetary process, it can be assured
that all the tasks that are necessary to achieve objectives will also receive the necessary
funding.

The Balanced Scorecard also enables a fundamental change in letting the organisation to
integrate its strategic planning with its annual budgeting process. At the time when a
business establishes 3-5 year stretch targets for the strategic measures, managers may
also forecast milestones for each measure during the next fiscal year.

35
The second possibility is to monthly analyse all the operations and their accordance to
fulfilment of strategies and responding funding.

Overall, the initiative should achieve that:

• long-term outcomes are quantified;

• mechanisms for fulfilment those outcomes are identified and possess the necessary
financing and

• short-term milestones have been set for the financial and non-financial measures of
the Balanced Scorecard.

It might be advisable to analyse the possibilities of using various catalytic mechanisms

to drive performance of the company.

2.1.4.Enhancing Strategic Feedback and Learning

The first three steps as mentioned above help in the strategic implementation process.
But, for knowing whether the organization is in a position to achieve the strategic goals
and whether it is in the right track, the process of feedback and learning is essential. The
strategic learning consists of acquiring knowledge about which way the organization is
moving to, testing whether the premises considered before hold true even now and
finally making adjustments wherever required. The corrective measures are required so
that the necessary rectifications are made which will help an organization pursue the
correct path.
Another point is that an organization gets to know whether the cause-and-effect
relationships among the different perspectives really hold true, to what extent they are
strongly linked and also whether positive results are being obtained. In case, an
organization realizes the existence of a gap in the cause effect relationships, an
immediate correction would be required so that a positive relationship can be build
among the various factors. Thus, the tool with its specification of the causal
relationships between performance drivers and objectives allows corporate and the
business unit objectives executives to use their periodic review sessions in order to
evaluate the validity of the unit’s strategy and the quality of its execution. Also, this
feedback and learning exercise may force an organization to change the measures set in

36
each of the perspectives and adopt those, which if attained would ensure the success of
the corporate and the business strategies.

The last management process embeds the Balanced Scorecard in a strategic learning
framework. This process might be considered the most innovative and most important
aspect of the entire Balanced Scorecard management process. This provides the
capability for organisational learning at all levels. Managers in organisations today do
not have a procedure to receive feedback about their strategy and to test the hypotheses
on which the strategy is based. The Balanced Scorecard enables them to monitor and
adjust the implementation of their strategy, and, if necessary, to make fundamental
changes in the strategy itself.

One of the main distinctive qualities of the Balanced Scorecard is to give constant
response about achievement of strategic and short-term objectives. Some ten years ago,
it was customary to do strategic decisions about once in three months. As today’s
business environment is so rapidly changing, it is necessary to take strategic decisions
in fact, every day to safeguard the flexibility to changes in the market.

First, it makes possible to rephrase so-called shared vision, where the opinions of all the
levels of the organisation could be taken account in defining strategic goals and
methods on achieving those.

Second, it gives continuous strategic response to the managing team. By foreseeing

short-term milestones, it might be necessary to amend long-term strategy’s timeline and
contents, as the latter may be either too optimistic or too pessimistic.

Third, it speeds up the process of finding the cause-and-effect relationships between

different Balanced Scorecard components. For example: working morale may have a
very strong impact on client satisfaction, which could be unknown for the senior
management. This in turn may lead to discovery of new cause-and-effect relationships.
For example: between client satisfaction rate and the speediness of submitting invoices.
Finding all kinds of correlations definitely helps to clarify and improve the content of
strategic goals and tactical steps.

To be more specific, the goal of the process is to establish an ongoing and continuous
improvement cycle, which starts with the first process in the Figure - Balanced

37
Scorecard as a Strategic Framework for Action. The first step is the clarification of a
shared vision that the entire organisation wants to achieve. The use of measurement as a
language helps translate complex and frequently nebulous concepts into a more precise
form that can gain consensus among senior executives. The communication and
alignment process, the second process in the Figure 2, mobilises all individuals into
actions directed at attaining organisational objectives. The emphasis on cause and effect
in constructing a scorecard introduces dynamic systems thinking. It enables individuals
in various parts of an organisation to understand how the pieces fit together, how their
role influences others and, eventually, the entire organisation. The planning, target
setting, and strategic initiative process – the third process in the Figure 2 – defines
specific, quantitative performance goals for the organisation across a balanced set of
outcomes and performance drivers. A comparison of the desired performance goals with
current levels establishes the performance gap that strategic initiatives can be designed
to close. Thus the Balanced Scorecard not only measures, but also even fosters change.
The first three critical management processes are vital for implementing a strategy, but
they alone would not be adequate in the real world.

Thus the learning and growth initiative has to be carried out in order to ensure
continuous improvement. That kind of continuous improvement may remind also
Deming’s so-called Plan-Do-Check-Act cycle. Please look at Figure – Possible Steps to
Go Around the Balanced Scorecard for more detailed description.

38
Figure – Possible Steps to Go Around the Balanced Scorecard

1 Clarifying and
5 Translating the Vision
and Strategy 8
Clarifying the vision
9 Gaining concensus
4

Communication and Linking 10 Strategic feedback and learning

Communicating and educating Articulating the shared vision
Balanced
Setting goals Supplying strategic feedback
Scorecard
Linking rewards to performance Facilitating strategy review and
measures learning

2
6
Planning and Target Setting 7
Setting targets
Aligning strategic initiatives
Allocating resources 3
Establishing milestones
2.1.5.Conclusions and Recommendations – How Many Measures to Choose?
After the measures have been set for all the perspectives, the organisation may face the
problem of having either too little or too many items to measure. To illustrate this
problem, the author would like to cite Norton and Kaplan.

Many aspects of our bodily functions must perform within narrow operating parameters
if we are to survive. If our body temperature departs from a normal 1-2deg window
(away from 37degrees Celsius) or if our blood pressure drops too low or escalates too
high, we have a serious problem for our survival. In such circumstances, all our energies
(and those of skilled medical professionals) are mobilised to restore these parameters
back to their normal levels. But we don't devote enormous energy to optimising our
body temperature and blood pressure. Being able to control our body temperature to
within 0.01deg of the optimum will not be one of the strategic success factors that will
determine whether we become a chief executive of a company, a senior partner in an
international consulting firm, or a tenured full professor at a major university. Other
factors are much more decisive in determining whether we achieve our unique personal
and professional objectives. Are body temperature and blood pressure important?
Absolutely. Should these measurements fall outside certain control limits, we have a
major problem that we must attend to and solve immediately. But while these
measurements are necessary, they are not sufficient for the achievement of our long-run
goals.

Similarly, corporations should have hundreds, perhaps thousands, of measures that they
can monitor to ensure that they are functioning as expected and that will signal when
corrective action must be taken. But these are not the drivers of businesses' competitive
success. Such measures capture the necessary "hygiene factors" that enable the
company to operate. These measures should be monitored diagnostically with
deviations from expectations noted rapidly; in effect, management by exception.

The outcome and performance driver measures on the Balanced Scorecard should be the
subjects of intensive and extensive interactions among senior and middle-level
managers as they evaluate strategies based on new information about competitors,
customers, markets, technologies, and suppliers. Unlike the strategic measures selected
for inclusion on the Balanced Scorecard, diagnostic measures are not the basis for
competitive breakthroughs. As one executive remarked, after he had implemented his
first Balanced Scorecard:

"Our division had always measured hundreds of operating variables. In building a

Balanced Scorecard, we chose 12 measures as the key to implementing our strategy. Of
these 12 measures, seven were entirely new measurements for the division."

Choosing the right measures and right number of measures is definitely one of the most
crucial parts in building up a Balanced Scorecard. Usually the set of 15-25 measures is
identified as optimal, as for a single person in an organisation 6-8 measures to follow is
the maximum ceiling. In the case that the organisation uses an IT system to follow the
developments according to the Balanced Scorecard, the number may also rise
accordingly. But it is impossible to give an optimum, for this is also up to the specifics
of a particular establishment.

2.2. Testing the Balanced Scorecard

2.2.1.Analysing Outcomes and Performance Drivers

All Balanced Scorecards use certain generic measures. These generic, or core outcome,
measures reflect the common goals of many strategies, as well as similar structures
across industries and companies. The generic measures include profitability, market
share, customer satisfaction, customer retention, and employee skills. The drivers of
performance are the ones that tend to be unique for a particular business unit. The
performance drivers reflect the uniqueness of the business unit's strategy: the drivers of
profitability, the market segments in which the unit chooses to compete, the value
propositions delivered to customers in the targeted market segments, and the particular
internal processes and learning and growth capabilities that enable the financial and
customer objectives to be achieved.

A good Balanced Scorecard should have a mix of core outcome measures and
performance drivers. Outcome measures without performance drivers do not
communicate how the outcomes are to be achieved. They also do not provide an early
indication about whether the strategy is being implemented successfully.

41
Conversely, performance drivers (such as cycle times and part-per million defect rates)
without outcome measures may enable the business unit to achieve short-term
operational improvements, but will fail to reveal whether the operational improvements
have been translated into expanded business with existing and new customers-and,
eventually, into enhanced financial performance. A good Balanced Scorecard should
have an appropriate mix of core outcome measures and the performance drivers of these
outcomes.

2.2.2.Analysing Cause and Effect

A strategy is a set of hypotheses about cause and effect. Cause and effect relationships
can be expressed by a sequence of if-then statements. For example, the organisation can
establish a link between improved sales training of employees to higher profits through
the following sequence of hypotheses. If organisation increases employee training about
products, then they will become more knowledgeable about the full range of products
they can sell. If employees are more knowledgeable about products, then their sales
effectiveness will improve. If their sales effectiveness improves, then the average
margins of the products they sell will increase.

A properly constructed Scorecard should tell the story of the business unit's strategy.
The measurement system should make the relationships (hypotheses) among objectives
(and measures) in the various perspectives explicit so that they can be managed and
validated.

The chain of cause and effect should pervade all four perspectives of a Balanced
Scorecard. For example, return on capital employed (ROCE) may be an outcome
measure in the financial perspective. The driver of this financial measure could be
repeat and expanded sales from existing customers, the result of a high degree of loyalty
among existing customers. So, customer loyalty gets put on the Scorecard (in the
Customer perspective) because it is expected to have a strong influence on ROCE. How
will the organisation achieve customer loyalty? Analysis of customer preferences may
reveal that on-time delivery (OTD) of orders is highly valued by customers. Thus,
improved OTD is expected to lead to higher customer loyalty which, in turn, is expected
to lead to higher financial performance. So both customer loyalty and OTD are
incorporated into the customer perspective of the Scorecard.

42
The process continues by asking what internal processes must the company excel at to
achieve exceptional on-time-delivery. To achieve improved OTD, the business may
need to achieve short cycle times in operating processes and high-quality internal
processes, both factors that could be Scorecard measures in the internal perspective.
And how do organisations improve the quality and reduce the cycle times of their
internal processes? By training and improving the skills of their operating employees,
an objective that would be a candidate for the learning and growth perspective.

In a very similar vein, recent work in the service profit chain has emphasised the causal
relationships among employee satisfaction, customer satisfaction, customer loyalty,
market share, and, eventually, financial performance.

Steps included in the Phase of Testing the Results of BSC Implementation

Testing phase of BSC implementation holds its unique position in the overall BSC
concept. Again as applicable for other processes, it should too be instigated with a
focused approach to eventually complete it successfully. The Testing phase
encompasses of a 3-step process to be followed by the businesses as mentioned below
as mentioned below:

 Preparations prior to initiating the testing phase. The hypotheses underlying the BSC
have to be explored to the maximum extent possible. Better formulation and
implementation of strategy is achieved by proceeding with this step.

 Determining the results of parameters of Balanced Scorecard. This step of the result
testing phase of BSC implementation aimed at calculating the actual results of the
company and comparing it with the values of parameters. Divergence in the results
are found out which finally enables the company to know what its current position is
and where it wants to be in the future. Devising the ways to correct the performance
of the BSC is also done in this step.

 Updating the core elements of Balanced Scorecard. The core elements of BSC
comprises of the objectives, strategies, measures and targets. Time to time update is
what is invariably required for efficient usage of the balanced scorecard. Changes in
the business environment may call for updating the core elements to help the

43
 company in staying focus towards the achievement of end goals. Updating is also
required when the company requires improving the understanding of its employees
regarding the BSC concept.

2.3. Establishing Action Plan

2.3.1.Setting up Catalytic Mechanisms

After the process of initial setting up the Balanced Scorecard, it is advisable to establish
various catalytic mechanisms to drive organisation’s performance towards achieving the
strategic goals.

One of the possible examples to be analysed is 99-year-old Californian based company

Granite Rock, that sells crushed gravel, concrete, sand, and asphalt. Twelve years ago,
when brothers Bruce and Steve Woolpert become co-presidents, they gave their
company a goal to provide total customer satisfaction and achieve a reputation for
service that met or exceeded that of Nordstrom, the upscale department store that is
world famous for delighting its customers.

They instituted a radical new policy called “short pay.” The bottom of every Granite
Rock invoice reads, “If you are not satisfied for any reason, do not pay us for it. Simply
scratch out the line item, write a brief note about the problem, and return a copy of this
invoice along with your check for the balance.” To put the radical nature of short pay in
perspective, imagine paying for airline tickets after the flight and having the power to
short pay depending on your travel experience.

In the years since it was instituted, short pay has had a profound and positive impact on
Granite Rock. It serves as a warning system, providing hard-to-ignore feedback about
the quality of service and products. It impels managers to relentlessly track down the
root causes of problems in order to prevent repeated short payments. It also signals to
employees and customers alike that Granite Rock is serious about customer satisfaction
in a way that goes far beyond slogans.

Moreover, it has had success, as has been widely reported. The company has
consistently gained market share in a commodity business. It has won the prestigious

44
 Malcolm Baldrige National Quality Award in 1992. In addition, its financial
performance has significantly improved from razor-thin margins to ratios above 10 per
cent.

The above however was just a single good example on how it is worthwhile to
sometimes consider unorthodox ideas to better satisfy the needs of the customers.

Malcolm Baldrige Balanced Scorecard

Learning & Growth

Leadership
Perspective
Human Resource Capital Learning & Growth
Perspective
Business Results Measurements and
Targets
Process Management Internal Process
Perspective
Strategic Planning Strategy Map

Customer Focus Stakeholder / Customer

Strategic Planning
Perspective

45
3. Implementing a Balanced Scorecard as a Management System

Step 1. Examine company before Balanced Scorecard Implementation

1. The SWOT Analysis.

SWOT Analysis. Objectives.

• Learning. SWOT analysis offers and opportunity to observe the operations of

the organization in the light of internal and external factors, both favorable and
unfavorable. This eases the process of making out what pays and what does not.

46
 • Planning. When one gets to know the problematic areas of the step taken, back-
up plans can be arranged beforehand. This would definitely decrease the
possible hindrances of the path.

• Reaping Benefits. In addition to having contingency measures, one can also put
in place systems to extract maximum from the opportunity that lies ahead.

• Integrating external and internal factors. Analyzing the picture from both
perspectives, one can align pieces so as to be able to convert challenges to
opportunities to make the most of strengths.

It has to be mentioned that it is fairly simple to create just a scorecard, but to create a
manageable Balanced Scorecard is a completely different thing. Some examples of the
failure to introduce the Balanced Scorecard have been linked to the fact that the
executives have viewed the Balanced Scorecard as simply a measurement system, not as
a new way to manage the business. Measurement as such is indeed a powerful
motivational and evaluation tool, but the measurement framework in the Balanced
Scorecard should be deployed to develop a new management system.

Using the Balanced Scorecard as a management system enables it to overcome the

deficiency of most of the measurement systems – it enables to implement and receive
feedback about organisation’s strategy.

A test of whether a Balanced Scorecard truly communicates both the outcomes and the
performance drivers of a business unit's strategy is its sensitivity and transparency. One
division president reported to his parent company's president when he turned in his first
Balanced Scorecard:

"In the past, if you had lost my strategic planning document on an airplane and a
competitor found it, I would have been angry but I would have gotten over it. In reality,
it wouldn't have been that big a loss. Or if I had left my monthly operating review
somewhere and a competitor obtained a copy, I would have been upset, but, again, it
wouldn't have been that big a deal. This Balanced Scorecard, however, communicates
my strategy so well, that a competitor seeing this would be able to block the strategy
and cause it to become ineffective."

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3.1 Advantages of Using The Balanced Scorecard

This tool is being used by several organizations throughout the world because of certain
advantages this scorecard has been able to deliver which are cited below :

1. It translates vision and strategy into action.

2. It defines the strategic linkages to integrate performance across organizations.

3. It communicates the objectives and measures to a business unit.

4. It aligns the strategic initiatives in order to attain the long-term goals.

5. It aligns everyone within an organization so that all employees understand

how they support the strategy.

6. It provides a basis for compensation for performance.

7. The scorecard provides a feedback to the senior management if the strategy is

working.

3.2 Potential Pitfalls

It is said that 50% of the Fortune 1000 companies have adopted the balance scorecard
methodology into their system. The balance scorecard technique helps in identifying the
areas and products that are financially viable and successful. This helps the management
in deciding their long term strategy with the various customers

Introducing the system without having any objective in mind is a major cause for the
failure in reaping the advantages of this system. The objectives that are to be achieved
must be well defined and communicated to all the parties involved in the attainment of
the same. The attainment of the strategy is possible by having a well drafted strategy
map which contains a set of objectives that must be arrived at to attain the overall
objectives of the company. A badly designed strategy map results in a confusing
scorecard

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As the business world is highly volatile the strategy must incorporate the changes in the
fast moving world. The company must be capable of taking the advantage of the
opportunities that open up before them. This calls for the changes in the existing system.
The major step to welcome the change must be taken by the top management. The
scorecard technique if is to be successful requires the full support and the commitment
of all levels of the management hierarchy. But in most cases the top management
delegates the task to other members leading to the failure in the implementation.

The cost and time taken for the deployment of the balanced scorecard is generally high.
It is said that the total amount of time for the initialisation of the first step takes about
two to three months and the complete deployment will take about 26 months to start
functioning. As the employees have to be educated on the changes in the system and
must be made efficient to meet the challenges. The system calls for continuous training
which takes up a great deal of cost and money. The failure to have an on-going training
facility to make the employees adept to exploit the opportunities as and when necessary
makes it ineffective. However, if successfully implemented, the scorecard can create a
higher return of income and a lower amount of waste.

The successful implementation of the scorecard depends on the knowledge of the

employees about the advantages of having it installed. The implementation is possible
only with the support for the system from all the employees involved in the actual
functioning of the business.

To be useful the scorecard must incorporate all the strategies of all the divisions of the
business and it must not be biased to any particular division. In most cases the
involvement from all active divisions is absent, thereby making it ineffective.

The scorecard requires the company to incorporate all the changes in the outside world
which have a direct impact on the company functions. This makes it difficult to conform
to the existing planning and budgets allocated.

The implementation of the balanced scorecard is a challenging work for which the
support of all the employees is vital to make it productive.

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The following are potential pitfalls that should be avoided 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 only 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 describe past performance, but also leading measures that can be used to
plan for future performance.

• Use of generic metrics: It usually is not sufficient simply 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.

4 Case Studies on Implementing a Balanced Scorecard

4.1 BUILDING AND IMPLEMENTING A BALANCED

SCORECARD CASE STUDY :- UNUM CORPORATION

Summary

Disability and special risk insurer UNUM Corporation has used a balanced scorecard to
drive the company towards its strategic vision. Crucially, the five-year scorecard was
devised to meet specific performance targets to the year 1998. A near-obsessive focus
on internal communications and an innovative compensation scheme have proved
intrinsic to the company’s success.

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Introduction

Headquartered in Portland, Maine, USA, UNUM Corporation provides

disability and special risk insurance solutions to individuals and
businesses. UNUM (which means ‘one’ in Latin) has about 7200
employees and operations in the US, Canada, the UK, the Pacific Rim,
Europe, Bermuda and Latin America.
Reporting total revenues of $4,076,700 in 1997 and net income
of $370.3 million, the company’s subsidiaries include UNUM Life
Insurance Company of America, First UNUM Life Insurance Company;
Commercial Life Insurance Company; Duncanson & Holt, Inc; Colonial
Companies, Inc and Colonial Life & Accident Insurance Company.

‘61592’ Corporate Goal

Founded in 1848 with the principle to ‘find a better way’ UNUM was
listed on the New York Stock Exchange in November 1986. At that
time the company, under the direction of chairman and chief
executive James Orr III, set its first corporate-wide goal, articulated as
61592 - to earn six dollars a share with 15 per cent return on equity
by 1992. This was achieved one year ahead of schedule, largely
because, as Eileen Farrar, vice president, human resources, states,
“We have a highly committed and motivated workforce who saw the
61592 goal as a powerful rallying point.”

Setting ‘Balanced’ Goals

With the goal achieved, and recognizing the power of goals as

mechanisms for breakthrough performance improvement, James Orr
and his team set out to develop new goals for the corporation.
However, this time there would be a significant difference in how the
goals would be focused and articulated. Farrar explains:

51
“By 1991 we had, through growth and acquisitions become a much more complex
organization and the chairman recognized that a single focus on a financial result would
be difficult to communicate effectively and would not reflect the diverse challenges of
the corporation. Consequently he decided that we needed a set of goals that would be
meaningful to all employees, that would focus their energies on improving customer-
facing performance and would improve further shareholder returns. In short, he wanted
a balanced set of measures that would reflect the interests of all UNUM’s stakeholder
groups.”

To achieve this, Orr created an organizing team of 13 senior managers

from throughout the corporation to develop this new set of ‘balanced’
goals and measures.
Says Farrar:

“The chairman told the team that he wanted financial, customer, employee and
productivity targets, gave it a budget and, most importantly, his whole-hearted support.
He made it clear that this was absolutely vital for the long-term success and growth of
the company.”

Over the next eight months, the team educated itself on the balanced scorecard and on
the business challenges then and how these may develop through to 1998 (the 150th
anniversary of the company). Farrar commented that this was an intense time as the
team did not leave their regular jobs. Rather it met about twice a month and kept in
constant contact through internal communication mechanisms such as Lotus Notes.To
design the scorecard sub-committees were set up for each focus area, owned by a
particular function, for example HR owned the ‘people’ perspective. This subcommittee
sought input from employees throughout the organization and a draft set of goals and
measures were tested at all levels of the company.
Although some outside experts, such as the well-known academic David Garvin
of Harvard University, were used to facilitate several of the early meetings, it was the
team itself which owned the process and chose the final set of interlocking goals and
measures, which were rolled out into the organization in 1993.

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Corporate Vision

Before presenting UNUM’s balanced scorecard it is worth pointing out

that, as with all the best practice companies profiled for this Report,
UNUM’s strategic goals and measures are to support a clearly defined
and meaningful corporate vision. As shall be explained later, the
corporation has a specific vision statement
for each of its four scorecard perspectives.

UNUM’s corporate vision is, ‘We will achieve leadership in our

businesses.’
Although a generic statement which could be applied to any company
in any market, UNUM supports this statement with a clear description
of what this vision means to UNUM. It says:
“Leadership does not necessarily mean a dominant market share. Rather, we will
achieve leadership in areas that are meaningful and important to our business and the
market (eg profitability, quality, reputation).
“We will focus our business on special risk-relieving products for which we can
establish and sustain profitable positions. Development of these products will be driven
by the needs of the customer, in both domestic and international markets.” As well as
Leadership, UNUM’s vision has three other elements. First, ‘We will be
a products-offered company’. Supporting this are explanatory
statements such as:

• “Developing products that meet customer needs and leveraging our

expertise
and strengths. Our product development efforts will focus on
providing the right solutions.

• “Developing our products in a high quality and efficient manner

utilizing existing and new channels.”

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Second, there is a vision of what UNUM will ‘be known for’. This
includes:
• Superior knowledge, expertise and risk management.
• Being responsive to the needs of customers and intermediaries.
• Being reliable, dependable and trustworthy.
• Providing the right solutions to current emerging needs.

And finally, UNUM’s vision includes ‘We will be a well-managed

company’.
The definition of which is:

• Consistently growing profits, efficient cost-structure, leadership

returns and financially sound.
• Anticipating, shaping and effectively responding to relevant external
forces and events.
• Making decisions in the best long-term interests of our stakeholders.
• Planning well, making clear and sound business decisions.

The Power of Corporate Values

Furthermore, within UNUM, corporate values play a key part in

creating a culture where employees are motivated towards achieving
breakthrough business performance.
These values are clearly articulated and disseminated to all
employees.

1.We take pride in ourselves and the organization’s leadership

position.

• Acting with integrity and high ethical standards.

• Achieving leadership in performance, the community and the
industry.
• Setting and meeting individual goals consistent with business goals,
and owning our individual performance.
• Being motivated and excited about the organization.

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• Believing in what we are doing.
• Emphasizing the positives, celebrating successes and strengths, and
con stantly striving to improve our performance.
• Delivering results.

2. We value and respect people.

• Dealing with each other as individuals and treating each other as we

would like to be treated.
• Developing people to their fullest potential.
• Working together in a common endeavour; recognizing each other
as important elements to the success of the whole.

• Having a common understanding of each other’s roles and how we

fit with corporate objectives.
• Collaboration with each other and having a sense of team.
• Recognizing and accepting differences among people, but sharing
the same values.

3. We value customers.

• Building long-term relationships with our customers and

intermediaries.
• Maintaining a strong orientation to service and the customer.
• Delivering what we promise.

4. We value communication.

• Communicating clearly, consistently, and openly with everyone we

dealwith.
• Building an environment that encourages open communication,
partici pation, honesty and candour.
• Listening.

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Balanced Scorecard

UNUM’s balanced scorecard consists of four perspectives:

• UNUM people

• Operating effectiveness

• Customer satisfaction

• Shareholder value.

Each perspective has a vision, quantitative measure and goal.

Crucially – and what makes the UNUM scorecard a particularly
powerful strategic implementation framework - the scorecard aims to
focus the organization onto time-sensitive achievements. Therefore
two of the goals define measurable results by 1998, and the
scorecard itself is referred to as ‘Goals 1998’. Says Farrar, “Specifying
a year by which we reach our goals worked well for the 61592 goal
because it gave employees something definite to aim for, so it
seemed sensible to take the same approach.”
UNUM’s balanced scorecard is shown below

.UNUM Balanced Scorecard

UNUM people

Vision:

We will have the mind of a customer and the pride of an owner.

Quantifiable measure:

A benchmark survey will integrate the company’s employee surveys

into a tool for gauging progress.

Goal:

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Our goal is to improve annually on the score established by the
benchmark survey. In addition, we will monitor our progress towards
the goal on an ongoing basis through formal and informal gathering of
employee opinions.

Operating effectiveness

Vision:

We will increase customer value by rethinking, improving and

streamlining our business processes.

Quantifiable measure:

Operating costs will grow at no more than one-half the rate of the top
line.

Goal:

By 1998, our total operating costs ratio will be reduced by

approximately one-third.

Customer satisfaction

Vision:

UNUM will provide the best value in offerings matched to customers’

needs in the markets we choose to serve.

Quantifiable measure:

Each UNUM area with an external customer chain will develop a

customer value measurement tool. It will be aimed at determining our
customers’ assessment of the overall value of our products and
services.

Goal:

57
We will continually improve our customers’ perception of the value of
UNUM’s offerings so that the number of customers who DO NOT rate
UNUM as ‘very good’ will have declined by 40 per cent when we
compile our final measurement in 1998.

Shareholder value

Vision:

We will deliver consistently superior long-term value to UNUM

shareholders.

Quantifiable measure:

Shareholder value will be measured in terms of total return - ie

dividends plus share price appreciation.

Goal:

We will achieve a total return that consistently places UNUM among

the top 125 companies listed on the Standard & Poor’s 500.

Internal Communications

An absolute prerequisite, according to Farrar, for achieving corporate

goals and for making the scorecard meaningful to all employees is
investing significant energy and time into employee communications.
Farrar believes that implementing a scorecard is a process of
relentless communication
and education, and it must be explained in ways that make sense
within the context of the employee’s own working environment.
At a corporate level, the company has defined exactly what it
means by each of

58
its scorecard perspective visions. Starting with, ‘We will have the mind
of a customer and the pride of an owner’ as the vision for the UNUM
people perspective, the company has communicated throughout the
organization that this requires UNUM employees to:

• think like a customer

• be interested in results

• discover better ways

• live by our word

• continuously grow and learn

• strive together towards our goals

• feel accomplished and recognized

• value differences

• master change

• share and listen.

UNUM is realizing this in a number of ways. First, there is the

benchmark survey which measures employees’ perception of whether
these behaviours are indeed being ‘lived’ within the organization. The
goal being to increase the number of employees who agree that these
behaviours are being practised at UNUM and decrease the number of
employees who disagree or who are not sure that these behaviours
are part of daily life at UNUM.
Second, employees within UNUM America developed a trust
workshop which
focused on what barriers existed within the work unit or company to
stop employees trusting managers. This identified the key issues and
the findings were shared throughout the organization. A 360 degree
appraisal system, through which managers are appraised by, for

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example, their direct reports as well as their superiors, helps further
ensure managers are aligned to corporate behaviours.

1998 Goals Stock Option Plan

However, perhaps the most powerful, and innovative, vehicle by

which employees are encouraged to ‘have the mind of a customer
and the pride of an owner,’ and indeed focus their minds squarely
onto achieving the 1998 goals, is UNUM’s ‘1998 Goals Stock Option
Plan’. The 1998 Goals Stock Option Plan was launched in January
1995. Each UNUM employee was provided with a stock option grant of
$18 per share to
purchase 300 UNUM shares once the grant was vested (a decreasing
number of shares has been provided to employees hired post-launch).
The date of vesting of the 1998 Global Stock Option Plan will depend
on the level of progress UNUM has made on its 1998 goals. In the
event of the 1998 goals not being met, vesting of the 1998 Goal Stock
Option Plan will automatically occur nine years after the grant date.
Farrar commented, “This has really helped employees to think like
owners. Financial results are disseminated to all employees quarterly,
and how the plan works has been clearly explained.”
One communication medium for this is ‘Knowing Your Options: a
guide for
employees to UNUM’s 1998 Goals Stock Option Plan’ which outlines
how the plan works and offers employees a telephone number and e-
mail address for further information.
Farrar feels that as owners of UNUM, employees can better
contribute to and

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share in UNUM’s success by better understanding how the business
works - how UNUM makes money, and how the money is invested to
grow the company.

A further compensation mechanism used to focus employees’

attention onto the 1998 goals is the annual bonus, part of which is for
achievement against annual goals and part for progress against the
1998 goals. To make the vision of the operating effectiveness
perspective (‘We will increase customer value by rethinking,
improving and streamlining our business processes’) meaningful,
UNUM has communicated throughout the organization an outline of
how employees can contribute to attaining this goal. Statements
include: ‘Bending Over Backwards’, which within a corporate
information pack the company explains as:

Says Farrar:

“This is how we achieved the 61592 goal one year ahead of schedule! And, it’s
precisely the way we will meet our operating effectiveness goal and each of our ‘98
goals.We will succeed only with the commitment of every member of the UNUM team.
And, we will look to each other - every UNUM employee – for leadership and creativity
in improving our operating processes.
“When we talk about operating effectiveness, we are not just talking about taking costs
out, but deploying money and resources in the most effective way and constantly
comparing our performance against that of our competitors.”

Chairman’s Involvement

To contribute to this perspective, and indeed the other perspectives,

the chairman regularly charges teams to focus on developing some
area of best practice, for example within disability insurance, in order
to look at how best this area can be improved and to share

61
information throughout the organization. This is just one way that
James Orr demonstrates leadership and personal involvement in the
Goals 98 programme. He also holds an annual chairman’s review, in
which he meets with a group of employees representing each
operating company or function to discuss how the employees
perceive progress towards the goals. Employees are drawn from
different organizational levels
each year and, says Farrar, are encouraged to speak candidly. The
chairman has also articulated a set of questions which are used
throughout the organization to ensure that the 1998 strategic goals
remain the key focus of employees. These include:

Overall

• What is the overall level of understanding of the ‘98 goals within the
organization?

• What are the benchmarks for the planned progress towards the ‘98
goals within the organization?

• What are additional enterprise-wide support needs?

• What are the ‘best practices’ which can be shared with other UNUM
organizations?

People goal

• What actions are being taken, and what are the results? What are
the challenges to employee understanding?
• What are the measures used to assess the progress between
corporate surveys (real-time metrics)?
• What is the composition of agreement/disagreement statements,
and how is this being addressed?

Customer satisfaction

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• What are the current dynamics of the market place? How is this
changing UNUM’s customer needs and satisfaction?
• How is the ‘voice of the customer’ being heard? What are the
measurements used to track customer satisfaction?
• What efforts are under way to better understand customer needs
and provide ‘best value’?

Operating effectiveness

• What steps are being taken to grow the top line?

• What are the key processes being worked on?

• Why were they selected? How do current efforts enhance value

from the customer’s perspective?

• What sharing/leveraging of strengths is taking place across the

enterprise?

• What economies of scale are being realized?

Shareholder value

• Discuss return on equity target trends if appropriate.

The chairman’s belief in the scorecard was clearly shown in UNUM’s

Annual Report 1997 where, in his letter to the shareholders, he
outlined progress against each of the scorecard perspectives. For
example, regarding the customer satisfaction perspective, he said:

“1997 was a year of profound learning for our organization,

particularly in terms of serving our customers. We know it is not
enough to keep our customers merely satisfied. To keep customers
coming back, to remain competitive, we must earn customers’ loyalty.

“In fact, customer loyalty is one of the greatest growth levers

available to UNUM. For example, typical long-term disability

63
customers create twice as much value for our organization in the
second five years they are with UNUM than in the first five years....
“As a result of these learnings, and in support of our 1998 Customer
Satisfaction Goal, UNUM employees focused on further developing the
‘Mind of a Customer’ in 1997, and the results were outstanding.What
started out as an experiment - to reach out to our customers through
our new Customer.

Loyalty and Satisfaction Center - turned into a tremendous success

and a critical
lever for accelerating growth.
Customer satisfaction is articulated within UNUM as:

• putting our customers first in all that we do

• listening carefully to find out what they really want

• anticipating what they need

• Meeting, even exceeding their needs and expectations in all of our

contacts
and with all of our products and services.

The Money Machine

For the shareholder value perspective UNUM has communicated to all employees what
investors are looking for and why this perspective is important. By making Shareholder
Value a goal, they have given investors, stockbrokers and financial analysts a ‘yardstick’
by which UNUM’s progress toward its other stated goals can be measured. Their
attitude is that companies that meet their goals win favour with investors and therefore
enjoy a more favourable capital position.
To communicate the scorecard holistically UNUM’s finance function has
designed an easy to understand presentation entitled ‘Money Machine’, which includes
a textual explanation of how UNUM makes money and a graphic that walks through the

64
whole organization process from sales to customers to the payment of shareholder
dividends. Says Farrar, “The money machine shows where opportunities for making
profit exist and, importantly, people can see themselves in that continuum.”

Deployment

For deployment of the corporate scorecard, each operating unit is charged with finding
its own way to achieving the strategic goals.
Farrar maintains that:
“It is up to the management of each company to decide on the most effective way to
move that company towards strategic goals. At unit level, it is the responsibility of the
manager to roll the unit’s goals back to company and corporate goals. However, annual
business goals will not be accepted unless they represent progress towards our corporate
goals.”
Alignment is further ensured through UNUM’s performance contracts, all of
which, from the chairman down, have the same categories as the corporate scorecard.
Says Farrar:
“Individual objectives support the scorecard goals, so you can see the line of sight from
employee performance through unit, company and ultimately to corporate
performance.”

Strategic Successes

So, given the amount of time and energy expended on the 1998 goals, the million
dollar question is has UNUM succeeded against these goals? At the time of writing this
case study, the company was still assessing its final position. However clues can be
found within the UNUM 1997 Annual report.
To quote James Orr:
“We continue to make solid progress to our 1998 goals - goals that have served UNUM
well over the past five years. Because of these aggressive goals,UNUM is closer than
ever to its vision - and ultimate goal - of world leadership in disability and special risk
insurance.

65
“We exceeded our overall ‘People’ goal target in 1997, aimed at creating a work
environment for all UNUM employees that supports superior business results. And our
UNUM America business again received national recognition for progress in this area
during 1997. Examples of plaudits that UNUM America has received, include being
voted within the:

• 100 best companies to work for in America by Fortune magazine

• 100 best companies for working mothers by Working Mother

magazine

• top 30 family-friendly companies by Business Week magazine

• top 50 employers by Equal Opportunity magazine.”

Orr continued:

“...We met our Operating Effectiveness goal ‘rule of thumb’ of growing

the top line at twice the rate or more of operating expenses. On a
cumulative basis, we have improved our operating cost structure by
22 per cent over our 1992 base year, moving towards our 1998 target
of 33 per cent...
“...Regarding our five-year annualized rate of return measured in our
Shareholder Value goal, we were ranked in the second quartile of the
Standard & Poor’s 500 at year end 1997, short of the top-quartile
performance that is our target.We have, however, delivered
exceptional returns over the past 10 years, with an annualized total
return of 30.2 per cent, ranking us 39th of the 457 current Standard &
Poor’s 500 companies with 10-year stock histories. “And, we continue
to make solid progress towards our Customer Satisfaction goal -
progress that is reflected in our 1997 results.While we are still below
our target for this goal, our work in this area has been, again, a
source of significant learning and opportunity for UNUM.”

Also at the time of writing a leadership team had been created to co-
ordinate the creation of a new set of corporate goals.

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Says Farrar:
“We will certainly continue using the balanced scorecard. It is an
excellent way to focus attention on creating value for shareholders
and indeed all stakeholder groups.”

And as Orr said:

“...As we develop our next set of goals we will seek ways to
accelerate our progress, grow our company by building long-term
relationships with...our shareholders, by continuing to build
shareholder value.We made great progress in 1997, but we know we
are capable of more in 1998 and beyond.”

Conclusion

According to Farrar, the five-year experience of using a balanced

scorecard has
revealed a number of key learning points. Not least that as the 1998
goals were such long-term goals, the company had to work hard to
constantly balance short-term and long-term goals and to clearly
communicate to employees any trade-offs. She believes management
must be vigilant in explaining how decisions today, such as
acquisitions, new product launches or exiting businesses, impact long-
term goals. If you do not do this, she believes, it can cause a lot of
confusion within the organization. She maintains that there are three
things a company must get right if it is to succeed with a balanced
scorecard:

“1. First and foremost it is critical to be clear about what the company
believes is important to measure and why it believes this.

“2. Understand that the goal is itself a vehicle for getting somewhere.
For example, we didn’t say that meeting these four goals would make
us the global leader, we said it would make us a stronger company

67
and significantly closer to that vision. So don’t confuse means and
ends.

“3. Engage all levels of the organization in defining the goals and
align the organization behind the goals.”
.
Key Learning Points

Finally, UNUM’s success with its balanced scorecard has been the
result of getting a number of fundamental things right. These include:

1. The balanced scorecard built on the success of UNUM’s ‘61592’

corporate goal, but was designed to reflect changes to the
organization and a new set of business challenges.

2. The chairman James Orr was totally committed to creating the

balanced scorecard and has been personally involved in building the
original scorecard and in continually communicating its importance to
stakeholder groups.

3. Senior managers within UNUM owned the process of building the

corporate scorecard and used external help only for facilitating early
meetings.
4. UNUM drafted a clearly defined and meaningful corporate vision
statement.

5. The scorecard was designed to meet specific time-sensitive

goals.This made the scorecard tangible to all employees and proved a
catalyst for breakthrough improvements.

6. The reason behind the scorecard perspective goals and measures

were clearly explained to employees.

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7. The company had a near obsessive focus on internal
communications.

8. An innovative compensation programme entitled the 1998 Goals

Stock Option Plan proved a powerful mechanism for aligning
individual performance with corporate goals.

9. All individual performance contracts, from the chairman down,

reflect the scorecard’s four perspectives.

4.2 Balanced Scorecard Implementation at “Philips”

The case examines the implementation of Balanced Scorecard in the Netherlands-based

Royal Philips NV. During the late 1990s, rapid changes in the external environment
necessitated Philips to make its operations flexible, innovative and value adding. This
led the company to introduce a program called Business Excellence through Speed and
Teamwork (BEST) in July 1999. Several tools were used in BEST, and one such tool
was the Balanced Scorecard. There were four perspectives in Philips' Balanced
Scorecard - competence, processes, customers, and finance.

Aim of BSC Strategy in Philips NV

“Our aim for adopting the balanced scorecard solution is to consistently communicate
strategy deep down into Philips' 80 businesses and support more than 10,000 managers
with tools to turn strategy into action by sharing knowledge, aligning actions,
monitoring progress and learning."

-“Peter Geelen of Philips Corporate Control”

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About Philips

 Philips was founded in 1891 by Gerard Philips in a small town of Netherland.

 In early 1900s Gerard's company emerged as one of the largest producers and
marketers of carbon-filament lamps.

 Focus was to lay emphasis on research just after the inception.

 It also established its marketing companies in the US and France before the First
World War.

 Philips Electronics later diversified in Health and Well-being company, focused on

improving people’s lives through timely innovations.

 Philips began the mass production of consumer goods like TVs, VCRs, DVD
players, and fax.

 X-ray radiation and radio reception was the key area of philips and they protected it
through patents.

PHILIPS…..Today

 Global leader across its healthcare, lighting and lifestyle portfolio.

 It has four product divisions: Consumer Electronics; Domestic Appliances &

Personal Care; Lighting and Medical Systems.

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 Philips Consumer Electronics is the third largest consumer electronics company in
the development of digital television systems and compact disc applications.

 It has diversified in the Medical Systems became a global leader in the growing
medical devices and diagnostic industry as well.

Company was witnessing a dismal financial performance during the 1990s basically due
to following reasons

• Change in External environment.

• Due to high manufacturing costs, the products could not be priced
competitively.
• Entry of Asian manufacturers like: LG, Samsung in the electronics
business.

So it’s quite obvious that there was a Need to bring flexibility in the processes and
innovation in the organization…!

Strategic Moves of Philips

Philips embarked on an improvement program:-

The program was called Business Excellence through Speed and Teamwork (BEST).

“BEST” was a company-wide initiative aimed at achieving excellence in every aspect of

business at Philips. Philips used several tools and approaches as a part of BEST. Some
of these were

 Philips Business Excellence Model (PBE)

 Process Survey Tools (PST) and

 Balanced Scorecard.

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The Balanced Scorecard was used to communicate the strategy across Philips' divisions
that had more than 120,000 employees spread across 150 countries in the world. The
Balanced Scorecard enabled the employees understand the existing policies, and plans
for the future. The initiative to implement Balanced Scorecard came from the top
management.

The top management, and all the divisions identified the critical success factors that
were important to create value and they were grouped under four perspectives :–

Implementation

 CSF’s were identified in every department, divisions with the help

of Quality department at philips.
 Performance indicators are the yardsticks that help in
measurement of performance.
 Traffic light system which include red, green and amber light
exemplify the degree of progress made in each dimension.
 Implementing a global balanced scorecard helped philips:
• In articulating and communicating their strategy
• Measuring the drivers of their performance
• Detecting the superiority of one strategy over another.

More than 50 percent of the Fortune 1000 companies use a version of

Balance score card making it a widely used tool

 The balanced scorecard of Philips has four card levels.

The levels in decreasing order are:

• Strategy review card

• Operations review card

• Business unit card

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 • Individual employee card

Lower card levels must align with scorecard goals in upper card
levels.

Critical Success Factors

 Competency

 Processes

 Customers

 Financial

Competency Factors

 Knowledge

 Technology

 Leadership

 Teamwork

Indicators –

 Organizational Development

 IT support.

Process Factors

 Drivers for performance

Indicators –

 Operational excellence

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Customers Factors

 Value proposition

Indicators –

 Customer Delight

 Employee satisfaction.

Financial Factors

 Value

 Growth

 Productivity

Indicators –

 Profitable Revenue

 Growth.

TRAFFIC LIGHT SYSTEM

• Green Light – target had been achieved

• Amber Light – performance in with the target

• Red Light – problem area.

Key results of BSC Strategy in Philips:

• Enabled employees understand the existing policies and future

plans.

• Succeeded in focusing in the diverse set of measures.

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 • Commitment and initiative of top management made it a big hit
in all the subsidiaries and in various line of businesses.

• Employees became more loyal and started taking part in

organisation.

4.3 Practical Aspects of Setting up Balanced Scorecard in a Service Company

After the initial phase of building the Balanced Scorecard, a company also has to use it.
One of the mistakes companies make is during the implementation phase by coming up
with a list of measures of what they could measure instead of what they should be
measuring. If a company thinks about what it needs to achieve to be successful in the
eyes of its shareholders, clients and internal stakeholders, that will yield operational
activities that the organisation needs to do well to achieve those strategies.

To make the Balanced Scorecard work, companies must comprehend the importance of
its four basic perspectives.

The financial perspective

This perspective tends to be the cornerstone of an organisation’s strategy. It includes

such measures of profitability as cash flow, quarterly sales growth and operating income
by division, increased market share, and return on

equity.

“There’s a fairly standard, two-legged structure that may be observed over the years,"
says Laura Downing, vice president of the Massachusetts-based consulting firm
Balanced Score Card Collaborative Inc. "The first leg is the revenue-growth strategy,
where companies try to determine how hey’re going to grow the top line of the
business." Typical methods for accomplishing a revenue-growth strategy are adding
new products to broaden the franchise and branching out into new businesses.

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The other leg of the financial perspective is a productivity strategy that usually includes
two components: basic expense management and effective asset utilisation.

"The natural inclination is to focus on the financial perspective because people are more
comfortable and familiar with it," says Downing. "Companies will tend to incorporate
more financial measures than are really necessary. But ultimately, at the end of the day,
all measures play out into cash flow."

The non-financial perspectives are predictive of a company’s future financial success.

However, they give organisations an opportunity to react to internal and external
influences before detrimental activities affect financial measures.

The customer perspective

This component of the Balanced Scorecard includes such measures as customer

response time, on-time delivery, and market share and product reliability.

The customer perspective can be divided into three major measures:

• Product attributes, a measure of how the product works its functionality and its
price.

• Customer service, an evaluation of how the company works with customers and
whether it takes a high-touch or high-tech approach.

• Image an examination of the product’s reputation.

The customer perspective tends to get little attention because measuring such
intangibles, as customer satisfaction and customer loyalty is difficult. However, this
perspective is important.

The internal business perspective

This aspect of the Balanced Scorecard focuses on quality, time and efficiency measures
such as head count, inventory and manufacturing lead time to determine what key
processes meet the needs of the customer and financial perspectives.

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To start building the internal perspective, a company typically needs to build a value
chain by defining its value-creating activities and separating those activities from any
type of organisational structure - in other words, thinking outside the box about the
added value the company brings to customers.

"We’ve observed four major themes in the internal perspective," Downing says. The
first theme is innovation. Companies must determine whether they need to seek
partnerships with other organisations, how much they need to spend on research and
development, and how they can find other creative ways to increase revenue. The
second theme targets customer management. Companies need to look at how they can
better work with their customers and how they can improve customer service.

"The third theme is operational excellence, a look at an organisation’s supply chain,"

Downing says. "You need to find a way to manage inbound and outbound logistics. Just
optimising that angle alone can be a major differentiator."

The fourth theme involves regulatory factors that can come into play for certain types of
business.

This theme is particularly important in heavily regulated businesses such as financial

services or public utilities.

The learning-and-growth perspective

The most frequently overlooked of the four perspectives, this aspect of the Balanced
Scorecard should be of paramount importance to companies with a strategy of finding
new revenue sources and expanding into new markets.

It measures such factors as the number of new products a company launches and the
length of time generating leading-edge products takes.

Why does learning and growth often get short shrift? "Companies already have the
financials down pat, and there’s been this customer-focus fad — perhaps to the extreme
— which has lasted for several years," Downing says. "It’s just been in the last couple
of years that people have even started to ask how they can apply technological
advancements to help them in their business."

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Until now, the scorecard approach has helped companies translate business strategy into
appropriate actions. The Balanced Scorecard can not only translate strategy, but also
help define it and, in some cases, create it. Rather than a cyclical, event-driven
phenomenon, the scorecard evaluation can become a process that continuously
determines areas in which the company can improve.

As an organisation considers the four perspectives, it should ask whether it needs to

address any cultural issues. Often when companies try to implement a new strategy,
they need a cultural change to reflect the new strategy. If a company can say, "This
cultural issue must change so that this process can be enacted so that customers will be
happy so that we’ll make more money," the need for cultural change becomes tangible.

4.4 Using the Balanced Scorecard at Metro Bank

Metro Bank was the retail banking division of two major banks. The agendas of the two
parents had never been fully rationalised into a single vision. At the same time, without
having achieved a synthesis or consensus on an operating style and strategy for the
Metro Bank, its managers had launched a major transformation programme in order to
be more innovative and to create a bank tailored for the twenty-first century.
Unfortunately, the transformation programme had gone wild, leaving the bank with
more than 70 different action programmes, each competing for management time and
resources.

Metro Bank had 30% market share of the core deposit accounts of the region but with
deregulation, increased competition, and a lower interest rate environment, income from
these retail accounts could no longer be sustained. A strategic review revealed excessive
reliance on these accounts and a cost structure that could no longer profitably serve 80%
of the bank's retail customers.

Metro embarked upon a two-pronged Balanced Scorecard-based strategy to deal with

these problems:

• Revenue Growth Strategy - Reduce the volatility of earnings by broadening the

sources of revenue with additional products for current customers.

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• Productivity Strategy - Improve operating efficiency by shifting non-profitable
customers to more cost-effective channels of distribution (e.g., electronic banking
instead of personal banking).

In the process of developing a Balanced Scorecard at Metro, these two strategies were
translated into objectives and measures in the four perspectives. Particular emphasis
was placed on understanding and describing the cause and effect relationships on which
the strategy was based. The financial objectives were clear: broaden the revenue mix.

Strategically, this meant that Metro would focus on its current customer base, identify
the customers who would be likely candidates for a broader range of services, and then
sell an expanded set of financial products and services to these targeted customers.
When customer objectives were analysed, however, Metro's executives determined that
its targeted customers did not view the bank, or their banker, as the logical source for a
broader array of products such as mutual funds, credit cards, and financial advice. The
executives concluded that if the bank's new strategy were to be successful, they must
shift customers' perception of the bank from that of a transactions processor of checks
and deposits to a financial adviser.

Having identified the financial objective, Broaden Revenue Mix, and the new customer
value proposition dictated by the financial objective, Increase Targeted Customers
Confidence in our Financial Advice, the scorecard design process then focused on the
internal activities that had to be mastered for the strategy to succeed. Three cross-
business processes were identified: Understand Customers, Develop New Products and
Services, and Cross-Sell Multiple Products and Services. Each of these business
processes would have to be redesigned to reflect the demands of the new strategy. The
selling process, for example, had historically been dominated by institutional
advertising of the bank's services. Good advertising plus good location brought the
customers to the banks. The branch personnel were reactive, helping customers to open
accounts and to provide ongoing service. The bank did not have a selling culture. In
fact, one study indicated that only 10% of a salesperson's time was spent with
customers. A major reengineering program was initiated to redefine the sales process.
The goal of the process was to create a relationship-selling approach where the
salesperson became more of a financial advisor. Two measures of this process were

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included on the Balanced Scorecard. The Cross-Sell Ratio-the average number of
products sold to a household-measured selling effectiveness. This "lag indicator" would
tell whether the new process was working. The second measure, Hours Spent With
Customers, was included to send a signal to salespersons throughout the organisation of
the new culture required by the strategy.

A relationship-based sales approach could not work unless face-to-face time with
customers increased. Hours Spent with Customers therefore was a "lead indicator" for
the success of this piece of the strategy.

The internal objectives led naturally to a final set of factors to implement the Revenue
Growth strategy. The learning and growth component of the scorecard identified the
need for salespersons to undergo a major role change. This role change would require a
broader set of skills (e.g., a financial counsellor with broad knowledge of the product
line), improved access to information (e.g., integrated customer files), and realignment
of the incentive systems to encourage the new behaviour. The lead indicators focused on
the major changes that had to be orchestrated in the work force:

• the upgrading of the skill base and qualified people-Strategic Job Coverage Ratio;

• the access to information technology tools and data-Strategic Information

Availability Ratio; and

• The realignment of individual goals and incentives to reflect the new priorities-
Personal Goal Alignment.

The "lag indicators" included a productivity measure, Average Sales per Salesperson, as
well as the attitudes of the work force as measured by an Employee Satisfaction Survey.

The result of the Balanced Scorecard in the Metro Bank is the following. By clarifying
the strategic objectives, it was able to create consensus and teamwork among all the
senior executives, regardless of which functional organisation they represented. Further,
the Balanced Scorecard created a vehicle to set priorities, to consolidate and to integrate
the many change programmes currently under way. The result was a much more
manageable set of strategic initiatives, all focused on achieving specific objectives.

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4.5 Using the Results of a Balanced Scorecard at Sears Company
Sears radically improved profitability using the Balanced Scorecard’s four perspectives.
However, shortly after Sears’ implementation of the standard Scorecard, Quinn
discovered that maintaining the company’s increased shareholder value would require
more change. For Sears, sustaining the Balanced Scorecard’s initial improvements
required senior management to alter the company’s overall vision and incorporate a new
perspective into the company’s Scorecard.

"You can’t look at the Scorecard as just helping you pull a bunch of strategic levers. You
have to be willing to go through cultural change," says Quinn, who retired from Sears in
1996 after a 26-year career with the company. "If you’re messing around with cultural
change, you have to ask yourself whether you’re ready to fire some of your senior team
if they’re not willing to behave differently. Really changing senior management causes
some discomfort."

Quinn was vice president of quality when he introduced Sears to the Balanced
Scorecard concept in late 1992. Sears had a net loss of almost $4 billion that year, but
the company posted the largest profit in its history in 1993. After the company’s
financial rebound, Quinn lost most of the audience for his idea. It soon became clear to
him that a small group of people had caused the company’s turnaround and that
different long-term measures would have to be taken in order to sustain Sears’
renaissance.

As a result of this realisation, Quinn began holding visioning sessions in early 1994
with the organisation’s top 100 executives. In off-site three-day sessions, Sears’
corporate managers developed a list of the company’s five-year objectives. In addition
to examining needed internal changes, the group discussed methods for aligning itself
more with what was happening outside the company.

"We spent all of 1994 developing our Balanced Scorecard with our top people," Quinn
says. "Most organisations aren’t willing to pay that price. We had the top 100 people
sitting through customer focus groups, digesting all the data and reading all the
literature to the point that we almost had a palace revolt."

Initially, Quinn formed task forces around the four basic perspectives of the Balanced
Scorecard. Each group was asked to define "world-class status" in the area of its

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perspective, identify Sears’ obstacles to achieving world-class status in that area, and
design metrics for measuring the company’s progress in the area. The task forces moved
forward with the following initiatives:

The customer task force was determined to get a firsthand assessment of how well the
company was listening to its clientele. "Satisfaction or your money back" had been a
Sears mantra since the company’s inception in the 1890s, but the group was sceptical
about whether senior management and frontline employees were doing everything they
could to increase customer satisfaction. Some stores had trouble keeping merchandise in
stock. Customers frequently complained about being unable to find sales associates and
rated Sears’ quality of overall service as poor.

To learn more about Sears’ customer-service challenges, the task force held 80 focus-
group sessions with customers around the country. As a result of its findings, the
customer task force set four goals: offering the right merchandise at competitive prices;
providing superb customer service by hiring, training and retaining the best employees;
building customer loyalty; and making Sears a fun place to shop.

The internal business task force held 26 employee focus groups and studied extensive
data on employee attitudes and behaviour. Each Sears employee was asked to complete
a 70-question opinion survey every other year. The internal business task force found
that repeatedly employees responded with the clear message that they were interested in
the company’s success and were proud to work for Sears. The task force also learned
that two dimensions of employee satisfaction — attitude toward the job and toward the
company — had a greater effect on employee loyalty and behaviour toward customers
than all the other dimensions put together.

The financial task force focused on shareholder return and tried to determine what path
Sears should take to be in the top 25 percent of Fortune 500 companies.

The learning-and-growth task force conducted outside benchmarking launched a

research project into the nature of change and suggested an effort to generate 1 million
ideas from employees.

Ultimately, Sears managers added a fifth perspective to the company’s Balanced

Scorecard. This perspective was designed to measure overall company values, and it,
too, was assigned to a task force.

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The values task force used employee surveys to identify six core values that Sears
employees felt strongly about: honesty, integrity, respect for the individual, teamwork,
trust and customer focus. The task force determined that Sears’ corporate culture was
too paternal in nature and didn’t value people as much as it should. The task force
decided that performance should count more in employee appraisals than effort.

Quinn says these task-force findings showed the company why change was needed. "In
1992," he notes, "our customer satisfaction was below the industry average and 16
percentage points behind our leading competitor." By 1996, Sears’ customer service was
above the industry average. In addition, an independent study of 203 companies found
that in 1996 Sears made the second-highest improvement in customer satisfaction.

"There’s an appeal to the Balanced Scorecard on two fronts," Quinn adds. "First, it’s
logical that those four perspectives go together for most people. Second, there’s a
blending of Scorecard and performance management — the whole idea is that the better
the measurement system I put in place, the more accountable I can hold someone."

5. Conclusions and Recommendations on Implementing a Balanced Scorecard

From the possible research resources from Internet and major international business
journals, it was possible to identify that throughout the world has the Balanced
Scorecard received very warm welcome among numerous very prestigious companies.
To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC
Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.

During the interview with Mr. Tiit Elenurm, managing director of Estonian-based
consulting company EM-International, it was identified that so far the applications of
Balanced Scorecard and related instruments are not yet familiar to Estonian companies.

Our personal experience is shortly the following.

The Balanced Scorecard is definitely a useful tool to renew an organisation’s mission

and strategic objectives. Multilevel analysis of organisational strategy helps to identify
possible shortcomings and flaws of existing objectives.

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Second, the Balanced Scorecard has proven its usefulness also as a two-way
communications tool that enables to pass information more easily to all the members of
an organisation, as every member’s task in formulating the core business information is
certainly much higher than in the case of centralised strategic management systems. At
the same time, the Balanced Scorecard simplifies the analysis of monthly performance
review and compares the results of the review with strategic objectives.

Third, it turns the activities of an organisation much more efficient as its every member
is more aware and committed to the strategy. In the end, it avoids performing many
tasks that are not in line with objectives and members start to diminish less important
assignments that do not contribute to goals.

As one of negative impacts of the Balanced Scorecard it may be noted slowing down of
some strategic planning processes, because discussions on so many levels of
management undoubtedly takes some time. The second problem is increasing time
constraints, because some increase in bureaucracy and increase in reporting.

However, to diminish those backlogs it is definitely recommended to use an

information-technology based solution in implementing Balanced Scorecard. During the
completion of the thesis, the author managed to find at least four different software
providers, who have started to actively develop, market and sell their software solutions
for better management of the Balanced Scorecard.

It might also be recommended to start building up the Balanced Scorecard together with
the implementation of some ISO- or EFQM-based quality management systems. The
preparatory process for all of those initiatives is largely the same, which may diminish
significantly the project implementation time and end in better results.

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6. Summary
The overall objective of the thesis was to analyse the use of Balanced Scorecard as a
performance measurement tool in the areas of general management and strategic
management.

The Balanced Scorecard may be described as a strategy-driven measurement system

that retains traditional financial measures, but adds also the perspectives of present and
potential (future) value of a company, namely its customers, suppliers, employees,
processes, technology, and innovation.

By its nature the four-fold division of the Balanced Scorecard into the perspectives of a)
financial, b) internal business processes, c) learning and growth, and d) clients, has
nothing especially new. Internal business processes have been targeted by several
quality management systems. Learning and growth has been analysed by a few trends
under knowledge management. Clients also have been subject to several kinds of
statistical and non-statistical researches.

The main objective of the Balanced Scorecard is to bring those different perspectives
together into an uniform system that would enable to measure them in a balanced way
that is derived from the strategic objectives of an organisation.

Author goes through detailed steps in implementing the Balanced Scorecard in an

organisation and during that tour he advises on practical questions which may arise in
implementing the Balanced Scorecard for the first time.

In author’s opinion, the Balanced Scorecard methodology may be regarded as the most
practical management tool since the SWOT analysis. Therefore, the companies who are
willing to remain competitive during today’s shift from industrial age business to
information age business will have to start consider implementing the Balanced
Scorecard. From the possible research resources from Internet and major international
business journals, it was possible to identify that throughout the world has the Balanced
Scorecard received very warm welcome among numerous very prestigious companies.
To mention just a fraction of them: Chase Manhattan, Hewlett-Packard, IBM, FMC
Corporation, Mobil, Shell, Sears, Texaco. The number is constantly growing every day.

85
Especially Estonian companies would have to try to acquire more information about the
Balanced Scorecard and its possible implementation schemes in order to get competitive
advantages in the European Union and world markets.

The author finds that the Balanced Scorecard is definitely a useful tool to renew an
organisation’s mission and strategic objectives. Multilevel analysis of organisational
strategy helps to identify possible shortcomings and flaws of existing objectives.

To diminish some backlogs that might be encountered during implementation of the

Balanced Scorecard it is definitely recommended to use an information-technology
based solution in implementing Balanced Scorecard. During the completion of the
thesis, the author managed to find at least four different software providers, who have
started to actively develop, market and sell their software solutions for better
management of the Balanced Scorecard.

It might also be recommended to start building up the Balanced Scorecard together with
the implementation of some ISO- or EFQM-based quality management systems. The
preparatory process for all of those initiatives is largely the same, which may diminish
significantly the project implementation time and end in better results.

The author found in the thesis show that the Balanced Scorecard may be considered as
one of the best remedies in tackling with the questions concerning:

• linking strategic vision and long-term objectives to short term tactics;

• directing sophisticated and different critical paths of success in the light of strategic
management;

• efficient performance measurement;

• review of strategic vision in the light of day-to-day operations management.

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 Bibliography
Kaplan, Robert S. and Norton, David P., “Putting the Balanced Scorecard to Work”,
Harvard Business Review on Measuring Corporate Performance, 1998 Edition,

We have used these websites for refrence in order to prepare this report

1. http://www.bettermanagement.com/bscauthority

2. http://www.businessfinancemag.com/

3. www.balancedscorecard.org

4. www.icmrindia.org

5. www.google.com

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